Are you planning to merge with or acquire a business? Do you need capital financing to scale up? Or do you just want to level up your company’s strategic planning? In all the scenarios, you need to know the “market value” or “economic worth” of your e-commerce business.
Proper bookkeeping for e-commerce can help you accurately estimate a business’s actual valuation. However, figuring out the worth of your e-commerce business might be challenging. Why?
It involves several dynamic elements and methods. A slight discrepancy can significantly impact accuracy.
If you’re also facing challenges in evaluating your business’s actual value, you’ve just landed at the right place. In today’s blog, we’ll discuss some common struggles business owners face while finding their company’s worth and how you can overcome them.
We promise we’ll keep it simple for you! And it’s our recommendation that you hire professional accounting and bookkeeping services to make the process easier.
What are the Different Types of Business Valuation Methods?
Before we jump to the challenges, it is vital that you understand the basics. It’ll only make things clearer for you during the assessment process and help you solve your challenge faster.
Seller’s Discretionary Earnings (SDE)
In the Seller’s Discretionary Earnings (SDE) method you need to calculate the discretionary income produced by your business. How? In this method, you need to be meticulous with bookkeeping for e-commerce.
- First, consider the revenue generated by your e-commerce business.
- Next, business operating expenses and the cost price of goods sold will be deducted.
- After that, add the resulting number to the owner’s compensation (salary).
- Finally, to obtain the business value, apply the SDE multiple.
This method offers a precise view of the income expected of a business owner. It also helps you gauge the financial benefits of your business.
Professional accounting services for small business typically suggest this method for valuing single-owner-operated e-commerce business.
Don’t forget to consider the market conditions and industry standards. These factors help determine the accuracy of the SDE multiple.
EBITDA Multiple Method of Valuation
If you want to attract investors, you might want to use this method. The EBITDA method is a simple way to calculate profit before you deduct the following:
- taxes,
- business interest,
- depreciation, and
- amortization
Similar to the SDE method, you need to apply an EBITDA multiple to properly estimate your business’s value.
With this method you get a snapshot of how well your business is doing at its core. Many accounting and bookkeeping services use this method to value the financial worth of mid-sized and larger businesses.
Revenue Multiple Method of Valuation
In this method, you’ll first require the annual revenue that your business generates. Then, you calculate your business’s value by simply using a market multiple.
Sounds simple? Well, if the primary key performance indicator (KPI) of your company is revenue, it is actually a pretty easy method.
It gives you a quick look at the financial value of your business. Usually accounting services for small business will use this method for startups. Because, your business is still in the initial growth phase. So, it’s yet to generate significant profits.
Discounted Cash Flow Analysis (DCF)
The DCF method is a bit different. It helps you estimate what your business’s future cash flows are worth in today’s terms. If you plan to go ahead with this method, you should consider:
- Projected revenue,
- Overall business expenses and
- Other related financial factors while discounting them to their current value.
Again for this method to work correctly you need to focus on bookkeeping for e-commerce. It is ideal if your business generates stable and predictable cash flows.
It offers a forward-looking perspective on your business’s market value.
Hire a professional accounting service to provide accurate financial projections and an appropriate discount rate. These are important for a practical DCF analysis.
Additionally, remember to account for uncertainties in future cash flows.
Challenges in Estimating Business Valuations & Solutions
Now, let’s look at the common challenges that you might be facing while calculating your business’s market worth. However, with the help of Accounting Services Provider.
For small to mid-sized e-commerce businesses, SDE or EBITDA methods are usually ideal.
But in certain scenarios your valuation analyst might suggest using the DCF method. This is especially true if you’re hiring someone with banking backgrounds.
So what’s the problem here? Using the DCF approach, you might end up producing an overvalued company. This is because the usual discount rate range does not apply to small businesses.
Small e-commerce businesses generating $1 to $25 million in revenue will have much higher discount rates as compared to public companies.
Again, if you’re using asset-based valuation techniques, they will also give skewed results. These methods will undervalue your company.
Solution: Hire a financial analyst with experience in bookkeeping for e-commerce. They’ll understand the specifics of your business.
Data Availability and Quality
Accurate company valuation depends on reliable data. Unfortunately, many e-commerce businesses neglect to maintain accurate financial records.
Sometimes, you might not find publicly available financials or comparable peers. As a private firm, you might face a greater challenge as there’s limited disclosure.
Your analysts are then forced to rely on the following:
- industry reports,
- expert opinions, and
- proprietary databases.
Solution: Inculcate a culture that values financial record keeping and bookkeeping for e-commerce. When you have properly maintained books you’ll get high quality data.
Market Volatility and Economic Conditions
It’s now clear that external factors can also considerably impact your business valuation. These factors may include:
- Geopolitical events like war or conflicts.
- Economic downturns such as regional or global recession
- Industry-specific disruptions like supply chain interruption
Remember the incident in March 2021? A large container ship was lodged in the Suez Canal for six days. It caused a global shipping standstill. It led to approximately $10 billion in daily trade losses.
Such events can affect your business’s cash flows, discount rates, and also risk perceptions.
Solution: Hire an accounting professional with expertise in financial management and Bookkeeping for E-commerce. Additionally, they should also have expertise in external risk management.
Legal and Tax Considerations
When considering business valuation, remember to factor in the following:
- Legal aspects such as shareholder disputes or consumer litigations
- Tax considerations (tax deductions, state-wise variance tax obligations, transfer pricing, etc.)
It can get complicated fast!
Solution: That’s why having a consultant on your side with specific knowledge on accounting and bookkeeping for e-commerce is key.
Hire a Finance Professional With Expertise in Bookkeeping For E-Commerce
Now that you know the methods and challenges in business valuation, you have a good idea of why bookkeeping for eCommerce is indispensable.
So whether you need to improve your business strategy, acquire a business or need investments, always consult a finance professional having specialization in your industry.
