Ever wonder what you’d do with $500,000 in your account?
You could afford a downtown apartment in Manhattan, max out your children’s college fund savings account, or even buy another eCommerce business. Whatever you decide, you could gain $538,960.08 in upfront capital (the average sales price of an eCommerce business on our marketplace in 2020).
In 2021, we’re seeing more sellers exit their businesses for huge capital windfalls compared to last year. If you own an eCommerce business, now is a great time to sell your business.
For the past few years, it’s been a seller’s market, as the appetite for strong ecommerce brands has increased among savvy buyers. The hunger for profitable brands isn’t slowing down.
Private equity firms and venture capitalists recognize the massive return on investment from ecommerce businesses. That’s why brand aggregators compete against each other to add new brands to their ever-growing portfolios.
It’s a shame many ecommerce owners dont realize this was an option for them. We’ve seen many great ecommerce businesses deteriorate because the owner only considers selling when things turn for the worse. By then, owners have no choice but to sell for a much lower price or to close the business.
We’d hate for you to lose out on getting the maximum sales price from a deal, which is why we’re going to share how eCommerce businesses are valued.
By the end of this article, you’ll understand what makes up a valuation, along with the different factors that affect the listing price and some ways you could increase a valuation.
Our valuation formula is easy to understand and broken down into the following two parts:
Valuation = Average Monthly Net Profit x Multiple
The average monthly net profit is easy to calculate; just add all the net profit figures from each of the past 12 months and divide by 12.
We normally use a 12-month pricing period to give a more accurate outlook of a business’s financial performance. You can also use a financial model template to help you determine this. Occasionally, we use a shorter pricing period to capture a business’s recent growth, but 12 months is the recommended standard.
Working out the average net profit is straightforward, but what about the multiple?
There’s a lot more that goes into deciding the multiple, and it’s why two eCommerce brands that earn the same net profit could have very different ecommerce valuations. We’ll break down the factors affecting the multiple by net profit, efficiency factors, and growth opportunities.
Having a higher net profit is always a good way to increase the multiple by virtue of an asset being a more powerful money-making machine. Larger ecommerce brands worth seven figures or more will generate roughly $40,000 profit each month at a minimum.
The 12-month pricing period sheds more light on a business’s money-making performance. A longer pricing period shows more stability, as buyers can see financial performance throughout the year to account for seasonality.
To increase the net profit, you can find potential growth areas to capitalize on.
A common mistake some sellers make while preparing their business for sale is getting rid of essential services to save on expenses. While net profit increases, the manpower and hours needed from the business owner also increase. In essence, you’re now working a full-time job instead of running a business.
If you can increase your profit margins while streamlining your operations, this combination can seriously increase the sales multiple.
There are several areas you can streamline your operations. While some first-time buyers don’t mind putting in the hours learning how to run their new business, many investors are looking for an investment, not a job.
The great news is that there are many areas you could optimize in your business, so it earns more money with less work.
A team that manages the daily activities plays a large part in a business’s operations. An established team is also an important asset to buyers who are more concerned about exploring new opportunities to grow the business.
The team can consist of in-house staff, freelancers, or consultants. As long as team members are competent at fulfilling their responsibilities, owners can delegate tasks to anyone they find helpful.
Building an in-house team means there’s an ongoing monthly cost of wages, but you have the chance to nurture talent that grows with the company. Employees will know existing processes and better understand how to improve the business over a freelancer who’s entirely new to the brand and its USP.
That said, working with an agency can provide top-level insight into new opportunities that owners can’t see since they’re in the trenches.
Hiring a freelance specialist can be cost-effective for one-off projects since you might not have the bandwidth to hire someone for a full-time role due to a lack of available work.
Many sellers wait until a deal is finalized before informing their team that they plan to sell the business. However, knowing whether your hired help is willing to work with the buyer after the sale is crucial.
If you’re running the business on your own or with limited staff, creating standard operating procedures (SOPs) can help the new owner transition smoothly. SOPs act as a manual that the buyer can refer to so they understand how to run the business and ensure performance doesn’t drop. SOPs also make it easier to train new staff if your hired help isn’t continuing with the business after the sale.
Running an ecommerce business often feels like being in a CRO hamster wheel, since there’s always some way to optimize your business for higher click-through rates (CTR).
Potential buyers want to know your CRO metrics to get a better understanding of how well you’ve optimized your storefront and advertising campaigns. They’ll ask if you’ve tried split testing to see which areas could be improved, such as average order value (AOV), customer lifetime value (LTV), or the average cost of advertising.
While many ecom brand owners begin with just one supplier, having multiple suppliers puts your business in a much stronger position. Being able to order from different manufacturers means you’re at lower risk of running out of stock due to production issues.
The quality of your supplier relationships also matter a great deal as far as your valuation price goes. Having strong supplier relationships is crucial to ensuring reliable production output.
Any exclusive supplier arrangements can increase the multiple if this relationship and partnership can be transferred to the buyer.
Logistics can get complicated, which is why there’s always room for improvement. Streamlined logistics that reliably transport inventory from manufacturers to storage facilities or fulfillment centers are essential for a higher multiple.
To look for areas of improvement in your supply chain, ask yourself whether your shipping and logistic costs are too high or if you could reduce the number of contact points in the management process by hiring a third-party logistics (3PL) service provider to handle everything.
Buyers are looking at whether their new investment has the potential to expand. We define these opportunities as growth multipliers.
There will always be room for growth, which is usually gated by how much capital you have or your level of expertise to take the business further. Let’s look at some of these growth multipliers below.
Products at competitive prices can increase the multiple since they’ll have a better chance of selling.
Your profit margin is largely determined by how you’ve priced your products. Pricing is a tough balancing act between going low enough to stay competitive and high enough to maintain a decent profit margin.
Lowering expenses like shipping costs or optimizing your ads for higher CRO can help with pricing. Some buyers will look at how you’ve priced your products, which could be a growth opportunity for them.
The best gauge of a brand’s strength is the product reviews and ratings left by customers. Prior customer feedback is great social proof that can sway potential customers to committing to a purchase.
As such, high ratings and a large number of positive reviews could significantly increase the multiple.
While buyers want to acquire reputable brands, branding changes could also offer good growth opportunities if there’s room for the brand to become even more attractive.
Having a roadmap in place showing how you are adapting procedures to improve the customer experience will help a new owner strengthen the brand.
Email marketing is one of the best customer acquisition channels that’s endured the test of time.
When you nurture an audience who subscribes to your newsletter, you can address them at any point in time without relying on search engine algorithms.
There’s increased interest and more buy-in from subscribers because they’re looking forward to what you’ve got to offer.
Even if you haven’t monetized your email list, building an audience is still a valuable asset to transfer to the new owner when you sell since you can monetize the list further down the road.
Creating more revenue streams increases a business’s survivability and is important in influencing the multiple. You could create new revenue streams by launching fresh products or producing content that’s monetized through affiliate marketing or display advertising.
With your current product range, buyers will notice your “hero SKUs,” or the SKUs generating the most business revenue. Diversifying revenue creation across your products increases the business’s defense and makes it more attractive to a buyer.
Let’s say your primary SKU generates over 60% of the total revenue. A potential buyer will be concerned about the product listing being suspended one day or your manufacturer running into production issues for your hero SKU. These interruptions could cripple the business’s ability to survive since the operations heavily depend on sales for that one SKU.
Similar to increasing your business’s defense by creating unique revenue streams, increasing traffic diversity provides your business with multiple avenues to drive traffic to your store.
Several customer acquisition channels can be built, such as partnering with influencers and selling on other eCommerce platforms. If opportunities exist to diversify to avoid relying on a single traffic source, buyers will be interested in this growth opportunity.
The two main options for selling your eCommerce business are selling through a private deal or using a broker’s service.
If you’re a first-time seller, I’d highly recommend using a broker. A private sale has no protection in place for either the buyer or seller. You’ll often be wasting a lot of time with lowball offers. Even for reasonable price offers, no process is in place to ensure buyers fulfill their end of the bargain.
Negotiations can also be incredibly tough, especially if you’re dealing with experienced buyers who know how to wrestle negotiations in their favor.
With a high-quality broker, you’ll get access to a massive deal flow of buyers competing for your eCommerce brand. Experienced business analysts and a sales team can mediate conversations between buyers and sellers, filtering out poor offers along the way.
At Empire Flippers, we’re also the only broker that helps with the migration process, which can be an incredibly stressful time in making sure all assets are correctly transferred, so accounts aren’t suspended due to suspicious activity.
If you’re interested in finding out more about selling your ecommerce business, consider registering on our site for free.
After you register, you can speak with one of our business analysts. They’ll help you prepare an exit strategy and help you find out what your business is currently worth based on the metrics explained in this article.
Even if you don’t sell your business now, being armed with this knowledge will help you prepare for a future exit when you decide to move on to other projects—or just want to take your chips off the table.
Vinnie Wong is a Content Specialist at Empire Flippers. Originally from the UK and now residing in Malaysia, he loves everything related to online businesses. When he’s not neck-deep with work, he’s running after his toddler or trying to relive the glory days by injuring himself while playing soccer.