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Value of Website on Incorporation

Sole trader has website generating small % of sales - can this be sold to company?

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Hello

A client is in the process of incorporating his sole trade and whilst any goodwill is personal to him and therefore not able to be 'sold' to his company there is a website which generates a small percentage of his total turnover.

This is self generated and I believe can be sold to the company - of course there is the thorny issue in that it needs a value attaching!

Currently, I have isolated the sales in the last 12 months and multiplied this by the gross profit percentage of all sales in the same period. I have then deducted the expenses incurred specifically in regard to the running/maintenance of the website such as google seo and a monthly fee paid for the software, to arrive at the 'net profit'.

Having researched it would seem that the value can be calculated as the net profits arising from the website multiplied by 1 to 3. My thoughts would be to use 1.5 times.

Does anyone have anything to add / any comments would be appreciated.

Thanking you all in anticipation.

Ellab

 

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By paul.benny
26th Sep 2019 16:50

Your approach seems entirely reasonable. You might want to consider whether alternative multiples in that 1-3x range give a more favourable position as regards any tax due, available resources to buy the website and domain, etc. Bear in mind too that the company should depreciate the website - probably over a fairly short life (no more than 3 years). Higher purchase price means higher depreciation, which means lower reported profits.

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By EllaB
26th Sep 2019 17:07

Thank you Paul.

I had initialy worked with 1.75 - it's difficult to gauge the 'right' multiple but middle of the road seemed comfortable.

I was planning on writing the cost off over 3/4 years - the profits from the non website stream are strong and I don't expect the value to be in excess of £8/10 k once I have finished the analysis. The client isn't being particularly helpful even with the lure of 'tax free' money - gain will be covered by the AE for CGT.

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By johnhemming
26th Sep 2019 19:04

I am not an accountant, but I would have thought the value of the website is either copyright the sale of which would give rise to income to the author or goodwill. Sorry to be a nuisance.

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By Clinton Lee
28th Sep 2019 22:19

While your approach seems logical, it does not take into account phone sales or showroom sales that would not have occurred if the website didn't exist.

Further, while many small businesses - one man bands especially - sell for the kind of multiples you mention, there are plenty of examples of digital assets like websites selling for higher multiples.

There may also be associated assets (subscriber lists for example) that have value independent of that demonstrated by sales / profit generated.

You have rightly deducted monthly fee paid for the software subscription. However, Google SEO is a long term investment, unlike PPC ads (Google Ads).

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