Free Instant E-Com Business Valuation
Are you thinking of selling your Amazon business or your DTC brand? Or just calculating the value of the asset you have built? If you would like to know how much it is worth, a business valuation is the starting point.
This free valuation calculator will calculate the value of an e-commerce business. Just enter the details and you will receive a tailored valuation.
To understand more, please see our explainer on e-commerce business valuation multiples below.
Understanding Amazon & DTC Business Valuations
Business valuations are usually described in terms of a “multiple” of earnings. But before comparing multiples it’s important to ask “Multiple of what?”
Including or excluding the earnout can dramatically influence the multiple, and in the cases of uncapped earnouts this isn’t truly calculable. We’ve even seen inventory included in some of the “multiples” people have quoted (usually the buyers).
But firstly it’s useful to understand the components of the deal.
COMPONENTS OF THE DEAL
EBITDA: Earnings Before Interest, Tax, Depreciation and Amortisation. A common earnings metric used by both public and private companies.
Seller’s Discretionary Earnings (SDE): An adjusted net profit metric after some costs have been “added back”. Technically this used to mean one owner’s salary and some non-recurring overhead costs, but in the current seller’s market the approach to add-backs has become more aggressive. Depending on the competitiveness of the deal and other conditions, many of the overhead expenses (and even some variable costs in certain situations) can be added back. This creates an SDE which varies from slightly more than EBITDA to almost double the EBITDA, depending on the specific situation.
Revenue: top line sales, excluding sales taxes such as VAT. “Net revenue” can be defined many different ways and usually appears on financial statements after refunds are deducted.
Inventory: The value of the inventory at closing, including stock in Amazon FCs, 3PLs, other warehouses, at sea, and deposits on stock in production. Valued at landed cost.
Other Assets & Liabilities: All businesses have accounts payable and receivable, and some have loans and other liabilities also. Cash and other assets are also considered here. The total of all liabilities is often referred to as the total “Indebtedness” in acquisition contracts, while assets are simply referred to as assets. Inventory can be included here but in e-commerce transactions this is usually defined separately.
Working Capital: The capital of the business used in its day-to-day operations. The simple definition of “current assets less current liabilities” disguises the intricacies in actually calculating this figure. It is common in acquisitions for the buyer to ask for a normalised amount of working capital to be included in the purchase, but in e-commerce M&A the norm is for little to no working capital to be included in the deal.
At Hahnbeck we always negotiate for our clients not only to achieve the highest multiples, but the best terms. An important element is the inventory and how it is treated. We have successfully negotiated in all of our recent deals for 100% of sellable inventory to be additional to the price of the deal, with no working capital included – a so called “cash, debt and inventory-free” structure.
A MULTIPLE OF WHAT?
Here are the different decisions that have to be made when deciding how to calculate the multiple.
Revenue, SDE or EBITDA?
Multiples of revenue are easy to understand but are not commonly used in e-commerce. Instead it is a multiple of the adjusted net profit which is used, and commonly people refer to a multiple of SDE. However, SDE is so variable from business to business (because the negotiation around add-backs varies so much) that for comparison purposes we prefer to use a multiple of EBITDA.
Up-Front Payment, Total Guaranteed Payment or Total Deal Size?
In most cases the bulk of the value is paid in cash at closing*, with the remainder paid in “deferred consideration”. If this deferred consideration is not dependent on performance, it is guaranteed. If it is dependent on performance then it is not guaranteed and is usually referred to as an “earnout”. In some cases the buyer agrees to set a “minimum” which means that while the earnout is dependent on performance, there is a guarantee that some of the earnout will be paid, regardless of performance. There is sometimes also a “cap” which is the maximum amount of earnout that can be paid, regardless of performance.
* Including some cash which is held back during a transition phase
So when talking about multiples, any of the following could reasonably be used:
Multiple of the up-front payment
Multiple of the total guaranteed payments (i.e. up-front and any guaranteed deferred)
Total deal size (i.e. up-front and all deferred, right up to the cap)
In cases where the earnout is uncapped, how should the total deal size be calculated? One answer is that it cannot be. Another alternative is to use reasonable assumptions and project what the performance of the business will be (conservatively), state those assumptions and calculate the expected earnout amount based on these.
Inventory and Net Assets
We’ve seen many cases where the buyer has submitted a letter of intent (heads of terms), showing the calculation of the multiple, with the inventory included in the calculation. This makes the multiple look huge! It is entirely non-standard and is effectively in the realm of marketing. Cash, inventory, net assets or any other combination of assets and liabilities should be excluded from the calculation of the multiple.
SO WHICH METHOD IS BEST?
We believe the fairest comparison is the multiple of EBITDA, based only on the total guaranteed payments, excluding non-guaranteed payments and inventory.
Alternatives:
Using SDE is much more common, but SDE as a metric is so highly variable that we don’t believe it offers a true comparison. We will sometimes report multiples of SDE in order to speak the same “language” that the reader is speaking, in a context where we believe they are comparing the multiple to others, which are likely to be SDE. But we will always state whether it is SDE or EBITDA when reporting our own multiples.
In some cases it is also OK to report the total deal size including non-guaranteed earnout payments if reasonable assumptions are made, but even in this case inventory would normally be excluded for typical (<$20m) Amazon FBA deals*.
* An exception would be made with larger deals where “enterprise value”, including inventory and other net assets, is the typical way the deal is described.
SUMMARY
The important thing is to state not only the multiple, but what it is a multiple of, and how it has been calculated. This way the reader can understand it and compare apples with apples.
