/ 13 min read
Apr 20, 2023
There has been a 200% surge in the number of Shopify stores between March 2020 and January 2022, with over 2.5 million new Shopify stores being set up in under 2 years.
But what if you’re ready to work on your next business idea? Or maybe you want to do some estate planning, take out a loan, or calculate your tax returns. This guide will walk you through everything you need to know to calculate your store’s worth using the SDE, EBITDA, and DCF methods. It’ll help you get the best price for your Shopify store, and walk you through the options for selling.
tl;dr To plan for the future or to sell your e-commerce business, you need to know its value.
You can use the discounted cash flow approach, or the earnings multiplier (value = earnings × multiplier).
You can also use OpenStore’s free tool which calculates your Shopify business’ value.
If you’re interested in selling, see our other article for advice on brokers, marketplaces, and private buyers.
Business valuation is the process of calculating your store's sale value. It helps you discover your store's market value based on its current and future cash flows. But how do you determine your store’s value?
Searching for “how much I can sell my Shopify store for” may leave you with more questions than answers, so we’ll walk you through everything you need to know.
There are several reasons why finding out how much your Shopify store is worth is necessary, such as:
Selling: If you’d like to focus on other things in your life or set up a new business, you may need to let go of your store to do that. You shouldn’t sell your store to just anybody at an arbitrary price. Valuing your business is going to help you arrive at an accurate number that’ll reflect your store’s true value.
Additional shareholders or owners: A business valuation is necessary if there’s a change in ownership. For example, if you’re bringing on board a partner or transferring your business to another person.
Pricing options: If you offer stock options as employee compensation, you’ll need to value your business.
Loans or re-financing: Business valuation helps banks, credit unions, P2P (peer-to-peer) lenders, and other financial institutions assess your business’s debt repayment capacity by understanding how leveraged the business is. The higher the valuation, the higher the amount of credit available to your business.
Tax purposes: It’s a good practice to value your business to file estate tax returns or gift it. Moreover, it’s necessary to understand the tax consequences of selling your Shopify store. For instance, if you sell your business below its market value, you’ll have to pay the IRS a gift tax based on the IRS’ valuation of your business.
Personal reasons: You may want to value your business for personal reasons, such as during a divorce, exit strategy and estate planning, or to decide how to divvy up your assets upon your death.
Paying off debt: If you’d like to pay off your student loan, inventory debt, or other debts in general (e.g. using your Shopify store as collateral), it’s essential to know its valuation.
Accurate business valuation helps you get a fair price when selling it. Mistakes can be costly. Here are the most common mistakes:
Depending on flawed valuation models: You can use multiple valuation models to value your business based on your specific business structure. You can use a DCF (discounted cash flow) model in most cases. But if you own more businesses under the same company, you might consider using the sum of the parts method.
Getting emotionally involved: While valuing your business, make sure you keep bias out of your valuation model. Being overly optimistic can skew your valuation and you’ll end up driving buyers away.
Comparing to competitors: Each business is unique because of its unique capital structure, profitability, and contractual obligations. Another store’s valuation, even if the store is very similar to yours, isn’t a great template to value your business since each business is unique. You may use comparable transactions to ascertain how your business is faring against its competitors, but it should never be used to value your business.
Using accounting profits: Accounting profits refers to a company’s net income and indicates the amount of money left over post expenses. It’s normal to think of profit as the central element of valuation. However, valuations are cash-driven, and so you need to use cash flows, not accounting profits to value your business.
Your store’s worth depends on the valuation method you want to use: income-based or market-based.
Which valuation model should you use? Both methods have their pros and cons depending on your requirements:
An income-based valuation model (typically the DCF method below) will let you account for your store’s ownership, its investments, assets, their life-cycle, and isn’t reliant on the market value of similar businesses. But it’s a complex and time-consuming method.
A market-based valuation model is reliant on current buy-and-sell transactions of similar businesses, helping you determine your store’s performance metrics. Although it’s simple and is less time-consuming, its dependency on other databases and value adjustments for pricing multiples are subjective.
This income based valuation method helps estimate the current value of a business based on its anticipated future cash flows using a discount rate.
Why is it called discounted cash flow? Am I valuing my store at a discount? No. It’s based on an underlying principle that states $10 today will be worth more than $10 a year from now.
In other words, this method is based on the time value of money. It takes inflation into account to help you determine your store’s worth by discounting its future cash flows.
Most companies can use this method for valuation, except those that are cash flow negative.
DCF = (CF÷(1+r)) + (CF÷(1+r)) + … + (CF÷(1+r))
CF = cash flow in the first year
CF = cash flow in the second year
r = the discount rate
n = future years
Here's a free calculator for the DCF formula.
The most common valuation method used to value e-commerce businesses is:
value = earnings * multiplier
Currently, you have two unknown variables you need to find your business value. Let’s address this formula in two parts: business earnings and the earnings multiplier.
You can use several methods to find your Shopify store's earnings. One is based on the actual business earnings, while the other on future projections:
2.1) Seller’s discretionary earnings (SDE):
The SDE valuation method is used to measure a business’s earnings in an owner-operated environment, where a sole proprietor runs the show. It’s a cash-flow-based method usually employed by small and medium-sized stores with a value of less than $10 million.
SDE = net sales - cost of goods sold - marketing expenses - operating expenses + owner’s salary and perks
For instance, if your net sales are $85k, the cost of goods sold is $20k, marketing expenses are $20k, operating expenses are $5k, and the owner’s salary and perks amount to $30k, then the SDE would be $70,000 (free calculator here).
2.2) Earnings before interest, taxes, depreciation, and amortization (EBITDA):
EBITDA is a widely used method to measure a business’s operational profitability, most commonly by companies worth more than $10 million.
EBITDA = operating income + depreciation + amortization
Or, in simpler terms:
EBITDA = net income (or loss) + interest + taxes + depreciation + amortization
For example, assume that your operating income is $150k, depreciation is $250k, and amortization is $25k. Your EBITDA in that case would be $200,000 (here's our free tool for the math).
The earnings multiplier:
It can range anywhere from 1× to 3× for a Shopify store. But how do you arrive at an accurate figure? Multiple factors affect it, such as your margins, customer acquisition sources, and others — read on:
Whichever method you use, the following will affect your valuation:
If you’re looking at ways to maximize your store’s earning multiplier, implement strategies to increase your net profit margin. First off, calculate your profit margin, and then look for strategies to help increase your sales, rethink your Shopify store’s marketing strategy, cut down on unnecessary expenses, and streamline your store’s operations. Your cash flow statement may help you get ideas.
Competitive advantage is a key factor in determining your multiplier — over 40% of e-commerce businesses say that they face stiff market competition.
Competition can be a great incentive to improve your product quality or different ways to reach customers. Keep looking for ways to solve your customers’ problems. For example, from the creative site: you could include appealing video content from influencers or other customers (UGC) on your product pages, convert your site to be headless — which can improve load speeds and conversion rates, or offer an augmented reality-based product view.
A business with multiple revenue streams can potentially have more stable cash flows given the diversification of sources. Lower business risk translates to a higher valuation.
It takes years to earn goodwill. A loyal customer base, positive online reviews, and an active online community are great assets that help you earn your customers’ trust.
OpenStore's marketing lead Seijin Jung, formerly at Facebook, AngelList, and Udemy, elaborates about the importance of a strong brand:
“Your business’ brand value is typically reflected in (1) repeat rate: how much a customer likes your brand and will come back to buy from you over and over, and (2) your customer acquisition cost (CAC): is your brand awareness able to drive organic traffic to your site to decrease CAC.”
Other factors like the macroeconomic environment and even the geopolitical can also impact business value. OpenStore has helped thousands of Shopify store owners price their business, and Seijin elaborates:
“To the extent a brand's already been impacted by macroeconomic factors then we will assume the trend will continue. For instance, if recession hits and consumer discretionary spending is down, then CAC could be trending higher.”
Overall, all of these factors are very important, but by no means exhaustive. If you feel like valuing your store seems like a lot of work, well, that’s because it is. How can you get your Shopify store’s valuation without all the research?
Business valuation can feel like a black box. So what can you do to get your business’ valuation without having to add even more accounting to your growing list of tasks?
For starters, qualified Shopify merchants can receive a free business valuation in 1 day using OpenStore's pricing model.
Verified by expert analysts, it draws from metrics that matter — customer retention rate/loyalty, marketing efficiency, average order value, and CAC. Cindy Hao, Head of Pricing and Diligence at OpenStore, explains:
“Unlike traditional valuation models, OpenStore's offer engine doesn't rely on historical multiples of profit or revenue. Instead, we derive a price from a forward looking view into the performance of a store.”
OpenStore recommends the following best practices to ensure you get the best price for your store:
Manage your financial records even if you’re a small business and aren’t legally required to file all your financial statements. Having tangible proof of your cash flow, profit margins, and other financial data makes it easier for you and the counterparty to arrive at a valuation.
While your accountant can easily prepare your store’s financial statements, it’s vital for you to understand your financial statements so that you can answer any and all questions pertaining to them.
For instance, someone interested in buying your store might be curious about the fluctuating revenue over a certain period. This might occur due to revenue recognition principles — income is recognized when it’s earned, and not when cash is actually credited to your account — disallowing you from recording a large transaction.
All store-related elements must be easily transferable to the future owner; get them ready to avoid future complications. These include:
your Shopify account,
domain and name,
any exclusive contracts you might have with your suppliers, such as a supply rate agreement, or logistics forwarder, and
other third-party agreements.
You might think a good holiday season will earn your business a higher value, but that’s far from true. Cindy Hao, Head of Pricing and Diligence, explains how their team values e-commerce businesses:
“When we price a store for an acquisition, we take seasonality or recent trends into account. Sometimes, people think that if they wait to price once they have a great holiday sales bump, they will get a higher price.
Let's say the seller is trending at 30% YoY growth. Unless the holiday bump is significantly higher than 30%, the current growth momentum and holiday seasonality are already captured in the price. Sellers could have moved on from their business sooner for the same price — missing out on the opportunity cost of having done something else with the precious time.”
A common mistake Shopify owners make during the negotiation process is using the valuation they’ve received from a broker.
A broker’s valuation is not a final offer since it doesn’t hide brokerage fees and, more importantly, do not guarantee a sale close to that valuation on a defined timeline.
Instead, take it from Miguel Facussé, the founder of the popular men’s apparel Shopify store, Jack Archer, that he sold to OpenStore. Here’s what Miguel advises after he himself maximized the price he received from OpenStore: streamline your store’s operations, and address any shortcomings from the store’s performance.
As you get ready to sell your Shopify store, don’t wind down your operations. For instance, don’t turn off your Facebook/Instagram advertising spend. Don’t stop restocking your inventory.
Keep up your store’s performance while waiting for your valuation. Modern platforms like OpenStore take into account real-time data to evaluate your business’ value. Don’t stop investing in your brand.
You will have heard that 6 to 12 months is the usual time it takes to set your store up for sale, find a buyer, agree on a price, and complete the transaction.
OpenStore is 400% faster. An experienced team and technology can get you an offer within 24 hours. The form only takes a few minutes, and the entire transaction takes weeks.
You can sell your Shopify store via various means, here are your best options:
Find a buyer directly: you can sell your store to somebody you know — a personal connection, a friend of a friend, or a LinkedIn connection.
Online marketplace: this can help you reach many potential buyers. For example, Flippa is a popular marketplace where you can list your store and sell it to a buyer who matches your requirements. Just make sure that you comply with each platform’s requirements and are willing to invest significant time to screen potential buyers. You might not receive much support.
Business broker: selling your store through a broker comes with fees, usually around 10-15%. The high transaction cost and the fact that they might not always be an expert in your field are only a few of the many disadvantages of selling via a broker.
Sell to OpenStore: if you want to sell your business quickly, at a fair price, and without paying hefty fees. Our team of experts ensure that you get the best price for your store. If you’re ready, fill out a quick form, and you can get an offer as soon as tomorrow.
Let OpenStore run your store: if you’re not quite ready to sell your store, check out OpenStore Drive, a managed service where you can turn your store into passive income.
The bootstrapped business you started in your living room can become the catalyst to realizing your dreams. With fresh capital, you could launch other brands or focus on other goals. But the road to selling your Shopify store is time-consuming, tedious, and complex.
What if you want a reputable team with experience that’ll be invested in your store’s future? Countless Shopify store owners have trusted OpenStore, which now operates the largest number of Shopify stores in the world.
For instance, Max, a first-time entrepreneur and founder of TheSTEMKids, sold his e-commerce business to OpenStore and with the funds he received, launched his next store.
Brendan and Chris, serial co-founders, sold their yoga apparel e-commerce Shopify store to OpenStore and plan on launching and selling dozens of e-commerce stores in the coming years. They said they’ll keep building, scaling, and selling their stores to OpenStore — it was a profitable collaboration and the process was stress-free and quick.
Free business valuation tool for Shopify
You don’t have to be looking to sell your Shopify store to use this form — just follow the steps for a free valuation.
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