Independent Business Valuations Backed by Experience

The valuation of a business may seem complex, but it always boils down to this: the value of a business is the amount a buyer is willing to pay a seller.

While the concept is simple, valuing a business (particularly in the early stage) is more of an art than a science. One of the nuances of valuation is that many companies are pre-revenue and have little to no data to pull from. If you’re a Shark Tank fan like I am, you’ve heard this before: “How can you be worth $5M if you have no revenue?” Such is the complex nature of business valuations. Whether pre-revenue or not, there are two ways to improve your business valuation.

TWO WAYS TO IMPROVE VALUATION

A simple valuation is usually a function of a financial metric applied to a multiple. For example, if my company was doing $5MM in revenue and an appropriate industry revenue multiple was 2x, my company would be valued at $10MM. The metrics used often differ by industry, but the most common ones are revenue, earnings, EBITDA, MRR/ARR, etc.

One strategy to improve valuation is to grow the metrics used in the valuation. Frequently, SaaS companies will focus on top-line growth, while product companies more often focus on profitability. Knowing what buyers in your industry value will help you target the right levers and improve your valuation.

Perhaps the quickest way for a business to improve its valuation is to improve the multiple. While a business may have more direct control over metrics than the multiple, valuation is more sensitive to increasing the multiple. Industry multiples come from actual industry data and are usually displayed as a range of values. Increase your valuation by showing that your business deserves a premium multiple and that you fit in at the top of that value range. To do this, you’ll need to generate confidence in the business and its potential to succeed. In short, we’re talking about risk: the more risk you can mitigate for the investor, the better your company’s valuation.

RISK IS THE KEY

In any scenario, investors are looking for solid investments — ones that will maximize return and minimize risk. The more risk you can remove, the more favorable your valuation and, consequentially, the more favorable your position when seeking buyers. While raw, hard data is always compelling, things like proof of concept, an experienced management team, intellectual property protection, strategic positioning in the marketplace, and a solid business plan can do wonders for calming the nerves of investors. Beyond that, the better you can articulate the unique strengths of your business and demonstrate a clear plan to turn those strengths into dollars in the pockets of your stakeholders, the more likely you’ll get a favorable multiple and valuation.

A CAUTIONARY NOTE ON EARLY VALUATIONS

While a high valuation may seem impressive, it’s important to note that a fair valuation is almost always better for the business than a high valuation. During the first capital raise, the bar is set for the company and each consecutive round sets an additional bar. Consider two scenarios:

1. Founder 1 raises a first round of $500K at a $2MM pre-money. The company does well and raises the next round of $10MM. Both founder and investor are happy — 4x value created. Also, justifying the $10MM pre is doable and VCs and angels are both key players in the next round.
2. Founder 2 raises a first round of $1.5MM at $10MM. To maintain that 4x growth like Founder 1, Founder 2 now needs to raise around $50MM. Doing so requires explosive growth and narrows the pool of potential investors, as the angel and small investors will likely drop out.

Because Founder 2 had a higher initial valuation, the bar is set even higher for the next round, increasing pressure for short-term growth on the founder. By pushing the larger rounds to a later stage, the founder can focus on long-term, sustainable growth, as opposed to racing to grow in order to prepare for the next raise.

VALUATION IS NOT THE END

Though it may seem like it, a business’s valuation is not the only thing to consider. Choosing the right investor is just as, if not more, important for a business to succeed. Because your investors may be heavily involved in the decisions of the company and will likely be linked to you for the remainder of your company’s life, you’d be wise to ensure you pick the right one(s). First, determine whether or not you would want the investor as a key decision maker in the business at any price. Then, decide whether that price is fair.

The more risk you can mitigate, the better multiple and better valuation you’ll secure for your business. Regardless of your valuation, do right by your business and you’ll reap the rewards. And as the best VCs have always told me, “Run your business like you will never sell it, but always be ready to sell it if the right offer comes along.”

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 Ampleo 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.

Did you know that nearly half of all businesses fail within the first five years, with only about 35 percent of them surviving through their tenth year in business? To endure and succeed well into the future, small to medium-sized businesses (SMBs) need access to clear data insights, financial expertise, and leaders who have been there, done that.

As we continue in our mission to help businesses access the leadership they need to thrive, I’m excited to announce our third acquisition this year: Peak Business Valuation. We couldn’t be more excited about what this latest acquisition means for Ampleo clients. Let’s explore how adding Peak’s valuation expertise to our suite of services will fill the gap experienced by many national SMBs.

Valuation: A Critical Component of Business Strategy

Peak Business Valuation has built a reputation as one of the highest-rated valuation firms in the country. They are not just any valuation company—they go above and beyond to deliver an excellent client experience. They have forged partnerships with over 90 SBA lenders, invested in a people-first approach that not only provides top-tier valuations but also adds valuable business insights.

Valuation isn’t just a snapshot of worth—it’s a roadmap to future success. It offers key insights into activities across a business’s lifecycle, including the following:

• Buying a business
• Selling a business
• Machinery and equipment appraisal
• SBA-compliant business valuation
• Succession planning
• Assessing risk
• Litigation
• Driving sustainable growth

By bringing Peak Business Valuation into the Ampleo family, our clients will now have a team that can work side by side with their fractional CFOs to lead them through not only big moments like purchasing or selling their business but also strategic planning for growth at their company.

Planning for an Uncertain Future

When business owners need a valuation, whether they’re buying or selling the business or simply need a health check to see how their business is performing, our fractional CFOs will work directly with the Peak Business Valuation team to provide greater guidance to business owners—in whatever stage of growth they are in. This means better planning for the future and confidence in every financial decision. With a valuation, clients can define exactly how to best grow their business by negotiating the best purchase price, identifying key risks, and understanding their market positioning.

However long an SMB needs support, the insights and mentorship offered by fractional CFOs and quality valuations will last long after engagement ends. Our executives and Peak alike both bring diverse experiences from across industries, offering objective perspectives to tackle complex challenges. This collaborative approach sparks innovation and helps SMBs implement best practices for long-term success.

How Valuations Fuel Business Growth

Business valuations are a powerful tool for growth, offering SMBs a clear roadmap to success. With the combined expertise of Peak’s valuation precision and Ampleo’s strategic vision, clients can now transform financial data into actionable growth strategies.

A comprehensive business valuation provides more than just a number; it offers insights into a company’s strengths and areas for improvement. Like an annual medical checkup, a valuation offers business owners essential insights into their health, including financial stability, growth, current value, and risk. Without this information, businesses are flying blind, unsure of how they’re performing or what to focus on to grow.

Between access to high-impact business valuations and vision from fractional CFOs, CMOs, and HR leaders, SMBs will have a compass to guide them through the challenges of growth and organizational change.

This acquisition marks the beginning of an exciting new chapter for Ampleo, Peak Business Valuation, and most importantly, the clients we serve. If you are a business ready to take strategic growth and leadership to the next level, lets talk.