Content Websites are regularly traded based on SDE (seller discretionary earnings), either on a monthly or yearly basis with 3 times the yearly SDE as the industry average, which does not necessarily reflect the true net profit in terms of EBIT.
Example: A Website is making $10,000 SDE on a monthly basis. This does not mean it’s netting $10,000, especially if you’re factoring in the time the current website owner is spending on
- operating and managing the asset
- creating content
- interacting on social media
- third-party costs to run this asset within a company like bookkeeping, banking, audits
- etc.
If you’re able and willing to step into the shoes of the previous website owner, managing the business in exactly the same way with an identical cost structure and thereby transforming the “asset” into your day job, the SDE might work as a rough estimate.
On the other hand, if you need an additional (management) team, source content from top-notch writers, use freelancers to optimize your UX and design, etc., all of these costs are directly eating into your fictive, SDE-based profits, which could even result in a negative ROI.
Adios, 33% returns!
Quick fix: At TreasureHunter, we’re transforming the SDE into an adjusted EBIT as if you’re looking at a Content Website from an investor’s perspective and calculating the profits like a third party has to run and operate the asset. Setting this baseline will give you a clear picture of the actual performance of each and every asset and also helps you compare various opportunities.
Tomorrow: Why, based on 2 data sets, self-managed Content Websites can make retail investors broke (and how to fix this while truly capturing the double-digit returns of this asset class)