If you own, operate, or want to invest in an eCommerce business, it’s important to understand the current market. Many owners of an eCommerce business are not sure how much their business is worth – or even how to approach the problem.
However, knowing how to value an eCommerce business can be lucrative and help you make future business decisions, such as whether to decide to sell your business or not.
The Current Market for eCommerce Businesses For Sale
According to data from Empire Flippers, the average multiple for an eCommerce business in 2021 was approximately 42.6x monthly net profit. This equates to a 3.55x multiplier on annual net profit.
Across all marketplaces, most eCommerce businesses are valued between 2.5 – 5x annual net profit. The multiplier increases, though, as the business grows in size. Most eCommerce businesses with a list price of < $1,000,000 typically sell for the standard multiple. Above $1,000,000 in list price, the multiplier increases to 4-5x+ and can even go up to 8x annual net profit depending on the business’s size.
In recent years, the market for eCommerce businesses for sale has been steadily increasing with increases in the multiple, the number of businesses sold, and the average list price.
From 2018 – 2020, the average multiple was steady in the 24 – 30x monthly net profit range.
Empire Flippers saw a 108% increase in average list price for an eCommerce business from 2020 to 2021. This is because of the rise of aggregators such as Thrasio and OpenStore.
These businesses look to acquire and operate multiple eCommerce businesses. They are one of the most likely buyers of an eCommerce business for sale valued between $750,000 – $2,000,000+.
eCommerce Business Valuation Methodologies
There are multiple ways to value an eCommerce business, but most of them are based on the business’s net profit. It can be difficult to determine exactly what comprises the net profit, leading to the multiple valuation methodologies below.
SDE stands for seller discretionary earnings and is one of the most popular ways to value an eCommerce business valued at <$5,000,000.
Seller Discretionary Earnings is meant to represent the full benefit a new owner will receive upon acquiring the business. That means it includes the owner’s salary and will add back any discretionary expenses.
Discretionary expenses are expenses that are not needed to run the business going forward. These could include a one-time website redesign, business travel, or hiring a contractor for one-time work. These are expenses that a new owner would not have to incur.
Add back can be contentious because they affect the net profit of the business and, subsequently, the list price. To clarify, add-backs are nearly always specified clearly on the profit and loss statement so any prospective buyer can verify that it’s a true add-back.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization and is another way to measure the net profit of a business. Because this is more complicated to determine, EBITDA is typically used when the business’s annual revenue exceeds $5,000,000/year.
The biggest difference between SDE and EBITDA is with regard to salaries. When calculating the SDE, the owner’s salary is added back into the earnings.
When calculating EBITDA, salaries are considered a necessary expense and part of operating the business. Most eCommerce businesses for sale will use SDE, not EBITDA, to measure their net profits.
Above a certain size, though, you will encounter EBITDA, and it’s important to understand how it differs from SDE.
Whether using SDE or EBITDA to measure the business’s net profits, the multiple is what will determine the business’s list price or true value.
The average multiple for an eCommerce business is 42x monthly net profit.
However, the multiple can change based on multiple factors.
The larger the business is and the longer it’s been in business, the bigger the multiple. That’s because buyers like to see an established business with multiple years of sales history.
While most eCommerce businesses are valued based on net profit, very rapidly growing businesses may be valued based on revenue.
eCommerce businesses like these typically grow 100%+ year over year and reinvest in technology or a differentiator that will give them a sustainable competitive advantage.
Because they’re reinvesting their profits, their SDE or EBITDA will typically be low or even negative.
This is a minority of eCommerce businesses and is mostly only used for eCommerce companies that intend to IPO at some point in the future. Some examples of eCommerce businesses valued based on revenue include publicly listed companies like Casper or StitchFix.
Comparison to Similar Businesses
A quick way to estimate the value of an eCommerce business is to compare it to similar businesses for sale. Compared to the other valuation methods, this is the least accurate and has the largest margin of error.
Ecommerce businesses can be incredibly complex, and even though two businesses may seem similar, there could be significant differences under the surface.
However, following this process is easy to do. Browse through online business brokerages such as Empire Flippers or Quiet Light and look for similar businesses. You want to find similar businesses in size, age, and revenue for the most appropriate comparisons.
Take note of the list price and multiples on these businesses. Use this as a quick reality check when you go to sell your eCommerce business.
Pricing Windows When Evaluating eCommerce Businesses
Determining the appropriate pricing window for your valuation method is essential to determining a fair value for your business.
90% of eCommerce businesses are based on the average earnings in the trailing twelve months (TTM). Using twelve months as the pricing window accounts for any seasonality in the business and gives a full view of the net profits.
For rapidly growing businesses, a shorter time frame may be used. In this case, 6 months may be appropriate. However, remember that using a shorter pricing window may not fully account for seasonality.
If you’re unsure about what pricing window to use, start with 12 months. It will be the most conservative way to value an eCommerce business.
eCommerce Business Valuation Factors
There are multiple factors to consider when determining an appropriate valuation for an eCommerce business.
At their core, most eCommerce business valuations are based on a multiple of net profit. Therefore, one of the biggest factors in the valuation is the business’s financial health.
When looking through the profit and loss statement, ensure all of the numbers can be verified via bank statements or tax returns. If you currently use Xero or Quickbooks for your accounting, this will make the process much easier.
Gross and Net Margins
Ecommerce businesses with high gross and high net margins are typically easier to run and receive a higher valuation as a result.
Most eCommerce businesses have an average gross margin of 60-70%. For example, they manufacture a product for $1 and sell it for $3-4+. When you include operational costs, advertising costs, and everything else, the average net margin for an eCommerce business is 15 – 25%.
Seasonality is important to consider in eCommerce businesses because it can significantly affect your cash flow. Ecommerce businesses typically hold inventory which they purchase upfront and then sell over time.
Most eCommerce businesses experience some seasonality in Q4 with the holiday shopping season. However, if there is significant seasonality, that can influence your valuation.
Prospective buyers of an eCommerce business like to see diversified sources of revenue and little to no customer concentration. If one wholesale account makes up 50% of your revenue and they leave, that can have a massive impact on the business.
Ideally, each customer accounts for <10-15% of your overall revenue. That way, if one customer leaves, the business is not negatively impacted.
Traffic Sources & Diversity
For an eCommerce business to have a high valuation, it’s essential that they have a diverse array of traffic sources and are not too dependent on one channel.
Many eCommerce businesses drive 70%+ of their traffic from Facebook/Instagram ads. These businesses were highly affected by the iOS14 rollout, and many of them failed to survive in the months afterward.
To ensure a high valuation, an eCommerce business should have multiple traffic sources – paid traffic, organic traffic, and even use influencer marketing to drive word of mouth for the brand.
Relying heavily on one source for all of your traffic can cause a lower valuation.
Customer Base & Retention
One of the highest value aspects of an eCommerce business is its customer relationships. When determining the value of an eCommerce business, look at its email list and list of past customers. How big is their email list? Do they actively communicate with their customers?
One important question is, what is their customer lifetime value? Do most customers order once? Twice? 4+ times? It can be difficult to acquire customers, so having a high lifetime value can be the key to increased profitability.
Businesses with a large customer base and a large customer lifetime value will have higher valuations than those without.
Business Age & Brand Recognition
The longer a business has been around, the higher the valuation. An eCommerce business that has been fulfilling orders and growing for multiple years gives buyers confidence that it will continue to do so in the future.
Also, consider brand recognition in the space. After years of fulfilling orders, do consumers recognize the brand and speak highly of it? Word of mouth is hard to measure but important when evaluating eCommerce businesses.
An eCommerce business that is highly regarded in its niche will command a premium valuation relative to similar brands.
How does the eCommerce business fulfill its orders? Do they have their own warehouse or do they use a third-party logistics provider (3PL)? Most eCommerce businesses use 3PLs to handle order fulfillment rather than doing it in-house. This simplifies the operations side of things and introduces additional costs into the profit and loss statement.
Most buyers like to see an operationally simple eCommerce business. The valuation could be lower if the operations are too complex or convoluted.
When looking to buy an eCommerce business, many prospective buyers come in with a “growth thesis.” They’ll look at your current eCommerce business and think – “how can I grow this to the next level?”
Businesses with multiple growth opportunities get higher valuations than those that don’t. For example, you may not have an SEO strategy to drive organic traffic to your eCommerce site. A new buyer could implement an SEO strategy and grow the business through that traffic channel.
Identifying all possible growth opportunities is one of the best ways to increase your eCommerce business valuation.
The market you are in can heavily influence the value of your eCommerce business. Is the overall market for your products declining, stagnant, or rapidly growing? If your business is in a declining market, your valuation will suffer.
However, if your business is in a rapidly growing market, you will receive a higher valuation.
FAQ – Frequently Asked Questions
Why is it good to buy an eCommerce business?
It can be good to buy an eCommerce business because these types of businesses can be difficult to start and reach scale. Acquiring an existing business allows you to skip the startup phase and improve upon what’s already working.
The business and product ideas have already been validated and have a large past customer base. If you have specific skills coming into the acquisition, you can use those to help grow the business even further.
How is TCV (Total Customer Value) calculated in eCommerce?
Total customer value is the total amount of money a customer spends with your eCommerce business. It is calculated by multiplying the number of orders they’ve placed by their average order value. This is an important metric to monitor because it can be difficult to acquire new customers. By increasing the total customer value, you can increase profitability.
Is eCommerce viable for low-priced products?
Selling low-priced products is possible through eCommerce, but it is difficult. There are fixed costs, such as postage and shipping material when it comes to fulfilling orders, and these can rapidly eat into your profit margins if you’re not careful.
The average order value for most eCommerce stores is in the $50 – $80 range. Selling products priced at <$20 through eCommerce can be difficult – especially if you want to use paid advertising to market your products.
How much time does an average eCommerce business take?
The average eCommerce business can take anywhere from 5 hours – 30 hours/per week to run. It depends on how the business is set up and whether or not you are fulfilling the orders yourself.
If you use the services of a 3PL to fulfill orders, most of the work will be on marketing the business. As the business gets more established and you start building out processes, you can reduce your time invested in the business.
How much can you sell an eCommerce business for?
You can sell an e-commerce business for $100,000 – $2,000,000+. If you look through online business brokers that sell eCommerce businesses, 90% of the businesses for sale are in that range. E-commerce businesses are based on a multiple of net profit, so if you have a business making $100,000 in profit per year; you could likely sell it for $300,000 – $400,000.
If you are considering buying an eCommerce business, it’s important to know exactly how to value one. There are several important takeaways from this article.
- Most eCommerce businesses are based on a multiple of the Seller’s Discretionary Earnings (SDE).
- Understand exactly what add-backs go into the SDE
- Financial health, traffic sources, and your customer base influence your multiples
- To get a quick comparison, use similar size eCommerce businesses for sale and see their multiple
- Most buyers buy with a growth thesis: you will get a higher valuation if there are more growth opportunities in your business
E-commerce businesses are more challenging to operate than simpler businesses like Amazon KDP or content sites, but they can be very lucrative. Understanding the value of your eCommerce business can help you make a decision about whether to keep growing or sell for a lump sum today.