Why Do Websites Sell for So Little Money? This Makes NO Sense to Me

Aereial view of Florida waterfront mansions fs
Aerial view of waterfront mansions in Florida, USA.

DISCLAIMER:  I am not a certified financial analyst.  I am not a certified stock broker.  I am not a website broker.  I am not a certified financial planner.   This post contains some investment information as well as my opinions about website valuations.  The information in this article are my opinions only and not meant to be advice.  

Why are non-website businesses valued so much higher for the same net income?

That has never sat well with me.  It makes little sense.

Okay, websites can be risky, but do they seriously warrant the ridiculously low valuation compared to other businesses?

I discuss this here and give my opinion.

How is the value of a website calculated?

In a nutshell, like any business, a website’s value is based on net income.  More specifically, the value is a multiple of the net income.

These days, websites are valued 10 to 50 times net monthly income.

It’s a huge range.  Older websites with consistently a rising net income with search engine traffic fetch a higher multiple.  Newer sites with a lower net income fetch a lower multiple.

A 50 multiple of monthly income, currently is not something you can count on.

My question is: why shouldn’t you expect a 50 multiple or higher?

I may be biased since I own a batch of niche sites with consistent cash flow.  Their perceived value to me is higher than a buyer’s perceived value.  I get that.

But my inquiry into the current multiples used for a website valuation goes beyond that.  Specifically, when compared to other businesses that generate a positive cash flow, niche websites fetch a ridiculously low multiple.

Price to Earnings Ratio (P/E)

The P/E ratio is a common metric used for assessing whether stock in a company is a good deal.  It’s a multiple metric.  Here’s a simple example.

If a publicly traded company earned $1 million in the last 12 months and its share price is 20, it has a P/E of 20.  The P/E ratio is calculated by the stock price/earnings per share (EPS).  There are different EPS figures used, but that’s it in a nutshell.  We don’t need more detail for this discussion.

Taking our publicly traded company with a P/E of 20, that’s a whopping 240 monthly multiple.  In other words, the company is valued at 240 times net monthly income.

Compare that to websites which are lucky to command anything above a 35 monthly multiple.

And no, a P/E of 20 is not an inflated example.  Many companies maintain a 20 P/E.  Some maintain higher ratios; some a bit lower.  Few, if any unless it’s a distressed company, have P/E ratios as low as website valuations.

In today’s climate, websites are valued with a 1 to 4.5 P/E.

Compared to publicly traded companies (and likely private companies), website’s P/E ratio is absurdly low.

After all, a website that generates consistent profits is no different than any other business that generates profits.

Why are websites valued so much lower than other businesses?

I don’t have the answer, but I can hazard a guess:  Risk.

For buyers, websites are perceived as risky investments.  I agree, there is risk to them.  The following are risks all websites face:

Loss of traffic:  Most websites are dependent on 3rd party platforms for traffic such as Google, Pinterest, Facebook and YouTube.  Those traffic sources can disappear any day which can dramatically reduce a website’s value.  This is a real risk.

Low barriers to entry:  Anyone can start a website with little cash.  You don’t need a degree.  You don’t need $100,000.  You just need access to a computer.  Therefore, competition is a constant risk.

Loss of revenue streams:  If a website earns from display ads and/or affiliate commissions, these revenue sources can disappear overnight.  Google AdSense can ban the account.  Amazon can kick an affiliate out.  Affiliate commissions can be reduced (this has happened to me).  Like traffic, many niche sites are dependent on 3rd parties for monetization.  This is a real risk.

No tangible assets:  Plenty of corporations own real estate.  This has intrinsic value independent of the company’s cash flow.  Websites do not own real estate and therefore there are no tangible assets independent of the revenue stream.

Some website-based businesses do have a high P/E

Facebook and Google have P/E ratios in the 20 range.  It goes up and down a bit, but these are digital companies.

Of course, they are the traffic sources and own real estate, so their risk is lower than niche sites.

Do these risks warrant such low valuations compared to other businesses?

I think not, but then at the end of the day, stuff, including businesses are only worth what people are willing to pay.

My opinion doesn’t matter EXCEPT for the suggestion that if you believe websites are undervalued right now, they offer an exceptional opportunity.  Not only can you generate a monthly income that will have some value, but if multiples grow over the next few years, that will quickly increase the value of your websites.

All businesses have risk

Remember Blockbuster?  Blackberry?  Sears?

There were seemingly invincible corporations that have gone bankrupt or suffered financially.  Ironically, website-based businesses bankrupted Sears.  Amazon and other leading online retailers have contributed to the demise of many brick and mortar businesses.

Will website valuations increase?

This is not based on a wish.  It’s based on two considerations:

1. High ROI

I think the multiples used for valuing websites will increase in the future.

The potential ROI from investing in investments can be insanely high.  I’ll give you an example from a website I purchased.

3 years ago I paid $10,000 USD for a website that earned $200 per month.  Actually, the net monthly income was $0 because server costs were $200 per month.  I paid a premium because the site had excellent authority, traffic, content, inbound links and was 8 years old at the time.

When I bought it I had no plan for it.  I just knew it was a good site to buy.  It was solid in every respect.

Fast forward 3 years (5 months ago) and I finally knew what to do with it.  I started adding content daily.  It now earns over $1,000 USD per month after only 5 months of work on it.  At a 30 month multiple, it’s worth $30,000.  That’s an amazing ROI for 3 years.  I cringe to think how much it would be worth if I knew what to do with it when I bought it.  I have huge plans for this site and expect it will be worth far more in 12 months.

2. Low Inventory

I scan websites for sale at Flippa, Empire Flippers and other brokers regularly just to see if there are any deals to be had.  Usually, I’m surprised at the lack of decent content/niche sites available for sale.

There are plenty of e-commerce sites for sale, but few quality content sites monetized with ads and/or affiliate offers

That means these content sites are getting snatched up.

Investors are discovering that well-run websites can deliver a very good return on investment, especially at today’s website valuation multiples.

Seriously, what other industries can you buy a solid cash-generating business with a P/E of 3?  It’s hard to find, if not impossible.

What else does this mean?

This also means people who have a successful track record growing websites may have huge opportunities to earn good salaries in organizations that invest in websites.  These investment organizations will need people to manage and grow the websites that they invest in.  It COULD be a big industry.

Finally, this means that this line of work is very, very exciting for anyone who enjoys it because while it’s fun and lucrative now, it could be even more lucrative in the future.

Should you hold off selling websites right now?

That’s a decision that involves a lot more than is discussed here.  There are many factors you must consider when deciding whether to sell a website.  I discuss whether to sell or not here.

DISCLAIMER: Just in case you missed the first disclaimer, the information in this post is just information.  It’s my opinion.  It is NOT advice.  I’m merely speculating about the nature of website valuations with an optimism that only a website owner could have.

 

13 thoughts on “Why Do Websites Sell for So Little Money? This Makes NO Sense to Me”

  1. For an example of risk, look at the sale of 10beasts.com – sold for over $500k, slapped with a Google penalty straight after (for abusing .edu / scholarship link building), traffic fell off a cliff. In that particular case they were able to get the penalty lifted, however if I was an investor that would factor into my calculations.
    Broadly I agree with you & think websites will become more highly valued over the next few years, as more sophisticated investment groups discover the opportunity.

    1. Hey Colin, thanks for the 10beasts.com example. That is indeed a risk. I also agree that institutional money will find their way into investing in websites. It’s bound to happen, if it’s not already. That will be very good for niche site owners. Imagine if you could get a 100 or 150 monthly income multiple.

  2. Excellent and thought-provoking, Jon. Indeed many websites do sell for way too low a price, IMO. So much is made of the “risks”, which, as you point out certainly exist.

    But the risks of brick and mortar businesses exist and are very real as well.

    Suppose you buy a shoe store in a mall and name it “Jon’s Sports Shoes” and feature Nike(tm) shoes. And Nike(tm) decides to sign a promo deal with (perhaps) the wrong spokesperson.

    Ooops. There goes months of profit down the drain while the rent for the store, sales help payroll, utilities, etc. just keep on reaching into your pocket every month.

    If you bought a sports shoe website instead, the worst that would happen is a dip in sales without any huge monthly expenses to meet while you rode out the decline or, worst case, you could switch brands/products and start promoting something else virtually overnight.

    1. Good analogy Dave and you bring up a very good point about the lower risk side of websites and that is the far lower overhead. Profit margins are ridiculously high compared to brick and mortar businesses which is great. Of course, you can easily fall into the overhead trap quickly as well by hiring too many people and/or paying for too much stuff you don’t use.

  3. I think overall the valuations have increased a little recently. I sold a site in August and got a better deal (36x) than I have in the past. I used a broker who I have known for several years, and he said it’s a pretty strong seller’s market right now.

    I do think the risk is a big factor. I’ve sold several websites over the years, and from what I can tell all of them have dropped in income after the transition. I also have friends who have sold sites, and typically the go down hill after a sale. Whether that is because of risk or because of not being effectively managed is a different topic.

    1. Hey Mark,

      I don’t doubt site revenue goes down after purchase. It’s hard to jump in and know how to do it like a founder. When I bought my first site I didn’t have a plan. I developed one three years later. It’s best to have a concrete plan of action before buying it.

      That’s great news on the 36x multiple you got. I’m not surprised multiples are going up because there’s very little inventory.

    1. Hey Tomasz,

      That $200 per month was what the seller was paying. I brought in the site into my hosting account with all my sites. I highly doubt it that site costs me $200 per month now. I agree, he was overpaying so in that case, the site had somewhat of a net income when I bought it. Even with $200 per month profit though, I paid a big premium for current valuations. I paid 50 times monthly income assuming $200 per month net income.

  4. P/E ratios of 20 are for things like growth tech or pharma companies with a bondifide business models, patents, and moats.

    Large consumer staple companies are 8x-10x.

    Most brick and mortar sell between 4x and 5x.

    No way in hell am I paying 20x annual earnings for a website that has virtually no moat and whose earning are at the whims of Google, Amazon, Pinterest, and/or Facebook.

    35x monthy earning (3x annual) is a fair price for a really good informational site with organic links and traffic.

    Less if shady link building and/or shitty content has been used.

    IMHO, YMMV

    1. Good points Mike. Thanks.

      While websites can be risky, the potential ROI when run by a knowledgeable person can be very, very high especially if you buy an existing site that’s under monetized and neglected. While 100x monthly earnings may see outrageous now, if more institutional investor money moves into website portfolios, that demand will increase the multiple used very quickly, especially if ROI continues to to be good. Any time there’s an above average return opportunity, prices will go up until it hits equilibrium.

  5. Hey Jon!

    Solid post as always man.

    I can help clear up one of the reasons why websites and online businesses in general tend to get lower multiples than say your local laundromat.

    I’m the director of marketing at Empire Flippers, so this is something I see on an almost daily basis. Unlike the other companies you mentioned, there is just no real financing in our space. You’ll be hard pressed to get a business loan to buy a $500,000 affiliate site for instance.

    The only real financing around is basically seller financing, potentially SBA loans (but these have a high failure rate of succeeding), or using other assets like real estate HELOCs to draw the loan from. A big reason why so many mini-funds are being created right now where people raise funds from investors to buy websites is exactly for this reason.

    Even if financing did start entering in a bigger way in our industry, they’ll likely still start in the $2-3 million range because the amount of work at the $3 million range is much the same as the $100k level… only with far less upside for the lender.

    Since this is a cash in pocket heavy industry when it comes to buying businesses, multiples for online businesses have stayed pretty low compared to offline businesses.

    This makes it at once an awesome time to be a buyer AND a difficult to be a buyer at the higher list price tiers. The moment financing companies figure out how to give financing to this space though, my gut instinct is that multiples will likely shoot up.

    We’re seeing multiples move up consistently year over year as is, so I think with financing entering the ring we would see even more of this.

    One point you made is super true… there simply are not that many great branded content sites out there in the market right now. This is a great thing for sellers, because buyers ARE hungry for this kind of business model and thus willing to pay a premium over say a dropshipping store.

    Out of the six figure content sites we’ve sold, the average had a 28x sales multiple and the highest had a 58x multiple. I think with current demand, content sites multiple in general will probably increase faster than ecommerce multiples.

    Though, I’m a bit biased like you in that I love the content site business model 🙂

    Hope you’re doing well man!

    Talk soon
    -Greg

    1. Hey Gregory,

      Wow, thanks for the insider’s insight into the issue. The financing angle never occurred to me, but that makes total sense. Simple supply and demand. The industry is still in its infancy so no doubt financing will enter the picture, but it’s tough given there are no tangible assets to secure the loans. But, money always makes its way to high ROI situations and currently when well managed, content sites enjoy a very good ROI with low overhead and relatively low cash needed operate (relative to capital intensive industries). Thanks again for your insights.

  6. Not all indicators are pointing to increased multiples for online assets. At this point, I think Google is generally a negative factor for content website valuations. This trends continues. They are making it increasingly difficult to increase (even maintain) pageviews due to the Knowledge Graph, rich snippets, tons of paid advert listings in the SERPS and no click search results in general. You could argue that info-based websites peaked somewhere around 2015.

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