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Evaluation Methods of a Website. Part 1.
by Alexander O. (www.webskyguide.com)
There are several precise methods of evaluating a website. It is also necessary to understand that evaluating an e-business is similar to evaluating the real estate
of an individual or a public company.
Systematized information, accurate data, and the calculation of most expenses and costs allows for the precise evaluation of any business. It is no secret that a low
price decreases the value of future profits, and a high price almost totally excludes the possibility of selling the business.
In this publication, we will consider the two most typical cases of website sales. The first is for a renewed website that has existed on the net for a short time and
is not profitable. The start of profitability is a boundary dividing a renewed website and an e-commerce website or a website that is part of an e-business. This is
the second case. Evaluation methods for an existing business requires a deep and thorough study. In this publication we will focus on basic vocabulary and on the
evaluation principles for existing business.
All the figures below are conditional, as each website is individual and the expenses for them are different. But our example will help the owner clarify the evaluation
methods of his or her resource.
So, how to evaluate a new website. In this case, the most important factor concerns the expenses for its creation. Let us suppose that our target is the creation of a
dynamic website for a company selling agriculture equipment in the USA. The main expenses for the preparation stages and the creation of the required elements of
the web-site include:
- The business plan
- The development of requirement description
- The programming, design, encoding
- The development of content for the site:
- text information - 100 A4 pages;
- number of photos - 100;
- number of tables (A4) - 10 pages
- Second level domain
- Hosting
Note:
The website is developed by seven people: the Internet analyst (manager of the project), the designer, 2 programmers, the encoder, and 2 content writers. The average
weighted yearly earnings of a webmaster in the USA are up to $120,000 per year. In our case, we will take average salaries of the employees: $7,000 per month.
The total time for the website development is three months.
Evaluation stages and forming the method.
- Business plan.
Before writing the web content and developing the website, there will need to be discussions, consultations, and a feasibility study
concerning the website creation. In most cases, a feasibility study of the website creation is an internal company document. After it is approved, the business
plan is discussed. The key moment is the budget of the proposed project. In any case, a business plan describes future expenses. Basically, it is a detailed
plan of the company's activities for a particular period of time, with set targets and a timetable for performance objectives. The length of a business plan
can be from ten pages of A4 format up to hundreds, and in some cases thousands of pages. In our case, the cost of preparation and writing the business plan is
$15,000.
Development of requirement description. This is a difficult requiring professional knowledge and experience, and a thorough treatment. It is developed on the
basis of the business plan. The average cost is $8,000.
Programming and design of the website. The stage involves drawing, programming, designing, encoding, editing, correcting, and testing. The cost of these
categories is directly connected with the technical level of the website. The higher the level is, the higher the costs are. An experienced webmaster knows
that usually the cost of the work is 2-3 times as high as the development of technical project and is defined on the basis of the employees' salaries. Let us
suppose that design services will cost $3,500 (two weeks of work), the encoder will cost $3,500 (two weeks of work), and the two programmers will cost $28,000
(two months of work). The total is $35,000.
Preparation of the website content. With the conditions mentioned above, the development of 100 pages of content will cost $7,000 (a month or 24 working days
for a copywriter). Design and input of 100 photos will cost $1,000 (on average, $10 for a photo). Table information will cost $3,500 (two weeks for a content
writer). The total cost of the content is $11,500. The website does not contain audio and video information.
Total expenses for second level domain and hosting: $100 per year.
Total expenses. Expenses required for any business: rent of office, consultations, telephone, Internet, stationary, lunches, etc.: around $30,000 for three months.
Total: $15,000 + $8,000 + $35,000 + $11,500 + $100 + $30,000 = $99,600.
In addition, at the beginning of any business start up, it is necessary to have 10% in reserve. The final total amount is $110,000.
It goes without saying that the above figures are not for all cases. This example is for a serious corporate website.
For developers the amounts will be different. As a rule, in such cases where there is no clear business plan, the expenses for the content and design are minimized.
This reduces the cost of the website, but its level leaves much to be desired.
After you earn money with your website, it stops being a toy, entertainment or an experience, it becomes a business with all consequent rights and obligations.
We will now discuss the basic principles of an extremely important topic: "Evaluation methods of private companies in e-commerce". This is a relatively new and
interesting topic that has not been fully discussed. What are the guidelines? What to start with? The USA Fiscal Department gives the answer to these questions.
In Revenue Ruling 59-60, there is a list of factors often used in the evaluation of a private business. It will be useful to enlist these factors, with some adjustments
for e-business:
- the character and history of creating e-commerce website;
- the study of general level of online economics of this industry;
- the balance cost of the e-commerce company and its financial state;
- the potential profitability;
- the level of business reputation and other intangible assets;
- the prices of comparable e-commerce companies.
The Revenue Ruling should be taken into consideration, but it should not be the only list of factors to consider.
The most common methods of evaluating websites are:
- method of discounting future profits;
- method of comparable multipliers;
- capitalization of profit;
- evaluation methods based on assets.
Method of discounting future profit requires accurate forecasts of future profit and a choice of discount rate. The method directly depends on the meaning the
evaluator defines for the term "profit."
Comparable multipliers. This is a quite common approach for evaluating both public and private businesses. It is simple and convenient to use standard
multipliers of the profit or gross earning of an e-commerce company. Chosen multipliers are basic for setting the price of purchase. Using multipliers of profit is
equal to using the definition of capitalization of profit.
Capitalization of profit. This evaluation method is close to the method of discounting future profit. Using this method implies that the buyer purchases the
right to eternal future profit flows. Usability of this method also depends on forecasts of profit and a choice of discount rate.
Evaluation methods on the basis of assets. There are several method based on assets. Some of them are more usable for public businesses, others are mostly
used for evaluating private businesses. Usage of this method results in computing fair market value, balanced value, and liquidation value.
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