Why I Don't Buy Using Revenue Multiples | DomainInvesting.com

Why I Don’t Buy Using Revenue Multiples

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Revenue MultiplesI 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 **


About The Author: Elliot Silver is an Internet entrepreneur and publisher of DomainInvesting.com. Elliot is also the founder and President of Top Notch Domains, LLC, a company that has sold seven figures worth of domain names in the last five years. Please read the DomainInvesting.com Terms of Use page for additional information about the publisher, website comment policy, disclosures, and conflicts of interest.


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Comments (16)

    dcmike77

    Geesh Elliot, you missed a big one.

    #1 Reason: Because traffic #s are easy to fake. Sellers can simply boost the #s by forwarding traffic from their other names temporarily. Buyer beware!

    -Mike

    July 17th, 2009 at 12:14 pm

    LazyDomaining

    Good info. Agreed there are too many risks involved. I feel, if you can find out the answer to the following one question you can be in a better position to make a decision – “Why are visitors coming to the domain?”

    July 17th, 2009 at 12:30 pm

    Victor

    I agree. I have great generic domain names that as of now does not have much traffic but with the right buyer it can make the buyer some money. Here are some that I own:

    photography.fm
    Orgasms.cc
    professors.info
    ComicTitles.com
    Howadji.com (traveler)
    Basketball.fm
    Robert.fm
    LawnCare.de
    and many more….

    July 17th, 2009 at 2:09 pm

    Ross

    Hey Elliot,

    I kind of think you miss the point of buying domains or websites like this.

    1. Yes it could decline, but it can also increase. If it is a website most likely you want to make it better and then flip it at the same multiple you just bought it for. This is an extremely common practice and its something that relates directly to the real estate business.

    2. Of course revenue might be seasonal. This is why you do research and check out trends before you buy. Darren from problogger.net just had a great post that can relate directly to this. Its all about making the most of when you have lulls and when you have spikes in traffic. http://www.problogger.net/archives/2009/07/15/6-reasons-your-blog-traffic-might-be-declining-and-what-to-do-about-it/

    3. I agree with you on this one 100%. Though that might be opportunity to turn the domain around and actually develop a website on it to harvest the traffic. I am sorry but parking is the crappy way to monetize domains, especially if you can create a business out of them.

    4. Yes there are costs but to be honest if you have to keep inventory and such then that’s a business not simply a domain name or website. If you are purely buying a website, unless it brings in hundreds upon hundreds of thousands of visitors, there is no reason the cost should exceed what you make on it. Then on top of that you should be able to monetize your traffic, even if its with adsense.

    What i am trying to say is that if someone is selling based on revenue then that means that they have hit a ceiling and would rather sell it off when its “hot” and make a good profit. This is when you come in and analyze the stats and what the site takes and you see if you can make it better and make more money than it currently does. If you are buying domains based on revenue and you have no plan on doing something to harvest the revenue then you are dead in the water. Anyone thinking that the money will never stop is hard headed and needs a slap in the face.

    July 17th, 2009 at 2:28 pm

      Elliot

      @Ross

      Have you bought domain names based on a revenue multiple, and did they meet your expectations? I know a number of companies/people who are hurting because of revenue multiple purchases.

      July 17th, 2009 at 2:30 pm

    Jim Holleran

    It’s seems nobody buys these days based on Multiples.
    Things change so fast, PPC decline, search engine traffic comes and go. I buy based on potential and in the last 2 years, I have sold about 20 domains and I don’t think anybody even asked for Revenue Multiples that actually bought.

    Thanks, Jim

    July 17th, 2009 at 4:23 pm

      Elliot

      @Jim

      I still see people trying to sell based on revenue multiples. I want people to really take a look at the numbers involved to make sure all is legit. DCMike brought up a good point too.

      July 17th, 2009 at 4:25 pm

    Kevin

    100% of the time, offer a buyer that is demanding 1x, 2x, 5x or whatever for one of your domains, the same value basis to buy one of their domains and see what response you get. LOL

    Exactly.

    Nuff said. End of story.

    PS – And we all do it, let’s face facts.

    July 17th, 2009 at 4:54 pm

    Shiphouse

    Elliott,
    You outline some very good risks to exemplify why one should be cautions when using only a multiple to make a base case for their purchase price.
    However, I do think that metric of a multiply can be very useful when applied in certain situations. For example let’s use the mini-site example you just completed, Athensvacations.com. Hypothetically speaking one year from let’s assume the following; you have not sold the site, you do not have the time to develop the site further and it is not on your short list of projects and the site on average is generating $2/day ($765/year less hosting & reg fees). Since this is not on your list of projects you decide to sell the name.
    The only buyer that comes along is somebody that is looking to add revenue producing names to his portfolio that require little maintenance, the buyer does not intend on developing the site any further and is happy with the ad sense/affiliate revenue the site generates. In addition the buyer knows your reputation and feels confident that no click fraud exists and that the traffic figures are real. The buyer will offer you 6x earnings. Do you find this to be an acceptable offer?
    In my opinion the offer is fair and the use of a multiple was appropriate based on the above assumptions. I am sure some people will find the 6x multiple to be outrageously low and argue that the domain has so much more imbedded value and if an end user were to develop it, it would become a far more valuable asset. However, no end users (travel agents, tour site operators, etc. somebody looking to develop the site further) did come forward and you were unwilling or unable to do the work yourself to realize the embedded value so why do you think it is owed to you (hypothetically speaking of course).
    I am interested to hear others opinions.

    July 17th, 2009 at 5:07 pm

    George Pickering

    PPC revenue will not increase significantly from here. I’m been a SEM manager since Goto.com days. In the early days, PPC bids were very low. Then they got out of control. Now they have returned to more reasonable levels.

    When you combine Google’s unwillingness to specify the pct they pay out – any bump in PPC revenue will be absorbed into their profit margin – not paid out to affliates.

    July 17th, 2009 at 7:34 pm

    George Pickering

    BTW I bought a couple sites with revenue was able to significantly grow revenue by switching them from pay per click to pay per lead sites. A change in business model can combat #1.

    July 17th, 2009 at 7:35 pm

    yamanote

    Every domain should be bought based on its income generating potential, of which there are four sources:

    1. cash flow
    2. appreciation (ultimately dependent on cash flow)
    3. amortization (if the investment is levered)
    4. tax shelter (note that Rick Latona used his tax credit to register thousands of country code domains)

    Looking at prior cash flow is a useful indicator of the potential profit that these four sources might produce. You should always buy based on projected future revenues. Being able to see past cash flows is always an advantage, and you make assumptions on how they may change in the future.

    Recently I was offered a domain for $2,200 with annual Adsense of $700. I did not buy it because my future projections of revenue did not meet the historical cash flows. You don’t buy on the income data alone, but it is a useful data point.

    July 18th, 2009 at 3:02 am

    stephen douglas

    Hi El-Silver,

    Such a great article, and so many correct responses from your readers. This is a blog that noobie domain investors and end users should be reading… ooops, no, not end users, because they are not addressed AT ALL in this article.

    I don’t even consider traffic stats on a domain I’m buying. I consider my own interpretation of the following values coming from the domain (darn it, I don’t want to give it away):

    1) Domain name generic descriptive qualities
    2) How many words in the domain
    3) How many characters in the domains (I don’t consider numbers or hyphens in domains unless the hyphenated domains specifically spell out a high yield SE keyword phrase)
    4) I look at how the domain name will brand my website, or my products and services (prodservs) that the domain will represent online
    5) I look at the domain name for lasting “recognition” power. Will this phrase domain still be around five years from now?
    6) Lastly, if the current traffic is good (I ask for a screenshot showing “Last Year” or “Year To Date” results). This part of the value of the domain means very little to me, because if the domain name was a one word natural, I already know it would be getting some serious typeins from name direction searches. And I also know that this type of domain (a one word natural) will cost six figures, at least in the .com version.

    So traffic stats mean little to me. Branding, and research on the future of the product, how many websites mention the phrase (in quotes) and how many companies are bidding on that exact phrase (easy way of finding that out), all have a percentage of my overall assessment of the value of the domain.

    Ultimately, what is not mentioned yet in this blog or the comments, is:

    What can the domain name do for the END USER? This blog article is focused on domainers buying the domain, but what about some company that sells/makes/distributes the prodservs the domain describes? They may ask for “traffic stats”, and that is a mistake for them to focus on, because if a company that sold the prodservs the domain defined, they can quickly increase the value of the domain name by literally promoting their own website and prodservs using the domain.

    So, current traffic stats really mean nothing. I have domains that make about $100 a year in PPC right now, but I wouldn’t sell them for less than $25,000. Obviously, if we focus on appraising domains based on multiples, 10 year, 20 year or less, we cheat ourselves.

    A Domain name is MORE than a PPC multiple. So appraising a domain based on a multiple is a big mistake for any seller of a domain. Consider the branding, the future growth, the value the domain will bring the end user, or anyone who wants to build the domain out.

    hope this helps! If so, support http://www.successclick.com, because I’m trying to beat El-Silver in visitors, and I’m 1/10 of what he gets. Probably because he’s a young stud writing great articles and I’m an old viking building a castle to retire… hmmmm.. lol

    Thanks El…great article

    July 18th, 2009 at 11:19 am

    Lda

    The question should be addressed: what is meant by ‘revenue’ ?

    Revenue has invariably been associated with parking earnings
    where page rank, SE traffic etc. are not contributing factors.

    It’s often quoted as though ‘revenue’ is an immutable that can’t
    be changed without superhuman effort or divine intervention.

    Like many others I’ve found this is not so if you choose the right domain. Most times you’ll find gems lurking in your parking portfolio.

    I’ve had good generic Dot Coms with moderate natural traffic
    produce 25 to 35 times parking rev. with simple well-paying
    affiliate sales links. Even better if the affiliate pays on return
    purchases for the life of the referral. That’s without buying any
    Google traffic.

    So what is a rev. valuation ?

    10 yrs parking rev. with built-in upper earnings asymptotes ?

    Evolving affiliate rev. (+returners kicking in over time) x 10 years ?

    Another model that includes rev. + ‘domain’s intrinsic worth’ to a
    company that uses the domain as a ‘Flagship’ name.

    Obviously a buyer of this type of domain would love to have the
    valuation restricted to parking rev. alone, quoting Google’s
    culpability. However, Google’s greed is by no means the whole
    story on revenue, going forward…if you use the right domain.

    July 19th, 2009 at 1:39 am

    stephen douglas

    @LDA

    WHAT ARE YOU, SOME DOMAINING GENIUS? Your answer is one of the best analysis of domain name values Ive evern seen. Of course, there are a few little changes I’d add to it, but overall,

    Right on!

    People, read LDA’s post closely, every word.

    July 19th, 2009 at 9:40 am

    Lda

    > WHAT ARE YOU, SOME DOMAINING GENIUS?

    :-)
    Thanks Stephen; could you now tell my wife ?

    My offering is just a follow on from your excellent post.

    Cheers.
    Lachlan

    July 19th, 2009 at 5:07 pm

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