6 Things To Know About E-Commerce Valuations
The rising trend of online shopping has risen significantly over the past several years. According to Statista, 209.6 million U.S. shoppers were browsing and buying products online, a number which is expected to reach 230.5 million by the end of 2021.
A spike like this indicates the online marketplace has become increasingly competitive, particularly in terms of selling e-commerce businesses for profit. Additionally, with at least half of the e-commerce market belonging to Amazon, it’s safe to say most businesses considering a sale use the leading online retail platform.
However, before knowing if your Amazon FBA business is ready to sell, you have to know how to value a business. Millions of businesses use the Amazon Seller platform as their primary source of driving e-commerce sales, but not all have reached the stage that makes it an attractive sale in the eyes of buyers. Here are a few key factors buyers look for when determining how to value an internet business:
- Earning history and trends
- Valuation drivers
- Audience reach
- Logistics and fulfillment
- Technical burden
Once your business has met the criteria, it’s important to understand the acquisition process, including the projected timeline and what’s needed to move forward.
Earning History and Trends
After you started to build continuous success, it’s smart to ask yourself: how much is my e-commerce business worth? Once your goal has shifted from solely making money from online sales to turning a profit by selling your business, you’ll be focused on the valuation of your business, which requires an in-depth assessment of your financial records and sales history.
First, consider your annual net profit or SDE. How much does your company retain after operational expenses and fees? E-commerce retailers operating under the Amazon FBA business model already know which fees and expenses are part of the setup by choosing either the Professional or Individual selling plan. Other operational costs to consider are shipping fees, advertising costs, and website maintenance outside of Amazon’s platform. Obviously, the higher the annual net profit, the more lucrative the sale looks to a potential buyer. At Forum Brands, we look for a demonstrated financial success of at least $200K of net profit or SDE in the past year.
Second to net profit is recognizing earning trends. A company that has come out of the gate strong but declined in revenue over the years has a lower value than an online business that has steadily increased their profits year over year. Annual profit trends show if your business will continue to be relevant to a large audience and have earning potential for future growth. Demonstrating financial success through a strong earning history is part of what determines your business's overall value.
E-commerce valuation drivers are ways your business is scored when determining future performance. They are what buyers look for when considering a potential offer. The higher your business ranks in these areas, the better the valuation.
One of the first drivers is the age of your business. A potential buyer will want to see a track record of success before considering buying a business. That’s not to say a young company won’t drive high annual revenue, but buyers are looking for longevity in terms of earning power. The ability to see how a business has weathered different seasons and changes in the economy better predicts its financial health in the future.
Another critical factor in identifying e-commerce valuation drivers is recognizing the time and expense of outside efforts to grow the business. Questions to consider are:
- Is your current customer base driven by paid marketing, direct search, or both?
- What percentage of your customers are repeat customers versus new customers?
- Are there product expansions available?
- How competitive is your business category?
Essentially, what key investments have you made, and how did they profit? These kinds of questions are important to review on at least a monthly basis to track trends and plan for future growth. Amazon FBA business sellers have access to reports with data that answer these questions and leave room for sellers to increase their sales and annual profit.
The term “forum” represents a medium where ideas can be exchanged. That’s why we call ourselves Forum Brands. There is nothing more inspiring to us than hearing founder stories. They illustrate how outstanding ideas evolve into products consumers know and love. If you are an e-commerce entrepreneur, please reach out using our Contact Form and share your story. We’d be honored to get to know you.
Logistics and Fulfillment
When determining e-commerce valuations, one of the basic requirements is knowing the value of your inventory. Track how much inventory you sell versus keep in storage, which products are best sellers, and the quality of your company’s fulfillment and delivery. Amazon FBA is one of the most popular options of e-commerce fulfillment due to its handling of packing, shipping, and storing your inventory. They also handle customer service inquiries and offer special delivery on chosen items, which customers have come to know and rely on when shopping online.
Customer satisfaction is largely based on how timely they receive their items and the condition in which they arrive. With Amazon taking care of maintaining a top-tier level of service, it makes this part of grading your FBA business valuation easier. You can review the shipping reports and establish the timeliness of which your products are delivered and any problems that may need remedied.
Part of what makes a business viable for sale is how easily it’ll transition to the new business owner. E-commerce stores that use well-established e-commerce platforms often have complex technology that’s been customized to fit a brand’s needs. While this may be valuable for a company growing its brand, it makes it difficult for new developers that need to update, change, or alter the unique code.
Though a high technical burden won’t be a dealbreaker for all buyers, it does work into the formula of your entire e-commerce valuation, especially if there is a way to make a more seamless transition. Any special technical information, including inventory management, coding, and search engine optimization should all be easily replicated or clearly outlined for the buyer taking over your business.
Maintaining impeccable organization of your financial and operational records from the beginning will pay off once a business owner goes through valuation, and ultimately, the acquisition process. The more clearly you understand your business and its growth potential, the easier it will be for buyers to make a decision regarding its worth. When it comes to calculating e-commerce valuations, it takes knowing your business inside and out. Illustrating your earning history and trends, identifying valuation drivers like online traffic and brand recognition, and streamlining your logistics and fulfillment are all part of what’s considered as part of an e-commerce valuation. Strength in these areas are what buyers look for.
The acquisition process at Forum Brands is straightforward. We look for e-commerce businesses that receive 70 percent or more of its sales through Amazon FBA, demonstrate a net profit or SDE of at least $150K in the last year, and have an inventory of products that will be in high demand for years to come.
Once we’ve decided your business fits our financial model, we’ll evaluate your company and prepare an initial offer, which usually only takes 48 hours. When we’ve reached agreed upon terms, we finalize the details and create a transition plan. This usually takes a few weeks before you’ll receive a cash out equaling years’ worth of profits, which happens in one day after everything is in place.
Finding the Right Time to Sell
Deciding the right time to sell your Amazon FBA business depends on your goals for the future. Are you ready for a new venture? Have you expanded your business as you intended and want to cash out? Attempting to sell a business on the decline will make it more challenging to receive a willing buyer and a good offer.
Knowing what buyers look for when acquiring e-commerce businesses will help uncover areas where you can improve, prepare, and eventually make a connection to sell.
Sources:https://www.statista.com/statistics/183755/number-of-us-internet-shoppers-since-2009/ https://www.statista.com/statistics/788109/amazon-retail-market-share-usa/ https://www.entrepreneur.com/article/336205