The art and science of valuing websites

In an online marketplace like Flippa, we’ve seen buyers and sellers try out the full gamut of approaches for valuing websites — some more creative than others.

Once you decide to get your site in shape for a sale, it’s important to value it properly. Over the last six years, we’ve sold more than $100 million worth of sites on Flippa. That’s given us insight into which valuation methods are good, helping site owners clinch that all-important deal, and which fall short, leaving sites unsold and their owners disappointed.

Today I want to walk you through the more successful valuation methods in use now. I’ll show you how they relate to different aspects of a site, and why they matter.

Then we’ll look at the different types of buyers in the market, and what that can mean for the final sale price of a site.

Common methodologies

For all their variation, the valuation approaches we see in use generally fall into three main categories: they’re based on income, assets, or the market itself.

The income approach

This approach is based on the belief that revenue matters most.

It calculates value on the bases of revenue that the buyer can expect to earn from the site, taking into account the risks that are involved in operating it.

Income-based valuations consider aspects like CAPM (capital asset pricing model), IRR (internal rate of return), NPV (net present value), WACC (weighted average cost of capital), NCF (net cash flow), and GAAP (generally accepted accounting principles).

Asset approach

The asset approach to valuation focuses on the market value of what’s included in the sale itself.

This method aims to find the total value of the assets being sold, including, for example, things like the inventory held for an ecommerce site, as well as the website, its customer lists, contracted agreements with suppliers, and so on.

At Flippa, we’ve found that this approach can undervalue a site. In the digital space, it can be hard to work out where one asset ends and the next begins. If we’re not 100% clear on the precise nature of the assets involved in a sale, we’re more likely to underestimate the value they represent.

Market approach

The market approach to website valuation is a bit like brick-and-mortar property valuations.

Buyers and sellers look at transaction values for similar sites that have sold in the recent past. By weighing up the nature of each site, and comparing that with its sale price, they can work out a rough valuation for another site in that niche.

The idea that a site is usually worth a multiple of its monthly revenue is an example of the market approach in action. This is the approach that buyers and sellers most commonly use to value sites for sale on Flippa.

What drives value?

In theory, this can seem a fairly open-ended question.

In practice, the market uses a few common primary and secondary drivers to determine a site’s value. Primary drivers include site revenue and site usage. The secondary drivers are the site’s age and the technologies on which it’s built.

Revenue

A site that’s making money is more valuable than a similar site that’s not. That pretty much goes without saying.

The ultimate value of this revenue is usually calculated as a multiple of the site’s average monthly revenue.

What multiple? It can range from 12 to 35, so a site that averages around $1,000 in monthly revenues will usually sell for a price between $12,000 and $35,000.

How can we know which multiple to use? By looking at three crucial factors:

• The repeatability or scalability of revenue. A revenue model that’s easy to repeat or scale up will be valued more highly than one that’s not. So a site that makes money from subscriptions will usually be valued more highly than one that uses a single-purchase model — a site that sells a product, for example.
• The quality, reliability and cost of site traffic. Buyers will value a site that attracts quality, converting traffic in reliable ways over one that uses shady techniques to attract traffic from anywhere. The value of a site that uses blackhat SEO tactics, for instance, will be calculated on a lower multiple of revenue than a peer site that gains most of its traffic through organic search.
• The current traffic’s conversion rate and yield. Website buyers are more likely to pay a premium for a site when they know they can easily improve its conversion rate. For example, if the buyer can see that they can boost profitability by honing the shopping cart experience, or improving the value of the traffic, perhaps by moving to a higher yielding ad platform, they’ll likely use a higher multiple to value the site.

Site usage

Clearly, traffic is a big factor in choosing the multiple on which a site’s value is based. Buyers are happy to pay more for a site that has strong traffic levels, especially if it’s in a niche that’s easy to monetise.

In fact, the listings for many sites for sale on Flippa show a monthly value per visitor figure. This gives prospective buyers a more granular, easily comparable metric by which to assess sites for sale.

Traffic value is influenced by:

• source and location, which can affect traffic reliability, the likelihood of fraud and chargebacks, and so on
• return visits as a percentage of total visits, which influences the cost of traffic, as well as conversion rates and yield
• the time on site per visitor, which reflects engagement.

Given the importance of traffic, it’s no surprise that buyers also consider third-party indicators for the site, such as Compete and Alexa ranks, and PageRank.

They’re also likely to look closely at the site’s backlink profile and its quality. Since backlinks influence search position and traffic, buyers considering a site that relies heavily on search traffic will want to know that the links to it won’t disappear if the linking sites change hands.

They’ll also want to make sure the backlinks are legitimate, and of high quality. This way, there’s less chance that the site’s search rank will decline with the next Google algorithm update.

Site age

Given the factors we’ve just talked about, it makes sense that buyers give a higher value to sites that have a longer history than those that are new to the web.

Even without strong revenue or traffic figures, a site that’s been around for a while will usually be worth more than one that hasn’t. An older site will usually have a more well-known brand, a better backlink profile, more results in the search engines, and potentially a better search rank for key niche terms.

Most buyers will find a site like this easier to monetise than one that’s a relative newcomer to the niche, and they’ll pay accordingly.

Technology

The final value driver is technology. The older the technology behind the site, the lower the site’s value. Why? Because it’s usually pretty hard to find developers to maintain outdated code.

On the other hand, sites that have been built entirely from scratch using current technologies can still take a lot of specialized work to maintain, so that may impact their valuations, too.

The best value tends to lie with sites that are built on popular platforms, and have been well-maintained. A site that uses standards-compliant, current-version code will get the best valuation. It’ll be easy to find developers who are willing to work on it, and the work itself should be comparatively straightforward to do.

What doesn’t drive value?

Among website owners—particularly those who haven’t bought or sold a site yet—there are a few misperceptions about what adds to site value.

The first is the amount of time the site owner has put into building the site. Novices often feel that the time they’ve devoted to their site is time that the new owner won’t have to put in, so it should count for something in a valuation.

But this time is seen as a sunk cost and it has little to no bearing on the final valuation figure.

Similarly, the potential of the idea that underlies a site that hasn’t yet attracted any traffic or made any money will rarely, if ever, influence its valuation.

Unless the site’s owner has been able to execute on the potential of that idea, it’s considered worthless. In fact, buyers usually doubt claims of “potential”—if it’s truly there, they ask, why hasn’t the current owner made the most of it already?

Buyer types and why they matter

Most buyers can be roughly grouped into one of two camps: they’re either financial buyers or strategic buyers.

Financial buyers evaluate each purchasing opportunity as a stand-alone acquisition.  They’ll usually want to pay a fair market value for a website they’re considering.

Strategic buyers will evaluate each opportunity to buy a site within the context of their existing portfolio of properties or specialist resources.

Since these kinds of buyers may see synergies between the site that’s for sale and their current operations—synergies that give them the chance to make even greater profits from the new acquisition than normal—they may be willing to pay a premium for it.

These buyers are usually the ones who make the news—there are no prizes for guessing what kind of buyer Zuckerberg was when he handed over $1 billion for Instagram!

The keys to a strong site valuation

While every seller wants to meet with the dream strategic buyer, it’s virtually impossible to anticipate the kind of premium they’d be willing to pay. Pricing a site in the hopes of capturing a strategic buyer is more likely to limit the number of buyers who’ll bother to look at your site than it is to increase it.

A seller’s best bet is to price their site for financial buyers, using the points I’ve mentioned here as the basis for that valuation.

Keep in mind the primary and secondary drivers of value—revenue, site usage, site age and technology—as you research your market niche to see what comparable or peer sites are selling for.

While every hour an owner has put into a site may not be accounted for individually in the sale price, this approach should help you arrive at a valuation both parties are happy with—and one that sells.

Image Credit: Dan Kitwood/Getty Images