Many Amazon roll-up firm analysts use valuation multiples to make reasonably accurate estimates when it comes to the value of an Amazon FBA brand.
But what exactly are business valuation multiples and how do they work?
To find out what makes multiples analysis a popular method of Amazon FBA business valuation, we’ve compiled all the information you’ll need to understand what makes financial multiples tick.
Put simply, valuation multiples are tools used in financial measurement. They’re designed to help analysts evaluate a financial metric in proportion to another.
For example, you can use valuation analysis to make an apt comparison between the share price of an Amazon FBA business and its earnings per share.
Unlike other methods of computing a company’s value, it provides the analyst with an estimated comparison with another venture’s numbers. This way, your Amazon FBA acquirer can see how well your business’s numbers stack up against the competition.
This value calculates the value of an Amazon FBA brand and its earnings before taxes, interest, depreciation, and amortization is taken out. More commonly known as the EV/EBITDA formula, it takes your enterprise value and ratios it against your company’s EBITDA or sales.
It aims to compare your Amazon FBA’s enterprise value to your annual sales, which can help analysts and the Amazon aggregator interested in your business determine a quantifiable value for your business.
It can be calculated using the following formula:
EV/Sales = (Market capitalization + Debt – Cash and cash equivalents) divided by annual sales
A bit different compared to EVMs, equity multiples are designed to help analysts examine ratios taken from your business’s share price and a specific element from your company’s performance.
This includes numbers from your Amazon FBA brand’s earnings, sales, book value, and more. Below, we talk about four of the more common equity multiples.
The price-to-book ratio or P/B ratio is used by an Amazon FBA acquirer when they want to compare your business’s market capitalization value with its book value.
Typically, a ratio under one score is a good investment for Amazon roll-up firms.
You can calculate the P/B ratio using the following formula:
P/B Ratio = Market price per share divided by the book value per share
The price-to-sales ratio is designed to help an Amazon aggregator compare a business’s stock price with its revenue multiples valuation by industry. In essence, it shows how much other investors are willing to pay for every dollar of sales on its stock.
To calculate your company’s P/S ratio, you need to use the following formula:
P/S Ratio = Market value per share divided by sales per share
Price-to-earnings financial multiples are used to measure a company’s current share price about its EPS, or earnings per share.
Unlike the other values which have a clear-cut explanation of how high or low ratio values can affect your business, this one relies on probabilities.
For example, a high P/E ratio could mean one of two things:
Your company is overvalued
Investors expect your stocks to grow exponentially in a short amount of time
It’s generally a good idea to be somewhere in between a high and low ratio.
To calculate the P/E ratio, you need to apply the following formula:
P/E Ratio = Market value per share divided by earnings per share
Last but not least, the price/earnings-to-growth ratio factors in the expected stock growth of your company over time while determining your business’s current stock value.
Think of it as an elevated version of the P/E ratio—one that incorporates more values into the equation for more comprehensive results.
To calculate the PEG ratio, you need to use the below formula:
PEG Ratio = (Price divided by EPS) divided by EPS growth
As mentioned before, performing a Comparable Company Analysis is straightforward. However, that doesn’t mean it’s easy. The first step is one of the most time-consuming in the entire process.
Unlike the previous method, this one focuses on using private company data to give you accurate results more quickly. The process takes an Amazon FBA business’s past M&A transactions to find its value.
Commonly prepared by analysts in the investment banking, private equity, and corporate development field, this is also a method frequently used by Amazon aggregators. It finds the value of your business as a part of the prospective merger or acquisition.
It helps an Amazon FBA buyer determine your company’s value as it’s absorbed by their Amazon roll-up firm.
A PTA is somewhat similar in form to a CCA. The principles are the same, so you shouldn’t have a problem with it if you follow the steps below closely.
Valuation multiples are one of the most important factors investors should consider when investing in a business. For this reason, I’m sure you want to know more about them so you’re better prepared to understand how to make your Amazon FBA business more attractive to an Amazon aggregator.
Valuation multiples are very useful for an investor, mainly because they give them several important pieces of information and help them make informed and quick decisions. They’re a useful tool that can be applied in different situations and different workflows.
And while there are several advantages to using valuation multiples, there are also some disadvantages. We’ll be briefly talking about the pros and cons of using valuation multiples to help you decide if it’s worth your investment or not.
One of the main benefits that valuation multiples offer is that they enable you to quickly find the value of your company. At this point, you’re able to decide on a tactic that helps you get the most out of your Amazon FBA sale.
Furthermore, it also helps you make sure that you can increase the value of your business before you try to sell it for a measly amount. For example, if your business is valued at $100,000, but the Amazon buyer is offering $70,000. This means that you’re missing out on $30,000 in extra income per sale by selling your company for less than its actual value.
However, there are several disadvantages of using valuation multiples in negotiations. For instance, it can also be harmful when you’re in a situation where the negotiation isn’t looking good. Valuation multiples—while providing you with a ballpark figure—are not always accurate. You may find that the numbers don’t show up well for a company that has a lot of potential with the right business decisions.
Furthermore, valuation multiples also simplify data and variables into a single number. This may not take into account the importance of other factors such as growth and financial health. And while it covers a lot of the basics, it doesn’t provide you with all the information you need to decide whether or not an Amazon FBA company is worth your time.
And just like any other method that relies on projections, valuation multiples can also lead to inaccurate results based on insufficient data or analysis. This is especially true when it comes to projections used in DCFs.
So, the next big question: “how do you choose multiples for valuation?”
It’s easy. Valuation multiples should be used depending on your goals. It should fit the narrative you’re trying to complete. For example, as an Amazon FBA seller, you’ll want to use the highest multiple to present to the Amazon roll-up firm or Amazon FBA buyer showing interest.
This shows your firm’s confidence in what the business can do. However, if you’re a VC investor, then you’re going to want to use the lowest multiple possible. This will give you a valuation that’s lower than any VC you can get for a company with a similar value to your own.
This shows that you believe that the company is undervalued and have good reasons to think so.
Valuation multiples are important factors that everybody should consider when they’re either buying or selling something.
They’re an easy way to quickly determine the value of your business and to quickly estimate its potential for growth by using another similar metric.
Additionally, they also let you turn your company into a profitability benchmark that lets companies know whether they can run their business profitably or not, as well as giving investors an idea of profit margins.
However, they are not always accurate. This means that you should always use valuation multiples with caution and in conjunction with other metrics. Things such as revenue, growth, and other financial metrics can provide better details that allow you to get the most out of your business.