II. Valuation of Website’s Profits and Cash flow

Trying to establish the value of a website, involves both traditional as well as non-traditional valuation methods designed for websites. On the one hand, you need to look at the sources of revenue, the costs involved in running the site, the infrastructure of the web site and on the other hand you must consider web specific factors such as traffic, audience and potential of the website, always keeping in mind the nature of the Internet.

The following is a somewhat extensive list of the factors that should be considered when valuing an existing website. The have been divided into three groups: (1) Profits & Cash Flow, (2) Assets and (3) Traffic and Audience.

1. Profits and Cash Flow

   1. Source of Revenues

      All sources of revenue for the site need to be considered. Depending on whether you are the seller or the buyer you need to look at both actual and potential sources of revenue for the site when determining the value. Actual sources of revenue are what is currently generating income for the site. Potential sources are those that could be used (but are currently not used) to generate revenue. By looking at this hidden potential, buyers can easily spot undervalued sites.

      Some of the various sources of revenue that should be looked at and considered are:

      1. Revenue from the sale of products or services.

         If the site sells any product or service, determine what the actual and potential revenue stream is. If the site does not currently sell product, ask yourself what type of product or service could be best sold through this site? Does the site have attractive demographic characteristics which are an ideal target market for a particular product or service? Products sold can be tangible physical goods (i.e. books) or electronic goods (i.e. like software or online legal forms).

      2. Membership Income

         Does the site generate any monthly membership dues? Are there revenues from selling access to the site or from subscription to a newsletter associated with the site? For example you will find that many sites generate part of their revenue through monthly membership dues. Other sites also sell access to content on a flat monthly basis such as a newspaper site selling web based access to old articles for a monthly fee. Memberships income can be either “recurring” or “one time”.

         1. Recurring Monthly Membership Revenue
            This comes from memberships that are (usually) automatically renewed each month.
         2. One time Membership Revenue
            This comes from a one-time membership fee that is charged for a feature or website,

      3. Revenue from Subscriptions

         This would be more income coming from fees received for subscribing to “delivered” content. For example income from subscriptions to a newsletter or mailing sent out by the site.

      4. Commissions from other sources

         You can simply look around at other sites to see sources of these commission revenues. For example, see whether the site carries an Amazon.com or another book seller’s ad which in turn generates a commission for the web site if a click-through on the ad leads to a book or product sale. Examine the revenue stream for such existent and potential opportunities. Think of whether the site has potential to carry such usually small ads and generate revenue. Determine if any other income is or can be generate from other potentially income generating click-through programs.

      5. Revenue from partnership deals

         Are there any partnership ventures tied into the site that are either generating revenues or cutting into the site’s revenue? Does the site generate some of it’s traffic or revenue because of a partnership with another site. Conversely, did the site license some piece of software to run the site in exchange for a “piece of the web site” to a third party? Is there any potential to create any (other) partnerships and joint ventures with the web site?

      6. Advertising

         If the site is currently selling advertising, then it will be a more straight forward exercise to determine part of the value of the site based on advertising revenue. You can use the numbers to extrapolate both actual and potential income from the site. Income will come from straight advertising sales or through participation in an advertising network such as Google’s AdSense. If the site does not currently sell advertising, but has good page view numbers, then it could easily join (as a temporary measure) a advertising network in order to generate income.

         Some of the things to keep in mind if the site sells their own advertising (which is increasingly becoming rare for some of the smaller and medium size sites) are (a) the type of system that the sites uses to deliver the advertising and keep track of the advertisers (sometimes called banner ad delivery system); and (b) the advertising sell through rate. The sell through rate is the percentage of the total avertsing inventory that the site sells. For example just because a site has 1,000,000 page views per month, and sells advertising at $5 per thousand it doesn’t mean that it is generating $5,000 a month in advertising revenue. You need to look at how much of the available advertising space inventory is sold and how much remains unsold each month. An astute buyer, may also want to examine if the sites advertising sell through rate could be improved by making it part of some advertising network in order to sell any excess ad inventory.

   2. Operating Costs

      1. Monthly hosting and server costs

         This is the monthly cost of the hosting for the website i.e. the cost to either run the server.

      2. Monthly fees and expenses

         Other monthly expenses could include rent (if the site has employees etc…), connection charges, access charges,

      3. Monthly bandwidth excess charges

         Does the site reside on a server where amount of traffic and bandwidth used does not matter, or is the site charged extra if the number of Megabytes or Gigabytes transmitted each month exceeds a certain amount each month. Does the site incur many excess charges on a monthly basis?

      4. Monthly employee expenses

         If the site has employees (or needs employees) what is the cost of the employees?

      5. Monthly outside labor

         Does the site utilize outside labor? For example if any programming is required, will it require outside programmers or is it handled by the current staff (if any). What is the average monthly cost?

      6. Advertising and Marketing

      7. PPC and SEO

      8. License Fees

   3. Growth Multiple

      Actually this growth multiple is used in two different parts of the evaluation.

      Once the net monthly or yearly income for the site is established you need to determine what factor to multiply it with to come up with another part of the value…. traditionally when valuing a “regular business” the net profits are multiplied by anywhere from 2 to 6 years to determine the selling price. However, there are valuations that use much higher multiples.

      The other thing that must be kept in mind is the growth that the site has experienced since it’s start. Look at the traffic growth over the history of the site. Look at whether there has been constant growth or if there have been many ups and downs. Too many ups and downs would tend to show instability our could be seasonally related. Determine which it is. On the other hand constant growth is a good indication of stability. Try to determine whether the site’s traffic growth has been related to anything is particular. Was it promotion, banner ads, links, search engine placement. Has the growth followed the Internet’s growth or exceeded it?