Need to Value Your Blog Site? Avoid This!

 

Recently I came across this Linkedin Post following reference:

"I own a blog worth $59,417-$72,634. Here's how and why it's valued at that price...

 

The formula is pretty simple:

 

Average Monthly Profit x Monthly Multiple = Valuation

 

The Monthly Multiple is based on:

- Traffic and revenue trend (upward = higher value)

- Domain and website age (older = higher value)

- Revenue streams (more = higher value)

- Traffic sources (more = higher value)

 

My blog currently:

 

- $1,872/mo profit (last 12-month average)

- Traffic and revenue trend: Upward trend

- Domain and website age: 2011 (old)

- Revenue streams: Ads and affiliate

- Traffic sources: Organic search

 

The current average Monthly Multiple for blogs is x35.

 

I start here, then adjust based on the above factors.

 

I also use a valuation tool to get a quick and easy valuation based on some factors.

I used one of the valuation tools I found on one of the sites designed for selling websites. According to their tool, the valuation range is:

- Low: $59,417 (x32)

- Middle: $65,620 (x35)

- High: $72,634 (x39)

 

What Do you think?"

 

We asked the applicant how long he has been trying to sell his blog for a price that ranges between $59,000 and $73,000, and he said that for several months, but no one is interested in buying.

 

So What Do We Think About This Form Of Evaluation?

The first thing that we can say is:

If valuation were so simple, as the questioner described, the applicant would probably not be involved in managing blogs but own a leading valuation agency. But he doesn't. 

 

Valuing any business, including blogs, is more complex than multiplying a profit with a multiple.

 

A Relative Valuation Approach - What is it?

Let's start with the question, what is a relative valuation approach?

 

The equation used to perform the above valuation was:

 

Average Monthly Profit x Monthly Multiple = Valuation

 

This equation is taken from a valuation approach known as the "relative valuation approach." 

 

According to the relative valuation, the assessment is carried out in three stages:

Step 1. Take one accounting parameter of the firm, such as profit.

Step 2. Calculate the multiplier of the accounting parameter of similar companies. If it is a profit - you must calculate the profit multiplier of similar companies.

Step 3. Multiply the accounting parameter (found in Step 1) by the average multiplier (calculated in Step 2).

 

We will apply the method to our example.

Step 1. What is the profit? $1,872 per month.

Step 2. The multiple averages ranged between 32 to 39.

Step 3. Therefore, the value range is between $59,417 (32 * 1,872) to $72,634.

 

In theory, the value calculation was simple and performed adequately. But only in theory. In the following sections, we will see what can lead to a wrong conclusion about the value.

 

Is the data used for the valuation sufficient for carrying out a valuation?

The biggest problem related to how they tried to apply the multiplier method is the data used for the valuation.

 

 

The essential data of the valuation was the monthly multiple. Reading the description - we must ask - Was the Multiplier Based on Similar Companies?

 

Nowhere is it written that the multiplier for similar businesses is between 32 and 39. It is reported that the multiplier is determined based on four parameters: Traffic and revenue trend, Domain and website age, Revenue streams, and Traffic sources.

 

Can any of these parameters help us conclude that the multiple is between 32 and 39? 

 

Traffic and revenue trend (upward = higher value)

One of the most important factors that affect a company's value is the growth rate of sales and profit. The description shows that the revenue is on the rise. That is great. How can we turn this qualitative information into quantitative information?

Moreover, the above valuation was based on profit, whereas we are given that the sales increase, not the profits. Does the fact that sales are increasing also mean that profit is rising?

 

Even if they told us that the profits were rising, there were still several reservations that would make it difficult to conclude that the multiplier is between 32 and 39.

 

The generator of value for the company is the future growth rate, not the historical growth rate. We must know what the future growth rate is, and what the profit volatility is. To conclude that the multiplier is between 32 and 39, it is not enough to know that sales are on the rise.

 

 

 

Domain and website age (older = higher value)

Web promoters believe that Google's algorithm prioritizes older domains, and as a result, they receive more traffic. This belief is excellent for SEO purposes - but does it help us to conclude that a multiplier is between 32 and 39?

The age of the domain and website only matters if they can generate more revenue.

And even if this statement is correct, you need to understand the quantitative relationship: every year the domain is older, the profit increases by how many percent? 1% / 2% / 3%?

And since we are comparing to other companies, we must find out the average multiplier for sites sold with a similar domain age. This figure was not brought to our attention.

The conclusion that one cannot conclude that "Domain and website age (older = higher value)" means a multiple of 32 - 39.

 

 

 

Revenue streams (more = higher value)

The third reason they concluded that the multiplier is between 32 and 39 is revenue streams. I have a Finance Ph.D., and I will be glad to know what is "revenue streams."

There is no such concept in valuation. What exactly is meant? Is it more revenue or revenue from different products? And what is the exact relationship between those revenue streams and the multiplier? Does the evaluated site have the same revenue stream as similar profit multipliers? And if not, what is the difference? And when we write the difference - we mean a quantitative difference and not a qualitative difference.

 

 

Traffic sources (more = higher value)

Regarding the term "traffic sources," - this term also requires clarification. What is the meaning? The clarification should be given quantitatively - in the form X visitors coming to the site every month from the Google search engine, Y visitors from the Bing search engine, Z surfers from Facebook, etc. More than that - a professional appraiser was interested in knowing - how many surfers come every month to similar websites with a multiplier ranging from 32 to 39.

 

 

All the above doubts lead to the conclusion that the factors on which the multiplier is built do not help estimate the company's value.

 

 

What About the Profit?

We were told that the monthly profit is $1,872. Sounds great. But we must ask - what profit is this? Gross profit, operating profit, profit before financing expenses? Profit before tax? Net profit? More than that - when was this monthly profit? This month or six months ago? Is it an average monthly profit in the last year? In the previous two years? Is it based on contracts that are about to expire?

 

The conclusion is that even this profit cannot be relied upon to conduct the valuation.

 

One Last Question

Let's assume all the above data is correct. A monthly profit of 1,872 USD equals an annual profit of 22,464 USD. The asking price is $59,417. The asking price is $59,417. These numbers indicate that the payback period of the investment is 2.67 years, or in other words - that the annual return is 37.81%. Why does the seller want to sell if the return is so high? Does he know something we don't?

 

 

Conclusion

My conclusion is that if you are looking for a company valuation tool, you need to know how to choose the right online tool. You need to know which company developed the valuation software and what their knowledge in Business Valuation is so you can be sure that the result is reliable. If you are looking for a quick and reliable way to test the value of a company - you are welcome to use Equitest. Start for Free by clicking here.