What would you say are the most common valuation multipliers for...?

[DaveR]

The following online business categories right now:

- eCommerce (Drop ship)
- eCommerce (Inventory)
- SaaS
- AdSense/Content

Seems that Penguin just killed the last category there from what I saw as 18-36x monthly net revenue to more like 6-12x now because of the traffic deaths.

Would love to hear other's opinions and ranges on these.

[Clinton]

I don't believe there are "common valuation multiples" or that it would be a helpful figure if it were calculated. Each site is individual and each buyer has his own perspective on what he can do with the site and what he's willing to pay for the revenue streams and risks he envisages.

Seems that Penguin just killed the last category there from what I saw as 18-36x monthly net revenue to more like 6-12x now because of the traffic deaths.

I don't see why the loss of a particular source of traffic for Adsense sites should affect the mulitiples people are willing to pay for them (unless they are clueless and basing their calculation on historical profit rather than profit projections)

Seems that Penguin just killed the last category there from what I saw as 18-36x monthly net revenue to more like 6-12x now because of the traffic deaths

Is this from a proper study? I would be interested in seeing the full set of figures.

[akirk]

If traffic in is lower (due to Penguin) then the total will be lower anyway - no need to change the multiple - the lower traffic will drive lower prices anyway!

Alasdair

[TrustButVerify]

Clinton is right in that there is no set multiple, per se. But it is common to throw around the multiple of 1-2 years of net income as a starting base and things go up and down from there. Flippas own statistics do support that... but of course they're mixing in all classes of sites.

- eCommerce (Drop ship)
- eCommerce (Inventory)
- SaaS
- AdSense/Content

I don't think it's really a question of an adsense site gets 1-2x yearly net and an ecommerce site gets 2-3x - it all depends on the site and who's buying it. Big dumb companies buy up companies at insane multiples to gain marketshare or push out the competition.

I would argue that more than 50% of sites sell for 1-2x yearly net revenue. That's usually what I pay at least.

[djilm]

I believe there are some variations in valuation in ecommerce with dropship versus inventory businesses or at least there are more interested buyers for dropship which in turn leads to slightly higher prices, the only data I have to support that is from reading listings from a variety of sources.

Overall, what I find most interesting though is that small business valuation whether websites or brick and mortar still holds to an average. According to the bizbuysell Insights Report which reports the averages of all the sales of small businesses on their site for the year and is a compilation of some 6,700 businesses sold in 2011 and the average cash flow multiple was 2.36 annual net.

When I started buying businesses twenty years ago, the average multiple was about 2.0 and has inched up a little, but some of the basic return on investment principles apply whether it is an internet business or not.

[David S]

I believe there are some variations in valuation in ecommerce with dropship versus inventory businesses or at least there are more interested buyers for dropship which in turn leads to slightly higher prices, the only data I have to support that is from reading listings from a variety of sources.

Overall, what I find most interesting though is that small business valuation whether websites or brick and mortar still holds to an average. According to the bizbuysell Insights Report which reports the averages of all the sales of small businesses on their site for the year and is a compilation of some 6,700 businesses sold in 2011 and the average cash flow multiple was 2.36 annual net.

When I started buying businesses twenty years ago, the average multiple was about 2.0 and has inched up a little, but some of the basic return on investment principles apply whether it is an internet business or not.

Those multiples (2.36) must be for really small businesses. A difference is size can make a big difference in multiples. For example, a report created recently from data from CapitalIQ (an S&P company) for the period between 2000 and 2010 showed average multiples ranging from a low of 6.95 (2009) to a high of 9.05 (2005). Those were middle market companies and went up to $750 million in deal size.

In my own legal practice, which is obviously not a scientific sample, I have seen deals in the lower middle market (say up to $20M) fall from multiples of 6-8 which were common in the mid-to-late 1990s and settle in the 3-5 range over the last few years. Of course, those are very rough guidelines and there will always be deals that for one reason or another are way over or way under those figures. The bottom line, however, is that a company with net income of $3 million might have reasonable expected to sell his business for $18-$24 million fifteen years ago, while a more reasonable expectation today would be in the $10-$15 million range.

For businesses with income of less than $500,000, those numbers typically drop further. In that range, I think the quoted 2.36 is pretty likely correct.

When people shift from talking about multiples of net income (or better, EBITDA) to talking about multiples of revenue, in most cases the comparisons cannot hold up to any scrutiny. There are a few industries (such as home security companies) where companies are routinely sold based on monthly recurring revenues, but in those cases there are typically subscribers with contracts that will produce known revenue and have a historically tested attrition rate.

Even when you break websites down into subcategories as DaveR (the OP) did, you are still comparing apples and oranges. One e-commerce site with inventory may have a turnover rate of 12x a year while another might have higher-value inventory that turns over only 5x a year. The net income would show the carrying cost of inventory, but the revenues would not. More important, one might have 40-50% margins while another might be selling items with a measly 15-20% margins. Or one could be relying heavily on PPC and other advertising while the other gets sales from organic searches. There are simply too many unknown variables for multiples of revenues to ever be truly useful measures of sales prices.

[djilm]

Yes the 2.36 multiple is for very small businesses since that is typically what is on BizBuySell, actually the same report that showed that average multiple was for 6,703 businesses sold in 2011 with a median selling price of $155,000 and with median revenue below $400,000.

There are simply too many unknown variables for multiples of revenues to ever be truly useful measures of sales prices.

When it comes to valuing really small business with sales under $500,000, I agree that any multiple of gross revenue is useless, but a multiple of net income is reflective of the value of the business to a buyer.

[W3Business]

2.36x net earnings is probably a reasonable place to start for an internet business with net earnings of $100K up to $300K. However, if the website generates larger cash flows then the multiple will increase. Other factors such as growth rate (or lack thereof) will also either increase or discount the multiple. Additionally, the website's business model, traffic and longevity will affect the valuation multiple as well. Finally, macroeconomic conditions, such as the condition on the economy and availability of or lack of credit will have an impact on valuations. For instance, in 2007-2008, we saw viable internet businesses selling at 3.5+x net earnings as banks were financing deals. Nowadays it is nearly impossible to get an SBA loan for the purchase of an internet business.

[Clinton]

Hi W3Business and welcome to experienced-people.net. It seems you're from a merger and acquisitions firm. Why don't you start a thread in our Introductions section and tell us a bit about you and your own personal background?

When it comes to valuing really small business with sales under $500,000, I agree that any multiple of gross revenue is useless, but a multiple of net income is reflective of the value of the business to a buyer.

That's true of all businesses, not just the <$500K ones.