How to Value an eCommerce Business

As the old proverb goes, something is worth as long as someone is willing to pay for it. Buyers and sellers both want to spend, but sellers don’t want less. In the online business world, some objectives and standards can be used to agree on or at least start a negotiation about the fair value of a business.

The term here is “fair.” Using the proper business valuation and gathering information that is important to the overall valuation analysis is needed to come up with a fair e-commerce business valuation.

Here, we’d like to give you a sense of how an e-commerce business can be objectively evaluated, not necessarily provide a how-to on valuation. However, familiarizing yourself with the basic concepts better prepares you for discussions about what an e-commerce business is really worth and arriving at a realistic market valuation.

What Is An eCommerce Business Valuation?

Simply put, an eCommerce valuation is an estimation of how much an eCommerce business is worth. Determining the value of an online business is essential for business owners, whether planning for growth or considering an exit strategy. An eCommerce business valuation provides an estimation of what your business is worth, which is crucial for attracting potential buyers and making informed decisions.

Understanding eCommerce Business Valuation

An eCommerce business valuation is more than a simple calculation of net income and annual revenue. It encompasses a thorough analysis of various aspects of the business, including operating expenses, customer service quality, customer base size, and overall customer satisfaction. Proper business valuation is vital for business owners who want a fair and impartial assessment of their business.

Critical Elements in the Valuation Process

1. Annual Revenue and Net Income: These are foundational metrics. They provide a snapshot of the business’s financial health and profitability, which is crucial for any potential buyer.
    
2. Operating Expenses: Understanding your operating expenses is vital. This includes everything from marketing and payroll to technology and logistics costs. Keeping these expenses in check can significantly impact the valuation.
    
3. Customer Base and Customer Satisfaction: The size and loyalty of your customer base, along with metrics on customer satisfaction, play a significant role. A satisfied and growing customer base indicates a healthy business with strong future potential.
    
4. Social Media and Digital Assets: Assets like social media presence, website traffic, and digital marketing efforts are integral to the valuation. These assets often contribute to the brand’s strength and market reach.
    
5. Growth Potential: Prospective growth, driven by market trends and business scalability, is a crucial factor. Potential buyers will look at how well the business can expand and increase its profitability over time.
    

Why Value Your eCommerce Business

You might be wondering why you need to know what your business is worth if you have yet to make plans to sell it. Value helps you fully understand your business and what it’s worth, which is essential information to have.

Recently, we have had a number of clients come to us in hopes of finding a resource to put a value on their eCommerce businesses – namely, a particular website and/or Amazon FBA business they operate. Many of these business owners have never spoken to a business broker, intermediary, or investment banker – they simply worked hard on building their Tech or Internet Company, and now it’s time to think about exiting the business.

Putting a value on an eCommerce company requires a much different analysis and approach than, say, a Brick & Mortar company. Most business brokers are not involved in, nor do they have any idea how to begin the process of selling a website, Internet Company, Amazon Seller Central Account, or any other variation of an Internet Company operating in the digital space. This is why business owners must look for intermediaries that operate directly in their space for advice, consultation, and exit strategy assistance. These brokers are often referred to as Internet Business Brokers.

Accurate valuation is essential for business owners preparing to sell their business. It ensures they receive a fair price and helps attract serious potential buyers. Moreover, understanding the valuation process can help in strategic planning, improving business operations, and increasing overall value. Valuations can help you learn a lot about your company. For instance, bankers, potential investors, and owners may need to be reassured by regular valuations. You can use it to track the growth of your business and quickly spot any problems. It is highly suggested that you evaluate your business on a regular basis, especially if it is big or growing fast. You can do an overview assessment at any time if you have all the information you need on hand. Of course, this price is not exact enough for a buyer,

Benefits Of Valuing Your Business

Valuing your online business is a critical step for any business owner, offering numerous advantages that go beyond simply knowing what your business is worth. Here are some key benefits:

Informed Decision-Making: Understanding the value of your business allows you to make strategic decisions for growth and expansion. It helps in setting realistic goals and developing plans to achieve them. If you’re considering selling your business, a valuation provides a clear picture of its worth, helping you set an appropriate asking price and negotiate effectively with potential buyers.

Financial Insights: A thorough valuation can reveal areas of strength and weakness in your business, guiding investment decisions to maximize profitability. When you understand your operating expenses and how they impact your valuation, you can identify areas to reduce costs and improve efficiency.

Attracting Potential Buyers: Professionally conducted business valuation can boost your chances of getting potential buyers, demonstrating that you have a clear and accurate understanding of your business’s worth. An accurate valuation can streamline the sales process, making it easier for buyers to assess your business and make informed offers.

Benchmarking and Performance Measurement: Valuing your business helps you understand how it compares to competitors, providing insights into your market position and opportunities for improvement. Regular valuations allow you to track your business’s performance over time, identifying trends and making necessary adjustments to stay competitive.

Why You Should Give Us An Opportunity

WebsiteClosers and its sister companies, ValleyBiggs and Seller Force, each have a strong foothold in this sector, both from a perspective of Small-to-Medium-Sized businesses as well as Mid-Market Internet and Tech companies. Our brokers only sell Tech, eCommerce, and Internet Companies, and since we’ve sold to hundreds of companies, our experience is vast and measurable.

When we begin the process of discussing valuation on an eCommerce Business, as with all companies looking to exit, we first begin with financials. Since 2011, the retail eCommerce space has seen a spike in exit activity from startups specializing in products they manufacture to those that sell a number of manufacturer’s goods. Over the same period, the range of exit valuation multiples for private retail tech companies has varied from, on average, between 2.5X to 7X Discretionary Income.

While there are cases of multiples going outside this “standard range”, the typical eCommerce transaction falls somewhere in this range. While EBITDA is often used when identifying the multiple for a strike price, EBITDA is not the norm for privately held sellers. The more accurate multiplier is based on Seller’s Discretionary Income, which is arrived at by going through the seller’s Income Statement and identifying the company’s cash flow PLUS any add-backs to income – in other words, any personal expenses built into the P/L that a buyer would not have as an expense of the company.

Placing an eCommerce company at the top of the 2.5-7X multiple range is critical, and that is where a solid intermediary comes into play. A broker who is unaware of the industry or how a particular kind of business works will find it very difficult to see the key features of a business that make it stand out and, just as important, the types of features that internet entrepreneurs are looking for in an acquisition target. For this reason, business owners must do their due diligence on the right brokerage to represent their company in the market.

Every business we sell is different. However, the one thing they have in common is that we were able to achieve over “normal” market rates for their companies because we could both coach them on selling at the right time and because we know how to put a value on companies by bringing out the distinct features they hold.

You owe it to yourself to give us a call. We don’t charge anything – in fact, we never get paid until we sell your company. But we spend a lot of time on the phone with entrepreneurs, and virtually all of them come back to us when it’s time to sell.

Getting Professional Help

While some business owners may choose to calculate the value of their business independently, seeking professional help from a business broker is often advisable. Business brokers have the expertise to perform a comprehensive valuation, considering all relevant factors to provide a realistic estimate of what the business is worth.