Companies and investors have been buying and selling businesses for a while, but with the emergence of ecommerce as a major player in the economy, buying and selling businesses has taken on a new digital edge. Valuing and ecommerce business is a lot like valuing and brick-and-mortar business, but it does come with some nuances. Here, we’ll discuss those nuances, and explore the different factors that buyers consider before acquiring an ecommerce business.
What Do They Want?
In short, buyers want a return on their investment. For example, if a buyer acquired your ecommerce business for $10,000, he or she simply wants to make $10,001 as soon as possible. This means that buyers are not interested in things like “potential,” or even how much you initially invested in website to get it going. They simply want to see that your ecommerce business is a low-risk way to make back their investment, and then some.
When valuing an ecommerce business, buyers look mostly at the profit and projected profitability of a business. If the profit is predicable, then their risk is lower. To describe the profit projection, a buyer will assign a multiple to your ecommerce business. The multiple is a ratio that represents how much of the average annual profit a buyer is willing to pay in order to acquire the entire business. This ratio is almost always greater than 1. As you can see in the chart below, the multiples for ecommerce businesses are generally higher than multiples of other types of internet-based businesses.
After the buyer has completed his or her risk assessment and has assigned a multiple to your ecommerce business, he or she will multiply the annual earnings of your ecommerce business by the multiple in order to ascertain the final sales price.
What Don’t They Want?
It’s easy to assume that if you’ve invested money in the creation of the website, the domain name, and marketing to boost traffic, then buyers will automatically add the value of those initial investments onto their valuation. Unfortunately, these assets all serve to create the profit of the ecommerce business, so their value is only considered insofar as it contributes to the profitability of your ecommerce business. This means that while these assets may have been purchased outright by you, they will not be purchased outright by the buyer.
Another thing that really turns buyers away is brand reliance. Since ecommerce businesses exist online, there is a disconnect between the business owner and the client. This often means that clients rely on a brand logo or specific person to serve as the face of that business. If the business relies too heavily on this brand, then the buyer will have to rebrand the entire business before he or she can make back his or her initial investment. This poses an extra risk to the buyer, which might decrease the multiple or even convince the buyer not to buy.
What Should You Do?
If you’re looking to sell your ecommerce business, then the first thing that you should do is put your profits in order, and then you must ensure that they are stable. This will increase not only your annual profits, but it will also benefit your multiple. Those two factors, a higher profit and a higher multiple, are sure to lead to a higher selling price for your ecommerce business.
To get a roundabout idea of what your ecommerce business might be worth, look at different valuation reports. Then, find businesses within these reports that are similar in size, sales, age, and profits to your own. This could give you a starting idea of what your ecommerce business might be worth!