How to calculate the real value of your web business

by Ivan on April 10, 2010

Once you’ve figured out how to make money from your website, you can start looking at how to sell it. Maybe you want to start another business venture and use the profits to get things started. So, how do you sell a website? This week I’ll show you how to sell your web business, which in many ways, is no different than selling a ‘real’ business. The business processes are the same, especially from the legal side, though how you value the business and attract buyers is different. Here’s how to do it.

Deciding To Sell Your Website

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First off, why do you want to do this? I sell websites for two main reasons:

  1. I’ve lost interest in the topic and/or
  2. I want to focus my energies in other areas

For example, I sold a site about Microsoft Word templates as I couldn’t develop the site any further; the market had become saturated and the time/effort was too demanding. The new owner outsourced the work and leveraged the domain name (which was very good, Google-wise) into his suite of sites, all to do with Microsoft Office templates.

You’re probably in the same position, otherwise you wouldn’t be reading this, right :). I would also add that there is also money to be made (very good money!) in buying under-performed sites, fine-tuning the site, increasing its profiles/sales etc and then selling it on at a profit. We’ll look at this over the coming weeks.

How Much Is Your Site Worth?

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Next, I’m going to show you next is how to value your site. Before I go any further, I would suggest that if you want to get the best value for your site (or business), then spend some time reading about business negotiations, valuation strategies and contracts. It’s not that hard, honest. Go to the library and get some (slim) books on business development. The same fundamentals apply online as offline.

Website v Web Business – to keep things simple, I’ll use the term website in this article. But, and this is important, try to look at your site as a business. It’s more than just a domain name and some webpages. Once you make the leap from building websites to creating web business, then you’ll start to make real money. Why? Because the money is in the business end, not the technical side. It’s a bit like real estate. They are all just bricks and mortar but it’s the location that usually makes the difference.

So, how much is your site worth?

To determine the value of the site, you need to collect the following information:

  1. Site traffic – create an excel spreadsheet and enter in the traffic for the past 24 months. In the Excel file, show the number of unique visitors, repeat visitors (i.e. loyal readers), page count and other analytics. Your aim here is to show the buyer where/how your site has progressed. This helps them decide if the site fits their business strategy.
  2. Email Readers – similar to above. The ‘money is in the email’ list as they say. The more you have signed up, the more you can ask for the business. One rule of thumb is that every reader is worth $1 per month. Therefore, if you have 500 readers, then 500 x 12 = $6000. This varies depending on your industry. For example, if your readers are CIOs and you’re selling web based project management software, this figure will be a multiple of $6000, maybe $12-24k. Why? Web-based project management is a very lucrative area and these readers are essentially leads to the project management company.
  3. RSS Subscribers have slightly less value. Why? Because it’s harder to send broadcast messages such as special offers, see demographics, segment this list, and analyze trends as you can with really powerful email software, such as Aweber. I use Aweber; it’s not cheap, but then neither is a BMW. Get Response is a low-cost alternative for email newsletters.
  4. Number of Sales – if you sell products on the site, break out the numbers. Focus on the top-sellers. Ignore under-performing and slow-sellers.
    Tip: sell no more than 7 products on your site. 3 to 5 is ideal. Don’t be all things to all people. Have a cross-section of low, medium and expensive products. But keep it focused.
  5. Google PageRank – let’s say your sites doesn’t sell much or have much traffic BUT Google likes it! You can turn this to your advantage. Show the buyer where your site ranks for certain keywords and (hopefully) the number of in-bound links to your site. Google uses in-bound links (i.e. links from others sites) to determine your site’s true value. Links from comments, forums, and no-follows don’t count. So, if you’re in this for the long haul, make sure your sites have something that others can link to, e.g. great tutorials, case studies, and other magnetic content.
  6. Advertising Opportunities – if you don’t have products to sell (services are very tricky to monetize on the web), then use advertising tools such as Chikita, Text Ads, and everyone’s default ad serving program Google Adsense. A more lucrative way to generate revenue is to concentrate on a specific area, say Real Estate for Upmarket Homes In San Francisco, and then approach the large Real Estate brokers on the web. This type of targeted advertising will generate considerable more revenue than generic box ads.

Once you have this information, you can start crunching the numbers.

But how much is my site, worth? Ballpark figure?

  • In the real world, businesses are valued between 7-10 times their annual turn-over. It varies by industry, segment and competition but this is a starting point.
  • Web business valuations tend to be valued lower that offline businesses. So if your site generates 15K from Google Adsense, 9k from direct Adverting and 17k from affiliate products then, your gross profit is $41 a year. This means that value of the site may be between $150-250k.

Reality Check: your business is worth as much as people will pay for it – not what you think you ‘deserve’. It’s up to you to get the best deal. Some domain names have sold for millions. Others you can barely give away.

Gross v Net – what does it mean?

  • Gross Profit – total revenue minus costs. For example, you make a product for $100 and sell it for $1,000, your gross profit is $900.
  • Net Profit - is gross profit minus deductions. For example, you sell $10,000 worth of goods, refunds are $1000 and expenses are $2,000, then your net profit is $7,000.
  • Deductions – are the items you deduct (take away) from Gross profit to get the Net profit. For example, interest payments, rent, utilities, taxes, salary, and web hosting.
  • Gross Profit Margin – the ratio (i.e. percentage) of Gross Profit to Revenue is called Gross Profit Margin. This is the percentage of profit your business is making.
  • Net Profit Margin – the ratio of Net Profit to Revenue is called the Net Profit Margin. The higher your net profit margin, the better.

Costs of Running a Website

Let’s look at expenses and other running costs for a moment. Depending on the size of your web business, you’ll need to capture the following expenses:

  1. Web Hosting – shouldn’t be expensive unless you have a dedicated server
  2. Domain name registration – less than $10 per year unless (and it’s a good idea) you register your domain name privately.
  3. Web Marketing – depends on your business but not investing enough in marketing was a major mistake for me starting out. Allocate at least 10% of your budget to marketing every month. Put some metrics in place to ensure your getting value for money.
  4. Web Advertising – I used Google Adwords extensively when I started but less so now. We spend approx $500-$2500 per month on Google Adwords now, especially when promotions and product launches, but have scaled back from last year. The ROI isn’t there anymore, at least for our markets.
  5. Email Software – as above, I tried to do it on the cheap and ended up regretting it. FeedBurner is free and very good, but Aweber is even better. John Chow, Darren Rowse (ProBlogger) and other A Listers all use it. And you can now convert each blog post into a newsletter. No need to cut/paste, send etc. It does it automatically. Get the $1 trial version here.
  6. Contributing Writers – we use an Adsense sharing tool to share the profits, so no real cost here.
  7. Training – another mistake I made in the early days was to teach myself and do it DIY. Big mistake! Yes, the web is full of incredible information but finding the right material in a nice format you can read and reference as your business develops, that’s harder to find. One that I recommend (and yes, it’s very expensive) is from Yaro Starak. Before you buy it, print out some articles from his site, listen to the podcasts and decide if this is for you. If you’re looking for a very detailed, systematic approach to running a web business, this will do it for you. And, yes, there’s a No Questions Asked refund!
  8. Staff – I outsource all the back office and admin tasks. oDesk is the place to find Virtual Assistants; ask for references.
  9. Backup – you back up your site every weekend, right? If you don’t, get some software that does it automatically. If your site goes down, and it will, you can upload the backup. Otherwise…
  10. Insurance & Legal fees – while you can’t insure your website (maybe you can!), make sure you have some insurance for your office, equipment, software, data, storage etc. These can all be written off as expenses by your accountant. You have an accountant, right? I know these are an expense but, in the long run, they will claw back the money and make sure your financials add up.

How to Write the Sales Pitch When Selling Your Website

Before making your sales pitch to prospective buyers, check that you have:

  1. Financial details ready. Include, as a minimum, the last two years trading accounts.
  2. Website stats and traffic figures – provide as much data as possible.
  3. Estimate of the site’s value. If you don’t have a figure in mind, the selling process can go on forever… maybe you think you’ll get a better offer next week. Maybe you will, maybe not. The sooner you have the money in your pocket, the sooner you can move to the next project.

The next step is to find a buyer.

Before Contacting Prospective Buyers

Do as much research as possible before you contact prospects (prospective buyers). This will save time and help narrow the focus on sales activities. You don’t want this to go on for months. The sales process from start to finish should take 4 week approx. If it goes on longer than this… drop me a line!

  1. Business value – decide on a figure you’d be happy with.
  2. Demand – see how much demand there is for your type of web business
  3. Finding Prospects in your industry – contact business owners in the same niche/industry as you. They will understand the value of your site and see where it aligns with their business. This means you have to do less ‘pitching’. Either they get it or they don’t.
  4. Finding Prospects outside your industry – if your site is in a micro niche or a new emerging market, then contact entrepreneurs looking to enter these markets. This may take more effort and ‘pitching’. Show them the figures and walk them through the financials.

Write a Short Compelling Sales Letter & Highlight the Benefits

First, write your sales letter. If you feel uncomfortable about this, or if English is not your first language, hire a sales writer on oDesk. As always, ask for samples. While this is another expense, try to see it as an investment in your business.

Don’t refer to your business as a site or a blog. Talk about the web business. They’re buying a business, which happens to be on the web. Do you see the difference?

Here’s what to include in the sales letter:

  1. The name and title of the person reading your sales letter.
  2. Spell their name correctly. I get emails addressed to Evan, Ian and Igor. And they want to do business with me… hmmm.
  3. An introduction to your web business – one short paragraph.
    Tip: Keep it focused. Don’t call it a blog!
  4. Identify your target audience – hopefully, this should align with your seller’s customer base.
  5. List the most impressive stats, for example, number of email subscribers. Generate interest. Make them want to learn more about your business.
  6. Highlight other key points, such as mentions in magazines or other well-known publication. We were mentioned in the New York Times last year – that didn’t hurt sales!
  7. Explain why you want to sell it. Be honest. If you don’t have time to manage it or want to move in a new direction, then say it.
  8. Add your contact details, including your mobile phone number. Don’t make it difficult.

Mistakes to Avoid When Writing Your Sales Letter

  1. Don’t include the asking price. The sales letter is designed to generate interest. Once you have this, you can start negotiations. Remember the X percentage of the responses will be competitors and/or tire-kickers. Don’t lose too much energy on this. Get a feel for who’s really interested and work with them.
  2. Don’t spell their name incorrectly.
  3. Don’t forget to spell-check.
  4. Don’t forget to follow-up.
  5. Don’t do mass mails. Really, don’t! I get close to 200 emails a day, every day. Sometimes you need to chase me.

Where to Find a Buyer For Your Web Business

If you’re starting out, then use the following sites. Once you’re more established, contact buyers directly and make contact in the industry. Most of these are free but watch out for hidden costs, especially if they charge a percentage of the sale, often as high as 5%.

  • BizBuySell.com costs $45 and $75 for standard and premium listings
  • Business-sale.com lists UK businesses selling for over £250,000. Free listing for three months
  • Daltons Business – UK web businesses selling
  • Digital Point – No charge for posting.
  • Domain State: Free listing.
  • DNForum: Paid site with the focus on domains
  • Ebizbrokers.com - selling web businesses since 2001
  • Flippa.com – $40 for their most expensive listing. Charge a “success fee” if you achieve a sale (5% of sale price).
  • Geek Village – Free post every 30 days. Sites worth less than $10,000. WTB allowed. Free listing.
  • Quiet Light Brokerage – 100% on website business brokerage. Network of thousands of website buyers actively seeking web businesses.
  • Search Engine Forums – No charge for listing
  • Sedo – UK site for the sale and purchase of domains.
  • Sunbelt Network – the world’s largest business brokerage firm, with approximately 250 licensed offices located throughout the world.
  • WHT – for sites under $10,000. Free to list or post Want to Buy.
  • Webmaster Talk: Free listing for sale or purchase.

Arranging To Sell the Web Business

Hand of Silver Mantis & Frog & Pinnochio

After all your hard work, you find a possible buyer. What next?

  1. Take it step by step – Don’t get rushed into signing. If alarm bells go off, or you get ‘bad vibes’, pull out. If the buyer tries to rush you, and keeps pressurizing you, run. This guy is a hustler. Stay away.
  2. Agree a Handover Date – give them a date to sign by and transfer the money. Otherwise, this will drag on and they may change their mind.
  3. Don’t Be Bullied – don’t agree to last minute re-negotiations. This is another ‘trick’ to avoid. Buyers will go 99% of the way with you – and hope you’ve refused/turned away all other offers – and then threaten to walk away unless you lower the price. Expect this to happen.
  4. Stick to the agreed price – If you waver, they will drive you down even further. Remember, some of these people do this for a living. You’re one of many sites they’re dealing with.

Handing Over The Site – Create a Checklist

Create a handover checklist. Itemize what you need to do (and dates) and what they need to do (and dates). See this as a small project that needs to be coordinated. Create a list of tasks, allocate them and assign dates. Share this with the new site owner.For example:

You need to:

  1. Show the new owners how the site works (e.g. if it has a CMS or Advertising software).
  2. Send PSDs of all logos and branding.
  3. Send them a User Guide if necessary. A Quick Start Guide will save you answering all those quick questions you’ll get if you don’t do this.
  4. Backup of all files including images, mp3, podcasts, videos etc.
  5. Tell your customers that the site has changed ownership
  6. Check if existing agreements, e.g. Adsense and other advertising arrangements, are discontinued or phased.
  7. Close Google Adwords campaigns.
  8. Remove content that will not be part of the handover.
  9. Show the new owners how email is setup, including autoresponders etc, if relevant.
  10. Send web hosting details if this is part of the transfer (IP numbers etc)
  11. Send the FTP username and passwords, if relevant.
  12. Remove personal, temp, test and other files from the server and/or databases
  13. Close any standing orders or direct debits that support the site, e.g. Anti Virus software
  14. Contact Advertisers and let them know you are no longer involved with the site.
  15. Forward your ‘old’ email address to your new business address.

The Buyer needs to:

  1. Schedule time to do this and have the right people available.
  2. Confirm they understand how the site works.
  3. Test the site, e.g. if there is a CMS used to publish content.
  4. Arrange web hosting so you can forward the IP address information
  5. Change the domain names to their server
  6. Setup new autoresponders
  7. Introduce themselves to existing customers

Arranging the Payment & Mistakes to Avoid

Before you do the handover, discuss with the new owner how the payment will be made. Don’t leave this to the last minute and assume it will be ok.

Here are some things you need to consider:

  1. How will the money be transferred? E.g. bank transfer, PayPal, check, or cash.
  2. When will the money be transferred? Agree dates for the transfers. Check the payments are made in full. If they miss the first payment, walk away. Don’t proceed; cancel the agreement. You’re dealing with a bad egg!
  3. Arrange an upfront partial payment (usually 50%)
  4. Agree the final payment amount and dates.
  5. Where possible, hire a lawyer to protect your interests.
  6. Send them a draft copy of the contract. Made amendments and send the final draft.
  7. Agree handover dates, price and which parties will sign it, e.g. the directors.
  8. In the contact, agree to provide X hours of support for 3 months.
  9. Itemize software licenses and expiration dates. (make sure to close standing orders with these vendors)
  10. Identify other third party contracts, e.g. with advertisers.

Conclusion

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We’ve now covered the entire lifecycle of buying and selling a website. While there are many steps involved in this process, most of these are common sense and not that difficult to master. The hardest part is the prep work, such as gathering the stats, estimating how much the site is worth, and writing the sales letter. Once you’ve been through this once, the next time will be much faster. Letting go of the site can be hard too, especially if it’s got a place in your heart.

So, what did I miss?

I’ve tried to cover as much as possible above but must have overlooked some points. Let me know below and I’ll try to answer your questions.

Related Articles:

Ivan Walsh, Internet Business ExpertAbout Ivan Walsh Got a question about running an online business? Contact me on Google Plus, @IvanWalsh, and Facebook

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