E-commerce businesses have huge value but most people do not have the basic knowledge on how to accurately value these businesses. As a result, most people either undervalue or overvalue businesses thus losing or gaining more money at the time of sale. With the right tools, one can get the proper business valuation based on the current market.
A comprehensive business valuation will enable me to leverage the business to get the best value when selling my business. In this article, I will be offering an objective way that will help you determine the appropriate value of an e-commerce business. While the article may not offer deep technical knowledge, it offers basic concepts that will guide you in correctly valuing your business. Some of the concepts to determine the value of the business include;
The acquisition of similar businesses can illustrate the approximate worth of your business. While each business has its dynamics and differences a precedent sale can offer an estimated value of a business. In my view, this technique will not offer the exact figure of value, but it offers a starting point especially before employing technical tools.
This method also can assist in determining the percentage of Dilutive Capital and Non-Dilutive Capital ownership to offer or Merchant Cash Advance to be offset when selling my business. Non-Dilutive capital does not translate to ownership thus in some instances, it has to be repaid if a sale is being done. In other words, this concept offers the current market trends in the valuation of e-commerce business and not purely technical valuation.
The success of such businesses depends on the traffic it receives. In the absence of significant traffic, the business is of no value and probably it will struggle to generate any sales. Therefore, traffic is a key element in determining the value of a business. It is however important to note that not all traffic is considered to be valuable.
The traffic has to translate to revenue and sales for it to generate value. A business with more traffic may be of less value than a business with less traffic but quality traffic. An e-commerce business may have traffic of 100 people but 90 of them make a purchase thus generating revenue while another may have traffic of 500 but generate only 20 sales.
To determine the best value of the business there is a need to develop a revenue per user metric. If the revenue per user is high the value of the
business must also be high. For your business to be of more value, diversified traffic is likely to yield more revenue and make the business grow its worth. Depending on the type of business, I can now use the revenue per user metric as a multiplier to determine the value of the business.
Just like any other business, e-commerce businesses have their capital ownership depending on the capital invested, time invested, and other resources. Startup valuation establishes the costs incurred when setting up the business and provides a starting point for the valuation. E-commerce businesses also have assets and liabilities that prices can be determined at the current rate and offer insight into the value of a business.
For example, a business may have multiple sources of capital that include, personal investment, dilutive capital, Non-Dilutive Capital, and Merchant Cash Advance. The business may also enjoy various trademarks which may increase the overall value of the business.
Other factors such as supplier agreements, talent, and staff also indicate the value of an e-commerce business since a slight change can significantly affect its performance. For example, when selling my business, the first step is to establish the startup valuation that includes my Non-Dilutive Capital, Merchant Cash Advance, loans, grants, and any other liability and then calculate the intangible capital in the business. The non-dilutive ownership indicates the capital given without giving up ownership while the Merchant Cash Advance includes items such as loans and grants which include the startup valuation.
In calculating the business valuation, discounted cash flow analysis is very helpful. The discounted cash flow analysis is a tool that looks into the prospects of a business based on the past, current, and estimated future returns. The model seeks to estimate the future return on investment while also factoring in the aspect of the time value of money.
Further, the model also factors in the projected growth of the business and considers the costs of capital in the estimated period. I have found this model to be risky due to the volatile nature of e-commerce business but it is important, especially when selling my business.
This model also has to correlate with other models to come up with an accurate business valuation. This model however does not work in startup valuation as it heavily relies on historical data to generate a value that may not exist when starting up.
Similar to any other business, running an e-commerce business costs money in terms, of bills, staff payments, inventory, logistics, etc. If these costs are high the business valuation process will yield a low value. By running a cost-effective e-commerce business, it is possible to grow the value of the business significantly. For example, when selling my business if the costs are high, prospective buyers may be scared of the profitability thus diminishing the business valuation.
In the case of a startup valuation where the operation costs are not established, the value will likely be undervalued due to the associated risk. It is, however, important to note that although the costs may be high, if they are justified and the business yields good returns then the value of the business will be equally high. These costs of operations also consider the Non-Dilutive Capital offered by investors as well as the Merchant Cash Advance that may need to be repaid when selling my business.
The age and consistency of a business are important factors in the business valuation process. If the e-commerce business has been operational for a long time the more appealing it is to buyers. During the period of operation, the business should demonstrate, growth good revenue, and sustainable sales.
A business that has run for a longer period also demonstrates its ability to fulfill its obligation to Merchant Cash Advance and return on Non-Dilutive Capital. Prospective buyers consider an aged business to be less risky compared to newly incorporated businesses. As a result, a startup valuation will likely be relatively low.
E-commerce businesses heavily on their synchronization with the current and emerging trends. For continuity and growth, the value of the business will increase as it keeps up with the emerging trends. For example, when selling my business, if it is currently performing well in the current market the value will be a bit higher.
If the business is high on demand and new in the market this is a key factor in calculating the business valuation. In addition, if the business has a unique aspect that is patented, the value will also be high and this has to be factored in calculating the value of the business.
To ascertain the worth of an e-commerce business, true and accurate financial records must be well kept. By utilizing new accounting technologies such as QuickBooks and Xero it is easy to keep accounting records and have an easy time selling my business. Well-kept records make it easy for prospective buyers to know the true value of an entity making it easy to sell the business.
These records also improve the value of the business by making it easy for Non-Dilutive Capital providers to offer funds and access Merchant Cash Advance. Keeping proper records also applies to startup valuation since they clearly show the costs of starting up as well as projecting possible costs for the future. Accurate financial records form a base for starting the process of valuing a company thus e-commerce businesses should emphasize accurately capturing these records.
The E-commerce valuation process can be a challenging task and many people end up losing money or buyers overpaying the value if proper techniques are not used. Even in the case of startup valuation, the process is complex because it is difficult to know the prospects of the venture. The article has discussed the key items to consider in determining the worth of a business.
These tips will assist you to get the best deal for your business whether through sale or raising capital through Non-Dilutive Capital or Merchant Cash Advance. You should be comprehensive in the valuation process and consider all factors to get the approximate worth of your business and position yourself correctly in the market.