Digital assets have grown from strength to strength since the internet opened up for online business. Right now, in fact, we’re experiencing a flood of activity of big money investors pumping capital into digital assets, which has resulted in a surge in the value of online businesses.
Investors are acquiring online businesses because they can be run from anywhere in the world, when set up well they’re hands-off, and they have incredible growth potential. There are few online business models more desirable than DTC eCommerce.
With the pandemic accelerating us into the new era of online shopping competing with traditional offline commerce, eCommerce stores have soared in value and popularity as a digital asset.
Here’s a quick snapshot of data taken from our marketplace that illustrate this growth:
You might not be familiar with some of these data points right now, but after reading this article you’ll have a good understanding of what they show, although the percentage increases alone should give you a pretty good indication of the growth of the market!
You might now be wondering how this all works in terms of how these businesses are valued and what it takes to sell an eCommerce business.
There’s a simple way to calculate a baseline valuation figure for your business, and there’s a more detailed process for determining a concrete value.
How DTC eCommerce Businesses Are Valued
The number one factor that determines your business’ value is its monthly net profit for the obvious reason that the more money a business will make an investor, the more they will be willing to pay for it.
We use monthly net profit as opposed to an annual profit calculation like an earnings before interest, taxes, depreciation, and amortization (EBITDA), because annual profits don’t show the potential buyer any fluctuations in earnings throughout the year.
Because net profit is the most important factor, it is baked into this simple formula for calculating the value of your business:
“Multiple” is one of the terms you might have noticed in the table above. A multiple is a figure that is calculated based on a number of metrics. The average sale multiple for eCommerce businesses right now is 34.3x.
That means if your business is earning $60,000 a month in net profit, you could realistically sell your eCommerce business for $2,058,000 ($60,000 x 34.3).
As a side note: if you’re curious as to what your eCommerce store is worth, we have a valuation tool that allows you to get a baseline valuation in just a few minutes.
When calculating your average monthly net profit, we recommend you choose a 12-month pricing window because it gives a more accurate view of the profitability of your business, as this length of time will account for any seasonality or spikes or dips in earnings over the year.
As for the multiple, let’s look at the metrics that are considered when calculating this value.
The older a business is, the longer it has been established in the market.
A business that has been established for some years has got a longer sales history, so an investor will have a clearer idea of how the asset will perform when compared to a new business that only has one or two years of sales data.
If a business has consistently earned a profit or shown consistent growth over its lifetime, then it’ll be a more valuable digital asset.
It’s also more likely that a well-aged business will have solidified itself in its niche market, making it more defensible against new competitors, which is another important factor to consider. This is especially true in the DTC world since businesses are brands, not just stores selling retail products. It’s a lot more difficult to establish a new brand in a niche than it is to just sell products.
Income and Traffic Diversity
A big part of establishing a brand is building traffic channels. While it’s great to have a main source of traffic like Google or Facebook, what’s better is to have multiple channels driving traffic to your store. When you only have one traffic source driving the majority of your traffic, you’re also reliant on it for the majority of your income.
What happens if your Facebook account gets banned? Or if there’s a Google update that sinks your search ranking?
Having multiple sources of traffic solidifies your business earnings and makes your business less risky.
Another way to solidify your earnings is to diversify your supply chain. When you source all of your products from one supplier, you’re reliant on that supplier for 100% of your business income. If there are any issues with the order fulfillment side of your supply chain, you run the risk of late deliveries or stockouts if your products can’t be delivered.
Speaking of products, when you’ve established your first few products in the market you can start to expand your range with new related products or with new product variations.
The same diversification principle applies here too; with multiple products, you have multiple sources of income and thus you reduce the risk of losing earnings if product demand wanes or if, again, you encounter supplier issues.
I think you can gather that the more solid traffic sources and consistently selling products that a business has, the more chance it has of receiving a higher sale multiple.
It’s not just whether your store is making sales or not that determines how much you could sell your eCommerce business for, it also depends on how strong your brand presence is within your niche.
When valuing your business, we’ll look at your product reviews and what customers are saying about your brand.
A big part of your brand’s reputation is related to the quality of customer service you provide. If you’re keeping your customers happy by communicating and handling returns and customer complaints promptly, well then that will be reflected in not only the conversations about your brand but also your customer retention and the lifetime value of your customers.
Another aspect of your brand we consider when valuing your business is its uniqueness.
A brand that is easily replicable is wide open to the threat of competition, so having a unique branding position, with potential trademarks where possible, helps make your brand more defensible and thus a safer investment for a buyer.
These key elements of your business are assessed when it’s being valued, but other sub-elements are also considered.
There are some lessons you can learn from being aware of these valuation criteria that will help you increase your business’ value. Most of these action steps to increase your business’ value are straightforward and easy to implement, and there’s an added benefit to carrying out these actions that benefits you even if you’re not going to sell your eCommerce business.
4 Tips for Maximizing Your DTC eCommerce Business’ Value
One of the most important sub-elements considered when valuing your business is how much work it takes for you as the owner to run it.
Many investors have a portfolio of businesses, and they're always looking for new additions, but that means they need each asset to have as little involvement required on their part as possible.
So the first tip for getting a higher payout when you sell your eCommerce business is to make it as hands-off as possible.
1. Organize, Automate, and Outsource
The first place to start when making your business more passive is your operations because what is required to operate your business determines how much time you spend maintaining it. The best way to clarify how your business operates and make your operations more efficient in the process is to create standard operating procedures (SOPs).
SOPs are detailed instructions for each of your business operations, for example, inventory ordering. They usually come in the form of simple documents that outline an operation step by step, but are much better when they are accompanied by video walkthroughs.
When you understand how your business works in terms of all the operations that are required to keep the business running, then you can look at what you can outsource and automate.
What can be a difficult notion for eCommerce owners who are really connected to their brands to understand is that you shouldn’t be doing everything in your business.
All entrepreneurs have strengths and weaknesses. Sellers who have successfully sold their eCommerce businesses often outsourced tasks that they weren’t as strong in so they could focus on expanding the business by leveraging their strengths, and we recommend you follow in their footsteps by outsourcing areas that you lack expertise in.
Another example is customer service, and you can use services like Gorgias to automate that side of your business. Using quality services like this will not only make your business more hands-off, but it’ll also help improve your brand’s reputation and the strength of your business.
You should be outsourcing tasks that don’t require specialist skills too. Virtual assistants (VAs) are great for helping you run your business by taking over these menial tasks that are simple but important. VAs are cheap and easy to find too, so it’s straightforward to outsource work to a VA.
Another option is to use softwares to automate some of your business operations.
Keeping with the customer service example, you can stop wasting time by repeatedly answering the same customer questions by creating template responses and automating a lot of your answers through Gorgias. Similarly, if you’re manually posting on social media or sending emails for marketing, then these are two other operations you can easily automate using software tools.
While you’re carrying out an audit of your operations, do some research into what software tools are out there to automate some of these processes.
The biggest aspect of your operations you want to pay particular attention to is your inventory management.
2. Give Your Inventory Machine a Service
The impact on your business of having poor inventory management isn’t just a ton of maintenance, it also affects your profits and thus your business’ sales history.
Stockouts and overstocking are the equivalent of your business becoming ill. Stockouts put your business out-of-service, and overstocking increases your storage fees. To avoid your business becoming ill, you need to keep it healthy through effective inventory forecasting.
This is where you use formulas to accurately calculate your inventory orders. The most effective way to calculate these is to look at your sales history while considering any anticipated changes in the market or demand.
A simple and effective way to forecast your inventory is to first calculate your sales velocity, which is how many sales you make per day. This is taken from your total sales from the past year, or however long you’ve been in business, divided by the amount of days you actually had stock:
Using this sales velocity figure, you can then calculate whether you are currently under- or overstocked:
There’s more that goes into inventory forecasting, so if you’re not skilled in this area or don’t want to dedicate the time needed to learn how to manage your inventory, then you might want to outsource this aspect of your business operations too.
3. Hire a Helping Hand through Third-Party Logistics Services
If you’re still in the bootstrap stage, you might still be packaging products in your garage. I imagine you could see the value of outsourcing your product handling and order fulfillment. This is where third-party logistics (3PL) services can really benefit you.
They can manage your supply chain for you, and while they come at a cost, the cost of the time spent on managing inventory yourself is way more expensive. Especially when it comes to selling your business as few investors want a business that takes 30+ hours to run.
4. Automate Inventory Management with Software
There are many types of inventory management software that can help you not only automate your inventory management but also optimize it. They can help you avoid stockouts or overstocking as they usually have tracking software, so you can keep on top of your inventory ordering.
Another aspect of your inventory management where you can get some quick wins to increase the profitability of your business is in your inventory costs.
Forecasting your inventory effectively will help you save on storage fees, but when it comes to delivery, if you’re air shipping your products, then you can greatly reduce your costs by changing to sea shipping for order fulfillment.
Another quick way to reduce fees is to simply ask your suppliers for cheaper rates. If you’ve been buying from them for some time and have a good relationship with them, then they might just be willing to offer you better rates.
While planning your processes, outsourcing tasks, and improving the strength of your inventory supply chain, bear in mind that the main advantage of DTC eCommerce over other eCommerce business models like Amazon is the customer connection you can build.
Use the Power of DTC
Your customer connection is one of your biggest growth levers for your DTC business.
It starts with providing excellent customer service and selling a quality product that your customers love.
Almost all the eCommerce owners we have spoken to regard these two factors as the most important when building a brand, but when you have achieved these two elements, it doesn’t have to stop there.
By providing excellent customer service, you are able to establish strong relationships with your customers. They can be encouraged to provide reviews of your products and service; the more social proof you have, the more powerful your marketing will be.
By getting to know your customers on a personal level, you gain highly valuable data about your audience that you can use to help improve your products and your marketing campaigns.
However, it isn’t easy to get to know your audience personally. To do this you need to communicate with your audience regularly and keep track of the conversations you’re having.
When you’re able to join your audience’s conversation, you’ll learn where they’re active online, what types of offers appeal to them most, what their biggest pain points are, why they use your product, and so much more.
By understanding their wants and needs, as well as their dislikes, you can develop your product to match your customer needs and make it more desirable. You can also adjust your marketing in terms of who you target and where and tailor your sales copy to your ads and your big picture campaigns as a whole to your audience, getting much better results than if you didn’t have any data on your customers.
Once you’ve implemented business-building strategies like these, you can start to think about how you can sell your business.
Where Should You Sell Your eCommerce Business?
When it comes to selling your eCommerce business, there are two routes you can take.
You can go down the private sale route. This involves advertising your business to buyers in online communities or unregulated online business marketplaces, where anyone can access your business information when it’s listed for sale.
There is a ton of work involved with this method, and the risks of selling your business for a price that’s too low or being scammed by a phony buyer are high.
That point aside, there’s still a lot of work involved in getting your business sold. You have to build your own audience of business buyers and sell them your business by yourself. You also need to correctly value your business and gather all your business data ready for the buyers, who will want to assess the health of your company.
If you’re a first-time seller, take note of common mistakes that entrepreneurs who are new to selling make, such as valuing their business too highly. Savvy buyers sniff this rookie mistake out and out negotiate these business owners, making them sell for below the business’ actual value.
The main benefit of opting for a private sale is you don’t have to pay any broker commission fees, but when you consider the service a broker offers and the fact that in the majority of cases they’ll be able to get you a higher sale price than if you sold privately, it’s just not worth it.
Another benefit is you get to skip a lot of the paperwork and get a quicker deal since there’s less red tape. However, it’s easy to miss something important in this type of transaction, so you need to be sure you’re willing to leave yourself open to the legal risks.
You also eliminate most of the work when you sell your eCommerce business with a broker as they already have a pool of trusted buyers to connect you with. If you list on a regulated marketplace, your business information is protected and only shared with serious and trustworthy investors. Plus, you get access to the experience and expertise of the broker, who can help you get the highest realistic valuation possible.
While, as we mentioned before, you pay the broker a commission, this is only if you make the sale, and you can continue to run your business as normal while it’s being listed.
Start Planning for Your Big Exit Now, Even if You’re Not Going to Exit
By following the guidelines we’ve listed above, you can not only put your business in a strong position for a big-money sale but also improve your business and make it more profitable whether you’re going to sell your eCommerce business or not.
If you do want to sell, whether soon or in the next few years, we recommend that you start planning your exit now. Preparing your business for sale in advance means you’ll reap the benefits when it is time to sell.
If you want some detailed guidance on how to prepare your unique business for a high-profit sale, then hop on over for a free exit planning call with one of our expert selling advisors. They love to give advice to business owners on how they can sell their eCommerce businesses!