Setting A Value For An Ecommerce Business

How much is my business worth?

It’s a question most entrepreneurs eventually ask, and online merchants are no different. They want to know the enterprise they’ve invested in and continually work to build will have real value if they ever choose to sell.

The good news is that profitable online companies do have value. The bad news is that there is no easy, industry-defined way to calculate what an ecommerce business is really worth.

Mike Gravel, co-founder and managing director of eBizBrokers, Inc., a mergers and acquisitions firm specializing in Internet businesses, said that, as a very broad guide, a business could expect to sell for two to five times its earnings before income tax, depreciation and amortization (EBITDA). Profit and profit margins remain primary factors in getting maximum value from a website’s sale. Having a high gross sales number doesn’t always equal a large sale price — profit is generally king.

“We had a [potential] client who was doing $70 million in revenue, but the net profit margin was 3.5 percent,” Gravel said. “Essentially, you look at that and say, ‘One wrong sneeze and you could be losing money very quickly at that kind of volume.’”

Beyond pre-tax profit margins, Gravel cautions there are many variables that ultimately determine the value of an online business.

To get the higher end of a sale price, Gravel said a business must produce a 20- to 30-percent EBITDA, possess high-margin products, be in a unique niche with higher-entry barriers or feature a product or technology that is proprietary. Additionally, several factors contribute to a site’s worth. Though not a comprehensive list, the following items are critical components a potential buyer will review before purchasing a site.

Keywords and search engine presence

How an online business ranks in the search engine universe is critical to driving traffic. Better rankings generally lead to increased value.

Todd Malicoat, a search engine optimization (SEO) and marketing consultant at Stuntdubl.com, has been both a buyer and seller of sites. A thorough analysis of a business’ cost per click and earnings per click yields a valuable perspective in the decision-making process, he said:

“It is easier for people who understand SEO to go in and buy a website and put a value on it because they can see the direct correlation between in-bound links and conversion to sales.” Anyone able to calculate the cost of acquiring each new customer through pay-per-click can then establish a clearer idea of the site’s value — and what it will cost to maintain the current customers and gain new ones.

In addition, he noted a seller should be aware that buyers routinely look at search engine rankings, the stability of those rankings, Alexa ratings, the quantity of unique keywords associated with a site and its current and past traffic levels, among other things.

“Without qualified, relevant, targeted traffic or the potential for it, a website is barely worth the space it’s hosted on,” Malicoat said.

Replication of the site

The nature of ecommerce is such that there are low barriers to entry. Potential buyers will probably ask themselves, “Instead of buying this site, can I create my own version of it more cheaply?” A seller should keep this possibility firmly in mind.

If your site has built a loyal following of visitors and shoppers, compiled a healthy opt-in newsletter list and created a unique sense of community, it won’t replicate easily. In that case, the seller will enjoy a more advantageous position.

“There is a lot of inherent value in a community,” Malicoat said. However, he added that shoppers who frequent an ecommerce site or visitors who rush to their favorite forum each day may become fickle if there is an ownership change. Potential buyers will likely desire a certain public level of transparency if there is a change in ownership, so there isn’t a negative response from those loyal to the site.

Assets

Beyond the conventional notion of assets — buildings, inventory, warehouses and computers — lies another asset that intrinsically impacts the value of a business: Its URL. Even if you don’t have a store “built” around the URL, the address may have value.

A so-called “keyword URL” generally carries more value than a less obvious address. For instance, the URL Golf.com would likely have far more value than Goodputters4less.com because the former is something a shopper might intuitively put into web browser without doing a search.

“URLs are kind of a neat concept; [they’re] what we refer to as ‘real estate space,’” Gravel said. You may not have anything built on it in the literal sense, but in the virtual world, “you have this land and it has some value. The value is no different than if you own a very attractive plot in a desirable neighborhood or a piece of commercial land on a high-traffic, busy street.”

If you want to get a ballpark idea of your URL’s worth, the web offers many tools that attempt to assess value. For instance, you can get a domain appraisal at Swiftappraisal.com or you can visit Zetetic.com for a list of 28 variables that impact domain values.

Competition

Are you in danger of being trampled in an overcrowded market, or have you carved out a unique niche? Perhaps you operate one small site in a Superdome-sized category like sporting goods, but with a few judicious adjustments your site could find distinguishing, serious value. One example might be to specialize as a “go-to” location for hard-to-find outdoor products. Being distinctive, especially in a crowded category, will add value to your business.

Diversity of income streams

Does your site sell at multiple locations or from one website? If you engage in multichannel selling, do you place products on auction sites, thus producing lower margins at one outlet, at the expense of the same products at your other locations? Do you make money from affiliate programs or other ads on your site?

A buyer will want to see stability in your revenue. Furthermore, he/she will look for opportunities to grow the revenue. “What the seller has to demonstrate is mainly that the site has a dependable source of income, that nothing is going to change [after a sale] and that revenue is not only valid, but it is going to sustain and grow,” Malicoat said.

Growth

Buyers want to see a track record of a business’ performance in the form of financial statements. The information should speak to these questions: Has the business been growing? Have sales been flat or apt to decline?

“If ecommerce [as a whole] is growing on a 20-percent, year-to-year gross rate and you don’t match that, you are going to have buyers who want to know why, what is going on and what are the issues,” Gravel said.

In short, your business will have a decent value if there is a healthy profit margin, a history of growth that can be backed up by financial records, a healthy ranking in the search engines and, ideally, a unique sense of community built around a loyal following of repeat customers. If nothing marks your site as unique within its niche, or if you operate a site that could be easily replicated, the value of your site is much less than you probably want to know.

The good news is that websites do sell. Beyond the attention received by the mega-sales of YouTube and MySpace, “average” sites are regularly bought and sold.

“For every YouTube deal you hear about — if you dig in a little bit more — you will probably hear of 10 to 15 smaller deals that were just under the radar,” Gravel said. “They may be deals for $6 million, $10 million, $12 million, $25 million — that type of stuff. Then at the next level, which quite often does not get picked up by the media, you could find dozens more of these smaller deals.”

Your website could be one of them — provided you know what it’s worth.