How to Value an Online Business

In this post I’ll talk about the 3 best ways to value an online business.

These are the methods I’ve used and am using to give valuations for online businesses.

The initial valuation you come to for your own online business is very important as this will be the guidepost you will use when talking and negotiating with potential buyers, brokers and listing websites. This initial valuation will give you a realistic expectation of what you can expect in a sale.

With that being said lets get stuck into the first method:

 

Method 1: Multiple of Earnings

There are a lot of methods used across the internet and each broker will have his or her favourite method but the most commonly used is a valuation based on a multiple of earnings.

The first step in this process is to calculate the Net Profit over the last 12 months of business operation. This will be the revenue of the business minus expenses. You can exclude any income taxes, one-off expenses and any owner compensation from these expenses.

With the Annual Net Profit you’ll now be able to calculate a rough valuation.

The equation is: Annual Profit x Multiple = Website Valuation

“What multiple should I use?” I hear you ask. Well this depends on a few key factors, but essentially its the number of years of net profit that the business is worth.

Buyers see the multiple as the period of time, in years, they expect to recoup their initial investment after buying the business.

But to give you a rough number, the well known due diligence company Centurica did a study of public sales data that found that the average ecommerce sale multiple was 2.7.
So now you can come to a very rough valuation using that multiple by timesing your net profit by 2.7.

Here’s an example of a site I recently listed. So this business had an annual net profit of $19,000 USD. So $19,000 USD by the 2.7 multiple gives us $51,300 USD as our initial rough valuation. I actually listed this business for $50,000 USD using this method and others so even this rough estimate can give you an idea of what you might get for your business.

Okay so now to our second method.

 

Method 2: Find A Comparable Business That’s Been Sold

I like this method a lot as it uses real and up to date data from the market. The best place to look for recently sold online businesses is Flippa’s “Just Sold” page. Here you can enter your business’ monthly profit and how long it has been operating among other factors. You can then go into the sold listings that are similar to yours and see if it has some similarities when it comes to business structure, the assets involved in the sale and other fundamentals of the business.

With this data you can come to a range that your business might be worth.

As an example, The aforementioned business that netted $19,000 USD annually would have an average monthly net profit of $1500 USD and is 2 years old. With this we can look for similar businesses and see what their valuation is and assume we would be able to achieve a similar range in the event of a sale.

 

Method 3: Experience/Data and a Second Opinion

Of course when you’ve been in ecommerce for a long time and have seen many sites you get a good idea for what a business might be worth by looking at only a few key figures. This intuition is best found in brokers and those in the ecommerce community that have bought and sold multiple online businesses.

However a respected opinion like this is at times hard to find. Some valuation sites like SitePrice.org are notoriously bad and sometimes only value a business at 5-7% what it may really be worth. On the other hand, some brokers will over value your business so that they can lock you into a contract.

For this I would suggest contacting one of the top professional brokers directly through their website as they always offer free valuations. My brokerage is one of them, but I would also recommend sites like FE International and Digital Exits.

However, if you are looking for a quick valuation where you can put in a few digits and get a rough estimation, I would use Flippa’s valuation tool as it is far more accurate and based on more data than any other site.

With this being said lets see what Flippa’s valuation tool thinks of the business I listed recently. After spending roughly 2-3 minutes putting in some quick information Flippa has given be a range of $45,000 – $55,000 USD for my business. One good thing to note is that you can leave some spaces blank if you don’t have all the information on hand.

With that being said other factors of the business can dramatically influence it’s valuation. These include but are not limited to: assets included in the sale, years operating, reason for the sale, seasonality, social media followings, customer data, contracts, trademarks and registrations, business expansion opportunities, employees, niche, business structure, product range, target market and the support period that you as the seller can offer.

 

Conclusion:

So these are the 3 best methods to value an online business. Let me know what you think of these methods in the comment section, and if you have other methods that work for you feel free to comment them as well, as I’m sure there are many methods out there.