• Home
  • About
  • Advertise
  • Contact
  • Policy
  • Guest Post
  • Archive

One Cent At A Time

A Personal finance blog to get rich

  • Email
  • Facebook
  • Pinterest
  • RSS
  • Twitter
  • Beautiful Life
  • Becoming Rich
  • Beginners Guide
  • Extra Income
  • Productivity
  • Saving Money

How to Do A Value Analysis Before Acquiring an Online Business?

August 28, 2020 Leave a Comment

Share this:

  • Tweet
  • Email

Obtaining an online business is tricky most of the time. Various elements must be determined before forging ahead with a decision. The process is challenging, exhausting, and time-consuming. But once all the factors have been accurately assessed, valuable information becomes available. 

How to Do A Value Analysis Before Acquiring an Online Business?

Only once all these elements have been thoroughly investigated should an informed choice be made. Assimilate all the necessary information to place yourself in a strong position to make a wise choice and make a valuable investment.

Image: Freepik.com

Do a discounted cash flow analysis

A discounted cash flow (or DCF) analysis comprises developing a comprehensive forecast of business free cash flows. Use a prearranged discount rate to discount these forecasts, which is typically derived from the weighted average cost of capital (WACC) when acquiring an existing business.

In essence, what this analysis accomplishes is that it takes the present-day dollar value, and forecasts what this value is likely to be at a future date for the specific business interest. Analyses come in many shapes and forms, and this technique is appropriately used to evaluate a stable business. 

Unfortunately, using a DCF is no guarantee of a business’s value, and neither should it be a standalone valuation technique. Follow this analysis with several others discussed below.

Comparison evaluations

Precedent business purchases rely on the investigation of other growth indicators. Use these indicators to check the appraisals for the target business and what similar businesses have been valued for. Indicators such as EBIT or interest before earnings and tax or EBITDA come to mind here. If the company’s details are publicly available, this will be a multifaceted undertaking but worth the effort.

When the business of interest is privately run as many online businesses are, this comparison method will be problematic. Usually, the owner will be willing to provide relevant transaction records if the company is up for sale. Use an accountant or professional business evaluator to facilitate the transaction or earnings-multiple valuation process if you are unsure of the requirements.

Evaluate site traffic

Once the financial evaluations have been covered, you can move on to other approaches to determine business value. The traffic value system requires an examination of key phrases that encourage traffic to visit the website. Include the CPC value of top keywords from Google AdWords, which should then be multiplied by the number of visitors that specific phrases have motivated to visit the site.

The result of this search will provide a good sense of how much the traffic value will be once it is monetized. Although by no means a conclusive system with which to value an online business due to its shortcomings, this technique is a good filler on which to base a purchase decision.

Multiple techniques for small business valuations

Using the multiple based technique is probably one of the most accepted methods to determine business value. Profits and the elements that impact the multiple must be considered. Seller discretionary earnings (SDE) is the remaining cash after the value of sold goods and operating costs have been subtracted from the gross income of the business.

What should be deducted and what should not form part of this formula, is up to the valuator. Factors that should be deducted, however, encompass the owner’s compensation, depreciation, travel expenses, and office rent. Additional deductions need to be investigated per business. Only once the SDE has been defined, can the calculation proceed.

Influencing factors on the multiple

Buying an online business should cover all the bases. Three important factors that should influence the decision must comprise the scalability of revenue, its transferability, and the sustainability of this element. When considering the multiple techniques, other considerations also come into play.

Financial details

Multiple factors can impact the use of the multiple technique, financial details being the most significant. The potential buyer should be asking questions like how old the business is, the flow of gross and net income over the past three years or more.

A comprehensive understanding of business processes must take place to determine if revenue streams are transferable to the new owner, whether the cost structure can be copied and so on.

Traffic particulars

Website traffic also influences the use of the multiple technique. A potential buyer should find out how much site traffic is promoted from searches, the stability of rankings and how these have been impacted by short and long-tail keywords, the flow of traffic over time, penalties initiated by Google, industry trends, and how sustainable the traffic flow is. 

The complexities of the multiple method do not end with the SDE, financial and traffic particulars, but should encompass a thorough investigation of business operations.

Business operations

Business operations refer to processes, policies, standards, and management methods. Ask about how much hands-on time is required to maintain operations, what the owner is responsible for and what technical capabilities are employed to run the business. Additional questions related to employee roles, responsibilities and so on must be hashed out along with whether the business operates in a niche market.

Determine how fast the market is growing, what the entry barriers are, whether environmental trends influence operations, and how, who service providers are, and what business networks are in place to sustain operations. 

The list of questions should be extended to cover trademarks, IP, and others. ‘Others’ include the business model such as SaaS, an App or an ecommerce business. Buyer profiles and market effects also play a role in the valuation process.

In short, an extensive examination is needed, as all these elements influence how the business is to be valued. Once the right questions have been posed, a more accurate multiple can be established on which to base the valuation.

Ultimately, professional aid will complement a process that should be characterized by due diligence. Do your research and do your homework to prevent rash decisions and regrets. After the facts have been accumulated and all the calculations have been done, enough evidence should be present on which to make a sound decision. Buying an online business is not something to be rushed.

LIKE THIS POST?
I agree to have my personal information transfered to MailChimp ( more information )
Join our community of 8000+ subscribers to increase your net worth and build wealth
We hate spam. Your email address will not be sold or shared with anyone else.

Share this:

  • Tweet
  • Email
The tool that changed the way I manage my personal finance - Personal Capital, The Best Free Personal Finance Tool

Want to start a WordPress blog now? The onecentatatime.com blog is hosted by Siteground Web Hosting. For only $3.95 a month, Siteground can help you set up and host your website/blog quickly and easily.

About the Blogger Hi I am SB, a personal finance enthusiast with a career in software development. I am an immigrant to the USA since 2005, after being born and brought up in India. This 40 something technocrat lives and breathes personal finance whenever he gets time from the day job, job as a husband and a dad

Some links on this page may be affiliate links, if you make a purchase following the links, I may earn a commission. Read affiliate disclosure here
« How to Get Top Dollar When Selling Your Car
3 Finance Hacks for Millennials »

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.



Create your own blog in 20 minutes and $20

Personal Capital, a free tool to change your financial health today

I use and suggest Upstart, for your personal loan need

CreditKarma, a free tool to check your credit scorey

I use Coinbase, for my crypto investments

101 Cents at a Time

101 Ways to Earn Extra Money on the Side
201 Frugal and Perfect Birthday Gifts
101 Ways to Save Money Everyday
101 Ways to be Better and Successful at Work
101 Ways to Save Environment and Energy
101 Frugal and Romantic Anniversary Ideas
101 Low-Cost Men's Fashion Ideas
101 Personal Finance Tips
101 Ways to Reuse Household Stuff
101 Things to Do, When Nothing to Do
101 College Graduation Gift Ideas
100 Tips for Ecommerce Startup
101 Ways to Enjoy Indoor During Winter
101 Ways to Beat Procrastination

Popular Posts

Quick Cash - How to make $100 legally, in a day
Living well on less than $15,000 a Year
Top survey sites for side income
What to do when auto repair goes wrong
Where should I invest my money now?
20 Ways to be productive and happy at work
51 Ways to get out of debt
Be a better person in 15 days, 15 ways
Income ideas for retirees and senior citizens
51 side jobs for college students
Urgently need a large amount of money?
Should I buy or should I rent?
Best Personal loan providers
25 Ways to save environment
25 DIY car repairs to save money
How to decorate office cubicle
How to show your wife you care
50 Financial Rules for Success
51 Frugal weekend family activity ideas
Become Rich By Saving 1 Hour Of Daily Wage
How much do I need to save for retirement?
How to negotiate your salary

Follow us on FaceBook

About Author

SB

Blogger by choice and IT manager by profession. Finance is my passion and gardening is my greatest satisfaction. Born in India, settled in US, Husband and a father. I created this blog in 2011 with a vision to help others. Thanks for your patronage. More info on my "about" page.

View all posts


Subscribe

Join our community of 5000+ subscribers to increase net worth and build wealth

Advertisements

Personal Stories

How I got a new HP computer replaced
Was COVID circulating in USA in fall of 2019?
How my credit score went up 800+
Why I didn’t invest in Bitcoins
How I controlled impulses to buy things
Why this blog is named One Cent at a Time

Subscribe via Email

Site Disclaimer

Disclosure of Material Connection: Some of the links in this web site are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”
Read full Affiliate disclosure


One Cent at a Time is published by SB. The opinions expressed herein by him are his own and not those of his employer or anyone else. All content on One Cent at a Time is for entertainment purposes only. By reading this blog, you agree that SB and/or One Cent at a Time is not responsible for any actions taken after reading this blog. For the full disclaimer, click here .

Major Media Mention

One Cent at a Time Media Appearances

Copyright © 2023 One Cent At A Time · Designed by Nuts and Bolts Media