Internet businesses for sale

Valuing an online business

Let's start with a very basic valuation formula
A straightforward formula is used for valuation: Monthly Average Net Profit x Multiple (Typically 20–60+). The wide variance in multiples reflect a number of factors: The size of the business, structure, industry specialism, stability of earnings over time, customer make-up, orderliness of accounts / contracts / systems.Two other related approaches are EBITDA multiple and SDE multiple.Let's look at each of these in turn.EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):This method is typically applied to businesses earning over £3 million annually, EBITDA is suitable for more complex structures with hierarchies and multiple stakeholders.
- Methodology: EBITDA accounts for businesses not being owner-operated, adding back excessive owner salaries and discretionary items for a fair comparison across the market.
Valuation multiples on EBITDA usually range from 3.5 - 6x for businesses with earnings for around £500k to £2m. As the EBITDA moves higher, the multiple also climbs, sometimes to around 10-11x.Seller Discretionary EarningsSDE is the preferred method for valuing small businesses generally in the US, but is also becoming somewhat of a standard for small online businesses eleswhere in the world.It calculates net earnings before tax, subtracting cost of goods sold and necessary operating expenses from revenue.
Adjustments in SDE: Owner salaries are added back to get a clear picture of the business's earnings. Discretionary earnings, or costs not essential for operation (like unrelated real estate or personal life insurance), are also added back.
Suitability: SDE is ideal for businesses with up to around £3 million in annual revenue, offering a clear view of cash flow independent of the current owner.EBITDA vs SDE
Looking at it another way, SDE = Adjusted EBITDA + 1 full-time Owner CompensationSo SDE is always a larger number than EBITDA.Be very careful when looking at price multiples for valuation purposes - are you looking at an SDE or EBITDA multiple? The distinction is super important, especially when comparing businesses.Nuances in Valuation:
Note that business valuation is nuanced and each business needs to be analysed in depth before an accurate valuation can be made.