What is a marketplace platform worth?

A marketplace platform’s revenue is only the slice it keeps of activity between two groups of users, so a useful question is what happens to that revenue when the founders step back and the network has to carry itself. Two platforms with identical revenue can differ in whether their users return on their own or whether activity is being bought through incentives and advertising, and BDC notes that the final selling price can be affected by numerous factors, such as market conditions, due diligence, the availability of financing and the seller’s post-transaction involvement. What follows is a set of questions to ask, not an appraisal of any business; BDC says the multiple used under a market approach varies greatly with the industry, market conditions and other factors, so any multiple quoted for the sector is illustrative general discussion rather than a measure of your platform.

Liquidity is the first thing to test

Liquidity, as this guide uses the word, means how reliably a listing finds a taker, and how quickly. Useful measures to ask for are the ratio of active supply to active demand, the time between a new listing going live and its first completed transaction, and the share of listings that never draw a response at all. Registered accounts say less than active ones. If new listings transact quickly, that suggests matching works without the founder hand-feeding it; a large inventory of stale listings suggests the headline numbers may flatter the network. It is also worth asking whether liquidity holds across categories or regions, or whether one corner of the platform is carrying the rest.

Questions about the take rate

The take rate, as used here, is the share of each transaction that the platform keeps, whether as a commission, a listing fee or a subscription. A buyer can ask for its history as well as its level. A rate raised shortly before a sale may not yet have shown up as lost participants, and a rate that large users have negotiated down shows who holds the bargaining power. It is also worth asking what the platform does to earn its share, such as payment protection, verification or demand generation, and whether the rate would hold if a competitor charged less. Steady revenue per transaction, with a steady pattern of how often participants return, is easier to read than rising revenue that comes from pricing changes.

How the earnings get recast

Before any pricing logic applies, the earnings can be rebuilt to show what the platform produces when run as a business rather than as a founder’s project. BDC says buyers will ask to look at historic and interim financial statements, projections, tax returns and other records, and a quality of earnings review of a marketplace can look at a few items particular to the model.

• Incentives and promotions paid to attract either side: whether they were a one-time cost of launching or are a continuing cost of keeping liquidity.
• Payment processing, refund and dispute costs, and whether revenue is shown as the platform’s own fee or as the gross value of the transactions passing through it.
• Founder time spent on support, manual matching and trust and safety work that a new owner might have to pay someone to do.
• Owner pay and related-party charges, the ordinary add-backs to review in any small business.
• One-off legal or remediation costs from a dispute or security incident, and evidence that the cause has been fixed.

Three findings to test for

Three findings are worth testing for. The first is leakage: evidence that participants meet on the platform and then deal directly afterwards, which would show up as repeat pairs disappearing from the transaction data after their first deal. The second is concentration, where a few high-volume sellers or buyers account for much of the activity and could leave together; the question is the one raised in should I worry about customer concentration, with the added possibility that losing one side of a marketplace weakens the other. BDC advises addressing supplier or customer concentration issues or thinking about ways a buyer could mitigate them, and says unaddressed issues could affect the price or terms of a sale. The third is a trust and safety record that does not match the platform’s own policy, because depending on the deal structure a buyer may take on unresolved fraud and dispute exposure along with the name.

The user base is valued, but it comes with limits

To the extent they identify individuals, the accounts and reputation data a buyer is paying for are personal information, and the law limits what a new owner can do with them. Under subsection 7.2(2) of PIPEDA, once a deal closes the parties may keep using and disclosing the personal information that was shared during it without the individual’s knowledge or consent if their agreement requires each of them to use and disclose it solely for the purposes for which it was collected or permitted to be used before closing, to protect it and to give effect to any withdrawal of consent, the information is necessary for carrying on the business that was the object of the deal, and one of the parties notifies the individuals within a reasonable time afterwards. A buyer planning to use the user base in a new way, or to merge it with another network, should not assume that is permitted, and Quebec’s Law 25 sets its own consent rules for Quebec users.

Ratings and “verified” badges raise a different limit. The Competition Act restricts representations to the public that are false or misleading in a material respect when made to promote a product or any business interest, and the general impression conveyed counts alongside the literal meaning. A buyer can therefore test whether the platform’s ratings and badges mean what users are led to think.