How Much Is Your E-Commerce Business Worth?
E-commerce businesses are capturing an increasing share of retail sales. According to eMarketer: “US consumers will spend $933.30 billion on ecommerce in 2021, up 17.9% year over year, and equaling 15.3% of total retail sales.” The COVID-19 pandemic forced many consumers to buy online, avoiding physical store locations. These e-commerce growth trends are expected to continue.
If you're considering an e-commerce business sale, you may be asking: “How much is my eCommerce business worth?” To prepare your business for sale and determine your company’s true value, work with an experienced business broker.
Factors That Determine Business Value
Discuss your operation with a business broker, to determine the factors that make your e-commerce business valuable. A veteran broker may uncover business value that you haven’t considered. Here are some traits that make your company attractive to a buyer:
An Attractive Website
Think about your last online purchase, including the look of the website and the ease of navigation. Was it easy to find the product you wanted, and then move quickly to checkout?
These are the traits that a successful e-commerce site must have, both on a PC screen and on a mobile device. To illustrate, BigCommerce lists some examples of attractive e-commerce websites. When you provide a great user experience, you’ll drive more business.
Products That Attract Customers
Successful e-commerce businesses often sell products in a particular market niche. The owners perform market research on social media sites (Pinterest, Instagram) to identify customer trends and preferences.
According to Shopify: “Niche products often have a more passionate customer base, which can make selling to specific crowds easier by raising awareness for your products.”
Some popular product lines include fitness, fashion, beauty, and hobby-related products.
Effective and Consistent Marketing Efforts
E-commerce businesses attract customers by providing blog posts and videos that solve customer problems, and by offering resources in exchange for a prospect’s email address. Companies also use social media posts, paid ads, and influencer marketing to promote brands.
Profitable businesses consistently market, in order to maintain top of mind awareness with customers and prospects.
Fulfillment and Customer Support
Valuable e-commerce businesses also provide a great customer experience after the order is placed. You need to deliver the product on time, and provide great customer service.
Many successful firms use dropshipping. For this business model, a third-party supplier packages and delivers the product to the customer, and the e-commerce business does not carry any inventory. The best e-commerce companies partner with suppliers who reliably ship on time.
Increasing Sales and Profits
Well-managed e-commerce businesses grow sales, and set prices that cover all costs and generate a reasonable profit. Dropshipping companies, for example, must account for the costs incurred to ship products through a supplier.
Your broker can help you determine the business features that make your company attractive to a buyer. The broker will use this information to create marketing materials for purchasers. Experienced brokers also understand the variables used to value your business.
E-commerce Valuation Methods
The two most common valuation metrics are seller’s discretionary earnings (SDE), and earnings before interest, taxes, depreciation, and amortization (EBITDA). Your company’s sale may be based on a multiple of these balances.
Using EBITDA for a Valuation
The earnings before interest, taxes, depreciation, and amortization (EBITDA) formula is a commonly used metric to value businesses. As the name implies, this method adds back some expenses to the earnings total.
Your firm may be valued at 2.5-5 times EBITDA, but larger firms with a consistent history of profits may sell for a higher multiple.
Applying SDE to the Valuation
The seller’s discretionary earnings (SDE) balance assesses company value based on the earnings that an owner generates from the business. Here’s the formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses)
SDE adds back business expenses that have some personal benefit to the owner. In addition to vehicles and company travel, you may add back charitable donations and your company salary. The goal is to calculate the total financial benefit earned by the owner.
A broker may negotiate a purchase price based on 2-4 times SDE, which is similar to the multiple used for EBITDA.
Other Valuation Components
The e-commerce industry is highly competitive, and buyers are looking for businesses that have a proven strategy for success. Changes in customer preferences, new technologies, and additional competitors make it more difficult to maintain profitability.
Purchasers are interested in businesses that are well positioned for success, and companies that have adapted to market changes.
Selling your e-commerce company requires a large time investment. A broker can take on many of the sale responsibilities, so you can continue to operate your business.
Find a Trusted Advisor
The brokers at Raincatcher understand how challenging it is to build a successful business, and their brokers are passionate about helping owners when it’s time to sell. They will create an effective marketing plan and use their business networks to find qualified buyers.
Contact the experts at Raincatcher today to find out how much your e-commerce business is worth.