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What’s Your Online Business Worth? Analysis Of $394 million In Exits: Here’s What We Found

What’s Your Online Business Worth? Analysis Of $394 million In Exits: Here’s What We Found

UPDATED: 13th January 2016 – The most comprehensive online business valuation analysis on the internet. 

The first question a seller asks us as a website broker when looking to sell their online business is, “What is it worth?”. So in 2012, we started analysing all online business transactions that we could find for the previous year and presented it in a report. Each year, we analyse the previous year’s sales to come up with industry averages. Fast forward to today and this article represents an analysis of sales data between 2011 and 2015.

worth

You will see the term multiple a lot in this article.  We calculate the profit for the business using SDE (Sellers discretionary earnings) using this formula:

The profit of your business is calculated as = Total Sale – Cost of Goods Sold – Expenses + Owners Wage

What is also discussed and needs explaining is when it says a multiple of 2.44X. What his means is the amount paid for the business is a value of 2.44 times the profit. For example, a business that is doing $300,000 in profit per year sold for at 2.44X means ($300,000*2.44=$732,000) So $732,000 was the selling price. This works in reverse as well. If a business sold for $723,000 at 2.44X then (2.44=$732,000/2.4X means the profit was $300,000).

What are the market trends?

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The market is growing, not only in terms of deals closed but demand from buyers. We are seeing around 10 buyers for every seller as a ratio. If you look at the total deals closed trends you can see that total deals closed went from $53 million to $112 million in 4 years. That is over a 100% increase. Our predictions, for 2016, is we will see another growth year again. As of writing this post we have 5 businesses listed and another 5 in the pipeline.

We Analyzed 712 Businesses From 6 Business Models

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For this report, we analysed 712 businesses sold between 2011 and 2015. The above graphs breaks down what percentage of the total deals each business model represented. Below is how we categorised each business model:

  • Advertising – a website monetized through ads or affiliate offers
  • App – a mobile app, monetized through paid downloads, membership or advertising
  • Ecommerce – traditional e-commerce stores, drop-shipping and digital products
  • Lead Generation – websites monetized through selling leads
  • Service – websites monetized through providing a service
  • Software – SAAS (software as a service) and any other software application based business

What We Found From Our Analysis

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This graph represents a snapshot of the total data. It will give you a better understanding of where your business sits in comparison to all the businesses analysed. The average multiple for all businesses sold was 2.44. The sum of transactions between 2011 and 2015 is $394 million giving us 5 years worth of data. I believe this represents only 10-15% of the overall market of traded web businesses.

What Is The Average Multiple Per Business Model?

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Now we have 4 years worth of data we can see how the average multiple has changed yearly.

Here is my thoughts on why there is a differentiation between each business model;

  • Advertising – Demands a low multiple because it doesn’t create much value and you also don’t control the customer. Essentially, advertising websites drive people to their website with the goal to send them away to another source.
  • App – Personally, I struggle to see the value in app-based businesses. We have yet to sell an app business in the 5 years we have been in business. I think the barrier to entry is too low and the ability to acquire customers is extremely hard.
  • Ecommerce – A consistent performer with a large volume of businesses selling. It is, in my opinion, the easiest business to understand and train a new buyer on. There is also the challenge of differentiation if you have a commodity product and it is only through a brand that you can combat this.
  • Lead Generation – A surprising performer over recent years. As more competition comes online it has been harder to generate leads for businesses and thus the higher demand for leads.
  • Service – Again, a consistent performer and also easy to understand business. The main value in a service based business is the book of clients which if can be transferred easily and they stay on as clients can lead to a decent return for a buyer.
  • Software – Still a very highly demanded business model and the biggest winner in 2015. There seems to be a large gap between low 6 figure valuations and million dollar valuations for software businesses. I think the market is finally starting to wake up to the value of recurring businesses and pay the multiples that they deserve. We did a podcast on this if you are interested in hearing it.

Are Smaller Or Larger Businesses Worth More?

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We can see from the last four years the consistent trend of multiple at each price point. The larger your business the higher multiple you can demand. For example, in 2015 the average multiple for a business that sold between 0-$250,000 was 1.9X. However, if your business was worth $4m the multiple was 3.8X.

How to interpret this graph: If your business is generating:

  • 0-$125k per year in annual profit = valuation range of 0-$250,000
  • $125k-$200k per year in annual profit = valuation range of $250,000-$500,000
  • $200k-$$380k per year in annual profit = valuation range of $500,000-$1,000,000
  • $380k-$650k per year in annual profit = valuation range of $1,000,000-$2,000,000
  • $650k-$2m per year in annual profit = valuation range of $2,000,000-$7,000,000

This will give you a pretty accurate range of where you business sits in the valuation spectrum.

How many transactions occurred at each price point?

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This graph represents the total number of transactions that occurred in each price range. For example in 2015, there were 122 transactions in the $0-$250k range. Subsequently, there were 43 transactions in the $250k-$500k range.

This data represents the volume of transactions at each price point. Obviously, there is less supply of businesses at a higher valuation range.

What do the multiples look like on a scatter graph?

business worth_scatter_1301-01

To get a true appreciation of averages you need to look at the dataset as a whole. This scatter graph represents each transaction and what multiple it sold at of profit.

You can see the massive variation in multiples from 0.2X to 9.7X earnings. What you do notice is the majority of transactions falling in the 1.8X to 3X valuation range. This data backs up the premise that all small businesses sell for 2-3 times earnings.

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  • Adrijus Guscia

    What about service businesses online? What do you predict for them?

  • http://www.digitalexits.com/ Jock Purtle

    I don’t think the valuation of service based businesses will change. I do however think there will be an increase in the number of service based businesses for sale.

  • http://wpcurve.com Dan Norris

    Hey Jock this is a solid post man good stuff. Can you explain to me what a multiple is and perhaps make that clear in the post. I guess most people know. For services for example you have a 2x multiple. Does that mean it’s worth 2x yearly revenue? Or 2x yearly profit after founder wages etc. I’d also love to know how a recurring revenue business fits in. I think a huge concern of people buying a business is whether or not it’s going to keep performing so recurring adds a lot of stability and continuity. I’m guessing that would mean a higher multiple.

  • http://www.digitalexits.com Jock Purtle

    Dan,

    A multiple in the case of this post is a multiple of yearly profit. So a 2X multiple for a service based business would me that if the business sold for $200,000 at a 2X multiple then the profit, after expenses, would be $100,000 per year.

    Regarding recurring income. The multiple people will pay is based on risk. So you are correct in assuming that a recurring based business will pose less risk for a potential buyer therefore a higher multiple. Another factor to consider in price is the growth trends of the business. Essentially it comes down to how can the new buyer get his money back.

  • fastow2012

    1- What’s the best way to approach online business valuation…some advocate 12-24x monthly revenues while you seem to favor net earnings
    2- in your transaction, do you advise seller to offer “seller financing”? Is it popular at all in the online acquisition game? Is there any price floor before you’d start talking about seller financing? eg $50K+ deals…
    Thanks

    • http://www.digitalexits.com/ Jock Purtle

      @fastow2012:disqus

      1 – They are both the same things. Some people in the internet world have adopted monthly earnings (mainly from flippa auctions) the reason I use net earnings is because that is standard accounting practice. And in larger deals with lawyers, accountants and consultants involved you will want to communicate in standard best practices (multiple of earnings)

      2 – Generally larger deals will incorporate some element of seller financing. Mainly deals sub $150 are mostly all cash

  • NormanSisneros2

    Useful commentary , For what it is worth , if somebody is wanting to merge PDF files , my wife ran across piece of writing here http://goo.gl/uPgc04

  • WebshopKopen.nl

    Hi Jock,

    We usually valuate based on the Discounted Cash Flow method. What are your experiences with that valuation method?

    Regards,

    Sander Scholten
    https://www.webshopkopen.nl