According to TechCrunch, the pandemic accelerated the shift from offline to online commerce by five years.
Your e-commerce business might have been fortunate enough to profit from this shift, but your biggest reward might be yet to come.
This huge consumer movement from offline to online has caught the attention of big investors, and we’re seeing more and more brand aggregators who are raising money to acquire digital assets in the form of e-commerce businesses.
This massive e-commerce acquisition spree has allowed e-commerce business owners to cash out of their business for a capital windfall likely larger than they’ve ever received in their life. As a result, they’ve been able to invest in their other businesses, start a new business from scratch, enjoy the money and take some time off, or buy that perfect family home.
Because more money is being poured into the online business buying and selling space, the value of e-commerce businesses has increased dramatically in parallel with the online commerce boom—by 17.7%, to be exact. In terms of the state of the market, there’s never been a better time to sell an online business.
To give you an idea of what e-commerce businesses usually sell for, the average value of e-commerce businesses sold on our marketplace is $344,785.92, and on average, they sell for 32X the business’ monthly net profit.
In this article, we’re going to talk about how e-commerce businesses are valued so you can understand what the value of your e-commerce business is and how to sell it if you’re ready to make a big profit exit.
How E-commerce Businesses are Valued
Businesses are valued based on a number of factors. When carrying out a valuation, it’s important to dig into a business’ structure to understand its strengths and weaknesses. However, you can quickly get an idea of what your business could be worth using a simple formula.
A Simple Valuation Formula for Calculating Your Business’ Value
The following formula is the foundation of the valuations we at Empire Flippers calculate for all businesses. Valuations are based on the premise that the more money a business makes, the more it is worth.
The net profit value is taken from a monthly average, preferably over 12 months. Typically, we only go less than this timeframe if the business is particularly young or the recent growth or decline of the business means that a 12-month average wouldn’t accurately reflect its current state.
When online business owners first consider selling their business, they usually compare their business to others with similar profitability, but that often produces unreliable results.
We’ve seen businesses on our marketplace earning less than others but selling for more. For example, we had one business earning $2,387 less than another business, but it still sold for $5,000 more! To put that into perspective, the cheaper business was earning $28,644 more per year.
While it might sound like the buyer of the more expensive business got a hard deal, there’s more that goes into a business’ value than just how much money it makes.
This is where the multiple comes into play.
A business’ multiple is a figure calculated based on a number of factors that reflect the strength and financial viability of the business.
The Power of the Multiple
We can break up the factors used to calculate an e-commerce business’ multiple into the following categories:
Business Fundamentals
These are the key traits of your business that investors look at first.
The fundamentals of your business are its age, its model, and how much time it takes to operate. All the other multiple calculation factors fall under the umbrella of these three core factors.
Growth/Decline
This is an evaluation of the current state of your business and where the pricing window used to calculate your profits comes into play.
So, we ask the following question: Is your business growing, declining, or stable right now?
Diversification
It’s important to diversify in business to mitigate the risk of single points of failure.
This is why, when valuing your business, a broker or an acquirer will look into how you’ve diversified your business by investigating how many suppliers you have, how many products, how many niches/sub-niches you’re in, where you sell your products, etc.
Defensibility
When investors assess the safety of your business as an investment, one thing they look at is its defensibility against competitors.
The defensibility of your business is marked by factors such as the number of quality reviews your products have, how easy it is to replicate your product, the uniqueness of your brand, and whether you have trademarks.
Business Assets
Your business assets give an indication of your business’ defensibility, diversification, and fundamental business model structure.
The main e-commerce business assets that are considered when valuing your business are the ones that are integral to the functioning of your business, including products and trademarks, employee and supplier contracts, e-commerce marketplace accounts, and any marketing assets.
When your business is being valued, all of these areas—the fundamentals, growth/decline, diversification, defensibility, and assets—are assessed to calculate the multiple for your business, which, in turn, determines its value.
Because valuing your business accurately is a complex process, we advise you to get some professional advice. Some entrepreneurs turn to business valuation services to gain additional insights into their company's worth. But before initiating that process, it’s best to understand how to sell your business.
How to Sell Your E-commerce Business
The first step to selling your business is preparing it for sale.
When you present your business to a business acquirer (or a broker, if you choose to use one), you need to have your business organized in terms of its operations, data tracking, finances, and other logistical areas, such as your supplier relationships and contracts.
There’s quite a bit of legwork to get your business ready for sale, but by doing so, you actually make your business run more efficiently, and you can even increase its profitability and, therefore, its sale value.
Ultimately, when you think it’s the right time to exit your business, there are two routes you can take to get it sold: you can sell privately or through a broker.
If you sell privately, you need to find the right buyer and handle the whole sale, including providing all of your business information, negotiating the best deal, migrating your business to the new owner, and collecting your funds.
If you go through a broker, they connect you with buyers and provide levels of assistance throughout the sale. As the only broker with dedicated teams for each step of the sale process, we know just how tough it can be to sell, especially for first-time sellers.
However you decide to sell, hopefully, this article has armed you with useful knowledge that can help you get the right sale price. If you’d like to learn more about the selling process and how to get your business prepared for sale, reach out to our friendly Business Advisors who are always more than happy to give open and honest advice.