Many Shopify store owners have never considered what their end game is. The grind to keep scaling your Shopify store is never ending. Whether you’re optimizing your product listing pages or streamlining your third-party logistics operations, the reality is there’s never a finish line for any ecommerce business—there’s always room for improvement.
However, many Shopify store owners have never considered selling their business and have a preconception that the only time they will part with their ecommerce business is when it’s failing due to negative cash flow or being unable to maintain the necessary operational levels. It’s understandable to have these worries since data from the US Small Business Administration (SBA) indicate nearly 50% of small businesses fail in their fifth year of operating. It can appear that the only choice is to keep running the business and pass it down to the next generation or close the business down when the owner decides to retire.
An ecommerce owner’s journey doesn’t have to end with their business’s closure. In fact, a Shopify store owner can sell their business and continue their entrepreneurial journey while passing the business over to someone who can take it even further.
Ecommerce businesses are one of the most popular digital assets that are traded on marketplaces. There are many institutional buyers entering the industry who are willing to pay six, seven or even eight figures for an ecommerce store.
To understand how ecommerce businesses are valued, let’s explore why you’re in a great position to negotiate if you own a Shopify store.
The Power of Shopify
Shopify is a flexible platform for building a profitable ecommerce business no matter what your starting budget is. Many ecommerce novices or college students hoping to create some side income leverage Shopify to start a store.
With Shopify, entrepreneurs have options to adapt and expand their business with the agile platform. From there, how an ecommerce business is valued depends on many factors that are related to the business’s DNA.
Understanding How Ecommerce Businesses are Valued
In order to understand how much you can sell your ecommerce business, first you need to understand the basic valuation formula:
12-Month average net profit x Multiple = Valuation
The average monthly net profit over 12 months times a multiple that usually ranges from 20x to 50x. Don’t worry about what goes into the multiple just yet, we’ll be getting into that below.
You might have seen online businesses valued with another formula:
EBITDA x Multiple (~2-4x)
EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and in the above formula, we are using an annual multiple. It’s common for brokers and private buyers to either use an annual or monthly formula. When someone says that they sold their business for 3x or 36x, they are effectively the same formula. The benefit of a monthly multiple allows you to get just a bit more granular in things like seasonality and is also helpful if you are using a pricing window shorter than 12 months.
Ecommerce businesses have several moving parts that directly influence the multiple. Some of these factors include the business age, number of products generating revenue, and diversity of traffic. A big factor of arriving at your valuation is the pricing window you end up using. Let’s talk about what a pricing window actually is so you’re better equipped in case you decide to make an exit.
Sellers can choose to value their business across a 12-month, 6-month, or 3-month pricing window. There are other pricing windows but these three represent the vast majority of pricing windows a buyer might expect, and should be the three that you as a store owner are most familiar with. The 12-month window to calculate average monthly net profit is the gold standard for valuations because it takes seasonality into account and increases a buyer’s trust in its financial performance. This is by far the most common pricing window and typically is going to give you the best possible multiple in your valuation formula.
All ecommerce businesses experience some degree of seasonality where products are in higher demand at certain parts of the year due to fluctuations in buyer demand. Calculating monthly net profit over 12 months provides a more accurate reflection of the business’s monthly net profit since months with fewer sales will be captured alongside peak periods.
Buyers appreciate having more data available to them while they perform their due diligence. A 12-month pricing window builds trust as the larger volume of data reflects the business’s financial health and helps potential buyers disqualify a deal or consider putting forth an offer more quickly.
Choosing a shorter pricing window isn’t usually recommended for sellers looking to get the highest possible valuation as it can narrow the potential buyer pool. A buyer may not be as concerned about a smaller ecommerce business valued at $30,000 based on a 3-month window, but they may be much more wary about buying a $300,000 store valued over three months. The lack of data and history of financial performance and sales will probably cause most buyers to overlook your business.
If an ecommerce store owner is selling due to a decline in sales, a savvy buyer is more likely to force a 3-6 month window on the seller to get a lower valuation. On the other hand, a store owner could consider using a shorter pricing window to reflect the business’s recent growth to get a higher listing price.
Understanding how pricing windows is one of many important factors that can influence your Shopify store’s valuation. Let’s explore other factors that influence the multiple.
What Goes into a Multiple?
Several things affect the multiple value, and the good news is you can increase the multiple through some adjustments. By stepping into a buyer’s shoes, you can understand what the strengths are for your ecommerce business and identify areas you could improve.
An older business generally means that the owner has had more time to find a product-market fit, develop effective distribution channels, establish the brand in its niche, and streamline operations across various fronts.
A profitable, mature online business also indicates that the company is resilient, having survived unexpected challenges posed by the marketplace, which can impact revenue streams and operations. When you can show that your business recovered from an issue that led to your revenue taking a hit like running out of stock during a peak season, this can be leveraged during negotiations. You can highlight that the business is profitable even in the face of setbacks and that these kinds of situations can be fixed. It’s why a 12-month pricing window establishes trust in buyers who can see consistent sales and revenue generated across the year.
Number of Products
The number of active SKUs or products reflects an ecommerce business’s valuation primarily in two ways: as a measure of risk and as a measure of how much effort is required to run the business.
A business that has diversified sales across a number of SKUs is a safer bet than one that generates all its sales through one SKU. Why? Because the entire revenue stream would be cut off if a business’s sole product was affected by a shift in trends or delisted for any reason. When you sell multiple products, your risk exposure is lowered if one of the products falls out of fashion. Ideally, you want your ecommerce store to be selling several products where no single product makes up the lion’s share of the total revenue.
That being said, there can be diminishing returns of selling more products when you’re trying to make an exit. Conducting product research, creating the listings, and managing each product requires additional time and man-power for a Shopify store owner. While much of that effort is done upfront once by you, there is still the maintenance work a buyer is going to have to take over during a sale. You want to make sure your business has several products generating revenue while also minimizing how many products have to be managed if you want to have the largest possible buyer pool.
If you were to compare two businesses that each generated $50,000 in monthly net profit where one had 8 SKUs and the other had 50, the former would be a more attractive prospect in most situations. A buyer would need less time to manage the product listings for a smaller number of SKUs and make it easier to work with fulfillment centers with SKU breadth restrictions, allowing them to focus on expanding the business in other ways.
While there is no hard and fast rule on how many products optimizes your valuation, there are a few general guidelines. First, having multiple products generating revenue with no single product making over 50% of the store’s revenue will make your business more attractive to most buyers. The second guideline is to make sure, as best as you can, every product you launch carries its weight in terms of the value added to the business. You want to avoid having so many products to manage that you turn off potential buyers when they see how much money the store is bringing in on a revenue-by-product basis and discover only a handful of products generate most of the store’s earnings.
After selling close to 1,500 businesses at the time of this writing, we can say the sweet spot tends to be between 3 and 8 products for the majority of buyers. This range is large enough to have decent revenue diversification, and small enough that most investors looking at your store will find the demands of inventory reasonably manageable.
Keep in mind there are exceptions to ideal product ranges. For instance, buying a one-product ecommerce store is a lower financial risk to a buyer with large capital resources compared to a buyer with a limited budget who can only afford to acquire one digital asset. If the ecommerce business lowers in value in the future, the buyer with more resources can take the financial hit if the asset doesn’t generate the desired ROI.
Establishing diversified traffic sources can increase a business’s multiple because it makes the store less reliant on a single source of traffic to generate sales.
Shopify store owners often rely on paid advertising campaigns to raise brand awareness and generate sales because SEO can be hard to leverage, especially on Shopify. Multi-channel selling is an effective way to increase brand exposure on other ecommerce platforms that attract a wider range of audiences, and using this approach can positively influence the multiple. A recent Shopify study suggests your revenue can increase by 120% if you sell on two additional ecommerce platforms.
Having a monetized email list with a large number of subscribers is another way to move the multiple needle in a seller’s favor. The real value of email marketing lies in the audience a founder can build through the list. Nurturing an email list provides a traffic and revenue source that’s independent of search engine traffic and won’t be affected by unforeseen algorithms. Many ecommerce owners underutilize email lists, so it’s to a seller’s advantage to grow one that has a high conversion rate.
Average Monthly Net Profit
Although monthly net profit is already a valuation factor on its own, it’s important to note that a higher profit positively influences the multiple.
An ecommerce business experiencing higher profit margins inherently has increased value that could stem from higher sales volumes, lower expenses, or more streamlined operations. If you are planning on selling your business, we recommend increasing the monthly net profit without sacrificing key components of running the business (e.g., without canceling essential 3PL solutions just to reduce expenses), which would increase the workload on the owner.
Deciding on Your Business’s Future
It’s important to have an end goal in mind.
Ask yourself what you want in the long-term. This simple question allows you to decide whether you want to keep building your ecommerce store or sell it. Keep in mind that there are only two basic exit strategies for a business; you either sell that asset or let it die. Unfortunately, we’ve seen many ecommerce store owners do the latter mainly because they didn’t realize they could sell or they thought it would be too big of a hassle.
Even if you aren’t planning to sell your business, you should pretend as if you will. It will make your business ultimately a more robust profit-making machine in the long run. Plus, you’ll thank yourself down the road if you changed your mind and decided to sell.
The most common reasons for ecommerce founders selling their businesses are related to personal situations or business decisions. Some sellers may experience events that change their personal circumstances and time commitments, such as a relative passing or family planning. It’s also common for sellers to lose motivation in maintaining the business and pursue another project, and raising funds through a sale could help grow another business.
Whatever the reasons for selling, it’s important that Shopify store owners learn how to prepare in advance of listing their business for sale. At the end of the day, you should only ever sell your ecommerce store if it gets you closer to either a personal or business goal. Ideally, both. We would never recommend trying to time the market or buyer demand or anything along those lines.
A Timeline for Preparing for a Sale
Adopting a mindset of selling your business will help you make it a more valuable asset. If and when you decide to sell, you should set a date in the future where you’ll publicly list the business for sale. We recommend planning at least 12 months ahead so you can prepare your business and be in a position to negotiate the best possible price.
12 Months Away – Create Your Plan
Although 12 months seems like a long time away, we recommend preparing financial statements to compile the profit and loss (P&L) statement that far ahead. As mentioned earlier, providing more financial data instills trust in buyers since they can analyze the business from a micro and macro perspective based on its financial performance over time.
One of the most important documents that will be referenced throughout an entire deal is the P&L statement. It serves as a foundation for valuations and can be used as a reference point during negotiations if a buyer starts asking questions about the finances in the later stages of a deal.
In addition to preparing financial documents, this is an ideal point in time to plan for optimization or expansion objectives, such as launching new products or increasing the number of traffic sources. By starting early, even if a strategy isn’t executed as planned and revenue numbers decrease, there is sufficient time to repair the changes.
6 Months Away – Tweak and Observe
Six months is enough time to observe the outcome of a new strategy. Along the way, a seller may consider adjusting their plan to increase the expected ROI.
For example, a seller may have planned to launch a series of new products and use an email list to promote the launches. Sales could have come in at a steady rate, but the conversion rate from the email list could be lower than anticipated. Experimenting with A/B split testing could reveal what type of voice resonates with the audience better or which CTAs generate higher response rates.
Use this intermediate period to reflect on your business. At six months away from an intended sell date, there’s still time to further refine a growth strategy or drop it entirely if it’s providing diminishing returns in proportion to the resources spent.
3 Months Away – Maintain Performance
As the intended date to list the business for sale approaches, it’s advisable for sellers to focus on maintaining sales volume and revenue numbers.
In the best-case scenario, a seller achieved their intended outcome (usually in the form of increased sales) from their earlier 12-month planning. If the strategy didn’t succeed, a seller can express this as a growth opportunity for a potential buyer in light of the seller’s lack of competency to execute the plan.
How to Sell a Shopify Store
There are three options to choose from when considering a sale: making a private deal, listing the business on a do-it-yourself auction site, or using a broker.
Many sellers consider a private sale since brokers like us charge a commission on the successful sale, and many do-it-yourself marketplaces also charge a similar commission rate. Because of the comparable commission a do-it-yourself marketplace is going to take, we almost never recommend anyone using one of these. Negotiating a private route or using a broker will almost always be the better option.
At the risk of sounding biased, we highly recommend first-time sellers use a broker or at least get a free valuation from a reputable broker. Selling a business can be a confusing process if you’ve never done it before, so having someone who knows the industry and how the process works can be extremely valuable.
First-time sellers are vulnerable to savvy buyers who have much more experience in negotiating and know how to win deals. There is also the issue of tire-kickers—people who take up valuable time by inquiring about the business but never make serious offers. If you’re selling an online business for the first time, you’ll encounter both types of buyers along the way. While you can get a good deal going the private route, keep in mind this is a harder path for first time sellers due to their lack of negotiating experience.
Also, since a broker’s service is technically free for buyers, buyers often look for off-market deals so they can buy businesses for a lower price a broker can command. Of course, private buyers will make comparable offers that a broker can help you get, but note that similar deals are rarer.
On the other hand, brokers can help you overcome most of the obstacles you’ll face in a private sale since they have large buyer networks, systems and processes to get qualified eyes on your business. They’re in the trenches making deals happen every day of the week which means they can negotiate effectively on your behalf. The big drawback to using a brokerage is the commission fee that sellers pay for their services. Typically, a broker can sell a business for a higher price than you would in a private sale, and this higher price tends to put more money in your pocket even after a commission is deducted. Keep in mind this is not always the case, so it’s always worthwhile to explore both the private and broker route with your ecommerce store.
Common Pitfalls to Avoid for First-Time Sellers
If you’re planning to go for a private sale, it’s important you’re aware of the common pitfalls that can lead to sellers losing leverage during the negotiation process or outright losing a deal.
Buyers naturally want to pay as little as possible for a deal. While negotiations are expected when discussing a deal, a common error for first-time sellers is to sell for as low as possible in response to all the submitted low-ball offers. Just because buyers are placing these offers doesn’t mean they’re an accurate reflection of your business’s value.
If you understand your business’s strengths based on the valuation factors outlined above, it’s easier to justify holding your ground or calling negotiations off in the face of unreasonable offers. If you’re wondering what the ballpark figure of your Shopify store is based on its current financial performance, you can use this free valuation tool so you have a rough value, which will be helpful to have on hand whether you do a private sale or go down the broker route.
One thing you should watch out for is over-valuing your business because of your personal bias.
It’s pretty common for first-time sellers to price their business much higher than what buyers are expecting because of their emotional attachment to it.
While setting the price higher is common practice for sellers so they can negotiate closer to an expected sales price, buyers can be put off if a seller isn’t willing to compromise on lowering their premium, especially if it’s unreasonably high. To get a better idea of how high you can sell for and negotiate, it’s a good idea to get a free valuation beforehand so you have a more objective perspective on your business’s value.
If you’re deciding on setting a sales price on your own, we recommend using your P&L statement as the basis of your valuation. Buyers will want to know how you arrived at your listing price and it will be easier for you to explain when you have your financial statements in order.
While you discuss pricing, make sure you avoid listing the business’s potential down as a factor. Serious buyers will lose trust and have second thoughts about going further in the deal if you include how far the business can grow as a core factor in its valuation. Whether you go down a private sale or use a broker, buyers will take a business’s current performance into consideration when deciding if it’s a worthwhile investment. It’s best to stick to the P&L statement and use measures that can be tracked. There will be plenty of back and forth during negotiations, but you’ll be in a better position to agree on a deal closer to your expected sales price when using clear financial data like the P&L.
Plan for Your Endgame
There’s a lot of detail to keep in mind when preparing to sell your Shopify store, which is why it’s recommended that first-time sellers use a broker. Going down the private option could be more lucrative than using a broker’s services and you might even save some money from the commission fee, but you’ll need to take care against all the tactics that savvy buyers can use to convince you to sell for much lower than you wanted.
Remember that the end game for any Shopify store boils down to two options: sell the business or close it down. Choosing to sell can mean you’ll receive between 20 and 50 months of net profit in cash up front. Having that much money from a deal is the largest windfall most people will get in one go and can unlock many opportunities.
Even if you have no intention to sell at this moment in time, it’s recommended that you adopt the mindset of preparing to sell so your business becomes more efficient in its operations and scales better. As long as you have an endgame in mind, you’ll be able to plan ahead and position yourself to exit from your business on your own terms, and even earn a handsome sum in the process.
Vincent Wong is a Content Specialist at Empire Flippers. Originally from the UK and now residing in Malaysia, he loves everything related to online businesses. He loves discovering new (and old) films, music, and cultures.