You may want ot open two browsers or use the back/forward toggle to view the table as you read the explanation.

Present Value: The first line shows the end result of the analysis, present value of $88,543. This is presented at the top simply for clarity purposes. It is just a reference to the last line of the analysis so we’ll discuss it at the end of this section.

Periods: To the right of the present value are simply the periods. I’ve labeled the periods as “years” but any unit of time can be used. Most common would be months or years, depending on the amount of data available. Months will give you the most accurate results since intra-year seasonal issues can be addressed. For example, increase in product sales due to the holiday season. Although this effect can be baked into an annual or yearly analysis, for the sake of tweaking or negotiating the monthly valuation analysis would more clearly present the data. Keep in mind that you must adjust annual percentage numbers for monthly data. That is, if your discount rate is 12% per year, be sure to convert it to 1% per month if you are analyzing monthly data.

Hosted Pay for Click Ads: The next three lines are used to calculate the total revenue generated from pay-per-click ads. The forecasted page views is input and then the forecasted % of clicks. This is simply what percent of total page views will result in a visitor clicking on a revenue-generating ad (for example, a Google AdSense contextual ad). The next line is the forecast for the average amount the website owner thinks he will get, on a per-click basis, for pay-per-click campaigns. Total Click Ad Revenue is simply multiplying the average per click times the total clicks (derived from the % of page views).

Affiliate Revenue: Total revenue derived from affiliate ad programs. Remember, we are in the ad revenue section so this is affiliate programs where the website owner is paid by, not paying, affiliates. An example would be an ad the owner has on his site for which the company the ad is for pays the website owner a fixed monthly fee to host the ad (or a percentage of sales).

Direct Product Sales: The direct product sales section is for products sold directly from the site owner, not affiliate sales. Here the total revenue (price x volume sold) and the cost of sales (what you purchased the products for or the parts and labor to produce the product) are input. The profit is simply the revenue minus the cost of sales.

Product Sales Commissions: The total amount earned from selling someone else’s products on a per-sale commission basis is entered here.

Income Statement: The line items in this section simply summarize the gross profit by adding up all of the revenues and subtracting the cost of sales. Ad Expenses: The “other side” of the revenue streams are detailed in the ad expense section. Pay Per Click, Print, Affiliate, etc ad campaign expenses are listed out here. For each time period, an estimate is made as to what will be spent on these campaigns. It is important to adjust for the business operation assumptions you’ve made in the forecast. For example, if a new product will be launched three periods out, the advertising expenses will increase due to the promotion campaigns for the product.

General and Admin Expenses: Hosting, internet access, fees, etc. are all of the monthly charges the operation will incur regardless of whether or not business is actually being conducted. These expenses are listed separate because they are not part of the operating profit/loss of the business and are often referred to as “below the line” expenses.

Income Before Taxes: Here is your pre-tax income (EBIT or Earnings before interest and taxes, EBITDA for Earnings before Interest, Taxes, and Depreciation and Amortization if these components are included in your analysis). The Income before Taxes is simply the gross profit less general and admin expenses. Taxes: Taxes are calculated based on the tax rate entered and subtracted from the income.

Net Income: Calculated as your “accounting earnings after tax” by reducing pre-tax earnings by the tax amount.

Depreciation Add-Back: If financial statements are used as a source of forecasting data the depreciation expenses are added back here. As stated earlier, depreciation is a non-cash expense meant to reduce the value of an asset on the accounting books. It does not represent actual cash flow and should not be considered as part of the discounted cash flow analysis for website valuation. Amortization works the same way but is usually attributed to capitalized projects (such as software development). Capitalized projects are projects that are treated as an asset, the amount paid to develop the project is put on the balance sheet as an asset and expensed over time (“amortized”) so the company feels the earnings effect over the life of the asset, not all at once up front when it is developed. Amortization may be more commonly found in the world of Internet related business.

Change in Working Capital: Also discussed earlier, the change in working capital outlays must be included as more or less cash is needed to fund such outlays. As business increases, so does the need to pay fees and expenses while waiting for the end of a payment cycle to receive cash. This is typically made as a function of change in revenue. As a starting point, for each 10% increase in revenues, put a one-time 2% change in working capital reduction to free cash flows. Terminal Growth: The terminal growth rate, discussed in detail earlier, is input here.

Free Cash Flows: Here is the bottom line number we are looking for to base our website value analysis on. The number represents the cash that the website operation is expected to bring in the door in the future. Risk Free Rate, Market Premium, Beta: These three concepts were all discussed in detail earlier. The numbers derived from subjective reasoning and objective methods are plugged in here to establish the discount rate. Discount Rate: The rate at which the future free cash flows are discounted to bring the value of the website into present terms for the sake of a transaction or measurement tool.

Present Value: Here is the end result of the discounted cash flow analysis. This represents the fair value of the website based on the objective and subjective data analyzed above. If the assumptions in the analysis are fair, this should be a major component of establishing a price for the website operation.

Summary of Discounted Cash flow Analysis for Website Valuation

If only one analysis was performed, the present value line item would be the price for the website or website business. It is best, however, to analyze the value of the website using at least two techniques to get a better comfort level around the end result. The discounted cash flow analysis is typically the most involved and allows for a fair amount of freedom to customize and tweak individual components. Customizing and tweaking components should be a big part of the website valuation analysis. The spreadsheets included with this book are meant to be templates or guidelines. The user can learn from the setup of these templates and then customize them by added or deleting sections as necessary to fit the business being evaluated as best as possible.

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