Today I was discussing with my "Nanaji" (Mother's Father) who is 82 years old and a British Architect cum Property Valuer. I was discussing about the valuation of Intellectual Properties especially web properties such as Websites, Forums, Blogs, Internet Businesses...etc...
After the birth of the Internet in 1990, the new Asset class born in this world and that Asset Class is the Web Properties also known as Online Assets. Unlike Physical Assets (Real Estate, Gold...etc..) Web properties are virtual. You can't see them. You can just imagine them.
Now my discussion with my "Nanaji" was that, - How to do Fair Valuation of the Web Properties & Internet Businesses?"
Because in case of Real Estate, we have several criterias for the valuation of Real Estate such as area, location, revenue and many more.... But in case of Virtual Assets such as Web properties we don't have any criterias like that. And if in past, sombody has bought certain size of webproperty for certain amount of money than it is not necessary that, the fair valuation of that web property is the same.
Now, according to my Nanaji, the fair valuation of any web property should be like exactly same like rental properties and traditional offline Businesses. Means it should be based on its Revenue (Income) Generating Capacity.
Now, Banks & Government provide you 8% interest rate per annum on your invested capital in India. So you should count the Income of that web property as an Interest rate and calculate in such a manner that, the final amount should give an interest rate at the 8% interest rate per annum. Let us understand this by Example......
Take the Example of this Blog. "My Journey To Billionaire Club" is my Blog Business. It's my web property. Now let us assume that, this Asset generates Rs.5000 every year for me. So Now we should count like this. How much amount of money can give me Rs.5000 per year interest rate if invested in fixed deposits/Bonds of 8% interest rate per year?
Well, 100 divided by 8 = 12.5. So the multiplication factor is 12.5 in my case. So Rs.5000 multiplied by 12.5 = Rs.62,500. So Rs.62,500 is invested in the Fixed income instrument than it can give us Rs.5000 income per year at the rate of 8% per annum.
So the fair valuation of this Blog should be Rs.62,500 if it generates Rs.5000 per year Income. Now, it is quite possible that, the Web property is quite popular on the Internet and the Owner of the web property wants its Brand Value. In this case, the Seller can increase the multiplication factor to 15x, 18x, 20x or even more.......
But in any case fair valuation of the web property should be counted like this. Now, you will ask that, but the Web assets grow in their popularity and Income generating capacity over the time than How can you surely say that this is the fair valuation? Why can't this be the undervaluation of the Asset? Because after a year, this Blog may generate Rs.10,000 per year......
But well, Here Buyer is covering the risk as well. The 8% return that we have counted is a safe and secure return that offered by the Government of India at present. You say that the income generating capacity of the web asset may go up. But it MAY GO DOWN as well...!!!!
And the buyer is taking all of this risk.
In short, This can be the fair valuation method of the web property.......!!!!!!
What do you Think?.......
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