Many people who sell a website leave money on the table… lots of money.
By expensing the content cost.
If you’re about to sell a site, read on. This may put a few or a lot of bucks into your pocket.
Table of Contents
- How are websites valued?
- The question put to website brokers and website sellers:
- My short answer
- Website Brokers’ Opinions
- Website Sellers’ Opinions
- My Arguments
- Similar to real estate
- What’s the real answer?
- If this is the case, why publish this article?
- 4 Tips for getting top dollar for your site
How are websites valued?
Net income is the main factor in valuing a website. A buyer takes the net income and applies a multiplier to it.
The multiplier value is where a buyer and seller take other factors into account such as growth rate, age, authority, inbound links, etc. If a site is solid, consistently growing and has been around for a while, it will fetch a higher multiple.
There are other factors that go into it. In fact, one buyer may value a site higher than another prospective buyer. It’s not strictly formulaic. A site is worth what someone will pay. However, what someone is willing to pay is in-part based on net income.
Last year someone offered to buy one of my websites. It was exciting. It would have been a decent amount of cash.
I wasn’t serious about selling, but that offer prompted me to carefully assess the profit and loss statements (P&L) of that site.
What I noticed was that my content costs were considerable, but I justified it for future growth. Then it occurred to me that if my investment in content is for future growth, current content cost is not relevant to the current valuation.
When I extracted the content cost from the P&L, net income was much higher which immediately increased the value of the site by a ton.
That’s when I realized many sites sold these days are undervalued because the “standard practice” is to count content cost as an expense that reduces the net income used in valuation.
I believe that is a wrong approach.
I set out 3 arguments down below. But before we get to my arguments, I thought it would be helpful to get insights from website brokers and site publishers who have sold sites in the past.
I reached out to a number of folks. Here’s the question I put to them followed by their responses.
The question put to website brokers and website sellers:
Is it your view that current content costs should be considered an expense and therefore reduce net income used for valuing a site?
My short answer
I believe content is an investment. It should not be expensed resulting in lower net income that’s used for valuation.
For example, if a site’s revenue is $5,000 per month with $1,000 spent per month on content, the income used for valuation should be $5,000, not $4,000. If a 30 net income multiple is used, the value in my view would be $5,000 x 30 = $150,000. It would NOT be $4,000 x 30 = $120,000.
Here are the responses from a few website brokers and niche site publishers:
Website Brokers’ Opinions
1. Flippa’s Response
“Thanks for reaching out.
In order for a potential buyer to have a clear understanding of a site’s profitability, we believe that a seller should include every outlay the site incurs to operate.
Kindly check out the information provided in this article:
Hope this helps. Please let us know if you have any further questions.”
2. Latona’s Response
“It is an expense. To claim it isn’t would be to claim that the content is some sort of capital asset like furniture, inventory, etc, Capital assets can be sold off and liquidated and turned into another form of capital ‘cash’. You can’t do that with content and continue to operate the site. Once the money is spent, it’s a sunk cost. If you are reporting the trailing 12 months of revenue and expenses and you spent $48,000 on content, then you have had $48,000 in expenses.”
3. Empire Flippers’ Response
“This is actually a recent change we just did at the brokerage. Before we used to count content expenses as part of the operating budget for the website, so it would hurt the overall valuation of the business if you were buying content on a monthly basis.
But, we realized this doesn’t make much sense when you consider that almost all new content is a growth investment not a maintenance investment. So now we add back all of the content expenses from the P&L so it doesn’t affect the actual valuation anymore. Of course, buyers will see the content expenses still and so they may still negotiate on that portion depending on how it is being done.
From a valuation standpoint though, content expenses are not considered required expenses to maintain the business “as-is” so it is not counted in the valuation as an expense.”
4. FE International’s Response
“We have been making adjustments to P&Ls based on content costs for a number of years now. It is a lot more complicated than just including all content expenses or adding back all – it is usually somewhere in the middle. The key is being transparent with buyers so they can make their own judgment. We recently applied this approach to a site where content investment was quite significant on a monthly basis: https://www.authorityhacker.com/how-to-sell-your-business/ – have noticed other brokers copying our approach since this case study went live.
For almost all content-based businesses, regular content is an essential part of maintaining the business, therefore the majority of content expenses would be included in the P&L and valuation. We look to find a balance between what is necessary and what is content for future expansion purposes and then include a reasonable maintenance cost in the financials.
We have an extremely advanced proprietary valuation model which looks at tens of thousands of data points so there is not a fixed rule we use – it depends on the business and judgment at the time.
The solution to increasing valuation is definitely not cutting back content expenses prior to a sale. Savvy buyers will notice this and reduce their offer on the expectation this will affect the future of the business. Similar to if an owner of a software business stops investing in development or an e-commerce business stops buying stock.
Ultimately, buyers are becoming more and more knowledgeable so trying to hide content expenses or cut back on content is not sensible. Focus on running your business well and buyers will recognize that and pay accordingly.”
Website Sellers’ Opinions
I thought it would be helpful to get insights from niche site publishers who have sold sites in the past. Here are a few:
1. Income School
When most businesses or investment assets are bought and sold, they’re done so on a basis of current and ongoing value. The current value of any investment is the time-adjusted estimated value of all future net income for that investment. In the case of a website, its real value is the sum of all future income from the site minus all future costs associated with that income, with all future income adjusted for time and risk. It sounds complex but it’s fairly straightforward.
But, because most of us have a hard time grasping what that really means, a lot of businesses just take the most recent year or two of income minus expenses to estimate an average annual income, and then multiply that by some number to get an estimated value. That some number varies dramatically by industry and is really just a way of approximating what I talked about before, the future income for the business adjusted for time and risk.
That point in saying all that is that past income is intended to be an estimate of future earnings. But if you’re in growth phase for a site and have more expenses because you’re buying content, and those are expenses that won’t be incurred in the future to earn the same revenue, then those expenses don’t accurately reflect the costs of running that business in the future. In short, those expenses aren’t an accurate reflection of the future.
But, that’s not how people in our industry tend to look at it. They look at the past 12 months, usually, calculate revenue minus cost, and divide it by 12 get to get average monthly net income. Then, they multiply that by some multiplier, usually between about 20 and 40, based on the industry, growth trajectory, etc. and they use that number to estimate the value of your site.
So you just spent a bunch of time and money building a site that now earns a mostly passive income with almost no cost, but your valuation is based on all that money you spent for content.
I think the expenses that should be included are ongoing expenses. Basically, we should be projecting the future based on the trajectory of the site’s revenue and then we should be projecting the cost based on all the costs required to attain the projected revenue. If it’s going to take $100 per month of content to keep the site on that trajectory, or to maintain its level of revenue, then that should be factored in. Startup and early growth costs shouldn’t.
So how do we deal with this when selling a site? Well, we’ve been fortunate to keep ourselves in a position where selling a site is never urgent. We never sell a site for at least a year after incurring all those early charges, so they drop off the radar by the time valuation comes around. We scale back all our expenses for several months before listing. Even if all costs don’t drop off, it’ll show an upward trajectory which usually leads to a higher multiplier.
The other thing we do for big sites, is we skip the website brokers and we look for a buyer in the industry that the site’s about. If we were selling a large website about fitness and dieting, we might try to get it acquired by one of the big fitness brands. Those kinds of buyers will be accustomed to a pro forma valuation so you just don’t have this same issue.
2. Spencer Haws
I had never personally considered removing content costs as an expense when buying or selling a website. Now I wish I had!
I can still see both sides of the argument. On one hand, how can you say that the investments you made in content should not be considered an expense when it’s a direct reason for the earnings? On the other hand, I completely agree that if it was the owner’s time, this might very well be seen as an add-back. Or one could easily just stop all content expenses and say, “look, it costs nothing to run this site!”.
I think the right answer is that it varies case by case. Each buyer and seller need to come to an agreement of what a nominal content cost would be to maintain the income level of the site. This is a negotiation point for sure. The seller might be spending $1,000 a month on content for example. But the seller might be able to rightfully argue that to maintain the income level of the site, content expenses should be calculated at a more reasonable $250 a month. If the buyer agrees, you may be able to adjust the net income by a difference of $750 a month.
I don’t have a definitive answer, but I do think it should be a negotiation point that can definitely increase the sell value of your website.
1. Future growth
Current investment in content impacts future growth. Since valuations do not contemplate future revenue growth but instead are based on current and trailing 12 months, it’s reasonable not to reduce net income by the current content investment.
Moreover, all current revenue is a result of past expenses. No new content is needed in order to continue current earnings. It’s not as if you’re buying a coffee shop where you must hire people and pay wages to keep it going. It’s totally different.
You don’t have to add content to a site to maintain earnings. Therefore, future content is not an expense, but an investment a buyer chooses to make. It’s the same if a buyer of a building decides to add on to that building to collect more or higher rents.
2. What if the seller writes the content?
When a seller personally writes all the content, there’s no content expense. However, under traditional valuations where content cost is expensed, if the seller paid writers, that would reduce the value of the site.
Why should a site that hires writers be worth less than a site where the seller writes the content? It makes no sense.
For example, if the seller writes and publishes 3 articles per week. Assuming each article would cost $80 to outsource, that’s $960 per month if the content were outsourced. If that $960 is expensed, that’s a significant reduction in net monthly income.
3. Stop investing in content 12 months before a sale
If I were planning to sell a site, I could reduce content costs 12 months in advance to very little or nothing (just like the guys at Income School do). Or, I could invest all $48,000 into content up front, build the site and let it grow on its own for 2 years without new content. Let’s consider a couple of scenarios.
I start a site and invest $48,000 into content all at once. I build out the site, let it sit and grow for 2 years. In 2 years time, the site is earning $5,000 per month. In this scenario, according to current practice, there’s pretty much no expenses attached to the site. At a 30 monthly multiple, the site is worth $150,000.
I invest $48,000 into content over the 2 year period. That’s $2,000 per month. At the 2 year mark when I decide to sell, under current practice, I must report that expenses are $2,000 per month for content. That means the site earns $3,000 per month. At a 30 monthly multiple, the site is worth $90,000.
I don’t understand why the same site with the same content would be valued so differently simply on the timeline of content investment.
Similar to real estate
When you sell real estate, you don’t reduce net income of the property by the cost to build the building as an expense. It’s already built. The cost is incurred. Yes, there are maintenance costs, etc. but the actual cost of building the structure and buying the land is done.
On the flip side, a manufacturing business or retail business has ongoing labor expenses that are necessary to earn a profit. Those expenses are directly attributed to revenue. That’s not the case with future content on a website. Future content is attributed to additional revenue. The current revenue is generated from past investment. In other words, future content will not go toward current revenue.
In my view, a website is more similar to a chunk of real estate than a manufacturing or retail business. Once built, its value is based on current expenses. If the new owner wants to add to the structure, that’s their business, but it shouldn’t be considered a current expense.
Similarly, at the time you sell your site, it should be considered built and paid for. What the buyer does with it is their business. They can sit on it and milk it for cash or invest and add to it. Buyers always argue that the value is based on current net income. I agree. Therefore, buyers can’t also say that net income should be lower due to content costs which only benefit the buyer in the future.
There’s one exception.
Ongoing content cost obligation
There’s one exception where content should be an expense that reduces the net income used for valuation and that is if the website is under contract to pay for future content.
When there’s a cost obligation attached to the sale, that’s an ongoing expense the buyer takes on.
What’s the real answer?
The real answer is your site is worth what someone is willing to pay for it and what you’re willing to accept. The market dictates the value.
Not all sites are sold for the same multiples. Some fetch high multiples (50 X net monthly income) while others low (10 X net monthly income) and most somewhere in between.
If this is the case, why publish this article?
First, any leverage you have during negotiations, the better. You can use this as a negotiation. Maybe you and a buyer settle somewhere in between. That’s cool. There’s no rule that you have value a site in any particular way.
Second, the current industry standard is to expense content cost. I’d like to get the word out that this is not the most accurate way to value a site. I don’t expect my article to change the industry, but the more exposure this idea gets, the more likely the industry standard will change.
I’m happy to see that Empire Flippers is already on board with this approach. I suspect it won’t be long until other brokers follow suit. After all, the brokers that fetch sellers the most money get all the listings.
4 Tips for getting top dollar for your site
1. Avoid selling out of desperation
If you are forced to sell out of financial need, you’re likely gonna leave money on the table. Sometimes stuff happens in life and you have to liquidate. I get it. But, if you can avoid selling out of desperation, you have a better chance of fetching a higher price.
2. Plan your exit – slash costs well before the sale
Don’t wake up one day and decide to sell. Instead, plan the exit. I love Ricky’s strategy (from Income School) where he and his partner Jim cut down on expenses many months before a planned sale. This is brilliant. Since most site buyers focus on the trailing 12 months’ revenue and expenses, slash costs for those 12 months. Don’t slash them so much that you hurt revenue. Your goal is to maintain or even slightly grow revenue while keeping expenses to a minimum. If you normally spend $3,000 per month on content, cut down to $100 per month.
Is slashing costs fraudulent? Not at all. What if you built your entire site in the first month and then let it grow on its own. That works and happens all the time. Would that be fraudulent? Of course not. Moreover, why should you suffer a massive sale price discount for content investments that don’t benefit you but will benefit the buyer? It makes no sense. Okay, I’m repeating myself again. You get the point.
What if the seller asks for content investment for the last 12 months?
Obviously, as a seller, you need to disclose the amount invested in content. I have no problem with that. I just have a problem with deducting the content cost from revenue when calculating the net monthly income used in valuation.
I like Empire Flippers’ position where they suggest sellers don’t include the content cost in the Profit & Loss statement but still disclose it.
3. Improve/update your content before the sale
Instead of adding new content (which costs money), put some time into improving and updating the existing content. Dedicate a couple of hours per week during the 12 months before the sale. It’s very possible this is a much better investment of your time because you may be able to increase revenue faster during those 12 months than if you published new content. The higher you can get your revenue by sell time, and assuming net income increases as well, the better price you’ll fetch.
4. Use a broker that doesn’t require you to expense content cost
This is a practical application of this article. If you’re looking to sell your site and plan to use a broker, choose a broker that won’t require you to expense the cost of content.