What Makes a Website Valuable?

Making your website as valuable as possible not only helps you maximize profitability and stability now, but you will be well positioned to get the maximum price when you feel it is time to sell.

This article will help you to think strategically and make decisions now to increase the value of your website over time.

So what makes a website valuable?

Like in all things, value resides in the eye of a potential buyer and what you are willing to sell it for. Just like negotiating to buy a car, you can look at comparable sales to determine value but at the end of the day, the car is worth what you are willing to pay for it. If a seller is asking too much, you walk away since their price does not match what you are willing to pay. The same thing goes for a website.

Therefore, in order to determine the value of your website, you need to think like a potential buyer. Fortunately, though websites have some unique aspects, the same fundamental principles of offline business valuation apply online. Additionally, there have been so many previous website sales that the drivers of value are fairly well known.

What Buyers Consider Valuable When Considering an Acquisition of a Website

I will walk you through the most common valuation variables and provide tips on what you can be doing now to increase the value of your website. Again, working on these things will make your website stronger now and down the road.

#1 – Financial Factors

A. Profitability Over Time

The number one factor for most websites’ value will come as no surprise to you – it is profitability. In other words, what is your net revenue after all expenses and other liabilities are taken into account? Though there are many possible formulas for determining profitablity, for the sake of this article, I am keeping it simple and sticking to fundamentals that will apply to most situations.

There are exceptions to profitability as the number one factor in influencing website value (i.e. intellectual property, market share, patents, proprietary technology, traffic, customer base, etc.) but for most sites run by solo entrepreneurs and small businesses, it simply comes down to how profitable you are.

However, profitability alone isn’t what most buyers look for. Profitability should be demonstrated over time – as long of a time horizon as possible in order to prove financial stability.

Why is long term profitability important? Short term profitability can be increased with risky business practices that could threaten long term profitability.Think about sites that might use risky link building tactics to boost search rankings in the short term only to get penalized down the road which could not only wipe out any gains, but any previous search rankings as well.

No one wants to buy a website only to have its profitability radically decrease in the near term due to business practices used by a former owner. This is a nightmare scenario for a potential buyer. Therefore, you want to demonstrate the earning power of your website over longer periods to prove stability and the soundness of your business model.

How long do you need to demonstrate profitability?

According to FE International, a website broker that has facilitated hundreds of Internet business transactions, “A business starts to enter territory of a premium valuation once it is three years older or more (and still showing growth).” (Source) Since your goal is to maximize value at point of sale, shoot for at least three years as an optimal target.

You can demonstrate profitability over shorter time horizons but know that potential buyers may use that against you in negotiations.

What you can do now

If you know you will be interested in a sale within the next 3 years or so, start paying attention to how your net profits may look to a potential buyer right now. Reduce expenses, protect your revenue streams, and avoid risks that might affect your financial stability. Stable and steady growth is often more attractive than explosive and risky growth. Though you might find buyers that are fine with higher risk, they are probably in the minority and may be harder to find and may use any perceived risks to drive down price in the negotiation process.

B. Diversified and Stable Revenue Streams

Whenever possible, diversify your revenue streams. If you aren’t familiar with the concept, diversifying means having as many different sources of revenue as you can.

Diversifying revenue streams makes your business safer in case something negatively affects one of your other streams. Its the same concept behind investing in mutual funds. If one company hits hard times and its stock dives, the mutual fund has invested in plenty of other companies to protect the overall mutual fund value.

This is especially important for affiliate sites. If your primary income is from one or two affiliate partnerships, your revenue streams are highly vulnerable to changes outside your control. An affiliate merchant can reduce commissions or remove the program entirely.

The stability of your revenue streams is also important. A buyer is going to look at potential threats such as partnerships that can be lost, suppliers that are no longer viable, removal from affiliate or ad networks, Amazon store changes, etc. The longer you can show that your revenue streams have been stable, the better off you are. The more backup plans, legal agreements, or any other factors that can show your revenue streams are protected will also add value.

What you can do now

• Treat your website like an investment portfolio with each significant revenue stream as if it is its own business. Nurture and grow those streams, add other streams, and have backups in case some fail. Do not take your revenue streams for granted as they are the lifeblood of your business.
• Continually search for new revenue streams such additional affiliate relationships, different ad networks, creating your own products, new partnerships and adding new products and services to your offering.
• Examine your top revenue streams and take an honest assessment of where they are vulnerable. Mitigate risk wherever you can.
• Diversify your traffic sources. If you are overly depedent on Google traffic, start looking for other cost-effective sources now. One algorithm change can literally decimate your earnings overnight.
• Create a backup plan for every major revenue source.

C. Verifiable Income and Expenses

No buyer, apart from a complete amateur, is going to take your word at face value. You must be able to verify every single source of revenue and expenditure with supporting documentation. In other words, you are going to have to prove just about every financial claim you make about your website.

What you can do now

• Keep excellent financial records. Better yet, outsource them to an accountant who can provide any requested reports and verify the integrity of your financials. Many solo entrepreneurs and small businesses can be very sloppy with their financials since they have probably found a system that works for them that doesn’t require the kind of precision that a potential buyer would. Always keep a future buyer in mind and run a tight ship when it comes to financial records. If your financial records are a mess, make organizing them a top priority in the next few months. Good accountants can be fairly affordable and can take the burden and stress of keeping track of everything yourself off your back if you don’t enjoy doing it.
• Find a way to log your revenue stream, traffic, and other key analytics every year in case a provider is no longer availabe to provide them in the future when needed. Digital space costs nothing. Keep records for as long as possible since you don’t know how far back a potential buyer may request reports.

D. Current Owner Influence Over Revenue Streams

How much you as an owner directly impact the revenue streams of your business will play a role in your website’s value. Here’s why.

If people do business with you because of you, this may decrease the value of your site to a buyer. For instance, if you are a consultant and people pay for access to your personal skills, you are therefore directly tied the revenue generated. If your deal-making or sales abilites are tied to ongoing revenue, this will also decrease value as you are likely not going to transfer yourself with the sale of the site. If your technical expertise is vital to the function of your website, software, or anything else critical to your business, this is also an issue.

What you can do now

Make sure your website can run without you. Note all activities you are involved in and come up with a plan to make yourself as easy to replace by new ownership as possible. Here’s how you can do this:

• Make your knowledge transferrable. Everything you know can be taught to someone else. If you have certain ways you go about things (deal making, content research, marketing, etc.) write down what you do in step by step fashion. Not only can this be used to train others, but you may be able to analyze what you do and find better ways of doing it.
• Outsource to less expensive labor or automate your activities with software wherever possible. Doing this demonstrates that you are not needed in this area and tasks can be delegated to lower cost labor sources.

E. Time Required to Run the Business By Current Owner

If your business requires a lot of your time, a potential buyer will add the value of your time to the expenses required to run the business and drive down the price during negotiations.

Additionally, some buyers aren’t looking to take on a “job” for themselves by replacing your time with theirs or with the time of an expensive employee.

As much as possible, you want to reduce the time required by you to run your website over time.

What you can do now

You might think replacing your time is unrealistic if you are currently working full time and managing many tasks. However, always be thinking in terms of replacing yourself with lower cost labor or software.

Additionally, eliminate any activities you don’t need to be doing at all. Identify any activities you currently do that don’t directly impact the value of the business and take note of them for future removal or replacement if possible.

#2 – Ease of Taking Over Operations

A. Ability of the Website to Continue Profitability Without the Involvement of the Existing Owner

We touched on this above in the financials section concerning the importance of disentangling yourself as an owner in regards to revenue streams and time required to run the business. Again, a potential buyer typically only wants your website and not you as an employee (exceptions occur of course).

What you can do now

Make a master list of everything you do. What activities can be replaced now, or in the future, by someone else who doesn’t cost as much as you? Since you are the owner, your time is arguably the most valuable of anyone in your business. Replace yourself wherever possible. Focus your time on strategic decisions that increase the value of your business.

B. Difficulty of Replicating Current Operations Under New Owner

Generally speaking, how hard is it to run your website? Is it fairly hands off (passive) or does it require expensive and active involvement? Are your key business processes easy to learn and replicate or very difficult? If your business is difficult and expensive to replicate, this might lower the value at sale.

Like everything, there are exceptions to this. Some of the difficulty in your business operations might be a strategic advantage by creating a higher barrier to entry to compete with you. That can be a good thing that adds value to your business but only if it adds value.

What you can do now

Take an audit of every business process that relates to your website. If any business process or activity can be simplified, do so. Going through this simplification process may help streamline your operations in the present and lead to greater efficiency. It will also help you when you are ready to sell.

C. Employees Required to Run the Current Website

Employees are expensive. If there are hard to replace employees that are critical to the profitability of the website under new ownership (i.e. webmasters with specialized knowledge, key salespeople, content writers, video creators, SEO experts), this may lead to a devaluation of your site in the eyes of a buyer.

Additionally, these hard to replace employees could affect your profitability now. What would you do if you lost your current webmaster? Is he or she easily replaceable? Could this person threaten the survival of your business by leaving for another job or using their power to negotiate a much higher salary?

What you can do now

It’s never fun to think about having to replace valuable people you have come to rely on but this is the reality of business. Everyone (including you) needs to be replaceable.

• Make a list of all the key people required to run your website. Do you have a backup plan in case they disappear tomorrow?
• Can any current employees be replaced by lower cost software?

It may not be pleasant for you to think about eliminating people’s jobs, especially if you employ people that are close to you. However, you do need to value the financial health of your company as well. Ultimately, the choice of retaining people you don’t really need is ultimately up to you but consider the impact on your website’s present and future value.

If I could give you one piece of advice it is this. Take heed to the old adage of being slow to hire. It is much easier to make the decision not to hire someone at all than to face the reality that you don’t really need them down the road and cut off a salary they depend on. Outsource and use subcontractors whenever possible if you do need human labor. These people are used to freelancing and working for a variety of different people for shorter amounts of time and by the nature of their chosen profession will be less dependent on you.

People are important. But you must balance the needs of yourself and any people you support with the needs of any employees you choose to hire.

D. Technical Knowledge Required to Run the Business

If your business requires specialized technical knowledge to run, be aware that factor may increase perceived expense, especially if that knowledge is closely tied to you or one of your employees. It’s all about replacement costs.

What you can do now

• Try and choose software options that are either considered industry standard or have a shorter learning curve if possible. For instance, if you have a website that runs on the Drupal content management system and is highly customized, finding someone with that kind of knowledge is generally going to be more expensive than a site that runs on WordPress with standard plugins. Sometimes a high degree of customization is absolutely necessary for competitive advantage which can add value to your site. Just remember the cost of ongoing operation and how such decisions might impact a future sale.
• Avoid any custom programming unless it gives you a necessary competitive advantage or can add value to your business in terms of intellectual property. Going with a custom option when a well-supported off the shelf option is available may not be worth the expense.
• If you do have any custom programming, make sure it is well documented and can easily be taught to anyone who needs to use it now or in the future. Don’t let specialized knowledge only reside in the heads of a few key people that could leave your business at any time.

#3 – Niche and Industry Factors

One factor solo entrepreneurs and small business owners may not think about enough is the broader influence of your niche and/or industry on the potential value of your website.
Your website does not exist in a vacuum. You exist within a larger ecosystem whose economic forces can influence the performance of your website.

I will give you one example. I found a very fast and profitable niche in the game download space back in 2003. I got in early and as an affiliate, was able to ride dramatic growth for about 5 years. Then a confluence of factors greatly affected the the economic health of my website – the rise of mobile gaming, price wars, and the global economic downturn. In a matter of just a couple years, our industry was radically changed and my rapid growth flattened and then started to decline.

A. Growth Potential

A buyer may be willing to a pay a premium for your site in a growth industry to take advantage of strong potential economic upside. If your industry is stagnant or in decline, it doesn’t mean you can’t get a sale but you may have harder time getting a premium valuation.

What you can do now

Find out where the growth is in your industry by reading industry specific economic reports that are typically released annually. If your current revenue streams are not in growth areas, see if you can pivot and get a piece of a growth area through content creation, affiliate partnerships, or creating new products and services that cater to that growth area. Getting a foothold in a growth segment can not only open up new revenue streams for you, but it can make you a much more compelling acquisition target.

B. Competition

A competitive market can indicate a sign of economic maturity and health or, if powerful players engage in harmful activity like price wars, it can adversely affect the market.

How competitive is your current market? If larger players are aggressively pursuing acquisitions, this can work in your favor and indicate it might be a good time to think about selling. Having more than one large player interested in your business can greatly drive up the value of your website.

C. Niche & Industry Risk

The overall economic health of your industry can have quite an impact on the value of your website. If you see signs of deterioration that might be long term, it may be a good time to consider whether your business has the strength to keep going or if it might be a good time to sell.

What you can do now

Devote time on a regular basis to keep up with what is going on in your industry. Be aware of opportunities and threats that can help or hurt your business.

#4 – Website Traffic

Visitor traffic is another factor that affects your website’s value. There are several components to consider.

A. Traffic Volume

As a former owner of a high traffic website, I am always amazed by how excited people get about large traffic numbers even if those numbers don’t necessarily contribute much to profitability.

High traffic numbers will always impress. Even if you aren’t fully monetizing the potential of your website traffic, a potential buyer may have opportunities that you don’t. It’s hard to go wrong with high traffic counts, especially if you are getting it for free via SEO or referral. However, if you are paying for it, quality beats quantity every time (unless quantity is a key component of your overall strategy).

What you can do now

Studying ways to increase website traffic, especially at low or no cost, is a valuable use of time for either yourself or a key person in your business. Search engine optimization companies that really know what they are doing are expensive. If you can, avoid paying huge sums for these companies who can’t really make any guarantees to overall effectiveness.

What you can make or provide that can drive high traffic numbers:

• Free tools or web apps
• Guides
• Free downloads (software, industry reports with stats unique to your business, templates, etc.)

B. Traffic Quality

Traffic quantity will impress but traffic quality, measured by the profitability of your traffic, is what will build your website value the most.

If the most valuable websites try to show the greatest profitability over time, the focus of your search traffic should be gaining customers that provide the greatest value over time.

In other words, do you want 100 customers that are worth $10 a piece in customer lifetime value or 10 customers that are worth $1,000 each in lifetime value? The second group of customers are 10x more valuable than the first group even if they are only 10% in volume.

What you can do now

Good search analytics and conversion tracking will tell you which customers from which sources using which search terms are most valuable for your business. If you aren’t tracking this, you are flying blind and leaving a lot of strategic value on the table.

C. Traffic Sustainability

Website traffic sustainability means how long your current traffic sources will last. Any smart buyer will look at your analytics to see if you are overly reliant on traffic sources that could literally disappear overnight.

What you can do now

Traffic sustainability can often rely on factors outside of your control. However, try the following:

• Make sure you are not engaging in any risky search engine optimization practices.
• Keep improving content that brings in your most search engine traffic to keep satisfying visitors and maintain a quality lead over competitors.
• Do what you can to strengthen relationships with sites linking to you that provide great traffic so they are less likely to take away your links and possibly give you more exposure to their audience.
• Don’t stop doing activities that bring in traffic. If your blog is a good producer, don’t stop. If you a YouTube channel or social media is a good source, keep nurturing it. Sometimes website owners get overwhelmed and let good traffic sources slowly die.

D. Traffic Diversification

A strong and diversified traffic profile gets visitors from direct type ins of your URL, search engines, any viable paid advertising, referrals from other sites, and social shares. Just like diversified revenue streams, diversified traffic sources help mitigate any loses from any one source.

What you can do now

• Depending on your niche and type of website, some of these traffic types may be more challenging to nurture. Social sharing doesn’t work equally well in all industries and for all websites. Social sites like Pinterest can perform great in some industries (food, home improvement, crafts, etc.) and terrible in others. Research and testing will reveal whether a social site is worth your time to nurture.
• Dive into your analytics and get a sense of what traffic sources bring in what percentage of traffic. If sites that are linking to you bring in lots of traffic, find out why and try to replicate.
• If you haven’t tried pay per click advertising, perform small tests to see if you can scale it into a large and profitable traffic source.
• Use search tools like SEMRush to spy on your competitors and get ideas from where they are getting their traffic. Try to replicate their sources wherever possible.
• YouTube is the second largest search engine. It is worth testing videos on a small scale to see if you can use them to drive traffic, build awareness of your site and brand, and even possibly develop a new revenue stream.

#5 – Reputation

The Internet makes it virtually impossible for a bad company to hide its poor treatment of customers. If you have developed a poor reputation online, it could drastically lower the value of your website. Make developing a strong reputation a priority in everything you do.

What you can do now

• Check all possible industry and consumer rating services to see what people are saying about your company or website.(BBB, ResellerRatings, Google Reviews, Facebook reviews, etc.) Do whatever you can to address any negative comments you find.
• Create a Google Alert for your website or company name. Monitor everything people say about you (or outsource this) and immediately respond when anything negative is said.
• Design your business processes so that positive customer comments are shared on the Internet and any complaints come directly to you first. Tell your customers you want to hear from them and resolve any issues right away.

#6 – Customer Base

Finally, the quality of your customer base will radically affect your profitability. If you have strategically gone after the very best customers, and sought to increase their lifetime customer value as much as possible, you will absolutely have a golden asset that another company will want to pay a premium for.

What to do now

• Develop and execute a strategy to attract and retain the highest quality customers in your industry.
• If you are using content marketing, are you appealing to the very best customer segments or are you simply going after high traffic volume?
• Get to know your customers very, very well by soliciting their feedback whenever possible. Become a great, customer-centric company.

If you know and serve customers better than anyone, you will absolutely develop a highly profitable website. At the end of the day, business is all about the customer.

Conclusion

I hope this article helped you think about what makes your website valuable. Additionally, I hope it prompted you to develop a list of action items that can help you strategically increase your website’s value year after.