A website is not the same as an online business and the value is therefore not determined in the same way, although the underlying method is similar. In this article we will explain how we look at website value and how we determine this value.
Value is a forward-looking concept. This may sound strange at first, but it means that value should not be calculated on the basis of historical figures but on the basis of future results. As a result, value is by definition a subjective concept: nobody knows for sure what the future results of a website will be. So, an opinion, or estimate, of the valuer is involved. This means that a valuation is actually also an opinion and therefore subjective.
Then you might think, why not value the historical figures: after all, they are fixed? That is indeed the case, but these figures do not provide any certainty of future results either. And it is precisely these future results that are the point: they are the reason why the buyer is prepared to pay for the acquisition of a website. The investment he is willing to make should pay off in the future with the future results of the website. In other words, the estimate of future results is essential in determining what the website value is and what a buyer will be willing to pay for a website.
Now that we have established that value should be determined based on expected future results, the question is how to do it. Various rules of thumb circulate in the marketplace: X times earnings or sales, for example. While these can certainly be sensible checks, we would not call this a valuation. They are often applied in a too simplified manner and are mainly based on the past. The question with these rules of thumb (the "multiples") is always to what extent there are comparable web stores. One online business is not the other, and the multiple of one web store is in our opinion not simply applicable to another.
But how should it be done? Assuming that value is a forward-looking concept and that the essence of website value (or more generally: business valuation) lies in 3 elements: Time, Money and Risk, the Discounted Cash Flow method is the appropriate methodology. Not coincidentally, the DCF is the most widely used method within SMEs to determine business value.
We will not explain the method further here as this has already been done in detail elsewhere in the knowledge base. What we do want to explain is that this method focuses on the net present value of future free cash flows (say 'operating profits') on the basis of a risk profile to be drawn up.
For an accurate picture of the value of a website, the starting point is therefore a substantiated forecast for the coming years. We ourselves use a planning period of 3 years. Do not count yourself too rich, because experience shows that growth in most cases flattens or becomes less profitable. Especially if you sell a website yourself, do not assume that a buyer will simply adopt your field hockey stick prognosis for his own valuation.
From this forecast, the free cash flows must be determined (say: operating profit) and these must then be discounted. The thinking here is that €100 in your pocket right now is worth more than €100 you will receive in 2 years. In this vein, the profits you expect from a website are worth less than a similar amount already in your bank account today.
The question that then follows is: how much less? This depends on the risk that you will never be able to meet the profit. Against this risk there must be a certain risk, which is why it is also called the return requirement. So, with this return requirement you calculate future profits back to a net present value: your website value.
The return requirement is built from several standard components, including risk-free interest rate, a market premium, and a premium specific to the website in question. The first are standard elements, so we will focus on the premium that we set specifically for the website in question.
As mentioned, these premiums revolve around risk. As such, we look primarily at elements that differentiate the website under review from below in terms of risk profile. To do this, we look at a list of 15+ components that have a lot to do with dependencies:
> What are its traffic sources? And related to that: how is its positions in Google and how are they structured.
> What is the history of the website?
> What are the dependencies on the owner and on staff?
> What are the prospects in the industry?
> How does the website earn its money and to what extent is this sustainable for the near future?
> What are the dependencies on monetizing partners?
Of course, every website is unique and each time specific elements will play a role. We can therefore not share a magic formula that allows you to objectively determine the value of a website within seconds. Valuation is a process that requires manual work, if it is to be done well.
However, we hope that with this article we have clearly set out the train of thought for you. Should you have any questions about this, we can be reached at 020-2184499.
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