The Bare Minimum You Need to Exit Your Business for $1,000,000
November 2, 2022
Want to see how your business would look if it was worth one million dollars?
Many factors influence the value of your business, but you can get a good idea of how close it is to that million-dollar mark by using the following formula:
Average monthly net profit over 12 months X valuation multiple = business value
Your net profit is the capital you take home after all business expenses. It sounds simple, but what you can classify as “expenses” can be a bit confusing.
Your valuation multiple is a figure calculated from an analysis of the health of your business as an investment asset. It’s essentially a business rating; the higher the multiple, the more likely the business is to generate a return on investment (ROI) for an investor, therefore, the more the business is worth.
Most businesses have a valuation multiple between 30-45X (except SaaS businesses which have multiples as high as 70X+).
We can invert this formula to see how much your business needs to be earning for it to be worth one million:
$1,000,000 = 40 X $25,000
So there you have it. Start earning $25,000 a month from your business and you’ll become a millionaire…If only it were that simple.
As aforementioned, numerous factors impact which multiple your business gets when undergoing a professional valuation, including its age, sales history, and monetizations. So, if your business instead has a 30X multiple, you’d need it to be generating $33,333 per month for it to be worth one million.
Which raises the question: what do I need in my business, all valuation factors considered, for it to be worth $1,000,000?
That’s what we’re going to discover today. We’ve collected data from the sales of 68 million-dollar online businesses we’ve sold over the past three years to give you insight into how they’re built so you can have some tangible targets to aim for.
A Quick Rundown On How Your Business Is Valued
Valuing businesses is not a game of averages and comparisons; it takes a deep analysis of the operations and profitability of a business to understand its true value. For example, we conducted a valuation study in which we compared one business that was making $2,776 a month to another business making $8,535. Even though the second business was earning $5,759 more every month—which is $68,108 extra per year—it was only worth $2,000 more than the first business.
This is why we advise against comparing your business to others when deciding on its valuation. Nevertheless, in this study, we did notice some commonalities between the million-dollar businesses that we’re going to share with you.
But first, we need to get a grasp of the basics of how valuations work to be able to understand what you need to get in place in your business for that dream exit.
Business Valuation Factors
There’s a reason we use the average of your business’ net profits over 12 months.
A 12-month average accounts for any seasonality or spikes or dips in profits your business may have experienced over the year. It tells an accurate story of your business’ earning power.
That said, there are situations where we use an 8-month or even a 6-month average. When a business is growing or declining rapidly, we’ll use a shorter timeframe as that timeframe more accurately reflects the current state of your business.
As for your business multiple, there are a few more factors at play.
They can be broken up into intangible and tangible factors; intangibles are factors open to interpretation, but they’re based on facts and data; tangibles are facts, data, and business assets.
For example, defensibility is an intangible factor because it takes a professional evaluation of the business to determine how defensible a company is against market conditions, laws and policies, and competition. A professional valuer will look at tangible elements of your business, including its traffic and income sources, assets like trademarks, and its age to decide how defensible it is.
Examples of intangible valuation factors:
- Defensibility – how well your business will be able to withstand external factors that can impact business performance, including market changes, competition, and account bans
- Brand strength – how well-established your brand is within its niche, its reputation, and its uniqueness
- Operability – how easy it is to operate your business, including whether there are opportunities to outsource or automate tasks
Examples of tangible factors:
- Growth/decline trends – consistency of profits over the past 12 months
- Business model – how the business is monetized and through which channels/platforms
- Business age
- Niche
- Traffic figures
- Number and quality of product and brand reviews
- Ranking in Amazon or Google – including which keywords your brand is ranking for
Examples of business assets include:
- Trademarks
- Physical or digital products
- Contracts – with suppliers, affiliates, or employees
- Email lists
- Social media accounts
- Warehouses
The evaluation of all of these intangible factors and tangible assets is how a professional valuer calculates the multiple for your business. The amount and quality of these assets and how they’re integrated into your business determines how high your business multiple is, as these assets determine how strong your business is, how likely it is to remain profitable, and for how long.
Considering all of these factors, are there any commonalities that million-dollar businesses share? Let’s see.
What A Million-Dollar Online Business Looks Like
Our data focuses on ecommerce businesses and content sites that are monetized through traditional ecommerce, Amazon FBA and FBM, affiliate, Amazon Associates, and display advertising. We’ve separated the findings into ecommerce and content site business models because there are some key differences between the two that affect how they’re valued.
A Million-Dollar Ecommerce Business
When valuing an ecommerce business, operability is the main factor we look at. Operations can make an ecommerce business sail or crash (stockouts are one of the biggest fears for a business buyer.)
The core of this business model is its operational backend, which includes its relationships with suppliers, its logistical process of fulfilling orders, its inventory management, and the quality of products.
Buyers are looking for a business built to last. That’s why most of these businesses were in evergreen niches: home, health & fitness, and outdoors.
Over the time the business has been running, how the owner has built it determines its value today.
Operability
Most business buyers aren’t looking for a day job. That’s why it’s important to set up your operations so it only takes you a few hours per week to run your business.
The average hours required to run these businesses was 12.47 per week.
To get the businesses to this point, some owners hired employees, virtual assistants (VAs), agencies, or sourcing agents, and others automated operations with tools. Eight businesses had VAs, 26 had employees, with some having a mixture of service providers, employees, and VAs.
If you’ve managed to build your business where it requires minimal input from you without any employees, then you’re sitting on a goldmine—assuming your business also performs well.
Employees are costly and require some management, so having a mostly hands-off business without them is best. However, if you’re spending many hours running your business, you should hire employees, service providers, or VAs to outsource some operations.
While this will increase your expenses and reduce profitability, it will still make your business more valuable because an important valuation factor is how easy it is to acquire and run your business. If it takes 60 hours per week and you’re handling inventory and running all other operations, then few buyers will be interested in acquiring your business.
The most common operations outsourced by business owners included:
- Inventory management
- Product sourcing and quality control
- Product design
- Product listing management
- Customer service
- Amazon PPC account management
- Off-Amazon marketing, including social media management
- Accounting and finances
Buyers want your business to be as passive as possible so they can focus on growth to generate an ROI on their investment. As you can probably imagine, they’re all about the numbers.
Figures & Finances
The first thing we look at when evaluating your business finances is its trends.
The history of your business sales data is a strong indicator of your business’ potential future performance. More so than arbitrary growth opportunities that don’t have any hard data to back them up. Trends tell the current state of your business, so your business is most valuable when it’s on an upward trajectory.
Many sellers want to hold on at this point and wait to sell their business for more money as it earns more, but this is dangerous. We’ve had sellers do this and lose $300K on its value because the business declined instead of grew.
Out of the businesses sold in this study, 31 were on a slight growth trend, 27 were on a big growth trend, 10 were steady, one was slightly declining, and one was declining significantly.
The average monthly net profit across all businesses was $69,701.56. The lowest-earning business was bringing in $18,150 and the highest-earning business was bringing in $282,930.
The average profit margin was 29.8%, with the lowest being 16% and the highest being 49%.
The average sale multiple for these businesses was 43.31X, so based on these numbers, your business should be generating around $77,480 per month in revenue, retaining 29.8% of that for $23,089 in profit to be worth one million dollars.
But let’s not forget the other factors that come into play.
Assets
If you’re running a traditional ecommerce business on a platform like Shopify or WooCommerce, then the quality of your site as an asset and its presence within Google are important valuation factors.
The average monthly site visitors ecommerce stores were bringing in was 19,089. The lowest amount of traffic that likely came to a secondary store for a predominantly Amazon-based business was 294, and the highest was 150,463 visitors per month.
Another asset is your products. The businesses in this study had an average of 63.9 stock-keeping units (SKUs). The lowest number of SKUs was 2 and the highest was 766— note: we removed one anomaly business that was selling 1,747 SKUs from this data set.
To make their brands defensible against competitors, all except for six had trademarks and all except 11 were registered with Amazon Brand Registry.
The majority of businesses in this data set didn’t have supplier contracts, but it is desirable to have them as it makes your business more defensible. Having them could significantly increase your business multiple as it eliminates the risk of your supplier increasing their rates once the new owner takes over. Alleviating this fear means buyers will be willing to pay more for your business than if you don’t have those contracts in place.
A Million-Dollar Content Site
Presence within the niche and defensibility against Google and competitors are the most important valuation factors for content sites.
Google updates are a buyer’s worst nightmare for this business model, so they want to know your site will be able to handle them after they take over your site. A strong traffic and earnings history over several years indicates your site will be a safe investment.
Site History and Performance
The average age of the sites in the study was 7.1 years. The youngest site was 3 years and 2 months old and the oldest was 12 years and 7 months old— note: we removed one anomaly site from this data set as it was 24 years old!
Performance trend is also an important valuation factor for content sites; four were experiencing big growth and the final one was experiencing slight growth.
The average net profit of the sites was $30,616. The lowest-earning site was bringing in $21,444 per month and the highest-earning site was bringing in $40,504 per month.
If we consider the average sale multiple was 40X, your site would need to earn a minimum of $25,000 per month to be worth $1,000,000.
To make potential buyers feel comfortable your site is going to continue earning that much after the sale, they’ll assess your site’s analytics.
The average number of monthly visitors these sites had was 660,251.33. The highest number of monthly site visitors was 1,426,810 and the lowest was 551,859.
The average traffic figures per channel were as follows:
- Organic search – 75.49%
- Social – 16.49%
- Direct – 10.13%
The more your traffic is diversified across multiple channels, the better. It makes your site defensible against traffic outages that can come from Google updates or social media account bans.
Traffic spread across your website is another defensibility factor. The average spread of traffic across the three top traffic pages for the sites in this study was as follows:
- Page 1 – 3.17%
- Page 2 – 2.11%
- Page 3 – 2.10%
While we do sell sites with PBNs, none of the sites in this study had PBNs. They tend to make your site a bit risky. Sites built on white-hat SEO tactics and quality content usually sell for the most.
Business Assets
The lowest DR a site in this study had was 27 and the highest was 65. That’s quite a large range, so this is where other assets come into play in valuations.
Most sites in this study had social media accounts that were significant for traffic or brand reach. Most also had email lists.
Your business’ second most-valuable asset behind its website is its email list. Email is still the most robust marketing channel because it’s divorced from Google’s algorithms and social media account policies. You have control over your audience’s data and you have direct contact with your audience.
Some business buyers will acquire sites just for their email list—that’s how valuable they are. The average number of email subscribers these websites had was 823. The highest number was 78,000 and the lowest was 400.
All the sites had associated employees or VAs who helped with tasks including writing content, posting on social media, designing content, producing videos, and researching keywords and the market. Because the sites had these employees, they only took 10 hours per week on average from the owners to maintain.
The moral of the story for content sites and ecommerce businesses is to make your business as hands-off, defensible, and profitable as possible.
Your Next Steps to Become a Millionaire
You might be looking at this data and thinking your business ticks all of the boxes. If so, then go ahead and submit your business for sale on the world’s largest online business marketplace now.
If it ticks some boxes, you might want to start building your business using these data figures as targets to get you closer to that million-dollar valuation.
Whether you want to exit your business now or in five years, start preparing it for sale now. Start collecting analytics data for your site, have an accountant specializing in your business model do your finances monthly to get a clear picture of your business’ profitability, and organize your operations by creating standard operating procedures.
Doing this will allow you to sell your business quickly when the time comes. The last thing you want is to delay your exit because your finances or analytics are inaccurate.
If you’d like some free, no-obligation advice on how to prepare your business for sale, schedule a professional consultation with one of our expert business advisors. We’ll give you an actionable plan and even check in with you every few months to see how you’re getting on, without any obligation to sell your business with us.
If you’re curious about how much you could get for your business now, then fill out our free valuation tool. It uses algorithms built on data from the sale of almost 2,000 online businesses to give you an accurate ballpark figure.
