This is written more for buying than selling. However, it has ideas useful for both. This primarily covers content websites, getting revenue from ads. If considering buying a website business, other than this, these concepts are not necessarily applicable.
For beginners, the following provides a good start on buying and selling website businesses.
Know the numbers.
Web sites are bought and sold based on expectations of future profitability. This requires understanding the potential of a website to continue generating profits. It requires an understanding of all website costs and revenues.
Profitability examples.
For example, site "A" earns $175 a month from advertising. To earn this, it spends $10 a month on hosting, $1 a month on domain name registration ($12 a year), and $64 a month on advertising. In this example, site "A" has expenses of $75 a month. This leaves site “A” with a profit of $100 per month.
Using a different example, site "B" earns $175 a month. To earn this, it spends $40 a month on hosting, $5 a month on domain name registration, and $105 a month on advertising. In this example site "B" has expenses of $150 a month, with a profit of $25 per month.
Changes after sale.
This is important, because it is often overlooked. Suppose you consider purchasing site "A" from a person named "Bob". Bob shows the site has 2,000 backlinks, in the popular search engines. It receives 1,000 unique visitors per day, and 3,000 page views per day. Site "A" also has a Google page rank of 6.
At first, it seems like a very healthy site. However, upon further examination, you notice the majority of backlinks and visitors come from other websites Bob owns. In this example, if Bob were to sell site "A", he would remove all these links and referral traffic. Of course, Bob keeps them for a little extra money.
What’s your multiple? Is it 8 months or 12?
Many people tell you to buy a site based on some arbitrary multiple. For some reason, it's usually 8 or 12. Thus, if a site makes $100 profit a month, you pay $800 to purchase it, with a multiple of 8. This is one of those areas where almost any advice you get is incredibly inappropriate.
Multiples are based on the expectation of future profit of the prospective web site, not from other people. Instead of trying to come up with a good multiple to use, simply determine a good "system" for applying a separate multiple for each website.
What industry is it in?
Topics like technology and travel have a higher profit potential than sites about games and jokes. For a technology site, let's start with a multiple of 6. For a site about trading jokes, give it a multiple of 2. The example site, "widgets.com", is a technology site. It gets a multiple of 6.
How relevant is the traffic?
Believe it or not, many webmasters do very unscrupulous things, to drive traffic. The problem is "relevancy". If a site has lots of irrelevant visitors, companies in the industry pay less for advertising on the site. Or, if the site sells products, it has a lower purchase percentage.
Fortunately, "widgets.com" receives most of its traffic from natural searches. The webmaster has never done much search engine optimization. This almost assures you the traffic is relevant to what visitors want. For this reason, let's raise the multiple by 2, which gives it a multiple of 8.
How much traffic?
The amount of traffic a site has plays almost no role in determining the multiple. Why? Keep repeating to this yourself. "You are purchasing the site based on expectations of future profit, not the expectation of future traffic."
"All things being equal", a site getting 10 visitors a day is worth the same as a site getting 5 visitors a day - if they make the same profit. There are, of course, exceptions to this. These are covered later.
Is it established?
Remember, traffic alone doesn't change a multiple. This is true, except for extreme situations. If the site looks good but has no visitors, it isn’t established. It is difficult to buy sites like this, because it's impossible to get an idea of future profits.
Non-established websites.
When dealing with non-established websites, the average profit is usually $0 or some very small number. From the above suggesstions, you are never able to purchase one of these sites. At the very least it is very difficult to purchase with a multiple of $0. Granted, some of these websites do have some value, but the risk is much greater.
Authority websites.
The other side of the coin is authority sites. They have usually been around for a long time and are the top site in their industry. They usually have a list of current advertisers, returning traffic, good public relations, etc.
If a site is an authority, the multiple rises significantly. While "widgets.com" has been around for 2 years and has a steady base of return traffic, it’s not an authority site. Because "widgets.com" is "established", but not an "authority", the multiple remains at 8.
Is the traffic good quality?
Since traffic relevancy and its effects on future profits have been covered, it is time to consider traffic quality. The best way to describe the difference is to use an example.
Forum traffic.
"Widgets.com" has a forum. It accounts for half its traffic. Forum traffic is notorious for not being profitable. While it is possible to make money doing simple CPM advertising (where you get paid based on the amount of page views), it’s difficult to get visitors to click on ads. This rules out Pay Per Click (PPC) and Pay Per Lead (PPL). Because forums aren’t as good quality (when thinking in terms of profit), lower the multiple for "widgets.com" by 2. This returns its multiple to 6.
Relevant traffic.
Another problem with "widgets.com" is many of the forum topics and site content is based on hacking tech devices. There are articles on how to get free cable channels, hacking your X-Box, pirating DVD’s, etc. While the traffic is relevant, (people look for these topics on search engines and find answers on "widgets.com"), the traffic is not of good quality.
Individual companies do not want to advertise here. In addition, suppose it is against the terms of service (TOS of the forum) to use third party ad networks. Because of this, lower the multiple by 2, bringing it to 4.
If you decide to buy the site, changing the TOS is an option to allow 3rd-party ad networks. However, it has the chance of reducing traffic. Hence, the multiple still reduces by 2, and results in a 4.
How much time does it take to run it?
Just because you aren’t paying yourself by the hour doesn’t mean your time is free. If a site takes a very small amount of time, such as 2 hours a month, this leaves you time to make more profit elsewhere.
If a site requires a 40 hour work week, you have locked yourself into a career. You no onger have time to pursue profits elsewhere. "Widgets.com" only requires 2 hours a week to run. For this, raise the multiple by 1, bringing it to 5.
Notice the small increase. While an easy to maintain website is good, they also tend to be easier to duplicate. This means, eventually, the competitors who work harder do catch up. Therefore, there is not as great a market lead, which results in a smaller multiplier increase.
Where’s the content?
In the world of internet advertising, content is king. If a website makes money off a "links directory" or web mail, then it offers no original content. If the site contains hundreds of lengthy articles about the industry it covers, it deserves a multiple bump. Of course, if the site is an e-store, this doesn’t matter as much.
While "widgets.com" does offer forums, it also has many original articles. They are included with the sale of the site. For this, it gets a multiple bump of 2, bringing it to 7.
What are the income sources?
If a site makes most of its money from a single advertiser, or product, you are taking a larger chance at determining future profit. If a site has various income streams, some PPC, some CPM, some with individual companies, and some ad networks, its much more stable. This deserves a multiple boost.
"Widgets.com" makes most of its money off a single PPC company. Because it is a single income stream, lower the multiple by 1. It now has a multiple of 6.
Is it fun?
Remember this, "don’t purchase a website, if you don’t like the subject." Like any other small business, websites NEED tender loving care.
Websites need love, too.
There is nothing like purchasing a profitable website and just letting it sit and mold. If you like the subject, you are more inclined to advertise, update, and add to it. If you like the subject, it becomes more profitable for you.
Operating "widgets.com".
Suppose you personally don’t like "widgets.com". Let's say keeping up with tech-related matters is interesting, but keeping the forums on-topic is not. Add to this, you don't want to write papers about DVD pirating. And, you don’t agree with the general principles behind the site.
To run this site, it requires spending time doing things you don't like. Remember the quote, “Its business, not personal." In this case, the principle does not apply. Each site needs to be a personal project for you. If it is, you spend more time improving it. Because of your feelings for "widgets.com", lower the multiple by 3.
The End result.
After all that deliberation, offer "widgets.com" a multiple of 3 times the average of the previous 6 months profit. The owner is outraged and counter-offers a price of twice that. You explain your reasoning and explain the good and bad points of "widgets.com".
Explain how much work was involved to determine the price. Let them know you think the price is reasonable. Unless there is new information about the site you didn't know before, don't increase the price.
If you buy the site at your chosen multiple, great. There is a good chance to make a profit. If you raise your price, you are decreasing your chance at becoming profitable.
Conclusion.
When purchasing web sites, its important to spend the time determining an acceptable price. If the owner doesn't like the offer, then pass. There are many other owners who respect well-thought out, reasonable offers.