Selling Your E-Commerce Business – Valuation
What is my e-commerce business worth?
I will give you one simple formula right here in the first paragraph. But before I do that I must say that valuing an e-commerce business depends on many factors so it’s alway best to work with a reputable business broker who has experience in this area. The most common valuation method that I’ve seen in online e-commerce trading platforms like Empire Flippers is a valuation rule of 30x – 33x the average monthly profit of the last twelve months. That means that if you have averaged a profit of $8,000 per month over the last 12 months, this method would give you a value between $240,000 and $264,000 depending on factors such as how consistent the income stream is and how fast your business has been growing. But don’t stop here, you need to keep reading.
Many investors, including myself, have been burned from businesses listed on these online platforms and most of us stay far away from businesses not listed by a reputable broker because the risk is just too great. In my case, last year I purchased a very small website for my son for $795 only to find out the site was a duplicate and false information was given to verify income. The seller was suspended from Flippa, but I didn’t get my money back and my son was disappointed. On another occasion, I purchased an online business and I wired $285,000 overseas only to find out within 24 hours the same thing had happened and we found a duplicate of this website as well. This time I got lucky and I was able to stop the wire before it was dispersed because I had a non-compete statement written into my purchase agreement. With these online platforms the seller is essentially representing themselves and although not all of them are trying to pull a fast one, the legit business owners usually lack the experience to get their business deal all the way across the finish line and get it sold by themselves.
How do I increase my e-commerce business value?
The generally accepted definition of business value is simply the number that the buyer and seller both agree to pay and accept with neither party being under duress. Many buyers out there want to buy their freedom from a job and they want to make what you, the seller, have been making for the last several years. But those buyers typically lack your experience and specific industry knowledge so there is always a risk of the business not performing the same under a new owner. That risk limits what some people are willing and able to pay for your business. A good business broker can help reduce that risk and thereby increase your value by doing a couple of things. First of all, the broker will make sure that excellent documentation exists across all areas of the business from financial records to key vendor relationships to key employees. See more on that here. Secondly, the broker will help find a buyer that has a higher risk tolerance and who will see the business value from the highest level.
For example, when I sold my large e-commerce business, my broker was able to bring me several very good offers. But one buyer in particular was already in my industry and they could more easily envision the future growth potential, so to them my business was less risky and they were able to offer a much better deal than anyone else could. Through that process I also learned how much work actually goes into selling a business and how difficult it is to try and continue to run your business and work through the sales process at the same time. The broker that I used was out of state and did not have e-commerce experience so much of that workload fell on me which is why I would recommend working with someone in your own state and who has experience in representing e-commerce businesses. I’ve worked with the team at Freedom Business Advisors for a number of years now and I can vouch for their knowledge and experience in e-commerce.
I hope these few experiences that I’ve shared help you in your decision making process and I wish you the very best in your transaction.
Stuart Compton is an entrepreneur and investor with Adventure Capital Investments, LLC. His latest acquisition was a local search marketing firm Win Local. Stuart can be reached by email at firstname.lastname@example.org.