I have a very simple online business that I am considering selling:

I own a domain name that has received a steady 200-250 unique
?type-in? visitors every day for almost two years. I send these people
to another website that pays me $15.00 for every sale of an
information product (which retails at $19.95)

On average, I make around 5 sales per day, which is $75 gross profit.
At the end of each month I get about $2250 wired to my bank account -
sometimes more, sometimes a little less, depending on the month.
Fall/Winter/Spring = more, Summer = less (fewer people online.)

I regularly receive unsolicited offers for the domain name for
$10,000, although the domain name is presumably worth far more than
this.

Any idea what I might be able to sell this little business for?

Thanks,

Noble Baron

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Request for Question Clarification by pafalafa-ga on 21 Feb 2005 17:31 PST

It is not uncommon for a small business with a steady stream of income
to sell at five times annual earnings.

If your business is, esentially, your domain name, then it is clearly
worth considerably more than $10K -- perhaps ten times more -- 
provided that a buyer was confident the income would keep on coming
in.  Paying $100K for a business that earns $20K/year would mean that
the business would pay for itself in five years...a very respectable
return on investment (I'm assuming negligible expenses here).

Beyond that rule-of-thumb type of observation, though, what sort of
information would you need to make for a complete answer to your
question?

Let us know,

pafalafa-ga

Valuing a business can be a complex task. Literally hundreds of books
have been written on the topic. However, your question is far less
complicated than most business-valuation questions because the core of
most valuation strategies involves discounting future cash flows. The
key to any calculation is, well, the cash flows. Your cash flows seem
predictable and simple.

We know that future cash flows are worth less than present cash flows.
For example, would you rather have $100 now, or $100 guaranteed
payable a year from now? Putting a value on that future cash flow
requires us to calculate the time value of money. For that we need a
discount rate.

Suppose you believe you can earn 10% on your money. If that is the
case, then you should discount future cash flows at 10%, which is the
amount of profits you are sacrificing by waiting for the payment. The
cash flows are guaranteed, so there is no need to adjust for risk. To
calculate the value that $100 payable next year, divide the cash flow
($100) by 1 + the discount rate (1.10). The resulting value is $90.91.
So if someone offers you $92 today or $100 in a year, and you believe
you can make 10% on your money, then you should take the cash now.

Why did I bore you with this? So that you?ll understand there?s a
theory behind the calculations I use to estimate the value of your
business.

Your business delivers cash flows of roughly $27,000 a year. In order
to calculate a value, we must make some assumptions.

Assumption #1: The size of the cash flows is unlikely to change as
long as you perform the current services for the current client. That
may or may not be a safe assumption because markets can change in an
instant, but based on the information you provided, it seems
reasonable.

Assumption #2: You have a written, exclusive contract with the company
that pays you the commission. Such a contract would allow any
purchaser of the domain name to continue operating under your current
agreement.

This assumption is important because if you do not have a contract
with the company that pays you $15 for the products, your cash flows
could stop at any time. The selling company could design its own Web
site to do the job you?re doing, decide to start sending you less
money per sale, or find an alternate service provider. If the guy who
does this is a friend of yours and may call the deal off if you sell,
then the domain name is of little value to the purchaser.

Assumption #3: At current levels, the stock market is not likely to
deliver exceptional returns over the next 10 years. But neither should
we expect declines. Let?s assume you have the option of investing your
money in the S&P 500 Index at an annual rate of around 8%. That
represents the hurdle rate, the rate you (or a buyer) could earn by
putting money into the market rather than depending on your package of
cash flows.

Please keep in mind that Assumption #3 relates to both the buyer and
the seller. If the buyer believes he can earn 12% with his money, the
discount rate will be higher, and he?ll be willing to pay less for
your business than you would demand. You can?t control what he thinks.
Your discount rate may indeed be different than his. In fact, each
buyer is likely to have his own distinct discount rate. But I?ve
assigned 8% as a starting point for the return assumption, with the
S&P 500 as a convenient proxy for the market. You can play around with
the numbers to determine an alternate value if you want. At the end of
this posting, I?ll direct you to an Excel spreadsheet that will allow
you to change the assumptions of the equation.

Also keep in mind that the discount rate must reflect both the
opportunity costs (the profits available through an alternative
investment) and the risk of the cash flows. Without more knowledge of
exactly what you?re selling, the resilience of the market for that
product, and the relationship between you and your partner, risk is
difficult to assess.

For better or for worse, revenue streams from referral sales are very risky. 

They must reflect the risk that the product will not perform as
advertised, that competition, new technology, or
economic/political/social change will erode the market for the
product, and all of the myriad other risks inherent in any retail
business.

In addition, you are the middleman, and the discount rate of your cash
flows must reflect the risk that you could end up with a smaller slice
of the pie or be cut out altogether. Additional risk always looms over
Internet businesses, simply because it is so cheap for others to enter
the market and compete.

Economic theory holds that when markets offer high profit potential,
competitors will enter those markets. Internet markets have few
barriers to entry, which makes it easier for those competitors to
start fishing in your pond.

Because of the risks of your business, I?m going to assume that your
cash flows are roughly three times as risky as the S&P 500. If you
believe the cash flows are safer than that, you can change the
discount rate in the spreadsheet to get another value. But unless you
have an exclusive, multiyear contract with a site that sells a
necessary service with little danger of obsolescence, it is likely
that your cash flows are at least twice as risky as the market, and
three times as risky is more likely. If you?re selling a hot, new
piece of software with a short shelf life, or a service that a large
company could decide to offer for free as a customer-retention tool, I
could be seriously underestimating the risk of your cash flows.

In any case, we?ll assume a discount rate of 24%, three times the
expected 8% return of the S&P 500. If you?re marketing a fad product
or something likely to draw in lots of competition, consider using a
discount rate of 32% or even 40%.

The value of a perpetual income stream is equal to the cash flow
divided by the discount rate. In this case, it would be $27,000 / 24%
or $112,500. But don?t get excited yet.

Unless you can demonstrate that your cash flows are likely to continue
uninterrupted for more than 20 years, the perpetual value is more than
what your business is worth.

Let?s go with a more reasonable assumption, that you are confident
that cash flows will continue for three years. Three years of $27,000
cash flows discounted at 24% is worth $53,495 today. The farther out
you try to predict cash flows, the less dependable the prediction.
Less-dependable predictions translate into more risk. So if you want
to assume five years of cash flows, you should increase the discount
rate. Assuming a higher discount rate of 32%, five years of annual
cash flows are worth $63,321 today.

Any business valuation must also reflect a terminal value, or the
value of the business?s assets after the cash flows are paid. Since
Web sites are simply intellectual assets with no intrinsic, physical
value, I?m assuming that once the cash flows dry up, the site will
have no value. If your domain has strong name recognition, you may
have some terminal value.

Suppose your domain name is well known, and repeat customers are
likely to continue visiting even after your collaboration with the
current seller ends. If you believe you could leverage that same
domain name into another business model, then the domain has some
terminal value. If your buyer is simply interested in the cash flows
and isn?t likely to make an entrepreneurial move to cash in on the
domain name, then to him, the name will have no terminal value.

If your goal is to sell the business, your best bet is to assume no
residual value, simply because any residual value for future use of a
Web site will be almost impossible to calculate. Alternatively, you
could rent the domain name for three or five years and assume control
again at the end of the contracted period so you can pursue your own
business idea.

Below are some numbers I calculated based on different discount rates
and cash-flow schedules.

Monthly dash Flow	Annual dash Flow	Estimated S&P 500 Return	Risk
Relative to S&P 500	Discount Rate	Value Assuming Perpetual
Payments	Value Assuming 3 Years of Payment	Value Assuming 5 Years of
Payments
							
$2,250	$27,000	8%	3.0	24%	$112,500	$53,495	$74,125
$2,250	$27,000	8%	2.0	16%	$168,750	$60,639	$88,406
$2,250	$27,000	8%	4.0	32%	$84,375	$47,690	$63,321

If you?d like to play around with the numbers, you can access the
spreadsheet at http://www.wecanwrite.com/CashFlows.xls.


V

P.S. If you?re a glutton for punishment and would like to learn more
about discounting cash flows and more complex business valuation, the
section below is for you. I pulled this section from a question I
answered for another Google questioner about business valuation.

Warning: Gratuitously complicated section to follow:

The discounted cash flow valuation is the sum of the company?s cash
flows, discounted at a set rate to reflect the risk of those cash
flows. The formula for a discounted cash flow is written as:
CFt/(1+r)t  --  The cash flow for period ?t?, divided by one plus the
discount rate, raised to the power of t. The value of the firm or the
equity stake is the sum of the future cash flows, usually representing
fixed amounts for five or 10 years, and an estimated terminal value.
For additional details about how the process works, check out
http://www.creativeacademics.com/finance/dcf.html#work

The difficulty here is not in the calculation, but in the assumptions
of future cash flows and the discount rate. The discount rate is
probably the most difficult to determine.

Once you have determined your inputs, the calculator at
http://www.creativeacademics.com/finance/dcf.html will calculate a
value for you. Alternatively, you could come up with ballpark
estimates for your company and calculate an estimated valuation that
will serve as a check on the other calculated values.

As for developing your assumptions, I cannot help you in detail. This
forum is inadequate for providing instructions, as the determination
of the cost of equity, cost of capital, and cash flows are tasks both
complex and company-specific. The access you have to company financial
data and the quality of that data will determine the difficulty of
calculating the cost of capital and estimating cash flows. However,
any advice I give you without spending hours examining your company?s
books and familiarizing myself with its operations would have little
practical value. If your stake has a substantial value, I?d advise
hiring an accountant to help you determine the inputs. Alternatively,
if you have good data and don?t mind crunching numbers, I have
provided some links that can help you do the math. Warning: This is
not for the faint of heart.

http://www.business.com/bdcframe.asp?ticker=&src=http%3A//rd.business.com/index.asp%3Fbdcz%3Dil.l.ml.e%26bdcr%3D5%26bdcu%3Dhttp%253A//www.stern.nyu.edu/%257Eadamodar/pc/model.xls%26bdcs%3D9BD1C5E4-0CE0-47CA-9EFF-A1DCAE0F177020041262915615%26bdcf%3D6e258a3a-10e2-11d4-8f60-00d0b7473557%26bdcp%3D%26partner%3Dbdc%26title%3DAswath%2520Damadoran%253A%2520Spreadsheet%2520for%2520Choosing%2520Appropriate%
2520DCF%2520Model&back=http%3A//www.business.com/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf/&path=/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf

http://www.business.com/bdcframe.asp?ticker=&src=http%3A//rd.business.com/index.asp%3Fbdcz%3Dil.l.ml.e%26bdcr%3D3%26bdcu%3Dhttp%253A//www.stern.nyu.edu/%257Eadamodar/New_Home_Page/lectures/dcfinput.html%26bdcs%3D9BD1C5E4-0CE0-47CA-9EFF-A1DCAE0F177020041262915615%26bdcf%3D6e258a3a-10e2-11d4-8f60-00d0b7473557%26bdcp%3D%26partner%3Dbdc%26title%3DAswath%2520Damadoran%253A%2520Estimating%2520Inputs%252
0for%2520Discounted%2520Cash%2520Flow%2520Valuation&back=http%3A//www.business.com/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf/&path=/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf

http://www.valuatum.com/tutorials/dcf_valuation.shtml

http://bluechips.uchicago.edu/dcfinput.pdf

Excellent, comprehensive answer.  Thank you.

Part of what would be useful to know is how long have you had this
business arrangment at that level of income.  Is the current payment
agreemnt transferrable to a new owner.  What level of risk is there
for the domain name and source of current revenue becoming obsolete? 
What probability is there of the revenues increasing?

Perhaps giving details of the website would help, being a website business.

dancingbear:

Q. How long have you had this business arrangment at that level of income.
A. 20 months.

Q. Is the current payment agreemnt transferrable to a new owner?
A. Yes.

Q. What level of risk is there for the domain name and source of
current revenue becoming obsolete?
A. Low to moderate.

Q. What probability is there of the revenues increasing?
A. Revenues should conceivably remain about the same with no further
work on owner's part.


monoecon:

I would prefer to keep the details of website private at this point.

Thank you both for your comments.

Noble Baron

First off- there is no one and right way to value a business.  There
are many formulas that take into account hundreds of variables ie
asset transfers, goodwill, managment team strength, transfers of
ownership designed to minimize the tax liability of both partiies in
the sale etc.  you business seems to be very straightforward- and
basically a self operating little cash cow.

I went to ask.com to see if there were any guidelines for something as
basic as your business.  Before you answered the my questions for
clarification- by intuition was telling me the value of your business
was around 1-2X you annual revenue.

Here's what Businesstown.com says:
"Sample Valuation Guidelines

An extremely well-established and steady business with a rock-solid
market position, whose continued earnings will not be dependent upon a
strong management team.
A multiple of eight to ten times current profits

An established business with a good market position, with some
competitive pressures and some swings in earnings, requiring continual
management attention.
A multiple of five to seven times current profits

An established business with no significant competitive advantages,
stiff competition, few hard assets, and heavy dependency upon
management?s skills for success.
A multiple of two to four times current profits

A small personal service business where the new owner will be the
only, or one of the only, professional service providers.
A multiple of one times current profits."

I would put you in the last category- and price your business between
1.5-2X your annual revenue.  you could possibly get more- if you were
willing to work out a deal with the new owner where they bought into
it over time.  I'm curious- is that more or less than what you thought
would get for it?

having bought and sold several businesses, the main factors here are
age (20 months is NOT a seasoned income)& what are you selling?
(income base with a low to moderate risk of loss). I agree with the
other writer here that you have a business worth maybe 1 1/2 times
annual income. There are very few small businesses, internet or
otherwise, that receive more than 2 x their annual income nowadays.
Since you essentially are selling nothing (but a name) the risk is
high. Also asked were costs of which there must be some (website
maintanence, hosting, updates, sending whatever product it is being
referred to, responding to customers...) which lowers value also. If
you have to do nothing and still make this income, my question of
curiosity would be, why are you selling? As a potential buyer, that
would by my biggest question mark? and worry.

Yeah- I was wondering the same as Bluegrass - why would you sell what
you have?  Short of needing an emergency hit of cash- if everything
you say is true -it seems smarter to keep it- and a little suspicious
that you want to sell it.  I also meant to write 1.5-2X annual profit-
but according to what you have described - your revenue is almsot the
same as your profit.

Just wanted to say thanks to all who have posted a comment to my
question so far.  I will write more info for you when I have a spare
moment.

Thanks very much for your responses so far - good questions raised.