What are the top things that make a website valuable? Website Investment Experts Liz and Matt Raad reveals their top three in this post.
Matt: Welcome everybody, this is Matt and Liz Raad. And in this video, we are going to take a look at what makes websites so valuable. In particular, we’ll put the top 3 things we look for that adds massive value to our websites.
Cashflow
Liz: The first one is very self-explanatory. It’s like in commercial real estate: The value is in the cashflow, in the generation of return on your investment. The more cashflow a business or a commercial investment makes, the more valuable it is. These kind of investments tends to be valued very much on that cashflow return.
When we were business broking, your standard offline businesses—bricks and mortar style business—often sell anywhere between 1 to 3 times the cashflow return of that business. If a business is making $100K a year profit, then it would reasonably expect to be sold anywhere between $100K and $300K, depending on various factors associated with that business.
Online and in websites, we do the same sort of thing. We value websites based on how much cashflow return they’re going to give us. In general, we start out with a kind of base for good, solid websites: good history, genuine seller, genuine profits, and traffic. We’d start out at around 10 to 12 times the monthly profit.
So that’s what we tend to value websites on. Some of them are going to sell for a lot more than that, some of them will sell for a lot less—you’ll get some bargains out there. That’s in essence how we start a website valuation, based on return on our investment.
Growth & Leverage
Matt: The second thing that adds value to a website is its potential for growth and leverage. It’s kind of a no-brainer, isn’t it? But this is what’s happening in big website deals. The big companies got unlimited budgets, and they can come in when they see that there’s massive potential just by putting some more money into marketing or something and really grow the business.
That makes a far more valuable website for business. We’re always looking for that potential, not just for growth, but for leverage as well—easy leverage.
What would it take to grow this website? Is it just more traffic? Can we pay for it? Is it just more content that we just need to pay few outsources to write more content for it?
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Target Market
Liz: And the third thing that increases the value of a website is also the sort of people that are coming to visit that website: who they are, and how targeted they are, and what sort of niche that’s in. What a lot of large scale investors are looking for—when you see these big deals—is this access to a market.
We’ll look at an example like Zomato, coming into Australia and buying Urbanspoon. Urbanspoon is an app and a website business that basically lists restaurants across Australia. They have a massive database of all these restaurants and eateries all across Australia, already done and rated by people using the service—they’ve got a lot of momentum there.
Now, Zomato from America wanted to break into the Australian marketplace. Rather than starting from scratch and try to do that themselves, they thought that it’s actually easier and faster for them to just buy Urbanspoon who already have all that traffic and all that lists—everything—all in place. They paid a massive multiple because of the access to that instant database, all those people, straight away.
That also adds value to the website. If you’ve got that big idea and you’re creating something big, think about that in about when you’ve got that database of people that you’re thinking about. Who would value that? Who would love to get their hands on that access—to the people who are coming to your website? That creates incredible value in a website.
Summary
So that’s our 3 things that we’re mainly looking for, and it also generates a lot of value. That’s the 3 things that are generally behind these massive website sales that you hear about in the media, where big companies are paying millions—tens of millions, or billions—for these kinds of companies.
We’ve been Matt and Liz Raad, hopefully you’ve learned something interesting and new. Get out there and start valuing websites!
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