Generally the first question someone asks me when wanting to sell their online business is, “What is it worth?”. So, I sat down and examined the sales of 250 businesses between 2010 and 2012. I also plan to do a follow-up post for all the 2013 data. To answer the question “what is my online business worth?” we use two valuation methods. A multiple of earnings method and a comparable sales method. By definition, the value of something only materialises when a transaction occurs hence the old cliche ‘it’s worth what someone is willing to pay for it’.
A major part of valuation is comparing the sale of similar businesses. When I used to do business valuations for my father’s company Valuator.com.au, a large proportion of the time was spent sourcing similar sales to use as evidence. This was sourced from subscriptions to services like redsquare.com.au and realcommercial.com.au. I picked buybizsell.com to emulate this process for online businesses, I chose them for a few reasons:
- I believe it’s the best representation of the market
- I also believe it is the best business for sale classified website (versus competitors bizquest.com and businessforsale.com)
- You will find most website brokers advertising their listings on bizbuysell.com
- I could buy the data to analyze
We Analyzed 250 Businesses From 6 Business Models
In total we analysed 250 businesses that were sold between 2010 and 2012. A few assumptions were made. We only analyzed businesses with a sale price higher than $50,000 and removed any obvious outliers in the data set (for example: a business that sold for $80,000 that was making $7,000 in profit for the last 12 months). I think this gives a better overall picture. Below is how we categorised each business model:
- Advertising – a website monetized through ads or affiliate offers (24% of businesses analyzed)
- App – a mobile app, monetized through paid downloads, membership or advertising (2% of businesses analyzed)
- Ecommerce – traditional ecommerce stores, drop-shipping and digital products (50% of businesses analyzed)
- Lead Generation – websites monetized through selling leads (2% of businesses analyzed)
- Service – websites monetized through providing a service (20% of businesses analyzed)
- Software – SAAS (software as a service) and any other application based business (2% of businesses analyzed)
What We Found From Our Analysis
The average sale price wasn’t a true representation of the data. The mode (most frequent sales price) was a much better representation of the data set, as this is backed up with the valuation requests we receive from our free valuation form. The majority of online businesses that are sold in the market are 200k and below. This is also backed up from the data as the top 80% of sales (200 sales) made up 20% of the total value of all the businesses ($128 million). This means there is a small percentage of larger sites that sell for a higher price. A 0.9 sale to offer % means if a business has an asking price of $100,000 on average it generally sells for $90,000 or 0.9% of the asking price. This means you will probably sell your business for 10% below the asking price if priced correctly.
This is a screenshot of the data we collected. As you can see we had access to the sale date, sale price, asking price, total sales (gross income) and profit (cashflow).
How Does Online Compare To Offline?
The fact that online businesses are selling for a higher multiple than offline businesses, is happening for two reasons. Firstly internet businesses generally run at a higher profit margin. Take the sale of helpareporterout.com (HARO) at the time of sale Peter had $2.5 million in sales and 3 staff to pay, that’s a 90%+ margin which would be unheard of in the offline world. An online business has less fixed expenses like rent, electricity etc. and more flexibility regarding staff. The other factor to consider is lower daily operational responsibilities. The high automation and reliance on technology and systems means there is less moving parts to manage. Take customer support, using services like zendesk.com to manage support tickets, while paying a contractor in the Philippines greatly reduces the responsibility of having to pay a staff member to man the phones to answer customer questions.
What Was The Selling Price Range?
We can see from the data that nearly 80% of all websites for sale had a valuation under $1 million dollars and 50% of all websites sold had a valuation under $200,000. This is happening because there are lots of one person businesses in the online space. The main reason there aren’t more businesses valued above $1 million is it requires a completely different skill set to take a business from $1 million valuation to $5 million valuation. This is mainly centred around hiring a team, implementing systems and processes and generally scaling with more fixed costs. It requires a different mindset to achieve this.
What’s Is The Average Multiple Per Business Model?
We analysed a multiple of net earnings (yearly profit) to compare business models. For example if an ecommerce sold for $520k at a multiple of 2.6X, then the yearly profit was $200k. I think there is a variation between the average multiple that each business models sold for because of a few reasons:
- Workload – time to manage the business each week. The less workload and more systemised, the higher the value
- Profitability – generally a business with more moving parts (operational expenses) costs more to run
- USP – how easily the business model could be copied or replicated. Easy replication resulted in a lower price
- Age – Older businesses are generally more established and pose less risk, therefore demand a higher price
- Risk – buyers thought certain models posed more risk than others. For example a service based business is seen as higher risk because of the higher client churn rate, reliance on service delivery of staff and low barrier to entry.
Here is my thoughts on why there is a differentiation between each business model.
- Advertising – demanded the highest multiple because of the low workload (simple systems) and high margins
- App – although hands off in nature, the businesses are generally quite young and therefore pose a higher risk
- Ecommerce – demanded the highest multiple because of the reduced risk (mainly the tangible customer base)
- Lead Generation – had the lowest multiple because they really add much value to the market place and had a high reliance on SEO traffic
- Service – sold for a lower multiple because of the higher workload and reliance on skilled employees
- Software – had a higher multiple because of the value generated through the technology of the software
Are Smaller Or Larger Businesses Worth More?
This data is surprising. There is far greater demand for sites worth under $200k than there is over. Simple supply and demand should say that smaller valued sites should be worth more, however they are not. The main factor I think smaller sites sold for less money are: Profitability, age and systems and the type of buyer. Simply a site that is making less profit will have more risk to variations in income. Secondly, smaller businesses were generally younger and this means more risk. Also, smaller businesses were more dependent on the business owner rather than systems created by the business owner, this also decreased valuation. However I think the main factor is that smaller businesses attracted less experienced buyers
Ecommerce Value Per Sale Price?
This data is surprisingly similar to results from the overall value per sale price. It is no surprise that the larger businesses sold for more. Again this is because of four things. Interestingly the second largest sale ($6 million) from the 250 businesses was an ecommerce store selling supplements, the largest business being a mobile app. The most expensive drop ship website sold was $3.95 million selling yoga products.
What’s in store for 2014 ?
- Valuations Increasing – We are sitting at an average of 2.41X multiple for this report, when I run the 2013 data I predict this increasing to as high as 2.8X multiple. As the general investor market starts to become educated about the possibility of investing online the demand is only going to increase. Similarly the multiple of offline businesses is going to decrease. General market conditions stipulate this. The global economy is struggling and this will be reflective in multiple for offline businesses.
- Ecommerce is only going to grow – As you can see by our data set, ecommerce businesses represent 50% of the data. I think this will be close to 60% in 2013 and it is only going to increase thanks to the growth in ecommerce platforms like shopify and bigcommerce and low barrier to starting your own online store. The general shift in the way we do business to online will also influence this.
- Increase in seller financing – The fact you are yet to be able to get a loan from any bank to purchase an online business spurns creative deal making. I see a steady increase in seller financing and creative deal making to get deals done. Expect to have some type of payment plan as a seller.
- Market Growth – I can only see the growth of online businesses to increase. This is combined with euphoric optimism from most buyers I talk to.
- Flippa Decline – Flippa.com is going to continue to decline in sales, traffic and quality listings. In 2013 we have seen a large shift of sub $50k sites over to website brokers and this will continue at a growing rate. I agree with the views of Justin here. Flippa has no way of filtering listings quality listings at scale and for this factor they are going to struggle.
- Private sales still pose the best deals – we will continue to see the best deals for entrepreneurs buying websites by going direct. Generally if you are looking to buy privately you will pick up a better deal (multiple) than if you go to the market. Drew Sanocki has a great article about when is the right time to buy an online business.
- SEO isn’t going to die – continual Google updates and unreliability of search traffic have forced people to become more open to other traffic sources. This is evident with Demand Media’s business model pivot and purchase of it’s first ecommerce business. However the continual prediction that “SEO is dead” is utter rubbish. Google wouldn’t have spent billions into the research and development of their algorithm to change it overnight. Sure there is going to be a higher influence of social signals in the algorithm, but back links are still going to be a cornerstone of ranking in Google.
- Drop ship is going to die out – with any form of arbitrage, eventually it get’s found out and more competitors move into the space making it no longer viable. Drop shipping products doesn’t add an value to the market. Although being a middle man is a perfectly legitimate business model, drop shipping adds no real value to the market unless you are able to create a brand, USP or personality around your business.
- Clicks and Bricks – the future of ecommerce is “clicks and bricks” this is something that Ian Schoen first introduced me too, terry and Ian talk about that in episode #76 of the buildmyonlinestore.com podcast. Clicks and bricks is a traditional retailer using online as their main marketing channel, while still having a physical warehouse, but no shopfront. This is the exact business model that Amazon uses.
- Investment firms increasing investment – the investment world is waking up. Whether they are buying for cashflow or process, the general investor market is starting to continually snap up of sub $5million deals.
- Small websites become more valuable – simple economics states that if there is more demand for a smaller business then the price is going to be larger. I predict there is going to be an increase in the multiple paid for sub $200k valued sites from 1.8X earnings to 2.5X net earnings in 2013.
- USP when selling – If you have the time and the audience you are always going to get a higher offer selling yourself, just like Andrew Youderian did with his trolling motors store. Or Dan Taylor in selling his Saas app. A strategic exit is always going to bring a higher selling price than a financial exit.
Do We Have New Reports?
Yes check out our most recent valuation reports:
What Questions Do You Have ?
I hope you got some value from my analysis of what your online business is worth. But I want to hear about how YOU plan on using this data when selling your business or any questions you have. Don’t be shy: drop a comment below right now and share the love! 
Here is a link to the infograhic: Click here