Do you run an eCommerce business? If the answer is yes, it’s important to know that your business is worth something big.
If you’re like most people, you’ve probably never thought about your eCommerce business’ value.
The question may come up when you want to consider selling your business one day, but for now, this guide will teach you the basics of valuing an eCommerce business, so you can see how much your business is really worth.
However, understanding the fundamentals improves your ability to have discussions about what an eCommerce firm is worth, and getting a reasonable market value.
3 Proper Valuation Methodologies
1) Cash flow analysis at a discount
A method known as discounted cash flow analysis is used to value online businesses. Essentially, it’s an estimate of the future return on investment plus the time value of money.
For example: $100 received today is worth more than $100 a year from now owing to today’s $100 invested at 10 percent, or 7 percent, is worth more than $100 when received a year from now.
Discounted cash flow analysis calculates the last year’s free cash flow (FCF) by subtracting capital expenditures from the period’s operating cash flow.
After that, it forecasts a business’s five-year cash flow projection rate and discounts it using the company’s weighted average cost of capital.
“Discounted cash flow analysis” is a fair valuation for an established conventional firm with a track record of stability.
Due to the wide range of monthly cash flow in eCommerce businesses and the eCommerce market’s inherent volatility, discounted cash flow analysis is not logically appropriate as a primary technique to evaluate an eCommerce business.
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2) Seller Discretionary Earnings
The historical earnings of an eCommerce business are typically used to determine its value.
Which is calculated by multiplying the company’s net profit (for at least the previous twelve months) by a multiplier (typically between 1.5 and 3.5).
Let’s look at this in practice. Assume an eCommerce business has earned $100,000 net profit in the previous year and is currently valued at 2.75 times that amount based on various criteria.
Using this information, we may calculate the company’s worth, which would amount to $275,000.
This is an illustration of how a firm’s value can be calculated by analyzing its financial statements.
A multiplier is used to determine the price of an option based on a variety of things, including revenue growth, consistency, scalability, and the amount of work needed to run the firm.
Revenue increase, consistency, scalability, and the amount of work necessary to run a business are all critical aspects.
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3) Precedent Sales
The acquisition price of comparable firms in similar markets, while not a primary valuation tool, can offer certain useful information.
This may be difficult, however, because the valuation standards used by comparable companies may differ and are not relevant to a specific scenario. It’s critical to figure out which metrics were utilized in the transaction in order to generate an accurate comparison.
There’s valuation factors to consider when you value your eCommerce business
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4) Multiple of Earnings (Or Income)
A common method of valuing a business is to divide its earnings by a certain number.
This technique, which exponentiates profits with a specific figure, is used to compute the value of a firm.
The “multiple of earnings” calculation involves multiplying the “earnings” (or income or profit) from one year, or averaging.
The first earnings’ number is usually determined by Earnings Before Interest and Taxation.
However, the “multiple of earnings” for online businesses with revenues from a few million dollars to a few hundred million dollars is frequently equivalent to the “multiple of EBITDA.”
The current earnings are multiplied by a certain number, which is dependent on the company’s stability.
A firm that is well-established, has a tight grip on the market, and can operate with or without a new staff might earn a multiple of 8 to 10 times current profits.
A small specialized company, on the other hand, may struggle to achieve even 500 percent growth because it lacks brand recognition and experience in dealing with customers and suppliers outside its
8 Valuation Factors You Must consider when valuing your eCommerce Business
Any potential buyers will give the running of an eCommerce business they are considering purchase a lot of thought.
Operations are frequently one where a new owner may make some quick changes to cut expenses, increase efficiency and productivity, and boost margins.
Even if they aren’t considering an exit, eCommerce entrepreneurs should be looking for new methods to improve their businesses operations on a regular basis.
Not only can this provide a chance to enhance the value of their business, but it will frequently make it more lucrative.
Knowing what aspects of operations are most appealing to customers may help eCommerce business owners identify areas where they should objectively assess and improve if feasible.
2) Owner Involvement
Not all purchasers of eCommerce businesses are looking for a full-time position. Businesses that need less than 20 hours each week of the owner’s time will generally be valued higher.
Businesses with less than 10 hours of owner involvement will generally be valued higher.
While many eCommerce entrepreneurs, particularly bootstrapped single founders, are used to wearing many hats and working lengthy hours, this is understandable and even praiseworthy in the early phases of developing a firm.
A high degree of owner involvement, on the other hand, can have a detrimental influence on the value of a business.
Even though some entrepreneurs may find it challenging to relinquish control of any elements of their business, taking an exhaustive list of activities and procedures is strongly recommended.
You’ll almost certainly find that some processes may be automated or outsourced. Freelance marketplaces such as Upwork enable you to locate skilled and talented freelancers quickly.
If you’re able to automate and offshore business processes, you’ll not only increase the value of an eCommerce business, but it will also significantly improve your work/life balance.
It also makes the business more scalable; after all, even the most driven entrepreneur can do a lot alone.
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3) Customer Service
Customer support is a significant cost for many eCommerce businesses. Efforts should be made to reduce the customer service process as much as possible.
Here are 7 measures that eCommerce companies may take to enhance their customer service operation:
- It’s always a good idea to have thorough product descriptions on the website, since this will help to reduce the number of customer service inquiries and expensive returns.
- Live chat is becoming increasingly popular among consumers, according to recent studies. Live chat has been shown in multiple research to be the most effective method of communicating with a business by 73 percent of respondents.
- Chat bots are a fantastic marketing tool for small and medium-sized businesses. They might answer simple client questions and ensure that customers are directed to the right person or department, as with Intercom and Drift.
- Frequently asked questions will help your brand differentiate itself. Customers who are confused or unsure about anything related to your business should look for answers in the FAQs.
- Help desk ticketing software may be useful as many owner-operators use email to manage customer service interactions in the early stages of an eCommerce business.
- Oversee Customer Service on Social Media as The majority of today’s eCommerce enterprises have a social media presence. This additional exposure comes with the responsibility of monitoring social media sites for customer service issues.
- The Availability of Billing and Payment History – ECommerce businesses that provide more self-serve options to their customers are more satisfied. Customers should have quick access to all of their prior bills, payment alternatives, and shipping addresses, just as they would in the Knowledge Base.
The lifeblood of every online business is traffic. An eCommerce company would be worthless if it didn’t generate any sales since you wouldn’t be able to obtain any customers.
As a result, the value calculation necessitates that traffic has a significant role.
Different types of traffic have varying degrees of quality. A store may acquire 700 visitors from a viral Instagram post, for example, but if no sales are made as a result of that traffic, it was wasted.
As a result, traffic statistics might be deceptive in the valuation procedure, necessitating extensive study to determine the quality of the traffic.
More visitors aren’t necessarily better, and it’s more important to focus on quality than quantity.
One of the most effective methods to assess the quality of traffic is revenue per user.
When you want to calculate how much money a customer brings in, count how many total orders they’ve placed. This is an excellent statistic to look at while determining which traffic channels perform best.
When analyzing traffic statistics, keep in mind the concentration. This will look at how many sources of traffic the website has.
Is 80% of the traffic from organic search? Or are there a variety of other sites that contribute a tiny percentage?
Although it’s frequent for eCommerce businesses to have a single traffic source that generates the bulk of their revenue, the more varied the traffic sources, the greater appealing it will be to potential consumers.
To make it simple for you: The higher the quality and more diverse your traffic is, the greater your entire eCommerce business will be worth.
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5) Differentiator in the brands Market
An established and well-known brand identity is worth more than a business in the early stages of building a brand.
The only differentiating element between brands that provide comparable products is price when this happens. It’s a race to the bottom, which isn’t good for any of the parties involved.
Customer loyalty ensures that businesses continue to thrive; well-known brands are more likely to attract new consumers, especially in saturated markets.
The importance of a brand can be measured in a variety of ways:
- Google search ranks for company names and goods/services.
- The number and quality of customer reviews.
A solid brand will entice customers to buy your product rather than someone else’s.
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6) Age of the Business
The age of the eCommerce business is one of the things a potential buyer will check.
A business that has been in operation for less than a year will not be considered. Many purchasers want to see at least two years of operations, but an eCommerce firm with five or more years of consistent growth may expect to be paid a premium.
It goes without saying that the financial health of an eCommerce business is one of the most important factors in determining its worth.
There are no identical eCommerce companies, but the following 2 factors must be met in order to get a company ready for valuation and possible sale:
1) Financial records that are thorough and verifiable
Having accurate financial records is one of the most essential things owners can do not just to improve their business’s value, but also to run it efficiently.
Both of them work with any type of business’s bank account, credit card, and payment processor, making data entry nearly obsolete.
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2) Revenue Concentration
After revenue has been confirmed as typically done with bank and payment processor statements, it’s critical to categorize income.
The following are the most important:
- Breakdown of income by supplier
- Breakdown of income by client
- Breakdown of income by product
Examine each revenue source individually to determine the strengths and vulnerabilities.
If a single client accounted for 15% or more of income, the business could be in serious trouble if he or she left.
Certainly, any customer who accounts for so much money must be treated with special attention.
Similarly, tracking how much of the company’s income comes from each product might highlight areas for improvement and danger.
What portion of the company’s revenue stems from one item? Is it a trendy object with a short retail lifespan?
Finally, what type of relationship does the business have with its main supplier?
Is the business solely yours or does it have a handshake agreement? Is there a written contract or document that allows for the seamless transfer of assets to new owners if you are self-employed after your death?
In general, maintaining sales across a broad range of customers and items may help protect an eCommerce business from a steep drop in demand for certain products, the loss of a significant client, or the dissolution of a supplier link.
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Every online business, regardless of the platform on which it is run, must embrace technology. Even eCommerce shops running on popular platforms like Shopify, WooCommerce, or Big Commerce will almost certainly have custom templates.
Because of the complexity of bespoke software, most online businesses are more likely to have a more complicated technology.
There are several things owners may do to make their eCommerce business more appealing to potential consumers in order to get the greatest financial return for their eCommerce firm.
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1) The Technical Burden
ECommerce businesses are frequently very appealing to non-technical consumers, who constitute a large portion of the market.
An e-commerce store created on custom software, in contrast to those using established platforms like Shopify, Magento, WooCommerce, and BigCommerce, is more likely to have a greater technical barrier to entry.
One reason for this is that there is a competitive and readily available market for development on well-known eCommerce platforms such as Shopify.
Having a known developer on staff or under contract to safeguard against any concerns that a non-technical founder may have about the technical demands of running the company.
2) Best Practices for Hiring Coders
It’s critical to follow current coding standards if the eCommerce firm is based on custom software.
The code should also be fully annotated, as it should be in any online company. Making it as simple as possible for a new developer to come in and make any required modifications and improvements is the aim.
Even if the e-commerce firm is based on one of the major platforms, such as WooCommerce there may be a significant amount of customization.
The goal is for the teams to have the same objectives. Using best practices and properly documenting code are essential.
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What Should You do if you are Overwhelmed? (Which is not your fault)
As your company grows larger, the issues you face become increasingly complicated.
When you reach this stage, you must hand over control to the specialists so they can assist you in growing (or selling) your online business while keeping your focus in your business growth only.
We here at Free cash flow, helping online businesses (like your business) to boost their revenue and doing what other firms miss.
I know you’re anxious about not receiving as much as you had hoped, but believe me when I tell you that we exceed your expectations.
How do you figure out the worth of an eCommerce business?
If an eCommerce business is valued using the discounted cash flow method, use this equation:
Value = after-tax earnings divided by P/E ratio. You calculate the latest profits after taxes of the firm and then multiply them by the appropriate P/E ratio.
How much is a small eCommerce business worth on average?
A small eCommerce business with no employees brings in roughly $45,978 per year on average.
How do you value a store on Shopify?
-Make a projection based on future cash flows for your discounted cash flow analysis.
-Subtract your liabilities (such as debts) from your assets (such as inventory).
-Revenue multiple – multiply net profit by a specific number of years.
Is my online business worth selling?
The earnings multiple is a calculation that compares the company’s revenue to its profits.
A multiple of the company’s earnings, or a P/E ratio, is a more accurate calculation. In the next few years, compute the company’s yearly earnings. If a typical P/E ratio is 15 and estimated yearly earnings are $200,000,