Is a business that’s less than a year old worth much?

To start with, if your a seller, then the business is going to be worth a great deal more to you than it is to a buyer. This is one of the due diligence points that we look through when purchasing a business (real site age). Finding out the true age of a site can be tricky. Domain names that are only a year old doesn’t necessarily mean the business is only a year old. A quick trick is to use archive.org to see what the site looked like in the past.

So let’s say the business is less than an actual year old, and we want to assign a value to it. There are quite a few ways to do this, the way we use at Approbo is straight income valuation/estimation.

We start with the revenue from the past year or number of months, and subtract the costs of running the business. We typically will remove anything related to building the site out, since this is mainly a one time cost (unless there is constant upkeep on a site, then the expenses are estimated).

The actual multiplier on a new site is going to be less than one that has been around for more than 3 years. We are seeing those in the 2.5-3x range for matured companies, so a company less than a year old is at the very low end, typically 1.5x – 2x.

Seasonality plays a large part as well, similarly fad based businesses. Is this a hit once and done? Are the dollars received the last year going to be the highest ever?  If it’s a new niche that is gaining traction, that is worth much more than a company following something fun in the news.

To get to a price, we look at the monthly net incomes (income minus expenses) and calculate the monthly growth rate.  We average out the month to month growth rates, and use that to calculate an estimate of the revenue for the next year.

An example just with two Months of data:

Month 1 Income: $1000

Month 1 Expenses: $200

Month 1 Net: $800. ($1000 – $200)

Month 2 Net: $950

Month 1 to Month 2 Growth Rate: 950 / 800 = 1.188

Month 3 Net: $1050

Month 2 to Month 3 Growth Rate: 1050 / 950 = 1.105

We continue with these growth calculations until we have as much data as available.

Once we have the month to month growth rates, we add those up and divide by the amount of months (average).

So for our two month example: 1.188 + 1.105 = 2.293

2.293 / 2 = 1.1465

So our average monthly growth rate is 14.65%

We can then fill out the rest of the year with this estimated growth. Note: if there is an outlier month, say a campaign of some sorts, we typically remove this from the data set as it will skew the data too high.

So Month 4 net we can estimate as $1050 * 1.1465 = $1203.83

And Month 5 would be $1203.83 * 1.1465 = $1380.19

Once we have built out the entire year, we then sum up the net profits (800 + 950 + 1050 + 1203.83 + 1380.19 ….etc) . We then multiply this value by our multiplier of 1.5x – 2x depending on the type of business.

 

So as you can see there is a way to put a price on a new business. Typically we advise against purchasing anything this new as there is no clear sign it will continue. Most sites with a quick growth curve are using a PBN, or Amazon based businesses which can change over-night. As always do your due diligence!

Contact us to have a quick seller consultation and we walk through your business