The arrival of the digital revolution and the explosion of eCommerce has turned websites into valuable commodities. They can be run as full-fledged online businesses, bringing in serious revenues as well as building up legitimate equity.
Yet despite all their promise, it’s still quite a challenge to determine exactly what a website is worth. Just like if you’re evaluating a business or a home, there are a lot of factors you need to consider.
So whether you’re looking to buy a website so that you can get in on all the money to be made online, or if you already own one and are looking to sell it, it’s important you know how to determine what the site is really worth. This will make sure you’re asking for or offering the right price, and this will help make things a lot easier down the road.
To help make this process a little easier to understand, we’re going to discuss what makes a website valuable and then point you to some tools to make it easier for you to uncover the magic number.
What goes into business value?
Determining the value of a business is not an exact science. And for websites, or online businesses, it’s really no different.
Typically, the starting point is revenue. Online businesses are considered to be worth roughly 2.5 times their yearly value. Getting a hold of the site’s financials will give you an idea as to where to start.
But there are many other factors to consider as well. Here are some of the top drivers of business value:
- Future sales predictions. A site might be making money now, but if it looks unlikely it will grow further, then it might be worth less than the 2.5x benchmark. But on the flipside, if the site looks poised for strong growth, it may be worth more.
- Lead generation. Where do new sales come from? If the site is currently exploiting all possible sources of new leads, this will negatively affect its value. But if there are areas still to be tapped into, then the value will increase.
- Risk. Businesses that haven’t properly assess their risks and that don’t have a plane to mitigate them are going to be worthless. Risk can come in many forms, so when evaluating a business make sure you have a good understanding of the business and the market in which it operates.
- Records. A surprising amount of business owners don’t keep good records, especially those new to running online businesses. The cleaner the records, the better. This will help give a better snapshot of the health of the business and will make it easier to know it’s true value. Plus, poor records keeping could mean trouble later with tax collectors and regulators, and this will seriously hurt the value of the business.
- Processes and systems. Sites that run efficiently and effectively are also worth more. If the website owner has taken the time to audit processes and install ones that work better, this will make the site more valuable, as it will require less work to run once the new owner takes over. Try to learn as much as possible about how the website functions behind the scenes to get an idea of what it’s really worth.
Some of this you won’t be able to find out unless you’re inside the business. If you’re looking to evaluate your own website, then this is easy. But if you’re looking at a site to buy then you’ll need to ask lots of questions and really dig into the business.
However, for some of these, there are tools you can use to do your own research. Here are a few of the more useful ones:
Search engine optimization (SEO) is a critical component of any website’s lead generating strategy. In fact, the majority of traffic to your site is likely to come from organic search, so understanding how a site is doing with SEO will be critical to determining its value.
You’ll need to go beyond just learning what keywords the site ranks for. You’ll also want to dig into its backlink profile so that you can see which sites are linking to it and if there are any red flags. Sites that draw a lot of links from spammy websites will ultimately be worth less.
There are lots of tools out there that can help you do this type of research, but probably one of the best is AHRefs. With this tool, you can easily see all the links to the sites, study up the referring domains and search for new terms that you could exploit.
All of this will help give a snapshot of the sites future. A low-quality backlink profile combined with few new keyword opportunities means a less valuable business, and vice versa. These tools can be a bit expensive, but they provide a level of detail that will really make your life much easier.
Another thing you’ll want to look at is the return on investment (ROI) of the site’s marketing efforts. This will help you get a better idea of the company’s future.
Sites with high marketing ROI represent companies poised for growth. You can feel comfortable that this site is relevant within its niche, and you can be relatively confident that if you increase and expand its reach this will lead to increased profits.
If the site doesn’t have great ROI, then this might be an issue. But there may be ways for you to invest more efficiently, lowering your expenses and boosting profit margins. This will vary case by case, but it’s something to consider.
The good news is that there are tons of different tools out there for you to measure all different types of marketing activities. It has become a real focus of the industry over the past few decades, and all this concentrated energy is really paying off.
Some of the best tools you can use are from the platforms where you are marketing. For example, Google, Twitter and Facebook all have analytics tools to help you figure out how well you are reaching your audience. You can also use a tool like Kissmetrics. This allows you to track activity on your site, specifically conversions. You can see how people got to your site, what they did there and then whether or not they bought something. This will allow you to see clearly which marketing efforts are resulting in sales, and which ones need to be tweaked or dropped to help improve the company
Risk evaluation tools
Lastly, there are some tools out there for helping you measure risks, the best of which are financial models. These are somewhat complex mathematical studies that take into account the many different factors that affect your business.
Once they do this, they generate a variety of different scenarios that could happen to your business, assigning a likelihood of occurrence to each one. This gives you a really easy-to-understand picture of where the business is at risk.
Unfortunately, though, creating these models is not easy. Your best bet is probably going to be to work with a financial consultancy firm to get a real idea as to the state of the website. However, you can do it on your own if you want.The best tool for this is actually going to be good old Microsoft Excel. It will take some time to learn the best ways to do this, but you can find plenty of resources online to help you, and learning how to do this will help sharpen your business mind moving forward.
Being able to accurately determine the value of a website is an extremely useful skill to have. If you own a website, it will help you see where you stand, giving you direction as to how to improve moving forward.
And if you are looking to buy a website, being able to perform your own evaluation will make it easier to recognize good deals and scams. Use the tools and strategies we’ve provided today, and you’ll soon become an expert in business value.
About the author: Jock is an online business broker who specializes in the buying/selling and appraisal of online businesses. He got into this work after years working as an internet entrepreneur—he started his first online company when he was just 19-years-old. Now he works with other entrepreneurs to help them understand how they can make their businesses better. Jock writes frequently about his experiences, and you can find some of his work in publications such as CNBC, Forbes Business Insider and Entrepreneur.