E-Commerce multiples low

January 25, 2023

by a searcher from University of South Carolina - Darla Moore School of Business in Charleston, SC, USA

I have come across a few deals in the e-commerce space and it looks as though the mutiples are very low, in many instances###-###-#### 25X EBITDA. I suspect this mainly is due to the short life of these companies, as many of them were started over the last 2-4 years. There there any other reasons why mutliples may be so low? Do e-commerce brands (selling on Amazon or Shopify) typically rise and fall quickly? Do they often have a few good years and then fizzle out? What are the primary factors making these so low? I'm not too familiar with this field, so thanks for any input.

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Reply by a professional
from University of Idaho in Boise, ID, USA

I'd second what Thomas is saying. In order to get people to the door with a new eCommerce biz, it takes a lot of PPC, which can be expensive. Not to mention that, during those first years, you're also working to hone in and optimize those ads, the user experience, etc. Organic traffic, which is what SEO focuses on, produces much more sustainable traffic over the long run. The problem is a sound SEO strategy can still take 6-12 months before it starts moving the needle.

For new online businesses, we usually recommend starting with PPC because it's instant, and starting SEO at the same time for the long-term strategy. As the SEO starts to generate traffic, you can start pulling back on PPC spend.

In the case of any eCommerce business, you'd need pretty strong margins AND well-tuned ad campaigns to make that work over the long haul. In my opinion, any viable eCommerce business must have some sort of SEO strategy in the works.

Hope that helps!

Reply by a searcher
from The University of Chicago in Chicago, IL, USA

Sometimes the multiples will be a proxy for how stable/repeated the revenue is-- you hit on it with the time that the company has been operating. To expand, early stage eCommerce companies often rely heavily on PPC traffic. Paid traffic is generally less sticky than organic traffic and sometimes the traffic can dry up when the PPC campaign ends (the growth is not sustainable). Other factors like seasonality, stability of inventory levels, exposure to platform risk (like Amazon), may also come into play. If you're looking at companies started 2-4 years ago, you could be looking at companies that have over/underperformed because of COVID and may have chunky financials. I'd look to SDE trends over the years to understand how the seller came up with an SDE figure and how that translates into a listing multiple.

In general, eCommerce is a pretty crowded space—the deals I’ve seen with higher multiples tend to be more niche.

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