what is valuation of a company, reasons for valuation, various methods of valuation, preferred methods to value an E-commerce industry, various factors to consider while valuing an E-commerce industry

1. VALUATION
OF E-
COMMERCE
INDUSTRIES
Suresh Sundar

2. What is Valuation?
“something is worth whatever someone is willing to pay for
it” – Old Saying
An estimation of monetary worth of something.
The process of determining the current worth (PV) of an
asset or a company.

3. Why Valuation?
• Investment analysis
• Capital budgeting (Funding)
• M&A
• Financial reporting
• Tax liabilities
• Litigation (disputes)

4. Features of Valuation
• Partly objective and partly subjective
• Depends upon the purpose and kind of business
• Time specific
• Prospective rather than historic
• Influenced by liquidity (directly proportional)

5. components
• Commercial
Tied to an asset and transferrable
• Non-commercial
Tied to personal attributes and non transferrable

6. E-commerce
EC is the buying and selling of goods and services or
transmitting of funds and data over an electronic network,
primarily the internet.
The benefits of this type of business includes
• Round the clock availability
• Speedy and easy access
• Wide range of goods and services
• International reach

7. Types
• B2C – Business sells directly to consumer
Eg: Nike, Amazon
• B2B – Business sells directly to another business
Eg: GoDaddy, Alibaba
• C2B – consumer provides service or data to business
Eg: Paid online surveys
• C2C – Customer who no longer needs a product can sell
to another consumer
Eg: e-Bay, OLX

8. Traditional Methods of
Valuation
Asset Methodology
Based on the value of the assets owned (land and building,
plant and machinery)
Future Earnings Methodology
An estimation of the present value of future earnings
Comparable Sales Methodology
By comparing with the value of the similar businesses that
have been sold

9. Discounted Cash Flow
method
• One of the most thorough ways to value a business
• Involves forecasting the free cash flows of the company
and discounting them with a rate(WACC) to consider the
time value
• DCF should be a serious consideration with stable
business and predictable cash flows
• The variance in monthly cash flows, immaturity of
business model and quality of financial data available for
E-com business makes it just a point of comparison.

10. Valuation of E-Commerce
• In a traditional valuation method Discounted Cash Flow
method is generally used as it is the most preferred
method.
• But as E-commerce is slightly different from traditional
businesses mainly due to their high reliance on goodwill,
multiple of earning method is preferred.
• It is based on future earnings (Net profit) of the next 12
months and a multiple is applied.

11. Multiple based Methods
• This method is preferred more in the internet business
world because of its simplicity and robustness in the
event of less financial or comparable data
• The “appropriate” multiple can be calculated based on
the particular business and all the aspects the valuer
seeks

12. Process of Multiple Based
Methods
• Identifying comparable assets (similar business) and
identifying their market value
• Converting these market values into standardized values
relative to a key statistic, since absolute prices cannot be
compared.
• It creates valuation multiples
• Applying the valuation multiples to the key statistic of the
asset being valued controlling any differences between
asset and the peer

13. Commonly Used
Multiples
• P/E ratio
• EV/EBITDA
• EV/NOPAT
Not all are based on Earnings or cash flows
P/B ratio
It compares market vale to the accounting book value of
the firm’s assets

14. Earnings(precedent
transactions)
• This is the average of all the earnings multiples that E-
commerce businesses are selling for in a particular year
• A multiple of 2.62 means that, on average E-commerce
industries are selling for 2.62 times the Net profit
• Other factors like growth trends, traffic sources and
business model also goes into valuation to find whether
a business is worth less or more

15. Multiple calculation
For Eg. In a particular year 3 companies in a similar industry
were negotiated and sold
C1 with a Net profit of 55,000 sold at 1,37,500
C2 with a Net profit of 72,000 sold at 2,23,200
C3 with a Net profit of 93,000 sold at 3,06,900
C1 multiple is 1,37,500/55,000 = 2.49
C2 multiple is 2,23,200/72,000 = 3.09
C3 multiple is 3,06,900/93,000 = 3.3
Average multiple for the industry is (2.49+3.09+3.3)/3 = 2.96
If we want to value another company C4 in the same year with a
net profit of 67,300
Value of C4 = 67,300 X 2.96 = 1,99,208

16. Example
BeardBrand is a consumer retail business that sells a range of men’s grooming
products including their most popular range of beard oil products who has
blogged on reddit about their journey to $100k per month in sales. The below data
is an estimate of their sales and profit projections.
• Year 1 – Sales of $220,678 and profit of $50,088
• Year 2 – Sales of $805,831 and profit of $140,436
• Year 3 – Sales of $1,532,685 and profit of $249,736
• Year 4 – Sales of $2,249,128 and profit of $456,089
Based on the data we analysed we can make the following assumptions about the
value of the business at each year.
• Year 1 – Profit of $50,088 @ 1.5X multiple = $75,000
• Year 2 – Profit of $140,436 @ 2.3X multiple = $322,000
• Year 3 – Profit of $249,736 @ 3.1X multiple = $772,000
• Year 4 – Profit of $456,089 @3.7 X Multiple = $1.68m
As you can see from the different values, logically the larger your business the
higher the exit value that you can have.

17. SDE and EBITDA
Sellers Discretionary earnings
• Used in case of smaller companies owned and or run by
manager or owner
• It will be difficult to separate what the owner or operator
gets and the earnings of the company
Profit of the business = total sales – COGS –Expenses +
owners wage

18. EBITDA
Earnings Before Interest, Tax, Depreciation and
Amortization
• Generally used to show an investor/buyer, how much a
company is earning
• The investor does not actively run the company and
must pay a professional manger to run
• So manager’s salary is included in earnings calculation

19. Gross Merchandise
Value(GMV)
• GMV is the total sales value of the goods sold through
the market over a period of time
• GMV for E-com means, sales price charged to customer
times number of items sold
• Flipkart has a real revenue (Commission) of Rs.300
crores but a GMV of Rs. 40,000 crores
• It does not necessarily mean the company is overvalued

20. GMV calculation
For Eg in a year a company sold 5 shirts of Rs.200 and 3
books of Rs.150 and 7 pens of Rs.50 and 10 bags of
Rs.250
GMV= (5X200)+(3X150)+(7X50)+(10X250)
GMV=4300
Value of the company=GMV X Valuation multiple
VM depends on how similar companies are valued.

21. GMV Valuation
• If we consider the Flipkart example their GMV is
Rs.40,000 crores and the industry multiple at the time for
E-com is 2.5
• Value of Flipkart = 40,000 X 2.5 = Rs. 1,00,000
crores(approx)
• The latest valuation of Flipkart is USD15 billion - Forbes

22. GMV Justification
• Often RE/VC firms exited from their investments at an
3X multiple
• For Eg. If I buy a 1/7th stake in Flipkart for $1bn in
anticipation that when it goes public its enterprise value
will become $21bn
• Then my 1/7th stake would be worth $3bn and I can sell
my shares at 3 times the money I have invested

23. Valuation Factors
Irrespective of the methods used there are certain valuation
factors that have to be considered while determining the
worth of an E-commerce industry
• Customer base & Market outlook
• Brand recognition
• Store traffic
• Operating costs and financial history

24. Customer Base and
Market Outlook
• A company with an active customer base and positive market
outlook will be worth more
• Active customer base means large number of repeat
customers
• It shows their product and service quality and the factors
include
1. Size of company’s email list
2. Churn rate
3. Uniqueness of customer base
4. Rate of growth of customer base
5. No. of competitors in same market
6. Cost of acquiring new customers

25. Brand Recognition
• A recognizable brand with a well good brand identity will
be worth more
• they have a large customer base and more goodwill
• Branding is very crucial for competing and shows a loyal
and growing customer base and also an already
established presence in the web and social media

26. Store Traffic
• Store traffic is the number of people visiting the
company’s website or app
• E-commerce heavily rely on traffic because the more
people visiting the store the more likely the company can
make sales
• But high daily traffic doesn’t always mean that it will
translate into high sales

27. Operational Costs
• Like any other businesses E-com also require certain
overheads to operate the business
• So a comparison of cost and profitability has to be done
• How the underlying costs can be transferred to the new
owner?
• How underlying costs can be reduced?

28. Other Factors
Scalability
How well can the business grow to meet market demand? Is
there room for the business to enter new markets
Product concentration
How much of the company’s revenues are reliant on certain
products? Do too many products make up for too few sales
Supplier agreements
How loyal are the suppliers and special supply agreements

29. THANK YOU