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Website valuation 101
I've written extensively on the subject of valuing websites and much of that content has been published in several locations online.
In that body of writing, I've explained Discounted Cash Flow, Net Present Value and other terminology that goes with the territory. I've also posted several spreadsheets that the busier reader can use to make these calculations himself and/or to analyse other financial figures, to compare internal rates of return and much more.
I'm going to keep this article relatively simple and avoid arcane technical terms, but please bear with me on one or two important ones.
The reason for the valuation affects the figures
There are numerous ways of valuing a website or web business and any site owner can affix an arbitrary $67 trillion price tag to his property. Plainly, his site isn't worth that much if nobody else will pay that price. Even when the ego factor is taken out and professionals are called in to value a site, they are constrained by accounting regulations and national laws and have to perform the calculations within certain pre-defined rules. These valuations are great for tax purposes, for probate or for asset sharing in divorce hearings etc., but they rarely reflect what a site would sell for in the open market.
The valuations discussed on this page are from the point of view of the sale of a site.
Why does a site have value?
A site has value if the buyer sees value in it. As obvious as that sounds, there are thousands of sellers who put their sites up for sale each year completely oblivious to the truth and in the mistaken belief that if they see value in their own site - perhaps because the niche is a particular hobby of theirs - then buyers would see value in that site too.
Buyers see sites as mini-businesses or as business assets. They expect a return from the site they are spending money to buy. The return is often in the form of direct earnings but a purchased site can provide other indirect benefits, all measurable in dollars. It could channel traffic to the buyer's main site. It could provide links/SEO benefit to another site. If it's the only competitor to the buyer, it could simply be closed down to leave him with a monopoly and the ability to ramp prices up on his own site. Whatever the benefit, the buyer is likely measuring it with the same yardstick that he's using to pay for the site: money.
So, yes, the primary motivation for buyers is profit. Not profit that the site has made in the past, not profit that the site is making now, but profit that the site is going to generate for them in the near future in one way or another. That logic underscores the biggest of purchases, from the youtubes and myspaces to top domain names, even if those properties aren't earning a penny (yet).
Since it is the anticipated future profits that determine what most buyers are willing to pay, it then boils down to a method of measuring those expected profits. This is where it gets tricky. How do you measure something that doesn't exist?
Indicators of future profit
In the case of well established sites, it is invariably the practice of buyers to examine cash flow and earnings. They want to see the profit the site has been making in the past, how steady those profits have been ... and for how long.
They are aware that, like with stock market investments, site profits can go up and down. However, a site making strong profits on a regular basis is more likely to continue making those profits than a brand new site with no history.
But buyers may see other opportunities that the seller has missed. They may see a badly monetised site and realise they can do a better job. It is not, though, in their interest to disclose this to the seller ... and they don't. The seller can't therefore expect to push the selling price up based on the "potential" a buyer sees. The only circumstances where that happens is when multiple buyers recognise the potential and bid against each other.
It's often the case that the seller recognises "potential" in the site (or believes he does), but this "potential" has an absolutely zero impact on the selling price. It's only the buyers' opinions on potential that can feed through to a higher selling price.
Value based on assets + value based on earnings
Sellers fallaciously argue that in addition to the earnings value of a site, there should be a value attached to their traffic/ SE rankings / valuable content or other asset. Unfortunately, for most sites, there is no further value to these assets. This is covered in the site valuation myths.
Under-monetised sites: where earnings don't reflect true worth
What about buyers who are buying sites - say non-profitable sites - for their domain name, Page Rank, traffic, back links, Alexa rank, age, copyrighted content, brand or other "asset"? How do they value these assets when there are no earnings directly attributable to each asset to provide a guide?
First, and to repeat a point made earlier, the seller's estimated value for these assets doesn't affect the selling price. If the buyers see value in these assets they would choose to not include that value in their offer unless they thought their competition would attach such a value and beat them to the purchase.
And that's an interesting point. The value built into the final selling price that is directly attributable to these assets is the value that the highest bidder was willing to pay for those assets.
How do you as a buyer/seller estimate what the highest bidder would be willing to pay? The winning bidder takes his highest bid to that point where it is just sufficient to see off his competition. If we know what the competition is regularly bidding for a a particular type of web asset - and have access to that information for hundreds/thousands of such recent transactions - it's relatively easy to make a fairly accurate prediction.
Our sister site's valuation tool attempts to do just that. It's backed by extensive data from real sales in the market carefully analysed by experts. It focuses more on valuing whole sites than individual site assets but take that website valuation tool for a spin today. It won't value your site in the hundreds of millions like some other so called valuation sites do, but it should give you a more accurate market value than any other service currently available.