Selling Price

As is always true in business, your product, in this case your business, is only worth as much, as someone else will pay for it. Ultimately, supply and demand determine the price of a business or brand. So it can happen that your company is worth quite different things to different prospective buyers. So for a prospective buyer from, say, Berlin your company may be worth more than it is to another prospective buyer from London. 

These different and individual considerations when calculating a selling price could lead to price negotiations between you and a prospective buyer that you might only know from the flea market. But your e-commerce is not junk goods that should be sold undervalued.

To avoid selling your business undervalued and to avoid wild negotiation situations between seller and buyer, you can rely on proven business valuation methods. The M&A industry is namely committed to the common goal that a selling price is not determined according to purely subjective impressions. That is why there are several valuation methods based on financial ratios as well as qualitative assessments of a business. It is important for you to know which financial ratios and qualitative valuations affect the purchase price and how. 

In what is called a business valuation, there are a number of methods for calculating a selling price. Most of them have been used for many years and are well established. Among all the valuation methods, the so-called multiplier method in e-commerce for company sales has become the most widely used. This is good for all parties involved, because the determination of a so-called multiple is simple and quickly understood.

The calculation of the selling price based on a multiple looks like this: 

(Net profit of the most recent 12 months – SDE) x Multiple = Sales price

As an example:

Net profit of the last 12 months: 575,000€

SDE: 75,000€

Multiple:

 (575,000€ – 75,000€) x 3 = 1,500,000€ sales price

As a basic guide, a multiplier reflects how many annual profits you sell. So if you hear about a company sale with a multiple of “3”, the seller has received three net annual profits for their company. Conversely, the multiple reflects how many years it will take a buyer to earn back the purchase price given the current profitability of the business. 

The range of multipliers for e-commerce companies is between 2 for a not very well organized company or a very small brand and 5 for very well organized companies with strong top sellers. 

To determine a multiplier, the most essential characteristics of an e-commerce company are used as criteria. These criteria are mainly sales, margin, listings in search engine results or marketplaces, the quality of the brand, and the organization of the company. For these criteria, the better the values, the higher the multiple. The following diagram shows an example of how a multiple of “2” or “5” is selected as the multiplier for a company or brand in practice. The values shown for the six criteria are to be understood as example values and may be different for individual deals. 

The chart summarizes that a company with the following characteristics has a very good chance of being a multiplier if:

  • Revenue is greater than ten million
  • Average margin is above 50%
  • The Marketplace merchant or FBA has more than ten top listings
  • At least two or more well-known brands to sell
  • The organization is highly standardized and automated
  • The future owner foresees strong growth for revenue and profitability

From the seller’s point of view, multiple means: multiple “1” equals one net annual profit. Multiple “2” corresponds to two net annual profits. Multiple “3” corresponds to three annual profits (net) and so on.

You want to get the best price for your business? Then become a Lucky Flipper too and arrange your free initial consultation with us:

__________________________

Facebook | Instagram | YouTube | LinkedIn

imprint | privacy