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Setting the price per x times monthly revenue or profit?

Discussion in 'Site Flipping' started by McSpike, Nov 19, 2013.

  1. McSpike

    McSpike Newbie

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    I don't understand why anyone would value their site based on revenue. It's the profit that matters. I read in various places that 12-24 monthly revenue is the rule. Fine. Yet some sites require very little manual labor, marketing and hosting costs and therefore their profit is close to the revenue, say 90% of the revenue, while others may be spending a load on marekting and buying traffic so their profit is around 50% of the revenue. Why do we bother making a pricing rule based revenue when clearly the profit is what matters?

    Why not just value it this way:
    - stable profit for the last half a year or year and you hit the 24 times profit mark
    - less stable profit with uncertain future or new site just showing signs of stable traffic for the last few months and we can come down to 12 month of profit mark.

    Why bother with revenue when there is so many unknowns under this label? Why not just look at a bottom line?
     
    Last edited: Nov 19, 2013
  2. meathead1234

    meathead1234 Moderator Staff Member Moderator Premium Member

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    People who say sites are valued on a multiple of revenue are idiots and are likely just rehashing something they read elsewhere. The vast majority of buyers/brokers will value sites off a multiple of net income (or discretionary income, depending on the size of a site).

    Caveat: it is quite accurate that a number of sites (especially small) don't have much in the way of [declared/provable] costs so often using a multiple of revenue would be close. Obviously if you have a business with variable costs (e.g. an ecommerce business where you buy stock) a revenue multiple wouldn't be very accurate, but in the case of a site making $1k a month, gross, or $990 a month, net, there's not going to be much of a difference what you multiply.
     
    Last edited: Nov 19, 2013
  3. kvmcable

    kvmcable Supreme Member

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    There are probably more controlled variables determining profits than revenue. Two different business owners working with the same revenue could produce completely different profits.

    Besides the nuts and bolts of revenue and profit are often secondary tangibles which might include, new supplier contacts, valuable domain, established backlink profile, SERP placement, customer database, sales history, keyword ranking product titles and descriptions, site traffic, website design and maybe favorable reputation or citation build-outs.

    Besides considering multiples of revenue or profit you need to consider the expense it would cost you to make the same business model or if it is even possible. If the business has considerable age and reputation; that isn't something you can re-create, for example.

    As an owner of a well established (24+ years) offline business, I wouldn't consider any multiple of revenue or profit without consideration for reputation and age of the business. In my area, everyone knows us so securing our name, location and reputation would immediately earn a buyer a loyal customer base with a well established location. Online businesses aren't that much different than off-line businesses in that respect. There are a lot more considerations than simply revenue and profit. Before considering those, I'd recommend you consider the expense of duplicating the business to come up with a realistic market value.
     
  4. McSpike

    McSpike Newbie

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    kvmcable: Absolutelly, you are right.

    Profit is the start value you have. The monthly multiple is then based on how stable the business is. This of course has its limits. One can tell me he invested 100s of thousands in a business and that this raises its value. Yet that doesn't matter to me. They could be showelling their money down the drain for all I care. What I care is just how much the business makes for their investment. Another entrepreneur could simply recreate that business with half less cash and same revenue, so to me it's how much you make now and what is the outlook. If the type of traffic you have is stable (spread accross various types of sites and sources) and you have a history (where not everytjing holds on to that ranks in G) then that's worth the most monthly multiples I am willing to pay.
     
  5. Breakk82

    Breakk82 Registered Member

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    I've also seen website that are targeting more profitable niches (law, health, insurance) sell for more, even when their "profit" was weak. Probably because of earning potential