Earnings Multiple, Passive Income, & Strategic Website Investments
Website buyers invest in websites with different objectives. However, most website investments fall into one or more of these 3 categories: Earnings Multiple investment, Strategic investment, and Passive Income investment.
1. Earnings Multiple Investment
The vast majority of website deals tend to fall in this category. In this case, the investor is looking to buy at a certain multiple of a website’s earnings or profits. This multiple generally depends on how stable the earnings are. This is similar to P/E ratio for stocks. Multiples can range from as low as 1 to as high as 4 times earnings, or more. The final sale price depends on the value of all the assets included in the sale and the bargaining power of the parties involved in the negotiations.
2. Strategic Investment
Strategic website investments are less about earnings and more about how a website fits in with an investor’s website portfolio or expertise. For example, an investor who owns an e-commerce website that sells women’s shoes may decide to purchase an e-commerce website that sells men’s shoes. In this way, she can apply the knowledge she built while successfully operating the women’s website to improve the earnings of the men’s website.
This acquisition also adds a website to her portfolio that enables her serve a new audience. And she may be able to cross-promote one website on the other website.
Finally, the websites could share costs like website hosting and staff. Thus, the cost of managing the websites together could be significantly lower than the cost of managing them individually.
3. Passive Income Investment
Sometimes an investor cannot or does not want to actively manage a website. He wants someone else to manage it and he’s primarily interested in the passive income that the website provides to him. In some cases, investors take a minority ownership stake in a website that is managed by a business partner. In this way, the investor earns steady cash-flow from his investment.
Some website deals fit neatly into one category. However, most website deals are actually hybrids of one or more of these 3 types of website investments.
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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