It’s been about 4 years since we last wrote about website valuations, continuing the work of a project we started 8 years ago. One of our readers recently commented that valuations have risen. He’s absolutely correct – and here’s why….
The Market for Websites – 2019 vs. 2012
Digital investing has come a long way as an asset class over the past decade. When I first started looking at this business, it was effectively an “operators only” market, especially for small websites. You had to be close to the asset.
The risk of buying a bad site was extremely high. The market was overrun with “black hat” SEO properties which had either already been penalized or, worse, showed impressive growth (which would collapse after the sale). Fake traffic was another problem: buyers using click-farms to pump up the traffic counts and revenue statistics in preparation for a sale. If you didn’t understand the nuances of how to generate traffic, you were an easy mark.
Assuming you reached a price, you had to close the transaction and migrate the website. Frequently working with sellers who were not in your country and therefore were beyond the effective reach of the law. Migration would often require you to clean up the owner’s past sins (including cyber-security failures) and integrate your own advertising.
The biggest difference between then and now is there is a emerging set of opportunities for financial investors who do not want to personally run a website. This is attracting new capital, which is raising valuations.
Website Valuation Factors – Some Key Trends
- Emergence of Professional Investors: There is now an active eco-system of private investment funds and a cast of supporting professionals (diligence, valuation, management, etc.). Many of these teams were originally focused on SAAS / FBA opportunities and have moved down market to acquire larger sites within the digital content space. This substantially expands the pool of available capital.
- Better Brokers: Brokers have come of age (Empire Flippers, FE International) and are better at getting good inventory before it hits the broader market. More big deals are moving in private sales between a well-advised seller and a knowledgeable buyer. It is getting harder to find quality sites outside this process. All of this improves valuations for websites which can pass their vetting process.
- Google has gotten more predictable: SEO was a dumpster fire a decade ago, with spam and link schemes. You couldn’t rank for hot topics unless you cheated. If you cheated, it was only a matter of time before Google busted you and wiped your site from the face of the Internet. Recent SEO trends are closer to Bill & Ted’s philosophy: “Be excellent to one another”. Recent Google site ranking policies have more consistent and aligned with the ideals of being relevant, trustworthy, and user-friendly. This provides a fairly simple litmus test for buyers to assess rankings risk. This is notable reduction in the traffic risks of a website investment.
All of these trends serve to increase the average valuation of a digital property.
Build vs. Buy – Growing Barrier to Entry
The level of content and authority required to rank in many topics continued to evolve. Many top ranked websites have had up to two decades to hone their content and build brand awareness and endorsements. Stable Google SEO policies have strengthened this trend, since you have fewer “accidents” occurring. This raises the value of buying an existing site vs. funding new ones. There are many organic search topics that are effectively off-limits to a new website without massive investments in content and branding.
Post-Deal Value Creation Playbook
The other part of the puzzle which has matured is post-deal value creation. The 2012 version was pretty manual – you converted the site, fixed any big problems, and started tweaking the strategies. This limited how many projects you could manage. This has matured in the past couple of years, with plenty of platforms and “done for you” services coming to market.
- AdSense Optimization: While AdSense is the best paying ad network open to small websites, larger sites (15,000+ visits per month) can make 50% – 100% more by shifting to an ad optimization service.
- Website Speed: Most small websites, particularly WordPress sites, tend to serve very slowly. This is especially damaging if you’re in a niche with a lot of mobile phone traffic. This can be quickly fixed with some basic technical changes.
- Mobile Experience: It’s 2019. Your site need to render well on a mobile phone or Google will penalize your search results. If you’re working with WordPress, this is matter of picking the right theme. Another immediate improvement in traffic and ad rates.
- Patch Content Gaps: Many small websites have very poor SEO and content strategies. It is worth doing an audit to clean up any obvious errors and check for adjacent topics you should be publishing about.
We cover these strategies in more detail in our acquisition integration playbook.
Still A Compelling Opportunity
While the market has matured, the fundamentals of investing in this space remain very attractive. You can put capital to work in a high quality small website (“clean SEO”, not spam, good content, established earnings trend) at 3 X – 5 X annual EBITDA. Management costs is a function of your skills: probably relatively cheap if you’re already a developer, higher if you must retain experts to do the work for you.
Most deals at that price point in traditional private equity are basically a train-wreck; you’re betting you can fix or flip a broken business before the cash runs out or your lenders lose patience. It’s profitable but hairy.
American Stocks? You’re paying a princely 12 x – 16 x multiple of EBTIDA outside of energy and communications for the earnings stream, much of which doesn’t directly reach investors (stock options, buy backs, required capital investments). And more than a few companies within the S&P 500 barely earn enough to justify their long term cost of capital.
I wouldn’t put everything I own in this asset class, but it appears competitive as part of a larger portfolio with the options I profiled above…
Interested in knowing more? Already own an investment website? Check out…
- Strategic Planning for Website Investors
- Our Acquisition Integration Playbook
- Website Revenue Study – original version and follow-up (3 year survival rates)
Or if that sounds boring, go check out some thoughts on B2B pricing:
- Using customer profitability for good and not evil
- How to earn high margins without ripping customers off