How to Evaluate the True Worth of an ECommerce Business?
📖 Learning
Running an eCommerce business has emerged as a highly lucrative and sought-after online business model. It allows you to expand your customer base on a global level without requiring massive investment. If you know all the ins and outs of running a successful eCommerce store, you can rake millions in revenue in an incredibly shorter timeframe. But this is just one way to earn using eCommerce stores.
Another way is to sell it off for a rewarding price. If you take a quick look at different website flipping marketplaces like Flippa, Empire Flippers, etc., you will find various eCommerce stores listed for sale. The listing price is usually a multiple of the revenue the site generates. If you don’t want the hassle of maintaining multiple stores, you can choose to set up profit-generating eCommerce stores and start selling them for substantial profits.
But the question is, how will you know the ideal selling price of an eCommerce store? You can do it by evaluating the store’s worth using the following methods.
Ways to Evaluate the Worth of an eCommerce Store
Valuation Factors that Matter for ECommerce
Determine the True Value of an eCommerce Store for Maximum Profits
Ways to Evaluate the Worth of an eCommerce Store
There are various methods to evaluate the worth of an eCommerce store, but specific methods are best suited for particular situations. You can use any of the techniques shared below that you deem fit.
Seller Discretionary Earnings
When evaluating an eCommerce store’s worth, factoring in the seller’s discretionary earnings emerges as the top option. It can be best described as net earnings before tax. To get the most accurate figure, you will have to deduct the total cost of products sold and operating expenses from the sales revenue and then multiply it by a given number. This number ranges from 1.5 to 5 and depends on various factors we will cover later in this guide.
After deducting these expenses, you can add back any costs that are not deemed mandatory to operate the store smoothly. The owner’s earnings can also be added to gain better clarity on the total revenue. In simple words, the net profit of the past months (generally 12 months) is taken into account and then multiplied by a number (ranging from 1.5 to 5) to ascertain the store’s present worth.
Discounted Cash Flow Analysis
Buyers that want to estimate the future return on investment after factoring in inflation should use this method to evaluate an eCommerce store’s worth. Although it is best suited to calculate the worth of traditional, offline stores that are more stable, one can always turn to this option for analyzing an online store’s value more reliably.
Under this method, you must deduct the last year’s capital expenditures from the operating cash flow. The resultant figure will be the free cash flow for the particular period. Do it for the previous five years to get an accurate cash flow growth rate and discount it according to the WACC of the eCommerce business.
For the uninitiated, WACC refers to the Weighted Average Cost of Capital. If this looks too technical, it is best to hire a professional to do it for you. If the current Discount Cash Flow (DCF) remains above the proposed investment figure, the investment could result in positive returns in the near future.
Precedent Sales
It cannot be termed the primary value evaluation method, but it can help the eCommerce store buyer and seller arrive at figures worth contemplating. If the previous two methodologies weren’t sufficient, try looking at the listed selling price of similar eCommerce stores on online marketplaces.
The acquisition price of similar eCommerce stores can offer some insightful points for reference. It can get tricky as the valuation criteria are never the same for all stores. Hence before proceeding with this point, predetermine a few key metrics, like company size, annual revenue, years of operation, and other things that are relevant to you.
Both buyers and sellers can have an unreasonable figure in mind, and checking the precedent sales can give a reality check to both.
Pratyusha Srivastava
Valuation Factors that Matter for ECommerce
Now that you’re aware of the standard and most popular methods to determine the worth of an eCommerce store, let’s quickly get a brief understanding of the factors that play a crucial role in most valuation processes.
Store Traffic
All eCommerce stores rely significantly on online traffic because higher traffic often translates to higher sales and vice-versa. Besides the quantity, it is also the quality that matters. For example, an eCommerce store attracting 5,000 high-quality monthly visitors will be worth much more than a store that attracts 50,000 low-quality monthly visitors.
Customer Base
Customers are the lifeline of any business, and eCommerce stores are no different. If your eCommerce store has a dedicated and loyal customer base that makes repeat purchases, its value will always be on the higher side. Many sellers make it a point to check the statistics related to repeat purchases before making any purchase decision.
Brand Value
If given an option, would you buy a product from a well-known brand you trust or a new store? You’ll most probably go with the former option because you’ve imposed your trust on the brand. Other online shoppers also think along the same lines. The sales prospects of a branded eCommerce store will always be higher than that of a non-branded one. Hence, you should never ignore this factor while determining the store valuation.
Besides these factors, you can also consider the financial history and operating costs for a more appropriate valuation.
Shubham Kumar
Determine the True Value of an eCommerce Store for Maximum Profits
Evaluating an eCommerce store’s worth isn’t easy and requires much of your time. But putting your efforts into it can prevent you from underselling your eCommerce store or paying more while buying one. If you want to employ the correct business valuation methods, you can stick to the above mentioned options. These methods are used by a major portion of eCommerce store buyers and sellers, so you have nothing to worry about.
FAQs
What are the types of e-commerce stores?
Traditional types of eCommerce stores are:
- B2C (Business-to-Consumer)
- B2B (Business-to-Business)
- C2B (Consumer-to-Business)
- C2C (Consumer-to-Consumer)
What are different ways to evaluate the worth of an eCommerce store?
The Worth of an eCommerce Store can be evaluated by:
- Seller Discretionary Earnings
- Discounted Cash Flow Analysis
- Precedent Sales
What are the factors for ECommerce Valuation?
Valuation Factors that Matter for ECommerce are:
- Store Traffic
- Customer Base
- Brand Value
What are the marketplaces for eCommerce stores sale?
Some marketplace where ECommerce stores are listed for sales are:
- Flippa
- Empire Flippers
- Motion Invest
- MicroAcquire Marketplace
- Investors.Club
What is the biggest ECommerce store?
Amazon is the biggest ECommerce store.
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