2021 was a year where the world adjusted to the new normal of the COVID-19 pandemic. There are still several places on lockdown, and much of the world faces restrictions, forcing both businesses and consumers to adjust accordingly. A big benefactor of these global challenges has been the e-commerce industry.
Business owners have always had to be conscious of both macro- and micro-economic factors when planning. With inflationary pressures and increased national debt across most developed nations, many will be making more conservative decisions in 2022 as they expect to bear some of that burden from the government, such as through higher taxes.
In mid-2021, we noted that the US could raise federal tax rates for wealthy investors to as much as 43.4%. While an increase is still likely to happen, offsetting measures such as an increase in the SALT cap for US taxpayers in high income-tax states like California and New York should help ease some of the burden.
Despite—or perhaps, because of—the pandemic’s persistence, e-commerce has continued to boom. Perpetual concerns regarding COVID-19 have pushed shoppers deeper into the e-commerce space to avoid potential exposure in physical stores.
Acquirers have continued to benefit from historically low interest rates and many sellers have opted to exit while the market is strong with multiples continuing to grow. Other founders and business owners have opted to grow their business more and deal with an increasing demand for remote/hybrid work, higher salary expectations and more optionality for e-commerce consumers. This means there should still be a strong supply of excellent acquisition opportunities in 2022 and beyond as the e-commerce businesses that have survived are stronger than ever.
There has never been a better time in history to exit an e-commerce business than today. While we do not have a crystal ball into the future, 2022 is proving to be another strong year, particularly before interest and tax rates are finally increased. At the lower end of the market, individuals are still leaving their jobs to buy businesses and at the higher end, institutional investors and private equity firms have more capital available than ever before.
In this post, we will explore the ins-and-outs of what e-commerce buyers and sellers are looking for, how the micro- and mid-cap e-commerce business acquisition landscape has changed in the past 6-12 months and what we expect to see soon.
Key Statistics
Invested Capital
The total value of closed e-commerce deals in 2021 was nearly double that of 2020, and 2020’s total value was 8x 2019’s total value. This means that 2021’s total value of closed e-commerce deals was roughly a whopping 12x the total value just two years prior.
Available Capital
E-commerce buyers evidently have quick access to a wide range of capital. In fact, buyers in our network represented nearly $39 billion in capital at the end of 2021, with many expressing interest in multiple business models.
Furthermore, 45% of the e-commerce buyers in our network have acquired a business before, 27% are looking to buy an FBA business, 47% are looking to buy a Shopify or non-FBA business, 8% want drop shipping and 18% are open to multi-types.
Industry Overview
The e-commerce industry continues to flourish at an unparalleled rate. According to the Census Bureau of the Department of Commerce, US B2C e-commerce sales for the third quarter of 2021 totaled over $200 billion. It’s anticipated that US e-commerce sales will surpass $1 trillion in 2022.
As we look toward the future, the e-commerce industry seems to hold ample opportunities for continued growth and expansion for a complete range of online businesses. The pandemic has brought on a monumental surge in consumers purchasing goods online, thereby increasing the demand for e-commerce businesses and ensuring that the market will not slow anytime soon.
With a surge in private equity firms entering the space, we expect to see an increase in demand for e-commerce businesses towards the larger end of the deal size spectrum. Take these recent three deals, for example, where our team facilitated the acquisition of an e-commerce business by a private equity firm.
- JM Bruneau, an online retailer of furniture, office
equipment, and supplies was acquired by TowerBrook
Capital Partners in July of 2021 for $561 million - Stamps.com, a provider of online-based mailing and
shipping solutions, was acquired by Thoma Bravo in
September of 2021 for $6.6 billion - Notonthehighstreet, an online marketplace offering
gifts and accessories, was acquired by Great Hill
Partners in January of 2021 for $306 million
Opportunities Within Shopify and Amazon FBA
It’s no secret that Shopify presents e-commerce businesses with an excellent platform to sell products and make a name for themselves. In fact, Shopify has the largest e-commerce platform market share in the US, with nearly 30% (more than 2.3 million) of online businesses using it to power their stores.
Shopify claims to have generated 3.6 million jobs and $307 billion in economic impact, and as more and more e-commerce website owners choose to build on Shopify, the demand for new features continuously increases.
The Shopify app ecosystem has seen a massive influx of various types of apps to provide incremental but critical features, whether it be automating returns, helping customers find the right size or locating other stores with available inventory. With its extensive e-commerce and SaaS experience, FE International has deep insights into the Shopify platform and the opportunities within don’t look to slow any time soon.
We are also witnessing a rapid expansion in e-commerce demand within the Amazon platform. According to its 2021 third quarter results, the e-commerce giant reported $110.8 billion in net sales—a 15% increase from third quarter 2020.
This trend is a pertinent illustration of what we’ve been seeing across e-commerce stores regarding the “new normal” of post-covid consumer trends. Stores that saw what many buyers have referred to as “COVID bumps,” or increased sales due to the pandemic, have either plateaued at a new baseline above pre-pandemic highs or actually continued to grow YoY through 2021, even as lockdowns eased and brick-and-mortar retail stores reopened.
The US Census Bureau recorded an increase in e-commerce sales for every quarter of 2020 and 2021, albeit at a diminishing rate from Q2 to Q4 2021. This data set also illustrates that the shift from brick-and-mortar retail to e-commerce continues post-pandemic, even after the bulk of the “COVID bump” has normalized.
It’s also worth noting that some 55% of customers start their online shopping searches on Amazon, and more than 50% of Amazon’s sales are generated by third-party sellers.
Without a doubt, Amazon FBA is an excellent place for e-commerce businesses to set up shop. In fact, Amazon FBA guarantees instant reach, a more level playing field and a variety of opportunities for sellers to scale their businesses successfully.
For high-quality Amazon FBA businesses under $100 million, the buyer landscape is nothing short of vast. But as we look toward 2022 and beyond, we anticipate more institutional investors entering the space looking for wildly successful Amazon FBA businesses that have blown competitors out of the water.
Interest in Amazon FBA businesses continue to surge, and FE expects FBA multiples to continue rising throughout 2022, with those of non-Amazon or non-marketplace e-commerce businesses.
To best prepare your Amazon FBA business for its eventual sale, we recommend reading our post on how to value and sell an Amazon FBA business.
Featured Deal: FoxyBae
The West Coast-based national beauty brand, FoxyBae, has, since its inception in 2017, built an impressive omnichannel sales engine across their direct-to-consumer site, wholesale accounts, and Amazon. Over the past two years, it has seen revenue grow at a rate of 87%+ while strategically cultivating a devout follower base through a vast network of over 750 influencer and affiliate partners.
FE International served as the sole sell-side M&A advisor on the acquisition of FoxyBae. The businesses’ strong branding, marketing strategy success and young customer base drew in many interested potential investors. As our team combed through these buyer options with FoxyBae, our focus was finding a steadfast buyer who saw value in the marketing engine that the hair care company had created. Ultimately, Boosted Commerce proved to be the most valuable and fitting buyer to expand on FoxyBae’s great success.
Miguel Gauthier, the co-founder of FoxyBae, said, “FE ran a robust and professional process that got us in front of an array of buyers from family offices to corporations and funds. In the end, they were a valued help getting a complicated transaction over the finish line, and we’re excited to have a partner like Boosted lead FoxyBae into its next chapter.”
Gauthier helped bring FoxyBae to roughly $30 million a year in sales. However, he didn’t feel comfortable going from $30 million a year to $200 million a year without a strategic partner, as he says an outside skillset would prove most beneficial in helping to scale to that level.
FoxyBae joins Boosted’s portfolio of more than 40 brands in the beauty, health and wellness category.
According to co-founder and CEO of Boosted, Keith Richman, the acquisition of FoxyBae will elevate Boosted’s entire portfolio. With FoxyBae’s popularity among popular retailers like TJ Maxx and Target, the acquisition should help to accelerate efforts for Boosted’s other brands.
E-commerce Buyers: What Are They Looking For?
Buyers have a range of aspects they look for in e-commerce businesses before deciding to invest. While these aspects may fluctuate and are specific to the buyer, an increasing number of investors are interested in businesses that have added social media platforms like Instagram as sales channels.
Practical Ecommerce estimates that roughly $2.6 billion in sales is generated annually via social media traffic, with Pinterest leading the pack in conversions with 47% of users also shopping via the platform.
Social media integration with your e-commerce business tends to give you better reach and exposure, helps to build a reputation for your brand and increases the chances of conversion, among numerous other benefits. According to Statista more than 55% of social media users in the US aged 18 to 24 made at least one purchase through social media channels in 2021. The 25 to 34 age group followed closely behind, with roughly 48.7% of them being social commerce buyers. Consequently, buyers tend to favor e-commerce businesses that use social media to improve their branding and boost sales.
Another crucial element that buyers are looking for in e-commerce businesses is excellent visual commerce. In simple terms, your visual commerce is how your visual content (photos, videos, etc.) influences your customers to form a preference for your brand or business. Your visual commerce spans both what’s on your website and what’s on your social media channels.
Consumers are incredibly visual, and e-commerce shoppers are even more so. Since online shoppers can only experience the product visually (or audibly, if a video is featured), it’s crucial to invest in your visual commerce with high-quality photos and videos that share a unique story about your brand or product.
It’s additionally fundamental to have well-written, optimized copy that supports the visual content within your business. If your visual content and copy do not align, consumers are more likely to quickly leave your site.
But when consumers are visually drawn to your brand and can connect with it, they are much more likely to become a long-term customer. With proven retention of long-term customers, your online business will invariably pique the interest of potential buyers.
For example, Verma Farms spent roughly 50% of its operating expenses on marketing and advertising (much of it agency-driven) and achieved a 30%+ returning customer rate with a portion of that being longer-term subscriptions.
What’s more, buyers have become more selective regarding which e-commerce businesses they decide to invest in. E-commerce businesses that sell generic products—without trademarked brands and IP in the form of utility of at least design patents—are much less attractive to acquirers than those that could be visualized “on the shelf at Target,” to quote the head of M&A at a well-known aggregator. This emphasizes the importance of diversified sales channels and proving you can retain customers off of Amazon.
As competition in the e-commerce industry continues to toughen, the implementation of artificial intelligence (AI) has helped many businesses—such as Amazon—stand out against their competitors. On a much smaller scale, individual Shopify storefronts have had success growing AOV (average order value) and increasing the percentage of customers who purchase more than one item (both important metrics for acquirers) by recommending additional products at checkout. This can be based on what customers have added to their cart, with the help of AI. There are several Shopify apps that can implement this, and developers are building these features into storefronts on various platforms.
Additionally, it’s critical to have accurate and robust accounting to keep track of your business’ financials, such as a profit & loss statement. When your financial details are accurately documented, it allows for a smoother transaction with a potential buyer down the road. It’s also worthwhile to note that you should strive for at least three years of profitability before deciding to sell, as doing so will help buyers see the stability in your e-commerce business.
To learn more about what buyers are looking for and best set your e-commerce business up for its sale, check out our comprehensive e-commerce business exit planning overview.
E-commerce Sellers: What Are They Looking For?
Just as buyers are looking for established, successful e-commerce businesses to acquire, e-commerce sellers are looking for the same level of quality when deciding to hand their business off to someone else.
Specifically, e-commerce sellers are looking for high valuation multiples for their business, and they want experienced buyers who have a strong understanding of the process to be the ones acquiring their business. The experience and track record of the buyer is increasingly important on deals valued at more than $1M because of the likelihood that the offer and sale structure include performance-based payouts.
Any seller thinking intelligently about the value of differing bids will compare the likelihood of crossing earnout and “stability” thresholds to achieve a fuller valuation of their sale over time. A buyer who can point to having scaled a portfolio of similar companies in the past will instill more confidence in their ability to get the seller paid on those parts of the structure.
Depending on a measure of a variety of valuation drivers, an e-commerce business should fall between 3.5x and 6.0x multiple of SDE or EBITDA. While every e-commerce business is valued uniquely, many successful e-commerce business owners will be looking for a multiple towards the higher end of this range.
Essentially, e-commerce sellers are looking for reputable buyers who recognize the value of their business and won’t neglect any parts of the business transfer process—buyers who are familiar with the business’ niche and understand what is required to maintain the success of the business and continue the seller’s legacy.
For more information related to e-commerce business valuations, read our post on how to value and sell an e-commerce business.
Aggregators vs. Private Equity Firms
If you’ve reached a point where you’ve decided to sell your e-commerce business, the first step is hiring an experienced M&A firm like FE International. From there, we work with you to decide whether it would be in the best interest of you and your business to sell to an aggregator (particularly if you sell on Amazon), private equity firm or another type of buyer, such as a strategic sale to a corporation. Ultimately, the chosen route depends on your business and what sort of involvement you want with it moving forward.
If you aren’t yet ready to separate yourself from your business or are willing to stay involved and participate in the upside of taking on a resource-rich partner firsthand, selling to a private equity firm might be the more favorable option which our team can explore with you. Most private equity firms and even many family offices will prefer to have the seller maintain ownership of 20% of the business, or “roll equity.” This often correlates to these firms’ desires to keep the seller involved in a day-to-day managerial role to retain their operational knowledge in the business.
For a deal larger than $25M in valuation, firms are more flexible in bringing in an outside operating partner or new CEO. However, if you no longer wish to be involved in your business, our team will likely suggest selling to an e-commerce aggregator/holding company.
If we feel that selling to an aggregator is in the best interest of you and the business, it’s crucial to understand what they are looking for. Essentially, aggregators are looking for companies that have achieved market fit for their products and have an established network of suppliers and manufacturers. Ideally, your products are private label as most aggregators aren’t interested in drop shippers, retail arbitragers, or sellers of generic goods.
In the same breath, many historically FBA-focused aggregators are searching for third-party (off-Amazon) storefronts that have achieved lasting, measurable success that they can build upon. They likely won’t be interested in investing in an online business that doesn’t yield the promise of longevity, so it’s crucial to be judicial about how you design your business.
Over the past 12 months, we have seen a significant increase in aggregator interest in acquiring a wide array of DTC storefronts, mainly those hosted on Shopify. From our own experience and data collection, nearly half of the roughly 60 aggregator firms have expressed interest in non-Amazon deal flow in the last two quarters alone. Many of these firms have even branched out to analyzing and buying SaaS businesses that serve the e-commerce market and content (or affiliate) businesses that support the existing niches in their portfolio.
Learn more about aggregators and what they’re looking for by heading over to our post on the companies funding FBA aggregators.
Aggregator Funding Update & What It Means for You
Billions have been raised in the aggregator space to date and the opportunities within are abundant. In fact, Amazon aggregator funding skyrocketed from 2020 to 2021. However, as we look at the last eight quarters, there are some tendencies indicating it’s beginning to slow down.
In terms of acquisitions, we are starting to witness a shift towards private equity firms. In fact, private equity firms are buying at a similar rate as aggregators. Despite the proliferation of opportunities with aggregators, it’s crucial to consider early on who else you can sell to in order to best set yourself up for success.
Aggregators and private equity firms may overlap in some of the aspects they’re looking for in e-commerce businesses, but there are some distinctive features that private equity firms are particularly searching for.
Many private equity firms are interested in more diverse businesses, and the majority are looking for sellers interested in rolled equity. With rolled equity, the seller’s management team can continue to help in business operations after the sale—something that most private equity firms are interested in, especially if your e-commerce business is on the smaller side.
Featured Deal: Verma Farms
FE International was pleased to act as the sole sell-side advisor to Verma Farms, an ultra-high-end health-conscious CBD brand that was purchased by a globally focused e-commerce conglomerate.
Founded in 2019, Verma Farms takes a unique and playful approach to CBD with its ever-growing inventory of CBD gummies, oils, dried fruit, and topical products. An ultra-luxury product, the company has gained significant market share, particularly in the consumer and pet-focused CBD consumables space.
While only being in business for two years, Verma Farms has become one of the fastest growing and most popular CBD brands in America. When founder AJ Agrawal finally decided to exit, he was faced with a plethora of vetted potential buyers interested in paying top dollar.
After qualifying interested parties, FE helped Agrawal sort through these potential buyers and identified the one that most aligned with his long-term vision for the business while maximizing the exit price. On this particular transaction, FE engaged e-commerce aggregators and holding companies, traditional private equity firms and family offices, as well as strategic corporations (companies that already operated in the wider CBD/Hemp/Cannabis niches).
Although this is not always the case, strategic corporations in this niche had the lowest valuation ranges of all three groups, and private equity was the most restricted by their LP and debt covenants when it came to investing in a niche like CBD (which was expected).
We found individual investors and more flexible holding companies and aggregators to have been most open to a competitive valuation and the growth potential of a highly branded consumer goods business in this sector. The early bids that were received were highly competitive and the process moved quickly.
After the deal was finalized, Agrawal said, “I had an excellent experience selling Verma Farms through FE, as their team was incredibly responsive, thoughtful and considerate throughout the entire process.”
Summary and 2022 Outlook
As an e-commerce business owner, it’s imperative to bear in mind your eventual exit strategy and how to best appeal to potential buyers—whether they be individuals, strategic acquirers, aggregators or private equity firms. Our experienced team at FE International can guide you through to a successful exit with whichever option is deemed most appropriate for your business.
Interest in Amazon FBA businesses continues to surge, and we anticipate FBA multiples will consistently rise throughout 2022, with non-Amazon businesses to follow suit. As we are starting to see a decrease in funding within the aggregator space with more funding for multi-channel e-commerce businesses, there are ample opportunities for the owner of any e-commerce business to exit.
In the coming years, we anticipate more Shopify businesses (which historically use 3PLs or own-fulfillment) will reach key acquisition metric levels, and more of the existing aggregators will become big enough to adopt hybrid FBA- and own-fulfillment solutions to optimize costs and efficiency.
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