Many Shopify store owners don’t know what their end goal is. It’s never easy to scale your Shopify store. No matter how you optimize your product listing pages, or streamline your third-party logistics operations there is always more to do.
Many Shopify store owners don’t think about selling their business. They believe that the only time they’ll sell their ecommerce business will be when it is insolvent or has lost its ability to pay the required operational costs. These worries are understandable, as data from the US Small Business Administration (SBA) shows that nearly half of small businesses fail within five years of being in operation. Sometimes it can seem that there is no other option than to continue running the business, pass it on to the next generation, or to close the business when the owner retires.
Ecommerce owners don’t have their journey end when their business closes. Shopify store owners can sell their business to continue their entrepreneurial journey and pass the business on to someone else.
Ecommerce businesses are one the most sought-after digital assets that can be traded on market places. Many institutional buyers are looking to purchase ecommerce stores for six, seven, or eight figures.
Let’s look at how ecommerce businesses value.
Shopify offers a flexible platform that allows you to build a profitable online business, regardless of your budget. Shopify is a great platform for college students and ecommerce beginners looking to make some extra income.
Shopify gives entrepreneurs the flexibility to grow and adapt their business through the agile platform. The value of an ecommerce company depends on many factors related to its DNA.
Understanding how Ecommerce Businesses Are Valued
To understand the basics of valuation, you must first understand how much your ecommerce company can be sold for.
12-Month Average Net Profit x Multiple = Value
The average monthly net profit for 12 months is usually between 20x and 50x. We’ll soon be discussing the multiple so don’t fret about it.
Online businesses might have been valued using another formula.
EBITDA Multiple (2-4x).
EBITDA is earnings before interest taxes, depreciation and amortization. In the above formula we use an annual multiple. Brokers and private buyers often use either an annual or monthly formula. They are basically the same formula when someone claims that they sold their business for 3x and 36x. A monthly multiple is a great way to be more precise about seasonality, and it can also help if your pricing window is shorter than 12 months.
There are many factors that influence the success of an ecommerce business. These factors include business age, revenue generation, traffic diversity, and number of products. The pricing window that you use is a major factor in arriving at your valuation. So, let’s discuss what a pricing windows is. This will help you be better prepared in the event that you need to exit.
Sellers have the option to price their business over a 12-month, 6-month or 3-month period. Although there are many other pricing windows, these three are the most common. They are the ones that a buyer would expect and are the ones you as a shop owner are most familiar. Because it considers seasonality and improves a buyer’s confidence in the company’s financial performance, the 12-month window for calculating average monthly net profits is the best standard for valuations. This pricing window is the most popular and will usually give you the highest valuation multiple.
Every ecommerce business experiences seasonality. Products are more in demand during certain times of the year because of fluctuations in buyer demand. The calculation of monthly net profit over twelve months gives a better indication of the business’s monthly profit, since lower sales months will be included alongside those with more sales.
Buyers value having more information to help them do their research. The 12-month pricing window helps build trust. It reflects the financial health of the business and allows potential buyers to reject a deal or make an offer faster.
Sellers who want to achieve the highest valuation are advised not to choose a shorter pricing window. This can limit the buyer pool. A smaller ecommerce store that is valued at $30,000 may not be of concern to a buyer, but a store worth $300,000.00 over three months may be more important to them. Most buyers will overlook your business due to the lack of information and historical financial performance and sales.
A savvy buyer will be more likely to place a 3-month window for an ecommerce seller who is selling because of a drop in sales. To get a higher listing price, store owners could use a shorter pricing window to reflect recent growth.
Knowing how pricing windows affect your Shopify store’s value is one of the many factors that will influence its valuation. Let’s look at other factors that can influence the multiple.
What goes into a Multiple?
Multiple factors can have an impact on the multiple value. However, you can make some adjustments to increase it. You can see the strengths and weaknesses of your ecommerce business by putting yourself in the shoes of a buyer to help you identify areas that you could improve.
A business that is older generally indicates that the owner has had more opportunity to identify a product-market match, create effective distribution channels, establish the brand within its niche and streamline operations on various fronts.
A mature, profitable online business indicates that it is resilient to unexpected challenges in the marketplace. This can have an impact on revenue streams and operations. Negotiations can be facilitated if you can prove that your company has recovered from an issue that caused your revenue to drop, such as running out of stock in peak seasons. It is possible to show that your business is still profitable despite setbacks, and that you can fix these types of situations. A 12-month pricing window is a way to build trust with buyers. It allows them to see the same sales and revenue year after year.
The number of active products or SKUs is a measure for an ecommerce company’s value. It can be used to measure risk and how hard the business needs to run.
It is safer to diversify sales than to generate all sales through one SKU. Why? Because if one product is affected by changing trends, or delisted for any other reason, the whole revenue stream will be cut. If one product is out of fashion, you have a lower risk of losing your entire revenue stream. Your ecommerce store should sell multiple products, so that no one product is the largest contributor to the total revenue.
However, selling more products can have diminishing returns when you are trying to exit. Shopify store owners need to spend more time researching products, listing the products, and managing each product. Although much of this work is already done for you upfront, the buyer will still need to manage it during a sale. If you want to attract the most buyers, make sure that your business has multiple products that generate revenue and minimize the number of products that need to be managed.
The former would be more appealing if they had both a business that generated $50,000 per month in net profit and had eight SKUs compared to the other with 50. The buyer would have less time managing product listings for fewer SKUs. It will also be easier to work with fulfillment centres with SKU breadth limitations. This will allow them to concentrate on other aspects of the business.
There is no one right answer to how many products will optimize your valuation. However, there are some general guidelines. Your business will be more appealing to buyers if you have multiple products that generate revenue, with no one product exceeding 50% of the total revenue. A second rule is to ensure that every product you launch adds value to your business. Avoid having too many products to manage. This can cause potential buyers to be turned off by seeing how much the store makes on a product-by-product basis.
We have sold close to 1,500 businesses as of the writing of this article. The sweet spot is between 3-8 products for most buyers. This is enough to provide decent revenue diversification and enough inventory for most investors to manage the inventory requirements of your store.
There are exceptions to the ideal product ranges. A buyer who has a large amount of capital can take a lower risk buying an ecommerce store that sells one product than a buyer who only has the funds to purchase one digital asset. The buyer with greater resources can absorb the financial loss if the ecommerce store’s value falls in the future.
Diversified traffic sources can help increase a business’s multiple, as it reduces the store’s dependence on one source of traffic to drive sales.
Shopify store owners often use paid advertising campaigns to increase brand awareness and drive sales. SEO is difficult to leverage on Shopify. Multi-channel selling can increase brand exposure on other ecommerce platforms, which attracts a wider audience. This approach can positively impact the many. Recent Shopify study shows that your revenue could increase by 120% if two additional ecommerce platforms are used.
A monetized list of email subscribers with large numbers is another way to help a seller move the multiple needle. Email marketing is only as valuable as the audience it can help build. An email list can be a source of traffic and revenue that is independent from search engine traffic. It won’t be affected or affected by any unforeseen algorithms. Ecommerce owners often underutilize email lists. It’s in the seller’s best interest to build one with a high conversion rate.
Average monthly net profit
While monthly net profit is a valuable valuation factor, it is important to remember that a higher profit positively impacts the multiple.
A ecommerce company with higher profit margins will naturally have more value. This could be due to higher sales volumes, lower costs, or more efficient operations. We recommend that you increase your monthly net profit while not sacrificing important components of running your business. This will help reduce the burden on the owner.
Deciding on the Future of Your Business
It is important to set a goal.
Ask yourself what your long-term goals are. This simple question will help you decide if you want to continue building your ecommerce shop or selling it. There are two options for exiting a business: sell the asset or let it go. We’ve seen many ecommerce store owners opt for the second option, mainly because they didn’t know they could sell it or thought it would be too difficult.
Even if your goal is to sell your business eventually, pretend like you do. This will help your business become a stronger profit-making machine over the long term. You’ll be glad you did it, if you decide to sell.
Ecommerce founders often sell their businesses due to personal or business reasons. Sometimes sellers might experience life events that alter their personal and work schedules. Sellers may lose motivation to maintain the business or pursue other projects. Fundraising through a sale might help grow another company.
Shopify store owners need to know how to prepare for listing their business for sale, regardless of the reason. Your ecommerce store should only be sold if you are able to achieve a personal or professional goal. Ideally, both. We wouldn’t recommend timing the market, buyer demand, or any other similar endeavors.
A Timeline to Prepare for a Sale
Your business will be more valuable if you have a positive outlook on selling it. You should plan a date when the business will be publicly listed for sale if and when you decide to do so. It is a good idea to plan at least 12 months in advance so that you have time to prepare the business and negotiate the best price.
12 Months Away – Create Your Plan
Even though 12 months may seem like a long time, it is worth preparing financial statements in order to create the profit & loss (P&L), statement. As we mentioned, buyers will trust more financial information. They can use this data to analyze the business’s financial performance over time.
The P&L statement is one of the most crucial documents that will be referenced throughout a deal. It is used to establish valuations and as a reference point in negotiations, should a buyer have questions about finances during the final stages of a deal.
This is a great time to prepare financial documents and plan for optimization or expansion goals, such as new products launch or increased traffic sources. Even if the strategy doesn’t work out as planned or revenue drops, it is possible to make changes quickly.
6 Months Away-Tweak and Observe
It takes six months to see the results of a new strategy. A seller might adjust their plan along the way to increase their expected ROI.
A seller might have planned to launch several new products and then use an email list to promote them. Although sales could have increased at a steady pace, the conversion rate through the email list may be lower than expected. Split testing with A/B could help you determine which voice resonates best with your audience or which CTAs have higher response rates.
This is a good time to take stock of your business. You still have six months to go before your intended sale date. This gives you time to refine or abandon your growth strategy if it is not providing sufficient returns.
3 Months Away – Maintain Performance
Sellers should keep in mind the revenue and sales numbers as the date for listing the business is nearing.
The best case scenario is that the seller achieves their desired outcome, usually in the form increased sales. This usually happens from 12-month planning. A seller who fails to implement the plan can present it as an opportunity for growth.
Here are some common pitfalls to avoid for first-time sellers
It is important to be aware of common pitfalls when you are looking to sell your house privately. Sellers can lose leverage in negotiations or even lose the deal.
Buyers want to pay the lowest possible price for a deal. Negotiations are normal when discussing a deal. However, first-time sellers often make the common mistake of selling for as little as possible to satisfy all low-ball offers. These offers are not necessarily indicative of the value of your business.
It’s much easier to defend your position or refuse to negotiate with unreasonable offers if you know your business’s strengths. This free valuation tool will help you determine the approximate value of your Shopify store based on its financial performance. It’s useful for both private sales and broker transactions.
You should be cautious about overvaluing your business due to your personal bias.
First-time sellers are more likely to overprice their business than buyers expect because of their emotional attachment.
Sellers are more likely to set the price higher to get closer to their expected sales price. Buyers can be disillusioned if sellers refuse to lower their premium, especially if they’re unreasonable. It’s a smart idea to have your business valued before you sell. This will give you a clearer idea of the price range you can expect to negotiate.
We recommend that you use your P&L statement to determine your sales price if you are deciding to set it yourself. Buyers will want to know the process behind your listing price. It will be easier to explain if you have all your financial statements in order.
When discussing pricing, don’t list the potential growth of the business as a factor. If you make the potential growth of the business a key factor in the valuation, serious buyers may lose trust and reconsider whether they are willing to invest more. Buyers will consider the current performance of a business when deciding whether it is worth investing in, regardless if they use a broker or private sale. Stick to the P&L statement, and follow all measures that can easily be tracked. While there will be much back and forth in negotiations, you’ll be better able to reach an agreement closer to your sales price if you have clear financial data such as the P&L.
You must plan for your endgame
It’s important to remember a lot when selling your Shopify store. This is why it’s highly recommended that first-time sellers hire a broker. Although the private route may be more profitable than the broker’s, you will need to avoid all the tricks that savvy buyers might use to get you to sell at a lower price.
Shopify stores have two options for closing down their business: either sell it or close it down. You could receive 20 to 50 months of net profit as cash upfront if you choose to sell. This deal can provide the biggest windfall for most people and open up many doors.
Even if your intention is not to sell, it is a good idea to prepare for the sale so that your business can scale better and operates more efficiently. You will be able plan ahead and make a profit by knowing your endgame.