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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:
- Growing the business
- 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.
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.
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.
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:
- We offer an Exit Ready programme to prepare your business to go to market, even 1 –3 year out.
- 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.
