32% Of Business Owners Don’t Know How To Value Their Business
Somewhere along your business journey, you may ask the question: should I sell my business? Some business owners (17%) are hesitant to sell because they are worried the seller won’t protect their business/brand or because they think the selling process will take too long (12%). However, the largest number of people (32%) say they are hesitant to sell their business because they may sell it for less than it’s true market value. If you find yourself in this same situation, it’s clear that before you think about selling, you must first know what it’s worth. Learning how to value a business includes: tallying a company’s intangible and tangible assets, calculating net profit, navigating the competitive market, and predicting longevity. It also includes exploring ways to maximize profits and increase its overall worth.
These factors apply to standard brick-and-mortar companies as well as e-commerce models, such as those that have built a business through Amazon FBA. Regardless of whether you're a business owner who has been in the industry for five years or fifteen, knowing how to value an internet business on a basic level will help you make the decision of selling should the opportunity arise.
Tallying Business Assets
The first FBA business valuation method is separating asset value from the company’s value. Calculating product inventory doesn’t equal what your business is worth. Buyers consider how much money can be made from your business in the future, not just the sale value of what you currently have in stock. Although your products are tangible assets that have a selling price associated with them, other business assets to consider are accounts receivable, cash on hand, and intangible assets, such as brand awareness and reputation.
A significant part of your business’s worth is dependent on the strength of your brand and the necessity of your products for the everyday user. Unique products with a super niche audience can be a harder sell. There’s less certainty that your products will be in demand as the economy and buyer preferences change. For Amazon FBA sellers, tracking accurate inventory through the seller platform is made simple through its built-in reports.
Being able to present a clear picture of best-selling products and eliminating products with lower demand is important to maintain relevance and competitiveness in the space. Additionally, diversifying your product offering lowers the risk for buyers. Evaluate areas you can expand or grow your current inventory and selection.
Calculating Net Profit
Calculating your net profit is an important business valuation method that requires factoring in one-time and ongoing business expenses. Most buyers make valuation decisions based on a company's current and future ability to generate bottom-line profit. Buyers look to pay sellers a multiple of net profits generated over the last twelve months, which varies based on broader business characteristics.
A standard company has to account for several expenses not typically involved in maintaining an e-commerce store. Most businesses must deduct expenses including, but not limited to, cost of goods sold, shipping, marketing, software subscriptions, rent and utilities, and more. These operational costs bridge from revenue to indicate the true profit potential of any business.
For most Amazon FBA business models, this formula is simple. Expenses are often limited to the cost of goods sold along with Amazon fees and marketing spend, all tracked directly within the platform. Business owners that only sell within Amazon can leverage Seller Central reports to provide a clean, clear view of Net Profit.
At Forum, we look for e-commerce businesses that receive 70 percent or more of their sales through Amazon FBA and have demonstrated financial cash flow success of at least $200K in net profit or seller discretionary earnings (SDE) in the last year. In addition, demonstrating an increase in cash flow and sales year over year shows the staying power of your business and makes it more lucrative to buyers.
Navigating the Competitive Market
Buyers are drawn to companies that can prove their place in the market both now and in the future. Although you may have worked years to build your business to what it is today, is it a model that makes sense in the modern world? What type of adjustments would need to be made to keep it relevant five, ten, fifteen years down the road?
Buyers want established brands in a stable, growing niche. To demonstrate this, historical financial statements, as well as examples of recent company growth, are important. A few questions to consider are:
- How much has your company grown year over year?
- How do customers feel about your product offering (reviews)?
- What are your net profit margins? Have these been stable or improved over time?
Knowing your current positioning in the market and providing confidence in future performance is valuable in the eyes of a buyer. Part of learning how to make an e-commerce valuation at a fair market value is presenting true numbers and the potential your company holds for the future. For online businesses, this means securing a top spot in a customer category that’s relevant to everyday life, such as home & kitchen, pet products & accessories, and health & personal care. It also means having a product line that will be in demand for years to come rather than solely piggybacking on the latest e-commerce trends.
Brands that have succeeded in building a strong customer base and can demonstrate metrics including consistently high engagement, repeat purchasing, and continued growth are in a better position to sell.
Every business faces challenges based on changes in the economy, technology, and buyer trends. Predicting longevity for a standard brick-and-mortar business involves considering increasing lease space and rates, employee retention, and rising salary demands, in addition to new competitors in the field. A company that has built a profound reputation with a loyal following looks favorable at operating in the future, but at what cost? Will future revenue cover initial capital expenses and ongoing operating costs? Is the business model scalable over the long-term?
In comparison, an Amazon FBA business has set fees that are more predictable, such as storage fees, shipping costs, and other operational expenses. Amazon warehouses maintain the brunt of what it takes to store, package, and ship products, an already wisely-used and trusted brand. Operators are tasked solely with maintaining “digital relevance” in the space with diversified products that solve a real need for consumers and stand out from the competition.
Knowing how to value a business can give you a better idea of what your brand is worth rather than only looking at one metric to determine its fate. Taking the time to navigate these various factors can save your company time and money as you prepare it for sale.
Ways to Maximize Your Business’ Worth
Once you’ve established how to value a business, you may want to consider ways to maximize its worth, if it’s not quite up to par for sale yet. A good place to start is to increase sales, and in turn, net profit.
For Amazon FBA businesses, you can start by optimizing your product descriptions and detail pages. Incorporate keyword research to use in titles and descriptions. This will result in higher search rankings and improve your visibility to help boost sales and the company's book value. Another key way to add to a business’s value is to offer promotions. Consumers like terms like “free,” “fast,” and “convenient” when shopping.
These are two of several ways to maximize profits and increase a business’s book value. A company’s worth is equal to its historical success, but also its perceived potential to be sustainable in the future. Buyers look for stability, revenue guarantees, healthy inventory levels, and opportunities for expansion in the market. Decide how well your business measures up and if there are areas that need to be fixed or improved.
What to Look for in a Buyer
Once you’ve established a strong sense of what your company is worth, it’s time to start thinking about where to sell. There are several options to choose from, including selling directly to a chosen buyer, working with an Amazon FBA business broker, or selling through an online marketplace. Regardless, you’ll want a buyer that is experienced and reputable in your industry.
For an Amazon FBA business owner that wants to sell directly, Forum offers invaluable experience in e-commerce, having advised the largest global CPG brands, managed nine-figure Amazon P&Ls, and executed over 40 M&A transactions. The valuation process is straightforward. First, you’ll discuss your business journey and share basic information about the company. Once a business valuation expert has established your business fits our model, we’ll move forward gathering financial statements and other records to put together an initial offer. This usually occurs within 48 hours.
From there, once offer terms are agreed upon, our team will work to finalize the transaction and create an integration plan, which is typically completed in a few weeks. Finally, you’re paid in cash equal to years’ worth of profits in just one day. This is highly expeditious, especially when compared to the typical timeline for selling a standard business takes approximately six to twelve months, if not longer.