Of all the potential outcomes for an entrepreneur seeking to exit his or her online business, a profitable sale is undoubtedly one of the most favorable. In order to achieve a successful sale, it is necessary to first understand how to value an online business’ worth and to set an appropriate asking price.
But how do you go about determining the value of an online business? It’s complicated and can be the most complex part of the sales process. Based on our experience successfully selling over 500 online businesses and overseeing hundreds of millions in transactional deal value, here is a list of just some of the factors that we use to determine the value of an online business.
All of these factors and more come into play when performing an accurate valuation. The complexity of this type of deal means that when the time comes to sell, consulting an experienced M&A (merger and acquisition) advisor will help ensure that you have prepared documents sufficiently, established buyer credibility and most importantly, accurately valued your online business. This will help ensure that you extract as much value as possible from the sale of your business.
Even before you consider selling your business, possessing a clear understanding of the factors that determine its value can be extremely beneficial.
In this article, we’ll take a closer look at key drivers that help determine the value of your business and explore how improving them can have a positive impact long before it’s time to sell.
Solid recordkeeping
The importance of maintaining solid records from the start cannot be overstated. Without precise financial records, coming to an accurate valuation of your business verges on impossible. Accounting packages, like QuickBooks, now eliminate almost all of the drudgery of following bookkeeping best practices by syncing with your bank accounts in real-time. This enables you to produce detailed, up-to-the-minute reports giving you a snapshot of your business’ financial well-being. Not only will this be invaluable when preparing your business for valuation, it also enables you to measure and improve performance on an ongoing basis.
It’s not just financial records that are essential to valuing an online business. From as early a stage as possible, it’s vital to track your website traffic and understand where it comes from. If you don’t already use Google Analytics to measure and analyze your website traffic, stop what you’re doing and get it up and running right now!
A key factor to keep in mind when it comes to traffic is how much of your traffic comes from organic search? How vulnerable is your business to possible changes in search engine algorithms? What keywords does your business rank for? How much competition is there for those keywords?
Consider using tools like SEMrush and Ahrefs in addition to Google Analytics to help you better answer these questions.
Related: 4 Traps To Avoid When Selling Your Company
Passive income
As an owner, do you spend more than 20 hours a week working on your online business? When you’re in the startup phase of your business, 20 hours likely seems a very low number. But as your business matures, it’s important to look at ways you can reduce the level of owner involvement.
Minimal owner involvement is important when valuing an online business because buyers tend to look for businesses that offer passive income. A business that requires 20 hours or less of an owner’s time on a weekly basis will fetch a higher premium than one that requires more owner involvement.
Aside from the impact on your business’ potential sale price, there are many reasons to reduce the number of hours you spend running your business, such as the amount of time you can free up to work on other projects or focus on the big picture of growing your business.
Freelance marketplaces like Upwork and HubStaff can be a fantastic resource when you’re looking to outsource your business’ operations. You can find experienced, talented freelancers at a competitive rate without having to shoulder the burdens of employing someone full or part-time.
Take some time to parse through the work you’re doing for your business and think of tasks that could reasonably be performed by others. It can be hard to let go of even the smallest tasks when the business is yours, but in the long-term, it will benefit both you and the business to do so.
Branding
In today’s environment of intense competition, it’s increasingly important for online businesses to differentiate themselves by means of branding. Having a strong brand that commands customer loyalty and can transfer from the current owner to a new buyer will make a business more attractive to potential buyers.
Effective branding goes far beyond just a logo. It means developing a story, an identity and a voice that consumers come to admire and trust.
When setting out to build a brand, focus on making one that can stand alone. This means resisting the temptation to have the founder be the “face” of the brand, or otherwise building it around one person. While a brand can (and most likely should) reflect aspects of its founder’s core values and personality, tethering it too closely to one individual creates problems when it comes time for that person to move on.
A business that is easily able to transfer its brand identity to a new owner will command a higher valuation.
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Final thoughts on your startup’s value
Regardless of what stage you’re at in your business journey (even if selling your business seems a far-off prospect), paying attention to the factors that drive higher valuations almost always leads to achieving a sale price at the startup’s full value.
Keeping detailed traffic and financial records, limiting owner involvement and building an effective standalone brand are just some of the factors informing how to value an online business that will not only help result in a favorable valuation of your business, but will aid in driving success right from the start.
