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Valuing A Web Site Business

The Question

I am receiving contradictory opinions from others that the retail value of a web site is based on either 3 times the yearly revenue or 5 times. Please tell me which is the norm: 3 or 5 times the yearly revenue.

The Answer

The people giving you the 3 or 5 times revenue rule of thumb are probably thinking of the VERY GENERAL rule of thumb that has been around for ages which is: "3-5 x EBITDA" (Earnings Before Interest, Taxes, Deductions & Amortization) In other words 3-5 time annual pretax profits. Notice that the rule of thumb is based on profits not revenue.

I don’t believe that multiplying revenue times 3 or 5 is a realistic way to set a price for a web site.

I recently saw a study based on the sale of 99 web based businesses. On average they sold for 1.8 x owner's benefit. The most any seller got was 4 x owner's benefit. I would suggest starting out with a multiple of two and adjusting it up or down based on several factors.

Increase the multiple if:

*Your product is unique and you have full control of it

* You get most of your traffic through word of mount, free search engine rankings and links form other sites

* your traffic, sales and profits have been trending up in recent years

* An existing company wants to buy your business because your products fit well with what they are already selling.

If 3 or more of the above apply to your site you can probably set your asking price at 4x annual profits. But you may have to negotiate a slightly lower price to get a sale.

Lower the multiple if:

* You buy your products wholesale from someone else and they are available at competing web sites

* You get most of your traffic and sales through paid advertising such as pay per click search engines

* Your sales and/or traffic are lower today than a year ago.

If all three of these negatives apply to your site you should probably set your asking price closer to 1.5 x owner's benefit and be prepared to negotiate the best deal you can from that starting point. This may not be what you want to hear, but I believe it is valid information based on the current market for web based businesses.

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