How to Sell Online Businesses

Selling An Online Business

The year 2020 saw an astonishing 44% rise of online retail purchases in the United States. The Corona Virus only accelerated a long term secular trend away from a traditional ‘brick and mortar’ business model and toward the virtual one. Consequently, today’s business buyers increasingly seek to acquire online businesses.  Many owners may receive premium valuations when selling due to the strong advantages and growth characteristics associated with online businesses. Owners of online businesses should always prepare their historical financial records for review by a business broker experienced in confidentially marketing online businesses, and reduce the level of owner-dependency prior to the sale.

Online Businesses Not Brick and Mortar

For brick and mortar businesses with physical storefronts, rent constitutes a major portion of operational expenses (typically around 10 percent of overall sales for retail businesses). Having a physical footprint in a retail location often necessitates a costly build-out. Brick and mortar stores also face higher labor costs necessary to keep the store open for lengthy hours. Additionally, brick and mortar stores face expenses for insurance, utilities, and equipment that online businesses avoid.  Many online businesses can be run from home or from a much cheaper warehouse-office location. The cost savings for online businesses means significantly higher margins compared to brick and mortar businesses.

Factors Affecting Valuation of Online Businesses

  • The growth rate in sales and profits over the last three years.
  • To what extent the website’s traffic is growing and how that website traffic growth is being achieved.
  • The online reviews of the company and its products.
  • What systems and procedures have been implemented to sustain future growth.
  • Whether key employees will transfer with the business.
  • The role of the owner and whether the buyer may continue operating the business with the same degree of success.
  • The competitive advantages of the online business by offering consumer lower prices or better services which may not be easily replicated by competitors.
  • How the company’s products are shipped to its customers and the return rate of such products.

Total Addressable Market (TAM)

The term Total Addressable Market (TAM) refers to the overall amount of revenue opportunity for a product or service if 100% market share is achieved. Online businesses generally have a very high TAM compared to brick and mortar stores since potential customers of online businesses may often reside anywhere in the world. For example, let’s say an online business sells branded kitchen utensils to customers throughout the United States. Buyers should evaluate the overall sales volume of the kitchen utensil market in the United States to determine its TAM. Clearly the potential level of customers throughout the United States is far higher than the TAM for a similar brick and mortar kitchen utensil store.

Higher TAM for Online Businesses Leads to High Valuation

The higher the TAM, then the higher the ‘runway’ available to the business for future growth. Since businesses are valued primarily as a function of its future cash flow, online businesses with a high TAM and runway for future growth will receive a premium valuation.  Brick and mortar businesses are inherently limited in their TAM by local geography. Customers do not generally travel very far to any retail or physical location. Online businesses are not limited by geography and (so long as they can fulfill the customer’s orders) may sell their products or services throughout the world. It is essential that the business broker properly explains and highlights this enormous advantage when selling an online business. That will help achieve a higher valuation and purchase price.

Virtual World

The Corona Virus has made social distancing and mask wearing a facet of life for all of us. It is uncertain when such restrictions will ease, but many people have simply gotten used to doing their shopping online. Companies with an online based business model will benefit from this long term trend. The lower operational costs in running online businesses combined with the inherently higher TAM of online businesses makes them more valuable in the eyes of a typical business buyer. The best time to sell a business is when sales or profits are high and when its industry is viewed most favorably by potential buyers. Without a doubt, the sales climate of online business is extremely favorable for sellers at the current time, and savvy sellers may wish to take advantage of the situation.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your online business.