In an age when consumers don’t just want instant gratification but expect it, the online retailer is king. That’s why e-commerce has become such a popular business model, as people increasingly avoid parking lots and checkout lanes in favor of websites and mobile apps.
As the owner of an e-commerce business, this popularity means that there are more data points than ever to help you gauge the success of your operation and put a dollar value on it. This makes selling your e-commerce site more viable than ever, but there is still much to consider when planning your exit.
First, let’s explore the general landscape of e-commerce today:
The E-Commerce Market
According to the U.S. Department of Commerce, growth in e-commerce sales is outpacing that of brick-and-mortar retailers. E-commerce sales in the U.S. grew 4.5 percent from Q1 to Q2 this year, and almost 16 percent from 2015 to 2016, compared to a respective 1.5 percent and 2.3 percent growth in total retail sales. Moreover, e-commerce sales represent a higher proportion of total retail sales in the U.S. than ever before, growing from 7 percent in Q215 to 8 percent in Q216:
In our own analysis of e-commerce business, we found that the aggregate value of e-commerce websites grew 50 percent from 2015 to Q2 this year. Plus, we’ve determined that sites that are at least 12 months old are valued at multiples 20 percent higher than those with just 3 months of history.
The platform of choice appears to be Shopify, accounting for 47 percent of the e-commerce businesses we’ve listed, followed by WordPress with 25 percent of listings.
Additionally, we’ve found that dropshipping is becoming increasingly popular. In 2015, just 17 percent of the e-commerce sites we listed used this direct-from-manufacturer method. This year, that number is closer to 45 percent.
In terms of niches, lifestyle products remain king. One in 5 of our listed e-commerce sites is in the apparel and accessories niche, followed by health and fitness, home and garden, and technology.
E-commerce is certainly trending upward, but that doesn’t mean all online retailers are in possession of a valuable business. Read on to see how we value e-commerce sites, and how you can derive maximum profit form yours.
How Do You Value an E-Commerce Business?
In doing over 400 deals in the online business space, we’ve found that the most accurate way to value a website is by using a multiple of seller discretionary cash flow, also known as SDE. This represents the profit after all costs – including goods sold, staff and non-discretionary operating expenses – have been subtracted from the gross income. The owner salary counts as part of the total profit.
Here’s the basic formula we follow:
Once you know your SDE, it’s a matter of applying a multiple. Unfortunately, this part isn’t as cut-and-dry, as it’s affected by dozens of factors relating to finances, site traffic and operations. We look at each one when valuing a business, ultimately considering transferability, sustainability and scalability as the core drivers of the multiple.
Our valuation scorecard lists out each question you’ll need to consider when valuing your business:
E-commerce businesses have special considerations, too. The time and costs of operations tend to be higher than those of other monetized websites, simply because there are physical goods involved. Warehousing, fulfillment, shipping, processing fees, marketing and staff all add up to your cost of doing business. Additionally, if you have a stockpile of inventory, the cost of that will be added on to the total listing price, making the business a bigger investment for a buyer.
All of these different facets make selling an e-commerce business more complicated, and it also means that there are no standard industry multiples for e-commerce businesses. An experienced website broker helps simplify the complexity and can provide an accurate valuation by combining industry experience with thorough analysis of your business.
Be wary of brokers who provide high valuations such as 5x annual net profit. This tactic is employed by some brokers to entice sellers to list their businesses with them. Lured in by a high valuation, you will find your businesses listed for months on end with no offers.
You can read this more detailed resource on internet business valuation if you would like to learn more about the process.
Salability: What is It and How Can You Achieve It?
Simply put, salability is the attractiveness of your website to a potential buyer. Having good sales and traffic is great for your site’s value, but a high-quality business that’s difficult to operate will still be a hard sell. Here’s what you can do to increase salability:
Having detailed financials is essential, so make sure your books are organized and up to date. If you’re using software like QuickBooks, that’s a great start. Also, understand that a buyer won’t necessarily want to sift through months of records to get the big picture, so you’ll need to make trends and growth patterns apparent. This is where an advisor can be especially helpful.
In addition to finances, you’ll want to have your site analytics well documented. Again, this should provide a big-picture view of site traffic, conversions and any other metrics that are important to your business.
As mentioned, a passive business model is going to be more desirable to a buyer than one that requires a lot of time or expertise. Take a look at your operating procedures and determine how much time you spend each week on your business. Then you’ll want to document the standard operating procedures for each task you carry out, as well as those completed by staff or contractors. While the process may take some time, it will make things much easier for a buyer, therefore increasing salability.
Once you have your processes and procedures documented, you should take a look at the ones on your plate to determine whether any of them can be carried out by a staffer or third party. Again, the goal here is to reduce the hours you spend on your business. If you don’t have employees to which you can delegate, look into agencies, freelancers or virtual tools and assistants that can take work off your hands.
Powder in the Keg
Buyers will be looking for opportunities with growth potential, so if you have any new product launches in the pipeline, you may want to hold off and include them as a “gift” to the new owner. After all, chances are the revenue you make off the new products in the weeks leading up to a transfer won’t be as significant as the lift in value you would see from including them as part of the package.
The same goes for any new markets you might be considering. Going international with your e-commerce business can be a profitable move, so if you’ve done the research and have suppliers lined up, this is a great value add for a buyer.
Now that we’ve discussed the methods by which value is determined and the factors that influence salability, let’s talk about your site’s value and how to get the most of it:
So How Much is Your E-Commerce Worth?
We typically value businesses at a 2-4X annual adjusted earnings, but the difference between 2X and 4X can be drastic, depending on your SDE. While generally your valuation will be based on the factors discussed above, here are those that will most drastically affect the multiple:
Age of your business: A long track record is clearly going to be a more reliable indicator of a website’s long-term earning potential. Most buyers will be looking to acquire a business that’s at least 18 months old, and we typically start to see a premium multiplier applied to sites that are 24-30 months old. While you can still sell a site that’s at least 6 months old, it will be difficult to justify a high asking price.
Owner involvement: This is a big one that’s too often overlooked by sellers. Essentially, the more time you spend on your business, the lower it will be valued. This is because most buyers are looking for passive income, meaning they want to spend no more than 5 to 10 hours on the business each week.
Trends: If your products are experiencing (or worse, have experienced) a spike in popularity, this is an indicator that there is an expiration date on the business. You’ll want a niche with consistent yet modest growth trends.
Concentration: Being reliant on one product or supplier can make your business a house of cards, as loss of one could make the whole thing tumble down. If you are somewhat dependent on a single supplier, make sure the terms of agreement work in your favor in order to maximize value.
To read more about the factors that drive the multiple of your business, read our post on e-commerce valuation. In this, our Valuation Director Chris Hiller explains how each detail can affect the price of your website, either negatively or positively.
How Can You Increase the Value of Your E-Commerce?
When thinking about an exit, it’s essential that you do everything you can to make a smooth transition to a potential buyer. This will both increase the value of your website and help speed up the sale process.
You should focus on the aforementioned areas to ensure you get a fair listing price. In the months leading up to an exit, here are some other things to consider that may bump that number up even higher:
Lock in terms of agreement. Work with the supplier of your product to lock in terms of agreement for a specified time period – especially important if you’re getting a deal that a new owner might not. Additionally, make sure you have a clear operating procedure with your supplier, and that this is documented and as automated as possible.
Sharpen your brand. You don’t necessarily need a widely known brand in order to maximize value, but having a very clear representation of who you are reflected in your website – including design, copy, blog and images – can be a bonus for a buyer. The more you can show that there’s been work put into finding out who your target customer is and appealing to them, the less work a new owner will have to do.
Simplify your packaging. While elaborate packaging can be a nice touch (and certainly add to a brand’s image) you should consider if it’s worth the time to hand wrap each shipment. Sometimes simple is best, so think about how you can represent your brand while not adding to the time or cost of packaging.
Mind your reviews. Consumers are greatly influenced by online reviews, doubly so if they’re buying online. If your product reviews are sparse, think about ways you can encourage your customers to drop a line or two. You can include a link to leave a review in your Thank You page, or use email marketing to follow up with buyers after they make a purchase.
Build an email list. Speaking of email marketing, it’s not dead – despite what you may have heard. Sending your loyal base news, promotions and follow ups is usually appreciated and can be a great way to encourage loyalty and repeat purchases. Plus, having a robust email list can be a significant value add to a buyer, especially if they already own a complementary business.
These valuation factors can weight differently for each business. While it’s good to do the research on your own and get a general idea of whether your site falls on the high or low end of the spectrum, you’ll want to speak with an experienced advisor to get a truly accurate valuation. Once you do that, you can consider where you’ll want to sell the business:
Where to Sell Your E-Commerce Business
When thinking about where to post your listing, you have a few options:
Broker – Have the professionals handle all the gritty details.
Auction – You guessed it: This is a platform on which potential buyers can place bids for your business. One popular example is Flippa.
Direct – Going it alone means handling all of the paperwork, outreach and marketing as an individual.
Here are some perks and drawbacks to each option:
Pros: When selling your business in a marketplace, there is usually only a listing fee, so this tends to be a low-cost option. Additionally, listings can potentially be viewed by a large number of potential buyers.
Cons: Marketplaces are popular options, so your listing could be one in a sea of hundreds. This means it will be more difficult to make your business stand out, and most qualified buyers are looking for sites that have been vetted by an advisor. Plus, the buyer also needs to be vetted, so you’ll be left to do that yourself as well.
Pros: An experienced advisor will do the vast majority of the work for you, and is likely to get you the best offer from a qualified buyer. Going through a reputable broker is often the best way to achieve an efficient, successful sale.
Cons: Professionals who know their worth will charge about 15 percent of the sale value, and you’ll need to front-load a lot of your work so that they can do their job efficiently once an agreement has been signed.
Pros: Much like a marketplace, your listing will get in front of a large audience. Plus, you can usually set your own timeframe for the listing.
Cons: Also much like a marketplace, some of these potential buyers will be a waste of your time. Plus, these platforms most often feature businesses on the lower end of the price scale, so selling a seven-figure site on an auction is similar to offering foie gras at a burger place – it will look strange on the menu and people will question its quality.
Pros: This is probably your least expensive option, as there will be no fees involved unless you seek legal or business advice form a professional (which you likely should).
Cons: Selling a business is no small feat, so expect the process to eat up a lot of your time. The biggest issue you might run into is finding a qualified buyer in a reasonable timeframe. Additionally, it takes time and expertise to put together a prospectus and financials.
Here’s a breakdown of the different sale platforms you could use:
If you have a viable e-commerce business, you may stand to make a good profit, but exit planning and assessing your website’s value shouldn’t be done hastily. Take the time to understand the value drivers, how you can maximize your site’s salability and the processes by which a monetized website is sold. Knowledge is power, and your only key to a successful sale.
To get in touch with a member of our onboarding team or receive a free valuation, click here.