The methods that usually apply to business valuation aren’t always a good fit for e-commerce. Unlike brick-and-mortar stores with warehouse space, equipment, delivery vehicles, and inventory, your Shopify store probably doesn’t have much in the way of physical assets. So how do you value a Shopify store?
How To Value an E-Commerce Business
There’s more to your company’s value than tangible assets. To get an accurate appraisal, concentrate on the things that make your business successful.
One factor is competitive advantages. Your company’s value is closely connected to the features that make it more valuable than competing Shopify stores. Buyers want a business that stands out.
The second factor involves profitability. The greater your revenue and profit margins, the more desirable your Shopify store is for investors, buyers, and lenders.
How To Value a Shopify Store’s Profitability
Many e-commerce businesses use the SDE method (seller’s discretionary earnings) to calculate how much a full-time owner could expect to make.
Step 1: Net Income
First, you need to find your net income by subtracting product costs and business expenses from your store’s total sales. Here’s an example:
- Calculate store sales for 2024: $450,000
- Subtract the cost of goods ($250,000): $450,000 – $250,000 = $200,000
- Subtract your operating expenses ($20,000): $200,000 – $20,000 = $180,000
- Subtract what you paid yourself ($120,000): $180,000 – $150,000 = $30,000
Your net income would be $30,000. It’s the money left over to reinvest in your business, your working capital.
Step 2: Owner’s Compensation
Next, add your owner’s compensation back into the net revenue. For example, $30,000 + $150,000 = $180,000. This adjusted number gives potential buyers a good idea of the average profitability of your business.
Step 3: Multiply the SDE
To value an e-commerce store correctly, you also need to multiply the SDE ($180,000) by a profit multiplier. This multiplier represents the store’s growth potential. It depends on factors such as:
- Recurring revenue
- Average order value
- Customer lifetime value
- Customer acquisition costs
- Sales growth rate
Buyers want to see opportunities for future earnings, not just one-time sales. Consistent revenue gets you a higher profit multiplier. The usual range is 1.5x to 3x, but it can go as high as 4x for expertly managed stores.
For our example, let’s be conservative. Your appraisal would be $270,000 (1.5x) to $540,000 (3x).
Why Do You Need To Know How To Value Your Shopify Store?
There’s more to appraising the value of a Shopify store than planning on selling your business. Appraisals are a key requirement when applying for financing or refinancing loans. They tell lenders how much money you can afford to pay back.
Larger e-commerce businesses need to show the company’s value when presenting business proposals to potential investors. Impressive sales figures and standout competitive advantages can convince them to back your expansion plans.
Increase the Value of Your Shopify Store
Knowing how to value a Shopify store is only the first step. Your goal is to make your business a long-term success. Shopify apps that reduce product returns or boost your average order value are smart investments. Find solutions right away.