There are quite a few different methods, which Flippa describes in an article here quite well. But let’s look at the one, which is most prevalent right now.
Monthly Profit Multiple
While this is not an exact science, it is being used quite frequently by various marketplaces currently. You simply divide the suggested purchase price by the monthly profit.
Monthly Profit / Suggested Sale Price = Valuation
Example: a website earns $800 per month. For simplicity, let’s assume the website is older than 12 months and shows quite a stable and growing income (ideally from multiple sources).
What is a realistic multiple?
What we currently see in the market are multiples between 25-35x the monthly profit. So in our example above this would lead to a valuation of $20-28,000.
Benchmarks – Multiples for selling a website
The market research firm Centurica.com published an exciting report for website buyers, where they analyzed average valuations further. You can find the free report here.
More specifically, they analyzed the median SDE multiple. SDE stands for seller discretionary earnings. Simply put, it is an estimate of the total financial benefit a full-time owner-operator would get from the business per year. Quiet Light Brokerage produced a cool explainer video of the SDE metric.
As you can see the median SDE multiple is slowly increasing, but still hovers around 2.5-3x. Which means that you have to pay 2.5-3x what the owner would roughly make in profit per year. Compared to what we suggest above, this equates to a monthly multiple of 30-36x.
However, let’s be clear. Age and profit aren’t the only determining factors in identifying the valuation of a website. If there is a promising outlook, good traffic development, and SEO positioning, those are all factors positively influencing a valuation.
Which factors influence a website valuation positively?
The proper due diligence can be quite complex. But let’s boil it down to a few crucial factors:
- Good traffic history: past traffic has been stable and growing over time. Pay particularly close attention to Google algorithm updates in recent years.
- Good traffic distribution: You want to see a fair balance of your traffic originating from multiple traffic sources and pointing to multiple pages. In case one of your pages loses its rankings, the income is not going down with it.
- Income is diverse: The more sources the better (as long as they do not increase operational complexity too much).
- Income is predictable: A lot of sites earn money from sponsorships, which are hard to predict, often depend on sales effort. Instead look for income that is recurring, or based on stable traffic, such as Amazon affiliate commissions or Display ads.
- Backlinks are good: You want a clean backlink profile with no spammy links. Also, look for any other signs of risk/instability.
Read our due diligence checklist on what to actually analyze and look for when buying a new digital asset (i.e. website). Do you want to share any thoughts or feedback? Please do so in the comment section below.
Forrest Webber says
I would love to see the orange chart with new data, do you have any idea where that can be found?