Why I Don’t Buy Using Revenue Multiples
I know a number of companies and individuals that have spent a lot of money buying domain names based strictly on revenue multiples, and there are many reasons why I think this is a bad idea. I personally have never bought a name strictly based on the amount of money it generates because of the reasons I outline below. I am sure there are plenty of people who have done well buying on multiples, with the “industry standard” previously being 10 years, but I strongly believe much more money has been spent on bad buys than good ones.
1) PPC will probably continue to decline. A 10 year multiple last year is probably a 14-18 year multiple this year – if not more.
2) Revenue might be seasonal, so if you buy a winter-related domain name in the spring, the last few months of revenue will be strong, but it’s probably not indicitive of how the domain name will perform year-round. If a seasonal domain name is bought on a 10 year multiple, when you consider it could be most active just 25% of the year, the actual multiple could be 40 years rather than 10.
3) A domain name may have been a developed website before it was parked. As time goes on, the site will presumably steadily lose traffic as search engine links disappear, and the money won’t continue to be generated as strongly.
4) A developed website that generates revenue will have costs associated with that revenue, including inventory, hosting, fulfillment, website design/updates, and the time it takes manage. An affiliate-based website will have less upkeep, but there are still management issues that take time and effort.
Sure, if a generic domain name is making money, I will take the revenue into consideration and probably pay what would be a greater multiple than whatever the industry standard is. However, I don’t like the idea of buying a domain name simply based on the revenue it is generating in its current form. In my opinion, there are too many risks to buying domain names based on a revenue multiple, whatever that multiple may be. It’s too difficult to evaluate domain name values based on a fixed strategy like revenue multiples.
** I am out of town for the weekend, so comments may take extra time to be approved, and questions may go unanswered for a bit – but I will get to them of course **