How to Value an E-commerce Business in 14 Steps (Complete Guide)
An e-commerce business can be highly lucrative. Overhead is usually low, which means handsome profits.
The thing is, not every business owner knows how to value their business accurately. So, when the time comes to sell or seek further funding, they often sell their business short.
That shouldn’t be the case with you.
We’ve created this guide to help you understand how to value an e-commerce business to maximize your exit strategy.
TL;DR - How to Value an E-Commerce Business
Don’t have time for the full guide right now? Here’s a step-by-step summary of how to value an e-commerce business:
Gather financial information
Analyze historical performance
Evaluate the business model and operations
Assess market position and competitive landscape
Analyze customer base and loyalty
Review website traffic and engagement metrics
Consider growth potential and scalability
Identify unique value propositions or intellectual property
Choose the appropriate valuation method(s)
Perform valuation analysis
Consider industry and economic trends
Adjust valuation for specific risk factors
Validate with comparable market data
Finalize valuation estimate
We explain each of these steps in detail in the comprehensive guide below. Read on for an in-depth study into e-commerce valuation and how to maximize your exit strategy with Exitwise!
Factors Affecting the Valuation of an E-Commerce Business
When valuing any type of business, you’ll often hear of revenue, cash flow, and profitability as the primary agents that affect how much a business is worth.
While these are integral, they’re not the only things that drive value.
Here are 15 key factors you need to look at to arrive at an accurate valuation:
1. Revenue and Profitability
Profitability is the number one factor that impacts value–because who wants a business that’s barely afloat? The greater your profit margins, the higher your listing price will be.
2. Growth Trajectory and Potential
Sustained growth over a long period (the golden standard being at least 12 months) can be extremely appealing to a potential buyer, especially as it shows stability.
Moreover, a business with the potential to scale promises better profitability in the future, hence its positive impact on valuation.
3. Customer Base Size and Loyalty
A broad client base means you’re capturing a huge chunk of the market and are less likely to slow down when faced with changing demands due to seasonality or changing industry trends.
One of the most significant determiners of loyalty is customer satisfaction, which can be seen via customer retention metrics like return rate and the number of repeat customers.
4. Market Position and Competitive Landscape
Understanding where you stand in the marketplace is vital to knowing how you fare against your competitors.
The best way to do this is to identify your unique value proposition and compare it against those of similar businesses.
5. Brand Strength and Recognition
Brand strength may not have a direct dollar value, but it contributes significantly to a business enterprise's strength.
This is why large companies invest big bucks in marketing and advertising to ensure their brand sticks—the same is true for e-commerce businesses.
6. Website Traffic and User Engagement
Business appraisers are keen to look at the quality of website traffic, not just its volume.
While promising, web traffic is not enough on its own to indicate that an online business is doing well. It only means that you’re getting attention. You need to show that it’s translating into business.
The traffic volume has to coincide with the number of leads generated or the level of engagement that happens on channels where you promote your goods.
It also pays to look at metrics like the percentage of web traffic gained through organic methods like SEO, which promote long-term and sustained results.
7. Product Range and Supplier Relationships
The wider the range of your products, the better your business’s chances of withstanding fluctuations in demand.
Moreover, where you source your products from (and how many manufacturers you have in your portfolio) also determines how efficiently you can fulfill orders.
8. Scalability and Operational Efficiency
Customers are getting increasingly used to shorter order fulfillment times and better customer service.
The faster you can deliver products to your customers, the more likely they will keep returning.
9. Technological Infrastructure
Do you have a solid website safe against security breaches, or are you on trusted platforms like Amazon or Shopify?
Your technological infrastructure, including the platform you’re using and security maintenance, is the foundation of your online store.
10. Legal and Regulatory Compliance
A trusted online store must tick off all the necessary legal and regulatory compliance boxes.
This means meeting all requirements for consumer protection, data privacy, intellectual property rights, and the like.
11. Intellectual Property
Protecting any intellectual property, such as the networks, programs, and software you use, will give you an edge over other businesses.
12. Customer Reviews and Reputation
Social listening is vital if you want to know how your market perceives your products and services. Social media and platforms like Trustpilot are good places to gather genuine feedback and integrate with your e-commerce stores.
13. Financial and Accounting Practices
If your books are messy, appraisers will assume your operations are too, and that’s never good for business.
To get the highest possible valuation, start cleaning up your books and organizing your finances long before you would even consider having your business appraised.
14. Marketing Strategies and Channels
In the digital world, online presence is everything. Your marketing strategies must be robust and well-adaptive to changing industry trends to compete in a highly saturated marketplace.
15. Economic and Industry Trends
When valuing your business, external factors like the state of the economy and shifts in the e-commerce industry will impact how much your business is worth.
It’s vital to conduct valuations during seasons that are favorable to your business to maximize your exit strategy.
Unfortunately, these shifts are highly unpredictable. That’s why we recommend partnering with M&A experts who can help you navigate the ins and outs of the e-commerce industry. Explore how Exitwise can help you.
10 Different Methods of Valuation
Now, it’s time to dive into how to conduct the valuation of an e-commerce business.
Note, though, that to arrive at an accurate valuation, you may need to use more than one valuation method, depending on the nature of your business.
Below are 10 valuation methods you can choose from:
1. Discounted Cash Flow (DCF) Analysis
This valuation method looks at the projected return on investment or a company's future value based on its historical performance.
It’s most suitable for stable companies or businesses past the startup stage. According to the 50-100-500 rule by Alex Wilhelm, you’re no longer a startup if your business is worth at least $500 million.
Other signs indicate you’re no longer a fledgling company, including increasing bureaucracy, a solid team, and an established brand identity.
However, because of the seasonal nature of most e-commerce businesses, DCF is not an ideal valuation method.
2. Comparable Company Analysis (Comps)
The Comparable Company Analysis compares your business with other similar enterprises. It works under the assumption that businesses with similar attributes will have more or less the same valuation.
This valuation method also uses similar valuation metrics. It is most often used to determine whether a company is over- or under-valued based on the valuation of businesses of the same nature.
3. Precedent Transactions Method
The Precedent Transactions Method provides insight into the value that a business may fetch based on recent sales in the same market.
It can help only if the sales recently took place and the enterprises are somewhat similar (such as if they sell or produce the same goods or are about the same business age).
4. Earnings Multiplier or Price-to-Earnings (P/E) Ratio
Let’s say someone wants to invest in your business. They might want to use the Earnings Multiplier Approach to determine how much they should reasonably invest based on their expected ROI (return on investment).
The value of your business will be determined by using the Price-to-Earnings Ratio, which you can calculate by dividing the company’s price per share (or current market price) by its earnings per share.
5. Revenue Multiples Method
The Revenue Multiples Method determines the value of a business enterprise based on the gross revenue it generates.
It’s typically used for businesses with low revenue, such as startups, or those with a negative cash flow, as it focuses on a business’s potential for growth.
6. EBITDA Multiples Method
The most popular valuation method for e-commerce businesses is the EBITDA Multiples Approach. It determines the profitability of a business enterprise without looking at its cash flow and non-recurring expenses.
Many business owners also prefer this method because it analyzes profitability, checks for growth potential, and evaluates performance based on industry standards.
To learn more, check out our guide about how many times EBITDA a business is typically worth.
7. Cost-to-Duplicate Approach
As its name suggests, the Cost-to-Duplicate Approach calculates the amount it would take to build the same company from scratch.
Typically used to assess startups, it checks whether a new company has a strong competitive advantage by factoring in all expenses made to start the business.
8. Asset-Based Valuation
During the sale or a merger, the Asset-Based Valuation Method helps determine the fair market value of a business based on how much its tangible and intangible assets are worth.
This method is only beneficial when the value of the assessed company is closely tied to its assets, not its stock price.
9. Market Capitalization (For Public Companies)
Used when valuing public companies, the Market Capitalization Method (often referred to simply as “Market Cap”) evaluates how much an enterprise is worth based on the total dollar value of its outstanding shares of stock.
Simply put, if a company has 10 million total shares selling at $100 per share, its total market cap would be $1 billion.
10. Venture Capital Method (For Startups)
The Venture Capital valuation method is often the most widely used for startups needing further funding.
Since most startups are still in the pre-revenue or active growth stage, the Venture Capital Method determines their future profitability instead of focusing on current financial performance.
Still unsure which of these methods to use? Enlisting the help of financial experts can take this load off of you. Chat with an Exitwise advisor to find out how.
How to Value an E-Commerce Business in 14 Steps
Let’s get down to business. Here’s a step-by-step guide on how to value an e-commerce business:
1. Gather Financial Information
We can’t stress this enough: Get your books in order long before you even think about conducting a valuation.
Not only will this make the whole process easier, but it will also help you prepare to improve the value of your business before you need to sell or ask for funding.
You can gather only 6 months’ worth of financial data, but the gold standard is to go back at least a year. Doing so will help you gather substantial data to support your valuation and show stability.
2. Analyze Historical Performance
The primary basis of e-commerce business valuation is historical performance.
Armed with your business’s data, calculate your EBITDA (expenses before interest, taxes, depreciation, and amortization) or SDE (seller’s discretionary expenses) to determine profitability and potential for growth.
While both EBITDA and SDE are key valuation metrics, many focus on SDE, as it looks at profitability while accounting for actual cash flow.
If your goal is to understand your business’s cash flow clearly, SDE is the better metric. However, if you want to evaluate your business’s performance against industry standards, you’re better off using EBITDA.
3. Evaluate Business Model and Operations
Now, look at your business model and operations. Several e-commerce business models exist, including B2C (business-to-consumer) and B2B (business-to-business).
The type of business model that applies to you, your unique business attributes (such as age), and other aspects of operations (such as order fulfillment and inventory management) will affect your valuation method.
For instance, if you’re a startup company, your profitability will likely be low as you actively invest in growth. You may also need funding to realize your projected profitability.
In this case, you may use the Revenue Multiples or the Venture Capital Method well.
4. Assess Market Position and Competitive Landscape
Where you stand in the market compared to your competition will significantly impact how much your business is worth.
For example, many online stores selling the same goods to the same market segment may result in a lower valuation. The greater your competition, the harder it is to have an advantage.
Conversely, selling unique products, using proprietary technology, or having a more efficient order fulfillment process can give you a competitive edge that may raise your business’s value.
5. Analyze Customer Base and Loyalty
Next, evaluate your clientele. Your main goal here is to determine your customer base's quality and satisfaction.
You’ll want to assess customer demographics: their age, location, gender, social status, and the like. These will show how likely they are to support (or keep supporting) your business.
Customer satisfaction, which you can check with metrics like return rate and shopping cart abandonment, is another aspect that determines the health of your business.
The happier your customers are, the better the likelihood of loyalty and growth.
6. Review Website Traffic and Engagement Metrics
Your online presence is a jump-off point to translate website visits into quality leads or sales. So, when checking for website traffic, monitor what percentage of visits result in successful check-outs.
If your marketing campaigns are gaining traction for your social media pages but you’re not seeing an improvement in sales, something could be wrong with the user experience on your website that’s turning customers off.
7. Consider Growth Potential and Scalability
An e-commerce business with a high growth potential will naturally be valued higher.
Factors that drive scalability include proprietary technology, unique goods, and platform security.
Instead of simply displaying growth potential, showing a steady growth pattern for at least a year and the potential for further scalability can boost your business’s value even more.
8. Identify Unique Value Propositions or Intellectual Property
E-commerce is a tremendously competitive market. To maintain your edge, you must have a unique value proposition that sets you apart.
It can be any technology you use to make order processing and fulfillment more efficient or share values in manufacturing or sourcing your products.
9. Choose Appropriate Valuation Method(s)
It’s time to decide on the valuation method to use. You may use multiple methods to arrive at a more accurate valuation.
The most common method is the EBITDA Multiples Approach, which analyzes profitability and informs potential buyers or investors on your business’s performance compared to similar enterprises in the industry.
10. Perform Valuation Analysis
Now, apply your selected valuation method(s).
This part, however, is where it gets tricky. Valuation requires an in-depth understanding of the industry and the internal and external factors that impact the valuation process.
You can simplify this step by using an e-commerce business valuation calculator.
11. Consider Industry and Economic Trends
Once you’ve calculated your business's estimated value, you may adjust for external factors that may increase or decrease its value.
Factor in the state of the economy: Do people have the same capacity to purchase your products? Are inflation rates affecting the price of your goods?
Industry trends, such as product demand, also impact your business value.
12. Adjust Valuation for Specific Risk Factors
Aside from the external factors we mentioned earlier, certain risk factors affect the value of your business.
These include potential stockouts, client disputes, fraud, and security breaches.
Risks such as these are unfortunately common in e-commerce and should be factored in to come up with an accurate picture of the health of your business.
13. Validate with Comparable Market Data
To check whether your business is over- or under-valued, look at how much similar businesses are selling for. Doing so can also help when you need to justify your business’s valuation.
14. Finalize Valuation Estimate
Congratulations, you’ve come to the final stage of the valuation process!
This is where you assemble a valuation report detailing your business’s historical performance and other records that back up your end valuation.
Frequently Asked Questions (FAQs)
Learn more about how to value an e-commerce business with these most commonly asked questions:
How Much Can I Sell My E-Commerce Business For?
Your business’s dollar value depends on numerous factors.
You can use a valuation calculator to quickly determine the real-time value of your business based on specific attributes like financials and operations.
How Much is a Business Worth With $1 Million in Sales?
To determine how much a business is worth, you need to look at its gross revenue and other aspects, such as the enterprise's multiple most suitable for your business model and valuation method.
If you’re using the EBITDA Multiples Method, calculate the enterprise value, compute your EBITDA, and divide the enterprise value by the EBITDA.
How Do You Value a Small Online Business?
To value your small online business, gather your financial data and conduct a valuation analysis using your selected valuation method. Once you have arrived at an estimated value, adjust for external factors, such as industry trends and risks.
We hope this guide has helped you understand the intricacies of e-commerce business valuation.
But if you’re still feeling a little confused, don’t worry. You don’t have to navigate valuation on your own.
Exitwise advisors can help you set up a dream team of M&A experts who can accurately evaluate and maximize the sale of your business.
Set up a time to chat with our advisors today!