Valuing a website business isn’t an easy job as you could imagine, but by breaking down the steps and doing one thing at a time you can really understand the true value of a websites.
When valuing a website business I must admit that most of the work is in crunching the numbers. That means getting the full profit and loss statements and calculating the income minus all of the expenses. When doing this, be sure to ask the seller for help understanding the profit and loss statement if you don’t understand what expenses are what.
This is key, because you can’t leave anything to chance here, by calculating these financials you get to work out what the business is really worth when you have all the figures laid in front of you. Just by doing this step you get to create your own value on the business rather than relying on the asking price (from the seller) to be a reasonably correct figure.
At times with certain websites I have had real trouble calculating profit and loss statements and concluding what each months net income really was so I could correctly value that business. I have spend weeks on just this step alone on a website before, so don’t rush this if you don’t have to!
Proof Of Financials
Once you have calculated the businesses correct income and expenses into something you can understand. You should be seeking validity in what figures you have been working with.
To do this you should be asking for proof of the financials from the seller by either getting video evidence that those figures really exist or doing a screen share whilst the seller shows you their Paypal account, Stripe account and even bank account should you need.
On crucial thing to note here is that all the income and expense figures you were given on the profit and loss sheets do exist on the statements you are shown by the seller. You don’t want to be valuing an investment on false figures that the website seller can’t prove to you exist.
Other than valuing a website business by just it’s earnings and expenses, it is important to value the business in contrast to outside influences. One of those outside influences that could change the whole value of the business, is what competition this website has.
More importantly what is the status of the website you are looking at investing in, in relation to the competition it has? For example are the competitors further up the ladder and far more established always making life tough on the website you may purchase? Or is the competition not all that fierce where the website is on a close or level playing field where it isn’t at a total disadvantage.
I stress these things because take all this into account is important when it comes time to valuing a website business you could be forking your hard earned cash to buy.
What Would You Pay?
After working out the financials and getting your own value of what you think the business is worth to you. You should take the time to sit yourself down and ask, how much would you be willing to pay?
For example is the asking price (sellers price) of the website higher or lower than your figure? And if the asking price is lower or is within close proximity to your figure you calculated. It appears you would have a valuable business according to your standards and this is an investment you may just wish to pursue.
On the other hand though, if the figure you calculated when conducting your financial due diligence is far lower than that of the asking price. You need to ask yourself a few hard questions like;
1. Would I be willing to pay the asking price of the business?
2. What is the highest figure I would be comfortable to settle at?
3. In the worst case scenario, would you be happy to pay the asking price and have that money back a few months after the multiple used by the seller to value the business?
As I mentioned right at the beginning of this article, valuing a website business isn’t easy, but it can be simple once you work out a few figures and ask yourself a few heavy but important questions. By doing all of that in sequence you can value almost any websites business and know what it is really worth to you and not what the seller is telling you it is worth.
The key takeaway from all of this is. You need to be completely responsible for conducting your own due diligence so you can cover your own back, because at the end of the day it is in your best interest to do so.
I know I don’t suggest starting buying websites from Flippa but they do have a good article sharing some different ways of valuing a website here. What are some of the things you do when valuing a website business that helps you to decide if the business is a worthwhile investment or not?