You may not have started your e-commerce business with the ultimate goal of selling it, but eventually many entrepreneurs come to that conclusion for a variety of reasons.
When is the best time to start thinking about how to increase the value of your e-commerce company for a potential sale?
Certainly not a month before you put up the For Sale sign. Actually, it’s important to have an exit strategy well before you actually want to sell the business.
The fact is that the things you need to do to make your e-commerce business attractive to potential buyers are the very same things you need to run it successfully in the first place. The more you increase value, the better not only for a future sale, but the better for your e-commerce business today.
So whether you’re 6 months out from a sale or 2 years, here are five ways to increase the value of your e-commerce business.
1. Determine Value the Way the Pros Do
If and when you do actually want to sell your website, we highly recommend using an experienced advisor to help you manage the process and get the best deal.
Here’s a brief review of the methods used to determine the value of an e-commerce business. Use them to get an idea not just what your e-commerce business might be worth if you wanted to sell it, but what you might want to improve in the business.
Discounted Cash Flow and Free Cash Flow
Discounted cash flow (DCF) is used to evaluate most traditional “brick and mortar” businesses. However, Internet companies typically have a much greater variance in monthly cash flow than these established companies. Which is why website brokers typically don’t rely on DCF.
That said, at least one aspect of DCF could help you assess what your business is doing right, and where it might need improvement.
DCF is an estimate of future return on investment. One part of the calculation is to determine FCF, or free cash flow. You simply subtract your capital expenditures from operating cash flow for an historical period.
This gives an idea of whether profitability is headed: steadily upward, leveling, declining or widely up and down from month to month. The next question for any of these conditions is: why?
Let’s say sales are improving monthly. Is it because sales are increasing, the costs of doing business are improving, your margins are higher than a year ago? The FCF analysis won’t tell you the answer, but it will give you something you’d want to think about…particularly if things are trending in the wrong direction.
Look at the Competition
How’s the competition doing? Admittedly, you’re not going to have access to private financial data. But you can gather intelligence from customers, suppliers, social media, even the competitor’s own web sites.
What do they seem to be doing that you aren’t? Conversely, where do they seem to fall behind you?
It’s always a good idea to take frequent looks at your competitors, or else they might be going after your business when you aren’t looking.
Project Future Profitability
Professional website brokers typically focus on profitability—net profits of the e-commerce business for at least the last twelve months—and apply a multiplier to determine likely future valuation over the next five years or so.
The multiplier can range from 1 to 5 based on how well the company is performing in a number of key factors.
Obviously, the broker’s goal is to project profitability to interest potential buyers. But by improving the performance of the next four factors that help determine whether the multiplier is high or low, you can turn a theoretical projection into a realizable gain.
2. Improve the Quantity and Quality of Your Traffic
Everybody likes to be loved.
But just getting more hits on your website doesn’t necessarily anyone wants to marry you.
Take a close look at your conversion statistics—how many website visitors turn into paying customers? You should break this down even further and look at the conversion rates by traffic channel. This will give you a good idea as to what traffic is worth going after and which traffic channels you should stop spending energy on.
No matter what your conversion rate is, think about how what you can do to make it better.
Consider the following:
- Site Navigation: How can you make it easier for users to complete a shopping cart, customer profile or request for information form?
- Push Notifications: You can’t just wait for potential users to come to you. Push notifications—text messages with sales or other informational alerts—have much higher open and click-through rates than email blasts.
- Content: Sites that are continually updated not only rank higher in Google’s search engine algorithm, they also engage users and are more likely to hold their long-term attention. And the more content you add, the related keywords that help perform better in search results.
- Social Media: It is measureable marketing that is much less expensive than traditional advertising. If you aren’t out there creating “buzz” about your business, how do you expect them to find you?
- Cost-per-Click (CPC) Advertising: While this is advertising you do pay for, it can have higher, steadier and more predictable results than organic search generation.
3. Tune-up Your Financials
You want to focus on the usual financials—gross revenues and net income, profitability, costs of inventory and operating expenses, the usual standard measurements. This is not just the financial statement your accountant prepares every year.
It’s a “living” document that continually monitors key financial indicators that tell you either you need a course correction or that you’re doing something extremely well, and that you need to figure out how to keep going.
Your operating budget drives pricing and profitability, and if any of your underlying financials are out of order, those can suffer.
Here are a few financial performance indicators whose improvement can increase your valuation:
- Cash flow. Are you paying your bills? Fine. Do you have enough cash on hand in case of unexpected shortfalls? A healthy cash reserve is always a good thing.
- Accounts receivable. What percentage of your accounts receivable remains 30, 60, 90 days past due? How can you improve your billing and collections processes?
- Product mix. Are you offering anything customers don’t seem interested in and/or generate insufficient revenue? Are there any gaps to fill? Do you need to diversify into related product lines to avoid dependence on only one or two offerings?
- Payroll. Do you have the right people, with the right skills in place, paying them competitive salaries?
- Liabilities. How well are you managing your debt obligations?
- Asset management. Do you own anything you don’t really need to own? Might it be more economical, for example, to use an office sharing arrangement rather than lease dedicated space?
- Costs of new customer acquisition. It costs more to acquire new customers than retain existing ones. What’s your churn rate and what can you do to reduce it?
4. Differentiate Your Brand
Your brand is more than your logo.
It’s the reason your customers choose your products over your competitors.
Investing time and energy into growing your brand is one of the best things you can do for your business. How do you measure the strength of your brand? Start by Googling yourself.
Check your customer feedback posted not only your site, but to other networks and online spaces. Then employ social media to get your brand “out there” and encourage more visitors to your site (which, by the way, helps improve your Google ranking).
You may not have the knack for social media and that’s perfectly OK, you just need to realize that and hire someone to help you out. You could engage a marketing firm or consultant to help differentiate your brand and this will allow you to spend more time on the things you are good at.
You need to keep your focus on running your e-commerce business; it pays to have experienced professionals create and implement a plan that best promotes your brand.
Which leads us to:
5. Take a Step Back and Delegate
Business owners tend to wear a lot of hats. The problem is they only have one head.
Sometimes, it’s by necessity, particularly in the startup phase. But there comes a time when owners have to step back and delegate. For one thing, there’s just so much multi-tasking anyone can do before becoming distracted and unfocused.
Keeping this up for too long ultimately results in burnout.
You need to delegate or automate as many tasks as possible that aren’t directly associated with leading the company’s strategic direction and product development. The more you can effectively offload administrative and technical tasks, the more efficient your e-commerce business will become.
And the higher its valuation. In fact, a key consideration for potential buyers is whether an e-commerce business is sufficiently streamlined that owner involvement is minimal. Because no one wants to buy a company that isn’t sufficiently scalable without the past owner’s direct involvement.
Therefore, it’s best for your e-commerce company over both the short- and long-term to deal with the overarching issues to running your business, and leave the details to other qualified individuals. Your business will not only earn higher value, you’ll find more value in the quality of your working and personal life.
[well type=”well-sm”]Thomas Smale founded FE International in 2010, growing the business with zero funds, from scratch into a seven-figure-a-year business. FE International has executed an industry-leading 400 transactions and closed over 60 million in website sales. He’s also been on podcasts such as Mixergy and EntrepreneurOnFire.[/well]