Thinking of Diving into the Online Business Pool? Smart Move. Let’s Talk Shop.
You want to leave the 9-to-5 grind and start your digital business? Great choice! The online business world is large and full of opportunities. But it has its challenges too. Before you jump in, let’s get oriented. We’ll cover everything you need, from valuing a business to financing and legal aspects. This guide is straightforward, with minimal jargon.
Decoding the Dollar Signs: Online Business Valuation 101
Ever seen an online business for sale and thought, “Where did that price come from?” Valuing online businesses isn’t as tough as it sounds. There are methods to determine the worth beyond just flashy websites and social media followers.
Valuation Formulas: The SDE Secret Sauce
Let’s discuss Seller’s Discretionary Earnings (SDE). What is it? It’s the real profit the owner makes. This means we take net profit before tax, subtract costs, and add back the owner’s salary. Why this extra step? Because once you buy, you own it. We must see true profit without prior salary affecting it.
Valuation Methods: Pick Your Potion
There are multiple ways to value a business. Here are some common methods:
- Asset-Based Valuation: This checks what the business owns minus what it owes. Assets include both tangible items like equipment and intangible things like domain names. The formula is simple: Assets – Liabilities = Net Asset Value.
- Revenue-Based Valuation: This focuses on sales revenue. We take the business’s revenue and multiply by a ‘multiple’. This multiple varies by industry and growth potential. For instance, $500,000 in sales could range from $500,000 to $1.5 million depending on the multiple used.
- Profit-Based Valuation: This method uses profitability metrics like EBIT or EBITDA. EBITDA is similar to EBIT but excludes non-cash expenses, like depreciation. If a firm has $500,000 in sales and $100,000 in EBITDA, with a multiple of 5x to 10x, valuation would range from $500,000 to $1 million.
- Discretionary Earnings Approach: This one uses SDE again. It’s the owner’s pay plus profits, multiplied by a factor between 1 and 4, based on risk level.
Value Vibes: Factors That Pump Up (or Plunge) Business Value
Online businesses vary in value. Here are key factors influencing worth:
- Profitability: Profitable businesses are worth more. High profits equal high valuation.
- Growth Potential: Growth potential attracts buyers. Businesses on the rise seem promising.
- Industry: Some sectors, like tech, have higher multiples than others.
- Customer Relationships: Loyal customers enhance worth. A strong customer base boosts future revenue.
- Owner-Reliance: If a business falters without the owner, that’s a warning sign. You want a self-sufficient business.
Examples in the Wild
- Simple Asset Valuation Example: Co A has assets worth $500,000 with $100,000 owed. Net asset value? $400,000.
- Revenue Multiple Example: Co B has $500,000 in annual sales. The valuation could be from $500,000 to $1.5 million depending on multiple applied.
- Profit Multiple Example: Co C has $500,000 in sales with $100,000 EBITDA. The valuation would range from $500,000 to $1 million at a 5x to 10x EBITDA multiple.
Pro-Tip Alert: Don’t DIY Your Valuation (Unless You’re a Pro)
While these methods are helpful, for precise valuation especially when buying or selling, consult professionals. They know their stuff, similar to seeing a doctor instead of guessing on WebMD. Trust those with experience.
Hot Online Business Tickets: Where’s the Profit Party At?
Now that you understand valuation, what types of online businesses actually make money? Here are some lucrative online ventures.
- E-commerce: The Reigning King (or Queen): Selling products online remains strong. Sites like Shopify simplify everything. The trick? Focus on niche markets. Avoid trying to sell everything to everyone.
- Digital Products: Low Overhead, High Potential: Ebooks, courses, templates, software – digital products offer low costs and high income potential. Create once, sell multiple times.
- Affiliate Marketing: Piggyback on Popularity: Want an easy entry? Promote others’ products for commissions. It requires low investment. Choose products you believe in for better audience trust.
- Online Courses and Training: Share Your Genius (and Get Paid): If you’ve got knowledge, use it! Create online courses to teach others and generate revenue.
- Freelance Writing/Design/Development: Skills for Bills: If you have skills like writing or coding, freelancing can be profitable and flexible.
- Content Creation: Blog, Vlog, Podcast – Monetize Your Voice: Create content on platforms like blogs or YouTube and earn via ads or sponsorships. Building an audience takes time but has lasting benefits.
- Social Media Influencer/Marketing: Become the Brand Whisperer: Cultivate a following. Partner with brands to promote their offerings. Genuine connections lead to lucrative opportunities.
Funding Your Online Dream: Show Me the Money!
You found an ideal online business to purchase. How will you fund it? Most need financing unless you are fortunate enough to have cash handy.
Business Loans: The Classic Approach
Traditional business loans are available for purchasing online ventures with cash flow. Many lenders exist online and offline that offer loans. Compare rates and terms just like any major purchase.
SBA Loans: Government Backed Goodness
SBA loans are partially backed by the government. This lowers lender risk and eases access for borrowers. Research requirements to prequalify for lower rates, taking note of associated fees.
Down Payment: Skin in the Game
Lenders generally expect a down payment if you want favorable terms. More down means better conditions for your loan agreement. Think ahead about how much you can afford.
Show the lender your commitment. Have some skin in the game. Less borrowing means less interest. A win-win.
Startup Business Loans: Money Mirages?
No money to start? It’s tough but not impossible. Here are some options. They may require hustle or a slice of your future pie:
- SBA loans: Yes, for startups. Expect strict requirements. You may need collateral or strong credit.
- Business credit cards: Good for small expenses. Watch high interest if you carry a balance. Rewards points can be nice!
- Microloans: Smaller loans from non-profits. They aim at startups and small businesses.
- Crowdfunding: Pitch your idea online. Get contributions from many. Think Kickstarter or Indiegogo.
- Invoice financing: Have invoices? Borrow against them for immediate cash flow. More for businesses with clients.
- Equipment Financing: Need equipment? Finance it instead of a whole loan.
- Merchant Cash Advances: Advance based on future credit card sales. Convenient, but often high fees.
- Grants: Free money! Fiercely competitive. Often have specific criteria. Worth looking into but don’t rely on them.
- Angel Investors: Wealthy individuals invest in exchange for equity. Be prepared to give a piece of your company.
- Venture Capital: Firms invest in high-growth startups for significant equity stakes. Ideal for ambitious businesses.
The Price Tag of Pixels: Costs to Run an Online Business
An online business isn’t free, despite some “gurus.” Let’s break down costs.
Variable Costs: The Flux Capacitors of Expenses
Variable costs change with business activity. Some online businesses start super lean – just a domain name and hosting. Others need inventory, marketing, software, or virtual assistants to manage chaos.
Website and Store Setup: Building Your Digital Real Estate
Website development costs vary. DIY with templates is cheap. Custom designs by a top agency? Expect high costs. Setting up an online store has its own costs – e-commerce platform fees, payment gateway fees, and necessary apps or plugins. A website is your storefront; make it inviting.
Legal Lasso: The LLC Lowdown
LLC stands for Limited Liability Company. Sounds serious. Do you need one to start an online business? Nope. Can you form one later? Yes. Should you consider it? Probably, especially as you grow.
LLC: Your Business Bodyshield
You don’t have to start with an LLC. Operate as a sole proprietorship if you want. Forming one is smart for risk management once you earn money. It separates personal assets from business liabilities. Think of it as a safety net.
LLC Perks: Why Bother?
Advantages of an LLC? Limited liability protection, pass-through taxation, and enhanced credibility with customers. It makes your business look legitimate.
Taxing Times: Income and Self-Employment Taxes
Online business income is taxable, like any other income. You’ll pay income tax and self-employment taxes (Social Security and Medicare taxes). Plan ahead to avoid surprises come tax season. Open a separate business bank account to simplify accounting. It looks professional too.
Post-Game: After You Seal the Deal
You’ve bought the business. What’s next?
Bank Account Shenanigans: Who Gets the Money Pot?
When purchasing a business, does the bank account transfer? Usually, yes. Funds in the bank are part of the assets. But it varies by sale agreement. Read the fine print.
Asset Sale vs. Stock Purchase: The Legal Labyrinth
In asset sales, you buy specific business assets – website, customer list, inventory, or bank account balance. In stock purchases, you buy the entire company, including liabilities and bank accounts. Asset sales are cleaner and common for smaller businesses. Stock purchases are complex.
Transferring the Bank Account: Smooth Moves
Transferring a bank account usually involves notifying the bank, providing sale agreements, and setting up new account access. Specifics vary by bank but your lawyer and accountant should assist. Don’t neglect this step – access to funds matters!
Easiest Entry Point: Dip Your Toes In
Want to start online with less hassle? Freelancing, dropshipping, or print-on-demand are easy online businesses to consider. They offer low startup costs, flexibility, and lower risk. Perfect for testing before diving in.
Thinking of buying or selling an online business? Navigating online entrepreneurship can feel chaotic at times. With the right information and a bit of wit, you can build something extraordinary. If you plan to sell your online gem someday, check those valuation tips! Investopedia has a guide to selling your small business. For insights on why buying an existing business is wise, check the University of Arkansas here. Now go conquer the digital marketplace! Try not to lose your shirt or sanity along the way.
