Valuation Multiples for an eCommerce Business
The eCommerce industry, also known as electronic or internet commerce, consists of businesses engaged in retailing goods or services using the Internet. In the United States, there are nearly 273,000 eCommerce businesses. These businesses generate over $546 billion in revenue. This industry has been growing at nearly 14% over the last five years – an outstanding rate. The growth outlook for this industry continues to remain high. With so much growth, now may be a good time to sell an eCommerce business or buy an eCommerce business. A business appraiser uses valuation multiples for an eCommerce business when performing a business valuation to buy, grow, or sell an eCommerce business.
If you are selling an eCommerce business, obtaining a business valuation can help you maximize the value and aid in negotiations with potential buyers. If you are considering buying an eCommerce business, a business valuation can help you feel confident in the purchase price. Many individuals wonder how a valuation expert determines the fair market value of an eCommerce business. One of the ways, a valuation expert values an eCommerce business is by using valuation multiples.
Valuation Multiples for eCommerce
Here is a quick summary of what valuation multiples look like for an eCommerce business. Be sure to also check out Valuing an eCommerce Business, How to Value an eCommerce Business, as well as Value Drivers for an eCommerce Business.
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
With eCommerce businesses seeing increased traffic now is a great time to buy an eCommerce business or sell an eCommerce business. The first step of that process is understanding the value of an eCommerce business. Get started today, by scheduling your free consultation with Peak Business Valuation, business appraiser California.
What is a Valuation Multiple?
One of the ways a valuation expert values an eCommerce business is using valuation multiples. A valuation multiple is like a ratio. A ratio compares two things to each other. For instance, one of the more common ratios in valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings of the business, with the implied value of the company. A valuation expert using the multiple of other similar eCommerce businesses that have recently sold on the open market and applies the multiple to your eCommerce business to get a range of value.
For example, if a company has $250,000 in SDE, and receives a 2.5x SDE multiple, then the business would have an implied value of $625,000. ($250,000 times 2.5) On the contrary, a 3.1x multiple would imply the value of the company would be $775,000. ($250,000 times 3.1)
Peak Business Valuation, business appraiser California, has worked with numerous eCommerce businesses that were looking to sell or expand their business. As Peak has worked with multiple eCommerce businesses, we have come to recognize some of the common valuation multiples an eCommerce business transacts at and is valued at. The two most common multiples to look at for an eCommerce business include SDE, EBITDA, and REV multiples.
REV Multiple
Average REV Multiple range: 0.3x – 0.5x
According to our data, eCommerce businesses sell for an average of 0.3-0.5x revenue multiple. You can calculate the implied value of the business by multiplying the amount of revenue or sales an eCommerce business makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, if an eCommerce business makes $600,000 in revenue and transacts at a 0.45x multiple, then the business is worth approximately $270,000.
$600,000 X 0.45x = $270,000
A revenue multiple does not consider the operations of the business. As such, this multiple may be less frequently relied on. Therefore, it is important to look at cash flow multiples. Cash flow multiples – SDE and EBITDA – consider expenses that impact the cash flow. For instance, COGS, salaries, rent, among others.
SDE Multiple
Average SDE Multiple range: 2.0x – 4.0x
According to our data, eCommerce businesses transact between a 2.0x-4.0x average SDE multiple. To derive an implied value of a business, apply the multiple by the most recent 12-month period revenue. The calculation is as follows:
SDE X Multiple = Value of the Business
For instance, if an eCommerce business generates $100,000 in sellers’ discretionary earnings and transacts at a 2.8x multiple, then the business value is worth approximately $280,000.
$100,000 X 2.8x = $280,000
Seller’s discretionary earnings is a common cash flow multiple used in valuing small business transactions. It starts by computing the company’s operating profit and adding back potential expenses that may not be incurred by a new owner. These expenses may include the owner’s compensation, the owner’s personal expenses, and other expenses such as non-recurring or non-related business items.
EBITDA Multiple
Average EBITDA Multiple range in 2020: 3.0x – 6.0x
The average EBITDA multiples for eCommerce businesses in 2020 range between 3.0x – 6.0x. This multiple is applied to EBITDA for a business to derive an implied value of the business. The calculation is as follows:
EBITDA X Multiple = Value of the Business
For example, an eCommerce business has an EBITDA of $250,000 and transacts at an EBITDA multiple of 4.5x. Using the above metrics, the eCommerce business is worth approximately $1,125,000.
$250,000 X 4.5x = $1,125,000
The EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings capacity a buyer expects from the business.
Summary
When looking at valuation multiples, keep in mind there are many factors that may impact the business and the multiple used to value that business. As such, Peak Business Valuation, business appraiser California, would love to talk with you more about the factors that may impact the value of your eCommerce business.
Peak Business Valuation, business appraiser California, loves working with small business owners to maximize the value of their eCommerce business. We focus on providing valuable information to help you grow, sell, or buy an eCommerce business. Peak works on valuations for eCommerce businesses monthly. Questions are always welcome! Get started today by scheduling your free consultation below!
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