This article is part of our Valuation by Business Model series, in which we provide you with information on what makes your particular business model unique when it comes to valuation. For more in-depth reading on valuation, see our post How to Value a Website or Internet Business. To get a valuation from our expert team, click here.
Affiliate websites are popular business models among online business owners, and for good reason. They’re relatively easy to get started, and, when done properly, can be very profitable.
We’ve advised in the sale of affiliate businesses across various niches and income levels, so we’ve learned quite a bit about the factors that contribute most significantly to a high valuation. Here’s what we’ve come to understand:
The nature of the affiliate program will likely have an impact on the valuation process. Any business that has been built to promote a single affiliate product is at risk of losing revenue because there is a chance that the product will change, go away or simply lose appeal to customers. Being too reliant on a single revenue source is always risky. On the other hand, if your website is promoting multiple offers, and your revenue is well diversified, the business will likely receive a higher valuation.
In addition to product concentration, you’ll also want to consider the overall growth patterns of the business. Here are some questions to ask yourself:
- How is the company doing? Is it growing or shrinking? Is it likely to be around for a long time to come? For example, if you are using Amazon, they are a growing company with an established program, and that means less risk.
- How long has your business been a part of the affiliate program?
- Does the program have a shelf life? If there is any uncertainty, this will be reflected in your valuation.
- Can the terms of agreement be transferred over to a new owner? Will the new owner have to negotiate on their own?
The more sustainable and reliable your affiliate program is, the more highly your site will be valued. Potential buyers want to feel that there is as little risk as possible before even thinking about drafting a letter of intent.
As with any business, the niche plays a big part in the attractiveness of the opportunity for a buyer. You’ll want to examine product trends, seasonality and the overall staying power of your affiliate products.
Generally, evergreen niches will be valued higher than trendy niches, even if the latter seems more appealing up front. For example, healthcare products like diapers, while decidedly unsexy, will always be in demand. Therefore, a buyer can be confident that the affiliate program will remain profitable, and that there may even be room for growth.
Conversely, if your program is selling a trendy product like hoverboards, a potential buyer would be right to question the sustainability of the business. It could be that hoverboards are here to stay, but it’s hard to predict that given the age of the niche and the demographic of the target customer (trends tend to burn brighter and faster with younger audiences).
Seasonality and Promotions
Seasonal businesses can be very profitable and even considered evergreen if they’re something customers will demand year over year. However, seasonality definitely plays a part in how you need to present your financials for valuation.
Let’s use electric fireplaces as an example. You’re likely to see higher sales in the fall and winter, and numbers will naturally be low in the spring and summer.
If this business generates $5,000 per month October through March, but just $500 per month the remainder of the year, it wouldn’t make sense to base a valuation on the financials from your high-income months. Instead, you would present your average monthly income for the year, which in this case would be $2,750.
The same is true for Christmas or Black Friday, which tend to be lucrative seasons for affiliate sites. This means there may be considerable spikes in commissions and revenue that should be averaged into year-round revenue.
Depending on your affiliate program, there may be commission tiers that are tied to the volume of sales through the affiliate account. The most well-known is Amazon’s affiliate program, where the commission rates range from 4 to 15 percent depending on the number of products purchased in a month. Higher commission tiers mean higher revenue per user, similar to the economies of scale concept of production.
Below you can see the different commission tiers that Amazon uses for its affiliate program:
Image via Amazon
Commission varies not just by units sold, but also by product category. For example, game downloads currently earn sellers 10 percent, while game console accessories earn just 1 percent.
Some buyers already have high-tier Amazon affiliate accounts, meaning acquiring and switching over affiliate links from a lower-tier will provide an instant boost to earnings. Commission tiers may factor into valuation, depending on specific scenarios, but aren’t a major consideration if the site is already making good income.
SEO and Link-Building
Affiliate sites usually target keywords with high buyer intent (i.e. “best espresso machines” or “top 10 espresso machines,” which heavily indicate that a user is looking to buy an espresso machine). Because of this, some sites rely on SEO tactics that are against Google’s rules.
If your link profile is heavily anchored around one or two high buyer intent terms, it could pose a penalty risk. Reversing an unnatural link penalty is not an easy process, and a full recovery after a penalty is rare.
The image below shows what a natural backlink profile looks like in terms of anchor text. Notice that the bulk of the anchor text is the name of the website, this is a good indicator the site gaining natural backlinks and not trying to game Google.
Affiliate sites that are built on private blog networks or purchased backlinks are worth less than those with natural link profiles. Sites that use PBNs or purchased links to generate search engine rankings also generally will have less history than their natural counterparts at the same income level. A combination of short history and high penalty risk can have a large effect on the valuation of an affiliate site.
High-quality content is responsible for ranking in Google for relevant search terms and for turning readers into buyers, both of which are very important to the success of an affiliate site. As such, it’s important not to neglect the quality of your content.
One of the best ways to determine the quality of the content is to see if people are engaged with your posts or product reviews. This could mean that people are leaving thoughtful comments, they’re sharing content on social or that it’s being linked to by high-authority websites within the niche.
You’ll want to assess the quality of your site’s content by your own subjective measures, but you may also hire an editor or freelance SEO consultant for a second opinion. If you’ve been outsourcing your content creation, you should consider using a tool such as Copyscape to confirm that there aren’t any duplicate content issues.
Content is the main asset for any affiliate website and ensuring it is high quality should be a top priority when valuing the site.
Organic Traffic Health
For the majority of affiliate sites, organic traffic is the main source of customers. This means that the more sustainable and consistent the organic traffic is, the better.
You should already have a good idea of your traffic sources and SEO metrics via Google Analytics (if you don’t, get on it). You can also use a tool such as SEMrush to look at your keyword profile and compare it to your competitors’. A diverse keyword profile is going to affect value positively, so this should be your aim in the months leading up to a sale.
The image below shows how SEMrush displays the keyword diversification of a website. It looks at the percentage of total traffic that is driven from that specific keyword:
The image above shows that the highest-ranking keyword brings in just over 6 percent of the traffic. This is pretty good in terms of diversification. If a keyword accounts for more than 50 percent of traffic, that’s a sign you need to diversify.
The next way to look at the organic health of your site is to view the diversification of organic traffic by the page. This is found by going to the “Pages” section in SEMrush.
Within the “Pages” section you can view the pages that account for the most traffic to the site. Once again, the more diverse the traffic amongst the pages, the better.
Take a look below at the percentage of traffic for the top few pages
The top page drives over 21 percent of the total organic traffic, which is not bad. Try to avoid having pages that account for more than 50 percent of the total organic traffic.
Relying on a handful of keywords or one page to drive the bulk of the traffic is not smart. If for some reason those keywords or pages were removed, the site would become practically worthless.
Standard Valuation Factors
In this article, we mainly focused on highlighting the different valuation factors that were unique specifically for the affiliate business model. Below you can view a checklist that contains all of the valuation drivers that we consider when valuing an online business. You should use the valuation drivers below in addition to the ones that we highlighted throughout this article.
In summary, the valuation of an affiliate site is highly contingent on the terms of the affiliate program and its longevity, the product category, the seasonality of the product, commission tiers, content quality, and your backlink profile. While it’s easy and useful to consider all of this on your own, it’s essential to get a valuation by a professional advisor who can properly weigh and evaluate each factor. Obtaining an accurate valuation can both ensure that you maximize your profit and are able to sell your business in a timely manner.