Contributing Factors When Evaluating Internet-Based Businesses

My favorite industry to work in, by far, is anything in the online market space such as eCommerce, SaaS, and affiliate websites. I feel there is just so much freedom and opportunity in this field, and the future only looks brighter as technology increases.

Finding the value of an online business when it comes time to sell is actually very complex. There is much more to it than just picking a multiple of earnings. I’m going to list 10 common questions an experienced broker will consider when finding the value and salability in this market.

1) What type of business is it?

  Not all internet businesses are the same. Some are valued different than others based on whether they provide products or services. A SaaS will typically have a higher multiple than an eCommerce or a content website. This is because they’re subscription-based and retain a higher customer retention. Also, they’re proprietary due to the development of the technology they offer. Anything directly developed or manufactured (patented) by the company adds value. You will typically see valuations done by a multiple of SDE (Sellers Discretionary Earnings).

  For an eCommerce the multiple is usually between 2.5x-5x, while cloud-based services have multiples between 4x-10x, and content sites have multiples between 2x-4x. The other factors mentioned in this article will determine where a business belongs in these multiple ranges. It’s also important to note that multiples for online businesses have overall been increasing due to the higher demand for them.

  Another thing to consider is the types of customers the company is geared towards. A B2B (business-to-business) model is considered less risky than B2C (business-to-customer). Wholesalers and service providers to corporations would demand a higher multiple than selling single items or services to individuals.

2) What’s the size, age, and trend of the company?

Sometimes the multiples will be based off EBITDA or revenue instead of SDE, or possibly a weighted average. It all depends on the size of the business and how involved the owner is. Larger businesses with a full management team will tend to use EBITDA. Also, the multiple tends to be higher with larger companies. A SaaS with $100,000 in profit might be worth 4x SDE while a similar SaaS with $1,000,000 in profit might be worth 10x EBITDA.

Age is also a huge factor, mainly because buyers want something with a proven track record for growth. Showing an inclining growth trend will allow the valuation to be based off the most recent and most profitable year as opposed to having to take a three-year average when the trend is declining or oscillating. Anything established less than 3 years ago will be much more difficult to sell.

3) How is Inventory Handled?

With eCommerce, it may be important to think about how inventory and shipping methods impact the bottom line. Holding inventory tends to be more profitable but requires more time and labor. Drop-shipping on the other hand can be attractive due to how simple it is, but cuts more into your profits as the suppliers will add on additional charges for this service. I find that the best solution is a blended model that drop-ships items that make sense logistically, while holding inventory for the commonly sold and easy to store products.

  Also, consider whether you are fulfilling orders in-house or using a 3PL fulfillment center. The pros and cons here are similar to drop-shipping verses holding inventory. Overall, having the logistics and fulfillment handled by someone else adds value to the business because it’s easier and more streamlined.

  What’s the turn rate of inventory look like? Higher turn rates are better indicators of a strong business and lead to higher valuations.

  Conversely, for subscription-based businesses, you want low churn rates. This is the rate in which customers subscribe and unsubscribe. High churn rates mean low LTV (customer lifetime value), and will ultimately lower the value of the business.

  Is there a seasonality factor in play? Some products or services are in higher demand during certain seasons. If the business depends too much on profits coming in during one point in the year, it could be a hard sell to buyers looking for a steady stream of income.

4) Who’s the competition?

  If a business has too much competition, then it will be harder to sell, which will also affect its value. A good example with eCommerce is apparel. Fashion is the number one most sold industry in eCommerce with an expected $760 billion in sales for the year 2021 alone. You might think that’s a great reason to sell apparel, but so does everyone else. It’s becoming a more and more saturated market, lowering the chances of successful growth unless your business is on top of trends, hyper-personalized marketing, and unique fashion products. Keep in mind too, you will be competing with apparel giants such as Nike, Nordstrom, Walmart, and Macy’s.

  There’s also the big elephant in the room, which is of course Amazon. Every year they gain more control of the overall eCommerce market share and currently stand at 50%. The good news is that 54% of products sold on Amazon are through 3rd party dealers. This plays into my next question.

  Focus on your differentiators to stand out from the crowd. What kind of unique product or service can you offer? How can you explain to a potential buyer that your company offers more than the usual to your target audience?

5) How many channels does the business sell through?

  More channels mean more stability and opportunities for sales. Selling products only through your website will be seen as less desirable and riskier than something selling through multiple channels like Amazon FBA, Etsy, Bonanza, and any social media accounts. Even selling on just Amazon alone can be risky because they are always changing their regulations that affect sellers in major ways. It’s beneficial to be using an eCommerce platform such as Shopify or Magento which will allow you to integrate multiple channels into a central hub for easier fulfillment.

  With SaaS, sales channels look a little different. These businesses want to look for affiliate partners, distributers, system integrators, app stores, and value-added resellers to give the business multiple ways of selling their software.

 6) What does the marketing and SEO look like?

  Having the right balance of marketing will greatly improve the bottom line. There is an art to getting it right. Often, I’ll see online businesses spending too much money on social media marketing or Google Ads and not getting enough results out of it. You must keep track of the insights to see what’s working and what’s not.

  Getting SEO right is also a tricky process that takes some knowhow. But having your SEO down will not only improve sales but also improve your chances of selling the business for more money.

  Another piece that’s important is Amazon ranking. Having a high ranking on Amazon is hard to obtain, but extremely desirable. This will have an impact on your multiple and ability to attract buyers.

  One last thought on this topic is reviews. The reviews of an online business are arguably more important than any of the marketing. Having numerous positive reviews will be a great supporting factor for a higher valuation, while having poor reviews could impede your ability to sell at all.

7) How easily can a new owner take over the business and maintain/grow sales?

  The level of involvement from the current owner will play huge into this. If the owner is doing most of the work and the business depends on them, this will be less attractive to a buyer. A business with the right management in place and only involves minimal tasks and fewer hours from the owner is what most investors prefer. The more a new owner must be trained and spend more hours maintaining the business, the less valuable the business is.

  Automation is a huge component of this. It’s important to utilize current technology to streamline tasks and processes as much as possible. This will cut down on costs and labor hours.

  The ability to transfer accounts and permissions such as vendors, suppliers, licenses, and patents to the new owner is important as well. It’s helpful to be on good terms with suppliers and vendors. Have a discussion with them to be sure the next owner can draw up new agreements with them. You should also ask suppliers if it would be ok for a new owner to switch the way products are handled. You might operate on a drop-ship model, but the buyer sees this is a great opportunity to increase profits by holding inventory. Having this discussion before going on the market will pay off during due diligence when the buyer meets with them.

8) Is customer service handled properly?

  Customer service can make or break a business. Having a system in place to ensure quick responses to customers and satisfying any complaints or requests will make an online business way more valuable.

  It’s highly recommended you put some measures in place to limit customers’ needs to speak with someone directly. Some ways to do this are having an up-to-date FAQ page, ensuring all products have detailed descriptions, providing an easy to locate payment history, and making use of chatbots to answer simple questions.

  For personal customer service, it’s preferable to outsource these tasks to a virtual assistant. Using VA’s are a great resource, but just make sure you’re using one that’s trusted and who can understand everything in your business from what products or services you offer to how warranties, returns, and exchanges are handled. Provide them with a knowledge base to help them answer questions and give them tools like a helpdesk and a live chat service to make it easy and fast for them to respond to customers.

9) What type of payments are accepted?

  Payment processing through multiple services will allow customers more options to buy, and this will increase the business value. Some common options are PayPal, Square, Apple Pay, and Google Wallet.

  Be careful about accepting cryptocurrency as a form of payment. Buyers could view this as risky. If you do accept anything like Bitcoin, my recommendation is to just remove it before listing the business, and then recast the financials to convert crypto coins into dollars. If a new owner wants that option, they’ll need to add their own wallet anyways.

10) How well is everything organized?

  As with any business you’re selling, having everything organized and documented is key to a successful sale. Financials should be done by a CPA to ensure correctness and well-documented P&L’s, balance sheets, and tax returns. Keep an organized database of all information pertaining to customers, suppliers, and vendors. Document all your systems and processes to make it easy for a new owner to read through and understand exactly how the business operates. For SaaS, you will also want to ensure you document source codes.

Final Thoughts

  As you can see, there are many things that a professional will think about while doing a proper valuation of an internet-based business. There are even more things considered that haven’t even been covered such as the level of website security, outstanding claims and returns, recent developments in a particular niche, and legal protection on intellectual property. If you plan to sell your business soon, I highly recommend thinking over these questions and changing things within your business as soon as possible to increase its value and chances of selling. Our team at Almond Tree Group would be more than happy to assist you with any of these areas and help you develop an exit strategy.