How in the Heck Do You Valuate an Online Gambling Site?

The decision to sell an online casino or sportsbook is a tough one to make. Simply knowing where to begin can be confusing for a business owner. Many factors have to be considered, such as what's included in the sale, how to find a buyer and/or even at what price to sell the site.

Before selling a business, there are three key steps business owners need to following, according to Bob Kleeman from Clifton Gunderson LLC.

First, clean up your financial statements, he suggested. Buyers will want to look at your business' revenue stream and see a debt free, positive cash flow. Second, he added, "know who your potential buyers are. If you don't know, get a professional to assist you." (In fact, Kleeman highly recommends the use of an intermediary when selling your business, saying the owner is usually too close to the issue to remain objective.) Finally, the sellers need to be aware that, unlike a brick-and-mortar business, Internet companies are selling ideas more than a tangible product. Sellers need to ask themselves what makes their business special. Plus, the business owner needs to give structure issues--which management talent is staying, what intellectual property is included in the sale, etc.-- some consideration.

Another factor to consider when determining the sale price is that few online gaming sites have been operating long enough to build up a business that others might salivate over. "'Traditional' businesses have sold based upon historical performance, and to some degree, the synergies that a strategic buyer may bring to the table," William Bavis of Clifton Gunderson's Baltimore office pointed out. Technology companies have little historical performance to add value to the business. He explained, "The seller needs to consider the future earnings that are possible given the attributes that the buyers will bring to the relationship."

Bavis identified two types of buyers. A strategic buyer, he explained, is someone in the same industry or allied to the industry that will benefit from the synergies of buying your business, such as expanding their products or expanding their sales territory. On the other hand, a financial buyer is much more dependent upon the future income stream from the purchased business.

"The difference is often evident in the price that a buyer is willing to pay," he said. "Historically strategic buyers might pay eight to ten times earnings, whereas financial buyers would pay five to six times earnings. However, this difference has been fading in recent years."

For technology companies, Bavis pointed out, historical performance may be of less relevance. Instead, "the seller needs to consider the future earnings that are possible given the attributes that the buyers will bring to the relationship." Sellers may not have much historical performance to offer buyers; such information may be limited due to the sellers' lack of capital or trade name recognition, or other factors.

"It is even more important to consider the value drivers in the hands of the buyer," Bavis said. "Usually companies are looking for resources they don't have, which is primarily people with the skill sets they lack." He recommends that Internet business owners consider several factors that affect the valuation of their business, including changing technology; quality personnel; effectiveness of research and development; share and size of market; customer retention; key management and market growth potential.

Another way to determine the selling price is by using the number of monthly unique users (MUUs), according to investment banker H. Peter Nesvold of Brown Brother Harriman & Co. in "The Valuation Game: Internet Mergers & Acquisitions." MUUs are defined as the number of unique individual users that visit a site a month. That number can be used to determine how much a buyer is willing to pay for a site per user.

"A look at some recent transactions suggests, for privately-held content and/or community-oriented sites with traffic exceeding 250,000 MUUs, a range of 75x to 125x may be appropriate," he said. "This range would cover such sales as Blue Mountain Arts (85x before the earnout, 114x after the earnout), Family Point (75x), and Garnersville (74x)." The multiples vary widely from one industry to another, however, and tend to be much lower for online gaming, explained The River City Group's Jeff McClanahan, who specializes in business-to-business marketing.

The concerns facing Internet gaming site buyers and sellers are somewhat different than those posed during a typical Internet business sale. As a result, the brokerage department at The River City Group (www.rivercitygroup.com) has developed a unique approach. First, clients wishing to sell their business fill out a site valuation form. "It's an outline to help us determine the value of the business," explained brokerage specialist Lynn Schneider. Buyers answer a number of basic questions covering the business's corporate structure, licensing, player base, software, e-commerce arrangements, financials, revenue sources, marketing and advertising expenditures and any other expenses.

Using this information, The River City Group's brokerage department helps the seller come up with a sales price. "If there's been no return on investment (ROI) within a year-and-a-half, the site won't generate interest," added Schneider. The business's sales price reflects "how much its worth based upon today's market." The key, he added, is whether the business is successful.

One problem that Schneider has encountered during negotiations is that a seller may not have revealed their true expenses, which can affect the selling price and the length of time for the sale. "It's in the seller's best interest to begin with a complete picture of their expenses," he said. If not, the true state of affairs can come out when a buyer goes through due diligence, which can effect the final deal.

Once the seller has decided to sell the business, a transaction brokerage agreement is signed. Typically a listing takes six months to complete, including four months on the market and two months during the due diligence and closing process. If there's been no sale during that time, Schneider said, then "the market has spoken."

In other words, it's time to look at whether the sale price is too high or what other factors are hindering the sale.

On the other hand, Schneider said, it can be difficult to determine a potential buyer's legitimacy. Sometimes the interested party ends up not having the money needed to buy a site, and others turn out to be "tire kickers."

An important thing both buyers and sellers need to keep in mind, especially given the legal concerns posed by Internet gambling, is that the River City Group is "not representing the seller or the buyer, but facilitating the sale," Schneider said.

Plus, confidentiality is given high priority. "It's a given on both sides, especially as a transaction brokers, that we have a specific duty to maintain the utmost levels of confidentiality," he said.

The client, he explained, determines the level of information that can be given to the other side of the transaction. For example, before a buyer can be given more sensitive information about a listing, a non-disclosure agreement usually needs to be signed.

In the end, with some preparation and forethought, selling your business doesn't necessarily have to be unduly difficult. The hardest part may very well be determining the selling price, something that is best determined with the assistance of an expert, such as provided by the River City Group or other brokerage firm. An outside opinion will bring objectivity to the process, as well as potential buyers.