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.
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:
Accurate business valuation helps you get a fair price when selling it. Mistakes can be costly. Here are the most common mistakes:
Your store’s worth depends on the valuation method you want to use: income-based or market-based.
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 = (CF1÷(1+r)1) + (CF2÷(1+r)2) + … + (CFn÷(1+r)n)
CF1 = cash flow in the first year
CF2 = cash flow in the second year
r = the discount rate
n = future years
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 break down this formula into two parts—business earnings and the earnings multiplier—to make this easier.
You can use several methods to find your Shopify store's earnings. Some are based on the actual business earnings, while others are based on future projections.
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 is $85000, the cost of goods sold is $20000, the marketing expenses are $20000, the operating expenses are $5000, and the owner’s salary and perks amount to $30000, the SDE would be $70000:
$85000 - $20000 - $20000 - $5000 + $30000
EBITDA is a widely used method to measure a business’s operational profitability. EBITDA is most commonly used 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 $150000, depreciation is $25000, and amortization is $25000. Your EBITDA in that case would be $200000:
$150000 + $25000 + $25000
The earning multiplier can range anywhere between 1× to 3× for a Shopify store. But how do you arrive at an accurate earnings multiple? Multiple factors affect it, such as:
Regardless of the valuation method you use, the following factors will affect your business’ valuation:
Net profit margin
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.
Many e-commerce businesses diversify their revenue sources by setting up a brick-and-mortar store, focusing on paid and organic marketing channels (email marketing, SEO, SMS, social media advertising), and referrals.
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.
Seijin Jung, Head of Marketing at OpenStore — the e-commerce startup that either acquires Shopify stores or operates them through a managed service — 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.”
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?
While valuing your business, you might be torn between using the income-based or market-based valuation models.
The income-based valuation model or the DCF method 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.
On the other hand, the market-based valuation model is reliant on current buy-and-sell transactions of similar firms, 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 in nature.
Both the methods have their set of pros and cons, so choose the one that fits your requirements perfectly.
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 24 hours by going through OpenStore's pricing model, which is then verified by expert analysts.
OpenStore’s pricing model pays attention to 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:
Maintain financial records
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.
Know your financial statements
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.
Get your business transfer-ready
All store-related elements must be easily transferable to the future owner; get them ready to avoid future complications. These include:
Don’t wait for the right time
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.
Don’t wind down your operations
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:
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.
You don’t have to be looking to sell your Shopify store to use this form — just follow the steps for a free valuation.