search

How To Value Your Ecommerce Business

How To Value Your Ecommerce Business
23/06/2022

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 deviates from those for 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 - read our guide to help you get an idea of the key metrics using 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 Amortiszation (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 expensecosts, and amortiszation. Simply add depreciation or amortiszation 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? Let’s find out:

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, Cash Flow Statements, etc., will be considered reliable. From the buyers’ perspective, the more transparent you are about the eCommerce business, the more likely they will consider buying from you. the company.

Risk & Valuations: A high revenue concentration on one of the suppliers, products, or customers is perceived as a risk. Buyers are instead attracted to organizations that depend on multiple products, customers, and suppliers. Hence, revenue concentration Revenue sources do does impact the multiple.

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 leave the calculation-wise to consult to a broker who offers independent business valuations.

Intellectual Property: As an eCommerce business owner, if you own any patents, copyrights, or trademarks, etc., they’ll their value will need to be valued and taken into account when determining the revenue multiple.

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 order ordering from you from time to time. While the value of such customers will certainly impact your multiple, again, you will most likely need independent advice to determine your customer value. ’ll need a broker to help you value such customers.

Running Costs: Operating costs, such as rent for your eCommerce business’ office space, will also affect the revenue multiple. It will put downward pressure on the figure.

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 professional. Contact us today for a free, independent business valuation.

More News

Sell Your Business: Five Reasons Why You Should Start A M&A Process

Sell Your Business: Five Reasons Why You Should Start A M&A Process

Investing time in an M&A process is a great way to grow your business even if you have no intention of selling. In this blog post, we will discuss fiv...

Read More
How To Sell Your Business Fast

How To Sell Your Business Fast

Are you a business owner looking for a new direction in your life? Maybe you want to retire or start a new venture? Or perhaps economic conditions hav...

Read More
How to Attract Buyers for Your Business!

How to Attract Buyers for Your Business!

When the time comes to sell your business, you might feel overwhelmed by all of the things that need to be done. The good news is that there are some ...

Read More

Read More

Read More

List your business

Would you like to register your company on one of the UK's largest and most effective Trade websites?

Are you looking for a reliable and consistent source of enquiries from your industry sector? Would you like to see why Find the Needle clients come back year after year to use our service? If so then feel free to register using the link 'here'.

Register
Office Address: