By Thomas Smale
Just over two decades ago, Jeff Bezos launched Amazon.com. At the time, Amazon—and e-commerce in general—was considered a novelty. Maybe it could work for books and CDs. But who would ever purchase clothes or shoes they can’t try on? But who would ever purchase clothes or shoes they can’t try on? Let alone go online to do their grocery shopping!
23 years later and Amazon has not only outlasted CDs, it has become, alongside smaller e-commerce businesses, a part of our everyday life. Over 63% of US households have an Amazon Prime account. For every $10 spent online in the US, over four dollars goes to Amazon. In less than a generation, Amazon, and countless smaller e-commerce stores have altered not only the retail landscape but also how we live our day-to-day lives.
While no one can compete with Amazon for scale, there are hundreds of highly successful e-commerce storefronts, some with thousands of employees, and many with just one or two. If you own or run a successful e-commerce site, chances are you’ve wondered what it’s worth–and I don’t mean just the bottom line on your balance sheet.
The fact is, an e-commerce business with solid numbers, steady growth, and passive processes can be a very attractive target for buyers and investors.
Even if you’re not yet ready to head for the exit, the following tips will give you a basic understanding of how a buyer values an e-commerce business. Added bonus–implementing these practices will likely lead to a better-run, and ultimately, more salable business.
There are many factors that determine the value of an e-commerce business. Here’s a helpful primer:
As you can see, a lot of work goes into valuing an e-commerce store and preparing it for sale. The above list is just the tip of the iceberg.
For the purposes of this article we’re going to focus on three steps you can take to make your business run smoothly—and make it attractive to buyers at the same time.
Doing It by the Book
Not the most exciting topic to kick off with, but certainly one of the most important. It’s shocking how many companies–particularly those that have experienced rapid growth and have only been established for a few years—simply fail to keep adequate records of business transactions. Forget about the long-term. Even in the short to mid-term, failure to follow accounting best practices is a recipe for disaster.
When it comes to valuation, without a solid set of books there is virtually no chance any established buyer will be interested in your business. It’s much easier to take financial responsibility seriously from the start. Having to go back through months, or years, of poorly kept accounts will cost a fortune in both time and money. They call it forensic accounting for a reason—the patient (in this case a business) is often dead.
For e-commerce businesses, keeping records doesn’t stop with traditional accounting. You also need to show where your traffic comes from, how much of it is organic or paid, and what keywords drive people to your site. Google Analytics, when configured properly, can take care of most of the heavy lifting for you. Without traffic documentation—over a long period of time—it will be an uphill battle to find a buyer.
Content is King
Speaking of traffic, what is it that drives users to your site? Social media? Search engine optimization? Word of mouth? The answer is: all of the above. A coherent and well-executed content marketing strategy is the cornerstone of any effective SEO campaign. Why do you need SEO? To drive organic traffic to your site. There is no method more effective than climbing up Google’s search engine results page (SERP). Higher SERP ranking means more eyeballs on your site and more sales for your e-commerce storefront.
Studies have shown that organic search results are 8.5x more likely to be clicked on than paid search results. Also, researchers have used heatmaps to show that searchers’ eyes focus on the top organic results, with people barely noticing the ads to the right.
Serving your customers high-quality content will pay dividends in the long-run. If you don’t have time to do it yourself, consider outsourcing. But pick the right agency—the days of keyword stuffing are over. When it comes to quality content, you get what you pay for.
Having a replicable content marketing and SEO strategy in place that can be proven to drive organic traffic and conversions to your site will greatly increase the value of your business.
Passive vs. Active
It’s practically a given that most potential e-commerce business buyers are not looking for a full-time job (at least not another one). The fact is, they want to spend as little time as possible actually working on the site, while still reaping a high return on investment (ROI).
Do everything you can to extricate yourself from the business, as an employee before you’re ready to sell. If a new owner needs to rely heavily on you, they are unlikely to buy your store in the first place.
Here are three ways you can disentangle yourself from the company, and thus raise its value for potential buyers.
- Build a brand that stands on its own: Resist the temptation to be too closely identified as the “face” of your business. It may seem appropriate at the start, but when it’s time to exit, it will make rebranding hard on the new owner.
- Outsource where you can: Most entrepreneurs love to wear a lot of hats, especially in the startup phase. Take a hard look at what you do for the business, and take steps to delegate responsibilities. It’s easy to give into the view that no one can do things better than you. It may be true. But there’s only one of you—and you’re trying to leave. Build an in-house team that’s happy to stay on through a sale (and an owner that’s willing to employ them). Or better yet, outsource to freelancers that you have trained in specific areas related to your business. Either way, outsourced or in-house employees can stay with a new owner, which is another major selling point.
- One of the biggest headaches for any e-commerce business is fulfillment and supply-chain-management. It’s time-consuming and labor-intensive. Those are two factors in any valuation that count as a negative. Consider a drop-shipping solution. Perhaps better yet, look at Fulfillment By Amazon (FBA) and see if it could be a fit for you, especially if you’re a Shopify merchant as integration between the platforms was announced recently. FBA puts its unparalleled fulfillment and customer service at the disposal of small business, all with no upfront costs. The opportunity to create passive income through FBA makes it attractive for buyers.
Valuing an online business is no easy feat, even when you’ve been doing it for many years. Following the three steps above and taking a closer look at the Valuation Drivers chart will give you an idea of both how your business will be valued and increase the value of your business.
- Keep solid records of all financial transactions and sources of traffic, preferably from the day you launch. It will make your life easier in the long-run.
- Consider the value of implementing an ongoing and coherent content marketing strategy in order to drive traffic and conversions.
- Try to make your business as passive as possible—at least when that relates to owner involvement.
If you’ve found this article helpful, and are thinking of selling your e-commerce business, consider getting in touch with an expert. Contact us to request a free valuation.
Thomas Smale is a serial online business entrepreneur and expert. Early in his career, he began building and selling small online companies. This turned into one of his ventures when he founded FE International (FE) in 2010, growing the business with zero funds from ground up and consistenly doubling annual revenue, as well as the average deal size. FE has several subsidiaries, including MageMail, MRR Media, and GrooveJar. Thomas specializes in advising in the M&A of SaaS, e-commerce, affiliate, and content businesses. He has consulted thousands of internet entrepreneurs on exit strategy, growth, and business development.