Normalization of Online Business Results

Valuing an Online Business: Why Normalization Matters

When you're looking to sell an online business and want to set a price that accurately reflects its true value, the net profit of the e-commerce business is typically your starting point. However, in many cases, adjustments—known as normalizations—are necessary to ensure a realistic and reliable valuation.

What Is Normalization?

Normalization involves adjusting the net income to remove the effects of costs and revenues that are not part of the company’s ongoing operations. These corrections help present a clearer picture of the business's operational profitability.

When Should You Normalize Financial Results?

There are several situations where normalization is both possible and advisable:

• Capitalizing Investments: Sometimes, businesses record investments as expenses when they should have capitalized them and depreciated the cost over several years. While this may lower profits—and therefore taxes—for that year, it distorts the true financial performance. Spreading the cost over multiple years provides a more accurate basis for valuation.
• Personal or Irrelevant Expenses: It’s not uncommon to find personal expenses—like a family member’s mobile plan or a company car that isn't essential—charged to the business. These should be removed from the financials when valuing an online business.
• One-off Costs: Non-recurring expenses, such as legal fees from a lawsuit, affect the results for a single year but won’t impact future performance. Normalizing for these costs gives a clearer projection of ongoing profitability.
• Unaccounted Owner Hours: A common oversight—particularly in sole proprietorships or general partnerships—is failing to account for the owner's time as a cost. Since the owner's time is a critical input, not recognizing it artificially inflates profits. A buyer will certainly factor this in, and so should the seller.

Accounting for the Entrepreneur's Time

Entrepreneurs in sole proprietorships or partnerships often take the net profit shown in their financial statements as the basis for valuation. However, this is misleading. In these business structures, the net profit effectively includes the owner’s salary, even though it isn't explicitly listed as a cost. From a valuation perspective, all operational costs—including the time the owner spends running the business—must be considered. After all, without this input, the e-commerce business wouldn't generate the same results. Prospective buyers will scrutinize whether the seller has included a fair cost for their own time. It's wise to anticipate this by calculating how many hours you spend on different activities and assigning a realistic hourly rate—lower for routine tasks like packing, higher for strategic roles like digital marketing.

Why Is Normalization Important?

Normalization helps reveal the true operational performance of a business. It strips away anomalies, discretionary spending, and accounting quirks to answer one key question:

What are the essential costs required to maintain these results?

The valuation of an online business is only as accurate as the financial data it's based on. Normalizing your figures—both positively and negatively—ensures a fair, credible, and market-aligned assessment of your company’s value.