How to Value Your Online Business? Let Me Share A Dirty Little Secret
As specialists in
selling online, e-commerce and tech businesses, there is one question we get
more than any other. By a mile. Our prospective clients overwhelmingly
want to know what value we put on their company and how we arrive at that
number. Is there some secret formula or factor that’s used to determine
value?
It leads me into
a discussion about what I’d call the “dirty little secret” of business
valuation. There are many, many factors which can push the number up or pull
the number down. It’s extremely important for owners of digital firms to fully
understand these drivers as they approach the decision to put the company up
for sale.
One
Owner’s Expectations
Here’s a
real-world example, a phone call I had last week with a successful business
owner I’ll name Jeff. Five years ago Jeff started an Amazon FBA business
selling accessories in the consumer electronics niche. He’d grown the business
each year through aggressive re-targeting efforts, through both paid and
organic search, plus a powerful multi-platform approach in which he was selling
on numerous marketplaces besides Amazon.
Jeff’s gross
revenues in 2016, for the first time, cracked the $2 Million threshold and 2017
was going even better. He’s done very well as a 2-person company, just he and
his cousin. His Profit & Loss statement shows a net income of nearly $450K.
Once I spent some time working through his financials, we were able to
establish a Seller’s Discretionary Earnings (SDE) of nearly $550K.
Additionally, he had a very strong balance sheet, with current assets exceeding
$300K and longterm liabilities of virtually zero. Jeff looks good on paper.
In our discussion
of sales strategies and marketing programs, it was clear that Jeff had no idea
how to price his FBA business for sale. Ultimately, he admitted to wanting a
sale price above $2 Million. He felt that all his hard work and effort
warranted a handsome number. I agreed that he’d built an excellent business,
one that was highly transferable. I also let him know his expectations were not
in line with the marketplace.
The
Dirty Little Secret
When he asked
about pricing models and earnings multipliers, it led me to discuss the “dirty
little secret” in the valuation world - that the vast majority of
businesses will sell between 2 and 3 times your adjusted net income, or SDE. The
overwhelming majority. That’s for most online businesses. Not generally above
3-times net, unless there are unusual value drivers at play. Some software,
tech and manufacturing companies can fetch prices above 5 or 6-times net. There
are also many sales prices around 1-times net and below.
Many business
brokers and M&A advisors would like to keep this 2x to 3x range a bit of a
secret. We worry that it will diminish the appearance of our valuation
expertise. After all, as a Certified Business Broker, I put tremendous
importance on providing my clients with real-world, actionable information.
Because there is
usually a substantial dollar difference between 2x and 3x net, we use our
expertise to hone in on the most accurate number. There are dozens of factors
we use to compute value. Among them:
Is earnings
trending up, down or stable?
How transferable
is the business operation and what impact will the owner’s departure have on
the income stream?
How competitive
is the niche of the online business and is there a high or low
barrier-to-entry?
What percentage
of traffic comes from search or paid ads and is it sustainable?
Are products sold
on multiple marketplaces or is all revenue dependent on Amazon, Shopify, Etsy,
etc?
Will distribution
channels and supplier relationships survive and thrive with a change of
ownership?
Overpricing is
the number one mistake in business sales. If the market thinks your brand or
company is drastically overpriced, it will be difficult to find a buyer. So
when it’s time to consider putting your enterprise on the market, keep in mind
that it will likely fetch a price between 2 and 3 times your adjusted net
income.
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