6 Steps to Boost the Value of Your Ecommerce Business
By some estimates, there are between two million and three million online retailers in the world, excluding those in China. Despite the scale of the online shopping industry, most of these businesses have spent years in what amounts to a kind of business Wild West.
In short, few people have fully understood the ins-and-outs of the major ecommerce business models when it comes to selling and valuing these businesses, because the business models are so new.
I can help: I've worked as an M&A advisor for dozens of ecommerce business sales with final valuations ranging widely, from $30,000 to $20 million. And I've seen many of these businesses make the same mistakes and require the same advice before being sold, regardless of whether they were a one-man-band or a corporate enterprise.
Hopefully you will get some ideas here for quick changes you can make to your business to make it more attractive to buyers and investors alike.
1. Reduce owner Involvement.
This is a strategy which can often be easy to implement and can apply to almost any business. When you are looking to sell your ecommerce business, it is important to look at the sale from the perspective of the potential buyer. Most people looking to purchase an online business aren't looking for a new job; they're looking for passive income.
By making sure that your role as business owner requires as few hours as possible per week, you will make the business more attractive to buyers and increase its likely valuation. By outsourcing tasks and refining your operations better, you'll find that this step can be accomplished in a short space of time.
2. Consider your technical hurdles.
Continuing the above point, it's important to consider whether there are aspects of your work as a business founder that others may find hard to replicate. Technical knowledge can be a tricky thing to pass on to a prospective new business owner (see a list of typical, technical e-commerce skills here). So, by reducing the amount of technical knowledge required to run your business, you are likely to see another boost in your business's valuation. In an ecommerce business, this might involve SEO, inventory management and/or coding skills.
3. Avoid a concentration of revenue.
When an ecommerce business is valued, its revenue is broken down in several ways, including revenue by product, revenue by customer and revenue by supplier. To get the maximum value for your business, it is essential that your revenue not be too heavily concentrated in any of these areas. If your business depends heavily on a relationship with a single supplier, for instance, a prospective owner may have some cause for concern.
There is a whole art to managing supplier relationships. So making sure yours are in order, and as formalized as possible, will be crucial.
4. Clean your code.
Online stores are often built using somewhat standardized tools and software, but there are many which require custom software. Whether you do this to separate yourself from the competition or to comply with the technical requirements for your kind of store,you should be aware that a custom selling platform's code must be clean.
Many ecommerce businesses run into problems if their code is messy, especially if there's a new business owner. This person will have difficulty developing the store, especially if he or she works with different developers. Conducting a code review before you sell can be a good way to ensure that everything is in good condition.
5. Streamline logistics and fulfilment.
A Metapack study showed that 38 percent of ecommerce customers surveyed claimed they would never return to an ecommerce store if they had a poor delivery experience. If this sentiment is that common among online shoppers, then logistics and fulfilment should be the lifeblood of ecommerce.
Bearing this in mind, you should simplify these processes in the runup to an ecommerce business sale or valuation. This could involve outsourcing the bulk of the fulfilment work or getting a better grip on your logistics. Setting up effective logistics analytics best practices could help to bolster your business.
There are many logistics and fulfilment solutions to choose from; Amazon’s FBA program is perhaps the most popular. FedEx also offers its own service and there are smaller names such as Rakuten Super Logistics, Fulfillfy and Shipbob. All have specialist offers for different business needs, so it is worth shopping around for the best deal for you.
6. Consider the age of your business.
For ecommerce businesses, unlike other businesses, buyers will usually pay a premium price when the business has been in operation for five or more years. Many potential buyers like to see at least three years of operation, and one year is regarded as the bare minimum needed to before a sale.
Being able to show that your business has grown steadily over time is another key factor in securing a high valuation, which means it's worth considering whether you should hold off on valuing or selling your business until you reach a more mature position. If it wouldn't hurt you to add another few months to your time line while working on the points mentioned above, don’t rush.
These steps should help knock any ecommerce business into shape, but there is still more that can be done. If you want a more in-depth look at the valuation of ecommerce businesses, read my article here. If you want more hands-on help with valuation or planning for exiting an ecommerce business, it’s worth speaking with a qualified online business M&A advisor.
As today's ecommerce universe allows more and more people to become entrepreneurs, it’s important that they receive real value in exchange for their efforts. Online business valuation techniques are becoming more precise, and there is a growing consensus as to what indicates an ecommerce "on the rise."
Want to describe your own business that way? Make sure your business sends off the right signals.