Cashing in on your Domain Portfolio

[edit] Cashing in on your Domain Portfolio

Jay Finnan, Sedo's Portfolio Sales Manager, breaks down the mechanics involved with portfolio valuations and offers advice on marketing domain portfolios.

There are buyers, professional domain investment companies, with the capital to move quickly on deals. Of course they’re looking for value in the domains they buy for the present and the future. In this feature we’ll take a look at the process of preparing your portfolio for a sale and how to find the right buyers.

Is now the time for you to cash in?

With so many new opportunities out there it’s tempting to look at what a cash generating portfolio can be sold for. Perhaps you’re interested in getting in on the ground floor and investing heavily in a new TLD or maybe you’re looking to buy UK or European traffic to diversify your portfolio. Maybe you’d just like to retire. Whatever the case, if you’re looking to move a portfolio and your domains are of decent quality, these days you have many options for making a bulk sale of many domains quickly, and at a fair price.

Who is buying?

One of the most exciting developments for the domain industry has been the emergence of institutional domain investment companies; well funded firms with the capital and organization to move quickly on purchases of large lots of domains. Media companies, some based on a ‘reverse search engine’ concept have entered the fray and domain companies have even started acquiring cash generating domains. Since entering the buyer’s market these companies have been a financial boom to long time domain portfolio holders who’ve finally received the offers for which they’ve been waiting.

Notable Recent Entries into the Domain Aftermarket:

• 2004: Marchex pays $164MM to acquire portfolio of 110,000 domains • 2005: Highland Capital pays $80MM to acquire Buy Domains (500K domains) • 2005: iREIT launches with $250MM to spend acquiring domain portfolios • MySpace co-founder launches Demand Media with $120MM to spend

The latest crop of big-money domain investors have entered the market for various reasons. Some come from the financial arena and look at domain names as another type of investment asset, and therefore value purely based upon cash flows and quantitative metrics. Others are experienced players in the domain industry with knowledge of both domain resale and domain monetization, who are looking to consolidate domain inventory and secure their revenue streams.

What type of domains are portfolio buyers looking for?

Portfolio purchases are never speculative. Buyers are looking for value now and down the road. Price will always be based on cash in and cash out. A financial analyst would call it a “discounted cash flow analysis.” But what exactly are these firms looking for?

Well, we can take some names out of the equation altogether. Professional Domain companies avoid trademark infringing domains. The potential to lose the names or be litigated down the road is too much of a risk for these firms to bear. Portfolios with little or no parking revenue, or unprofitable portfolios (portfolios where the parking revenue does not cover the registration costs) will not generate much interest either. Increasingly, vice domains (domains in the areas of adult, gambling, etc.) are also being avoided by some buyers. Companies that are going public or planning on going public find the potential negative PR not worth the gain.

What buyers are looking for are profitable, cash generating, generic domains. Money making generic domains with type-in traffic may fetch upwards of 8 years revenue, although most deals have taken place in the 2 to 5 years range. Domains with expiring traffic from past development will usually receive offers of 1-3 years depending on how long the traffic is expected to last.

This is a business valuation, not a domain appraisal. I mentioned a discounted cash flow analysis above. The operating cash flow your portfolio is calculated by adding traffic monetization revenue (parking) + sales and deducting ongoing costs (such as registration fees, legal and maintenance costs, etc.).

The portfolio buyer will then calculate the Net Present Value (NPV) of the expected future cash flows to determine a fair value of your portfolio. NPV is a financial concept which is summarized by the axiom that $100 today is worth more than $100 one year from now. It uses a discount rate to calculate the future value of cash flows, as represented by this chart:

You’ll often hear valuations cited in terms of “X” number of years of revenue. This is a highly-simplified way of looking at valuation which is used as a quick point of reference. The multiple of the number of years worth of revenue the buyer is willing to offer is based upon the growth potential of the cash flows. Non-cash generating names, and risky names that might be taken away or lead to litigation will devalue a portfolio. If there’s a potential for increasing earnings (for example, a significant number of domains focused on emerging markets or technologies) this will certainly be taken into account as well.

Preparing your portfolio for sale

The buyers I’ve mentioned above are as well organized as they are funded. They’re definitely looking for opportunities to invest but not without first scrutinizing their prospective acquisition.

The 5 essential steps to prepare:

1. Prepare an EXACT list of the domains you would like to sell. You won’t find any offers if you’re not up-to-date on which domains are about to expire, have already expired or already sold. The exact list of domains available is an obvious first step.

2. Detailed traffic stats. As mentioned above, portfolio sales are cash flow based transactions. If you’re looking to move a portfolio, have all the relevant stats ready at hand: unique visitors, click through rate, earnings per click, total earnings and traffic origins (geographical breakdown and top referrers). Make sure this data is recorded over an extended period of time. Most buyers require at least a year of traffic data. Make sure to park with a company that will provide you this information in real time.

3. Sales history. Even though some domains originally in the portfolio may have already been sold it’s of great interest to the buyer to see what you’ve been able to move in the past, how often you’ve been able to sell, and for how much. Traffic isn’t the only cash flow meter that will be scrutinized. The most competitive portfolio buyers, in my experience, will also factor in prospective sales revenue.

4. Relevant costs. It’s not just the cash generated that will be looked at, it’s also the cash expenses. Registration fees, transfer fees, and potential legal fees for problematic domains all need to be considered. Not all of these apply to every portfolio but, in general, this is something a portfolio buyer will factor into their analysis. Be ready to show potential buyers how much they should expect to pay for maintenance.

5. Your price expectation. A portfolio without a price will not receive an offer.

Finding the Right Buyer

Of course there’s a lot of discrepancy that can be expected between offers for an entire portfolio of domains. The use of different metrics to evaluate performance, the nature of the purchasing company’s business model and their expectations for immediate gain and future growth will all dramatically affect the final bid. So how do you know you’re getting the best offer for your portfolio?

Some key questions to ask prospective buyers:

1. Do they take resale value into consideration? This is a key metric. Discussing your past sales and having the buyer take resale value into account can add significantly to the final offer.

2. Are they able to make more money from the domains than you are? If the answer is yes, then great! If they can make more they will offer more. Economies of scale and other synergies often allow professional buyers to pay a premium over what the domains would be worth to you.

3. Do they understand the market? Don’t let yourself be intimated by expensive suits and financial jargon! If the buyer lacks a solid grounding in the domain market, you may do better elsewhere.

You have several options for finding a buyer:

1. Go it alone. Attend domain events like TRAFFIC or the SedoPro Partner Forum, research who in the media is acquiring domains and market directly to them, or rely on your network of colleagues to generate leads.

2. Seek professional representation. Investment banks or well-connected domain brokers make it their business to know who is in the market to buy and where the best offers are coming from. You’ll want to make sure they have the reach to secure offers from anywhere in the world too. The domain market is a global one and if you’re not tapping every market for buyers you could wind up dramatically underselling your portfolio. Institutional domain investment companies aren’t just an American phenomenon. You might find the most bullish offers come from an Asian, European, Australian firm or elsewhere.

In the end the preparation is worth the effort. Make sure your portfolio data is in order. Partner with a parking company that will give you all the tools you need in order to maximize the long term value of your domains, have immediate answers to all the commonly asked questions and don’t be afraid to ask buyers how they’re evaluating your portfolio. Use the advice above and you shouldn’t have to wonder if you have received the best price for your portfolio.

Do you have a portfolio you’re interested in selling? Contact Jay Finnan, Portfolio Sales Manager, at Jay@sedo.com for a free consultation on how best to market your domains.