Solving Your Online Business Valuation Headache
If you are selling your online business one of the biggest
questions you will have to answer is, "what price should I ask
for my business?"
How about if you are buying a business?
Well, then your question is likely to be, "Is the price they
are asking fair for that business?"
While understanding online business valuation is not an
exact science, there are some definite factors you need to take
into account when pricing or reviewing business valuations:
1. Online Business Revenues
This is the first place to look, but by no means the only
condition to take into account when putting a value on an online
business.
You want to look for signs of either consistent or growing
revenues
over as long a period of time as you can find for a particular
online business.
Ideally, you would like to see a minimum of 12-month revenue
history,
as it is quite easy to generate a spike of revenue over 1-2
months
online, longer term growth is a much better indicator of value.
2. Net Profit
A much better indicator of online business value is net profit.
You
want to look at a monthly breakdown of revenue less all
fulfillment
costs, expenses, and operational expenses to get a feel for both
percentage of profit and profit patterns over time.
Online business profit will expose various conditions including
faulty business models (where the business pays too much for
wholesale arrangements to ever make a sustainable profit),
situations where the business owner has given away their product
for revenues, and many other undesirable factors that may lower
(or increase) the value of a particular online business.
3. Expenses
You definitely want to get a handle on ALL expenses related to a
given business. You want everything to do with running the
business such as supplier costs, distribution costs, marketing
costs, operational costs, staffing, etc...
You also want to get details on all licenses and service
contracts
that are in place with suppliers, web hosts, autoresponder
companies,
and distributors. You don't want a nasty surprise a month after
buying your business when you re-negotiate an agreement at much
different terms.
4. Time/Effort to Operate
Depending on your criteria, you will want to know if a
particular
business has been run by 1, 10 or more people and if they have
spent
a full-time effort on this business.
You need this information to know how much it will take you to
maintain and grow this business going forward.
5. Unique Value Characteristics
Here's where art takes over from science when assessing online
business
value.
There are many qualitative factors that may influence the value
of an
online business
Conditions such as:
- what market you are in and it's potential
- subscriber or mailing lists
- unique content (either web-based, ebooks, print, etc...)
- how unique is the business model, how easy is it to replicate
- what is the outlook for this particular niche market
- how well has it been marketed in the past
Any one of these conditions may substantially influence the
value of
an online business.
6. Competitive Environment
Just as real estate agents use past house sales in your area as
a
major guideline for current valuation, previous online business
transactions are an important part of online business valuation.
While you may have unique characteristics that set your business
aside
from others within your market, you will need to take this
factor
into account as a buyer or seller.
The challenge you have as a business owner or as a potential
business
buyer is to:
a) Get the TRUE details of all these factors to make a solid
business valuation
b) Understand what is happening in your market in terms of
buying and selling activity
c) Use objective criteria to value your business
d) Understand how to combine all of these complex factors into
one final valuation
Having spent years operating the most popular online business
selling
service, it is clear to us that buyers and sellers can find a
business
broker to be incredibly helpful for assessing the value of their
business.
With specialized market knowledge, objective valuation
experience,
insider information on what is happening in any given online
business
market and experience on online business valuation, an online
business
broker can help you get the best price for your business for
sellers,
or find the best business for buyers.
Don't make the mistake we see too many sellers make by giving
away
their business, or failing to get what they deserve.
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