What is Your E-commerce Business Worth?
It’s been awhile since you’ve started your e-commerce business, and now you’re looking to sell it. There are so many different questions running through your head! You don’t know where to start. It isn’t easy to put a price tag on a business venture that’s already cost you so much of your own time, money and energy. Determining the worth of an e-commerce business can seem a daunting task. However, the process might be easier and much more straightforward than you think! In this article, we’ll explore the different factors that contribute to the overall value and final sales price of your e-commerce business.
Sales and Profits
Just like they have been for centuries, sales and profits continue to be one of the best indicators of a healthy and valuable business venture. When buyers are trying to determine a good sales price for your e-commerce business, the first things that they’ll look at is how much money your business is making. Other factors, such as the ways that your e-commerce business attracts new customers and continues to please returning customers, website traffic and marketing techniques, all play into their valuation, because these factors are closely linked with your sales and profits.
Consistently high profit margins, growing sales, as well as the overall size of the business can contribute to the final sales price of your e-commerce business. As you can see in the chart below, e-commerce businesses with higher sales and profits tend to be worth more.
It makes sense that buyers prefer to buy e-commerce businesses that have stable and reliable profits. This means that an e-commerce business with consistent and predictable growth is more likely to be sold and to be sold at a higher value.
Before giving a value to an e-commerce business, buyers will run a risk assessment on any venture that they are interested in buying. This risk assessment looks at factors such as the growth trends and history of your e-commerce business. Based on this risk assessment, buyers will assign a sales multiple to each e-commerce business that they wish to buy. The sales multiple is a ratio that describes how much of the annual profit a buyer is willing to spend in order to buy the entire e-commerce business outright. This ratio is almost always greater than 1, and as you can see in the chart below, the sales multiple usually falls between 1 and 3.
Source: Digital Exits
For example, if a buyer assigns your e-commerce business a multiple of 1.7 and your annual profit is $15,000, then the final sales price from that buyer would be $25,500. This is because the buyer would be willing to pay 1.7 times the amount of your annual profit. Lower perceived risk on the part of the buyer leads to higher sales multiples, which, in turn, lead to higher final sales prices. The easiest way to up the sales multiple from a prospective buyer is to make your e-commerce business as stable, predictable and low-risk as possible. Consistent growth and a well-documented history are the two most important factors to putting forward a low-risk e-commerce business.
Another important factor to consider while assessing the value of your e-commerce business is your business’s brand. Since e-commerce mostly exists in the sphere of the internet, the interactions between you, the business owner and your customers is rather limited. This can be efficient for marketing and sales, but it also causes a rift between your company and the customer. This makes it tempting to do all of your communication with the greater public under one logo or figurehead. That’s your brand. However, if your e-commerce business is too heavily reliant on this brand, it’s not good for a prospective buyer.
Buyers want to know that your e-commerce business can survive and continue to thrive, even without a well-recognized logo or figurehead. If your e-commerce business relies too much on the brand, then the buyer will have to re-brand the entire company after you sell your e-commerce business. This adds another risk to the buyer’s investment and will likely drive down their offered sales multiple.
Jock Purtle is the founder of M&A Consulting Firm and Brokerage Digital Exits. Questions about the value of your website? Contact Jock at Jock@digitalexits.com or at http://www.digitalexits.com/