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Site Flip: Buying and Selling Websites for Profit

Tuesday, July 25, 2006

Website Appraisals 101: Revenue Appraisal

Having a good eye for appraising a website is one of the site flipper's essential skills. After appraising a website's content the next most important factor to value is revenue. If you enjoy the read, consider my free newsletter.


In traditional business takeover theory, a business' value is estimated in multiples of monthly revenue. The standard multiple, or range of multiples, varies depending on the type of business. This is basic, and simple enough that it needs no more explanation than that.

This leaves us with certain difficulties, however. Firstly, earning revenue is not synonymous with making profits, and secondly, a site's revenue streams aren't taken into account by a simple assessment of revenue.

Revenue vs Profits

Many websites earn a revenue but don't make a profit because costs exceed revenue. (Recall from business 101 that Profit is Revenue minus Costs. P = R-C) A situation where costs are greater than revenue is commonly known as being in the red, or running a deficit. Depending on the website, such a situation presents either humongous potential or a seductive trap. The following are the key issues in differentiating one from the other.

1- Ease of profitization: We've all heard of monetization, but the key issue is really turning a website into a profit generator. To see if turning a profit would be easy, you need to consider monetization opportunities (affiliate programs/advertisers/other revenue generators in the niche), the traffic's demographics (return users vs new, trust factor, disposable income of visitors) SEO, and whatever else could have an impact.

2- Turnaround time to profits: A website flipper conducting a revenue appraisal will look at how long it will take to turn a deficitary situation around. That means two things. First, time the site flipper will put in working on the site. Second, the time span until the website turns a profit. Usually, when a website reaches a certain critical mass of traffic, it can break even. A site with easier profitization will have a faster turnaround time.

Those are the two main factors I know of. If you know of any others, you're welcome to leave a comment.

The point I'm making is that when a website earns revenue but makes no profit, this isn't necessarily a bad thing. Site flippers with an eye for a bargain will seek out websites in the red. This is because their financial situation is inevitably a huge bargaining chip. If the website can be easily profitized with a quick turnaround, well, a good deal has been found (with regards to revenue appraisal; other factors may not make the site worth purchasing).

Sources of Revenue, or Revenue Streams

With respect to sources of revenue, finding out if a website's revenue streams are diverse and sustainable is the main task of a site flipper.

In terms of being varied, the desirable amount of revenue diversity grows proportionally to a business. For example, a small business with a handful of revenue streams can be contented. Any more might cause logistical difficulties, while any less would put the business in an undesirably risky and dependant position.

By contrast, it makes sense for a big company to have several sources of revenue. One of the greatest failures of modern business saw GM's parts manufacturer Delphi be spun off. It only had GM as a client. When GM ran into financial troubles, the Delphi went under. "The former wholly-owned parts unit of General Motors Corp. (down $0.06 to $28.29, Research) said it has been hit by the downturn in fortunes at the world's largest automaker, as well as by its own internal problems."

With particular respect to the website market, I've seen cases of people placing a premium on non-Adsense revenue streams. I personally have no problem with Adsense, but there is obviously a problem with over-reliance on Google's ad platform as a revenue source.

In terms of being sustainable, revenue streams should preferably come from a source independant of outside factors. For example, a website that has been earning money by selling FIFA World Cup soccer balls will oviously have revenues tail off as interest drops post-Cup.

In appraising a website's value, consideration is given to:
  1. multiples of monthly value,
  2. the ease of profitization,
  3. turnaround time,
  4. revenue diversity, and
  5. revenue sustainability.
I've invented a formula to take these factors into account.


Revenue Appraisal Range = RAR
Monthly RevenuE = MR

The lower multiple in the industry's revenue appraisal range = LM
The higher multiple = HM

Ease of Profitization = EP
Turnaround Speed= TS

Revenue Diversity = RD
Revenue Sustainability = RS

RAR = {LM x MR + [(EP + TS) x MR] + [(RD + RS) x MR]} to {HMx MR + [(EP + TS) x MR] + [(RD + RS) x MR]}

This can be simplified. Combining Revenue vs Profits into one factor (e.g. EP + TS become Revenue vs Profits, or RvP), and combining Sources of Revenue into one factor (e.g. RD + RS become Sources of Revenue, or SouR), we get:

RAR = [MR x (LM + RvP + SouR)] to [MR x (HM + RvP + SouR]. Of course, these factors are weighted and adapted as per their importance.

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