AOL has been on a buying streak lately trying to pull the ultimate makeover from hawking dial-up Internet access to the world's largest advertising sales agency.
In September, 2010, the company announced it had acquired TechCrunch, a technology gossip blog with a complimentary events business. While terms were not announced, CNBC reported that AOL paid $40 million.
And on Monday it announced it had acquired Huffington Post for $315 million ($300 million in cash and the rest in stock).
What do these two blockbuster deals say about the value of your business? More than anything else, my takeaway is that beauty really is in the eye of the beholder.
If you look at the most common way to value a business - on a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) - the Huffington Post deal looks rich given that, according to Arianna Huffington, the company only reported its first profitable year in 2010.
At the same time, TechCrunch reportedly had EBITDA of $10 million, which means - if both numbers are accurate - AOL got TechCrunch for a relatively modest four times EBITDA.
Another way media companies can be valued is by traffic. Huffington Post's 25 million unique visitors a month means AOL paid around $12 per monthly unique visitor. TechCrunch averages around 1.5 million uniques a month, which means AOL paid a rich $27 per unique.
And that's the problem with valuing a business. Using a multiple of EBITDA, AOL overpaid for Huffington Post and got TechCrunch for a bargain. At the same time, using traffic as a valuation metric, TechCrunch was richly rewarded for its tech-savvy eyeballs and Huffington Post took a haircut for the value of its left-leaning readers.
I think the key take away for a business owner contemplating an exit is that your business could be worth vastly more or less depending on how you position it and to whom. The trick then is to find out what people are paying for a business like yours and how they're doing the math.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable - sellable - company.