Before even thinking about selling a business, it is essential to know how much it would be worth in the first place. After all the work put into building a successful business, a reasonable person will want to sell it for a price that reflects the amount of time and money invested.
How Value Is Determined
Many people see the value of websites and online businesses as subjective, meaning that the market dictates their worth. For example, a rare item might be worth nothing to one person and then worth millions to another. It truly depends on what the market is willing to pay. Although, valuing rare items that do not generate cash flow is much more subjective and difficult to value. This is entirely different when determining how much a profitable online business is worth.
When typically valuing an online business, the primary factor will be the monthly or yearly average net profit over a rolling twelve months. Of course, other factors go into creating an accurate valuation which will be outlined later.
There Are Different Approaches For Valuing A Business
There are a few different methods when determining the value of a business. Two different ways it is done is through the Silicon Valley method or by multiplying the monthly net profit by a multiple (36 – 60x). The Silicon Valley Method is primarily used in hyper-growth tech start-ups that have yet to generate profit but still produce millions in revenue.
Unless the business is worth more than $20 million, this is not the correct way to value an online business. In most cases, people can determine their online business value by multiplying their average monthly net profit by 36x – 60x. For example, If a business generates a rolling twelve-month average net profit of $35,000, then this business would be valued at $1.26M on the low end and $2.27M on the high end. So the million-dollar question most people might be wondering now, “How is the multiple determined?”
Factors To Consider When Determining The Multiple
In addition to the above methods that are typically used for determining a business value, there are also some additional factors that need to be considered. Suppose most people wonder whether to multiply the monthly net profit by 36x or 60x, for example. It’s essential to keep in mind some of the following factors and remember each one will have a different weight decided by a buyer or broker.
Age Of The Business
If the business has been around for quite some time, it’s much easier to swing the opinion of specific buyers that it is worth a lot more than just a 36x. Due to the ability to demonstrate the previous financial success of a business and help assure potential buyers that this success will continue well into the future. Essentially, a company with more economic success is at lower risk for buyers.
This is because buyers will tend to prefer businesses that have a track record of success. When a business has under twelve months of profitability, it might be best to wait a little longer before selling since buyers set that as a minimum.
The Pool Of Potential Buyers
If there is a large pool of potential buyers ready to buy a specific business, it is likely to compete against each other. This will be very helpful for anybody that is seeking to bump up their potential and multiply their monthly net profit up to 60x. For example, a business that requires local manufacturing and operations in a small rural town of 25,000 people will have a much smaller buyer pool than an online business that can run anywhere in the world.
Growth Potential Of The Business
When discussing with interested buyers, one of the first things that they will inquire about is the growth potential. They will need to see how the business can be scaled, if there are easy methods for improving profit, and continue to grow in popularity. Many buyers like to acquire companies that are struggling with cash flow since growth can be easily obtained by solely investing more capital into the business areas that have a history of profitable returns.
One of the common problems that online businesses have regarding growth potential is that their niche might be a fad. If there is a physical product that was a fad or a website that makes money off of a dietary trend, then it might be much hard to time the perfect exit or convince a buyer that this is an evergreen business. Most fad businesses will be sold at a lower multiple unless it’s timed and positioned correctly.
Building A Business Moat And Protection
When potential buyers bring up competitors or copycats, they want to know how protected the business is from all ends. For example, imagine that a company is selling t-shirts that are plain colored with standard text. Unless this business has unique materials, a strong trademark, or a factory for producing the t-shirts, it will be easy for anybody to mimic this business. In an instance like this, it ideal for exploring making a unique product and trying to create more of a moat.
However, on the flip-side, if the business is a fantastic software business with no competitors and it would take years for someone to build a competing company, this would be a powerful moat for a potential buyer. This type of business would result in a much higher multiple, even more so if the business is coming along with monthly or yearly recurring revenue!
Time To Manage The Business
A seasoned online business buyer is never looking to acquire a full-time job. Especially if it is only one of the many different business ventures they are currently running. When planning to sell an online business, an individual will likely have much more success if their company doesn't take too much time to run or have the primary tasks outsourced or automated.
For instance, a business will sell for a higher multiple if it already has a streamlined process for all primary operations. Most procedures will either be automated or handled by employees. If this is not the case, then there might be a lot fewer options for a potential buyer.
Need More Ideas On How To Sell An Online Business?
When deciding to sell a business it’s essential to learn about the process and fully understand all options. It’s imperative to choose between using a private broker, selling with an industry expert, or trying it privately. Regardless, it’s essential to read up more on the exact process of selling an online business. This way, it can potentially save valuable time and result in a much higher valuation price.
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July 05, 2021 at 09:10PM
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How Much Is Your Business Actually Worth? - Forbes
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