Claus Lauter [00:00:00]:
Welcome to episode 305 of the ecommerce Coffee Break podcast. In this episode, we discuss strategies to maximize your business value when it's time to sell. Joining me on the show is Emmett Kilduff, co founder and CEO of Thefortiagroup.com. So let's dive right into it.
Voice over [00:00:18]:
This is the e commerce Coffee Break, a top rated Shopify growth podcast dedicated to shopify merchants and business owners looking to grow their online stores. Learn how to survive in the fast changing e commerce world with your host, Claus Lauter, and get marketing advice you can't find on Google. Welcome, welcome.
Claus Lauter [00:00:43]:
Hello. Welcome to this coffee Break podcast. Today we want to talk about business valuation, or in other words, the best way to get the most money out of it when you sell your business. Now to dive deeper into the topic today, Emmett Kilduff is joining me. He is the co founder and CEO of the Fortia Group, an investment bank focused on the lower middle market ecommerce space. He also founded Pitstop, an app to improve men's life, and has been a data entrepreneur since 2012 and the founder and executive chairman of Eagle Alpha. Prior to his entrepreneurial work, Ahmet was an investment banker at Morgan Stanley and Reddit Swiss. So he has a vast background when it comes to valuation.
Claus Lauter [00:01:22]:
So let's welcome him to the show. Hi, how are you today?
Emmett Kilduff [00:01:24]:
Hi, Claus. Thank you for having me on the show. I'm great. Looking forward to a good discussion.
Claus Lauter [00:01:28]:
Yeah, great to have you. Tell me about our listeners a bit on how you get involved in the world of e commerce and investment banking.
Emmett Kilduff [00:01:35]:
Sure, it goes way back to 1999. It was the time of the.com boom. And having done a degree in business and law, I saw that there was a new masters in e commerce. I think it was the first type of its kind globally. And I couldn't resist electing to do that course, given how the Internet and e commerce was really starting back then. So I've had one eye on e commerce for the last 25 years. But of course, back then, there wasn't actually much e commerce in 1999. So what I decided to do was to join the world of investment banking to do some deals, mainly.com deals at the time in the year 2000, before the.com bust.
Emmett Kilduff [00:02:14]:
And that got me on my journey of investment banking.
Claus Lauter [00:02:17]:
Okay, so you're right. We're right there. From the beginning of e commerce, basically 25 years, there's very few people in the world that can say that they're on e commerce since 25 years. That's a very long time.
Emmett Kilduff [00:02:28]:
Yeah, yeah. I have a few gray hairs to show. Yeah, yeah, look at my white hair.
Claus Lauter [00:02:34]:
Same story here. So obviously a lot of ecommerce businesses came up and a lot of founders startups have always the exit in mind when they start their business. And then it's important to basically find a way to make devaluation one of the most critical factors in growing your business. So what is one of the most important things that can affect how much a shopping business or e commerce business is worth when you want to sell it?
Emmett Kilduff [00:03:02]:
Well obviously, obviously the profit and loss accounting, the financials are key. The better the numbers, the more likely the higher the multiple. But thats quite superficial. My stock and trade answer to that question is fail to prepare. Prepare to fail. He is CEO's of S and P 500 companies or the leading companies around the world. They plan their exits one to two years out, maybe even more in some cases. It really frustrates me that a lot of econ entrepreneurs I meet start thinking like one quarter out or in some cases one month out.
Emmett Kilduff [00:03:34]:
That's not how the best business folks around the world plan for an exit. So my first answer is, if you want to work towards an exit, start planning as early as possible. If you double click on that, why would you do that? Well, there's lots of things one can do to and make the business more not sellable viable, and the best businesses get bought, not sold. And so lets think of some examples. Theres red flags that you might have to get rid of. Ive 25 years experience in M and A. I couldnt operate a brand at all. But I do know how to operate an exit deal and that includes trying to identify red flags that I picked up over the decades to make sure that the business Im selling doesnt have those red flags.
Emmett Kilduff [00:04:16]:
Simple example. A few years ago we were selling a brand and the acquirer sent a team to do due diligence on the manufacturing plant out in China. The audit of that plant scored 3.3 out of ten, which is the lowest score that they had ever heard of. There was fire safety issues, there was human resource issues, all sorts of things. And the deal was killed. And there was no chance that that acquirer in the States was going to acquire that brand given that supply chain at risk. Now that sounds obvious, but if youre selling your business and you have manufacturing in China or elsewhere, have you done an order, an independent audit of how that manufacturing facility scores? Most have not. Its not expensive, but its just one of these things you want to tick the box and prepare for.
Emmett Kilduff [00:05:02]:
And if you rush that. If you get negative response, its hard to suddenly change supplier because the buyer will want to see a few quarters of smooth supply chain post change of supplier. So that's one thing. Once you do one to two years out, make sure you've got a good supplier. If you don't change supplier or have multiple options, but show the throughput, show business working for a period of time. So there's lots of red flags cloud that you want to get rid of. There's also just some low hanging fruit. So right now the markets are wanting businesses that are more bottom line focused than top line focused.
Emmett Kilduff [00:05:40]:
Now that was very different two years ago and most likely it'd probably be different again in two years. So it's fluid and that's not helpful is it, to your listeners? But you need to work with an advisor that sort of is monitoring the data so that you're chasing to where the puck's going to be. If you're selling today. It's got to be about bottom line, as in buyers would prefer to see a higher net margin than chasing for growth on the top line in two years. Well have forgotten the pains of the last few years most likely. And buyers will probably want to see more top line growth than an amazing net margin. So that needs to be taken into account to create a plan in terms of what youre bringing to market at the right point in time.
Claus Lauter [00:06:24]:
Very interesting that you mentioned. Its not about creating a sellable business, but having a buyable business. I think thats a huge difference. And a lot of people just have to sell or the sale in mind and not the buyer in mind what they are looking for. Now, you said before that you need to plan ahead of time a year or so or even more when you're trying to sell your business. Now, you said obviously the markets are changing and e commerce business, e commerce markets are changing very, very fast. What's in the current situation? And there's a lot of things coming in. Inflation is coming in, recession is coming in.
Claus Lauter [00:07:01]:
Bigger players are coming in. Shifts in e commerce behavior are coming in. What kind of trends do you see what business will become basically a target for bigger businesses to buy them?
Emmett Kilduff [00:07:14]:
Well, I think right now, if you look at the data within the different categories of e commerce, the categories that are growing from a revenue perspective and putting through price increases successfully are categories like beauty, pets and baby. So its no surprise therefore then right now the acquirers that we speak to are more interested in those categories than say, for example, home and garden. Home and garden. Did incredibly well during the COVID period, for obvious reasons, we were stuck at home looking to do basic refurbishments. But now, ever since everyones allowed out, again, people are buying more beauty products as an example to look prettier when they go out. So again, a bit like that comment of the market wanting revenue or bottom line. Its also fluid in terms of which categories are doing better depending on the time and the dynamics. And therefore, ideally youre in a category thats on the upswing and you sell on the up and not when its starting to decline.
Emmett Kilduff [00:08:13]:
Timing is everything in business, isnt it? Its sometimes hard to time timing, especially if youre not tracking the data. We work with a company called Grips Intelligence, which to me has the best data points as to which categories are doing well or not. They speak on our quarterly valuation webinar and they have data based on consumer transaction data, hard data. So they have a finger on the pulse as to which categories are doing well and not well. Then that goes into our thinking in terms of how aggressive you can be in terms of pricing of a deal and things like that.
Claus Lauter [00:08:44]:
For our listeners who are not used to mergers and acquisitions and business valuation, can you give me an example about the different steps that are involved to going through the whole process?
Emmett Kilduff [00:08:54]:
Yeah, we have a seven step process KLauS I used to use at Morgan Stanley, a very big Wall street firm. We're all about bringing Wall street level of approach down to the small e commerce world. It's a seven step process. The first step is preparation, so we don't go live with any deal unless we have a simple two page teaser, typically a 50 page SIM, which stands for confidential information, memorandum to position the business and the growth story in the best light, and three bespoke data room. A data room contains all the obvious information that a buyer would want to think about, whether they want to submit a letter of intent, and based on what terms. That takes at least a month to pull together those three items. And only then do we start phase two, which is the marketing phase, which is where we put the deal initially. The teaser, to grab the attention of people at any one of three different types of institutional buyers.
Emmett Kilduff [00:09:53]:
They could be corporates or strategics. Private equity firms are. The newest category in the last few years is aggregators. Aggregators can be both DTC led or FBA led. Theyre new. Before aggregators came along, there was really the two other categories. It was strategics and private equity. So there are two of the seven stages.
Emmett Kilduff [00:10:14]:
The third stage, just to finish, is my favorite stage, which is the negotiation its when youre getting, you're getting people say I'm interested and they're thinking about submitting their LoI's letters of intent. Then they do submit the letters of intent and we help the entrepreneurs compare them apples with apples as best as possible and you play them off against each other to ultimately get the best terms for our client, the entrepreneur.
Claus Lauter [00:10:37]:
Hey Claus, here, just a quick one. If you like the content of this episode, subscribe to the weekly newsletter at newsletter dot e commercecoffeebreak.com I score and create 50 news sources so you don't have to saving your hours of research your revenue with ecommerce news, marketing strategies, tools, podcast interviews and more all in a quick three minute read. So head over to newsletter Dot ecommerce coffeebreak.com to subscribe as said, 100% free. Also you will find the link in the show notes. And now back to the show. So I understand the Future Group is an investment bank focusing on lower middle market e commerce companies. As a partner of the company, do you find a buyer or what's the partnership? How does that look like?
Emmett Kilduff [00:11:18]:
Absolutely. That's our job. We want the entrepreneur to continue to run the company as best as he or she can do. That's the best thing they can do to help us ultimately get them the best deal. We do all the documentation, we put the business in front of all the right buyers. We're incredibly close to buyers of e commerce brands. I'll give you three examples. One, we host the only conference for e commerce brand acquirers globally.
Emmett Kilduff [00:11:45]:
It's in New York every January 2. I have a WhatsApp group for c suites of e commerce acquirers, 132 members on my mobile phone for my sins messaging all the time. Number three is one of my co founders is an operational e commerce guy. So we're not just corporate finance geeks. He ran e commerce for water wipes, the largest baby wipe company online. And thats really important because he understands buyers and how to articulate the growth story to buyers.
Claus Lauter [00:12:18]:
I think its quite important that from a financial side, from a bankers side that you have a background on how e commerce actually works. I remember when I did my first startup in 2001, also a long time ago, talking to banks and literally had no idea what we were doing. Can you give me some examples of companies that you have sold and what kind of results they can expect?
Emmett Kilduff [00:12:41]:
Yeah. Our most recent deal was an Amazon house of brands out of the UK. It incubated six brands, got to over $30 million in revenue and sold to a us firm in February of this year. We cant disclose the name of the acquirer or the specific valuation, but that was an Amazon FBA led brand. The typical range today for those types of businesses is between, for profitable FBA brands is between 2.5 and 4.5 times STE seller discretionary earnings. That's where most businesses are trading today. The valuation was just slightly above the high end of that range because it was a bigger, it was a family, it was a House of brands as opposed to one individual brand. Just to complete the picture, those numbers are for FBA led brands.
Emmett Kilduff [00:13:32]:
For DTC led brands, for example, Shopify or Bigcommerce, the multiples are higher because they own the customer. So typically we see trades at the moment between three X and twelve X EBitda. So for example, we sold a business last year called J Flex Fitness for 7.1 times EBITda. And to get to the higher end of those multiples, you need a bigger business. You need to be in one of those categories that we discuss where the timing is right. Ideally, youve got a big subscription recurring element to revenue, if not repeat purchase rate. But recurring revenue is game changing from a valuation perspective.
Claus Lauter [00:14:10]:
Okay, you just mentioned a couple of things that you're looking for. Who's your perfect customer?
Emmett Kilduff [00:14:16]:
Our perfect customer today is a business ideally doing at least 10 million revenue, where revenue is growing in a category that's in demand. Bet baby beauty. Ideally the subscription revenue or if not, high repeat purchase rate. And they're transparent and easy to work with, and that's obviously important. Life's too short to work with people that are difficult to work with. To be honest, I've done too many deals. I've looked back and said I didn't enjoy working with those people. We're looking to work with fun, interesting people who are looking to help their baby get to the next stage.
Emmett Kilduff [00:14:51]:
That's what we do. We can put it to a good home to help it continue to grow.
Claus Lauter [00:14:55]:
Raoul, talking about localization, you're based in Dublin. Where are your customers coming from? Obviously our listenership is global. What's the country where you most focusing on?
Emmett Kilduff [00:15:05]:
North America, certainly on the entrepreneur side, most of our businesses we've sold are north american. On the acquirer side, it's a mixture, probably mainly north american, but also european. I have three companies, all of which are north american orientated in nature, but for family reasons. I live in Dublin, Ireland.
Claus Lauter [00:15:25]:
Excellent. Where do you earn from? What's your share on a deal?
Emmett Kilduff [00:15:30]:
The way we make our money is we get paid by the seller. And that's the model of investment banks for decades. It's nothing new there. The specifics are, there's two components, Claus. We have a commitment fee, an upfront commitment fee and then a success fee. And we don't get rich on the upfront commitment fee. It's all back end and success fees. If we get a deal for the seller within the success fee, there can be a percentage for hitting a basic milestone in terms of valuation.
Emmett Kilduff [00:15:57]:
And then there can be increments for hitting higher thresholds of valuation to ensure that were aligned with reasonable valuations that the entrepreneur believes they can obtain.
Claus Lauter [00:16:08]:
Okay, you mentioned before that you should start planning for a sale long time in advance. But once it comes to the decision, how long actually does it take?
Emmett Kilduff [00:16:17]:
Typically four to six months.
Claus Lauter [00:16:19]:
Okay. And that includes you finding a buyer if there's a suitable one, or how does that work?
Emmett Kilduff [00:16:24]:
That includes the seven steps. If its an Amazon FBA business, its generally shorter. Theyre simpler businesses. If its a DTC led business, its more like six months. Thats from when were instructed to start that first phase of preparation to actually getting the check into the bank account of the seller. Typically we like to work with clients quite far out from actually starting that process. We have something called evaluation audit, where we do a detailed four week dive, looking under the hood of the business, understanding the business and presenting back to the entrepreneur on the things he or she could do to increase the valuation. And in that case, if we do that, it allows us to work with the client on a one or two year view and slowly begin to prepare for the exit, which is the right way to do it.
Emmett Kilduff [00:17:13]:
We're big believers in this concept of flirt date. Marry Claus. It's the same in personal relationships. We think it's the same in m and A. It sounds silly, but if you want to sell, you need to be flirting with the right buyers early, get on their radar, make sure they know you're coming to market, then start dating and then start find the right marriage.
Claus Lauter [00:17:32]:
Yeah. I think it's important what you mentioned before, that you personally like to work with fun companies, interesting companies, and I think there's three parties to the story. There's the seller, there's the buyer, and you are in the middle. And I think it just needs to click to make it a good deal. At the end of the day. Before we come to the end of the coffee break today, is there anything that you want to share with our listeners that we haven't covered yet?
Emmett Kilduff [00:17:55]:
It's a great time to be a buyer. Don't be afraid to think about acquiring a competitor over the next year. If your business is doing well, growing, think about increasing shareholder value, getting to scale by acquisition, and then selling the combined entity in one, two, or three years. Most people sort of think about just what they have today, but actually think outside of the box and happy to help people explore that if they're interested.
Claus Lauter [00:18:24]:
Okay, where can people find more about you guys?
Emmett Kilduff [00:18:27]:
Our website, Claus, is the Fortia group.com, our inquirieshourtiagroup.com dot.
Claus Lauter [00:18:33]:
Okay, and I think you had it offered for a complimentary call to discuss on how to prepare for an exit, is that right?
Emmett Kilduff [00:18:39]:
Yeah, absolutely. Really interested to talk to brands who are doing at least 10 million in revenue. And very happy to have an introductory call to explore the feasibility of an exit for them in the near term or medium term.
Claus Lauter [00:18:54]:
Okay, cool. I will put the links to your website in the show notes and you just one click away. Emmet, thanks so much for the chat today. I think it's a very interesting topic to have always the exit in mind and to do it the right way so that you get the most out of it. Thanks so much.
Emmett Kilduff [00:19:11]:
Thank you, Claus.
Claus Lauter [00:19:11]:
Take care.
Emmett Kilduff [00:19:12]:
Bye bye.
Claus Lauter [00:19:14]:
Hey, Claus here. Thanks for joining me on another episode of the ecommerce Coffee Break podcast. Before you go, I'd like to ask two things from you. First, please help me with the algorithm so I can bring more impactful guests on the show. It will make it also easier for others to discover the podcast, simply like comment and subscribe in the app you're using to listen to the podcast, and even better if you could leave a rating. Thanks again and I catch you in the next episode. Have a good one.