What is the Purpose of Website Evaluation Models?
When the time comes to sell your website to a worthy buyer, you need to know how much to ask for to open the negotiations. But unlike physical property, the exact monetary value of something as intangible as a website can be difficult to pin down.
But there are several valuation models you can use to determine a financial value for your website or digital company. Some methods will be better for certain types of websites while others will be more appropriate for larger sites and sprawling online empires. Choosing the right valuation model can lead you to the highest possible asking price for your website and will ensure that you aren’t underpaid for all of your labor.
One of the best (and more modern) ways to value your website is to use earnings multiples. You’ll create a multiple by dividing one aspect of your site by another. While many companies use multiples that divide the price of their shares by the earnings per share, this isn’t exactly appropriate for many websites.
Instead, you can generate an appropriate earnings multiple by using your discretionary cashflow, or SDC, by another metric that’s relevant to your business, such as traffic, sales, or passive income. The exact multiple can be determined by you and a buyer, but the end result of such an equation should work out to a valuation number that accurately reflects the value of your website and/or company.
This method is favored by many buyers because it’s relatively simple and can be applied to websites both large and small. If your site doesn’t deal in a lot of direct cash transactions, consider using this method to come up with a single number that represents the financial value of your website. It’s much easier than trying to tally up all of your digital or physical products, as well as your labor or the value of your traffic.
Discounted Cashflow Analysis
This is a much more thorough method for evaluation, but it’s mostly used for real-world businesses rather than Internet websites. Still, it can be effective if your website has consistent cash flow and a stable business model that can be safely predicted to continue for the foreseeable future.
This valuation model has you forecast your future free cash flows and discount them with a predetermined discount rate. The discount rate to be measured against your future free cash flows is generally the weighted average cost of capital, which can be somewhat difficult to determine for many Internet businesses.
Basically, this valuation method tries to consider what your site’s future earnings will be worth even when considering its value in the present day. It’s very focused on forecasting future success and is best used if your Internet business or website has lots of financial data backing up your claims.
This valuation method can be used to frame your company or website against other websites that are similar in either their business model or design. By measuring your website against similar websites for which ownership transactions took place, you can have a general benchmark for the value of your website based on what others paid for to acquire similar sites.
This does require that you have certain financial metrics between both companies. These can be web traffic, multiples of your earnings, or the total revenues of both sites. This is mainly a valuation method that can be used to supplement your opening bids or convince your buyer to raise their price. For instance, if you have a calendar-making website, you can find out what other calendar-making websites normally sell for and use this as a sticking point to prevent a buyer from underpaying you for your digital property.
But gaining access to the transaction data for other websites can be a little tricky. Public companies are easier to gather this information on. It’s also possible that you might accidentally undersell your own site if you bring up a transaction without knowing that such a transaction was actually done poorly. You have to be able to independently recognize fair transactions to effectively use this valuation method.
This valuation method is of particular use if your website doesn’t generate a lot of income, either passively or actively. Instead, it focuses on the traffic that your site generates. This requires lots of research into your website’s traffic and you and your website’s buyer will likely need to confirm this information several times.
You can check out the keywords or main key phrases that drive most of the search traffic to your website and then identify the potential cost per click value of those keywords or phrases. This is essentially a way of determining the possible financial value of your website from traffic alone, even if it has not yet been monetized.
This can be extremely useful if your website doesn’t generate income but you want to sell it for a tidy profit. Buyers are more likely to purchase websites that are already pre-configured and pre-optimized for SEO keyword competition and who already have traffic flowing through them. Buyers looking for these sites will be attracted both to the possible financial earnings and to the ease-of-use when it comes to setting the site up.
Be aware that if you value your site using this method, you may attract domain flippers that are mostly interested in buying and selling Internet property quickly. This may not matter if you’re just trying to exit your online business with some earnings, but it could result in your site’s theme or design being taken far away from where you intended as the site changes hands rapidly in the near future.
If your site has a lot of assets that can be predictably valued, you might be able to use this method.
Almost anything can be counted as an asset if you can prove that it has monetary value or future monetary value. Traffic, for instance, can count as an asset if you presented as possible future revenue based on cost per click values for major keywords. Alternatively, if your site has a special domain name or a domain name that is naturally competitive due to its simplicity or direct nature, the domain itself may be an asset that can be monetized in your negotiations.
If your website is popular and you sell physical products, your brand or the product stock can also be considered as assets for the site as a whole.
This valuation method requires you to add up the value of all of your assets and use the resulting number is the final value for your website. Naturally, the digital assets we mentioned above can be difficult to value themselves. It helps to find similar sites or sales to value those assets, as you would with a precedent transaction valuation method.
Reverse-Engineering the Cost
Finally, you can also use the cost of building your website from scratch is the final value of the website if you built the website yourself or have enough knowledge to determine the cost in labor and programs to make an accurate estimate. You can also add the cost in labor or material to reduce the amount of traffic the site currently enjoys for a final value.
This valuation method works best with websites that are noticeably impressive from an architectural standpoint or from their structural sophistication. Websites that have excellent SEO-lacing throughout their pages will benefit from this valuation method more. It can be effective if you know that your buyer is not very experienced with building websites and might be intimidated by the idea of building a site themselves.
However, trying to put a value on the time or labor spent driving traffic and creating the site can be interpreted in lots of different ways. Your buyer might not consider the task of building a website to be particularly billable or important, or they might disagree with the cost per hour that such a task might demand. In these cases, having examples of the cost of website builders are programmers on hand can be effective for pinning down an exact amount to represent the cost for labor or time.
This valuation method will be most effective for smaller but impressive websites. Larger websites or some Internet companies are too massive to accurately reverse engineer the cost of the endeavor, so a different valuation method should be used.
Using some (or all) of these assessment strategies will help you demand the correct price for your website when it’s time to sell. If you’re looking for a buyer that won’t try to underpay you, consider Landocs Private equity (Landocs PE). They’re website specialists that are always on the lookout for new digital properties that they can buy and improve. With lots of digital and financial experience, their valuation team will work with you to determine a fair price for your website and ensure that you both leave the transaction satisfied. Contact them today to start discussing your site’s future.