Ecommerce Business Valuation Methods

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THE AMBITIOUS SELLER’S GUIDE

TO VALUING ANDSELLING YOURBUSINESS

Ecommerce BusinessValuation Methods:

There's never been a bettertime to build and sell an

eCommerce business.With online sales revenue on the rise at an

annual growth rate of 6.29%, market volume is on track to hit $3.4M by 2025 and

by 2040 a whopping 95% of transactions could be done online.

But with so many business valuation methods and selling strategies making the rounds, it can be hard to know which ones

are right for you.Luckily, with the right strategy and tools,

selling your store can be both smooth and profitable.

Let's dive into some top tips to help you value and sell your store for a price worthy of

all your hard work.

2 | ECOMMERCE BUSINESS VALUATION METHODS Powered by


Are you thinking about selling your store?

Find out how our Sellers Signals solutioncan help you optimize your store for the best offers.

What We'll Cover:

• The Art of Mentally Preparing Yourself to Sell

• Business Valuation Methods to Boost Your Selling Price: The Ecommerce Edition

• 5 Ways to Enhance Your Store's Selling Price

• How to Sell Your Ecommerce Business Without Losing Money (or Your Sanity)

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Ecommerce BusinessValuation Methods

The Art Of MentallyPreparing Yourself To SellBuilding a business is a labour of love (plus a little blood, sweat, and tears ) — which can make selling your store a tough nut to crack.

Here’s how to prepare yourself for the journey:

• Know why you want to sell:To prevent any future regrets, it's important to know why you want to part ways with your business. If you're feeling worn out and 'over it', try outsourcing more tasks and having some time off before signing it away. But if you’re 100% ready to move on, you have the green light.

• Know that your emotions can influence what you think your company is worth:

At difficult times (like when you’re selling your business) emotions can overtake business sense. This could lead to you underselling or overpricing, so make sure you get a second (and third) opinion before you hit the dotted line.

• Accept that the process may be bitter-sweet:Some days you might feel great about selling up, while on others you could regret ever thinking of it. This is completely normal, and it's helpful to acknowledge it before you jump into the selling process.



Business ValuationMethods to BoostYour Selling Price:

The Ecommerce Edition.

So, what are the best business valuation methods to help you get the hottest deal?

Let’s find out:


Method #1:

The Ebitida WayEbitida stands for Earning Before Interest, Tax, Depreciation and Amortisation.

It's a mouthful, but it’s also a good way to assess your business' op-erational profitability, efficiency, and performance. For best results, look over your EBITDA from at least the last twelve months.

Take your Operating Income (Revenue – Cost of Goods Sold) and subtract your Selling General and Administrative costs (SG&A).

SG&A includes operating expenses like:• Marketing• Sales platform costs and subscriptions• Travel costs• Salaries

Don't worry about adding Interest and Tax because you've already calculated your operating income before taking them out.Next, add any Depreciation and Amortisation.

Bring it all together, and the formula will look like this:

E.g, £40,000 – £5,000 + £800 + £500 = £36,300

Most eCommerce businesses will fetch a price 2-4.5X their EBITDA, but this depends on your niche and your store's circumstances.

For example, if your store has gained celeb-like status, it could col-lect more money on the market.

OPERATIONINCOME SG&A EBITIDADEPRECIATION AMORTISATION

Method #2:

The Valuation FormulaThe valuation formula will give you a rough guide on what your business could sell for.

These are the 3 components you need to pull together:

Work out your Monthly Net Profit Average:

Thanks to hit shows like Dragon's Den and Shark Tank, we all know how much investors and buyers love profit. So it's a good idea to figure out how much net profit your store brings in each month.

This figure also forms a critical part of the valuation formula.

Net profit is the cash left over after you've taken care of essential operating expenses (e.g, stock and software costs but not your salary).

The formula for Net Profit is:

Since we'll need the average over one year, calculate the Net Profit for each month in the last year, then divide it by 12.

For example:£9,500 + £6,000 + £6,800 + £8,000 + £5,000 + £4,600 + £5,000 + £3,500 + £7,000 + £5,100 + £4,900 + £3,800 = £69,200 (Net Profit per year).

So your average Net Profit per month would be:£69,200 / 12 = £5,766.67

GROSSREVENUE

NETPROFIT

TOTALEXPENSES

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Method #2:


Estimate Your Earnings Multiple

Investors want to know what a business's future looks like before they commit — and an Earnings Multiple can show them exactly how bright it will be.

An Earnings Multiple (aka the Price to Earning Ratio (P/E Ratio) or Price Multiple) is the figure you use to quantify a business' growth, worth, productivity, and efficiency.

To work this out, research the earnings multiple of brands similar to you with shares (you might have to do some digging in forums, Facebook groups, and in your network). As a ballpark range, most eCommerce businesses' P/E Ratio falls between 2-4.

Here’s the formula for the P/E ratio:

Note: Earnings per share = Company profits for fiscal year / shares outstanding.

For example:If your Price per share is £89 and your Earning per share is £26, your sum will look like this: £89 / £26 = £3.42

You can even use the P/E Ratio on its own to calculate your business’ value. Simply use the P/E and multiply it against your business’ earnings for the last year.

PRICEPER SHARE

P/ERATIO

EARNINGPER SHARE

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Method #2:


Know Your Inventory Costs

The final piece of the valuation formula puzzle is your inventory costs. Tally up how much you spend in 12 months on inventory, and be sure to include things like:

• Stock• Packaging• Handling• Shipping• VAT and Duty (if applicable in your territory)

Pull your Monthly Net Profits, P/E Ratio, and inventory costs together and you get this:

In action, the valuation formula could look something like this:

• Average Monthly Net Profit: £5,766.67• P/E Ratio: 2.5• Inventory cost: £20,000• £5,766.67 x 2.5 = £14,416.67 + £20,000 = £34,416.67 (estimated store value)

MONTHLY NETPROFIT

P/ERATIO

INVENTORYCOSTS

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Method #3

The SDE FormulaSDE stands for Sellers Discretionary Earnings.

The SDE formula is probably the easiest way to value your business.

It uncovers your store's potential to generate revenue because you add your salary (owner's salary) to your takings. This allows you to see what the cash in your business would look like if you didn't withdraw funds from it.

Here's the formula:

For example:£150,000 – £20,000 – £10,000 + £50,000 = £170,000

REVENUE COST OFGOODS SOLD

OPERATIONEXPENSES

YOURSALARY


What other factors can affect howmuch your store fetcheson the market?

No single valuation method will give you a spot-on figure for how much your eCommerce store is worth. It's best to use them all and assess them as a whole to make an informed decision.Here are some other factors that can affect the final sales price. Keep these in mind as you embark on your business valuation journey to ensure you get the most accurate estimates:

• Your business' age:An eCommerce business that's been in the game for a while (5+ years) has a higher chance of investors paying top dollar for it as it's withstood the test of time and has come out triumphant.

• Registered trademarks:Intellectual property can help boost your business' worth as it demonstrates your brand has valuable intangible assets to comple-ment its tangible ones.

• Social following:A large engaged social following that helps your store's new owner drive leads can increase your asking price.

• Your niche and industry:Some niches demand more cash than others. For example, a teen fashion store could pull in more cash than a cat feed store because more shoppers are in the market for teen clothing.

• Growth potential:If you can prove your brand is on the road to riches through your financial statements, investors will offer more.


5 Ways to Enhance Your Store's Selling Price

You've worked hard to build a successful business, so it's only right you get the

money you deserve from the sale.

Here are some things you can do to boost your store's worth.


5 Ways To Enchance Your

Store’s Selling Price

Go multichannel

These days consumers shop all over the internet, so diversifying your sales channels can help secure a bigger cut of the sales and significantly increase your business’ earning potential.

Take the path of least resistance to ensure you don't end up doubling your workload before your exit. For example, if you already have a Shopify store and 3PL setup and want to expand to eBay, you could:

• See whether your 3PL can split stock between your Shopify and eBay stores.

• Speak with existing suppliers about increasing order units.

• Recycle photos from your Shopify store.

• Tweak existing product descriptions to fit eBay's platform.

Negotiate with suppliers to drive up your margins

Next, speak with stock suppliers to work out better product prices. You'll have more negotiating power if you buy more units, so build this into your store's budget and consider your warehouse capacity limits.

Don't stop your bargain hunt there. Speak with your business' subscription and service providers to try to secure better rates. Success with this may vary, but you don't know until you ask.

Bonus tip: Keep in mind that too much inventory can scare off investors, especially if there’s no clear reason for why you have so much extra inventory on hand.


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Fine-tune your business strategy

A clear 5-year plan is essential for getting a better selling price — it shows your business is winning from a systematic strategy, and will put investors at ease.

Your plan should include financial projections and key performance indicators (KPIs). KPIs help measure business performance, so you know whether to adjust your strategy or plough on ahead.

Another tactic to get under-the-fingernails of your store’s true value is to understand its vital signals. For example:

• Visinger Score• Traffic• Profit & Loss statement• User Ratings• Top performing products

(For those who don’t already know, Sellers Signals can help you track these ).

Finally, don't forget to ensure your bookkeeping records are complete and easy to interpret. Create a handy breakdown of your store's key figures, like:

• Yearly growth rate• Operating expenses• Wholesale account figures• Revenue• Average visit• Conversion rate

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Stabilise your cash flow and pay down any debts

When you're planning any new move in life, it's always a good idea to get your finances together.

Before you hand over the baton to another entrepreneur, pay off any debts (or as much as you can) and spruce up your finances to expand the eCommerce funding types you can access.If you have any cash flow issues, establish funding lines to address the shortfalls like Daily Advance or Working Capital(in case you're wondering, SellersFunding offers both of these funding options ).

Automate and systemize tasks to increase your store's passivity

The new owner will be forking out a pretty penny for your business, so the last thing they want is work overload.

Step into your buyer's shoes and systemise, automate, or outsource tasks that could zap their time. The more passive your store's revenue generation, the more appealing it will be to buyers. Plus, upleveling your systems will make transitioning out of the business easier for you, and can reduce post-sale contact between you and the new owner.

Here are just a few areas to get started with your spring clean:• Customer service• Marketing• Logistics• Order fulfillment• Administration• Accounting and finances• Inventory management

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How to Sell Your EcommerceBusiness Without Losing Money(or Your Sanity)

You've got through all the small business valuation methods and pol-ishing tasks, now it's time to sell!

Here are two of the best ways to find the right buyer:

• Sell directly to another buyer:Take the selling task into your own hands by finding, engaging, and negotiating directly with potential buyers. This is a great option if you have a strong network of people interested in buying an eCommerce store, but you’ll need enough funding to cover the legal and admin help you'll need to complete the sale.

• Use a broker:If going it alone seems like too much work or you don't have a community to tap into, you're still not out of options. For a fee (u-sually between 2-15%), a broker site will guide you and facilitate the selling process from end to end. Reputable brokers will list your business on their platform where vetted potential buyers can check out your store and make enquiries/offers.

Some top eCommerce store brokers include:

• Empire Flippers• Flippa Secure the Best Offer for Your Ecommerce Store• Investor's Club• FE International• Exchange Marketplace (owned by Shopify)



Working out your business' worth may seem like an intimidating and lengthy process. But it doesn't

have to be.

Avoid overwhelm by breaking down your valuation, business optimisation, and selling processes into manageable weekly tasks, and don't be afraid to delegate to consultants and business analysts for

extra breathing space.

Above all, enjoy the time you have left in the business as you make this huge transition. You'll have fond memories as well as a cushy bank

account when the sale goes through. Good luck!

Need a way to easily track your store's selling performance?

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Discover how our Sellers Signal solution can help.

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Ecommerce Business Valuation Methods