The valuation of a stand-alone website or a business consisting of a collection of websites is a very important and commonly misunderstood practice. The valuation process is a mixture of objective and subjective tasks and can be very difficult to perform without the right knowledge and tools. The need for website valuation usually arises due to a pending transaction to either purchase or sell the site(s). It is extremely important that sound business models are used for website valuation in order to establish a fair and accurate price for such transactions. The fact that the market for websites is relatively new and growing exponentially makes this a topic of study that is both fascinating and very valuable.

The purpose of this chapter is to take your online advertising market knowledge developed throughout this book to the next level by giving you the tools and understanding to establish a fundamental value for a given website or group of sites. Armed with this knowledge you can profit from buying undervalued sites, selling sites above market to less informed purchasers, or simply value your websites as a means of measuring their success. Combined with the previous chapter's information, this website valuation chapter will give you an incredible level of website business knowledge that will pay for itself many times over.

First we will take a look at some of the nuances surrounding website valuation, move on to the foundation of website valuation, then jump into the details of the discounted cash flow model and how to properly apply it to websites. From there we will look at market value approaches, the all too over-used and independently unreliable price or revenue multiple methods, decision tree/scenario analysis, and finally discuss the art of establishing the actual value from the analysis.

The Headaches with Website Valuation

We'll begin by discussing some of the problems with valuing websites. As made evident already, the website valuation process is difficult and often misunderstood. It is very common for a website owner to take a simplistic approach and simply apply a price based on a multiple of revenue or worse yet just pull a figure from thin air. Price multiple based valuations are legitimate methods for valuing websites, private companies or public corporations but should never be used as the sole valuation method. This is the first of various roadblocks that make website valuation a difficult task. In order to establish the most accurate and fair value for a site, at least two methods should be used.

Unlike public companies, there is no readily available financial data for websites. In a private company valuation an agreement may be arranged to share financial data under a nondisclosure arrangement. When the information is shared between the buyer and seller, standard accounting statements such as the income statement, balance sheet, and statement of cash flows can be expected. In the case of a website transaction, the buyer would be lucky to get such information. Although this may cause an inconvenience on the part of the person doing the valuation, it is just that, an inconvenience, and certainly not a showstopper. The underlying data is what is really needed, no matter what format it is presented in.

Although the market for buying and selling websites is growing rapidly, it is not yet a liquid one. What I mean by that is that there are not an enormous amount of market participants buying selling sites each day. Some problems that arise due to an illiquid market are limited price transparency, less choices, and delays in making transactions. Limited price transparency means that there are not multiple sites with similar characteristics on the market at all times. Without multiple sites with similar characteristics, it is difficult to get a good price view, or a feeling for the right price, because you cannot comparison shop as easily. Less choices simply means that a buyer may not be able to find a site that works well for his business model and a seller will have a more difficult time finding the right buyer. Delays in market transactions are caused by less choices or the fact that no one may be looking to buy the type of site that you are willing to sell.

As mentioned previously, website valuation is derived from a combination of objective analytics and some subjective assumptions. The fact that subjective decisions exists and may vary from one person to the next causes some issues as well. A fair amount of the analysis of website valuation may rely on the analyst's view of the future business. Will more and more people continue to log on to the Internet for the first time each day? Will the price of Internet access or website hosting continue to decline? Will a given website's traffic continue to increase at its five-year historical rate for the next two years? These are all questions that may have different answers depending on who you ask.

Typically the person on the sale side of the deal will have a more favorable answer than the person on the buy side. This is the nature of business deals and one of the primary reasons why profitable deals can be done. If there was one solid undisputable answer then the profit margins would be smaller. Extracting extra value from a website transaction will rely on the answers to these types of questions. Better yet, if the seller has not even considered such careful analysis, the buyer is at an even better advantage if he did consider all variables and factor them into his valuation analysis.

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