Appreciating the online business you’ve created is a feeling like no other, but what happens when you put a monetary value on that website or online business?
That’s why we’re here. We’re here to help you value your website or online business that you’ve created so that you know how much it’s worth if you ever decide to sell the online empire you’ve built.
We will cover the different methods you can use when valuing a website or online business, and you can choose which method is the best for you to value your website or online business in 2021.
The Methods for Valuing a Website or Online Business
There are a variety of methods you can choose from when valuing an online business. You can use any of these methods to value a website or online business in 2021.
Two factors are used when valuing your online business using the earnings-multiple method. They are the seller’s discretionary earnings and multiples.
A seller’s discretionary earnings, also known as SDE, is a business’s historical cash flow that is often determined by the net profit of the business from the business’s income tax statement or its year-end income statement. The SDE consists of the annual profits that a business makes.
The SDE is required for valuing a website or online business using this method because it will be multiplied by a designated multiple that relates directly to the performance of the business.
To put it simply, a higher multiple will mean a higher business value.
So, how is the multiple chosen?
An analyst valuing the business will look at how the business has performed throughout the year with an emphasis on how a business will perform in the future. This is known as predictability.
A business with high predictability for performing well and creating high profits is more likely to have a high multiple than a business with lower earnings and less predictability.
To value an online business using the earnings-multiple method, an analyst will multiply the seller’s discretionary earnings by their chosen multiple.
In this example, we will use a business with an annual earning of $100,000 and a multiple of 2x.
$100,000 x 2 = $200,000
Using this approach, the website or online business will have a value of $200,000.
Discounted Cash Flow (DCF) Method
The discounted cash flow method looks at the business’s future cash flows from an investment to determine its current estimation of value. Because future cash flows are based on investments, the DCF method considers return rates, dividends, interest, and other types of operating cash flow to help establish an accurate value of the business.
The discounted cash flow method can be difficult to use when trying to value a website or online business because there is often no established cash flow trend to work with. Many online businesses or websites can have drastic differences in cash flow from month to month, making the DCF method a difficult one to use when valuing a website or online business.
To calculate the discounted cash flow, you will need to follow these three steps:
- Look at the investment and forecast the cash flow that you expect to see from the investment
- Select a discount rate
- Discount the forecasted cash flow back to what it would be today
Precedent Transaction Analysis
Another method you can use to value a website or online business is the precedent transaction analysis.
The precedent transaction analysis is a more traditional approach to valuing an online business. Like the word precedent implies, the precedent transaction analysis looks at the transaction data that has been established within the business.
The downside of using the precedent transaction analysis method for valuing an online business is that you really need to have access to the business’s transaction data history to determine the value of the business. Without access to the transaction data history, precedent transaction analysis is not the best method to choose.
The precedent transaction analysis works similarly to the earnings-multiple method in that you will need to establish comparable metrics in the form of multiples of earnings or revenue.
Once you have viewed the transaction data and determined if the earnings were in the form of EBIT (earnings before interest and tax) or EBITDA (earnings before interest, tax, depreciation, and amortization), then you can choose which multiple to use.
How to Choose the Right Method for Valuing a Website or Online Business
As you’ve seen, there are three primary methods you can choose from when valuing a website or online business, so how do you know which one is the right one to use?
You’ll need to think about the information you have access to that you can use to value the business.
If you have the earnings that a business made last year, you should use the earnings-multiple method.
- Take the annual earnings from a business’s income tax statement or year-end income statement and multiply by a multiple. If you have information about a business’s investments, you can use the discounted cash flow method.
- Take an investment and look at the forecasted cash flow based on the investment. Then, discount the forecasted cash flow back to what it would be today using a discount rate. If you have access to a business’s transaction data or history of transactions, then you can use the precedent transaction analysis method.
- Look at the company’s transaction history and identify what type of earnings are being used in the calculation so that you can choose which multiple to use.
We hope this has helped you understand how to value a website or online business in 2021 using one of these three methods. The key takeaway that you need to know is that no method is better or more accurate than the other. You’ll just need to have as much information as possible about the business and its earnings to calculate the most accurate value.