Budget and Cost Breakdown
Using actual numbers will make this analysis easier to understand.
For the sake of illustration, let’s take numbers from the previous report of our client which nets $100,000 in profits per year.
Normally, a growing and healthy eCommerce business would be able to sell for 2.5x to 3.0x net income. But because sales have actually declined during the past year, the multiple we’d likely see would be much closer to 2.0x.
So the value of the business would be $100,000 x 2.0x = $200,000.
Let’s also assume that over the course of the next year, we’ll see a decline in net income/revenues similar to that we’ve actually experienced over the last years at around 30%. That’d mean one year in the future, the business would have made $70,000 instead of $100,000.
To create a baseline scenario, let’s look at the total value of the business/any income one year in the future.
Business Value: $200,000
12-Month Income: $70,00
Total Value in 1 Year: $270,000
Assuming we do nothing, in this hypothetical scenario, we’d likely receive $270,000 in value from net income + the value of the business (if we wanted to sell it) over the next year. But in fact, it’s less, as we have below $70,000 in 2018.
Now that we have a baseline, let’s pencil out some rough numbers for a redesign and rebuilding scenario.
Let’s make the assumption that the redesign will result in a 50% increase in revenues/profits. This may seem high to many, but as our experience shows it’s a realistic projection.
In the past, this is the minimum increase we’ve seen for established businesses.
A 50% increase in net profits would mean $150,000 in hypothetical net income for the business in the coming year.
From a valuation standpoint, not only would the net income increase but so would the multiple used to value the business. Because revenue growth was on the upswing once again, you’d likely be able to get a 2.75x multiple vs. the 2.0x one you received for a shrinking business.
The combination of the increased income plus improved multiple makes a big difference. The value of the business would be $150,000 x 2.75 = $412,500, more than 2x the value of the business under no redesign.
To create a redesign scenario, let’s look at the total value of the business/any income one year in the future.
Business Value: $412,500
12-Month Income: $150,000
Total Value in 1 Year: $562,500
Calculating the ROI
In summary, here are the two hypothetical scenarios of business value generated:
- Optimystical value with doing nothing: $270,000
- Value with Redesign: $562,500
- Potential Value Upside with Redesign: $292,500
So we’ll see a hypothetical increase of $292,500 in generated business value if our assumptions about the redesign are correct.
Would you risk $50,000 for redesign and rebuilding if you thought you had a better-than-not chance of earning an additional $292,500 within a year?
Of course, you would! It’s nearly a 6x return on your investment in 12 months.
Even if we saw just a 20% increase in conversion, you’d still likely come out $120,000 ahead over the course of one year.