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How a Premium Domain Name Can Improve Your Website’s Value
By Quiet Light
The most recognizable part of your website is most likely its domain name. So if you have a really great domain name, this should make your website more valuable, right?
Well, yes, but not in the way you might think.
Many people expect the domain name to be valued separately from the rest of the website, then added on to the value of the website. So, for example, if the domain is worth $50,000, and the business is worth $100,000, they would expect the buyer to pay a total of $150,000.
But this is not how your domain adds value to your website.
The value of your domain name is, in most cases, already ‘baked’ into the value of your overall website. It’s value is reflected in the earnings of the company and wrapped up in the ‘goodwill’ of your website.
This is a concept that many sellers have trouble accepting, so in this article I’ll try to dissect the concept of ‘goodwill’, how your domain name participates in goodwill, and also look at the few cases where the speculative value of a domain name might exceed the value of the overall website.
Does The Valuation Process Consider Domain Value?
If you have ever gone through a thorough valuation process, you know that it can be quite tedious. We typically require at least 36 months of profit and loss statements, detailed analytical data, and a lengthy written client interview.
But when we present the formal valuation, there are seemingly only two factors considered: discretionary earnings and a multiple.
Why is that? How can anyone determine the value of a complex website based on just two factors?
Your Multiple is a Highly Complex Number
Despite the apparent simplicity of the earnings multiplier formula, it is a wonderfully complex formula that measures both the anticipated return on investment and also discounts for potential risk.
The multiple itself represents an entire ecosystem of influencers. These influencers tug at the value of your business both positively and negatively. Some can drag your valuation down considerably while others may justify market-busting valuations. But, for the most part, they work in a series of addition and subtraction to your overall value.
Your domain name is a vital part of this overall ecosystem. If the domain is especially valuable, then it becomes a key player in this multiplier ecosystem.
A Domain’s Value is Purely Speculative
While domain names are intangible assets (they are not physical in nature), they can carry their own independent value. Domains such as Insurance.com, which sold for $35.6 million in 2010, make the news for their ground-breaking prices.
But where does a domain name get it’s value? From speculation.
More specifically, the value of a domain reflects the speculation of how profitable that domain could be with a website and business attached.
Take a look at the list of the most expensive domains ever sold. Insurance.com wouldn’t sell for $35.6 million if the acquirers didn’t think they could make far more than that by selling insurance. Similarly, Nations Luxury Transportation, LLC didn’t buy PrivateJet.com for $30 million unless they believed they would receive more value in the general goodwill that the domian would bring.
So when we think about the value of a domain name, it is important to keep in mind that a domain name, on its own, has little to no value. It is the speculation of what could be done with that domain name that brings value.
Your Domain Name is Part of Goodwill
While the upfront valuation of an online business may appear to only consist of two variables (earnings and multiplier), at the tail end of a website acquisition, buyers and sellers are required to assign values to the various parts of the acquisition price. Most of the time, the majority of the purchase price is assigned to ‘goodwill’.
The folks over at AccountingCoach give a solid explanation of Goodwill:
In accounting, goodwill is an intangible asset associated with a business combination…Outside of accounting, goodwill could refer to some value that has been developed within a company as a result of delivering amazing customer service, unique management, teamwork, etc. This goodwill, which is unrelated to a business combination, is not recorded or reported on the company’s balance sheet.
So goodwill acts as a giant repository for all these intangible aspects of your website that make up your website’s character, reputation, and success.
Your domain name can contribute significantly to this goodwill.
What do speculators look for in a valuable domain name? In an interview with domain broker Andrew Rosner, Placester.com writer Seth Price noted the following key elements:
- Proper names
All of these attributes speak towards adding to the general goodwill of your website. Having a short, descriptive, memorable, and brandable domain name makes it easier to build goodwill. Having a keyword-rich domain name makes it easier to obtain premium search rankings.
Speculative Value & Actual Value Meet
So when a domain name has an attached website, the speculative value of that domain is tested and proven in the reality of the added goodwill to the business.
There is no doubt that having a great domain name actually makes your business more valuable. It does so through stronger rankings, protection from competition, and general goodwill from users who remember your website more readily.
Typically, this actual value replaces the speculative value because the speculative value is now proven in an actual website.
But what happens if the actual website doesn’t match the speculative value of the domain name?
When a Domain Name Is More Valuable Than a Website
Although it is rare, the speculative value of your domain name may actually be more valuable than the domain name itself.
If you analyze some of the recent domain name sales, there are examples of sold domains that had previously attached websites.
In 2013, Rockies.com sold to the Colorado Rockies MLB team for $1.2 million (although there is some reason to doubt this figure as accurate). Previously it was a well-kept website for tourism in the Rockies mountain range. Although the website was well maintained, the value of that business was likely less than what the domain sold for (although I am, admittedly, speculating).
So what happens here? If the speculative value of the website is ‘absorbed’ into the actual value of the website when a website is built, like Rockies.com?
There are two reasons that may make the domain name more valuable than the website:
- You executed the business poorly. If domain speculators believe that your domain is potentially worth more than the website, that’s a sign that you did not create as successful of a business as others think you could build.
- An alternative business model is more profitable. Rockies.com took a tourism website and applied it to Major League Baseball, which we all know is extremely profitable.
So it is possible that your domain name is more valuable than the website you built on that domain name, but don’t expect to get value for both your website and domain name.
You can either sell the speculative value of the domain name, or you can sell the actual value of the website. Not both together.
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Also worth mentioning that just owning the domain doesn’t mean you own the trademark for that domain name. Be sure to do a federal trademark search on the domain name you are evaluating, and related names, to see what risk you have in either being able to trademark it or having someone else claim they already have a right to that domain name once you make a big splash with it.
I absolutely agree! Trademarks are great protection against competition and help reduce the risk with an acquisition (which increases value).
I saw a situation in which a client had a great domain name (let’s just call it domainsforsale). A competitor registered domainsforsaleonline in order to steal some of his work. A trademark would have given him some protection and recourse.