Maybe you started your business as a side hustle. Maybe it was the best way to turn your hobby into a full-time profession. Maybe it was your path to quitting your job, thanks to the sustainable income your business brought in.<\/p>\n
As a reader of this blog, you\u2019ve likely been thinking about how to grow your business<\/strong><\/a>. Yet, like so many entrepreneurs I’ve seen, you might have never considered what your end goal is.<\/p>\n And it\u2019s understandable\u2014being in the trenches every day makes it hard to think about your exit strategy.<\/p>\n Unless you\u2019re in the business of mergers and acquisitions, the exit plan for your business is likely to be more of an afterthought\u2014something to get to once the business is humming along or when you\u2019re ready to retire.<\/p>\n But knowing your end goal can help you plan for the best possible outcome, especially when it comes to a successful exit.<\/p>\n Starting with the End in Mind<\/strong><\/p>\n So, the first thing you should do is set your goals with the end result in mind. This means that if your intention is to sell your business, you should start thinking of how you can increase your website\u2019s value to get a sale price closer to your expectations.<\/p>\n Armed with this knowledge, you\u2019ll have insight that could influence how you decide to build your business to make it an attractive acquisition for online business buyers and how to grow it in conjunction with an exit strategy that positions you for a potentially life-changing exit.<\/p>\n Website brokers use a simple formula to calculate the value of an online business. This takes into account the monthly net profit multiplied by a multiple. The end result is the estimated value of a website.<\/p>\n For example, a business that generates an average net profit of $10,000 per month and has a 36x multiple would be valued at $360,000.<\/p>\n Let\u2019s go into the specifics of these two variables and how you can improve on them to increase the value of your business.<\/p>\n Typically, the monthly net profit figure is the net profit averaged over the last 12 months of business operations.<\/p>\n A 12-month timeline is standard, as it takes into account seasonal fluctuations and captures an in-depth snapshot of the business performance that a buyer can expect to see when taking over.<\/p>\n Sometimes a shorter time frame is used when calculating a business\u2019s average net profit. For example, a 6\u201310 month average might be used if the business hasn\u2019t had 12 months of operations or if there was a recent spike in revenue to where the business is consistently operating at a new baseline.<\/p>\n If you\u2019re not in a rush to sell, it is recommended to build up 12 months of operations, as businesses with less than 12 months of data are seen as riskier investments and are less likely to sell.<\/p>\n For example, if you saw sudden spikes in revenue over the last two years due to an increase in online shopping, maybe it\u2019s a good idea to sell before sales return to normal levels.<\/p>\n The \u2018multiple\u2019 is a score usually between 20\u201350x that is decided based on several factors. Ultimately, is an indicator of the financial health and value of a business.<\/p>\n From a buyer\u2019s perspective, a multiple can be seen as the number of months it would take for them to recoup the capital invested.<\/p>\n A multiple of, say, 36x means a buyer would see a full return on their investment in 36 months, assuming the business generated the advertised average net profit each month.<\/p>\n Some online business brokers might use an annual multiplier, meaning a 36x monthly multiple would be the equivalent of a 3x yearly multiple.<\/p>\n While it\u2019s clear how the monthly net profit is calculated, how are multiples determined and how do sellers maximize this multiple and the valuation before listing their business for sale on a website broker\u2019s marketplace?<\/p>\n Generally, a business\u2019s multiple will increase or decrease depending on how well the business generates consistent revenue and is protected from external factors.<\/p>\n There are several variables and metrics that help measure this, including the following:<\/p>\n A higher monthly net profit shows that a business has validated its business model and niche.<\/p>\n For businesses selling a physical product, that could mean it\u2019s cornered a larger portion of the market than its competition, has a larger total customer base and can leverage its reputation to expand further.<\/p>\n A higher net profit also provides a new owner with more monthly cash flow with which to grow the business, whether through hiring employees or paying for advertising.<\/p>\n An older business has demonstrated its ability to withstand the external forces that threaten all online businesses.<\/p>\n This may be the website that has shown resilience to Google algorithm updates or an eCommerce business that proves its products are not just a trend that will burn out after a season.<\/p>\n An older business also provides a buyer with more data for spotting trends, such as if the business is generally growing year-over-year or if there are any significant dips or spikes in revenue.<\/p>\n Ultimately, it provides a new owner with greater confidence that the business will live on after acquiring it.<\/p>\n An email list is considered one of the few assets that a business owner might truly own, as many other parts of an online business are often dependent on a 3rd party for generating their income.<\/p>\n Active email lists can be used to drive revenue by sending traffic to an eCommerce store or affiliate page. More advanced email marketing campaigns can involve segmentation and automation to recapture and re-engage leads.<\/p>\n Similar to having an email list, driving targeted traffic<\/strong><\/a> to your business through multiple channels is another method of reducing risk in an online business.<\/p>\n It communicates to a potential buyer that the business will continue to operate even in the event of a single point of failure.<\/p>\n For a content-based website, this could mean that traffic is being driven from several pages rather than relying on just one popular blog post that could lose traction over time or be impacted by a Google algorithm update.<\/p>\n For a physical product business, this could mean selling your products through multiple channels, such as Google Ads, Amazon, Facebook, or even brick-and-mortar locations.<\/p>\n In particular, the organic traffic<\/strong><\/a> that comes from SEO<\/strong><\/a> is a very attractive traffic source for buyers, as it is a channel that drives revenue without additional costs or significant maintenance.<\/p>\n Buyers tend to want to acquire businesses that require fewer hours per week of direct owner involvement\u2014they want to purchase investments, not time-consuming jobs.<\/p>\n They\u2019ll want to be sure that a business can operate seamlessly without excessive supervision on their part.<\/p>\n For small business owners, this could mean establishing business systems to automate more time-intensive tasks or hiring freelancers to replace anything skill-based that a new owner might not be able to fill personally.<\/p>\n Even if a business owner isn\u2019t quite ready to sell, having an up-to-date succession plan can organize business processes that enable the owner to remove themselves from the daily operations.<\/p>\n This could include clear SOPs, organized bookkeeping, and a list of all assets associated with the business.<\/p>\n Similar to traffic diversity, a business is more resilient when it generates revenue from multiple sources.<\/p>\nHow to Calculate the Value of Your Online Business<\/h2>\n
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Net Profit<\/h3>\n
Multiple<\/h3>\n
How to Increase the Value of Your Business<\/h2>\n
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Average Monthly Net Profit<\/h3>\n
Age of Business<\/h3>\n
Email List Size<\/h3>\n
Traffic Diversity<\/h3>\n
Owner Involvement<\/h3>\n
Revenue Split<\/h3>\n