Valuing an eCommerce Business
eCommerce is an ever-growing industry. With the recent pandemic, online buying has seen a drastic spike. With increased demand, more and more eCommerce businesses are being bought and sold. Whether you plan on selling an eCommerce business or buying an eCommerce business, it is important to understand the fair market value of an eCommerce business. Determining this value can be quite complicated and complex. Especially because each eCommerce business is unique and can be quite different from others in the industry.
There are many factors that impact the value of an eCommerce business. Peak Business Valuation, business appraiser, works with dozens of individuals who are buying or selling an eCommerce business. The first step of that process is obtaining a business valuation. As part of a valuation engagement, we discuss some of the key factors used in valuing an eCommerce business. Keep in mind the below factors are only a guide. For more specific information about valuing an eCommerce business you are looking to buy or sell, schedule your free consultation with Peak Business Valuation.
Market Multiples for an eCommerce Business:
Because the eCommerce industry can be remarkably diverse, the range of multiples for an eCommerce business is quite large. Below is an idea of what average multiples in the eCommerce industry look like.
- SDE Multiple Average: 2.0x – 4.0x, including inventory
- EBITDA Multiple Average: 3.0x – 6.0x
- REV Multiple Average: 0.3x – 0.5x, including inventory
Most often an eCommerce business is valued using either REV, EBITDA, or SDE multiples. By gaining a clearer understanding of what your eCommerce business is worth, you can begin taking steps to increase the value of your eCommerce business. This is helpful whether you are buying a new eCommerce business or wanting to maximize the value of your eCommerce business before selling. Here are just a few ideas to help increase your eCommerce businesses’ value. If you are searching for a more extensive valuation, schedule your free consultation with Peak Business Valuation.
Key Success Factors
There are several success factors that can help distinguish an eCommerce business and increase the value of an eCommerce business. Below we discuss just a few of the key success factors of an eCommerce business.
Traffic and sales are at the heart of every eCommerce business. Without any sales, a business is essentially worthless. As such, traffic plays a key role in valuing an eCommerce business. While high traffic is important, even more important is the conversion of traffic into sales. A valuation expert measures the quality of the traffic through customer lifetime value and churn rate.
A valuation expert will also consider customer concentration. Is your customer base diverse or does one source drive most of the traffic? The more diversified the traffic is, the more attractive it is to a potential buyer.
Next, your eCommerce business’s SEO presence is becoming increasingly important. The stronger your SEO presence the more traffic that is likely to be driven to your website. There are many ways to increase your SEO presence. Ideas include building a google compliant and mobile-optimized website, creating a Google my Business page, gathering customer reviews, writing relevant and keyword-rich original content, among others. For more information see The Value of SEO for your Business.
Creating customer loyalty is key to maximizing the value of an eCommerce business. Repeat customers show the business has great products and solid relationships with its customers. Your customer base is often what a potential buyer is looking to acquire. The loyalty and sense of community with your customers is one of the most valuable assets. As such, investing time in building customer relationships is key. Some ideas to do this include, improving customer service, initiating loyalty programs, and nurturing relationships. For more specifics on this, The Value of Customer Loyalty. By increasing your customer loyalty, you increase the lifetime value of your customer. The more loyal your customers are, the more valuable your business becomes.
For online businesses, there are many ways to create revenue. Potential buyers often look for eCommerce businesses with stable revenues. Diversifying your revenue streams can help create stable revenues and provide opportunities to increase revenue. Some businesses sell exclusively through their owner site, while others sell by affiliate marketing or advertising on their website. As a business owner, you often get stuck doing business one way. This limits your revenue and growth potential. By diversifying your revenue streams, you can grow your business and increase its value. Some ways to diversify your revenue include creating a subscription model for a product or service, piggybacking services, selling advertisements on your website, or creating a membership group. For information on these ideas and more, read Diversifying Revenue Streams.
As with any business, the level of owner involvement is crucial. The more dependent the business is on the owner the less sellable and less valuable it is. The more independent an eCommerce business is the more transferable it becomes. In the eCommerce industry, high owner dependence is common but easily solvable.
First, build a strong team. Increasing the confidence and capability of your team through decision-making and problem-solving goes a long way. Next, document key information – detail processes for every aspect of the business operations. Last, remove the owner from the day-to-day operations of the business. This will make an eCommerce business not only more sellable but more valuable. For more information see, Reducing Owner Dependence.
Financials and Operations
Last, a valuation expert will always analyze the financials and operations of the company. A valuation expert will analyze your financial statements and assess the strengths, weaknesses, and opportunities for your eCommerce business. They will then compare these metrics to those of similar companies. Do not underestimate the value of strong operating history and clean financials.
There are many important aspects to consider when valuing an eCommerce business. Understanding the value of your eCommerce business is important whether you are looking to grow, sell, or buy an eCommerce business. Obtaining a business valuation from Peak Business Valuation can help identify ways to grow your business. Doing so can help you maximize the value when it comes time to sell.
Peak Business Valuation, business appraiser, has valued eCommerce businesses across the country. We are happy to answer any questions you may have about understanding the value of an eCommerce business. You can reach out via email or by scheduling your free consultation below.Schedule Your Free Consultation Today!