The world of internet marketing is filled with interesting (and occasionally laughable) examples of people selling their websites for tens or hundreds of millions of dollars, and sometimes billions. In recent memory you have NewsCorp’s purchase of myspace.com for $580 Million, Microsoft’s grab of 1.6% of Facebook for $240 Million (giving Facebook a paper value of $15 Billion), and Google’s purchase of YouTube for $1.6 Billion.

I’m not likely to create the next Facebook, so when I think about selling my websites I have to look at more practical ways to prepare a site for sale.

Warren Buffett, the “Oracle of Omaha”, and probably the most successful purchaser of businesses of all time, wants a business to have three main characteristics if he’s going to buy it, or even just buy shares in it:

1. Is the business simple and understandable?

2. Does it have a consistent operating history?

3. Does the business have favorable long term prospects?

It seems to me that following Mr. Buffett’s criteria could set me up for a big pay day on the sale of a site. Judge your web businesses against his high standards:

1. Is Your Site’s Business Model Clear and Obvious? 

Imagine your prospective buyer trying to explain your site to her business partners. Can she do it in just a few sentences? If I were looking to buy websites I would want to hear an explanation that goes something like this: “People come to site, and they either do X, or they do Y. If they do X we immediately make this much money. If they do Y, then they’ll generate revenue later by…..etc.” I want to see a clear connection between the user and the revenue stream.

I as a prospective buyer for a website do not want to hear: “Well, it’s interesting. They call it micro-blogging, and see, what happens is it’s kind of like an instant messenger service, but you can carry on conversations with 97 different people at a time by using this neat little ‘@’ symbol, and there are about a zillion users. What’s that? How does it make money? Oh I don’t know, we’ll figure that out later. But think of all those users!” 

I’m not saying someone won’t buy a site like that for $100 Trillion or some other outlandish number. I am saying you’re more likely to sell somebody a site with a business model that has an obvious method of generating cash, along with…

2. A History of Success

Smart buyers are usually not looking to buy a fixer-upper. The extension of point number one is they want a simple business that has also been succeeding for a convincing period of time. So if you want to sell a business for a nice big chunk, create a business with a solid and simple cash generating system, and then sustain that result over a period of years. If you can do that, you’re creating the third fundamental characteristic that smart buyers like Warren Buffett are looking for…

3. Favorable Long Term Prospects

Mr. Buffett says a business with the best long-term prospects is one that has established a solid franchise. Of course he doesn’t mean franchise in the McDonald’s sense. This is how he defines a franchise:

“A company providing a product or service that is (1) needed or desired, (2) has no close substitute, and (3) is not regulated (by the government).”

Number 3 is not likely to be a factor in most web businesses you could create, but 1 and 2 are crucial to a high valuation for a site.  I  believe if you want to sell a site for a big pay-out it needs to be providing something that people really want, and can’t easily find elsewhere.  Here’s why:

“These traits allow a [company] to regularly increase the price of their products or services without fear of losing market share.”

Thinking about it from your potential buyers’ perspective - if your site has a strong franchise, they are buying an income stream that could not easily be duplicated. That’s what leads to high purchase prices for websites. And for real estate and other businesses, for that matter.

*I used information from a book called “The Warren Buffett Way” by Robert G. Hagstrom. I highly recommend it.