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Website Valuation Formula

Updated on December 30, 2011

Website Valuation

Every day, online businesses exchange hands for unbelievable amounts of money. The most recent enormous figure was $1.65 billion, the sum Google paid for YouTube in 2006. Other online businesses have been purchased for massive amounts include;

• Newscorp’s purchase of Myspace for a sum of $ 580 million in 2005

• Yahoo’s purchase of MyBlogLog for $ 12 million in early 2007.

• Yahoo’s purchase of MusicMatch for $160 million in

• Yahoo’s purchase of Flickr for undisclosed millions in 2004.

• Google’s purchase of Jaiku for $ 12 million in 2007.

• Google’s purchase of MeasureMap for $ 5 million in 2006

After hearing such figures, the natural thing for every webmaster (website owner) is wonder at the value of their own site. This hub takes you through how to establish the value of your website. 

Financial Formula Valuation

Traditional accounting formulas for valuing websites tend to suggest that the value of an online business is about seven times its net monthly revenue. Other formulas suggest that its value is equal to half its turnover or gross sales. In summary there are four main financial formula methods applied when valuing a website;

Asset-based valuation – a number of people looking to buy a business use this approach to valuing the business. Assets are the capital that a business employs to generate revenue and include such things as equipment, land, buildings, machinery stocks, bonds, cash and so forth. A potential buyer would consider the net assets to be the true value of the business. Net assets in this case arrived by taking the market value of all assets and subtracting the total liabilities as follows;

             Net assets = Total assets – Liabilities                                                                                                       

The problem with the asset based model is that the bulk of most online businesses is intellectual capital which cannot be easily quantified which makes this method wanting. A good number of online businesses are highly scalable meaning that revenue can be grown with minimal additional capital outlay.

Profit based valuation – still other buyers use the profit based approach to determine the value of a business. The profit based valuation model takes into account the profits that the business is generating. For this method to be reliable, then the profit figures availed must be availed. Unaudited figures are very difficult to verify and therefore in the absence of audited accounts, it becomes very difficult to value a business.


Comparable Sales Method

This valuation method takes into account recent sales prices for businesses of a similar nature. Hence, the valuation amount is arrived at by comparison.

“Rule of Thumb”

This method looks at the specific industry and then applies a valuation method using factors considered important to that particular industry e.g. sales, return on investment, gross profit, net assets and so forth. A popular rule of thumb approach for many businesses that sell highly intangible offerings such as most online business is the use of the company’s future cash flows to determine the current value of a business; basically giving more weight to cash flow and net profit.

Read this HUB to find out about the factors that increase the value of your website


Financial Valuation, + Website: Applications and Models
Financial Valuation, + Website: Applications and Models

Real world applications and professional consensus by nationally recognized valuation experts

 

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