So… you want to buy (or perhaps even sell) an existing online business? How do you work out what it is really worth? When is the selling price reasonable, or way over the mark? Find out what is really important when it comes to deciding what an online business is worth.

Recently I received a call from a lady asking my thoughts on an e-business she was interested in buying… and whether the $50k asking price was in the ball-park for the actual website and business up for sale…

So we had an extremely interesting discussion about the various things she should look at to do her “due diligence” to decide whether it was a good opportunity for her.

Now while this revolved around a lot of things to do with search engines, traffic (free and paid) and actual web logs and Google Analytics figures, and customer databases, and… and… and… and many other factors that will only create a total state of confusion at this initial stage…

Deciding whether the PRICE being asked is reasonable, really boils down to one thing and one thing only…

How Much Money Is The Site/Business Making?

After all… you ARE in this to make money, so if you are going to spend serious dollars to purchase an existing online business, then this is the only factor that is important in determining an appropriate selling/buying price for a website.

And we’re talking NET profit here (after all expenses)… and not just total turnover or gross profit.

By way of definition… gross profit is turnover MINUS the purchase cost of the items you sold. Then you arrive at net profit by deducting all your expenses (hosting, domain name, auto-responder and other web services, web development and maintenance costs, advertising, postage and packaging of physical products, etc).

And an important element often not included in the net profit calculation with online businesses here is the TIME it takes for the owner to “run” the business.

So make sure a “wage” expense is included here for the number of hours it takes to manage the business.

And now… once you have an accurate “net profit” figure based on past profits generated by the business for sale, you can start to work out what it is really worth.

Standard Practice Not So Standard on the Web

Most advisers would now suggest that you take a multiple of around FIVE times the annual net profit to arrive at a “realistic” selling price.

With my example, the $1300 “profit” per month ($15,600 pa) is a multiple of just 3.2 with a sale price of $50k, so it may almost begin to look as if the business is a little underpriced…

BUT… Don’t Get Too Excited Yet!

While such a multiple may well apply to an offline “bricks and mortar” business, it is often way OVER the mark for an e-commerce business.

And yes… there are some exceptions to this, but I am NOT talking about million dollar web businesses here. This discussion is about online businesses that are a lot more affordable to the average person.

If you haven’t already realised it, things change VERY quickly on the ‘net! And what is working well now, may not be in 6-12 months from now – “evergreen” content excepted.

With web businesses, the multiple used to estimate its worth changes quite significantly to reflect that higher risk. So it’s more accurate now to think in multiples of MONTHS rather than years.

So let’s start with that $1300 a month net profit, and work it out using a multiple of 10-18 months – the actual multiple will vary quite significantly depending on the type of online business being sold – but for this example, let’s try say 14 months as a starting point…

14 x $1300 = $18,200

Even at a higher multiple of 24 months ($31,200) it would seem this business is way over-priced because the seller is using the wrong technique!

Online, past profits are really NOT as good an indicator to future profits as they are with offine businesses. And when the sources of the “regular” profit are not so secure, an even lower multiple should be used to estimate the worth of a web based business.

Imagine if you have to BORROW money to finance this purchase… factor the cost of interest in (IF you can get a loan for this type of purchase in the first place) and it’s going to take a very long time to get a return on your investment.

Finally… Factor In YOUR Time

Yeah… I know… most small business people work for the “love”, often paying themselves very little while they get their business off the ground.

But for the purposes of this calculation, look at the skill set needed to run this web business and how much time you are going to spend in it.

The person who currently runs the business already KNOWS how to do things – MANY things – very quickly…

How long will it take YOU to get up to speed?

Is it something that YOU can do? And how long will it take you?

Or is it something you may need to outsource? And how much is that going to cost?

What’s that all worth to you relative to the price being asked? Are you simply buying yourself a job, rather than a “business”???

Obviously, there’s more to this if you are still interested in purchasing an online business after making these initial calculations… Further analysis will help you work out if an existing site has some untapped “potential”… and whether you can actually “do” something to tap into that.

But for now, we have concentrated only on determining what a “realistic” price might be for an online business.

Quite often, as a seller, the reality is not you think your site should actually sell for:)

And as a buyer, you should be looking at minimising your loss if things go pear-shaped.

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