Estimated reading time: 6 minutes, 18 seconds
Today I continue my Would I Buy It series with RetirementCalculators.org.
Buying an existing website with content and revenue is a lot like buying a business. I HIGHLY recommend you know what you are doing or have access to someone who does before venturing out and departing from your hard earned cash. For a primer on Virtual Investing you can read my book on Amazon titled "The Virtual Economy - 21st Century Investing Simplified".
With that in mind, this is a fixer upper domain and hasn't been touched in years. There is a little bit of revenue coming in which more than pays for hosting and the domain. I would treat this a little differently than something that was already making money, but would expect a significant discount since it IS a fixer upper website.
I won't go into details in what I would do to "fix it up" for obvious reasons, but I will answer the routine questions that I have set for myself and the audience.
Some initial questions I ask myself after skimming through the listing and their answers.
Can I build this site myself (with ease) and monetize it in a short amount of time? Maybe, you can get some of these PHP scripts on Code Canyon for $5. But the value is in the aged domain, exact keyword match domain, the existing traffic and revenue.
Does the owner accept or discourage escrow? When buying a website, it's important you have recourse, especially when this much money is at stake. You wouldn't buy a house without a proper title search and closing, would you? The same goes here. An escrow company makes sure you got what you paid for and he seller doesn't run for the hills after they get your money. If they refuse escrow (even after I offer to pay for it) then I walk away, no exceptions. There is NO valid reason for NOT accepting the use of an escrow service. In this case, the seller DOES accept escrow.
Can the site be moved to a host of my choosing and is it dependent on proprietary scripts that keep you tied to the seller? Yes, seller was very clear that they will push the domain to the new owner via Namecheap (my preference anyway) and compress all files to put on your own hosting. I won't get tied down and become dependent on a seller to maintain scripts they built or that I have to purchase. Actually, if I have to purchase them, it's more desirable, but I ALWAYS research the company to see if the scripts can be easily replaced or rebuilt. You want a clean break from the seller, if I can't move to my own host or need scripts they built to run the business, I get concerned.
Is Google Analytics installed? No, but I was able to do some extrapolation by using SEMRush and other tools.
Are they willing to give you a tour of the backend? This doesn't apply here since they are scripts.... But I would look for any signs of "calling home" that may be built in. I would have someone look at the code for any funny business. Since escrow is accepted, I would do this before the deal is finalized, so a tour is not an absolute requirement in this case. Screenshots can be manipulated, it's much harder to do it online where you can keep track of the URL paths.
Are there any copyright or legal issues? You don't want to inherit anyone else's problems. Looks like it's not a problem with this site.
How long will it take to run the website, can you outsource it? With a little bit of marketing and lead collection, this site will pretty much run on autopilot.
Will the owner consider fractional ownership? In this case, the amount is so low, it would not be necessary or even worthwhile.
So after I ask these initial questions, I dive into the math. Of course, this is an initial review. For a more in depth review of how I analyze a website, visit myMarketingExperiment.com post.
You are basically buying the future cash flow of the business and the digital assets, assuming the latter are worth anything in and of themselves. For example, an app may not have any earnings per se (it's just an idea and a bunch of code) but how you market it could make it more valuable, so in that case you do not have numbers to go by on the future cash flow.
When I consider a website for purchase I like to use a Risk Adjustment. I adjust my numbers by the percentage likelihood that it will lose it's earnings substantially at any given time, thus the risk adjustment.
I also use a discount rate. This will tell us what the future cash flow is in today's dollars. There are a few ways to determine this number based on what you are doing. If you are borrowing the money, then the discount rate will be the interest rate you are paying. If you are paying cash, it is the rate of return you would expect to receive in something else (I'm conservative here). If all else fails, I put in what the cash is worth to me, is it worth at least 15%, 10%?? It will be different for each person, but these two numbers are VERY important.
Combining the numbers above we get the Risk Adjusted Discount Rate. I'll plug them in later, but first I want to discuss revenue, expenses then perpetuity valuation.
As with with any investment, you need to be concerned with the revenue and expenses. In the case of buying a website you need to get confirmation of the earnings, not just screenshots. You can do this easily if they use Google Adsense... if they use other networks (such as a CPA network) ask to speak to their affiliate manager to confirm. I usually focus on the first three years of revenue and expenses.
Finally, after crunching all the above numbers I get a perpetuity valuation. This is the MAXIMUM I will pay for a website, with rare exceptions. This evaluation is different based on whether I want to sell the digital asset or keep it. If my intentions are to keep it long term, I will add the numbers beyond 3 years...
So for the website in question, this is what we have:
Purchase Price: 1200 (max I'd pay)
Risk Adjustment: 30% (the % risk that the site will zero out and die)
Discount Rate: 16% (what I'd expect on a typical investment of mine)
Risk Adj Discount Rate: 26%
Year 1 Cash Flow: $228 ; Discounted: $156.16
Year 2 Cash flow: $228; Discounted $106.96
Year 3 Cash Flow: $228;Discounted $73.26
The value I came up with is $495.65 That is with the current revenue staying the same and not really doing anything with it.. there are a lot of other factors, but this is definitely one I'd take a deeper look into.
Would I buy it? YES, at the max price I stated. It would definitely be a nice addition to my portfolio.
Would I "fix it" up? YES - most definitely.
Will I tell you how I'd fix it up? NO, NEVER.
Interested in seeing the formulas I use? Find them at Doing the Math on a Virtual Investment.
If you want to see other "Would I Buy It?" valuations, be sure to sign up for my email list to get notified when I post.