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At a recent webinar I had an interesting question asked of me, “Is it better to develop a domain prior to selling?” My immediate response was, that depends on the buyer. Although this is true I thought that it would be worthwhile unpacking this a little further.
I like to get back to business basics to more fully understand what developing a domain out actually does to valuations. In order to do this you need to fully consider the impact on both the P&L and the Balance sheet.
Let’s imagine that I think that that the domain I’m wanting to sell is worth $10,000. I then decide to build this domain into a business. At the beginning of the business the balance sheet has an asset in it that is worth $10,000 and the P&L hasn’t changed (ie. $0).
If after six months of work I manage to generate $50,000 in sales with a cost of $30,000 then the P&L has now changed to having a profit of $20,000. This is then effectively retained earnings as an asset in the balance sheet.
Now I want to sell the domain. Hang on a second, you’re actually not selling the domain, you’re now selling a business. If you can maintain the run-rate then you’ll generate $40,000 in profit by the end of the year. So typically you will sell the business on a multiple of profit which will also take into consideration the assets controlled by the company (eg. the domain name).
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