How to Value an eCommerce Business
The eCommerce industry has retained steady demand for decades. As the world has become more reliant on technology, we have seen rapid growth in the eCommerce industry. An industry report on IBIS World notes that eCommerce sales increased by over 40% in 2020 alone. Moving forward, this upward trend will likely continue as eCommerce becomes more popular. If you are looking to buy, expand, or sell an eCommerce business, now may be an ideal time to do so. However, the eCommerce industry is extremely saturated and competitive. To succeed, it is important to understand the value of an eCommerce business. By learning how to value an eCommerce business, you can build a profitable eCommerce business.
To learn how to value an eCommerce business, receive a business valuation. As part of a business valuation, an appraiser uses various valuation methods to determine a fair market value of an eCommerce business. In addition, they will discuss the strengths and weaknesses of your eCommerce business. This information is vital whether you are buying, expanding, or selling an eCommerce business.
Peak Business Valuation, business appraiser, works with eCommerce businesses on a regular basis. We are happy to help you! Peak can provide you with a business valuation for an eCommerce business. In addition, we can answer any questions about valuing an eCommerce business. Schedule a free consultation with Peak below!
How to Value an eCommerce Business
There are various valuation approaches for an eCommerce business. Peak Business Valuation often uses the market approach and/or the income approach to value an eCommerce business. The approach a valuation expert uses depends on various factors. They will use their knowledge and expertise to determine the best method for your eCommerce business. Often, the valuation process involves a combination of valuation approaches. In this article, we discuss the market approach and the income approach for valuing an eCommerce business.
Valuing an eCommerce Business Using the Market Approach
The market approach is often used to determine the fair market value of an eCommerce business. This approach is similar to how a real estate appraiser determines the value of a property. Real estate appraisers compare similar properties that recently sold to the property they are appraising. This helps them estimate an accurate fair market value of the property. With the market approach, business appraisers compare your eCommerce business to similar companies that recently sold. For private businesses, an expert refers to private transaction databases. They will then analyze key value drivers and financial statements to determine a fair value of the eCommerce business.
Multiples for an eCommerce Business
When using the market approach, business appraisers use valuation multiples for an eCommerce business. To determine suitable valuation multiples, Peak Business Valuation uses the applicable NAICS or SIC code. Below, we discuss the basic market multiples for eCommerce businesses.
REVENUE or SALES Multiple for an eCommerce Business
- Business appraisers apply a multiple to an eCommerce business’s revenue when using the revenue multiple. This allows them to determine the fair market value of an eCommerce business.
EBITDA Multiple for an eCommerce Business
- The EBITDA multiple measures the return on investment (ROI) an eCommerce business can expect.
SDE (Seller’s Discretionary Earnings) Multiple for an eCommerce Business
- The SDE multiple assesses an eCommerce business’s cash flow by multiplying its SDE by the multiple. This multiple is common when valuing an eCommerce business.
The multiple a business appraiser uses depends on the business transaction and the purpose of the business valuation. For more information, see Valuation Multiples for an eCommerce Business, Value Drivers for an eCommerce Business, and Valuing an eCommerce Business.
Valuing an eCommerce Business Using the Income Approach
The income approach is another common method when learning how to value an eCommerce business. This approach analyzes the risks associated with buying, growing, or selling an eCommerce business. Below we give an overview of some common risks in the eCommerce industry.
- Competition: The eCommerce industry is extremely competitive. To succeed, it is vital to set your eCommerce business apart from competitors.
- Inventory Control: Demand for your eCommerce products may fluctuate. As such, it is important to have effective inventory control to remain profitable.
- Quality Control: eCommerce businesses compete on the basis of quality and pricing. It is crucial to ensure that your services and products are of high quality.
- Reputation: Building a strong reputation promotes customer loyalty and word-of-mouth recommendations. This can increase sales revenue and profitability at an eCommerce business.
Methods to Value an eCommerce Business Using the Income Approach
There are two common methods business appraisers use under the income approach. They are the capitalization of cash flow method and discounted cash flow method. Below, we discuss how these valuation methods are used.
Capitalization of Cash Flow Method
- Valuation analysts frequently use the capitalization of cash flow method to value an eCommerce business. This method is best for businesses with long and stable histories. When using this method, the expert estimates an appropriate amount of economic income for one period. Then, they divide this time by an appropriate capitalization rate. The cap rate reflects an appropriate rate of return the buyer can expect. It also assesses any risks associated with the eCommerce business.
Discounted Cash Flow Method
- The discounted cash flow method is best for eCommerce businesses with strong financial histories. It is also ideal for businesses that have built reliable forecasts. When using the discounted cash flow method, the valuation expert uses 3-5 years of projections to estimate the value of future cash flows. Then, they discount the future cash flows using a discount rate rather than a capitalization rate. Keep in mind, this method is less common since it relies on future cash flow estimates which can be inaccurate.
Summary
When valuing an eCommerce business, valuation experts may use the market approach and/or the income approach. At Peak Business Valuation, our business appraisers receive extensive training. They will use their knowledge and expertise to determine which methods and multiples are best for your eCommerce business. To learn more about how to value an eCommerce business, receive a business valuation. During a business valuation, you will learn how to maximize the value of an eCommerce business. This is beneficial whether you are buying, expanding, or selling an eCommerce business.
Peak Business Valuation, business appraiser, works with eCommerce business owners on a regular basis. We are happy to help you find success in this competitive industry! Peak Business Valuation can provide you with a business valuation for an eCommerce business. Any questions about valuing an eCommerce business are also welcome! You can start by scheduling a free consultation with Peak today!
