Automation can be a very useful tool for business operations. It can replace menial labor with computer systems that more quickly and efficiently accomplish pre-programmed tasks. This reduces costs and adds value to the business. For online businesses, however, determining how much value is added may be difficult. In fact, determining the value of an online business can be a difficult venture in-and-of-itself. You might think that the use of an automated calculator only makes sense in a world of business automation.
But it doesn’t. Simply put, not all automation is the same. Because there is no single agreed upon equation for calculating the value of an online business, calculators such as these cannot account for qualitative variables and the arbitrariness of numbers produced. These automated tools cannot do anything except spit out a random number that is essentially unusable. Luckily there are several alternatives for valuing your online business beyond the use of an automation calculator.
Assets, Domain and Traffic: Qualitative Valuation
If your online business has tangible assets, these need to be monetized. But many online businesses are of a different variety. There are online businesses which develop applications or software, offer online services instead of tangible goods or are specialized for advertising. All online businesses, however, have a domain name and, hopefully, some level of traffic. These intangible assets as well as all other assets need to be monetized.
Some sources state that there are numerous variables that can add value to a domain name including age of domain, its uniqueness, its traffic, content with which it is associated and many other things. These variables can be used to generate domain value alone or can be applied to the online business itself. The longer a business has been around, its uniqueness, the amount of traffic it receives and the content it generates can all add or decrease the value of an online business. There, however, except for traffic, are qualitative variables that whose value will need to be negotiated with a prospective buyer. An automated calculator cannot help value these qualities. It can only deal with raw statistical quantities.
Revenue vs. Profit Generating Models for Valuation
While valuing a domain and traffic as well as all other tangible and intangible assets is important, these variables will not give you an adequate valuation of your online business alone. Some suppose that using a revenue based model is best. And while revenue is important, it does not really matter until costs are accounted for. An investor is looking for a return on investment after all and is more likely looking for a model based on profit.
Take for example a business that has monthly costs of $10,000 and yearly revenue of $100,000. Given that total costs for the year would be $120,000, the business is operating with a loss of $20,000. An investor is more likely to use a sales-earnings multiple based on profit rather than revenue. If he focuses on revenue, he doesn’t account for costs that could prohibit his return on investment. And while it might be beneficial for you to ignore costs, it’s not realistic. For this, profit-based models of generating a value for a business coupled with asset valuation are one of the best routes to go.
Turning to the Experts
Now, all of this information is helpful of course, but when it comes to valuing the business, putting it all together can be difficult. Determining the value of specific qualitative variables or deciding on the appropriate sale-earnings multiple are not easy tasks. Luckily there are website brokers which will value, market and sell your online business for you. If it is an established business, this is the best route to go. You will have to pay a commission to the website broker, but for those looking for instant gratification, this makes sense.
Conclusion
Automated calculators for valuing your online business proliferate across the internet like so many nasty viruses that spread pandemic. Avoiding these tools is the best way to avoid the sickness of miscalculating the value of your online business. In place, you should instead value your qualitative assets, value traffic and use a profit-based model of valuation to generate a more adequate value. Or you could just turn to a website broker. It is, of course, up to you.