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DTC Briefing: 3 Founders on What the Acquisition Market Is Right Now

Globally, mergers and acquisitions volume of transactions fell 13% year-over-year in the first seven months of 2022, according to the Boston Consulting Group. During this time, trading volume decreased by 32%.

Although there has been a recent flurry of e-commerce acquisitions – in the past month, Victoria’s Secret announced plans to acquire Adore Me, while French pharmaceutical giant Biocodex acquired the brand of Hilma supplements – many of these agreements were already underway. for months, masking how difficult the acquisition landscape is right now. Online-only brands have fallen out of favor now that the growth rate of online shopping has slowed from the height of the pandemic. And, industry insiders warn, it will only get more complicated if a recession hits.

In order to get a better idea of ​​what the acquisition landscape is currently for DTC brands, I spoke with three founders who sold their companies at different stages this year: Ju Rhyu of Hero Cosmetics, who sold his acne-care company to Church & Dwight for $630 million, Supply’s Patrick Coddou, who sold his razor business to Foundry Brands, and Sweet Reason’s Hilary McCain, who sold her hemp to another CBD beverage startup, Cann.

While Supply and Sweet Reason were acquired for undisclosed sums, the acquisition of Hero paints a picture of the kind of valuation e-commerce brands can get these days: Hero achieved sales of $115 million over a 12-month period ending June 30 and generated USD 45 million of EBITDA over the same period. As a result, Hero was acquired for $630 million, or approximately 14 times EBITDA.

Their stories had a few themes in common: the days of acquirers only caring about revenue growth are over. These days, acquisition multiples are based on EBITDA and profitability, and that will only become more valuable in a recession. Additionally, being a DTC brand no longer makes a startup special – instead, acquirers are looking for startups that they believe can help them reach new demographics or propel themselves into new markets.

Even if everything goes according to plan, a sale can take up to a year
The three founders I spoke with told me that once they decided to take their business to market, it took anywhere from six months to over a year.

“You really have to be mentally prepared for this,” McCain of Sweet Reason said. She estimated that she started talking to buyers six to nine months before her business was sold.

This not only means founders must have the cash to sustain their business for a year through the sale process, but they also have to juggle the expectations of investors and employees — who might have questions about what a sale is. potential could mean. for them — while growing their business. “There’s a lot more complexity in managing people through a sales process than I think most people expect,” she added.

And in some cases, changes in operating conditions can lengthen the sales process. Supply’s Coddou said he started planning to sell his business in the spring of 2021. But soon after, his business growth started to take a hit, which he attributed to the iOS14 update. ‘Apple.

“Right after we entered the market, our business started to perform very poorly and scared off many potential buyers,” Coddou said.

As a result, Coddou decided to put the search for a buyer on hold and rebuild Supply’s marketing approach. Previously, Supply relied heavily on agencies, but following the upheaval in the digital marketing landscape, Coddou decided that Supply needed to do more of its own marketing in-house. “Before, I had maybe a fifth or a tenth of [an agency’s] careful about my ad buying,” he said. Over the past year, he has hired about six full-time marketing staff.

“In the spring, things looked really good for us,” Coddou said. “And we called a group of people back and said, ‘Hey, look at us now,’ and we got some interest again.” The sale of Supply closed this summer, just as it hit an all-time high in its 12-month EBITDA – although Coddou said it has continued to rise since then.

An attractive acquisition starts with profitability and a compelling story
Coddou said his biggest advice for founders looking to sell — especially those making less than $20 million in revenue — is that “nobody cares if you have a hot product… ‘a die [the other parts of your business] if you have no profit.

Coddou added that while buyers will want to check other metrics that can indicate a startup’s health, like customer satisfaction and repeat purchase rate, “the main thing that mattered was profit,” Coddou said. . “That’s what the multiple was based on, that’s what their interest was based on.”

McCain of Sweet Reason said his biggest advice to founders is “to have a very clear and compelling reason why you want to sell…[acquirers] want to buy into your plan and your dream of what the future may hold for you. »

Similarly, Rhyu advises founders to: “find out what makes your company truly special…whether it’s internal capabilities, or whether you tap into a particular demographic or have a [unique] product or service that no one else really has.

What makes a story compelling will vary depending on whether the acquirer is a private equity firm or a strategic company. In McCain’s case, she wanted to expand Sweet Reason to THC and wanted the help of a larger brand to better navigate changing laws from state to state and work with dispensaries. “IIt’s a really unique industry, and Cann understands that,” she said.

Preparing to sell in a recession means consolidating the basics
While no one yet knows for sure whether or not a recession will hit next year — or if the United States is already in the early stages — any kind of economic downturn could lead at least some companies to put the acquisition process on hold.

Still, Rhyu said that if a business is profitable, “it will always make your business attractive, I think, no matter what.”

She also advises startups that “many acquirers are likely to ask companies, now that we’re in a recession – or soon to be – what impact will this have on the business? Is your product or your company a must rather than an asset? Companies should certainly have a view on this.

If a company decides that 2023 might not be the right time to sell, it suggests “really doubling down on the things you think will [make your business] interesting in a year or two, so you can really turn them into unique differentiators for your business. »

“It comes down to making sure you’re building the best kind of business you can with a really great economy and fundamentals,” Rhyu said.

what i read

  • For another take on the acquisition environment for DTC startups right now, Business of Home took a look at who is still buying startups right nowquestioning leaders of Pattern Marks and Open store among others.
  • Ancient More shiny marketing director Ali Weiss was appointed on general director the start of baby equipment rental Loopmaking her one of the few CMOs of DTC to make the leap to CEO.
  • Everlane continues to take on more debt, with investment firm Gordon Brothers announcing in a press release last week that it had provided a $25 million loan to the clothing company DTC.

What we’ve covered

  • How to flower delivery company DFT has restructured its activity following the bankruptcy, moving its website to Shopify and adding more non-floral delivery options like snacks and alcohol.
  • About a year after its IPO, online wine seller Wink filed for bankruptcy. Winc had been hit in recent quarters by a decline in its DTC sales as more people started buying alcohol again in stores.
  • Even though the cost of processing returns is getting higher and higher, startups are avoiding charging for returns for fear of alienating customers. This is how brands like Beckman 1802 and Caraa are returns processing.

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