Value an Online Business
Here we are talking about the value an online business that do most of their business on the internet. Examples of online businesses are: Online shops, businesses that sell information solely online, businesses whose customers deal with them only online. You can have hybrid businesses which have both online and offline trading. An example of a hybrid business is a retail store with a physical presence that also has online trading for its customers.
- Customer Relationship
Valuing an online business is different from valuing another type of business. One of the major differences between online businesses and offline businesses has been the quality of the relationship between the customers and the business. Traditionally, customers shopped with a business and grew to know the business owner and its staff. The relationship became very important. The value of the business was often bound up in the quality of that relationship. Businesses, especially franchises, tried to reduce the importance of the customer relationship by introducing systems and relying on brand and market strength. Their proposition was that the customer experience could be replicated across all stores and all transactions. This was one of the reasons that franchise businesses became popular and indeed more valuable because they were not as reliant on the owner as other businesses were. Now, online businesses are capitalising on the same effect. The customers deals with the website. The experience is replicated across all transactions. The importance of the “person” is less relevant, just as it is in franchising. This is not to say that the customer relationship is not important. Indeed, the keys to a good online relationship are good range of product, prompt service, delivering what is promised and a keen price. The customer comes back because he or she trusts the seller. As long as those four things are maintained, it does not matter who is sitting behind the screen. This means that if you are buying an online business, you will feel more comfortable that the income streams will continue after you have bought the business and hence will pay more for it. Less risk means higher value when it comes to an investment.
- Barriers to Entry
The other factor to consider is barrier to entry. With a physical shop, there was cost of fit-out, equipment, and stock to fill up the shop. In the online world it is more intangible assets that are required and hence less need for upfront investment. Once you have established your online business, someone else is just waiting around the corner looking to copy and cash in on your idea. Length of time that the business has been established is a key pointer to value.
- Intellectual Property
Domain names become important. If you are a real estate agent and you own the domain name realestate.com.au, then you business is worth more than if you are trading in your own name.
- Cost of Staff
In the physical world you were faced with a alternative of employing younger staff or reducing hours worked by regular staff if you wanted to cut costs. With an online business, there is more opportunity to outsource work to people in other countries at a fraction of the cost.
- Markets
If you are selling a service, it is very easy to provide that service anywhere in the world and even with a product, you can ship it to another country if the offering is unique, the price is right, and cost of freight is reasonable. If you have already developed an international business when you come to sell it, That adds to value because you don’t have all your eggs in one basket. The luxury of many markets adds to value.
- Competition
You want a site that has some competition, but not too much. You don’t want to be in a bidding war on Google for keywords relevant to your product or service.
- Traffic to Site
Is there a solid history of growth in traffic to the site?
- Automation
It’s no good having hundreds of people working behind the scenes if you can replace that with a level of automation. Automation is like systems in franchising, taking the weakness of reliance on people out of the equation as much as possible.
- How long established
Google likes sites that have been around a long while. It helps with ranking.
- How Well Supported
Is your site supported by other media and other sites like Facebook, LinkedIn, Youtube, Twitter etc? This builds a foundation for the strength of the site
- Stickability
You want a product or service that that is going to be around for years to come.
- Google Ranking
This is the holy grail. Google will make sure you can’t game the system. If you have good content and your presence on the net is genuine and big, you will be rewarded.
- Growth in the case of online businesses often happens through reference of other businesses. The reference may be fuelled by the desire to roll out of new technology faster, or adding niche technology to existing portfolio or some times to kill a new technology that can harm existing player. The
- consideration paid to seller in such cases defies conventional logic and valuation may be based on factors which would not fit into traditional methods like rule of thumb method, Assets Valuation method etc.
- If you plan to buy or sell an online business, you should be glad to know that the market for privately owned Web based companies are still alive and doing well in the market. In addition to many individual business buyers, Online businesses often attract numbers of people – corporate buyers and private
Here is a good article by Fred Schebesta on the value of an online business.
Like all business value issues, if the business is not attractive to a buyer, it won’t sell, even if you discount it drastically.
What are you doing to your business to make it attractive?
