How Information Reduces Investment Risk and Increases Website Sale Price

The more information available to an investor, the lower the perceived investment risk to the investor. This applies to investors in all asset classes such as investors in private businesses, publicly-traded stocks, bonds, and real estate.

How does this apply to website assets?

Websites are private businesses. The more information a website buyer has about a website he’s interested in acquiring, the more comfortable he’ll be in making the investment. The investor’s comfort level determines how much capital flows into the investment.

Information and Liquidity

When an investor has lots of information about an asset, he transfers his cash to the seller faster in exchange for the asset. There’s higher capital flow. This asset is liquid. It can be turned into cash quickly.

When he has less information about an asset, he moves his cash much slower. There’s lower capital flow. This asset is less liquid. It cannot be turned into cash quickly.

Of course, one other important driver of liquidity is the availability of buyers and sellers in a marketplace. Generally, where there’s a lot of good information about an asset, there will be an abundance of buyers and sellers for that asset.

Information about Publicly-traded Businesses

Let’s use the stock market as an example. Publicly-traded companies are required by law to provide investors with tons of information. This information is interpreted by analysts, financial reporters, professional investors, and private investors. In short, there’s a ton of data and analyses available out there to any investor.

This is why there’s so much liquidity in the stock market. Buyers and sellers move cash and stocks quickly through the stock market. There’s high trading volume.

Penny stocks, OTC stocks, or blank check corporations that provide less information about their business operations to investors have less liquidity. These stocks have smaller trading volume.

Overall, this liquidity makes it much easier to sell stock of a publicly-traded business to buyers.

Information about Privately-held Businesses

On the other hand, there’s less information available about privately-held businesses.

This includes website businesses. For this reason, it takes much longer to sell a privately-held asset such as a website or stock in a privately-held website business.

How Information affects Earnings Multiples

Wherever there’s less information about assets, the assets will always fetch lower prices than assets where there’s more information. This is due to the perceived risk to the investor who may not have all the information necessary to make an educated investment decision.

In addition, there are fewer buyers in an illiquid marketplace which also depresses prices.

As such, the stock in a publicly-traded online business can sell for over 15 times earnings (EBITDA). If the same business were privately-held, it could sell for 7 times earnings.

The higher availability of buyers and sellers and information in the publicly-traded stock will inevitably give it a higher earnings multiple than a private business with less publicly-available information and marketplace participants.

The sale of privately-held assets such as websites sell for even lower multiples of under 4 times earnings because there’s even less information and higher perceived investment risk.

Market Segmentation

Businesses are categorized in 3 segments: Small business, Middle market business, and Large companies.

1. Small businesses are defined as those that make under $5 million in annual revenues. The vast majority of businesses around the world fit into this category. Most website businesses and assets fall into the small business segment.

2. Middle market is broken down into 3 sub-segments: Lower middle market, Middle-middle market, and Upper middle market.

– Lower middle market consists of businesses that make between $5 million and $150 million in annual revenues.

– Middle-middle market consists of businesses that make from $150 million to $500 million in annual revenues.

– Upper middle market consists of businesses that make from $500 million to $1 billion in annual revenues.

3. Large companies consists of businesses that make over $1 billion in annual revenues.

Types of Intermediaries

Intermediaries help business owners sell their businesses. Different types of intermediaries serve different market segments.

Note that there are no clearly-defined revenue boundaries separating each segment. These are rules of thumb.

Business brokers generally sell small businesses that make under $5 million in revenues. These transactions are asset sales. That is, the broker sells the assets owned by a business (or individual) without selling the stock of the underlying business.

This includes website brokers who sell websites.

When small businesses are sold, they tend to sell for up to 4 times earnings.

Mergers & Acquisitions (M&A) professionals generally sell businesses that make over $5 million in annual revenues in the middle market and large companies segments.

M&A professionals include private investment bankers that specialize in private business transactions and public investment bankers that specialize in publicly-traded business transactions.

As revenue numbers increase, the quality of information increases, which increases the availability of capital from equity and debt providers to the business. This increased liquidity and lower perceived investment risk increases the earnings multiples during the sale of these businesses.

– Lower middle market businesses tend to sell for between 4 to 7 times earnings.

– Middle-middle market businesses tend to sell for between 7 to 10 times earnings.

– Upper middle market businesses tend to sell for between 10 to 12 times earnings.

– Large companies tend to sell for over 12 times earnings.

This is how the availability of information and market participants affect investment risk. More information increases capital flow and therefore increases the earnings multiple during a business sale.

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