July 12, 2010, 5:00 am

How Do We Evaluate Our Online Company

by: The Financial Blogger    Category: Alternative Income,Business,Make Money Online
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During my last net worth update, The Dividend Growth Investor asked me how I evaluated my online company. Since it is a big part of my net worth (and the only reason why I’ve had an increase of 13% in my assets last month), I thought it deserved a full article to disclose how I evaluate what my shares are worth.

Why Do We Need To Evaluate Our Online Company

The problem with your own company is that it always worth more to you then it would be to anyone else. I’ve put a lot of effort into it and know it has a lot of potential. Unfortunately, my “love” for my websites cannot be accounted for on a balance sheet. So why try to find a value for my shares? Mainly because I have a partner.

The thing is that I really don’t plan on selling. However, during our last company meeting, we discussed the eventuality of one of us passing away or if we ever decided to separate our sites and continue on our own. This is why we had to determine a way to calculate the value of our shares: to make sure that we have a way to buy the other’s part of the business if it ever goes sour.

The Magic Formula

So here is our magic formula to determine how much our company worth:

(last 12 months of gross revenue * 1.5) + cash in bank account – debts

Pretty simple isn’t? Since we wanted to know the value of our company in a case of a death or major dispute, we wanted to make sure it was simple and that nobody could interpret another way to calculate it.

Why 18 months of income?

The way accord a value to our company is done in 2 separate steps. The first part is what our website is worth. As I previously mentioned in another article, the usual value of a blog is set between 18 to 24 times the average monthly income. Therefore, we preferred to simply use the minimum value for a site; 18 times the monthly income, without  considerating our expenses (writers, correctors, virtual assistant, an accountant).

We know that if we would take the time to sell all our websites, we would get much more than 18 times their income. However, the point it so keep it simple and conservative (in no way do we want to overestimate the value of the company shares).

The rest of the equation (cash minus debt) is just because we have a lot of cash sitting in our bank account right now so it wouldn’t be fair to have it disposable for the sole owner of the company. If we ever break up our partnership, most of it will be divided via dividends I guess.

Is This A Real Valuation Model?

Not at all. In fact, we had no clue how to value our company at first. As our company figures more as a SASI (Sideline-Alternative-Source-of-Income ;-) ), we didn’t find any valuation model guidelines to start our own. This is why we have decided to start from what we know (blog valuation) and extend it to our company model.

Final Thoughts

In the end, I am happy with the way we have evaluated our online company as it is conservative and easy to understand. This way, everybody (I hope) will agree on its value. I haven’t decide if I will use a quarterly or semi-annually update for its value as it has made a significant improvement since the last time I put a value on my shares. Do you have any suggestions on how I should proceed?

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Comments

Very interesting methodology and depending on the website it is maybe even conservative. If you buy or sell a website, how do you account for that in the valuation of the company?

Ok my question is the following. If someone offered you the amount that you get to with these calculations, would you sell your company?

Very interesting. Thanks for sharing. I think you should do it every quarter, almost like a public company.

Are you taxed as a corporation? or is it through individuals as sideline income?

by: The Financial Blogger | July 12th, 2010 (10:43 am)

@IS,

this is probably the biggest flaw of our method. If we take 20K to buy a site and we would like to value the company the next month, we would need to add the past income from the site we bought and add it to our formula. If we don’t do it, we would be missing 20K of worth!

@ BMSP,

I would NEVER sell it a that price. In my opinion, it worths much more than that but I want to make sure to be highly conservative ;-). I would probably consider only 3 times this value ;-)

@ Passive Income Earner,

This is a good idea ;-), I might include the calculation quaterly in my net worth update!

We are taxed as a corporation since we have taken the decision to incorporate our company a few years ago. We want to make sure that we are structured the right way in ordre to grow.

Neat stuff.

I can tell you from experience that if you guys want to split up, then doing a shotgun is the best approach.

Basically the person who wants to buy the company or any asset (ie one website) has to make an offer to the other partner for their half.

The other partner can either accept the offer and sell their half or buy out the other half for that amount. (ie buy from the person who made the offer).

Well while the valuation model is not perfect it is at least conservative. It would be easier to assess your company’s value and compare it to past periods, since you have a known formula for valuing assets.
The main issue of course is not the current value of the company but its future value. And it is your company’s strategy, based on input from partners that will shape the future valuation and make or break your partnership. In other words if one partner wanted to expand by acquiring all finance related blogs on the net, while the other wanted to harvest the revenues, you might not be able to realize the full value of your company..

by: The Financial Blogger | July 12th, 2010 (7:24 pm)

@ Money Smarts Blog,
I like the way you did it with your own blog, but I hope I’ll never come to this… ’cause we wouldn’t go far if we would split up!

@ Dividend Growth Investor,
This is why we only assess 18 month of revenue. Therefore, regardless of what you want to do, you will most likely realize this value (while not getting the true value as you mentioned).

I’m not suggesting that you guys should split up – if the partnership is working then keep going. However, people change, situations change…

If necessary, both of you would be fine on your own. Everything can be outsourced.

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