We get asked all the time at DigitalExits, how do you value an ecommerce business? When you have multiple products, distribution channels, employees, marketing budgets, how do you add all of this up and put a price on it? The answer is much simpler than you might think; it’s going to be a multiple of your annual net revenue.
We surveyed the sales of 151 ecommerce companies over the course of 2013 to determine these numbers. As you can see from the diagram shown, the multiple averages around 2.62 for ecommerce businesses. The average sale price was $518,676 and $200,000 was the most frequent. The total of all the sale prices for these 151 businesses was almost $78M.
What does this mean for your ecommerce business? It means you should be thinking of valuing your business based on the amount of profit it makes each year. Buyers will be looking at the number almost exclusively when determining if they should acquire your business. Let’s look at an example from a buyer’s point of view;
Let’s say your business has brought in 50k in profit over the last four years consistently. Now, you want to sell your ecommerce business for the industry average: 2.62 x 50k = 131k which would be the final sale price and it would take 2.62 years for the buyer to get their money back if the profit stays the same.
Now, if the industry average is 2.62, what can cause the fluctuation in price one way or the other? The answer to that has a lot of variables, however one of the biggest factors is the size of your company. Here is another common scenario:
Year 1 – Sales of $220,000 and profit of $50,000
- Year 2 – Sales of $805,000 and profit of $140,000
- Year 3 – Sales of $1,500,000 and profit of $250,000
- Year 4 – Sales of $2,200,000 and profit of $450,000
Based on the data we can make the following assumptions about the value of the business at each year.
Year 1 – Profit of $50,000 @ 1.5X multiple = $75,000
- Year 2 – Profit of $140,000 @ 2.3X multiple = $322,000 valuation
- Year 3 – Profit of $250,000 @ 3.1X multiple = $775,000 valuation
- Year 4 – Profit of $450,000 @3.7 X Multiple = $1.67m valuation
The bigger the business, the higher multiple can be. Mainly, because the buyer has more confidence in the company’s ability to sustain and grow. Other factors that affect the sale include how automated the business is, its profit (growth or decline), the diversification of your customer acquisition, the market(s), the product(s), brand, intellectual property, competitors and the overall business model.
How To Get The Best Deal
– You always want to sell the business when it’s growing. Buyers want the opportunity to purchase something that has momentum. If your market is doing well and the products are hot, selling would increase that multiple.
– By offering financing to the buyer, meaning they can pay a significant portion of the sale up front and the rest over a period of time.
– Working with a broker will always help your chances of selling for a higher multiple. Brokers have the experience and know how to help you get your sale in order and can work with you to position your ecommerce business for maximum success
– Starting with a higher selling price gives you room to negotiate. Buyers will always try to find reasons to lower the valuation. If they are right, having a higher selling point will allow you to lower that price without going under your personal reserve.