Lawyers Gone Wild
Lawyers are taught to value businesses by using a multiple of profits or revenues. Depending on the attorney, the value of the company may be determined by taking the profit for the previous year and multiplying it by three years or some other objective calculation. I would submit to you that this approach is often not only wrong for online businesses, but useless as well. Let me explain why.
The Drudge Report is a famous news site. Have you ever actually looked at the site? It is an utter piece of junk. It looks like something a spastic monkey with bad vision might come up with using an HTML program from 1995. Seriously. Click here to look at it.
Does this mean the site has no value? Of course not. It is incredibly valuable. The value is not found in the design, but in the information published on it and the traffic the site receives each day.
When evaluating the site, would you look at revenue projections to come up with a price for it? Hell no! You would analyze the traffic and the fact a high percentage of that traffic is of the repeat variety. The valuation of the site would then focus on identifying a means to monetize the traffic.
Another situation shows how this way of thinking was applied to a famous site not long ago.
Craigslist is another site that has all the design pizzazz of a concrete brick wall. As we all know, however, the value of Craigslist is in its domination of the online classified ads market. The site controls vast amounts of traffic. If you could buy it and monetize it in some way…the potential boggles the mind.
A private company, Craigslist was thought to pull in as low as $10 million a year in 2004. After expenses, the company probably posted a profit in the $5 million range. Using these figures, the value of the site would be in the $15 million range using the traditional three-year calculation method. [$5 million multiplied by three years.].
While a lot of money, $15 million is a ridiculously small number for a site dominating its field and bringing in huge traffic numbers. eBay certainly thought so. It paid $15 million for just a 25 percent share of Craigslist in 2004. Yes, it paid at or close to the full traditional valuation amount for just a quarter of the company.
I must admit I still thought this was a great deal at the time for eBay. With Craigslist now believed to be bringing in roughly $150 million a year, I am going to hanker a guess that eBay is pretty happy it plunked that $15 million down.
The point you should take from these examples is the valuation of website worth is something that needs to be done carefully and with a lot of thought. The value of a site may be found in some aspect of it that is unique compared to other online properties.
Consider Google. Is the home page of Google valuable? No. It is basically a white page with a search box, the Google trademark, and a few links. To be blunt, I probably wouldn’t even try to copyright it.
No, the value in Google is the domain, the brand, and the search engine algorithm. Nobody goes to the home page for anything other than to start a search. In fact, most Google apps bypass the home page and forward you directly to a search results page.
Now consider Yahoo. It doesn’t even run its search engine anymore [Microsoft does it.] Yahoo is now more of a content, email and news company. Unlike Google, the home page for Yahoo is packed with information. If you were to buy the company, the home page would be treasured because people come to it for information instead of just to conduct a search.
In Google and Yahoo, we have two competitors that started out doing the same thing. The companies have since evolved in different directions, and the valuation of each would rely on factors unique to each companies evolution.
Failing to identify the real value of a site can lead to disaster. Let’s consider an online business based on an individual. Yaro Starak is a successful blogger who has built up a number of sites teaching people hot to make money online. His sites are based on his personal advice, stories, and feedback.
Would you consider buying one of Yaro’s sites? Yes, but one would have to think the purchase through very carefully. The members and subscribers to the site are there because of Yaro. If you buy the site and he is no longer associated with it, how much of the traffic will just migrate to one of his other sites? A significant percentage.
The loss of members would devalue the site. Given this, you would probably offer a much lower purchase price than if it were not built around the identity of Yaro. Alternatively, you could put together a healthy offer for roughly 90 percent of the ownership of the site. Yaro would keep 10 percent, but be required to remain active within the site. This would serve to keep members and subscribers around, which would solve the personalization problem.
It is easy to overstate this “identity” problem in many situations. Consider another famous blogger – Perez Hilton. His blog publishes tabloid gossip. If you want to see the latest celebrity doing something regrettable, this is the site for you.
Hilton personalizes his site, and his name is indeed the domain name itself. Does this mean people would stop coming if you purchased the blog from him and he stopped being active on it? No, not really. People come to the site to see celebrities make asses out of themselves. Whether Perez is on it or not is secondary. His absence probably would make little difference.
Another issue to consider is the value a site might have in relation to your business that it does not have for other potential buyers. This value can be a bit difficult to explain in a vacuum, so let’s look at an example.
I’ve decided to launch a movie review site. I have significant financial resources. The only problem is sites like Rotten Tomatoes already dominate the niche. How am I going to compete with them?
One approach might be to buy a site like PerezHilton.com and then plaster ads and branding for my movie review site all over it. Since Perez’ site already has a huge following interested in movie stars, this could be a very powerful cross-over marketing strategy.
The fact Perez’ site is already profitable could also give me extra cash flow flexibility as I battle through the rough early years. In short, his site has unique value to me because I can leverage it in a different manner than a person just looking to buy it and keep it going.
What Is A Site Worth?
Let me give you the famous answer every lawyer gives – it depends. The key is to look at it closely. I recommend you get different people involved when considering a site. A lawyer helps, but so does an accountant. Hiring a consultant that runs a successful site is also advisable as such consultants can point out strong and weak elements of the property that may not be obvious.
Only then can you really arrive at a decision on the worth of a particular website.
Richard A. Chapo, Esq.