There are multiple ways to value a business but the most common is based on a multiple of earnings.
Firstly lets walk through how exactly that earnings number is calculated.
Multiples are a common way to value businesses. They are typically your Profit x Multiple = Valuation.
This profit figure for larger businesses is based on EBITDA (Earnings Before Interest, Tax, Depreciation, Amortisation)
However, smaller businesses, which are typically run by an owner/operator, are usually valued as a multiple of Seller’s Discretionary Earnings (SDE) rather than EBITDA.
SDE is the net income plus add backs over a period of 12 months.
12 months is a perfect range of time as 6 months can be influenced by seasonal factors like Xmas and an average of 2-3 years can be a disservice if your business has been growing.
An inexperienced seller may list their business at a too low or too high multiple but just as importantly this multiple might be based on a too low SDE with no add backs.
Typically 10-30% of earnings can come from add backs.
Typical add backs include owner benefits that are not just seen in your salary, these may include things like car, meals, personal development and reward points.
SELLER TIP: Most people use cash basis accounting to fill out their tax return. But calculating the SDE using the accrual basis can more accurately show income and expenses in that time period, helping to more accurately show your SDE.
For example if you buy stock that has not yet sold then the cash basis may show your SDE as lower as those items have not yet sold.
So to summarise, the buyer asks “how many years of annual cash flow would I pay for this business?” A 2x multiple would mean the buyer expects that it will take two years to recoup the initial investment, a 3x multiple means they expect it will take three years, and so on.
If you are buying a business but the multiple is not provided by the broker you can take the asking price and divide it by the stated earnings to create the multiple.
You may notice that this does not include stock. You may see + SAV (Stock at Value).
This means that you will be buying the business at its valuation plus the stock at their value.
Some brokers may include stock in the valuation. I would not recommend this as it changes the multiple.
But you can work out the actual multiple by removing the stock value from the asking price.
All the listing prices on the Aussie Acquire marketplace exclude SAV unless mentioned.
You can see examples of Australian eCommerce businesses for sale here:
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// 2. Australian vs American eCommerce Business Multiples in 2022?
Multiples can vary greatly depending on the deal size.
So I have split the average multiples up for each deal size.
Australian multiples are in green and American average multiples are in yellow.
Please note these averages are based on 2021 listings and exclude stock (SAV).
As you can see American multiples are almost double for deals under $100k and for $500-1m deals.
So you can buy an Australian eCommerce business for less than half of an American eCom business.
We will cover some of the factors that influence multiples in general and in particular this regional difference.
// 3. Factors that influence multiple size?
Multiples are a handy measure on what businesses are selling for but it is not a one size fits all method.
Each business will have its own strengths and weaknesses that influence the multiple.
If your business has positive factors then it can go for the higher end of the multiple range and vice versa.
a) What product factors affect the multiple?
How old is your store?
The minimum for a good exit is 12 months but buyers love stores with 24 months of history or more.
BUYER TIP: First time buyers love smaller stores to minimise risk. Although the financial risk is smaller the total risk can be larger as these younger businesses may rely on one advertising channel, one product or one trend.
SELLER TIP: Your store may be only 12 months old but if you prepare now for a sale in 24 months, you have a year to set the business up for an exit and address all these risk factors to maximise the multiple too.
What is your stores profit margin?
The average gross profit margin for Australian eCommerce stores is 20-60%, this varies a lot due to the wide variety of products that can be sold.
Net profit margins area a lot lower for most online retailers with people like Amazon working on 2% net profit margins.
Obviously the higher your gross and net profit margins the better as the more options you have to invest in customer acquisition or to take money off the table for the new owner.
How many total customers did the site have over the trailing twelve months?
The more customers you have already reached, the more chances there are for word of mouth and repeat purchases in the future.
If the business has an email list of these customers then this can really boost those repeat purchase rates.
What is your product defensibility like?
Can someone set up a store overnight and start competing against you?
If you have a patent or thousands of reviews it is going to be much harder and therefore safer for someone to buy.
Similarly do you have great SEO for your product or strong recurring revenue for your consumable.
Do you have one hero SKU saving the day?
A SKU is essentially a product or (Stock Keeping Unit). If you have one product that does 70% or more of your revenue this can be riskier.
Compared to a store that has 5 products each producing 20% of the revenue.
Similarly do you have one supplier for that product with no back ups. As we saw over Covid what happens if you are unable to get product for a period of time.
It does not mean that your business is unsellable, just that the multiple may be lower if compared directly to another store.
What is your products lifespan?
If you are selling an electronic product or accessories will your product still be in demand in 5 years?
An iPhone case may change every year or an electronic toy may get outdated quickly.
To help overcome this risk you can plan out for the next versions of your product or diversify into other products.
Is there any Key Person Risk for your product?
Are you the face of your company and all your products and advertising?
Celebrities may launch brands in their names but if they launch a brand not tied to them and grow it with their distribution, it can be worth a lot more.
For example Connor Macgregor launched Proper Twelve Irish Whiskey, if it was called Connor Macgregor Whisky with his face on it, it would be more risky and less valuable to a buyer.
Is there any marketplace risk?
If you sell on your own store on Shopify then you own the customer so the risk is low.
But if you sell on Amazon, Etsy or eBay you may not own the customer in the same way, increasing risk.
Another way to look at marketplace risk is to look at all the channels a business uses to market their products.
If you have 50% on Amazon and 50% on Shopify then that is less risky than 100% on Amazon.
Are there any growth opportunities left?
Do you sell every size and style for your product?
And is the market for that product growing? Check Google Trends for the number of search queries for your product over time.
SELLERS TIP: Most buyers are buying to grow the business to reduce the time to get their money back. If you can show them some simple ways to continue the growth this helps reduce risk and increases multiple.
b) What Financial Factors influence the multiple?
Is the sellers financial documentation healthy?
I can't imagine buying a business in the 70s or 80s, the amount of paperwork and admin for financials must have been a nightmare.
Xero is probably the most popular accounting software and can link directly to your bank account and create a Profit and Loss for you.
SELLER TIP: If you can't produce an accurate P+L then it is hard for any buyer to confidently make an offer. Hiring a bookkeeper early to keep everything in order is a lot easier and cheaper than trying to do it with an accountant retroactively.
Is your revenue trending up?
Probably the first thing most buyers look at, are you growing consistently.
For a <24 month old brand there should be lots of growth and as your brand becomes 4-7 years old then 10-20% growth would be positive.
BUYER TIP: Multiples show the number of years you need to pay off the business but a business growing at 50% each year could reduce that multiple.
Often buyers will try and sort by lowest multiple to get the best deal but it can be better to pay a higher multiple for a business that is growing really strongly.
Is revenue diversified?
Does all your revenue come from Amazon or through Facebook ads.
What is the YoY or MoM net profit growth rate?
Steady growth over a long period is perfect, if your business is growing dramatically you may want to wait before selling to get the best multiple.
If your business is declining then you may still get interested buyers but the multiple will be lower as the risk and time to turn it around will be higher.
BUYER TIP: Sellers may cut costs drastically to maximise their SDE in the 12 months before selling, this can be spotted easily by looking at their net profit and costs month over month eg advertising.
SELLER TIP: Increasing profit and declining revenue can be a red flag that expenses are being cut to try to improve the SDE. Every deal gets completed based on trust so trying this will often waste the time spent doing it as they fail in due diligence.
Has the rate increased, decreased, or flattened since the previous period?
- How is revenue trending over the previous 3/mo to 1/yr?
- How is net profit trending over the previous 3/mo to 1/yr?
- How are expenses trending over the previous 3/mo to 1/yr?
- Are sales expected to grow, decline, or flatten over the next 3/mo to 1/yr?
Race to the bottom line risk?
How hard is it for someone to compete with you?
A dropshipping business where the product can be found on Alibaba in less than 5 minutes is higher risk.
Once you have competitors driving the price down, margins get tighter and it gets harder to build a sustainable business long term.
What time of the year are you selling?
Some eCommerce businesses in particular can earn the vast majority of their revenue in November and December from Xmas shopping.
If you sell just before this period then you may get a higher multiple as the new owner gets to start with cash in his account.
Or you could choose to sell after to maximise your SDE.
Are there any big investments you want to make before listing?
If there is a big investment that you are confident that it will work but it takes 12 months before you see a return and you are listing in the next few months.
Let the new owner make that decision as you will be reducing your SDE for a direction that the new owner may not want to take.
SELLERS TIP: Check with your broker or advisor if the investment can be an add back. A big advertising investment is not an add back but some investments can be.
SELLERS TIP: Also don't forget to include this idea in the growth opportunities for the new buyer to consider.
c) What website factors affect the multiple?
Is traffic diversified?
Are you relying solely on FB ads, TikTok or SEO.
How stable is traffic overall?
If you have 24 months of history, how volatile has the traffic been?
How have pageviews trended over the previous 3/mo to 1/yr?
What are the main traffic sources?
SEO is more defensible than FB ads, so a business with a strong foundation there will have less risk.
Note this risk is not zero as Google updates their algorithms regularly.
Is there a subscriber/customer list?
If so, what is the current growth rate?
What is the user engagement like?
What is the current customer churn rate?
What is the lifetime value of a customer/subscriber?
Any notable assets attached to the sale (i.e. social media accounts, IP, etc.)?
Email lists are a big asset for an eCom business so if you have a list that is regularly sent to and has a high open and click through rate.
Other assets could be really engaged social media lists and especially for larger deals patents or trademarks for products and brands.
d) What operations factors influence the multiple?
Do you have SOPs for your business to run without you?
Standard Operating Procedures (SOPs) are simple docs that outline every step in a task.
Every business is a collection of systems and if each system has an SOP then you can hand it over with confidence for someone to take over.
They can be based in Google Docs, with a checklist of tasks for each SOP and ideally a Loom video to show how it is done in practice.
Have you got all your key documentation organised?
Are there key contracts, bank statements or reports in one place and are they clearly labeled?
When a seller asks a question, if you have the answer on hand it can be a lot easier to answer quickly.
Are there key staff your business needs to run?
If there are key staff, what can you plan to reduce this risk.
You can talk to the staff before or after the business is put up for sale.
Often once it is under LOI, key employees may be offered compensation like bonuses or equity to stay on as it is in both the seller and buyers best interest.
Make sure these agreements are formalised in contracts so that everyone is clear on the terms.
Are there key manufacturers or suppliers?
The new buyer will want to build the same relationship you have with the manufacturer.
If they have to find a new manufacturer at short notice after acquisition then this can be a big risk.
Are the same terms and rates carrying over to the new seller?
Are you living the 4 hour work week?
Sellers and brokers know that the 4 hour work week is attractive to buyers.
If you are working 80 hours a week and your wife or husband is also working 80hrs a week behind the scenes then this is not transferable.
BUYERS TIP: Ask what the owner is currently responsible for and what their work week looks like. If this doesnt match with the hours then that can be a red flag.
SELLERS TIP: If you can outsource anything do it now. Write out SOPs and get an assistant to help with admin tasks to help reduce the number of hours required.
What is the seller like to work with?
All deals have a foundation of trust, so if the seller is organised and trustworthy then your deal can be successful.
Likewise a seller may choose a buyer that they think is a better fit than just the person that offers the most.
Don't make yourself an unnecessary risk factor by posting anything too crazy on social media.
Some deals may include an agreement to continue working in the business or advising for a period of time too so you want to be able to work together well.
// 4. Do you think multiples will continue to go up?
I get asked this a lot but no one can 100% predict future prices.
However these are in my opinion some interesting factors that could affect multiples for Australian eCommerce businesses.
Online spend is rising significantly
Pre Covid the % of retail spend online was around 10.9%.
It jumped to a peak of 25.5% in September 2021 but is up on average to around 15%.
And this percentage looks set to continue to rise worldwide.
Rise in US buyers wanting to buy Australian eCom sites.
The Australian population is at 26m but the United States is at 330m, over 12x.
So American buyers can buy proven stores in a similar market with manufacturers in place.
Launch in the American market where they have experience and systems and build a bigger business just due to the population advantage.
This is especially true for larger deals that may have capped out at the Australian level but have lots of growth internationally.
With low interest rates there has been a rise in aggregators and portfolio builders going after Amazon FBA businesses and now that focus is coming over to Shopify stores too.
Access to finance
In the States there is an SBA loan that US citizens can get to buy a business.
Its low interest rate, has a personal guarantee and can usually go up to low 7 figures with a relatively small deposit of 5-20%.
Unfortunately we don't have the equivalent in Australia so its a lot harder to fund some of these deals.
If you want to join the petition for something like this let me know, as it has a lot of benefits for the economy through more investment and jobs.
More and more finance providers are expanding outside the States with loans but also revenue based financing options.
Once these hit Australia the 500k-$2m market multiples will see a rise, as this bracket is too high for most personally financed buyers with savings and too low for most Private Equity firms.
In America this has already played out with an increase in activity in this range.
Amazon is not dominant in Australia
In the States, Amazon accounts for 41% of the total eCommerce market.
Although this number is expected to grow steadily over time that leaves a lot of eCom opportunity for Shopify stores to build in.
More online stores were started in Covid and this year than ever before
Not all of these are going to be successful but the top ones will be coming up for sale after two years in the next 12-24 months.
This means there will be a wave of opportunities for buyers, that if matched with funding options, can cause the demand and multiples to rise.
eCommerce stores currently have limited history
Compared to a bricks and mortar manufacturing company, most eCommerce stores are relatively new.
As companies get bigger the multiples tend to get bigger.
You can see this from 100k acquisition to 5m but the multiple jumps up even more from 5m to 50m and then 50m to 500m.
As more of these companies mature, the average sale size will increase and therefore the average multiple should rise too.
Plus we may see some of these companies buying smaller stores in their niche, increasing the overall activity in the acquisitions market.
// 5. Summary of How to Value an Australian eCommerce Business
To summarise, everyone wants to talk about multiples and it's exciting for business owners to see them going up.
Businesses are individual beasts so there are a lot of factors that can influence a multiple.
And just as important as the multiple is how you accurately calculate your SDE.
Now that you know everything about multiples, the next part of the equation is my favourite, terms.
You can either win on the multiple or the terms, you should probably want to win on the terms.
You may be offered a 10m on your business but if its paid to you $1 per day over a 10m years its not very useful to you.
So next time in the Aussie Acquire resources we will talk everything about terms you can negotiate in your acquisition or sale.
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And based on weighted factors can calculate your multiple and recommended asking price.
He is not a broker so will not charge any fee or commission but you can choose to list for Aussie Acquire for free, if your business is a fit.