An e-commerce company has appointed our firm, as the shareholders were planning to raise the funds by diluting their shareholding. For this, they want to determine the fair value of the business to be used as a benchmark price during the course of negotiation. I decided to carry out the analysis required for valuation, considering my industry knowledge and experience.
I had to determine value on the basis of the assumptions provided by the management of the company and gather information from external sources available which were useful for valuation.
The company has been in the e-commerce business for more than 24 months, and its revenue has consistently grown monthly. As I was able to determine the future projections and get industry metrics, I preferred to use the income-based approach using Revenue Multiple and EBIDTA Multiple. Also, I used the Discounted Cash Flow method as the company was in the growing stage, and the present value of future free cash flow projections is used to determine the enterprise value.
While making the projected cash flow and determining terminal value, the following points were taken into consideration.
- Management has indicated that they would like to maintain a conservative approach to future business prospects, and accordingly, they projected expenditures at an inflation-adjusted 5%.
- Net working capital is calculated by assuming that there will be 05 days of debtors and 15 days of creditors, considering the historical trend.
- The revenue projections are linked to the marketing cost. In the past months, revenue has been between 10x-12x of the marketing cost. Considering the same the future revenue projections are derived as 12x of the marketing cost.
- The discount rate of 14% is considered by adding unsystematic risk of 4% to average of 10% of Risk free rate of return.
Revenue Multiple Approach
The revenue multiple for the e-commerce industry lies within the range of 2X to 3X; however, based on the average views on platforms, conversion ratio, and low customer acquisition cost compared to the industry, I assumed 2.5X as the Revenue multiple for terminal value.
| Particulars | Value (AED) |
| Average Revenue (FY 2024 to 2030) | 38,388,211 |
| Market Multiplier | 2.5 |
| Terminal value as per Revenue multiple | 95,970,527 |
| Present value of terminal value as per discount rate of 14% | 46,683,262 |
EBITDA Multiple Approach
EBITDA multiple for the e-commerce industry lies within the range of 10X to 15X; however, upon analysing the market penetration of the Company and its key metrics, I have assumed 12X as the EBITDA multiple for terminal value.
| Particulars | Value (AED) |
| EBITDA projected FY 2030 | 6,387,258 |
| Market Multiplier | 12 |
| Terminal value as per EBITDA multiple | 76,647,097 |
| Present value of terminal value as per discount rate of 14% | 41,336,471 |
Discounted Cash Flow Approach
To validate the above multiples, I projected free cash flows for the period of 6 years along with terminal values.
The present value of the said terminal value was derived using the above-mentioned discounting factor of 14%.
| Particulars | Value (AED) |
| Primary Value (Cash flows for Horizon period) | 13,222,201 |
| Terminal value (Perpetuity cash flow) | 78,687,358 |
| Total Value | 91,909,559 |
| Present value of terminal value as per discount rate of 14% | 44,882,792 |
Sensitivity Analysis is as below
| Revenue Multiple | 2X | 2.5X | 2.7X |
| Present Value of Enterprise at 14% discounting rate | 37,346,610 | 46,683,262 | 50,417,923 |
| EBITDA | 10X | 11X | 12X |
| Present Value of Enterprise at 14% discounting rate | 35,122,520 | 38,229,496 | 41,336,471 |
Based on my analysis, the entity’s fair value ranges from AED 35.00 million to AED 50.00 million, with an average of AED 42.00 million based on management’s assumptions.
