This is the 3rd chapter of “How To Evaluate a Internet Property”. You can read part 1 – Financials here and part 2 Rate of growth here.

Run Rate

Often times you will hear big corporations and Venture capitol firms talk about a “run rate”. Run rates are basically a forecast of how much money a website will make over a given time. If no time periods are specified generally the run rate is for 1 year. For instance if a company says based on first quarter earnings of 1 million dollars we are looking at a run rate of 4 million dollars. So that would be the very very basic definition of a run rate… but its not how its most commonly viewed. Every company has trends. If your selling Barbecues you know that every spring your sales are huge. The same with Boats, Rv’s, Motorcycles, Convertible Cars, etc. You get the point. Vice versa it’s the least profitable time if you are selling snow skii’s, snowmobiles, space heaters… etc. Run rates are one of the easiest skewed numbers there are. A run rate can give a favorable or bad forecast for a company determining what is being factored in. A good measurement is to take historical data for the last 5 years and apply the average trends to your 1 year run rate based on 1st quarter numbers. Basically if the last 5 year data shows that 2nd quarter performs historically 25% lower, 3rd quarter performs 10% better and 4th quarter performs 25% better vs 1st quarter now you have some data for your run rate evaluation.

Now that all sounds fine and dandy but on the internet where market trends happen in the blink of an eye the only thing you can count on is that you can’t count on anything. Internet property financial run rates really need to be examined in tune with the rate of growth metrics as mentioned in the last chapter to truly if you a accurate run rate valuation.

By Jeremy Schoemaker

Jeremy "ShoeMoney" Schoemaker is the founder & CEO of ShoeMoney Media Group, and to date has sold 6 companies and done over 10 million in affiliate revenue. In 2013 Jeremy released his #1 International Best selling Autobiography titled "Nothing's Changed But My Change" - The ShoeMoney Story. You can read more about Jeremy on his wikipedia page here.

37 thoughts on “How To Evaluate a Internet Property Part 3 – The Run Rate”
  1. Run rate in my office is how many times I can get a run in on any given work day. 🙂 Like these posts Jeremy, good stuff.

  2. This has been an awesome series Jeremy! Just wanted to say thanks for educating us 🙂

  3. Help the “newbies”? They don’t have 5 years of data to compare Q1 with.

    /Andreas

  4. run rates also apply to expenses. Best to look at all numbers over time so you can see the variation and hopefully attribute a distribution to the data.

  5. I just went through this exact exercise with a friend here in town on his local business. The market is Heating and Air Conditioning… and they were wondering why, after 25 years of local business, they always seem to lose money in Feb-April and Sept-Nov.

    I dont think they had ever looked at the historical info in their financials to scale up or down at the appropriate times of year (Seasonailty) when it comes to labor, overhead etc.

    I will say that in relation to the web – we ran an ecommerce site for 2 full years and the same seasonality that affected their local business was NOT applicable on the ecommerce site. Even though sales in our local market were stunned when mild weather hit… there was always another area of the Country that was either too hot (needed AC related items) or too cold (needed heating related items)…

    Very different animals, local and web, and they need to be evaluated in unison as well as separately.

    Mark

  6. lol – run rates, acquisitions, valuations etc etc

    every so-called analyst has their own numbers.

    but in the end…whatever price the buyer and seller meet at, is the perfect ideal price.

  7. The seasonal nature of a business, and how it affect cash flow, is one of the critical components of valuation, whether brick & mortar or online. Thanks for the primer Shoe.

  8. I find it especially hard to calculate the run rate of a non-ecommerce site. e-commerce sites are a little easier because they function like BM stores to some extent.

    Sites that rely on advertising for revenue can be tricky to evaluate because they rely on site traffic. A lot of those factors are out of your hands. So you could be doing great this month, then lose some inbound links or PR, and tank the next month.

    I focus mostly on how viable I think the overall idea is. If it’s genius, I think I can make it work.

  9. I have really enjoyed the new write up about business. I see that you have learned a lot in the years you have been in business. I know you have commented about this before, but maybe you should put together a book “Owning an online business” including chapters about marketing, finance, hiring/firing ect.. At a reasonable price I think your fans would really like it.

  10. A while back I was running an operation of custom woodworking through online sales. I used a laser cutter to do the precision cutting, and the rest was a mix of my talents and outsourcing to local companies. One business function I failed to heed was the seasonal variations on my raw materials I sourced for e-commerce. So let this be a warning to newbies, a cold Russian winter can have dire consequences for the next 6 months. Lesson: beware the single source.

  11. Really have to give him props for posting this series. I sure will check back when I’m out there buying my next site..

  12. are you going to suggest next what sites to buy 😉 The buyer would love you for it.

  13. I woudl label affiliate marketing more of a game.. where buying a selling websites means business as it can be from 50 dollars to 50 million 🙂

  14. I really will have to relay these posts to my clients! I also wish we had this kind of ideal set up during the dot-com boom. It would have prevented so much of the volatility we saw in the market at the point in time.

    Great posts!

  15. Yea, sometimes it is kind of hard to nail thiings down when they happen “in the blink of an eye.”

  16. In terms of valuation, is run rate the main attribute in contributing to price? i.e. 5x 1 year run rate = value of company?

  17. Man, I’m hoping my luck changes after reading more about this. I need to send you my latest linkshare check for $2.49. WEEEE.

  18. i wanna share a little story about trends. when i started online marketing, i was doing the adult niche. and every summer sales are rock bottom. i guess people are going out more during summer, and not stuck at home on their computers.

  19. Great post. It’s extremely true that the world of the internet is different than any other business medium. The rules can’t apply here. The environment is anything but predictable.

  20. It may help some of the “veterans” of the internet as well. Some may not really know much about how to evaluate internet properties or run rates.

    Anyone here have a $1 million 1st quarter? 😀
    ~Terry

  21. I don’t think luck will change by reading anyone’s blog. It will just come to you from your hard work, so keep working and you will get your reward.

  22. So if someone evaluates an internet property, he does calculate the growth of the e-business as a whole, too?

  23. Would it be possible to do a write up on how to get in front of venture capitalists that invest mainly in internet companies?

  24. Interesting and useful post.

    This is a really tricky subject though (and for those who make it to the level that they are able to sell their online business for a good price, then something, certainly, worth thinking about).

  25. Great series on valuing web properties. This kinds of ideas don’t get talked about nearly enough. I recently posted a video on how valuing web properties can be related to valuing real estate. I love this stuff. Great post, Shoe.

  26. […] You can read part 1 – Financials here and part 2 – part Rate of growth here and part 3 – The Run Rate Here and part 4 – Resources […]

  27. Unfortunately, this series has just depressed the heck out of me. 🙂 Thanks for the information. I must work harder!

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