Introduction
A few years back I was considering of buying a website. In the end, I didn’t end up making the offer, largely because I couldn’t figure out how to calculate the offer price in a plausible way. Since then I’ve had a bit more experience in estimating figures in other contexts, as well as participating in some M&A discussions in the ecommerce field. But today, while cleaning my inbox, I happened to read that old email from many years ago, and thought of sharing some thoughts on the topic — hopefully as a bit wiser person!
Basic figures
If you are planning of buying a website and thinking about the offer price, you should know some basic figures of the website:
ARPU, or average revenue per user
if there is none, you have to estimate the earning potential. If the monetization model is advertising, find some stats about avg. CPMs in the industry. If it’s freemium, consider avg. revenue per premium user as well as the conversion rate from free to paid (again, you can find some industry averages).
Number of users/visitors
This is easy to get from analytics software.
Revenue
Revenue or revenue potential (if there is none at the moment) can be calculated by multiplying the two previous figures. So you would move from unit metrics to aggregate numbers.
Profit
You also need to consider the cost of maintenance, marketing and other actions that are needed to keep the site running and growing. Deduct those from the revenue to get profit. If you want faster growth, you need to factor in an investment for that; although it’s not exactly a part of the offer calculation, it still needs to be considered in the overall plan for making money with the website.
Calculating the offer price
Then, to determine offer price you need to multiply the profit with a time unit, e.g. months or years, to get the offer price. This figure is like a line in the sand — you can try and think it from the seller’s perspective: how many years or months of profit would he want to recoup in order for him to be willing to sell.
As an investor, your best break can be found when the profit is low, but revenue potential and number of visitors as well as visitor loyalty are high. The high revenue potential means that there is likely to be a realistic monetization model, but because that has not been applied yet, one can negotiate a good price if the seller is willing to let go of the website. Loyalty – manifested in high rate of returning visitors – indicates that the website provides real value for its visitors instead of relying e.g. on spammy tactics to lure in casual browsers. In the end, the quality of traffic matters a lot in whatever business model you apply.
You should also consider the stability of the figures – in particular, the historical growth rate. With the historical growth rate, you are able to project the development of traffic and revenue in the future. At this point, be realistic of what it takes to uphold the growth rate and thorough in asking the current owner in great detail what he has done so far and why. This information is highly valuable.
Because there is a lot of imprecision in coming up with the aforementioned figures, you would be wise to factor in risk at every stage of the calculation. Convey the risk also to the buyer in a credible way, so that he sees ‘it won’t be easy’ to get your money back. This is a negotiation tactic but also the real state of affairs in many cases.
Closing remarks
I don’t include any “goodwill” on things like brand or design in the calculation, because I think those are irrelevant for the price determination. All sunk costs that don’t serve the revenue potential are pretty much redundant — sticking to real numbers and, when they are absent, realistic estimates — is a much better way of determining the price of a website.