Valuing an online company is challenging because it lacks physical assets. But, just like any other business, this business is also subject to the same profit and revenue considerations. With these reliable methods, you can determine the value of any online business.
Determine the Revenue Model
Different online businesses have different revenue models. Understanding how a company generates money helps to know it. Analyze your business and determine how it makes money. Does it generate income from advertising, subscription, and lead generation or from selling products? This will help you to know where the money comes from, and you can determine whether that business is valuable.
Analyze Previous 12-Months Revenues
Professional analyzers value businesses by looking at the figures for the last years’ worth of gross income. Total these revenues. You can get this data from the business’s balance sheets.
Multiply by 3 or 6
Is your business commercial? Then, multiply the previous 12-month’s income by 3. If it is a content business, which generates revenue from advertising and donations, then, multiply the 12-month trailing revenue by 6. Compare it with similar businesses to see how you’re doing.
Estimate Annual Expenses
Discount the value of the business according to its costs. The expenses include advertising, merchants fee, hosting fee, administrative fees, and bank fees. For an online business, there is no formula on how much to deduct. However, know your expenses if they are 75% of the revenue.
Traffic
Traffic is the key driver of an online business. Without, traffic an online business is worthless because you won’t make any sales. Hence, traffic plays a crucial role in determining the value of your online business. What matters is quality traffic.
To determine quality traffic, use the revenue per user (RPU) method. This helps to know the value of each visitor. This is the best measure to use to determine which traffic channel performs best.
When looking at traffic statistics, consider concentration. This will help to know how diversified traffic channels are. Is 70% of traffic coming from organic search or are there different channels that bring small portions of traffic? When analyzing traffic, the higher the quality and diversified it is, the higher the value of your online business.
Customer Base
An active customer base will increase the value of your online business. Having an active customer base means you have repeat clients and people keep coming back to purchase. This is a pointer you have great products, and you have built a solid relationship with your customers.
Here consider the following factors:
- How does your business gain customers?
- What is the cost of customer acquisition?
- How exclusive is your customer base and at what rate is it growing?
- How many competitors do you have?
- Do you have an established mailing list?
- What is your churn rate?
To get the true value of your business look at the larger picture.