Valuing any business is part art and part science. There are constant changes in the marketplace the make assigning a value to any type of asset a tricky task. This is also the reason that the stock market can move 30% in one direction or another in any year. Simply put, assets change value on their performance and based on the size of the buyer pool. Only by having a narrow focus on a certain market can any investment banker or broker have an idea of what businesses will sell for. For that reason, we recommend to use calculators (including our own) as nothing more than a guideline.
E-Commerce Traffic Channels & Affect on Valuations
The e-Commerce businesses that sell for the highest valuation multiples will have multiple sales channels and traffic channels.
In exploring this further, I’ll make a representation of two hypothetical companies that are the same age, sell the same products and require the same amount of time from the operator.
- $10M in Revenue, $2M in EBITDA
- 20% or revenue comes from Amazon FBA
- 20% of revenue from wholesale
- 10% of revenue from Walmart.com
- 50% of revenue through the e-Commerce website
- Website gets 30% of traffic from SEO (organic traffic)
- 20% from social media
- 20% from paid search
- 20% from email
- 10% from affiliates and other channels
- 3PL logistics and Amazon FBA fulfill all orders
- $10M in Revenue, $2M in EBITDA
- 100% of revenue comes direct to the website
- 80% of website traffic comes from social media marketing.
- 15% from email marketing
- 5% of traffic from other sources
Even though these two companies have identical revenue and net profitability, Company “A” will sell for 30-50% more money than company “B”. Similar to diversifying a portfolio of stocks, having diversified traffic channels and sales channels in an e-commerce business mitigates risk and increases business stability.
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What channels represent more than 20% of your website traffic?
How many years old is your business?
How much net profit did the business make in the last calendar year?
Pending Risks & How They Affect e-Commerce Valuations
The most common risk that faces an e-commerce business is dependency on one sales channel and/or traffic channel. Other prominent risks that affect valuation are:
- Dependency on a small number of suppliers.
- “Product of the day” companies.
- Sector specific risks
- Low AOV and low CTV businesses
Valuation Changes By Business Size
Businesses that have a 5+ year stable tenure will generally sell for higher valuations and quicker than businesses that are relatively new. In addition to a longer tenure, older businesses are generally larger. Quality e-commerce businesses that generate $1M+ of EBITDA per year will sell for higher multiples than businesses that make six figure profit.
The next tier of profitability that heavily affect valuation is cresting $5M EBITDA. These businesses that generate over $5M in profit will generally see attention from larger corporate buyers and boutique private equity firms. This increase in competition from buyers drives multiples and deal terms in favor of the sellers. Generally speaking, businesses in this arena will sell for 4-6 X EBITDA while it is very rare for businesses under $5M EBITDA to see a 4X valuation.