How are website businesses valued?
Most traditional business brokers don't understand the many different variables that a website broker must take into consideration when determining the value of an internet business. A website broker must look at all of the variables that impact an internet business valuation including traffic sources, barriers to entry, year founded, revenue trends, net profit trends, supplier relationships, transferability, daily operations, hours required for daily operations, competitors within the niche and more. In fact, there are literally dozens of different variables a professional website broker must consider when calculating the asking price for an internet business. While most people might automatically assume net profit is the single most important factor, this is not always the case. Traffic sources can actually be equally important as the trailing twelve months net profit figure because traffic is ultimately the lifeblood for any internet based business. An experienced website broker must analyze the Google Analytics traffic reports as one of the first steps to determining the valuation for an internet business. This is important because there can be a concentration risk if a business is too reliant on one specific type of traffic source. This is definitely something internet business owners can relate to if they experienced drastic declines in traffic due to Google's algorithm changes over the past few years (Panda / Penguin updates). Our website brokers received a surge of valuation requests from sellers immediately after Google's major algorithm changes because internet business owners were seeing huge declines in revenues literally overnight as they were 100% reliant on SEO traffic. Every good ecommerce business broker knows that a comprehensive marketing strategy should never be too reliant on one type of traffic source, especially after the lessons learned after the Panda / Penguin Google updates.
Assuming the majority of the key valuation variables are favorable, our website brokers will focus on the trends in topline revenues and net profits. The most commonly type of valuation method used for internet businesses is the earnings multiple valuation method. This method is widely accepted by buyers and sellers and has become the leading valuation method used among website brokers. The earnings multiple valuation method involves applying a multiple of the trailing twelve months earnings figure. The earnings multiples can range from 1x to 5x the trailing twelve months earnings and the range is determined by the website broker depending on the many different variables mentioned above. It's more of an art than an exact science, which means it's important to work with an ecommerce business broker that truly understands the dynamics involved with calculating a valuation that best suits your website business.