Mastering E-Commerce M&A: Strategies and Success Insights with Emmett Kilduff

With a team of seasoned professionals , the Fortia Group excels in identifying and securing the best deals for e-commerce entrepreneurs . Join us as we delve into valuations of e-commerce brands and how to best plan for exit . Welcome back to the show , emmett . Great to be back . David .

A lot's happened in two years , I know , and really looking forward to getting into it . So for those of our listeners that did not tune into episode 118 , which was back in January 2022 , can you please share a little bit about your background and your path to co-founding the Fortia Group ?

So I went and joined the world of investment banking , initially with a firm called Credit Suisse , first Boston , and then more latterly with a firm called Morgan Stanley , one of the leading US M&A firms in the world . That's where I learned the art of corporate finance , investment banking . I left there 12 years ago and started up a number of businesses .

I'm sort of a serial entrepreneur . And three years ago actually it was four years ago I spoke to a guy called Carlos Cashman , who some of your listeners will remember . He was the founder of Thrasio , which was the start of the whole aggregator craze .

And speaking to Carlos , I recognized there was a big opportunity to bring a Wall Street level of service to small and medium-sized e-commerce businesses . And that was the gap I saw four years ago . And so I decided to set up the Fortia Group with two co-founders . And here we are . It's been a difficult last one to two years .

We had a great start when the frenzy and COVID frenzy was there and M&A was relatively easy , but it's been a relatively difficult two years . But these things come and go .

In terms of volumes , m&a volumes , valuations have sort of stayed stable . I would have said They've reduced . We spoke in January 2022 . I would say December 2021 was the peak of e-com valuations , whether that was an FBA-led brand or a DTC shop or BigCommerce-led brand and valuations have definitely come down and are very unlikely to get back to those highs .

But the light is at the end of the tunnel . These things come in cycles Interest rates we thought six months ago might be down already with the Fed . The Fed should reduce rates in the next few months and then we'll start to see volumes tick up and valuations slowly regain their territory . To see volumes tick up and valuations slowly regain their territory .

There's a great chart by Goldman Sachs which shows that M&A volumes have never declined for three years in a row . So , barring something very strange , in the next six months the year should finish above . We've had the two bad years , obviously , so we shouldn't get a third year of down volumes .

Now , most of your listeners will think I mean that someone has to acquire their business , but I actually try to encourage entrepreneurs to think about them being the acquirer . Why don't more companies take the time now to acquire one of their competitors ? Or if they're strong in North America , think about an acquisition in EMEA .

Or if they're strong in category A , think about an adjacent deal in category B . So it is a great time to be a buyer . There's no two ways about it . But that doesn't mean you , the entrepreneur , can't be the acquirer .

And the best exits and we'll talk about exits ultimately are bigger and have a bit more clout and can pitch their exit to multiple types of institutional investors , not just aggregators . I mean private equity , family offices , corporates , and so I would be trying to think about this period to scale . Scale as an entrepreneur , scale your business .

And some people might be saying well , it's hard to get acquisition finance . You don't always have to use acquisition finance . There could be clever ways to do a cashless merger by offering the founder of the other business stock in new code at an appropriate relative number . So there's ways to be creative . I would create value through acquisition .

Platform is when they might say , enter the pet category for the first time and that is a sizable platform deal of generally at least tens of millions of dollars . But when they do that deal then they might look for add-ons or bolt-ons or tack-ons of pet businesses . That could be 5 million , 7 million , 10 million revenue .

But below 5 million now is really more for individual buyers , not institutional buyers . It's not an area we look to work in and it's interesting we've touched on aggregators .

Three years ago aggregators were buying businesses of that size but they've increased their minimum threshold and we sort of followed suit because the energy it takes to acquire a business doing 5 million or 10 million revenue is the same , sometimes less than a business doing a million revenue , because they might be more organized or more proven .

So yeah , quantum , the size of revenue , is the first factor . Then you've got to have growing revenue . Really tough to sell a business where revenue is not growing and I appreciate that's tough in this environment , but there's a lot of . It's a buyer's market , so we don't deal with distressed exits , we just deal with brands that are growing well .

So quantum of revenue growing revenue . Next is net margins , and I'm less interested in gross margins . Entrepreneurs love quoting gross margins . I want the bottom line . I'm like what's the bottom line after all the costs ? That's much more important to me as an investment banker trying to help an entrepreneur sell For an FBA-led brand .

Typically that net margin is 15% to 20% . Is what acquirers want to see . Sometimes for DTC it can be slightly lower . So there are some of the big factors . The other would be is it remote ? Is there patents ? Is it protectable or is it going to compete with a Chinese copycat that's going to eat into the margins over time ?

There's so much work that can be done to get a business ready for sale before you start a formal process that can have a massive impact on valuation . So what's an example ? There was a deal where an acquirer did an audit of the manufacturer in China , sent someone to do literally an audit of the manufacturing facility and the business .

The facility scored three out of 10 10 and it killed the whole deal . There was , you know ,

it just didn't tick all the boxes from a fire and safety perspective and other things . So the acquirer said we're just not going to do . The deal at the investment committee meeting of the acquirer was just just big X .

So all that work has been put into selling that business and then it takes two to three quarters to change supplier and see all the products flow through , for the acquirer then to maybe revisit the deal . So it's sort of dead . That's just one example . Other examples can be well . I'll give you some of my favorite quotes in M&A right .

So flirtate marry is something we believe in , right ? The best marriages or partnerships don't happen in a day or a month . It takes time , and it's the same with M&A . So we like to engage clients early , even one to two years out , where we work with the client , start flirting with potential buyers , start dating with them and marry in two years time .

And there's two key benefits of that process . One another great quote is is the best laid plans only survive contact with the enemy until you meet the enemy . Right , no matter how much planning you or I are a great entrepreneur does , it's about the buyer's feedback and what they want , because they're the guys with the check right , the cash .

So during the flirt date marry period , we believe it's critical to put your business in front of the enemy , in front of acquirers , and get feedback . Ask them what do you think of my business today ? What would you change ? And then iterate on that feedback over multiple quarters .

And the final quote , the best quote of all time for M&A is but I love your Warren Buffett quote , but my favorite quote is the best businesses get bought , not sold .

But if you don't make a good offer , the Fortier Group is going to run a really formal professional auction process and you're going to have FOMO because you might miss out to one of your competitors . So that goes back to the word I said at the start preparation .

Preparation allows you to be thoughtful and smart and leverage deal tactics , m&a tactics , you know to your benefit .

And then really the same question on the buyer If someone has never bought a company but is interested in doing so , what are some things that you know ? What are steps one , two and three for them ?

I know how to do deals . But there's great independent research from the University of Alabama which shows good advisors can get up to 25% higher valuation . So if you hire someone who knows what they're doing , they can hold your hand and guide you through .

We have an eight-step process that we do , from early preparation , final preparation , marketing , negotiation , et cetera . So that's what I would do . I would hire a professional who's been there , done that . From a buyer perspective , there's various firms you can hire , including ourselves , to think about buy-side due diligence .

There's some that'll do it for one-off fee of $10,000 to do a really detailed analysis of the target company . That can clearly help de-risk your view on the asset and have an independent view on the asset .

But I would be very careful about yeah , if you're going to buy a business , I will be very careful about not engaging an advisor who's done M&A for a living and a good lawyer . Otherwise , you might make mistakes that people have been making for the last few decades .

You want to get rid of all those mistakes and make sure you're doing the best deal possible .

For those types of entrepreneurs , what would you recommend .

You know , find an entrepreneur who maybe can't sell or is , you know , tired or wants to change a scenery , and say that you will take on their business and give them a decent share of new co and then , stronger , together , you go to exit in one two years time .

As a bigger business , you're more likely to get a higher valuation multiple than going separately with two smaller businesses . So the valuation arbitrage is already a step forward . With two smaller businesses , so the valuation arbitrage is already a step forward , it's already a positive . So I get creative Acquisition financing doesn't have to be the blocker .

There's definitely deals pricing below that range and there are some exceptions above the range we call diamonds , but by and large that's the range we're seeing for growing typical businesses . That's FBA , DTC businesses traded higher multiples because they own the customer .

So the range is a little bit unhelpfully wide because we're seeing such a wide variety of businesses in all sorts of states . But it's 3x to 12x EBITDA and if you want to be at the higher end of that range you need to have some of the things I mentioned high revenue , great revenue , growth , things like subscription .

If all your revenue is subscription and you're in a category that's in demand , like pet , you have a chance of getting a really high multiple today .

And if I'm a serious acquirer , I buy a brand okay , it might start in Amazon , but I have to be able to be convinced that it could go full , omnichannel , wholesale retail marketplaces , shopify , et cetera . So we do like to see that the entrepreneurs are stepping into those other areas and not everyone gets it right . It's tough . Right , it's a different world .

But if you look at Hero Cosmetics as a case study one of the best case studies in the last five years it started on Amazon but then did what I talked about . It started to get into all those other channels to prove it's a real omni-channel brand and then sold for hundreds of millions . So it's tough .

It's tough on the entrepreneurs because you've got to try and understand all these different channels . But Amazon is crunching the numbers . The margins are getting tighter . You don't own the customer , so there's good reason to think about trying to engage TTC as well .

So if you're a great FBA business in the pet subcategory , find your counterpart who's a great DTC business in the petG category and let's come together , and then you've got a more you know , an omnichannel business , two co-CEOs maybe , or you know , one chairman , one CEO , one president , and you're stronger and you're going to increase your valuation multiple by doing

that sort of you know task .

They'll never get back to December 2021 , but there should be an uptick next year .

And before we get to the fire round , for our listeners that are looking to exit their e-commerce brand , what type of clients does the Fortia Group ?

You're working for maybe the man rather than the man , and you're a number so co-founding my own boutique investment bank clearly tiny compared to Morgan Stanley it's great because you can drive the strategy , you get more client exposure , which I love , and when you do the deals and get them across the line , you're a part of that , genuine part of that and you

can celebrate it . That's a great way to celebrate deals getting done .