What I have learnt from going through tens of website flipping case studies, references and recommendations.
A) BUYERS AND SELLERS CONSIDER EARNOUT FOR A QUICK CLOSE.
Buyers and sellers interested in website flipping; listen to me it’s recommended for you to consider earnout to close your deals. An earnout is a financing arrangement for the purchase of a website. Where the buyer will pay part of the asking price and leave the remaining amount to a later date. The seller will finance part of the buying price contingent on achieving predetermined future conditions.
Example website flipping:
A website generating $250 a month sold for $5000.
Two parties agree on selling price $5000 for a website. They negotiate the deal as pay $4000 now and $250 a month for the next four months. Contingent on the site continuing to earn $250 a month for the first four months.
Website flipping Option one: if the revenue drops below the $250 mark, during this period seller agrees to accept only the $4000 down-payment amount.. A solution harsh on the seller.
Other variations to be expected and we stay with the same example. The seller receives a part down-payment, and the remaining based on an agreed performance metrics. Say if the revenue is between ($100 – $250) then the seller will accept the same revenue amount achieved for that month. If the site made $139 only, you will get paid $139 for the month and not $250. But, if the revenue is above $250 the owner gets paid the full amount.
The buyer ends up receiving under $5000 for selling his website business. Total amount $4000+ $139 +$250+$250+$250 assuming months 2,3, and 4 exceeded the agreed sum.
whenever not having consistent monthly revenue.
It’s sometimes fair for both buyers and sellers to use earnout if there were particular months of the year skewing data, you don’t have much information to fall back on, and you want to close the deal. The buyer will gain by achieving a quick close, and the seller has a buffer if things are not as expected. A way to protect his investment. Put yourself in the buyer’s position it will help if you are in the website flipping business.
B) THE MULTIPLIER METHOD
The norm for valuing internet website businesses is using a multiplier. It’s an easy concept to put a value on an asset generating income. What most people are using is the “Multiple of Net Earnings Method.”
You pay X multiple times the most recent net monthly income; some people may go further and use for the net income the average of the past 3, 6, 12 months. Use a prolonged duration if the data permits, it will cause a much fairer valuation for both buyer and seller.
Historical data is important
The longer the website has been in business, the more reliable the numbers and we can then use the yearly net income instead. Giving a more correct representation of what the assets can generate.
It’s when the site is new then we have an issue of how accurate is the net earning used with the multiplier. so it’s only expected to see new websites sell for a much lesser multiple than established sites- like the ones generating revenue for years. Expect an x10 multiplier of net monthly income or even less. The reason is high risk associated with the purchase.
C) THE YEAR 2017 WEBSITE BUYER’S REPORT
Reading through the 2017 website buyer’s report published by centurica I found some intriguing stats if you are in the website flipping business recommended for you to read. Before listing the findings, you need to know the study looked at internet businesses having asking prices from $15,000 to $5 million. The study relied on asking prices, which may differ from negotiated or selling prices. That is important and may skew the data as the asking price can differ somewhat from market price. They used data from 2015 and 2016.
Website flipping and key points to take from the report:
- The multiplier for each business model is different with the highest multiplier for 2016 is a SAAS and software-based business model. A multiplier range was (3.24x to 3.12x) of yearly net income or 39 x net income.
- Lowest multiplier was for e-commerce- Amazon FBA businesses, and it fetched (x2.26 to x2.11), so such assets were selling for 27 times net income.
- Content and media websites saw a rise year over year for their multiplier it jumped from 2.31 to 2.35 for the year 2015 to 2016.
- Marketplaces and transactional business model sites are in shortage as fewer sites are listed for sale. You will face less competition trying to sell a marketplace business website. A business model worth considering.
High Demand Businesses and Worst Performers:
- An e-commerce-dropshipping business model is still having a year over year a rising multiplier and in high demand.
- Services are the biggest loser having the multiplier drop 7% year over year.
If you are serious about website, flipping then give your site time to generate higher revenue.
Sites generating more income sell for a higher multiple so, it’s worth the wait to achieve a higher multiplier.
Note Consider the numbers presented above as a general guide and it’s a no substitute for a formal valuation. The market price is what the buyer will pay for the business, and you need to do proper DD.
Also, the pattern is that sites generating more net income sell for higher multiples and younger sites will not enjoy the same multipliers mentioned above. Maybe 50% cheaper although not the case for the year 2018 as multipliers are higher refer to the examples given below.
D) PAST FORWARD 2018 RECENTLY SOLD SITES
For 2018 I have seen recent sales:
– Internet business site sold through classified for $33,500 has $1,815 net income. Giving it X18.45 multiple.
– Automated service business providing vector artwork sold for $2,250 having only $60 revenue putting a multiplier X37.5
-A site sold for $3,385 generating $123 income from Amazon clicks and AdSense for a multiplier X 27.5
When I record historical data, I place more weight on the numbers depending on the buyer if, for example, a buyer with a portfolio of thousands of dollars is considered more sophisticated buyer vs a new buyer.
It looks encouraging to be in the website flipping business.
E) ALTERNATIVE METHOD TO VALUING INTERNET BUSINESSES
I’m contemplating valuing content and media websites based on the number of pages they own or based on blog posts, and for e-commerce according to the number of products listed on sites.
As an alternative procedure instead of using the multiple of earning method, you can value a business on the number of high-quality posts that come with the site.
This can be an accurate way to value a business. Why not look at the underlying assets of the site to appreciate its strength? The assets of the website if it was a publishing business is the content that comes with the site. If it was a website with many pages, then consider the number of pages as the assets of the business besides the number of posts. If it was an e-commerce store, then you can view the number of products listed on the site as the core assets.
Example: A publishing website has 50 high quality articles.
A publishing business is having 50 high-quality posts, estimated worth $250 per article making the overall site have a price tag around $12,500.
The $250 multiplier per content or page I used for this example is an estimate, and detailed research does not back this number.
Why we recommended using the alternative valuation method suggested here:
The content articles are the future income generators for the business so considering the website value as a breakdown of the individual assets owned is a more exact way of valuing the online asset. The future income will come from the strength of the underlying assets, in this case, the blog posts.
I will present my findings after doing my research, record and review publicly sold websites. Then construct an excel sheet containing the number of pages, blog posts, products listed if any for each site sold and compare to the net income multiplier.
I have yet to come to a solid conclusion what formula to use to estimate a website value based on a combination of pages, posts, and listed products. Those are the real assets of any website and breakdown of what each is worth is a more exact estimate for valuing the internet business. The above is limited to publishing websites and e-commerce business models.
PRESENTING YOUR WEBSITE IN A PROFESSIONAL, CORRECT AND EASY TO UNDERSTAND CONTENT.
Finally strongly recommended preparing all the information you have on your website in a correct, easy to understand, and nicely presented. It’s impressive how so many sellers showcased their work. Taking the time describing details and professionally answering all queries from potential buyers. They go further stating how the site runs, what improvements the new owner can do, and reason for selling. It’s very crucial not to ignore this last part even if you have a good business scoring low on the way you present your website can negatively affect the final sale price.
When it comes to flipping websites, what is a good deal? As a buyer how do you decide how much you are willing to pay, good deal or not?
Interesting read: How Much Does It Cost to Start a Profitable Internet Business?
Also, you might like: Website Flipping Case Study and What Other Entrepreneurs Are Doing.