Shoemoney - Skills To Pay The Bills

Buying or selling a website? How much should I pay or sell for?

Posted: 20 Sep 2013 01:15 PM PDT

This ShoeMoney Question was sent in by Mark from Gainesville, Florida. Because Mark’s question was chosen he will receive a ShoeMoney Shirt and a signed copy of my best selling book “Nothing’s Changed but my Change – The ShoeMoney Story”. To submit your question just email questions@shoemoney.com and if yours is chosen we will ship you out a shirt and book at our expense anywhere in the world.

Guide to buying and selling websites from my personal experiences.

In this guide I will walk you through my real life process, using real life examples.

To date I have purchased over 10 websites and sold 5 companies which were “web properties”. This post is based on my experience in doing so. Below I am going to take you through a deal that happened a couple months ago. The facts are real. The name of the property is not revealed.

While I am going to talk about my personal experience and real numbers keep in mind that the site is ONLY worth what the buyer(s) will pay.

Important legal protection notes – Please keep in mind I am not a lawyer, so any legal references I make should be taken with a grain of salt. With that said, I do have a lot more experience than most attorneys that I want to share because most know nothing about the internet and especially valuations. Please always consult an attorney. I recommend Fraser Stryker. They have handled all of my legal dealings in buying and selling websites.

Seller: When selling a website NEVER reveal any internal details with the potential buyer without them signing a nondisclosure agreement and possibly a non compete form. This way you’re protected from the person revealing any of your data, but more importantly you know that they are not just inquiring so they can steal all your information as to how you do what you do. The standard length of the terms for these is 3 years but I have signed up to a 5 year agreement. Consult a lawyer for what is best for you but generally these are 3-5 year terms.

Buyer: The process of buying a website can take months to properly evaluate. The higher the dollar value, the more due diligence you are going to want to do on this to make sure your investment is protected. During this process you want to make sure your time is not wasted. While this process goes on you will exhaust a lot of resources. It isn’t just your time in doing all the due diligence that you’ll be paying with; the hard expense and time spent will be your lawyers. Once you have agreed on a price, then sorting out the contract to purchase has to go to the lawyers… They will go back and forth forever racking up a HUGE bill. Again, this depends on the price of the site and whether you feel it’s worth it or not. Again, this can really depends on the price for the site you’re considering. For me – sites that are below $100k I have purchased with some basic agreements that I slightly altered from previous deals, or found on docstoc, and the transaction was done within a week. In a couple cases where the price was a few thousand the deal has closed in as little as a couple hours and I wired the money with zero agreement in place. But I am in that position where I am willing to risk that price without going through all the legal hassle. You might be in a different position. A lot of times when the seller is in talks with someone they will pursue other buyers and try to get a bidding war going for the site. This can all be protected by a LOI (letter of intent). This LOI will outline that you intend to purchase the website within X amount of days. During this period, the seller is not allowed to solicit other buyers. You can also spell out items like you will share 50/50 in the buyer’s legal expenses or whatever else you want to put in there. Again, consult a lawyer.

Side Note: When buying or selling if the site is over $500k I would consult a broker to handle the sale. Companies like RBC will handle all of this for you for a percentage of the sale. You shut up and let them handle everything. If the price is below $500k (broker’s evaluation) most brokers will not be interested. They are the go-to company in the industry for negotiations and will get you top dollar for your website. With that said, sometimes they will complicate the deal, refuse to sign a LOI or NDA, and be greedy. Plus, they will want you to sign an agreement with them that they are the exclusive representation for any sale of your site within X amount of time. This sucks cause if you get a offer on your site you can’t sell it without giving them their cut even if it’s a unreal deal.

Buying a website

Let’s just get started.

Whether people come to me who want to sell their site or I inquire about them, there are several questions I ask right off the bat:

Server operating system, core code language, caching method, database type ?
Unique visitors to the site per day, average per month, and per year over the last 3 years.
Main sources of traffic?
Gross topline revenue?
Profit per month averaged over the last 12 months.
Streams of revenue?
Number of Employees?
Is the existing team open to staying with the company?
Payroll expense broken down by position?
Server expense?
DMCA Takedown requests? If so, how many in the last year?
Any existing or past litigation issues?
Links to your privacy policy and terms of service to the site?
Do you collect email from current users? If so, how often do you email them?
Demographics of users if possible – geo location, age, sex, annual income, position in company, social profiles, social interests, whatever you have?
Any offers you have received in the past?
What sort of multiple are you looking to get (how many months revenue)?

Here were the response and my findings:

This site is 100% user contributed content.
It was doing on average 1.5 MILLION users per month.
The site’s standard profit was 99% of the gross revenue. Only expenses were server expenses.
The site was making 40k per month in profit.
The site was maintained by one person. The owner that was taking no salary.
The site was powered by 3 Linux servers. A main webserver running nginx and 2 mysql servers in round robin pulling data. The site was memcached out and super fast.
The site’s gross revenue streams came from banner ads, subscriptions, and other small misc stuff.
95% of the traffic was direct.
The guy selling the site gave me direct access to his Google Analytics so I was able to verify the sites growth, demographics, and everything else.
The guy said he had received no previous offers.
Over 50 take down requests today that had a backend that would not only remove the content but mail the person thanking them for reporting and letting them know it was removed. In seeing this backend I was surprised how easy it was and you could select all and it was done in less than a minute. If you manually reviewed them it would take less than 10 minutes but he said he just removed everything as it wasn’t worth the hassle.
He had not ever had any legal issues other than the take down requests. Nobody pushed them any further in the 10,000 plus.

His valuation and price to sell- $3,000,000.00 (3 million dollars)

My valuation process of the web property:

Here are things that hit me right off the bat.

The industry starting point for a web property is 1 year profit * 4 years.

His evaluation (asking price) was based on 6.25 years of profit at $3,000,000. My math – $40,000 per month * 12 months * 6.25 years = $3,000,000.00. That’s silly.

Here is what I really like about this site personally (which is a biggest part make or break for me):

It’s a site that I use EVERY day. It’s a great site with really cool features.
From a user perspective the interface is easy and simple.
From a development perspective it’s good to go. When I was given a read only login to the site I saw that all the code is VERY well written and commented properly. For my existing developers to jump in they would not have to research much on what did what.
Based on looking at his analytics the site has 85% organic traffic. This is a huge factor. The site is not going to live and die with SEO as is and is what I like to call “traffic stable”.
The site has ZERO seo optimization. The site is a PR8 and just doing the title tag and url properly it should kill it.
The site is doing NOTHING with emails. It is collecting over 15,000 emails per day, purely, organically, double opted in, and never emailing the users anything at all. Even if I just sent out a newsletter 2x a month that simply recaps the most visited pages and had cpm/cpc ads in the email that should rake in a decent amount of cash.
The site is doing NOTHING on mobile.

Here is what I like about this site from a financial growth aspect:

If I stuck with just the networks he is using now in talking with them they would pay me 10% more than he is earning right now.
He is not monetizing his site via affiliate links whatsoever.
Being the site has TONS of text content I think placing something like skimlinks or any inline text advertising would generate a lot of revenue.
The site is very geared to programmers. I believe I could strike direct deals with major brands like Intel, HP, and Oracle.
I think there is a possibility the site could do really well with a Job Board or classifieds being it’s SO focused on something that is VERY hard to reach for employment – good developers. I even envision doing this on a geotargeting level.

My crazy brain side note – He was asking a even number for the website. From a psychology perspective that round number and that he is a one person shop I assumed the following things:

He just came up with a random number.
He had not done any industry research for what similar sites have sold for.
He had a lack of confidence in himself to keep the site running and generating revenue.
He is just not experienced in selling a website.
He is ready to move on to the next project.

Of course there is no quantification for these… It might seem weird to you that I made all those assumptions based on the fact he threw out a round number. I still don’t know if they were correct but from previous dealings I have found them so. This can be good or bad depending on obviously which ones are actually true.

I currently maintain 3 major companies. This blog ShoeMoney, My annual conference, and my newest company the PAR Program.

These take 100% of my time and I have zero time to run a property like this.

Here are the expenses that I have to take into account should I decide to buy this site:

A CEO/COO/manager like full time person in charge of growing the site’s revenue and the day to day. This person would ideally work off of a yearly salary ($75k) plus a percentage of the growth of revenue of the site. Finding the right long term person to fill this role would take time.
A part time server admin. This would take away from our existing tech staff. It would not require a ton of time but I estimate $15k/yr for that position/time.
The server expenses would be significantly more. Our servers are all enterprise level and full managed with backups and everything. I would want to double the amount of servers in place ($1,500 a month) plus the expense of 2 load balancers for the front end which are $10k+ per (one for failover) to balance the front end web traffic. His servers were on the very cheap.
Even though I would like to be completely hands off, it is going to require some of my time. The majority of which is finding the right manager for this property. That is a major pain in the ass. But ongoing, my time would be required for monetization. I will go into this more in a bit but let’s just factor in a small dollar amount as $2k/month.

Baseline initial valuation:

My hard expenses based on above would be $126,000.00 annually rounded-up for misc crap that will no doubt come up – let’s just say $150,000.00 annually.
So here is where we are now based on a 4 year multiple.
His stated profit per year $480,000.00 * 4 = $1,920,000.00
Subtract my expenses at the same 4 year valuation for profit would be $1,320,000

Big Concerns after purchase going forward:

My biggest and really only concern is the legal risk. He was getting a lot of takedown requests per day and the site did not look, at first glance, that it could be making nearly the money it was. This could have kept people at bay from suing him with the content on the site. He tried to assure me that he is in full compliance with the DMCA and fair use acts so nobody could sue him. From my own experience I know that’s bullshit; anyone could sue for anything. Doesn’t matter right or wrong. If it’s a big enough company then it’s your ass, cause you will go broke just defending yourself.

Why this is a concern:

In 2007 I sold a company called AuctionAds. The sale amount I can’t disclose. Techcrunch said it was $15,000,000.00. I don’t know who wrote that or where they came up with that but I can tell you that was not the sale price.

But it doesn’t really matter does it? The company that bought the site is a 1.2 BILLION dollar company so people knew that it wasn’t chump change. The ridiculous amount of people that came at me and the company that bought it; it was crazy. I had a patent troll law firm who stated they had a patent on AFFILIATE MARKETING and since there was an affiliate component I owed them money. One guy said he had a patent on a digital advertising network and wanted money. People who were making money as users but not as much after I sold it contacted me saying I should give them money since I sold it.

So in my view, Auction Ads had VERY little legal risk. Now this site was getting over 50 legal letters per day. When the word gets out the site sold… and even if there is a non disclosure in place – people will find out or make their own estimation of the price and openly post about it. So I was really nervous with this site in that respect of companies realizing the company was now backed by a company with money.

My adjusted valuation and offer:

So after taking into account my crazy brain assumptions, my valuation after hard costs, and my vision for growing the site, the legal risk, and the standard starting negotiating point, I offered $1,232,483.00.

How did I come up with this offer?

The number I have in my head max I would pay is 2 million which is largely based on where I can take the site.
I knew immediately without even bringing in anyone just by moving his existing ad network over to my account I would make at least 10% more. Because of my position in the industry I get a lot of sweetheart deals.
Growth of the site was somewhat stagnant. It was close over the last 12 months plus or minus a few thousand a month. This really doesn’t factor much but I feel it’s important to mention because if the site was growing month after month I would have valued it significantly more based on the amount of growth.
Missed opportunities on monetization… geez…

Now you are probably asking yourself why the weird complicated number of $1,232,483.00.

Pro Tip – You never want to counter with a round number like 1.2 million or something like that. By having a complex number it shows off the bat that I really drilled down on everything. This is purely from my experience but I have found success with that.

The eye opening ‘come to jesus’ moment with the seller:

When you write your offer email it is VERY important to spell out why this site is worth nothing compared to what they are asking for. The seller needs to have a real “come to jesus moment” about the true value of the site. You need to EXPLICITLY spell out not only all your reasoning for your valuation but the PAIN you are going to have to go through. WAY OVERSTATE any negatives. I vastly expanded on my big concern of the legal risks and even included quotes from my lawyers who cited case law on why this was such a huge risk for me. Obviously really point out that you are hesitant and have other properties you are looking at but felt strongly that you would be a buyer for that amount. If you don’t have a LOI in place to prevent you from negotiating with other properties, you can say something like you have 2 other properties your investment group are looking at and they want to get in on one of these deals soon. For those who don’t recognize the psychology it’s a bit of social proof and scarcity. I don’t want to go into the psychology too much but those are always good.

Did the deal happen? Now I would like to tell you this was a cinderella story and I got the site for a great deal and all that but this kid was hung up on 3 million. About half of my max I was willing to pay. He was pretty insulted by my email and responded pretty aggressively how I was clueless and it didn’t take a staff of people to run and all that. I responded simply by saying I completely understand, and respect his valuation of the site. I even went on to say that someone not in my position who has the skill-set to code php, manage mysql servers, experience with a site doing 1 million + unique visitors per day, and has nothing else to do but this full time and also has 3 million in cash would be his buyer. Ya good luck with that but whatever I wish him the best of luck. He responded more cordially and thanked me for taking the time to go through the process with him. He said he was going to fish around a bit and see if there were other people interested. Side note – He recently disclosed to me he bought the site 4 years ago for ONLY $5,000. Good on him!Now before I get on to selling a site… I wanted to share my personal experience in selling nextpimp.com. At its peak the site made close to $2,000,000.00 in one year. I was in the exact same situation as this guy.. I had zero expenses – one man shop doing everything from coding, server stuff, monetization etc etc. I had people come to me with offers but I wanted 10 million dollars for the site. Nobody was interested. My ego got in the way and I was positive it was going to be the next YouTube. Long sad story short – In 2010 (after 7 years since it started) the money drastically was down. I sold the site for a fraction of what it made in one month =(.

Selling a website

This is actually a pretty fascinating real life experience I had. I had a website that I tried to sell to several companies for only 25,000.00 and nobody was interested. Then one day a company called me and I ended up selling the site for over $150,000.00. Thanks to the TV show Shark Tank!

Selling the site section of this post is shorter than the buying section because a lot of it is up top in the other section but here it is.

A couple years ago I had this site that was a web service. I don’t think many people knew that it was even mine.

The details of my site for sale:

The revenue model was to offer the service initially for free then up-sell other services on the backend. This was done through an email drop campaign giving value but up-selling people into our subscription model, affiliate offers, and random other stuff.
The site was getting about 500 new users per day into a very specific vertical.
The site didn’t do a huge amount of traffic but the conversion rate for the free users was huge like 70% of the users that visited the site initially opted in.
The site paid out 100% to affiliates OR users could get additional products in the service by referring friends.
The majority of traffic was coming from affiliates.

The site grew very quickly between affiliates or active users referring people. It was a great viral free user acquisition method.

The first month revenue was about $1,000 first month, 2nd month – $2,400, 3rd month – $4,200, 4th month $7,200. This was top-line gross revenue. Only about 10% was profit. So while those numbers looked awesome in growth, and they were, the 4th month in it was only at $720 in profit. It was snowballing well though because a lot of it was subscription and compounding.

So the valuation of the site from a baseline of 4* annual profit on the high side of the 4ths month revenue would be around $35,000.00.

I was only into this site about 4 months but it was a side thing that turned into something bigger and now needed support and affiliate management and all that crap I hate to deal with or divert resources to.

So I was ready to sell it.

I figured it would be a easy quick sale. Remember these users were awesome leads in a very targeted niche. Most of the companies that service these users will pay $2-$5 PER LEAD so I figured I would have people going nuts trying to buy this site. Forget about current revenue the value in hundreds of free leads per day was amazing. Or so I thought…

I went to several companies pitching it to them at $25,000.00. I was amazed that NOBODY was interested. I mean WTF!!!!!

Then a friend told me about this show called Shark Tank. If you have never seen, basically people pitch all their ideas to these 5 investors and sometimes they will fund them but most of the time the ideas are stupid. But what I found amazing was how the “Sharks” positioned their deals. It really got my brain cooking.

Then one day a company in the vertical called me and said that they heard I wanted to sell it and wanted more information about it.

The Position:

They asked the standard questions… traffic, revenue, asking price, offers before etc..

I cut the guy short and said, “I appreciate your interest and as you can imagine we get a lot of interest because it’s generating so many free leads per day that would be a goldmine for companies like yours. Just to get to the point I would take $125,000.00 for 90% of the website. I really love the site and want to stay involved so I would still like to be part owner. Also if the site sells within 1 year I want 25% of the purchased price. I am sure you can get 10x what I am asking for the site and if you are just looking to flip it then I would like to be compensated for that.”

Sounds crazy right? Well the guy said that sounded fair and the deal was done within 48 hours from the time he called me.

Here is the kicker. He sold his parent company that bought the site only 3 months after he purchased it. He emailed me to let me know and that he was not sure how to evaluate what 25% of that property would be worth being it was wrapped up in a big deal. He offered to send me $25k extra instead of trying to figure out what 25% of that part of the sale was worth. I am sure I could have got more, but I agreed to it. I figured – shit I already am happy, let’s not get greedy.

So that is how I sold the site. A site I couldn’t sell for $25,000.00 – I was able to sell for $125,000 with a 25k bonus kicker. Thanks to Shark Tank.

Its ALL about the positioning.

I have been involved with so many website sales in the last 5 years it’s crazy. Whether it’s my own or someone else’s. I also consult with this Venture Capital firm out of Omaha Nebraska that buys and sells websites, anyway, what I am trying to say is please pay attention to this when you are selling:

POSITIONING IS EVERYTHING

I made several mistakes in selling the site above.

I was contacting people and I sounded desperate.
I had thrown out a round number, 25k I was asking.
I was trying to sell a 25k site to 5-20 million dollar companies.

In the example above I not only changed the price but I also drastically changed the way I was selling it. I was no longer just looking to sell something cause I was done with it.

By holding on to a percentage of it I now took the position that I was looking for a “partner” that would have full control over the site but I still wanted to be an owner.

I also was now asking a price that the company would pay attention to. Again this was a 10 million dollar firm and while 125k property was not a HUGE risk for them it also was significant. A 25k purchase is perceived as “cheap”.

Important thing about taxes! Specifically long and short term capital gains. If you own a property for over a year then you only have to pay around 15% long term capital gains tax. If you own the property for less than one year then you are taxed at your normal rate (I think).

Anyway with the Auction Ads example it was about a 22% difference if we could get long term capital gains. Even though I only had that company for 4 months we were able to get long term capital gains because the core assets contributed were from another company called ShoeMoney Ads which was over 2 years old. That was a make or break deal so I am glad that worked out.

Reasons not to sell your website:

Ok here is the thing. Having excess money sucks. Now you have to figure out what to do with it. Yes I know…cry me a river. Just ask anyone though it’s a major pain in the ass and sometimes it seems like all you can do is lose it. Mo money Mo problems – Biggie

Do you have a plan on what you are doing with the money you are getting? If it’s just going to be to put in the bank then DO NOT SELL IT. I can’t tell you how many people I know worked their asses off to build a website. Sold it for 4 times revenue. Went on to their next ventures that flopped and now it’s 5 years later and their original property has grown 10x the size and they have a little money in the bank left over.

Reasons to sell a website:

If you are getting long term capital gains in one lump sum that is pretty awesome. Especially when you take into account how long it would have taken you to earn that much money paying your normal income tax. Also factor in if you sell and get one lump sum you will be gaining compounding interest on that money which even makes it sweeter.

What I am trying to say here is that your valuation might be at 4 years revenue but your actual true profit might be 7-8 times revenue by getting long term capital gains and compounding interest on that money. Hopefully that makes sense because it is a BIG deal.

Seth Godin wrote a book about quitting called The Dip. I don’t mean to say that selling your website is quitting… but when you think about it… it is. The best reason to sell a site is that it’s not something you enjoy doing anymore. For me AuctionAds, when it hit 2 million dollars a month in revenue, was now a bigger operation than a one person show. To grow the company I needed to hire a full support team, CEO, CFO, etc etc. Bleh that was not for me at that time. I was done.

Key Points I want to leave you with

Be careful – I have known people who have gotten sued for false or misleading claims when selling a website. While that might sound pretty easy and straightforward lemme tell you I have seen some CRAZY shit. Here is a example that isn’t even that extreme. One of my friends bought a domain name from someone saying that it was for his father for a father’s day present so it wasn’t really worth that much to him. Well he took the domain and launched a website that became very popular. The person he bought it from sued him for 10x what he sold him the domain for. He cited that the person made false claims on why they wanted to buy it and for some reason I guess that holds a little water. Anyway my friend ended up paying him 50k to go away (he only bought the domain for 10k). Anyway just be careful.

The deal isn’t done until it’s done - There are several reasons deals fall through. Usually from my experience its from a pride perspective over little stupid dumb shit. I was selling a site in 2009ish and everything was cool except for this one little stupid thing that me or the buyer were willing to budge on. It was so stupid. But it ended badly… something along the lines of me telling him to take his agreement and shove it up his ass. I know… Super Classy! But 2 days later we ran into each other at a conference and he was the last person I wanted to see. Long story short we got hammered together and the deal was done the next day.

Now on the other side of that I have had deals that were completely done and wrapped up. Even signed contracts….. but were not actually executed until the money was delivered. At the last minute the person pulled out. Yup it happens. It’s not money in the bank until its money in the bank.

Have a plan – I know I touched on this before but no matter if you are buying or selling have a plan with, know what you are going to do with the property or money you get from it. It sounds SO EXCITING to sell a company/website for millions of dollars… But there is a reason 80% of lottery winners end up worse off after 5 years from getting their money. I’m telling you money can really suck… especially if you have never had it or any experience on what to do with it.

On the flip side of that when buying FOR SURE have a plan. With my example in the first part of this you can see I had a general outline of what I needed to do as far as staffing goes… my expenses for that… my monetization plans.. So keep that in mind

Guy Kawasaki says there are 3 times you will sell your site: Too early, Too late, or just at the right time. I can’t agree more.

I hope you enjoyed this post. HOLY BALLS it’s about 5500 words! One of my longest if not the longest blog post I have ever wrote.

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