Increase the value of your online business
The valuation of an online business often takes place only around a time of acquisition: The seller wants to know how much he can ask for and the buyer wants to know how much he should offer. However, a good valuation also provides useful guideline during the operation of an online business: the results provide substantive starting points for increasing the value!
Discounted Cash Flow
The most commonly used methodology to determine value is the Discounted Cash Flow:
To summarize, this method calculates future free cash flows back to the current present value via the formula shown, using a return requirement.
Risk & Profit
The essence of this formula consists of two elements that recur as the numerator and denominator. Thus, to influence the outcome of the formula you need to take a closer look at these 2 elements: The outcome is higher when the numerator (the free cash flows) is increased, but obviously also when the denominator (the return requirement) is decreased.
The free cash flows are mainly influenced by increasing the operating profit (lower costs, more sales). The return requirement is mainly influenced by restructuring (of the operational side) of an online business. By making improvements to, for example, the dependencies of the shop, a lower risk profile is obtained and thus a lower return requirement. The result is a higher value with the same financial performance. (100 divided by 4 is more than 100 divided by 4.5)
Online business owners who want to improve the value of their business often focus primarily on increasing turnover and profit. This is certainly important, but the effect of lowering the risk profile of a company should not be underestimated! In this article we will therefore look at increasing the value of your online business by influencing this risk profile.
Risk profile of the online business
The risk profile of an online business is reflected in the return requirement. A shop with a higher risk simply requires a higher return on the invested capital. This is the case because the chance that you will not (fully) see this capital back is greater. The consequence of this higher requirement is of course a lower value.
To arrive at a return requirement for an online business, the starting point is a general online business contribution. This is then corrected for the specific situation in which an online business finds itself. For this correction, a series of elements are used to score an online business. This article explains a number of the most important ones. You can immediately get to work with this to increase the value of your shop.
- Dependency
The dependencies of an online business have a very decisive influence on its value. The degree of dependency is scored on, among other things:
A - Supplier dependence: Are you dependent on a monopolist or are there many suppliers who can provide similar products at similar conditions?
B - Traffic composition: Are you very dependent on paid visitor sources over which you have little control or does the majority come in through your own channels?
C - Owner dependency: Do you have specific knowledge about the market and/or product range, which is difficult to transfer?
- History
A well-known saying is that history is the best predictor of the future. This goes so far that an online business with stable sales over a long period can be seen as less risky than an online business with volatile sales over a short period. As an example, in the summer of 2017 both Tel Sell (with an online business since 1996), and also an online business in fidget spinners were for sale. (Typical hype product of that summer) It will be clear that Tel Sell with a long history and stable sales scores much better on this element of the risk profile than the shop in fidget spinners.
D - Order history: Over what period can the online business show an order history and is it stable or volatile?
- Competitive advantages
In practice, we see many online shops with a generic assortment that are struggling. Many online businesses with a good performance have a specific competitive advantage. This can be their own brand, but also specific knowledge/relationships. These have (if transferable) a positive influence.
E - Entry barriers: Are there barriers that make it harder for new entrants to fight their way into the market? These could be exclusive dealerships or import rights, but also the better purchase prices obtained with increasing purchase volume.
F -Intellectual Property: Does the online business have an established proprietary brand? Customers can only get this brand from this shop, which makes the future more predictable and therefore has a substantial impact on value.
Structure of the return requirement
To arrive at the return requirement, each element is scored on a scale whose scale depends on the importance attached to this element. (for example, 0-5)
Suppose the return requirement is determined for an online business that is fully dependent on Adwords. Then the return requirement for this element will be corrected from 1.20 to 1.25. If the shop is then dependent on a limited group of suppliers, the yield requirement will be further corrected from 1.25 to 1.28. When all elements have been reviewed, the yield requirement is set.
Conclusion
By reducing the risk profile of your online business, the value can be increased. When the elements treated are improved from a score below average to a satisfactory score, it makes a difference of 0.1 points on the return requirement. Suppose this was 1.4 and can be improved to 1.3, then the value of the company increases (roughly) by 20%!
This value increase can of course also be realized by improving the free cash flows by 20%. It is up to the entrepreneur which path or combination of paths he/she considers most appropriate.
Our new value application!
We have launched an app at the end of 2017 that allows Lightspeed and CCV Shop customers to actively manage the value of their business themselves. The app displays the value at any given time and provides the online business owner with concrete tips to improve the online business value.