How to Evaluate the Worth Of An eCommerce Business?

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The valuation and funding of e-commerce businesses are two of the most important matters to consider when looking to determine the worth of such an online business. When all things are done and dusted, arriving at a fair value should be what matters most for both the seller and the buyer. Here is a list of useful tips on how to evaluate the worth of an eCommerce business in a correct and realistic manner that is advantageous for all involved parties.

Multiple of SDE

One of the most important methods of evaluating an eCommerce business has to do with multiplying the SDE or Seller Discretionary Earnings. This is done by analyzing the historical earnings of the business and multiplying them by a value that’s usually between 1.5 and 3.5. The result will be the value of the said eCommerce business. It’s important to explain that the historical earnings of a company represent its net profit over at least the past year.

So, an eCommerce business has a certain net profit over the last twelve months which you multiply by 1.5, for example. It’s worth noting that the value of the multiplier depends on a number of important factors that we will get into a bit later. To put it simply, the more favorable these factors are, the higher the multiplier is and, obviously, the higher the value of the business is. The final result represents the company’s value.

Precedent Sales in Similar Markets

Another very good method of evaluating the worth of an eCommerce business is by analyzing precedent sales that have happened within similar markets. This may not be the most popular or most telling valuation procedure, but it can offer valuable insights, especially if you are not sure where you stand.

However, you need to do some research and find out the companies that are worth comparing with your own because being in a similar market doesn’t necessarily mean that other eCommerce businesses will provide a good starting point. So, in order to do that, you should be looking at a company’s time in business, size, revenue, and many other factors. This evaluation method is not as precise as the aforementioned one, but it can provide a base in case the buyer and seller have different opinions when it comes to the company’s value. It’s like a reality check that should be taken into account by the involved parties.

DCF Analysis

The analysis of the Discounted Cash Flow represents another good way to evaluate the worth of an eCommerce business. This method aims to provide a glimpse into the future and possibly let you know how much your business will be worth. In short, the DCF analysis represents an estimated return on investment when it comes to buying a company that’s adjusted for certain factors like inflation.

This is a very good valuation method if we are talking about an established business. However, it’s important to mention that because of the increased volatility of eCommerce businesses and the differences when it comes to the regular cash flow of such a company, DCF analysis might not be the best valuation method. This doesn’t mean, however, that it is not a useful analysis to make and one that will also help you repeat some steps that have brought positive outcomes in the past.

The aforementioned tips on evaluating the worth of such a business are not mandatory but are definitely helpful. Every business is different, and every owner knows what’s best for their brand. This is why doing some research beforehand and only picking the methods that work the best for your case is a mandatory thing to do.

Important Valuation Determinants

There are certain eCommerce business valuation determinants that are worth taking into account when calculating the worth of a company. Here are some of them:

  • Size and age: A company that has been consistently successful for the past years and has witnessed growth is certainly attractive for buyers, regardless of whether it’s an eCommerce one or any other type of business. Besides that, a business with a clean history will always find a buyer. Don’t forget to do your research on similar markets to see where similar sized-businesses have stood in the past;
  • Reputation: Having a good reputation is imperative for an eCommerce business that wants to have good value and happy clients. Things like customer support and high-quality services are the most important when determining the worth of a business. Besides that, making sure that the demands of the clients are met, the orders are fulfilled, and any problems are immediately solved is the key to having a valuable eCommerce business;
  • Logistics and operations: Certain types of operations can increase or decrease the value of a business. Things like order fulfillment, cost-cutting, and employee satisfaction are mandatory when it comes to analyzing the possible worth of a business. Take a look at all the important logistics and operational details when evaluating the worth of a business, regardless of its nature.

Conclusion

All in all, we can safely say that evaluating the worth of an eCommerce business depends solely on the management capacities of its owner. From this stem other important factors like the success and recognition of the company. Besides that, even if nowadays the number of strictly eCommerce-focused businesses is large, thinking of a physical business that you can extend into the eCommerce market is a very good idea too. Planning and then executing certain steps that will help your company develop and, subsequently, have a higher value, is one of the best things that you can do.

 

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About the Author: Brian Novak