How your online presence affects business value

How your online presence affects business value

By James Price, BBM, FAIM

2 jpabusiness.com.au +61 2 6360 0360

Table of Contents

Introduction ........................................................................................................... 3

Chapter 1: Three reasons why online is not an option ............................................ 4 Don’t get left behind ........................................................................................................................................... 5 Web Marketing That Works ........................................................................................................................... 6

Chapter 2: Positioning your business in the online world ....................................... 8 What if I like my ‘geography’? ....................................................................................................................... 9 First steps to positioning your business in the online world ......................................................... 11

Chapter 3: How an online presence impacts current and future business value .... 12 Valuing an online business ........................................................................................................................... 12 Valuing 101: Understanding earnings multiples ................................................................................ 14

Chapter 4: Why Facebook paid billions for break-‐even online businesses ............. 17 How did this happen? ..................................................................................................................................... 17 Facebook’s strategic acquisitions ............................................................................................................. 18 Financial business health factors important, too ............................................................................... 19 $19 billion – what a bargain! ...................................................................................................................... 21 Opportunities to enhance business value exist, online and off ..................................................... 22

Disclaimer: The information contained in this eBook is general in nature

and should not be taken as personal, professional advice.

jpabusiness.com.au +61 2 6360 0360 3

Introduction Some of our readers may have heard that Facebook, the world’s most successful and prevalent social media platform, has paid an extraordinary amount of money for two relatively young, online businesses.

Those businesses are WhatsApp, which is a messaging, photo and video sharing mobile application, and Instagram, a popular mobile-based photo sharing site.

Facebook shelled out $19 billion for WhatsApp in February this year, after paying $1 billion for Instagram in April 2012.

These are both businesses that currently would not be reporting positive earnings. How did this happen?

Why online is a necessity, not an option

In this eBook we’re going to examine why an online presence is a necessity, rather than an option, for business.

We’ll share some tips from Bluewire Media web marketing strategists Adam Franklin and Toby Jenkins on how to position your business in the online world, and talk about the way basic business principles still apply, both online and off.

In the second half of the eBook we’ll discuss how an online presence impacts the value associated with businesses and tease out some of the reasons Facebook was attracted to WhatsApp and Instagram, and why their value is as it is.

http://www.bluewiremedia.com.au


Chapter 1: Three reasons why online is not an option I used to think ‘online’ just meant a website and this website existed independent of and outside the business – kind of like a revolving planet outside our little galaxy – with no relevance to the day-to-day activity of the business.

When we established our first website more than 10 years ago it contained fairly basic information on our business. We used it to advertise our clients’ businesses, but otherwise it was static – like putting an ad in the Yellow Pages. We thought some people might access it, some might not, but it was there – we’d ticked that box!

I’m here to tell you that in business today, the ‘online’ world is central to business success and online means much more than creating a one-dimensional ‘brochure’.

Today our online presence extends across a number of social media platforms, and our website is regularly updated with useful information relevant to our clients and potential clients.

We’re still ‘babes in the woods’ when it comes to understanding and using the digital world as a tool in our business, but the results speak for themselves.

Since focusing on ‘quality’ online activity and extending our network utilising this tool, we’ve attracted and won clients located throughout Australia, as well as the USA, New Zealand, Japan and the United Kingdom.


Don’t get left behind

Online technologies, how customers use them and how a business leverages them, are integral to business development and growth.

Imagine if one of the big four banks had sat back in the early 90s and said: “There’s no way we’re going to put our accounts online – that’s too impersonal – we only want people to deal with us directly.”

As well as missing out on huge cost savings (the banks’ cost-to-income ratios have gone from high 60% to sub 50% over the same period), that bank would have become irrelevant to its customers because online banking – like much online commerce – has been a consumer-led phenomenon.

That leads us to the 3 reasons why online is not an option, but a necessity:

1. The customer is always right If you don’t embrace the online opportunity, the risk is you will miss out on a range of customers who are embracing it for themselves. Growth in online business is being led by customer actions and their behaviours regarding purchasing, seeking and sharing information.

2. Everyone else is doing it If you’re not online, there’s a good chance your competitor is, or soon will be.

3. Endless capability It doesn’t matter what business you’re in (retail, heavy industry, services, wholesale or manufacturing), if you’re still thinking of your website as a ‘revolving planet’ that sits outside your business – like I used to – then you’re doing yourself a disservice.


An online presence has the capability to:

• Extend the traditional elements of your business, in a cost-effective way, across a wider, relevant audience and/or geography;

• Act as an enabler just like other enablers, such as employing a business development person, getting a new accounting software system or undertaking a brand marketing program for a new product release; and

• Provide a tool to allow you to identify key customers and/or audiences relevant to your point of difference and value proposition.

Online technology is not a silver bullet for achieving all-conquering financial and business success – but it can have a silver lining!

So don’t be blindsided by leaving ‘online’ as a revolving planet outside your business. Embrace it and think about how you can use it to best effect.

Web Marketing That Works

Our business is now 13 years old and in the 10 years since we established our first website we’ve spent time and money experimenting with our online offering.

Just as business valuation is not an exact science, neither is online, because it depends on customer behaviours, how Google and other search engines rate your online offering, the strength of your network and database, relevance of the information and your value proposition, your service levels and delivery and fulfilment capability, and so on.

We’re constantly trying different ways of enhancing our offering in both the online and offline space, and as part of that exploration we came across the team from Bluewire Media.

We asked them to do a ‘health check’ of where we were placed in terms of our use of online technologies and how we could enhance those over time to assist us meet our business objectives.



We’ve got a lot of value out of the Bluewire Media boys, Adam Franklin and Toby Jenkins, so we’re happy to share the news they’ve just released a book called Web Marketing That Works.

Toby and Adam have spent close to a decade ‘in the marketing trenches’ and they’ve documented their findings in the book.

Given we’ve experienced and tried a number of the tips and tools in their book, we’d highly recommend it as an essential read for a business owner looking to embrace and understand how online platforms and marketing can be advantageous and, importantly, how to get the best value out of your online spend.

As a bonus the book also includes a free download of their 33 popular marketing templates “proven to master social media, conquer content and attract customers online”.

The book is officially out in bookstores around Australia or you can order it online.

http://www.bluewiremedia.com.au/web-marketing-that-works-book




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http://au.wiley.com/WileyCDA/WileyTitle/productCd-0730309274,descCd-buy.html?cm=widget


Chapter 2: Positioning your business in the online world We’ve talked about why online is a necessity in business today, but is it only a necessity for certain types of business?

Is it simply a tool and a platform for a business selling products, such as a retail or wholesale business?

Or is it a tool for any business, whether it is a home-based business, a traditional retail business, a services or engineering business?

I’d argue online is relevant for all business and that’s because, while geography is blurred, the basic principles of good business apply.

Here’s an example:

Recently a client contacted us who has set up a home-based, online business providing services and special deals of interest to families.

The business suits her because she has a young family and can work from home, and the product offering is also aligned to her own experience of family life and family needs.

The business now has a large subscriber base of advertisers who sell family-friendly products and services offering to enhance family lifestyles. The owner has created a portal for families to look at hand-picked offerings relevant to themselves and their lifestyles.

She doesn't provide the offerings – she essentially coordinates a ‘chat room’ for people to talk about the offerings, then search them in an exclusive way, relative to the advertisers subscribing to her site.

Stock management is decentralised with the product/service providers, rather than in a traditional retail business where inventory is held on site.

The business operates out of a small home office in a regional location. There is no passing ‘foot traffic’ but it has well over 60,000 likes on Facebook (in just over two years of operating) and is a highly sought-after online business.


Why is this online, home-based business so successful?

Because the owner has nailed some of the most important principles of good business:

• Point of difference • Products/services and

content of relevance to audience

It’s no different to the principles that apply to a successful, traditional, offline retail store.

Successful businesses are ones that provide a point of difference and products that are relevant to the customer base interested in browsing.

Their geographic position may make it easier, but they have to pay more rent for preferred positions.

In our example of the home-based online business, the point of difference is that the owner has done the hard work of bringing together the relevant offerings for the customers – the online component means the barrier of geography no longer exists.

What if I like my ‘geography’?

You might say:

I’m the owner of a steel metal fabrication business located in Dubbo in western NSW and I only want to deal with people within the town boundaries of Dubbo.

Dubbo has a population of 41,000 and I’m happy with the size of that audience. I can meet with them, put an ad in the paper, send them a letter – I don’t need an online presence.


It’s fine to impose your own geographic limit on your preferred audience, but the fact is a large percentage of that audience – your potential customer base – are changing their purchasing and researching behaviours.

When they get home from work to relax, they’re playing with their mobile devices, looking at photos and information about products or services they’re interested in.

They’re doing their early stage purchasing research online. They’re looking at chat rooms, commendations, reviews, what bloggers have said about companies, products, services and issues.

That’s helping them distil where and what they want to purchase.

It doesn’t mean they’ll consummate the purchase at arm’s length and never go into your store or business premises. It doesn’t mean they won’t eventually contact you directly.

What it does mean is that they’re usually a lot wiser and more prepared when they do make contact.

Think of your online presence as part of the sales and relationship funnel.

If you’re in Dubbo and just want to deal with the Dubbo region, make sure you have an online platform in your marketing ‘funnel’ to help those customers find their way to you.

It may well mean that your eventual contact with the customer will be via the traditional form of business development, such as a face-to-face meeting, or a phone call followed by information provision or a quote.


But rest assured that before this ‘old-fashioned’ meeting takes place, many potential customers will have done their research online.

If your business, product or service is not positioned in that universe, you’re missing out.

First steps to positioning your business in the online world

We asked online marketing strategists Toby and Adam from Bluewire Media for their thoughts on the first steps you should take to establish an online presence for your business. Here’s their response:

Step 1

Be clear on who your ideal buyers are because this forms the strategy behind what you will be doing. The idea is to describe your ‘buyer persona’ in great detail and give them a name.

Here’s an example:

Our buyer is ‘Nicola’ who is a marketing manager at a company dedicated to being No.1 in its niche. She has an interested CEO and supportive IT team. Nicola aspires to ‘webify’ her marketing efforts and faces the challenge of understanding how to do content marketing and how to use all the new social media platforms.

Step 2

Once you are crystal clear on your buyer persona and what problems they have, you can create content like blog articles, reports, eBooks, templates, videos, webinars and podcasts that help them solve those problems.

You can then share this content freely and generously on social media platforms like Twitter, LinkedIn, Facebook and Google+.

To help you with this, you can download the Web Strategy Planning Template.

This is the essence of content marketing: solve problems, be helpful, be generous and your buyers will come flocking to you.


http://www.bluewiremedia.com.au/web-strategy-planning-template


Chapter 3: How an online presence impacts current and future business value When we look at the value of a business today, one of the things we consider is the extent to which the business – the name, brand and services – is known by audiences.

That audience must be relevant to the service the business is providing and may contain existing customers or potential new customers.

Google is an example of a business that has received the ultimate compliment from its audience in terms of business valuation.

When people think of ‘Google’ they’re generally not thinking of it as the name of a business; in the psyche of customers ‘Google’ means a search process or tool i.e. ‘I’ll just google that...’

In my book, that’s the ultimate compliment and the ultimate tick to a business valuation: when customers use your name to describe their behaviour.

Valuing an online business

Valuation is not an exact science. There is a degree of objectivity and market comparison regarding a valuation assessment, but there’s also a degree of emotion and subjectivity around it.

After all, beauty is in the eye of the beholder.

These days online companies have added another layer of complexity to business valuations and it is a tricky area, because there is some subjectivity and future projections involved in people’s behaviour in the online space.


However, generally customers are becoming increasingly sophisticated in the way they seek and share information online to determine whether they wish to buy a product or service, or recommend one, and we can use this behaviour to inform our valuations.

Gauging a business’s online position

These days when we value a business in any industry we consider the usual elements such as physical location, customer base, product offering, point of difference, financial and business performance, people and so on, but we also look at how they are positioned online.

Their online ‘position’ includes:

• What people are saying about them, as well as what they’re not saying about them;

• How high they rank in organic searches; • If there are positive or negative reviews about their services; • How frequently they appear in relevant searches or, if they don’t

appear, which of their competitors appear; • The size and activity of their online database.

Database – key component of value, online and off

One of the components of a business valuation is a database of prospects and customers, which signifies the potential of a business in terms of prospects the business may have to transact with into the future.

A large database is often held up by a business vendor as proof of value and goodwill.

Size doesn’t matter? Well actually it does, but quality wins every time!

In terms of business value we don't just look at the size of the database, but also the quality – the actual users of the product or service – because that interaction is a direct proxy for what the database thinks about the business’s offering.


Quality database ranks high in online space

Online businesses are often valued more on the size of their database and regularity of those users interacting with the content or product and service offered, than the actual financials of the business.

In the next section, we’ll talk about the valuations of WhatsApp and Instagram and why Facebook was so attracted to them.

One of the reasons is the number of users and potential users both those businesses have and the type of users they bring to Facebook – not necessarily the financial performance of the companies.

Valuing 101: Understanding earnings multiples

We’ve talked about this in previous eBooks, but businesses are typically valued using:

• A discounted cash flow analysis, or• A multiple of business maintainable earnings (BME), or• Net tangible assets of the business.

In the first two, and particularly with multiple of BME, the market will normally say there’s a range of earnings multiples.

For a small to mid-sized private business that is an add-on type business, the multiples may range from 1.5 to 4 times BME.

So we can say: “Clothing Shop A has BME of $300,000 per annum and, as we know that like businesses have sold in a range, we think the value is somewhere between 2.1 and 2.8 times BME.”

The difference between 2.1 and 2.8 is a big number – in this case it’s 0.7 times $300,000, which is $210,000.

So how do we determine the value – is it 2.1 or 2.8?


Assessing business health factors

In order to determine value we need to assess the business health factors, which may include:

• Size and quality of database• Online presence and quality of online interaction• Staff• Product• Physical location• Quality of financial earnings (steady or fluctuating over past three

years)• Diversity of clients• External pressures on industry• Point of difference• Future projections and prospects

These business health factors are about asking: ‘If I take over this business today is it healthy, or will it catch a cold in the first 30 days?’

If Clothing Shop A had a 2000-strong database and 500 were regular users who spent over $150 each year, that would be a tick in terms of health factor.

That, in isolation, would move the multiple of that business closer to the 2.8 times than 2.1 times BME.

But you need to think of each health factor on a sliding scale, each sliding between 2.1 and 2.8.


Beauty is in the eye of the beholder

While each health factor moves along a sliding scale, they will also be ranked in different orders of importance by different potential buyers.

The reason there are values in the market that don’t seem to add up is that some buyers will place a much higher value ranking on certain health factors than others.

When we do a valuation for a client looking to sell their business, we try and make assumptions about the target market for the business and what those potential buyers will be looking for.

We ask ourselves ‘which health factors are of most importance to potential buyers?’:

• Will they be looking at this purchase as an add-on business, which means a seamless transfer and synergies is most important?

• Or would it better suit a stand-alone business operator who would be more interested in their likely rate of return?

As we will discover in the next chapter, when it came to ‘health factors’, Facebook ranked the databases of WhatsApp and Instagram much more highly than it did their financial performance.


Chapter 4: Why Facebook paid billions for break-even online businesses As we outlined in the introduction, Facebook has recently paid an extraordinary amount of money for two relatively young, online businesses.

Those businesses are WhatsApp, a messaging, video and photo sharing mobile application, and Instagram, a popular mobile-based photo sharing site.

Facebook paid $19 billion for WhatsApp in February this year, after paying $1 billion for Instagram in April 2012.

These are both businesses that currently would not be reporting positive earnings – at best they’re breaking even.

How did this happen?

To understand why Facebook valued these businesses so highly, we need to recognise that, when conducting a valuation, a business’s health factors are divided into two key categories:

• The strategic framework, and

• The financial and business performance of the business.


Facebook valued WhatsApp at $19 billion, not because of its financial performance, but because the acquisition gave them a strategic advantage – it gave them a quality online database in a market they were targeting.

Facebook’s strategic acquisitions

When assessing the value of an online business some of the most important strategic health factors and issues include:

• Size and quality of database;• Online presence and quality of online interaction, and• How others in the online space are interacting with customers and

audiences, including their point of difference.

Over the past few years Facebook has become concerned about the loss of users and potential users aged in their teens and early 20s, because that demographic tends to be more interested in mobile technologies than PCs.

At the same time mobile-based applications, like WhatsApp and Instagram, have developed very large user bases, specifically targeting this same audience.

For instance, in February this year WhatsApp had a reported user base of 450 million people. Instagram, when it was sold to Facebook back in April 2012, had a user base of 33 million – it’s now reported to have a user base of 150 million.

But it’s not just the big numbers.

As well as having large databases these applications have ‘quality’ users – people in the demographic Facebook wanted to secure: the tweens, teensand early 20s.

These are people Facebook saw as strategically important for their future – they also saw competitors grabbing these users’ attention and behaviour.


Facebook was prepared to step in and pay an enormous sum of money for these businesses because it put a high value on specific ‘strategic health factors’, i.e. their database and quality of online interaction.

Put another way, it was an aggressive move to remove a competitor that threatened Facebook’s core business.

Financial business health factors important, too

Facebook wasn’t too fussed that, at the time of purchase, their new acquisitions weren’t making a profit.

What they were more interested in was stemming the tide of loss of a particular age group of customers and strategically positioning themselves with applications to attract those customers.

However, don’t for one minute think Facebook didn’t assess what the potential value would be – in a financial sense – from buying those businesses.

Just like a discounted cash flow analysis, that value assessment was based on future revenues and earnings, the growth trajectory of those earnings and the risk of achieving positive earnings in the future.

Revenue potential from online businesses

If you look at the financial aspects when valuing an online business, there are usually three levels of revenue generation:

1. Advertising revenue; 2. Transaction revenue (i.e. products and services sold), and 3. Subscription-based services.

Typically online businesses will look at revenue per user on a daily, monthly or 12-monthly basis to assess how active the user is and whether the business is enhancing their revenue per user over their cost base.


As valuers, we also look at the actual earnings – the business maintainable earnings (BME) – even though some don’t consider BME relevant when valuing online businesses.

Often, when valuing a traditional small or mid-sized business, the valuation involves first looking back at how the business has performed over the last three years, and then sketching out future projections, usually only for indicative purposes as a health factor.

Online business valuation is more about looking at how the business may perform or is projected to perform in the next one to 10 years, given the user base, user activity, demographic, the relevance of content, it’s ranking in search engines and so on.

WhatsApp is growing at one million users a day and in 12 months time they’re projected, by some commentators, to have one billion users.

After 12 months of using WhatsApp, users pay a subscription fee of 99 cents per annum. That means Facebook’s revenues from one billion users will be about one billion dollars per year, apart from future growth in the user base.

In Facebook’s eyes, there are future profits to be made, even if they don’t know exactly what they are and there is a risk and return equation around them.

So while strategic factors were critical in Facebook’s purchase of WhatsApp and Instagram, financials were still important and they had a positive view about future earnings.


$19 billion – what a bargain!

It’s interesting to look at relative valuations of Facebook, WhatsApp and Instagram at the user level (i.e. what the valuation of each equates to on a $/user basis – see graph above).

Facebook has 1.28 billion users and is estimated to be trading at a market valuation of approximately $117/user.

The WhatsApp purchase for $19 billion equates to $42/user, and the 2012 Instagram purchase for $1 billion equated to $30/user at the time.

So maybe Facebook got a good deal! History will tell.


Opportunities to enhance business value exist, online and off

If you’re in business with either a significant online business model or a more traditional offline-based business, and you’re leveraging some online technologies, the principles of valuation discussed here are all relevant to how the market may assess the value of your business.

There are also opportunities to focus on areas to enhance business value by underwriting the Business Maintainable Earnings, and making sure the health factors that are important to you and/or potential suitors show a sustainable value proposition into the future.

How your online presence affects business value

Business

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