Valuing an online business can be tricky. After all, because your business operates online rather than in a physical store, you may find that many of the traditional valuation methods do not value your business accurately.
However, although the process of valuing an online business is different to valuing a traditional bricks-and-mortar store, as long as you’re clear on the methods available and you know how to apply them correctly, you can arrive at an accurate and fair valuation without abandoning standard business principles.
To help you learn more about how to value an online business for sale, we’ve put together this practical guide. In it, we’ve explained the differences between valuing online and offline businesses, the processes for valuing your online business and some of the techniques you can use to achieve a fair and accurate valuation. Finally, we’ve shown you how our business value calculator can help make the process quick and simple.
The differences between valuing an online and offline businesses
When valuing online businesses, many first-time sellers face challenges when trying to come up with a valuation that’s fair and accurate. This is because the way that online businesses are valued is different to the way that we value bricks-and-mortar stores.
As a result of this, many investors misunderstand the valuation techniques that are required for valuing an online business. Due to this, they use the wrong information in their analysis and lose sight of the big picture. This ultimately leads to an inaccurate valuation that either puts off potential buyers or fails to maximize the value of the business for sale.
When you’re valuing your online business, you need to assess a range of factors that would not necessarily be included in a valuation for an offsite business. After all, when it comes to valuing online businesses, although certain metrics like cash flow, revenue and customer base all remain just as important as they do in offline valuations, many other metrics need to be considered.
For example, if you’re running an internet business like an eCommerce store, your valuation will also need to factor in metrics like website traffic and search rankings. This is because all of these metrics have a direct impact on the number of people who are visiting your website, clicking on adverts and buying products. As a result, they must be considered in order to reach a fair valuation. If you fail to include them in your analysis, you’ll likely sell your business for less than it’s worth.
Of course, the exact metrics you’ll need to analyze to value your business will vary depending on which form of online business you run. For example, a SaaS business will be valued differently to an eCommerce store. Due to this, it’s always wise to speak to an experienced broker who knows the market.
That said, if you want to work out a valuation yourself or want to obtain a rough estimate of what you might be able to sell your online business for, there are a number of techniques and methods you can use. Let’s take a look at those in more detail.
Four methods for valuing an online business for sale
A number of approaches can be used to help you determine the value of your online business. As a result, the process can be complicated. For this reason, it’s not uncommon for a prospective buyer and a seller to reach two completely different valuations for the business. This often happens when your buyer either takes a different approach or views the data in a different way.
However, throughout the valuation process, the important thing to remember is that a fair deal can always be reached if both the buyer and the seller are willing to compromise and negotiate.
That said, the most important thing you can do is to negotiate from an informed position. By identifying all of the factors that will positively impact the value of your business, you will be in a strong negotiating position. However, you’ll need to keep in mind that even if this is the case, several rounds of negotiation will likely be required.
One way that you can reach an informed negotiating position is to use multiple valuation methods. By gathering relevant information and using proper valuation methodologies, you should be able to not only calculate a fair value for your business, but also gain an in-depth knowledge of its positive attributes.
Most valuation methods take some form of annual profit and apply a multiple in order to predict future revenues. In instances like this, historic profits are seen as an indicator of future successes. However, depending on the nature of your online business, these profits could increase incrementally, increase exponentially or decrease. As a result, you need to work out a multiple that accurately reflects future forecasts.
Each valuation method you use could provide a different figure for how much your business is worth. As a result, as a business owner, you need to decide which valuation method (or methods) are best for you. In doing so, you’ll need to choose methods that correctly balance the opportunities that are available to a potential buyer with the risks they’ll need to take.
When selling your online business, it can be easy to get wrapped up in the emotional aspect of selling something you’ve worked really hard on. However, you need to ensure that you’re as objective as possible. If you fail to be objective, you may over-value your business and lose prospective buyers.
The method (or methods) you use to value your online business will be informed by the type of internet business you’re running, the age of your business, the amount of profit that you make and the size of your cash flow. Four commonly-used methods are:
- Seller’s discretionary earnings and multiples (SDE): This method is often used in situations where the current owner of a small internet business runs daily operations and wants to sell to someone who will take over these responsibilities.
- Precedent sales: This method is popular for valuing established businesses that have a predictable profit trajectory.
- Discounted cash flow (DCF): This method is useful for valuing businesses that have invested significantly in future growth.
- Traffic valuation: This method can be used to determine a valuation for a website that hasn’t been monetized.
To help you decide which of these four methods is right for valuing your online business, we have outlined some more details on all four approaches. However, you’ll need to keep in mind that in order to receive an accurate valuation for your business, it’s often best to combine the different approaches and compare your findings in order to get a complete picture. This will help you ensure that the valuation is both fair and accurate. By combining valuations and reaching a consensus, you may also be able to reduce the amount of negotiation required with prospective buyers.
Seller’s Discretionary Earnings and Multiples (SDE)
If you run a small online business, the SDE method is likely to be the starting point for creating a valuation. Like many business valuation methods, the SDE approach uses your business’s current earnings and applies a multiple to assess its value.
To get a valuation, you need to multiply your seller’s discretionary earnings (this is essentially money left once the cost of goods and critical operating expenses have been deducted from gross income) by your chosen multiple.
However, you may find it difficult to decide on a multiple for your business. After all, this number represents the strength of your business based on its performance against a number of different metrics like its website traffic, brand strength and organic search visibility. The higher the multiple chosen, the higher the future estimated worth of the business.
Multiples vary considerably for online businesses, and you should be aware that you and the prospective buyer may believe that different multiples are appropriate. This can create a gap between valuations that can be difficult to bridge.
For this reason, you should be prepared to negotiate and ask the expert advice of a broker who will advise you on how realistic your valuation is and how you can maximize your business’s value. After all, each party must agree on the multiple used. Due to this, it’s best for you to identify as many positive factors about your business as possible. If you, your broker and the buyer agree that all of these points are positive, you’ll add value to the business and increase its worth. When conducting this analysis, you should focus on showing that your business is scalable, sustainable and transferable.
The exact factors that will be used to determine your business’s multiple will depend on the type of online business you run, but common factors include:
- The age of the business
- The gross and net income of the business over the last three years (or less if the business isn’t yet three years old)
- Whether your business model can be replicated by new businesses
- The stability and growth of revenue over the period
- Whether customers and suppliers can be transferred to a new owner
Traffic and website performance
- Organic rankings
- Volume of traffic from paid search
- Stability of search rankings and traffic
- Link profile
- Traffic share
- How well your business is known in your industry
- Whether your business is more or less recognized than other brands in the sector
- The presence of brand assets
- Owner responsibilities
- Documented processes and procedures
- Time requirements from owner and employees
- Number of active customers
- Number of repeat customers
- Demographics of customer base
- Cost of acquiring new customers
- Lifetime value of customers
- Churn rate
- Size of emailing lists and social media followers
- Website and CMS scalability
- Ability to launch new products
- Possibility for overseas expansion
You and your prospective buyer will both need to agree on how much these factors actually improve (or harm) the value of your business. To work this out, you’ll need to attribute a suitable weighting to each component based on how much value that factor is perceived to add. As a result, human judgement is necessary and it’s not uncommon for negotiations about the multiple to be complex. Due to this, we recommend using a professional broker who will help guide the transaction and ensure that a fair value is reached.
Precedent sales (EBITDA)
The precedent sales method involves looking at how much similar businesses have sold for in the past. Although all businesses are unique and yours may be slightly different to the comparable sales figures you can find, this method can still be good for providing you with a ballpark figure.
In this respect, the precedent sales method can be very useful if you, your broker and your prospective buyer cannot agree on the correct multiple for your business. This is because, if the valuation you receive using the precedent sales method is wildly different to the valuation you receive from the SDE method, then this may show that the multiple you’ve used is incorrect and you may need to reassess the formula you’ve used, either to increase the value of your business or lower it.
However, using the precedent sales method can be difficult if you can’t find comparable sales. After all, although a business may match yours closely in terms of turnover and size, there may be massive differences between the two businesses in relation to any of the factors bullet pointed above. For example, a business with a similar amount of revenue to yours may not have anywhere near as much brand recognition or may suffer from inferior organic search performance.
As a result, to evaluate relevant precedent sales, many people assess the comparable company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Essentially, this figure provides you with a tangible comparable metric. Although this method will not include the value of capital investments such as your business’ technical infrastructure or property, it is a metric that’s used for almost all large company transactions because it provides strong valuation parameters.
Discounted Cash Flow analysis (DCF)
A DCF analysis is an incredibly thorough way of valuing a business and it uses cash flow as the basis for doing this. The DCF method calculates the value of a business based on expected future cash flows, with the addition of a discount rate (usually the weighted average cost of capital). As a result, it provides potential buyers with an estimated return on investment for purchasing an online business, with appropriate adjustments made for time and inflation.
For this calculation to be successful, the forecasted valuation must be discounted because inflation naturally erodes the value of the money over time. If money is received now, it will grow over time because you’ll receive interest payments. However, this will not happen for money you receive in the future, which is why its value must be discounted in the calculation.
Although a discounted cash flow analysis is a great method for valuing a business, there are several instances where it isn’t suitable for online businesses. This is because, for your business to be valued using the discounted cash flow method, it must be mature, stable and have a predictable cash flow. Sadly, even some of the most established online businesses don’t meet these thresholds because they suffer from variances in monthly cash flows and immature business models.
As a result, although a discounted cash flow analysis can be a good way of valuing a business (particularly if you’ve invested significantly in future growth), it’s best to use it in conjunction with another form of valuation in order to get a full picture of what your online business might be worth.
Not all internet businesses are monetized. If your website has a substantial amount of traffic but doesn’t generate income, then you can achieve a valuation for it by using the traffic valuation method.
In order to use this approach, you will need to research the keywords and phrases that drive traffic to your site. Once you’ve established the terms that your business is ranking for and the search phrases that are bringing traffic to your website, you then need to identify the cost-per-click value of each keyword.
If your website receives upwards of 90% of its traffic from five keywords, you need to find the cost-per-click for each of these five phrases using Google Ads. You can then multiply the cost-per-click for each phrase by the number of visitors that are drawn to the site by that search term. By doing this for all the relevant phrases and adding the total cost together, you’ll get a sense of how much your website’s traffic is worth. This can then be factored into a potential sale price.
However, although this approach is very useful for valuing sites that aren’t yet monetized, it is not an effective way to value a site that’s regularly bringing in revenue. This is because this method often undervalues certain internet businesses like SaaS providers and eCommerce stores. That said, the approach can still be useful for checking valuations that have been reached using the other methods we’ve mentioned above.
Using our business value calculator to value your business
Need help valuing an online business for sale? Then use our business value calculator. By providing us with a few basic details about the online business you’re thinking of selling, we can tell you the current value of the business’s future cash flow.
Just tell us some basic details about your initial investment and some information about the business’ cash flow, like its annual revenue and annual expenses. We’ll then show you the value of the business’ cash flow. By using our calculator, you can carry out a discounted cash flow analysis in a matter of minutes.
Although the calculator only takes into account the current value of future cash flow and does not take into account goodwill, inventory, content, software or any other value the website or domain might have, understanding the value of cash flow is imperative. This makes the calculator a highly useful tool. So, get started today and receive the information you need in only a few clicks.
Alternatively, if you’d like to receive more information about how to value an online business for sale, get in touch with our expert brokers. We have experience closing five, six and seven-figure deals for online businesses and we can help you maximize the value of yours.
Once we’ve agreed a sale price for your online business, we can also send the listing to more than 20,000 globally vetted buyers. So, get in touch with us today to learn more about how we can help you plan your exit strategy.