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.