Evaluating An eCommerce Business

Your eCommerce business is now several years old, has a loyal customer base, and thanks to the pandemic resulting in a boom in online trading, is growing well—but your efforts are now required elsewhere and you’re looking to sell.

Or perhaps you’re interested in running your own eCommerce business, but you don’t want to build it from the ground up, and you’re looking for an established platform with proven success.

When looking to either buy or sell an eCommerce business, it’s vital that you evaluate the business thoroughly and fairly to ensure you—as either a buyer or seller—have a complete understanding of the business’ content, aesthetics, functionality, marketing strategy, and revenue.

Without evaluating an eCommerce business, it’s impossible to know if you’re buying or selling for the right price, or what the future looks like for your investment.

Evaluating a business doesn’t start with valuing a business. Of course, when buying you want to know that the business is going to be a worthy investment. In several years the buyer is going to want to break even and start to see a profit, but to do that it’s vital that they’re presented with information on every aspect of the business, including customer base, traffic, outgoings, growth potential, and functionality.

As a seller, your main concern is going to be how much you can sell the business for, and as a buyer, your main concern will be how much money the business will make you in the long term. But, before considering how much money a business is going to make, you first need to analyze how it’s going to make money.

Here’s how to evaluate an eCommerce business before you buy or sell:

The factors to consider when evaluating the potential

Brand recognition and reputation

As a buyer, an important factor in your decision to buy an established eCommerce business, rather than build one from the ground up, is that it’s already a recognized brand within the industry. Brand recognition can be a long, expensive road, so buying a name already in the public consciousness could be an effective shortcut.

Without brand awareness, it’s difficult to establish trust. A business may have a solid logo, consistent style and formatting, and a user-friendly website, but if customers don’t know the brand exists, then the site isn’t going to make any sales.

Worse still, if the web is littered with one-star reviews, that first impression is going to stick with consumers. Oscar Wilde said, “There is only one thing in the world worse than being talked about, and that is not being talked about.” However, at that point, Oscar Wilde was yet to be made aware of Trustpilot.

When buying an eCommerce business, it’s important that recent reviews are mainly positive. It’s expected that there will be some less-favorable reviews, but the more one-star reviews there are, the more likely this will impact your chances at converting new customers.

This could be one of the reasons the seller is looking to distance themselves from the brand, and it won’t take a prospective buyer long to realize this for themselves. If a business has a less than savory reputation, how much time and money will it take to rebuild customers’ trust?

Marketing strategy

It’s unlikely that a business reached any level of success by accident, with word of mouth only able to contribute towards a finite amount of growth. That’s why there are still regular ads and digital campaigns for Amazon, the biggest eCommerce business in the world.

The internet is busy and loud, and to continue growing, a solid digital marketing strategy is vital.

Does the site follow Search Engine Optimization (SEO) practices? Do they have active social media channels with a strong following? Do they produce a blog and/or video content? Do they undertake Pay Per Click (PPC) marketing? Do they have a regular newsletter? Do they work with a PR agency?

Sellers will only be interested in purchasing an eCommerce business if there’s scope to continue growth, and a solid marketing strategy with consistent spending and measurable ROI offers the best chance to attract new customers.

It’s common for social media to be overlooked when evaluating an eCommerce business. However, a business with a strong social media presence can go a long way to building a loyal customer base.

Customer base

Ensuring a company has an active customer base is vital, and naturally, a business with loyal customers will be valued far higher than one without. If the business sits within a niche, you should also consider the cost per conversion from their digital marketing activity, such as PPC.

If you have a working knowledge of Google Analytics it will enable you to accurately analyze traffic sources, conversion rates, what is working and what isn’t, and return on investment.

Knowing the type of product the business sells will help the buyer determine how often the customer is likely to make a repeat purchase. If the website sells refrigerators, then they’re unlikely to be on the market for a new model for several years. However, if the site sells designer makeup, the customer may seek to make another purchase in a matter of weeks.

It isn’t just the number of repeat customers that should be considered. Other factors include the number of unique customers, active users, the user journey and speed at which new customers convert, social media following and engagement, and the number of subscribers in the mailing list.

The amount of traffic hitting the site each day, week and month can also indicate how well the site is performing. Sites with high traffic will generally be worth more than those with low traffic. However, if traffic is high but the conversion rate is low, it’s worth asking what’s happening along the user journey that’s preventing them from making a purchase. Are shipping costs too high, with users leaving shopping carts abandoned? Is the site too slow due to the increase in traffic? Or is the checkout process itself too clunky?

Spikes in traffic don’t always result in spikes in sales. Does the business have success with remarketing? What is the average time between a customer first visiting the site, and completing a purchase? The higher the cost of the product (i.e. not an impulse purchase), the longer this timeframe will usually be as they dip back into the research phase.

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Scalability

As a site’s customer base grows, so too does the need for scalability. As new customers find the website, and subsequently place an order, will this increase in demand result in a decrease in the quality of service? And if so, how much time and money will it cost to rectify this?

The fewer steps a customer has to take for their order to be fulfilled, the better. An increase in sales doesn’t always result in an increase in profit. With more traffic comes higher server costs, with more demand comes bigger staff and workspace costs, with more customers comes the need for a dedicated customer services team. What is the cost to the business per transaction, and at what point will that become unsustainable?

Revenue distribution across your products and services can affect how feasible it is to scale up the business. If 90% of your revenue comes from 10% of your products, it may be clearer which direction the business can move towards. Single product eCommerce is proven to have led some to success, but does come with risks if markets or trends change.

Outgoings

Outgoings to consider include:

  • Staff wages
  • Server costs
  • Property rent
  • Insurance
  • Equipment
  • Software
  • Utilities
  • Loan interest

As the business grows so too will these outgoings. It’s also possible that the figures will change in the short-term, based on agreements finalized under the current owner, which may be due for renewal.

When buying an established eCommerce business a new owner will likely scrutinize these outgoings especially carefully. Something the seller values highly, the buyer may see as an unnecessary expense, and this is something that the buyer should also consider. While the owner is selling the business and will no longer have control, they’ll still feel protective over the business they’ve built and have its best interests in mind.

Other factors to consider

The age of the business is also something to take into consideration. If a business is still in its infancy, but growing steadily, it is likely to be valued higher than a business that has been around for a decade but has begun to stagnate.

Some business owners also like to be more hands on than others. If you like to work closely across multiple aspects of your business, the next owner may prefer to take a step back from the day to day operations. What implications might this have on an owner who doesn’t wish to be so involved?

How to value an eCommerce business

Only once the above factors have been considered in depth can work on valuing the business begin. Understandably, both buyers and sellers will be keen to establish a business’ worth. Net profit is of course an important factor to consider, but to evaluate the business’ longevity, a number of other factors must be considered alongside it.

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Formulas

Using a formula such as Discounted Cash Flow (DCF) wouldn’t be appropriate for an eCommerce business, as DCF is far more suited to evaluating traditional, offline businesses with a longer earnings history. You may consider DCF to give yourself an idea of what the business might be worth in the future, but because eCommerce can fluctuate wildly, it isn’t recommended.

Seller’s Discretionary Earnings (SDE) is a simple formula: revenue minus the cost of goods sold and operating costs, plus any salary taken by the owner is added back. Adding the owner’s salary back into the calculation allows you to see the true earning potential of the business, but shouldn’t be used when calculating the value of the business.

Net Profit Value (NPV) is used to determine the feasibility of investment in a business and calculates the present value of future cash flows. It takes into account that a dollar today isn’t necessarily worth the same as a dollar a few years from now, and can give the buyer an accurate picture by using cash flow rather than net earnings.

Compare the competition

A simple way to get a rough estimate of the business you’re looking to buy or sell is by looking at the sales of competitors. The average eCommerce business sale price is 2-3 times the annual net profit, but this is often less than it’s actually worth.

Known as precedent sales, it can be an unreliable method as it uses the same multiples as Comps (Comparable Companies Analysis). The valuations are often higher than they should be, which can be appealing to sellers but can turn off potential buyers. Because of this, it shouldn’t be used as the sole source for a company’s value. There will be numerous factors and considerations in play that aren’t in the public domain, but it’s useful as a starting block to get an idea of the sort of ballpark figure you might expect.

Historical earnings 

To calculate an eCommerce business’ worth, look at the net profit over the last 12 months, then multiply it based on a figure agreed by the seller and buyer (usually between 1-5, but on average around 2-3). This multiplier depends on the above factors such as outgoings, scalability, workforce, and historic growth.

Naturally, the buyer is going to look to keep this low, but the seller’s eagerness to sell shouldn’t allow for the multiplier to be set lower than the business deserves.

For example, Tom makes $10,000 in net profit each month selling custom computers. There are four other employees, working out of a small warehouse with high rent. Tom has a moderate digital advertising budget, which is highly targeted and has a good return on investment. Tom has great reviews on websites such as Trustpilot, with a steady rise in demand for his products, ensuring growth.

Because of this, Tom will look to agree on a multiplier of at least 2.5. His net income is steady, with the option to scale up, however, staff costs and rent are high. Because of this, his seller may push back.

With 12 months’ net profit at $10,000, multiplied by 2.5, the business is worth approximately $300,000. This is of course subjective, with the buyer and seller having different ideas about whether or not this figure is accurate.

Let Latona’s do the work for you 

It’s possible that, even after considering each factor, you are still undervaluing your eCommerce business. At Latona’s we have almost twenty years of experience selling eCommerce businesses and can help sell your business using the highest possible multiples.

We understand what makes a successful business, and know exactly what to look for when it comes to evaluating an eCommerce business.

With Latona’s, you’ll be working with professional business brokers and exit strategy consultants, who will make your business visible to the largest pool of globally vetted buyers in the industry.

Use our Business Value Calculator to get a free and accurate valuation of your eCommerce business, and allow us to do the hard work for you.

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