What's My Business Worth?

I spend a lot of time working with website owners to provide then with a ballpark estimate as to the marketplace value of their websites. Typically the first question I hear, well before providing an initial valuation is how do you come up with a figure and what goes into a valuation? Some sellers are happy enough with that initial valuation, but many if not most want to know what if anything they can do to maximize if not increase the value of their business.

This is the first in a series of articles aimed at explaining and hopefully making sense out of how website valuations are done, what factors are considered, and maybe even more importantly how you can prepare your business for sale in such a way that when you do come to sell, you will generate a firestorm of interest and have buyers lining up and eager to buy it.

Way back in 1996, I had an offline business (which actually spawned my first online business) and was working toward selling it – that had always been the plan, buy-build-sell, and move on to another business. Like most business owners though, I had no idea what it would sell for. I knew what I paid and what I would like to sell it for but not really what a buyer would pay or even what that would be based on. I was stumped because although I had often thought if not wished, I could sell the business, I had never seriously considered what I would ask for it.

If you’ve ever considered selling your business, or if you have ever been contacted by someone asking if you would like to sell your website, then you know you obviously begin thinking about what it is really worth to someone else.  You might start by doing a little research and if so, will likely find a huge variety of methods and values that will leave you feeling way more confused than enlightened.

Over the years I’ve heard it all, from "a business is worth 10 times its gross revenue" to "it’s not worth anything unless you are on page one of Google search results".  I’ve also seen online calculators that will have you submit a few pieces of very basic if not arbitrary information, then spit out a number sometimes even down to 2 decimal points even (generally these valuations are nothing but snake oil – but that’s another post entirely). Both of these examples are extremes of course, but both do also have some part in the process of real life business valuations. 

There really is no “one size fits all” answer to the value question, it requires you look in detail at all the elements that contribute to the business, both front end, meaning the website itself and the backend – admin systems, traffic measurement and probably most important of all the records (preferably third party but at the least verifiable) to prove what you are saying is really what you are making form the business. The real question is – what makes your site valuable and how is that calculated into an actual figure that is verifiable and can be evidenced to potential buyers?

There are many factors to be considered and each can and will speak to the final sales price you'll be able to achieve when you do come to sell your business. It's much like a beauty contest and the more boxes the judges (in this case buyers) can check off, the higher price they will be willing to pay to own that business – if you have all your ducks in line chances are it will be yours and you will maximize the price you are able to ask for it.

When I'm looking at a site to provide a valuation for a potential sale I am looking at several factors. All are related to how the new owner will be able to see and appreciate the value of the business as a whole. They speak to the sustainability, marketability and growth potential of a web business.

One of the toughest issues for sellers to understand is they often point to the "potential" of their business to support a higher asking price. Be aware, buyers always want to “see” potential (that's the basis of how they plan to recoup their investment) but they rarely want to “pay” for it. Until you can "show"  potential as a revenue stream on a profit & loss statement it’s unproven – so generally buyers won’t pay you for it. Having said that – potential is the "garnish on the plate" that makes the entire dish irresistible to buyers.

Factors to Consider

• Market or Niche Demand
• Sustainability
• Growth Potential
• Inventory Requirements
• Delivery Methods
• Marketing Methods
• Financial Records
• Traffic History & Sources
• Relocatable
• Hours & Skills Required to Run

Marketplace Values

Hopefully you’re still with me on this, the question I'm trying to address is where is the value in an online business? 

First it’s important to understand that not every business sells at the same multiple or average.  You can have two apparently similar sites yet they will sell for very different sales prices. What makes one site sell for a lot more money than another and how can you control the value of your website?

We've discussed where the buyer will look to find value, but where can a seller make a difference as he or she plans and prepares for a sale?

Well the basics are a constant so you should have clear, accurate and preferably third party verifiable proof to support the value you place on the business. What is third party proof? For sales that would be your Merchant Account and/or PayPal statements. For expenses it would be vendor invoices and for Traffic it would be Google Analytics or a similar program. All of these are statements or reports that can be verified with a third party and on the internet that means often that you can evidence the account live via screen share which unless you're in Hollywood is pretty difficult to fake with a live login.

Ideally you will have your sales and accounting systems integrated and have been keeping excellent, detailed records since you bought or started your business. The best known accounting program, especially for small businesses is Quick Books but there are plenty of others out there too. Smart business owners know that integrating their sales stream with their accounting systems saves them both time and money, but most of all it allows them to have a finger on the pulse of their business at all times. You can and should be monitoring the effectiveness (and that comes down to profitability or ROI) of every new product, service and marketing initiative you try. There's no faster or easier way to do that than to keep clear, concise and complete records. 

You should have (or gather) all statements by month and go ahead, save yourself some time right now by scanning and putting them into a PDF by year (buyers love to see this – it gives them a sense of security that you are organized and therefore not lying or trying to hide anything about your business). If you don't already have the information in a Profit & Loss statement by year, create at a minimum a spreadsheet to show all revenue and expenses by month preferably for a full 3 year history. Same for traffic reports, by month for a 3 year history. If you have a business that's been around for longer than 3 years then simply have the annual gross and net profit figures and primary traffic stats for prior years. 

Take a step back and look (objectively) at your business as if you were a potential buyer. This is really tough for a lot of sellers as we tend to be so emotionally invested in our businesses, so this is where an experienced online business broker can be worth their weight in gold, their business is selling businesses. Be sure you are working with a business broker who specializes in representing online businesses though, many business brokers are (often just ex real estate agents who graduated to selling businesses yet have never owned or run a business themselves – in my book Real Estate doesn't count because for most it's a secondary income or retirement supplement and simply a way to allow them to write-off expenses against their own taxes) used to selling offline businesses and simply don't know enough about online business to represent yours successfully.

Look at the details of your P&L, the truth about your business is right there in the bottom line. Identify every possible savings, efficiency of process and avenue of growth that you have not had the time, money or maybe even the inclination to target or explore. Be brutally honest with yourself because buyers will rip you apart for sure on even the tiniest flaw or inconsistency in your explanations.

As long as you're honest about the reasons for not doing some of these things, lack of time, money or even lack of motivation (burn out is often a driving factor for the decision to sell, buyers will accept that – but it absolutely can't be a reason for overpricing a business) are understandable to most buyers and simply give them a clear road map as to how they can grow the business if they buy it.

Once you have all the supporting documentation in place, you should start to see where the values and opportunities lay within your business as it exists today. When you get to the point where you begin to wonder "why am I selling this business," you're probably at the right place and time to do just that. If you think you might just be a little bit crazy to let this business go, then buyers will likely feel the same way – but only if you have been brutally honest! 

Now is the time you need to decide if you will go it alone and try to sell the business yourself or engage the services of the aforementioned Online Business Broker. As always there are pro's and con's to either path, but you can rest assured that if you have done your homework and properly prepared your business for a sale, however you decide to go about the mechanics of selling it, you should be well positioned to get maximum value for it.

Takeaway Tip:

Be a boy scout and be prepared, approach the process as if you knew nothing about your business but were looking to buy.   Look for the strengths, values and yes even the weaknesses (these are often where buyers will see opportunity) in your business. Prepare proper well organized documentation to support your financial and traffic statements and representations. Identify efficiencies of process, opportunities and areas for growth that a new owner can implement to justify and help recoup their initial investment as quickly as possible.       

Check out our other posts on selling an online business, especially the basic valuation formula (hint: there really isn’t just one) the marketplace uses to determine average values. Comment or ask your own questions below and follow us on Twitter @NextGenBizTools to get leading edge, tips, tools and tactics for your online business.