Never Miss a Beat - Get Updates Direct to Your Inbox
How Much Is My Ecommerce Business Worth? Here’s How to Find Out
By Quiet Light
Regardless of whether or not you are planning to sell your ecommerce business, you have probably asked yourself the question, “How much is my ecommerce business worth?” After all, your business is likely your most valuable asset. Knowing how much your business is worth and what determines its value can help you run a more profitable business now and in the future.
In this article, we discuss:
- How to value an ecommerce business
- The importance of knowing the value of your ecommerce business
- Factors that determine ecommerce business value
- How to increase the value of your ecommerce business
How to Value an Ecommerce Business
Whether you plan to start a business in the future or already own a successful ecommerce company, it is important to understand how to calculate the value of your business. In this section, we will discuss the SDE multiple method of valuation, one of the most common ways of valuing a business.
SDE Multiple Method
To start, SDE stands for seller’s discretionary earnings. We will take a closer look at this next. For now, the SDE multiple method states that:
Business Value = SDE x Multiple
“Essentially, SDE is a figure that sums up the total money-generating capacity of a business for a single owner.”
Seller’s Discretionary Earnings
What is SDE, and how is it calculated? Essentially, SDE is a figure that sums up the total money-generating capacity of a business. It is the pretax and pre-interest profits a business creates before taking into account certain discretionary expenses. These expenses include:
- Noncash expenses
- Owner’s benefits
- One-time investments
- Unrelated expenses or income
Thinking of Selling Your Business?
Get a free, individually-tailored valuation and business-readiness assessment. Sell when you're ready. Not a minute before.
Why not just simply use profit instead of SDE? Occasionally, the value of an online business is calculated based on profit. However, SDE does a better job of accurately representing a business’s performance. In other words, SDE more clearly states the total benefit that the buyer can expect to receive from the business once they take over ownership.
When calculating the value of your business, it is very important to get your SDE figure right. If you fail to “add back” certain discretionary expenses, you can potentially undervalue your business. Likewise, it is important to not overstate your SDE.
For these reasons, many entrepreneurs often choose to work with a qualified Advisor or valuation expert when conducting their ecommerce valuation.
A valuation multiple is simply a number that is multiplied by the SDE in order to calculate the value of the business. For example, if you calculate that your SDE is $1,000,000 and your multiple is 2.5x, then the value of your business would be $2,500,000.
Multiple numbers vary from business to business. What, then, determines the multiple for any given business? The multiple is a figure that captures perceptions of a business’s value, and this includes both tangible and intangible factors.
As you can imagine, two companies could have the same SDE but have different expected values in the long run. Perhaps one is in a market that is growing while the other is in a declining market. One may clearly be more organized and easy to manage while the other may require a lot more time and energy to run. If you are the one buying a business, these are important factors to consider.
The multiple value depends on several factors that influence the overall health and profitability of a company. These factors are sometimes referred to as the Four Pillars of Value. These include:
We will cover each of these factors in more detail in a later section.
“Knowing the value of your ecommerce business is important when it comes to planning your financial future.”
The Importance of Knowing the Value of Your Ecommerce Business
Knowing the value of your online business is important when it comes to planning your financial future. Additionally, there are many other benefits to calculating and knowing how much your company is worth, both in the short and long term.
Improve business efficiency
Calculating the value of your business is an in-depth process. By going through the steps to calculate your SDE and arrive at an appropriate multiple number, you can’t help but learn more about the various strengths and weaknesses of your company and familiarize yourself with your business metrics.
Armed with this knowledge, you are then able to go through your business processes and eliminate inefficiencies one by one. You may recognize that your inventory delivery time and costs can both be reduced, for example. You could do this by switching to a supplier who can handle manufacturing as well as packaging for your product.
In the short run, improving efficiency will help you save valuable time and energy and make it easier for you to run your business. In the longer run, however, the value of your business will increase. After all, an efficiently run business is a more attractive prospect for a potential buyer.
In addition to making it easier for you to run your online business, gaining an understanding of the drivers of value can help you increase your profitability in the short, medium, and long run. By taking a closer look at the performance of your business you can work to identify areas for future growth.
During the valuation process, for example, you might notice your marketing efforts are failing to produce the results you want. While some customer acquisition channels, such as your content strategy, are firing on all cylinders, you realize it may be time to incorporate a more professional approach to your paid advertising efforts.
By first recognizing the shortcomings in your marketing plan and then addressing these issues, you are able to increase your sales and revenue.
Increase sale price
By knowing the value of your business and taking steps to increase your profitability in the short term, you will naturally be able to sell your business for a higher price when you do decide to sell.
The best time to prepare for an exit is long before you actually decide to sell. If you pay attention to the factors that drive the value of your business and optimize them along the way, you will organically create a business that is attractive to potential buyers. This creates more competition, a higher sale price, and better deal terms.
As mentioned previously, knowing the value of your business can help you plan your finances for life after you sell your business. Of course, you don’t want to count your chickens before they are hatched, and the final sales price will ultimately be determined once you do sell your business.
By having a realistic idea of how much you expect your business to sell for, however, you can factor this information into your current and future financial picture.
“By knowing the value of your business and taking steps to increase your profitability in the short term, you will naturally be able to sell your business for a higher price when you do decide to sell.”
Factors That Determine Ecommerce Business Value
Financial performance metrics aside, the Four Pillars of Value discussed earlier determine the real and perceived value of every ecommerce business. When it comes to internet business valuation, these four factors are crucial to pay attention to. Let’s take a closer look at each of these factors and how they impact the value of your business.
The past, current, and potential future growth trends of your business have a large impact on its value. Buying a business represents a significant investment. As such, most prospective buyers seek to realize a strong return on their investment. One of the most important factors to look at when analyzing the potential future ROI is whether or not the business is likely to grow in the future.
Buy a Profitable Online Business
Outsmart the startup game and check out our listings. You can request a summary on any business without any further obligation.
Steady past and current growth trends are healthy indicators a company will continue to perform well moving forward. In addition, a prudent buyer will also look to see if there are any obvious areas within your business that are primed for easy growth.
For example, if your company is steadily growing but hasn’t developed a social media marketing strategy, a new owner may be able to make use of this untapped opportunity to drive future growth.
In addition to evaluating the growth trends of your specific business, it is also important to keep in mind the state of your market as a whole. Is your market experiencing strong growth, staying steady, or in decline? While market trends are outside of your control, they will have an effect on the overall value of your business.
“The past, current, and potential future growth trends of your business have a large impact on its value.”
As every business owner knows, all business ventures entail some risk. However, the more risky a business is perceived to be the less valuable it will be, all other things being equal. Just as a buyer wants to see their investment grow, they also want to have confidence their investment won’t unexpectedly fail or go under.
Risk for a business comes in many forms. For example, if an Amazon business relies on a shaky patent for its success, it will entail more risk. Or, if a business’s success hinges on unproven technology, many potential buyers may lose interest, driving down its value.
Special circumstances aside, an ecommerce store whose performance depends on a single point of failure naturally incurs more risk. If, for example, your business relies solely on Facebook marketing for sales, its success would be highly vulnerable to a sudden change in Facebook’s ad policies.
By becoming aware of the areas of your business that present more risk, you can proactively address these issues long before it comes time to sell your business.
“Just as a buyer wants to see their investment grow, they also want to have confidence their investment won’t unexpectedly fail or go under.”
Your business is only valuable to someone else if they can successfully take over ownership. While many businesses are easily transferable, some businesses have a harder time changing hands due to the nature of their business, regardless of which ecommerce platform they use.
For example, if your online store is closely tied to your image or personality for its success, a new owner will likely find it hard to take over ownership without negatively impacting the performance. In other cases, some businesses may require a specific certification or accreditation to run. While not impossible to transfer, this will reduce the number of qualified potential buyers, thus reducing the sale price.
Lastly, the way in which you run your business has an impact on how easy it is to transfer the business. If all of the instructions on how to run your business are only stored in your head, a new owner will be at a loss for how to take over the reins. By contrast, if you delegate tasks to employees and have clear operating procedures for your business processes, you make it easier for a new owner to operate your business smoothly.
A well-run and organized business is generally much more attractive to a prospective buyer than a disorganized business. A big part of this organization comes down to having clear and effective documentation.
Prior to the sale, proper financial documentation helps reassure the buyer that your financial performance claims are accurate and correct. It will also save the buyer time, energy, and frustration as they go through the process of verifying your claims about the business’s finances.
Additionally, a qualified buyer who sees that your business has clearly documented procedures will have peace of mind that you have run your business in a responsible and orderly fashion, making it a more attractive prospect in their mind.
By familiarizing yourself with the Four Pillars of Value and understanding how they impact your business, you will gain a better understanding of what you can do to increase the value of your business.
“A well-run and organized business is generally much more attractive to prospective buyers than a disorganized business.”
How to Increase the Value of Your Ecommerce Business
In theory, there is an endless list of things you could do to increase the value of your business. In reality, you won’t have time to get to each and every one of these optimizations. There are several important things you can focus on, however, to maximize your sale price.
First and foremost, you can work to continually drive growth within your ecommerce business. While easier said than done, taking an incremental and calculated approach to driving growth can yield results.
For starters, look to see if there is room for improvement in your marketing efforts. Are there any channels you aren’t utilizing that you could add? Perhaps you haven’t earnestly created an effective content marketing plan or implemented an email marketing strategy yet.
Aside from delving into new marketing strategies, look to see what channels can be optimized. Does your paid advertising convert at the rate it should? Oftentimes small changes yield positive results.
Lastly, keep an eye on current ecommerce trends. By paying attention to what is working and what isn’t, you can be better prepared to create growth when opportunities present themselves.
Minimize single points of failure
When it comes to reducing risk in your business, look through your business’s operations to identify single points of failure. Whether they relate to marketing, operations, your supply chain, or your product offerings, the first step is to gain insight into potential weak points in your company.
Once you have identified these areas of increased risk, you can work to eliminate or mitigate them as much as possible. For example, if your sales and revenue rely primarily on one successful product, diversify your income by launching additional products. Eliminating risk will strengthen your business and increase its value.
Make it easier to transfer your business
There are several things you can do to make it easier for a buyer to successfully take over ownership of your company. Some common steps include:
- Removing your personal image or personality from your business
- Creating clear, easy-to-follow operating procedures
- Removing the need to have specific certifications or knowledge to run your business
The steps you need to take to increase the transferability of your business depend on the business model of your unique business.
Create clear documentation
If you haven’t already, now is the time to create clear and orderly financial statements for your ecommerce business. In addition, create standard operating procedures, or SOPs, detailing the performance of your business from top to bottom.
While this does take some time, it will help you both run your business in a more efficient manner while you own it and drive up the value of your business when you do decide to sell.
Your business represents hours, months, or years of hard work. In addition, it requires sustained energy, attention, and focus. When all is said and done, you want this effort to be worth it.
By knowing how to calculate the value of your business and becoming familiar with the factors that drive overall business value, you can work to create a more efficient and profitable business in the short term and a more valuable and attractive business for your future exit.
Thinking of Selling Your Business?
Get a free, individually-tailored valuation and business-readiness assessment. Sell when you're ready. Not a minute before.