If you own a profitable website or online business, then you own a digital asset that has value. One that has value both to yourself, but also to investors who like buying websites for the income they produce. If you own a successful website, you’ve maybe been approached by someone looking to buy your website. Or maybe you are interest in selling your website for a big chunk of money.
Before you sell your website to someone, you should determine how much your website is worth. To do that, you need to understand how the industry values a website. This guide will walk you through how websites are valued and the qualitative aspects that affect website value. By understanding the underlying factors that affect valuation, you can also learn how to improve the value of your website prior to selling it.
How much do websites usually sell for?
I dislike giving an “average” or common selling guidance, because there are so many variables. BUT, on average, most websites sell for 1.0x-3.5x their annual profits. This range is known as the “valuation multiple” and annual profits are commonly referred to as “Seller’s Discretionary Earnings” or “SDE” and differ slightly from true, bottom-line profit.
This is a huge range, and whether your business falls on the low end or high end of that range depends on a number of qualitative factors. While we tend to look at dozens of qualitative factors in determining value, what we are really doing is analyzing risk. Ultimately, your valuation multiple is determined by how risky your website is.
If your website generated $50k of SDE last year, how much risk is there in this generating the same amount this year and next year?
Most owners overvalue their website relative to the market
90% of the time we see someone selling their website on their own, they have it listed at an unrealistic valuation, relative to what an investor would pay. This is because valuation comes down to risk.
If you built your website from scratch and have owned it for years, you understand it day in and day out. You know that traffic and sales tend to dip in the Summer months, but always pick right back up. You’re comfortable that one slightly down month is just an anomaly and nothing is wrong with the business.
Investors and people who don’t have that kind of history with your website are way more skeptical. Two months of declining traffic is “uh oh, what’s going on with the site? Is this downtrend going to continue?”.
Investors pay based on risk, and you are always going to think that your business is less risky than an outsider will. And usually, your business is more risky than you think it is, you have just grown comfortable with that risk and overlook it.
How are website values calculated?
Website values are calculated by taking the profits from the last 12-months and multiplying those profits by the valuation multiple.
Most Recent 12-Month Profits x Valuation Multiple = Website Valuation
Because you can’t really change your profitability (at least immediately), the thing that really drives value is the multiple that gets applied to it. Prior to digging into how to determine your multiple, we need to figure out how exactly to calculate profitability.
Websites sell based on their “Seller’s Discretionary Earnings” aka SDE
Seller’s discretionary earnings does not always equal net profit. The purpose of SDE is to determine how much money the owner is able to put in his pocket every year. For example, your website might do $0 of net profit, because you pay yourself a $100k annual salary. Or vice versa, it does $100k profit but you don’t pay yourself a salary, you just take distributions from time to time.
Ultimately, its how much financial benefit a new owner should expect had they owned the business for the past 12-months. To get to this number, you need to take your net profit and add-back your salary and personal benefits you pay for through the company.
Website owners commonly expense their apartment rent, their cell phone bill, car payment and gas, etc. as business expenses to reduce their taxable income. Because most of these are truly personal expenses, and are not necessary expenses for running the website, you get to add them back.
Prior to selling your website, you should speak to a business broker to get help determining what your SDE is so that you don’t miss out on any addbacks you could be taking advantage of.
Determining your valuation multiple
The valuation multiple is the qualitative analysis that determines whether your website sells for 1x or 3x (or anywhere in-between) your annual SDE. Determining your multiple is an art rather than a science.
As discussed previously, your multiple is a factor of risk. It isn’t as easy as “because this, then that”, because everyone sees risk differently.
However, there are 5 primary things we can point to that determine your selling multiple.
1. Your business model / monetization method
Content, affiliate, SaaS, and membership sites tend to get the highest multiples. Content and affiliate sites tend to less cyclical and more consistent. SaaS and membership sites generate high levels of recurring revenue. These are more valuable because their earnings tend be less volatile. Additionally, content and affiliate sites usually have a ton of untapped potential.
eCommerce, services, and lead gen sites tend be lower multiple businesses. Earnings fluctuate more, for example, Q4 is the biggest month for eCommerce. Additionally, they are usually less “value-add” as the majority of eCommerce sites we see for sale are dropshipping non-proprietary products.
All-in-all, these are just generalizations based off of what we have seen in the market. If you have an eComm store that sells a unique, proprietary, branded product, then it very well might even be a 4x multiple.
2. Traffic and where it comes from
Generally speaking, websites with more traffic are worth more. And websites with consistent and growing traffic is even better. You want your traffic to either be flat and consistent, or growing like nice up-slope. Websites with declining traffic, or huge spikes from month to month are going to be considered more risky.
However, more important than traffic trend is where that traffic comes from. Organic traffic is king! But you also want highly diversified traffic acquisition channels. Buyers want to know that if you stop ranking #1 for x keyword in google, that you aren’t going to lose 90% of your traffic immediately.
We love seeing 95% organic traffic because it means there is so much potential to increase traffic through social, paid ads, referral, etc. On the other hand, if your site is 95% traffic from paid ads, we get very scared. What if CPC doubles? Or you have a small target audience? Paid ads aren’t sustainable in the long run.
3. Financial trends
Aside from how much money your site is making, the trend of profitability is extremely important. People tend to believe that things that are increasing will continue to increase, and that things decreasing will continue to decrease. Flat or increasing profits is going to earn a higher multiple than declining profits.
Additionally, length of profitability is important too. If your business had made $90k-100k of profit consistently for the last 5 years, a buyer probably has decent confidence that it will make the same amount next year. If your site made $100k this year, but it was your first year being profitable, buyers will be more cautious.
Overall, you want profits trending upwards, and 2+ years of profitable history.
4. Website age
This goes hand in hand with everything above. An older website has more data and history on traffic and profitability. More data = more comfort from a buyer. Buyers like to see 2+ years of age on a website, at the minimum. Anything less than that will likely result in a haircut to your multiple.
5. Owner maintenance / involvement
Most buyers in this space tend to own multiple other online businesses. They tend to be investors that are buying the business for its profits. If your business requires you personally to work 40 hours per week on it, then you are going to scare a lot of buyers away.
Websites with high levels of autonomy, that are highly passive, get the highest multiple. As you think about selling your website, reducing the amount of time you are required to work on the business can have a huge impact on your valuation multiple.
So, how do you determine multiple then?
You use our calculator! (its currently being built)
Well, its really difficult. You probably came here to determine how much your website is worth, so I’m sorry for not providing you a concrete answer. But you can’t simply say that a site that is 3 years old, with uptrending traffic, thats highly passive is definitely going to be a 3x multiple.
For example, let’s say we have two identical content sites: same traffic, profits, trends, age, etc. Site 1 is a health site writing about healthy meals and workouts. Site 2 is about how to program algorithmic trading robots. Sounds pretty cool, but the health site is going to be worth more because how many buyers are out there that can program algorithmic trading robots? Now, if 100% of the content is outsourced, then its a different story and the programming site might be more valuable.
As you see, it isn’t cut and dry.
Website Value Calculators
There are a handful of different value calculators out there on the web. Most are ‘type in your domain name and hit enter’ and it spits out a value. As you’ve hopefully learned by now, this isn’t going to be anywhere close to accurate. Its all an estimate and its completely pointless unless your site is a content site that generated revenues 100% from advertising/adsense.
The lack of good calculators out there is why we created our own website value calculator. We built a unique algorithm that calculates value based off of a number of inputs, and how important these factors are to investors/buyers.
Give it a try, we promise its the most accurate one you’ll find!