Shoemoney - Skills To Pay The Bills

Buying or selling a website? How much should I pay or sell for? Part 1

Posted: 25 Sep 2013 06:30 AM 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.

Don’t expect every answer to be this long. I started writing and before I knew it I was 5,000 words in… so I put it together as a guide LOL.

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 =(.

Check back tomorrow for Part 2 of this series.

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