May 8, 2013, 5:00 am

My Company Shares Valuation Going Down, Sell in May and Go Away?

by: The Financial Blogger    Category: Business
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Last week, I highlighted most of what we had done during our annual meeting. One other thing I didn’t mention was our company shares valuation. Each year, we crunch the numbers together and assign a value to our business. For the first time in 5 years, the company value is lower than the previous year. That sucks!!!

 

How DO YOU VALUE NON PUBLIC COMPANY SHARES?

 

A classic method to value our business would be to take the net profit, adjust it with amortization and apply a multiplier. For example, our last year’s financial statement show a net profit adjusted with an amortization of roughly $40K. This means that, after taxes and all other expenses, our business generates $40K per year. If we use a multiplier to value our business, it would have to be 3 or 4 times the profits. Therefore, the company would worth between $120K and $160K. People who think that you can apply a big multiplier to value a company are not in the real world. You may think that your company is worth several hundreds of thousands of dollars or even a low 7 figure due to its big potential. Let me tell you; potential income worth only for the owner! A few episodes of Shark Tank or Dragon’s Denwill teach that!

 

We thought the classic valuation model wasn’t right for a web business. Especially because there is no way to appreciate the true potential of this business since we run it with only 20 hours/week (10 hrs from each partner).

 

HOW OUR VALUATION MODEL WORKS

 

 

If I had to sell my blog empire tomorrow, I would certainly base my asking price with the valuation model I use to buy blogs. According to this model, I could sell my sites for as high as four times the gross revenues. Since we broke the 100K figure for the third year in a row, I would not be afraid to ask for $500K. But I would certainly not sell quickly!

 

When we put a share value to our company, we decided to create our own business share valuation model. We thought it would be a good idea in order to:

 

#1 Keep the same model to see the shares value evolution through time

 

#2 Design a model considering both the real market and the potential of this business

 

#3 Establish a value for our shares upon our death as our wives would benefit from the life insurance we purchased.

 

Here’s our quick formula to determine the business value:

 

PAST 12 MONTHS GROSS REVENUES * 3 YEARS + CASH – SHORT TERM AND LONG TERM DEBTS

 

So we built a valuation model which considers the classic valuation model for websites (a multiplier of gross revenues) and added the cash and debts composites. We did that as we were sitting on over $60k in cash one year and we thought this was worth something. The situation is currently the opposite right now as we have corporate debts.

 

According to this model, our shares are worth $126,000 compared to $131,000 last year. It’s a drop of nearly 4% in a year. This is mainly due to a drop in our gross revenues. The drop is not astronomical, but when you look at our model, each time we lose $1 in revenues, it affects our business valuation by $3. Since we have concentrated on paying down our debts in 2012 and not growing our gross income, we affected our valuation model at the same time.

 

WHY I THINK MY COMPANY IS WORTH MORE TODAY THAN LAST YEAR

 

For the first time since we created our company in 2008, our revenues didn’t grow. Even worst, it has dropped by a few percent! Still, I’m convinced my company is worth more today than it was worth a year ago.

 

It’s been a while since we havebeen concentrating on diversifying our business and make it more sustainable. Almost 70% of our business model was based on private advertising only a year ago. This part of the business was continuously growing and I was even expecting revenues as high as $15K/month by the end of 2012. An important Google update happened at the beginning of last year and forced us to change our business model to survive.

 

Last month, we had our best month in term of gross income for almost a year! The best part is less than 25% of our income is now coming from private advertising! We even cleared some of our websites completely! We can now expect to receive money each month from various other sources:

 

Adsense

Book sales (Dividend Growth)

Small eBook Sales

Affiliate programs

Niche websites

Ad campaign brokering services

 

It is true that we made less money in 2012. But the point is that we are making more passive income than ever. We are making money from so many other sources that our business model is not dependent on anything anymore. We even suffered from traffic loss and are still making more money since we are able to attach our readers through our newsletter.

 

With the addition of videos, podcasts and a membership site by the end of 2013, I’m convinced that we will continue to break the $10K/month and eventually reach $15K/month in 2014. At that point, our business will be worth a lot more! Hahaha!

 

Readers, do you think my shares value worth more this year? Would you invest in such a company if you had the opportunity?

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Comments

If I were buying a blog I would use my own valuation method and ignore the sellers method, which is sure to be inflated.

And because Google traffic can be volatile, I’d have to take last year’s revenue/traffic numbers with a grain of salt.

At the most I’d pay 2.5x annual sales for a blog.

To answer your question though, I do think your company is worth more this year than last year, but mainly because I would not count private ads in your total revenue.

by: The Financial Blogger | May 8th, 2013 (12:19 pm)

Hey Robb,

I know that many potential buyers don’t consider private advertising revenues. I find it interesting that they would consider Adsense revenues though. From my experience, Adsense revenues could double or drop by 75% upon a Google update. Therefore, this type of revenues is also shaky.

On the other side, I’ve been consistenly making good money from my sites for the past four years. I’m glad I didn’t sell to anyone as next month, I’ll still receive money from my company.

This is the cruel dilemma any business owner has when it’s time to sell; the company always worth a lot more for the seller than for the buyer!

Never sell Mike. I wrote a post on Yakezie.com about this last week. Buy, build, hold until you get the mega millions!

I haven’t done my online company analysis, so the value is currently at $0. But 3X revenue + cash – debt sounds good to me!

I don’t think I will ever sell but you never know what could happen in life. Technically, if someone offers me 1M$ today, I would sell… but it won’t happen :-D hahaha!

I’ve been involved in the six figure sale of web properties multiple times, and in my experience you can throw an traditional valuations right out the window. It’s either worth way less, or way more than a traditional valuation.

Here’s two examples. I was a partner in a niche site that earned about $5K a year – hardly enough to cover costs. But we owned the niche, lock stock and barrel, competitors simply could not break into it. So when we decided to unload, we simply called one company and said ‘you’ve got until friday to offer us $X, or we call around to your competitors and see what the market rate is.’. We had a positive answer in under 48 hours. The valuation wasn’t based on revenue, it was based on fear of a hobbyist site getting into the hands of a competitor, and the cost of trying to take the traffic away from a site.

Conversely, I used to have a reasonably well trafficked american life insurance site. When I decided to remove myself from that market, I had two american agents who knew exactly what the site did and what it was worth. They bid against each other because they both knew they couldn’t easily get the traffic I had. The result? I sold the site for 6 months of revenue. And the lucky bidder told me they made enough money from it in 3 months to pay for the costs. And I was lucky to get 6 months of revenue, because the buyer’s market just isn’t there from insurance agents. So much for three years revenue :).

In short, it’s unlikely someone’s going to buy a website business based on the site’s annual advertising revenue – nobody wants that business, and if they do, it’s way cheaper just to build it yourself. For example, they could spend $100K buying this site. Or they could buy a high PR site that’s 15 -18 years old for $10K (I know of sites like this), spend another $40K marketing it, and probably end up with similar results for half the cost – right?

Instead, I think many web properties are valued less on income, and more on things like what it would cost to replace or rebuild, how competitive the niche is, and how dominant you are in the niche. Someone’s going to buy a website because it’s cheaper to sell their product by owning your traffic compared to building it from scratch. Very unlikely someone’s going to buy the website with the idea of taking the $40K in advertising revenue and turning it into $60k in advertising revenue. In fact if I was building a web property specifically to sell, I’d be focusing on developing a repeat audience (newsletters, twitter, special offers, etc) ans sustainable non-google traffic as I would be on developing direct income.

[...] @ The Financial Blogger wonders if you should stick with your Company Shares or go away if the value is going [...]

I know I’m a bit late to comment, but I have to say that valuation is very difficult. I can’t dispute your numbers, but I have to say that when I look at your company – there are a bunch of websites that are worth a decent amount of money, but the biggest assets are the two owners. I think that’s why you value the future growth because you know you guys can make it happen. A buyer may not be able to realize that.

Once you get your debt ratio to what you want it to be, you should keep buying websites and applying your magic in order to get more benefit from volume.

Hey Mike!

When you look at most companies, the biggest asset is often the owner (this was definitely true for Apple anyway, lol!).

I think the best example is our dividend sites. When we bought them, they were authored by a single writer and he was greatly appreciated. Over time, we continue his work with a different approach and it worked perfectly.

Once the debt is down, we will definitely continue our buying activities!