Guide to Buying a Website

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myshtern

Yellow Belt
Know the financial breakout
Web sites are bought and sold based on the expectation of future profitability. To find this you must first determine the "profitabilityâ€. Profits are defined as earnings minus expenses.

For example, site "A†earns $175 a month from advertising. In order to earn this it must spend $10 a month on hosting, $1 a month on domain name registration ($12 a year), and $64 a month on advertising. In this example, site "A†has expenses of $75 a month. This leaves site "A†with a profit of $100 profit per month.

Using a different example, site "B†also earns $175 a month. But in order to earn this it must spend $10 a month on hosting, $1 a month on domain name registration, and $139 a month on advertising. In this example site "B†has expenses of $150 a month with a profit of $25 per month.

What changes when it is sold?
This is an important area, if only because it is often overlooked. Let's say that I'm considering purchasing site "A†from a person named "Fred.†Fred shows me that site "A†has 2,000 back links in the popular search engines. It receives 1,000 unique visitors per day, and 3,000 page views per day. Site "A†also has a Google page rank of 6.

At first this seems like a very healthy site, but upon further examination I notice that the majority of back links and visitors come from other web sites that Fred owns. In this example, if Fred were to sale site "A†he would remove all these links and referral traffic. Of course Fred may keep them for a little extra money.

What's your multiple, 8 months or 12?
Lots of people will tell you to buy a site based off some arbitrary multiple, for some reason it's usually 8 or 12. This means that if a site makes $100 profit a month, then you would pay $800 to purchase it at a multiple of 8. This is one of those areas where almost any advice you get is incredibly stupid. Multiples should be determined based on the expectation of future profit of the prospective web site, not from other people.

Instead of trying to come up with a good multiple to use, you should instead determine a good "system†for determine a separate multiple for each website.

I'm going to go over an example of buying a site and explain how my system works. Its just to give you an idea of my thought process.

What industry is it in?
Topics like technology and travel have a higher profit potential than sites about games and jokes. For a technology site, I may start with a multiple of 6. For a site about trading jokes, I may start with a multiple of 2. The example site "widgets.com†is a technology site, so I'll start with a multiple of 6.

How relevant is the traffic?
Believe it or not, many webmasters can do some very unscrupulous things to drive traffic. The problem is "relevancy†if a site has lots of irrelevant visitors then companies in the industry will pay less for advertising on the site, or if the site sales products then there will be a lower purchase percentage. Fortunately widgets.com receives most of its traffic from natural searches. The webmaster has never done much search engine optimization, so this almost assures us that the traffic he does get is relevant to what visitors are looking for. Because of this, I'll raise the multiple by 2, bringing it to 8.

How much traffic?
The amount of traffic a site has should play almost no role in determining the multiple. How can this be? Just keep repeating to yourself. You are purchasing the site based off expectations of future profit, not the expectation of future traffic. This means that all things being equal, a site that gets 10 visitors a day is worth the same as a site that gets 5 visitors a day - if they make the same profit. There are of course exceptions to this which are explained in the next topic. The multiple I'm using for widgets.com, of course remains at 8.

Is it established?
Earlier I talked about how traffic alone shouldn't change your multiple. This is true in all but extreme situations. If the site looks good but has no visitors, then it isn't established. I personally don't consider buying site like this, because it's impossible to get an idea of future profits. When dealing with non-established site the average profit is usually $0 or some very small number. Using my system you would never be able to purchase one of these sites. At least it would be very hard to purchase one at a multiple of $0. Granted, some of these sites do have some value, but it's a lot more risky.

The other side of the coin is authority sites. Authority sites have usually been around for a long time and are the top site in their industry. They usually have a list of current advertisers, returning traffic, good public relations, etc.. If a site is an authority, then the multiple goes way up. While widgets.com has been around for 2 years and has a steady base of return traffic, it's not what I would call an authority site. Because widgets.com is "established†but not an "authorityâ€, the multiple remains at 8.

Is the traffic good quality?
Earlier we talked about the relevancy of the traffic and how this can affect future profits. Now we are going to talk about the quality of the traffic. The best way to describe the difference is to use an example. Widgets.com has a forum that accounts for half its traffic. Forum traffic is notorious for not being profitable. While you may make money doing simple CPM advertising (where you get paid based on the amount of page views) it's difficult to get visitors to click on ads, this rules out Pay Per Click (PPC) and Pay Per Lead (PPL). Because forums aren't as good quality (when thinking in terms of profit) we will lower the multiple by 2, bringing us back down to 6.

Another problem with widgets.com is that many of the forum topics and site content is based on hacking tech devices. There are articles on how to get free cable channels, hacking your X-Box, pirating DVD's, etc. So while the traffic is relevant, (people look for these topics on search engines and find answers on widgets.com) the traffic is not of good quality. Individual companies will not want to advertise here, and it may be against the terms of service to use a third party ad group. Because of this we lower the multiple by 2, bringing it down to 4.

How much time does it take to run it?
Just because you aren't paying yourself by the hour doesn't mean your time is free. If a site takes a very small amount of time, such as 2 hours a month, then this leaves you time to make more profitable use of your time elsewhere. If a site requires a 40 hour work week, then you have locked yourself into a career and can't spend time pursuing profits elsewhere. Widgets.com only requires 2 hours a week to run. For this, I'll raise the multiple by 1, bringing it to 5.

Where's the content?
In the world of internet advertising, content is king. If a site makes money off a "links directory†or web mail then it offers no original content. If the site contains hundreds of lengthy articles about the industry it covers then it deserves a multiple bump. Of course if the site is an e-store then this doesn't matter as much. While widgets.com does offer forums, it also has many original articles, which will be included with the sale of the site. For this it gets a multiple bump of 2, bringing it to 7.

What are the income sources?
If a site makes most of its money from a single advertiser or product, then you are taking a larger chance at determining future profit. If a site has various income streams, some PPC, some CPM, some with individual companies, and some ad networks, then its much more stable and deserves a multiple boost. Widgets.com makes most of its money off a single PPC company. Because of the fluidity in this single PPC profit, I will lower the multiple by 1, bringing it to 6.

Is it fun?
If I could leave you with one piece of advice it would be this. Don't consider purchasing a website, if you don't like the subject. Like any other small business, websites NEED tender loving care. There is nothing like purchasing a profitable website and just letting it set and mold. If you like the subject then you will be more inclined to advertise, update, and add to it. If you like the subject, then it will be more profitable for you. I personally don't like widget.com very much. While I usually like keeping up with tech related matters I would find it difficult to keep the forums on topic. I wouldn't want to write papers about DVD pirating, and I don't agree with the general principles behind the site. In order to run this site, it would require me to spend time doing things that I don't want to do. Remember the quote, "Its business not personal.†I don't think this applies; each site should be a personal project for you. If it is, then you will spend more time improving it. Because of my feelings for widget.com I'm lowering the multiple by 3.

So in the end, I offer widgets.com a multiple of 3 times the average of the previous 6 months profit. The owner is outraged and counter offers a price of twice that much. I explain my reasoning to him and also explain the good and bad points of widgets.com.

I explain to him that I have put a lot of work into coming up with a price that I think is reasonable and unless there is new information about the site that I didn't know before I won't change the price.

If you buy the site at your chosen multiple, great; there is a good chance you will make a profit. If you give in and raise your price then you are decreasing your chance at becoming profitable.
 
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