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Buy and Sell Websites – Online Investing Explained: Part II

This is the second part of our (very) comprehensive guide to Buying and Selling Websites. If you haven’t read Part 1, I highly recommend you check it out before you read Part 2. You can access Part 1 of the guide here.

We’re going to jump right into the second part of the guide. In this part we will cover the following:

• Valuation
• The Transaction Process
• Improving your Site’s ROI
• Whether or Not You should Sell
• Where to Sell

Valuation

Valuation of a website can be a tricky thing. Unlike with some other more established types of investments, there is as of yet no established framework for valuing websites. There are definitely a few rules of thumb, but overall, the valuation process for websites is still quite murky. As such, it is up to each individual investor to decide how they want go about filtering and choosing the websites that they want to buy – at the end of the day, only you can decide if a certain website is worth a certain amount.

The first thing that investors need to understand is in the world of investment, value is not the same as price. To maximize your chances of success as any kind of investor (not just as a website investor), it is essential that you understand this point.

Price is the highest number that anyone in the marketplace is willing to pay for something. Value is what that same something is worth to you. Price can fluctuate based on market conditions, investor sentiment, luck – there are any number of factors which can affect the price of something. On the other hand, for smart investors, the value of something should only shift in response to some change in the fundamentals of an investment.

As an example, say there is a website about cats that gets 10k visitors and generates $100 a month. For whatever reason, cats are in vogue on the internet – and because of this, the site ends up selling for $10k. In this case, the market price of the site was $10K – this is a fact, because that’s what it sold for.

However, you may have only been willing to pay $2K for this particular site – so the site had a value of $2K to you. The value of that site to you should not change unless there is some change in the fundamentals of the website – if traffic were higher, or if earnings were higher, then that would justify a corresponding change in how much you value the site. On the other hand, you should adjust the value you assign to an investment just because market conditions have changed (e.g cats are in vogue, so the site gets higher bids).

Now, on to the specifics of valuation.

The main rule of thumb when it comes to investing in websites seems to be to assign a 20x figure to monthly earnings. Basically, that means that a site that makes $100 a month is worth about $2K, and a site that makes $1k a month is worth about $20K, and so on.

While this valuation method is very basic, it’s a good first step. A few things to keep in mind with regards to this rule:

• Smaller deals have a lower average multiple (say 15x for investments under $7K), and larger deals can have a much higher average multiple (the listings on some of the higher-end brokers are often priced at 30x or higher).
• You may consider paying more for a site that matches your skillset – for example, if you’re great at conversion rate optimization, a site with high traffic volume that is under-monetized might be easier for you to improve upon. In cases like these, you might be willing to pay a bit more than you would otherwise (perhaps 15-20% more).
• You should always take your due diligence into account when thinking about the valuation of a website. If a site has more due diligence warnings flags, but you nevertheless want to go ahead and buy, you should assign some kind of discount to the valuation based on the fact that there may be problems with the website. For example, if I value a site at $2K, but I think there is a 5% chance that the site is a scam (perhaps because the seller wouldn’t screenshare with me), then I take the $2K and multiply it by 95% –> $1900. The site is worth 5% less because I think there’s a 5% chance that it’ll be a dud.

Sometimes, you come across interesting websites that aren’t earning any money. That doesn’t necessarily mean that the site has no value. In these cases, there are a number of ways that you can try to value a site.

Keep in mind that these types of websites (websites without any earnings) are probably not the best idea for beginners – it takes an experienced hand to be able to gauge the potential of a site, and even people who are well versed in online business make bad calls on these kinds of investments. If you’re a beginner, I’d definitely recommend you stay away from buying a website just based on potential.

You can value a website with no/low earnings based on

• Traffic
• Potential Earnings
• Replacement Cost

Traffic

Traffic is the simplest way to value a site with insignificant earnings, and in our opinion the most flawed. There is no universal value for traffic – a site about finance will have a much higher visitor value than a quotes site. A simple way to value traffic is to use this article by MonetizePros which breaks down CPMs (cost per 1000 impressions) by niche.

For example, if we had a site about Travel that currently had no ads, but had 20K visitors a month, we’d take the CPM average of $2.57 for the Travel Niche, discount it by 30% (because the CPM is the cost to the advertiser, and the ad network will always take a cut), then we’d work out the traffic value of the site in the following way:

Travel Niche Average CPM x Ad Network Cut x Traffic of the Site /1000

$2.57 x 70%  = $1.79 –> $1.79 * 20,000 /1000 = $35.8

So if this travel site earns $35.8 per month, we can apply the usual 20x rule of thumb to arive at about $700 for this site.

The problem with this method of valuation is that it is prone to wildly overestimating (or underestimating) the value of a site based on what CPM figure you use. Some sites are worth more based on the potential of new monetization methods beyond just ads, whereas other sites have limited growth/monetization potential.

This brings us to our next method:

Potential Earnings

Again, I can’t stress enough that this kind of investment is mainly for experienced website investors. It’s very difficult to get a good feel for what potential a website might have without significant experience.

To valuate based on potential earnings, you go one step further than valuing with traffic. You find a relevant monetization method, make an estimated guess at a conversion rate, and make a rough guess at what potential a site has.

We’ll continue with our example above. A travel site might have a relatively low CPC, but depending on the nature of the site, there might be potential affiliates offers that would appeal to visitors of the site. For example, you could have a flight/hotel booking module on the site that would generate affiliate income on each successful holiday booking.

Tripadvisor has an affiliate program that gives up to 50% commissions (through Commission Junction). An experienced website investor might assign a 0.1% conversion rate to this affiliate program (it’s low because holidays are expensive). After some research, one might conclude that the average dollar value of a booking at similar travel sites is about $100. We can then do the math

20,000 x 0.1% = 20 conversions x $100 x 50% =  $1000.

See the huge difference between valuation based just on traffic/CPMs and between potential earnings?

Herein lies the issue with valuating based on potential earnings. Anybody can do this kind of easy math – but using the wrong numbers for your conversion rate and your profits per conversion can lead to drastically different results.

In the investment community, there is a well known saying for these kinds of situations.

GIGO.

Garbage In, Garbage Out.

This is why it takes an experienced website investor to be able to suss out potential value. The tricky part is not the math itself – the tricky part is getting correct, realistic figures of the conversion rate and the profit per conversion.

If, for whatever reason, you are a beginner and you still want to buy a site based on potential (despite our many warnings), we strongly urge you take a large discount on your potential earnings figures. For example, with the example above, I might take an 80% discount on the figure I arrived at, because I think there’s only a 20% chance that the site would reach this best case scenario of $1000 a month.

Valuing a site based on potential is risky business, and we generally wouldn’t recommend it. You’ve been warned.

Replacement Cost

The third way to value a site that has insignificant earnings is to figure out the replacement cost of that site.

This valuation method is most suitable for sites that are ‘starter sites’ – basically, sites that are just a site design, logo and a bunch of content with low traffic and next to no earnings.

In these cases, you’re pretty much just paying for content, so you want to figure out how much it would have cost you to create that same content and work from there.

You should ask yourself the following questions:

• How much quantity of content is there on the site?
• How good is the quality of the content on the site?
• Is all the content on the site unique?
• Does the site look good or does it look shoddy?
• Is the site Keyword Optimized for SEO, and are those Keywords easy or difficult to rank for?
• Does the site have any other media that might be valuable (infographics, videos, images, etc)

The most important thing is that the content is unique. If the content isn’t unique, then the site is essentially worthless.

Also, if you plan to generate traffic primarily through search engines, the Keywords that the site is targeting are pretty important. If you bought a site with loads of content about Payday Loans and you planned to try and rank the site organically, you’d have wasted your money. It’s highly unlikely you’d be able to rank a site in the highly competitive Payday Loans niche (unless you’re an SEO Genius of some kind, in which case you probably don’t need this guide).

Quality of content is also important. The content has to be good enough for visitors to engage – there’s no point in buying a site that has tons of content if you end up having to rewrite all of it.

If the site has amazing media content on it in the form of infographics or videos, make sure that the site purchase includes these pieces of content. For each of these, we’d recommend you take the low end replacement cost of each form of media – infographics can be made for as little as $100, and videos can come even cheaper depending on what type of video it is. So if a site has two infographics, you might value those at $100 each.

The bulk of the value of a starter site will typically come from the quantity of content. Reasonably good content can be had for about $30 per 1000 words (prices can get even lower than this). So if a site has 20k words of good quality content, at $30 per 1000 words, the site would be worth about $600.

Site design isn’t a huge deal – especially if the site uses wordpress – but if you don’t want to deal with that side of things, you might consider paying a little bit more for a site that looks and feels good design-wise.

The important thing when it comes to valuing a site based on replacement value is that you don’t want a fair price – you want a good price. A site without earnings and without significant traffic is pretty much a site that you can recreate for yourself. As such, you never want to pay full replacement cost for a site – if you’re going to do that, you might as well recreate the site for yourself and tailor it to your specific requirements.

The only reason you might want to buy a starter site is to get a full site at lower than replacement cost. Only then are you getting good value.

As such, I’d assign at least a 50% discount to the calculated replacement cost. So, say a site with 20K words of content – replacement cost would be about $600. Because we’re looking for something that’s a great bargain, we’d at most be willing to pay $300 for this site – 50% less than the the replacement cost we calculated.

The Transaction Process

In most cases, the transaction process is reasonably straightforward. If you’re buying through a broker, the process will be explained to you in great detail, and your broker should answer any questions you might have and deal with any complications that may arise.

If you’re buying on a marketplace, make sure you know how the seller wants to be paid before you buy. Some sellers will request Paypal only, whilst others like to use escrow. Escrow is the safer option, and Flippa now has a built in Escrow option – this is our personal preference.

Also, prior to paying, make sure you know exactly what you’re getting. Make sure the seller is clear about what comes with the sale – social media profiles, mailing lists, EBooks, Youtube videos – be clear about what you expect to receive in the sale, so that the seller can’t play dumb later.

Some people like to sign contracts via email. While this is mostly just a formality, it may help weed out some % of charlatans, so we’d recommend you go ahead and get the seller to scan a signed contract of some sort. Just don’t ever believe that these contracts are enforceable – don’t ever think that you’re not getting scammed just because someone signed a contract and sent it to you via email. Basically, contracts are fine, but you shouldn’t derive any sort of peace of mind just because the seller agreed to sign a contract. Always be vigilant.

Depending on your experience level, you may want/need help after the transaction. While this can be difficult to enforce, again, make sure you have it in writing that the seller will aid you for X amount of time after the purchase. Make sure to get contact details outside of the marketplace – e.g Skype, FB, and other contact details that will allow you to follow up with a seller if he/she is unresponsive.

The most important thing when it comes to the entire buying process – both during bidding and post-sale – is to ask a ton of questions. The worst thing that can happen when you ask a lot of questions is that you get ignored.

If a seller doesn’t answer your questions satisfactorily, then don’t go through with the purchase. There are thousands of potential websites that are available for purchase each year, so don’t be afraid to walk away from a deal if there’s something you’re unhappy or uncomfortable with.

Improving a Website’s ROI

I could literally write an entire book just on this topic. “Improving A Website’s ROI” is pretty much another way of saying “How to make money online” – almost every single online business technique is applicable is some way to an established website. There’s more than one way to skin a cat, and if we were going to do a deep-dive on every single way to improve the ROI of a website, this post would probably end up being the length of a book.

As such, we’re going to just do a brief overview of each method of improving a web property. It’s likely that we’ll write more in depth on each individual method in the future, so think of this as more of a high level overview.

Improving Natural (Unpaid) Traffic

More visitors = more conversions/ad clicks = higher earnings. There are a number of ways to increase traffic. These can generally be split into short term and long term strategies. These lists are by no means meant to be exhaustive – they’re just what came to mind when we thought about all the ways we know how to improve traffic.

Short Term Traffic Strategies

• Reddit/Social Media: Sites like Reddit are an excellent way to drive some short term traffic to your site. Make sure your content is up to par – Reddit can react extremely negatively to blatant self-promotion
• Guest posts: Guest posts on high profile blogs can be good for a quick traffic boost Some people view guest posting as predominantly an SEO strategy (to get links), but guest posts on relevant, high quality blogs can drive short term traffic and some of those visitors may even become regulars on your website.
• Promotions/Giveaways: These can be an excellent way to get traffic – in some cases, partnering with a company to do a product giveaway/discount can be mutually beneficial. Be sure to publicize your giveaways on different blogs as well – this can sometimes generate links, which can help long term SEO value as well as short term traffic.
• Competitions/Contests: This works in a similar way to promotions and giveaways – again, try to publicize on other blogs and on social media to maximize both short and long term benefits.
• Community participation: While blog and forum comments have very little SEO value these days, they can still drive traffic to your site. The important thing is that you make a genuine effort to become a part of the community. If you’re just shilling for your website, it’s likely that your comments will get removed and you might even get banned. On the other hand, if you make a sincere attempt at becoming part of a community, not only can you drive short term traffic to your site, you can also develop relationships that might prove extremely helpful for your site in the long run
• Linkbaiting: This can be in the form of egobaiting of controversybaiting. Egobaiting is where you write nice things about other bloggers (or ask for their opinions) in an attempt to get a link back. Controversy baiting is where you purposely write something that’s controversial in your niche, and hope that people link to you so that they can discuss it on their own blog/site. Linkbaiting is essentially the more cynical version of Outreach (which is a longer term strategy).

Long Term Traffic Strategies

• On Page SEO: The most straightforward SEO improvements for any given site will usually be On Site Optimization – things like adjusting Keyword Density, making sure Title/Meta tags are correctly optimized, etc. Backlinko is a great resource for all things SEO, and they have a guide specifically for On-Page SEO
• Off Page SEO: The less straightforward part of SEO is building backlinks. Depending on your preferences, you might want to be purely whitehat (outreach, content marketing, broken link building), greyhat (PBNs, Buying Links, Buying Social Signals, etc) or blackhat (Spam, SAPE, etc). Obviously each of these philosophies have pros and cons, and discussing them in detail is probably beyond the scope of this guide.
• KW Research: One way to take advantage of an established site is to find better KWs that are either more profitable or easier to rank (ideally they’ll be both) than the content currently on the site.
• Social Media: A sustained effort towards building an engaged Social Media Following can be a good way of generating repeat traffic. This can be a tough goal to accomplish though – it takes a certain type of content and a certain set of skills to be successful on social media.
• Mailing List: One of the best ways to develop a strong, consistent readership is to build an email list. This can be a slow process, but in the long term, this method can pay huge dividends. If you have a large enough email list, other traffic sources become icing on the cake – you no longer need to worry unduly about losing social media followers or getting penalized by Google. An email list can also make launching new projects in the same niche a breeze.
• Develop True Authority: If you consistently put out great content, and you build up enough of a readership, you’ll begin to develop authority – and not in the SEO sense of Moz’s Domain Authority. I’m talking about Authority in the real world. A couple of extreme examples of this are Bill Simmons (of Grantland) and Nate Silver (of 538) – both were once small-time bloggers who are now considered experts of the highest caliber in their respective niches. While it’s unlikely that your site will ever get you to that kind of authority/fame, there are hundreds of respected voices of authority in each and every niche.

Improving Monetization Methods

There are two main ways of improving Monetization Method. The first is to improve conversions on the current monetization method. The second is to test new monetization methods.

Improving Conversions

The possibilities for CRO are pretty much endless, and CRO experts will generally tell you that the most important thing to do is to “Keep Testing”.

While we agree with this sentiment, there are a couple of main areas where testing and improvements can take place, depending on whether your site is monetized via Ads/Affiliates/Dropshipping or Ecommerce

For Ads:

• Ad Positioning and Sizing (Most important, likely to have the largest effect)
• Ad Color/Design (Font size, font color, background color, etc).
• Ad Copy (Probably outside of the control of the site owner)
• Technical Stuff (Aysnchronous loading, Best ad comes first in the HTML code, etc)

For Affiliates:

• Integrating Tracking Codes for More Data/Testing
• Types of Affiliate Links (Tables, Images, In-Content, etc)
• Setting up ‘Best Selling’ or ‘Most Popular’
• Playing with the Text of the Text Links (e.g Buy Now vs Lowest Price, etc.)
• Design Stuff (Page layout, button shapes, button sizes, location of tables/images/text, etc)

We haven’t got enough experience with Ecommerce sites yet to write about them with any kind of confidence, but much like anything else Conversion-related, we expect that proper testing and experimentation is the key to success.

Finding New Monetization Methods

Searching for new monetization methods works amazingly well for certain types of sites, and doesn’t do anything for others. Generally speaking, the more targeted your traffic is, the more opportunities there are for new forms of monetization – the more general your traffic, the more difficult you’ll find it. For example – you might be willing to buy an Ebook about fishing from a site about fishing – on the other hand, it is highly unlikely that you would buy any kind of Ebook from a site about the latest celebrity news.

Generally, finding effective new monetization methods involves moving up the online business value chain.

The value chain goes roughly something like this:

Large Ad Networks (Adsense) –> Small/Private Ad Placements –> Large Affiliates (Amazon) –> Specific Affiliates –> Dropshipping –> Digital Products –> Physical Products –>Ecommerce

So, if you bought a Travel site that was monetized via Adsense, you might want to start looking for a relevant Affiliate offer – you might review travel guides and monetize via Amazon Affiliates. Going one step further, you might find a specific travel related affiliate offer and promote that product/service.

You might decide to skip being an affiliate altogether – you might decide you want to put out an EBook about Travel. The important thing to remember is that the further up you go the value chain, generally the more costs you incur. It’s more or less free to become an affiliate, but to put out an Ebook you either need to write the content yourself or outsource it. Physical products cost even more, especially if you need to think about inventory/warehousing.

Our advice on the monetization front is to test/experiment with as many options as possible whilst spending as little as possible. Any extra money you put into a site is basically adding on to your initial investment – and if your efforts don’t bear fruit, you’ve effectively lowered your ROI. Start slow – so if you’re on adsense, try incorporating affiliate offers. If you’re already selling affiliate products, try striking a more favorable deal with the company/person who owns that product rather than going through a middleman.

From an investment perspective, you should only invest in the more expensive methods of monetization if you’re reasonably sure that you’ll succeed.

Of course, in the online business world, it’s important to keep on experimenting and trying new things – if you’re doing something new for testing purposes, that’s fine, but you should know in advance that what you’re doing is not necessarily a smart investment decision. Basically, you should mentally separate your ROI-improving strategies from your experiments and tests.

Should you Flip your Web Properties?

The short answer, in our opinion, is no. We’ve already outlined (in Part I of this Guide) why we think that web properties are good value compared to other forms of investment. If on average, buying a website is a good investment (because websites are generally cheaper than we reckon they should be), then it follows that selling websites on average is a bad investment decision (because you’re selling something for cheap).

There are only two scenarios where we seriously consider selling our sites:

• If you own larger sites that deserve more of your time (because any improvement in ROI will net you a higher absolute return in dollar value), then you might consider selling a smaller site so that you can focus more time on a larger site.
• If life gets in the way, and you find yourself in a position where you have a deficit of time/cash that necessitates a sale, and you don’t have any better options.
• If an offer that is too good to pass up comes along – for example, if you own a fishing site and a fishing company is interested in buying your site at a high multiple (e.g 35-40x monthly earnings) because the site has some greater strategic value to them than it does to you.

In the above three circumstances, we might consider selling our sites – but as a general rule, we’re buy and hold investors. The current climate of the website investment market is such that we feel websites are undervalued/underpriced in general, and so it makes sense that we’re generally hesitant sellers.

How to Sell a Website

Depending on how large your site is, and how fast you want to sell your site, where you you want to list your website might change.

Listing your site with a broker is appropriate for larger sites – especially if you don’t mind a long waiting period between listing a site and selling it. The advantage of listing with a broker is that there is relatively little work involved on your end, and brokers have an incentive to maximize the value of your sales because they normally take a % commission based on the transaction price. On the other hand, if you’re looking for a quick turnaround, a broker may not be appropriate.

If your site is sub $10K, you might be better off listing on a marketplace. Marketplaces require more effort on your end, and depending on the bidding, your site may not fetch as high a value as you might hope – but on the other hand, listing on a marketplace can more or less guarantee a sale, and the turnaround time is generally much faster than when you list your site with a broker.

As a refresher, here are some of the brokers/marketplaces we mentioned in Part I:

Marketplaces

Flippa

Digital Point Forum Marketplace

WebsiteBroker

Low End Brokers

Empire Flippers

Flippa Dealflow

FE International

High End Brokers

Quiet Light Brokerage

Website Properties 

Digital Exits

Final Thoughts

Hopefully you’ve find our guide thorough and enlightening. We put a lot of effort into it and we’ve tried our utmost to cover everything that’s relevant to buying and selling a website. Here are a few takeaway points for those of you who have short attention spans:

• On average, websites are currently an extremely cheap and attractive investment option
• The website marketplace lacks transparency and regulation – always remember the mantra “Buyer’s Beware”
• Successful website investing takes a specific knowledge base and skill set – familiarize yourself with all the aspects of online business before jumping in
• Due diligence is the most important thing when assessing a website as an investment
• Website Valuation is a murky area – 20x monthly earnings is a good rule of thumb, but take into account all factors before deciding what a website is worth to you
• Websites can be valued based only on potential, but this kind of investment is mainly suitable for experienced web property investors
• During (and after) a transaction, always try to ask a lot of questions
• Improving the ROI of a website can be done by increasing traffic or improving monetization
• When working to improve the ROI of a website, be careful about accumulating costs – additional expenses into a site directly reduces your ROI
• Experimentation is essential to finding success online
• We’re not fans of selling investments – only do so if you meet one of the three criteria we listed
• If you’ve decided to sell, using a broker will generally take longer but net you more cash, using a marketplace will be faster but probably less profitable

 

April 6, 2015