Buying an internet-only business

The buying and selling of web businesses has taken place for long enough now, that business valuers are now able to confidently identify elements and characteristics of internet business sales that enable the creation of standardised pricing structures and guidelines.

For both buyers and sellers of internet-based businesses, the overriding factor that must be dealt with is the business’s value, which can prove difficult to pin down. Wide ranges of values of comparison deals, different motives behind the deals and the (non)attractiveness of particular industries often result in differing valuation figures and, as a result, make the setting of even a vague system of values difficult.

The very early, content-driven, small to medium-sized websites were originally valued at multiples of the monthly profit. This was often taken to be synonymous with revenues, as advertising and administration costs were low or non-existent. Typically, these were valued at around at eight to ten times monthly revenues. This slowly lowered - as the internet became widely accessible - and for several years was determined to be around seven times the monthly net profit. The current model now sees content-driven internet businesses valued between four and six times their monthly net, or at much higher values - with very few falling in between.

What is it, then, that could give a site a much higher value? A deal involving an American pet services site can help to answer this question. It sold recently for a value that was 42 times its monthly net profit.

The site in question was a popular, 'traditional' internet portal for US-based animal lovers, which provided multiple web formats, such as blogs, a forum and advertising services. These added several domains to the sale and significant user loyalty value. Also, the site's monthly revenues were high, which played a major part in its ultimate value, and it was well structured and organised, with up-to-date mailing lists of its members and a detailed documentation of day-to-day operations.

A key concept to take on board is that the distinction between internet-only businesses and offline businesses is becoming blurred when it comes to assessing values. It’s virtually impossible to run an internet business without incurring operating expenses over and above the cost of hosting the website, and therefore revenues are no longer equivalent to profits. A buyer must investigate claims relating to the time spent on the business, as this is almost always under-quoted by the vendor. The key task is to ascertain the true value of costs incurred in running the enterprise, including a generous allowance for the owner’s time.

Internet businesses that have a selling price of over £200,000 often use a valuation method used by larger, established online and offline companies, valuing the enterprise at 2-4 times EBITDA (24 - 48x net monthly profits). Total revenues also have a linear influence in this valuation method. It would be unusual for a business turning over less than £2m, whether online or offline, to be valued at much over 3 times EBITDA.

99 per cent of vendors should ignore the recent valuations realised by über-popular websites including LinkedIn, Facebook and RenRen. Following its recent flotation, RenRen, the Chines social networking site, is valued at roughly 80 times its annual sales. These hyped valuations require sustained levels of increases in annual profits and sales to avoid having their bubbles burst.

Let’s look at an actual transaction that is more typical of the small online business marketplace. Inquisitr.com is a small content-based internet business put on the market earlier this year. It changed hands in May for US$330,000, representing a 21x monthly revenue multiple and a 33x monthly EBITDA (equivalent to an earnings multiple of 2.75). It took $15,500 each month from 1.4 million unique visitors. This was sold at the higher end for small online businesses, which would typically sell for around 10 – 20 per cent less than this. Set up just three years ago, the website features articles on general interest topics on tech, sport and entertainment, and uses pay-per-click, in-context text links and display advertising to win revenue through advertising.

The current buying and selling market is thought to be in the early years of its growth cycle and is still changing. New buyers used to be most concerned with how to actually build a website up. The easing of technological demands - with the rise of templated blogging sites and cheap website design facilities - has shifted this priority, however, more to the question of how to generate steady traffic to a site. They now see that buying a site with healthy traffic and a means of sustaining it will mean that their biggest challenge is overcome and justifies the purchase of a site, rather than building one from scratch.

A quick note to buyers: make sure that the owner has not been artificially increasing page views if you are paying a premium for ‘traffic’. Look at analytics traffic over time and question the vendor over irregularities in the pattern. Have your web developer look at the website’s traffic logs, paying particular attention to the originating source of the visitors.

In the early days of the market, internet business buyers placed more emphasis on the strength of a site's revenue and its brand name. They have seen that with the evolution of the internet a site's quantity of targeted traffic has a higher value than its revenue, using their experience from previous deals to recognise that a website's potential is often its most important quality.

The motive for buying and selling a web business is also definitive to its value, and is a reason why someone looking to sell up should be careful in deciding who to sell to, and be particular about potential buyers.

A business insurance lead-generating site, for example, which perhaps sells 400 leads every month, at £50 per lead, could generate around £240,000 every year. To someone looking to buy it as a stand-alone business, its annual turnover would have a high probability of remaining in the range £200,000 to £280,000.

However, if someone with a series of sites in a specific business services area, such as payroll services or loans, is looking to buy it, however, then its value to them would come from the lifetime value of a customer, i.e. how much that customer would spend across their portfolio of sites in their lifetime. If this value was, for example, £400, then they would have the potential to generate up to £2m every year - as much as eight times the amount the other buyer would be able to, therefore putting it at a vastly different value to them.

The buying and selling of successful smartphone and tablet apps is the latest modern phenomenon, having been born with the advent of Apple's revolutionary iPhone in 2007.

The selling of apps varies greatly between the different smartphone operating systems due to different levels of control and security. Google's Android operating system -still in its comparative infancy - has far fewer restrictions on the buying and selling of Android apps than on Apple's offerings for both iPhone and iPad. An Apple-specific app will forever be tied to the Apple Developer account from which it was first created, however. This means either only the code can be sold - running the risk of Apple dismissing it as a duplicate app when the new owner comes to register it - or the ownership of the whole developer account has to change hands in its entirety, posing a problem if a developer wants to keep using the account or has existing apps on it.

A development that is expected in the near future will see more and more patents being included in internet business sales. The patenting of code remains notoriously difficult, however, which puts a limit on the market, and they are likely to be in such demand, that the small-cap end of the market is unlikely to get a look-in, with patents remaining the preserve of larger set-ups.

Many predict the future of internet-based businesses and websites to go the same way as real estate, with parents investing in the purchase of a website in the same way they might invest in a piece of property to give their children a residual income. The primary valuation method will be very likely to move to discounted cash flow analysis – working out the present value of future cash returns. It is yet to be judged whether that will take place in the short or long-term, but that is certainly considered to be the way it is heading whether it takes place in two or twenty years.

Find online businesses for sale in the UK

Share this article

Latest Businesses for Sale

View more businesses for sale