How To Evaluate a Internet Property Part 1 – Payroll

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FinancialsRecently when I had free time on airplanes I started writing about how to properly evaluate an internet property. The writings got so long thought that I thought I would put it into a book. But now experiencing all the pains of writing/publishing a book I am just going to release it in a series on my blog.

I get a lot of email asking for site evaluations or if they should sell their site or how much… etc.. Through the years I have purchased and sold probably 500 different Internet properties. These properties can be anything from just simple parked domains to full blow advertising networks and price ranges from $10 to Millions of Dollars.

I have also consulted for Accounting and Law firms in the Omaha and Lincoln Nebraska area in valuating an Internet properties worth. Basically when I valuate these companies/properties they just give me all the financial and history I need for my valuation but never tell me why they need the valuation. So while I give them an accurate valuation of what I would pay for the company its not necessarily what they should sell for.

So here is my guide to website valuation.

Financials are of course a huge part of a website valuation. A company can be grossing millions a year but only profiting a few hundred thousand or even only a few thousand. Many factors come into these costs.

When most are thinking of a website just see the end numbers. What is the gross and what is the expense that gives you the profit. There is a ton more to think about.

Payroll: Most of these companies might be a 2nd source of income in which the owners are not paying themselves a salary or at least a not very realistic salary. This is one of the biggest mistakes people over valuation in companies. If it’s a smaller business/website the current owners are probably doing all of the accounting, legal work, labor, hardware/server administration, computer programming, product fulfillment, customer service and various other day-to-day tasks. Closely examining these items should play a very large role in your valuation of this company. Are you able to do all of these tasks? Most likely you are not. Let me give you a real world example of a valuation I recently did for a company that was selling Remote Control Cars on eBay. (it actually was not remote control cars but I will use that to protect what he does ;) )

A former attendee of my Elite Retreat conference called me out of the blue one day and asked if I would give his business a proper valuation. The whole business was selling Remote Control Cars on eBay and it was a 100% drop shipping business. She was a stay at home mom and it began as a hobby. The whole thing started because a local independent department store went out of business and had a ton of these RC Cars. She had done a lot of research on eBay finding out what these were selling for then decided to purchase the lot from the department store. She raked in quite a return on her initial investment and used that money to start purchasing these RC Cars from local stores and around the Internet to then resell on eBay. Over the next couple years she started to learn everything there was about RC Cars. They wanted to build the business bigger so they took on the drop ship model. They would buy at wholesale prices and drop ship directly from the manufacture. Now they had a scalable solution and even though the profit margin had narrowed they could do a much larger volume of sales being that these products were always in stock and not just when they found them at a closeout or special prices. They were doing hundreds of sales a month and because of there grass roots experience they could offer customer and technical support to their clients. They also had a huge advantage in that they could up sell various add ons because they were so familiar with their products. This also led to them having a huge returning customer base that would buy from them just because they had piece of mind in knowing that they could call for help if they needed to and also they could easily purchase add-ons that would work for their RC Cars.

Ok now that you know all of that lets look at some of their financials. Over they last 3 years they are averaging gross revenues of 2 million dollars per year. They have 1.85 million dollars of expenses total, which leaves 115 thousand dollars a year in net profit. Not to shabby right? Now a idiot would valuate this company based on that profit number x 5ish and give this company a 500,000 valuation and call it a day. But that is not a very accurate valuation.

In order to give it a good evaluation I needed to dive deeper into what was going on. I asked Jamie how much time it takes to accurately run the business. How much time for customer support? How much time for accounting? How much time for shipping? How much time for posting eBay ads? How much time for posting feedback and other misc tasks? All these things are EXTREMELY important for a proper valuation (as I will show in a minute).

The answers I got back are really important for the valuation. She told me she spends an average of 20 hours per week answering customer support emails or questions via the eBay site. These emails and/or questions come in all days of the week and at any time. She also explained to me that sometimes not answering these emails could cost them a lot of money on an eBay auction or eBay store sale. She said she has them all go to her blackberry so she can answer quickly no matter where she is. She also told me she spends a minimum of 10 hours per week on shipping/fulfillment. While most of it can be handled electronically if there were issues it sometimes took as long as 24 hours to hear back from the supplier. As far as posting the eBay ads she said that took less then 1 hour per day. She posts ads on eBay every day but can schedule them ahead of time. The same was true for her eBay storefront. It took sometime to setup but after setup it was good to go. Jamie told me she contracts a 3rd party to do her graphic design that is a friend and does not charge her. In exchange she uses her account and her incredible feedback and reputation to sell his products for him. The thing that took up most of her time though was the accounting. She spent a average of 25 hours per week dedicated to keeping the books straight. Then I asked if there was anything else. She said she spends a lot of her free time on competitive research and looking for new products to add to their inventory. She also spends a lot of time trying to get better deals on existing products in order to increase their margins. She also went on to say she spends countless hours researching the Internet reading forums on what other eBay sellers are talking about in regards to saving money on fees and writing ads that convert into better sales. I asked her if she could somehow put a average per week on this misc stuff and she told me probably at least 15 hours per week.

So now lets look at this.

25 hours a week for accounting.
20 hours a week for customer service.
10 hours a week on order fulfillments.
7 hours a week for placing orders.
15 hours a week on misc stuff.

Total = 77 hours per week.

So now lets take 77 hours X weeks in a year (52), which gives us 4004. That is the total number of work hours per year this business takes. Then if you divide the profit (115,000) by that number (4004) it tells you the hourly values of this labor before it becomes non profitable. In this case that number is 28.72.

That is a very important metric. Being Jamie was not taking any salary what so ever for doing this 77 hours per week of work we have to put some sort of valuation on it. The 28.72 number is VERY important because that is the amount of money that could be spent per hour on labor to do these tasks before there is no profit…

Now depending who you are or what you do this metric is good or bad. If you are a person already very busy and not in the eBay/RC Car business this means you are going to have to hire someone with at least some eBay experience and hopefully with drop shipping. And you are most likely going to have to pay that person… lets say 20$ per hour. Now your profit just fell drastically. A company that was profiting 115,000 per year under your adapted business model is now only profiting roughly 35,000 per year.

I will show my math:

$20 per hour x 77 hours(hours per week) x 52 (weeks in a year) = $80,080. Now take the total profit per year of $115,000 minus the new payroll expenses of $80,080.

This is pretty much based on paying 2 people to do the 77 hours worth of work per week. If you only paid 1 person that person would be severely overworked and also you would have to pay them overtime (usually time+half) which would mean your profit margin just fell quite a bit more.

I am not going to get into the experience and knowledge and valuation of those quite yet. They will come later in this guide. This is strictly payroll.

Now lets look at the reverse of this. Lets say you already were running a drop shipping business on eBay. You already have the staff and experience in doing exactly what she is doing. Therefore the payroll expense is very minimal if any at all.

Now you see perhaps what roll payroll plays in a valuation. Its VERY important to do research in this area to give a proper valuation.

Also its important to know that if you are selling the business be as accurate with these facts as possible. While it might make the business look better to fudge numbers or to conveniently not include numbers that might not make the business appear as profitable to get that big payday, the new owners will soon discover what you did not tell them and most likely file suit for you misrepresenting the company. And that will suck for you. Not only will you have an enormous new legal expense but could possibly back to square one with a lot of lost revenue and time. So just be honest.

62 thoughts on “How To Evaluate a Internet Property Part 1 – Payroll

  1. Sean

    good post shoe. Knowing the support commitment is important. There are no standards out there just buyer due dilligence and persistence. If you buy sites at places like sitepoint or DN, you are constanly asking for decent stat information on revenue, traffic, se penetration etc.. trying to get decent support numbers always seems like too tall a hill to climb. Knowing the business and providing your own range of support estimates seems to be the norm in the website speculation buys. buying an internet property is a risky endeavour for many reasons. I look forward to your future posts as I am sure you will bring those other risks to light.

  2. Mark

    Great post Jeremy… I just closed down a 1.1m per year eBay store to focus more on affiliate marketing and niche building. eBay is definitely a time consuming process when you factor in fulfillment issues.

    I have about 700 domains… monetizing roughly 50-75 each week through various trial and error methods. Selling them is a goal one day… not for several years though.

    I also want to ask… where does the “xxxxx xxxxxxxxxxxx xxxxxxx” fit into this story? You mention it in the thrid paragraph, but there is only a single reference and it has nothing to do with RC cars.


  3. Vizion

    THANK YOU! I work on various projects and I’m always trying to determine just a rough estimate of the time/value of the work I provide to possible future clients and it can become extremely difficult. That “simple” breakdown though looks great…I’m going to have to try this now.

  4. Don Draper

    Great points all. Many small businesses miss the fact that even if they don’t pay themselves the new owner will look at that as a downside. Never get into a business that can’t support a payroll after the initial investment.

  5. Passenger 57

    Who wrote this excellent article… it cant be Jeremmy there are no typos and Jeremmy is not so organized :)

    Well, just to say there are certain sites that required time and effort to build them, boot them and bring them to certain level and then much less time is needed to maintain them. Evaluating Internet property is hard it is like evaluating brand name… for how much money would you sell “Shoemoney” trademark?

  6. Julian

    This is also the problem with many projects sold over Sedo. The best thing always is, to inform the future owners what kind of work there will be per Week. There is almost no internet project which has nothing to work on.
    I won’t sell my projects anymore because each time I sold them, the profit and the visitors exploded because of my optimization. ^^

  7. sockmoney

    Good stuff. This is a concept many website owners cannot grasp (and buyers!). One of my sites runs itself and requires about an hour a day of moderation/answering e-mails, etc. That equates to 7 hours/week.

    Compare that to your case study (77 hours a week work) and you can see the value in a business model like my site greatly out weighs the site that requires 2 full-time employees to run.

    It is nice to see a general consensus on this… and hopefully it will become more of a standard stat that is shared by buyers moving forward…

  8. samo

    I like it. It relates well to how i keep thinking im making money with keywords doing affiliate marketing, but when i actually look into it, im spending more getting the clicks, then the leads are giving me.

    “Over the next couple years she started to learn everything there was about xxxxxxxx xxxxxx xxxxxx. ” ?? what??

  9. Flimjo

    Evaluating an online business is very different from a brick-and-mortar business. It presents different challenges, etc. I guess if you don’t do it correctly, you might lose out on a lot of money if you intent on selling your business.

  10. Flimjo

    Good idea on the e-book. Heck, you should put that together and sell it for a few bucks each. There are a lot of people out there who would want that information very badly.

  11. Website Reviews

    I don’t know if this is going to be part of another post or if it is just out of the realm of this discussion, but if you are going to have two full time 40 hours a week employees the human resources of that increase operating expenses. There are benefits, taxes, retention, training, communications, office space and so much more to factor in. Having 2 fulltime employees can increase operating cost greatly!

  12. Rob

    I can definitely relate to this post. Several years ago, I lost a sale of one of my businesses because I didn’t factor in the time I was personally spending on the business. Unfortunately, the buyers account pointed that out to them and the deal fell through. This is an often overlooked factor when it comes to valuing any business whether brick and mortar or online. Thanks for the great post Shoe.

  13. Rush

    “A former attendee of my Elite Retreat conference called me out of the blue one day and asked if I would give his business a proper valuation. The whole business was selling Remote Control Cars on eBay and it was a 100% drop shipping business. She was a stay at home mom and it began as a hobby.”

    Sex change operation overnight?

  14. SiteHoppers

    Interesting read, I never thought so many factors would come into play for valuating a website but I agree these things need to be considered although it’d be hard to do for smaller websites.

  15. Money

    If she only raises her prices by five percent she brings in another $100k per year. Now, she may lose 10% of the sales because of the price increase, but she’s then nearly doubled her take-home for the year.

    This is another factor in valuation – not just what is, but what can be.

  16. jdm joe

    wow…this is a good read…evaluations take in many factors…this made me log and track all the time and money i am spending on my sites…when it comes time to sell i can easily evaluate my selling price.

  17. Vlad

    Hey shoe, i think you are a bit off here. I run an ebay business on a bigger scale then that and i don’t spend that much time on it. This is what she is doing wrong:

    1. She doesn’t use ebay api to collect and post all the data (for accounting, product placing, orders, ect.) this will save you a ton of time in all of the areas you talked about.

    2. Make a knowledge base of answers and hire an Indian company to just copy/past answers – You save a ton of time because 99% of questions on ebay are the same thing over and over again.

    3. Hire 1 person to spend 15-20 hours a week to make sure everything is going smooth

    This is why i love buying internet business. Most people don’t know how to milk them right and they get undervalued.

  18. oakling

    ooo, I’d love to hear how much you’d valuate your own property at! Let’s hear some personal examples! Although I really enjoyed learning more about what’s involved in the eBay game, too, along the way here.

  19. Erica DeWolf

    Great post, shoe. This is definitely one to save and come back to when I need it. I’m looking forward to the next posts in this series. I think you should still make this into a book sometime (or an e-book!) I know many, many of your loyal fans would purchase it. Just because it’s hard doesn’t mean you should give up!!!

  20. Shane

    2% profit after labor and expenses = not much of a valuation at all. She needs to aggressively renegotiate her supply prices.

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  22. Alex

    “If she only raises her prices by five percent she brings in another $100k per year. Now, she may lose 10% of the sales because of the price increase, but she’s then nearly doubled her take-home for the year.”

    Sounds great in theory. But in a price competitive business where other people are selling the same product that is difficult, if not impossible, to do.

  23. Chuck

    A great post.
    You are much smarter that I previously thought.
    Now I understand a little more of why your site is a money maker.

  24. Tim

    That’s a very good point. I mean really, that doesn’t seem like a very good net margin when you factor in all the other work involved. If you can’t automate and delegate tasks in a business where your margins are razor thin and your competitive advantage is negligible (while still making a profit of course), then why bother?

  25. Pingback: How To Evaluate a Internet Property Part 2 - Rate of Growth - ShoeMoney®

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    That is a great post, especially using a real world example.

    It just shows you the scale of business you need to do to make decent money selling physical things. I think this shows how good the affiliate marketing business can be in comparison.

    Must go up and read the second installment. Keep them coming.


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  31. CodeFreedom

    Thanks for this post. Really, evaluating internet property is now different from evaluating anything else you are considering investing in. The same as with internet business principles – the are just the same as offline business principles. If you do not take notice of basic business principles, offline or online, they will come back an bite you. The dot com crash showed us that. Have a business plan for your online busiess and stick to it.

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  37. Jeremy

    25 hours per week on accounting seems awfully high. Perhaps she’s not very skilled in bookkeeping, and a part-time bookkeeper could get it all done in 5-10 hours per week… She could probably have Ebay and/or her shopping cart integrate with Quickbooks (even hire someone to one-time make the connection), and cut accounting dramatically. That’s over 1/3 her time invested.

    “She also went on to say she spends countless hours researching the Internet reading forums on what other eBay sellers are talking about in regards to saving money on fees and writing ads that convert into better sales.”

    Should I be charging my business for the time I spend here?

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