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If you have launched an ecommerce business, you may need to know its worth, either to raise funding or if you are looking to sell it to a third party.
Valuing an e-commerce business differs to those of bricks and mortar companies, because of the potential to scale and reach a much larger market.
There are two main methods used by the industry - our guide gives you the key metrics used for online company valuations.
In order to create a realistic valuation, you need up-to-date financials, including the profit/loss, assets, liabilities, and loans of the company.
Once you’ve prepared these, you should determine your firm’s earning power, which can then be applied as a multiple to arrive at a business value. It’s important to note that the two most common approaches to valuing an eCommerce business include Sellers Discretionary Earnings (SDE) or Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA).
However, these two methods may not give the true value of fast-growing businesses that are investing heavily in technology and growth. In this situation, you’ll need to forecast revenue and growth and then use those figures to arrive at a realistic valuation, so long as your projections are realistic.
Avoid relying on the growth-based method if you’re using SDE or EBITDA, which are discussed below. As a rule of thumb, SDE is used to value smaller companies, while the EBITDA metric is more commonly used when valuing large online companies.
Let’s briefly go through how each method works.
SDE: SDE is a valuation method using the Total Owner Benefit a business produces. It is based on the owner’s total cash flow which includes salary, benefits, and depreciation, and benefits received by the owner from the business. All of these items are added to the profit of the business to arrive at a valuation figure.
EBITDA: EBITDA valuations involve using earnings before deducting interest expense, taxes, depreciation expenses, costs, and amortisation. Simply add depreciation or amortisation expenses to your operating profit to reach the EBITDA value. The figure will represent the underlying earning power of your company.
Now that you have a ‘net income’ figure through either the EBITDA or SDE method, it’s time to determine the multiple. This is a figure multiplied by your SDE or EBITDA to attain your final business value. So, how do you determine this multiple? The most critical factors affecting your multiple include:
Financials: Your eCommerce business’ financials will be the most critical and most complex factors. A business with comprehensive financial records and with up-to-date Income statements, Balance Sheets, and Cash Flow Statements, independently verified, will be considered reliable. From the buyers’ perspective, the more transparent you are about the eCommerce business, the more likely they will consider buying the business.
Quality of Web Traffic: This is one of the most complex factors used to determine the revenue multiple. Common metrics used to evaluate traffic quality include pages per session, bounce rate, conversion rate, and average session duration. Apart from traffic quality, your backlink profile, trends in web traffic, and concentration of web traffic into specific resources will also be considered in calculating a multiple. Considering the complications involved, it’s best to consult a business sale broker who offers independent business valuations.
Intellectual Property: As an eCommerce business owner, if you own any patents, copyrights, or trademarks, their value will need to be determined.
Value of Customers: This is an obvious factor in the calculation of a revenue multiple. Your aim here should be to highlight any loyal customers who keep repeat ordering; relying on one or two suppliers can be perceived as high risk
Running Costs: Operating costs, such as rent for your eCommerce business’ office space, will also affect the revenue multiple
You should now have a clear idea of what you need to determine your ecommerce business valuation. If you are planning to sell your ecommerce business, it’s usually easiest to get a free independent valuation from a trusted professional.
Contact us today for a free, independent business valuation for ecommerce businesses.