State of SMB Valuations 2024

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TLDR;

- How Picky should I be when I’m Buying A Biz?

- The State of SMB Multiples 2024

Takeaways:

SMB multiples for eCom and Amazon bizs are ~3x.

1. Don’t believe the headlines. There’s a whole market that determines the valuation of deals in every market. Outliers don’t define prices.

2. Amazon bizs typically trade at lower multiples.

3. Deals are still getting done, but not at the headline breaking numbers

+ Why big decisions always are a “Hell yes!” or a “No”.

LBAB Community: How Picky should I be?

Something that I constantly grapple with when we're looking at deals is how picky I should be. Or to flip it, how in love do I need to be with this deal to pull the trigger?

It’s the biz equivalent of dating.

Sometimes I ask myself how many of these deals should I have just pulled the trigger on? There is a real FOMO not doing deals.

You always have to know who you are, what you’re truly great at, what your blind spots are, and then know that nothing will ever be perfect but greatness still exists.

But when do I stop looking for the perfect one and pick the ones that’s right for now?

What parts of the biz are you okay that they are the way they are, knowing that you need to be patient, fix them over, and be prepared that something might not be “changeable”.

It's been a really interesting journey over the past four years. Especially as I've evolved along with the biz dating game. 

For me personally, I think a biz needs to check 80% of the marks, and we have to be extremely excited about it to say yes.

The one question that I always ask my biz partner, David, when we're deciding on a deal: do we want to do this for the next decade?

(Do we want to spend all of our working hours working on this project, building it, obsessing over the customer base + product + problems that we know we're gonna face?)

I think it's similar to how you pick a partner. And in some ways how I decided to pick my wife: it's either a hell yes or it's a no.

If you just can't get illogically excited about it, then it probably isn't the right fit.

So the big question I’m asking now is what deal can we get illogically excited about?

We know it's gonna suck sometimes.

We know it's gonna have problems sometimes.

We know it's gonna be a difficult 5 to 10 years of fixing, building, repairing.

But it's gonna be worth it because we're so excited about what it is and what it will be. Regardless of what ultimately plays out, it's gonna be a great run, and this is the thing that's worth getting after.

That's why we've passed on so many deals over the years. 

We're still searching for “the right one.”

Let’s Analyze SMB Multiples

We spent the last 2 months analyzing 70 SMBs (eCom & Amazon) that exited between January 1, 2023–May 15, 2023 to get you better data on where SMB multiples currently are.

Context to know:

• Total offers: 187 (2.7 offers/deal)

• Total transaction value: $84.7m 

• Transaction range: $34k–$7.25m

• Median multiple: 3x

• Median earnings/biz: $382.6k/biz/yr

Note: The data that we’re analyzing is what these bizs closed for. Not what they were asking originally.

This content is not legal, financial, tax, or any other advice. And I was never here 😉. This is for information purposes only and we do not claim that any of the data presented is representative of any specific deal or potential outcome of you selling your biz.

Now let’s get to the good stuff.

Thank you to our Sponsor: Quiet Light

I want to quickly thank Quiet Light for sponsoring this report. It took us months to source, analyze and create insights on this data. While I get to put my face on these things, there’s a team of hard working people who help me put these reports together. 

There’s also a ton of content Quiet Light shared on how biz owners can prepare to sell their biz and increase their valuations that we synthesized into bite size pieces for this report, but there were 10s of articles (all 1,000s of words) that they built and helped us consolidate.

If you are looking to sell your digital biz (eCom, Amazon, SaaS, Agency Content) they are great partners. We have looked at a couple deals from them before.

1 of the great things about Quiet Light, in addition to the incredible content they put out is, the number of sellers I’ve met that originally bought the asset they were currently selling from Quiet Light. When a buyer is so happy with a service that they turn around and become a seller. That’s a good sign.

Let’s Talk Multiples

The standard multiple is 3x Earnings across the 3 biz types, but there is some variation:

1. eCommerce (DTC): 3.41x (w/ inventory 3.66x)

2. Amazon: 3.07 (w/ inventory 3.42x)

So if we had a $5m biz with $1m in profits/yr, exits would be:

1. eCommerce (DTC): $3.41m (w/ inventory $3.66m)

2. Amazon: $3.07m (w/ inventory $3.42m)

There are many factors that impact each individual deal and how they are valued, but… 

Biggest Takeaways for me:

• Amazon was all the rage, but valuations for FBA has cooled on FBA bizs. (Nice to be validated there).

• Multiples are brutal in the Pet space right now.

• There are a lot more terms that go into SMB deals than just purchasing. They aren’t Mid-Market complex, but not as simple as they seem.

Let’s Analyze Biz Categories

We grouped all eCom + Amazon bizs together to see the multiples by biz category.

Overall, multiples across categories hovered around the 3x mark, with some specific categories like Computer & Electronics breaking 4x and Animal & Pets dipping down to 1x. 

There are many factors that go into these multiples but 3 high-level takeaways to gauge acquirer sentiment:

1. Acquirers are bearish on Pets. After the great COVID boom, the fear is a lot of the demand has been pulled forward and growth won’t continue at the same pace. Combined with a whole lot more competition.

2. Computer & Electronics typically have higher AOVs which = larger Gross Profit $$$. Certain Acquirers know how to run this play.

3. Other categories like Health & Beauty and Baby & Toddler trade at 3.5–3.6x multiples, as these bizs traditionally have higher Gross Margins and existing markets of acquirers to tap into.

Check out the full report to go more in-depth on size of earnings, multiples and overall valuations for each category.

In the Full Report, dive into…

1. Glossary of financing terms and what they mean. What’s the difference between Seller vs. Performance financing?

2. Why are Amazon bizs valued lower than eCom (DTC)?

3. The differences in multiples across categories for eCom/Amazon brands (Apparel vs. Beauty).

4. Financing Terms data. How are deals getting structured + what does that mean for you personally.

5. Advice on how to increase your multiples and valuation.

6. Process for how to get your biz ready for a sale + make it more valuable to acquirers.

7. Buyer’s perspective to understand how a buyer is analyzing your biz from myself and a couple of SMB buyers in the space.

Check out the full report here.

Final Thought:

Broad averages are helpful, but they’re just a starting point. Don’t ever accept headlines as universal truths. Usually, headlines feature exceptions/outliers, not the norm. Big #s drive clicks.

There are 180+ points we analyze in every deal we consider. There are many factors that go into how we value deals. SMB deals are a little simpler than the typical lower mid market deal we look at because they have less going on in them, but averages help set a baseline.

The “market” is a major determinant of that baseline price for deals. 

We aren’t breaking the laws of economics here. Market value will set the baseline then the finer points of the biz will determine where the final number nets out.

A great example here. If you are looking to sell your SMB biz, if it  falls squarely into SMB territory (2-3.5x multiple), and if you’re looking for a 10x multiple or a Revenue multiple, it’s going to be tough to find buyers willing to pay that price. It’s too far away from where the market currently stands.

All in all, there needs to be more visibility into valuations/multiples and how these deals get done. 

There’s too much information asymmetry between biz owners and acquirers that the stereotype “biz acquirers screw over sellers” prevents good deals from getting done.

Our goal with this report (and all of our content, really) is to provide you, the biz owner, with more information about how these deals do get done + multiples so you know more about how to properly sell your biz (and how much $$$ you can get for it).

Thank you again to Quiet Light for being our premier sponsor and providing us with great info on how sellers can better prepare for an exit. 

If you are looking to sell your biz (and don’t meet our investment criteria 😉) talk to the Quiet Light Team. They’ll be able to help you dot all your i’s and cross your t’s to be prepared to make that sale.