What if we told you that keeping an eye on the prize can help you extract the biggest financial windfall from your company?
This prize is a high-value sale. By thinking about your company’s sale right from its inception, you can extract a profitable financial outcome, free up tied-up capital, and make it available to explore new business opportunities. But for this, you need to start preparing early. And part of this early preparation involves calculating your e-commerce company’s value or worth. You are required to understand what your e-commerce brand is currently worth and what you can reasonably hope to get if you sell it.
Nevertheless, evaluating a business is not a straightforward process. The “n” number of permutations and combinations makes it a complex task.
So how can you work out your company’s value and create the best possible conditions for a future sale?
In this brief article, explore some strategies to guide you along your valuation process.
How to Determine Your Company’s Value
There are several ways to determine your e-commerce brand’s valuation. Let’s start with these five methods.
Determine Asset Value
Determine the value of all your company assets. Your company balance sheet is a good place to start. Ask yourself questions like:
What do we own?
How much inventory and equipment do we have?
Do we own land, buildings, or other tangible assets?
One common asset-based valuation method is asset accumulation valuation. This is where you determine all your assets and liabilities on the balance sheet, and assign a value to each. Your company’s value is the difference between these assets and liabilities.
To ensure that you determine the correct value of your company at the end of the valuation process, carefully identify each asset and liability – no matter how small or insignificant it may seem. If you’re not sure how to properly assign values to assets and liabilities, work with a valuation expert such as an appraiser.
Calculate Your “Seller’s Discretionary Earnings” (SDE)
For companies all over the world, EBITDA is a measure of overall financial performance. SDE is similar to EBITDA.
SDE includes EBITDA along with your (the owner’s) salary and benefits added back in. It also includes any purchases that you report as business expenses, such as a company vehicle or travel. If you have made any one-time purchases, donated to charity, or organized employee outings or events, you can also include these expenses to calculate your SDE.
Once you have your SDE figure, look for similar businesses that have recently sold. Use both pieces of information to set a selling price that’s higher than your SDE.
Perform a Discounted Cashflow (DCF) Analysis
A DCF analysis looks at how much cash your e-commerce business generates each year and creates a projection of future cashflow. Then it calculates the current worth of your future cashflow stream by “discounting” it using a discount rate. This current worth is also known as the net present value (NPV).
For e-commerce companies in the U.S., this discount rate is often the long-term Treasury bill (T-bill) interest rate. If your company is in another country, an appraiser can help you determine the right discount rate to use in your DCF analysis.
Review Your Revenues
One of the simplest ways to evaluate your company’s worth is to look at revenues. So, if you sell $30,000 worth of merchandise every year, your business has a $30,000 revenue stream. Then you can value your business at some multiple of this revenue stream, such as “three times sales” or “one and a half times sales”.
This method, in which you use a multiple of your current revenues to determine the maximum value (“ceiling”) for your business, is known as the “times revenue” valuation model. The multiple may be 1 – 3 times your actual revenue. However, it could also be higher or lower depending on the economic environment, the local business environment, and your company’s current economic/financial status.
Of course, this is an overly simplistic method since it doesn’t take into account all the other aspects that go into running your business, including costs. For this reason, valuing your company at multiples of earnings (profits) may be a better strategy.
Leverage the Earnings Multiplier Method
The earnings multiplier method generally gives a more accurate picture of your company’s real value. This is simply because earnings or profits are a far more reliable indicator of financial progress and success than simple sales revenue.
You can use either an annual profit value or a monthly one to calculate your value using the earnings multiplier method:
Value = Average annual profit x Multiple
Value = Average monthly profit x Multiple
A professional appraiser can help you understand how to set the correct multiple by looking at factors such as your company’s age, number of products in your product portfolio, number of customers, and number of customer reviews and ratings.
If your e-commerce company has market leadership in its niche and a strong, well-run management, your multiple number can be higher than the industry average.
Conclusion
To arrive at your company’s value or worth, you need to take into account multiple components that contribute to your brand’s revenue, expenses, and profits. These calculations involve considering your capital structure, current sales, future earnings potential, inventory, debts, management strength, and the market value of all your assets. A business valuation considers and evaluates all these aspects to generate a dollar value for your company.
If you’re considering selling your e-commerce company and need further help, reach out to Ergode! Our skilled appraisers and e-commerce experts leverage the best practices and updated information to help value companies and set a realistic price for a sale. Contact us to get started.
