Below are 27 factors that comprise an algorithm which National Diversified Funding Corporation uses to calculate the purchase price (valuation) of Amazon storefront type companies for sale.
Why are these 27 factors important?
It's not enough to say Amazon storefront companies are valued at four or five times EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). Some should be valued as low as two times and others might command a six times multiple. So what makes the difference?
EBITDA is the most significant factor in the pricing process and is typically applied to the last Twelve Trailing Months (TTM). The multiple that is applied to the TTM EBITDA must however be rationally evaluated in order to get to a reasoned valuation of the selling company. With a password provided by the seller, most of the 27 factors that modify the appropriate multiple can be calculated from unfiltered reports accessed directly from Amazon.
1. EBITDA Size – The larger the company's EBITDA size, the higher the upward pressure on the EBITDA multiple. It is simply more profitable to do a larger transaction than a smaller one given that the costs of doing a purchase and related financing are nearly the same. Financing options become more robust and money costs percentages come down as the transaction becomes larger.
2. EBITDA Growth Rate – The higher the growth rate month-over-month or year-over- year, the higher the upward pressure on the EBITDA multiple. The financing gets more efficient and the ROI for the buyer gets higher. Rapid growth rates translates into less risk for buyers and lenders allowing for rapid repayment of debt and the return of and the return on equity.
3. Volatility of EBITDA Growth Rate – the more volatile the EBITDA growth rate month-after-month, the higher the downward pressure on the EBITDA multiple.
4. Volatility of EBITDA Margins – The more volatile the EBITDA margin month-after-month, the higher the downward pressure on the EBITDA multiple.
5. Profit Margins – The higher the profit margins, the greater the upward pressure on the EBITDA multiple. Simply a high profit margin allows more room for changes in market condition, customer preferences, sales and discounts to spur sales.
6. Sales Size – The larger the company's sales volume, the higher the upward pressure on the EBITDA multiple. The reason is similar to EBITDA Size. In addition sales size (volume) can be calculated against the size of the market to determine future growth potential based upon market share.
7. Sales Growth Rate – The higher the sales growth rate month-over-month or year-over- year, the higher the upward pressure on the EBITDA multiple. The reason is similar to EBITDA Growth Rate. The impact of this field on the calculation can be modified up or down depending upon the current market share.
8. Volatility of Sales Growth Rate – The more volatile the rate of sales growth month-over-month, the higher the downward pressure on the EBITDA multiple.
9. Number of Product Launches During Year – The higher the number of new product launches during the last twelve months, the more the downward pressure on the EBITDA multiple. New launches tend to skew the growth rate higher than is sustainable once the product line is mature.
10. Number of Months Since Last Launch – The more months since the last product launch, the greater the upward pressure on the EBITDA multiple. The above referenced Growth Rates are more representative of future growth rates of a more mature product line.
11. Number of Unlaunched Products – The higher the number of unlaunched products (developed products awaiting launch), the higher the upward pressure on the EBITDA multiple. New products launched after the purchase will tend to increase the Growth Rates referenced above.
12. Number of Products in the Line – The higher the number of products in the line, the higher the upward pressure on the EBITDA multiple. With more products in the line subject to historical evaluation, the more stability of future sales and the less risky the purchase.
13. Number of Best Seller Products – The higher the number of Best Seller products in the line, the higher the upward pressure on the EBITDA multiple. The reason is similar to the Number of Products in the Line. Also more Best Seller products tends to be an indication of quality and customer satisfaction.
14. Time as a Best Seller Product – The higher the number of consecutive months that a product has been a Best Seller, the more weight that is given to its upward impact on the EBITDA multiple.
15. Platform Concentration – The lower the number of selling Platforms, the more the downward pressure on the EBITDA multiple. The higher the concentration on any one selling Platform, the more the downward pressure on the EBITDA multiple. While Amazon may currently be the best platform from which to sell the company’s product line, the risk of single platform or even Amazon as the company’s dominant platform places the company at a high risk to decisions made by Amazon over which the company has no control. Substantial sales on alternate platforms such as Jet, Walmart, Shopify and the company’s own website(s) reduce this risk.
16. Manufacturing (Supplier) Concentration – The higher the number of suppliers and the more they are interchangeable, the higher the upward pressure on the EBITDA multiple. The scalability of the supplier(s) weigh heavily on the company’s ability to continue a high growth rate.
17. Reorder Rate – The higher the Reorder Rate, the higher the upward pressure on the EBITDA multiple. A high reorder rate is a sign that customers like the product and growth in sales is likely to continue as old customer reorders compound with new sales. It also adds to the lifetime value of a customer which allows more money to be spent on marketing driving future growth.
18. Return (Refund) Rate – The lower the return or refund rate, the higher the upward pressure on the EBITDA multiple. Low return or refund rates tend to be an indication of quality and customer satisfaction yielding higher growth rates into the future. Low return or refund rates are viewed favorably by Amazon and the other platforms which is important for maintaining Best Seller status.
19. Subscription Ratio – The higher the Subscription Ratio relative to sales to new customers, the higher the upward pressure on the EBITDA multiple. Voluntary conversion to subscription is clear indication of customer satisfaction and an indicator of future sales growth as old customer reorders compound with the addition of new sales to new customers. Also the subscription sales lay in a more solid base for future sales reducing risk to the party acquiring the company.
20. Subscription Growth Rate – The higher the Subscription Growth Rate, the higher the upward pressure on the EBITDA multiple. When taken into account along with the Subscription Ratio, this factor takes on more or less importance especially if you consider a high growth rate where the Subscription Ratio is already high.
21. Number of Positive Reviews – The higher the Number of Positive Reviews, the higher the upward pressure on the EBITDA multiple. Amazon and the other platforms tend to position products in their line up more favorably when they have a large number of positive review which tends to create more sales into the future. Also customers tend to look for products that have a large number of positive reviews.
22. Review Reliability Rating – The higher the Review Reliability Rating, the higher the upward pressure on the EBITDA multiple. Websites exist such as reviewmeta.com that test Positive Ratings posted on Amazon and other platforms and determine, among other things, how many of them are real and how many are manufactured. The public and the platforms are becoming more sophisticated making this an important measure for the buyer of the company to take.
23. Number of Years in Business – The longer the company has been in business (selling the product on the platform), the higher the upward pressure on the EBITDA multiple until the end of year 3. Then the factor remains neutral after that. A three year history or longer is more attractive for financing.
24. Seller(s) Remaining Active – Seller(s) remaining active after purchase and where growth rates are high and more products will be launched tend to put an upward pressure on the EBITDA multiple.
25. Transferability of E-Commerce Marketing Know-How – The higher the rating on the first 22 factors along with the owner developer willing to stay on and help the buyer understand the marketing and profit building processes, the higher the upward pressure on the EBITDA multiple and the better the terms of the purchase.
26. Gating – The effects of the Platform’s gating (product approval) process on the Company including the grandfathering for existing sellers and its effect on the EBITDA multiple are still being evaluated.
27. Industry News & Trends – Platforms and products trading in the eCommerce space are the subject of frequent news releases regarding policies, procedures and trend information that can put upward or downward pressure on the EBITDA multiple.
If you are thinking of buying or selling an eCommerce company whether it's an Amazon Storefront, or on Walmart, Jet or Shopify or if it's a standalone website, check out http://nationaldiversifed.com or call (805) 497-1000 and ask for eCommerce Acquisition Finance to check out financing options.
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