Retail

Preparing your e-commerce brand for acquisition: How e-commerce roll-up companies work and how to maximise your valuation


One of the often understated, but nonetheless positive after-effects of e-commerce’s tremendous growth has been the rise of an army of independent private label brands offering some of the most loved products on the internet. It’s no longer surprising to see a product by a relatively unknown brand surpassing some of the biggest global brands in rankings through sheer customer love.

Having said that, it’s often easy to underestimate the amount of effort that goes into making something like that happen. Although running an e-commerce brand may look simple on the outside, most brand owners realise it’s anything but that – constantly rising working capital, pricing wars by well-funded competitors, supply chain disruptions are just some of the challenges you’ve to face on a daily basis. And even when you’re able to find your way around all of these problems, it may sometimes take years for business success to translate into actual financial success for brand owners-because most of the profit is anyway reinvested back into growing the business.

While in very rare cases, some brands grow big enough to the tune of multiple of 100s of crores in annual revenue and get acquired by large conglomerates, there’ve been very little options in that regard for smaller brands. Exits are mostly unheard of and the only option to realise the value of the brand is to grow it to something really big. Of late, e-commerce roll-up companies like Thrasio, Heroes and Powerhouse91 have in that sense opened up an entirely new opportunity for these brand owners in the form of being able to sell off their brand. These companies are built around the simple principle of consolidating brands and collectively growing them using shared expertise, economies of scale and growth capital. This ultimately helps the brand owners in two ways –

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  1. Gives them an opportunity to make a good financial return on what they’ve built.
  2. Sets their brand for success through dedicated resources, infrastructure and expertise that it needs to grow according to its true potential.

While these companies typically make their processes as hassle-free for the brand owners as possible, brand owners can still help make the process smoother for themselves through some simple measures. Not only can these help you significantly pace up the process, but being prepared and data-centric is just another positive signal to any potential acquirer.

Starting with the most basic things first, sellers can have a clear picture of expectations before jumping into the process by asking themselves some simple questions like:

  • What is the minimum required value you want to settle at?
  • What would you hope to do or achieve with the earnings from the sale?
  • Would you like to get out of the business entirely, or would you like to stay involved?
  • How does your optimum time frame for selling look?

Planning a bigger picture can help you feel comfortable when negotiating as the deal proceeds. Additionally, it’s always good to research about the specific acquirer you are talking to and see if there’s a mutual fit. Different companies may have different preferences with respect to the categories their brands operate in, for example. Typically though, roll-up companies prefer brands with products that have a stable demand curve without a lot of seasonality.

The single biggest area where you as a brand owner can significantly pace up the timeline of your brand’s acquisition is getting the data together. Acquirers typically need access to historical sales data, the costs breakdown and the growth trajectory to be able to make an overall assessment of the business health. Preparing this data beforehand in an easy to comprehend manner can help make the process quick and efficient.

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How to maximise your valuation

At the end of the day, the simple straightforward way of maximising your valuation is, well, to actually build a good profitable business. Most successful brands that eventually get acquired weren’t built with the purpose of getting acquired, but with the purpose of bringing delight to people’s lives. That being said, it could definitely be useful to really understand how companies arrive at valuations and use those metrics as guiding performance indicators for your own internal assessment of your brand. Some of the key criteria e-commerce roll-up companies typically look at when acquiring a business are:

Scale and Margins: Businesses with greater scale in terms of net sales are likely to command higher valuations. However, the overall revenue is not looked at in isolation and it has to be backed by healthy gross, contribution and EBITDA margins which drive the final valuation.

Organic Growth: Healthy organic growth is often a good indicator of product-market fit and validates a pull from the market.

Brand differentiation: This is an important criterion that can strengthen your case for any potential acquirer. The differentiation may not always reflect in technical IP, and may often be just significantly superior quality, customer experience or a keen insight leading to differentiated brand positioning.

Customer Love: The foundation of all of the above is of course genuine customer love. Products with good & honest ratings and reviews are the first ones to catch our eye.

These are of course only a few things acquirers look at to assess a brand. Most of the acquiring companies realise that a brand is much more than just a few numbers in a spreadsheet and look at the overall picture when making the final decision. It is important to realise however that at the end of the day, the best thing you can do to get the maximum valuation is the same thing you’d do even if you were not selling your brand – keeping your customers happy.

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The writer is co-founder, Powerhouse 19.

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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