Data Shot is a series that gathers and reviews data from the Hatchit Marketplace. You will be able to use it as a guide in your business transaction process, and as a way of identifying useful insights.
This Data Shot looks at the relationship of earnings to price multiples. Shannon Pratt, a leading expert in business valuation methodology, has written extensively on this topic. His research has demonstrated the relationship between the size of a company and its multiple. Pratt explains, “Larger companies are less risky, and therefore, are priced in the market reflecting lower discount rates and higher market multiples.” However, does this conclusion apply to our smaller e-commerce companies? We looked at 132 e-commerce businesses for sale on Hatchit with less than $2 million in SDE (seller’s discretionary earnings).
Note: To ensure accuracy, statistical outliers were eliminated.
You can see how the dots congregate around the mean of 3.49 with relative symmetry, and that the trend line is essentially flat. So, company size is not driving valuation multiples in our dataset. Why is this? It’s possible that there are simply an insufficient number of observations, particularly at the higher end of the SDE range, where we might expect to see a “break”. Or, perhaps the size band we’re looking at is too limited. Alternatively, it’s also possible that in an online environment with competitors like Amazon, risk is not reduced as readily with size as it might be in other environments. Regardless, the graph offers buyers and sellers of <$2 million SDE e-commerce companies a sense for typical multiples in the space.
Questions to consider with your adviser or business broker:
- At what size level do multiples begin to increase with e-commerce and with other companies? How might I use this information in my acquisition search?
- What factors affect the profit multiple of my small business: IP and other assets? Marketing strategy? Revenue consistency?
- How can I maximize my ROI (return on investment)?
If you are interested in exploring a complimentary business valuation, please reach out to us. We’d be glad to help.