Editor’s note: This is a guest post from Gregory Elfrink, Director of Marketing of Empire Flippers.
Every day you wake up, turn on your computer, and work hard. You’re putting in the long hours building up something that is amazing, that can provide for you, and maybe is even allowing you to accumulate wealth. As an entrepreneur, you are driven by the passion and the need to create and push your business ever further.
But what are you pushing toward?
It’s a question we don’t ask very often, yet we should.
For most entrepreneurs, the light at the end of the tunnel is where they can successfully exit their business by selling the asset to another entrepreneur. After all, despite our passions, most of us want to retire one day and the most feasible way is by building up your business and selling it off.
The tricky part is determining how much your business is actually worth. Knowing the value you’ve created in your asset can do a ton of different things for you even if you decide you don’t want to sell the business.
By acting as if you are going to sell it, it’s going to make your business a tighter ship that is easier to steer because you’ll have a better picture of your business’s overall health.
We’re going to go over a few elements that go into valuing an online business and how you can increase that value.
This might be one of the most important posts you read if you’re looking to do an exit.
Do this right, and it is more than possible to exit your business for multiple six or even seven figures.
What would an extra six or seven figures look like in your life? It probably would open up a lot of doors. Don’t think you can only sell one business, either.
At Empire Flippers, we’ve seen people come and sell multiple businesses for six figures using our marketplace, over and over again.
There’s no reason why you can’t do the same.
The first step is understanding how value is given to an online business. This is one of the primary issues entrepreneurs run into when it comes to selling their business. Usually, they’re just shooting in the dark and have no real frame of reference in determining their value.
Let’s change that.
First off, there are two main kinds of valuations:
Pre-revenue is what all the Silicon Valley-style companies get. These are companies like Twitter, Snapchat, Instagram, etc. While these businesses don’t make a profit (yet), they definitely are valuable in their own right. Most pre-revenue-style companies are only going to be looked at by venture capitalists and other high-level investors.
For the rest of us, we are building revenue-producing assets.
These kind of assets are already cash flowing with profit, and this is the main valuation model that the majority of business buyers use when determining value.
At Empire Flippers, we actually created an automated tool that you can use to get a valuation for your online business, but here is a super basic formula you can use:
Business Valuation = 12 Month Average Net Profit x 20-50 Multiple
The biggest variant in this formula is the multiple, which can range depending on a number of factors. The two biggest factors for your multiple is the track record of profitability and your actual net profit. The longer track record you have of stable earnings or upward trending earnings, the better your multiple is going to be.
Likewise, if you have a track record with year-over-year decline you’re going to get a lower multiple, often below the 20x range since it is a distressed asset.
On average, larger net profit tends to correlate with higher multiples, since that higher net profit typically correlates with a bunch of other factors that go into helping you get a better multiple.
While track record and net profit are the two largest factors that go into getting a good multiple, there are a ton of other factors, too.
The good news is that over a lot of these factors, you have quite a bit of control.
While this isn’t an exhaustive list, it will point you in the right direction to getting way more money out of exiting your business when that time comes.
We have a saying at Empire Flippers: “How deep is your moat?”
Your moat represents how difficult it is for someone to come along and do the same thing as you. If you’re running a drop shipping store, is it one that someone could enter the niche and have the exact same kind of website as yours set up in an afternoon? Or do you have exclusive agreements with suppliers and a powerful brand with a community that loves you?
The harder it is for someone to replicate your business, the more valuable your business is going to be.
This isn’t meant to be confused with not having systems in place for your business or a good team, though. For example, if it is up to you to get on the phone and proactively sell your products to your customers, you might have a hard-to-replicate business but one that very few buyers are interested in purchasing.
Instead, you might have amazing sales training you’ve turned into a standard operating procedure that has cultivated a high-converting sales team for your agency. This procedure can then be passed along to the new owner as part of the intellectual property of the business.
Always ask yourself what really makes your business unique. Why would smeone be attracted to buying your business? What advantages do you offer them versus if they went out and tried to build it from scratch?
The deeper your moat, the bigger multiple you’re going to get.
Critical points of failure in your business are things that could literally destroy it. A common example is in the Fulfillment by Amazon (FBA) business model. Your product is housed on Amazon.com and all of your traffic is likely coming from Amazon’s ecosystem. Now, Amazon has monstrous amounts of traffic to offer your business which is one reason why the model can be so lucrative.
Yet, you don’t own that platform. If Amazon changes their FBA rules and policies, you could be noncompliant purely on accident and have your account banned completely, or they could change their algorithm, causing you to suddenly lose all that organic traffic you were getting from the Amazon search ecosystem.
This can be a pretty big point of failure for Amazon FBA. Because of this, we always stress looking into multichannel selling for your ecommerce business and eventually build out a real branded e-commerce store that you own for longevity.
Don’t get me wrong — we’ve definitely sold big Amazon FBA businesses (like this $1.7 million dollar Amazon FBA case study we did). However, you’ll help your multiple by building out a full-fledged ecommerce store in addition to your FBA channels.
If you have just one traffic source, then your traffic source is both your moneymaker and point of weakness. Most entrepreneurs seem to stick to just one traffic source and never really look into building out other sources.
If your entire e-commerce or software as a service (SaaS) business is promoted through Facebook ads, and Facebook suddenly bans your account, what happens to your business?
Probably nothing good.
It is best to master one traffic source, and once you have the system in place there, it is time to launch another traffic source. You don’t need to become an expert in each one; in fact, you can often hire out a lot of the work to agencies and contractors once you get one source producing a good profit for you.
Buyers like to see multiple traffic sources. Not only do those sources signal multiple ways for people to find you and spend money with you, but it also signals more of a real brand and authority.
This one is the exact same as the traffic issue, only as applied to revenue.
Diversified revenue can mean many different things depending on what your business is and what you do. Someone who runs a very large Amazon affiliate site might want to diversify away from Amazon’s affiliate program by introducing display ads. If you’re running an e-commerce store, you might want to introduce multiple stock keeping units instead of relying on just a few SKUs driving all the revenue.
The majority of business models can support a portfolio of revenue streams, and it is worth considering how you could incorporate this into your business since it will give you a better multiple.
A real brand goes a long way to getting a better multiple. Once your business is in the multiple six figure range, it becomes a lot harder to sell if you don’t have some kind of compelling brand. When you have a good brand, you have people that are coming back and buying from you again(rather than just a one-off killer marketing funnel).You’ve built a community that loves what you are doing and you’re potentially the thought leader in your space.
The business model where people miss this point the most tends to be in affiliate sites. Many affiliate sites are earning great revenue, but they’re set up like a mini-niche site with an ugly long-form article for a homepage.
For most savvy buyers, this is a big turn-off.
Instead, those affiliates should look into designing a beautiful, branded homepage that acts as a portal page to tons of different content. It makes the site look legitimate and as a bonus makes it way easier to get backlinks to your site.
Every business model, not just affiliate marketing, can fall into the trap of going for fast money instead of building a real brand. If you’re looking to exit your business, consider how you could strengthen the brand.
Affiliate sites can become real media sites, Amazon FBA businesses can become real e-commerce stores with communities that love them, etc.
Building a brand can be a bit nebulous, but when you crack the code you will see a nice lift in your multiple, plus it makes selling the business much easier.
It is definitely worth it.
Want to see how valuable your online business is?
Check out our free automated valuation tool
It uses REAL data from over $40 million worth of businesses sold on our marketplace.
Gregory Elfrink joined Empire Flippers in 2016 as their Content Manager and now acts as the Director of Marketing. He oversees the Empire Flippers brand and launches new collaborations, content, and campaigns to increase Empire Flipper’s presence as the leading M&A advisory firm when it comes to helping buy and sell online businesses. Gregory also participates in several industry conferences around the world as an attendee, sponsor and speaker from the mainstage.