Online Business Valuations

At WebsiteClosers.com, we are a boutique brokerage that focuses on representing savvy Entrepreneurial Sellers of online businesses. This article is about the value of your company. Obviously every business owner wants to maximize the sales price when they bring their company to market, and equally as obvious, is the fact that since we represent you in a brokerage capacity, we are equally incentivized by the fact that we receive a commission on a percentage basis of the purchase price. So, the lower your price, the lower your closing funds and the lower our commission. There is a constant battle that takes place between what a Seller wants to see from his company, and where the reality of the value lies. We have online business owners that come to us and claim it should be a Dutch auction with the spoils going to the highest bidder. In our wildest dreams. In the end, the Market will dictate the price range, but a good Broker will always drive that number to the top of the price range.

There are a lot of variables in play and the first lies in funding. A Seller will not sell his company unless he can walk away with a payment at the closing table that meets his expectations. The value is dictated by the Sellers Discretionary Cash Flow (SDC). This is the number that is derived from adding the following:

• Profit
• Payroll / Management Fees to the Owner
• Depreciation
• Interest
• Amortization
• Addbacks

Hopefully the addbacks represent a smaller portion of this figure because it will make a difference to the overall value of the business.  Oftentimes, this figure will then become a multiplier that will determine the final sales price.  In our experience, it is rare that a Buyer will “overpay” for a company, so it’s important that the multiple presented be in line with market valuation trends. The multiple can be up to 3 times the SDC. In some cases even more, but that would be determined by the list of factors listed below.

Positive factors – leading to a multiple of 3 times or possibly more

• A reasonably mature company with tenure of 4 – 5 years or more
• Sales increasing at a double digit pace
• A sector that represents stability and a long future
• An easy to takeover or relocate situation

Negative factors

• The product is somewhat less than mainstream
• If there are a lot of addbacks (specifically hard to prove ones) auto expenses, misc personal, etc
• A relatively short tenure in business
• Erratic sales
• A large percentage of Amazon / Ebay derived cash flow
• Excessive Inventory

Inventory is a two edged sword. On one hand it has a concrete, solid value that projects a positive image, but on the other, neither a bank nor an evaluator will increase the value of the business based on inventory. In some case, a bank will actually decrease it. As strange as that sounds, if the inventory increases every year at a higher percentage than the sales and the profit coming from increases in inventory, there is a much higher risk based on the inventory trend that such inventory is non-sellable. So the inventory ends up taking up space and the perception (real or otherwise) is that in order to continue company growth, an inordinate amount of what should be free and clear cash flow gets eaten up by excessive inventory needs. Never build up more inventory than you actually need in advance of a sale of your company.

Feel free to Contact Us for any questions on your business – we’d love to help!