How to Value an Online Business
Online businesses are part of the global economy, cementing their place and gaining a larger share of the market every year.
Different Types Of Web Businesses
According to Statista: “In 2021, over 2.14 billion people worldwide are expected to buy goods and services online, up from 1.66 billion global digital buyers in 2016.” Not only is internet business as a whole driving the worldwide economy — each of the most popular online business models is slated for sustained growth:
eCommerce
eMarketer forecasts that American consumers will spend $933 billion in 2021, a 17.9% increase year over year.
SaaS
According to Gartner, spending on public cloud computing services (including SaaS businesses) by end-users will grow from $396 billion in 2021 to $482 billion in 2022, a 21.7% increase.
Mobile Apps
In a forecast by App Annie, annual consumer spend within app stores will reach $157 billion by 2022, representing an impressive 92% growth since 2017.
Valuing an online business can be more difficult than valuing offline businesses. Many variables such as non-traditional business assets, diversity of revenue sources, and the more obscure nature of cash flow management, can complicate matters. That said, many traditional principles of business valuation apply to web-based ventures.
Valuing an online business can be more difficult than valuing offline businesses. Many variables such as non-traditional business assets, diversity of revenue sources, and the more obscure nature of cash flow management, can complicate matters. That said, many traditional principles of business valuation apply to web-based ventures.
If you’re thinking of how to value your online business, an experienced broker can walk you through metrics of importance, help you prepare your financials, and give you a true sense of how the market operates if you choose to sell.
Businesses that run on the internet are highly diverse, in terms of both profit model and overall structure.
Each type has pros and cons when it comes to ease of valuation and achieving high returns upon the sale of the business.
eCommerce businesses entail the sale of physical products online via digital “shopping cart” functionality. The market leader in eCommerce is Amazon, and one of the most popular platforms on which entrepreneurs start eCommerce ventures is Shopify. A key metric is gross merchandise volume (GMV), which points to the number of goods sold within a specific time frame.
SaaS or “Software as a Service” businesses are usually subscription-based cloud software platforms that users pay for on a monthly or yearly basis. The basis of revenue is the roster of paying subscribers, and the value of the business may be substantially affected by the churn rate (the rate at which users cancel their subscriptions).
Professional service businesses that run online include consulting, writing, graphic design, and lead generation services.
Blogs may generate revenue from any combination of advertising, sales of affiliate products, monthly membership for access to special content, or direct merchandise sales.
Each business model lends itself to different degrees of overhead costs, valuable assets, and revenue streams. While the ways your business earns revenue matter, the value of your venture is ultimately tied to long-term profitability, regardless of the profit model.
Each business model lends itself to different degrees of overhead costs, valuable assets, and revenue streams. While the ways your business earns revenue matter, the value of your venture is ultimately tied to long-term profitability, regardless of the profit model.
Online businesses that can show positive cash flow, consistent profits, and multiple streams of income over long periods are better positioned to sell for a high amount.
If your business is small and only recently hitting a stride in revenues, a broker may be able to point out areas of value you haven’t considered, and help you market your business to raise its value.
6 Factors That Raise The Value Of Online Businesses
Multiple “soft” factors come into play with web businesses that can greatly affect their value over time.
1. Monthly Recurring Revenue (MRR)
Web businesses with a high monthly recurring revenue, or MRR, are attractive to many buyers. This particularly applies to online businesses that operate on a subscription or membership basis, including eCommerce stores that offer recurring orders, blogs or websites that offer courses or other exclusive content on a monthly membership basis, and SaaS platforms that have a monthly subscription.
2. Backlinks And SEO
Backlinks can be thought of as a measure of goodwill online, and websites are rewarded in search engines for the number of other high-quality websites that link to them.
In addition, intentional usage of SEO best practices (such as using long-tail keywords in helpful content, and optimizing the website’s loading speed and mobile responsiveness) can influence a website’s search rankings for the better.
These both bring more traffic to the website, increasing opportunities for sales and ad revenue.
3. Paid Traffic
Online advertising can take several forms, including pay-per-click (Google Search and Display Ads) and social media advertising on Facebook, Twitter, Instagram, and other outlets.
SmallBizGenius notes paid ads can result in a return of $2 for every $1 spent, which represents a 200% ROI. Running and optimizing ads as part of a digital marketing strategy can bring a website consistent traffic, which can represent potential paying customers.
Increasing and stabilizing profits in this way, can raise the value of the business over time.
4. Email List
A list of qualified leads or buyers is a very valuable business asset and attractive to those who might want to acquire your business. This is especially true if the people on your list are highly-engaged, responsive to your follow-up messages, and are repeat customers.
5. Analytics
Analytics platforms, like Google Analytics, help you understand your traffic patterns and sources, as well as what factors are influencing your website’s performance. You are then empowered to allocate resources towards the most promising channels.
Buyers of online businesses often insist on seeing quality analytics anywhere from 6- to 12-months out from the sale; the longer, the better.
6. Standard Operating Procedures (SOPs)
SOPs are worth documenting. Buyers want to see clear roadmaps for the day-to-day operation of your business, including the processes you use to work with vendors, virtual assistants, freelancers, and other parties.
By detailing everything that goes into running your business in an SOP, you’ll furnish serious buyers with a solid picture of what it takes to maintain the profitability and long-term viability of the venture.
There are several valuation methods that brokers can help you with, in terms of determining a fair range of prices for your business.
Valuation Methods For Internet Businesses
The most commonly-applied valuation methods are earnings before interest, taxes, depreciation, and amortization (EBITDA), and seller’s discretionary earnings (SDE). The value of your online business may be determined by a multiple of each number.
Using EBITDA For a Valuation
The earnings before interest, taxes, depreciation, and amortization (EBITDA) formula is a very popular business valuation metric. EBITDA adds back some expenses to the total earnings as the name suggests.
The longer the track record of profitability an online business has, the higher the EBITDA multiple it has a shot at selling for.
Applying SDE to the Valuation
The seller’s discretionary earnings (SDE) balance measures the value of a business based on the earnings that an owner generates from the business.
The formula is as follows:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses) = SDE
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.
How a Broker Can Help
Every business is unique, so it pays to talk to a broker who can choose the valuation method that makes the most sense for your situation.
You will want to work with brokers with specific experience in online business, because they will understand the volatility of the internet, and what changes — such as Google algorithm updates, consumer trends, and other intangibles — affect the value of web-based businesses. They can provide a professional opinion of value, are knowledgeable about valuation methods, and can help you do your due diligence as a seller. A broker will likely know what appeals to qualified buyers, and can help you raise the value of your business in the marketplace.
An experienced broker can also unearth ways to raise your venture’s value, and position it to sell at higher multiples.
At Raincatcher, this is our expertise. Our brokers have seen every type of online business imaginable, and know the ins and outs of various business models. We know what it takes to negotiate an attractive price for an online venture, and have helped thousands of satisfied business owners achieve a satisfactory sale.
Contact Raincatcher today to get a free business valuation and learn what your venture could possibly be worth.
