Before You Start Thinking About Your Multiple, Get Clear on These Details

by | Jun 7, 2021

I’ve talked to thousands of ecommerce business owners who want help selling their saas, content, and product businesses. The first and most common question I hear from them is, “What kind of multiple are things selling for now?” In most cases, they have a vague idea of what their business is worth, and they think the multiple is the missing piece—the magic number that will reveal their business’s true value.

Be honest: you’ve thought the same thing, haven’t you? It’s okay. You’re in good company. The only problem is, most of the time, this question is premature.

An inexperienced broker or a direct sale to a buyer might give you what seems like a great list price, but if it’s based on an incorrect discretionary earnings calculation, your total valuation could be a gross undervaluation. Or, it could be too high, and then the deal will get renegotiated or fall apart in due diligence. That’s why, before you even start thinking about your multiple, you need to get clarity around some key details.

Your Financials Should Support Your Multiple

Several years ago, a client (husband and wife) from New Zealand came to me with a drop-ship wig business and an art supply business. We had spoken for some time about the first, but the second had taken off like a rocket and they were excited and eager to sell. 

For four years, they had enjoyed the flexibility of running an ecommerce business while traveling and raising their little girl. However, it was time to settle down, and they were under contract to buy a house. The only catch was that their atypical overseas income made it difficult to secure a bank loan. They had to pay cash for the house, and that cash was wrapped up in the sale of their business.

“Full disclosure, Joe,” they told me. “We’ve spoken to two other brokerage firms as well, and they’ve given us a multiple. We want to run it by you, too, since we already have a relationship.”

As usual, I started the valuation process by digging into their financials to assess what they actually had. About 80 percent of their revenue came from Amazon and 20 percent from a separate ecommerce platform. 

Plus, the business was only 18 months old. Combine all of that with just a few SKUs driving the majority of the revenues, and there was a good bit of risk to overcome.

Artificially Inflating Values Won’t Work

Despite the obvious risk factors, the other firms had edged up the multiple to 3.2 and 3.3 in an attempt to reach the seller’s financial goals. In my experience, artificially inflating a value with a stretched multiple doesn’t work. Instead of following suit or sending them away, I examined their financials more closely to determine what else we might be able to use. It didn’t take long to have our answer.

One of the first things I found was that their financials were presented using cash-basis accounting. In this situation, using cash-based accounting depressed their Seller’s Discretionary Earnings, or SDE (which is net income plus add-backs over the trailing 12 months), and the overall value of their business.

We sorted out how to calculate their landed cost of goods sold on an accrual basis, which is the Generally Accepted Accounting Principles (GAAP) method, then shifted the P&L accordingly. This one changeover to the correct accounting method more accurately demonstrated their income—and increased their SDE by about $75,000. 

That allowed us to bring the multiple down to a more reasonable 2.7 in light of the business risks. Despite the lower multiple, we exceeded their financial goals and the suggested list price by the other firms. Their business sold for cash at the full asking price, and it closed within thirty days. They were able to close on their dream home because we focused on getting the details right before we worried about their multiple.

Wrong Details Are Costly

There are enough layers between your business and its multiple that could mean losing tens of thousands of dollars (and potentially the realization of your goals) if you get the details wrong. 

A too-high multiple will make buyers skeptical and may even prevent them from looking at your listing. A too-low calculation of financials will leave money on the table.

Get the details right, and you might get multiple offers and your choice of a buyer. At the very least, you’ll arrive at an eventual multiple that makes sense and facilitates an accurate value for everyone involved.

That’s why you need to get clear on the details of your business. Are you using accrual-based accounting? Are your financials clear? Do you know what your SDE is? Do you have a clear understanding of what the process of valuation entails? Make sure you can answer these questions accurately before you focus on the multiple.

There’s Far More to Your Business Than the Multiple

It can be seen as a badge of honor for a business owner to have a high multiple. Yet, if the valuation isn’t based on accurate numbers—if the earnings weren’t calculated properly or the multiple doesn’t reflect the true value of the business—that high multiple is worthless.

My best advice for you when thinking of selling your ecommerce business is to make sure you get the details right. Then, take whatever steps are necessary to ensure you can provide potential buyers with good data and a complete picture of your business. 

Whether you sell a physical product or have a SaaS business or content site, do these things before you start worrying about your multiple. Then—and only then—is it time to start thinking about your multiple.

For more advice on how to increase your business’ value, you can find The EXITPreneur’s Playbook on Amazon.

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