Putting a value on your business can be a tricky enterprise, but it’s not as puzzling as some would have you believe.
The real hurdles come as you attempt to increase that value. What improvements should you make? Where should your priorities lie?
Steady, dependable growth relies on four interrelated factors: earnings, risk, growth prospects, and transferability.
Buyers make purchases to see returns on their investments; existing earnings are the most concrete predictors of potential ROI.
If you’re not making money, your value will generally be lower. Potential money is good, but money in hand goes a long way in proving the viability of your business model.
The less risk in your business’s future, the higher its value.
A few years ago, my company received multiple valuation requests from electronic cigarette companies. Whenever a rush of these requests comes from one particular industry, it’s usually a sign of trouble. In this case, the Food and Drug Administration and the industry were determining whether the FDA had jurisdiction over e-cigarettes — and whether the FDA would issue a ban if it did.
Several owners of e-cigarette businesses didn’t want to take the risk that their companies could be valueless after an unfavorable FDA ruling. Buyers saw the obvious risk as well. The ones that did sell sold for significantly less — they came with several safety nets to protect buyers than comparable businesses might come without the impending threat of closure.
How much growth can your business expect to see in the future? How soon will that growth occur? How difficult will it be to attain?
Recently, we listed an online directory of maps that was more than 20 years old. The website had eye-popping traffic, but its owner was content to monetize by using only AdSense. Potential buyers quickly drove up the value because paying a high price would still yield decent ROI with the immediate monetization options available.
If ownership of your business would be difficult to transfer, your value could suffer.
Transferability encompasses many different hurdles. Some industries have expensive and complex licensing criteria, like real estate and mortgage businesses. Others, like blogs, rely heavily on the voice or personality of owners. If an owner were to leave, the company’s brand recognition would take an immediate hit.
Consider whether a buyer could come in and understand your business within a month. The easier it is to answer “yes,” the better your transferability will be.
Strategies to Increase Your Company’s Value
Now that you understand a few of the drivers of value, you need to know what you can do to increase that value. The following four strategies will help you appeal to potential buyers:
Over-reliance on natural search engine traffic is one common example. To combat this, include other traffic sources like email lists, pay-per-click campaigns, branding initiatives, etc. Buyers love good search engine rankings, but are wary when businesses have no other sources of traffic.
Other examples include relying too much on a single vendor or only a few customers. Diversifying suppliers insulates your business from potential consequences with a single vendor. And if your business revenue depends heavily on one customer (15 percent or more in revenue) or a few customers (25 percent or more), work to spread out your revenue base.
Reduce your risk and give yourself a boost in growth by doing something unique to make your business stand out. Whether through shopping experience, brand awareness campaign, or customer service, distinguish your business as something unique and not easily replicable.
Ultimately, nothing increases the value of your business like investing in it. It’s a boring answer, but it’s true: Focusing on your bottom line, working to create future prospects, and branching out in new directions do wonders for the value of your internet business.
ROI is always the driver of value, so as you work to increase that value, build the kind of company that will promise buyers solid, safe returns on their investments.
About the Author
Mark Daoust is the founder of Quiet Light Brokerage, Inc., an advisory firm that helps entrepreneurs buy and sell websites and online businesses. Quiet Light Brokerage was recently named the No. 1 brokerage for buying and selling websites valued at more than $1 million and is headquartered in St. Paul, Minnesota.