What Makes a Million Dollar Website?

[emilybon]

I have been working on a website for a couple years now and think I am ready to sell it and move on to another idea I have.

I have an idea of what makes a website salable, however, I would like to get a more organized list of criteria such as CENTS.

To start off and in guide with CENTS, I have the following list. Let me know if I am missing anything. Also, I can't remember how to value a website, is it 5x the monthly or yearly revenue? Net or gross revenue?

1. It should provide a need to a market.
2. It should contain an automated system.
3. It should have ? new visitors per day.
4. It should earn ? net or gross revenue per month.

Thanks.

 

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[Inphinity]

I think it's going to depend a lot, like any business, on what industry it is it. The factor which you multiple annual revenue by to get a company value is often variable between industries and such, as well as taking in to account any special circumstances. I'd suggest if you want a website to sell for $1mill, you'd want to be doing $35k/month or so in revenue, but that's just an estimate based on a few specific examples I've dealt with previously, which may be out of line with the "overall" market at the moment.

 

[snowbank]

I'd suggest if you want a website to sell for $1mill, you'd want to be doing $35k/month or so in revenue

People get profit and revenue confused a lot. The point of business is not to make revenue, it's to make profit. There are exceptions to the rule, but businesses are usually valued based on what they make. If your business does $35k per month in revenue but you spend $34k, no one will buy your $1k/month profit business for $1,000,000. If you only spent $1k per month, they might.

 

[Inphinity]

People get profit and revenue confused a lot. The point of business is not to make revenue, it's to make profit. There are exceptions to the rule, but businesses are usually valued based on what they make. If your business does $35k per month in revenue but you spend $34k, no one will buy your $1k/month profit business for $1,000,000. If you only spent $1k per month, they might.

Sorry, yes, you're right of course - was rushed in my typing

 

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[ChrisRempel]

It's not as simple as using a multiplier.

The REAL asset online is an active userbase or customer base.

If you've got an affiliate site online doing $35K/mo in profit but all your traffic is organic, or otherwise from a single source like PPC - and all you do is refer visitors to the vendor, with no client-base building up - that is a RISK.

Therefore, you will be doing very well to sell a site like that for anything over 12X revenue (months). Maybe a better way to state that is that as a BUYER, I would be wary of buying any web property solely dependant on one main traffic source - where all foregoing revenue hinges on new traffic influx. 12 months rev would be my comfortable limit.

This all changes once we start talking about an actual customer-base.

Most biz's majorly under-utilize their most valuable asset - their clients. They don't followup, they don't orchestrate ASK campaigns (and transform them into new offers) - they don't do a lot of stuff.

So if I were to buy a business that brought in 10K/mo profit, and they had an existing client base of 20,000 customers, but they didn't really work with them that much (aside from the odd update, etc.), and they listed the biz for sale at $200K (20 months rev), I would seriously consider that. Potentially, it's a very good deal and underpriced.

Chances are just one or two well-orchestrated product/service launches to the EXISTING customers would cover your initial buy-in, and then it's all just gravy from there.

Plus, you can then launch new recurring model services, put together JV's, etc.

THAT is a valuable online asset.

THAT's the kind of business you can sell for 3-4 years revenue once you are well-optimized and you've got a major client-base you can leverage at any time.

-Chris

 

[kwerner]

Can you define what an "ask" campaign is, Chris? Thx.

 

[Jonleehacker]

I had to go to the internet archive to find this since the original blog where I read it is now offline. It is for affiliate sites but has lots of great info for building a successful, sale-able site.

How to: Build an Affiliate Site You Can Sell for $1M

It takes strategy, tactics, balls, elbow grease, money, and smart planning. Mostly, though, it’s a matter of putting in a lot of time every day to “block and tackle†(a.k.a. “the boring details†or “content and links†or “the grindâ€).
Most people do not have the proper attitude, personality, or personal situation (kids to feed?) to grind it out for 3 or 4 years. You have to wake up, work the 8 to 5 job, come home, lift a few weights, eat dinner, then work 7 to midnight on the side project (which, if it yields any profits, are most likely reinvested).
So, if you can’t/are scared to/aren’t able to grind it out for a few years, this guide isn’t going to help you. Now, even if you are grinding it out, you still are unlikely to build a site you can later sell for $1M: most SEOs are applying their valuable tactics, sweat and money to bad business models.
And that is what this article addresses: making sure that you apply your grind to a site that can sell for $1 million USD in a few years (rather than $20 or $200k).
The Multiple: Why Some Sites Sell for 10x Yearly Profit, and Others Sell for 6x Monthly

To many readers, $1,000,000 sounds like a ridiculous sum to sell a website for (it would seem that way, if you’ve check DP for sites lately). Now, this is partly because “bigtime†websites are usually sold privately, so you’re not going to see the high value ones listed at DigitalPoint or SitePoint.
But we’re also used to seeing low multiple sites for sale on these public forums. What do I mean by low multiple sites? These are sites that sell for somewhere in the neighborhood of 1x their annual profits. If these sites were stocks listed on the S&P, their P/E (price to earnings) ratio would be 1. (Hint: that is an absurdly low multiple for a stock.) Nevertheless, that is the multiple that the marketplace is willing to bear for these types of sites.
What sort of factors would discount these investments so much? (From an investor’s standpoint, that’s what a site is–an investment.) Why, when the investor is willing to pay 15x annual profits to own a share of stock, is he only willing to pay 1x annual profits for a site being sold at DP?
The main reason these sites are so discounted is that they are extremely risky. They generally don’t hold any strategic value for the acquirer (for instance, why Youtube commanded a premium valuation), so their value is solely a function of return vs. risk. The typical site sold at DP:

• Yields revenue from only a single source (Adsense).
• Receives traffic from only a single source (usually a site does well in Google or MSN).
• Has search rankings which are likely not-defensible (based on low quality links, DP co-op weight, links from the webmaster’s own network, etc.)
• Does not have any other valuable assets to speak of besides the revenue stream itself (e.g., there is no newsletter list, no brand name recognition, etc.)
• Overstates profits because the webmaster’s salary (opportunity cost) is not taken into account.

That last bit gets me all the time. First of all, I think it’s pretty hilarious when someone tries to sell a site based on its revenues. If your site brings in $20,000 a year, and you spend $19,000 on cost-per-click, the revenues aren’t really the relevant piece of information, are they? But even in the case above, it is misleading to state that the sites makes a profit of $1,000 a year.
We have to assume that the average webmaster’s time is worth something–let’s say, $30 an hour. If it takes you 2 hours a week to manage the CPC campaign in the example above, your opportunity cost for running the site is $30 x 104 (hours per year) = $3,120. So in fact, this site isn’t making $20,000 or even $1,000 a year… when the salary for the webmaster is factored into account, it is losing $2,120. Small wonder it is selling for such a low multiple! When you combine the overinflation of profit numbers due to ignoring the opportunity costs of running the site with all the high risk factors (single revenue source, single traffic source, etc.) it isn’t surprising that the generally accepted fair valuation multiple at public site-for-sale forums is 1x yearly “profitâ€.
How to Build a High Multiple Site

The thing you need to realize is that there are plenty of websites out there that are actually selling for 5x, 7x or even 10x their annual profit (and I’m not just talking Youtube or Facebook–I’m talking real, everyday websites that a guy like you or me could actually build if we put in a lot of time and elbow grease).
When you take that sort of sale multiple–7x annual profit–building a $1M website is much more realistic and attainable. If you can clear $12,000 a month (in profit, after subtracting your own salary), that’s $144,000 a year; multiple by 7, minus a few thousand for the accountants and lawyers who do the deal–that’s how you sell a site for $1,000,000.
The trick is, it has to be the right $12,000 in profit per month. It has to be $12,000 a month that is defensible, sustainable, diversified, and strategically valuable to larger companies.
So what kind of site is defensible? The long version is here, but the short version is: good domain name, good brand, diversified traffic sources, diversified revenue sources, and measurable assets like RSS and newsletter subscribers.
What kind of site is sustainable? A niche where consumer interest is growing not shrinking, a site with low legal risk (e.g. you don’t host a bunch of copyrighted files or infringe on trademarks). I also personally believe that profit margins based on CPC campaigns are rarely sustainable over the long term.
What kind of site is diversified? Revenue: You don’t make most of your money from Adsense, and you are selling leads or acting as an affiliate to multiple merchants. Traffic: You rank well on all 3 search engines (or at least 2), plus get a majority of your traffic from non-search sources like direct links, RSS subscribers, bookmarks and typeins.
What kind of site is strategically valuable? One that doesn’t reflect negatively on the entity who owns it, and one that exists in a niche with a mature lead marketplace.
Now, that latter statement needs a bit more explanation. Some people like to go after microniches (low profits, low competition). I take the exact opposite approach, for two reasons: Firstly, as I explained in Warren Buffet’s Advice to SEOs, it is highly profitable to be an average player in a highly profitable niche. (Not always the case when you’re the top player in a low-profit niche.)
More importantly (when discussing multiples), to extract full value when you’re selling a website you need to be in a market with an abundance of website-buyers. To use a specific examples (because boy do I hate generic advice!), if your website generates mortgage leads there are about seven hundred zillion (roughly) mortgage affiliates, brokers, lead resellers and argitrageurs who would just love to own your monthly stream of leads. This is going to create an efficient marketplace for when you try to sell your site, and is going to extract the maximum multiple (price). Potential buyers know there are many other potential buyers out there, so they are less likely to lowball you. It would not be a stretch at all for a defensible mortgage site to sell for 7x its annual profit.
Conversely, when there are fewer buyers of leads in your niche, it is going to be very hard to receive an attractive multiple when selling your site. Let’s say there is only one large niche-widget-merchant in your little niche, and you are one of a few affiliates that generate leads for him. When it comes time to sell your site, who is going to buy it? Super-affiliates are going to heavily discount the value because selling leads to a single niche-widget-merchant is risky and not very defensible. If he cuts his payout-per-lead in half, you don’t really have any option but to continue to sell your leads to him (now for half the payout!). Likewise, if you try to sell the site to the actual niche-widget-merchant, he knows he probably isn’t bidding against many (or any) other buyers, so he is likely to only offer a low multiple to purchase your site.
Here’s a little test to see whether your niche has a mature lead marketplace: Login to CJ, and search for your product/service name. Are there at least 5 merchants coming up for your product or service? If so, the lead buying marketplace in your niche is mature.
To summarize: If you want to build a site you can sell for $1,000,000, build a site that makes $12,000 or more in monthly profit, passes my 10 point defensibility quiz, and operates in a mature (large) lead-buying marketplace.
Back to the Grind: Getting to 12k/month

So we’ve covered how to make a site defensible, and how to pick a mature niche. Now we need to figure out how we can get to $12,000 a month in profit (realistically this is something like $17,000 a month in profit before your “salaryâ€, since whoever buys your site will probably have to spend ~60k a year to get a webmaster to maintain the site).
The rub is, I don’t have a step-by-step plan to help you do that. Even if I did, it would be pretty useless–we all have different talents and resources, so the easiest way for me to get there is going to be very different than the easiest way for you to get there. Rest assured there are hundreds of different tactics, marketing channels, monetization strategies and options to get a site to 12k in monthly profit.
I actually recommend you start with what you know. Tactics: Do you know link baiting, how to program AJAX tools, or low-cost offline marketing? Niches: Where have you operated in the past? Do any of your past niches fit the definition of being a mature lead marketplace? Resources: We all have special connections that make things easier; is your dad an insurance agent? Is your college roomate good at manipulating large data sets? Or maybe your husband has a law degree.
No matter what your personal situation is, your strategy has to play to your own personal strengths. For me, these strengths have included:

• Having a partner who is a lawyer
• Being willing to work 12 hours a day
• Being good at link baiting and social media optimization
• Having a team of low-cost, talented writers in India

In the vein of Warren Buffet’s Advice to SEOs, I’ll admit that the following strategems have also served me well:

• Structuring sites so that the ads are the content
• Building traffic of visitors who are in the buying cycle
• Finding affiliate merchants who don’t operate at CJ
• Partnering with reliable, honest people whose talents complement (not overlap with) my own

And Now: The Catch!

Let’s say that 3 years later, you have the site–it’s defensibly earning 17k in monthly profit (12k after your “salaryâ€). A few things might happen. #1, some big company decides they just have to have your domain name or position in the SERPs or whatever tools/assets you’ve developed, and they offer you a 12x or 20x annual profit multiple to buy your site. That’s pretty much a no-brainer SELL, but let’s not count on that, it’s a (relatively) rare occurance. #2, let’s say God forbid you get sick or have some sort of misfortune, and you need to sell your site quickly–in this case you might get a much lower multiple than you otherwise would, but it can’t be helped.
More commonly, you are in a position where you can choose whether or not you want to hold or sell. And here’s the ironic part: you may very well find that the type of site you could sell for $1,000,000 (at a 5 or 6 or 8x multiple) is worth keeping! Personally I feel like if I can get a site to 12k/profit a month in two years, I can probably get it to double or triple that given another year or two. Why be in a hurry to sell? If you’ve developed truly premium virtual real estate, it’s only going to increase in value; meanwhile, despite your Aunt Gladys who thinks money earned online is “silly moneyâ€, if the site is truly defensible, it may represent an option that carries less risk than alternative investments (*ahem* Enron stock *cough* Las Vegas real estate).
If you take the proceeds of the sale of a 144k annual profit site–let’s call our sale price $1,000,000–first you’ll get hit with a long term capital gains tax (at least, us yanks will), and your after-tax pile of cash is now $850,000. If you put that into real estate, the (long term) average rate of return is 3%–you’ll yield $25,500 this year. If you put it in an S&P index fund, you’d average maybe 12%–$102,000. So the alternative uses for our money aren’t even coming close to beating the $144,000 annual yield we got from the website. Meanwhile most of us don’t have the talents to substantially increase the yield we get out of real estate or stock investing (like we would if we were maintaining/expanding a website we founded).
Of course, if most of your net worth is tied up in a single website, there is serious pressure to cash out and diversify that worth (and rightfully so). And most of us with the fortitude and personality to be an affiliate marketer/competitive webmaster in the first place realize that change is good for the soul (and often good for one’s lifestyle)–wouldn’t it be lovely to cash out, put most of the proceeds in an investment account, travel the world for a few months, and start all over again (with a brand new premium domain name)?
It’s a good problem to have.

Whether you decide to sell, or hold, or hold then sell then start again, you’re still in a good place. I’m chasing the dream and I hope all Tropical SEO readers are, too!

 

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[Inphinity]

Brilliant post, thank you!

 

[snowbank]

The thing you need to realize is that there are plenty of websites out there that are actually selling for 5x, 7x or even 10x their annual profit (and I’m not just talking Youtube or Facebook–I’m talking real, everyday websites that a guy like you or me could actually build if we put in a lot of time and elbow grease).

Jon,

Did he ever give specific examples of the sites he was talking about? I know there are exceptions like in anything, but the way he makes it sound is if 7-10x profit is semi-standard, and I've barely heard of any sites selling for these multiples.

 

[Jonleehacker]

Jon,

Did he ever give specific examples of the sites he was talking about? I know there are exceptions like in anything, but the way he makes it sound is if 7-10x profit is semi-standard, and I've barely heard of any sites selling for these multiples.

He didn't give any examples, but he wrote another article about what makes a site "defensible" which is what he considers to the determiner of valuation...

Here it is:

Is Your Site Defensible? A 10 Point Quiz

In my experience the natural motivation to preserve wealth and income is even more powerful than that to increase it. For us SEOs, this means making our sites, rankings, traffic and revenue defensible.


The following quiz is a little cheat sheet to let you know how defensible your site is. (For some, but not all of you, ‘defensible’ is nearly a synonym for ‘Google-proof’.)

1. Does your site rank in more than one search engine? As Google’s share creeps towards 100%, this question becomes less and less realistic… still, there’s a big difference between 6% of organic referrals coming from Y!/MSN, and 36%.
2. Do you get type-in traffic? Whether type-ins occur because of branding and repeat users, or because your domain is keyword.com, is irrelevant. When people navigate directly to your site, no search engine penalty in the world can hurt you!
3. Does your site have a significant number of subscribers? Subscribers can be be to your RSS feed or email newsletter or anything really–the point is, you have repeat visitors and don’t depend entirely on transient traffic.
4. Is your revenue diversified? If a single CPC ad provider (ahem), or even a single merchant, provides a majority of your site’s revenue, then they certainly have you by the balls. They could cut your payout in half tomorrow without much of an explanation, or they could boot you without appeal or recompense.
5. Do you get bookmarked? If you’re booked on Delicious or on people’s browsers, you can count on some repeat visitors and possibly future links.
6. Does your site have citations and links that send you traffic? Maybe SugarRae’s Hall-of-fame post makes sense now
   
   It bears repeating: When people navigate directly to your site, no search engine penalty in the world can hurt you!
7. Does your site have some sort of remarkable value? This question is not asking: is your content “unique� More like, if your site ceased to exist, would the Web as a whole lose something valuable? Would people’s lives be inconvenienced? If the answer is YES, your site is likely to get future citations, links and bookmarks–and further, search engines will have to think longer and harder before banning you or penalizing you, since not ranking your site might make their results less useful.
8. Does ‘arbitrage’–CPC, email blasting, affiliates–make up a minority of your promotional efforts? As Brian Provost points out, marketing methods such as these are often unsustainable over time due to increased competition, structural changes, commodization and margin erosion.
9. Do you have a strong network in your niche? Maintaining a friendly relationship with bloggers, stakeholders, and even competitors can be the key to standing back up when you get knocked down. Think about it this way–is a merchant likely to screw you out of money if you can get their bad behavior blogged about by industry leaders?
10. Are you thinking about/working on defensibility? There are many ways to make a site more defensible that I haven’t listed. If you are actively working on it (regardless of what you call it), you deserve a bonus point. Even thinking about defensibility–if you can apply some of the principles in the future–is going to go along way in protecting your future wealth (and pride).

Rate Your Site’s Defensibility
Well this wouldn’t be a hokey quiz if you didn’t rate yourself at the end! Count how many times you said ‘yes’ to the above questions.

• 1-3 yes’s: You’re F*cked. Probably better and easier to start a new Web site that has a more defensible idea behind it than to fix the old site. In the meantime the old site can sit as an (indefensible) passive revenue stream. (It may also be a good candidate to unload at Sitepoint.)
• 4-6 yes’s: Your site is like most quality Web sites–you have some defensible traits, but still a Google penalty and Adsense booting (or equivalent) would likely cut your earnings by a very high percentage. Even most quality Web sites are fairly vulnerable.
• 7-10 yes’s: Congratulations, you don’t just have a Web site, you have a real, saleable business.

 

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[emilybon]

Thank you Jon,

You added great information to this post that answers my questions.

- Emily

 

[smith360]

The aim of the website was to sell all of the pixels in the image, thus generating a million dollars of income for the creator...

 

[Inphinity]

The aim of the website was to sell all of the pixels in the image, thus generating a million dollars of income for the creator...

Yes, that was the specific approach taken by one specific website.

 

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[emilybon]

The aim of the website was to sell all of the pixels in the image, thus generating a million dollars of income for the creator...

LOL! Too funny. Yes, I remember that site, but that was not what I meant. I am sure you knew.

Actually, the same guy who started that website I think is doing the same concept but in a book now.

 

[DeletedUser2]

I like the 10 Point list.

I buy sites, and Yes i get them for sub 1x a very tiny multiple. but I aways make sure they are in evergreen markets.

Another way to sell for your top price is to sell out of the market, Arbitrage. I notice alot of sales on flippa, are other flippa trollers, who are looking for a deal to buy and flip. however, just taking the site out of that market place and approaching an offline business, or a real estate investor, could dramatically affect the valuation of the site. Real estate investors usually have a predetermined "yield" they are trying to get, and if they could get all their money back in a year this would seem like a "HUGE YIELD" to them. they could view it through the perception of their expectations for rental property. and it could seem like a great purchase to them.

An offline business is in the same boat. A Lead Generation site for a company that is in the same market, could mean they don't have to build out a whole system, and wait years. I recently was approached by a local company that I had been selling leads to, for their product and asked to buy the site. they offered a lot more than I would have guessed. its a tiny site, but done correctly for the local market, and they no longer want me to sell leads to their competitors.

So before you get into a market, look at how it is positioned in regards to lead gen, or a strategic arm of a larger company. build their future department, they would probably be willing to pay VERY handsome multiples above industry average.

But do keep track of that 10 Point list too!

 

[ChrisRempel]

So before you get into a market, look at how it is positioned in regards to lead gen, or a strategic arm of a larger company. build their future department, they would probably be willing to pay VERY handsome multiples above industry average.

This right here is gold, folks.

Done this in one market already. Doing it in another as we speak.

I don't think many lead-gen affiliates realize that their $39 "leads" often equate to $X,XXX or $XX,XXX+ net profits (sometimes much more) for their buyers from a single customer.

Kinda changes the perspective a bit.

And the valuation

Examples of such markets are bridge loans, commercial insurance, investor procurement, etc.

-Chris

 

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[Maxjohan]

This right here is gold, folks.

Agree. Was just about to make a post myself about this thing. I'm currently planning myself to build three web sites in the same niche for a large online company. Hopefully they will look at me, like me and aquire me for $30-$40 million or more, 2-3 years from now. Otherwise I be still making money.

I think personally, after studying all the mega hit sales through the years, like DrugStore.com, that was aquired by Walgreens last month for... yeee $409 million!

If you are smart. You stop building web sites for investors. Instead, you build a web business for a large major player.

Literally you should find a large player in a field. Then build something incredible that sells it self. They will come to you and...that is your chance to ask... not $1 million...not $5 million... but ask $30-$40 million+

$1 million is small potatos, just ask MJ lol

But really, you may as well go BIG.

(Bankaholic.com is one example.)

 

[MJ DeMarco]

In my experience, this is what makes a million dollar website:

1) Cash-flow
Basics of business valuation is the multiple X cash flow (or EBITDA, earnings before interest, taxes, depreciation and amortization.) If cashflow is $200K/year and avg multiple is 5, the business is worth $1.0M.

2) Stability of Cash-Flow
How rock solid is the cash-flow? Can a Google algorithm change disrupt the cash flow? Can a "super-affiliate" quit and erase 20% of your cash flow? How stable is the cash flow?

3) Customer List
How easy (or hard) is it to acquire (or reacquire) your customer list? Is your database have 1,000 or 1,000,000?

4) Start or Buy?
Under both instances when I sold my company, the buyers ultimately wanted to know if it was CHEAPER to invest the purchase capital into an entirely new business and start fresh ... OR, allocate the capital into an existing business and bypass the startup phase.

5) Industry entry barriers / Industry size
How easy (or hard) is it for competitors to enter the market, compete, and steal marketshare? How large in the industry? In other words, if your website has 99% marketshare, the grow potential is small. If your website has .05% and is earning millions, the grow potential is huge.

6) Brand
Does the website have a defense created in the form of a brand? Or is it a business?

7) Proprietary property / processes / systems
Does the website offer something proprietary or unique that others don't? A patented process or proprietary software solution? (Similar to #6, brand)

8) Records
If someone is interested in your company/website, make sure to have GOOD, ORGANIZED records. If you say you are earning $1M a year but the acquiring company cannot document it, it makes your liquidation task that much harder.

Awesome question.