Do you know how much your online business is worth and how can you find out? A business valuation tool like the one on Flippa.com is a great place to start.
This data is important for mergers, partner buy-ins, estate planning, and even divorces. A business valuation is particularly crucial if you are selling your online business or blog.
Even if you’re using a business valuation tool, it’s important that you understand how your ecommerce business’s value will be calculated.
Top 3 Business Valuation Methods
There are three major methods most business valuation firms use.
- Comparable Company Analysis
- Asset-Based Valuation
- An Income-Based Approach
Let’s go through each one.
Comparable Company Analysis
Comparable Company Analysis compares organizations based on similar values. These measures include age, business model, category, and several other metrics. Additionally, valuation firms look at the prices similar businesses sold for. These metrics are then used to determine your company’s value.
Think of it the way real estate is priced. Appraisers look at homes in similar neighborhoods with similar characteristics. Then they use the value of those homes to determine yours.
This business valuation method focuses on the fair market value of your company’s tangible assets after deducting liabilities. These assets can include things like your equipment and property. Measuring intangible resources can be tricky. Plus, ecommerce businesses often outsource many processes like manufacturing and fulfillment. Asset-based valuation may not be the best method for valuating service-oriented companies or online businesses.
This approach is common for service-oriented companies. An income-based approach is the most accurate method, especially for your online business or blog. Evaluators look at the present value of your business’s reasonably expected future cash flow.
With an income-based approach, valuators use EBITDA to calculate your organization’s value.
EBITDA basically refers to your net earnings before interest, tax, depreciation, and amortization.
EBITDA Factors to Consider
Your business’s value may be anywhere from 2-8 times the calculated EBITDA. That’s a pretty broad range. The multiplier you should use depends on several factors besides profitability.
- Growth Rate- What’s the potential profit?
- Organizational and Leadership Depth- Can your company continue to grow and move forward without you?
- Revenue- Is your revenue recurring? Or is it one-time? What’s the lifetime value of your customers?
- Revenue Diversity- How many sales channels do you have? Is your reach local? National? International?
- Product Diversity- How many products do you have? Is most of your revenue only from one product or service?
- Brand Value- Do you have a brand? Do you have complete control of your products and/or services?
- Intellectual Property Protection- Do you have trademarks and patents? Do you have intellectual property control over your products or are you a reseller?
Don’t be surprised if your business valuation returns a range of values instead of just one. These calculations will be based on all of the metrics above. If you plan to sell your ecommerce business, the most important number will be what potential buyers are willing to pay for it. The range your valuation yields will be a good starting point for you and potential buyers to consider.
Business Valuation Made Simple
Calculating your business’s value is critical, especially if you’re about to sell your site. Still, it may seem like a daunting process. Online business valuation calculators like Flippa can take the stress out of online business valuation. Besides being free, the process is quick and easy. You can receive an accurate valuation after answering a few questions about your company. You can also use their site to list your business for sale, connect with buyers , and do the negotiations. A one-stop shop for selling your business.
One final note, you’ll want to make sure your books are as precise and up-to-date as possible to get the most accurate valuation. LedgerGurus eCommerce accounting services can help you get your books cleaned up and ready for the selling process. The better you know your business, the more power and choice you have.