Opportunity vs. Potential while valuing your ecommerce company
It is interesting to see the wide range of value various buyers will attribute to a same online business. One buyer may find a business as worthless while other is willing to pay hundreds of thousands. Valuation of your ecommerce company is in direct proportion to the amount of opportunity perceived by the buyer. To understand this fully, we first have to differentiate between opportunity and potential.
Opportunity Vs Potential
Internet business owners I have served over the years have always stressed the potential their business represent. They were unaware of the damage caused on their business’s value by over emphasizing its potential. This is one of the most innocent mistakes that virtually every business owner makes and the word “potential” is perhaps the most commonly used words by business owners who nurtures unrealistic value for their business. This is also one of the "core" principles of developing a successful exit strategy. “My eCommerce company has so much potential to grow because of the size of the industry it operates in, specific niche it addresses…. and so on”. Yes, if only business owner had applied himself he would have done much better. If buyers apply themselves, more or better than you, then certainly they will achieve more success than you have experienced.
The problem is that the buyer’s response to all this always seems to be, “If I am going to do it why should I pay you for what I will do?”
Buyers will purchase because of the potential.
Buyers will pay for the opportunity. Opportunity that you have created. It’s already there and it’s only fair you get paid for it.
Buyers will not pay for the potential.
Few years ago I was helping a client who owned an online clothing designing company. He had created a unique concept of using designs created by elementary school kids in his line(s). This was such a unique concept that it immediately caught the attention of press and was all over the media in a short time. Among those interested were also some big box retailers who showed their interest in this company’s line. During this time, the owner was presented with some unique family situation that required him to sell his company. When the seller approached me to value and sell his company, I struggled to justify the expectations of the seller for his company. His company had a great potential but it was fairly young and implementation was untested. The company did not have years of history behind it and there was nothing to show other than the press coverage and interest from the retailers. I tried to explain this to seller but he was convinced that company can be sold for higher value. Fast forward few months and we learned that it did not make sense to sell the company for the money people were offering to pay for it because seller was trying to sell based on the potential and not a real opportunity. If on the other hand, seller had signed a long term contracts with retailers that guaranteed future revenue and profitability, the company would have created a real opportunity and it would have been easy to sell at a price that would have made the seller happy.
With above discussion, we know that any business that is priced based on fair valuation of the opportunity it represents can be sold provided it has a potential to grow, potential to make more profits, potential to attract more customers and so on. This not only explains the difference between opportunity and potential, but also emphasizes the fact that you will attract more buyers if your ecommerce company for sale offers both. Why both? This is because internet business for sale market places are flooded with all kinds of exciting opportunities for buyers. The first ones to be sold are the ones that offer both elements.
The Value of a Business is Directly Proportionate to the Opportunity a Buyer Perceives
It is evident that buyer who sees the most opportunity for your website business will pay the highest price. Next question is why the same opportunity could mean different to different people and how to find Mr. Right to whom your business will offer the most opportunity? This will be the topic of my next blog post …