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Who Should Be Interested in Domain-Name Valuation?

Alex Tajirian
May 14, 2004

Before you purchase or sell your car, you try to find its Blue Book value, the value of comparable models, and the best transaction venue (online, a dealer, a newspaper); you also investigate alternatives to purchasing (such as leasing) or to selling (such as donating to a charitable organization). When acquiring or selling domain names, shouldn’t you do the same?

A person who is interested in acquiring the additional cash flow that the control of a domain name may generate has two options: to purchase the domain name or to lease it. On the other hand, a domain-name owner has to find the highest value among selling, leasing, donating to a charitable organization, or keeping his intangible asset.

Below are the different situations where a domain-name appraisal becomes valuable information, aside from revealing its fair market value.

(1)   Buying

a.      Determining Reserve Price: A buyer should acquire an asset only if the value of its expected future benefits is greater than its acquisition price, i.e., if the acquisition’s Net Present Value (NPV) is positive. Thus, a buyer needs to establish the reserve price (the maximum price) she should pay to acquire a domain name and therefore needs to obtain an estimate of its fair market value. The value of expected benefits is largely driven by how the domain name will be used and thus varies with each buyer.

b.      Assessing Tax Impact: When domain names are part of a portfolio of assets obtained through a merger or an acquisition, the acquiring company needs to value each of the assets in the portfolio, so as to determine the correct accounting amortization amount. Although there are no explicit amortization standards for a domain name, it is typically treated as an intangible asset.

(2)   Selling

a.      Determining Reserve Price: One would sell an asset only if the sale price is greater than the value of its expected future benefits to the owner, i.e., if the sale results in a positive NPV opportunity to the seller. Thus, obtaining an estimate of the value of its benefits or its fair market price is required to establish the reserve price, the minimum price at which the seller should relinquish a domain name.

b.      Determining Auction Type: The best type of auction to use in the sale of a domain name depends on what bidders perceive its value to be. A seller can use the difference between the pre-appraised perceived value and the appraised value as an indication of whether potential bidders are expected to over- or underestimate each others’ bids. If, for example, a seller expects bidders to overestimate each other’s maximum bid, the domain name should be sold through a sealed-bid auction. (For further discussion of best auction types, see Domain Name Auction Strategies.)

(3)   Leasing
To determine a lease rate, one must first establish the value of the domain. (For further discussion of leasing domain names, see How Much to Lease Your Domain Name For?)

(4) Making Charitable Donation

An appraisal report from a reputable domain-name appraiser serves as a certificate for tax-deduction claims.

(5)   Liquidating
This option is typically associated with involuntary sale due to, for example, a court order. Although the appraised worth represents a fair market value, liquidating is different from selling voluntarily, as such a transaction involves relinquishing an asset under financial duress.

Topic tags: appraisal/valuation

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