How to Value Your Small Online Business
So, you’ve decided to sell your bootstrapped business. Here’s how to value it properly so it actually sells
Imagine you’re at an interview.
You’re past the ‘why us?’ formalities.
You’ve spun your virtue crap about ‘wanting to work in a thriving environment with inspirational people’. You even managed to keep a straight face, hiding the fact you just want access to clients you can eventually steal to go solo.
It’s salary negotiation time.
They lowball you, citing your age. You resist the urge to wreck the place and storm out, opting instead to explain calmly that you were hoping for the upper bracket. The interviewers exchange a knowing glance, concluding that ‘they’ll consider it’.
You leave, encouraged. The call never comes.
Valuing a micro business isn’t so different to valuing the worth of your labour at interview — you have to back the number with substance.
As a fresh-faced noob, the interview scenario might play out thus, and that’s why you don’t get the gig; you failed to properly sell your value to your interviewers.
As a first-time seller, failing to back your price with the substance of your value is the primary reason your business will expire on the shelf, unsold.
Price vs Value
To understand how value works, it’s useful to risk having you rage-quit this blog by getting basic. Bear with us, it gets more useful — we can only go at the pace of the slowest in the room.
‘Price’ is just a number.
‘Value’ is what that number represents.
A twenty-dollar bill is inherently valueless in and of itself. It’s worth is arrived at by mere consensus — we all agree it’s worth 20 dollars. Its actual material value is a fraction of that.
Setting a business valuation is more than just ‘what people will pay for it’. It’s an objective, itemised calculation of the total sum of the business components.
Just because the code you touch turns to gold, doesn’t mean you can pick a number and slap a bunch of zeros at the end. Strong business valuations give strong justifications.
SDE-Based Valuation
Ok, if you’ve not put your fist through the screen in disgust of the back-to-basics entree, let’s wade out into the SDE valuation method (that are the most common for owner-operated small and micro businesses) and associated multiples that together arrive at the valuation.
Seller’s Discretionary Earnings (SDE)
SDE is your pre-tax income before non-cash expenses, one-time costs and other outgoings not expected to continue in future. It’s the go-to for owner-operators who are firmly in the driving seat as an indicator of how much money the business brings in regardless of who the owner is.
SDE = (Revenue — operating expenses — cost of goods) + your compensation.
where owner compensation is how much salary you can reasonably take as the owner-operator.
Buyers care about SDE because it gives them a ballpark of what they’d earn if they purchase your business. When comparing two businesses, a potential buyer will use the business cash flow (SDE) to evaluate which could be the better buy.
Using SDE to Set Your Valuation
Once you have a hard SDE, you’ll arrive at a valuation by applying the right multiple and then adding hard assets. Typically, online businesses sell for 1 to 4 times the SDE.
The exact multiple itself is decided — primarily, though not exclusively — by hard, quantitative factors that span financials, traffic and operations.
Fundamentally it comes down to indicators of:
Sustainability
Scalability
and transferability of the business
Though other peripheral factors can also swing the valuation a little further up or down. Factors such as:
Automation present (or not)
Level of owner involvement
Positive or negative growth trends
The age or maturity of the business
Level of churn, LTV and CAC
Dejargonizer:
Churn = time taken for customers to cease using your software.
CAC = the S&M investment cost that goes into acquiring a single customer. The lower this is, the easier it is for you to grow.
LTV = Income you can expect per customer.
Valuation & Due Diligence
Teasing out the right valuation for your business will give you a headache, though it’s worth doing properly. Once you’re out of Beroccas and feeling zen again, retrace your steps forensically and make sure you’ve not overlooked anything.
Buyers take valuation very seriously and, even if your valuation gets the buyer on the hook, you’ll risk losing them on the reel-in as you get to the due-dil stage when buyers will mercilessly review the paperwork and examine every inch of your valuation.
To this end, be obsessive about documenting all your financials, ingoings, outgoings and everything in between to make sure the paper trail backs you up every step of the way.
If you’re selling within the IndieMaker community, give us a nudge. We’ll oversee your methodology before you spread those tail feathers to make sure things go as smoothly as possible toward a quick sale at the value you deserve.
