Before you sell a website, you need to know this…

Most “website valuations” are based on dated and flawed thinking

Thinking that leaves the entrepreneur selling a website out of pocket!

In this article Website Selling Authority and good friend of IncomeDiary, Clinton Lee shows how the entrepreneur can get more for their online business (or indeed any business) than they thought.

Clinton was one of the first to professionally value websites –  even before website flipping was recognized as a business model, writing one of the first authoritative works on website valuations back in 2008. Clinton has also written previously for IncomeDiary here.

With the correct marketing and approach, you can achieve a ‘life changing sum of money’ for your website.

Read on…

Website Valuations – What You Need To Know When You Sell A Website

There is no end of junk information on the internet about how to value websites. And there’s no shortage of so called valuation “tools”, not to mention “gurus” with theories and formulae. For example, some of these so called experts claim that you can arrive at the value of a website if you know the “going multiple” in the industry. Simply multiply your site’s earnings by that number and … voila?!

For example, if the going multiple is 3x annual income, the value of a website earning $10K per year is $10K x 3 = $30,000.

Pure, unadulterated nonsense!

I’ve explained the logic fail behind this “formula” (and other valuation “methods”) in this article about valuation myths. Put these theories behind you. Because if you limit yourself to thinking your website is worth 3x your earnings, you’re placing an artificial ceiling on the value of your site. And that doesn’t help you get the best price.

3 Simple Factors That Determine The Selling Price When You Sell A Website

1. What you’ve got to sell: (everything from your domain name to your mailing list)
2. Who you show the buying opportunity to: (presenting to and attracting the right buyers / investors is essential)
3. How you play: (Everything from negotiating the deal to creating the best deal structure – very important!)

It’s at #2 and #3 where most of the money is to be made!

1. What you’ve got to sell

The assets that underpin your website’s earnings are of keen interest to the buyer. They include your domain name, your traffic and so on. Without these assets there is no revenue. So it’s in the buyer’s best interest to pay close attention to these assets, to evaluate them, to conduct due diligence on them, to satisfy themselves that they are worth what they are going to pay you for your website / online business.

However, there are likely numerous assets your business possesses but which you haven’t brought to the buyer’s attention.

If you haven’t identified them and you haven’t pointed them out to the buyer…. you won’t get paid for them!

When trying to sell a website entrepreneurs often miss out on the following:

– manuals, processes and procedures developed in the business over the years (yes, they have value!)

– copyright in material created over the years – images, advertisements, content

– customer database / list of past customers

– list of subscribers

– the team (the people working in the business, sales, accounts, bloggers etc)

– licences, permits, permissions the business enjoys.

– social media engagement (no, not followers but actual engagement)

– custom software you’ve commissioned or modifications you’ve had done to off-the-shelf software – brand, logos, trademarks (you may have trademarks even if you haven’t ever registered a trademark)

– detailed traffic logs, data on your customers (from surveys conducted, for example), other data

– a long history of Adwords PPC campaigns (very valuable!) etc.

It’s amazing how often owners go to market with a sales memorandum that doesn’t include their best assets!

But it gets worse than that.

When you sell a website you need to know this…

Many mistakenly identify some of their liabilities – you know, the bad stuff – as assets. They then proceed to spend much time and effort highlighting these liabilities and talking about them. As you will expect, this does them no favours when it comes to price!

Examples of liabilities often promoted heavily by sellers:

– high rankings in Google: The smartest buyers, the ones with the deepest pockets, see this as a liability. If the majority of your earnings is reliant on a source of customers over which you have no control, that’s a major risk. One algo change is all it takes…

– the “potential” in their business: Buyers absolutely hate hearing about potential because every single seller claims potential. Buyers take the fact that you haven’t developed the potential yourself as proof that this potential doesn’t really exist!

– the fact that the business hasn’t been advertised and that a lot more profit can be made with a bit of advertising: This is naive thinking that sellers often display. Buyers know that they will have to waste thousands of dollars on non-working ads before they discover what ads and what channels work well for this business. They don’t want to be the ones to run these costly experiments. Far better if you have actually advertised and have proof of which channels work well for your specific business.

Making a big song and dance about these liabilities (in the belief that they are assets which will impress the buyer) loses vendors a lot of money. These detract from value, not add to it. Each time you mention “assets” like these the astute buyer is mentally knocking another 10% or 20% off the price!

What buyers want is often the exact opposite of what you’re boasting about. To ensure top price familiarise yourself with what impresses buyers and what scares them away.

2. Who you show the buying opportunity to

Erect a lemonade stand on a busy promenade on a hot day and you’re going to sell more lemonade than if you set up shop on a freezing winter evening near the sea front.

Simple, right?

Yet most sellers go about finding buyers completely the wrong way! They list their website on an auction platform like Flippa. Or they use the various business-for-sale classified sites and portals. Wrong, wrong, wrong.

This is not targeting buyers who have the greatest need for your website.

It’s not that you won’t get a sale at these locations. Thousands of websites sell at these locations every year. But these are not the venues where you’ll find the best buyers, the buyers who’ll pay the highest price, when you sell a website.

If you’re willing to put a bit of time and effort into finding the right buyers you can get paid well above the craziest website valuation.

Let’s take a step back and consider what we mean by the “best” website buyers.

This is best illustrated with a simple example.

You own a website selling car tyres (American translation: tires).

You’ve been going for five years and are now making $30,000 a year in net profit. The going multiple in your industry is 2.6.

You go to market by listing at the usual locations and you attract their typical buyer – Joe Bloggs who’s looking to get into online businesses, who doesn’t want to start one from scratch and who happens to have some capital to make the purchase. He’s read various guides on valuation and knows that the going multiple is 2.6. He expects to get your business for circa $60K or a max of $78,000 (30K x2.6). His calculation is that he’ll make $30K a year and recover his investment in a little over two years. He considers that a reasonable “payback period”.

Now think outside the box.

When you sell a website, who is likely to derive the most benefit from acquiring your business?

Who could use all your assets to their maximum value?

I will offer one suggestion:

A national chain supplying automotive parts. Let’s call them XYZ Cars Ltd. They sell everything from engine oil to wing mirrors, from brake shoes to tyres. They are well established with bricks and mortar outlets in several towns but they don’t have a great online presence. All they have is a basic website with no online ordering facilities. What benefits can they derive from buying your website? First, even if they sell the same number of tyres that you do they’ll make a lot more than $30K on the tyres. They buy in larger quantities and get better prices. If they ran your site they’d make an additional $10K a year in profit without making any changes whatsoever. Just on tyres.

But they see an opportunity here to use your infrastructure to load tens of thousands of their own SKUs – their engine oil and brake shoes and everything else – to your online shop. Now they’ve got a complete, operational online shop (and saved the $15K in development costs they were on the verge of paying to have a new website created for them). They figure that visitors coming to your website – your visitors, customers they wouldn’t otherwise have access to – could be persuaded to buy other car products. The number crunchers calculate an additional $60K in profit from your visitor flow.

It doesn’t end there.

XYZ has some smart cookies working for them and they recognize that customers who previously ordered from you are a valuable resource. They can notify your customer database of all the new products the site is now stocking. These customers like you and will come back to you the next time they need tyres, but handled well they can now be converted to customers for all the other products too. XYZ plans to run a bit of a promotion – a special discount offer – to get these customers to buy their first non-tyre product. It is expected that new sales from these past customers could generate another $50K in profit.

Let’s do some adding up. XYZ Cars Ltd, if they buy your business, will see the original $30K you were making. They’ll also make an additional $10K + $15K + $60K + $50K in the first year as described in the previous paragraphs. That’s a total return of $165K in the first year and $150K in subsequent years (as the $15K web dev cost savings is a one off).

Bear in mind that such a return will be unique to a company such as XYZ Cars Ltd. Other buyers won’t see anywhere near that kind of return from your business. But, if XYZ expects the same payback i.e. to recover their investment within 2.6 years, they could justify a price of $165K + $150K + ($150K x 0.6)= $405K.

So instead of $78,000, you sell a website for $405,000!

OK, a somewhat simplified example – but more than the so called normal valuation is what what the entrepreneur is looking for!

In reality, larger firms don’t think in terms of two year “payback period”. Their strategic plans tend to have longer time frames; this presents an opportunity for you to negotiate even more than $405K. And if you play your cards right with the deal structure (see the next section) you could add further value to the deal to ramp the price up another notch or two.

XYZ Cars Ltd wasn’t actively looking to make an acquisition. They never even considered the idea. It took some legwork to find them. But if you invested in the research, identified companies like them who could benefit from the synergies, and convinced their head honchos to take a look at the opportunity, there’s a bounty to be had far and beyond what you’d get at the usual website-for-sale or business-for-sale outlets!

It’s not always possible to find the perfect match strategic buyer . But even if you didn’t, small synergies can still be worth a lot of money, a lot more than the $78K type pricing you’d get from “typical” buyers at the marketplace platforms.

3. How you play the game when you sell a website

In one of the blog posts on my website I offer to buy any business for double the owner’s asking price, whatever the figure the owner has laid on the table.

So, yes, if you’ve valued your business at 5x your earnings, I’ll pay you double that. If you’ve valued your business at 50x your earnings I’ll pay you double. You get the picture.

There’s just one caveat: It is me who decides the deal structure in the contract.

And here’s the deal structure I have in mind: $1 paid today and the remainder paid in $1 installments for as long as the business is running at a profit.

Not such a good deal, is it?

But if you want a big price for your business you need to be willing to play the game the way the big businesses play it. Sellers of small businesses often expect to get the agreed price paid in cash on the day of completion. That’s not how it works in the biggest deals. The biggest deals involve some form of seller financing i.e. the seller defers part of the payment.

Offering credit when they sell a website is anathema to most small business owners.

“No way,” they cry. “How can I trust the buyer to pay me for my website?”

Or, “I need the money now, that’s the reason I’m selling my website!”

And that’s fair enough. If you want an all cash deal that’s entirely your prerogative. However, if you want the best price you’re going to have to be flexible on not just payment terms, but on a few other things as well.

If, instead of demanding $500K for your business, you’re willing to take $300K upfront with the balance securitised on the business’ stock, the buyer’s house or some other asset, you will be opening up the opportunity to a wider range of buyers – those who can’t quite raise $500K in cash.

But more importantly, you could expect a significantly higher price simply from making this one concession when selling a website.

$600K wouldn’t be unreasonable.

That’s a whole 20% more than you would have obtained before.

But “seller financing” is just one of several tools available in the deal structure. If you are willing to accept some personal responsibility for driving sales and meeting projections for a year or two post handover, for example, you could bump the price up by another 20% – 30% when you sell a website.

There are numerous ways a seller can mitigate the risk inherent in any transaction. There are warranties and indemnities you could extend that could add another 20% to the price. Or you could take part payment in stock of the merged company.

Not only that, you could collect a ‘salary’ or consulting fee for staying around!

Detailing all the ways in which a seller can add value to the deal is beyond the scope of this article, but I’ve hopefully whetted your appetite and spurred you to investigate the thoughts shared in this post.

Above all, please know…

Your website may be worth a lot more than you think, but what you obtain for it, is going to be dependent on how you go about selling it.

You do not have to settle for the “going multiple” when you sell a website or any business!