How to Value an Ecommerce Business

October 20, 2022
How to Value an Ecommerce Business

Many people and businesses have had a tough time since the pandemic hit — but one area that hasn’t suffered is eCommerce. Global eCommerce sales enjoyed a 38% increase between the first quarters of 2020 and 2021, and there’s no sign the growth will stop any time soon. With figures soaring so high, it’s only natural for entrepreneurs in the sector to wonder how to value their eCommerce business

After all, a valuation is essential if you’re hoping to raise funds from investors or for tax and legal purposes — or maybe you’re just curious. Fortunately, whether you have a store on Amazon, Shopify, or even an independent site, there are a few universal methods and tools you can use to help you. We’ll outline them below, and explain which factors have the biggest impact on swinging a valuation.

The SDE vs. EBITDA

This isn’t going to be one of those articles where we vaguely tell you that selling lots of products is a good way to increase your valuation, leaving you to figure out the rest. No — we’re getting straight to the juicy stuff.

There are two main methods we recommend to help you reach your valuation: the SDE method and the EBITDA method. Once you have a number from one of them, you can use it to reach your final valuation. But before we get ahead of ourselves, let’s take a look at how they both work. 

The SDE method

The Seller Discretionary Earnings (SDE) method is ideal for smaller companies with between $500,000 to $1 million annual turnovers. If you’re bringing in more than that, feel free to skip this section and go straight to the EBITDA method.

This is all about calculating how much money a business takes home in a year after covering its costs. And it does that using a simple formula: Revenue - Cost of Goods Sold - Operating Expenses + Owners Salary.

The EBITDA method

As we’ve mentioned already, the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) method is for businesses with an annual turnover of at least $1 million. It aims to do the same thing as the SDE, but the means to arrive at that number is slightly different.

This time, the equation in question is: Net Income + Interest Expense + Depreciation Expense + Amortization Expense + Taxes.

How to value an eCommerce business


Once you’ve reached a figure from either the SDE or EBITDA method, you’re within touching distance of reaching your final valuation. But there’s another step: determining your valuation multiple. There are a few types of valuation multiples, and the one to choose depends on your specific business. 

Then, finally, you can multiply either your SDE or EBITDA by your valuation multiple to reach your valuation. For example, if you ended up with an EBITDA of $500,000 and a valuation multiple of 2, you’d end up with a valuation of $1 million.

If you’re struggling to reach any of the figures above or get your head around the math, there’s another option — you can use a valuation calculator instead. The Dragonflip calculator will take you through the process in a few simple questions about your finances and brand, and automatically give you an estimation of your valuation.

What can increase or decrease a valuation?


Now that you know the basics of how to value an eCommerce business, we can look at the wider picture by looking at some of the most important determinants of a valuation.

#Age of business

You might think that the older a business is, the better — after all, it shows that a company’s success isn’t a fluke but rather the sign of a sustainable business model. However, this isn’t always the case.

While it’s true that it's a struggle to find a business with just a few weeks or months behind it, many buyers prefer a younger company since it’s a sign that there’s plenty of space to mold it into a new shape or send it in a new direction — and plenty of room for growth.

#Trends

Only a madman would want to invest in a business that’s part of a dying industry. However, it's also unlikely that an owner would be willing to sell their business when it’s right at its peak, so there needs to be some balance here.

At the least, investors need to know that industry trends are going in the right direction and there’s no reasonable reason to suggest that’s going to change any time soon. Otherwise, they’ll be throwing their money down the drain.

#Owner involvement

Most people looking to buy companies are doing it as an investment and not as a lifestyle choice — they probably have numerous other investments and don’t want to spend a significant proportion of their time keeping the weeks turning for one business.

Also, if the past owner of a business has been the main reason for a company’s success so far and is the only one who can manage certain processes, it might be too difficult for someone else to take over.

#Finances


It goes without saying that a company’s financial performance matters. Consider aspects like:

  • State of inventory
  • Solid financial records and statements 
  • Business size
  • Sales growth
  • Stability 
  • Seasonality 

It helps to get an accountant on board to ensure your figures are solid.

#Products and brand

Are you selling multiple different product types or focusing on one? If you have a range that spans different niches or industries, it will put investors at ease because it shows you’re not putting all your eggs in one basket.

Also, if you have a solid brand with a loyal customer base, this will also work in your favor.

Time to get your valuation 

As you can see, valuing your company can be complex, and there’s not always an exact science. But if you at least have a solid understanding of how valuations work and make some tweaks to the most important determinants, you’ll be well on your way to success.

Or if this all seems a bit overwhelming, you can seek out an expert to carry out this validation process for you.

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