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Website Value Based on Accurate View of Profit

Stored in Website Management and tagged
website profit
© 2018 Scott Bateman

Website value is a popular topic on message boards around the Internet. The postings often focus on revenue as a way of establishing a site’s worth. But revenue is misleading.

A number of websites have calculators that claim to show the value using publicly available information. They included estimated audiences from Alexa.com, a site’s presence in the search engines and other factors. Those numbers are misleading as well.

The best way to determine website value is with an accurate view of profit.

Why is Revenue Misleading?

A common measure of the value of a company on the major stock markets is price divided by earnings, or the price/earnings ratio. The average ratio usually ranges over time between 15 and 20, meaning that the company is valued at 15 to 20 times its profit.

A small website that generates $1,000 a month in revenue and has $900 a month in expenses has a monthly profit of $100. At 15 times its annual profit, the site is worth $18,000 or $100 x 12 x 15.

Why is revenue misleading? What if a second small site also has $1,000 a month in revenue and $1,000 a month in expenses. It is left with no profit at the end of the year. Why would someone pay $18,000 for a site with $1,200 in profit and someone else pay $18,000 for a site with no profit?

An online publisher who is thinking about buying a site, selling one or just wonders about the value of a current site should start with profit as a way of determining its value. Once that value is established, the publisher should look at revenue, audience and value of the domain name, among other considerations.

Growth Rate Impacts Value

The value analysis only begins there. A tour of websites that sell websites will show they often include the revenue statistics over a period of time. If those numbers are declining, which is often true these days, then the profit is probably declining as well.

So a site that is worth $18,000 today may be worth only $12,000 next year using the same profit analysis. Stock market experts have an answer to that problem too. They use a ratio called PEG or (price / earnings) / earnings growth rate.

Let’s say a site has an estimated $1,200 net profit this year and $800 last year. The earnings growth rate is 15 percent. If the site is worth 15 times its earnings, the formula for PEG is 15 / 15 = 1.0.

A site that grows its profit higher than its market value (using the price / earnings ratio) is more valuable and should attract a higher price if sold.

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