Ecommerce businesses are on the rise; every day more and and more investors consider purchasing an ecommerce business. At Digital Exits, many business owners come to us with an idea of a selling price that is based on the potential of the business. When you are ready to sell your ecommerce business, it is important to remember that “potential” is not usually a valuation factor. Someone who is interested in your business is primarily going to be interested in the actual profit, and not the potential for profit.
Historically, standard business valuation tends to be 1-3 times the net income of the business. While there may be many factors that can increase and decrease a business’ value, profit is the factor that has the most impact on the final selling price.
Let’s look at some of the other factors that help determine business value:
- Smaller Businesses (less than 100k in net income) – you probably making anywhere from $100 – $4,000 in monthly profit.
- Medium Businesses (100k – 5 Million) – Your net income is probably around 5k – 200k per month or 50k – 2M a year in profit.
- Large Businesses (5M +) – More than 2M in net profit or EBIDTA is usually a target for a merger or acquisition.
Drop-Ship vs. Order Fulfillment:
- Drop-Ship Businesses: Historical data shows that drop-ship companies do not carry as much value as companies that fill their own orders. Drop-ship companies typically have lower profit margins, more competition, and more complicated distribution channels, and are less desirable to potential investors. As shown in the image below, ecommerce businesses are sold for a considerably lower amount compared to similar businesses that handle their own order fulfillment
- Businesses that have been operating over a longer portion of time tend to have a higher valuation than newer businesses, and it is not hard to see why. Older businesses are more reliable.
- How automated is your business? What kind of relationship do you have with your suppliers, distributors, and manufacturers? What is the cost of customer acquisition, and how much recurring revenue do you have? These questions are important to ask yourself, because you can bet that the prospective buyer is going to ask them.
- What do you sell? How strong is your brand? Is there a niche for your business? How are the margins? What are the long-term goals?
This list give you just a few of the variables that a potential buyer might consider when assigning a value to your ecommerce business.
Comparing your ecommerce business to other similar businesses that have recently been sold can be a great way to approximate a value. We conducted our own research and analysis by studying the sale of 151 businesses in 2013, and we found that on average, these 151 companies sold for 2.62 times their annual profit. Using this average multiple, it would take a buyer 2.62 years to earn their initial investment back. This average multiplier is not perfectly accurate for a business valuation, but it can provide both the business owner and potential buyer with a starting point for negotiations.
Selling your ecommerce business can be a daunting task; if you would like some help determining the value of your business, and facilitating the sale, don’t hesitate to contact Digital Exits today.