Understanding Valuation Multiples for eCommerce Companies
A growing percentage of retail sales is moving to e-commerce, and eMarketer predicts that e-commerce will total 15.3% of 2021 retail sales. Statista projects that over 2.1 billion people will shop online during 2021.
In addition, the COVID-19 pandemic has forced many traditional retailers to offer online purchasing options. According to The Science Times: “25% of physical retail shops had to launch an e-commerce platform to meet demand, but also to overcome the crisis. Consumers often had no choice but to shop online and guess what? They loved it.”
The most popular items purchased online are shifting. The pandemic, and the increase in remote workers, has increased demand for consumer goods, health, hygiene products, and casual clothing. Other categories, such as travel and luxury purchases, may not be as popular.
If you’re considering the sale of your e-commerce business, you may find a number of interested buyers. The valuation method used for your company has a big impact on the price you receive. To understand e-commerce valuation multiples, consult with an experienced business broker.
Valuation Multiples For E-commerce Multiples
A business valuation is based on a number of factors, but three metrics are most commonly used: revenue, seller’s discretionary earnings (SDE), and earnings before interest, taxes, depreciation, and amortization (EBITDA).
Your company’s sale may be based on a multiple of these balances. To understand multiples, think about the transaction from the buyer’s perspective. Buyers want businesses that can grow sales and earnings over time, so that the purchaser can recover the cost of the purchase.
While e-commerce firms may be valued at .3 to .5 times company revenue, the other two valuation metrics are more complicated.
Using EBITDA For A Valuation
The earnings before interest, taxes, depreciation, and amortization (EBITDA) formula is a commonly used metric to value businesses. As the name implies, this method adds back some expenses to the earnings total.
Your firm may be valued at 2.5 to 5 times EBITDA, but larger firms with a consistent history of profits may sell for a higher multiple.
Applying SDE To The Valuation
The seller’s discretionary earnings (SDE) balance assesses company value based on the earnings that an owner generates from the business. Here’s the formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses)
SDE adds back business expenses that have some personal benefit to the owner. In addition to vehicles and company travel, you may add back charitable donations and your company salary. The goal is to calculate the total financial benefit earned by the owner. A broker may negotiate a purchase price based on 2 to 4 times SDE, which is similar to the multiple used for EBITDA.
A broker can help you uncover company value that should be considered in your business valuation. Discuss your business with a broker, so that the broker can put together marketing materials to effectively promote your business.
Increasing Business Value Before A Sale
You can maximize the price you receive by making business improvements before a sale. Work with a broker to analyze each component of your business, and pay close attention to the customer’s experience with your firm. Here are some areas for potential improvement:
Your Website’s Look And Design
Consumers see hundreds of ads and product offerings each day, and you need a website that grabs the viewer’s interest. Once they arrive, consumers must be able to easily navigate your site.
Successful e-commerce websites are attractive on both PCs and mobile devices. If you’re looking for ideas, BigCommerce provides attractive e-commerce website designs.
Why Niche Businesses Succeed
Serving the needs of a particular niche can be an effective growth strategy. As Shopify points out: “Niche products often have a more passionate customer base, which can make selling to specific crowds easier by raising awareness for your products.”
Niche businesses know their customers better than firms that market a variety of products. You get more specific feedback through customer service interactions, and by collecting surveys. Owners can use the feedback to solve more problems for customers, and grow sales.
To find the right niche, perform market research on social sites (Pinterest, Instagram), and identify customer trends and preferences. You can also review existing e-commerce sites that serve a particular niche.
Staying In Front Of Prospects
Customers buy products and services to solve problems, and they start the process by researching the problem online. To keep your name in front of prospects, you need to provide solutions to problems.
E-commerce firms provide blog posts, videos, podcasts, and online training sessions to get attention. Companies also use social media posts, paid ads, and influencer marketing to promote brands. You may decide to give away e-books and other resources, in exchange for a prospect’s email address.
The final step is to process a payment, and ship the item to the customer. Valuable e-commerce businesses also provide a great customer experience after the order is placed. You need to deliver the product on time, and provide great customer service.
If you outperform the competition in any of the areas listed above, you may be able to obtain a higher sale price for your business. A broker will take these issues into account, along with the valuation multiples for the e-commerce industry.
Work With A Valuation Expert
Managing your business is time-consuming, and it may be difficult to work on a business sale while running your company.
The brokers at Raincatcher understand how challenging it is to build a successful business, and they are passionate about helping owners sell companies. Raincatcher can provide several types of business valuations, and the broker will represent your interest in a sale price negotiation. Sell your business in less time, and close a successful sale with Raincatcher.