4 Ways to Increase the Value of Your Online Business

As an owner, you should always be looking for ways to increase the value of your online business. Not only does your business’s value affect your prospects for selling, but it also reflects how much utility it can provide to you while you’re still in charge. 

Because there are numerous moving parts in any business, it’s important to focus your efforts on the activities that have the greatest impact on your business’s value. In this article, we discuss the four critical areas that ultimately determine your business’s value. We also share actionable advice to help you optimize your business and increase its value. 

Related Articles:
How to Get Your Business Ready to Sell
7 Things to Consider When Selling Your Online Business

How to Determine the Value of Your Online Business

Before diving into the strategies for increasing business worth, it’s important to understand how the valuation process works.

Most online businesses are valued using the ‘SDE Multiple Method.’ There are two parts to the equation: SDE and the multiple.

Seller’s Discretionary Earnings

Seller’s Discretionary Earnings (SDE) are the pre-interest and pre-tax profits that a business generates before reconciling the owner’s benefit, non-cash expenses, one-time investments, and non-related expenses or income. In other words, SDE is the total earnings that a business generates for a single owner. 

The reason SDE is used instead of Net Income is because SDE is a more accurate reflection of a business’s performance. For example, other metrics such as profit or income include expenses that won’t necessarily be carried over to a new owner when the business is sold (i.e., interest expense, depreciation, etc.). Therefore, it’s important to remove those expenses in order to identify the business’s true earning potential. A qualified business broker or Advisor can help you create a detailed add-back schedule and establish an accurate SDE.

Understanding Valuation Multiples

The multiple is a number that is multiplied by SDE to arrive at a business’s value. For example, if a business has $500,000 in SDE and is valued at a ‘3x multiple,’ its value is $1.5M ($500,000 x 3 = $1.5M).

When valuing a business, the multiple reflects how valuable a business is relative to its SDE. Two Amazon businesses may have the same SDE, but if one has a higher multiple, it will have a higher market value.

There are four primary areas that determine a business’s multiple, and therefore, its value. We call these the Four Pillars of Value, and they include:

• Growth 
• Risks
• Transferability
• Documentation

Later on in this article, we’ll go into more detail about these Four Pillars, as well as how you can optimize your business for each.

Why Increasing Your Business’s Value Matters

Most smart business owners are intently focused on increasing their business’s value, and for good reason. Four key benefits of increasing your business’s value include:

• Increasing your earning potential
• Owning a more stable business
• Streamlining business operations
• Creating greater opportunities for yourself

Increasing Your Business’s Earning Potential

It’s no surprise that businesses with higher future cash flow potential have a higher value. When you focus your attention on high leverage activities that drive growth, you’re able to enjoy the benefits that come with a higher income.

Owning a More Stable Business

All else being equal, valuable businesses are typically more stable than those that are less valuable. As an owner, it’s incredibly important that your business isn’t vulnerable to numerous unforeseen circumstances that are beyond your control. Minimizing points of failure and increasing recurring revenue are two steps that many owners take to reduce risk and build value.

Streamlining Business Operations 

In addition to the points mentioned above, valuable businesses often have streamlined operations. This makes them easier (and more enjoyable) to manage. As an owner, there are some incredible benefits to having clear systems and procedures in place.

When your business is streamlined, it’s much easier to step away from the day-to-day operations. Doing so allows you to focus on growth and value creation activities. Additionally, it’s easier to find or replace employees or contractors when the need arises. 

“When your business is streamlined, it’s much easier to step away from the day-to-day operations in order to focus on growth and value creation activities.”

Selling Your Business for a Higher Purchase Price

Of course, the higher your business’s value, the more money you’ll receive when you sell. For many entrepreneurs, this is a highly motivating reason to focus on building brand value.

Higher value businesses are often in a better position to negotiate for more favorable deal terms. Also, owners of such businesses have a greater opportunity to choose a potential buyer whom they like.

When to Focus on Increasing the Value of Your Business

Most business owners pay attention to growth, but many fail to think about the value of their business on a regular basis. However, that’s a mistake.

As a business owner, you shouldn’t wait until you want to sell your business to start thinking about value. Rather, you should always have a clear understanding of what increases and decreases company value. By doing so, you’ll be much better positioned to make smart decisions that lead to your success.

While knowing your company’s value is always important, it’s especially essential if you intend to sell in the future. 

“As a business owner, you shouldn’t wait until you want to sell your business to start thinking about value.”

Typically, it’s wise to get a business valuation at least 12-24 months before executing a business sale. Doing so ensures that you’re aware of what needs to be done in order to maximize its value and prepare for a smooth transition. However, regardless of where you are in your business journey, the usefulness of a business valuation cannot be overstated. In most cases, the valuation process reveals what opportunities, risks, and financial metrics owners should be focusing on.

4 Ways to Add Massive Value to Your Online Business

Above, we mentioned the four key elements that determine your business’s perceived value: growth, risk, transferability, and documentation. Therefore, in order to increase your business’s value, you must focus on improving it in each of these four areas.

Increase Your Business’s Growth Trends

There are two primary reasons why growth is important for business valuation. 

We have already discussed how your business’s value is based on a multiple of SDE. Therefore, by growing your small business and increasing SDE, it becomes more valuable. 

Additionally, positive growth trends indicate a promising future for your business. As an investor, wouldn’t you want to acquire an asset that will generate more income next year than it does today? Not only does growth suggest that your business’s value will continue to increase, but it also makes it easier for investors to experience a higher return on their investment. 

All businesses are different, but there are several general activities that owners can focus on to boost revenue and SDE growth trends:

• Launch more products or offer more services
• Increase your Customer Lifetime Value (CLV)
• Expand to new markets
• Increase your marketing and advertising ROI

For many businesses, launching more products or offering more services is an obvious way to drive revenue growth. For Ecommerce businesses, this typically includes launching new products that complement their existing product line. The equivalent strategy for service businesses is to create added value for existing clients by offering additional services.

“It’s important to note that you should never seek to increase SDE by sacrificing long-term growth and profitability.”

If you have a high degree of customer loyalty in your business, launching new products often leads to an increase in customer lifetime value. Other ways to boost your CLV include implementing upsells, effective lead nurturing campaigns, and boosting customer retention and customer satisfaction. When you increase your CLV, you can accept a higher acquisition cost for each new potential customer in your target market.

In addition to launching more products and increasing your CLV, many businesses seek to grow through expansion to new markets, as well as by finding ways to increase marketing and advertising ROI.

It’s important to note that you should never seek to increase SDE by sacrificing long-term growth and profitability. For example, if you’re an Ecommerce business owner, don’t cut advertising costs to artificially boost your profit margin and SDE. Such a decision will undermine the long-term performance of your business, and in turn, destroy trust with potential buyers.

Also, always leave a clear path for growth in your business. If a prospective buyer can see that there’s room to expand, they’ll be much more likely to make a solid offer.

Reduce Risks in Your Business

In addition to looking at business growth, buyers also pay attention to risks. Therefore, to increase the value of your business, look for ways to reduce risks and liabilities.

One of the primary ways to reduce risk is to identify and overcome single points of failure. For example, if you own a content site and 95% of your traffic comes from just one blog post, your business is exposed to significant risk. If that page were to lose its rankings, your entire business would collapse. 

“To increase the value of your business, look for ways to reduce risks and liabilities.”

Similarly, if your Ecommerce business generates 90% of its revenue from just one product, you’ll face the same problem. If a supply chain disruption or increasing advertising costs threaten the product, your whole business could be in jeopardy. 

To combat these issues, try to find ways to diversify your revenue and traffic sources. Additionally, make sure that your products or services are sufficiently differentiated from your competitors in order to reduce competitive threats. If you can secure trademarks or patents on your products, that can go a long way toward instilling confidence in buyers and boosting website value. 

Maximize Your Business’s Transferability

Not surprisingly, if your business can easily transfer to a new owner, it will be worth more. Therefore, to boost business value, make sure to make it as transferable as possible.

To increase your business’s transferability, make sure that operations don’t require your personal involvement. That doesn’t mean the business needs to be completely automated (although that’s a huge plus), but it shouldn’t require your personality or unique knowledge. 

“If your business can easily transfer to a new owner, it will be worth more.”

Additionally, try to systematize your business as much as possible. If you can implement clear Standard Operating Procedures for activities such as ordering inventory, handling customer service, or refining your marketing strategy, it will be significantly easier for a buyer to step in and succeed after the transaction.

Implement Effective Documentation Practices

Documentation is the fourth Pillar of Value. If you have strong documentation practices, it will be much easier for potential buyers to understand the story of your business. 

To provide as much detail as possible, make sure to organize your each balance sheet and financial statement on a monthly accrual basis. This is especially important if you’re an Ecommerce business owner since cash accounting leads to the appearance of distorted cash flow (i.e., “lumpy earnings”)

“If you have strong documentation practices, it will be much easier for potential buyers to understand the story of your business.”

Additionally, make sure that you have all supplier contracts, employee agreements, trademark registrations, and other documents organized and easily accessible. Not only does sound documentation make the transition process much easier for everyone, but it also instills confidence in buyers during the negotiation process. In turn, your business will be worth more.

By building your business with the Four Pillars of Value in mind, you’ll create a desirable asset and set yourself up for a successful exit.