Domain Valuation

Some domain names are valued in the thousands or millions of dollars by virtue of their uniqueness and rarity. However, the valuation of non-premium domain names should be approached with the same rigor as the valuation of a traditional business.

The valuation of a business in any industry starts with CURRENT earnings. Various risk factors and other intangibles may also be considered, and the final valuation will usually be some multiple of current earnings (EBITDA).

The multiple often varies from 1x - 10x earnings, depending on the industry. Of course there are rare exceptions where particular companies have created a dominant market position that cannot be easily challenged (e.g. Microsoft in the 90’s, Google in 2000’s).

Remember, in most cases an experienced buyer will only value actual results to-date. Granted, in many cases they're interested in the company (or domain) because they believe there is future potential to grow or improve the business, but they will NOT assign much value to “future potential” when negotiating.

I understand the potential of the domain business (which is why I’m in it), but it’s unreasonable to expect to be paid on speculation.

In fact, I argue that buying a domain or website based on even a 1x multiple of annual earnings is risky, because the traffic and monetization strategies are volatile and can change much faster than in the brick and mortar world.

Now you might say that using this type of valuation for an undeveloped domain name is like saying a piece of vacant land on the strip in Las Vegas is worth nothing simply because it is generating no income.

Well the problem is that we need to consider time.

I’ll bet that in 1930 there was vacant land on the strip in Las Vegas that they couldn’t give away. Only a few visionary “speculators” saw the value in this land in 1930. The average business person interested in hard numbers just laughed. Seventy (70) some years later and everyone can appreciate the value of property on the Las Vegas strip.

In 2008 we’re the speculators for domain real estate. If we’re inclined to sell today we need to understand the perspective and mindset of the typical buyers at this point in time. We can’t expect the vast majority of people to see the true value of domains for another 5 or 10 years. At that time the “real values” will be obvious and may far surpass traditional business valuation methods.

Unless of course substantial advances in search technology and structure of the internet render “domains” redundant.