eDesk logo

How to value an eCommerce business

January 23, 2023 12 min read
How to value an eCommerce business cover
Contents

Share this article

Does your business have value?

We’re talking profit, growth, and reputation. All of these things contribute to the value of your business, but there are still questions to be asked – namely, how can you numerically value your eCommerce business, and why do it?

Consulting professionals, preparing what you'll need, and doing your research can make the valuation process as easy as possible. Wondering where to begin? Let’s dive in…

TL;DR

  • An eCommerce valuation puts a literal price tag on a business. It's an overview of how much your business is worth, and focuses on other factors besides profitability and earnings.
  • Valuations for an eCommerce business are necessary if you intend to sell, but can also provide valuable insight into your business' growth and profitability. Regular valuations are recommended for most businesses.
  • There are six steps to an accurate eCommerce business valuation: understanding the basics, using the formulas, preparing your data and consulting a professional, using the industry multiplier, making the final evaluation, and continuing to efficiently run your business.
  • Prepare for an eCommerce valuation by sorting all the paperwork ahead of time. Employ good eCommerce tools, find a good business broker, and learn the basics of business valuation yourself.
  • Online businesses can be easier to value, since many eCommerce platforms collate and analyze data (such as website traffic, engagement, etc) for you.
  • A business valuation is focused on the future just as much as it is focused on the present. Plenty of factors may be considered in the valuation of your business, including your customer base, website traffic, business plan, competition, the state of the industry, and growth.

What is an eCommerce valuation?

Simply put, an eCommerce valuation is an estimation of how much an eCommerce business is worth.

Valuing eCommerce businesses takes time. There are several formulas you can use to get a quick result, but you’ll need to prepare the information beforehand, and fully take stock of your business. This means your inventory, your earnings, your prospective growth, assets like social media, and much more. It's generally considered to be good business sense if you plan an exit strategy as you're building up your business.

Even if you love your business, the time may come when you want to sell, and it's important to be ready for that. After all, you don't want to spend years of your life, energy, and a lot of money in a business that turns out to be less profitable than you hoped.

Valuing eCommerce businesses is more than just calculating overall earnings and adding up assets. A valuation should be a well-rounded and impartial figure, taking into account many variables. What those variables are will depend on the nature of your business, its size, and how many moving parts there are. Valuations can vary from business to business.

Business valuations are necessary whether you have a traditional brick-and-mortar store or an online business. It’s often a little easier to collect data for an online business if you use eCommerce platforms – these platforms usually collect and analyze data for your benefit.

While it's easier to get professional help to value your business – especially if you have a large eCommerce business – you can calculate the value yourself.

Why value your eCommerce business?

You may be wondering why you need to value your business, even if you don’t plan on selling. Valuing helps you to fully understand your business – and what it's worth – and this kind of knowledge is key.

Valuations can give you a good insight into your business. For example, regular valuations may be necessary to reassure prospective investors, stockholders, and bankers. It can help you measure your business' growth, and identify any possible issues quickly. Regularly evaluating your business is highly recommended, especially in large or quickly-growing businesses.

If you have the information needed to hand, you can complete a reasonably quick overview valuation at any time, although of course, this valuation won’t be accurate enough for a banker or a buyer.

Benefits of valuing your business

Valuing your business can be a time-consuming, fiddly task. However, it's certainly a necessary one. What benefits will you receive from valuing your business?

  • A better outlook on your business – profitability, value, etc.
  • You'll know how much your business is worth in the current market. This is helpful whether you intend to sell or not. If you need loans, more investors, or anything risky to help out your business, you can use your valuation number as leverage.
  • You can see how your business is growing. For some people, that means seeing that their small business which they started at home is now a thriving, possibly multi-million enterprise. It never hurts to see how far you've come.
  • The correct data will now be available and up to date. Collecting the information needed for your valuation can take a while, but these are crucial figures, mostly necessary for tax and legal purposes. Once you've completed your valuation, you'll have this information easily to hand.

How to value your eCommerce business: Six steps to success

Once you've decided to put a proper, official value on your business, what comes next? Following six crucial steps to success will help you come up with a neat little number to attach to your business.

Or, hopefully, a neat big number.

Step One: Understanding the Basics

Before you start calculating anything, you need to familiarize yourself with the basics of business valuation, especially if this is your first time valuing a business. Business advisors can help to calculate your business's value, and they may provide a business valuation calculator.

These calculators provide a rough estimate of your business' value. While it's not a definite, official number, it's a good place to start. The basic information you'll need for a valuation calculator is your personal details (name, address, ZIP code, etc), as well as details of your business (industry, net profits, etc). You may be asked additional questions, such as how much of your revenue goes to your own salary and other expenses.

Once you've entered all of this information, you'll be given an estimate of your business' value. If you're looking for a brief overview of how much your business is worth and how well it's growing, this number may be enough just for your own benefit. However, if you intend to sell or if you need to present this information to others, you'll want a more specific number.

This is where you'll need to delve deeper into the subject of business valuation – the basics are no longer enough. You'll need The Formula.

Step Two: Understanding the Formula(s)

There is more than one way to create value for your business. The method you use may depend on the business advice you get or the specific needs of your business. For example, online businesses tend to have lower operating expenses, and more factors to consider – online traffic and sales funnels, for example. They may need to be handled differently than a traditional store. If you have a combination of eCommerce online stores and traditional locations, you may need to use a hybrid method of valuation.

Simply put, you value a business by calculating your net revenue and using an industry multiplier to calculate its overall value.

The first step is to calculate your net revenue, and there are a couple of ways to do this.

  • Method One: Seller's Discretionary Earnings (SDE)

This method is best suited to small businesses. SDE takes your revenue and subtracts operating expenses and the cost of goods sold. Then, that number is added to non-essential expenses and owner's compensation. So, the formula for SDE looks a bit like this:

(R – (OE+CGS)) + NEE + OC = SDE

SDE shows how much a buyer would earn if they worked the business full-time. For a small business, where the buyer is likely to be the one doing most of the work, SDE is a more useful method of calculating net revenue.

  • Method Two: Earnings Before Interest, Taxation, Depreciation, and Amortization (EBITDA)

EBITDA is better suited for larger businesses. The formula is simpler: add up your net income, your interest expense, income tax, amortization, and depreciation. This gives you an overall number and is often much simpler to calculate. The formula for EBITDA looks like this:

NI + IE + IT + A + D = EBITDA

EBITDA gives an overall number that is designed to be compared to similar brands and companies. Since this method is commonly used for large businesses, the profit margins will be much larger, but competition can be fatal. Buyers need to know how well the business is doing in comparison to its competitors.

While these formulas are simplified, they'll give you an overall idea of how your business is doing. A business advisor will help you work through a more complex version of these formulas. An eCommerce valuation is rarely simple, and it's always a good idea to get outside help.

Step Three: Prepare your data and consult a professional

Hopefully, you're planning to consult a business advisor or broker for your eCommerce valuation. While you can calculate figures like your net revenue by yourself, you can't slap a figure scrawled on a piece of paper in front of a business advisor and think that's enough. No, your business advisor is going to need to look through your records.

This means getting your paperwork in order. There are a lot of accounting apps available these days, so keeping up to date with accounts is easier than ever before, especially for small businesses. If necessary, take some time to bring your books up to date before approaching a business advisor or calculating any figures.

You will need records going back at least one year, but it's better to have two or three years' worth of books to get a more accurate valuation. Here's what you'll need:

  • Tax returns
  • A profit and loss statement
  • Financial statements (this includes expenses, revenue, assets, etc)
  • Accounts payable
  • Accounts receivable
  • A business plan
  • Supplier agreements
  • Website traffic information
  • Payroll and salary information
  • A list of fixed assets
  • Depreciation information for said fixed assets
  • Relevant loan documents

Your business advisor may ask for more information besides these documents, for example, a discounted cash flow analysis, customer information, or further information on loans and assets. Print out copies of everything and secure them in a folder for ease of access. Missing out on crucial documents can delay your business valuation, and may even make it impossible to value your eCommerce business at all without the relevant paperwork.

Step Four: Calculate the industry multiplier

Once you've calculated your net revenue, it's time to work out the industry multiplier. This is the part that will definitely require you to consult a business advisor. ECommerce businesses can be complex, and getting an accurate value isn't necessarily easy.

An industry multiplier is a number by which your net revenue will be multiplied. This number can be anywhere between 1x or 6x, and it varies depending on the industry you're in, the state of your business, the level of competition and potential for growth in the industry, and much more. An expert appraiser can analyze the industry and decide what number would be appropriate to use in order to multiply your business' value.

If you know what you're doing, it is possible to calculate the industry multiplier yourself. However, unless you're a professional yourself, it's much wiser to seek professional help.

Step Five: Make the final valuation

As mentioned earlier, these formulas and business calculators only give a rough estimate. For a more accurate estimate, you will need to consult a professional. A business broker or advisor knows the industry and knows how to analyze your business. Their job is quite literally predicting the future – and the place of your business in that future.

The figure your business advisor gives you will be the definitive valuation of your eCommerce business. A good broker will also help you with the sale of your business if that's your aim.

It's important to make it clear from the start why you want this valuation. Tell your broker if you intend to sell, or if you're simply looking to assess how healthy and profitable your business has become. Valuations can take time, so be clear if you have a deadline in mind.

Stay in communication with your broker. They may need to ask additional questions – for example, on website traffic, on seasonal or evergreen business, information about your niche, information about daily operations and the responsibility of the owner, and much more. It's likely you'll be asked about customer demographics, your ideal customer profile, and mailing lists. Knowing how solid your customer base is and how fast it grows is something that can add – or detract – a lot of value from your business.

The quicker you address these questions and provide any additional paperwork needed, the sooner you'll receive your ultimate valuation. Try not to get impatient – the valuation of a large eCommerce business can take a while. Remember that you're getting a highly accurate figure to attach to your business, not a rough, quick estimate.

Step Six: Don't take your eye off the ball

You may feel tempted to sit back and wait for the valuation to come in. After all, that's the good thing about hiring a broker to value your eCommerce business, isn't it – you can sit back and not worry about anything.

Not quite.

Even if you're planning to get the valuation to sell your business and wash your hands of the whole process, you still need to focus on your business while you wait. Valuing your business is the perfect time to spot weak points or areas in which you could improve. Learning that your business is less valuable than you'd thought can be something of a shock. Use that shock to fuel your hard work and build up your eCommerce business again.

While you wait for your valuation, make sure you keep working just as hard as always. Now is not the time to take your eye off the ball. A business' value can tank very quickly if you aren't careful.

Analyzing a business – even surface analytics – provides valuable information. However, it's up to you to interpret that information and act on it. Even if you don't intend to sell your business, use the information from your valuation to improve your business. Your broker will likely give you valuable advice as regards moving forward. Listen carefully, and put it into action.

How to prepare for valuing your business

When it comes to eCommerce and the world of online business, preparation is key. A well-thought-out exit strategy is every bit as valuable as a clever and attainable business plan. If you're planning to have your business valued sometime in the future, what can you do to prepare? Let's take a look at a few things you can do to be ready for a smooth and helpful business valuation.

  • Have your accounts up to date. If the information and paperwork you'll need are all up to date and ready to hand, you'll save time trawling through your accounts books to get the paperwork your broker needs.
  • Find a professional, reliable business broker. You're unlikely to get a proper, reliable, accurate valuation on your business by doing it yourself. Especially when it comes to the industry multiplier, you'll need a professional to work it out. If you plan to sell, you will absolutely need a professional, accurate valuation. Buyers may not accept anything else. You may need to provide proof that you've used a proper broker.
  • Educate yourself on business valuation. Knowing how the process works and what you'll need to provide makes your part much simpler.
  • Have a deadline in place or at least a rough outline of how long you'd like the valuation to take. A broker may not be able to guarantee delivery by a certain date, but good communication and making your intentions clear is a good step forward.
  • Stay accessible. Your broker may need additional paperwork and information to provide an accurate valuation. The sooner you provide this, the sooner you can get your valuation.
  • Stay patient and busy. If you've made up your mind to put your business on the market, delays can be infuriating. However, remain patient – it's worth waiting for an accurate valuation. Keep busy managing your business. There's still work to be done!

Frequently asked questions

Valuing businesses is no simple task, and it's not surprising that many people have questions. Here are a few commonly asked questions about valuing an eCommerce business.

  • What is a value indicator?

There are five value indicators (known as Key Performance Indicators – KPI): revenue growth, revenue per client, customer satisfaction, client retention rate, and profit margin. A business broker may require additional information on a business's customer base in order to calculate an accurate business value. These value indicators can be improved by good business practices and outstanding customer service. However, you need to put these plans into practice long before you go in for a business evaluation. These value indicators take time to change and may require a lot of different methods to update and improve. However, they can make a company infinitely more attractive to a buyer.

  • How do you value an eCommerce company?

Essentially, the value of an eCommerce company boils down to assessing the net profit of the business for at least the last year and multiplying it by an industry multiplier. This is a highly simplified way of calculating value, and the industry multiplier can vary.

  • What is a good profit margin for eCommerce?

When it comes to eCommerce, the numbers, info, and profits will naturally vary depending on the size and profitability of a business. However, a profit margin of around 10% is considered to be an average margin. 5% is a low-profit margin, and 20% is a high-profit margin. Margins may well change during the year, based on many different factors.

  • Is eCommerce really profitable?

In a word, yes. Online shopping is simpler, more convenient, and provides more variety and ease of browsing. Traditional stores have roughly a 9% return rate – meaning that shoppers return 9% of the time. Online shoppers, however, return 30% of the time. While there is higher competition for online stores, there is much more room for growth, as well as better analytics, and lower overhead costs.

There are plenty of strategies to keep profits high, such as using live chat and focusing on current trends to increase average order value. If you’re strategic about your business’ growth, you’ll soon reap the rewards.

Conclusion

A proper business valuation is all a part of a well-planned exit strategy. ECommerce businesses aren't immune to sudden changes in the market and industry. Even while you're starting up your business, it's important to think about how you'll get out of it.

Remember, the value of eCommerce businesses isn't just about the profits you're getting now, or what your business is in the present. Buyers need to consider what their business will look like in the future, and so do you.

See our Privacy Notice for details as to how we use your personal data and your rights.