Whether you want to buy or sell your online business, it is essential to first figure out its value. However, valuing your online business is not necessarily a straightforward process.
The key to estimating the realistic value of any online business hinges on some factors like understanding consumers and the market, alongside some other evaluation factors that are typically applied to traditional businesses.
Here are the methods:
Consumer and Market Research
When estimating the value of an online business, you should have a thorough analysis of consumer behavior and market trends. Online customers are fickle, so this approach requires ongoing research.
Don’t forget, something that was in the spotlight years ago may no longer fascinate users today. This makes it essential to watch out for mistakes, as they could be costly.
As a result, conducting top-quality research cannot be emphasized enough when you’re buying or selling an online business. You need to be able to answer basic questions like:
- What do you see trending in the future?
- Are the predicted growths feasible?
- Are there any threats from the competition?
- Will it be easy to convert visitors into customers?
Valuation Factors for Traditional Means
Here are some other factors to consider when estimating the value of an online business:
- Asset Valuation:
If your online business is in eCommerce, the main things you need to account for are your stock, equipment, and warehouse, which shouldn’t be too difficult.
However, getting the value of your other online business assets may prove challenging. For instance, it will be hard to determine the worth of factors such as the importance of reputation, product or service quality, customer database, etc. Determining the asset valuation is often a matter of assessing financial factors like the intensity of sales and projected position of the firm within the industry.
- Financial Performance
One also needs to explore the performance of such businesses over the years in terms of things like cash flow and net profit.
A good approach is the price/earnings ratio, in which the firm is valued at a recognized multiple of the net profit. Any successful online business will typically sell for around twice the annual net profit.
For a new business with few assets, the discounted cash flow approach is often used to determine value. This involves estimating the future cash flow over a certain period of time while factoring in a discount to account for the time it will take to receive the projected cash.
- Entry Cost
For a young business without any accounts, the valuation approach might be used to estimate how much it would cost to start the business from scratch. However, this type of valuation approach does not account for the time and effort that were invested in order to get the company up and running.
- Personal Circumstances
What prompted the sale? An owner who needs quick cash due to relocation, illness or relationship problems may not realize or even care about the true value of their business.
Also, if the buyer has to borrow a large sum of money to foot the payment, the value of the business will take a hit.
- Operational Factors
Are the skills and knowledge of the business owner essential to the success of the business? Or are there established rules and trained workers that can help keep the business running even without the owner?
If the business can operate mainly without the owner’s input, the value will be high. This is also true of a scalable business.