Valuing a revenue domain.
If you were to buy an income share, i.e. an investment that paid dividends, you would be looking at two major factors of value: The resale price of that stock in future (i.e. will the stock price go up or down) and the annual return on that stock (i.e. dividend may be e.g. 5%).
Your purchase of that share is determined by your judgement of the risk/likelihood that you will benefit overall from the alignment of both of those factors.
With a domain, if you buy it for sake of argument 5 years revenue then effectively you have paid an investment price for the domain which equates to that figure and expect a 20% annual return on that investment.
So 20 times annual revenue would equate to an equivalent investment in the stockmarket or bonds or property (or whatever) bringing you 5% (dividend) return.
The differing risks and rewards of domains need to be taken into account, some of them here:
Risks:
a) The long term future of .co.uk as a dominant domain brand may not be reliable e.g. other extensions eg international domains may be given preference by dominant browser manufacturers or search engines when determining default site destinations.
b) The traffic may be pumped and the revenues and traffic may not be reliable over a long period of time.
c) The prices of domains in general may fall and therefore undercut your original investment price
d) tm issues of course + many others
Potential:
a) Better management of domains may bring hugely increased returns e.g. trialling different parking solutions (e.g. overture vs google vs Miva etc) may bring better returns, development may bring hugely increased returns
b) the traffic may only just be getting started as global takeup of the internet continues to rise, as people get more used to typeing in domains directly, as parking in general becomes better SEOed etc
c) prices of domains may continue their trend rapidly upwards, or your particular domain may become the focus of someones beedy eye for e.g. brand development or brand consolidation.
d) many others
I would put a typo and generic value under the category of "beedy eye, possible brand consolidation" potential!
The current "market average" of about 4 to 5 times annual revenues may be a figure reached by the buyers' assessment of the % return they would be prepared to live with given the high risks listed above e.g. most likely pumped.
The risks can be increasingly accommodated with contractual vigour and prior checking of traffic sources, and only dealing with reliable people.
The potentials have not really been the main focus of the average domain seller to date.
So I think it is a buyers market, and that 4 to 5 times annual revenue on an honest deal is quite a bargain!
Unfortunately I've just run out of budget . . .
-aqls-
