Intro
How to value an ecommerce store business
Online stores are one of the best-selling businesses on the global network. But for the effectiveness of the transaction, it is important not only to offer it to the buyer but also to evaluate its capabilities in order to set the price. The latter should not only be attractive to the seller himself but also fair. Therefore, we must consider e-commerce business valuation methods, which we will present below.
How is an online business assessed?
Specialists Website Closers firm argue that in an sell ecommerce store it is necessary not only to present the product (in this case, an online store) and to evaluate it correctly.
There are several methods commonly used for business valuation:
- SDE: Represents the net profit after deducting expenses.
- EBITDA: Profit before deducting interest payments, taxes, equipment depreciation, automation process fees, etc.
- Asset-based Valuation: Takes into account the tangible assets of the business, including raw material/product inventories, equipment, trademarks, etc.
Here, it is important to factors affecting e-commerce store value, which include revenue and profitability, as well as CLTV (Customer Lifetime Value - the average amount a customer spends on a product throughout their entire service usage). Traffic and conversion rates also play a significant role. Brand awareness and reputation influence this factor.
Other features are also highlighted:
- market share;
- competitive environment;
- growth potential;
- financial Stability;
Providing a broker referral program service, one of the online platforms Website Closers online takes a meticulous approach to the evaluation process, considering key performance indicators. They engage in collecting financial data from the past one to two years to calculate revenue, gross and net profits, EBITDA, CLTV, and various intricacies. In each unique case, a specific valuation method is chosen, tailored to the characteristics of the client's business and industry standards. Additional factors such as brand recognition and reputation with clients are invariably taken into account in the assessment.
How to independently calculate how much a business is worth?
You can utilize your efforts to find out how much your e-commerce store is worth. However, it's essential to consider that this complex process will require a thorough understanding of the business's performance and other metrics.
In reality, there is no universal formula for evaluating the health of an online store, but you can try:
- Analyze how much you gain after deducting all the income (profitability).
- See how much you spend separately to keep the store running.
- Evaluate the above value with equipment, products in stock, and the cost of intellectual property.
All this information must be gathered for at least a year and summed up to calculate e-commerce store valuation. However, the price will be dynamic and may fluctuate due to market conditions. Ideally, engaging business advisors on a site like WSC to obtain comprehensive information about your enterprise situation would be the best option. Additionally, such an assessment should be not only comprehensive but also regular.
To correctly calculate e-commerce store valuation, it is recommended to use specific formulas:
- Based on net profit (SDE): Net Profit * Coefficient
- However, calculating the coefficient is highly challenging as it depends on the industry, store size, and other factors.
- Based on earnings before deductions (EBITDA): EBITDA * Coefficient
- This valuation method also considers the actual depreciation of equipment and increased expenses for ongoing costs (inflation, breakdowns, additional software, etc.).
There are also other methods to estimate value of online store, which concern tangible assets and DCF, but they are highly complex and even less consistent. In the first case, we assess existing equipment, furniture, the value of domains and hosting, and other assets. In contrast, in the second case, we evaluate the potential profit you can obtain if the store continues to operate.
In conclusion, to obtain an accurate price, it is advisable to use multiple valuation methods and seek the support of an experienced appraiser.
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