Valuing an Internet Business - that old chestnut

Valuing an Internet Business - that old chestnut

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Dave2P

Original Poster:

784 posts

179 months

Thursday 17th July 2014
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Been helping a friend out who has an investor interested in his business; both see big potential in building out from where he is at the moment - for which it'll need investment.

Investor wants a minority stake (prob ~10%, maybe a bit more), and brings good contacts and experience into the mix.

Background is; business always in profit and with 6-figure turnover for last 7 years. Website traffic is several Million annually.

So how do they value the business? Any common rules-of-thumb?

I know, I know; how long is a kettle of fish? how many Instagrams? etc. but any pointers as to where to start negotiations would be very much appreciated. Thanks in advance for any input.

eps

6,272 posts

268 months

Thursday 17th July 2014
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Surely just value like a normal business...?

nstar

38 posts

146 months

Thursday 17th July 2014
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Profit x a multiple (based upon future growth / performance)

Any patents or property owned will also help.

burwoodman

18,709 posts

245 months

Thursday 17th July 2014
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They could use the 'fantasy' model ala most tech cosy and expect 100x earnings or get real and look at 3-4x

KFC

3,687 posts

129 months

Thursday 17th July 2014
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eps said:
Surely just value like a normal business...?
It would all depend on where the traffic is coming from.

If its all coming from Google then they could take it away overnight. Moreso if you're doing something spammy to acquire it in the first place.

So there isn't enough info in the OP to even take a speculative guess at this.

22s

6,337 posts

215 months

Thursday 17th July 2014
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Easiest way is via multiples - find a firm doing similar things that is publicly traded and work off of that. However, if it's an online shop then using Amazon's PE ratio isn't going to work.

Could start by looking at competitor firm VC or angel investmnets in recent years. Same caveat as above.

Since it actually has cashflow numbers for several years, you could even run a DCF model to value it if you're any good with finance or have a friend in a bank who can do it quickly for you.


KFC

3,687 posts

129 months

Thursday 17th July 2014
quotequote all
22s said:
Easiest way is via multiples - find a firm doing similar things that is publicly traded and work off of that. However, if it's an online shop then using Amazon's PE ratio isn't going to work.

Could start by looking at competitor firm VC or angel investmnets in recent years. Same caveat as above.

Since it actually has cashflow numbers for several years, you could even run a DCF model to value it if you're any good with finance or have a friend in a bank who can do it quickly for you.
You're still completely ignoring my point above about the crazy volatility in where your traffic is coming from.

Frimley111R

15,537 posts

233 months

Friday 18th July 2014
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You value it in much the same way you value an offline business. For example:

What sector is it in?
How many customers does it have?
How many are repeat?
How scalable is the business?
Is it owner managed or are there staff?
Where is the income derived from?
What are the profit levels over the years (growing/slowing/stable?)
How many website visitors are converting into paying customers?
Etc.

KFC, I am not sure what you mean by "If its all coming from Google then they could take it away overnight." however "Moreso if you're doing something spammy to acquire it in the first place." if the business has been running 7 years with a six figure t/o it is unlikely to be employing such techniques.

We value many businesses over a range of sectors and sizes and, as the OP says, it's far more complex than a simple multiplier of profit or whatever you choose. A business may have valuable intellectual property, be a market leader, be in a niche that no-one else is in, have staff with unique/rare skills in the market, a strong brand name, a diverse and recurring revenue stream, etc. All of these have a value which are not taken into account with a simple multiplier.

OP, you may also find this thread useful regarding taking a stake in a business (on the same page as this thread):

http://www.pistonheads.com/gassing/topic.asp?h=0&a...

wilwak

759 posts

169 months

Friday 18th July 2014
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If the new investor bring experience and contacts to the business then it may be worth giving him the 10% for free (or almost free).

If having him onvoard is a bonus to the business and it's future then you don't need to take his money.

DSLiverpool

14,672 posts

201 months

Friday 18th July 2014
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Dave2P said:
Been helping a friend out who has an investor interested in his business; both see big potential in building out from where he is at the moment - for which it'll need investment.

Investor wants a minority stake (prob ~10%, maybe a bit more), and brings good contacts and experience into the mix.

Background is; business always in profit and with 6-figure turnover for last 7 years. Website traffic is several Million annually.

So how do they value the business? Any common rules-of-thumb?

I know, I know; how long is a kettle of fish? how many Instagrams? etc. but any pointers as to where to start negotiations would be very much appreciated. Thanks in advance for any input.
Not many net companies are worth much unless sold to a competitor or have solid repeat (ie not net) business and not many have this.

If your pal has trundled on for years making a small profit and this guy can light the afterburners and make much more profit I would GIVE him a % based on certain achievements over a set period of time.

No risk for your pal (unless the guys damages the biz) and a set goal for the other chap

Frimley111R

15,537 posts

233 months

Friday 18th July 2014
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DSLiverpool said:
Not many net companies are worth much unless sold to a competitor
That's simply not true. The best example is that such a company could be sold to a business with complimentary products. Lets say it was (as we're petrolheads) blackcircles.com buy alloyrefurbishing.com. Each then sells their new products to the other's existing client base. Both businesses generate more business immediately.

DSLiverpool said:
or have solid repeat (ie not net) business and not many have this.
This is true of any business, whether online only or a combination. An online business is just as likely/unlikely to have repeat customers. This is more dependent on sector.


KFC

3,687 posts

129 months

Friday 18th July 2014
quotequote all
Frimley111R said:
KFC, I am not sure what you mean by "If its all coming from Google then they could take it away overnight." however "Moreso if you're doing something spammy to acquire it in the first place." if the business has been running 7 years with a six figure t/o it is unlikely to be employing such techniques.
If you are not sure what I mean, then you aren't in a position to value an internet business properly.

Plenty businesses get away with doing something spammy for months/years before finally getting nailed for it and losing 90%+ of their traffic. The six figure part is irrelevant, it can still be all spam. I turn over 6 figures a month and 90% of that is profit, yet my business is probably worth next to nothing as its impossible to value it since all my traffic is coming from extremely dubious sources.

DSLiverpool

14,672 posts

201 months

Friday 18th July 2014
quotequote all
Frimley111R said:
DSLiverpool said:
Not many net companies are worth much unless sold to a competitor
That's simply not true. The best example is that such a company could be sold to a business with complimentary products. Lets say it was (as we're petrolheads) blackcircles.com buy alloyrefurbishing.com. Each then sells their new products to the other's existing client base. Both businesses generate more business immediately.

DSLiverpool said:
or have solid repeat (ie not net) business and not many have this.
This is true of any business, whether online only or a combination. An online business is just as likely/unlikely to have repeat customers. This is more dependent on sector.
I accept you know the score far better than I ever will and I was being simplistic - competitor / complimentary side seller agree 100%.

On repeat business however a business that is heavily dependent on the days google fix or ebay / amazon for unforcast business is very much out of fashion especially since Google got all Panda and Penguin on companies. It doesn't stop it being desirable but its really a lucky dip of a purchase as even years of stability can vanish overnight.

Mainly but not exclusively buyer wants a perfect company with regard to stability and growth and largely a seller wants shut of an imperfect company that needs effort, investment or more. This OP scenario is not that and as such I woul GIVE the share away once specific agreed goals are reached.


anonymous-user

53 months

Friday 18th July 2014
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A forum (and it isn't much more than a forum when you dig round it) sold for US$3.2m recently

http://techcrunch.com/2014/04/15/freelancer-buys-w...

anonymous-user

53 months

Friday 18th July 2014
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For the 10% stake, I think it is just a negotiation really with the starting point being the would be investor's opening offer

As others have said, if his input grows the business significantly, then it may even be worth giving 10% to him for nothing.

If he is thinking of offering ££ too, then 3x his initial offer is probably as high as he will go

Frimley111R

15,537 posts

233 months

Friday 18th July 2014
quotequote all
KFC said:
Frimley111R said:
KFC, I am not sure what you mean by "If its all coming from Google then they could take it away overnight." however "Moreso if you're doing something spammy to acquire it in the first place." if the business has been running 7 years with a six figure t/o it is unlikely to be employing such techniques.
If you are not sure what I mean, then you aren't in a position to value an internet business properly.

Plenty businesses get away with doing something spammy for months/years before finally getting nailed for it and losing 90%+ of their traffic. The six figure part is irrelevant, it can still be all spam. I turn over 6 figures a month and 90% of that is profit, yet my business is probably worth next to nothing as its impossible to value it since all my traffic is coming from extremely dubious sources.
hehe Well we've valued and manged sales on a wide variety of businesses successfully and I've been in the M&A/business sale area fo nearly 10 yrs so I may have to disagree with you a little there.

Of course, I accept that with such limited information we don't know where customers come from and although Google changes the way it priortises searches and PPC regularly this does not mean the business will suddenly crash in terms of site traffic. Despite the continuing changes I have never seen an 'instant' 'crash' as you suggest. However, this is all speculation tbh.

DSLiverpool

14,672 posts

201 months

Friday 18th July 2014
quotequote all
Frimley111R said:
Despite the continuing changes I have never seen an 'instant' 'crash' as you suggest. However, this is all speculation tbh.
Happened to me in Jan 2013, lost 90% of organic search overnight - had to ramp up adwords until we found a solution. However it was an old site (2008) with many many now taboo methods of SEO and we should have seen it coming. I was quoted between over £10k to fix it with no time frame being available as its a "google thing" we started a new site with new URL from scratch!

KFC

3,687 posts

129 months

Friday 18th July 2014
quotequote all
Frimley111R said:
hehe Well we've valued and manged sales on a wide variety of businesses successfully and I've been in the M&A/business sale area fo nearly 10 yrs so I may have to disagree with you a little there.

Of course, I accept that with such limited information we don't know where customers come from and although Google changes the way it priortises searches and PPC regularly this does not mean the business will suddenly crash in terms of site traffic. Despite the continuing changes I have never seen an 'instant' 'crash' as you suggest. However, this is all speculation tbh.
Never seen an instant crash? So you don't follow Penguin or Panda updates? Never seen a site penalised in Google? There are literally 1000's of examples of this online, use Google and search and you'll find loads of them.

I'm not saying you don't have experience in sales; but with these posts you're coming out with you seem horribly placed to value anything internet based.

sideways sid

1,371 posts

214 months

Friday 18th July 2014
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Leaving aside the valid quantitative angle for a moment, and partly to assess the owner's valuation expectations, how much would he accept for the business, and how much would he pay to buy it if he didn't own it?

For example if I offered him £1 for 100% of his business, he probably wouldn't accept it. Would he take £1000, £1m, £1bn etc...?

If I was running the business, how much would he pay me to buy it in its current state?

Hopefully the two numbers are relatively close to each other, and close to a reasonable PE multiple. If not, the valuation may be valid but the OP's expectations may need to change significantly.

jammy_basturd

29,776 posts

211 months

Friday 18th July 2014
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JPJPJP said:
For the 10% stake, I think it is just a negotiation really with the starting point being the would be investor's opening offer

As others have said, if his input grows the business significantly, then it may even be worth giving 10% to him for nothing.

If he is thinking of offering ££ too, then 3x his initial offer is probably as high as he will go
It staggers me that some might suggest giving away 10% of a business always in profit and with a 6 figure turnover for nothing more than contacts and some experienced advice - neither of which I would say are prized or rare, unless these contacts are gold and extremely hard to get.

However, when on the other thread, a number of people baulked at the idea of trading up to 30% share in a business in return for a lot of direct work into the business - something which should yield some tangible results.

Never give your business away for nothing. Giving percentages away based on results is the best suggestion yet in my opinion.