08 June 2022

Ecommerce Due Diligence: 8 New Things To Know Before an Exit

Matthew Walker

Ecommerce Due Diligence: 8 New Things To Know Before an Exit

Read Time: 5 minutes

A common mistake for eCommerce business owners when they go to sell their brand is assuming all aggregators operate from the same buying criteria.

This assumption is false.

Thinking there is a standardized market valuation for eCommerce businesses and a corresponding due diligence checklist that all buyers consult pre-acquisition, overlooks the fact that due diligence is an intense M&A negotiation – that if entered unprepared will most definitely lead to a lower valuation of your online business.

In this post, we will discuss eight unexpected things we have learned from navigating due diligence for a number of eCommerce exits in the last 12 months. But firstly, let’s look at why you should retain an experienced M&A advisor before engaging buyers for your eCommerce business.

Benefits of Retaining an M&A Advisor | The Fortia Group

If getting the best valuation for your eCommerce business is your number one priority when selling, then having an experienced M&A advisor to oversee the exit process and navigate due diligence is essential.

A landmark study from the University of Alabama (Does Hiring M&A Advisers Matter for Private Sellers, 2018) discovered that retaining an experienced M&A advisor increased the business valuation up to 25%.

Here’s why:

Leveling the negotiation table: The study found that private labels were typically sold at a lower valuation due to (1) inexperienced sellers with information gaps and (2) negotiating against well resourced buyers.
Lack of bargaining power: A private sale of an eCommerce business tends to be less visible against the market, rendering valuations more subjective and the bidding process less competitive.

We launched The Fortia Group to provide an investment banking approach to selling your eCommerce business.

With decades of M&A experience across hundreds of deals worth billions of dollars, and a buyer network including 130+ aggregators, PE firms and private offices, when we sell an eCommerce business our procedure is two-fold:

Exit Ready – Our exit team works with you (even 1 – 2 years from exit) to get every aspect of your eCommerce business ready for sale (eg. Legal, accounting records, business operations, product roadmap etc.,).

Exit Process – To ensure you achieve the highest offer, we run a seven step exit process that includes a professional auction with our buyer network, M&A support through due diligence, close of deal and post close (earnout, stability payment and so on).

The first step to successful exit is knowing the value of your business. Contact our team now, to book your free valuation call today.

Our mantra is preparation: “Failing to prepare is preparing to fail.” And, our decades of M&A experience teaches us to “Always expect the unexpected” in the due diligence process.

Let’s look at some of the new obstacles we have negotiated in eCommerce due diligence in the last 12 months, and the lessons learned in the process.

#1 Due Diligence Always Takes Longer Than Expected

This is nothing new, but rather a good reminder. Timelines and expectations are typically penned in the LOI. However, the forensic scrutiny of diligence – even for buying an Amazon FBA – always brings up some point of contention that needs to be resolved. Therefore, the success of the deal often depends on both parties’ ability to renegotiate.

#2 Buyers Don’t Want to Take on Extra Debt

When engaging a potential buyer, all external funding (like inventory or revenue based financing (RBF) loans) on the seller’s balance sheet should be disclosed immediately. We have found that outstanding loans discovered deep into due diligence can:

Ward off potential buyers resulting in less competition for the asset – and less competition typically means lower valuation.
Delay the deal by putting immediate pressure on the seller to source a bridging loan resulting in delays, and sometimes buyers changing their minds altogether.

We have seen buyers willing to fund the loan pre-closing, and take it off the final proceeds. However, a buyer’s appetite for risk has limits – even more so in the current market.

For example, let’s say the loan was sourced on Amazon Lending for acquiring inventory. Amazon places a lien on your stock as security that – if outstanding – can result in delays once you go to sell your eCommerce business as the lien will not be removed until the debt has been paid. Lien removal is not automatic upon payment and can take 5 – 10 days – longer if you don’t follow the Amazon process.

#3 Amazon Policies and Regulated Markets

It is important to adhere to Amazon policies around product claims, particularly in regulated markets such as supplements and food.

If a product has to be regulated by a separate body in order to adhere to Amazon policies, the seller needs to assess if the cost of doing so (legal fees, timing etc) outweighs the potential holdback or reduction of funds from a buyer undertaking this process themselves.

We have seen holdbacks in consideration (for >1 year) as a buyer attempts to register a product with a regulatory body. Furthermore, regulations can vary from region to region, so it’s important to consider each marketplace separately.

#4 Retain Commercial lawyers with eCommerce Experience

Recently we advised on a deal that was delayed by more than a month due to lawyers creating unnecessary delays. Selling your Amazon FBA is a relatively new niche in M&A, with new terminology specific to this space. This can be problematic when setting out term sheets for the deal.

Experience with Amazon businesses or the eCommerce business model in general is preferable for a smooth exit process.

For more in-depth legal advice, check out section 5 of Exit Guide for Amazon FBAs [Free Download]

#5 Manufacturer Due Diligence

A deal was stalled because the audit of a Chinese manufacturer failed to meet the standards of a buyer (the score was 3.4/10).

Absent policy documentation comprised 90% of what failed to meet standards in the audit. This included penned terms around things like slave labor – all of which was easy to rectify.

More serious breaches of manufacturing standards can result in having to source a new manufacturer. This is costly and can cause considerable delays.

Increasingly buyers are doing audits which cost approximately $700. Sellers should consider paying for an audit in advance of an exit process.

#6 Source the Proper Barcodes for Your Products

Amazon sellers should know that Amazon has specific policies around barcodes. It is important to acquire all product identifiers from the GS1 organization and not from resellers.

These include:

Global Trade Item Numbers (GTIN)
European Article Numbers (EAN)
Universal Product Code (UPC)

Buyers may request you swap reseller barcodes for GS1 codes – which is time consuming.

Furthermore, Amazon needs to see that the owner of the Seller Central account is the same individual on the GS1 database. Reseller barcodes do not provide that assurance, and this can result in delisting or suspension from Amazon.

For more on sourcing the correct GS1 barcodes.

#7 Secure Your Trademarks

If you are having a product manufactured in a location where you may not be selling, it is prudent to register a trademark (TM) in the place of manufacture.

We have seen deals stall due to bad faith filings of TM in the manufacturing location. There may be minimal risk to your business, as you never plan to sell in that location. Yet, the sales process may stall as the buyer can be concerned that the asset is encumbered.

#8 Chase Margin not Revenue

Your business is valued on a multiple of your seller discretionary earnings (SDE), which is determined by the net margin. And the extent of the multiple can be dependent on the margin profile of the business (how big your margin is).

There is a temptation to achieve a higher revenue by introducing more products to your brand or spending above average on advertising in the long term. However, this can also reduce the margin profile of the business, resulting in a lower multiple and valuation when you go to exit.

Adding new products to your brand to increase revenue is justifiable if they are of a similar margin profile to your existing portfolio. Otherwise, it dilutes the overall of the business.