Even if the primary motivation behind creating a subscription-based e-commerce website is not a future sale, company founders may want to pass the torch and embark on a new adventure by valuing the asset they have created.
In this article, we will review together the valuation criteria on which buyers rely to purchase the company, the different calculation methods to sell your subscription-based e-commerce website, how to improve this valuation, and the difference between trying to sell on your own versus seeking assistance from generalist or subscription-based e-commerce website sales professionals.
- Business Model
If you are reading this article, it is because you have launched or are about to launch a subscription-based e-commerce website. You can rejoice, as this is a model that is more likely to appeal to buyers or investors for the following reasons:
- Recurring revenues that are the holy grail sought by any business.
- Higher customer lifetime value (LTV) with customer engagement and loyalty.
- Easier stock forecasting, a major point for cash flow management.
- A privileged relationship with customers thanks to a product offering that can be tested, expanded, and personalized as much as possible for them.
Whether you have a website solely dedicated to subscription-based sales or you add a subscription-based website to your existing e-commerce platform, you have everything to gain by including a subscription-based model in your business to increase the value of your company.
- Revenues and net margin
One of the most important figures is, of course, your revenue.
Is it decreasing, stable, or rapidly growing?
This will necessarily affect your valuation and prospects for the buyer.
Furthermore, even if you are experiencing rapid revenue growth, if you invest unreasonably in marketing and do not monitor the cost of goods sold and logistics, this will pose a problem.
This is where the breakdown of the net margin comes in, including post-cost of goods sold and logistics, post-marketing, and finally, post-structural costs.
This will help you to clearly explain your business and better value what you have built.
You must have a good grasp of all these elements, clearly explain them, and show their evolution since the launch of your subscription-based e-commerce website.
- Key performance indicators (KPIs)
In addition to your net margin, the other figures that will count in the valuation of your subscription-based e-commerce site are as follows:
- Customer Acquisition Cost (CAC): this is the total amount of money spent to attract a new customer. It is often calculated by taking all marketing expenses divided by the number of new customers.
- Lifetime Value (LTV) of a customer: it can be calculated in revenue or net margin. You multiply the revenue or net margin that a customer brings you by the number of months they are a customer of your subscription-based e-commerce site. For example, if a customer brings in an average of €10 per month and is a customer for an average of 14 months, the LTV is €140.
- LTV/CAC ratio: both figures are compared using a ratio, which allows you to easily measure how much a customer costs you compared to how much they bring in. This is very important for managing your marketing expenses.
- Attrition rate (or churn): calculated differently depending on the characteristics of your subscription-based e-commerce site, churn is the number of people who decide to unsubscribe on a monthly basis, for example. The higher your churn rate, the more you need to recruit new customers to maintain your monthly revenue.
In addition to these indicators, you also have the evolution of traffic to your subscription e-commerce site, your newsletter subscriber base, your SEO rankings on specific keywords, your ratio of returning customers to new customers, the geographical distribution in France and abroad, your dependence on a customer or supplier, etc.
All of these factors will be taken into account by your buyer to value your company.
- Market trends and entry barriers
Another aspect that your potential buyer will take into account is market trend. Is your product or service just a passing fad, with the risk of having short-lived revenue and then a sudden drop?
Note that these trendy businesses can have a high valuation if they are set up early or at the beginning of the trend and sold at the right time when the trend explodes. This is more interesting for classic e-commerce than for subscriptions that will have to continue in this market when the trend changes, whereas an e-commerce site can simply modify its stock and offerings.
Is the market declining, stable, or experiencing strong growth? Are you positioned as a leader in this market, and how much are you still fighting for market share?
A site that is a leader in a growing category will not have the same valuation as a site that is far behind the leader in a declining market. Similarly, if your subscription e-commerce site has barriers to entry and cannot be easily competed with, it will have more value.
Whether the barriers are regulatory, financial, operational, related to your contacts with suppliers, or a complicated supply chain to put in place, all of this will strengthen the quality of the proposal to the buyer.
Why do we not value a subscription-based e-commerce site that has been in operation for less than a year in the same way as a site that is still growing after its fifth year?
Firstly, because it is known that many companies go out of business at the end of their second year, only 50% of them remain after four years, and it is difficult for founders to make a living at the start.
A subscription-based e-commerce site that has been around for several years, with recurring revenue, loyal customers, close relationships with suppliers, authority on search engines, provides much more guarantees for the buyer and is therefore much better valued.
- Facility of transfer
The last point on valuation criteria is the ease of transferring the activity.
To simplify, if your subscription e-commerce site can run without you thanks to established processes, you’ve won half the battle.
A subscription e-commerce site that relies on its founders due to their unique relationship with a supplier or a customer who is part of their family, is obviously not considered reliable for a buyer.
Similarly, if there are no logistical, financial, or operational processes in place, the buyer may think that everything could collapse overnight.
The buyer must think that they can do better than you by bringing their expertise, but they must be able to rely on a solid business where no one is irreplaceable.
The valuation methods
Once the criteria are defined, let’s look at how the valuation of your company is calculated.
The first method is the multiples method.
Based on the criteria defined above (growth, seniority, ease of transfer, specific key indicators for subscriptions, etc.), your company will be valued with a multiple that will be even higher if your subscription-based e-commerce site is transferable, older, and a market leader.
So, what figure is this multiple applied to?
We often hear about the multiple of revenue.
For example, your company may be valued between 1x and 2x the annual revenue.
In reality, at the time of a sale, and not a fundraising, the multiple is much more often applied to the net margin before the founders’ salary, SDE (Seller’s Discretionary Earnings).
A multiple of 5x the net margin means that your company will be valued 5 times that amount. For example, if your company generates €5,000/month before paying you, that’s €60,000/year and therefore a valuation of €300,000 for the company with this multiple of 5.
In addition to the multiples method, you also have the comparable method.
This method involves looking at how companies with the same business model as you or in your vertical have been valued.
For example, an e-commerce subscription site that is being sold in your domain and is roughly your size can be used as a reference for negotiating with your buyer.
The problem with this method is that it is more difficult to access these figures and especially to compare small structures with market leaders that are bought by private equity firms or listed on the stock exchange.
Without a bad pun, it is absolutely not comparable even if your business model is the same and you operate in the same sector.
That is why players like Storybee are working on a growing database of comparables from the resale of digital SMEs to feed their valuation algorithm, which is at a more realistic scale than that of large companies or investment funds.
Improving its valuation
Now that we have looked at the criteria and methods for valuing a subscription-based e-commerce site, let’s see how to improve its valuation in the final stretch.
- Technology used
As we mentioned before, the solidity of the business and transferability are important aspects to consider. An e-commerce site that relies on unstable technology and requires expensive maintenance or updates will not have the same value for a buyer. This could lead to a decrease in valuation due to the risk involved.
Using a reliable and efficient technology solution such as Ciklik, with its native subscription features and solid foundation, can increase the value of your e-commerce site. If you’re not currently using a suitable solution, it might be a good idea to migrate before putting your site up for sale.
A good design can help increase the value of your e-commerce site. Hiring a professional web designer can help you better express your value proposition and make your site more attractive to potential customers and buyers.
It’s important to anticipate the sale of your e-commerce site to maximize its value. Selling your site is a time-consuming process, so preparing all necessary documentation in advance, organizing your indicators and processes, and having everything ready to go can help maximize the sale price.
During this time, you can also work on improving your site, social media presence, and overall company image, which can further increase the appeal of your subscription-based e-commerce site.
Offering support to your buyer during the transfer process can increase the value of your site. This shows that everything is well-organized and transparent, which can increase the buyer’s confidence and trust in the business.
Selling alone or getting support from an intermediary?
- Selling alone
It may be tempting to try to sell your e-commerce site alone, but this could be a mistake. Hiring a professional broker or advisor can help you navigate the sale process, negotiate effectively, and maximize the sale price. It may cost money, but it can be worth the investment in the end.
In our opinion, it is a mistake to try to sell your company on your own. You need to rely on professionals for different aspects of the process:
- An accountant who validates your accounts and assists you in justifying the valuation. They can also help you prepare the income statement, balance sheet, and cash flow statement to present to your buyer.
- A lawyer who handles all the legal aspects. They will be very important because valuation and acquisition are not just about numbers. They involve a lot of legal clauses and translation of the deal you want to make with your buyer.
- An intermediary who can help you with your valuation, organize your documents, prepare a complete sales package, find qualified buyers, negotiate, and, most importantly, bring the sale to completion while coordinating the other parties involved in the deal. This is a profession that requires expertise in your business model and size.
- Getting support from an intermediary like Storybee
As we discussed earlier, getting professional help comes at a cost but it allows you to make the sale, which is not negligible, and most importantly, to get the best possible price based on everyone’s expectations. An intermediary will help you save money during negotiations rather than being a cost item.
With a team composed of financial experts specializing in buying and selling businesses as well as experts in SEO and web development, Storybee has become a reference in the field. They can manage both business asset sales and ecommerce site sales, and can support you in your project to sell your subscription-based ecommerce site.
They will enable you to:
- Determine the right price based on indicators, your expectations, and those of potential buyers.
- Create a clear and precise sales document, highlighting your strengths and explaining potential weaknesses of your subscription-based ecommerce site.
- Present you with targeted and qualified buyers, which is one of the most important things to avoid wasting time.
- Conduct negotiations with different buyers to find you the ideal buyer at the best price.
- Ensure the sale is successfully completed by also helping the buyer find financing and understanding the transition process.
This aspect should not be overlooked, as there are many things to do to ensure the transaction is successful, alongside daily operations to manage. Everyone has their own profession.
If your goal is to one day sell your subscription-based ecommerce site, you have all the tools at your disposal to understand evaluation criteria, valuation methods, ways to sell better, and finally the reasons to get professional help like Storybee.
As with developing your subscription-based ecommerce site, prioritize professional experts in your field. Ciklik is here to support you in the long term with specific expertise in subscriptions.