How to value a growing online business

A trailing-twelve-month (TTM) profit figure adds up the last twelve months. When profit is climbing, the older, smaller months pull that total below what the business is earning as it changes hands. This is the mirror image of the problem in valuing a declining online business, and the arithmetic is the same.

Neither figure is wrong. The TTM total is what the business has proven over a full year. The run-rate is what it is earning now — and, if the growth continues, less than it will earn next year. The argument is about how much of that you should pay for in advance.

It helps to write all three down and label each one by what it rests on:

• Trailing twelve months — earned. Every dollar in it has happened, and a full year contains every season once. It is the floor of a defensible price, not the ceiling.
• Recent run-rate — earned, but short. The last three months times twelve is closer to today, and it is still history rather than forecast. It is also noisier, and for a business with a seasonal pattern it can be badly wrong; compare those three months with the same three a year earlier before you trust it. See valuing a seasonal online business.
• Next year — forecast. Whatever the business earns after you own it depends on the growth continuing, and on you. A price built on it is a bet, and the useful question is who carries the bet if it does not come off.

A reasonable starting position is to price on a run-rate you have checked, at an ordinary multiple, and treat anything above that as a payment for the future that needs its own justification.

The mistake that mirrors double-discounting a decline is double-counting growth: using the latest month as the earnings figure and raising the multiple because the business is growing. Both adjustments are paying for the same trend.

• If the denominator is already the run-rate, the growth to date is priced. A higher multiple on top of that is a payment for growth that has not happened yet — say so explicitly, and put a figure on it.
• If you would rather keep the TTM denominator, a higher multiple is the place to recognise the trend. Just do not then switch to the run-rate when the seller asks.
• Write the forecast down. "Profit grows another 30% next year" is a claim you can test against the monthly figures and argue about. "It's growing, so it deserves a premium" is not.

A rising line is a symptom too. What it is worth depends on whether the cause comes with the business:

• Search rankings climbing. Real, but not owned. Ask for the traffic source breakdown month by month, and whether the growth is broad or rests on a handful of pages or terms.
• Paid acquisition. Growth bought with ad spend is only profit if the spend is in the figures and the return holds at a larger budget. Check that advertising is deducted, not added back.
• One channel or one partner. A marketplace feature, an app-store placement or a single affiliate deal can drive a year of growth and end in a day. See platform dependence and online business value.
• A young business finding its level. Early months are small by construction, so a business under a couple of years old will almost always look like it is growing. See valuing a business less than a year old.
• Costs cut before the sale. Profit can rise because spending stopped rather than because revenue grew. Check whether revenue and profit rose together; if only profit did, ask what was cut and whether it can stay cut.

Whatever the cause, confirm the monthly figures from the source accounts rather than a spreadsheet — the method is in how to verify a seller's revenue and profit.

Each sale in our database carries one stated annual profit figure and one stated annual revenue figure — whatever the listing reported — alongside the sold price. There is no month-by-month series behind those figures, so we cannot tell which businesses in our sample were growing when they sold, and we do not publish a "growth premium". We have nothing to measure one with, and we would rather say so than invent it.

The medians below are averages over growing, flat and declining businesses in proportions we cannot observe. Use them to price a figure that has been earned — a checked run-rate or the TTM — not as evidence of what growing businesses specifically sell for.

The first two columns cover every non-demo sold deal of that type with a stated profit. The last two are measured over the paid report's window — the most recent 200 priced sales of that type — on the profit basis, so they can rest on a smaller sample. A dash means we hold fewer than five comparables on that basis and publish nothing.

When buyer and seller disagree about whether the growth will continue, the usual way through is to pay up front for what has been earned and make the rest depend on the growth arriving — an earnout tied to next year's revenue or profit, or part of the price paid over time. The seller is paid for the trend if it happens; you are not out of pocket if it does not.

Contingent payments have their own traps: they need a definition of the figure that triggers them that you, now in control of the business, cannot easily be accused of suppressing. And a headline that includes one is a cap, not a price. Read what a headline sale price includes before you quote one, and how to make an offer before you write one into a letter.