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The debate continues to rage between the viability of the dropship model. On one side of the argument is drop-ship will always have a role in the market and on the other is that it will slowly be phased out. I have my own opinions however I thought it would be a good idea to get the thoughts of other ecommerce experts on the subject.

Ecommerce Versus Dropship

Drew Sanocki

(www.drewsanocki.com) Drew runs the popular ecommerce blog about hacks for ecommerce executives. He has a book, Masterclass and coaching that he provides for readers and fans.

Too many people make “dropshipping the operational approach” into “dropshipping the business strategy”. Of and by itself, it’s simply a tactic, like employing white glove shipping or next-day delivery. If it makes sense for your business, use it — if it doesn’t, don’t. It’s not going anywhere — financially it will always make sense to ship once (from a vendor) as opposed to twice (from a vendor to a retailer and then a retailer to a customer) for certain products.

Trouble comes when you make it into a business strategy. That’s like saying “we are a ground shipping retailer”. That doesn’t make any sense. Only a handful of retailers might define themselves by their delivery method — Kozmo, Postmates, etc. — and I’m guessing the readers of this article aren’t among these retailers.

Instead, you’ve got to do the fundamental things that eek out a competitive advantage. Build a brand, offer proprietary merchandise, etc. Once you’ve done this, thing about whether it makes operational sense to drop-ship your product. But don’t put the cart before the horse.

Andrew Youderian

(www.ecommercefuel.com) – Andrew runs Ecommerce Fuel, a blog that is dedicated to sharing insights and lessons learned from running his own ecommerce businesses, and is written especially for individuals and small teams hoping to start, grow and operate their own online stores.

What is the future of dropshipping?
“I’ve been a full-time eCommerce entrepreneur for more than six years and used drop shipping exclusively. That being said, my next eCommerce business will not be a drop shipping model.

Why? Drop shipping is fantastic to get started when capital is tight, to test out new markets, to supplement your in-house products or if building a location independent business is extremely important for you. But building a sizable and profitable drop shipping business can be difficult because everyone else has access to the products you’re selling, which often leads to price wars.

It’s definitely not impossible. Again, I’ve been doing it for half a decade with success – but it does take a lot of work and a very carefully thought out niche. You need to pick a market where you can add a lot of informational value to your product – or a very unique branded experience – or else you’ll struggle to do well.

Building your own product or brand takes more time up-front, but is a more much more defensible business long-term and offers the highest ROI. So while I’ve really enjoyed drop shipping and know it’s possible to make it work, I won’t be choosing it for my next business model given I’m looking to maximize my returns in the long run.”

Ian Shoen

(www.thevaletspot.com) Ian owns and operates a number of businesses in the ecommerce space also is also the co-host of the popular online business podcast the tropical mba podcast.

What is the future of dropshipping?

I define dropshipping as buying and reselling someone else’s product and never paying for inventory. By virtue of it being easy I don’t think it will be valuable in the future because you have to compete with amazon and the manufacturer. I think you do it purely for research value and learn about the product and then you go put and create your own company off that. It’s much easier now for a manufacturing company to do their own sales and marketing. By making your own products there is more valuable intellectual property, goodwill and the ability to add more services to the product offering.

Leighton Taylor

(www.ecommercepulse.com) – I’m here to help you start a successful ecommerce business and find more freedom and fulfillment in life. Stick around for free articles, tutorials, and a podcast designed to help you build a thriving business and achieve your goals.

What is the future of dropshipping?

I think the drop ship model will continue to exist as long as that model makes sense for the manufacturer of the product. If manufacturers can profit by offering to drop ship for their retailers, they’ll do it. However, some manufacturers may discover that it’s just easier and more profitable to sell direct to consumer on Amazon. I predict that the drop ship model won’t go away, but that it will continue to grow more difficult for retailers to differentiate themselves and make significant profits.

Terry Lin

(www.buildmyonlinestore.com) Terry owns the widely popular ecommerce podcast and blog Build My Online Store where he interviews successful ecommerce store operators about their experience running a profitable ecommerce business.

What is the future of dropshipping?

While dropshipping is a great way to get started in e-commerce with low financial risk and no inventory overhang, entrepreneurs taking up this business model will need to really think through their differentiating angle to the end customer. With minimal barriers to entry, lower margins (10-30% on average), and no ownership in manufacturing, dropshippers require a large revenue base to make any sort of meaningful net income.

As the dynamics between paid and “free” advertising channels become more complicated, dropshippers will find it more challenging navigate due to budget constraints that originate from their lower product margins. But the advantage dropshippers have is market knowledge and an existing customer base. From there, they can consider sourcing inventory for bestselling products, private label their own brand, or go down the manufacturing path.

Richard Lazazzera

Richard Lazazzera – (www.ABetterLemonadeStand.com) – Richard runs the blog and community at A Better Lemonade Stand. His blog is dedicated to helping new ecommerce entrepreneurs figure out what to sell online and provide them with the necessary advice, resources and tools to get started.

What is the future of dropshipping?

With low startup costs and almost no barriers to entry, dropshipping is seen as an ideal to start point for many new ecommerce entrepreneurs. However, dropshipping has always been a difficult business model and continues to get harder. Slim margins make it hard to compete. Tactics like paid advertising and discounting are difficult if not impossible to do effectively in the dropshipping space.

What is many times sold as a easy way to start an online business has actually become one of the hardest. There is no easy money is dropshipping. It’s a long road uphill and the hill continues to get steeper.

With that said, the dropshipping model will continue to exist because it’s beneficial to manufacturers. However, I would caution new entrepreneurs to strongly consider their niche before getting into it. They days of selecting a niche, finding a dropshipper, doing a bit of SEO and making sales is done. You better love what you’re doing because you’re going to be spending a lot of time doing it.

Shabbir Nooruddin

(www.bootstrappingecommerce.com) is a blog about building an ecommerce business on a shoestring budget.

What is the future of dropshipping?

“Drop shipping is getting tougher and tougher, but as long as you can find a way to differentiate yourself from everyone else, you can succeed. I think drop shipping is evolving from a regular niche site to a super-specialized niche site where your target market is a niche within a niche. Many successful drop shippers have already embraced this philosophy and are seeing good results. From a business and money perspective, you could successfully grow a drop ship business to a million dollars or more in revenue, but it’s more like something you’d want to use as a stepping stone to manufacturing or sourcing your own products. Margins are tight, costs are high, and competition is tough, so you’ll do well if your in it for the long haul.”

Andrew Egenes

(www.shoplio.com) Shoplio owns and operates a network of speciality and niche online stores in various markets including home goods and protective covers.

What is the future of dropshipping?

I believe dropshipping will always be a legitimate catalyst for quickly and cost-effectively entering new, immature, or unproven markets. However, I also believe the Internet will only continue feeding and supporting a price conscious mindset among online shoppers. As a result, I think companies operating off an exclusively dropship-based business model will increasingly be forced to consider sourcing and securing at least a portion of their catalogs to remain competitive in what I see as an ever more price sensitive and price competitive e-commerce future.

Jason Guerrettaz

(www.websiteclosers.com) Jason is the co-founder of website closers, a brokerage that has been helping selling online and ecommerce businesses since 1998.

What is the future of dropshipping?

As owners and brokers of digital assets, we see the answer differently depending on our stake. Our process as site operators has been to evaluate the ability to compete given supply and demand marketplace dynamics. Based on these dynamics, we will generally stock those SKUs that perform well in order to maximize margins and compete. But so much more can go into the decision making process of moving a SKU from drop ship to stock; including, whether the Manufacturer has made the decision to sell product directly on its website, on Amazon or on other marketplaces. Also of importance is whether Minimum Advertised Pricing rules have been put in place. These market dynamics continue to evolve, and thus, we continue to monitor the marketplace and our competitors to identify whether a SKU should be stocked or drop shipped.

When we represent a Seller that wholly or primarily drop ships product, we find that some Buyers are interested in the business because they don’t have to manage or deal with the costs associated with inventory management, whether it be in a warehouse or via a third party fulfillment company. Buyers also look at drop ship Internet companies as an opportunity to increase operating margin to offset the cost of debt service.

But as to the value of a drop ship model versus that of an inventory hold business, we are not currently seeing a higher multiple from either model. Multiples tend to be more tied to top/bottom line trends, the category served, the opportunity for scale and the strength of the brand.

Thomas Smale

(www.feinternational.com) Thomas is the co-founder of FE International, a website brokerage the helps people sell their online business. They were established in 2010.

What is the future of dropshipping?

In recent years, dropshipping has got more and more popular. As less internet savvy people get online, running a relatively simple e-commerce business (dropshipping vs. holding your own stock) is extremely attractive. Whilst profit margins may not be as high as stocking and shipping yourself, for the average hobbyist/small business owner, it is ideal due to the lack of moving parts and relative simplicity.

Demand will continue to grow for dropshipping businesses, particularly in the sub-$100k range where the majority of first-time buyers are. First-time buyers generally want something easy to run and are far more comfortable dropshipping than anything else. It is very rare to see websites at the $100k+ net profit a year level that are entirely dropshipped. With relatively low margins, they can be hard to scale, and as a business grows it makes sense to build an infrastructure (whether that is through a fulfilment service like Amazon or stocking and shipping product out of a small warehouse). I don’t expect to see much more supply at the mid-high end of the market, but in the sub-$100k range I expect supply to be stable and multiples to increase as demand continues to outstrip supply.

(www.quietlightbrokerage.com) Mark is the founder of Quiet Light Brokerage. A premium website brokerage established in 2007.

What is the future of dropshipping?

Dropshipping sites have been extremely popular among buyers and I believe they will continue to be popular. For first time buyers, I often recommend dropship sites as the business model resembles business models that they will be familiar with, and the benefits that dropship sites offer (relatively low-work load, automation) give first time buyers a good taste for what is possible with Internet businesses. When I am evaluating a dropship site, one of the first areas I look towards is whether it has any distinguishing factors. Do they have special pricing with their vendor that others won’t get? Do they have a unique mix of products that is unlike their competitors? Do they have any exclusive rights?
The worry buyers often have with dropship sites is that the barrier to entry can be relatively low, especially if a vendor has an open door policy, automated feed, and no oversight of resellers. These types of sites, however, get filtered out pretty quickly in the acquisition space (or they sell for very low multiples). If you have a dropship site, you should work on making your business unique. Overall, I don’t see the demand for dropship sites declining. If anything, I would guess the demand for these businesses will actually increase.

Julie Neumann

(www.bigcommerce.com) Julie manages all the content at ecommerce platform Bigcommerce. Her work has been featured in Entrepreneur, Inc, Washington Post, Yahoo!, TechCrunch, VentureBeat, Spin and more.

Tony Loya

Tony Loya has been with the Volusion team for more than 3 years and manages Technology Partnerships. In his free time Tony enjoys all things to do with bicycles and Chinese gadgets. To earn more about using Doba drop shipping with Volusion, please visit: https://www.doba.com/partners/volusion.

“In the future, online businesses will continue to reap the benefits of drop shipping, if not more so than they do now. But when choosing most ecommerce business decisions, it has to fit in with the business’ structure. If drop shipping fits into that model, business owners have the potential to utilize drop shipping to save money, give them additional flexibility, and minimize risk & waste to support and improve their online business for years to come.”

What is the future of dropshipping?

“Drop shipping can be a great way to get an e-commerce business off the ground, expand and test new products. The minimal overhead costs make it appealing to a wide range of merchants. And that means it is becoming an extremely competitive space. Differentiation will be key moving forward. Merchants need a unique niche or identity plus a solid strategy to succeed. The time they save with drop shipping should be spent building a brand, connecting with consumers, establishing themselves as experts and looking for ways to stand out from the crowd. Drop shippers will find success providing white label services, helping merchants extend their brand and providing a superior customer experience. To maximize profits, everyone should embrace a new mantra: always be adding value.”

Following up from our successful post last year outlining what online businesses are worth. We have compiled and collated the data for 2013 transactions using the same formula and data source as last year to bring you the 2013 data on what your online business is worth.

Some interesting things were found:

• General sales multiples making online businesses more valuable
• Website valued under $75,000 still sold at an average of 1.8 times net earnings
• Larger businesses ($5 million plus) still commanded the highest multiple
• Average overall sales multiple increased 11%
• The majority of transactions are still under $250,000 in valuation

We Analyzed 92 Businesses From 7 Business Models

In total we analysed 92 businesses that were sold between January and December 2013. Again we only analyzed businesses with a sale price higher than $50,000 and removed any outliers in the data set. We changed up the categorisation of business models slightly this year and came up with the following 7 models:

• Advertising – monetized through ads or affiliate offers
• App – a mobile app, monetized through paid downloads, membership or advertising
• Ecommerce – traditional ecommerce stores, drop-shipping and digital products
• Lead Generation – monetized through selling leads
• Service – monetized through providing a service
• Software/SAAS – any other application based business
• Subscription/Membership – exclusive membership only websites (includes directories)

What We Found From Our Analysis

What Was The Selling Price Range?

What’s Is The Average Multiple Per Business Model?

Are you thinking of selling your blog and think it might have the potential to be sold for a lot of money?

To sell your blog for 6 or 7 figures there are some things that you need to take into account. The major element is the profit that your blog is making. Investors generally seek investments that are going to get them a return on investment so they are looking for blogs that are making money. Not only making money but making it consistently. Although there are some examples of blogs being sold that make no money, in this article we will be talking exclusively about blogs that do make money.

When large media companies come in an purchase and buy a blog for $315 Million then as a blogger you start to question “what is my blog worth?” and how can I attract a large offer when I am looking to sell.

There are the types of things investors look for when buying a blog: Profit, Growth, Strong brand, Other assets (including mailing lists, database etc.), Systems Process, Defensibility, Little Owner Involvement, Diversified Income and Traffic

The following 4 factors are the main elements that investors look when paying 6 or 7 figures for a blog:

1) Income

The number one deciding factor that will make your blog saleable is the income that it generates. Whether it makes money from advertising revenue, selling your products or services or other people products or services, this factor will be key in defining what your blog is worth and how much you could sell it for.

What investors look for when assessing what your blog is worth is the net earnings or total profit that your blog makes. They will generally then pay a multiple of that net earnings to come up with a figure that determines the valuation of the business.

Generally the lower the multiple the higher the risk of the business and the higher the multiple the lower the risk of the business. The way to look at multiples is as a return on investment.

• 1x multiple = money back in 12 months
• 2 x multiple = money back in 2 years
• 3 x multiple = money back in 3 years
• 4 x multiple = money back in 4 years

There statistics have been gathered from online classifieds website flippa.com, online business for sale sites, website brokers and forum data. They are the average website multiple across 10 sales per category.

The following table shows the monthly profit levels required to achieve a 6-figure sale and a 7-figure sale of your blog.

As you can see from our website valuation data post you can see that content sites are selling for a multiple of 2.6 time net earnings. This means that if you have a blog that is making $100,000 per year in sales then it is worth on average $260,000

2) Growth

The second factor to consider is the growth of your blog. Is it growing, declining or stable. If a buyer can see a positive growth trend then they will probably pay a higher price for your business because they will get excited about the future revenue prospects of the business. If for example a website makes $200,000 in net profits for the last 12 months and it is on track to make $250,000 in the next 12 months, this is an attractive investment for any investor.

3) Systems and Processes

In a business you have systems and processes which produce a product or service. That product or service can then be sold to a customer to generate a profit and it is that profit that the business generates that a buyer looks at when assessing the value of your blog. You need to show that you have a repeatable system that to generate those sales. The value of your business is in it’s ability to generate those sales.

So in the case of selling your blog it is the content that you create that attracts an audience. So having a system around generating, producing and syndicating great content is the first type of system that you need. The second type of system is a monetisation system. Depending on the business model that you are running for your blog will depend on the system that you need. What a buyer will be looking for is if they take the business over, will the income be transferred to the new owner. Also having some type of customer service system is necessary. This includes managing emails and support as well as managing social accounts of the website.

If you can remove yourself as the blog owner from these systems and processes you can increase the value of your blog and get a higher price when selling.

4) Brand

When you brand your blog it creates repeat and loyal users. This means that you are going to get more referral traffic , more direct traffic. With the recent google updates buyers are getting more cautious of businesses that solely rely on Google search traffic. Specifically Panda and Penguin have created websites that once had value, lose that completely after being affected by a penalty. What a brand does is it counteracts this problem.

What Is My Business Worth?

• How To Value An Online Business
• Seller’s Discretionary Income: What is It and Why Does It Matter?

Getting Ready For Sale

• How to Improve The Value Of Your Web Business
• Accounting: Cash Basis Accounting vs. Accrual Basis

How Does The Process Work?

• What Is The Process
• WhatTypes Of Offers Will Your Review

What Happens When I Get An Offer?

• Due Diligence
• Deal Funding
• What Legal Contracts Do I Need?
• How Do I Get Paid?

After The Deal Closes

• Transferring the business
• Re-sell or hold?

When you are selling your website here is what you need to know. What your about to read is a summary of the process that we use to filter, value, prepare and sell websites. We offer an internet business broker service if you are looking to sell.

Warning: this post is currently 4500 words long so you might want to bookmark it and come back to it later. If you only want to read one post on this website make it this one. I plan to make this the Ultimate sell your website resource on the internet and will be continually updating it with the most recent information.

Is My Website Fit For Sale?

The first question you need to be asking yourself before venturing down the selling path is “is my website actually fit for sale?”. What I mean is do you have a profit producing asset that is of value to potential investors. If it fits into any of these categories then you have a winner:

• #Profit producing website
• #Most likely older than 1 year
• #That makes at least $3,000 per month net profit
• #That has consistent earnings
• #That has stable traffic
• #That has some type of systems in place

Why You Can’t Sell Potential?

Ideas are cheap. Every man and his dog has an amazing idea for something. It is only the people that get moving on those ideas and turn them into a profitable business that prosper. Key term there profitable. Most seasoned buyers, the first thing they will ask is “How much does it make and what is the net profit”. Notice how that question wasn’t whats the potential in the market. Buyers are ruthless, logical and calculating that love crunching numbers and beating you down on price. So wipe that word from your vocabulary, no-one is sitting around looking to pay for your unproven ideas, or pay for your poor development or crappy sales strategy. Buyers pay a multiple of net profit.

As a generalisation, most sites sell for a multiple of 1-3x net earnings. Or 1 years net profit to 3 years net profit. Example: on a site that makes 100k net profit per year, that is a sales value of 100k-300k depending on the site and the type of buyer. You may be sitting there thinking, but instagram just sold for $1 billion dollars and it wasn’t making an money. ***Reality Check*** if you are reading this article, then you are no instagram and you probably never will be. I’m referring to private market sales of small to medium businesses that are normally sold to businesses, entrepreneurs or investors.

Each Part Of Your Website Doesn’t Give Extra Value

I get asked all the time, why isn’t there extra value for my domain, traffic and email list?

The simple answer is no there is no extra value. The sum of all your assets does not add up to total value.

Value is derived from the profit that those assets generate.

WRONG VALUATION:

A site makes $20,000 per month. It has a great brandable domain, massive traffic, large subscriber list and good web design.

You think it is valued like this:

Site making $20,000 per month X 2.5 years earnings = $500,000

Domain = $20,000 (it cost me this much)

Traffic = $50,000 (because I should get extra value for my traffic)

Subscriber list = $50,000 (because I can email my list any time and make money)

Web Design = $10,000 (because that is what it cost me for this site)

Total Value: $630,000

RIGHT VALUATION

Site making $20,000 per month X 2.5 years earnings = $500,000

Why Now Is The Right Time To Sell

A good website can make a lot of money. But a good website will also make you a lot more money in the future. So why sell?

When the Opportunity Cost is Higher not selling

With limited resources such as time, energy, talent, people, capital. If they are better invested in other ways then it may be time to sell . The opportunity cost of being involved in your current Company/Business might include giving up:

• #Another business venture or opportunity
• #Time for rejuvenation and reflection
• #Friends, family, and grandchildren
• #Diversification of investments or reduced risk
• #New challenges, intellectual stimulation, or education
• #Health, travel, community involvement, spiritual service
• #Or, any other opportunity that can not be pursued because of the demands of your current Company.

If the need is greater for any of the above then it might be the right time to sell.

You receive a highly inflated offer:

You know the market. If you receive an offer that is well above the market and well above the value it may have in 5-10 years time, get out now. Pigs get fat, hogs get slaughtered.

The Business In Risky

If there is a high risk level of the business, whether that be a heavy reliance on one traffic source or income source. Or in a volatile market like gambling or credit cards that can change dependant on government legislation or market forces. You could suffer a huge blow at any time, maybe it is the right time to take your money and run.

You need the money / Your sick of it

Sometimes you just need the money, it happens. Or you have just lost your passion and are burnt out. Whatever the reason the pain can be alleviated in the short term, but it might not be the best in the long run. Thus solving your problem today, you have to give up potential in the future. An option might be to to partner with someone or sell some equity.

You can get better returns elsewhere

In my opinion a website should be seen as an investment. Generally you can achieve the below returns from there respective investment channels . These rates obviously can vary dramatically depending on the market, your skill and knowledge of these sectors.

• Cash – 4%
• Bonds – 5%
• Real Estate – 6%
• Stocks – 10%
• Small/Medium Business – 33%

If you can make more money elsewhere, then jump ship, or if you are underutilizing the current site, and you think someone else can do better, then it might be time to move on.

Market Is at It’s peak.

If you think your site has hit it’s full potential then it may time to offload the site.

Why Now Is The Wrong Time To Sell

Selling your business and having a million dollars in the bank is plain stupid unless you have a plan for it. If you don’t have an asset that is appreciating at the same or greater rate than the asset you are selling (where an asset is defined as something that makes you money, could be property, a business etc.) then it may not be the right time to sell.

Selling in a bad financial position

You are going to get a significantly lower multiple for your business if you have had a bad financial record in the last year or two in comparison to historical data. If possible, holding onto the business and improving the financial position of the business will get you a larger sale price. Or, if you need the cash quickly, to pay an impending bill, deadline. Ask yourself are there other avenues to take that might be a possibility. For example, selling a percentage of equity or asking for an extension on the impending deadline. You will be cutting yourself short if you don’t explore all avenues.

Selling to pay off manageable debt

Let’s say you have $25,000 in bad debt from college. You are thinking of selling your website for $100,000 to pay of that debt and put some cash in the bank. The payments on that debt are $300 a month. So the current site can maintain that debt can probably. It may be an idea to take that $25,000 and over the next year and invest that money into your $100,000 website and after 12 months it is now worth $200,000. Think about the opportunity cost of that money and take that into consideration when selling.

What Is My Website Worth?

What your website is worth is purely determined on, not by what you’d like to get, but what buyers are likely to pay. Therefore the pure definition of what is my website worth is: What someone is willing to pay for it. That is purely determined by how quickly can a buyer get their money back.

If a potential buyer sees no way to make their money back they are not going to purchase the site. People will then go onto say your website is worth a multiple of earnings. 12-36 months earnings get’s adopted for web businesses. So what determines that number? To get a better understanding of that we first need to determine what real value is:

What Is Value?

Value in its purest form, by definition is “the monetary worth of something” So what determines the monetary value of a website, quite simply this: There is a return on investment to be made by the buyer. If the potential buyer can’t see a way to make his money back and then some, he’s probably not going to buy and thus your website has no value (monetary worth).

Just because you invested $30,000 into development of your website doesn’t mean it automatically has $30,000 in value if that website isn’t producing income.

What Level Of ROI Is Required

To understand why buyers will pay more for some things and less for others we need to look at return on investment (ROI). If a buyer pays a 1x multiple, they will likely get their money back in 1 year. 2 x multiple, money back in two years. 3x multiple, money back in 3 years. However if we look at these as percentages you will start to see a trend arising here as to why other asset classes (stocks, bonds, real estate etc.) get valued the way they do.

If you were to pay a 2x multiple your would be receiving a 50% ROI. That is you would get your money back in 2 years. Generally small to medium business multiples are 2-3 times earnings because it is a 33%-50% return on investment. Small business are classified as a riskier asset class than lets say residential property, which normally sits in the 4-5% ROI (20-30) year return because it is deemed a safer investment with a more secure future revenue stream.

Risk and Value

So the amount a buyer is willing to pay will be based on the level of risk they are willing to take. The higher the risk the lower the price.

What Website Buyers Will Pay More Money For

These factors below lower the risk of losing future earnings and thus increase the price you are likely to receive for your website

• #Solid earnings
• #Positive growth trend
• #Processes automated
• #Defensible Market (a site on CD’s has little value today)
• #Room for growth
• #Strong brand
• #Diversification (of revenue and traffic)
• #USP (some type of unique asset)
• #Key assets (like email list, premium domain, supplier contracts etc.)
• #Legal Liabilities (you have none)

Valuation Methods

Buyers will usually utilize one of the following valuation methods when approaching your site.

1. Asset Valuation – buyers may make their valuation based on the assets of the website. Be it traffic or customers, buyers will look at ways of leveraging those assets to get a quicker return on investment
2. Future maintainable earnings – buyers might look at the rate of return they can expect from the website by capitalizing future earnings. This is achieved by multiplying the average profit by the desired rate of return.
3. Earnings multiple – buyers may apply an earnings multiple to your website example net profit multiplied by 1.5X
4. Comparable sales – buyers may search for similar sales of you website to find comparable sales data.

How A Buyer Will Deconstruct Your Business

The following is a analysis of what buyers will look at when analyzing your business. These factors will determine the offer they are likely to make.

• Business Model – certain business models are riskier or more labor intensive than others. Buyers will value your model differently based on their perceived risk and understanding of the business.

• Current Year Earnings – how much your website made in the last 12 months is the main basis of the valuation.

• Current Yearly Profits (made up of assets and liabilities) – do the business process and systems affect its profitability? Can we decrease costs somewhere or develop a synergy? These are the things buyers will be asking themselves.

• What is my traffic and where does it come from – buyers will see a high reliance on search engine traffic as risky. Conversely if traffic sources are spread well from multiple sources then there is less risk.

• What is the growth trends – which way is the business trending? A growth trend will attract higher prices.

• What is the market like – a website in the CD market is going to be worth a lot less than a website about golf. Consistent industries will receive higher earnings.

• Where can value be added? – potential buyers will ask themselves where they can add value to the website to get their money back quicker.

What If It Has Been Effected By Google Updates ?

If your site has been hit and lost a large proportion of your traffic then unfortunately it is worth little/or nothing if it was previously profitable. If consistent earnings can be proven the site may regain some of it’s previous value.

8 Ways To Prepare Your Website For Sale

Below is the top 8 things your must do to

1. Don’t change anything – buyers are wary of any recent changes and will wan’t to know why things were changed. This includes site redesign, change of monetization methods, new server, domain change or any other changes.
2. Organize your statistics -get your traffic statics for the last year. Create an excel spreadsheet of your profit and loss statement for your website since it’s inception.
3. Fix up any website errors -do a quick check for any errors in your web code and clean them up
4. Check your legalities – don’t let anything come back and bit you later.
5. Establish a selling price – based off the advice from this article figure out how much you think a potential buy might pay for your website then add a small margin on top of that as a starting asking price.
6. Create your Information Memorandum – develop your selling document outlining.
7. Identify anyone you think might be interested in buying your website
8. Create time – you’ll need some time to talk to buyers. They will ask lots of questions about your website. You might feel that some things they are asking are irrelevant, however bite your ego and present everything in a polite and respectful way. At the end of the day you never know who will cough up the money for your website so don’t burn your bridges.

The Process To Sell Your Website

This is the Digital Exits process that we go through with our clients helping them sell their business:

Step 1 – Get a valuation

The first step you will want to know is what your website is worth. We walk our clients through the valuation process after analyzing the following:

• Historical and current profit and loss statements
• Historical and current balance sheet
• Traffic stats of the business
• After spending considerable time getting to understand the business, the industry, the competitors and the general market conditions

Step 2 – Getting all your documentation together

Once you understand what your business is worth it is time to get together all the documents and proof that you will need to show a buyer when selling your business. Sellers are going to want to see numbers and facts when considering the purchase of your ecommerce business. You’ll need to have as much data, stats and proof as possible. If any of the data comes back suspicious or incorrect, buyers can use this to lower their asking price or pull out from the deal altogether.

Here are the key things that we prepare for a buyer:

General Information – Includes quick data points that answer frequently asked questions buyers want to know up front. Including:

• Summary of facts – the most important information you want the buyer to know about your business including sales, profit, traffic, staff and a general FAQ.
• Summary of operations – AN overview of how the business works. How many employees do you have? Salaries paid, processes setup for automation, hours of week needed to run the business and any other information that you feel is important.
• Summary of customer sources – Who are the clients and how do you acquire them?
• Summary of products and processes – What do you sell? How do you sell it? How many products do you have? What are their stats and margins? How are the suppliers and what is your relationship with them?
• Summary of security – How do you protect your digital property? Patents, copyrights, trademarks? What security processes do you use to keep bad people from stealing or destroying your digital business?

Marketing Information – This summarizes how you get new customers:

• Summary of marketing – How do you get new customers? Do you have media mentions, awards, or publicity? Any information that can help new buyers understand your business reputation.
• Traffic stats of the business – What are your keywords driving traffic and where do you rank on search engines for those keywords? What other traffic sources are driving both visitors and sales to your business?
• Marketing Strategies – Specifically, what processes do you have in place to reach new customers and how do you implement them? Is it automated? Do you have employees with this specific job (in-house or virtual assistants), any joint-ventures setup with media outlets or other businesses that help drive traffic?
• Customer Demographics – Do you have a customer profile setup that includes age, gender, location, income level, needs, etc? Do you have visitor statistics that reflect those demographics?
• Competitor Landscape – Who are your competitors? What are they doing different? Do you have a barrier to entry that prevents competitors from taking market share? What makes your site unique compared to them?
• Sales History – How many products have you sold over a period of time and what are their margins and conversion rates?

Formal & Legal Information – You’ll need to provide proof that you own the site, have rights to do business, and proof of the revenue that the business is making. With regards to revenue documentation makes sure you include:

• A break down on your ROI
• Any appraisals you have received from other parties
• And any contact information regarding the sale of your business
• Bank statements
• Merchant facility statements
• Historical and current profit and loss statements
• Historical and current balance sheet

Step 3 – Develop a prospectus or “the book”

A prospectus or information memorandum is a detailed 10-30 page documents that outlines:

• What the business does
• How the business makes money
• Where the web traffic comes from
• How the business operates
• General frequently asked questions about the business
• Market Trends
• Growth Opportunities

This document is then used to present to prospective buyers to highlight the business opportunity.

Step 4 – Finding a buyer

You can use the following channels to look for a buyer.

• Personal Network – Your existing network of business owners, friends and family.
• Brokers network – A broker usually has an existing buyer network of pre-qualified investors looking to acquire an online business. Digital Exits has over 1,000 + people on their buyer database. Of those 55% elected that they were interested in acquiring an ecommerce business.
• Competitors or Vendors –A competitor is going to look to control market share and a vendor to vertically integrate and control retail through acquiring your business.
• Classifieds, Auction Sites, and Forums – This is a place where buyers are hanging out and are good sources to find potential buyers. Sites like bizquest.com and businessforsale.com.

Step 5 – Getting an Offer

The process of receiving an offer from a buyer is generally split up into two steps:

1. General FAQ
2. Letter of intent

General FAQ

Once a buyer receives the prospectus there will generally be some back and forth between the buyer and seller about the business. This will be clarification on the business; it’s operation and questions about information in the prospectus. Generally there will be email back and forth, a few calls between buyer and seller before an offer is made.

The Letter Of Intent

A letter of intent (LOI) is a formal offer that a business owner will make to acquire your business. This LOI will include an offer price and terms. Once you accept this LOI you allow the buyer to move forward, exclusively, into a deeper due diligence period where they will address all the claims you made about the business and verify that what you claim is correct. A LOI is a non-binding sales agreement. This is not a contract for sale.

As a seller the following needs to be considered before accepting an LOI:

• The buyer – have you done your background research on them? Criminal record check? Bankruptcy check? Do you like them? Do they seem legitimate? Your broker will help you with some of these steps however remember that you will likely be dealing with this person a lot in the future.
• Deal terms – What sellers forget to realize is that it is the deal terms that are more important than the actual offer made. Things to take into account are the percentage of upfront cash, the financing or performance terms and if there are any conditions attached to the deal.
• Owner financing terms – things to consider are the length, repayment terms and if there is any interest attached to the deal.
• Non-compete terms – what are the restrictions on the non-compete and what is the time length of those restrictions (2-3 years is generally considered)
• Exclusivity – in the LOI there will be a time frame for how long the exclusivity period is that they want to engage in due diligence. Generally on smaller less complex deal 1-3 weeks is acceptable, more for a larger deal. Consider how long your business will be locked up in due diligence while the buyer verifies everything and isn’t allowing you to talk with other buyers.
• Timeframe of closing – sometimes the highest offer is not always the best offer. If you are waiting 3 months for a loan to be approved versus cash deal tomorrow. Consider the time it will take to get the cash into your bank account.
• After sale support – an inexperienced buyer is going to take a lot more hand holding after the sale than a seasoned investor. Consider the amount of time and investment you will have in the deal after the sale when assessing the LOI.

Step 6 – Due Diligence

After a letter of intent has been agreed upon and signed, the due diligence phase of a deal commences. Due diligence is the exclusive period (where you can’t offer the deal to any other buyers) that a buyer gets to verify that all the claims that you made about the business are correct. For example if you said you made $1.2 million dollars in sales in the last 12 months a buyer is going to want to see that you did in fact make $1.2m in sales by checking merchant account statements and bank statements.

NOTE: At any time during due diligence the value or original offer that a buyer makes can be reduced if the buyer notices any problems with the business. For example a buyer might find that there is a potential problem with a key supplier or that some of the inventory was slow moving and that would get devalued. A buyer must factor in a lower price to adjust for that risk if they find any problems.

Here is a list of some things that a buyer might request during due diligence:

• Bank statements
• Merchant statements
• Paypal account statements
• Credit card processing statements
• Customer list
• Source code
• Suppliers names and information
• A staff list
• Interview with staff
• Interview with sub contractors
• Contracts for suppliers
• Contracts for staff
• Current and historical Tax returns
• Current and historical Balance sheet
• Interview with customers
• Support desk overview
• Business systems and processes

There are some key differences between the due diligence of a brick and mortar company compared to an online business:

• Financials – A lot of verification of financials performed with an online business is a reconciliation of bank statements. It is expected in brick and mortar deals that tax returns or audited books will be required. This will include things like bank statements, invoices, credit card statements etc. A lot of deals there is a live screen-share/walk-through of the bank of a business to assist with verification
• Traffic – whilst a traditional business has customers walk in the door an Internet business has eyeballs to a website. Having Google analytics installed (the accepted tool) to report on traffic statistics will go a long way to getting your deal closed.

Step 7 – Final Offer & Legal

After due diligence is completed a buyer will either make their final formal offer or pass on the deal because it didn’t pass due diligence. If it did pass we as the broker prepare a standard contract for sale which will outline the deal terms, the assets being sold, the non compete and training and support terms.

Note: in most deals you will be selling the assets of your company not the company itself. What this means is that say Internet LLC owns www.internet.com. In the deal Buyer LLC pays Internet LLC for the assets of the business (the domain, the website, the customer list, the merchant accounts, email list etc.) they do not buy the shares in the company. This is called an asset sale versus a share sale.

As a disclaimer we are not lawyers and you should always have your legal counsel independently review the contract before signing.

Step 8 – Transfer & Escrow

After all parties have agreed and signed the asset sale contract the transfer process commences. This process is broken up into a few stages:

1. Sales contract signed
2. Broker sets up the escrow transaction using either
   1. www.escrow.com
   2. www.escrowhill.com
3. Escrow transaction terms agreed by Buyer and Seller
4. The buyer sends the escrow the agreed funds (funds are secured but not released)
5. The escrow service confirms receipt of the funds and requests the seller to start transferring all the assets to the buyer
6. The buyer confirms that they have received all the assets according to the terms of the agreement and initiates the inspection period
7. Inspection period is used to confirm all assets have been received and are in working order
8. Buyer confirms satisfaction with assets receive and notifies Escrow service
9. The escrow service releases the funds to the seller

10. Training beings for the buyer

At no point during the process are the buyers funds released to the seller without the buyers consent. This allows for an at arms length transaction.

Step 9 – After Sale Training & Support

Generally there is a typical 4-16 week period of support for the buyer after the deal has closed. This is put in place to assist the buyer in learning the day to day running and operations of the business. The length of time and training that a seller provides is purely contingent on what was negotiated in the terms of the deal.

Should I Use A Website Broker?

What does a website broker do?

A website broker helps you sell your website by getting it ready for sale, showing it to potential buyers, negotiating offers and then finalizing payment and handover.

Why Hire A Website Broker ?

There are generally four main reasons why people hire a website broker. Marketing, Price, time and confidentiality. By hiring a broker you get access to their network of qualified cashed up buyers (marketing), they can apply the appropriate valuation methodology to your business to come up with the highest asking price possible (price) saving you time bringing their knowledge and experience to the table (time) all while showing your business to select qualified buyers so you don’t have to advertise to the world that you are selling your website.

What does it cost ?

Brokers charge a standard rate of 10% commission. 15% for smaller sites and negotiable rate for sites worth over $1,000,000. They only get paid when you get paid, and the more you make, the more they make so rest assured they will be working hard to get your site sold for the top price possible.

Do they charge fees upfront ?

No. Brokers work on 100% commission basis. If you don’t get paid, they don’t get paid.

How Long Does It Take?

It normally takes about two weeks to four months to finalize a website transaction. However some sites can take a week and some sites a year—it really depends on the site in question. The longest part of the sales process is normally the due diligence and the back-and-forth between buyer, seller, and broker. Some buyers need more time than others. If buyers request things like tax returns or older financials, it usually takes a little while longer.

What happens if they can’t sell my website?

A typical exclusive agency agreement lasts around 60-90 days.

Where To Find Buyers

Below is a list of where you may locate a buyer for your website.

Website Brokers: Brokers attract buyers due to the volume of listings that they have. There is usually no upfront fee, however a percentage of the successful sale is taken for the service rendered.

Classified Sites- are mainly aimed at selling traditional brick and mortar businesses. They will charge you a listing fee ($100-$250) to place an ad on their website for a certain time period.

businessesforsale.com
bizquest.com
bizbuysell.com

Marketplace Sites

Digitalpoint.com
flippa.com
websiteproperties.com
ebay.com
craigslist.com
websitebroker.com
daltonsbusiness.com
business-sale.com

Larger Buyers (normally in the millions)

internetbrands.com
verticalscope.com
crowdgather.com
namemedia.com
escalatemedia.com
ezoic.com
advameg.com
untd.com
oneclickventures.com
wmmediacorp.com
invenda.com
domainnewmedia.com
AlphaBrandMedia.com
mediawhiz.com
nicheplayer.com
webuywebsites.org

Forums

Experienced-people.net
forums.digitalpoint.com
webhostingtalk.com
webmaster-talk.com
dnforum.com

Private Sale – Private sales usually occur when webmasters find a strategic buyer (competitors/suppliers/customers) in the similar market who will benefit from from the acquisition than a financial buyer. The advantages for a strategic buyer would be cost savings or customer cross promotion.

Different Types of Buyers

First Timers – It is said 70% of businesses are purchased by people coming out of corporate jobs.

Financial Buyers – These buyers are just looking for a return on investment and will value your business in a way to get their money back as quickly as possible.

Strategic Buyers – Usually consisting of competitors, suppliers, customers or complimentary businesses.

Investors – These buyers purchase websites for their portfolio and usually buy hands of automated businesses where their is little day to day management of the website.

Negotiation Tips

Good negotiation starts with good preparation. Those that fail to prepare, prepare to fail. In the case of selling your website preparation comes in the form of organising all your information to present to prospective buyers in a clear and concise manner.

Note: These tips only come from experience.

• Be in a strong negotiating position (basic fundamental have a good website that lots of people will want)
• He who wants it less wins in negotiation
• Figure out the minimum you want for you website and then add a margin on top of that for negotiation (be aggressive)
• Don’t take things personally
• Understand the power of anchoring
• Read Harvards negotiation tips

What Will They Offer (Types of Financing)

All too often negotiations get sidetracked with emotional sellers high valuation and shrewd buyers low valuation. This is a lot easier to control if you enter into a pure cash sale, however it can be a struggle if the sale involves a level of seller financing, work-out or future earnings agreement. As a buyer you need to determine what is more valuable,time, risk or money. A cash sale will have smooth negotiations if the earnings multiple is agreed upon. As a note Independent advice can mostly sway a valuation. It is in the interest off all negotiations to be quick and painless. It is thus a good idea to set.

That being said if you are not offered a pure cash sale to settle on your website the other option that sellers will present in most smaller website deals is some type of seller financing.

Seller financing is a loan provided by the seller of a website to the purchaser.

There are three types of seller financing:

• Straight Financing – Like taking out a loan from the bank except the the person lending the money is the website owner
• Performance Based – making payments based on the future performance of the website
• Holdbacks – a small amount of money (usually 10% of total sale price) that is help back and paid at a later date (usually 30-60 days)

Seller Financing Example

Example 1- A website is sold for $200,000. $150,000 is paid upfront in cash and the remaining $50,000 is paid off over 12 months at 10% interest. So in the end the seller gets $205,000 for their website.

Performance Based Examples

Example 1 – A website is sold for $200,000. If after a 12 month period the websites monthly income has been more than $18,000 for the past three months running, a bonus payment of $40,000 is to be paid.

Example 2 – A website is purchased for $200,000 and the seller is entitled to 8% of gross profits for the website over the next twelve months.

Holdback Examples

Example 1 – A website is sold for $200,000. $180,000 is paid upfront and $20,000 is paid after 30 days once the website seller has provided training to the new owner.

How Do You Tranfer The Money?

If you have a deal completed and it is time to handover your assets you probably don’t want to run the risk of transferring your domain name without getting paid first. And the buyer doesn’t want to transfer his money without getting the domain. Kind of like the chicken or the egg theory.

The Solution?

Enter third party escrow services. An escrow service is a company that acts as a middle man for a transaction. You emply the services of an escrow service. The buyer transfers the money to the third party

Who Provides Escrow Services.

Generally a lawyer or realtor provides an escrow service when transferring a house. When selling your website you may want to engage the service of a lawyer to act as an escrow service. They normally charge anywhere from $500 to a few thousand dollars.

Alternatively you can use an online escrow service

An online escrow service is just like using a lawyer, except the system is more automated. This doesn’t mean it’s safer, it just means they can use economies of scale and reduced costs equaling lower transaction fees for buyers and sellers.

options include:

escrow.com

safefunds.com

How much do they cost ?

We use escrow.com for all our transactions. This doesn’t mean other options aren’t good, we have just had experience with them. Note: we are in no way affiliated with them and do not make any commissions from recommending their services.

How much do they cost ?

Check out escrow.com fee calculator here:

How the process works ?

Resources:

Website Buying And Selling Forum

Shane Sold His Website For $1,000,000

Slideshare.net Presentation on valuing website

Yaro’s Sell Your Website 2005 Article

2013 website valuation guide

Why buy a website?  

The main objection I see raised about buying websites is why pay all this money for a website when I can just start one from scratch? Here are some reasons that you would buy a website:

It’s a good investment

The internet isn’t going away any time soon. The Global Financial Crisis caused millions to lose a lot of money. Getting 3-7% on real estate and 10% on stocks isn’t that attractive. Why not try a new asset class getting 40-100% return on investment.

Gain Time

Buying a website lets you fast track the time it has taken the founders to develop a website. There is a certain amount of lead time you must endure before getting traction with any new business. Acquiring a website eliminates this process and allows you to leap frog years of hard work.

Make profit from day 1

There is a certain lag time for a new business where you build up momentum. By purchasing an established website you start making money from day 1.

Growing industry

We are just at the infancy of the web. With anything the earlier you invest in a growing industry the more money you make in the long term.

You can always resell

All things being equal, if you buy an established website and make no changes you can probably sell it for around the same money that you bought it for.

Easier to obtain finance

A proven track record will make it easier to get financing from an external source or from the seller.

Acquire Customers

When you purchase a website, you also acquire its customer base, whether that is actual customers (sales) or eyeballs(visitors).

Eliminate Competition

Buying your competitor means one less company to compete against.

Employ Arbitrage Value

The following diagram represents the benefits you may achieve from arbitrage value. By combining two companies you can achieve some levels of synergy regarding revenue and expenses thus increasing the profitability of each business as one unit compared to separatly.

Increase Market Share

By acquiring a website in your market, you increase the size of your market share. You will find in most mature markets, there are only a handful of competitors (for example supermarkets). This is because, over time, markets consolidate.

Inherit Staff

Google is the master of this. With a limited pool of talented employees, it is sometimes easier to acquire a whole company to gain staff than to individually poach them from their existing workplace.

Increase Profits

Simply, if you have a business making $500,000 in net profit per year and add a business that is making $250,000 net profit per year, all things being equal, you will have a business that is making $750,000 per year. Nothing is ever as simple as that, but an acquisition should lead to an immediate increase in the bottom line if handled correctly.

What types of websites can I buy?

1. Advertising Sites

– these can either be blogs or static websites. They are either niche content or can be broad category sites like business. They are monetized through either pay per impression ads, pay per click ads, affiliate promotions or direct advertising. Examples:

• Large – www.cracked.com
• Medium – www.golf-newz.com
• Small – www.superweddings.com

2. Service Sites

– these sites offer a service to customers for a fee. They can either be one off or recurring. Example:

• Large – www.hostgator.com
• Medium – www.99designs.com
• Small –  www.logodesignteam.com

3. Product Sites

– the oldest online business model. Takes a tangible product and sells it online. Example:

• Large – www.amazon.com
• Medium – www.cufflinks.com
• Small – www.theportablebarcompany.com

4. Subscription Sites

– driven by a paid membership or a subscription. Examples being a magazine, newsletter, club, application, Example:

• Large – www.readersdigest.com
• Medium – www.lynda.com
• Small – www.fastwebformula.com

5. Lead Generation Sites

– Lead generation combines advertising in a service model to generate “leads” or potential customers for that company and getting paid to do so. Examples:

• Large – www.creditcards.com
• Medium – www.dui.com
• Small – www.idahocarinsurancepros.com

6. Software

– a program created for a computer. The product can be charged as a one off or recurring. Examples:

• Large – www.salesforce.com
• Medium – www.basecamphq.com
• Small – www.speeddash.com

7.Web Applications (apps)

– commonly refereed to as apps. Usually consisting of a game or fun application these digital products earn revenue when users purchase them online. Examples:

• Large – www.Farmville.com
• Medium – www.myfitnesspal.com
• Small – apps.facebook.com/justdrawme

8. Forums –

These can either be free or paid forums. Free forums generally are free to join and are monetized through advertising. Paid forums cost money to join and generally earn money through a monthly or yearly subscription. Examples:

• Large – www.gaiaonline.com
• Medium – www.webmasterworld.com
• Small – www.mustangforum.com

What will determine what you buy?

•  Acquisition Size – usually measured with annual sales. However depending upon other considerations, employees, plant and equipment and other measures may become important
• Transaction Size – Determined by the gross dollar value of the purchase and corresponds to your companies financial strength and adherence for risk.
• Transaction Structure – Usually a combination of cash, seller financing,  third-party debt, and/or the use of stock as part of the purchase price.
• Financial Strength of the Target – Is the target business profitable or not. Are you willing to take on their liabilities and have a management team in place to turn a business around.
• Business Status – Defined as start-up, development, growth or maturity. It may be an idea to consider the stage of your own business to that of the target. Understand the challenges differences in these stages present.
• Geographic Location – This adheres to your comfort levels with one or more remote facilities and their distance from your main location.
• Synergy – The advantages of combing the two businesses, where markets, services or products are compatible

Steps To Prepare For An Acquisition

Everyone online is looking for the quick fix. Well sorry but there is none. Finding a good site to buy takes time effort and hard work. Sure you can setup systems and process that is going to make it easier to find oppurtunities (I list some below) however it can take days/weeks/months even years to find a good deal. I read in an article about a media company owner that spent 9 years courting a particular company that they wanted to purchase. This involved checking in once every 6 months with a phone call, asking how business was going and just building that relationship. Then when the time came that he wanted to sell, guess who was the first perso that came to mind ? So get yourself prepared:

1. Get your finances ready (lots of deals fall through because of financing issues and buyers not being able to move quick enough)
2. Get in contact with brokers and outline your requirements in terms of what you are looking for.
3. Alternatively pay someone to do all the research for you and filter deals based on your requirements. Blatant plug for our services, we act as a buyers agent to help you find good delas if you need help.
4. Register for all the online marketplaces like flippa.com businessforsale.com, bizquest.com
5. Understand you are going to need patience and look at a lot of deals before finding the right one.

What defines a quality website?

• Profit producing website
• Most likely older than 1 year
• That has consistent earnings
• That has stable traffic
• Positive growth trend
• Processes automated
• Defensible Market (a site on CD’s has little value today)
• Room for growth
• Strong brand
• Diversification (of revenue and traffic)
• USP (some type of unique asset)
• Key assets (like email list, premium domain, supplier contracts etc.)
• Legal Liabilities (you have none)

Where can I find a business to buy?

Website brokers:

• www.digitalexits.com
• flippingenterprises.com
• latonas.com
• quietlightbrokerage.com
• wesellyoursite.com
• websiteproperties.com

Marketplaces

• Flippa.com
• websitebroker.com

Business for sale websites:

• Businessesforsale.com
• BizQuest.com
• BizBuySell.com
• BusinessBroker.net

Other ideas

• Scroll through DMOZ listings looking for sites that haven’t been updated for some time.
• Pay for an ad in the above business for sale websites
• Run a PPC campaign and direct it to a sell your website landing page (see in detail below)

What is the buying process?

Coming soon

How Much Should I Pay?

Coming Soon

Pre Purchase Checklist?

Generally the first thing you will look for when looking at a website to buy is how quickly can you get you money back. The main reason your looking to buy a website in the first place is to make a profit, so that should be your driving motivation. There is then two schools of thought regarding the type of site you would want to buy 1. Undervalued site – normally a distressed seller or someone with a site that doesn’t understand the full potential of it 2. Strong investment – normally a site that has steady growth is most likely mature in it’s earnings and you are looking for a place to invest your money. When looking at sites to buy there will be a number of common questions that you will want to ask before you go into detailed due diligence.

Questions like:

• What is the gross revenue?
• What is the net profit?
• What are the expenses?
• What is the breakdown of traffic sources?
• How much time per week do you spend on the website (the owner)?
• How may staff manage the website, what are their roles?

Generally something that looks too good to be true is usually….too good to be true. A couple of other tips:

• Speak to the seller before buying
• Use an escrow service when transferring money
• Make sure you ask for the historical traffic and income data

Financing Options

No matter perfect you due diligence is you can’t predict the future. A more public example of creative financing.  You may want to develop some sort of performance based payment scheme so you can decrease the risk by paying some money upfront and some money after certain milestones have been achieved. Here is a breakdown of payment structures you may want to adopt. There are three most commonly used financing strategies that you may employee when buying a website. Just a note most deals in the sub 100k range will not have an aspect of seller financing.

• Seller Financing– A website is sold for $200,000. $150,000 is paid upfront in cash and the remaining $50,000 is paid off over 12 months at 10% interest. So in the end the seller gets $205,000 for their website.
• Performance Based Financing– A website is sold for $200,000. If after a 12 month period the websites monthly income has been more than $18,000 for the past three months running, a bonus payment of $40,000 is to be paid. Example 2 – A website is purchased for $200,000 and the seller is entitled to 8% of gross profits for the website over the next twelve months.
• Holdback Financing – A website is sold for $200,000. $180,000 is paid upfront and $20,000 is paid after 30 days once the website seller has provided training to the new owner.

Due Dilligence Checklist

Due diligence is the research you conduct prior to buying a website. The process allows you to asses the risk of your investment as well as verify the claims made by the seller regarding the website.

Due diligence is the skill of uncovering facts and information that isn’t immediately apparent. This involves analysis of the data that is given to you by the seller but also checking third party data as well. By asking the right questions, digging just below the surface and drawing educated conclusions you will be able to uncover everything before purchasing. Purchase yourself this checklist or  hire an expert to assist with the due diligence process.

I believe due diligence on websites should be broken down into three categories.

• Financial
• Legal
• Technical

Financial Due Diligence Checklist

1. Bank Statements
2. Merchant Facility statements
3. Paypal account statements
4. Third Party payments – ie Affiliate commisions, Ad Sales, Adsense, Amazon, Clickbank etc.
5. Accountant prepared P&L’s
6. Tax returns
7. Costs of goods sold expense reports – invoices and wholesale pricing proof
8. Supplier invoices – e.g. advertising, consulting
9. Emplyee verification – payroll, tax returns
10. Recalculating “real” net profit using add backs and add-ins (accounting modelling)

Technical due diligence checks:

1. Traffic details – from server stats and preferably a third party statistics service like Google Analytics
2. Database information – check supplier records, logins.
3. Where the site has received a google penalty, look for a drop in traffic – www.semrush.com
4. Download SEOquake for chrome or mozilla firefox and fo a quick check on the site stats – www.seoquake.com
5. Check traffic for the sites keyword/keywords:
6. Search for references on the domain in google and bing to see any mentions – www.domain.com, domain.com
7. Check if the site is indexed in google – site:domain.com
8. Check the backlink profile, select the tab referring domains to see if there is any sinister back links to the site – www.majesticseo.com
9. Check the keyword traffic stats in adwords – https://adwords.google.com/select/KeywordToolExternal
10. Use  to see that sites lisdted on the ame IP address and that have the same adsense or analytics code – www.spyonweb.com
11. Understanding the business model
12. Check ballpark traffic stats for higher traffic sites – compete.com and quantcast.com
13. Check Yahoo and DMOZ for a listing – dmoz.org and yahoo.com 
14. Check copyscape for duplicate content – www.copyscape.com
15. Confirm the sites page rank, is it real or fake –pr checker

Legal due diligence checks:

1. Domain registration details to verify ownership and registration dates
2. Check Whois to do a second check on the ownership – www.whois.com
3. What the site used to look like to check it the site used to be something more sinister – www.archive.org
4. Trademark/Copyright records
5. Background search on the company or LLC.
6. Legal leans or lawsuit
7. Supplier agreements
8. Employee agreements

Legals

Coming soon.

Escrow

Generally most large deals will involve a third party who will handle the money transfer. In real estate deals it is usually a lawyer or real estate agent (realtor). In most internet deals it is a third party online service called escrow.com. The process works as follows:

• Buyer and seller agree on terms – the selling price
• Buyer pays escrow – the buyer transfers money from his bank account into the third party bank account
• Seller ships the merchandise – The seller will transfer the domain name and any assets (website, hosting account, content, payment processors, files, documents, email accounts etc.)
• Buyer accepts the marchandise – you will receive the domain and assets, you will then confirm with escrow.com that you have received the everything that has been agreed upon and instruct escrow.com to release the funds to the seller
• Escrow pays the seller – they will release the funds from their bank account to the sellers bank account

Post Sale

The reason that you are reading this article is you want to know what your website is worth. But what you are really searching for is the price you are likely to get when you sell. At the end of the day value is derived from a transaction. If i do a quick search in google the results show over 1.4 million results for what is my website worth. In this article we are going to dissect the accounting theory and breakdown the process you can use to value your website.

And if at the end of the article you think you have a good understanding of what you think your website is worth and are looking to sell.

The market is ultimately what determines value. When you sell something at a certain price, that value becomes what you sell it for. International valuation standards defines market value as ”the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.” where property in this instance can be exchanged for website or web business.

Why valuations are a tricky business

As value is derived from a sale there is true correct answer, only opinions. It is the opinion of the valuing party that can alter value. Value can vary based on the buyer, market conditions, valuation methodology applied, purpose of the valuation, presentation of the assets and more. There is no set criteria nor is there rules of thumb that apply in everyone scenario. Only an educated opinion. In this article I will try and educate you on how to form one.

How valuations can vary

The purpose of a valuation and the model that you apply to a website will result in drastically different values. Let’s say, for simplicity you had a website making $10 million dollars a year in sales and $9 million in expenses. Making the total net profit of the business $1 million. If you applied a multiple of earnings model at say 3 times earnings the business would sell for $3 million dollars. However if you applied a liquidation valuation to the business and the business had $7 million dollars in assets on the books at auction value you would get $7 million dollars for the business. A drastic difference.

A public example of this is Digg.com. Which had about $10 million dollars in revenue per year and a similar amount of expenses. According to TechCrunch the sale value of Digg was about $16 million, Washington Post Co. paid about $12 million for the Digg team; LinkedIn paid $3.75-$4 million for patents; and Betaworks bought Digg’s remaining assets for $500,000-$725,000.

What is market value to website buyers?

The reason that a website has a market value to a buyer is because a potential profit from it. Nothing more, nothing less. Buyers are solely motivated by return on investment, so anyone out there thinking “but my website has so much potential” by economics you are wrong. But hang on Jock, instagram sold for $1 billion dollars and it hadn’t even made a cent! Well i’m sorry to say your website is no instagram. And when you are dealing in the private markets (which is what you are dealing in) value is determined by what someone is willing to pay for your website which is determined by it’s ability to make a profit and present a reasonable rate of return for it’s purchaser.

What doesn’t add value

Just a side note. The assets the make up a website (like domain name, trademarks, copyright, graphics, programming, databases, email lists, form, content and traffic) are what determines the revenue (more specifically profit) of the website and it is that profit that will determine value to buyers. Some website owners and bloggers struggle with the idea that just because you’ve put all this effort into creating content and doing SEO, your website inherently has value. I’m sorry to tell you this, but in terms of valuation 1 + 1 doesn’t equal 2.

How do website buyers determine value? (most common approach)

Let’s have a look at some general facts about valuations

• Valuation is a combination of objective and subjective tasks
• A valuation is really only an opinion of what something will sell for
• Real value only materialises when something is sold
• Website sellers generally over value their website
• The higher quality data (proof of income, traffic stats etc.) the higher quality valuation
• There are always macro factors out of the control of the buyer and seller that affect value
• Valuation models vary and there is no one “correct” valuation for a business

Website buyers typically pay a multiple of earnings for a website. That is they pay a multiplication of how much net profit the website makes per year. For example if your website makes $100,000 per year. A buyer may adopt an earnings multiple of 1.5X thus they will offer you $150,000 for the website. Generally the higher the risk the website holds, the lower the multiple they will offer. The basic valuation method used to value websites: Net

Income x A Multiplier = Your Website Value

Here is a breakdown of the two.

Net Income (profit)

Basically Net Income a company total profit and is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses, or in accounting speak EBITDA (earning before interest tax depreciation and amortization). Generally speaking there are less expenses for a web business as you don’t normally have things like rent, office expenses and general normal business expenses. So there is normally less calculation to do in a normal business valuation. There can be a lot of money saved by understanding the actual profit that you really are making. That is why bigger companies pay ridiculous multiples for companies. They can see the synergy and economies of scale by cutting costs and expenses to bring the overall profit level up.

A Multiplier

A simple multiplier will be based on a Rate of Return. If we use the following. 12 Times Month Multiple = 100% return- your money back in 1 year 24 Time Monthly Mutiple = 50% return – and your money back in two years 36 times Monthly Multiple = 33% return – and your money back in three years. You are beginning to see why internet businesses are becoming a good investment in terms of an investor. With minimal staff and expenses to worry about, they start to look quit attractive. Much better than putting your money in the back and getting 1-5% interest, depending on what country you are in.

Why You Can’t Trust Online Tools

If I go and see the value of Google.com using the following tools I get the following results: https://www.dnscoop.com – $2,246,400,000 https://www.worthofweb.com – $ 78,650,521,400 https://sitevaluecheck.com – $710 https://digsitevalue.org – $1 365 751 473 With a range between $710 and 78 billion you can appreciate why automation doesn’t equal accuracy. That range is a factor if 100,000,000%. Why such a disparity? Because may of them operate the mathematical and scientific foundations of tarrot cards or astrology.

What Multiples Do Buyers Pay? Multiples vary based on market sentiment, supply of sites coming up for sale, number of buyers in the market, the synergies that buyers may recognize, timing, location of listing, credit offered by seller, form of payment, or the buyer’s mood on the day!

First Timers – 1.5x – 2.5x multiples

Financial Buyers – 0.5x-2x multiples

Strategic Buyers – 1x-5x multiples

Investors – 1x-3x multiples

What Types Of Sites Sell For More?

I don’t believe there are “common valuation multiples” or that it would be a helpful figure if it were calculated. Each site is individual and each buyer has his own perspective on what he can do with the site and what he’s willing to pay for the revenue streams and risks he envisages. But it is common to throw around the multiple of 1-2 years of net income as a starting base and things go up and down from there. Flippas own statistics do support that… but of course they’re mixing in all classes of sites. I don’t think it’s really a question of an adsense site gets 1-2x yearly net and an ecommerce site gets 2-3x – it all depends on the site and who’s buying it. Big dumb companies buy up companies at insane multiples to gain marketshare or push out the competition. There are two major value variables that can alter value:

• The consistency or scalability of revenue
• The quality and reliability of website traffic

The strength of these two factors can be Industry

• How competitive
• Low barrier to entry
• Future of the market
• Any vertical or horizontal integration]

Income

• One source of income? Stable ?
• What is the ratio costs to profit
• Active customer base
• Clean finances

Traffic

• Multiple sources of traffic
• Referral traffic
• Reliance on Google

General

• Age of Site
• Unbroken Whois history
• Brand and goodwill
• Previous owners
• Technical Knowledge required

• Solid earnings
• Positive growth trend
• Processes automated
• Defensible Market (a site on CD’s has little value today)
• Room for growth
• Strong brand
• Diversification (of revenue and traffic)
• USP (some type of unique asset)
• Key assets (like email list, premium domain, supplier contracts etc.)
• Legal Liabilities
• Quality evergreen content
• A commercial demographic (10,000 doctors is better than 100,000 teenagers)

Other factors:

• Can the owner make money from day one ?
• What level of input does the current owner have in making the site function (are they too close)
• Is location a factor in earnings
• Are there special requirements (licenses, certificates) to run the business
• Are their any special needs of vendors or suppliers
• Any debts
• Documented Operations Manual
• Seller involvement post sale

How to get a higher valuation when selling

• Performance Goals – the seller is willing to take payments on certain milestone achievements or goals being achieved.
• Seller Financing – the seller is willing to finance the acquisition. Through seller financing or some type of payment plan.
• Ongoing Support – if the seller is willing to provide ongoing support this can reassure the new buyer.
• Part Ownership – sometimes that notion that a seller has a monetary interest in the future of the website can help increase price.
• Non Compete– sometimes a clause about not competing will tip the sale in your favour.

CASE STUDY: why some people can afford to pay more for a website Let’s say for example you see a site that you already own in a simialr market and that site converts at 10%, the site you are looking to purchase you calculated that it converts at 5%. Say that site has been valued at 36 times monthly earnings for a total of $300,000 Buy It Now Price. If you were an uneducated buyer in that particular market you would happily pay the 300k and get your moeny back in three years. However as the educated buyer in that market, you can afford to pay twice the money $600,000 giving it a 72 times monthly earnings multiple and outbid any uneducated competitor, knowing that by improving the conversion rate from 5% to 10% you can get your money back in the same amount of time and thus can afford to spend more on the site to secure it. You can now see how one person can value a site at X, then another person value a site at Y. That is why at the end of the day the market tells you what a site is worth. CASE STUDY 2: same income different value This should give you a better understanding of why similar businesses sell for completely different amounts.

Although the above two websites have the same annual profits, the above data suggests that company 789 will probably sell for more than company 123, maybe even twice or three times the amount. This highlights how “rules of thumb” and “industry standards” are useless in some aspects and value is such an individually past aspect.

Valuation Methods

Below is a list of valuation models that can be applied to a business.

• Capitalisation of future maintainable earnings
• Discounted cash flow
• Nett asset backing
• Net realisable value
• Replacement cost
• Liquidation value
• Capitalisation of dividends
• Return on investment
• Industry rule of thumb
• Comparable market transactions
• Cost to create
• Multiple of earnings.

However these are the more common methods that are applied by both buyers and valuers:

• Asset Valuation – buyers may make their valuation based on the assets of the website. Be it traffic or customers, buyers will look at ways of leveraging those assets to get a quicker return on investment. Buyers can recreate value based on what they think each individual asset is worth.
• Future maintainable earnings – buyers might look at the rate of return they can expect from the website by capitalizing future earnings. This is achieved by multiplying the average profit by the desired rate of return.
• Earnings multiple – buyers may apply an earnings multiple to your website example net profit multiplied by 1.5X
• Comparable sales – buyers may search for similar sales of you website to find comparable sales data and use this as a basis of making an offer.
• Discounted Cash Flow – looks at the cash flow received for the investor discounted at a return on investment rate required form the investor. This valuation model takes into account the time value of money. Essentially the dollar you invest today is worth less next year due to inflation.

As you can see there are a multitude of things that can come into factor int he eyes of the buyer and understanding them as a seller will better enable you to sell your site. Sometimes we will recommend that buyers hold onto their site for, example another year, because they will likely get double or even triple the money at that time.
The market consists of thousands of buyers and each and every one of those people will have a different point of view. The point of this article is to give you a framework to build from when trying to put a value on your site. And never assume that the price you think you can get is what you will get, you would be surprised at the creative ways people come up with to get their hands on your website at a price that both parties are happy at.