Studies & Opinions
Effective Domain Name Appraisals
Alex
Tajirian
December 18, 2007
An effective appraisal should be more than a
number that estimates market value. It should explain how the estimate
adds value to the customer’s main objectives, and it should outline
the risk factors that the customer faces. The customer who pays
for an appraisal is, like any customer, paying for a value proposition.
That being said, customers for domain evaluation
services fall into three broad types: those transacting, those seeking
a damage estimate, those filing for IRS deductions. Each group has
its own objectives, its own idea of what information is value adding,
and its own risks, as outlined below.
(A) Transacting
A transacting customer is one who is seeking
to buy, sell, or lease domain names.
- General Objectives:
- Value-Adding Information
-
For a seller:
-
The likelihood of a sale in the marketplace,
or through the appraiser and at the appraised value,
within x months.
-
The average time it takes to sell
similar domain names.
-
Why the appraisal methodology is appropriate
to the specific domain name[1]
-
Whether playing “hard to get” is a
viable strategy[2] i.e., whether the customer should ignore an offer in
the hopes that the offer is increased.
-
What are effective venues to sell
the domain name (e.g., direct contact, auctions, or
brokers)?
- How accurate an estimate is. An
appraisal should provide a statistical range of confidence[3] This provides a guide as
to whether, say, a lower offer is in the “ball park” (i.e.,
statistically equivalent to the appraised value). For appraisals
that are not based on statistical models, the customer wants
to be assured:
- That the estimated price is not too
low compared to its intrinsic value[4] The customer would incur
a loss if a sale took place at such appraised value.
- That the estimated price is not too
high, which would be tantamount to waiting for Godot,
as an ask price based on the unjustifiable high estimate
would scare off
potential buyers
-
For a buyer:
- In just about any case, a buying
customer also wants to know:
- The likelihood of a purchase at the
appraised value in the marketplace.
- Which approaches to buying domain names
are effective.
- Whether “low balling” is effective[5]
- Whether the appraised value is accurate.
If the estimate is too high compared to its intrinsic value,
the buyer may be scared off from a good thing. This concept,
the accuracy confidence range, is also discussed above.
- Risk factors that consumers fear are:
- Price risk due to recession, increase in
click fraud, and/or a drop in PPC rates and search volume.
- Trademark issues.
(B) Seeking a Damage Estimate
Under the Lanham Act, damages for trademark infringements
are available only under two circumstances: when there is actual
confusion, or when the infringement is willful.[6] For that reason, UDRP filings and many legal disputes do not result
in assessed damages, only the handing over of the domain name in
question. Under federal cybersquatting laws, the minimum a court
could award the IP owner would be $1,000 per infringed domain name,
up to a maximum of $100,000 per domain. Nevertheless, domain name
damage settlements have arisen in antitrust-related litigation[7]
The most important risk factors for this type
of customer, are whether the:
- Appraiser is qualified to testify as an expert
witness.
- The estimation methodology is acceptable
to the courts.
(C) IRS Deductions
There are no publicly available concrete guidelines
as to what valuation methodology is acceptable to the IRS. Due to
this uncertainty, some legal and accounting consultants have asked
their clients to keep a certain portion of the deductions in a trust
account to reduce the impact of unfavorable IRS decisions. (Some
evidence suggests that the IRS prefers the discounted cash-flow
method. If so, use of a different methodology would make the qualifications
of the appraiser especially important.)
[3] Typically a 95% confidence interval is used.
[6] Terrene P. Ross, Intellectual Property Law, Damages
and Remedies, Chapter 4 (Law Journal Press, 2005).
[7] There is an interesting case filed with the U.S. District
Court for Southern Florida in October, which argues that “‘typosquatting
is effectively a counterfeit’ of the trademark holder's product.”
See Brian Crebs, “Dell Takes Cybersquatters to Court,” WashingtonPost.com (November 28, 2007), available at <http://www.washingtonpost.com/wp-dyn/content/article/2007/11/28/AR2007112801679.html>.
Topic tags: appraisal/valuation
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