In general, most online businesses usually sell within the range of 2.0 to 3.0 times the Seller’s Discretionary Earnings (SDE).  However, there are outliers as there are certain sections of the market (mostly businesses that sell and provide consumable goods and services) that command (and at times exceed) the higher range of these multiples.

Why are those companies selling at premium multiples? Here are the reasons:

Longevity

A website business that has been around for a decade or longer will certainly warrant a higher multiple than a similar one with less operating history. The business will likely have well-indexed keywords which is invaluable to the site’s organic traffic. Buyers will pay extra for a more established online business with a viable future and historical cash flow as there will be less risk and greater predictability.

Wide customer base

Companies that sell everyday products and services such as health and beauty products, sports and fitness products and pet products for instance, have an advantage of being appealing and easily understood by a wide range of potential customers.  These companies might have a wider potential market than other more niche businesses which may only appeal to a more limited market.  Prospective business buyers understand the demand for these consumable products, which customers might use recurrently and then buy again in the near future, which makes the acquisition of that sort of online business more attractive.

Built-in revenue

If a company comes with an established residual revenue base, it will automatically generate a higher price. Companies with strong customer bases create security for a business unlike trend companies where most customers are one-off buyers in a market which might not be hot for long.  Buyers of businesses with recurring revenue streams know they have a viable and sustainable established customer base to work with, allowing for easier expansion; it’s much more efficient to cross-sell additional products or services to an existing customer than to acquire new customers. That is the inherent “low hanging fruit” which is highly valuable. A prospective buyer also knows that reaching and acquiring new customers will be more feasible when having a strong financial foundation as a turnkey platform to work with. Furthermore, reaching and acquiring new customers by exploring new marketing mediums and sales channels is more viable when revenue streams are strong in other areas of the business. Examples of eCommerce businesses with high repeat customer rates would be ones selling consumable products such as razor blades, water filters, pet food and supplies, cosmetics and personal goods, baby products, etc. Some examples of service businesses with high recurring revenues and customer retention rates might be SaaS (software as a service) businesses or digital marketing agencies.

Limited specialized knowledge

A business with a short learning curve and smooth transition – one that a potential buyer with just general business knowledge can acquire and start running immediately will command a higher multiple than one requiring special knowledge.  Generally speaking, the majority of eCommerce businesses do not require too much experience or specialized knowledge and a new buyer can easily take over and manage the business with ease. With some service industry companies, especially when there is a saturated market of companies offering the same service, it may take some specialized knowledge to stand out. An easy way to analyze this variable is by using the simple economics of supply and demand.  With little specific knowledge required, the business can appeal to a larger pool of potential buyers and thus have greater overall reach and demand. On the other hand, should a specific skill set be required of the incoming buyer, then there will be fewer potential buyers available and subsequently less competition for the business.

Passive Income Websites

Another online business that usually demands a higher multiple is an AdSense website; a passive online information portal/web directory which derives 100% of its revenue from advertising displayed throughout the website. With many of these websites, the “heavy lifting” has already been done and the site continues to carry a considerable amount of weight as it relates to organic traffic rankings. Unlike many other internet businesses that are subject to the overhead costs associated with selling tangible products, this sort of business maintains an extremely low working capital structure with steep profit margins. These businesses generally do not require office space and are run from an owner’s home, mostly on autopilot with the owner spending very little time operating the business. This is an attractive business model as the website receives 100% organic traffic and generates revenue as users click on the relevant ads which are placed on the site. In layman’s terms, Google AdSense is an ad network that allows an owner to place ads on his website and profit when people visit the site and then click on the ads. The program uses keywords and other data to place ads which are relevant to the website content. When visitors come to a website and click on an ad, Google earns money from the ad placement and then pays the website owner a percentage of what is earned.  The individuals creating these ads are marketers using Google AdWords, who have decided to expand their reach beyond just Google search.  Therefore, Google reads AdSense websites, analyzes their content, and then targets website visitors with relevant ads, which come from the marketers who are using AdWords to associate their ads with certain keywords.

To sum it up, different prospective business buyers want different things from a business and each has his or her own investment criteria. But in general, companies that maintain the above invaluable characteristics and sell or provide consumable products and/or services needed by a large base of customers command a substantially higher multiple than those with more of a specialized niche.