Wednesday, April 7, 2010

Selling online business websites -- how the buyer attributes value

A very important aspect of acquiring a website is having both the Buyer and Seller be reasonable with their price expectations.

Let's just get one thing straight, just because Google is trading at a 30X multiple it doesn't mean that the website you plan on selling should and would justify the same multiple.  Google is a game changer that more or less invented a whole new business model and a platform for building additional technology.  In addition, they are a very successful publicly traded company, with the emphasis on being public.  They also have thousands of employees and mint cash on a daily basis.

Even a successful, profitable, $250M per year company that is private has a discount applied to their shares.  This discount is applied to the value of the company because the assets are not liquid.  Keep in mind too because you are likely a small "mom and pop" shop, and most likely private, there will also be a discount applied to you.  If you have shares of your website you can share publicly on NASDAQ, you can ignore my previous statement, otherwise this applies to you.

Chances are, your website, although successful, won't garner the same level of excitement as Google, and therefore would not justify the same multiple.  In addition, most of the websites out there are just what they are, websites. 

Now that we have gotten you off the 30X multiple high horse, what should you really expect?

Ultimately, the goal of any acquisition is for the Seller and Buyer to come to terms they can agree on.  The transaction is only successful if it's completed. 

Here is how companies who are interested in acquiring your site value your online website business

They look at your historical performance as an indicator of future potential.  Although this is an inaccurate science, this is the best tool we have.  Even when you judge which mutual fund or stock to invest in, you take into account at their historical performance.  Why should an acquisition of a website (which is also a form of investment) be any different?

Keywords that drive traffic to your site is very important.  For a mortgage company, keywords that attribute to people transacting on mortgage offerings is more important than people arriving at your site looking for "Britney Spears" or "free hot dogs".  This is why some "targeted" sites with much smaller volume justify a higher purchase price than another site with more volume but less relevant traffic.  Relevant traffic changes from Buyer to Buyer.  Just because one Buyer who's in the mortgage space decides your website only has 2% relevant traffic doesn't mean a Britney Spears fan site wouldn't find the rest of your 98% traffic valuable.  For example, if you run and operate a porn site, you're not going to try to sell it as an education web property.  This goes back to you having to find the right Buyer for your site.  It is all about the "fit".

What value to attribute to the Seller

This is more art than science with the valuation process. The most clear example I have is how the Buyer decides what to attribute to the Seller and what to the Buyer.  You may have a very crappy site with a lot of potential, but that does not mean you will get paid on that potential.


A good parallel is if I buy a classic junker from you but I have to spend a lot of resources to restore said car, does that mean I should pay you the full value of the restored car for your junker?  Not really, right?  The same principal applies to selling your website.  If you have a website that will require the Buyer to invest a lot of resources for it to get to where the Buyer wants the site to be, it is not likely the Buyer will attribute a lot of that eventual value to the price he is willing to pay upfront for the site.  On the other hand, if your site is already optimized and ready to go, or plug-and-play, there is much more value the Buyer can attribute to the purchase because there will be minimal investment he/she will need to make.

I hear a lot of times Seller mentioning, "I'm glad I didn't sell my site then, cause 5-years later, I'm making more now per month than I would have made then and they're offering me more money!"  Now let's be realistic, the reason why your site is worth more now is because you invested a lot of resources improving the site's SEO rankings and adding incremental value to the site through unique content, adding proper high value back links, etc.  Everyone in this space knows SEO is a lot like running on a treadmill, you are either running harder than everyone else or they are passing you.  If you really had your site on autopilot, chances are the site would have atrophy over the 5-year period as competitors improve their rankings and surpass you. 

There is also a "strategic" value that the Buyer may, or may not, place on your site.  If the Buyer already has a lot of similar sites in his/her portfolio, he/she may not be willing to pay as much for the site as if your website will be the cornerstone of a new vertical for the company.   Good example would be rare, classic items sell for a lot more than items you can find easily.  This is just simple Economics 101 "supply and demand".  The less supply there are the more the demand will be.  Just something to consider when you are negotiating with the Buyer.

Selling an online business website isn't that difficult, and the general theories that apply with online acquisitions are the same that applies to buying/selling an used car.  What is important is to understand is the "real" value of the website and what you are willing to take for the site.  Make sure you work with a Buyer who is transparent with their process and what they can offer.  The same applies to the Seller, being honest with your Buyer will help facilitate the process as well.  End of the day, it is all about trust and transparency. 

A rational Buyer will never overpay for a site.

No comments:

Post a Comment