This post is part of my series on digital investment. See here for an overview. More articles on investing in digital assets coming out every few days.

One of the most interesting things about buying a website is the return on investment of a website. If you know what you're doing, then buying a website or online business is the easiest way to turn cash lying around in your bank account into a revenue stream!

But what should you pay to buy a website? It seems so ethereal. It's just data in the cloud!

Nonetheless, they're hard to build. They generate real money. So they're worth something.

If you ask around the internet (in forums or on Reddit) in 2021, you'll find that the price you should pay to own any online business is around 2-4x annual profits.

But firstly, that's a huge range. And secondly, finding where you are in that range takes some research, analysis, and thinking ("Damn it Dana! Just give me the answers!").

You should ask yourself

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What is a good earnings multiple for a website?

Just a few years ago, in the early days of Flippa (one of the more popular marketplaces), you could buy a website for 24x monthly earnings (2x the annual revenue). Which means in two years you'd have your money back, and then after that, profit!

Of course, in those days, you were much more likely to be ripped off than even today. Scammers would buy a domain, throw some random pages on it, buy fake traffic, and sell them for $1,000 to suckers.

A multiple of 2x the annual earnings might seem shockingly low to you if you've never invested in an online business. A "blue chip" stock is typically priced at 10-15x earnings, and tech stocks can have valuations above 50x. But paying 2-3x annual earnings (plus assets) is quite common when buying fixed asset businesses like cafes and gyms.

The difference is, of course, that there are no fixed assets, and you can operate your business from anywhere.

Let's take a look at the listings on Empire Flippers (at an arbitrary point) for example:

Websites for sale on EmpireFlippers late 2020

If you take the weighted average of all these, you'll find that the average price is 36x the average monthly profit — which means you would pay, on average, three times annual profits to own any of those businesses.

This is right in the middle of the range for valuation multiples for a website. Multiples these days, start at 28x (and rarely less), and go up through to 50x (and rarely more).

If a website is priced at less than 24x or more than 48x and it's on a big marketplace, there's typically something specific that makes it worth that little or that much.

What factors can affect the valuation multiple of a website or online business?

These days, valuation multiples tend to hover around the 36x range, by which I mean 36x monthly earnings (or profit).

But there's a lot of variance. In the last week I've seen multiples as low as 17x, and a few higher than 50x!

So what can affect the valuation multiple of an online business? Here are a few things I've noticed and learned from speaking to sellers and agents, and also my own intuition.

The following are factors that can increase the earnings multiple of a business. Not having these things means the multiple decreases.

In a nutshell, the things that increase a valuation multiple for a website are:

There's undoubtedly more here. I'll add them to the list as they come across my table.

Demand for online businesses

As I mentioned above, just a few years ago, valuation multiples hovered around the 24x, according to my vague memory and some googling.

Before 2020, online businesses got more skepticism. There were also more shysters around, creating thinly built websites, buying backlinks, and selling the websites before Google figured them out and the traffic crashed.

By 2020, working online had become more mainstream. Chatter among people buying and selling websites was that multiples were now north of 30x, and that a good website would cost 36x.

These days, probably partly because of more people working at home, working from home and being self-employed has forced a lot of people to look into other ways of generating income — and buying ready-made websites has been one of them. So multiples have increased again — roughly by a factor of 6x. I.e.

  • A basic affiliate website that used to sell for around 30x would now sell for 36x
  • An established affiliate website with a great domain and good design that used to sell for 36x would now sell for 42x, and
  • A decent SaaS app with steady recurring revenue that used to sell for 42x would now sell for 48-50x — or more.

The multiple I've observed for the kind of websites that your average person (like me) could buy and manage is around 36x — and more for something that comes with more.

One aspect of demand that's within your control is where you're finding your website. If you're finding it on a big marketplace, then you're competing with many other prospective buyers, and the multiples will be higher. If you decide to find it yourself... then you may have an advantage in that a) your bid won't be competing and b) you can avoid commissions. Remember, there's more than one place to buy a website online.

A great domain name

You can build a good website on any domain, but the name counts for a lot, as does its authority.

But if you have a great domain name — one with high-trustworthiness keywords, and a .com domain — you'll find it easier to attract traffic and thus pay more, all other things equal.

For example, if two websites in the laptop space were for sale, one called "LaptopNews.com" would sell for more than "BestLaptopsNow.com", which would in turn sell for more than "BestLaptopsNow.net.au"

The second part of a great domain name is one that has a high degree of authority.

If a domain has many unique backlinks from high-authority sites that are relevant to the niche, then it'll be worth more than one that doesn't.

High-quality traffic

High quality traffic is traffic that is

  • Predictable (even if it's seasonal)
  • Growing (even slightly)
  • From high-value sources (the US, Australia, Europe, the UK, more expensive Asian cities)

By contrast, low-quality traffic fluctuates a lot and comes from low-income places. I remember when we had a lot of traffic coming from Egypt, we had trouble getting advertising sponsorship.

Predictable Revenue

Nobody would buy a site that makes $1,000 a month today, but which will make zero next month.

But if you could buy a site that would absolutely, definitely make $1,000 a month for at least the next ten years, that'd be worth a lot – it would be easy to sell for over $50,000. It's basically an annuity.

In the world of websites, things change a lot. Products change, content goes stale, and competitors come (and go). That's why I wouldn't say that owning a website means earning "passive income", unless you're happy with that income dwindling away to zero.

So the more predictable the revenue, the higher the valuation. And the higher the risk, the lower the multiple.

If a website gets its revenue from steadily growing traffic, memberships, and a fairly constant RPM (revenue per mille – see my glossary), then it's worth more. If there's a bit of cyclicality, that's still OK.

But if revenue swings around wildly, or worse, has been decreasing – expect to pay less.

Well-managed site

A well-managed site is on a stable, reliable platform, with everything up to date, using a CMS that's well-maintained (like the most up-to-date version of wordpress).

By contrast, if a website is on an obscure or custom CMS or is built in some other weird way, or if it hasn't been maintained, uses out-of-date or bespoke plugins, the valuation multiple would go down — you'd have to invest in the site to get it working well (or to keep it up to date).

Contracts and SOPs

Unless you're planning on doing all the writing and publishing yourself, your site will need writers.

Some sites I've inspected (and bought) just come with the articles and that's it. There are no guidelines for how to create more content.

Some sites come with guidelines, but with no writers. The guidelines are known as SOPs (Standard Operating Procedure). A good SOP should be brief and very clear – such that if you give it to a total stranger, they could follow it without any questions.

The best sites come with writers and editors and contracts! If you inherit a site and the writers stay on for at least a few months, you'll have a smoother transition.

Natural traffic

It's best when a site has traffic you don't need to worry about, from a variety of sources, like Google search traffic and members who keep coming back.

If a site's traffic relies on ad spend, the multiple always decreases. This is true even when there's predictable return on marketing spend (e.g. cost per click is $2, conversion rate is 10%, meaning cost per sale is $20, and each sale results in more than $20 revenue). The reason for this is that it adds one more variable into the viability of the business – a good ad campaign.

Sites with ad-driven traffic still sell, but for lower multiples (roughly 6-12 months revenue less).

Of course I'm excluding sites with fake traffic from bots – this was common maybe 5-10 years ago but no longer is – it's too easy to spot (because there'll be traffic but no revenue).

Diverse revenue streams

My own strategy is to own multiple sites, even if each one only has one main revenue stream.

But good sites will have diverse revenue streams in and of themselves. For example, very well-established news and information sites get money from memberships, from ads, and from affiliate sales. Think New York Times. They make money from ads, they make money from your membership fees, and they own sites like Wirecutter that make bank from affiliate sales. Those guys know what they're doing!

If a site only relies on one affiliate stream, it's usually Amazon. That's OK, but even so, there's risk in being very concentrated in Amazon, because their policies change so often... people who invest in Amazon too much feel like they get screwed over sometimes.

Further, if a site sells many products (either through direct sales or as affiliates), you should check to make sure it earns its money from a diversity of products. Otherwise there's a lot of risk. I've seen sites where 36% of revenue comes from one product and one page... that means that there's a lot of risk tied up in that keyword, page, and product.

Finally, some sites earn a lot of money through one affiliate partnership, like promoting one software product. If that relationship goes south, it would be of high risk to the site.

Website age

The older a website is, the more it's worth.

This isn't a measure of a domain's age. It's really how long has the website been actively generating traffic and revenue (in other words, how long it has been an investible website).

I loosely see websites in three tiers:

  1. Less than one year history of meaningful traffic and revenue — new, and could all drop away quickly
  2. 1-3 years history — established, not fly-by-the-night
  3. 3+ years — basically blue chip

This is very loose, and it's very debatable. My point is more broad — the more history (and the more consistent the history), the higher the multiple.

Nonetheless, I've seen many websites with just six-nine months of history sell for decent multiples.

Low-maintenance

If a website only has to be updated irregularly, and needs just a couple hours a week of effort, then that's great, and the multiple goes up.

If, however, you have to spend 40 hours a week replenishing stock, updating articles, and adding new content... then you have a new full-time job that might not even pay that much, and the multiple would go down.

The majority of websites I see require something like

  • 2-6 hours per week
  • 2-4 new articles a month
  • Quarterly updates to existing articles

The websites I've seen with the lowest multiples have been Amazon FBA-type sites where you have to constantly be watching inventory.

Uncompetitive industry

This metric is a personal one, not one applied by companies by Empire Flippers and the such.

Basically — a website in an uncompetitive industry is more attractive than one in a highly saturated industry.

All else being equal, I'd prefer a website that sells industrial machinery to one that sells laptops, for example. In industrial machinery it's easy to stand out and hold a position (for now).

But in laptops, I'd already be competing with CNet, The Verge, Tech Republic and so on. And new laptops would be coming out every couple of months... keeping up would be a challenge.

So what earnings multiple should use to value a website? You get an intuition for it after a while. In one sense, the website is worth whatever someone pays for it. But in a more absolute sense, a website is only worth a value if you can get more of a return than in other assets — like in the stock market, for example. It's up to you to make that analysis (but I will, later).

Is the Earnings Multiple the only factor to consider when buying a website?

I want to point out something that might be obvious — that it's not just about the multiple.

If you're very analytical, it's easy to go down a path of trying to find one multiple to rule them all. But in reality, there are other things to consider. Like

  • Do you have time to transition and manage this new website?
  • Is it an industry that you intuitively understand (or can understand with a bit of research)?
  • Is it an asset that will be interesting to you in a few years time?

There are more things to think about too. Some of them are quantitative, like growth curves and whatnot, and some are qualitative, like "hey is this website full of scammy clickbait and that's why it makes money?" (I've seen it!)

Everyone has their own list — I'll help you create one at a later date.