7 Steps to Maximize Your Ecommerce Business Valuation
If you want to sell your ecommerce business, you need to ensure you’re getting a good deal. The most surefire way to do that is with ecommerce business valuation, a process that estimates the economic value of a business.
Of course, you’d want to maximize your potential valuation as much as possible. But how do you do that? Let this article be your guide for how to increase company valuation.
Calculating and Maximizing Your Ecommerce Valuation
There are many variables you can juggle to maximize ecommerce companies’ valuation, though many involve minimizing risk. Here are seven variables worth considering.
These are just to get you started to adopt a valuation mindset. Be sure to seek advice from a financial professional when you want to get serious about estimating your valuation.
1. Financials
Your financials need to be in order before you can even consider getting a valuation of your business. You should have an organized year-over-year (YoY) comparison report as a baseline. This model can communicate how your current year performance compares to previous years, which can then help you answer questions for many other categories on this list.
Cleaning up your financials also ensures you clarify all the essential metrics:
- Gross Margins: After calculating your total product costs, your gross margin is the amount of profit available to pay remaining operating expenses and reinvest back into the business. Gross margins can help determine a company’s potential scalability.
- Contribution Margins: Your contribution margin is the margin of profit left after subtracting all variable costs from your revenue. In our view, this is the most impactful data point to help determine your valuation since it includes both the cost of the product, as well as the costs to sell and deliver the product to the customer.
- Growth Rate: Using that YoY comparison will help tell the story of how your business has progressed over time, which potential buyers may use to predict where you are going in the future.
Additionally, having clean financials communicates your level of organization and trustworthiness to potential buyers.
Questions to Consider
- Are my financials up to date?
- Do I have a record of my past financial data that I can use to create a YoY financial report?
2. Revenue Concentration
Revenue concentration refers to the size of your customer base. The basic concept to understand here is that the fewer customers you have, the greater the risk of a low valuation.
If all business revenue came from six customers, losing even one customer would have a significant impact on your revenue. This is typically a greater concern for B2B ecommerce companies that deal with just a handful of clients at a time.
Other variables to consider when reviewing your revenue concentration include your customer-sourcing solutions. A single technical issue can disrupt your entire business if you just have one source to gather customers, such as Facebook or Instagram. Algorithm updates, downed systems, and data breaches can all cause you to lose your grip on revenue growth.
Questions to Consider
- How can I diversify our marketing channels to find new customers?
- How large is the current customer base?
3. Customer Base and Retention
Consistently attracting new customers is essential for your valuation, as it proves to potential buyers that your product or service offers real value. However, if you only deal with new customers but lack the groundwork for retention, that is expensive and unsustainable. If your average customer buys one thing and never returns, this indicates a high churn, which can affect your valuation.
The dream customer is one who frequently returns to purchase your products. Having repeat buyers means you’ve established an infrastructure that keeps customers around long-term, which many buyers see as an excellent sign of business health.
Questions to Consider
- How many of our customers are repeat buyers?
- What’s our customer churn rate?
4. Brand Recognition
Many online shoppers are more interested in products than brands. They’ll see a list of products on a search results page and choose a product that offers the best features without attributing the product to its brand. As a result, it’s incredibly difficult to establish a strong brand online.
If you lack quality brand recognition online, your company won’t be seen as much different from any of the other hundreds of businesses in your industry, which makes the company less valuable. But if people navigate to your website to purchase your products or search for your brand name specifically, these are good signs of brand recognition.
Questions to Consider
- How are customers discovering our products?
- How much of our website comes from direct traffic (users typing your URL into the search bar)?
5. Traffic (And Traffic Quality)
High website traffic is a good sign—it means your marketing efforts are working to attract customers. But high website traffic is also somewhat of a vanity metric. If you have a lot of traffic but visitors don’t browse your website or buy your products, the quality of the traffic is low.
Conversion rates are a better metric to track, as they indicate your website traffic and business growth because people are buying your products. Having a process in place to measure the performance of your marketing channels can ensure the money you spend on attracting website traffic has a positive ROI.
Questions to Consider
- How does our site traffic compare to our conversion rates?
- What is the ROI of our marketing spend? Are there precise conversion results from our investment?
6. Growth
The cruel irony of selling a business is that you can gain a higher valuation if your business is actively growing at the time that it is sold. Potential buyers will look at how much cash you’re generating to help determine your company’s value. They will also consider your expenditures, which represent the money you are currently spending to grow your business.
Questions to Consider
- What is our month-to-month growth?
- Are there opportunities we’re missing that can help grow our business (new target audiences, new markets, etc.)?
7. Scalability
Much of scalability in ecommerce has to do with warehouse and inventory management. Are you able to take orders first and build products later, or do you need a certain amount of inventory in stock at all times? What software do you have in place to better manage your inventory?
Companies will consider these variables when evaluating their business.
Questions to Consider
- Do we have problems with large order volumes?
- Do we have reporting teams that help us plan for future demand?
Key Characteristics of a Successful Ecommerce Business
It’s hard to track your progression on many of the above variables. Use these three potential characteristics of a successful ecommerce business to establish benchmarks for areas of improvement.
Great Web Design
A robust online presence begins with excellent website design. Aside from simply looking sleek and well-designed, the layout of an ecommerce site should optimize conversions.
Quick Sprout has a long list of potential fixes you can apply to your website to reach this optimization, including:
- Reducing visual clutter
- Adding a search bar for instant access to products
- Paying for a premium web hosting service that reduces ads and improves load times
Exceptional Customer Support
Online shoppers risk a lack of customer support in ecommerce settings. In a brick-and-mortar store, shoppers can walk up to sales representatives to ask specific questions, get insights into certain products, and more easily return products that don’t work.
An ecommerce setting strips most of those options away, but buyers should still have access to high-quality customer service solutions. What does excellent ecommerce customer service look like? Document360 names several best practices, including:
- Using real-time support with live chat technology
- Maintaining a consistent customer service infrastructure
- Using help desk software like ThriveDesk to support customer service representatives
High-Quality Product Images
It may seem insignificant, but the quality of the images on your website can significantly impact your sales performance. Customers want an image that is the most accurate reflection of the product they’re looking to buy. Uploading the highest quality images possible can help you gain customer trust, which improves sales performance.
Maximize Your Value Today
To recap, the best way to ensure you receive a high valuation for your business is to organize your financial statements so you can better showcase improvements in your cash flow, revenue diversification, and other financial variables.
If you’re unsure where to start in cleaning up and improving the financial reporting for your business, our team at Amplēo can step in. Our experts will organize your financials, deciphering the data to give actionable insights into how you can maximize your ecommerce business valuation. Contact us today to learn more.
