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When you go to sell your eCommerce business, to get the best valuation, you need to understand how acquirers value the business. 

Understanding the acquisition process gives business owners an opportunity to prepare their business to: 

• Attract the right acquirers.
• Increase the valuation through competitive bidding. 

At The Fortia Group we have decades of M&A experience across hundreds of deals worth billions of dollars. We have seen countless entrepreneurs take a lower valuation multiple for their business because they begin the exit process unprepared. 

In this article, we will discuss five ways to prepare and increase the valuation of your eCommerce business according to leading M&A experts. We’ll begin by outlining how top acquirers evaluate an eCommerce business. 

How Acquirers Evaluate Your eCommerce Business

In Section 6 of our Exit Guide for Amazon FBAs, 11 top aggregators explain their process for evaluating eCommerce businesses before submitting an offer.  

There is a clear division between valuation models all acquirers use (eg. SDE or EBITDA), and the specific criteria each acquirer uses to assess a potential asset.

SDE or EBITDA

Each buyer will have unique metrics they look for regarding gross revenue, growth rate and net margins. While these can vary considerably between FBA-first and omnichannel (DTC) acquirers, the process to evaluate the profitability of an eCommerce business is standard. 

There are two principle models: SDE (Seller Discretionary Earnings) and EBITDA (Earnings before Interest, Tax, Depreciation and Amortization). 

There is no hard rule when one model is employed over the other. SDE is typically used for acquisitions (FBA or DTC) <$10 million, where the entrepreneur’s salary is considered discretionary and added back to the valuation.  

EBITDA is used to calculate the full operating costs (salaries included) of a business generally >$10 million with a more complex governance structure i.e. multiple stakeholders.  

This year, we hosted a webinar on the role of the Letter of Intent (LOI) in the acquisition process. Seven legal experts agreed that a seller’s inability to manage expectations and renegotiate when issues were discovered in due diligence, often killed the deal. 

Having an accurate estimation of your SDE or EBITDA will provide a firm footing when you engage buyers and consider LOIs. It also helps to manage expectations ahead of due diligence.  

Are you considering selling your eCommerce business? Your first step is an accurate estimation of your SDE or EBITDA. Contact us today for a consultation.

Specific Buyer Criteria

These are aspects that each acquirer uses to filter deal-flow like category, operation history, supply chain, marketing, channel split and so on. They can also include intangibles like is the founder a passionate advocate of the brand; and what will the owner involvement look like post-acquisition.  

With the recent downturn in the market, we wrote about the rise of the niche aggregator: Aggregators prioritizing operations by focussing on a specific niche/category, region and channel. To mitigate risk, acquirers are becoming increasingly inflexible around their buying criteria: Only buying assets they know they have the expertise to scale across their portfolios.  

This is important for an entrepreneur considering an exit because an acquirer is willing to pay a premium for an asset that fits their criteria. Assets that complement the firm’s portfolio are highly valued. As the criteria varies from firm to firm, entrepreneurs can struggle to identify the right acquirer. 

#1 Buyers are Looking for a Strategic Fit

In a recent panel discussion on bear markets, Jeremy Bell, Head of M&A at Elevate Brands opined that most of the acquisitions in the near term were going to be between firms. From an efficiency standpoint, it makes sense for acquirers to refocus their buying criteria and offload assets they do not have the operational expertise to grow. 

Watch full webinar: Acquisition Criteria of Buyers in a Bear Market

During our recent webinar on current valuations, Eric Satler, President of Win Brands Group further narrowed the definition of “strategic fit” to category leader. These are businesses that have established a defensible moat in a niche. The fact that they operate in that category was secondary to their competitive position in the market, for Win Brands Group. 

When an entrepreneur is considering an exit, how do they know which firms would be a strategic fit, so they can pitch their business and potentially price above the average multiple ranges? 

How to Identify a Strategic Fit for Your Business | The Fortia Group

At The Fortia Group we achieve a strategic fit by understanding the asset criteria of each buyer in our network. We maximize the valuation by creating a competitive auction for the asset. 

Our process is to build out marketing materials to gauge interest, identify shortlists of interested acquirers, and achieve as many LOIs as possible. Then, we run a competitive auction for the business. 

For example, in a recent deal we completed we targeted 50 buying firms (including PE firms & corporates) with the right criteria. We received 12 LOIs which gave the founder options with regards to deal structure (Upfront and deferred payments).   

#2 Fix Issues Before Engaging Acquirers 

The current constraints in the market have lead to stricter financial covenants across most investment committees (IC) which has resulted in risk aversion across the M&A space. 

Acquirers are looking for clean businesses, that migrate smoothly, with solid infrastructures, secure supply chain, and steady growth – that will begin to yield a return on investment (ROI) quickly. 

In our recent panel discussion, Sean Lee, President of Cincy Brands details an all-too-common scenario where a business that is presently profitable comes to market but has an inconsistent operating history. In this case, Mr. Lee pointed to standard issues around inventory, supply chain volatility, fluctuating ad spend, and inefficient landed cost of goods (COGS). Ultimately, this reflected in a far lower offer than the business was worth, had they fixed these issues and maintained 12 months of steady growth.  

That said, without a proper understanding of the M&A process, eCommerce businesses that do not undergo careful preparation ahead of an exit often discover issues in due diligence that could have been avoided. 

To learn more, read: “eCommerce Due Diligence: 8 New Things To Know Before an Exit.”

How to Identify Issues Before an Exit | The Fortia Group

In order to achieve a smooth and profitable exit, once the business is prepared we get initial feedback from potential acquirers. The value for the business buyer is they get a first look at an asset; the value for the entrepreneur is it can highlight issues in the business that could result in a lower offer. 

To learn more about our Seven Step Exit Process, read this article: “The 7 Step Exit Process to Sell Your Amazon Business” 

Feedback allows us to assess whether it is worth the time and expense for the entrepreneur to fix the issue (if any are discovered), or disclose it to a buyer and negotiate from there. 

For example, we advised on a recent exit and warehouse issues were discovered in due diligence. On inspection, poor working conditions were contributing to an increased defect rate that threatened to kill the deal altogether. The deal was delayed for period of time to change suppliers which was very costly – and could have been prevented. 

When we prepare a business for exit, we recommend running a full supply chain audit. For this, we use a third party like Factored Quality that specialize in  securing every aspect of the supply chain. This assures potential buyers that sourcing and delivery are certified.   

#3 Build a Brand

A theme that comes up in every expert panel we host is the importance of creating a brand around a product. 

On our recent panel, Kenneth Ott Co-founder of Metacake described it this way, “A brand is not just a logo, a brand is how a customer feels when they interact with you.” Mr. Ott is keying us into the fact that consumers buy emotionally, not logically, like we all think. A strong brand has forged an emotional bond with the consumer beyond the product. Leveraging the bond between consumer and brand is a clear strategy for sustainable growth.

In the same webinar, Tommy Dai, Investments Director at Olsam Group outlined things they look for in a business to create brand equity in the marketplace. These include:  

• Brand identity: Is there coherence between the products in the brand portfolio. 
• Single vertical: Are the products solutions in a single vertical or are they a disparate collection across a number of categories. 
• Intellectual property and protections: Does the brand have intangible property like internal processes, patents and copyrights that are defensible in the marketplace. 

However, without access to customer data, it is increasingly difficult to create brand equity; this is evident on Amazon. Furthermore, Amazon’s low barriers to entry have seen a decrease of market share to ASIN ratio, resulting in increased saturation in categories and low brand loyalty among consumers. 

That said, there are really only three ways to consistently grow revenue and increase the valuation of the business: Increasing prices, increasing customers, and increasing the life time value of the customer. 

Mr. Ott (on the same panel) stated that all three ways to grow revenue intersect at having a strong brand. Brands that have built trust and value into the customer’s life can leverage that consumer loyalty to increase: 

• Prices (within the bounds of the customer relationship), 
• Conversions through increased conversation rate on social media and other channels 

However, it’s important to look at the ratio of your customer repeat rate to your customer acquisition. Let’s say your online store has a 50% repeat rate. A potential buyer might initially think the brand community is really engaged, and the continuity strategy of the business is on point. However, if the acquisition funnel is not equally healthy, this will raise a red flag for investors as retargeting the same customer base without an influx of new custom is unsustainable.

Articulate Your Brand | The Fortia Group

At The Fortia Group, our greatest emphasis is on preparation: “Fail to prepare, prepare to fail.” Our entire network of acquirers are seeking to buy strong, profitable brands. Before we bring a business to market, our Director of eCommerce works with the founders to articulate the brand and establish it in the marketplace. This includes demonstrating to potential acquirers a clear product roadmap. 

#4 Pursue EBITDA Multiples Over Revenue Multiples

Focus on margin expansion over revenue growth. Most acquirers assess profitability on a last twelve months (LTM) EBITDA basis.

It’s possible to boost gross revenue while depressing the EBITDA of the business. Inflated marketing costs is a tell-tale sign of a business chasing revenue and a red flag for investors. High customer acquisition costs (CAC) ultimately steals profits, and can reveal that the revenue of the business is bloated. 

In a bear market, with little appetite for risk, margins signal sustainability, and a good return on investment. Even slimmer 5% – 10% margins show the business is working, and presents an opportunity if resourced properly.

In our recent webinar, SVP of M&A at The Stryze Group shared how consistent growth and longevity can offset the risk of slimmer margins. He gave an example of a recent acquisition with 10 – 12% margins, but its six years of steady growth signaled opportunity.

 #5 Understand the Market | Retain an Advisor  

In June, we hosted a digital event with 10 CEOs in the eCommerce space. As the panel discussed valuations in the context of a recession, one remarked “Average is not good enough, anymore.” The bar for what is considered a good target had been raised leading to greater scrutiny around brand equity, growing revenue and healthy margins.  

However, as a result of our recent deals, numerous industry webinars, and our Survey of Aggregator valuations, we have discovered the average multiple range has widened for quality assets. 

In a recent deal we completed, the difference between the highest offer and lowest was approximately 2X SDE (including deferred). 

With this degree of differentiation across the market, only the best prepared businesses with access to the deepest pool of potential buyers, will command the higher multiples. 

Experienced M&A Advisor = 25% Higher Offer

A seminal study from the University of Alabama spanning thirty years of acquisitions found having an experienced sell-side advisor increased the final consideration by up to 25%. 

The study concluded an experienced M&A advisor:

1. Levels the negotiation table: Businesses were typically sold at a lower valuation due to entrepreneurs with no M&A experience negotiating against well resourced buyers. 
2. Strengthens the seller’s bargaining position: A direct sale tends to be less visible against the market, rendering the bidding process less competitive, leading to lower valuations.

The Fortia Group | Global M&A Firm for eCommerce

We launched The Fortia Group to provide investment banking, sell-side representation to eCommerce entrepreneurs planning an exit. 

We differ from standard business brokers as our exit team will work with entrepreneurs (even 1 – 2 years from exit) to ensure every aspect of the business is ready to go to market. Then we run a professional auction with our buyer network with hundreds of aggregators, corporate ventures and PE firms. 

This gives your business the visibility it deserves and the competitive bidding process that drives up the offer. 

Contact us today to begin the sale of your eCommerce business.