What is EBITDA?
Has the thought of selling your Shopify business or any ecommerce business for that matter, crossed your mind? Not until now?
Even if it hasn’t, you most certainly will be interested in knowing what your business is worth. When it comes to online business valuations, there is a lot more than meets the eye. This complicated valuation process has quite a few different approaches to crack it.
EBITDA or earnings before interest, taxes, depreciation and amortisation is the approach you need to take when your ecommerce business is valued above $10 million. This means, when you’re running a large business with multiple stakeholders and a considerably complex ownership structure - EBITDA is your go-to methodology of valuation.
EBITDA is used to evaluate the company’s overall performance in terms of profitability before taking into consideration any uncontrollable or non-operational expense.
Get this - as per Statista reports, JD.com had the highest Enterprise-value-to-EBITDA (34.9) in 2020.
How do you calculate EBITDA for your ecommerce business?
As we’ve already seen, EBITDA sums up the earning power of your ecommerce business. This metric is often considered to be a precise measure of the business’ performance as it is able to show the actual earnings of the business before considering the influence of financial deductions and accounting.
EBITDA is calculated by adding the operating income to any depreciation or amortization expenses. So the formula you would need to calculate this is:
EBITDA = (Revenue - Expenses) + Depreciation + Amortization
Why should ecommerce business owners calculate EBITDA?
As this metric leaves out non-operating elements such as taxes, interest expenses and intangible expenses, EBITDA is a more accurate measure of an online venture’s operational profitability.
Here are a few points that sum up why this is a metric that matters:
- Ecommerce business owners can count on EBITDA to give them a more realistic picture of their short-term operational efficiency.
- Calculating this metric is imperative as it helps owners understand the approximate cash generation from their online store. Say you want to acquire an ecommerce store - EBITDA is the metric that you need to be looking at!
- As the metric focuses primarily on operational efficiency, it helps business owners size up their acquisition targets to the T. Furthermore, it turns out to be an extremely useful tool in comparing online stores with different capital investments.
- That’s not all - this metric is often cited by analysts and investors when it comes to measuring the financial health of a growing ecommerce business.
Typically ecommerce businesses that have a good 5+ year run generally sell quicker and for higher valuations compared to the more recent ventures. This also stands true for those ecommerce businesses that make $1M+ of EBITDA per year. These businesses are being sold for higher multiples than businesses that make a six-figure profit.
What is a good EBITDA that will set you up for success?
Pulling off a good EBITDA will in turn help you build the market value for your ecommerce business. So how well does your business fair?
You will get to know this by calculating the EBITDA margin. This is done by dividing your business’ EBITDA by the total revenue.
EBITDA Margin = EBITDA ÷ Total revenue
EBITDA margin tells you the cash profit that your ecommerce store makes in a year. This will also help you in analysing how well your business is doing when pitted against rivals in the same industry.
You may have a shiny website and a huge fan following on social media for your online venture but if your EBITDA margins are low, you need to be rethinking your strategies.
Here’s something that you could get started with right away - never miss a customer query with DelightChat. That’s right, keeping your customers happy could go a long way in improving your business margin and making it more profitable.