Pricing an online business?

[rogercbryan]

This is a VERY simplified version

I’ve been ‘arguing/discussing’ with a few people about what the proper way is to price a business when you are selling it.

I see more and more people trying to sell their business based on their annual SALES. Most will have 2-3 months of sales… let’s say $500 a month in sales. They will take their monthly earnings and multiply it by 12. So $500 x 12 = $6000 asking price.

It is my opinion that the figures should be based on NET PROFITS. So if the site is making $500 per month in sales but has $400 in advertising expenses (or) if the site is a drop ship site and it has $500 per month in sales but COGS of $400 then the site is only profiting $100 per month. 12 x $100 = $1200

This is a very simplified version. I’m not talking about branding, traffic, site scripts, or dbs values. Most people don’t take that into account online anyways (unfortunately).

What is everyone’s opinion on this?

[BringTheSilence]

No one cares - 1 - 100%

[rogercbryan]

No one cares - 1 - 100%

Huh? What are you trying to say here...?

[akula]

This is a VERY simplified version

I’ve been ‘arguing/discussing’ with a few people about what the proper way is to price a business when you are selling it.

I see more and more people trying to sell their business based on their annual SALES. Most will have 2-3 months of sales… let’s say $500 a month in sales. They will take their monthly earnings and multiply it by 12. So $500 x 12 = $6000 asking price.

It is my opinion that the figures should be based on NET PROFITS. So if the site is making $500 per month in sales but has $400 in advertising expenses (or) if the site is a drop ship site and it has $500 per month in sales but COGS of $400 then the site is only profiting $100 per month. 12 x $100 = $1200

This is a very simplified version. I’m not talking about branding, traffic, site scripts, or dbs values. Most people don’t take that into account online anyways (unfortunately).

What is everyone’s opinion on this?

interesting question
personally, i think the point of the game is to get a valuation range, and use transactional/tactical issues for the pricing
so, let's say you do both the sales and the EBIT valuations
the sales is 100k and EBIT is 50k...so that becomes your range
once you have a range you'll price the thing...for example, because the buyer can pay cash upfront, you'll give him a 25% discount on the upper end of the range and price the transaction at 75k
....ideally....you wanna avoid the whole "preferred valuation method" argument with the buyer by applying all the methods to set a valuation range and negotiating in that ball park

[jack1887]

if you think it is a goodidea then do it

[rogercbryan]

interesting question
personally, i think the point of the game is to get a valuation range, and use transactional/tactical issues for the pricing
so, let's say you do both the sales and the EBIT valuations
the sales is 100k and EBIT is 50k...so that becomes your range
once you have a range you'll price the thing...for example, because the buyer can pay cash upfront, you'll give him a 25% discount on the upper end of the range and price the transaction at 75k
....ideally....you wanna avoid the whole "preferred valuation method" argument with the buyer by applying all the methods to set a valuation range and negotiating in that ball park

I agree with this. Here is the exact numbers I'm looking at for a deal that made me ask this question.

One year average monthly sales
$9000pm x 9/12 = $81,000 / $108,000
* I use 9/12 as per 9 month period or 12 month period

The asking price for the deal was $88,000
The current auction price was/is at $12,500 (with 24 days to go)

I started to get into the accounting questions so I could evaluate this deal. First off the owner had no P/L he only had screen shots from his inventory system that showed sales price, tax, and COGS. This made me a little nervous. I was able to take the COGS and use that to determine he was operating on a 20% margin (average) for the products he was selling. So I took that information and did the following calculations.

$9000 x .2 = $1800pm x 9/12 = $16,200 / $21,600

This gave me an EBIT of $16,200 to $21,600. I told the seller that this is the range I would consider. The seller was a little dumbfounded but still professional so I decided to continue the conversation.

So if we are using the idea that you gave that would give me a (12 month range) of $21,600 on the low end and $108,000 on the high end.

I now have to consider:
Site design
Supplier contracts
Customer db value
PR
Completed SEO
Traffic
Branding

He has to consider:
Payment Schedule

I like this. It gives a middle ground for further discussion. He also has now taken the time to gather his information based on his sales records (which he has shared with me) to create the normal accounting reports. While it bothers me that this is a two year old company that never had a P/L done before I’m somewhat content that the numbers are accurate.

Back to the negotiations… thank you for your input!

[rogercbryan]

if you think it is a goodidea then do it

Please read the above post and look at the numbers... when you are dealing with this much money you can not simply... just do it