Valuation Guide: Online Dating Industry

|||Valuation Guide: Online Dating Industry

Valuation Guide: Online Dating Industry

Industry Description

The online dating industry (SIC 7299, NAICS 812990) consists of companies engaged in online matchmaking services. Most companies generate revenue under a subscription model.  Often, “browsing” will be free, but messaging or contacting other users will require a subscription.  Alternatively, some websites generate revenue solely through advertising and are free for users. In all, the online dating industry generated approximately $1.2 billion in revenue in 2012.[1]

Computerized matchmaking for college students occurred as far back as the 1950s and ’60s with programs that used computer punch cards with student survey responses to find compatible matches.[2]  However, the industry did not begin to gain momentum until the launch of Match.com in 1995.[3] Now, some estimates suggest that the U.S. has over 2,500 online dating sites.[4]

As a result, the industry is highly competitive.  To be successful, new entrants must have a differentiated offering.[5] Attracting a large enough user base is the main hurdle – it is challenging for new companies to recruit new users when they do not already have a substantial pool of other users. As a result, marketing costs for new firms are disproportionally high.

The online dating industry is dominated by several large corporations with a handful of well-known websites.  The top 10 online dating companies as reported by comScore as of December 2012 are:[6]

  1. Match (and affiliate sites)
  2. PlentyofFish
  3. Zoosk
  4. Spark Networks
  5. Xpress
  6. Speeddate
  7. eHarmony
  8. DateHookup
  9. LovePanky
  10. Mate1

Industry Trends

The online dating industry has grown dramatically over the past decade, primarily in response to technological shifts. A few of the most significant industry trends are:

  1. Online dating has become socially acceptable
    One in five relationships now begins online.  Over one third of single adults in the U.S. have an online dating profile.[7]  As of the end of third quarter 2012, 10% of total internet users visited an online dating website in a given month.[8] As the user base grows, the likelihood of finding a match increases and companies’ algorithms can improve due to more data.
  2. Older users are a growing client base
    Approximately 16% of dating website customers are over age 50.[9]  In general, people who encounter fewer potential mates in their daily lives are more likely to turn to the internet.  In fact, older daters spend more time browsing dating sites and go on more dates than other users.[10]  In January 2013, the AARP launched its own online dating service, AARP Dating.
  3. Mobile applications make online dating more accessible
    Mobile apps increase opportunities for users to communicate with their matches. Users spent more time on mobile dating apps than on dating websites in 2011.[11] By the third quarter of 2012, two out of ten smartphone users used an online dating app in a given month.[12]  Mobile technology can also allow companies to offer location-based dating, which suggest potential matches based on their proximity. Over the past three years, mobile dating revenue has grown at an annual rate of over 70%.[13]  Currently, mobile dating generates approximately $251 million in revenues each year, and this is expected to nearly double over the next five years as smartphone use increases.[14]

Key Performance Metrics

The following are performance metrics that managers in the online dating industry use to benchmark their performance against others in the industry:

  1. Average daily visitors
  2. Number of active accounts
  3. Conversion rates
  4. Customer loyalty rates
  5. Number of dates or matches made

Industry Organizations and Publications

Some organizations that publish helpful information about the online dating industry include:

  1. Online Personals Watch: www.onlinepersonalswatch.com, a source for dating industry news
  2. Online Dating Magazine: www.onlinedatingmagazine.com, an industry publication for online dating customers
  3. Online Dating Insider: www.onlinedatingpost.com, a source for online dating industry news and commentary

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing an online dating company.  These methods are:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities. This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets. This approach is seldom used for an online dating company because its value is more closely related to its user base and cash flow.
  1. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  1. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.
  1. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded online dating companies and privately held businesses.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

Online dating falls under NAICS 812990, personal care services.  The following benchmarking data is based on the financial performance of various companies in this category: [15]

  2007 2008 2009 2010 2011
Operating profit % 3.4% 12.3% 7.1% 8.5% 5.9%
Owners Compensation/Sales % N/A N/A 4.7% 7.2% 5.7%
Sales/Fixed assets 9.0 5.1 9.8 7.6 5.9
Current ratio 0.9 0.5 1.5 1.2 1.1
Quick ratio 0.5 0.3 0.6 0.9 0.7

Before using this data for specific valuation purposes it should be evaluated for appropriateness. Personal care services is a broad category that may include companies with significantly different business models than online dating websites.

As an additional point of reference, profit margins for the dating services industry as a whole (which also includes non-online services) averaged 18.5% in 2012.[16]

Availability of Publicly Traded Comparable Companies

Most of the top online dating websites are owned by publicly traded companies. The availability of financial data for publicly traded online dating companies makes it possible to compare a subject company to industry benchmarks and apply industry multiples.  However, when valuing an online dating company, it is important to use benchmarks and multiples based on companies that are similar to the subject company and be aware that multiples of certain publicly traded corporations as a whole may not necessarily reflect those of their online dating divisions.

The top four publicly traded companies with online dating operations, ranked by market capitalization, are:[17]

  1. IAC/InterActiveCorp ($3.73 billion)
  2. Jiayuan.com International Ltd ($164.52 million)
  3. Spark Networks Inc ($146.62 million)
  4. FriendFinder Networks Inc ($14.25 million)

The price to earnings ratios of these companies range from 17.32 to 24.15.[18]  As a whole, publicly traded companies in the internet information provider industry have a price to earnings ratio of 25.5.[19]

IAC/InterActive Corp.

InterActive Corp.’s Match division provides subscription-based and ad-supported online personals through branded websites. The company’s branded offerings include Match.com, Chemistry.com, OurTime.com, BlackPeopleMeet.com and OkCupid.com.  In addition, it offers mobile applications under the Match, OkCupid and DateHookup brands.  The division generated over $713 million in 2012.[20]

Jiayuan.com International Ltd

Jiayuan is an online dating company based in China.   Jiayuan.com is China’s largest online dating website.[21]  The company allows users to post profiles for free and charges an initial messaging fee and a periodic subscription fee. The company’s online services division generated $44 million in 2011.[22]

Spark Networks Inc

Spark Networks offers online desktop and mobile dating websites. The company’s largest websites are ChristianMingle.com and JDate.com.  The company offers free membership but requires a subscription fee to message other users. The company generated approximately $58 million from online dating services in 2012.[23]

FriendFinder Networks Inc

FriendFinder’s adult dating and social networking division is a provider of online dating, social networking and online personals services for different cultural, ethnic and interest-based groups. In order to communicate with other members and view full profiles, clients must pay a subscription fee. The company generated approximately $197 million from adult dating and social networking platforms in 2012.[24]

Availability of Private Purchase Transactions

In addition to public companies, data regarding privately held companies can also provide a useful benchmark when valuing an online dating company.

A database of private transactions lists one online personal services company that was sold during the five year period from January 1, 2008 through December 31, 2012.  This transaction had the following characteristics:[25]

  1. Total deal value of $100 million.
  1. Market value of invested capital (MVIC) to net sales multiple of 6.75.

This information is from only one transaction and as such should not be used without further analysis. As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject. Additionally, technology and industry economic conditions vary over time, which can affect online dating companies as investment opportunities.  Specific factors that are unique for each business must be considered.

Fulcrum Inquiry performs business appraisals for online dating companies and other businesses.

 


[1] “Going Mobile: Trends and Projections for Mobile Dating,” IBISWorld, June 2012.

[2] “From lonely hearts to electronic dating, “ BBC News Magazine, February 14, 2013.

[3] “How Big Data Has Changed Dating,” Smithsonian.com, January 29, 2013.

[4] “How Many More Online Dating Sites Do We Need?” Forbes.com

[5] “The £2bn Relationship – The Business Of Online Dating,” Huffington Post Business, UK, October 27, 2012.

[6] “News on the Dating Industry and Business – Internet Dating Rankings – U.S.A,” www.onlinepersonalswatch.com

[7] “How Big Data Has Changed Dating,” Smithsonian.com, January 29, 2013.

[8] “State of the Internet in Q3 2012,” comScore.com, December 5, 2012.

[9] “10 things dating sites won’t tell you,” MarketWatch, The Wall Street Journal, February 11, 2013.

[10] “The £2bn Relationship – The Business Of Online Dating,” Huffington Post Business, UK, October 27, 2012.

[11] “Going Mobile: Trends and Projections for Mobile Dating,” IBISWorld, June 2012.

[12] “The State of the Internet, 3rd Quarter 2012,” comScore.com

[13] “Going Mobile: Trends and Projections for Mobile Dating,” IBISWorld, June 2012.

[14] “10 things dating sites won’t tell you,” MarketWatch, The Wall Street Journal, February 11, 2013.

[15] RMA (The Risk Management Association)

[16] “IBISWOrld Industry Report 81299a: Dating Services in the U.S.” IBISWorld, March 2013.

[17] Google Finance

[18] Ibid.

[19] Internet Information Providers Overview: Industry Center – Yahoo! Finance

[20] IAC/InterActive Corp. 2012 10-K

[21] “From lonely hearts to electronic dating,” BBC News Magazine, February 14, 2013.

[22] Jiayuan.com International Ltd. 2011 20-F

[23] Spark Networks, Inc. 2012 10-K

[24] FriendFinder Networks Inc. 2012 10-K

[25] Private transaction data obtained from Pratt’s Stats available through www.bvmarketdata.com

 

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