By Vishal Bharucha, President of VNB Business Brokers, a leading business brokerage and M&A advisory firm.
Covid-19 has placed the world in flux — everything has changed. The way we socialize, work and do business. There are many online business owners who want to exit but are worried this isn’t wise due to the pandemic. However, this is not the case. Online businesses provide clear opportunities for investors looking for risk-averse, recession-proof investments, and they can deliver that value for them.
Online Business Is Booming
According to IBISWorld Report 45411A (paywall), large-scale companies have been enabled to boost profit by leveraging economies of scale through the acquisition of online businesses that align with their strategic business objectives.
With the unprecedented digital access that consumers have, it’s forecasted that revenue growth for online businesses is set to spike due to operational and commercial aspects that will continue to drive demand from key markets as consumers become more comfortable with engaging companies via digital channels.
Many online business owners who have designed a proven business model that allows for scalability are looking to exit for the purposes of profit-taking so as to enable them to start a new commercial venture. Owners have a tendency to invest in it, grow it according to its key performance indicators (KPIs) and sell it with little to no strategy. It’s entrepreneurs who have identified a gap in the digital market, translated that concept into a full-service online business and are now ready to move on.
There are different motivations for selling an online business as opposed to brick-and-mortar businesses — and most online businesses are sold while they are still high-performing, high-functioning and highly profitable.
For online businesses, the business model is driven by increased consumer spending, and with more people being online than ever before, every consumer with an internet connection in every market has the potential to become a customer. The rapid mainstream adoption of mobile device usage has driven confidence in digital engagement and online experiences. IBISWorld reports that industry revenue has increased at an annualized rate of 12.1% over the past five years, up to a current value of $645 billion.
Valuing An Online Business
The Q1 2020 Market Pulse Report indicates that while main street valuations have in the past operated within a 10% range, a large contingent of advisors anticipate the market to be a seller’s market for businesses valued in the range between $2 million and $5 million.
While brick-and-mortar businesses consider assets, goodwill and profitability, when it comes to online businesses’ marketing analytics, forward-looking percentages are critical as it directly indicates how scalable a business is. Online businesses offer excellent scalability, so a sizable part of the valuation hedges on forward-looking metrics, as well as assessing cash flow and auditing similar businesses to determine a value.
Insofar as market trends go, there is a strong demand for online businesses operating in software development, search engine optimization (SEO) and mobile application development — these sectors have no end in sight as they have evolved alongside a key way in which we live and work. With the uptick in the smartphone narrative, these industries are poised to deliver real growth and create new value for buyers, thereby placing sellers in an esteemed position to sell their business to a captive buyer’s market.
Online businesses have intangible assets that include high social media engagement, high search engine placements, web traffic analytics and other digital metrics that are pertinent to measuring their success. Quantifying this value for buyers is as simple as positioning the business using these metrics to determine or predict future revenue. With online businesses, these KPIs will translate into revenue and increase the top line. And, while these are not necessarily easy to quantify, conveying the future growth rhetoric of the business to an interested buyer is key.
If you’re thinking about getting an appraisal for your online business, contact a firm that specializes in valuation or appraisals for online businesses, usually a CBA, which is a designation for a valuation expert.
KPIs To Consider When Putting Your Online Business Up For Sale
It is highly recommended that online business owners get a clear, holistic picture of what’s going on in their business. Similar to brick-and-mortar businesses, ensure you have identified risks in processes and attend to that. Consider any operational improvements as a strategic mechanism to obtain maximum value for your business. If you have systems that require improvement or implementation, attend to them so as to ensure a seamless transition to a new owner.
Consider enlisting a CPA professional to audit your financials so as to enable you to conduct a financial recasting. This is particularly important if you don’t have detailed analytics that a buyer would want to see. If you have data at your disposal, assess it and identify some patterns that could assist you with creating a comprehensive due diligence pack. For an online business, metrics and analytics are important to present to buyers prior to going to market.
Do You Need An Exit Strategy For An Online Business?
All business owners need an exit strategy from the day of acquisition. By understanding the milestones you want to achieve, you’ll be able to present a definitive timeline of achievements to investors. These metrics enable investors to easily understand the business and its potential — which is pertinent with online businesses.
Where To From Here?
A sound go-to-market plan is to engage a certified business intermediary or certified M&A professional for businesses valued up to $10 million. (Full disclosure: My business offers these services.) During the consultation, the business intermediary will identify business strengths and develop an understanding of the business so as to compile an opinion of value and subsequently produce creative assets that depict the business’ operational and strategic narrative for investors.
In summary, online businesses:
• Provide clear opportunities for investors looking for risk-averse investments.
• Experience unprecedented revenue growth that is anticipated to increase as digital engagement continues to soar.
• Are valued similarly to brick-and-mortar businesses and also should audit KPIs to determine a value and predict future revenue.