An e-commerce business is much like any other commodity which is generally purchased to generate a return on investment (ROI). A wholesaler, for example, might sell chocolate bars to a retailer but only if a ROI is present or likely. This is the same with the retailer who also desires a ROI. Ultimately, however, the worth of the chocolate comes not from the wholesaler or the retailer but from the price that a buyer is willing to pay for it.
When selling your e-commerce business, you are like the wholesaler selling to the retailer. Whatever the retailer will do with your business after he purchases it matters less than that you are able to sell the business to him. And just as much as you are looking to make a ROI, so too is the buyer.
Profit vs. Assets and Revenue
Your e-commerce business is only worth what someone is willing to pay you for it. This necessitates distinguishing between profit, assets, revenue and loss, four variables that are often confused during the valuation of an e-commerce business:
- Revenue is the amount of money brought in by a business over a given period of time.
- Losses include whatever amount of money is spent to keep the business running.
- Assets in an e-commerce business include things such as the domain, design, traffic and list. Though they can help to generate profit, they are essentially losses.
- Profit exists when revenue exceeds losses.
For example, a seller with an e-commerce business that spent $15,000 making a website, $10,000 for its domain and a traffic valuation of $50,000 values the worth of his business at an extra $75,000 based on these assets. But because these assets may not be quantifiable as profit, the buyer may not include them in his valuation of the worth of your e-commerce business. The buyer desires a ROI and thus will not include non-profitable assets in his valuation of the business. Rather, they will likely act as losses for you as the seller.
From Profit to Worth
In calculating a probable ROI, the buyer is liable to include a risk-assessment in his valuation of your business. Such factors that decrease risk and thus increase the worth of your business include but are not limited to solid, consistent earnings for the business over a period of time, documented increased and increasing growth of the business, the use of automated systems, the generation of revenue through multiple streams, diverse traffic sources, a unique selling proposition and proven market leadership and branding.
Based on this risk assessment, a buyer will multiply the profit generated by the business by a multiple he deems fair. The average multiple used by buyers is 2.51. This means that a one-year-old business with a profit of $40,000 in a single year will be valued on average at $100,400. Assets that can increase the profit of a business may also be taken into consideration and added to the value, but this is not always the case. Simply because $25,000 might have been spent on the making of a website and its domain does not mean that a business valued at $100,400 will suddenly be worth $125,400.
As shown in the chart below, however, the multiple can be highly variable (0.5x to 6x). This means that an e-commerce business with a profit of $40,000 could be valued between $20,000 and $240,000.
So what is your website worth? Most simply it is worth whatever a buyer will pay for it. This means that there is no simple and static number that can be given. Based on its generation of profit, the risk it has for the buyer and the possible return on investment, each e-commerce business will be worth a different value than other e-commerce businesses. Lastly, what one buyer is willing to pay you for your e-commerce business may be very different than what another buyer is willing to pay.