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Selling
/ 15 min read
Charley Liu
Nov 27, 2024
As a Shopify brand founder, you've poured your heart and soul into building your e-commerce business, navigating the challenges of entrepreneurship from sourcing products to marketing and customer service.
But now you might be wondering: What's my business truly worth?
Whether you're contemplating selling or simply want to understand your company's value, grasping the valuation process can benefit brands large and small. By understanding how valuations work, you can take further steps to maximize your company’s worth and make the most informed — and profitable — decisions going forward.
First things first. Should you sell your business?
Deciding whether to sell your e-commerce business is a significant step that involves both emotional and practical considerations. It's not just about crunching numbers; it's about aligning your personal goals with the future trajectory of your brand.
You might be experiencing a crossroads in your entrepreneurial journey. Perhaps you've noticed:
Burnout or fatigue. Running an e-commerce business is demanding. If you find yourself overwhelmed or lacking passion, you might need a change.
A new opportunity. An exciting new venture or personal endeavor could be calling, requiring your full attention and resources.
Your market has reached a peak. Favorable market conditions may mean your business is worth more now than it might be in the future.
Growth has slowed down or stagnated. Despite your best efforts, growth has plateaued, and fresh ideas or investments are needed to take the business further.
If any of the above sounds like you, reflect on what you envision for your future. Ask yourself:
Are you aiming for financial freedom, more family time, or the opportunity to pursue a hobby?
Do you want to start a new business or shift into a different industry?
Letting go of your creation can be challenging. Are you ready to move on?
No matter the reason, if you're considering selling your Shopify brand, OpenStore can provide a seamless and supportive experience. Our team of experts can guide you through the process, starting with a fair valuation of your e-commerce business. Learn more about how to sell your Shopify brand today.
Understanding how to value your e-commerce business is the first step toward maximizing its potential.
The most commonly used methodology is the multiple approach, where your business's worth is calculated using a financial metric — like revenue or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) — multiplied by an industry-standard multiple. This method is popular because it provides a straightforward way to estimate value based on quantifiable data.
How it works: Values your business based on a multiple of its gross revenue
Best for: Businesses with consistent revenue streams but varying profit margins, or those investing heavily in growth at the expense of current profitability
Example: Your e-commerce business generated $1 million in revenue over the past year. Industry revenue multiples might range from 0.5 to 1.0. Using a multiple of 0.8:
Business Value = $1,000,000 x 0.8 = $800,000
How it works: Values your business based on a multiple of its EBITDA, which reflects operational profitability
Best for: Established businesses with steady profits, providing a clearer picture of operational efficiency
Example: Your brand's EBITDA is $200,000. Industry EBITDA multiples typically range from 2.5 to 4.5. Using a multiple of 3.5:
Business value = $200,000 x 3.5 = $700,000
How it works: Estimates the present value of future cash flows, discounted back to today's dollars
Best for: Businesses with predictable cash flows and long-term growth prospects
Example: You project your cash flows for the next five years, totaling $1 million. Applying a discount rate of 10% to account for risk and the time value of money, the present value might be calculated as:
Business value = Present Value of Future Cash Flows ≈ $750,000
How it works: Calculates the value based on the company's net assets (total assets minus total liabilities)
Best for: Businesses with significant tangible assets (also often used during liquidation)
Example: Your business owns assets (inventory and equipment) worth $500,000 and has liabilities totaling $150,000:
Business value = $500,000 − $150,000 = $350,000
The valuation process can seem daunting, but breaking it down into manageable steps can simplify the journey.
Start by collecting relevant financial documents. These can include:
Profit and loss statements: Aim for at least three years' worth to show trends.
Balance sheets: These reflect your business's assets, liabilities, and equity.
Cash flow statements: These demonstrate your liquidity and overall financial health.
Tax returns: These provide verified financial data.
As you gather these documents, make sure they're accurate and up-to-date. Consider working with a professional accountant to organize and verify your financial information.
Raw financial data often includes anomalies that can distort the true value of your business. Normalizing your financial statements means adjusting them to reflect your brand's typical earnings and expenses.
Identify and exclude one-time expenses and unusual or non-recurring costs.
If you've been paying yourself above or below the industry standard, adjust your compensation to reflect what a typical owner or manager would earn.
Separate any personal expenses that may have been run through the business, like personal travel or non-business-related subscriptions.
With your financials in order, it's time to ascertain which valuation method best suits your business's characteristics and goals:
Revenue multiple: For high-growth businesses with significant sales but lower profitability. It values your business based on a multiple of gross revenue.
EBITDA multiple: For established businesses with consistent profits. This method focuses on operational performance by applying a multiple to your EBITDA.
DCF analysis: For businesses with predictable future cash flows. It calculates the present value of expected future cash flows, discounted back to today's dollars.
Asset-based: For businesses with significant tangible assets. It totals all assets and subtracts liabilities to determine value.
Market-based: When comparable businesses have been sold recently. It bases your valuation on market trends and sale prices of similar companies.
Consider consulting with a financial advisor or valuation expert to determine which method aligns best with your business's unique situation.
Understanding where your business stands in the broader market landscape adds depth to your valuation.
Research current trends affecting your industry, such as emerging technologies, regulatory changes, or shifting consumer behaviors. For example, if you're in the sustainable products niche and eco-friendly goods are on the rise, this could enhance your valuation.
Analyze your competitors to identify your market share, unique selling propositions (USPs), and areas where you excel or lag. Knowing how you stack up can highlight strengths that add value.
Assess demand for your products or services. High demand with room for growth can positively impact your valuation.
These types of analyses not only support your valuation but also highlight opportunities and provide valuable insights for strategic planning.
Financial due diligence is a thorough examination of all financial aspects of your business for accuracy and transparency. Here's what to do:
Cross-check sales data from different sources, from your e-commerce platform to payment processors and bank statements. Consistency across these sources builds credibility.
Scrutinize all expenses to confirm they're accurately recorded and necessary for operations. Identify any areas where you can reduce costs without affecting performance.
Conduct a detailed inventory audit to verify quantities, condition, and value. Check for any obsolete or slow-moving stock that may need to be discounted or written off.
Review outstanding invoices and debts to understand cash flow dynamics and potential risks.
Making sure your business complies with all legal and regulatory requirements mitigates risks and adds value.
Check that all necessary business licenses and permits are current and valid. This includes any industry-specific certifications.
Review your contracts with suppliers, customers, employees, and service providers. Make sure they're up-to-date and transferable if the business is sold.
Review your intellectual property protection, including trademarks, copyrights, patents, and any proprietary technology or processes, to make sure you have the right documentation and registration to protect your assets.
And finally, confirm that your business adheres to any data protection laws, consumer rights legislation, and other relevant laws in its jurisdiction. By proactively addressing these areas, you reduce potential liabilities and increase buyer confidence in your brand.
With all the groundwork laid, you're ready to calculate your business's value using your chosen valuation method:
Apply the multiples: Use industry-standard multiples for revenue or EBITDA methods, adjusting for factors specific to your business.
Perform a DCF analysis: If using DCF, project future cash flows realistically, considering growth rates and market conditions.
Consider intangible assets: Factor in brand strength, customer loyalty, proprietary technology, and other intangible assets that add value.
Adjust for risk factors: Consider risks like market volatility, customer concentration, or dependency on key suppliers, and adjust your valuation accordingly.
Thoroughly document your calculations, providing explanations for assumptions and adjustments. This transparency could be crucial if you decide to sell your business.
To ensure your valuation is realistic and competitive, validate it against the broader market.
Compare your valuation with average multiples and valuations within your industry to see if your numbers align.
You might also investigate the sale prices of similar e-commerce businesses. This data provides context and can strengthen your position during negotiations.
Enhancing your e-commerce business's valuation isn't just about presenting the right numbers; it's about fundamentally strengthening your business to make it more attractive to potential buyers. These five strategies can help maximize your brand's valuation.
Financial health is at the core of your business's value. Improving profitability and demonstrating sustainable growth can help boost your valuation.
To increase sales revenue:
Expand your marketing efforts. Invest in targeted advertising campaigns across platforms like Google Ads, Facebook, and Instagram, or use SEO strategies to improve your organic search rankings.
Enhance your product listings. Optimize product descriptions, images, and keywords to boost your conversion rates.
Offer promotions and discounts. Strategic promotions can attract new customers and encourage repeat purchases.
To improve your profit margins:
Negotiate with your suppliers. Seek better terms or discounts on bulk purchases to reduce the cost of goods sold (COGS).
Experiment with new pricing strategies. Analyze pricing models to find the optimal balance between competitiveness and profitability.
A strong brand can set your business apart in a crowded market, fostering customer loyalty and commanding higher valuations.
Start by developing a compelling brand story. Define your mission and values. Clearly articulate what your brand stands for and what it aims to achieve. Then, use that information to connect emotionally with your customers. You can use brand storytelling to create a meaningful connection with your audience.
It's also important to keep your branding consistent wherever you use it. Maintain consistent logos, color schemes, and design elements across all platforms, and use a consistent voice in all communications, reflecting your brand's personality.
Another way to make your e-commerce business more profitable is by finding and capitalizing on new revenue streams — whether those are new products and services, sales channels, or both.
Introduce new products: Expand your product line to cater to different customer segments or trends.
Explore new sales channels: Sell on marketplaces like Amazon, Facebook, or Instagram, or consider wholesale partnerships.
Try out new sales models: Consider creative ways to sell your existing products. For example, is there a way you can offer subscription services for consumable products to capture recurring revenue?
Customer loyalty translates to repeat business and positive word-of-mouth, both of which are attractive to buyers. Some ways you can build and strengthen relationships with your customers include:
Offering exceptional customer support. Give timely and helpful responses through various channels, including email, chat, and social media. Use customer data to personalize communications and offers.
Engaging with your community. Actively engage with followers by responding to comments and messages. Encourage and act on customer reviews and suggestions.
Implementing a loyalty program. Offer discounts, exclusive deals, or points systems to incentivize loyalty. Encourage customers to refer friends by offering rewards for successful referrals.
Efficient operations reduce costs, improve customer satisfaction, and demonstrate professionalism.
Look for ways you can automate processes behind the scenes of your business. For example, use inventory management software to track inventory levels, reduce stockouts and overstock situations, or implement systems that automate order processing and shipping.
You can also lean on technology to optimize your logistics, analytics, and other aspects of running an online brand.
The process of valuing your e-commerce business can be delicate, and certain missteps could undermine your efforts. Being aware of common pitfalls can help you navigate the valuation process more smoothly and present your business in the best possible light.
It's tempting to view your inventory at its full retail value, especially if it's substantial. However, this can lead to an inflated valuation that doesn't reflect market realities.
Why it's a mistake:
Some inventory may be outdated or out of season, reducing its actual value.
Excess inventory ties up capital and incurs storage costs.
To move slow-selling items, you may need to offer discounts, affecting profitability.
How to avoid it: Realistically assess your inventory. Evaluate the salability of each item, considering factors like demand, seasonality, and shelf life. Then, adjust for market conditions. If certain products aren't selling as expected, adjust their value accordingly. Finally, make inventory management part of your regular operations. Regularly review inventory levels and adopt just-in-time practices to minimize excess stock.
Consumer preferences evolve, and failing to adapt can make your business less attractive to buyers.
Why it's a mistake:
Neglecting trends can lead to declining sales as customers shift to competitors who meet their new preferences.
Your product offerings may become outdated, impacting future revenue projections.
How to avoid it: Regularly research industry reports, attend webinars, and follow thought leaders to stay ahead of trends. Engage with your customers (and their feedback) to understand their needs and desires. Be agile and willing to pivot or expand your product line to align with emerging trends.
Financial transparency is crucial in any business. Inaccurate or incomplete records can raise red flags for potential buyers.
Why it's a mistake:
Discrepancies can raise questions about the legitimacy of your business.
Inconsistencies prolong the valuation process and may result in lower offers or deal withdrawals.
How to avoid it: Keep your financial records up-to-date, accurate, and well-organized. Have comprehensive financial statements ready, including explanations for any anomalies. And consider hiring an accountant or using reliable accounting software to manage your finances so you can have peace of mind knowing your records are professionally maintained.
The valuation process can vary, sometimes ranging from a few weeks to several months, depending on the complexity of your business and whether the required information is readily available.
It depends on the business, but you'll often need:
Financial statements (profit and loss, balance sheets, cash flow statements)
Tax returns
Inventory records
Legal documents (contracts, licenses, patents)
Operational manuals and standard operating procedures (SOPs)
To value your Shopify brand with OpenStore, all you have to do is link your Shopify business and a few performance details via our quick and easy online application form. If we’re a good fit, you’ll receive a valuation and offer in just days.
Yes, and you should! Regular valuations help you understand your business's performance and identify areas for improvement, even if you're not planning to sell immediately.
It's a good idea to update your valuation when significant changes occur, such as major investments, shifts in the market, or substantial growth. You may also want to value your business on a regular cadence, such as once a year. This is a personal choice and may be different for every business founder.
Valuing your e-commerce business is a significant undertaking, and deciding whether to handle it yourself or enlist professional help is a big choice that can impact the accuracy and credibility of the valuation.
Taking the reins of your business valuation can be empowering, offering deep insights into your company's worth. But engaging a professional appraiser brings expertise and objectivity to the valuation process, which can enhance the credibility and accuracy of the valuation.
Why not get the best of both worlds?
OpenStore offers free, reliable valuations of most Shopify businesses. If you've been considering taking time off, pursuing a hobby, spending more time with family, or starting your next dream venture, OpenStore can help — our experts are ready to value your business and help maximize your exit with less hassle. Connect your Shopify account and provide performance metrics to request an offer.
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