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Valuation of E-Commerce Business - Please Help

by fmckinnon
11 replies
Hey Gang,
First, if this is the wrong forum for this post, I hope the mods will simply move it to the correct one - I saw there is a forum for selling websites but this would be much more than just selling a domain or website.

I'm curious as to how to best valuate an e-commerce business. I own a decent-sized e-commerce business where we primarily sell on our own site, and all major marketplaces (ie. Amazon, Newegg, BestBuy, Rakuten, Sears, Shop.Com, Groupon, Jet, etc). The majority of our sales are dropshipped from distribution partners but a growing percentage of sales is from products we've bought and warehouse in our local office or at FBA (Fulfillment by Amazon) facilities.

Although I am not seeking to sell my company immediately, I am in a business/personal finance planning session with our financial advisors and having a plan for the future of this business is on the table. Perhaps we'd like to sell it some day or I'd like to have some general information on how I'd go about marketing and valuing the company if something were to happen to me.

The biggest assets/value for the company is obviously, the gross sales volume and the name recognition (ie. established brand name, years of established, positive feedback and reviews), etc. Someone could take over the operation or could simply assume the brand/reputation and migrate the account to an existing e-commerce platform.

We have our gross sales, net sales (gross sales less vendor COGS), and of course, final net profit (after paying employees, expenses, etc). Final net profit could vary greatly based on how a person could see trimming expenses, staff, etc.

So:
1 - how is the best way to value the business?
2 - is an existing e-commerce business with a positive brand marketable?
3 - if something were to happen to me (disability, death, etc) what is the best way to market and sell the company? (currently, we do not have any staff members who would want to assume the ownership of the company, though I'm considering a new hire for that very reason - someone who can learn everything I know and if desiring, be in a position to buy out, etc)

I suppose this is enough to kickoff the conversation. I hope to get some valuable insight here.

Thanks,
Fred
#business #ecommerce #valuation
  • Profile picture of the author Online Traffic Victory
    I would think the best way to value the E-Commerce website is to have a look at how much you make over the course of the year.

    So if you've made $5000 over the course of a year your website valuation would be worth $5000 there's also the amount of traffic and where it come's from so If it comes from organic searches then the valuation will increase as whoever buys the ecommerce website doesn't have to do much to make money from the website.

    If however your using paid methods to get the majority of the traffic then this can devalue the cost of the website as whoever buys the website will need to pay extra money to market the website as well.

    For selling the website I would use flippa but the business itself with all the products you have available I honestly don't have an answer as to how you can sell that apart from maybe making a deal with the website owner who want to buy the website from you
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  • Profile picture of the author fmckinnon
    Thanks - OTV --- the actual website itself isn't worth much. A very small % of our gross sales go through that website, and it's really more of a branded storefront. The overwhelming majority of gross sales comes from the marketplaces.

    When you say "how much you make over the course of the year" --- are you referring to net sale profit, or overall company profit? (see how I'm defining each in my original post).
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  • Profile picture of the author Online Traffic Victory
    That's a trick question but if I had to choose I would say net sale profit but you also have to look at whether any of the expenses are a one off expenditure which the buyer of the company will not have to buy or an expenditure which is essential to keep the business running for instance if you had charged someone a one off fee to design your website then that's a one off expenditure which you made which the buyer will not necessarily need to keep the business operating but if you regularly buy ppc advertising then that will be need to be added as part of the net sales worth as that's an essential part in keeping the business running as without ppc then no traffic and no traffic = no sales/money.
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  • Profile picture of the author MarkAse
    Your value depends on a lot of things and really, all we're going to be talking about at the end of the day is the multiplier and how that multiplier is calculated.

    First, it's pretty standard as I am sure you've read that you're going to see offers (if you hire a good broker and have a bookeeper and solid accountant) of 3x. The question if people value your business at 3x revenue or 3x profit.

    Secondly, there's an additional multiplier going around for membership sites, often up to 9x revenue.

    3) This is incredibly complicated and you should find someone whom has dealt with this before....it's going to be a distressed sale at that point. That being said, if you've incorporated, the thing can live on by itself so having even an hourly, few hours a week employee can likely run the thing in your absence. Depending on your personal setup (I had to decide how old my son might need to be before he would be capable of running the thing, or deciding he didn't want to) there's some even more complicated choices.

    Good luck, but getting some professional help as you already expressed is a good start
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    • Profile picture of the author Kay King
      1. I don't think there is any one way to set a valuation - but there is a tremendous amount of information on business valuation available...

      How Do I Determine the Value of My Small Business? | Chron.com

      Business Valuation Calculator | Calculators by CalcXML

      | NFIB


      2. Yes


      3. This is something you have to decide. What is important is that what you WANT to happen is what occurs if you are disabled, ill or deceased. Whether you have

      -a business broker you trust who can step in and sell the business -
      -a competitor interested in acquisition or a partner or family member who -can take over or buy you out -
      -or you choose to sell off assets and close it down -

      planning ahead is necessary for your peace of mind if nothing else.
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      • Profile picture of the author logostang
        Flippa has some free ebooks and guides on this issue. I would recommend you check them out.
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  • Profile picture of the author Thomas Smale
    [DELETED]
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    • Profile picture of the author CLSVentures
      OP> Don't just assume that Flippa is the only place to buy or sell a website. I sold a small e-com business in the music/guitar space a couple years back and actually, after advertising it in a few places the buyer came from Craigslist. Depending on the niche, certain areas of the country work well. In my case, a Nashville Clist ad got a bit of interest. Ultimately, the buyer came from a San Fran/Silicon Valley clist post.

      But don't forget to post it to some major cities. I actually also think sometimes you get more legitimate business buyers there, rather than 90% of your ad viewers being small-potatoes kind of folks that are looking to play in the "$2000 e-commerce site in a box" type space.
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  • Profile picture of the author fmckinnon
    This is great feedback folks. We're in e-commerce with primarly known brands and products with stiff competition. As a result, our margins are low - so our valuation would most certainly be on profit .. I'd LOVE to think our valuation would be on gross sales .. but as flashy as gross sales may be ... if the net profit from the sale is a low %, I know that makes a big difference.

    I'll read some of these articles. I do have a great financial advisor who is coaching me on this and every quarter when we meet, he asks me how I'm coming along with our business continuation strategy. We've discussed buy/sell agreements with friendly competitors, etc., but no interest there.

    Ideally, it would be great to offload to an aspiring entrepreneur/e-commerce enthusiast who could do a buy-out agreement and keep me on for a year to help the transition and teach them the ropes.
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  • Profile picture of the author fmckinnon
    Thanks, TryBPO - it's hard to guess w/ that tool because the sale of our business wouldn't be based on our website, but our overall sales across multiple marketplaces, such as Amazon, etc.
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    • Profile picture of the author Steve B
      Fred,

      Please seek competent professional financial advise from someone that understands Internet business valuations. It's evident that most of the advice you're getting here is coming from well-meaning but non professionals in the field. People are giving you their opinions which, if I were wanting to know what you're asking, I would not take seriously because these Warriors are not in the valuation business. Some of the advice you're been given is way off base.

      I'm not putting anyone down, but I spent a 35-year career in small business development working with many successful and unsuccessful businesses and most of what I'm reading in this thread has no basis in fact. I would think this would be an important decision in your life (to sell or not and for how much) and it's not one you should be opening up to random folks that you know nothing about.

      The very best to you,

      Steve
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  • Profile picture of the author fmckinnon
    Thanks, Steve
    Agreed -- most of the info here is specific to selling a "website". We're valuating much more than a website .. we're valuating a brand ... tens of millions in revenue, and tens of thousands of customer reviews, etc. ULtimately, it does all come down to net margin/profits for a buyer, I realize .. but not as simple as "how much money did your website make". We're not doing anything new here --- anyone can create a Seller account on eBay, Amazon, Sears, etc and start selling. Our value is in historical sales, brand recognition, and established online feedback/reviews, in my opinion.
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