Our friends Mike and Judi Berkens of MostWantedDomains have successfully exited their portfolio of some 70,000 domain name in a recent sale to GoDaddy. This news enjoyed quite of the buzz across the industry leaving many guessing what was the amount on the cheque.
As the deal is under the non-disclosure agreement, we may never hear the price details. In the future one eagle eye may derive it from some upcoming financial reporting. However today this blog wants to present several approaches of how to value similar deals and illustrate few numbers that quite possibly were discussed during the negotiations.
A bit of the input:
As it is reflected in the domain name brokerage league, in the past MostWantedDomains publicly acknowledged about 236 sales amounting to $5.6 million USD. This makes approximately $24k per sale.
It is worth noticing, that considering two other top players were acquired by GoDaddy already (AfterNIC and TDNAM), the seller was the top 11 domain name dealer globally.
There is no uniform way in finance to come up with the price of an asset. In the end of the day the sale goes through if the seller is eager to sell and to lower the price somewhat below the market beliefs, or the buyer is willing to pay a premium to acquire it. Various techniques are used to value the assets to be used as bargaining reasons during the negotiations
1. Multiple based on historic deals
A similar deal GoDaddy stroke with Marchex valued the portfolio of about 200 thousand domain names at $140.50 each. This would price 70 thousand names of MostWantedDomains only at $9.8 million. The seller would most probably not agree to this, as by having sold less that 0.05% of the portfolio they have realised just that amount.
Possibly another multiple was negotiated leaving both the buyer and the seller happy.
2. Multiple based on historic sales
The argument could have gone using the average price paid per domain name. We know it is around $24k. As a large domain name manager we also know that realistically 5% to 20% of the portfolio is “sellable” under these price tags. Assuming the parties agreed to 10% of “sellable” names at $12k bulk discount per name, the total valuation would be around $84 million USD, or approximately $1,200.00 per domain name if reverting back to method 1 presented above.
One can argue and speculate which way the negotiations went. Likely GoDaddy came up with the reasons to lower the number down and the seller would put few hundred ultra premiums with six and seven digit values on top of the list justifying the numbers.
In any case, it is quite unlikely the deal was priced over $80 million cash.
3. [Discounted] cash flow
We do not know what proportion of the MostWantedDomains sales went unpublished, but from the experience one can tell that at least 50% did. Let assume this was the case including other cash ins, such as leases, parking, etc.
Then for the last five years the proceeds from the company operations looked like this:
|Public sales||$ 800,000.00||$ 1,000,000.00||$ 1,050,000.00||$ 900,000.00||$ 1,650,000.00*|
|Number of sales||15||65||72||45||27|
|Public sales x 2||$ 1,600,000.00||$ 2,000,000.00||$ 2,100,000.00||$ 1,800,000.00||$ 3,100,000.00|
|Less renewal costs||$ 700,000.00||$ 700,000.00||$ 700,000.00||$ 700,000.00||$ 700,000.00|
|Free cash flow||$ 900,000.00||$ 1,300,000.00||$ 1,400,000.00||$ 1,100,000.00||$ 2,400,000.00|
* – assuming neatly.com sold for $100k; it was reported as a six figure sale in 2015
One can assume there was on average $1.5 million of positive cash flow a year. Discounting it perpetually at the yield of 10% will value the portfolio at $15 million.
GoDaddy has probably argued that the multiple in this case should not be x10 but closer to x5 (representing 20% annual discount rate).
The buyer would probably counter offer with the arguments of the high terminal value, adding $10 million to $20 million on top of the $5 million of the discount cash flow.
In any case, as we can see based on the the cashflow, the portfolio is likely to be priced between $5m and $20m.
The tricky question about the terminal value of the portfolio would be the seller’s favour. By selling 50 names a year it would make a very long game, taking a millennium if one wants to liquidate 70,000 domain names. No business would consider that time horizon, so the value is likely to benefit from some additional upside.
Where does this leaves us? With 95% certainty we can tell the deal happened somewhere between $10 million and $40 million. Considering the buyer was more inclined to sell and GoDaddy’s share price went up on the news significantly, it was in the lower half of the range, likely between $15 million and $30 million.
Hence, the cheque GoDaddy could have written was around $22.5 million +/- $7.5 million.