EXPERT ADVICE

How To Value an E-Commerce Business

Technology has made it easier for entrepreneurs to start businesses without worrying about having a suitable business premises, paying rent, or getting local permits. Nowadays, anyone can launch a business online with almost no restrictions. All that is needed is an e-commerce website, which will serve as the business outlet.

This means that with just a few dollars, you’re good to go. After all, you’ll just need to register a domain name, pay for hosting, have someone design a logo for you, set up a reliable payment system, and post goods and services for sale. You may also need to hire a fulfillment company that will handle packaging and shipping of goods to your clients.

Valuing Your Online Business

If you have a great product, and you have invested in search engine marketing, you’re on track to attract customers and build a large customer base. Since your overhead is low, you might find yourself making healthy profits quarter after quarter.

At some point you might have to carry out a valuation of your business for one reason or another. A couple the most common reasons are:

i) You Want to Sell

Before you can sell the e-commerce business, both you and potential buyers will want to know its market value. The asking price can then be based on that value.

ii) You Want Funding

Nobody can offer you funding without first finding out what your business is worth. If you want to get a capital injection into your e-commerce, you must first value it.

Determining Market Value

There are many methods of valuing a business, and we will go into that in a moment. However, it is important to state that the value of a business is determined by a variety of factors, including:

  • Annual revenues
  • Annual profits
  • Brand recognition
  • Value of tangible and intangible assets
  • Liabilities
  • Financial history
  • Scalability
  • Future prospects

It is also important to note that most e-commerce businesses do not have a lot of tangible assets. In fact, the only assets they own are; the e-commerce website, brand name, and inventory held by fulfillment companies.

When valuing an ecommerce business, therefore, additional factors must be considered, such as:

  • Source of customers: Traffic can either be from organic searches or paid advertising. Businesses that run profitably with traffic from organic searches have a higher value.
  • Streamlined fulfillment service
  • Quality of customer service
  • Investment in internet security: Everyone is concerned about internet security, so the most secure e-commerce sites usually sell at a higher price.
  • Owner involvement in daily operations: Businesses whose operations rely heavily on the owner are less valuable than those that run profitably regardless of who is in charge of operations.
  • Age of the business: E-commerce businesses that have been in existence for a long time are more likely to survive several years into the future, so they are more valuable. They also have an established customer base, which means their revenue figures are likely to be sustained in the long run.

Valuation Methods

1. Multiple of Historical Earnings

One of the simplest methods of calculating the value of an e-commerce business is to use the profit multiplier method. The annual net profit of the business is multiplied by a given factor to determine its value.

The multiplier can range from 1.5 to 5. For instance, a startup that has been in business for the two years might have reported a net profit of $750,000 over the last 12 months. This profit is multiplied by a factor of, say 3.0, to determine its value. With this method, the business will be valued at $2,250,000.

2. Precedented Sales

The second method of valuing e-commerce businesses is to look at other recent transactions of similar businesses. Look for an e-commerce company that has been recently sold and deals with similar types of goods or services. The age of the business as well as its revenue must be considered. This will give you a clear picture of what your business can fetch in the open market.

However, this method will require a lot of negotiation since potential buyers might also have a different idea of what the business is worth. Be sure to point out reasons why your business is worth more than a similar-sized business that was recently sold.

3. Discounted Cash Flow Valuation

This method is not commonly used for e-commerce businesses, but rather traditional businesses with a long and stable history. It basically considers what the business will be worth in the future taking into consideration inflation and average rate of return.

Get Professional Advice

Whether you are planning to sell your e-commerce business, want to get funding, or you simply would like to know what your brainchild is worth, it is recommended you work with an expert.

While you can try to estimate the value, only experts in the field of online business valuation can give you an accurate figure of what it’s worth in the open market. An expert will also provide you with a valuation report with a breakdown of everything to justify the quoted market value.

Stefano Endrizzi is an investment banker and founder of MergersCorp M&A International, a lower middle-market mergers and acquisitions advisory brand. He also is a senior mergers and acquisition-investment banking adviser, serial entrepreneur and management consultant with more than 15 years international experience.

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