Ecommerce Business Valuation

The first is an asset value. With an asset valuation they're going to look at your property and equipment and other tangible assets to determine what the value is. Now this is not very good for ecommerce, because a lot of what you do is outsourced, your manufacturing, your fulfillment, and so you don't have a lot of assets in your business. So this isn't a good reflection of the value of the business.

The second way that they'll look at is comparables, where they'll look at private and public business transactions, sales transactions, and determine what the price of that business was compared to yours. Think of this as like when you go to buy a home, an appraiser is going to go and they're going to look at houses similar to the one that you're buying in that area that have similar attributes, and see what the price of that house sale was. It's the same thing for a business.

The third approach, and most accurate, is an income-based approach, wherein they'll look at the profit of your business, or they'll look at discounted cash flows, where they're looking at what is the profit now and in future years, to come up with a value of your business.

1:31 What multiple applies to you

With a profit-based approach, what they're going to look at is what's known as EBITDA, earnings before interest, tax, depreciation and amortization. It's a fancy way of describing profit. This is key. Profit is king.

Now a conservative benchmark would be two to four times your EBITDA to determine the value of your business. A more liberal model would be four to eight times the EBITDA. The value, or the multiple value that you're going to use, is going to be dependent upon the characteristics of your business. So you can use a multiplier, and everybody wants to know what is the multiplier I should use, but it really depends.

2:15 The factors that move your multiple

Let's talk about what it depends upon. There's a number of factors that will drive higher or lower value in your business, so let's talk about them.

Obviously we talked about profitability, but if you're looking at the multiplier effects you got to look at stuff like revenue. Is your revenue one time or is it recurring? What is the lifetime value of your customer? What are the customer acquisition costs? The higher the CAC, the [unclear], the bigger the LTV, the higher the value.

Growth rate is another factor that makes a big difference. Now a lot of businesses will say, hey, I have a lower profit because I had a higher growth rate, therefore I should get a higher multiple. That's not a bad argument. What a company is going to look at is what is the potential profit, and if you can argue that your profits were lower because you put more energy into growth, there's an argument for a higher multiple.

3:18

Another factor that you have to consider is revenue diversity. An Amazon seller is not going to get the same valuation as somebody who is selling on their Shopify website in addition to Amazon, in addition to other third party sales channels. Another element of revenue diversity is geographic sales. Are you selling only in the United States or are you selling globally? The bigger the reach, the better the value of your business.

Another key factor is brand. Do you have a brand, or are you leveraging Amazon's brand? The more brand value that you have, the more control of your product and the brand around it, the more the value of your business.

Another factor is product diversity. Are you a one-trick pony, or do you have a portfolio of products that balances out your revenues?

Another key factor is your intellectual property protection. Do you have patents and trademarks around your products, or are you just reselling somebody else's products for which you have no intellectual property control? This is really important because, as we all know, knockoffs happen, and when they happen it diminishes the value of your business.

Finally, a seller is going to look at organizational and leadership depth. If they buy your business, are you dependent on the value and the sales of that business, or is your team and organization going to be able to continue to move that business forward without you?

4:24 What a buyer will actually pay

One final note. When you go to sell your business, the type of valuation that you'll get will often result in a range of value, and that range is going to depend on those factors.

At the end of the day, what a valuation firm says doesn't matter. What matters is what a buyer is willing to pay. They will probably play within that range, they might go outside of that range, but it's a benchmark for you guys to negotiate. And ultimately your value is what somebody is willing to pay you.

So you know the leverage you can pull, you know some back of the envelope calculations you can look at, but ultimately it's about finding a buyer, or ideally multiple buyers, and then being able to get the price that you want.

5:06 Where to go next

All right, if you've enjoyed this video, I'd encourage you to go to our website and download the Preparing Early for an Ecommerce Exit white paper, where we'll discuss more around exiting and acquisition of your business.

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