Have you ever thought that some day you might sell your business?
For serial entrepreneurs this is the one of the first things they think about before they even get started.
For mortals who may have set up a business just to survive, the idea of selling up may not cross their mind until they approach retirement, or someone makes them an offer.
The decision to sell or not, often depends on the expected saleable value. It can be a journey which is really only worth embarking on if the expected final return is good enough.
There are many ways to value a business, but one component that is often missed is the value of the business’s digital capital. This is something that can have a cash value (sometimes substantial), so what is it and how is it valued?
Breaking Down Digital Capital
To begin to understand Digital Capital, we need to break it down first.
In this context, digital means the online presence of the business. This is the public view of the business that can be seen over the internet in some way.
For example, through a website or social media presence. Access to this digital presence is usually controlled by a third party. So, even if you run your own website, getting found is often highly dependent on search engine search results. In this case the search engine (e.g. Google) is the third party.
In this context, capital is something of value that the business possesses that is valuable to the business.
Bringing the two things together we are describing a valuable or beneficial business presence on the internet.
The Value of Digital Capital
The value of digital captital can be huge. The best way to think of this is like land. If you own a large amount of land you can do lots with it. You can also stop your competitors owning the land and doing something with it themselves. This can be a bit like the land-banking tactic employed by the house builders and supermarkets.
The more land you own and the more widespread it is, then the more opportunities you will have to attract customers onto it and charge them for the privilege.
It almost goes without saying that if your business owned lots of land and you sold the business, then you would expect to get paid for it.
So, digital capital is bit like a land grab on the internet. Just as with real land, the digital land, or digital capital has to be purchased in some way – or earned.
The Third Party
It is in the earning of the digital capital that the third party comes in to play. This is the digital presence that sits between your business and new customers, effectively deciding who sees what and when.
To get a handle on this, let’s pick on Google for a bit. Somewhere out there in Internet Land is someone searching for a business that does exactly what your business does. They decide to start on their search by typing some words into the Google search box. What happens next will dictate whether you get the business or not.
If your website is shown in the first three search results, you have a chance of getting the business. The closer you are to top of the list, the more likely it is you will get the business. In effect, this is the third party (i.e. Google) making the decision for your customers.
Getting to the top of the list for a particular search term requires you to persuade Google that your proposition is the best. This is before you get anywhere near the prospective new customer.
Sometimes if your product or service is in a small enough niche then it is easy to persuade Google you should be top of the list. However, where there is more competition, you may have a hard slog ahead and end up paying substantial sums to get to the top.
Remember that a good website will want to rank well for a number of search terms. It is also not 100% clear why/how Google ranks as it does – the Google folk are pretty cagey about that. This means you will often find end result of a number of key terms ranking well ends up being even better for you than you expected.
The point is that whether we are talking about using Google, Bing, Facebook, Twitter, LinkedIn or whatever to reach potential new customers, there is always a third party involved.
Calculating Digital Capital
No matter how you achieve the high ranking on Google you can regard the position gained as something of value that you own – as digital capital. It has a very specific value in other words. This can be calculated in relation to how much effort and cash was required to get there and the profitable sales that result.
Put a bit more simply it is the profit you obtain from your digital presence plus the cost of doing it all again from scratch. Remember that any prospective buyer will have to do it from scratch if they do not buy your business.
You will also need to add an element for time. It takes time to achieve good quality search engine rankings and time is money. Also, if someone had to do it from scratch, it is not just a matter of time, but all of the opportunities lost during that time.
Digital capital is a genuine asset class which should form part of your business value if you come to sell. You will have to value it yourself as it is unlikely external parties will understand the true sales value in terms of the day-to-day operation of your business.
When you do the calculation you may be pleasantly surprised – it could be worth more than the rest of the business put together.
If you do the calculation and think your digital capital is worth next to nothing – get in touch as there is work to do.