Value of your business when there is no profit

The value of an online business with no net profit is difficult to determine. In fact, most regular valuation methods are based on this profit (or more precisely, free cash flow). And this is not surprising, because a buyer will have to pay off his investment with this (future) profit. However, not every online store makes a profit. Especially when the entrepreneurial salary is calculated accurately, profitability does not appear to be a given. How to determine the business value in that case?

First of all, it is of course not true that an online business without profit has no value: For example, there may be a lot of SEO specialized content and unique proprietary imagery, the online businss itself may be an asset or there may be large newsletter files. But if the seller is unable to make a profit from these, then it can be argued that the value of these components is limited. The question then remains: is someone else able to make a profit with these components?

The value of an online business to the buyer

One way to still arrive at a value, for a an online business that is not making a profit, is to reason from the buyer's perspective and situation. A buyer may be able to make a profit by integrating the business with his own company, because certain costs will no longer have to be incurred. Or because there are cross-selling opportunities. These are also called synergy benefits. It is one of the main reasons why acquisitions take place.

Two problems with this are that first, the picture will look different for each buyer, so it is difficult to arrive at an unambiguous value. The second (bigger) problem is that a buyer will see the profit being counted as his/her own merit: it is what he/she adds to the acquired company. The willingness to pay a seller for this is often limited, and there is something to be said for that.

There are two other approaches that can be used to arrive at a value assessment: the liquidation value and the reconstruction value. Keep in mind, however, that the calculated value of an online business through these methods (the name says it all) is generally limited.

Liquidation Value Company

The liquidation value is the market value of a company's assets (which may or may not be on the balance sheet and) which can be sold. In many cases with online businesses, this will mainly be the stock, customer files and the online business itself because other assets such as means of transport, machinery and inventory are not present or limited.

There is no absolute formula for this, but (substantial) discounts on balance sheet values and/or investment values can be assumed. In practice, there will often be a relationship with the reconstruction value:

Reconstruction value enterprise

The reconstruction value can be seen as the value a buyer would have to invest in building a new online business or website if acquisition were not an option. The value of the technology itself is often small because building an online business is becoming increasingly easy through software such as Lightspeed and Shopify, among others. But the built-up SEO positions, link profile, history and newsletter database can represent value. On the other hand, the rebuild value is depressed considerably because the buyer's freedom of choice is limited: the buyer cannot set up the business entirely as he or she wishes. Many choices have already been made by the seller and the buyer must invest in modifications and updates or take the choices made for granted.

In practice we see that the rebuild value is a helpful concept to make clear to a buyer, that it is cheaper to take over an already existing business than to build it yourself. But the fact remains that there needs to be paid for an online business that does not make a profit (and thus has not proven that the incurred costs/investments were worthwhile).

With the knowledge that profitable online businesses are already sold for x number of times the net profit, it is clear that loss-making online businesses are taken over for a fraction of the rebuild value. Nevertheless, an elaboration of the rebuild value and value-increasing factors can support the sale.

Value-increasing factors

Components of liquidation value and rebuild value include: content, organic customers, database and supplier contacts. It is important to remember that the value of these factors depends primarily on the buyer's perception of value. Where one buyer is happy with new unique content another appreciates a large customer database. The question here is primarily where the buyer in question thinks synergy benefits can be gained.

Content

Unique or SEO optimized content can increase value. Despite the fact that the unique content has not been able to generate a net profit by attracting organic (free) online business visitors, the content can be useful to, for example, a buyer in the same industry. So it will differ per buyer whether the content is seen as valuable.

Organic visitors

A high number of organic visitors is an indication that the content and SEO optimization are paying off. A good sign for the buyer. The buyer can then immediately start improving sales and profits by focusing on conversion from visitor to customer.

Database

A database can be worth a lot to the right buyer. If the online business has built up a database in a specific niche, and this is the niche the buyer wants to reach, this is valuable. Important here is how complete the database is and whether the same customers cannot also be easily identified through other means.

Supplier contacts

In some cases, nice price agreements have been made with suppliers. When these agreements are fixed and can be transferred to a next owner, this can increase the value of the online business.

History

Online businesses that have been active online for years are better rated by Google than new online companies. Despite an absent profit, the shop may have made a name for itself. This "online presence" can act as a small springboard for the buyer because the shop can probably climb faster in search results than a new online business.

Valuation 

Insights into liquidation value, rebuild value and other value factors can act as tools for creating a sales price. Perhaps even more important are these insights for buyers in order to also get the necessary handle on your perception of value. 

We recommend doing market research on similar online businesses so that it becomes clear where the company excels (or not). Often you will then soon enough feel how the value of the online business lies compared to competitors in the market. Research in the takeover market is also a good start to see for what price comparable companies are offered. For example, by looking at our 'For Sale' page you will quickly see a correlation between company size, (absent) net profit and asking price. Finally, it is advisable to clarify for yourself the urgency to sell. If you would like to sell the company in the coming months, it may be wise not to set the asking price too high in order to miss out on possible interested buyers.