Determining the Net Worth of an E-Biz

Happy · Aug 24th, 2008, 02:27 PM

Net worth can be computed by subtracting liabilities from assets.

Assets - Site Content, Subscribers and/or Customer Base, and Retained Earnings.
Liabilities - Employee Salaries, Web Development, and Hosting & T1 Line fees.

This gets a little fuzzy to me in an E-Businesses environment. My biggest assets are site content and my customer base. How can I assign a realistic dollar value to electronic information which I would consider a soft asset?

Thanks,

Happy

fanocks2003 · Aug 24th, 2008, 02:33 PM

Interesting question. Wouldn't it be the same as for a brick and mortar business, but with the slight difference that an ebiz is more intellectual asset than a brick and mortar? Most of the balance sheet is mostly intellectual asset?

Happy · Aug 24th, 2008, 02:39 PM

Originally Posted by fanocks2003

Interesting question. Wouldn't it be the same as for a brick and mortar business, but with the slight difference that an ebiz is more intellectual asset than a brick and mortar? Most of the balance sheet is mostly intellectual asset?

Fanocks2003 - I think you hit the nail on the head (So to speak), how can I determine the value of an intellectual asset?

Thanks,

Happy

Happy · Aug 25th, 2008, 09:18 PM

While searching for an answer to my question, I entered - determining the net worth of intellectual assets, into Google and the first thing that popped up in Google's results was this thread. Granted there were only 332,000 results found - but I would not have thought this short blurb in a message forum would be first on the list.

MJ - you appear to have some serious SEO mojo going on here - Congrats!

biophase · Aug 25th, 2008, 09:29 PM

Search engine ranking and domain name to me is a large determination of the net worth of an ebiz. If your ebiz ranks in the top 10 for significant search terms in your market and you have a good domain name, your ebiz will be worth alot more than a similar one with similar revenue.

australianinvestor · Aug 25th, 2008, 10:42 PM

I had to read your question a few times to try and work out what you really need.

If you are trying to work out the value of your assets in order to add them together and come up with a figure for the value of the entire business, I'd suggest that such an approach is only suitable for accounting purposes, since assets are usually recorded at cost, not worth.

If you want to value your whole business, forget the assets and the liabilities. Forget the notion of "goodwill" which usually results in someone adding an arbitrary, magic number to the book value of the company to get a sale price.

The value of a business is the amount that someone would pay today to buy the future (free) cash flows to that business. In other words, how much would someone pay today to buy your profits for the rest of the business' life (including the risk inherent in your business)?

Eg: if I offered to sell you a cash flow stream of $10,000 per year, how much would you pay for it? In other words, how much cash do you think $10,000 per year is worth in today's dollars?

Google "Present Value" for the basics on this concept, and then google "present value of future free cash flow to the firm" for info about valuing companies this way.

:-)

Jonleehacker · Aug 26th, 2008, 01:39 AM

For me the bottom line evaluation is traffic.

Without it you ain't got nothing in an ebiz. Yes, there are other factors, but traffic is the biggie. All the other factors can really be thought of as traffic factors:

mailing list ... does it bring traffic to your offers?
content ... does it bring in quality traffic from other links and search engines?
domain name ... is it brandable so it brings in traffic?
earnings ... is the traffic that create them well diversified?

Controlling traffic is the heart of an ebiz (and quickly becoming every biz!).

Happy · Aug 26th, 2008, 07:05 AM

Originally Posted by biophase

Search engine ranking and domain name to me is a large determination of the net worth of an ebiz. If your ebiz ranks in the top 10 for significant search terms in your market and you have a good domain name, your ebiz will be worth alot more than a similar one with similar revenue.

I agree that high ranking in the search engines and a good domain name will add value to your ebiz.

Originally Posted by australianinvestor

I had to read your question a few times to try and work out what you really need.

If you are trying to work out the value of your assets in order to add them together and come up with a figure for the value of the entire business, I'd suggest that such an approach is only suitable for accounting purposes, since assets are usually recorded at cost, not worth.

If you want to value your whole business, forget the assets and the liabilities. Forget the notion of "goodwill" which usually results in someone adding an arbitrary, magic number to the book value of the company to get a sale price.

The value of a business is the amount that someone would pay today to buy the future (free) cash flows to that business. In other words, how much would someone pay today to buy your profits for the rest of the business' life (including the risk inherent in your business)?

Eg: if I offered to sell you a cash flow stream of $10,000 per year, how much would you pay for it? In other words, how much cash do you think $10,000 per year is worth in today's dollars?

Google "Present Value" for the basics on this concept, and then google "present value of future free cash flow to the firm" for info about valuing companies this way.

:-)

I apologize - I went back and re-read my original post, it was a bit unclear. I appreciate you taking the time to help me work through the problem. The information on the cash flow stream is a big step in the right direction on helping me determine the value of my ebiz. I will follow up with the Google searches you suggested. Thanks again!

Originally Posted by Jonleehacker

For me the bottom line evaluation is traffic.

Without it you ain't got nothing in an ebiz. Yes, there are other factors, but traffic is the biggie. All the other factors can really be thought of as traffic factors:

mailing list ... does it bring traffic to your offers?
content ... does it bring in quality traffic from other links and search engines?
domain name ... is it brandable so it brings in traffic?
earnings ... is the traffic that create them well diversified?

Controlling traffic is the heart of an ebiz (and quickly becoming every biz!).

Great points as well. Without traffic your ebiz is basically out of business.

John · Aug 26th, 2008, 03:00 PM

E-businesses are generally sold based on a multiple of annual profit. The multiple varies a lot, and takes into account various factors that help to predict the future success of the business.

The multiples I see most often are between 5-10 x profit. So, if your e-biz has revenue of $100,000 per year, and has $20,000 in expenses your annual profit is $80,000. If you find a buyer who agrees to a multiple of 7x, you could sell the business for $560,000.

When figuring out the expenses, be sure to factor in the value of any time you put in if you're the owner/operator. What would it cost to hire someone as competent as you to do everything that you do to keep the business going?

Note that this is just a general rule of thumb. The value of any business, but especially an online business will vary a LOT based on any number of extenuating circumstances.

biophase · Aug 26th, 2008, 03:49 PM

I think that 7x annual profit is too high. In fact, I've seen anywhere from 1.5x to 3x with most ebizes. If I could get 7x annual profit I'd sell mine in a second. Heck I'd take 5x. I would probably pay 1x for most small ebizes right now.

Jill · Aug 26th, 2008, 04:00 PM

I agree with Bio. In the "real" world, I think 3x is a good rule of thumb, altho we could debate that point for pages and pages. Anticipated market conditions are the big determinant here.

In cyberworld, however, I've seen/heard 1-3x. Market conditions are still what I would take into consideration. But the cyberworld changes a lot faster - or at least has the potential to. So assuming that the earning potential will be at least the same (read: unchallenged by competitors) three years from now is a little riskier than in the "real" world, IMHO.

Jonleehacker · Aug 26th, 2008, 05:08 PM

The multiple of earnings for a web business can be as high as 7, but it is determined by the "defensibility" of the business or website.

In a nutshell, you're looking for foundation of traffic that is not easily compromised. If two sites earn the same and one gets 90% of it's traffic from Google, and the other 10% of traffic from Google and that is the largest traffic source, the second site is A LOT more valuable, even if everything else about the 2 sites is the same.

Defensibility also relates to difficulty to reverse engineer. For most we savvy folks, the first thought in their head when buying a site is: "what would it take for me to do the same thing?" if the effort seems insurmountable, then the website is worth a lot.

Most websites are easily copied and results duplicated with a couple hundred or thousand $ and in 3 - 6 months time which is why multiples are low (1 - 3 times earnings)... why bother paying more.

Only sites with a significant market edge will command the higher multiples, but it is possible.

Here's a decent guide to: 10 Ways to Build Defensible Traffic for Your Website

fanocks2003 · Aug 26th, 2008, 05:19 PM

If 7X is to high or not is rather irrelevant seen from this standpoint (you need to have a reference point). It all depends on what the buyer expect to recieve for his money.

I read somewhere on the internet that selling a business is actually selling it's cashflow (unless the business has no operations and only has assets and debts). That is the real value you are selling. Nothing else. So if you have an annual profit of $10,000 you should really see that cashflow as a bond with a certain interest coupon attached to it.

So if you have $10,000 in annual profits and you want 10X profits when you sell your shares then what you are actually selling is a bond with an interest of 10% annually. Are you with me? The same goes with 20X profits, that is 5% annual interest on the buyers/investors money.

If you look at it from that angle you can see why certain multiples may make a lot of sense to some investors and be totally idiotic numbers for others (because they expect a higher return).

If we look at Warren Buffet. I think he expects at least 15% on his investments annually (right?). So for him 10X profits wouldn't be that interesting. But I am pretty certain 7x profits and a stable brand would entice him much more.

Happy · Aug 31st, 2008, 07:49 AM

ebizvaluations.com "may" be another useful tool to help calculate the value of a web site.

PEERless · Aug 31st, 2008, 10:33 AM

There are MANY formulas for valuing a business. I can't vouch for one over the other. I would just recommend bulking up on assets through the creation of intellectual property: domain, trademark, logo, content, copyright... In many cases, intellectual property can be created out of nothing! ROI=Infinity!

Aug 24th, 2008, 02:27 PM	#1 (permalink)
Happy Level: (12) Chevrolet Joined: Aug 2008 Locale: St. Louis, MO - USA Posts: 52 Thanks: 21 Thanked 10 Times in 10 Posts	Determining the Net Worth of an E-Biz Net worth can be computed by subtracting liabilities from assets. Assets - Site Content, Subscribers and/or Customer Base, and Retained Earnings. Liabilities - Employee Salaries, Web Development, and Hosting & T1 Line fees. This gets a little fuzzy to me in an E-Businesses environment. My biggest assets are site content and my customer base. How can I assign a realistic dollar value to electronic information which I would consider a soft asset? Thanks, Happy

Aug 24th, 2008, 02:33 PM	#2 (permalink)
fanocks2003 Level: (5) Porsche Joined: Mar 2008 Locale: Sweden Posts: 687 Thanks: 46 Thanked 89 Times in 75 Posts	Re: Determining the Net Worth of an E-Biz Interesting question. Wouldn't it be the same as for a brick and mortar business, but with the slight difference that an ebiz is more intellectual asset than a brick and mortar? Most of the balance sheet is mostly intellectual asset? __________________ "Make as much as you can for as long as you can. Whoever has the most when he dies is the winner." - Lawrence Garfield in the movie Other People's Money

Aug 25th, 2008, 09:18 PM	#4 (permalink)
Happy Level: (12) Chevrolet Joined: Aug 2008 Locale: St. Louis, MO - USA Posts: 52 Thanks: 21 Thanked 10 Times in 10 Posts	Re: Determining the Net Worth of an E-Biz While searching for an answer to my question, I entered - determining the net worth of intellectual assets, into Google and the first thing that popped up in Google's results was this thread. Granted there were only 332,000 results found - but I would not have thought this short blurb in a message forum would be first on the list. MJ - you appear to have some serious SEO mojo going on here - Congrats!

Aug 25th, 2008, 09:29 PM	#5 (permalink)
biophase Level: (5) Porsche Joined: Jul 2007 Posts: 553 Thanks: 1 Thanked 21 Times in 16 Posts	Re: Determining the Net Worth of an E-Biz Search engine ranking and domain name to me is a large determination of the net worth of an ebiz. If your ebiz ranks in the top 10 for significant search terms in your market and you have a good domain name, your ebiz will be worth alot more than a similar one with similar revenue. __________________ My blog - Live Learn Invest

Aug 25th, 2008, 10:42 PM	#6 (permalink)
australianinvestor Level: (6) Mercedes Joined: Aug 2007 Locale: Australia Posts: 414 Thanks: 33 Thanked 20 Times in 18 Posts	Re: Determining the Net Worth of an E-Biz I had to read your question a few times to try and work out what you really need. If you are trying to work out the value of your assets in order to add them together and come up with a figure for the value of the entire business, I'd suggest that such an approach is only suitable for accounting purposes, since assets are usually recorded at cost, not worth. If you want to value your whole business, forget the assets and the liabilities. Forget the notion of "goodwill" which usually results in someone adding an arbitrary, magic number to the book value of the company to get a sale price. The value of a business is the amount that someone would pay today to buy the future (free) cash flows to that business. In other words, how much would someone pay today to buy your profits for the rest of the business' life (including the risk inherent in your business)? Eg: if I offered to sell you a cash flow stream of $10,000 per year, how much would you pay for it? In other words, how much cash do you think $10,000 per year is worth in today's dollars? Google "Present Value" for the basics on this concept, and then google "present value of future free cash flow to the firm" for info about valuing companies this way. :-)

Aug 26th, 2008, 01:39 AM	#7 (permalink)
Jonleehacker Level: (6) Mercedes Joined: Oct 2007 Locale: Edmonton, Canada Posts: 450 Thanks: 17 Thanked 90 Times in 48 Posts	Re: Determining the Net Worth of an E-Biz For me the bottom line evaluation is traffic. Without it you ain't got nothing in an ebiz. Yes, there are other factors, but traffic is the biggie. All the other factors can really be thought of as traffic factors: mailing list ... does it bring traffic to your offers? content ... does it bring in quality traffic from other links and search engines? domain name ... is it brandable so it brings in traffic? earnings ... is the traffic that create them well diversified? Controlling traffic is the heart of an ebiz (and quickly becoming every biz!). __________________ online biz tips, tricks and cool links in 140 characters or less

Aug 26th, 2008, 03:00 PM	#9 (permalink)
John Level: (10) Toyota Joined: Sep 2007 Age: 30 Posts: 114 Thanks: 14 Thanked 17 Times in 9 Posts	Re: Determining the Net Worth of an E-Biz E-businesses are generally sold based on a multiple of annual profit. The multiple varies a lot, and takes into account various factors that help to predict the future success of the business. The multiples I see most often are between 5-10 x profit. So, if your e-biz has revenue of $100,000 per year, and has $20,000 in expenses your annual profit is $80,000. If you find a buyer who agrees to a multiple of 7x, you could sell the business for $560,000. When figuring out the expenses, be sure to factor in the value of any time you put in if you're the owner/operator. What would it cost to hire someone as competent as you to do everything that you do to keep the business going? Note that this is just a general rule of thumb. The value of any business, but especially an online business will vary a LOT based on any number of extenuating circumstances.

Aug 26th, 2008, 03:49 PM	#10 (permalink)
biophase Level: (5) Porsche Joined: Jul 2007 Posts: 553 Thanks: 1 Thanked 21 Times in 16 Posts	Re: Determining the Net Worth of an E-Biz I think that 7x annual profit is too high. In fact, I've seen anywhere from 1.5x to 3x with most ebizes. If I could get 7x annual profit I'd sell mine in a second. Heck I'd take 5x. I would probably pay 1x for most small ebizes right now. __________________ My blog - Live Learn Invest

Aug 26th, 2008, 04:00 PM	#11 (permalink)
Jill Level: (7) Lexus Joined: Jan 2008 Locale: Frisco, TX (Dallas) Age: 44 Posts: 357 Thanks: 6 Thanked 36 Times in 20 Posts	Re: Determining the Net Worth of an E-Biz I agree with Bio. In the "real" world, I think 3x is a good rule of thumb, altho we could debate that point for pages and pages. Anticipated market conditions are the big determinant here. In cyberworld, however, I've seen/heard 1-3x. Market conditions are still what I would take into consideration. But the cyberworld changes a lot faster - or at least has the potential to. So assuming that the earning potential will be at least the same (read: unchallenged by competitors) three years from now is a little riskier than in the "real" world, IMHO.

Aug 26th, 2008, 05:08 PM	#12 (permalink)
Jonleehacker Level: (6) Mercedes Joined: Oct 2007 Locale: Edmonton, Canada Posts: 450 Thanks: 17 Thanked 90 Times in 48 Posts	Re: Determining the Net Worth of an E-Biz The multiple of earnings for a web business can be as high as 7, but it is determined by the "defensibility" of the business or website. In a nutshell, you're looking for foundation of traffic that is not easily compromised. If two sites earn the same and one gets 90% of it's traffic from Google, and the other 10% of traffic from Google and that is the largest traffic source, the second site is A LOT more valuable, even if everything else about the 2 sites is the same. Defensibility also relates to difficulty to reverse engineer. For most we savvy folks, the first thought in their head when buying a site is: "what would it take for me to do the same thing?" if the effort seems insurmountable, then the website is worth a lot. Most websites are easily copied and results duplicated with a couple hundred or thousand $ and in 3 - 6 months time which is why multiples are low (1 - 3 times earnings)... why bother paying more. Only sites with a significant market edge will command the higher multiples, but it is possible. Here's a decent guide to: 10 Ways to Build Defensible Traffic for Your Website __________________ online biz tips, tricks and cool links in 140 characters or less

Aug 26th, 2008, 05:19 PM	#13 (permalink)
fanocks2003 Level: (5) Porsche Joined: Mar 2008 Locale: Sweden Posts: 687 Thanks: 46 Thanked 89 Times in 75 Posts	Re: Determining the Net Worth of an E-Biz If 7X is to high or not is rather irrelevant seen from this standpoint (you need to have a reference point). It all depends on what the buyer expect to recieve for his money. I read somewhere on the internet that selling a business is actually selling it's cashflow (unless the business has no operations and only has assets and debts). That is the real value you are selling. Nothing else. So if you have an annual profit of $10,000 you should really see that cashflow as a bond with a certain interest coupon attached to it. So if you have $10,000 in annual profits and you want 10X profits when you sell your shares then what you are actually selling is a bond with an interest of 10% annually. Are you with me? The same goes with 20X profits, that is 5% annual interest on the buyers/investors money. If you look at it from that angle you can see why certain multiples may make a lot of sense to some investors and be totally idiotic numbers for others (because they expect a higher return). If we look at Warren Buffet. I think he expects at least 15% on his investments annually (right?). So for him 10X profits wouldn't be that interesting. But I am pretty certain 7x profits and a stable brand would entice him much more. __________________ "Make as much as you can for as long as you can. Whoever has the most when he dies is the winner." - Lawrence Garfield in the movie Other People's Money

Aug 31st, 2008, 07:49 AM	#14 (permalink)
Happy Level: (12) Chevrolet Joined: Aug 2008 Locale: St. Louis, MO - USA Posts: 52 Thanks: 21 Thanked 10 Times in 10 Posts	Re: Determining the Net Worth of an E-Biz ebizvaluations.com "may" be another useful tool to help calculate the value of a web site.

Aug 31st, 2008, 10:33 AM	#15 (permalink)
PEERless Level: (4) Ferrari Joined: Jan 2008 Locale: Jackson Hole, Wyoming Age: 25 Posts: 1,213 Thanks: 79 Thanked 46 Times in 38 Posts	Re: Determining the Net Worth of an E-Biz There are MANY formulas for valuing a business. I can't vouch for one over the other. I would just recommend bulking up on assets through the creation of intellectual property: domain, trademark, logo, content, copyright... In many cases, intellectual property can be created out of nothing! ROI=Infinity! __________________ My Book About Creating Your Own Luck

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