How Does eCommerce Business Valuation Work?

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How Does eCommerce Business Valuation Work?

Looking to sell your eCommerce business? To make sure you and any potential buyer gets a fair price that you’re both happy with, your eCommerce business needs to meet certain objective criteria. This will help you to accurately value your business, thus speeding up the sale.

In this article, we’re going to take a look at how eCommerce business valuation works, and we’re also going to take a look at a few ways you can build up the valuation of your specific business. 

Ready? Let’s make a start. 

How eCommerce Business Valuation Works 

The first thing you need to do is to determine your net revenue. 

There are a few ways you can do this:

SDE Method of Valuation 

SDE uses a basic formula – the costs of your operating expenses and goods sold are taken away from gross revenue.

Your salary is then added back into the earnings. 

Why would you add owner compensation into the revenue? 

Because it helps you and any potential buyer to learn more about the true earnings power of your business. You may also want to add back personal travel expenses and other additional expenses, too. 

EBITDA Method of Valuation 

If you anticipate that your eCommerce business is valued at over $10,000,000, it’s a smart idea to use the EBITDA method of valuation. 

With this method, your owner’s salary is not added back because it’s a legit operating expense. 

Instead, the EBITDA method assesses the performance of your eCommerce store in terms of how profitable it is before non-operational expenses. 

Growth and Revenue-Based Valuations

Most eCommerce businesses will employ either the SDE or the EBITDA method of valuation.

However, if your store is well-capitalised, growing at a very fast rate and investing in future growth, you’ll instead need to judge your future earnings (and thus the value of your business) by taking a look at growth and revenue. 

Earnings forecasts based on these two things are, of course, more volatile than the other two methods. Why? Because they’re based just on growth. As such, you should only use this method of valuation when EBITDA and SDE are both ineffective.

How To Gauge The Earnings Multiple 

Once you’ve determined your earnings using either the SDE or the EBITDA method (or basing your earnings forecasts on growth), you then need to find your earnings multiple. 

Finding the earnings multiple is a tad complicated, and is indeed the trickiest part of the puzzle. Your objective is to figure out an earnings multiple that predicts as accurately as possibly the best price your eCommerce business can be sold for. 

Naturally, it depends on the fundamentals of your particular business. But most eCommerce stores find that they have a multiple in the 2.5x to 4x ball park. 

In other words, if your store has $4,000,000 in annual earnings + 3x earnings multiple, it gives you a valuation of $12,000,000. 

How do we arrive at the earnings multiple? 

There are a few valuation drivers you can use:

  • Financials
  • Traffic 
  • Operations 
  • Age of the Business 
  • Level of owner involvement 

Let’s take a look at each one separately.

Your Valuation Drivers 
Financials

One of the most important factors to consider when working out the valuation of a business is its financial health. As such, it’s really important that you maintain your financial records, as doing so will a) increase its value and b) it allow you to keep operating it efficiently. It will also make it more attractive to buyers. 

And while manually tracking financials sounds daunting, there are tools such as QuickBooks to help. QuickBooks syncs the likes of payment processors, credit cards and banks accounts so that you have to manually input very little data. 

Traffic

eCommerce businesses drive their traffic from various sources, including social media. 

But many of them drive most of their traffic organically from search engines like Google. You can also launch a PPC campaign to drive even more traffic. 

Traffic is a massive key to success for any eCommerce business, and it’s a huge valuation driver. There are four elements to consider here: 

  • Trends
  • Concentration 
  • Backlinks 
  • Quality 
Trends

Using a tool like Google Analytics, you can monitor your traffic trends. This allows you to see whether you’re experiencing slow and steady growth (important), and whether or not there are any sudden surges in traffic. Spotting surges in traffic gives you the chance to replicate these surges and thus boost revenue. 

Concentration 

Once you’ve uncovered your trends and understand more about your traffic sources, you need to go deeper. What you need to uncover is where the core basis of your traffic is coming from. 

For example, some stores derive most of their traffic from Facebook ads, while others rely on Google. 

However, you also need to uncover what high-ranking keywords are outperforming the rest on Google, as this will give you a better understanding of what keywords to double down on, and what to perhaps ignore. Again, this can boost conversions and revenue.

To uncover insights like these, you can use an SEO tool like Ahrefs

Backlinks 

Backlinks can be the difference between an eCommerce site ranking highly or lowly on Google. Good quality backlinks not only drive more traffic, they also demonstrate how effective the eCommerce store owner’s marketing efforts have been. 

Essentially, a good backlink profile suggests the owner has taken the time to create a strong marketing campaign that has propelled their store up the SERPs. And with a strong backlink profile behind it, an eCommerce store has a strong defence against any new competitors trying to outrank them on Google. This alone will make it more attractive to potential buyers who want to drive more organic traffic to the store. 

Quality

There are two types of traffic:

  • High quality traffic 
  • Low quality traffic 

What’s the difference?

High quality traffic is made up of prospects who are more likely to convert. 

How do you measure traffic quality? You need to take a look at your page analytics and look at metrics including: 

  • Bounce rate
  • Conversion rate
  • Average session duration
  • Number of pages per session 
Age of The Business 

How old your eCommerce business is will help to determine not only the value of your business, it will also determine whether or not you even manage to attract any buyers. 

Why is this?

Because one of the first things a potential buyer will look at is how old your eCommerce store is. If it’s less than a year old (or even just over a year old), you’ll find it very hard to attract serious buyers. 

Serious buyers will instead look for eCommerce businesses that have been operating for at least three years. This is because the older your business is, the more you can demonstrate not only its growth but also its growth potential. 

Operation 

It should probably go without saying that the way you run your eCommerce store is a key valuation driver. Potential buyers won’t acquire your business unless they can see how it’s run. This is so that they understand whether or not transferring ownership from you to them will be a simple affair, or whether it will be full of snags. 

In essence, potential buyers want to see how efficient and productive your operations are, and how you boost margins. Not just that, but they want to see how easily they’ll be able to replicate your success. 

If you’re not sure about your operations at the moment, it’s a smart idea to evaluate them and look for ways you can make improvements. This will increase your store’s value, and it will also make it more profitable during the weeks and months before you sell up. 

Level of Owner Involvement 

The more involved you are personally in your eCommerce business, the less attractive it is to potential buyers. They’re not looking for a full-time job. 

If your eCommerce business requires you to work on it for less than 20 hours a week, it should have a higher multiple. 

If your eCommerce business requires you to work on it for less than 10 hours a week, it will have an even higher multiple – perhaps even a premium one. 

The age of your business will likely determine how many hours you’re personally involved in it. For example, it’s not unusual for an entrepreneur who’s just launched their eCommerce store to be dedicating 20+ hours to it each week. It’s the same for a bootstrapped founder who does most things themselves. 

But while this kind of work ethic is commendable, it won’t add value to your business. In fact, it will remove value. 

One of the best ways to decrease your level of owner involvement is to automate a number of tasks, including inventory processing. You can also hire freelancers to take care of some tasks, such as web design and marketing. This will improve transferability, and will therefore make your business more attractive to potential buyers. 

All Sounds Great … But Will My eCommerce Business Actually Sell? 

This is a really good question. Because while the size of your business, as well as your niche, is important in determining your businesses valuation, it’s the characteristics of your specific business that will determine its final value. 

It sounds simple but it really is true that the more favourable characteristics your business has, the more it will be worth. Not just that, but more favourable characteristics will give you a better chance of actually selling your eCommerce store. 

Above, we took a look at key valuation drivers that will not only bump up the value of your business, but which will also make it more saleable. However, what’s really important to note is that, out of all the possible business characteristics that make an online store more valuable, automation sits right at the top. 

Why? 

Because automation is the secret sauce that gives potential buyers the confidence that your store’s earnings will continue once they’ve bought it and taken over. 

What is automation exactly?

Automation is when you replace yourself (the entrepreneur/founder) as the necessary ingredient to the success of your business. It refers to systems that are put in place so as to allow your business to succeed without you having to be there. Even if you got sick or couldn’t work on your store for a number of months for any other reason, your store would continue to thrive. 

It doesn’t need you anymore. 

Automation elements include reliability, stability and systemisation. And while solid financial performance is definitely preferred by any potential buyer, it comes secondary to automation. 

On a final note, another way to ensure that your business is not only well-valued, but also sells, is to produce positive revenue growth.

Positive revenue growth is a strong sign that your business is doing well and will continue to do well after it’s been acquired. Not just that, but it also suggests that your niche is performing well, which further makes your business more attractive to buyers. 

Indeed, eCommerce businesses operating in a growing niche will be able to push their valuations up in the range. This can also make your store more saleable. 

Conclusion 

Business valuation is an important step forward in preparing your business for sale. Especially if you’re selling a business for the first time, we always recommend that you work alongside a broker to not only value your business, but also to sell it. This is because valuing a business is less a science and more an art form – and it often takes experienced professionals to get it right. 

The next step is to use the suggestions in this article to value your own business before deciding what course of action to take next. If you decide that your business still needs to boost its value, automating it is the best way to start. Then, it’s time to start looking for potential buyers.


Ready to sell your business for the best possible price? Click below to get started. No obligation, no hard sell. Just solid, professional advice.

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