The average price for an e-commerce business in 2020 was over half a million dollars – $538,960, to be exact. And this trend of lucrative business sales has only continued in recent years.
What's driving this surge in e-commerce exit activity? It's a combination of intense buyer demand and the unique strengths of the online business model. Private equity firms, venture capitalists, and other investors have recognized the great potential returns from acquiring successful e-commerce brands. They're aggressively competing to add these businesses to their portfolios.
For e-commerce entrepreneurs, this presents a rare window of opportunity to cash in on years of hard work and investment. However, many online business owners never even realize this exit option is on the table. They only consider selling when their business starts to struggle - and by then, it's often too late to get maximum value.
The truth is, timing the sale of your e-commerce business properly is necessary to get the best possible deal. In this article, we'll explore the essential factors influencing e-commerce valuation, helping you position your business to achieve the highest possible price when you're ready to exit.
Calculating the value of your e-commerce business
The starting point for selling your online business is understanding what it's actually worth to potential buyers. Most use a simple formula:
Valuation = Average Monthly Net Profit x Multiple
The "average monthly net profit" part is straightforward - you just add up your net profits from the past 12 months and divide by 12. This gives you a good baseline for your business's typical monthly earnings.
But that "multiple" part is where things get more complicated. This number can range anywhere from 2x to 30x your monthly net profit, depending on a variety of factors. Let's take a closer look at what influences that all-important multiple.
Factors that affect your e-commerce valuation multiple
Net profit
Unsurprisingly, the amount of net profit your business generates is one of the biggest drivers of your valuation multiple. Businesses with higher net profits will command higher multiples. As a general rule, e-commerce brands worth seven figures or more will need to be generating at least $40,000 in monthly net profit.
The 12-month pricing period also matters, as it shows buyers a more complete picture of your business's financial stability and performance throughout the year. A longer track record of consistent, strong profits tends to boost the multiple, as it demonstrates the sustainability of your earnings.
Team resources
Having an established, competent team in place to handle daily operations is a major asset for potential buyers. They want to see a finely-tuned operation that can keep running smoothly after the acquisition, without needing much hands-on involvement from the new owner. This team can consist of in-house staff, freelancers, or a combination of both. The key is demonstrating that these individuals are reliable, skilled, and knowledgeable about the business's inner workings. Buyers will view this as a major value-add, as it allows them to focus on growth initiatives rather than getting bogged down in the detailed aspects of day-to-day management.
In some cases, business owners wait until a deal is finalized before informing their team about the impending sale. However, it's important to understand whether those key employees are willing to stay under new ownership. Losing critical talent during the transition can severely disrupt operations and erode value.
Creating detailed standard operating procedures (SOPs) is one way to mitigate this risk. Comprehensive SOPs allow the new owner to quickly get up to speed on how to run the business, ensuring performance and efficiency don't suffer. They also make it easier to onboard replacement staff if needed.
Conversion rate optimization (CRO)
Buyers will closely examine your conversion metrics to gauge how well you've optimized your storefront and marketing campaigns. Things like average order value, customer lifetime value, and advertising efficiency all factor in heavily.
A track record of continual CRO improvements demonstrates your commitment to ongoing optimization and a willingness to experiment. Buyers recognize that there's often still significant low-hanging fruit when it comes to boosting conversions - and they'll pay a premium for a business that has proven it can consistently identify and implement those improvements.
Efficiency factors
Buyers aren't just looking at your raw profits - they also care a lot about how efficiently your business is run. Things like your team, your conversion rate optimization, your supplier relationships, and your logistics can all greatly impact your valuation multiple.
For example, having a reliable, well-trained team in place makes the business much more attractive to a buyer who doesn't want to have to learn everything from scratch. An established, competent team that can easily continue operations post-sale is a huge selling point.
Branding
A strong brand with positive customer sentiment, as reflected in reviews and ratings, can meaningfully boost the valuation multiple. Buyers recognize that a reputable, well-liked brand represents a major asset that's difficult for competitors to replicate.
But it's not just about your current brand equity - buyers will also be interested in your roadmap for further strengthening the brand's appeal. Outlining plans to enhance the customer experience, expand brand awareness, or pivot the positioning can all be very compelling to potential suitors.
Growth potential
Perhaps the biggest factor in your valuation multiple is how much room your business has left to grow. Buyers want to see a clear path to increased profits and expansion.
For instance, a business with a diverse product line and multiple traffic channels is seen as much less risky than one that's overly reliant on a single product or ad platform. Buyers will pay a premium for a business they can easily scale up.
Brands with a strong online presence, loyal customer base, and plans for future growth are hugely attractive to buyers looking to maximize their investment. The more growth potential you can demonstrate, the higher your valuation multiple will be.
Logistics
Streamlined, efficient logistics for transporting inventory are essential. Buyers want to see an efficient supply chain that minimizes complications and costs on the back end. This could mean opportunities to optimize shipping providers, reduce the number of handoff points, or outsource more of the logistics to a third-party specialist.
Identifying and addressing any inefficiencies or pain points in your supply chain can make your business significantly more attractive. Buyers recognize that strong logistics capabilities are critical to maintaining consistent product availability and customer experience - and they're willing to pay a premium for that.
Pricing
How you've priced your products relative to the competition is another relevant factor. Maintaining competitive pricing while protecting profit margins is a delicate balance, but one that buyers will scrutinize closely.
Demonstrating that you've thoroughly researched the market, tested different price points, and struck the right equilibrium between sales volume and unit economics is important. Buyers want to see evidence that your pricing strategy is optimized to maximize profitability.
Email list
An engaged email subscriber base is viewed as a valuable asset, even if the list hasn't been heavily monetized yet. Buyers recognize the potential to leverage this audience to drive additional sales and revenue growth.
The size of the list, as well as metrics like open rates and click-through rates, will all factor into the valuation. But buyers also care about the quality and relevance of the subscribers. A list filled with a targeted, responsive customer base is seen as much more valuable than a large but generic collection of contacts.
Revenue streams
Diversifying your revenue across multiple products or monetization models increases business survivability and is viewed favorably by buyers. They want to see defensibility against disruptions to any single revenue stream.
Perhaps you've expanded your product catalog into complementary categories, or incorporated affiliate marketing, advertising, or other supplementary monetization methods. Demonstrating a multi-pronged approach to generating income makes the business appear more stable and less risky.
Traffic diversity
Similar to revenue diversification, having multiple customer acquisition channels - rather than relying on one primary traffic source - reduces risk and represents an opportunity for growth.
Buyers will scrutinize your traffic sources and look for signs of channel diversification. Have you built partnerships with influencers? Expanded to new e-commerce marketplaces? Experimented with different paid and organic strategies? The more diverse your traffic mix, the more appealing your business will be.
Supplier relationships
The quality of your supplier partnerships can also impact the valuation multiple. Exclusive arrangements or long-term, reliable production agreements are viewed very favorably, as they represent valuable assets that transfer to the new owner.
Having multiple suppliers - rather than being overly reliant on a single source - is also advantageous. It reduces the risk of inventory shortages or production disruptions, which can be crippling for an e-commerce business. Demonstrating that you've cultivated a network of dependable manufacturing and fulfillment partners provides a lot of reassurance to potential buyers.
Where to sell your e-commerce business
Once you understand the key factors driving your business valuation, the next step is deciding where to actually sell it. The main options are:
1. Private deal
Selling directly to a buyer on your own, without any broker involvement. This gives you the most control, but also the most risk and hassle. You'll have to handle all the marketing, negotiations, and legal/logistical details yourself. And you run a high risk of encountering unreliable or unsophisticated buyers who try to lowball you.
2.Broker service
Using a professional business broker to market your business, negotiate deals, and handle the sale process. This costs more upfront, but provides a lot more protection and support. Brokers have the expertise to properly value your business, the connections to reach a wide pool of interested buyers, and the know-how to navigate all the legal and logistical complexities.
They can also vet potential buyers to ensure they're qualified and serious, which dramatically reduces the risk of getting taken advantage of. And they often have specialized programs to help ensure a smooth transition of ownership.
3. Marketplace platform
Listing your business on a specialized platform like Empire Flippers, where a large pool of qualified buyers can browse and make offers. This combines some of the benefits of a broker service with the transparency and deal flow of an online marketplace.
For first-time sellers, working with an experienced broker is usually the safest and most lucrative path. They have the industry knowledge and connections to maximize your sale price, while also handling all the heavy lifting for you.
Timing your e-commerce exit
One final critical factor in selling your e-commerce business is timing. Many owners make the mistake of only considering an exit when things start to go south. But that's the worst time to try to sell - your business will be worth a fraction of what it could be.
Instead, start planning your exit strategy years in advance. Monitor your business's key metrics closely using a net worth tracker, so you can time the sale just right. And work closely with your broker (if using one) to make sure your business is as attractive as possible to potential buyers when you do decide to pull the trigger.
That way, when the time comes to cash out, you'll be able to walk away with the maximum possible payout. Just imagine what you could do with $538,960 (or more!) in your pocket. Pay off your mortgage, start a new venture, or just enjoy the financial freedom. The choice is yours!
Conclusion
The opportunity to sell an e-commerce business for a good sum doesn't arise often. However, the current market conditions make this an opportune time for online entrepreneurs to potentially cash out for sizable paydays.
To get the best deal for your e-commerce business, you need to know what makes it valuable. Factors like net profit, operational efficiency, and growth potential all heavily influence the multiple applied to your company's earnings.
Of course, navigating the sale process can be complex, especially for first-time sellers. Working with an experienced business broker makes all the difference. They have the specialized knowledge and connections to properly value your company, reach the right buyers, and handle the legal/logistical details.
Brokers can also vet potential buyers, ensuring you don't end up in a disadvantageous negotiating position. And many offer tailored support to facilitate a smooth transition of ownership.
In the long run, selling an e-commerce company has the potential to be truly impactful. By understanding valuation drivers, timing your exit carefully, and enlisting expert guidance, you can position yourself for a sizable payday that opens up new possibilities.
