If the coronavirus pandemic has taught us one thing in business, it’s that if you have a business that can’t be shut down you will outperform. In some cases, you might even thrive as we heard from one online business seller of nutrition and home exercise equipment. As a result, online business valuations are going to increase.
The forced lockdowns by our governors and mayors have decimated local businesses like restaurants, gyms, retail stores, and dental practices. Meanwhile, the coronavirus has upended the travel, hospitality, and entertainment industries even if these industries were allowed to open. As a result, unemployment reached a record high.
The value of a business can be calculated by the net present value of its future cash flow. The value of a business can also be calculated based on a multiple of revenue, operating profit, or net profit.
All else being equal, if your business’s earnings are more certain, your valuation multiple goes up and vice versa.
I’m formulating a plan for another online business during this latest recession and I’m absolutely pumped there is now such a huge tailwind!
Online Business Valuations Going Higher
There are many types of online businesses. Common online businesses include e-commerce, social media, courses, product review sites, newsletter sites, and media sites.
Obviously, not all online businesses are the same. Some will be more negatively affected by a pandemic or a recession than others. Some have higher operating profit margins than others. Some are more dependent on certain traffic sources than others and so forth
However, every online business should get relatively more valuable compared to other businesses that are at higher risk of shutting down.
The issue with going through a 3+-month-long lockdown is that politicians will be more emboldened to enforce new lockdowns in the future, whenever there is some type of unforeseen virus.
Therefore, all business owners need to be thinking ahead about how they can make their earnings more defensive in the future. Rolling lockdowns will likely be a way of life for us all.
I’ve already talked about the top 10 reasons everyone should start and own an online business.
Today, I want to talk about perhaps the most important reason to own an online business. It is also potentially the biggest reason for the increase in online business valuations as capital looks to acquire online businesses.
Why Online Business Valuation Multiples Should Increase
The reason why parents are willing to pay a fortune for a college education is to give their kids the chance at a better life. There is no other reason why parents are willing to sacrifice so much energy and time to pay for a degree they know is depreciating in value. Kids are everything to parents. There’s nothing parents won’t sacrifice for their kids.
We know there are wealthy parents out there who are willing to risk prison time to get their kids into better schools. These parents seek status for their children and for themselves.
These parents are also fearful they won’t be able to buy their kid’s way into getting a job. So bribing a college is as close as they can get to helping their children.
Excluding race, the one thing all the parents who got caught in the college bribery scandal share in common is that none of them own a majority share in a company they founded. If they did, they would feel no need to bribe colleges. Why does this matter?
Anti-nepotism policies at all reputable firms.
For example, even if you are one of the eight Senior Vice Presidents at Apple, you can’t just push your child’s way into the firm. In fact, you probably have an even more difficult time than a regular employee getting your child a cushy job at Apple because you are so high profile. There are clear anti-nepotism policies at firms that prohibit the hiring of children of employees.
Now, of course, there’s nothing preventing you from doing a child swap with your friend who is a Senior Vice President at Cisco. You tell your Cisco friend to hire your son if you promise to hire your Cisco’s friend at Apple. You just have to make sure there aren’t any business relationships involved between you two e.g. your friend works at a client.
Let’s say you could buy your child’s way into a reputable firm or the firm you work for. This is an extremely risky move if your child is incompetent. When it comes to business, performance matters. If you are a terrible employee, you will not only hurt the business’s bottom line. You will only hurt the moral of your colleagues and your reputation.
If you are a dumbass in college who slacks off too much, you can still graduate so long as you get a 2.5 GPA or higher. Your incompetence will not negatively impact your fellow students. In fact, your incompetence will help your fellow students get ahead. They will have a greater chance of getting a job with you out of the equation.
Senior Employees With Senior Worries
Given my age, I now have several friends in their 40s and 50s who hold very senior positions at their firms. We’re talking Managing Partner, Senior VP, President, Board Members, and CEOs. They all have kids who are in high school or college.
Despite their seniority, every single one of my friends has told me they cannot hire their kids for a summer internship or a job upon graduation at their firms.
Despite everything they’ve put into their kids, from private grade school, to private sports and music lessons, and private university, they are all worried that their kids will end up graduating from college with nothing to show for. And worse, there’s nothing they can do about it.
Everybody Wants The Illusion Of Control
Control is something everybody wants, especially the richer and more powerful you get. Imagine managing many employees who listen to your direction at work every day. You have the power to hire people, promote people, and lay people off. With so much power, you naturally want the same type of power to help your children.
But thanks to a crap economy and anti-nepotism policies, you have no way to prevent your children from falling through the cracks. If your hands are tied, it’ll pain you to no end that you can’t guarantee the last mile for your children, meaningful employment.
Can you imagine graduating during the last great recession in 2008-2009 and now facing another devastating recession in your mid-30s? It’s hard to recover if you have two great blows in such a short period of time.
The main reason why online businesses will skyrocket in value is due to the ability to ensure your child does not end up broke and unable to launch. Such career insurance is priceless because the love you have for your children is priceless.
Own At Least The Majority Of Your Online Business
It’s not enough to own an online business. You need to own at least 51% of the business and determine the company policies.
If you own at least 51% of your online business and set the company policies, you can hire your children without too much pushback. Some employees may grumble, but they risk losing their position at the firm if they grumble too much.
If you own 100% of your private online business, you can absolutely hire your children. You can pay them whatever they want and give them whatever title they want. To have full ownership means full control. You are more than a King or Queen of your country. You are more like a Demigod who can make the clouds swirl.
The online business world is going the way of owners and freelancers. For 100%-owned online businesses, you can see a scenario where the only employees are family members with a large ownership stake. The rest of the people working for the business are freelancers who just want to get paid for their work, and do not care about climbing the corporate ladder.
Let’s do a case study comparison between a senior corporate employee and an online business owner to see which might be better.
The SVP vs. The Online Business Owner
The senior corporate employee makes $1 million a year as an SVP. The online business owner makes $300,000 a year but owns 100% of his online business. Both have two kids. Which route is better?
If you are the SVP, you’re earning three times as much. However, you might be stressed out every day working 60 hours a week for someone else. You do not have the flexibility or satisfaction to create something on your own. The online business owner with more control does.
Both SVP and online business owner get to earn an income and have shares in their respective companies. The online business owner has a lower income. However, his equity could be worth much more as online business valuations increase.
Further, the online business owner has extra business value that is hard to quantify. Let’s try to quantify it anyway.
Online Business Owner Versus Highly Paid Employee
- Online business value increases by $300,000 – $500,000 because the online business owner feels little need to send his kids to private grade school.
- Online business value increases $200,000 – $700,000 given there’s no need for the online business owner’s child to go to college anymore, including a public college.
- Online business value increases by up to five months of freedom because the online business owner no longer needs to bribe his child’s way into college and risk five months of prison time.
- Online business value increases by $50,000 – $100,000 because the online business owner’s child no longer has to pay for IUI or IVF to have her own children because she was too busy climbing the corporate ladder for the first 15 years after college.
- Online business value increases by $1,000,000 because the owner’s child can start saving and investing in middle school with the money she earns from the online business.
- Online business value increases by infinity because the online business owner is no longer stressed about her child’s financial or career future. By getting the finances and career out of the way, many other worries go away.
Go With Change
Thanks to the lockdowns and the power we’ve given the government to take away our freedom, the way we do business has permanently changed.
The old rules of getting straight As to get into the best university possible to get the best job possible is no longer as effective. Colleges are not lowering the price of a college education as the value of a college degree declines. Therefore, we must change.
When you add on globalization, everybody is out there ready to eat your breakfast, lunch, and dinner! Wage compression is an inevitability and there is likely going to be an elevated unemployment rate for years to come.
We can believe our children will adapt and figure things out on their own. However, there’s no harm in us parents adapting and figuring things out as well.
To Summarize Why Valuations For Online Businesses Will Increase
- Much harder to shut down
- More defensible earnings
- Higher profit margin
- More flexibility from where to run the business
- The ability to supplement traditional education with business education for your loved ones
- The ability to provide employment and purpose for your loved ones
- The increased penetration and adoption of the internet
- There will be a rush of capital looking to buy more online businesses
I know most people won’t even try to start an online business. This is despite the fact that starting has never been cheaper and easier. But after listening to so many immigrant online business success stories, I just can’t help but try again.
My goal is to start another business during this recession. I will report back by 2030 and share how things are going. Online business valuations are going to keep climbing. Thank you America for giving me the chance to try!
If you want to start your own website, here is my step-by-step guide on how. Not a day goes by where I’m not thankful for starting Financial Samurai back in 2009. Back then, it cost me $1,500 to start my site. Today, you can start one for less than $50.
Readers, do you believe the valuation of online businesses will grow in a rolling lockdown world?