How to Properly Value Your Internet Company

One of the earliest considerations you face when deciding whether to sell your Internet company is its objective value. To gather the appropriate data on the relevant valuation drivers requires that you understand and use proper valuation techniques, gather the correct information, and understand the “big picture” regarding your industry, the economy and other external factors.

Here are some of the most critical factors to be considered when evaluating your company:

·         Domain appraisal: Unfortunately, too many companies rely on so-called “website valuation tools” to value their domains. These online tools offer quick answers to complex problems, ignoring items like financial analysis, hard data and human judgement. Instead, these tools massage publicly available information to extrapolate advertising revenue and other financial information. We suggest you avoid automated tools – the results are inconsistent and undependable. 

·         Traffic valuation: A technique popular with sites that have significant traffic but have not yet been monetized is the traffic valuation method. This involves researching the most popular key phrases that drive the bulk of search traffic to your site. Next, identify each keyword’s cost per click (CPC). For example, if you find three keywords that drive almost all of your traffic, use Google AdWords or something similar to assign CPCs and then multiply each by the number of visitors stemming from each keyword. This is a good proxy for the traffic value of your site. However, if your revenues are not traffic-driven (for example, a software-as-a-service site), this method will substantially undervalue your website.

·         Revenue and earnings: A popular method used to help evaluate Internet companies is to employ methods that center on earnings multiples. The basic idea is to multiply the site’s discretionary cashflow – pre-tax earnings before non-cash expenses, owner’s compensation, interest income or expense, as well as non-business related and one-time expenses and income – by an appropriate multiple. The rub, of course, is arriving at the correct multiple, and this takes experience and lots of data, including:

o   Length of time in business

o   Annual income trends and anomalies

o   Transferability of revenue streams

o   Stability of CPMs and their reliance on a particular owner

o   Traffic, discussed above

o   Many more factors – this is a huge topic that requires additional blogs

·         Assets: The presence of physical assets and inventory certainly affects a site’s value. Also consider licensing requirements, intangibles like patents and trademarks, and specific regional factors. 

   Before selling your company it's important to get a professional valuation done. You may be sitting on hidden value in your company. When hiring someone to put a value on your business make sure they have experience with internet businesses.