As investors, we’re more likely to buy a blog than to sell one, but how much is a blog worth when you’re buying?
As a cash flow investor I tend to value a blog based on the cash flow it provides. During my due diligence process, I will get a number for the provable monthly revenue the blog has made in the past, and then I’ll get another number for the expected monthly expenses.
I use these two numbers to calculate the blog’s expected monthly income. Then the question becomes how quickly I want the money I spend purchasing the blog to come back to my bank account. I have a process for determining that as well.
I use all this information to ultimately arrive at a final value for the blog. Usually this number is between 20 and 36 times the expected monthly income.
In order to properly value a blog, we must first calculate monthly cash flow. So let’s start with calculating revenue. As an investor, you must verify every piece of a website’s claimed income. And income can come from many sources.
- Affiliate marketing
- Product Sales
- Lead generation
And there are plenty of other ways a website can make money. But most blogs will be making money from the first three items on this list.
As a buyer, you want to mostly ignore any number that the seller of the website is providing you. Those numbers can’t be trusted.
The most important part of any investment is the due diligence process. It is primarily your purchase price that will determine how profitable your investment is. So how do we go about arriving at a revenue number we feel confident in?
Due diligence for revenue
Since you’re ignoring the revenue number the seller provided to you, it’s up to them to prove to you how much money they’re making from the website.
Note: There are many items not included in this article which should be a part of your due diligence process. These are things like verifying the person selling you the website actually owns it.
Ask the seller how the website makes money, then they need to show you statements. Screenshots can be manipulated, so schedule a video call with them and have them take you through the financials.
If they claim affiliate income, have them take your through the statements provided by their affiliates, and also ask them to show you some affiliate links on their website.
Same with any other form of income. Some website brokers, like Empire Flippers, will vet any site they list, but others, like Flippa, have no process for vetting website postings and their sites are full of scams and scammers.
The best way to avoid scammers is to make them prove every aspect of the business. Sellers are well aware of this problem and legitimate sellers should have no issues walking you through all their income statements.
I like to give myself a specified amount of time that I commit to spending on due diligence. I use 20 hours. If I’ve spent 10 hours on due diligence and I feel pretty good about the legitimacy of the website and its numbers, I’m still only half done. I’ll force myself to keep researching for the entire 20 hours. Spend the remaining 10 hours proving to yourself that the information you’ve gathered so far is correct. The more detailed your information, the less likely you are to blunder.
I also like to do some gut check analysis on my own. Read several of the articles on the site. Are they good articles? Does the site effectively send readers to the money making actions?
Also, if a site claims any significant amount of organic traffic, I want to know what keywords are driving traffic and verify that they actually show up in search results. Use an incognito window when doing your search verification.
If the site sells a product of any kind, you definitely need to read through their sales page. Ask the seller what their conversion rates are and compare those with the quality of the sales page.
Basically, just visit the site and try to track through the path that a potential customer would take. Does the site pass your personal gut check?
Generally, a blog has low expenses. It’s one of the reasons I love blogs as a potential investment.
When you purchase real estate, for example, you have a real asset (a house), which helps reduce the risk, but the truth is you’ll always have some pretty large expenses with a house. Insurance and taxes are a given forever. You might also have a utility bill, and you can’t forget the cost of maintenance and repairs over time.
With a blog, it’s not uncommon to have your only costs be hosting and domain name registration. This could potentially cost you less than $100 per year, although for larger blogs you’re probably looking at more like $250-500 per year.
Due diligence for expenses
Again you’ll want to spend time working out the expected expenses for the site. This part can be a little harder. It’s not terribly difficult to hide expenses during the sale of a website.
If the seller pays for links or pays for writers, you may have a hard time identifying those expenses if the seller doesn’t share that information with you.
Sometimes the best you can do is come up with a list of questions for the seller and make them lie to your face. During your call with them ask them every question you have around expenses.
- “What are your monthly and yearly expenses?”
- “Do you pay writers to produce content for you?”
- “Do you pay for any links to your site?”
- “Have you ever given a refund on your product? How often does that happen?”
- “How are you taxed on the income from your site?”
You first line of defense is to sort of grill the seller. They have expenses, and you can get them to share some of those expenses with you. Just don’t trust that they’ve shared them all with you.
And don’t forget about taxes. Chances are the income from the blog will be taxed as personal income, include that as an expense and use it in your price analysis.
Add at least 10%
In every investment I’ve ever done, I calculate my expenses and then I add at least 10% to my final number. For a website, it might make sense to add more than 10%.
Websites are much more difficult than other investments to have concrete numbers for. Basically this just means there’s more room for error. With that in mind, you might consider adding 20-25% to your final expense number.
You must identify the things which can significantly change the expected revenue and expense numbers. For example if the main source of revenue is the Amazon affiliate program and Amazon suddenly changes their payout rates (like they did in April 2020), then this is a risk for the site.
Where does the revenue come from?
For a blog, usually this is going to be where you find your biggest risk factors. If you make most of your money from affiliate marketing or ads, then you’re dependent on the terms of those contracts.
Most affiliate contracts don’t guarantee terms for life, so if the terms change in the future, your profits could take a hit. Likewise contracts can change with advertising programs and that can significantly affect your revenue.
If you make most of your revenue from the sale of an ebook or course, then you’re not subject to a change in terms, but you may have a problem if your traffic slows down…
Where is most of the traffic coming from?
You need visitors to make money, so where is the site’s traffic coming from? Generally you like to see a lot of organic traffic because it’s free and generally requires minimal upkeep, but paid traffic can be profitable as well.
If the site gets a lot of traffic from Google then changes to Google’s search algorithms would be a risk factor. And anything that goes against Google’s guidelines is a risk factor as well (paid links for example). If a lot of the traffic is paid, then you’ll need to learn more about the paid traffic campaigns to understand what the risks are there.
Is an email list included in the sale?
Email lists can be very profitable, but more importantly they provide a way to still bring in revenue even if the blog’s traffic disappears.
Having an email list is a risk reducer.
Anything else you can think of
There are hidden risks everywhere in the world, so spend several hours looking through the site and brainstorming any other way that the blog could turn into a bad investment:
- Potential for lawsuits
- Political connections can sometimes lead to backlash from readers
- Does the blog have employees? If so, there’s a risk of losing those employees in the sale.
- Will you assume debt to purchase the site?
You won’t think of everything, but give yourself several hours to think, and don’t be afraid to ask others for their thoughts.
Ignore Potential Growth
When valuing a blog, I never include the potential to increase income. The value is dependent only on the historical earnings. You’d like to buy a site with obvious potential to increase revenue, but you shouldn’t ever count on that money when valuing the site.
When selling a website, you want to highlight all the areas that hold potential for growth. If you haven’t build an email list yet, then tell buyers that they could build a list and increase profits in a matter of weeks. If you don’t sell any ebooks on the site, that could be a huge boost to revenue, tell the buyer about this opportunity!
But as a buyer, we can’t factor potential into our offers. We don’t know that an ebook will sell, and we don’t know how an email list will perform either.
Calculating A Profitable Purchase Price
We’ve finally gotten through the grind of the due diligence process, now it’s finally time to put a value on this blog.
Calculate “provable” monthly cash flow
The first step in valuing a blog is to calculate the monthly cash flow using the numbers you arrived at when calculating revenue and expenses.
Don’t forget that revenue is only the amount that the seller provided adequate proof for. If they claim to make $300 per month from their YouTube channel, but weren’t able to provide proof of that income, it shouldn’t factor into your offer.
Subtract the average monthly expenses (include the extra 10%) from the average monthly revenue and get your final monthly cash flow number.
Determine your multiple
Your multiple is the number you multiply the monthly cash flow with to get the blog’s value. For example if your multiple is 10 and the blog’s monthly cash flow is $300. Then the blog’s value to you is $3,000.
The significance of the multiple is that it reflects how long it would take to return your initial investment back into your pocket. It’s not easy to find a traditional lender who will give you money to purchase a website, so most commonly you would buy the website outright.
It is absolutely possible to borrow money to finance the purchase of a website, but that’s a topic for another day. We’re assuming we will be purchasing the site outright.
I like to start with a multiple of 24. When you look through marketplaces like Empire Flippers, you’ll see website generally listed with multiples between 20 and 48. I start with 24 and then add/subtract months for various details about the site.
- Add 4 if at least 75% of the site traffic is organic
- Add 2 if at least 50% of the site’s revenue is from affiliate
- Add 4 if at least 50% of the site’s revenue is from an ebook or course
- Add 4 if income is consistent for 1 year with very little new content added in that year.
- Subtract 2 if the site is less than 1 year old
- Subtract 4 if the site has less than 1 year of revenue data
- Add or Subtract based on positive signs or risk factors
These are purely personal preferences, and are just a peek into how I’ve been valuing blogs. They’re not intended to be a rule.
I typically say you should never offer to buy for more than 36 times the monthly income. Even if a site has been around for 10 years with consistent income that comes from organic traffic buying an ebook, and hasn’t had any new content added for the last 3 years, I still don’t want to risk more than 3 years of site earnings on the purchase of a website.
Once you have your final multiple, just multiply the monthly income you calculated by the multiple to get your MAX purchase price. That’s the most you should be offering.
If your expected monthly income is $2,400 and the multiple you calculated was 27, then the absolute most you should pay for the blog is $64,800 ($2,400 x 27).
How To Lose Money
There are a thousand ways to lose money purchasing a blog, but the good news is the most money you can lose is the amount you buy the blog for (though you can lose more if you get a loan to purchase).
Here are some of the ways you can lose money purchasing a blog:
- Don’t verify the seller actually owns the site
- Don’t verify earnings and expenses
- Pay too much for the blog
- Completely ignore the site after buying it
- Don’t read through the site before buying
It’s also important to remember that you can’t lose money if you don’t buy. Never be afraid to pass on a deal if it doesn’t meet your expectations or if the seller won’t part with it for the price that makes sense to you. Don’t fall in love with a site before you own it and always be willing to pass on a deal if the numbers don’t hold up.
In my time investing, I’ve learned that it’s important to put your own value on an investment. If someone else thinks an asset is worth $60,000, that doesn’t mean it’s worth $60,000 to you. It may only be worth $48,000 to you. I believe we should each create our own valuation process that fits our strengths and our own comfort levels. Then we should stick to that process no matter what.
My process for valuing blogs is to find the provable revenue, then subtract the expected expenses to arrive at a monthly cash flow number. Then I arrive at a multiple by looking at risk factors and positive indicators.
I multiply those two to arrive at my blog valuation.