Website Valuation: The Online Market

For the more complex model, the valuator should consider more seriously changes in actual website business going forward. In the next example, the following things are assumed in the forecast:

• The Historical growth rate of page views is 1.28 (28%) and 600,000 in the final year of historical data. • In period two, an investment will be made to double an existing sales campaign for a product, increasing expenses but also increasing revenue more than the increase in expenses (a proven successful campaign simply being increased). The campaign will continue at this new level. • In period three, enough product sales will be achieved to receive a 5% discount on Cost of Goods Sold. • Period 3 will be dedicated to website optimization with an expected page view increase of 20% in period 4 & 5. • Due to increased ad space on new pages due to be launched in period 2, affiliate ad revenues are expected to increase 10% starting in period 2 and the same is expected in period 4.

Items such as hosting fees, which directly relate to the page growth or number of visitors, should be calculated based on a historical percentage of visitors. Items like banking fees should be tied to a percent of revenues, etc. Your geometric mean should be used for historical revenue or free cash flow. Whenever possible, tie a component to a specific event like those mentioned above or a percent of revenues, a multiple of visitors (i.e. for each 100,000 visitors the hosting fees increase by $x.xx).

Below is the valuation with the above assumptions taken into consideration. Each assumption can be seen reflected in the 5 year forecast. For example, you can see that the site visitors started at 600,000 x 1.28 = 640,000 and increased until period 4 at the geometric historical average growth of 28%. In period 4, the above stated optimization was successfully implemented, increasing page views an additional 20% for that period, which the historical growth than took on from there.

iMARKET WEBSITE VALUATION MODEL
		FORECAST YEARS
Present Value:	$88,543	1	2	3	4	5

Hosted Pay for Click Ads
Total Page Views (#)		640,000	819,200	1,048,576	1,610,613	2,061,584
Ad Click Percent of Views (%)		1.50%	1.50%	1.50%	1.50%	1.50%
Average click payment($)		1.10	1.10	1.10	1.10	1.10
Total Click Ad Revenue		10,560	13,517	17,302	26,575	34,016

Affiliate Revenue
Total Affiliate Revenues ($)		17,500	21,000	21,000	25,200	25,200

Direct Product Sales
Product Revenues ($)		21,000	24,150	24,150	24,150	24,150
Cost of Sales ($)		18,000	20,700	19,665	19,665	19,665
Profit ($)		39,000	44,850	43,815	43,815	43,815

Product Sales Commissions
Total Product Sales Commissions ($)		0	0	0	0	0



Income Statement (000's)

Net Revenues ($)		49,060	58,667	62,452	75,925	83,366
COGS ($)		18,000	20,700	19,665	19,665	19,665
Gross Profit ($)		31,060	37,967	42,787	56,260	63,701

Ad Expenses
Pay Per Clicks ($)		3,250	3,250	3,250	3,250	3,250
Print Ads ($)
Other Advertising ($)
Total Ad Expenses ($)		3,250	3,250	3,250	3,250	3,250

General and Admin Expenses
Hosting ($)		480	480	480	480	480
Internet Access ($)		240	240	240	240	240
Merchant Fees ($)
Bank Fees ($)		120	120	120	120	120
Other Expenses ($)
Total G&A Expenses ($)		840	840	840	840	840

Income Before Taxes ($)		26,970	33,877	38,697	52,170	59,611
						-
Taxes (enter rate %)	40%	10,788	13,551	15,479	20,868	924

Net Income ($)		16,182	20,326	23,218	31,302	58,687
Depreciation Add-Back ($)		-	-	-	-	-
Change in Working Capital ($)		0	0	0	0	0


Terminal Value						186,168
@ g =	5.0%

Free Cash Flows		16,182	20,326	23,218	31,302	244,855
5
Risk Free Rate	4.00%
Market Premium	6.20%
Beta	5.50
Discount Rate: (%)	38.10%

Present Value:	$88,543

Notice all concepts discussed earlier are included in the valuation such as the risk premium, the beta, the market premium, terminal growth, etc.

Here is a line by line analysis of the above table - explaining the discounted cashflow model for website valuation.

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