As more people take up e-commerce, the industry is growing in leaps and bounds. The application of virtual reality and other upcoming technological advancements is set to increase the industry growth and subsequently the worth of different businesses several fold in the next few years. But most people who engage in e-commerce have little to no idea on how much their businesses are worth. We take a look at e-commerce valuation: how much is my e-commerce business worth?
Valuing your e-commerce business
Before you dive into the valuation, you must understand why you want to value your business as this has an influence on the valuation method to apply. Are you doing it for personal knowledge? Do you intend to sell the business or is the information necessary to approach investors? When approaching investors or selling the business, you must adopt a valuation method that will result in the most accurate valuation to avoid misleading the investors or people interested in purchasing the business.
The first method of valuation is known as the sellers discretionary method where the value of the business is calculated as the total revenue of the business plus the personal remuneration of the owners as well as any personal expenses covered by the business less all operational costs. This is a common valuation method for small businesses whose value is estimated to be below $10million.
For a business whose value is above $10million, the earnings before interest, taxation, depreciation and amortization (EBIDTA) method is used. However, for businesses that are in a growth spurt, it is good to calculate the value using the Earnings multiple method. This method usually determines a multiple using different variables in the industry and then multiplies the total earnings of the business by this multiple to arrive at the value of the e-commerce business.
Factors affecting the worth of your business
In most cases, the longer the period the business has been in operation, the higher the value. This is because the skills and experience of the business owners in managing the business increase over time as they encounter and deal with different business challenges. The value of the business is also affected by the level of traffic and the conversion rate from this traffic. Therefore, a business with high traffic but low conversion may be less valuable compared to one with lower traffic but a higher conversion rate.
The efficiency in operations also has a great effect on the value of the business. A business that has found a seamless way to deliver products to clients within the shortest period is more valuable compared to one that has multiple inefficiencies in their delivery process as well as their customer service. This should not be taken to imply that the business must have everything figured out but to imply that businesses with minimal incidences of inefficiencies are more valuable.
The technology in use in the business, the level of customer engagement, the level of owner involvement, the type of employees working in the business, how well the business manages its inventory and the relationships with stakeholders all determine the value of the business albeit directly or indirectly.
A business owner needs to continually value the business in order to gauge progress and make plans on how to increase the business revenue over time. In some cases, the business valuation services can be outsourced to experts in order to arrive at accurate figures but, you will still need the knowledge on valuation to interpret the results.
