A Note on Using Metric Multiple Website Valuation Models

Metric Multiples like the ones used above or others such as “10 months revenue should be the price” are extremely simplistic and should never be used alone to develop a value for a website. At best they should be a second source to help establish a value (see next section). There is so much information left out that is becomes very easy to get burned for a single metric like revenue is easily manipulated. If you wanted to build a site that sole focused on revenue, you could do so by spending more money buying advertising then you do selling advertising. Crank up that revenue number and then sell the site for “10 months revenue.” The poor sucker on the buy side is left with a loser when he discovers it is bleeding cash or the revenue number just can’t be sustained.

Another example is to build a site focusing on traffic alone. A builder may dump a bunch of money into traffic generation and then dump the site to some unknowing purchaser. The traffic is useless (i.e. not directed at the topic of the site) and disappears quickly. A bad valuation in a website transaction is going to hurt either the buyer or the seller. Unfortunately, that person does not find out until after the deal is closed.

The multiple valuation approach should be used whenever possible. Perform a detailed discounted cash flow analysis as your basis. Then do Market Comparison analysis and throw in a revenue multiple for good measure (FYI the current rate is about 10-13 months revenue). Average the three using weights that rely more heavily on the discounted cashflow and least on the market multiple. The following is a good starting point but should be tweaked depending on how good your data used was (i.e., if you couldn’t get good discounted cash flow data but your market comparisons were excellent, you would lower the discounted cash flow weight and raise the market comparison).

Discounted Cash Flow 70% Market Comparison 20% Revenue Multiple 10%

Perform the weighted average by multiplying across and then adding up the three results like below:

At least two different scenarios should be done, more if possible. A “high and low”, for example, to establish a range. This should also be done at each individual valuation whenever possible. Other things to consider are the margin potential as noted above with website number 4 and it’s high margin per visitor metric. Also, and very important, is how much time/maintenance does the site need? How difficult are site updates and how often do they need to be made to keep the traffic up? Always remember that your time holds value as well.

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