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Timing Is Everything | How to Time Your eCommerce Exit in 2023

Timing Is Everything | How to Time Your eCommerce Exit in 2023

Blog Summary

This blog discusses the considerations and factors to take into account when deciding whether to exit an eCommerce business in 2023. It explores the timing of the sale and how it can affect the quality of the offer received. The blog suggests evaluating the decision from three perspectives: macro (global trends and forecasts impacting M&A in the eCommerce sector), micro (performance metrics required to attract buyers and secure the best offer), and personal (signs indicating the right time for the founder to exit and the preparation needed for a smooth exit process). The blog mentions that 2022 was a challenging year for M&A, but there were positive indicators for the eCommerce sector. It highlights the importance of using all available data to inform the timing of the exit and discusses the macro outlook for 2023, including market conditions and projected interest rates. It also explores sector benchmarks, business performance metrics, and trends in deal volumes and valuations. The blog emphasizes the personal aspect of the exit process, including founder situations, new ventures, de-risking, and potential pitfalls to avoid. It concludes by suggesting that founders start preparing their business for exit if they are considering selling in 2023 or 2024 and highlights the services offered by The Fortia Group to secure the best deal.

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Key Takeaways From The eCommerce Acquiror Conference – NY 2024

Summary

Our 2024 eCommerce Acquiror Conference took place Jan 16th in New York, hosting eCommerce acquirors and eCommerce operational experts from around the world. The agenda was to discuss key trends driving eCommerce valuations and discuss operational areas within eCommerce acquirors. We thank our title sponsor Airwallex and all our other sponsors for making this great event a success and we look forward to seeing you all and some new faces at our next annual eCommerce Acquiror Conference.

1.eCommerce Environment

Participants: Furhaan Khan at UBS, Bill Pecoriello, CEO at Consumer Edge.

Key Takeaways:

  • UBS and Consumer Edge kicked off discussions reviewing the macro landscape impacting eCommerce valuations.
  • Based on public company comparables, eCommerce valuations have softened. Consumers spend is forecasted to transition from post covid high sectors such as travel however consumer spend in general remains subdued by caution towards inflation and interest rates.
  • Medium view (2025-2027) is that M&A volumes will be expected to increase once again as inflation starts to curb and the cost of capital stabilizes.

2.Acquirors

Participants:

Session 1 Panellists:

    • Philipp Triebel, CEO at SellerX.
    • Mark Goldfinger, VP of Growth at unybrands.
    • Ben Cogan, Co-Founder at Agora.
  • Insight provided separately by Tushar Ahluwalia, CEO of Razor, who have a successful record in consolidation of aggregators [Stryze & Valoreo].

 

Session 2 Panellists:

  • WTB Co-CEOs, Jaschar Hupperth and Nicolai von Enzberg.
  • Olsam Group Co-Founders: Ollie and Sam Horbye.

Key Takeaways:

  • Announcing 2 New Mergers Of Aggregators: The Fortia Group was proud to announce the merger of We The Brands and Mantaro Brands, two German based aggregators, a deal that The Fortia Group had been appointed M&A advisors.Weeks before the conference the eCommerce world learned about the successful merger between Olsam Group [UK based] and Dwarfs [NL based].It was noted that while these are logical strategic moves and something many in the aggregation space will be considering, these deals do take longer due to the complex nature of appeasing a larger group of shareholders. Deal timelines were from 6 to 12 months in duration.

 

  • Consolidation (MoA) and Acquisition Trends: Acquirors in the space are communicating more discussing topics and solutions to issued being created. Consolidation within the market is an important topic.The macro implications of cost of capital in the current environment consolidation are a lot more complex than straight M&A due to the fact they are share deals with limited cash changing hands.The main reason for consolidations are as follows:
    • Strengthening Balance Sheet
    • Scale
    • Cash
    • Leverage
    • Group EBITDA

 

  • Challenges of Market Conditions: Panellists discuss the challenges faced over the past year, including lower consumer spending due to inflation, pressure on margins, the rise in interest rates, and the general move towards a survival mode among companies.
  • Direct-to-Consumer (DTC) Focus: The preference for DTC over Amazon (FBA) due to control over customer data, customer support, marketing, and the overall customer experience (CX) is emphasized.Amazon remains a focus, but many are becoming more interested in diversifying into DTC or gain back more control through this channel, particularly as increasing Amazon operational fees are forecasted for 2024.

 

  • Integration of AI and Technology: eCommerce players have a range of tools available to help them achieve success in the markets.AI is delivering solutions for cost savings removing resource requirement on content, customer service benefits by reducing SLA’s pricing and demand planning.

 

3.Acquisitions

Participants: Alex Lukashov, CEO at Fintent, Muddy Mat, Johannes Rossner [on behalf of Alpin Loacker and BBG), Daniel Mc Carthy, Co-Founder at Theta, Paul Hanley, Co-Founder at The Fortia Group and Withum CPAs.

 

  • Our Shark Tank Brands Were A Big Success:
    • Introducing Muddy Mat – Impressive omnichannel pet brand coming to market in Q1 2024. Matthew, Andrew and Ikho gave a fantastic demo and financial performance overview of the brand.
    • Alpin Loacker – EU based tech hiking clothing and equipment omnichannel brand.
    • Berlin Brands Group – US portfolio. BBG wish to refocus efforts and as such are open to offers for their current US portfolio.

To learn more about any of the above deals, please contact The Fortia Group directly.

  • Daniel Mc Carthy, Co-Founder at Theta educated the crowd on valuations with this talk on “Uncovering Hidden Valuation Insight through Predictive Customer Value Analysis”, followed by a poll on current valuations observed in the market.

Poll no.1: What is the typical valuation range you are seeing for profitable Amazon FBA led brands?

  • Average valuation range: The average lower bound of the valuation range is approximately 2.86x, and the average upper bound is approximately 4.13x.
  • Lowest valuation range: The lowest valuation range given was 1x.
  • Highest valuation range: The highest valuation range provided was 8x
  • Please note all valuation ranges are EBITDA multiples.

Poll no.2: What is the typical valuation range you are seeing for DTC led brands?

  • Average valuation range: The average lower bound of the valuation range is approximately 3.78x, and the average upper bound is approximately 6.06x.
  • Lowest valuation range: The lowest valuation range given was 2x.
  • Highest valuation range: The highest valuation range provided was 12x.
  • Please note all valuation ranges are EBITDA multiples.

 

  • Paul Hanley, Co-Founder at The Fortia Group brought the audience through the firms new Buy-side diligence offering. The Fortia Group have been servicing investors and credit funds but are now formalizing their Buy-side diligence offering, a rapid initial target screen, to learn more please contact The Fortia Group directly.

 

 

04.Value Creation

Participants:

Will Holtz, Head of Operations at SourceMedium

Daniel Mc Carthy, Co-Founder at Theta

Robert Sperling, CEO at EastWest Basics

Rupesh Sanghavi, Founder & CEO at Ergode

Jim Stine, VP of sales at ShipPlug

Naseem Saloojee, Co-Founder at Carbon6

Kevin Fischer, President At KAPOQ

Bill Tauscher, CEO at Farallon Brands

Balaji Kolli Co-Founder at Saras Analytics

CFO Josh Holley at Bare Performance Nutrition

Jacob Cook, CEO at Tadpull

Heath Barnett, Head of SMB & Growth, North America at Airwallex

Jim Mann, VP of Europe at Getida

Ben Fletcher, CEO at The Mothership

Joseph Falcao, CFO at Orva

Shawn Dougherty, COO at Society Brands

Alex Urdea, Founder at Deep Ocean Partners

 

Key Takeaways:

  • Title sponsor Airwallex spoke about the important of localised payment options and how this was going to be crucial as part of a hyper-localised targeting strategy for eCommerce today and into the future.
  • Local payment methods accounted for 77% of transactions worldwide.
  • 44% of consumers are likely to trust online shop that offers their preferred payment methods.
  • The supply chain panel agreed that the rise of manufacturers going direct to the customer via marketplaces will continue to cause difficulties for eCommerce acquirors. It will be difficult to compete on price, however, as always obsessing over CX, branding and marketing strategy always have their place in combatting this type of competition.
  • A common theme throughout value creation talks were the importance of visiting and developing relationship with suppliers globally. Often this can open up different credit terms or cost efficiencies over time.
  • Predications for 2024 on supply chain were mixed as we move further from a covid container spike yet current situations in Suez Canal may continue to cause delays and additional cost.
  • KAPOQ and Carbon 6 explained that obsessing over performance metrics and investment benchmarking were crucial for brands and operators to double down on, with new Amazon marketplace fees forecasted to hit 2024, operators should be focusing on where they can make savings and efficiencies within the P&L.
  • CFO Josh Holley brought this to life with insight into how his brand, Bare Performance Nutrition are optimizing with data support and help from Saras Analytics.
  • Scrutinizing costs and ensuring you are setup for future success was a common theme, Bill Tauscher at Farallon Brands explained the importance of agility in retail, the role of eCommerce and marketplaces, and a view on timing when discussing growth plans with big retail.
  • Conference Partners Jake Cook, CEO at Tadpull and Daniel Mc Carthy, Co-Founder at Theta discussed the importance of understanding and using data sets to help with prediction analysis or growth forecasting.

 

Poll no.3: What is your top financial and operational priorities for 2024?

  • Become cashflow positive: 45%
  • Increase corporate EBITDA margins: 23%
  • Revenue growth: 13%
  • Reduce leverage: 12%
  • Improve inventory turns: 7%

Poll no.4: What is your target for corporate EBITDA by end of 2024?

  • Unprofitable: 0%
  • 1-5% margins : 20%
  • 6-10% margins: 10%
  • 11-15% margins: 60%
  • 16-20% margins: 10%

Poll no.5: What will drive the biggest valuation (profit multiple on exit / listing) of aggregators?

  • Financial profile e.g. corporate EBITDA margin: 15%
  • Brands: revenue quantum, growth, net margins: 54%
  • Being truly omnichannel: 8%
  • Tech & Data competence: 0%
  • Scale efficiencies: 8%
  • Other: 1%

 

Need some comments from the finance and operations panel.

Need a comment from an investor in the space [ don’t name Alex Udea].

Need success stories comment, don’t need too much detail on that.

 

We thank all our sponsors, without them conferences like this would not be possible. We look forward to working closely with you all throughout 2024.

  • Airwallex | ConferenceTitle Sponsor
  • BigCommerce
  • Carbon6
  • Eastwest Basics
  • Factored Quality
  • Getida
  • Grips
  • KAPOQ
  • Saras Analytics
  • ShipPlug
  • Withum

As we mentioned at the event, this will become an annual event, and together, we look forward to making the next one bigger and better.

 

Blog Summary

This blog discusses the considerations and factors to take into account when deciding whether to exit an eCommerce business in 2023. It explores the timing of the sale and how it can affect the quality of the offer received. The blog suggests evaluating the decision from three perspectives: macro (global trends and forecasts impacting M&A in the eCommerce sector), micro (performance metrics required to attract buyers and secure the best offer), and personal (signs indicating the right time for the founder to exit and the preparation needed for a smooth exit process). The blog mentions that 2022 was a challenging year for M&A, but there were positive indicators for the eCommerce sector. It highlights the importance of using all available data to inform the timing of the exit and discusses the macro outlook for 2023, including market conditions and projected interest rates. It also explores sector benchmarks, business performance metrics, and trends in deal volumes and valuations. The blog emphasizes the personal aspect of the exit process, including founder situations, new ventures, de-risking, and potential pitfalls to avoid. It concludes by suggesting that founders start preparing their business for exit if they are considering selling in 2023 or 2024 and highlights the services offered by The Fortia Group to secure the best deal.

Read Time: 6 minutes

It is natural for founders having completed another busy holiday sales cycle to take a moment, reflect, and consider their options going into a new year.

All available options will fall into one of two strategies:

 

  1. Growing the business
  2. Exiting the business

If you are a founder of an eCommerce business and are considering an exit in 2023, properly timing the sale of your business can determine the quality of the offer you receive.

 

For example, the structure of the deal often reflects the perceived risk in the market, at a given time. Buyers in tightening markets will seek to minimize risk by increasing the percentage of deferred and shared components like earnouts and equity compensation. This can result in a lower upfront payment for the entrepreneur.

 

In order to determine whether 2023 is a good time to exit your eCommerce business we advise founders to consider timing from three perspectives:

 

MACRO

What are the global trends and forecasts that will impact M&A and subsequently shape acquisitions in the eCommerce sector in the near to mid-term.

 

MICRO

What are the performance metrics required to attract the right buyers for your eCommerce business and achieve the the best offer.

 

PERSONAL

What are the signs that it is the right time for you, the founder, to exit your eCommerce business. And, what preparation is needed to ensure the exit process is smooth and the deal closes.

 

In this article we will discuss the benefits and risks of exiting your eCommerce business in 2023 from a macro, micro and personal perspective. We will start by looking at eCommerce M&A in 2022.

 

Are you considering an exit in 2023/2024? If so, planning should begin now. Contact us today for a consultation.

 

eCommerce M&A 2022

According to a Reuters report, 2022 was one of the worst years for M&A since the financial crash in 2008. However, 2022 did not begin that way.

 

Each year we tackle the nuances of timing an exit for the year ahead. In preparation for 2022, we conducted two surveys (Q4, 2021):

Some of the insights and forecasts for 2022 included:

 

Acquirors Survey [2021]

  • Estimated deal volume among buyers (specifically FBA aggregators) to be approx. 1,000 deals for 2022.
  • 39% of firms estimated to complete >40 deals in 2022
  • Average transaction size expected to reach >$5mm.

Data includes a JP Morgan eCommerce report H2, 2021.

 

Sellers Survey [2021]

  • Valuation Multiples: >60% negotiated >4X SDE (a third of those at >5X SDE).
  • Healthy net margins: 64% exited at 20–30% SDE.
  • >65% of founders received multiple offers for their business.

In January 2022 we hosted a panel discussion with three experts in eCommerce M&A. When asked “Is 2022 a good time to exit your eCommerce business?” understandably each of panelists said “yes” pointing to the huge quantum of capital raised in the sector (>$13bn USD) and the acquisition data points, highlighted above. They all agreed that the favourable market conditions were unsustainable long-term, and valuations would most likely soften in the future.

 

Watch the full webinar here.

 

Q4 2021 – The US Fed forecast an increase in inflation for 2022 (up to 2.6%). However, nobody expected the sudden shift in the markets – expedited by geopolitical conflicts like Ukraine (Q1); resulting in stock market decline and 40 year high inflation (Q2); and culminating in the most aggressive cycle of rate hikes in decades.

 

By Q3 2022, 3 out of 4 firms were reporting a decline in valuations by >30%, and 70% of acquirors were estimating to complete less than 10 deals for 2022.

 

Read our valuations survey report here.

 

The seeming disconnect between 2022 forecasts and what transpired in the market demonstrates how difficult it is to time deals – especially in a high paced industry like eCommerce.

 

Informed Exit Timing | The Fortia Group

For this reason, when we advise an exit, we use the best available data from a Macro, Micro, and Personal perspective to inform our preparation and exit strategy.

 

Article January 2023 Timing

Source The Fortia Group

 

Limiting your preparation to a single view increases the risk of a mistimed exit.

Some of the recent developments in the eCommerce M&A sector could be viewed as operators focussing too much on one perspective while overlooking another.

For example, rapidly acquiring eCommerce assets at a velocity unseen in the history of M&A (Macro) while underestimating the operational challenge of integrating these assets (Micro) – was definitely a contributing factor to the decline in M&A and valuations in 2022. Of course, this was compounded by acquiring the assets at inflated valuations due to the pandemic.

Maximizing the valuation of your eCommerce business requires using all available data to inform the timing of your exit.

 

Let’s take a look at the Macro outlook for 2023 and how it could inform timing for your exit.

 

MACRO | Market Conditions

There is a lack of consensus among the leading investment banks regarding the outlook for 2023. While an economist poll conducted by Reuters (Q4, 2022) reported a 65% probability of a recession in the US (H2, 2023), the outlook from industry leaders is divided between a soft landing and mild recession.

 

  • Goldman Sachs and Morgan Stanley project a soft landing.
  • JP Morgan/Chase and Wells Fargo project a mild recession.

While a soft landing is preferable to a recession as it suggests stability and growth in the nearer-term, neither outlooks present a clear opportunity to exit in 2023.

 

However, there is a consensus among the same banks regarding an end to aggressive rate hikes. To date, the US Fed has completed seven rate hikes in 2022, with another 0.5 – 0.75% increase expected in Q1 (2023).

 

Projected rates to peak between 5.0 – 5.25% and remain >4% through 2024, while inflation is set to decrease to 3 – 4% by year end.

 

Article January 2023 Timing

Source US Federal Reserve

 

Having navigated the difficulties of 2022, these projections could tempt founders to risk operating through a possible recession in the hope of a better M&A market next year or in 2025.

 

Equally, one could make the case for seeking an exit now, financially de-risking as the markets are set to further destabilize, due to:

 

  • Geopolitical Conflict: War continues in Ukraine, and there are weekly threats of conflict in east Asia.
  • Chinese Markets: The property crash (Q4, 2022) and economic slowdown in China is slated to have global significance in the coming quarters. China’s GDP is projected to lag behind the rest of Asia for the first time since 1990.
  • COVID Outbreaks: The recent COVID outbreak in China and subsequent shutdown swiftly impacted global manufacturing and supply. This forced even insulated tech leaders like Apple to revise projections for the coming year. In 2022, COVID induced issues resulted in increased operating fees on marketplaces like Amazon, impacting net margins (and valuations). Will there be more hikes in 2023?

Furthermore, we are seeing new capital formations in the eCommerce industry evidence that the sector is still attractive to managers and investors. A number of the large aggregators that paused acquisitions in 2022 have started to acquire again, not to mention the record levels of dry powder amassed by PE firms and the healthy balance sheet of strategics.  Now that valuations have cooled, PE firms are expected to begin acquiring.

 

The top investment banks agree there will be further decline in the markets in 2023, even if the details are unclear. If securing a competitive offer for your eCommerce business is possible now, in the near term it could be the path of least financial risk.

 

MICRO | Sector Benchmarks and Business Performance

According to Reuters, Global M&A declined in 2022 by 37% (43% US, 30% APAC, 27% Europe). The total value of M&A fell to $3.65 trillion in 2022 from a record high of $5.74 trillion in 2021.

 

Article January 2023 Timing

Source Refinitiv

 

In December 2022, we conducted our Annual Survey of Acquirors to better understand M&A specifically in the eCommerce sector for 2023.

 

The metrics – while not as impressive as the numbers for 2021 – are beginning to show a more steady trajectory. 2023 is the first year since 2019 there will be year-on-year comparisons that are not directly COVID related – provided there is no resurgence in the virus.

 

Survey Insights Include:

  • Deal volumes are down: 90% of firms did less than 10 deals in 2022.
  • Estimated Deal Volumes for 2023: 51% expect to do 1 – 5 deals; 26% to do 6 – 10 deals; 14% to do 11 – 15 deals.
  • Valuations are down: 4 out of 5 firms are reporting a >30% decline in valuations, and 37% expect to see further decline in valuations in 2023.
  • Current average of Multiples SDE/EBITDA: 58% are seeing 1.5X – 3X in their deals; 43% seeing 3X – 4X; 9% seeing >4X.
  • Flight to Quality: 7 out of 10 firms increased their target transaction size in 2022, and plan to increase it again in 2023, as larger, more revenue positive businesses are considered better investments. For example, Razor Group who were looking at deals in the $3 – $5mm range in 2021 are now targeting $20mm deals.
  • Niche/Categories: 64% of buyers said they will focus on fewer categories in 2023.
  • Smarter Buyers, increased due diligence: 9 out of 10 firms issue LOIs for <10% of deals screened.

2023 is projected to be a year of fewer, bigger deals.

 

Consolidation will likely lead to fewer buyers, less competition, and fewer deals. However, the influxof Chinese sellers, will increase the threat of commoditization at the category level, resulting in higher competition for the bigger brands in the more established niches. Hence, acquirors are increasing their target transaction size to secure more profitable brands.

While no investment is considered recession proof, evergreen categories like Beauty & Wellness, Home, Baby, and Pet are seen as the most stable in a downturn as repeat custom is high and healthy margins are achievable.

 

Combining a flight to quality in the market with the increase in interest rates, smaller businesses could find themselves in the tricky position of not being able to source the working capital to grow, and attract low-to-mid market buyers.

 

Read our article on aggregator financing here.

 

In light of these trends and forecasts, founders that are considering an exit in 2023, and want to price above the averages, need to be:

 

  • Strong brands with large revenue, high revenue growth, recurring revenue, >15% net margins (>20% FBA), with significant growth potential and a great team.
  • Exit Ready: every aspect of the business must be prepared before engaging buyers.
  • Marketed widely to all relevant buyers including PE firms and strategics.

A recent poll of entrepreneurs and buyers (Q3, 2022) found that the majority consider the lower valuation averages we are seeing in the market as the first realistic trendline since the pandemic.

 

One of the primary barriers to successfully exiting today is unrealistic expectations; many founders have anchored their bias in prior market conditions, that are unlikely to return.

In order to secure the best deal, founders must view the performance of their business in the context of recent sector benchmarks.

 

PERSONAL | Founder Situation, New Ventures, De-risking

The personal aspect of the exit process is regularly overlooked, and yet, it is often the single driving factor in timing the sale of your eCommerce business. The ecommerce sector is unique in that sole founder/operators can grow successful 8 and 9 figure businesses with little to no employees or advisement.

 

However, having grown a profitable business on their own, founders can be tempted to negotiate an exit in the same way.

 

Retaining an experience M&A advisor in order to understand your personal relation to the business in the context of the market outlook can help in identifying the best time to exit.

Here are the most common exit rationale to look out for:

 

  • Fund new ventures: Many entrepreneurs are wired to grow a business from ideation to profitability, and are always looking to their next idea.
  • De-risk personal finances: Many founders are heavily invested, overleveraged, and seek financial freedom.
  • Competition: Increased competition in a market is proving more difficult to maintain growth and margins.
  • Lack of interest and resources: Launching and scaling a profitable eCommerce business is different from optimizing and maintaining a business long term. In order to transition a business for long term growth requires resources – not least more of your time.
  • Burnout: Having executed a great product idea, and spent years painstakingly growing the business, many founders can experience burnout.

The problem is once a founder arrives at one of these inflection points, they are at risk of expediting the deal without the proper preparation.

 

This can lead to rash decision making: engaging acquirors without a clear strategy, accepting offers prematurely, or hanging onto the business too long to where there is no market for it.

In our last Survey of Sellers Who Exited, 2 out of 3 entrepreneurs stated they signed an LOI too quickly; that under proper advisement they could have achieved a better deal.

 

This is confirmed by the seminal M&A study (Does Hiring M&A Advisers Matter to Private Sellers, 2018) which discovered retaining an experienced advisor on the sell-side can increase the valuation of the offer by >25%.

 

Timing Your Exit in 2023 with The Fortia Group

Is 2023 a good time to exit your eCommerce business?

The lack of consensus regarding the outlook for M&A presents clear risk in either:

 

  • Pursuing an exit in the near term.
  • Delaying an exit in hope of improved markets in 2024/2025.

Whatever course you pursue, the lack of stability in the markets emphasize the need for greater preparation around exit planning, exit strategy, and timing your exit.

 

In one of our recent webinars, both sell-side and buy-side lawyers with years of eCommerce M&A experience debated the finer points of a Letter of Intent (LOI) and its importance in the acquisition process. While both sides approached a deal differently, they all agreed that only the best prepared businesses achieve the higher valuations and a smooth exit process.

 

If you are considering selling your eCommerce business in 2023 or 2024, now is a good time to start preparing your business to exit.

 

Two ways The Fortia Group differs from other firms and secures the best deal:

  1. We offer an Exit Ready programme to prepare your business to go to market, even 1 –3 year out.
  2. When your business is ready we run a competitive auction with all the relevant buyers including PE firms, family offices and strategics to achieve the best valuation.
 

Contact us today for an introductory consultation. 

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