Valuing a web business is in so many ways similar to that of a normal offline business. So when you're placing a value on a web business, you don't have to neglect the basic principles of valuing a business. However, to know the precise value of web business, it's essential to consider some extra factors that majorly affect businesses that operate in the digital space. To help with this, experts in business valuations Adelaide have created foolproof methods for valuing any type of web business. These methods of valuing web business can be used to know the worth of your web business if you want to sell it or to know the worth of a web business you wish to purchase. If you wish to learn more about how to value a business, this article will provide you with all the information you need.
Types of Web Businesses
Before diving into how to value a web business, let's start by learning about the various categories of web businesses. There are majorly five categories of web businesses, namely:
- Media and content:
This category of web business focuses on entertainment. Examples are online journals - Lead Generation
They're web businesses that supply leads to business partners - Membership and Subscription
These websites are gated sites that showcase educational content to subscribed members. - E-commerce
The websites under this category are mainly online stores that sell various products. - SaaS and software products:
These web businesses are software tools created to simplify daily living and make businesses easier.
Factors That Affect Valuation Of Various Web Businesses
Several factors play significant roles in the valuation of web businesses. Some of these factors include:
Traffic
Online traffic is one of the major factors that play a significant role in valuing an online business. It is often called the heart of web businesses. Traffic refers to the number of visitors a website receives. The more people visit a website, the higher the chances of making a sale. Though sometimes, the more traffic a website receives isn't usually proportional to the sales. Online traffic often considers quality over the quantity of traffic. The best method for evaluating the quality of traffic on a website is the popular metric called Revenue per User (RPU), which precisely indicates the amount of revenue each web visitor generates. Websites with a higher quality of visitors usually have more value.
Financials and Operations
Another factor to consider in web businesses is the finances of the business. Some of the financials that can affect the value of a web business include; net income, gross revenues, cost of operating the web business, liabilities, assets, trademarks, licences, and many more.
Brand Differentiation
Web businesses that have a well-established brand identity are usually of higher value. Although most online businesses offer the same products and have a similar mode of operation, their products sometimes differ in price. However, web businesses with an already established brand will attract many customers regardless of the similarities with other online brands. Well-known web businesses have the potential to grow their customer base increasingly.
Customer Base
The customer base of a web business is the influx of data from shoppers into the website. A vibrant customer base indicates that the web business has several customers who are loyal to the online brand. The bigger the customer base of an online business, the higher its value.
Methods of Valuing A Web Business
Discounted Cash Flow Method (DCF)
Discounted Cash Flow Method, commonly called the DCF analysis, is one of the most effective and precise ways of web business valuation. It involves predicting the free cash flows (FCF) of the purchase target and reducing the cost with a predetermined discount rate. The discount rate is usually the weighted average cost of capital (WACC) for the web business that's being valued. This valuation method is theoretically based on the time value of money. If you're interested in purchasing a stable and mature web business with predictable cash flow, you should consider using the DCF method.
Traffic Value Valuation Method
This method utilises top ranking keywords in line with the niche of the web business. It's a suitable valuation method for websites that haven't been monetised but have a high amount of traffic. To begin valuation with the traffic value method, the investor is required to do some research to find the top keywords that pull visitors to the website. After finding the keywords, they will then find the monetary value of each keyword (cost per click).
Once the CPC value has been found, you will then multiply each keyword by the number of visitors attracted to the site by those keywords. The answer will give you an estimate of the monetary value of the traffic.
Customer Value Valuation Method
This method of valuation utilises a few parameters, such as Life Time Value of a customer (LTV) and Dollar per Email (DPE). To create a certain amount of customers, the web investor must consider LTV. The Life Time Value of a customer indicates the amount of time spent on the website.
Precedent Transactions Valuation Method
The precedent transaction valuation can't be used independently to value a web business. It's used as a model of reference against other methods of web valuation. This method involves the use of comparable metrics, typically multiple revenue or earnings.
Earnings-Multiple Valuation Method
The earnings multiple is also one of the most effective ways to value web business. It utilises several core metrics such as EV/Sales, P/E multiples, and EBITDA/EV. This method of valuation is increasingly gaining more popularity amongst investors because it's simple and could work with few comparable data. The investor should arrive at a value by multiplication of the seller's discretionary cash flow value (SDC) by a number that is suitable for the web business, according to the multiple-led technique. The "preferred" multiple is when both buyers and sellers try to create their own opinions and come to an agreement before closing the deal.
To value or learn more about how to value your web business, you can talk to us here; https://www.businessvaluationadelaide.net.au/.