Not everyone wants to build an online business from the ground up. They’d rather hit the ground running with a proven, established website or the perfect domain name. Others are trying to grow by acquisition. Whatever the reasons, demand has created a virtual market for buying and selling websites, domain names, and a wide variety of online businesses.
That presents all internet entrepreneurs with the option of building their business towards an exit, or ‘flipping’ websites as a business model. Either way, you’ll need to know the value of the website before listing it for sale. If you’re not happy with that number, you can continue to add value and monitor how the price goes up. In other words, it isn’t only for exiting your business, but also to monitor your progress towards an exit. These valuations can also come in handy for investor presentations, loan applications, or grants.
Valuations for an online business typically begin with the net profit for 6-12 months, multiplied by a multiple (usually starting at 20 but it can be well over 50). For small businesses, it’s typically based on Seller Discretionary Earnings (SDE).
“SDE is calculated based on net earnings before tax,” explains Empire Flippers. “This means the cost of goods sold and necessary operating expenses will be subtracted from the revenue. Any owner salary will be added back on so that you get a true understanding of the business’s earnings. Discretionary earnings, which are the costs that aren’t necessary to operate the business, will also get added back…
This method works well because it shows how the business performs on a pure cash flow basis. It takes the current owner out of the equation and makes it easier to see how much the business is making should anyone ever take over.”
However, the valuation of an online business is based on more than revenue. Other considerations include the category, niche, type of monetization, potential, assets (content, emailing list, social media accounts, suppliers, etc.), and anything else that adds value or has the potential to add value. Most of that is adjusted with the multiple.
“The multiple is influenced by the business model, market conditions, earnings stability/trend, uniqueness, traffic, customer acquisition efficiency/sources and of course, historical website and online sales data,” say the experts at Flippa.
Online businesses are often categorized by buy & sell marketplaces, for example:
Blogs & Content
Ecommerce (products, drop shipping, subscriptions, or by platform like WordPress or Shopify)
Sectors or niches, such as Pets or Weddings
Amazon (FBA, FBM, Merch, KDP, etc.)
Software as a Service (SaaS)
Or several of these categories combined. You can also use this list as a guide to future potential.
How to Increase the Value of Your Online Business
Things have changed a lot since I sold a website. Back then, buyers would make an offer just to get your domain name. While that still happens, today’s digital marketplaces make it much more civilized (not to mention safer). As expectations have grown, entrepreneurs have found ways to optimize the value of their business when it comes time to sell.
In other words, your online business website is much like offline real estate. If you want to get top dollar, you’ll probably have to do some work.
The top marketplaces recommend:
- Update your website design. Make it functional and professional but most of all, user friendly and free of glitches. Go through each and every step your customers make, from arriving on your website to checkout. Check your links and sales funnels too.
- Work on your Search Engine Optimization (SEO) and Domain Authority (DA). Your search rank can seriously impact the value of your web presence. Diversify your traffic sources to position yourself for growth and to further stabilize your results on paper. That could include everything from advertising on social media to growing an email list.
- Excellent financial reporting, backed with proof and explanations for any serious fluctuations. Once you’ve worked with a professional to clean up everything, keep it that way with a good bookkeeper and automation.
- Collect solid proof of your great reputation through rating sites, such as reviews and screenshots. If your customer service needs work, start improving it right now. Consider including things like your Better Business Bureau or TrustE rating.
- Evaluate and reduce expenses.
- Build a ‘how to’ guide to running your business, outlining all current procedures.
Flippa suggests, “If you write content – how do you decide what to write? Which types of articles work? Who edits these articles and how much does it cost? If you are a SaaS business, how are support tickets handled, what are the most common? How does bug maintenance work? If you are an eCommerce business – how does order fulfillment happen and what does the supply chain look like?”
- Summarize your plan for growth as a way to highlight business potential for buyers.
All of these suggestions work because they improve the value of your business and facilitate growth. Even if you don’t sell or wait a long time to do so, these ‘best practices’ will reward you with a boost to your bottom line.
According to Empire Flippers, you’ll need the following information to begin the valuation process:
- Business creation date
- Average monthly gross revenue
- Average monthly expenses
- Average monthly unique visitors
- Number of email subscribers
- Number of social media followers
- Additional information depending on the type of business, such as the number of products and revenue model(s).
Head to the top marketplaces for the sale of online businesses and check out the listings for ideas. You can also run your site through their valuation process to get an idea of what your business is worth. Each marketplace has a different valuation process, usually through benchmarks based on their own sales data.
There are professionals who can guide you through the valuation and exit process, but perform thorough due diligence before hiring one. You should also consider using platform escrow services, a lawyer, and your accountant to ensure a safe transaction.
Your online business (and its website) is an asset. It could be your entire small or home-based business, part of an omni-channel strategy, or a link in your marketing chain, but has a value like any other asset. When the time comes to sell your online business, these tips will place you in a position to ask for top dollar.
Have you ever sold an online business? Please share your experience in the comments below or join us in the Online Business Canada Facebook group.
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Melody McKinnon's formal education is in business management, which she enhanced with more than 60 certifications revolving around business, marketing, health, general sciences and writing. In 25 years of working online, she has owned or managed both educational and ecommerce websites. Her book, 7 Recession Proof Online Businesses to Start From Home, is available on Amazon.
Melody has worked with many businesses & brands in a multitude of capacities. She can often be found on CanadiansInternet.com, CanadianFamily.net and AllNaturalPetCare.com, as well as other quality digital publications. Her content has earned reference links from highly-respected websites, magazines and university textbooks.