The Ecommerce Explosion: The Emergence of Online Marketplaces in the LMM

When Shakil Prasla, founder of Pro Click Ventures in Austin, Texas, put two of his 12 e-commerce stores up for sale this spring – each with between $150,000 and $200,000 in seller’s discretionary earnings (SDE) –  both sold for 3.4x SDE. 

Prasla, whose firm owns businesses such as Gloves.com, is now marketing two other businesses and is bullish on those as well. “It’s just a hot market right now,” he says. “There are more buyers out there than inventory. It’s kind of like the housing market.” 

At the same time, Prasla is in the process of raising capital from a publicly traded fund to acquire more e-commerce stores selling gloves and inventory.

Buyers are increasingly aware that once it’s time for them to sell, it’s not hard to get a 30% return on investment, even with a 2x or 3x multiple. “It’s hard to get that anywhere else. People are realizing that more and more.” 

Prasla isn’t an anomaly. Owners are finding buyers clamoring and willing to pay attractive prices, with e-commerce stores becoming a new asset class for investors in the lower middle market. Many have been inspired by the e-commerce store aggregator and unicorn company Thrasio, which has raised $3.4 billion to date.

Financial advisory firm Peak Business Valuations found in April 2021 that e-commerce businesses were selling for an average multiple of 3-5x revenue; 2-4x SDE or 3-6X EBITDA. But that was last year. Prasla keeps his finger on the pulse of valuations by staying in close touch with brokers and lawyers in the space. “From a buyer’s perspective, I have definitely seen a trend,” he says. “When you have anywhere from zero to $250,000 in SDE, you’re typically able to sell it for 3.2x SDE. If you’re between $250,000 and $500,000, that multiple is about 3.6x. If you’re at half a million to $2 million, you’re at the 4-5x multiple.” 

Even with obstacles like supply chain issues, labor shortages, and rising advertising costs challenging e-commerce merchants, Prasla argues valuations haven’t slowed down. 

The market could get even better in the months to come. Gary Huang, a veteran e-commerce seller who runs the 7 Figures Seller Summit, an international e-commerce event for online merchants, says owners who have cashed out are generally receiving between 4-7x EBITDA this year. 

According to Huang, many factors determine what the final selling price will be. “Buyers are looking for a business track record of 24 months, continued growth, and some sort of business moat that would increase the multiple. These could include patents or IP protection, a social following, a brand with recognition, a portfolio of complementary products, annual revenue of $2-5 million (preferably more), and SDE of $500,000 or more. 

For businesses looking to position themselves for sale, Prasla recommends prioritizing bookkeeping. “Have your finances in order,” he advises. “All my businesses run through QuickBooks. It takes 2-4 weeks to prepare your finances to be able to sell.” 

Getting to know potential buyer preferences through networking in the industry is also critical. Ryan Gnesin, CEO at Elevate Brands, a venture capital-funded, Austin, Texas-based firm that has acquired 36 Amazon e-commerce stores since it was founded in 2016, says a business’s SDE and EBITDA are top considerations. His firm’s average purchase price for acquisitions is currently about 4x EBITDA, though it varies. “The size of the multiple will depend on the quality of the business,” says Gnesin.

Elevate Brands, for its part, only considers businesses with at least $1 million in EBITDA annually and margins around 25%. Generally speaking, the stores that command the highest prices from Elevate Brands have at least two years in business, have achieved leadership in their product category, have thousands of high reviews on Amazon, and sell high-quality products, according to Gnesin. “No amount of branding can turn a crappy product into a good business,” he says. He also avoids Fidget-Spinner-like fads. 

Elevate Brands also looks for the potential to expand the business — good news for entrepreneurs who feel they’ve left money on the table by failing to take advantage of every possible growth opportunity. “Can we grow this business by taking it to Amazon International?” he asks. “Can we put it on Walmart? Can we build a direct-to-consumer business? At the end of the day, we are looking for a business we can grow. The more growth potential we think it has, the higher the multiple.” 

Meanwhile, Benitago Group, a New York City firm that owns about 18 e-commerce stores selling consumer packaged goods on Amazon, has been paying about 2.5-3.5x EBITDA for targets with EBITDA below $1 million, and 3-4x EBITDA for brands above that, according to co-founder Santiago Nestares Lampo. For those above $6 million, it’s 4-6x EBITDA. “The reason I buy a business is they have an immediate value-add to our portfolio,” he says. 

To find acquisition targets, Benitago Group keeps a close eye on Amazon to look for businesses that are achieving best-selling ranks in their category. He uses tools such as Jungle Scout, an Amazon seller tool and research source, to supplement what he finds, but ultimately, he notes, “We like to go directly to the source.” 

Nestares recommends that sellers prepare for sales by getting legal counsel two to three months ahead of time, to avoid surprises during due diligence. “Clean up all the taxes. Make sure all the taxes have been paid,” he advises. 

For those that want to get the best valuations, he suggests soliciting multiple offers, rather than using the hardball tactics recommended in negotiation books. “Have more people at the table and make it a true competitive process,” he says. With all of the potential buyers out there at the moment, there’s no time like the present to pull in the offers.