eCommerce Website Valuation
E-Commerce websites might have some of the widest possible earnings multiples out of all online business models. From sites selling Alibaba products trading at 0.5x earnings to stores with proprietary, custom manufactured products selling upwards of 5x, eCommerce multiples can vary drastically.
This guide speaks specifically to ecommerce stores that stock physical inventory. If you have a dropshipping site, you can read our dropshipping valuation post here.
On average, eCommerce stores sell for 1.5x-3.0x earnings. But how do you know if your ecommerce website will sell at the low-end, high-end, or even at a multiple outside of that range?
Valuation isn’t an “if this, then that” calculation, so we can’t give you an exact answer. Valuation is a factor of risk and the current market environment. What we can do is tell you the 5 most important factors that affect ecommerce valuation. Based on how your business stacks up to these 5 factors, you should be able to get a good feel for the value of your ecommerce website.
5 Top eCommerce Valuation Factors
- Is your product proprietary or unique?
- Barriers to entry and competition
- Reliance upon paid advertising
- Brand value
- Owners time requirement
1. Is your product proprietary or unique?
To fall on the upper side of the valuation range, having a proprietary or unique product is important. This ties directly into reason 2. If your product isn’t unique, what is stopping someone from replicating or re-selling your product?
To clarify, the product doesn’t need to be the only one of its kind. If you are simply importing products from a China manufacturer who owns the product design and then re-selling them, you are going to fall on the low-end. However, if you own the designs to the products, they are branded, and the manufacturers only make them for you, then this checks the box.
Buyers don’t want something that is easily replicated. Here is what buyers like to see:
- You own the product designs
- You have an exclusive relationship with the manufacturer to only make it for you
- It is branded, or private-labeled
2. Barriers to entry and competition
If your product is unique or proprietary, you certainly have a higher barrier to entry.
As a good example. I run an ecommerce store that sells automotive parts. They are OEM parts, not proprietary, not custom. I use a mixture of in-house fulfillment and dropshipping. If you knew who my supplier was, had a legal US business entity, and a state sales and use tax license, you could do exactly what I do. Also, I’m one of probably 20+ stores that sell this product online.
My store has a low barrier to entry and high competition. Unfortunately, that’s a negative factor for the valuation of my ecommerce store.
However, you could also have a store that has a higher-barrier to entry, but still a lot of competition. For example, if I owned a performance car parts business, it’s relatively difficult to design and manufacture a custom exhaust system. The difficulties of that alone with deter 99% of people on the internet from trying to replicate my business model. But, there are also dozens of other companies selling custom exhaust systems. I have barriers to entry, but still heavy competition.
Clothing ecommerce stores sell for lower multiples because internet jokers can replicate them for $10 – literally. To maximize value, your ecommerce store should have serious barriers to entry and a limited competition set. And hopefully some advantages over the competition.
3. Reliance upon paid advertising
You should 100% be utilizing paid advertising on your ecommerce store, if it makes sense. But, if paid advertising is 100% of your revenues, you are going to get a low valuation multiple.
Stores that live off of paid ads are doomed to eventually run dry once they have saturated their target customer base or a competitor enters the space and doubles CPC costs. They likely have very little brand value, a low returning customer rates, etc.
The second issue is that, not only does the buyer need cash to purchase the business, they also need cash to dump into the 1st month of advertising expenses. We’ve seen $200k stores that run $50k of monthly ads. As a buyer, you would now need to fund an additional $50k just to cover the first month of ads, and that’s 25% of the purchase price.
4. Brand value
The cheapest and best customer is the one that loves your brand. The one that doesn’t need to be advertised to to keep coming back. The one that shares and posts your product all over their social channels, tells their friends, etc.
We see so many ecommerce stores nowadays that have very little brand value.
We can measure brand value by looking at social media presence, organic and direct product sales, repeat customer rates, organic media mentions, etc. And stores that have a brand will sell for higher multiples than those that are not branded.
5. Owner’s time requirement
Time requirement is a huge factor for any online business. However, even more so for ecommerce stores that stock physical inventory.
Most online business buyers own a portfolio of other businesses and websites. If you are the bread and butter of your store and run the marketing, handle customer service, pack and ship products, and manage all other aspects, you likely spend a lot of time running your business.
Most website and online business buyers don’t have 40 hours a week to run a new business. More time required by the owner equals a lower valuation.