Evaluating a website for purchase or sale is not a straightforward process. The value of an online business requires various factors to be taken into consideration including current value and an estimate of potential earnings. We run through everything you need to consider.
Business analysts recommend the value of a business is ten times the gross profit, five times the average revenue or twice the total revenue of the two previous years. Other financial advisors claim an online business is typically worth three to six times more than the profits made through a website before interest and taxes are deducted.
The fact of the matter is, a website is only worth as much as a buyer is willing to pay for it.
Whether you are buying an existing website or you’re an online business owner looking to profit from your cash cow, you need to know how much your website is worth.
Accurately valuing a website can be a challenging proposition. But if you have relevant data and a clear idea in your mind about the pros and cons of a specific website and the potential profitability of the market, carrying out due diligence will help you make a decision with your head and not your heart.
Website valuation calculators
Before you begin evaluating a website, here is a word of warning: during your research you will no doubt discover website valuation calculators. Should you choose to use them, treat them as little more than curiosity as you will soon come to realise they are unreliable at best and useless in most cases.
Website appraisal calculators such as siteprice.org, webuka.com and worthofweb.com are fun tools, but in reality offer little more than entertainment value. Calculating the true value of a website involves a lot of data gathering and thorough due diligence verifying the information you have to hand is accurate and reliable. No automatic tool can give you a good website valuation.
This article covers five key areas you need to consider to accurately appraise the value of a website. Although you will never be able to quantify the exact value of a website, gathering data in these five key areas gives you the best understanding of the current profits a website makes, and more importantly the potential the online business has to develop and grow.
Not all existing websites that become available on the market will be making a profit. Often website owners lose interest in their website as it isn’t making money or they’re spending their time on another project. The owner is simply looking to cash in on their investment and recoup some of their time but there may be a good opportunity in there and a revenue stream that the current owner hasn’t fully explored.
The amount of revenue a website is making is not always relevant. The key factor is the potential a website has to turn a profit. And before a website can be monetised, it has to be receiving traffic. This data is easy to come by in whatever web analytics program the current owner has installed, typically Google Analytics.
Traffic metrics are a useful way of sense checking the value of a website. But don’t only look at the top line figures. You need to know where the traffic is coming from, how diverse is the traffic sources are and whether visitors are organic or arriving through other sources?
For example, if the current owners recently adopted a pay-per-click marketing strategy, the volume of traffic will be inflated. This is not reliable data for valuing a website. You also want to know which keywords are driving traffic, how many natural backlinks the site has and how consistently the site receives organic traffic v non-organic traffic.
A website owner should be happy to provide you with PDF reports from Google Analytics. What you need to ask for are:
- Top line view on monthly users, sessions, pages per session, session duration and bounce rate
- Traffic sources: broken down into Organic, Direct, Referral, Paid, Email and Social
- User geographic and demographic data
Age of website
The relationship search engines have with websites is a little like a maturing friendship. The longer you know somebody the more trust, or lack of, you have in them. As part of their ranking process, Google et al use trust and authority metrics. Older websites typically rank higher than new websites if they have been following an honest journey and not trying to game the system with black-hat SEO techniques.
Older websites will only rank higher if the site has been well maintained and the online business is trusted. You can determine that to some degree by the performance indicators in the web analytics.
In addition, you should be looking at the historical performance of the website to check for any dips in performance that may have been due to a Google penalty or a Google update. Also, run a check through an online website penalty indicator that gives you an at-a-glance comparison of historical data traffic.
The financial depth of a business is an overriding consideration. The performance of a website can be means tested by its conversion rate, but also by how much potential the business has to make a profit online. Remember, you can carry out a website audit to spot opportunities to improve the site, drive more traffic and improve conversions.
During due diligence, look for trends. Does the conversion rate have an upward trend in revenue over the lifetime of the website, or is it a seasonal business that peaks and troughs over the course of the year?
The amount of income a website makes should also be offset against running costs. Websites have overheads such as hosting or subscription fees, domain renewal, SSL certificate and maintenance which typically includes content and advertising. Look for a correlation in marketing spend against a rise in income to determine realistic monthly income and the growth potential of profits.
When valuing a website, it is pertinent to look at the bigger picture. Buyers with a solid growth strategy don’t rely solely on the numbers in front of them, rather they look towards the value of the end product.
Even websites that don’t make a profit can be hugely valuable. Consider the setup costs of a website and the time involved. If you can buy an operational website that has had thousands of pounds and hundreds of hours invested into content, setting up social channels, customising the Content Management System and so on, you could be onto a winner.
Assuming you can afford the upfront cost (the asking price), you’ll then just need to focus on areas for growth and optimising the site to perform well.
Establishing a website to rank well in Google usually takes 6-months on concerted effort but can take up to two years, depending on the industry.
If a website owner has given-up after 12 months, you might be buying a valuable website at a low outlay and one that is primed to do well.
Backlinks are vital to any website as they help search engines like Google establish the quality of your site simply by looking at who links to you.
Deep-linking backlinks, i.e. backlinks that link directly to a specific page on your site can help your site improve its ranking.
Backlinks also send referral traffic, people click on backlinks and come directly to your site.
In short, they’re hard to get and great to have. A site with a lot of backlinks but a poor user experience or badly setup e-commerce store could be a huge opportunity waiting to be tapped.
We carry out backlink audits for our clients, to help them establish the true potential of a website.
A website doesn’t have to be profitable to be worth your investment. If you have a business idea, an existing website can help you reduce the time it takes you to establish your business online. An established website can also free-up your time and allow you to concentrate on your product or service and not have to spend as much time learning about the merits of different content management systems, drawing up website scoping documents and learning how to set-up social channels.
If you’re looking at buying a website, we can carry out a full audit of that site to help you establish its value and true potential. Contact us on 0207 305 5599 to discuss what we can do for you.