Through the years we have noticed that some website business brokers have resorted to putting automated website valuation calculators on their sites. We can honestly state that this is a gimmick intended to rope potential sellers in as clients. It is unquestionably impossible for an automated calculator to provide you with a feasible and accurate valuation of your website.

Sure, it can take into account the age of the website, the revenue and cash flow and even the growth and profit margins. However, it is impossible for this online tool to consider your website’s other significant intangible properties which can add considerate value.

For instance, your product, service and customer segment are material variables which strongly affect the viability of your online business. Additionally, the recurring revenue, repeat business rate, customer retention and acquisition costs are also influential elements which will strongly influence your website’s value.

Furthermore, the intellectual property and owners’ involvement, whether active or passive, are just a few more components and characteristics of the business which cannot be measured without human input and which will certainly impact an evaluation. These are just a handful of essential aspects which are impossible for even a very well programmed calculator to properly accommodate for when valuing a website.

Therefore, it is implausible at best for your business to be accurately evaluated without an expert website business broker’s input and knowledge.  W3 Business Advisor’s experienced business brokers are formally educated, have owned and operated internet businesses and understand each and every nuance of your online business. Therefore, we have the ability to represent your business in the professional and ideal manner in which it deserves.

No matter how you describe the cash flow of a business, SDE, SDCF, or EBITDA; one thing usually remains the same, there’s add backs and explanations to accompany them which are included in those numbers. Here is how we start our conversations with clients: let’s review each add back items individually to determine what we can justify to a buyer and what we cannot. That being said, as we work through our due diligence on any listing, we do understand that while those other add backs which cannot be justified, they are still critically important to cash flow, just ones we wouldn’t be able to convince a buyer to accept.

This is where the broker’s expertise really comes into play; knowing how to address any potential concerns prior to the buyer reviewing the financials because we have seen many deals not get to the closing table due to “red flags”. Each internet broker operates differently, but we simply do not accept a listing if provable and documentable cash flow will not support the asking price. This does not at all mean that there aren’t other variables to be considered when determining a business’ valuation. However, the actual verifiable cash flow is significantly important. Unlike a brick-and-mortar business broker, an online business broker is very knowledgeable about specific internet business models such as ecommerce, SaaS, AdSense, digital marketing, etc., and knows what to look for and where to look in the P&L.

Before any prospectus leaves our office, we have completely reviewed each and every item included in the overall cash flow of the business. We’ve calculated the verifiable add backs for at least the last 3 years and have determine which to present and what questions might arise after presenting them. There simply cannot be any surprises, which means that a buyer can never expose something we missed when we do not miss anything.

Once cash flow has been determined from a buyer’s perspective and we’ve completed our internal due diligence on this business, we will then finalize the viable and feasible asking price with the seller. We are extremely thorough, so once our due-diligence has been completed, we are utterly confident that once and offer has been agreed upon, it will pass the buyer’s due diligence, saving countless hours and days while moving toward a closing.

While most Website brokers rely heavily on earnings multiples when valuing a website, there are other variables that may either increase or decrease the value of a site. An owner that is looking to sell internet business will rightfully point out that his traffic and google page rankings are high and should have a positive impact on his website’s valuation. While both numbers are vitally important to a website’s success, aren’t they already accounted for by the revenue and earnings of the business?

As internet business brokers with heavy finance backgrounds, our firm tends to look at many of the other intangible assets that drive up the value of a website. For instance, if a website has a longer operating history and more importantly, a history of earnings growth, it will deserve a higher multiple. Additionally, we perform our industry analysis and view the amount of competitors within, the barriers to entry, the legal concerns and stability of the industry in question.

The gross and net margins (and their trends) and the working capital requirements of the business are important valuation variables also. Any buyer that needs to come up with an additional 30% of an offering price to account for the inventory requirements of the business will likely factor that into his ROI calculations. Obviously, customer data such as repeat business and unique visitor stats are important as they help determine the longer-term stability of the website.

At the end of the day, valuing a website business is not as simple of a process as sticking numbers into a finance calculator. We may begin with a multiple of earnings number but then must discount or increase it to account for the distinct variables of the business.

There are of course many variables inherent to your own website which will have a notable affect on the valuation of your internet business.

For instance, the cash flow, operating history, growth, transferability, and organic traffic are all some of the characteristics that will be a component of the multiple you will sell website for.

There are, however external factors out of your control which will largely affect the multiple as well.

Similar to the stock market, the current economic landscape and market conditions largely impact M&A multiples. Prior to the 2008 credit crisis, not only was borrowing money extremely easy but the cost of doing so was rather cheap as rates were relatively low.

Private equity companies were bidding up public target companies as they were financing up to 90% of most deals via bank financing. As a result the multiples that these companies were acquired at were at historical levels.

During this time, internet business brokers were selling smaller online businesses at peak levels as SBA and bank financing were a norm for these deals. Of course when you sell internet business, the lower the amount that a buyer puts down personally, the higher the return on investment (ROI) will be.

That being the case, then your online business can not only support and justify a higher multiple, but there will be stronger buyer demand also. These days, even with rates at record lows banks have shut down their coffers and it is extremely unusual for a buyer to get even some bank financing.

As a result, the buyer of your business will have to put down a lot more of his capital, his return on investment will be lower, and he will require a lower multiple to justify the purchase of your website and the risk associated with it.

When analyzing an internet business, or any business for that matter, there are generally two common valuation methods used.

The first method known as discounted cash flow or simply “DCF”. Basically, DCF tries to estimate what the present value of a business is today using projected future income flows. While this can be a tedious process, you can find many free DCF calculators on the web in which you just plug in the data and then get an instant valuation. We have found one that works very well: Free DCF Calculator.

The problem with this method is that there are many subjective variables, that when changed slightly can significantly impact the resulting business valuation.

For instance, while the interest rate is a variable that can be universal, the discount rate, which is the rate of return required while factoring in the risk involved, can vary greatly. Additionally, it can be very difficult to predict the sales, cost of sales and cash flows of an internet business several years out as the economic landscape can easily change.

Ecommerce business brokers prefer to rely primarily on the second method of valuation, multiples analysis, which is widely used to value businesses with high growth potential and a limited operating track record. Multiples analysis utilizes key financial ratios, such as earnings, sales or EBITDA. When similar internet businesses have sold for three times earnings, then an internet business broker can use that multiple to value your online business and then either discount or increase the value depending on the strength or weakness of the business model, operating history, overall risk profile and growth or lack thereof.

Obviously a website that has a strong business model with a long operating history of continuous growth is expected to fetch a higher website valuation than one that does not exhibit these characteristics.

Many buyers who do not have experience with domain appraisals often do not understand the numerous variables that are considered when determining an online company’s value.

While most buyers primarily base their decision on the company’s financial performance, there are a handful of aspects that an ecommerce business broker should consider when evaluating a domain appraisal.

Aside from the bottom line, organic traffic rankings are one of the most important intangible assets tied to an internet business because of the results they produce and the length of time they take to achieve. Ideally we like to see businesses that have a strong organic traffic foundation that is not heavily dependent on handful of first page rankings, but derive their traffic from hundred or even thousands of optimized keywords.

In addition to traffic rankings, we also look at the company’s historical trends, growth opportunities, owner’s involvement, overall business model, website infrastructure, supplier relationships and more. The key is determining how much weight each of these variables carry in formulating the recommended listing price.

For example, if you were to compare two different companies that have the exact same cash flow, same historical performance, but Company A essentially runs on autopilot while the owner of Company B works 40 hours per week to keep the business running, there will be a difference in listing price.

The business that essentially runs on autopilot will sell for a higher multiple because the owner will not be tied up with operations and will have time to focus on running an additional business; on the other hand, if the owner had to hire an employee to work the 40 hours per week, this would need to be taken into consideration because it would ultimately reduce the bottom line and would result in a lower sale price.

However, each business is different and it is difficult to compare one opportunity to the next because there are few businesses that posses all of the quality attributes buyers ideally look for, as most businesses have a few areas of weakness that leave room for improvement.