June 15, 2011, 11:06 AM

IRCE 2011 Report: Determining an e-retailer’s true value

There’s a blueprint for pricing online retailing organizations.

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Hot social media and online gaming sites might command higher acquisition prices than other e-commerce operations, but online retailers can still pull off a good deal—if they have the right combination of ingredients buyers are looking for.

That’s one of the main pieces of advice Glen Kayll, chief financial officer of Coastal Contacts, No. 117 in the Internet Retailer Top 500 Guide, gave attendees this week while speaking at the Financing Growth workshop at the Internet Retailer Conference & Exhibition 2011 in San Diego in a session entitled "How much is my business worth?"

Because they have different business models, e-commerce companies can be more difficult to value than traditional retail companies. But business-to-consumer e-commerce companies also offer buyers a unique—and valuable—business development opportunity. “Buyers understand the world continues its relentless shift into Internet retailing,” says Kayll. “Internet retailers are a hot commodity.”

In particular, buyers seek companies on a fast track with an excellent growth opportunity, good cross-selling potential and established customers. More important, potential buyers of an online retail organization want to know that the company has a unique value proposition that sets it apart from other competitors. “They want to know what’s in the secret sauce that makes you different,” says Kayll. “They want to know the answer to the question: Is this company capable of moving the needle?”

Coastal Contacts, a Canadian online eyewear retailer, has made several acquisitions over time, particularly in Europe, says Kayll. During due diligence of any acquisition, Coastal Contacts is interested in many factors, but looks particularly close at the management. “Getting to know the owners and management helps you understand if the company is in control of its own destiny,” he says.

Web retailers can follow several steps to make their companies look more attractive to serious bidders, says Jonathan Thralow, a former online retailing executive and now a partner with Tycoons Private Equity Funds. The first step involves raising the company’s public profile. “You need to stand on the street corner and look sexy to draw attention,” says Thralow.

To get the company in shape for potential buyers, any online retailer also needs to get its financial house in order—and disclose certain positive financial results such as growing sales and profits in press releases and other public forums. “The better you look, the higher the asking price,” says Thralow. “You need to get your information out.”

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