An online business also generates income, just like a brick-and-mortar based enterprise. However, when it comes to selling a website-based enterprise, the seller has to consider whether someone would be willing to pay the selling price.
Unlike a brick-and-mortar enterprise, the online venture may not have any tangible assets. The company may only have the online presence and income generation as proof of its value. To this end, it is extremely important to get a professional business valuation.
Setting the price too high means that nobody will buy. Setting it too low could indicate that the seller suffers a financial loss. The correct valuation is thus imperative to ensure that the online business is sold at a market-related price. Below are four common online business valuation mistakes to avoid.
1. Considering the Historical Income as Opposed to the Current Income
Keep in mind that with almost no physical assets or none at all, the online business is about its presence, traffic, history, and most importantly, income. Unlike a traditional business valuation, one cannot pay too much attention to the historical earnings of the online enterprise. Although it is important, for any business valuation, you cannot just rely on one type of valuation. Instead of just using comparable company analyses or discount cash flow analyses, you must use a combination approach.
2. Putting Too Much Value on Social Media and Traffic Totals
Having a large following on social media does not make an online business profitable. Yes, the social media presence is important, as it is a vehicle for driving visitors to the online business where sales are generated. But, it is not as valuable as one might think. Social media should be considered as a factor that influences the company’s income. To this end, influencing factors, such as email lists, Twitter accounts, and more should also be considered in the valuation.
3. Not Considering the Time Factor in the Valuation
The seller discretionary earnings valuation method makes provision for the owner’s salary, but it does not allow for the analysis of the time investment. The selling price of the online venture should be set with hours per week of investment as a factor. There is a difference between an online venture that requires two hours a week from the owner’s time and one that requires 20 hours a week of the owner’s time. A near-passive online enterprise is worth more than one that relies heavily on the owner.
4. Putting Too Much Value on Potential
Another online business valuation mistake to avoid is that of setting the selling price based on potential. Anything can have potential. Any person is potentially a millionaire. A house has the potential of being used as a restaurant, but the property must first be zoned for the right land use.
See the problem? Seeing an opportunity to double the earnings of the business does not automatically increase the venture’s value. To this end, you can add some value, but you cannot just base the price on potential.
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