6 Levers That Affect the Valuation of Online Businesses

6 Levers That Affect the Valuation of Online Businesses

The pressures of the pandemic have increased the shift towards ecommerce, causing a sudden and unprecedented 10-year growth in the electronic commerce industry in just 3 months, according to the McKinsey insights report, the Quickening Edition (July 2020).

With this grand shift, many business owners are turning to invest in digitization, exploring how the e-commerce industry works, and the key levers of such an industry.

Based on a personal decade-worth experience in the finance and valuation industry, and as cofounder to Brokers Digital (an intermediary agency between buyers and sellers for online businesses), we have come out with 6 key levers that any business owner can use to enhance the value of their company.

1.     Revenue and Margin %

A business’s revenue is what keeps a business alive. In the early stages of a company, the most important factor in valuation is a business’s revenue, which proves that the product and business can generate profit. The rate of revenue growth is also important, with the growth trajectory acting as a reflection of the future strength of a business.

While young companies focus on revenue and gross margin, mature businesses focus on operating margin and net profit margin. A company’s profit margin conveys the profitability of a business by accounting for all of the costs involved in producing and selling its products. The higher the net amount of profit that remains after accounting for gross and operation margin, the better.

2.     Social Media

Social media plays a big role today in our lives and in the world of consumerism. It is not only a valuable way to reach customers, but it is also a powerful tool used to grow brands and gain valuable insight.

Much of the time, an ecommerce business’s success is tied to social media, where the number of social media followers increases the business’s exposure and decreases the marketing expense. The number of followers, shares, and the reach of a brand will impact the value of an ecommerce business. The more successful and established a brand’s social media presence is, the more positive the impact on the valuation.

3.     Company Age

A company’s age provides valuable insight into the process of valuation, especially when its long-standing success proves its stability in the industry.

New businesses on the other hand rely on the projection of future sales or are being sustained during a bubble, where eventually the bubble bursts and the value falls.

In contrast, more established businesses have an existing track record that can instill confidence during the valuation process and boosts its value.

4.     Conversion rates

When we talk about an ecommerce business’s conversion rate, it refers to the number of site visitors who made a purchase divided by the total number of visitors. The average conversion rates globally are between 2.5% and 3.5%.

Conversion rates are a key factor in the valuation process because it indicates how well a business performs in turning a visitor into a paying customer. An ecommerce business that has an optimized conversion rate has a lower customer acquisition cost, with increased revenue per visitor.

5.     Number of contracts

Stable earnings are always a good thing for an online business, and an increase in the number of contracts enhances the stability of the businesses by diversification. Online businesses that have secured long-term contracts ensure sustained revenue streams into the future, with positive effects on the business valuation.

A diverse number of contractually guaranteed revenues decreases the business risk and implies that a business is more prepared for the future, reducing uncertainty.

6.     SEO

SEO or Search Engine Optimization lends immense value to an online business. Successful websites prioritize SEO optimization for search engines like Google because better SEO means improved organic search visibility through search engines.

This saves a company time and money, effectively bringing down the cost per conversion by making a website easier to discover by organic means.

Conclusion

Ecommerce business owners and those who wish to join the world of ecommerce through the purchase of an established online business need to look at the key levers that define the value of a business and brand.

These 6 key levers provide a deep insight into the workings of an ecommerce asset and a company’s value. Understanding the levers of value and how they affect the business valuation is an important step in the buying and selling of a digital asset, helping you predict how profitable a business will be under your management and into the future. 


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