12 x Monthly Earnings Valuation method

The unpredictable nature of websites makes them inherently risky. Matt Cutts can press a button and make a site virtually irrelevant literally overnight for reasons even he doesn't understand. Assuming a site doesn't depend on SEO, that should reduce risk, but there's always the possibility that you could be banned from the e-mail/affiliate/PPC site that drives sales.

A more accurate evaluation would be (average monthly income X 10). Based on his self claimed income, he makes about $4,000/month. If that's true, and I would get that confirmed, then the site is worth only $40,000...no where near $500,000...which would include his lists, campaigns, and the works. in my opinion, this guy is either tripping hard are trying to con you.

12x monthly income is usually meant for websites that are not very stable in traffic and earnings flow. Otherwise said, websites that are a riskier investment.

Large corporations that make millions of dollars a year definitely do not sell their companies for 12x their monthly income. They sell their website for their earnings years to come.

Ben

I agree that is pretty high.

The valuation also depends on how long the site has been profitable for. If it's been making $50k per year for many years then the stability will increase it's value. Also, I agree that the traffic sources and the methods for monetization also affect the value of the site.

A lot changes in just a year or two on the internet. Whatever he is doing could easily collapse and become worthless due to factors outside of his control. I would be hesitant to value it at more than 20 x monthly income -> ~$85,000. Of course, it's impossible to say without knowing more details.

Either way, there's no way I would pay $500,000 for a site making $50,000 per year. It would have to keep making that same profit for ten years just to break even. Just think about what the internet was like ten years ago... it's unlikely that it would keep it's value that long.

I'm confused. Sadly that is an easy step for me. :confused: Did you mean $50,000 per month?

I would be more interested in net profits than want it does.

Joe Mobley

If I owned a site that didn't rely on search engine traffic, had a large list, was established for over 10 years, and had nearly hands free income, I DEFINITELY wouldn't be selling it for 12 times it's monthly income, never mind 10 times as someone else suggested!

Fair enough if it was some 6 month old site that carried a bit more risk but to sell the site based on what you have described for only 1 year's worth of revenue would be a mistake for the current owner in my eyes.

I also agree that $500,000 is an unrealistically high price to pay, but as a good negotiator who is selling something knows, you always start with an unrealistically high offer so it leaves you plenty of room to move down to a more agreeable price.

12x is just a nonsense number thrown around on forums by people who think Flippa is where all sites are sold or read a couple of WSOs on flipping. The problem with forums is people repeat what they have read by others and you get to a stage where everyone ends up believing it.

Without knowing any more information about the site, if you ended up paying $100k you probably got a good deal. If you've approached an owner directly to sell, don't expect them to give it away. It also depends what plans you have for the site. I've paid 3x yearly net for sites knowing I can triple income overnight.

$500k is too high but it wouldn't be uncommon for a company cold approaching a seller to pay 4x yearly net. Assuming a stable business that requires little work, 4x yearly net still gives you a 25% yearly ROI which beats most traditional investments.

You won't see sales like that publicly or through brokers, as people selling publicly tend to be motivated sellers and more likely to accept a "fair" multiple.

The average multiple for an established site in the 6 figure range is 2.3x yearly net income. Most sales fall in the 2-2.5x range. A site with 10 years of history, entrenched and stable would probably go for 3x yearly net if sold professionally and assuming everything is verifiable and it's not a full-time job for the owner (unless owner compensation was included in the net numbers).

Hope that helps.

There are many reasons why people sell businesses. Plenty of profitable businesses are sold each and every day of the week. A lot of people start businesses nowadays with an exit strategy in mind. They cash out after a certain amount of time. That's the whole reason they start the business in the first place.

Other people might want to take their money and invest it in something more stable such as real estate or shares. So don't think it's ludicrous for someone who has a profitable business to want to sell it because this is happening all the time. A lot of times they will take that money and use it elsewhere so it generates them more than if they had just kept the business they sold.

As for the amount of money someone can ask for their website, that is totally up to them. All of these numbers being thrown around mean absolutely nothing. Businesses are just like real estate in that you can ask whatever the hell you want but at the end of the day the business is only ever worth what someone is willing to pay for it.

You might own a company in a similar niche and therefore have a lot of resources you could throw at this site to grow the site and it's income very quickly. If that were the case you might be willing to buy the site for a lot more than someone else who just plans to keep running the site as is. So it's all relative.

In real estate or business if someone prices something ridiculously high it's usually an indication that deep down they do not want to sell it.

If buying any type of website for that sort of money though I would want to be very confident in it's longevity. Just because a website has lasted 10 years doesn't mean it will be here next week or even tomorrow. Successful websites come and go all the time. Nothing in this world is a guarantee, especially not on the Internet. Look at myspace.

Shane12 hit the nail on the head. Like it or not - a majority of traffic for most websites is seeded organically. Yes, we build lists and relationships as a safety net - but that root of growth is planted in google.

Matt Cutts or any other figurehead over there can easily change the rules at anytime and banish a sites organic traffic overnight. The 10 month mark that Devon refers to is more about mitigating risk than pure value.

$50,000 looks reasonable to me and $500,000 is a NO!

Try to negotiate and prove him that the price is asking his really to high.

If he still does not accept your terms.. Move on..

There's plenty of other opportunities.

Cheers,

Gary

Websites that make considerably less, tend to sell for 12 months worth of income.

Established sites that make a considerable amount of income can be sold at whatever price the owner wants - because .........they can.

(That's the G rated version Caliban )

There tend to be more than just a few factors, and Thomas has made a few really good points.

I generally see businesses selling for somewhere around 2-2.5x their yearly profits, too. There are quite a few other things that matter as well. Someone mentioned tech businesses sell for unreasonably high prices. In their cases, the price is usually attached to the team the company is buying, not the product. The product is, in many cases, shut down after a while. So, their valuation is completely off the charts and it's definitely not something anyone should use if their aim is to recoup the money they are spending.

What you generally want to see is a solid history, growth (which is something that can drive the value unlike anything, and that can reflect on the final price), the market it's operating in, etc.

Some businesses depend so much on their current teams that their worth is basically zero if you remove the team. So, even if you buy them, you need to have the team with you, and the value comes down considerably.

I'd also take into account how me buying the business impacts the business. For instance, if I know the market in and out, the business has a team already set up, I'd pay a little more than what the rest of the market will simply because the potential is different in my eyes.

In your specific case, the only positive is that the site has a 10 year history (and thus, a solid foundation, etc.). Unless you can somehow get its revenue to, say, $200,000/year or so in the next couple of years, $500,000 would be a little too much. I'd pay $100,000-$150,000, the latter if I'm getting the people who are working on it for at least the next three months.

On the other hand, if it requires me, the buyer, to spend a significant amount of time understanding the market, running the business, scaling it up, etc. then it gets a bit dicey for me. Businesses aren't constant; this one will change, too, and maybe the current owner is in a position to adapt to those pretty quickly. How these changes impact you is another concern.

Just some food for thought. :-)

[I agree with you though: unless it's very desperate, it actually makes absolutely no sense to sell a business for an amount that you'd make in 12 short months.]

The only question about the value of the website you are buying is "how much return on investment will I get from my purchase, and how much am I trying to get?"

A website can be a great investment or a terrible one. But it depends on so many factors. It depends on everything from traffic amount, traffic sources, traffic growth, conversion rates, trends in the topic/industry, number of competitors, likelihood of growth in the future... etc.

Most of the methods we use to value sites today, are a throwback to the early Sitepoint Forum days where sites had little to value them on other than traffic and revenue.

Someone at somepoint waaaaay back in time probably paid 4 - 6x monthly revenue (not profit) for a site, and then the next buyer, looking for guidance, plucked this as their selling price and so on until 4x - 6x monthly revenue sort of became the norm.

As the years went on, sites became more sophisticated and larger sites started to sell publicly which meant

1) There was now a clear difference between profit and revenue as these sites had declared and substantial expenses

2) Sites now had other 'assets' (in the digital sense) such as traffic and revenue history, mailing lists, software and content such as videos or ebooks that would inevitably affect their valuation.

Slowly, a divide began to happen with larger (+$20K) more sophisticated sites increasing in their average valuation to today's current 'established site' average (brokered and flippa) of around 18 months net (it's much higher for brokered sites only).

We use the numbers as a convenient way of establishing a quick valuation, but in reality sellers are taking much more into account like the 'assets' listed above, which is why two sites with identical profit can sell for entirely different amounts.

There's a Slideshare here which goes into more detail on website valuations

Valuations for Buying and Selling Websites

Hope this helps

Hi,
And make sure the seller signs a non-compete clause so he or a family member, or friend do not try to make a competing site once the original is sold.

It is pretty tough to say what the actual worth is without knowing everything about the website. Nobody here can really help with that because there are too many variables. Variables like where the traffic comes from and the sources for monetizing. I think most website sellers will tell you that the x12 rule does not always apply to every website.

Yes this website might have been around for 10 years, but the online industry just gets more and more competitive. I am not saying it wont stick around for longer, but I will say 500k is asking for quite a bit for something that only makes about 50k a year.

If it were me, I would save my 500k and work on a website for the next 10 years to eventually get it to that point.

I find it interesting that not one person has mentioned or asked you what type of ROI you are looking for?

As a Business Person my opinion is not to worry so much about whether the person is asking for 10x or 12X annual earnings, but to look at the ROI you are going to potentially get.

So if you made $50,000/year and paid $500,000, then that is a 10% ROI.

Once you see that then the question you need to ask yourself is, "is this a good return? and will it help me achieve my goals?"

one way to figure that out is to compare that potential return with other investment opportunities.

If you could take your $500,000 and invest it into another business and get let's say $80,000/year or a 16% ROI, then you can choose if you want a 10% ROI, or a 16% ROI.

In this case you are comparing the rates of return on different investments. And that will should allow you to know where to put your money.

Of course there are other things that go into this, I am just trying to keep the examples simple.

So figure out what kind of ROI you are looking for, and that is where you start, and how you filter any investment opportunities.