As one would imagine, the volume of ecommerce acquisitions has increased over the past 5 years, with all-time highs notched in 2017. In a classic valuation sense, the models were essentially built to estimate the worth of brick and mortar types of businesses, where assets were depreciated and discounted cash flow was the norm.
Even today, to my knowledge, there is no one specific method used to value an online company. What most merger and acquisition experts do first, is to divide the online community into several smaller, but similar groups, and then assign a value to that group.
Emily Chisolm, an analyst at FE International, states, “There is no industry standard for valuing online businesses, so we created a proprietary model seeking to fill this need. They have put together five broad categories in which to determine value.
- Lead generation: A business that supplies leads to a partner business.
- Content and media: An entertainment or affiliate website, such as Forbes or Entrepreneur.
- Membership and subscription: A site that pay-gates educational content, such as Lynda.
- E-commerce: An online store where various goods are sold, like Amazon.
- SaaS and software products: A subscription to a tool that makes your life or business easier, such as Hootsuite.
Once an online business is categorized, there are three main ways to discover value, and are used on brick and mortar businesses as well.
- Discounted Cash-flow Analysis: This method involves determining the value of the business today based on the cash it could make available to investors in the future. This analysis can be done on the company as a whole, or on any project the firm may consider undertaking.
- Precedent Transactions: This method is used to determine the value of a business based on similar acquisitions in the past. This is almost always looked at, as it tends to be the most relevant.
- Earnings-Multiple: Earnings-multiple involves multiplying the discretionary cash-flow of the seller by a multiple that is determined on a case-by-case basis, calculated by analyzing several variables: financials, traffic, operations, niche, customer base, and other relevant factors. What typically happens is that once the top and bottom line numbers have been determined, they will be multiplied by an industry standard number. For example, one may take revenues and use a multiple of 2 (Revenue x 2) and also use net earnings and use a multiple of 12 (Earnings x 12). Often these two are averaged for a final value.
Once you have obtained a value, it is the norm to revalue the company and its stock annually. If you are considering using this value to sell your online business, you will fall into one of three categories.
Small Websites (Under $100K) – Sell yourself
Smaller business and micro-businesses are usually best sold privately by the owner through forums or classified websites. Flippa would be one example.
Medium Websites (Under $50m) – Sell with a broker
Medium sized businesses making between $250,000 and $20 million in profit are best sold through brokers who help with finding buyers, negotiating and structuring the deal. Ask your accountant or attorney for recommendations.
Large Websites (Over $50m) – Sell with an investment bank
Larger businesses making over $20 million in yearly profit are best sold through investment banks or merger and acquisition companies. If you get to this point in your business, they will begin to call you!
