Understanding the website valuation process is critical when buying or selling a profit-generating website, or any type of online business. There are two levers when it comes to valuations: (1) the average profit and (2) the monthly multiplier.
Determining the monthly multiplier is more of an “art” than “science” in the niche website industry. My goal is to provide clarification on how I go about determining the monthly earnings multiplier using a semi-systematic approach.
In this valuation guide, I cover two approaches to performing a valuation, factors that increase and decrease the valuations, and common questions that arise. Note that this framework applies to websites that generate more than $50/mo on average; it’s not for starter niche sites.
Let’s get into it!
How Much Is My Website Worth? 2 Valuation Methods
There are two methods to valuing a niche content site: (1) profit-based, and (2) cost-based approaches.
The Basic Formula for Valuing Niche Content Websites
The basic formula that is used by most brokers in the content website industry is the following:
Here is a definition of terms:
- L6M: This represents the last-6-months of average profit. Profit is defined as revenue minus operating expenses, which includes hosting fees, domain fees, must-have subscriptions, and content costs to keep the site operational.
- MM: This is the monthly multiple which is determined by the industry-based on-site quality, site assets, industry trends, and more.
In this equation, the two levers are the L6M average and the monthly multiple. The one that is in the seller’s control is the L6M profit average.
Note: if you are buying or selling a seasonal website then you will need to use a last-12-month (L12M) average to capture the ups and downs.
Other Valuation Method: Cost Approach
Another approach for valuations that the real estate industry uses is a cost approach. This is where the appraiser will value the asset from what it would take to rebuild that asset from scratch today.
To understand the raw cost of a content website, check out this calculator and guide. This approach takes into account the following for niche sites:
- Site age
- Amount of articles and word count
- Formatting costs of content
- Number of backlinks
- Site buildout costs
The challenge of using a cost approach on content websites is one cannot value the organic traffic. With real estate, theoretically, you can build another property in the same area and garner the same rental income. With websites, you cannot build another website and get the same organic traffic immediately; the SERPs have scarcity and not all websites are created equally.
How To Calculate A Website’s Profit and Loss (P&L)
To calculate a website’s profit, you need to consider all revenues and operational costs. For all sites I buy and sell, I like to organize data into a standardized spreadsheet. Here is the one I use:
Any revenue that is generated via passive sources, e.g., Amazon Associates, Ezoic, Mediavine, AdThrive, affiliate networks, lead generation, can be added to the P&L as-is.
For other sources, primarily sponsored posts, where you obtain revenue for allowing other sites to write a guest post or obtain a backlink from your site, those get discounted 50%. This is because (1) this dilutes the site’s authority, and (2) it’s not passive since there are back and forth negotiations and formatting that need to be done.
Determining Operational Costs
These are the costs that should be added to the P&L:
- Domain renewal fees amortized
- Monthly hosting fees
- Email service provider subscription fees
- Social media tool fees
- Content needed for maintenance
- And any other fees that are necessary for the site to operate
Capital Costs vs Operating Costs for Niche Sites
Capital expenditures include costs incurred for growing the site. Operating expenditures include costs to operate/maintain the site.
Oftentimes, niche website builders invest heavily upfront to grow a site. When I invest in a website, at times I spend 2-3x of the monthly revenues from the site out of my pocket to further grow the asset. This can last for 6+ months.
These growth costs are NOT required for the day-to-day operations of the website; these are for growth only. These costs should NOT be included in the P&L. Only the costs associated with maintenance should be included.
The biggest cost is usually content investments. A typical niche website requires approximately 3-5 articles a month to maintain its freshness at a bare minimum. However, during the growth phase, you may be investing in 50-100 articles per month. Do not include those costs in the P&L.
Monthly profit is calculated as all the revenues minus the operational expenses in a specific month. This is done for all months in the P&L.
Estimating The Monthly Multiple When Determining Website Value
Each website buyer and broker will have a different stance on what is a fair market multiple for a business.
I like to follow a more standardized process to determine the multiple. This includes using a base monthly multiple and then adjustments for different aspects of the business.
Setting the Base Monthly Multiplier: 35x in Q2 2021
The base monthly takes into consideration the industry as a whole, what other sites have sold for, and also assumes the site is performing well. The baseline assumes there are no issues with the website (i.e., no toxic backlinks, downtrend, etc).
By analyzing the market listings from brokers, private sellers, etc., you can gauge the monthly multiple. This base multiplier can then be adjusted for specific scenarios. Note that this multiple is for the FINAL closing price of the deal. Many brokers will increase multiples artificially but after negotiations, the actual market multiple is achieved.
5 Factors That Cause Monthly Multiple To Increase
Each website has factors that cause it to be valued higher than other websites. These incremental factors are adjustments to the base monthly multiplier which during the due diligence phase can be uncovered and factored into your final sale multiple.
Note: In these factors, I will not state how much the multiple should increase because there are many moving pieces, and assumptions to be made. My goal here is to state what can increase the multiplier so that you, as a buyer or seller, are aware.
1. Domain’s “Indexed” Age
Domain age has two factors when it was registered and when the site’s content has been live. Many domains get registered but just sit idle. The age we are looking for is how long the website with content has been live and indexed in Google.
You can find this information usually by looking at the oldest content’s published date through the sitemap. Or, you can ask the seller when was the first article published on the site.
An aged website has a higher value. This theory has a few factors why:
- A site that’s indexed for longer has had a long time to obtain natural backlinks thus more authority
- A site that’s aged has gone through more Google algorithmic updates
- A site that’s aged has a longer history of revenue generation
I am personally willing to pay a premium to acquire a site that has been live than a newer site.
As an example, I paid a 75X multiple for my outdoor site (case study here) because it was aged since 2010 thus has had time to obtain many natural backlinks.
2. High-Quality Backlinks
In line with the domain age is also high-quality backlinks. I value sites higher if any of the following are true:
- Does the website have editorial backlinks (e.g., NY Times, Forbes, CNN)?
- Does the website have niche relevant backlinks from high-traffic sites?
Note that I am not referring to blog comment backlinks; I mean contextual backlinks within the content of these authority sites.
Such backlinks provide a “moat” around your website allowing you to rank for keywords easier, survive Google updates in the long term, and reduce the effort you need to put to build new backlinks.
Valuations calculations value a website on just profit alone. This forces an aged site with quality backlinks to be valued similarly to a brand new site with the same last-6-month average profit.
In my opinion, this is wrong.
3. Upward Traffic and Revenue Trend
An upward trend is a positive sign for a buyer when buying a site. Usually, an upward trend in traffic also correlates to an upward trend in revenues.
When evaluating a site on an upward trend, the L6M average profit is depressed due to the earlier months being lower in profit than the most recent months (e.g., in the 1st month, the site was earning $500 and last month the site was earning $1,000).
However, as a buyer, they are going to reap the benefits of the higher profit months going forward. As a seller to compensate for this, the multiple can be increased.
The buyer is getting a good deal when buying a site on an uptrend. To compensate for this on the valuation, the multiple can be increased.
4. Diversified Traffic Sources
Diversified traffic is nice to have. However, that traffic needs to bring in revenue. If the revenues can be tied back to traffic sources, then a higher multiple is warranted. This is because the site is less dependent on one traffic source to bring in revenue.
The multiplier increase based on diversified traffic sources depends. If a site receives a large portion of traffic (e.g., 50%) from 2-3 sources (e.g., Pinterest, email marketing), then that warrants a higher multiplier increase as compared to just one extra source at 10% of the traffic.
5. Diversified Revenue Streams
A site that has multiple revenue streams warrants a higher multiple. A site that has its digital products obtaining sales deserves a higher multiple.
A site monetized with Amazon Associates and display ads do not deserve a higher multiple than the baseline. In 2021, this monetization strategy has become the norm.
However, if the site monetizes with Amazon Associates, display ads, and digital products, then that warrants a higher multiple.
Here are the revenue streams that deserve a higher multiple, if already implemented:
- Digital products
- Affiliate programs
- Lead generation
- Paid advertising leading to revenues
4 Factors That Cause Monthly Multiple To Decrease
Similar to the factors that increase valuations, some factors decrease valuations. Again, I will list out the concepts, and provide thoughts on adjustments. There is no exact answer to how multiples are adjusted base on these factors.
1. Downward Traffic Trend
The notorious downward traffic trend is the primary reason sites get a lower multiple. Traffic is the biggest factor contributing to revenue for niche affiliate sites. A downtrend on traffic is usually a downtrend on revenues.
As a rule of thumb, I’ve seen downward trending sites receive a 5x to 7x reduction from the baseline multiples. This means a 28-30x multiple.
2. Toxic Backlinks and Private Blog Networks (PBNs)
Low-quality backlinks, specifically toxic links (i.e., adult, foreign, casino links) or PBN links, are a major red flag for many buyers. Thus, this results in multiples being lowered significantly or buyers just walking away.
I do not buy sites with PBN backlinks regardless of the multiple.
A 5-10x reduction in the multiple should be experienced if PBN links are found. That puts the valuation at 25x to 30x.
3. Single Traffic Sources
Most niche sites for sale have a primary traffic source bringing in 80% or more traffic. This is the norm. However, this is risky. If that traffic source gets impacted (i.e., Google algorithm updates), your asset is worth much less.
However, the industry does not penalize sites for having single dominant traffic sources.
Single traffic sources are risky. The industry still values such sites at the baseline multiple of 35X though.
4. Single Revenue Sources
Many website buyers purchase Amazon Affiliate sites as their gateway into the world of website flipping. These are usually single revenue source sites, which are risky. A reduction in commissions by Amazon can reduce your valuations overnight.
Having a single revenue source, while risky, does not impact the baseline multiple of 35X.
2 Factors that DO NOT Impact Monthly Multiple
For a profit-generating niche site, some factors do not impact the monthly multiple and consequently the website valuation. Here they are:
1. Total Word Count and Articles
Total word count or the number of articles on the site does not impact the multiple. Since valuations are based on profits, it does not matter if 50 articles bring in that profits or 500 articles.
This is because the buyer should not have to pay a premium for excessive content on the site if those articles are not performing well. Performance is a key metric in valuations.
2. Website Framework and Design
A site designed with a fast technology stack (e.g., VPS Hosting, GeneratePress, WP Rocket) vs a potentially slower stack (e.g., page builders) does not warrant a change in multiples.
Again, profits are key. If profit can be generated from a site with a slower tech stack, then that warrants the same multiple.
Common Questions about Website Valuations
How do I value sites earning less than $50 per month profit?
Valuating sites that earn less than $50/mo cannot be done using the traditional method outlined in this article.
This is because these smaller sites are seen as starter sites where in this case, the content cost and site build-out costs outweigh the valuations based on the typical multiple. For example, a site earning $50/mo average is valued at $1,750 based on a 35X base multiple but may have upwards of 100,000 words of content for which the buyer paid $5,000 or more.
To value such a site, you need to use a cost-based approach which is outlined in this write-up on how to value starter sites.
How do I value starter niche sites with no revenue?
To value starter sites with no revenue, you need to use a cost-based valuation methodology. In this approach, you find the value of each component (i.e., content, website design, formatting) and put together a valuation.
Read more on how to evaluate such sites.
Practice Valuing Websites!
Understanding the value of your portfolio of websites or one that you are looking to buy is a critical skill to master. When buying, you never want to overpay for a website and later regret it. When selling, you never want to sell for lower than the true value of your business.
There are two ways to continue developing this skill:
- Review public sites for sale on broker marketplaces and reverse engineer how they got to that valuation. Make a bullet list of notes, and what valuation you would place if you disagree with their numbers
- Maintain active P&Ls for all of your sites. This ensures you practice keeping track of the important metrics. You can then use the numbers to practice valuations of your sites (of course, try to be unbiased).