On today’s episode, Kunle is joined by Emmett Kilduff, CEO of The Fortia Group, an investment bank providing high-standard services to the lower middle market of the eCommerce sector.
Emmett has been in investment banking pretty much his whole career but working with top corporates like Morgan Stanley and the American Bank, he was inspired to bring the kind of service these banks offer to big corporations to smaller eCommerce brands. His company has grown rapidly and is now providing services to hundreds of clients. Emmett’s passion for helping eCommerce brands has helped a lot of eCommerce brands succeed.
Meeting Carlos Cashman has inspired him to create his third startup, The Fortia Group. The Fortia Group is focused on providing comprehensive financial solutions to eCommerce businesses. They use the latest technology to provide tailored solutions that help businesses grow and succeed. They are committed to helping businesses reach their goals.
It’s an insightful episode as you’ll hear Kunle and Emmett talk more about exit strategies for brand owners/founders, valuation from the acquirers’ perspectives, and other tips for creating a flawless exit for eCommerce brands
Here is a summary of some of the most important points made:
On today’s interview, Kunle and Emmett discuss:
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Emmett, welcome to the 2X eCommerce podcast.
Glad to be here.
We’re no strangers. We’ve conversed a lot. The last time we spoke, I was pitching to you on behalf of Octillion. I don’t need any introductions to you but the audience will love to get a bit of your background so please go for it.
Thank you very much. It all started with a master’s in eCommerce that I did back in 1999. It was the first of its kind and nearly globally at the time. As some of the audience may remember, it was the time of the dot-com boom, maybe more dot-com than eComm. I was fascinated with all the dot-com IPOs that were happening at the time so I wanted to join the world of investment banking. I moved from where I lived in Dublin, Ireland to London, England and joined an investment bank called Credit Suisse.
I spent many years in investment banking doing corporate finance deals, M&A, and finishing up with Morgan Stanley, the American bank, which is up there at the top three in the world with JP Morgan and Goldman Sachs. That’s where I learned the whole art of M&A, which I’m sure we’ll come back to. I always wanted to be an entrepreneur though as opposed to be a number in a large firm.
I left Morgan Stanley in 2012 to start a data company called Eagle Alpha, which provides data to hedge funds. Interestingly, a New Jersey hedge fund invested in that business. The guy that had the investment happened to be best friends with a man called Carlos Cashman. Many of your audience will probably know that Carlos founded the eCommerce aggregator industry by starting Thrasio many years ago.
I got to speak to Carlos years ago and he had inspired me with what he was doing and it led me to want to do something in this space so I started my third startup at The Fortia Group, which is an investment bank focused on eCommerce and my big ambition is for it to become the Morgan Stanley for eCommerce. I know how bulge bracket leading at Wall Street firms work and I’m trying to bring that level of service, that high standard to small and medium-sized eCommerce folks all around the world.
I love the vision being the Morgan Stanley of eCommerce, particularly in the lower middle markets and middle market segment. It’s interesting. At Fortia Group, you do buy-side and sell-side M&A. I would think debt capital advisory and equity capital advisories. How does it work there?
The three main products of an investment bank are equity credit M&A. Unfortunately, equity markets are pretty much closed right now for eCommerce. Let’s be honest, it’s incredibly tough. Debt markets are tough but they’re not closed and M&A is still happening. It’s clearly not as high years ago, which was the height.
Global M&A is at a seven-year low or it certainly hit a seven-year low in the second half of 2022 and it’s been treading water since then and will rebound again, it always does. I’ve seen many cycles of M&A. We generally do equity credit M&A but, right now, most of our deal flow is M&A, both, as you say, on the sell-side and buy side so we can help an eCommerce entrepreneur prepare their business for a sale, even if it’s 1 to 2 years out.
It frustrates me when entrepreneurs come and say to us, “Can we start selling next month?” That means you put no planning into your exit. S&P 500 companies start to think about exits 1 to 2 years out. Why shouldn’t everyone else? Maybe we can come back to that. We like helping entrepreneurs ultimately get the best valuation for their business. We’re also involved on the buy-side by helping, for example, a private equity firm find businesses that they want to acquire. We’re advising on a merger of two aggregators who are coming together because they need to scale and find synergies.
Going back to why we had this conversation, I put out a big question on my LinkedIn and you were kind to comment. The genesis of this is who’s buying and who’s involved in M&A and you came up with three suggestions. Do you want to expand on that? Who is buying eCommerce businesses right now?
I’ll prefix the answer by saying that The Fortia Group works with companies that are doing at least $5 million in revenue up to $200 million. By definition, we’re not selling smaller brands to individuals. Our buyer universe are institutional or professional investors as opposed to individual people. Within that, there are three main buckets, there’s strategics, private equity, and aggregators. Before aggregators came along, there were two main buckets, strategics and private equity. Strategics is another word for corporates and they can be as big as Procter & Gamble or as small as a competitor of a brand.
There are the private equity firms who have a lot of dry powder at the moment given interest rates have been so low. There are two types of deals that private equity firms do and one is called platform and two is called bolt-on. Platform deal means it’s the first time a private equity firm does a deal. Let’s say the pet category so they’d look to go in relatively big and buy something established and good size. On the back of which, they can do bolt-on, which can be as small as a couple of million revenue, depending on the relative size of their first platform deal.
There are then the aggregators. Reme2mber, it’s important for the audience, years ago, there were no aggregators. It’s a relatively new concept. For aggregators, there are two buckets there, there’s FBA-led aggregators and there’s DTC-led aggregators. On the FBA side, Thrasio being the most common. There’s about 100 in our database and there’s about 30 in the DTC world, OpenStore out of Miami, or Pattern out of New York, and that would be two examples. They are the 3 buckets and that’s how we see the landscape, strategic, private equity, and aggregators.
We’re going to come back to each of them. You’ve expanded on them. Let’s go back to 2020 when there was a pandemic and eCommerce was an all-time high. The only place people could buy was via digital. Every eCommerce retailer was having record sales. When the economy started to open back up and shopping behavior started to return and as well as inflation with shrinking wallet sizes, we started to see a decline in eCommerce sales. These are macro effects.
If I want to come and buy a business based on EBITDA, I’m seeing skewed data, especially from a point of view of sometimes the 2021 numbers and 2022 numbers are all time lows for some of these businesses or five-year lows as compared to 2020, which was an all-time high. How do you value a business with these once in a lifetime time events that are skewing the data? How are valuations starting to take place now in comparison to 2020 and 2021?
It’s interesting. All the way through, the metric that brands were being valued off was the last twelve months. For FBA-led brands, it’s the last twelve months of seller discretionary earnings, which is like EBITDA or net profit for DTC-led brands. For Shopify-led brands, it’s more commonly used EBITDA. It was typically LTM. As an entrepreneur or as an eComm operator, if you’ve had a bad period, you’re waiting for X months so that you can wash out months 10, 11, or 12 so they start to be good performance. That’s one of the drivers of the low volume of M&A deals.
It’s not just buyers being careful because of inflation and interest rates and the two wars, unfortunately, that are upon us. A lot of the sellers are waiting for their like-for-like comps to be to be relatively better and clean and on the growth trajectory again. That’s why there’s been less and less volume. People are hoping that valuations will increase as well. They’ll never get back to December 2021 levels, specifically for FBA because there was so much money chasing, all the brands. Brands are not valid on looking back, historically, two years. It’s generally the last twelve months. That’s the period people are looking at and that hasn’t changed over all that period.
For brands that are otherwise still selling, why are they selling? With the deals you’ve closed in the last, let’s say, 6 or 12 months, have these brands had decent trading 12 months or have they had bad trading 12 months but don’t mind and just want to sell? What’s the temperature there?
The majority of prospects we speak to do not have growing revenue. As a firm, we only work with clients that have growing revenue even in a tough environment. We’re not set up to sell distressed brands frankly because there are few buyers of distressed eCommerce brands. It’s tough for us to make a market or it’s tough for us to be an intermediary between the buyers and sellers. For growing brands, that’s where we want to be. There’s business to be done by being an intermediary.
For brands, we have to see growing revenue and that’s tough. It means we’ve got a much harder job prospecting to find the gems or the diamonds as we call them. Like a lot of buyers are not buying, those that are want diamonds, and they’ll be happy to sort of sit on their hands and wait for diamonds as opposed to anything else. There are some buyers of distress brands. We’re a shareholder of the leading aggregator that buys distressed DTC brands, the hedgehog company. There are a few people doing more distressed acquisitions in FBA but there’s not many. It’s a tough environment.
With the diamond in the rough, do you have any examples? You don’t need to mention the brand. What sector and why do you think they’re doing well?
In 2022, we’ve been saying that the three categories where acquirers have the most interest today are pet, baby, and beauty. It’s because as we go into or have entered into a recession, even if it’s hard or soft, consumers tend to keep spending money on their pets or their babies. Now that we’re all allowed out again, post-COVID, they spend money on beauty. Those categories have done quite well over the past few years and continue to do quite well based on data we’ve seen.
Frankly, we’re hunting for prospects in those categories and that’s where we’re spending the most of our energy because that’s where we know there’s decent growth. We’re analyzing big data to analyze where growth is because we have to be hunting where the growth is and that’s where our buyer clients are asking us the most as well for those types of categories. On the flip side of that, home, garden, and other categories may be tougher in the more recent past.
Given the fact you are hunting and looking for operators, how receptive are these operators in this diamond-in-the-rough companies to want to entertaining the idea of wanting to sell their businesses? It’s one thing using big data to find traffic spikes and activity and there’s a human element or human side of things.
In terms of our marketing, our main form of marketing is outbound email campaigns. We do a couple of hundred emails a day. Our message is, “Are you interested in exploring a strategic discussion towards an exit, even if the exit is 2 to 3 years from now?” Most people, on a 2 to 3-year view, are thinking of building towards an exit. We’re not saying, “Do you want to sell today?”
On that timeframe, there are a lot of things that one can do to become what we call exit-ready to build towards ticking all the boxes, getting rid of red flags, and making sure the investment committee at the acquirer like what you’ve got, and availing of the low hanging fruits and making some strategic discussions to increase your value. When we talk like that, most people like to have a conversation because it’s long-term strategic and thinking.
It depends on the individual, to your point. Some people are tired. It’s been a tough two years. Some people want an exit now. Some people have already started a new brand and their energy and love are moving towards that so they view their older brand as maybe non-core and they want to monetize it. There are lots of other personal reasons, it could be health reasons, and we’ve seen that a few times. Some people are encouraged to sell for different macro, sectoral, personal, or financial reasons. We’ve written a blog about that earlier this year. There are lots of different types of reasons that can drive one to do a sale.
If you don’t keep those conversations up, you never know so that’s a plus. Going back to your point on the three major categories of where activity is going on, based on your deal size framework, which is $5 million to $200 million, you talked about strategics, PE firms, platform, bolt-on, and then aggregators, the FBA and DTC. I was quite surprised not to see family offices in this list. Do you know why? Do you want to expand on that?
At the starting point, family offices are incredibly secretive. It’s hard to know who they are and what they invest in. Strategics, private equity firms, and aggregators make it clear and public. Anyone that says they know what 1,000 family offices invest in globally is telling lies. That’s the starting point. The second point is that family offices are more likely to do equity investments or even lending than acquiring a business.
By and large, they’re not looking to do the operations and run a business like a private equity firm would do or at least oversee like a private equity firm would do. There are clearly some exceptions. If someone has built a great pet brand and sold it for $100 million dollars, yes, he or she might set up a family office and want to invest and acquire other pet brands. By and large, and I’ve seen this over twenty years, family offices are not necessary the most active acquirers.
Let’s jump into strategics and multiples. You talked about training twelve months in SDE. Does that rule apply to strategics in the space we’re talking about, middle market eCommerce businesses?
Strategics, for one, most people will know that they can pay a higher multiple than private equity or aggregators. Historically, they have done. That multiple for FBA brands would be SDE-led. For DTC brands, it would be EBITDA-led. FBA is lower valuations than DTC. In the latter, you own the customer. Strategics, the reason why they can pay more is because there’s likely to be more revenue and cost synergies and they can also play the longer-term game. The problem is, for a lot of your audience, they’ll be too small for strategics.
Let me define strategics. Big strategics are the Proctor & Gambles of the world, they’re huge. There are different levels, large, medium, and small strategics. A small strategic could be the biggest competitor of a brand who might have a bigger balance sheet and be interested in acquiring one of the smaller competitors. It doesn’t always have to be that listed company on the New York Stock Exchange called Procter & Gamble, etc. They pay higher multiples but they take longer to do deals and they can be harder to find. One needs to plan significantly ahead of time whereas an aggregator can do a deal quickly. Fail to plan, prepare to fail.
In regards to aggregators, you mentioned higher multiples for DTC versus FBA. What are the multiples? What multiple should sellers be looking at now? I’m not necessarily talking about buyer-sellers but sellers who’ve prepared the last twelve months and they’re saying, “Now is the time to start to have conversations with M&A firms to sell.”
Great question and that’s probably the most common question I’m asked, “What are valuations? What are volumes?” Rather than giving Emmett’s view on any given day, what we decided to do was productize our house view, if you will. Every quarter now, we publish a 50-page report with our view on valuations and we host an online webinar where we get guest speakers in from private equity firms to bring that to life. Our Q3 report was published and in that, for FBA brands, we said that the valuation range for brands that are doing well, and these are not for distress brands, was between 2.5 to 4.5. That’s the typical valuation range.
There can be exceptions on the downside for distressed and the upside for diamonds. That’s 2.5X to 4.5X SDE. On the DTC side, for profitable good brands, it’s typically between 4X to 12X to take. If you’re at the lower end of that range, you’re probably in not a sexy category right now. You’ve got lower growth and lower net margins. You maybe don’t have any recurring revenue. To get to 12X or even have a chance of beating it, if you’re a pet brand and you’re 100% recurring revenue or subscription revenue, your revenue is growing, and you’ve got 20% net margins, you’re going to be in the teens. There’s everything in between. The summary is 2.5 to 4.5 for FBA and 4 to 12 for DTC.
That’s clear enough. What’s the higher end of the scale, the 4.5X SDE for the FBA or the 10 to 12X SDE, which is training twelve months? You need to be a retention brand. You need to be a brand. Have some brand equity and have a recurring base. It’s almost like a SaaS set up in that way. The closer you are to a SaaS from a recurring revenue standpoint, the better for your brand.
DTC can have recurring revenue. FBA can have a repeat-purchases. The stronger the repeat purchases, the better. The first question is, is it a brand with a capital B? Acquirers do not want products or commodities that ultimately will compete with low-cost Chinese folks. That’s not of interest.
In the DTC space, it would be very obvious, the size of your list, and how engaged your list is. You need to get into the retention and engagement data from email-first and zero-party data. You need to tear that data apart. Sellers with a 12-to-36-month horizon for selling, what key things should they know today?
We like working with folks that far out because we can add a lot of value based on our decades of experience. I’ve worked on over $20 billion of deals in the last twenty years. The way we think about it is there are strategic financial and operational improvements that one can make. From a strategic perspective, I’ll throw some examples out there. Should you acquire a brand to increase your scale quicker? Should you go offline? Should you add DTC if you’re on the FBA?
There are some big strategic questions. From a valuation perspective, if you’re FBA-only, you should think about DTC if you think you can win there because it’s going to increase your valuation given the multiples are higher as we discussed. There are a lot of strategic discussions that one can think about. If you look at financial, net margin is critical, especially in this type of environment. What can you do to increase your net margin? That might have a tender process for your suppliers.
If there are costs there, it might be improving your marketing efficiency. It might be moving more folks offshore, etc. It’s operational. Are there any red flags in the business? What I’d like entrepreneurs to think about is if you went in front of the investment committees of 20 acquirers today, how would they score you? That’s the way we think. These smart folks who buy businesses every day, how do they score you across a lot of these metrics?
You want to know the answer to that score today. If it’s 43 out of 100, you want to go, “Emmett, what can I do in the next 6, 12, or 18 months to get that score up 10 points each year from 43 to 53, 53 to 63, and so on?” Ultimately, when you do press the green light on your exit, you can maximize your check. That’s what we do.
We have an offering called an exit-ready audit that we do with clients to look under the hood and analyze their data and business to help chart their course. As one of our clients said, “You can drive from San Diego to New York but what’s the best way and what’s the quickest way? Is he just going to set off without a map or does he get a map to chart the best journey?” We can help provide the map.
I like your piece on the strategic. You mentioned two key points, M&A. Could you just acquire a smaller brand in your space and how would that look like over the next a few financial years? If you’re a single channel business, you’re adding more value if you go multi-channel. Obviously, it’s going to require a new set of expertise, which will affect net profits but there should be payback period eventually.
Who knows what the market would reward you years ahead if you’re planning financial years ahead. Are there any of the ways entrepreneurs can increase valuation? You mentioned increasing net profit. What are you seeing as the most effective ways to increase net profits consistently? You could delay payments and that will catch up with you eventually, particularly if you’re looking over a 24-month period. What ways are you seeing the most effective businesses maximizes net profit in this economy?
What I and acquirers want to see, it’s fair to say, is the ability to increase prices, especially in a tough market. If you can increase prices in a tough market, you’re showing that you’ve got a strong brand and you have loyal customers. That’s powerful. Instead of the opposite, decreasing prices and offering discounts all the time, that shows you don’t have a tremendous brand equity. I get excited when I see folks increasing prices and customers continuing to buy.
One of the trends we’ve picked up is if you look at order volume in 2021, let’s say the order volume was 10,000 orders and that generated £1 million. Because of increases in pricing, order volume has gone down due to discretionary income of consumers but that price increases hedged. When you look at year on year, it looks like the revenue has gone up and net profit is inflated but transactional volume is down across the board.
What I’ve seen in some instances is transactional volume is down. If you look at the trailing twelve months, in most eCommerce stores, transactional value volume is down. They’ve increased prices, which looks like they’ve grown year on year. The fulfillment centers are processing orders but because of the increase in price due to inflation and all the costs coming up, it appears on the P&L that the business is growing. Would an acquirer look at transactional volume or do they just look at the money at the revenue?
I did look at all of the above. There’ll be looking at gross margin, net margin, cashflow, bank statements, and everything. They’ll get to the bottom of the drivers of growth. Ideally, price increases and volume transaction volume increases. If there’s discrepancies, they’re going to find it, for sure.
To be respectful of your time, is there any question I haven’t asked you? I will hate not to ask you certain questions.
We’ve covered valuations and volumes, which is key. There are a lot of tips that we have. We’ve produced a two 90-page guides, Kunle, over the years, exit guides, one for FBA, and one for DTC folks. They’re available for $99 on our website. They’re packed with information from us and from acquirers. For folks who want to grab a strong coffee and digest a lot of advice, that could be helpful. That’ll include things that we haven’t covered today. My biggest piece of advice to entrepreneurs is to plan your exit as far out as possible. It saddens me that folks start to think about an exit next month or even in three months’ time and that means you’re not prepared. You haven’t got rid of all the potential red flags. You haven’t maximized your value. That’s my biggest piece of advice. Think 1 to 2 years out, ideally.
Emmett, thank you so much. You guys have heard it from the horse’s mouth himself to start now, plan ahead, and best of luck with your exits. Emmett, thank you so much for coming on to the 2X eCommerce podcast. For people who want to find out more about The Fortia Group, it’s TheFortiaGroup.com. Emmett, what social media platforms are you active on if the audience wants to continue this conversation and follow you?
Thank you very much. Great to be here.