What’s Your Online Business Worth?

factors to consider in business valuations

I spend a lot of time working with home based & online business owners to provide them with a ballpark estimate as to the marketplace value of their web based businesses.

The main question I’m looking to answer in this post series, is how can you maximize the value if and when you come to sell?

First it’s important to understand not every website sells at the same multiple or even an average multiple. You can have two apparently similar websites, yet they sell for very different sales prices. What makes one sell for a lot more money than the other? How can you control or add to the value of your home based/online business?

Typically the first question I hear and it’s a very good one of course, is how do you come up with a figure and what actually goes is considered in an online business valuation? Some sellers are happy enough with the initial ball-park valuation, but many if not most, really want to know what if anything, they can do to increase the value of their business if and when they decide to sell.

This is the first in what will be a series of posts, aimed at explaining and hopefully making sense out of how valuations are done, what factors are considered, and maybe even more importantly, how you can prepare for a sale in such a way that when you do come to sell, you will be able to generate a firestorm of interest and have buyers lining up and eager to buy.

Way back in 1996, I owned a bakery (which actually spawned my first online business) and was approached by someone asking me if it was for sale. Like most business owners, I said it might be for sale – if the price was right and then of course they asked what the right price was. I was stumped, because although I’d often thought, and if I’m really honest even more often wished, I could sell the business, oddly I’d never seriously thought about what I would ask for it.

If you’ve ever considered selling your online business, or if you’ve ever been contacted by someone asking if you would like to sell your website, then you know how tricky it can be to figure out what it’s really worth to you and most importantly what someone in the market to buy an online business might pay for it. You might start by doing a little research and if so, will likely find a huge variety of valuation methods that leave most of us feeling way more confused than enlightened.

I’ve been around for a while and got enough grey hair to have heard it all, from “My business is worth 10 times its gross revenue” to “It’s worth anything unless you are on page one of Google search results”. I’ve also seen online value calculators that will have you submit a few pieces of very basic information then spit out a number sometimes down to 2 decimal points even (generally they are nothing better than snake oil – but that’s another post entirely). Both of those statements are extremes of course and both also have some basis in fact, but no valuation method that relies on one specific factor alone is ever going to give you a realistic valuation of your online business.

There really is no “one size fits all” answer to this question, it requires you look in detail at all the elements that make up the business. First and foremost of course would be the face of the business, both front end meaning the website itself and the backend – admin systems, traffic analytics and probably most important of all the financial records to prove revenue and expenses. The real question is – what makes your site valuable and how is that calculated into an actual figure that is verifiable and can be evidenced and supported to the satisfaction of potential buyers.

There are many factors to be considered and each can and will speak to the final sales price you will be able to achieve when you do come to sell your business. It is much like a beauty contest and the more boxes the judges (in this case potential buyers) can check off, the higher price they will be willing to pay to own your business – if you have all your ducks in line chances are it will be yours and you will maximize the price you are able to ask for it.

When I’m looking at a website to provide a valuation for a potential sale or acquisition I’m looking at several factors. All are related to how the new owner will be able to see and appreciate the value of the business as a whole. They also speak to the sustainability, marketability and growth potential of that particular online business.

One of the toughest issues for sellers to come to terms with, is the real value of “potential” related to supporting a higher asking price – and the answer is NONE! That may sound harsh at first but be aware, buyers always want to “see” potential (that’s the basis of how they plan to recoup their investment ASAP) but they rarely want to “pay” for it. Until you can “show” potential as a revenue stream on a profit & loss statement it’s unproven – so generally buyers won’t pay you for it. Having said that – potential is often the “garnish on the plate” that makes the dish irresistible to buyers in the end.

A Few Factors to Consider

  • Ease of Transferability
  • Active & Well Established Market or Niche
  • Established Reliable Vendor Relationships
  • Effective Marketing Programs
  • Clear, Precise & Well Organized Financial Records
  • Special Skills or Knowledge Required to Operate

Hopefully you’re still with me on this, because in the next post, we’ll look at valuation formula and Understanding The Marketplace relative to valuations (here’s a hint: there really isn’t just one formula) we’ll also look at how the marketplace drives and to some extent determines values. Like I said, this is the first in a series of posts on this subject, stay tuned or sign up to Next-Gen-News to be sure you get the next installment delivered direct to your inbox 🙂

Cheers,


About 

I launched my 1st website back in 1996 selling baking mixes, now I blog about doing business online, most of all I love to travel, cook, enjoy wine, good company, music & movies in no particular order - I like it best when I can enjoy them all at the same time! Connect with me on Google+

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