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An Internet Business Opportunity Awaits
The most important question a prospective business buyer can ask is, “How much is that business worth?”  There are accepted methods to come up with the proper valuation of a “bricks & mortar” company, but an Internet business valuation rarely fits those parameters.  If you have an Internet business opportunity fall into your lap, or you are actively seeking out an Internet business for sale, how do you know that the asking price is a fair one?  Owning an Internet business can be fraught with difficulties; the last thing you want to do is pay too much.

The Early Internet Bubble
During the late 1990s, when Internet business opportunities were first entering the public’s consciousness, a strong argument was being made that Internet businesses for sale should be priced based upon the amount of traffic they attracted.  A standard metric of land-based businesses involves something called “net present value of future cash flow.”  This is a fancy way of saying that the current value of your business is tied directly to the amount of revenue you will generate over a specific period of time – oftentimes three to five years.  The problem with any Internet business opportunity that arose around the beginning of the 21st century had to do with the fact that investors were caught up in the excitement and the newness.  They did not apply standard business valuation methods to the Internet – assuming incorrectly that it possessed its own unique valuation rules – and were subsequently burned in the process.

Two Basic Types of Internet Business Opportunities
Any Internet business for sale will fall into one of two primary categories – a “network” or an “application.”  Internet networks form the basis for the World Wide Web and, in a way, are not all that different from a television network – Fox, Telemundo, NBC, etc.  These networks have clear revenue streams, which primarily involve advertising but may also be based on a subscription model.  Major Internet networks include Microsoft, Google, and Yahoo!  Internet applications are sort of like the shows you watch on television.  The people who create a show like “Seinfeld” are not directly concerned with the revenue each episode may generate.  They are more interested in building a quality product that people will clamor to watch, thereby using that measure of popularity to sell their program in its entirety to a network for a lump sum.  This is the way that Web sites like Facebook and YouTube were monetized.  They built up strong followings while struggling to stay afloat financially, surviving long enough to be snapped up by a network for millions of dollars.

Small Business on the Internet
That’s all very well and good for people who have the foresight (or good fortune) to think up a brilliant notion like allowing users to post video clips to a single Web site.  But what about the budding entrepreneur who simply has a product for sale and wants to use the Internet as its primary marketing vehicle?  What if you see such an Internet business for sale and want to know how much you should pay to acquire it?  Well, the realistic value of Internet companies for sale should be calculated by predicting cash flow – but there is an additional element worthy of consideration.  A factor known as “anticipated growth” is an important part of Internet business valuation.  Since most Internet companies have a short track record of sales, that is not the only metric to be considered.  Where land-based retail businesses are often priced at four to five times annual revenue – this figure can actually range from between three and eight times, depending upon the industry and its standard margin of profit – many Internet businesses are priced at many times that.  For example, Skype was acquired by eBay for an astounding 371 times earnings.  Naturally this is an extreme case, but it helps illustrate the anticipated growth factor.  Internet businesses can expand exponentially without eating up much additional overhead.  For example, compare the cost of doubling the size of a neighborhood bookstore so that it can accommodate twice the inventory against the expense of adding double the number of pages on a Web site to equal the same increase.  The rise of professional Internet business valuators – people who have experience in trading Internet-only companies – will remain a valuable resource well into the coming years.  If your plans include the intention of starting an Internet business or buying an existing one, examine its current revenue but expect to pay more based upon this growth potential.

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