Website Factors in Business Valuations

I recently had the opportunity to attend another excellent Online Media Today workshop, Online Marketing Strategies for Business Owners, hosted by Jim Gibson and Michael Gier to learn more about best practices in web development, search engine optimization, social media optimization and online marketing. These events offer a wealth of information and provide opportunities to network with industry professionals. After the presentations I happened to speak with Neil P. White a Business Broker and Mergers & Acquisitions attorney with The Associates. So what was Neil doing at an Internet marketing event?

As it turns out valuing websites and looking for web presences is a significant factor in determining the selling price for businesses today!

Whoa – now here’s an opportunity to learn something new. Neil was kind enough to give an interview that should be of value to business owners, web developers, SEO experts, SMO experts, and the lot. We can all learn from what Neil has to say about website factors in business valuations. Here’s what we spoke about…

Don: What questions do you ask a business owner seeking a business valuation prior to a sale or acquisition by a larger firm?

Neil: One of the things that’s always on the list is to ask the owner, “What is your website and what is your web presence like?” Because that is an asset. We look at it just as we would a piece of equipment. We value the website as an asset, and judging by the presence of it, how in depth it is, how many pages, how good it is. If the presence is very strong and that in and of itself for the copyrights, the intellectual property, the part of the goodwill, the marketing advantage that they have, we’ll assign a value to it. Another way is if their web presence – they don’t have one, or if it is terrible, or if it is a cookie cutter site. If that’s the case then it is viewed as an indication for buyers. Sophisticated buyers, especially a younger buyer they view that as a sign of poor management. That will negatively affect the value.

Don: How do buyers react to an undeveloped web presence?

Neil: Buyers will start to lower the valuation. I always try to put a positive spin on it, that’s why there’s an opportunity here. You don’t want to buy a business and pay exactly what its worth when it’s maxed out and you can’t grow it. You always want to find room for growth. There is marketing that hasn’t been done. There’s a market segment they haven’t tapped. As a buyer you always want to find what the other guys aren’t doing right. If you can’t do any better than the current guys why buy the business? You always want to do better. Here is one of the areas you can do better; they haven’t even touched on the net yet. They haven’t gone in to LinkedIn, they haven’t done Tweets, they don’t have a Facebook presence, they haven’t done any of that. There’s an opportunity for you to build a business with basically, to put a positive on it, minimal capital and time involved compared to retooling an industrial plant or trying to develop a new product line.

Don: Does it make sense to invest in developing a web presence?

Neil: One of the areas that doesn’t take that much money and doesn’t take that much time is to develop a web presence. I find that as a real positive. Some buyers like it when they see a web presence that is terrible because they are going drive the price down. They will certainly drive the price down more than what they are going to spend. And while they could spend $100k to develop a web presence, they’ll drive the price down by three times that. It’s an easy way for them and within a short time, within a couple of months with a web presence they can turn the business around.

Don: I agree with you, having unrealized potential represents opportunity to a buyer. It’s interesting that you are drawing a parallel between traditional business expenses and investing in a web presence. What you are indicating is that it is far less expensive to develop a web presence than to develop a new product line or retool in manufacturing.

Neil: Absolutely, let’s say if you sell a product, an MP3 player, and the web presence is huge, it’s all over the place, you have ads, cross marketing, a Facebook presence and you are selling a million units a year. When you look at that, it’s a whole different kind of analysis than if you were selling a million units a year without any real web marketing. The first thing you do to drive that million units a year is spend money, not a tremendous amount, because it doesn’t take that much money and time to develop a much better web presence. You get your product known in market segments that haven’t heard of your product. This is a different analysis than discovering a company is maxed on the web. Now the next thing we have to do to drive sales is develop a different product. That’s millions of dollars, that can cost a lot.

Don: It’s so interesting that when many businesses dominate a market they seem to believe that ‘Everybody knows who we are. We get most of our business by word of mouth.’

Neil: I hear that all the time. I can’t tell you the number of sellers especially if the business is being sold, it’s not a young person, 34-35 years old that’s selling the business.
But most sellers right now are 55 years plus, mostly 65, and they are using the economy, the downturn to say well I was going to get out, so I might as well get out now. I raise that because we are dealing with sellers that are not that internet savvy. They know the internet and they do stuff on the internet. So their marketing presence on the internet does not tend to be that great. They all think, “Look at how much money I’ve made. Everybody knows my product. I don’t need to do that much work. I don’t need to spend that kind of money and time developing an internet presence because it’s all word of mouth, everybody comes to me.” The classic advertisement we see now is “we don’t know about the people that don’t come to you.” If only one out of four people come to you, how do we get to three?

Don: So if a business is looking to improve their business valuation, if they are looking to sell or be acquired by a larger firm, how does developing a web presence factor in to preparing for acquisition?

Neil: It would be great for sellers, and I try to talk to as many as I can, to plan ahead for selling. Most sellers don’t. The smart businessperson, the one who plans ahead, are the one’s who are interviewing ahead looking for a broker or a mergers and acquisition specialist to help out. They are looking for someone who can get on board now to help prep the business for sale. One of the things I look at is what have they got going on the web. If their web presence isn’t good and they are not active I will say, “This is how you are going to drive up the value.” Get your website 10 times better, get your web presence 50 times better. That will be the money you will recoup the fastest and you will recoup more dollar for dollar than what you spent. And I get people to do that. Because the reality is that owners don’t see it but we are in a society now with smart phones and laptops and iPads and all the mobile stuff. Even if you don’t have a product that’s sold online, the first thing a buyer does to get a feel for your product or your business is they go online. They Google your name, what’s popping up? If you don’t even show up on the first page they think, ‘well these guys are nobody.” You may be the biggest in the business but people will think you’re nobody. “I don’t’ see any articles about you, I don’t see blogging, I don’t see people talking about you, I don’t see a website yet.” That not only affects a sale that affects buyers who will buy a business.

Don: So organic search results become a manifestation of good will. Businesses are actually able to document good will through search and social media. So here’s a question, You’ve been in this for a number of years, have web presences become more important over the last few years?

Neil: The web presence is huge. When I get a cold call and the business is for sale right now or for next year while the person is on the phone I’m going online and I’m taking a look. If I see they have a website and a web presence and their name is popping up all over the place I start talking to them about that and it opens the door because then you start finding out why we’re seeing more of this. Here is a company that’s managed well. They start rattling off why they do all that. You instantly start seeing that good management nowadays knows the world has changed. Used to be fax machines were the highest tech, but now you will see people who will say our SEO is this or that, this is what we raised, this is what we’ve done, and here is how much we spend each month. I am hearing more of that now.

Don: So rather than having a single listing in the search results or one or two listings on page one, let’s say you are lucky and you are above the fold on Google. Let’s compare that to a company that has several pages of links and articles about their company in the search results, does that make a significant difference?

Neil: Yes, that’s sort of a current day indication of what the goodwill is. If you see a presence, that’s what goodwill means – people know the name. If people know the name, if people know the name IBM, if people know Coca Cola, the goodwill as you type in those names you instantly see all kinds of hits. The reason we’re charging an extra million dollars, that’s for the goodwill. If buyers don’t see this they will go online and say, what goodwill? I don’t see your name anywhere, no one knows about you guys. This is one of the positive aspects of the net.

Don: So tell me more about goodwill…

Neil: Goodwill is when you type in something and you are above the fold but you don’t have to be on the first page or second page. The old saying that people don’t look beyond the first page – I ask people that and more and more people are going deeper now because Google’s changed the format again and it’s confusing. People are saying I don’t know who is paying for what anymore so a lot of people are going for the second page.

Don: Right, the first half dozen hits might be for companies that are simply too expensive, they could be enterprise level. A potential client looking at the search results realizes they can’t afford the services of IBM.

Neil: That’s right. And now the way Google has changed everything about a month ago you used to know that the results that were at the top were paid for. Google is now intentionally trying to make that for the average person. The average person looking at the search results doesn’t know that the first 1,2,3,4,5,6 results are being paid for. That’s why people are starting to look down they are to scrolling down the page.

Don: What is the resource you are using as a general guide for business valuations?

I refer to Pratt & Reilly’s Valuing Small Businesses and Professional Practices. People have tried over the years to be as specific as possible with formulas and discounted cash flows looking at all kinds of different ways to arrive at what the value of a business should be. The problem with them is always the good will part of it. There isn’t an exact science on that. When you do it with homes you look at comparables, with business you try to look at the same business sector and same geographic area but that starts getting tough. So there’s a kind of rough valuation you get by looking at as many businesses as you can that have sold in the last year or two that are somewhat similar. So that’s where the concept of web presence and a web presence that is very good applies.

Don: Do you use any particular tools other than looking at search engine results for business valuation?

Neil: As far a putting a value on websites, no. If I do see a web presence that looks like the business knows what they are doing and looks quite big then I’ll start to ask them for their internal stuff, for their SEO reports, Google report and all that. And I’ll use that to shore up the pricing where the seller is saying, “well the goodwill is strong I am going to charge an extra million dollars for it, or five million or ten.” Then I’ll use their reports when I talk to the buyer.

This post was originally published on my blog Opus-Terra.net.

 

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website & content by Don Platon Ⓒ 2015

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