How much is your business worth?
To you, the world, perhaps. After all, your business is your own pride and joy – the product of all your efforts and hardships. But have you ever stopped and wondered how much it’s actually worth everybody else out there? If the answer is no, then this post is for you.
Determining the worth of your business is certainly not an easy task, but it’s something you have to do, especially if you’re a beginner business owner. In this article, we’ll give you some helpful advice on how you, too, can determine the value of your business, especially if it lives on the World Wide Web.
Why business valuation is important
There are two big reasons why it’s essential to know the value of your business, online or otherwise. One, business owners, especially beginner businesses, have to be conscious of their finances. Most new businesses tend to have limited start-up costs, which means they can’t always afford big setbacks or risks. Knowing the value of your business is important to know which ones you can and cannot take. This alone can make a whole world of difference.
Two, new businesses are a prime product for venture capitalists and investors. If they see that your start-up looks promising and is already thriving this early on in the game, then there’s a much better chance that they’re going to be interested in supporting what you have to offer to the world.
Kane Georgiou, owner of The Money Pig, states ‘Anyone who wants to build wealth, must have a vision of what their business will be worth one day. Having an exit strategy can be both highly lucrative and highly tax efficient. It really can set you up for life.’
How to determine the value of your online business
That said, it’s not that easy to calculate how much your business is worth, especially if it operates entirely online. The valuation of your business depends greatly on many factors – factors that you have to be aware of if you want to become successful in your venture. To help you out, here are some of the most common ways that you can determine the true value of your business.
Analyze the cash flow of your business
Keeping an eye out on your cash flow is one of the simplest and easiest ways to monitor the progress and development of your business.
Cash flow refers to the amount of money that goes in and out of your business. When it comes to online businesses, this can be seen as the amount of money you receive, be it from your products and services or advertisement and affiliate revenue, and the amount of money you spend, regardless if it’s payment for your blog hosting or compensation for your employees’ service.
Ideally, the money you receive should always be much greater than the money you spend. This is called a positive cash flow and it shows that your business is successful. If you’re spending more money than you’re receiving, however, then this is a negative cash flow and should immediately be solved or else you’ll drain your finances much faster than you realize. When this happens, you’ll be forced to close down your business eventually due to insufficient funds.
Compute for the total average earnings
The result that you will get from analyzing the cash flows of your business will be directly related to whether your business is succeeding or failing. If your earnings are, on average, higher than your spending, then there’s a good chance that your business is doing well. To get this number, simply subtract the total cost of your monthly expenses from the total monthly income that you receive from your online business. The average of these numbers will be your total average earnings on a monthly basis.
Just like your cash flow, the bigger the difference between your earnings and spending, the better it is for your business. Of course, it only means a thing if your average earnings are higher than your average spending. While bad days are inevitable even for the most stable of businesses, a successful business never goes in the red for far too long. For example, a business that gets a negative average daily earning for about 5 days a year is doing normally, but a business that’s operating in the red for at least 2 months a year should do some adjustments to improve their business.
Unless profitability isn’t your biggest concern, or unless you think that it won’t be a factor in attracting some potential investors, then computing for your total average earnings should be your top priority as an online business owner.
Determine the amount of traffic the site gets
One of the biggest differences between a traditional business and an online business is that it’s much easier to compute the amount of traffic that your online business gets than a traditional one.
For traditional businesses, the best way to compute for the exact number of visitors is through the number of sale transactions completed per month. However, this ignores the number of visitors that only drop by but don’t make a purchase. Unfortunately for traditional businesses, this number is important since it is used to determine the popularity of the store compared to other competing stores in the area – one of the factors in considering how much a business is worth. While a small business may not be able to compete with a bigger business in terms of raw numbers, it could have a higher sales per visitor ratio than the bigger store, which makes its value higher as well.
Online businesses don’t need to employ nifty tricks to find out the amount of traffic that their websites get. Most, if not all, self-hosted platforms allow web admins to monitor the exact number of visitors, impressions, and other traffic-related figures on their sites. You don’t even need to own the site to see its average traffic. Many online website ranking systems like Alexa, Moz, and Google use the amount of traffic to determine which website has a higher value, and this can be done with just a quick search on the World Wide Web.
Calculate its rank compared to similar niches
Speaking of rank, one of the fastest ways to determine the value of your online business is to check its rank compared to other websites in the same niche.
As of 2019, Facebook is the top social media website in the world, with a global Alexa rank of 3. In comparison, another social media site, Twitter, has a global Alexa rank of 11. In monetary values, Facebook is also exponentially worth more than Twitter. While there’s not always a direct relationship between rank and value, it is applicable most of the time.
One of the best ways to achieve a higher rank is to learn how to properly optimize your website for search engines, also known as SEO (Search Engine Optimization). A high rank also means that your website has a higher chance of showing up on the first few pages of search engines, which can lead to better traffic and higher sales as well.
Know how much others are willing to pay for it
In relation to your site’s rank, another way to determine the value of your online business is to find out how much other people are willing to pay for it. This doesn’t mean that you have to sell your website, of course, but getting quotations for your site isn’t too bad either.
One important thing to remember when it comes to the laws of supply and demand: supply means nothing if there is no demand for it. You can have all the, say, red mangoes of the world, but if nobody wants red mangoes, then you’re stuck with an unsellable product that nobody is willing to spend money on.
Similarly, determining the value of your online business has little use if there is nobody out there who is willing to pay for that amount. Even if you have 500,000 monthly visitors, you can’t force advertisers to pay $500 per ad if they’re only willing to pay $300 for websites in the 500,000 range. That’s why industry research is also important in business valuation.
Websites such as Flippa, Empire flippers and Exchange marketplace will give you an idea of current business for sale. A lot of the time, 3x your yearly net profit is a good ballpark figure for a business sale.
Do take note that trying to determine the worth of your business doesn’t mean that your online business is nothing but a bunch of numbers and statistics. Remember, it was your love and passion for what you do that allowed you to reach this part of the journey. If your online business is worth the world to you, then nothing can be in the way towards your path to success.