24 Jun eCommerce Business Valuation
Profit multiples are a good pointer to the range within which the selling price of your business may fall. If used independently however, it will not give an accurate valuation of the business bearing in mind that the net profit figure is simply a function in the overall profitability equation. If you need an expert opinion on whether to use it exclusively, the express answer would be, no. This is because, depending on how the net profit figure was reached, the other intricate details about the business have to be revealed to be able to set a reflective selling price.
The most important variable to keep in mind when making that estimation is the prospective future of the business going forward. Ecommerce businesses rely on technology a big deal which is as dynamic as it can get. The best thing about it is that it is predictable and businesses with structures to adopt the new technology often retain that competitive edge in the online crowded market space. Remember that when the business started there was perhaps little or no competition, your products were unique, and your internet search rankings were top. With the competition joining the fray, profitability and perhaps sales dwindled, forcing you to reduce the profit margin and operate on a budget. Giant retailers like E-Bay have taken eCommerce to a whole new level hurting many smaller businesses. At the same time there are millions of smaller businesses doing well and expanding as new ones come and pick impressively well, what is their secret? Uniqueness keeps customers coming and the referrals they make add to your clientele. Being the best at what you do offering quality that cannot be matched propels the business higher and higher. Financial figures are a sheer accounting of previous performance and an indicator of the future however, these are the primary criteria used by buyers to filter out those that do not meet their expectations.
It is recommended to use Sellers Discretionary Earnings (SDE) to obtain profit figures that are accurate, inclusive and a true reflection of the state and trajectory of the business. SDE is obtained by adding the business’ taxable income plus the owner’s benefits/salary and discretionary expenses billed to their business. The resultant SDE figure is multiplied by industry-specific multiples to get a selling price.
Similar to any other business valuation including those used in software mergers, businesses valued as a multiple of SDE are usually modified up or down according to factors adding or reducing the value. The factors that add value include: steadily increasing profitability, revenue/sales, B2B/C clients, high social media following, solid backlinks, strong search and page rankings, long term contracts enjoyed by the business and a business needing less involvement by the owner. A bigger business is a plus as it attracts funding/investment easily, has higher liquidity and stronger brand name.
Factors that work against the value of the business include dwindling profitability, a shorter business presence (newer business), competition, low search rankings and lack of well-maintained books. In general, statistics reveal that internet businesses’ sales don’t deviate much from those of physical businesses. If you are planning to sell your business, it is prudent to monitor selling price variations over time and capitalize on when there is an overall boom. Contact us, we can help.