How to Determine the Value of Your E-commerce Business in a Volatile Marketplace
May 11, 2020
Guest Post by Empire Flippers
If you own any type of e-commerce business, you have probably asked yourself what the future holds for your business in light of the economic turmoil happening around us.
While it still may be too soon to feel any huge impact, the current pandemic is causing e-commerce as an entire industry to suffer from increased shipping times, costs, and obvious spending volatility as many customers are no longer generating sufficient income for themselves.
You may think that no one in their right mind would want to voluntarily sell their e-commerce business during these uncertain times, and for the most part that is true. Keeping this in mind, what we are seeing now is an emerging buyers’ market for these businesses within the digital asset marketplace.
Buying and selling online businesses is Empire Flippers’ bread and butter. It’s what we do.
Not only do we offer the largest curated marketplace for buying and selling online businesses today, but we also have the most buyers online actively looking for e-commerce businesses just like yours to invest in during these uncertain times.
So, before the thought of selling your e-commerce business and retiring on a beach somewhere in the tropics takes you away, it might be nice to know exactly what your e-commerce business is worth to begin with.
There are a few standard factors to take into account when considering the value of your e-commerce business, such as the following:
- How much revenue are you generating on average per month?
- On average, what do your monthly expenses add up to?
- Where is most of your traffic coming from?
- What marketplaces are you selling in?
- What makes your business stand out from the competition?
In this article, we will discuss the key factors that determine what your e-commerce business is worth in today’s volatile marketplace. This information is great for those looking to get a better understanding of what determines the value of an e-commerce site and what changes may or may not increase the value of your business in the not-so-distant future. So let’s dive in.
What an Attractive E-commerce Business Looks Like to Investors
When it comes to making sure you get the maximum value for your e-commerce business, it’s important to research other similar businesses that are making the same net profits as you are selling for. You don’t want to sell your asset for too little and waste the countless years of hard work you put in, but you also don’t want to be waiting around forever on a listing price that is too high.
To alleviate the pain of doing this research on your own, we’ve created our own valuation tool that our audience uses all the time to gather real-time data on the values that businesses similar to theirs are being sold for.
For the cold hard numbers, we use a basic formula:
We look at your rolling 12-month net profit average and multiply that by a multiple. This multiple will usually range between 20 and 50x your 12-month average net profit for a well-optimized, highly desirable e-commerce business.
You may see some online business brokers using multiples of 2 or 3x the earnings before interest, tax, depreciation, and amortization (EBITDA).
Other brokers use this formula in reference to annual multiples, whereas at Empire Flippers we use a monthly multiple. There is normally little difference between which formula you choose; however, during volatile times like the current economic crisis, using a monthly multiple might be the better option.
We prefer using a monthly multiple to give a better picture of where the business currently stands financially and where it has been trending recently.
Similarly to driving traffic to your business through pay-per-click (PPC) ad campaigns, there are certain improvements you can adjust within your e-commerce business structure to increase your multiple even during these times of economic uncertainty.
A Smooth-Running Supply Chain
Nothing can lower the value of your e-commerce business more than issues with your supply chain. If the products that comprise your business are not being sold, your business is not making money, and who in their right mind would want to invest in a business without income?
Based on the data we have collected over the years from various e-commerce business owners, one of the biggest contributing factors to a decrease in monthly net profits was from stock-outs and issues with the supply chain or logistics.
Making sure you have enough working capital to keep inventory in stock will not only help you maintain great customer reviews, but also keep you from having to explain a sudden dip in net profits to potential buyers down the road.
Optimizing your logistics and supply chain is one of the biggest improvements you can make, whether you’re buying or maintaining your current e-commerce business.
Multiple Traffic Sources
As an e-commerce business owner, you understand the importance of building a well-established brand following among your target audience.
How you first establish a relationship with your target audience is also important to the overall customer lifetime value (CLTV) as they move into your sales funnel.
If a majority of your traffic comes from PPC ad campaigns, that will most likely be considered a much larger risk to investors, as those ads become less profitable over time. We are not saying that running PPC ad campaigns for your products is not a good idea, as many e-commerce owners have been very successful with this approach, but we are saying that diversifying your traffic sources is important to spread the risk in case one traffic channel should close.
When you diversify your traffic streams, you are providing a safety net for the overall health of your business.
An Established Brand Name
Trademark or no trademark, having an established brand name, image, or other identifying factor that separates you from the competition of similar products will always help improve your multiple.
The reason we say that having a trademark is not as important as having a well-recognized brand is that attaining a business trademark could be an investment opportunity that the buyer recognizes.
While not having a trademark still gives a potential buyer scaling opportunities, not having an established brand or product line altogether poses too much risk of copycats entering your market.
Establishing a brand name or trademark to set you apart from the competition will increase the value of your e-commerce site in any market condition.
A Large Email List
While having a large brand following and loyal customer base is great to have, not collecting their contact details means you’re missing out on a huge monetization opportunity.
Most e-commerce owners will use their email list to provide a follow-up response after their customer makes a purchase, but it is even better for adding additional revenue to your income streams.
Having a large email list means you can test certain products and calls to action (CTAs) to figure out what converts your email subscribers to paying customers the best. Providing seasonal discount codes and promoting new products gives your business more value when looking at the additional sources of revenue being generated for the asset overall.
When your business includes a large active subscriber list, you are giving potential investors an opportunity to test new marketing campaigns and thereby drive the value of your business up.
Actual Conversions from Social Media Traffic
Established social media accounts, while they are nice to have, will not increase or decrease the value of your business if you have no way of proving that a specific number of conversions have come from your social media accounts to begin with.
There are plenty of fake social media accounts with inflated numbers out there today, making them less important compared to your email list. You can have hundreds of likes and thousands of followers, but only once you can prove your social media following and promotion are driving real traffic and sales to your business can they be considered to increase your expected sales multiple.
Only offering one product is a huge risk to potential investors.
The difference between selling one and multiple products is that the effects of any major reduction in supply or demand for a given product are far more dire for a business that is solely based on one product. This presents a far greater risk than any buyer would be willing to take (unless they happen to be a Strategic Sally, in which case they will usually plan to integrate this product into another brand they already have established).
Whether you’re selling to a small sub-niche market or a huge audience within the home goods industry, offering multiple products helps to limit the risk of having to rely on a single product to keep the business profitable.
Especially in these times of economic uncertainty, diversifying your product line to offer items in other sub-niches or markets will offer more protection from sudden shifts in market trends, as we have experienced lately.
Not Another “Me Too” Product
Nothing can drive down the value of your business faster than featuring a product that can easily be reproduced and sold for a lower price with minimal effort.
Creating a barrier for entry around your established brand not only offers more value to investors looking to make you an offer for your growing business, but also gives them the needed reassurance that they won’t have a bunch of new competitors entering the space with the same products once they take over.
Directly sourcing products from the manufacturer and not going through a third-party supplier assures that your product will not be easily copied. It also gives you some exclusivity, making it more difficult for competition to come in and start a price war.
Minimal Effort Required to Maintain Profits
This is important not just to minimize an investor’s workload requirements to take over and maintain the business, but also to show just how well you have optimized the backend.
E-commerce site buyers are not generally looking for something that requires more than 40 hours per week to maintain, because chances are they have other responsibilities that require their focus.
Having said that, they also don’t want something over-optimized without room for growth or further improvement opportunities to make them a timely return on investment (ROI).
Improving your backend operations by outsourcing work to virtual assistants (VAs), hiring social media managers, and contracting digital media professionals are all things that can be done not only to help you stand out with quality marketing content for your products, but also to give investors the peace of mind that they could take over your business in a very turnkey fashion.
So, say you have optimized and improved all of the features on the backend of your e-commerce site, but you’re still having issues with growing your site’s value due to the recent economic struggles around the world.
What Can You Do to Increase the Value of Your Ecommerce Site?
Just because you add more products to your line, increase ad spending, or grow your email list doesn’t mean that the overall net profits or value of your e-commerce business will increase.
However, besides the key factors that determine the multiple and overall value of your business mentioned above, there are other improvements to your site you can make today to increase its value.
Add Additional Forms of Monetizations
You would be surprised how many e-commerce businesses we have sold in the past that had been monetized selling products alone.
There is a huge opportunity offered by simply diversifying your revenue streams and capturing conversions on traffic that might not be at the buying stage in your funnel just yet.
Adding a few paid advertisements, sponsored banner ads, or even building your own affiliate network for the brand not only helps diversify your revenue streams a bit but also doesn’t require much effort on the backend to set up.
Not taking advantage of expanding your business model to include different revenue streams, whether it’s from monetizing your email list, adding PPC advertisements to your content pages, or offering affiliates commissions for marketing your products, means you will miss out on a great value addition to your business’s overall attractiveness.
Testing Your CTAs
Whether you are new to the e-commerce space or have been selling for years, you should always be testing your CTAs to figure out which ones are the most effective at converting your traffic.
Going hand-in-hand with this testing procedure is performing conversion rate optimization (CRO) on your site, which is essentially a more data-driven approach to testing your CTAs. Changing the colors, copy, and placement of certain CTAs within your content can either increase or decrease the likelihood that your visitor will be converted.
Many e-commerce buyers we have spoken with said they had seen huge improvements in their average net profits since they performed CRO on their sites. This not only helps you to get a more detailed analysis of what works the best for your CTA conversions, but also provides valuable data to help improve your overall marketing strategy for future growth.
What is the Real Value of Your E-commerce Business Today?
If you take a step back and look at the details of your business, it will be easy to see where your business may need improvements and where you have already augmented the asset to the best of your ability.
Once you have a general idea of your 12-month rolling-average income, you can make key improvements to increase your multiple, encompassing the updates mentioned above.
You can improve the overall value of your business by these methods:
- Optimizing your logistics
- Increasing your traffic numbers
- Establishing a well-known brand
- Growing a large email list
- Expanding your traffic channels
- Developing unique products
- Maintaining low hours
If you work towards achieving some (if not all) of these improvements on your e-commerce site, you can surely gain more value and a larger multiple even in the toughest of market situations. By producing a unique and standout asset, you will build demand among buyers for your business and thus drive the value up.
Once you have made these updates, or if you are in the middle of making these adjustments as we speak, head over to Empire Flippers’ valuation tool page where you can see the value of your e-commerce site as it stands on the market today.
Once you have a better understanding of how much your e-commerce business is worth, you will be better prepared to achieve a huge exit when you do decide to sell for a profitable ROI.
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