How to Value an Ecommerce Business in 7 Steps

Accurately valuing an ecommerce business is useful whether you’re selling, raising capital, or making strategic decisions. Sometimes, it’s just nice to know how much you could sell your business for, even if you don’t plan to, yet.

This article will discuss why accurate ecommerce valuations are important, and how to value an ecommerce business in 7 steps, plus a bonus tool at the end.

Why is an accurate ecommerce business valuation important?

Valuations aren’t just for selling; they’re important for understanding a business. A valuation done well requires a business to organize documents, kind of like cleaning one’s room. You would need to have a clean room to sell it, but that doesn’t mean you wouldn’t clean your room if you aren’t selling it.

An accurate ecommerce business valuation is crucial for several reasons:

  1. It helps sellers get a fair price when selling their business: Undervaluing means leaving money on the table, while overvaluing makes it challenging to sell the business.
  2. For buyers, an accurate valuation ensures they don’t overpay for an ecommerce business: Overpaying reduces ROI and ties up capital that could be invested elsewhere.
  3. Valuations are important for raising capital from investors: Investors want to see that a valuation is justified based on financial details, growth potential, and market conditions.
  4. Understanding true value helps ecommerce business owners make better decisions: When one understands the true value of their business, it helps one make wiser decisions, such as when to sell, how much to reinvest, and whether an offer is reasonable.
  5. Lenders also rely on accurate valuations when offering ecommerce business financing for growth or acquisition: The valuation impacts how much funding can be secured. A realistic valuation increases the chance of successful funding rounds.

It’s generally recommended to work with experienced ecommerce business brokers and due diligence professionals to help ensure a valuation is comprehensive and realistic. That isn’t to say you can’t value an ecommerce business without a broker, but it’s usually best to get professional help.

That said, even if you aren’t doing it yourself, it’s worth learning about the steps involved. 

How to value an ecommerce business

1. Analyze financial metrics and calculate key metrics

The first step is to analyze the financial metrics of a business, including income statements, balance sheets, and cash flow statements for the past 36 months or since the company’s inception. It’s essential to diligently look through financial metrics to gain a detailed understanding of the financial health and performance of the business.

The main financial metrics to calculate include revenue, gross profits, operating profits, net profits, gross margins, and net margins. Understanding these metrics year-over-year will help you identify factors like growth trends, seasonality, and, of course, any potential red flags. Consistent positive growth of revenue and profitability generally indicates that a business is thriving and healthy.

If dealing with a small ecommerce business under $5 million in annual revenue, you can determine the “Seller’s Discretionary Earnings” (SDE) by adding back the owner(s) compensation and benefits to net profit. SDE will provide a more accurate picture of a business’s true earning potential for the new owner. If an ecommerce business exceeds $5 million in annual revenue, calculate EBITDA (earnings before interest, tax, depreciation, and amortization) to calculate the company’s operational profitability.

2. Evaluate website traffic and its value

The next factor to assess is website traffic. Use tools like Google Analytics to analyze the company’s website traffic to understand where the traffic is coming from. For example, break down traffic by source, including organic search, paid ads, email marketing, social media, and referrals. 

Go in-depth into specific traffic sources if they are key drivers of revenue, such as using Google Search Console to analyze traffic from organic search results. Look at keyword rankings, and how high the website ranks for specific profitable keywords related to the business and its products.

Also, look at where the traffic is coming from, including the country and city. Review the traffic trends over time. Ideally, look for steady, organic growth. Sudden spikes or drops could indicate vulnerabilities and over-reliance on tactics that provide short-term results.

The aim of analyzing website traffic is to try and find the most significant correlations between specific traffic sources and revenue/profitability. Then, scrutinize these correlations for stability. For example, if most traffic that’s driving revenue is coming from one specific source, this could be seen as risky, as it’s not diversified, versus revenue coming from ten different sources distributed relatively evenly.

3. Assess customer acquisition and retention

Calculating average customer acquisition costs (CAC) for e-commerce is crucial to understanding the efficiency and sustainability of the company’s growth.

To calculate CAC, divide the total sales and marketing expenses by the number of new customers added over a specific period. This will determine CAC. A lower CAC, relative to similar competitors and industry standards, indicates that an e-commerce business has a more profitable and scalable customer acquisition model.

Customer lifetime value (CLV) is also essential to calculate. CLV is the average profit generated by a customer over time. The typical formula used to calculate CLV is customer value x average customer lifespan. CLV is challenging to calculate because it requires accurate assumptions to be made about how much one expects specific customers to spend over their lifetime as a customer. It’s hard to predict parameters like how long a customer will remain engaged and how much they’ll spend.

Other factors you should consider are customer demographics, purchase frequency, average order value, and the percentage of repeat customers, which shows the degree of loyalty customers have to a brand.

A strong base of repeat customers is very valuable, as this provides stability, makes revenue more predictable, and lowers the reliance on new customer acquisition to propel further growth. High average order values and purchase frequency generally indicate a strong product-market fit and customer satisfaction, all of which are positive metrics for any business.

4. Look at an ecommerce business’s processes and operations

The ideal business to buy is one that has streamlined operations and efficient processes. This makes the process of transferring the business and its assets smooth, which is viable. Also, a business with good systems and processes is in a much better position to scale with less complexity. The more well-run a business, the higher valuation it commands.

The first step is to assess a company’s supply chain, including how products are sourced, the relationships between the company and suppliers, and how inventory is handled. Look for well-documented SOPs and long-term stable relationships with key suppliers.

Next, look at the company’s order fulfillment and shipping processes. Is the company efficient and accurate with order processing, picking, packing, and shipping? Does the company handle fulfillment completely in-house, or are they using logistics partners, or are they reliant on partners like Fulfillment by Amazon (FBA)? If they aren’t handling fulfillment in-house, look at the strengths and weaknesses of the third-party relationship, how they perform, and their ability to scale.

Last, look at the technology stack the company uses, including the ecommerce platform they sell from, whether that’s Shopify, WooCommerce, or third-party platforms like Amazon. Look at their customer relationship management (CRM) software and other automation tools. Consider how much it might cost you to upgrade if needed.

5. Study market position and the competition

Market position and competition are important to give more context about the business and its growth potential.

To understand the market position of the business, the first step is analyzing the niche it’s in and its target market. For example, the niche might be pet food, and the target market is pet owners in the US on the higher income side who care a lot about their pet’s health.

Determine whether the company is a major player in this specific niche or whether they’re a smaller player in the market. Dominance in a specific niche can be valuable, especially with industries that have stronger barriers to entry.

When evaluating threats from competitors and barriers to entry, look at factors like brand loyalty and why customers keep coming back. Are proprietary technologies being used and owned by the company? Are there exclusive supplier relationships and contracts in place? Companies with a defensible position, higher switching costs, and recognizable brands will command higher valuations versus easily replicable business models providing no competitive advantages.

Look into industry trends, projected growth rates, and consider macro-factors concerning the business’s market share. Try to identify potential disruptive technologies that could impact the industry and the company’s viability.

6. Determine ecommerce valuation multiples

To determine an appropriate valuation multiple for an ecommerce business, the first step is to research similar companies that sold and valuations in the industry. You can browse marketplaces ecommerce businesses for sale and get a sense of what similar businesses are listing for and what they sold for.

While not a foolproof method, comparison is a great way to get a sense of what similar businesses are actually selling for, instead of making assumptions exclusively via formulas.

You can calculate the average revenue multiples and profit (SDE or EBITDA multiples) for similar companies in the industry. This should give a good baseline range for valuation multiples. But remember that multiples can vary widely based on factors like the company’s growth rate, market position, profitability, and other risk factors.

For example, let’s say we’re using an average multiple of 3x annual profit for a $1m ecommerce business. From here, you can apply discount multiples for risk factors like concentrated customers, supplier concentration, or key person risk. After the discounted multiples, adjust the multiple upwards based on positive factors like patents, strong brand and website traffic, recurring revenue, or operational efficiencies and advantages like good supply chain management.

By analyzing an ecommerce company’s business processes, you can arrive at a reasonably accurate market valuation. But don’t forget that valuation is as much art as science, and ultimately, the true valuation is what a buyer is willing to pay for it.

7. Apply valuation methods, and determine a valuation 

When you are ready to finalize the valuation for an e-commerce business, make sure you apply multiple valuation methods, reconcile the results, and come to a conclusion.

The discounted cash flow (DCF) method is great for high-growth companies, projecting future cash flows and discounting to the present value. This is good for capturing the growth potential of the company.

An asset-based valuation is good for estimating the fair market value of the company’s assets like inventory and intellectual property. This is a good way to establish a “base” asset valuation for a business that’s separate from the value derived from sales. It’s also a good valuation method to focus on if revenue is lower or slowing considerably and emphasize the value of the assets over the company’s growth rate.

Whether you are doing the valuation or you’re working with an accountant, financial advisor, or business broker, make sure to reconcile multiple valuation methods to conclude a final, accurate, well-rounded valuation figure.

Bonus: Try a free ecommerce business valuation calculator

Using an e-commerce business valuation calculator like Empire Flippers’ online business valuation tool is a great way to save time while still providing an accurate estimate of your e-commerce business.

This calculator, and many like it, utilizes proven valuation methodologies to quickly analyze metrics including revenue, profit, traffic sources, business age, and more to instantly provide a valuation.

While the valuation isn’t a substitute for a professional valuation done by experts, it’s especially useful if you’re a bit clueless about how much your business is actually worth—it gives a solid starting point.

For best results, try to fill out as much information as it requests from you. After you’re done, you’ll be instantly emailed the results, and from there, you can proceed with potentially listing it on the Empire Flippers marketplace and selling it, if that’s your goal.

The bottom line

Valuing an ecommerce business accurately is complicated. It requires the analysis of various financial details, traffic sources, the use of appropriate valuation multiples, and a long list of other factors.

While valuing an ecommerce business accurately requires more steps and details than this article, the steps outlined should provide a solid framework for you to find the true value of any ecommerce business. Alternativley, you can use an ecommerce business valuation calculator for an instant estimate.

Last but not least, don’t forget that how much someone is willing to pay for an ecommerce business depends on just that—how much they’re willing to pay. Value is both subjective and objective.

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