technology

How To Value an Online Business

While entrepreneurs start digital businesses for a variety of reasons, chances are the prospect of one day selling for a profit is an attractive one. No matter if you’re just starting out with no concrete plans to sell, or you already have a successful business with a proven track record of success, understanding how an experienced M&A advisor—or a potential buyer—will arrive at an accurate valuation of your online business can help you scale operations and growth strategy with both ongoing and potential future value in mind.

Unless you’re an expert, it can be hard to know where to start when it comes to determining what your online business is worth. Here are just some of the factors looked at when coming to an accurate valuation of a digital business:

The above chart is a summary of the many factors taken into consideration when determining the value of an online business. At FE International, we typically benchmark 80-100 areas against a database of more than 40,000 company data points to arrive at an accurate valuation of the business.

When it actually comes time to determine an accurate selling price for your business and put it on the market, consulting an expert on how to value an online business will ultimately result in a higher profit at exit. In the meantime, let’s take a look at addressing a few of the most significant valuation drivers that when improved, can have a positive impact not only when it comes time to sell but also on building the value of your business today.

Follow Accounting Best Practices

It should go without saying that it is impossible to come to a favorable valuation of any online business without access to solid, verifiable financial records. Having this information at your fingertips is essential not only for coming to a valuation but for running your business effectively and efficiently. Having an accurate picture of the business’s finances in real time allows you as the owner to make strategic cost and revenue-stream adjustments as necessary. Thankfully, keeping accurate financials is nowhere near as labor-intensive as it used to be. Accounting packages like Intuit’s Quickbooks sync with your bank accounts in real time, eliminating much of the data entry requirements of traditional bookkeeping. Essential reporting like cash flow forecasting and profit-and-loss statements are just a few clicks away.

The importance of following accounting best practices cannot be overstated when it comes time for an expert to determine the sale price of your business and accurately market it to a pool of potential buyers.

Track Your Traffic

Accurate financials are not the only records you need to keep when it comes to your online business. You also need to be able to show where your website traffic comes from historically and how it’s trending. At a bare minimum, ensure you have Google Analytics up and running on your website right away. Google Analytics enables you to track data essential to the effective management of any online business. Examine how much of your traffic comes from organic search. Does this potentially put you at risk for factors beyond your control, like changes in search engine algorithms?

Does your business rely heavily on paid search or Pay-Per-Click (PPC) advertising? What keywords does your business rank for? How much competition is there for the keywords that drive traffic to your site? Use SEMrush and Ahrefs to dig deeper into your paid keyword strategy and that of your competitors.

Limit Owner Involvement

Blame it on The Four Hour Workweek if you like, but the fact remains that most buyers of online businesses are looking for passive income. If you’re spending more than 20 hours per week working on your business, examine ways you can reduce your workload. Delegating work can be loathe to founders who often experience difficulty ensuring the quality of outsourced work. While a “do-it-yourself” mentality may be helpful when a business is first getting off the ground, it is not sustainable or scalable, nor is it desirable to most buyers who may otherwise be interested in acquiring your business. Automate and outsource your business processes wherever possible. There are talented and reliable freelancers all over the world available to help on online marketplaces like Upwork and Toptal. The less the business is reliant on your individual participation as an owner, or that of a potential new owner, the more attractive it will be to potential buyers and investors.

Build a Standalone Brand

It is important not to tie the branding of your online business too closely to your participation as an owner. While a brand can, and often should, reflect the personality and values of its founder, having a company that relies on any one individual as the “face” of the brand presents challenges when it comes time for that person to exit. Instead, focus on building a strong standalone brand right from the start. Be sure to think beyond the logo—more than anything, successful branding is about telling a story that resonates with its target customer base. In today’s oversaturated market, brands that articulate a coherent vision and stick to it build trust and authenticity with their audience.

Finally, never forget that your intellectual property has value. Utilize trademark and copyright protections wherever appropriate. Safeguarding these vital assets has the added bonus of making them easily transferable to new ownership, thereby increasing the value of your business.

Final Thoughts

Even if you’re in the startup phase of your business, it’s never too early to build towards value. Entrepreneurs who prioritize the strategic path of their business almost always end up experiencing accelerated growth and higher chances of a profitable exit.

To summarize:

  • Always follow accounting best practices.
  • Document your sources of paid and organic traffic.
  • Reduce the need for owner involvement wherever feasible.
  • Build a brand that isn’t reliant on the participation of an individual.
  • Safeguard your intellectual property.

Following these steps will not only increase the value of your business to potential buyers and investors, but it will also help put your business on the path to success.

 

 

Thomas is the Founder of FE International. He is a serial online business entrepreneur and expert. In his early 20s, he began building and selling small online companies. This turned into a full-time career when he founded FE International in 2010, growing the business with zero funds from ground up and consistently doubling annual revenue, as well as the average deal size. Thomas specializes in advising in the M&A of SaaS, e-commerce, affiliate and content businesses. He has consulted hundreds of internet entrepreneurs on exit strategy, growth and business development.

Twitter: @thomassmale

www.feinternational.com

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