This guest post is by Sunil of the Extra Money Blog.
Not long ago I wrote about determining the value of your website or blog here on problogger.net. Now that you know how a web property is or can be valued in the free market, in this article I want to discuss a practical strategy you can apply to increase the valuation of your web property.
The value of a website or blog, or any other business for that matter, is derived from its earnings or free cash flows before interest, taxes, depreciation and amortization—a term referred to as EBITDA in the professional sector.
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For example, if a similar blog sold for four times its earnings couple months ago, there is a good chance you can count on a similar multiple when putting a value on your web property.
What do I know about website valuations? For starters, I sold an ecommerce website in 2007 for $250,000 to one of the top power sellers on Ebay at the time. Since then I have sold several niche websites for five figure cash out deals.
The best way to boost value
If valuations are based on earnings, it is obvious that earnings must increase if the value of your web property is to increase. Many online entrepreneurs take their time growing their web property organically, often on their own due to funding restrictions.
However, once the web property starts generating a little bit of money, one of the best investments you can make to increase its value is by reinvesting those earnings right back into the business.
For example, let’s assume you have a niche website that has 30 pages, each of which brings in $1 a day, roughly on average, from Google Adsense. If you took your earnings and invested in 30 freelance articles, you can hypothetically double the earnings from your website.
Let’s walk through this example with numbers. A 30-page website generating a dollar per page per day generates a total of $30 per page per month. $30 per page per month multiplied by 30 pages gives you a monthly income of $900. If you took the $900, or one month’s earnings, and invested it in 30 high-quality articles at $30 each, you would now have a total of 60 articles. 60 articles generating $1 each per day equates to an income of $60 per day, or $1,800 per month, which is double of the initial $900 you were making.
Now here is a question: since your income has now increased by $900 per month, or $10,800 per year, has the value of your web property also increased by that amount as well?
No it has not.
It has increased even more.
Let’s have a look at the reasons why. $900 generated per month equates to $10,800 per year. If you were to sell this web property at an earnings multiple of four, you could expect to get $43,200 for it. However, your web property now generates $1,800 per month, or $21,600 per year. At the same earnings multiple of four, we are looking at a valuation of $86,400, which is not just $10,800 more, but double the initial $43,200 valuation.
The math reads pretty simply. Assuming the same multiple is in place, double your earnings and it will double your valuation. This example is very simplistic in that it assumes no operating expenses, stable multiples, certain Adsense earnings correlations, etc.
A valuable concept
Even though it’s not always quite this easy, or simplistic in nature, don’t get fixated on the facts. Instead, keep the general concept in mind.
A web property may never grow, or may grow slowly if you were to work on it on your own, but hiring outside help can boost your earnings in the short-term and pay large dividends down the road if and when you sell your web property.
What do you think of this method of increasing the valuation of your business? Do you have additional tips or strategies that you can share with us?
Sunil owns over a dozen profitable niche websites and is the author of “How to Go from $0 to $1,000 a month in Passive and Residual Income in Under 180 Days All in Your Spare Time“, a FREE report you can download instantly from his Extra Money Blog, where he discusses how to create multiple streams of passive and residual income, entrepreneurship, internet marketing, blogging and personal finance.
While it sounds like you’ve had some good success selling websites, and I totally agree with reinvesting profits back into your business… I have to say that the value increasing example you used is total nonsense. If doubling your income was as easy as adding more content to your website, there would be a lot more rich webmasters out there!
I guess it is a simple and easy to understand example, though. I’ll give you that much!
the point of the example is that increasing revenues by $1 doesn’t equate to getting an additional $1 upon sale, rather a multiple. don’t get caught up in the details.
This seems pretty straightforward. I say if you have a niche website making money off every page you’ve got one exceptional website! Anything I’ve ever monetized with AdSense only makes money off a few of the pages. I guess that can be changed with extensive promotion and SEO of every page you write.
How would you translate this into a non-passive-income generating site? One that you have to actually maintain as a service, like a freelance writing business or something? Are those as valuable when there has to be a person involved every step of the way?
Brandon – price multiples typically are lesser for businesses that involve more effort and that rely on external counterparties (i.e. supply chain, etc). that said, the rule of thumb is EBITDA times going price multiple.
I agree. I have over a hundred pages on my site but only a few ever make any AdSense earnings.
Hey Sunlil,
I was wondering how exactly to determine the value of my blog and now I have a much better idea. It makes sense to eventually outsource work in order to increase earnings.
Many of us try to save a buck by doing the work ourselves but for the long term this is not a good idea.
think about how many more ideas you can conceptualize with all that free time? most who outsource often all agree that they should have much sooner
I know what you are saying is right and what I should do, but it just seems that I need the money for other reasons and investments each month, but I’m thinking maybe I should split the income 50-50 between me and revinvestment in the site where the income is from.
Not sure what I will do, but you got my thinking again Sunil!!
Jamie – true definition of an entrepreneur is one who shifts resources from low return to high return endeavors. spend where the returns are greater
I think the balance is clear numbers are just really simple to understand the principle of outsourcing. The problem I find is mostly: how to be sure of your investment. I guess you never are but, still there must be some methods to bet for some assets that will actually make the blog’s income grow. How to find them? I would appreciate your comments on that question in particular. Nice post still!!
good question. certainty is hard to nail down online, however with more experience you get closer to your target. example, if you are building a niche site around a kw that has a adsense payout of $10, you know google gives you 68% therefore you get $6.8 per click. you also know traffic is X visitors per month. thereby, if you get your website to spot one, according to some researches 48% of the traffic comes to you. assuming a clickthru rate of 2% you can narrow in on your monthly earnings. simple as mud?
Also bear in mind if you were to consider selling most buyers would like to see consistent earnings over 6 months+, so make sure you have those stats freely available to any interested buyers.
great point. one hit wonders can’t expect these returns
Sounds a very profitable business to me. If you earn an amount 4 times of your investment then this is where i will put my eggs into. Seems great, Sunil.
Hemen – it is indeed, but not passive by any means. Not initially at least. once established and bringing in positive cash flow on a passive and residual basis, the owner may decide to keep the cash flow, or sell off at a high price multiple and cash out, hence an exit strategy. I highly recommend considering web properties when debating between entrepreneurial initiatives.
Wow. Can’t wait to actually make money to re-invest back into the pot! Woo hoo! Posts like these motivate me. Never quit! (Said the guy who doesn’t make any money yet!)
Great post and easy to digest…thanks.
Ken
glad to motivate. one thing i have learned for sure in this game is that the longer you play it the more fruits it will bear
Agree, Sunil, that reinvesting back into your site is a sensible approach.
I think many Blog(Website) owners are often saying to themselves ” Once I am making X amount of Dollars from this site I will start to invest into it”
The main obstacle for most would be firstly actually having a steady amount of income coming in, whether that be even a small to moderate amount, that could be used for reinvesting into the Blog(site).
On the other hand, It is commonly stated that it is best to invest into your site through many and varied methods, well before money starts flowing in from your site (To establish your site giving it a far greater chance of success )
great points Danile. one can invest upfront to boost a site’s progress, or grow it slowly organically over time until it makes the X you speak off and then reinvesting Y or all of X right back in. either way, investment in your business, if done right, will definitely yield returns faster than without
Easier said then done. As i am just starting in blogging im trying to up my earnings, if there are any earnings at all!! I suppose tho it does take time
Cheers and good blog!
Ryan, it doesn’t take some time, it takes a LONG time…for me at least it did. but I tell you what…when it rains it pours, and when it pours it doesn’t stop for a LONGER time. hang in there my friend
Great article, your “reinvest earnings..” link is 404’d though.
It is no longer 404. My blog was down for the first time ever – it is finally back up after 2 days!
Sunil, that is some great advice. However, it is also important to weigh that not all articles make the same.
definitely, and as a web property grows larger, the amount of pages normalize or cancel out the differences and average out nicely to a predictable number that is consistent over the months.
I really like your approach of simplicity, not over complicating your plans. I hope that doesn’t sound sarcastic, it’s meant to be a complement ;-)
How easy it is to consistently get $1 a day from every single page, Im not sure, but I imagine some pages will get more than others so perhaps this balances out. So yeah, those figures look achievable.
awesome point Dan. i did not read your comment prior to answering Robert’s above. I should have pointed to your comment which is bang on. i am a simple person, and i like it when i am called that :)
Great post Sunil!
I’m curious what is a common earnings multiplier? 2-4 times depending on the market?
Ryan for websites I have seen as high as 8-10. just really depends on the industry, the effort an owner needs to invest to sustain the results, synergies to be achieved from the acquisition , etc.
Wow, 8-10 times is a lot higher than I would have expected! Thanks for the reply!
Thumbs up! The value of this article is that the ‘practical tips’ are actually practical. Nice post.
Thanks Mariana, glad you found it actionable