Thomas Smale, founder, FE International
Of all the online business models, e-commerce is undoubtedly the most familiar. As of 2016, Amazon had 310 million active customers worldwide. To put that in perspective, that’s only 13 million fewer people than the population of the United States that same year.
E-commerce is an integral part of the lives of many consumers. Interestingly enough, in my entire experience as an M&A advisor for online businesses, I have met many successful e-commerce business owners who have little sense of what their business is worth. Of course, they know how much traffic they’re getting, their sales numbers, and their growth rate, but a considerable number of entrepreneurs don’t have a clear understanding of what buyers look for when purchasing an e-commerce business.
That’s not surprising. It is complicated.
What follows is a summary of three underrated, but important, factors in valuing an e-commerce business. Even if you’re not ready to sell, applying these principles from day one will help you build a successful and valuable store.
Passive Processes, Passive Income
Passive income is a common goal of many online endeavors. In this context, it refers to revenue created with limited owner involvement. This is a key factor for many online business buyers when assessing a potential acquisition. Typically, investors aren’t looking for a full-time job.
When valuing an e-commerce store this may be even more of a concern. There are so many moving parts—so many things that can go wrong.
One of the biggest challenges inherent in any successful e-commerce business is order fulfillment. Fulfillment refers to the nuts and bolts work of getting your finished product to the consumer on time. Coupled this with the demands of customer service and returns and running an e-commerce business can be very hard work indeed.
One of the most successful business models that addresses the challenges of fulfillment comes courtesy of Amazon, with their Fulfilment By Amazon (or FBA) program. FBA merchants benefit from Amazon’s best-in-class storage, order fulfillment, payment processing, shipping and customer service. They even deal with customer returns.
The FBA model eliminates a huge number of challenges that require high owner involvement in running an e-commerce business. But that convenience does comes at a price. Evaluate whether Amazon’s fee structure will save you time (and money) enough to outweigh other dropshipping options or handling fulfillment in house.
Keep in mind that should you ever want to sell the business, the more passive the income, the better.
Branding
Everyone thinks they understand branding but what branding means to a buyer is quite specific and important when looking to purchase a business. For example, a buyer might be more hesitant to purchase a business whose brand is reliant on the current owner’s identity.
In an ecosystem of intense competition, it’s hard for an e-commerce retailer to stand out from the crowd. Unless you have a unique patented, trademarked, or exclusively distributed product, you are bound to have competitors. Even if you do have a unique product—and you are successful—competitors will take notice and either try to mimic your model or try to figure out how to do it better. No product stays completely unique for long.
Branding is one way to deal with this reality. Build a product and support it with a brand that has strong customer engagement and loyalty, and insulates you against some of that competition. Even in the world of SaaS, where function was once king, branding is becoming increasingly important.
Consider your “brand” right from the start. If you are first to market with your product, consumer loyalty through branding is best established from the launch. This will prove a valuable asset when your direct competitors inevitably emerge.
I always like to tell e-commerce owners to look beyond the logo. Too many entrepreneurs think that’s where branding starts—and stops. The logo is what someone looks at and then associates with an overall brand. For example, think of the Amazon logo, then think of the eBay logo. Both companies do similar things, but you most likely have very different associations with the two companies.
Here are three quick pointers on how to build a successful e-commerce brand:
- Tell a story: Share with customers what makes your brand’s mission or journey unique. The more your customers get to know you, the more loyal they are likely to become.
- Target wisely: Know who your target customer is. Who is the ideal consumer you are trying to reach with your product and your brand? Tailor your branding to appeal to your target audience. The more specific and personalized you get with your audience the more trust you will build with them.
- Don’t promise too much: Building customer trust is one of the keys to building brand loyalty. Under-promise, over-deliver is a commonly heard refrain, but it still holds true. On the flipside, be careful not to sell yourself short. Create realistic expectations in the minds of your customers and meet, or better yet, exceed them.
One must only look to successful companies like Apple to see the importance of coupling innovation with branding, and its importance to long-term success and salability.
Keep Your Records Straight
Perhaps the least exciting part of being an entrepreneur is record-keeping. Everyone knows it’s important, in principle, but that doesn’t necessarily always translate into practice since there are so many ways you can track the same information. It’s exciting turning your ideas into reality, and it should be, but too often entrepreneurs lose sight of the importance of keeping records of every measurable aspect of the business.
For any potential buyer, solid record-keeping will be key. How else are they supposed to accurately gauge the performance of your business over time? Better yet, why would someone want to invest in a business when they don’t have a clear picture on where the business stands or how the business has grown?
If there’s one ingredient I commonly see lacking in a successful e-commerce business, it’s this one. Do it properly, from day one, and it won’t ever be a negative factor when you decide it is time to exit your business.
Just as importantly, solid record-keeping can help you grow your business from the very beginning. With accurate reporting from every area of your business, you will be able to spot things that are working, and things aren’t, much more quickly than without it.
Here are two of the most important record-keeping functions to be on top of right from the start:
- Traffic: Know how many customers you have, and where they’re coming from and how much they are worth. Look beyond Google Analytics. Many e-commerce platforms, like Shopify, offer additional traffic-monitoring tools, and there are often third-party solutions to each business’s unique challenges as well.
- Accounts: Too often, especially in the startup phase, accounting best practices take a backseat to everything else. This will negatively impact both the success of your business and the possibility of selling it somewhere down the line. Be sure to organize and keep any invoices for services you use on a recurring basis especially. These will be vital if you choose to exit your business.
Good ideas and a gut feeling are important to follow, but without proper planning and documentation, can only take you so far.
Conclusion
Pay attention to the above factors, as they will play a major role in valuing your business should you choose to exit: set your business up to run without heavy involvement from you, so that it follows a passive process, passive income process; establish a brand beyond your logo; and make sure to document traffic and spending in an organized manner.
Whether you are an established e-commerce retailer wondering how much your business is worth—or at an earlier stage in your journey—following the steps outlined above will help you to grow your business. Having these assets in place will greatly assist in an accurate valuation and maximum return on the sale of your e-commerce business.
FE International advises internet business owners on selling their businesses.
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