Putting a Dollar Value on an E-Commerce Website
When you think of a profitable website, the first thing that comes to mind is e-commerce. It is an easy concept that does not need much explanation, and it’s also something most of us have experienced. E-commerce websites are becoming a favorite for consumers shopping for everything from clothes, electronics and used items to almost anything you can imagine. Without ever having to go out you can visit a website, browse products you’re interested in and, with just a few clicks of the mouse, make your purchase.
That is why e-commerce websites are appealing to those looking to buy a business. It is not something complicated or technical, but an online store with a process that is very familiar. Still, that does not make it any easier to put a dollar value on them.
Having worked with several e-commerce businesses we understand what sets them apart from other business models when it comes to valuing them.
E-commerce websites usually have a more meticulous valuation process compared to other businesses due to several particular costs involved in running that type of business. From inventories, fulfillment, SEO, marketing, warehouse(s), software, servers, and employees, here are a few things you want to keep in mind when looking to put a dollar value on an e-commerce site:
E-Commerce Market Trends
As far as e-commerce trends go, sales continue to rise. In 2017, close to $280 million of total aggregate sales were e-commerce business. In the last three years e-commerce business totaled over 50% of all business sold.
Average Sales Multiplier
E-commerce businesses sales are on this rise and the average sales multiplier (AVS) changes as well. From 2010 until recently the AVS has been around 2.2-2.6X earnings with the last three years starting at 2.2X earnings and then a significant rise to 2.9X earnings in 2017.
The process of selling an e-commerce business is similar to selling a traditional business. However, the valuation process can be more complex and can take more time. The process starts when you are ready to sell your e-commerce business. Second, get a valuation of your e-commerce business. Third, develop a summary of all the details and finances of your business. Fourth, set the price you want to sell your e-commerce business for. Fifth, look for buyers interested in your business. Sixth, the buyer does their due diligence in verifying your business figures and summary. Seventh, go into escrow and transfer money. Finally, hand over the business to the new owner.
How to value inventory?
Since all e-commerce websites have some type(s) of products, you must keep enough inventory to sustain the business in order for someone to buy your business. You must include the average amount of inventory to continue current revenues in the buying price. Any excess inventory can be sold on top of the valuation of the business. In order to value inventory a count must be conducted and inspection of product(s) made to make sure nothing is damaged and to calculate the age.
Preparing to Sell an E-commerce Business
To get the best price for an e-commerce business you want to be prepared with facts such as what drives new sales. Other important considerations in order to get the best price for your e-commerce website business include:
- Reputable Online Traffic Sources from more than just AdWords or social media. The more online traffic sources that come with a good ROI the better
- A strong source of suppliers for the product(s) you sell
- Analytics that show a rise in sales
- Repeat customers
- Branding website or product(s)
- Training and processes set in place
- Show scalability of business
- A solid management team
- Show the business can run without you
- Organic search engine visibility on your product(s).
The Best Places to Sell Your E-commerce Business
When selling an e-commerce business there are a few ways you can go about it, but you also want to consider the size and value of your business. If you are a small e-commerce business you might want to try and do it yourself, as opposed to larger businesses that will want to use a business consultant or broker to enhance the sale of their e-commerce business.
Small business with a value of under $100,000 can try posting classifieds on craigslist or their local businesses. However, they might want to still consult with an experienced business broker to make sure they have everything in order to sell their small e-commerce business.
Larger and medium sized e-commerce businesses definitely want to use an experienced business broker that is well connected with a strong network of buyers, experienced in processes, guidelines and marketing strategies, and has a comprehensive exit strategy. For an experienced business broker to help sell an e-commerce business, contact Tom Culo.
Cost of Selling an E-commerce Business
Most brokers will charge a percentage for the sale of an e-commerce business. A good broker will offer several options and work with you to increase the offers to buy your e-commerce business.
Timeline to Sell an E-commerce Business
Every e-commerce business differs in the amount of time it takes to sell. From the valuation process to escrow and finally payment can usually take from 3 to 6 months. However, using an experienced business broker should certainly help.