How Much Is Your Ecommerce Business Worth?

From time to time, I get emails from customers saying that they have decided to move on from having an online business and they are wondering if I can tell them how much their online business is worth.

Business valuation is a tough one and we certainly are no experts in that arena. But we do have some insights on the topic. Here are some of the factors that a prospective buyer will likely consider in determining what they will pay.

1. Customer Base

There is no question that a large and active customer base is a great asset. If you have 30,000 account holds on your website, that would likely have value to a prospective buyer. Building a customer base and continually communicating with them is an important practice on many levels.

2. Inventory

You need to consider whether you want to sell just your website or all the product inventory that goes along with it. Some buyers will be quite interested in your inventory and others will just want access to your customers.

3. Website

As you know, investing the money in a professional website as well as the time to build out all the content is significant. Buyers who are knowledgeable about what it involves to build a full-featured site will understand the value.

4. Domain Name

A great domain name could be worth as much as anything else you have to offer. Of course, you need to have a really awesome name. The market for domain names has declined from the fervor in the early 2000s, but a solid name still has value.

5. Brand Recognition

If you have been successful in building some recognition for your brand and business that will be worth a lot. If you have done nothing to contribute online and establish your brand in your industry, you likely won’t get much of a bump.

6. Revenue and Financials

As with any business transaction, the value often comes down to your financial statements. That is no different with an online business. Be prepared to show sales data and financials to prospective buyers.

7. Traffic and Search Placement

A buyer not only wants to understand your current financial position, but they are going to do their best to determine whether a business acquisition is going to grow and prosper in the future. A strong signal (assuming they are wanting to take over your website) is your site traffic trends. If your traffic is consistently trending upwards, that is an important factor.

Related to your traffic is your current search engine placement for important phrases. If you can show that you have established your website in the search engines, that can be worth quite a bit to a buyer. We all know that strong organic placement is not an overnight process!

Conclusion

One of the key elements for any successful business is a clearly defined exit strategy. Although it is very hard to determine exactly what someone else might pay for your business, we encourage you to start thinking about the factors we have listed so you have a compelling package to offer when the day comes for you to test the waters with putting your business on the market.

What Makes a Business Worth Investing In?

You have always been interested in investing in a business, however you always hold back because you are scared of making a bad choice and losing your investment. However, there are some ways to evaluate businesses to reduce the risk you are taking when you invest. Of course, risk is never eliminated, but when you properly evaluate what makes a business worth investing in then you will more than likely have your answer whether the company will be a success or failure before you invest your dollars. The following tips will help you make the right investment.

Investment Tip #1 Management

When deciding whether a business is worth investing in or not you need to evaluate the management because a business really is only as successful as its management. Because of this you want to evaluate if the management is knowledgeable, rational, and able to make the right choices to make the company money and prevent it from losing money. Of course, this is an easy question although the answer is a little more difficult.

Investment Tip #2 Business Plan

A business plan that is well laid out and shows positives, negatives, and how the company and management will handle problems within the business is very important. A good business plan shows that management knows where the company is, where it wants to go, and what it needs to do to get there. Be sure you take a look at a company’s business plan before you invest.

Investment Tip #3 Return on Investment

The ROE, or return on investment, is also crucial when you are considering making an investment in a company. Of course, the ratio of equity to debt can be confusing, but if you evaluate the ROE and other economic factors you should be able to tell if the company is bringing money in or losing it.

Investment Tip #4 Room for Growth

Making sure the business has room for growth in its market is also important. A company that has little competition is preferable, but a company with a moderate amount of competition and a plan to be number one is OK as well. Just do your research.

When you are interested in investing in a company you need to take your time and evaluate the company, look over financial statements, talk to management and have all of your questions answered to your satisfaction. After all, it is your money and you aren’t going to give your money to just any company. So, be sure and confident in the company and have that backed up with proof and you will decrease your risk investing in a company.

What’s My Business Worth?

Probably one of the most common questions business owners ask is “What is my business worth?”. Perhaps you want to do some retirement planning, succession planning, divorce planning, estate planning, etc.. This simple question has no simple answer, however. Valuations differ based on their purpose. For instance, the courts and accountants focus on a “Fair Market Value” without compulsion. For the sale of a business, brokers and valuation experts create a “Most Probable Selling Price” that takes the current market conditions into consideration. Let’s assume we’re looking to sell our business, and we want a valuation.

There are three main approaches to determining a most probable selling price:

1) Market Approach
2) Income Approach
3) Asset Approach

The market approach is based on the comparison of “similar” businesses that have sold when compared to ours, then projecting a value for your business. The principle of substitution would suggest that this is a reasonable way to come up with a valuation. There are several problems, such as comparing businesses in different parts of the country, or even state that might make this comparison inaccurate since local economic conditions vary. Also, comparing companies of significantly different sizes can skew the results since buyers typically pay higher multiples for larger companies.

The income approach looks at a view that presumes that a business is a cash generation machine, and you should compare your business to any other investment that generates cash. The big difference here is that small business is risky, so an accommodation for risk needs to be built in. A key part of the process is to identify the cash coming from the business through a process known as recasting. Recasting will take tax returns or financial reports and estimate the cash flow of the business that benefits the owner. This is often referred to as “Sellers Discretionary Cash Flow” (SDCF) or “Seller’s Discretionary Earnings” (SDE), or something similar. This cash flow number is then multiplied by industry specific ratios to estimate a value. Other variations on this method include a capitalization rate applied to the SDCF or looking forward and estimating the SDCF for several years and calculating the net present value of that cash flow (what the sum of future benefits is worth today).

Finally, the asset approach depends on the fair market value of the company’s assets. This is sometimes called the cost approach, since it deals with the physical assets of the business, and doesn’t provide much value for goodwill. In most businesses, goodwill is the majority of the value of the business. This approach is most useful for unprofitable businesses or businesses that have a significant investment in equipment or other assets.

Ultimately, the market determines the price of the business. Because every business is unique, expect negotiation on the price. Buyers buy the whole package, it’s not just price, but the perceived risk of the business, the prestige of owning that business, the volatility of earnings, strength of the industry, the local economy and a host of other factors not easily quantified. The opinion of value is the start of the discussion on what the business will actually sell for. You should get some help when its time to price your business.