Answer these questions before you buy a web site.

The debate about how much a developed web site is worth has been rekindled in the domain name community with Rick Latona’s entrance into the web site brokering business.

I interviewed web site broker David Fairley last year to get an idea of how much developed sites are selling for. Anyone considering buying or selling a site should read that article and the linked presentation for an idea of what the market is like. Generally we’re looking at 2.5x-3x trailing 12 months EBITDA for a sale price, although that can go higher if the site has good underlying factors and scale.

I’d like to proffer 11 questions you should consider when buying a site, and then a couple smokescreens a seller might throw your way.

1. How much profit is the site making? The best measure here is probably EBITDA. That excludes any amortization the owner may be expensing based on an initial purchase, such as a domain name. Revenue isn’t nearly as important as EBITDA in most cases. Remember, a site grossing $100,000 a month may actually lose money. Don’t forget to include the owner’s time in expenses (see #3).

2. Is there diversity in revenue? If 100% of the revenue comes from Google Adsense or a particular product sale then you should discount the value of the site. Reliance on a single revenue stream or ad partner means your revenue could plummet over night.

3. Are there opportunities to introduce new revenue streams If the diversity of revenue streams is low you may want to pay less for the site. But there’s also upside if you have new ideas.

4. How much time does the owner spend maintaining the site (really)? – This is one of the most overlooked parts of buying a web site. It’s part of your cost equation but many people forget about it since it doesn’t show up on the income statement. As a general rule, if the owner tells you he spends 10 hours a week on the site then you should probably double that number. Consider how much it would cost to hire someone to do that work or if you’ll need to do it yourself. Deduct that amount from the profits.

5. What are the costs? This is part of the EBITDA equation, but you need to look a little deeper. Will your costs increase over time? Can you shave some of the costs out?

6. How often does the site need to be updated? This is related to the time equation. Think about the commitment you’re making.

7. Is there diversity in traffic? I’ve talked to many publishers who lost 20%-50% of their traffic after Google’s Panda update. That’s a painful reminder of how important traffic diversity is. You want your traffic to come from a number of sources, not just Google. Consider newsletter subscriber counts, social network followers/fans and traffic, type-in visitors, repeat visitors, RSS subscribers, etc.

8. How long has the site been around? A site that’s been around for a year and makes $10,000 a month is very risky. There’s little history to show that this is sustainable. Perhaps you see tremendous upside potential, but at that point the historical profit doesn’t mean as much.

9. What has the traffic looked like over the long term? Again, look at the history. If you only have a year of history then you don’t have much to go on. But if you look at three years of history then you can see the ups and downs and how sustainable the traffic is.

10. Is there an opportunity to add more content or otherwise attract more traffic? is the site underdeveloped? If so then you have upside opportunity. But, remember that building more content takes your time. Consider how much time it will take you and build this into the cost equation.

11. Do I really care about this topic? If you’re just buying the cash flows but don’t care about the topic then there’s a good chance you’ll fail.

Now let’s look at a couple smokescreens — one is a metric that shouldn’t matter much to you, and the other is a seller’s claim that doesn’t make sense.

1. High search engine rankings. I don’t care that a site is ranked #1 for a term. What I care about is how much traffic that ranking delivers to me. The ranking and traffic aren’t a cumulative value. I also need to look at the opportunities and risks that come with the rankings. What happens if I lose that ranking? Are there terms the site ranks low for that I can improve?

2. “You can triple your profits!” Another warning: if the seller touts the potential of the site, be wary. “If you put just a little more elbow grease into the site then it could generate 3x as much money!” If that were the case, then the current owner would take advantage of it rather than selling the site to you at a “low price”.

source from domainnamewire.com