12 x Monthly Earnings Valuation method

45 replies
I've never understood the 12 x monthly earnings logic when valuing a web site.

Talked to a gentleman today about purchasing his site. Does about $50,000 per year on about 35,000 visitors per month. He wants $500,000. Way too much, but it's definitely worth quite a bit more than $50,000 to him. It's nearly hands free income. Barring any medical or family emergency, I'd question his sanity even if he sold it for $100,000 (24 months x earnings).

The task at hand now is to uncover what it's truly worth & convince him that my number is a fair price and that it's more accurate than his. Hopefully he's got quite a little wiggle room.
#earnings #method #monthly #valuation
  • Profile picture of the author Shane12
    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.
    {{ DiscussionBoard.errors[8163254].message }}
  • Profile picture of the author Devin X
    Banned
    Originally Posted by Lance K View Post

    Talked to a gentleman today about purchasing his site. Does about $50,000 per year on about 35,000 visitors per month. He wants $500,000. Way too much, but it's definitely worth quite a bit more than $50,000 to him.
    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.
    {{ DiscussionBoard.errors[8163273].message }}
  • Profile picture of the author Ben Gordon
    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
    {{ DiscussionBoard.errors[8163284].message }}
  • {{ DiscussionBoard.errors[8163362].message }}
  • Profile picture of the author konakid
    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.
    {{ DiscussionBoard.errors[8163469].message }}
    • Profile picture of the author Lance K
      This site has been around for 10+ years. Deeply entrenched in an offline industry. Not reliant on email lists or ad campaigns for revenue. Does have an email list. But the money flows even without it. I'm very familiar with the seller and the site. Not worried about getting conned, just getting to the true value.
      Signature
      "You can have everything in life you want if you will just help enough other people get what they want."
      ~ Zig Ziglar
      {{ DiscussionBoard.errors[8163544].message }}
      • Profile picture of the author TheEye
        For a small bricks and mortar business, the general rule of thumb is three years earning as a valuation price.

        The price should include the customer list.

        Whether stock and machinery is included in this price is up for negotiation.

        This assumes it is not a personality business that is dependent on the owner to be successful.
        {{ DiscussionBoard.errors[8163590].message }}
  • Profile picture of the author Joe Mobley
    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


    Originally Posted by Lance K View Post

    I've never understood the 12 x monthly earnings logic when valuing a web site.

    Talked to a gentleman today about purchasing his site. Does about $50,000 per year on about 35,000 visitors per month. He wants $500,000. Way too much, but it's definitely worth quite a bit more than $50,000 to him. It's nearly hands free income. Barring any medical or family emergency, I'd question his sanity even if he sold it for $100,000 (24 months x earnings).

    The task at hand now is to uncover what it's truly worth & convince him that my number is a fair price and that it's more accurate than his. Hopefully he's got quite a little wiggle room.
    Signature

    .

    Follow Me on Twitter: @daVinciJoe
    {{ DiscussionBoard.errors[8163597].message }}
    • Profile picture of the author Lance K
      My real point is I don't get the 12 x method. Why would anyone with a real business let it go for 12 times monthly revenue unless it's a house of cards or has a dismal profit margin?
      Signature
      "You can have everything in life you want if you will just help enough other people get what they want."
      ~ Zig Ziglar
      {{ DiscussionBoard.errors[8163631].message }}
      • Profile picture of the author Devin X
        Banned
        Originally Posted by Lance K View Post

        My real point is I don't get the 12 x method. Why would anyone with a real business let it go for 12 times monthly revenue unless it's a house of cards or has a dismal profit margin?
        It's X 10, and because it's the most honest way to evaluate a site's worth. If you're someone like Yahoo who has investors' money to blow, then ok, you can spend 30 million on a site that probably was really worth 10,000. Silicon valley is learning this the hard way with all these tech company flops. Instagram just sold for millions of dollars, but the site is in the RED, badly.

        Just because someone is willing to spend an obscene amount of money on a site, doesn't mean that the site is worth that much. Anyone remember the .com bubble? I don't, I was too young.

        Anywayz, yeah, selling a site for more than X12 it's monthly revenue is not prudent. If you wanna give the guy something stupid like $100,000 then fine, go ahead. I think you'll be quite disappointed though.
        {{ DiscussionBoard.errors[8163665].message }}
      • Profile picture of the author Mike Hlatky
        Originally Posted by Lance K View Post

        My real point is I don't get the 12 x method. Why would anyone with a real business let it go for 12 times monthly revenue unless it's a house of cards or has a dismal profit margin?
        The more the site makes, the more multiples you can get for it.

        I would say for sites making $25k+ per year, you can get 1-3x yearly income.
        {{ DiscussionBoard.errors[8163673].message }}
        • Profile picture of the author Lance K
          I guess at some point we have to establish the difference between a site and a business.

          Imagine what Allen's response would be if you offered him 10x monthly revenue for this place.
          Signature
          "You can have everything in life you want if you will just help enough other people get what they want."
          ~ Zig Ziglar
          {{ DiscussionBoard.errors[8163854].message }}
        • Profile picture of the author Lance K
          Originally Posted by Mike Hlatky View Post

          The more the site makes, the more multiples you can get for it.

          I would say for sites making $25k+ per year, you can get 1-3x yearly income.
          How much would you change the multiple you were willing to pay based on profit margin?
          Signature
          "You can have everything in life you want if you will just help enough other people get what they want."
          ~ Zig Ziglar
          {{ DiscussionBoard.errors[8163858].message }}
          • Profile picture of the author sbucciarel
            Banned
            Originally Posted by Lance K View Post

            How much would you change the multiple you were willing to pay based on profit margin?
            Using a broker, who doesn't normally rely on the multiples method of valuation for high value sites, would most likely get him closer to what he wants than just listing it on Flippa, although I think $500,000 is too high for that amount of income and just one income stream.

            There are other considerations when valuing a site:

            Consistency of income and how long it's been making money

            List/Facebook Fan Page with *real fans*

            Ease of maintaining website - does it have a nifty content management system? Require a lot of maintenance?

            Financial statement. Is the income passive? If not, how much work is required to maintain income or grow it?

            Traffic: Does it get high quality, organic traffic? Paid for traffic? How is it positioned in serps?

            If the site is a "business", there may be other business assets, intellectual property, etc. to consider and factor in.

            Product: Does it have a product or products?

            You could always consult a website broker to help you get an idea of what the site might be worth.
            {{ DiscussionBoard.errors[8176450].message }}
            • Profile picture of the author Lance K
              Originally Posted by sbucciarel View Post

              You could always consult a website broker to help you get an idea of what the site might be worth.
              After some more digging, everything I've seen with the site I was talking about leads me to believe that they would be lucky to be some of those folks who get the dreaded 10-12 times monthly earnings. Which is why they'll more than likely continue to own and operate the site. It's worth more than that to them, but probably only that or less to a buyer.
              Signature
              "You can have everything in life you want if you will just help enough other people get what they want."
              ~ Zig Ziglar
              {{ DiscussionBoard.errors[8212028].message }}
      • Profile picture of the author CDarklock
        Originally Posted by Lance K View Post

        Why would anyone with a real business let it go for 12 times monthly revenue
        Think about that for a moment.
        Signature
        "The Golden Town is the Golden Town no longer. They have sold their pillars for brass and their temples for money, they have made coins out of their golden doors. It is become a dark town full of trouble, there is no ease in its streets, beauty has left it and the old songs are gone." - Lord Dunsany, The Messengers
        {{ DiscussionBoard.errors[8166122].message }}
      • Profile picture of the author Joe Mobley
        Originally Posted by Lance K View Post

        Why would anyone with a real business let it go for 12 times monthly revenue unless it's a house of cards or has a dismal profit margin?
        Let it go is a reflection of your thinking right now.

        He may want or need a cash infusion right now.

        He may have an issue that might be mitigated to some degree by selling this website. Divorce, IRS, legal or civil issues, or a new and expensive girlfriend. :rolleyes:

        Joe Mobley
        Signature

        .

        Follow Me on Twitter: @daVinciJoe
        {{ DiscussionBoard.errors[8166566].message }}
  • Profile picture of the author RockNRolla
    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.
    {{ DiscussionBoard.errors[8163897].message }}
    • Profile picture of the author Lance K
      My thoughts exactly. If it's a less established site without a solid track record or a site with a profit margin of say less than 10% then perhaps I could see 1x annual revenue being feasible.
      Signature
      "You can have everything in life you want if you will just help enough other people get what they want."
      ~ Zig Ziglar
      {{ DiscussionBoard.errors[8163953].message }}
  • Profile picture of the author Thomas Smale
    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.
    Signature
    I specialize in selling websites over $10,000 in value. No obligation, confidential valuation here.
    {{ DiscussionBoard.errors[8165209].message }}
  • Profile picture of the author WillR
    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.
    {{ DiscussionBoard.errors[8165244].message }}
    • Profile picture of the author agmccall
      I would say that 500k is a reasonable starting price. You are actually buying someones business, not just a webstie. and more than likely there would be a no compete clause in the agreement.

      I have a custom golf club ecommerce site and was approached last year by a broker that was making an offer for our business for a large golf club company. We were not interested is selling but the gentleman said that an online business will sell for 5 to 10 years worth of sales,

      So, 500k is a good starting point

      Al
      Signature

      A bar of iron cost $5. Made into horseshoes, it's worth $12. Made into needles, it's worth $3500. Made into balance springs for watches, it's worth $300,000. Your value is determined by what you are able to make of yourself

      {{ DiscussionBoard.errors[8165266].message }}
      • Profile picture of the author WillR
        Originally Posted by agmccall View Post

        I would say that 500k is a reasonable starting price. You are actually buying someones business, not just a webstie.
        The website is the business and vice versa.

        Sorry, but at 500k it would take you 10 years at it's current earnings just to get your money back.

        That's a scary investment if you ask me.

        Look back at the Internet 10 years ago and think about how much it has changed. Now look forward and imagine how different it will be 10 years from now.

        I wouldn't pay anywhere near that for a site making only 50k per year.

        But that's just me...
        {{ DiscussionBoard.errors[8165274].message }}
        • Profile picture of the author agmccall
          Originally Posted by WillR View Post

          Sorry, but at 500k it would take you 10 years at it's current earnings just to get your money back.
          If you are interested in buying a business then you should have plans to grow that business and multiply the current earnings.

          It is like buying a website that makes $100.00 per month. I am sure you do not plan to keep it at the $100.00 per month level. With that said, if you have a plan then the current earning for any business is just a starting point.

          al
          Signature

          A bar of iron cost $5. Made into horseshoes, it's worth $12. Made into needles, it's worth $3500. Made into balance springs for watches, it's worth $300,000. Your value is determined by what you are able to make of yourself

          {{ DiscussionBoard.errors[8165372].message }}
    • Profile picture of the author Lance K
      Originally Posted by WillR View Post

      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.
      True. One of the other potential buyers is a competitor who wants to buy it and shut it down just to eliminate competition.


      Originally Posted by WillR View Post

      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.
      I'm fairly certain that's part of what's happening with this one.

      Originally Posted by WillR View Post

      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.
      This site isn't going anywhere anytime soon. The owner could probably double or triple the revenue in pretty short order if they wanted to put more effort into in. They have a very loyal following, limited competition, and are very well respected in the industry.

      Great insights, Will. Thanks.
      Signature
      "You can have everything in life you want if you will just help enough other people get what they want."
      ~ Zig Ziglar
      {{ DiscussionBoard.errors[8165870].message }}
      • Profile picture of the author PerformanceMan
        Originally Posted by Lance K View Post

        This site isn't going anywhere anytime soon. The owner could probably double or triple the revenue in pretty short order if they wanted to put more effort into in. They have a very loyal following, limited competition, and are very well respected in the industry.

        Great insights, Will. Thanks.
        Sounds like this guy is ripe for fresh competition. As they say, if you can't join'em beat'em
        Signature
        Free Special Report on Mindset - Level Up with Positive Thinking
        {{ DiscussionBoard.errors[8175835].message }}
  • Profile picture of the author jasonellis
    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.
    Signature
    Low Competition Niches, Sales like Clockwork => http://commissiontap.com/sites
    {{ DiscussionBoard.errors[8165465].message }}
  • Profile picture of the author Gary Ning Lo
    $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
    Signature
    -------------------------------------------------------------
    {{ DiscussionBoard.errors[8165590].message }}
  • Profile picture of the author John Romaine
    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 )
    Signature

    BS free SEO services, training and advice - SEO Point

    {{ DiscussionBoard.errors[8166216].message }}
    • Profile picture of the author CDarklock
      Originally Posted by John Romaine View Post

      (That's the G rated version Caliban )
      The G-rated version is "because QQQQ."

      Think about it
      Signature
      "The Golden Town is the Golden Town no longer. They have sold their pillars for brass and their temples for money, they have made coins out of their golden doors. It is become a dark town full of trouble, there is no ease in its streets, beauty has left it and the old songs are gone." - Lord Dunsany, The Messengers
      {{ DiscussionBoard.errors[8166519].message }}
      • Profile picture of the author John Romaine
        Originally Posted by CDarklock View Post

        The G-rated version is "because QQQQ."

        Think about it
        LOL ...............
        Signature

        BS free SEO services, training and advice - SEO Point

        {{ DiscussionBoard.errors[8169514].message }}
        • Profile picture of the author Rod Cortez
          Originally Posted by Lance K View Post

          I've never understood the 12 x monthly earnings logic when valuing a web site.

          Talked to a gentleman today about purchasing his site. Does about $50,000 per year on about 35,000 visitors per month. He wants $500,000. Way too much, but it's definitely worth quite a bit more than $50,000 to him. It's nearly hands free income. Barring any medical or family emergency, I'd question his sanity even if he sold it for $100,000 (24 months x earnings).

          The task at hand now is to uncover what it's truly worth & convince him that my number is a fair price and that it's more accurate than his. Hopefully he's got quite a little wiggle room.
          Originally Posted by Lance K View Post

          This site has been around for 10+ years. Deeply entrenched in an offline industry. Not reliant on email lists or ad campaigns for revenue. Does have an email list. But the money flows even without it. I'm very familiar with the seller and the site. Not worried about getting conned, just getting to the true value.
          I've been buying and selling websites for a long time and unless the seller has some kind of serious patent or some kind of intellectual property that has an almost guaranteed growth potential, at 500k, he or she is overshooting their valuation by a mile.

          If the owner had a large prospect list and a good-sized buyer's list, he could probably add another 50 to 150k to the equation.

          I start off my evaluations anywhere from 10 to 12 times the monthly net earnings. So depending on what other assets they may have they could reasonable ask for 50 to 75k. But 500k? I don't think so, at least, not without knowing more.

          I also look for consistency of earnings. How long have they been in business and how long have they been earning?

          Has there been a steady and predictable earnings growth?

          Where is all the revenue coming from? A website / business that has multiple streams of income is better hedged against risk. So if the business gets all their income from ONE traffic source or only ONE product or service, it's not going to ge a higher valuation.

          Btw, I've come across sellers who think it's 12x the annual earnings, and they end up over valuing their business, which is possibly what this guy is doing. It's generally 12x the monthly net earnings and that's just to have some kind of starting off point.

          Lastly, I like to do a contextual valuation and see what other similiar businesses in that industry are selling for. Some businesses might have a product or service that has higher inelastic demand. The more demand for a product and less competitors, that is also going to increase valuations.

          There is both an art and a science to valuating businesses, online or offline.

          I think the seller in Lance's example has either made an error or he was hitting the crack pipe heavily that week.

          RoD
          Signature
          "Your personal philosophy is the greatest determining factor in how your life works out."
          - Jim Rohn
          {{ DiscussionBoard.errors[8170306].message }}
          • Profile picture of the author Tom B
            Banned
            Lance, it will also depend on if the site can be built on to increase revenue. If I am capped at 50k a year, I will keep that in mind when deciding if my cash outlay will have better alternatives.
            {{ DiscussionBoard.errors[8170703].message }}
          • Profile picture of the author Lance K
            Originally Posted by Rod Cortez View Post


            Where is all the revenue coming from? A website / business that has multiple streams of income is better hedged against risk. So if the business gets all their income from ONE traffic source or only ONE product or service, it's not going to ge a higher valuation.
            That's one of the main rubs here, Rod. The revenue, although steady & predictable, is from a single service at the moment.

            There are a handful of new services that could be implemented fairly quickly that have the potential to significantly increase earnings. But I'm not going to pay that kind of premium for potential.

            It's not a motivated seller, so it's likely a dead deal. They're fairly certain they'll make $50k/year minimum over the next 10 years so that's why they're stuck on $500,000 (I guess they're not factoring in the time value of money). And it sounds like they going to start being more hands on and implementing some new services to boost revenue. That is if they don't convince one of the other 2 potential buyers to fork over half a million.

            So far they've been fairly successful at thriving and fending off competition. But I doubt anybody that has tried to compete has thrown any serious money at it. And there's no way that someone would have to spend $500,000 to launch & establish a competitive site that will clear $50,000/year.

            I'll be interested to see if they get it sold to one of the other potential buyers. My gut tells me they're going to still own it & that's really what they want. It seems they have the "if the price is right, anything is for sale mentality". And I don't blame them a bit for it.
            Signature
            "You can have everything in life you want if you will just help enough other people get what they want."
            ~ Zig Ziglar
            {{ DiscussionBoard.errors[8172773].message }}
            • Profile picture of the author Rod Cortez
              Originally Posted by Lance K View Post

              That's one of the main rubs here, Rod. The revenue, although steady & predictable, is from a single service at the moment.

              There are a handful of new services that could be implemented fairly quickly that have the potential to significantly increase earnings. But I'm not going to pay that kind of premium for potential.

              It's not a motivated seller, so it's likely a dead deal. They're fairly certain they'll make $50k/year minimum over the next 10 years so that's why they're stuck on $500,000 (I guess they're not factoring in the time value of money). And it sounds like they going to start being more hands on and implementing some new services to boost revenue. That is if they don't convince one of the other 2 potential buyers to fork over half a million.

              So far they've been fairly successful at thriving and fending off competition. But I doubt anybody that has tried to compete has thrown any serious money at it. And there's no way that someone would have to spend $500,000 to launch & establish a competitive site that will clear $50,000/year.

              I'll be interested to see if they get it sold to one of the other potential buyers. My gut tells me they're going to still own it & that's really what they want. It seems they have the "if the price is right, anything is for sale mentality". And I don't blame them a bit for it.
              Unless they have an asset of substantial value aside from that one revenue stream coming in, I seriously doubt they're going to find any takers.

              Having only one revenue stream from one source is a huge red flag and actually lowers the valuation in my book.

              I would only consider paying 500k for a website if it earned at least 40,000 dollars per month for at least 18 months and it had multiple income streams.

              This one sounds like one big turd.

              RoD
              Signature
              "Your personal philosophy is the greatest determining factor in how your life works out."
              - Jim Rohn
              {{ DiscussionBoard.errors[8173176].message }}
            • Profile picture of the author Tom B
              Banned
              Originally Posted by Lance K View Post

              I'll be interested to see if they get it sold to one of the other potential buyers. My gut tells me they're going to still own it & that's really what they want. It seems they have the "if the price is right, anything is for sale mentality". And I don't blame them a bit for it.
              It sounds like he is in jeopardy of being left behind due to laziness and greed.

              No brand recognition, only making 50k a year after 10 years and only one traffic source would be ideal for a competitor to throw some money at it and beat him at his own game if there is additional revenue there.

              I would approach him in that manner. Tell him you can become a competitor and take away some of his business. Say it would cost 250k (or whatever you think it's worth) to duplicate his efforts and start taking his customers away from him. Of course it would be easier to buy him out at the same price.

              Either way, if you enter into competition it will affect his bottom line and he will be selling for less in a year or two if he can even sell it.

              He is probably bored with it and doesn't want to put in the effort to remain competitive.
              {{ DiscussionBoard.errors[8173400].message }}
  • Profile picture of the author rajeevsh
    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.]
    {{ DiscussionBoard.errors[8167009].message }}
  • Profile picture of the author Curtis2011
    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.
    {{ DiscussionBoard.errors[8167095].message }}
  • Profile picture of the author Flipfilter
    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
    {{ DiscussionBoard.errors[8175405].message }}
  • Profile picture of the author GforceSage
    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.
    {{ DiscussionBoard.errors[8175570].message }}
  • Profile picture of the author Soulstreak
    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.
    {{ DiscussionBoard.errors[8175699].message }}
    • Profile picture of the author Lance K
      Originally Posted by Soulstreak View Post

      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.
      Nobody's planning on investing 500k...that's just what the current owner is asking.
      Signature
      "You can have everything in life you want if you will just help enough other people get what they want."
      ~ Zig Ziglar
      {{ DiscussionBoard.errors[8176284].message }}
  • Profile picture of the author shane_k
    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.
    {{ DiscussionBoard.errors[8212782].message }}
    • Profile picture of the author Lance K
      Originally Posted by shane_k View Post

      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.
      I have a degree in finance.
      Signature
      "You can have everything in life you want if you will just help enough other people get what they want."
      ~ Zig Ziglar
      {{ DiscussionBoard.errors[8213044].message }}

Trending Topics