So ive had the quesiton posed to me about valuing a website business and domain. The person is selling their web business, and thinks they may be missing out on value. As they have done the traditional DCF valuation. But they seem to think that the valuation is missing out on the value of the website and the domain. Like for example if you had 2 traditional businesses, one leased the building, while the other owned it, the value of the building would make it mroe valuable. To me the DCF valuation work, as it values the whole business and includes the tangible and asset tangible values on there. Its the Whole worth in essence. Thoughts, ideas, etc would really be welcomed here…
Long time no speak chief! An available website will mean the buyer does not have to create the website. This is difficult to value though, because I think the price of creating websites varies a lot. However, if the website is simple and just includes basic items like information pages and query boxes, the value of the website will be negligible. Also, there is a current news story regarding companies being able to use their name as a suffix in web pages. This may diminish the value of any company domain names in the future, but at the moment only for larger companies, as there is a fee of almost $200K just to apply for the suffix. Ask the owner what makes him think the domain name is worth anything. Has anybody inquired about it? At this stage, every established firm has a website already and I think only very generic domains (or very specific names that were purchased at the beginning of the web era, before corporations got their fingers out) will fetch much at market.
The value of the business is the net worth (buliding in OP post) plus the present value of the future free cash flows to the equity discounted by cost of equity
So basically its the NPV of the future cash flows the assets (website and domain) are producing. Adding anything extra just doesnt make sense for the domain and actual website
transferpricingCFA Wrote: ------------------------------------------------------- > So basically its the NPV of the future cash flows > the assets (website and domain) are producing. > > Adding anything extra just doesnt make sense for > the domain and actual website If you could wind up the business, and sell the site and domain, I think you should attribute values to them, otherwise you should not.
the business though is a purely web based business. without the website and domain it wouldnt exist
What are the metrics for the website/domain? Hits/Conversion/revenue etc. perhaps that would help in assigning a value. Is the business model based on active marketing or passive marketing. i.e do potential clients come to the website through Google etc or does the company actually go out and promote itself other than Google? Are the services unique? Failing a sustainable competitive advantage tacking on potential sources of cash flow could overstate value. Just my opinion. Just a few thoughts.
transferpricingCFA Wrote: ------------------------------------------------------- > the business though is a purely web based > business. without the website and domain it > wouldnt exist They wouldn’t exist without that specific domain name, or they’re web-based so they have to have some domain name?
Well it doenst need that specific name, but I guess the name has built up value. But what Im getting at here, is all the value of all these intangibles should be implicit within the value determined by a DCF right? Its like a DCF valuation an equity researcher might do on a listed company. In the DCF value implicit is the value of the business intangible, tangibles such as property, etc etc?
^But then I add to the above, thinking about a traditional bricks and mortar business. WHat if your business is still earning the same cash flows, but a property it owns sky rockets in value? How does a DCF capture this in its valuation?
This is tricky because the two are intimately linked. The domain name can be worth a tremendous amount of money (sex.com sold for $13mm a while back), but I would argue it is part and parcel of the operating business, not really something that is available for sale with zero cost to the business. Think of it this way - if a company sells off its brand name to another company, but retains the rights to the product. For example, let’s say WD-40 sells its brand name and trademark to Dow Chemical, but WDFC retains the formula, client list, assets used in production, distribution, and sales, etc. Do you think that they could use those assets/formula/client list and just keep right on ticking, selling exactly what they had before with no loss of revenue or volume? My guess is that their sales would slow down substantially and they would have to spend a large, large, large amount of money explaining to all their old clients that WD40 the brand was no longer WD40 the product, and that if they wanted to buy WD40 the product, they’d need to try KAPLOOEYDEGREASER, which looked nothing like the old WD40 (despite being made the same way in the same factory by the same people). Similarly, selling your domain name can be a real beeyotch to your traffic. Imagine if Google sold their domain to another search engine website. Even if google got 95% of their previous customers to switch to TOOTLE, their new search engine, they would seriously hurt the flow of their business with that 5% they dropped. This 5% would be made up of people who were too dumb to get the memo, people who got the memo but think the new owners of Google do a fine job, people who were looking for a new search engine anyway, etc. This 5% of lost customers is a really rosy estimate, too - imagine if this was the wall street journal.com we were talking about. Every one of the millions and millions of pages that links to the ‘old’ wall street journal articles now no longer works - all those links would be ‘orphans’, meaning you’d get 404 pages when you click them. So yeah, I’d view the domain name as an operating asset, not available for sale unless you owned it and it was dormant with no use whatsoever (available-for-sale), in which case, sell away.
transferpricingCFA Wrote: ------------------------------------------------------- > ^But then I add to the above, thinking about a > traditional bricks and mortar business. WHat if > your business is still earning the same cash > flows, but a property it owns sky rockets in > value? How does a DCF capture this in its > valuation? In the vast majority of cases, the DCF should capture the value of all required tangible and intangible assets. In the real estate example, you could remove depreciation and some cap ex from the projections and replace it with market rent and then add the value of the real estate to the conclusion. You would have to deal with tax issues, discounts, etc. but that’s the basic idea.