Selling my website - valuations, multiples, Current market metrics

Economic theory teaches us that the true value of a business (or a security or real property) is equal to the sum of future cash flows from that business, discounted to present value at an appropriate, risk adjusted, interest rate. An alternative statement is that it is the value at which an unforced buyer, fully aware of all the relevant information would pay and an unforced seller, similarly informed, would sell a property. Putting this theory into practice presents two major challenges. 1. What is the appropriate cash flow forecast to use? 2. What is the appropriate discount rate (interest rate) to use? Accurately forecasting cash flow over a long period of time is difficult. No one can accurately see the future or understand the effects of unknown, outside events. Therefore, when this type forecasting is done, it is usually limited to a maximum of five years, with an amount added for “terminal value”. The terminal value is an estimated valuation of the enterprise at the end of the period. Based on your description, I would use 7X – 10X cash flow or 2X to 3X revenue in the last forecast year. Discount rates are influenced by the security of the cash flow as well as risks surrounding the accuracy of the forecast. The more secure and more accurate the forecast, the lower the discount rate will be (e.g. a portfolio of government securities). The more risky the forecast, the higher the discount rate will be. For example, Venture Capital investors frequently use a discount rate of 40% because of the risks inherent in new venture investing. So, put together a three to five year forecast of cash flow, in as much detail as possible. Pick a range of discounts rates and see what you get.
Or, you could rely on the Greater Fool theory…

I've looked into selling my business, and while I didn't do it, here's what I learned.

There are two types of buyers for businesses. The first is a financial buyer, the second is a strategic buyer.

The financial buyer is buying your business based on the numbers your business is currently producing. Private equity firms fall into this category. The purchase decision is an investment decision, and they are comparing your business to several other businesses and even other investments. A private equity firm will typically pay 5-6 times EBIT. Basically, they will pay 5-6 times your current profit. Some industries get a higher multiple than this, but 5-6 times is a good generic figure.

The strategic buyer is buying your business because it improves their overall position somehow. They may want your team, your customers, your technology, your patents, etc. Typically, a strategic buyer is a competitor or is a company looking for a short-cut into your market. For example, when Google bought YouTube, they did it as a strategic buy because they wanted to corner the market in advertising on video content. A strategic buyer does not care much about EBIT, and they often end up paying much more than 5-6 times earnings.

The best advice I've been given about selling my business was to get multiple buyers bidding against each other. Even if you have only one company interested in you, if you are thinking of selling, go out and find others who might want to buy you. There are investment bankers and business brokers that can help you do this. Lack of competition is the number one way to get screwed by a company that is buying your company, because once you get emotionally committed to the idea of a big payoff, they will find ways to reduce the price and most business owners will still do the deal because they've already emotionally checked out.

Here are a couple of metrics people use for evaluations:

• 1x Yearly Revenue: If it's a brick and mortar type place with slow growth. That's kind of your baseline.
• Money In: Again, a baseline. You don't want to go below this if it's a growing business.
• 7x Yearly Profit: You can also do some projections for 2, 3 and 5 years out and use the range. Typically, the 2,3 and 5 year profits are discounted back to present day (via Net Present Value)
• 1-3x Yearly Revenue: Again, some projections are good to have for 2, 3 and 5 years. Look at the industry and how it grows to determine the future revenue numbers.
• 10x Investment In (3-5 year time frame): This is what a typical VC wants but you should also consider the time frame. If you want, say, 20% year-on-year return, and you have been around for a year, then just do the math on that.
• Comp's: Look around at other companies that have been sold and see that they are worth. That's usually a good way to justify your price.

Once you have all of these numbers and ranges, you then do some "eye-ball" averaging to get a "fair" price. It's also up to you and what you want out of the deal. If you think you can make more money (in the long run), running the business, then keep it.

At the end of the day an experienced buyer will look at the total profit (via the EBITDA) the site can make for the next three or so years (after that it's all a guess anyway) and base a valuation on that.

If you can successfully defend the 4-months history and show how "it will continue and/or increase for the for seeable future" then you'll be a valuable business someone will want to buy.

Particularly in this day, people don't by businesses unless they can see a real ROI within a few years. Every other "strategic" approach is risky and thus requires a very specific suitor..and then the multiple is completely un-predictable.

So if your profit is $100k/yr then expecting $300k for the site might not be unreasonable. Plus-or-minus $100k depending on the buyer.

Generally, the price is whatever the market wil bear - so rather than picking a multiple, I'd recommend looking to find the going rate for similar sized sites, and then determine if there are extenuating circumstances (which would modify the price).

Check out Flippa (the site formerly known as SitePoint's market place). It's a website dedicated to the auctioning off of websites: http://flippa.com/

Some things to keep in mind when determining the asking price - Is the target market especially strategic to the buyer (if so, charge a premium) - If you built the site & traffic recently, is it easy for the buyer to duplicate (if so, discount the price) - Is there some reason why you're doing especially well? e.g. exclusive partnership, reseller agreement, etc. (if so, charge a premium) - ec.

Good luck with the sale!