Ecommerce business valuation
Do you want to know what your online store is worth? There are several calculations that you can use to get an ecommerce business valuation. In some situations, it’s good to know your store’s value, and each situation should take different factors into account. Which method fits in which situation?
- How to determine the value of an online store
- Methods of valuation
- Balance sheet value
- Total share capital
- Using the annual profit of several years
- Turnover, goodwill and/or customer base
- A combination
- The valuation of your online store should be tailor-made
How to determine the value of an online store
Owners of online stores often wonder: what is my business worth? Though probably not all of them are thinking of retiring, the bag of money beckons. No more stressing about losing your position in Google search results, no more worries about suppliers who might suddenly stop supplying, no fears of a competitor becoming a market leader.
The value of your business can change continuously. In day-to-day operations, many of the decisions you make directly affect the valuation of your online store, even if you’re not aware of it. It’s usually not that important to know what your online store is worth exactly, but in some situations you will want to consciously maximize it. This is the case when an investor joins in or when you want to sell your online store.
You can simply determine what your online store is worth when you sell it. But if you’re planning to sell it soon, you can already prepare for it. If you prepare well, you can usually increase the value considerably.
If you do it right, you can increase your online store’s value.
At least, if you do it right. For example, stock that has been on the shelf for a long time is not so favorable for the value of your online store. If you sell these products before the valuation and have top turnovers in the months before the sale, this usually has a positive influence. But to know what works, it is important which method of calculation you will use later.
Methods of business valuation
There are several ways to determine your store’s value. Every method has its own advantages and disadvantages. There is no unequivocal answer, not even if you ask a professional appraiser.
An advisor of the party that’s interested in buying your online store will probably look at a store’s value differently than an advisor of the person who’s selling it. In any case, it will be helpful to have an ecommerce specialist appraising your store’s value. Even if it’s only to find out what they base their valuation on. After that, it’s wise to take some time to take some time to get used to those numbers.
Everyone appraises in their own way.
If a potential buyer or investor comes up with a calculation, that doesn’t mean that it’s the best way to determine your online store’s value. Everyone appraises in their own way!
Methods for ecommerce businesses
Using a balance sheet
The most well-known way to determine your store’s value is by using a balance sheet. A balance sheet indicates what the assets of your online store are, minus outstanding debts.
Total of shares
Companies on the stock market depend on supply and demand. You can buy shares of large companies on a stock market. Adding the number of shares and their worth together will determine the value of the store.
Using the annual profit of the last couple of years
In acquisitions and loans, a company’s yearly results are usually taken into consideration. However, often times discussions arise about what exactly make up the company’s profits. You might see the gross profit as your annual profit, while a possible partner might want to deduct loan charges or write-offs. The differences between these two ways are also called EBITDA.
‘The turnover of an online store can vary enormously and the profit margin is usually limited.’
You’ll also need to decide how many yearly results you will take into consideration. An insurance company has a relatively fixed customer base and will usually take the gross profit over many years when determining its value. An online store, however, has a high turnover and lower margins. If there’s been no increase in profit and turnover in recent years, these companies usually use the results of just two years. Banks usually look at the results of the last three years.
Revenue, goodwill and customer base
Even though online stores often have low profit margins, they can still be of value to someone who knows they can earn money with it. A competing store will have to pay less for paid search results after acquiring it. It could also get volume discounts with suppliers, because it can increase its sales amount. Just because a competing company will benefit that much from acquiring your store, your store’s value might be higher than what regular calculations indicate.
A combination of these methods
As you know, ecommerce is a very volatile market. During one year, you might make a large profit, but then the next year you might spend all your profit on buying new software, a new storage space, an app, or on the launch of a new product or a new store in a different market.
This is why determining your store’s value based on profits, revenue or your client base can be risky. Most companies that work in ecommerce use a method that combines the different facets that are mentioned above. This way, you take the market’s volatility into account.
The valuation of your online store should always be tailor-made
All methods mentioned above can be used to determine an online store’s value, but usually, these calculations aren’t done by the book. Every acquisition is different. A store’s value always depends on the market, the product group and situation. An online store in a small niche with a returning customer base will be worth more than a business active where giants such as Amazon are also active.
Frequently asked questions
Some frequently asked questions about the valuation of an ecommerce business are:
How do you value your online store?
Do you want to buy an online store or sell one? Before you can do that, you’ll need to know what the value is of that business! There are several methods to determine your business value. On this page, we mention the pros and cons of valuation based on revenue, profit, intrinsic value and other methods.
How much does a business valuation cost?
Of course, you could make an estimate of your business value on your own. If your revenue is higher than thousand of euros, then appraising a business can become a tricky task.
A buyer or seller might also think that your estimate isn’t objective. Outsourcing the valuation of your online business to a specialist can cost between a thousand and two thousand euros. However, this depends on the complexity of your online business.
What is my online store worth?
Your online store is worth what the highest bidder is willing to offer you. It can make a large difference when there are multiple interest buyers and when you’re able to reach them. You’ll know your store’s value as soon as you receive your first offer. However, there are some platforms that can give you an indication of your business value beforehand.
If you’re not planning to sell your business, but you’re still interested in your business value, then there are ways to calculate it. Look at your yearly profit of the last three years. Also take a good look at whether your profit and revenue were stable in those same years. Do they grow or decrease strongly? Then you’ll need to estimate what your revenue and profit will be in the coming years.