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What it takes to Exit Successfully

by DigiVest

Cashing out on your DTC eCommerce business

Why you need an exit strategy

No matter where you are on your eCommerce business journey, investors, brokers and consultants all agree that you should be thinking about your exit strategy already, in fact you should be including it in your business plan right from the very start.

Sound counterintuitive? We understand that it doesn’t seem like a high priority especially if you are early in your journey or an established business moving into a new direct to consumer vertical. But the reality is to fuel your dreams you will eventually need an investor to provide you with the capital you need to expand, and they will expect to see a clear exit strategy. This includes a detailed plan of how you will achieve it, what goals and milestones you’ve set in place and the progress you have made.

Not only should you be thinking about your exit strategies in relation to future capital needs but also your own future because in today’s fast-moving economy, it really is the smartest move.

Big companies used to have a lifespan of 61 years, it’s now down to 18 and Mckinsey predicts 75% of current S&P 500 companies will have disappeared by 2027*.

Even if you put aside the need for investment, your business is unlikely to last your entire working career and with life expectancies increasing in most advanced economies, that leaves you either needing to start again or start working for someone else. But if you exit at the right time, you can secure your future with the kind of payout that gives you many options. Whether that’s retiring young, starting your next entrepreneurial adventure or simply giving you the financial safety to pursue that low paying passion project.

So what is your DTC eCommerce worth?

Traditional consumer retail businesses have long been reliant on EBIDTA (earnings before interest, taxes, depreciation, and amortization), as a measure of overall financial performance and health, when calculating their valuation. This is because a lot of their value to investors and those looking to acquire them is in their physical assets and their ability to leverage these to maintain profitability.

But the rise of pureplay direct to consumer eCommerce brands has created the need for a new way to define a businesses worth and a different set of core metrics. Direct to Consumer eCommerce valuations for exit of course still factor in a multiplier of revenue however they are assessed on many other factors in the same way elements such as goodwill, leases and plant machinery might be in a traditional valuation. Some of the typical factors that affect the final multiplier applied in a direct to consumer eCommerce exit include:

Investability Score Factor: Website Traffic

Your history of acquiring consistent new and repeat traffic and the growth rate for both provides potential purchasers/investors with a way to predict future revenue and is key to a higher valuation.

Impact on eCommerce ValuationInsight
Growing New Traffic: New traffic drives your new customer acquisition and is used to predict the future size of your customer base. It is also often the most expensive part of your marketing mix, so indicates the viability of your business going forward.Low or stagnant new traffic can be an indicator that there simply isn’t a sufficient market size for your offer, while high growth that is now plateauing can indicate the need to invest in new marketing channels, that it’s time to refresh your creative to increase cut through, a need to develop new offers or to enter new markets to continue to grow.
Conversion Rate: It’s important not to just drive new traffic but attract the right traffic. High rates of new traffic who bounce right off your page without a purchase can be an indication that you either aren’t attracting the right customers or you have a poor product/offer market fit.Optimising conversion rate for new traffic is key to securing a higher valuation. Conversion can be defined in several ways so it’s important to have the correct event-based attributions for a true view of the quality of your traffic, for example if you offer free samples this can distort your conversion rate and cost to acquire measurements.
Percentage of Repeat Visitors: Repeat visitor rates not only reflect the average purchase cycle i.e. how often a customer reorders and customer LTV. But the rate at which it is growing also reflects your churn rate and can indicate if you are a “one time” only purchase.High churn & one time purchase rates can negatively impact your future valuation. Repeat revenue is a key factor that both investors and acquisition teams look for, as the acquisition costs associated with repeat revenue are much lower. This makes repeat customers much more profitable. As a result, subscription businesses are regularly valued substantially higher than other direct to consumer eCommerce models not just due to their increased profitability but because of the increased predictability of future revenue.

Investability Score Factor: Business Fundamentals

In an increasingly competitive direct to consumer world with new entrants to every category every day, demonstrating a strong product or brand USP supported by expertise in your area helps you fight off competition and secures your position making you more attractive as a business opportunity increasing the valuation multiplier.

Impact on eCommerce ValuationInsight
Market Place Dynamics: The level of competition you face and the rate of new entrants, new innovations, consumer trends and potential macro factors that could impact your business. What factors will help you retain your customers and market position against these dynamics.Do you have first mover advantage, have you successfully created barriers to entry or developed a loyal customer base through unique customer experiences. Have you created a USP that helps you stand out from the crowd? Are you innovating and leading product development in your category, are you future proofing your business model?
Trademarks & Patents: The more you’ve invested in developing your IP and protecting it, the more defendable your eCommerce business is against competition, protecting future revenue and increasing your investability.Have you trademarked not just your brand but your products, do you have exclusive formulas, awards or patents that you can defend to prevent copycat competitors taking market share?

Investability Score Factor: Marketing Channels

Your ability to profitably acquire new customers and demonstrate your business is still growing is key to being an attractive DTC eCommerce offering.

Impact on eCommerce ValuationInsight
Number of Acquisition channels: Not only do having multiple channels show marketing mix maturity and present a more attractive proposition to potential owners, but reduce risk as your business is not reliant on just one channel for new customers. A mature marketing mix will include multiple mediums and platforms across paid, earned and owned.Being overly invested in just a few channels for new customers presents risk. An example of this was Facebook banning the advertising of hand sanitisers, drastically reducing the ability of brands to acquire new customers overnight. Algorithms change, advertising rules are updated and channels become saturated. The more divested you are, the more you spread the risk to future new revenue while also maximising ROI on campaign creative costs by repurposing them across multiple channels.
Acquisition Metrics: Demonstrating that you can acquire new customers profitably is a crucial metric to show future growth potential. It is common for eCommerce brands to have a high CAC as they scale but investors will want to see that this has come down and stabilised to a level that maximises return on advertising spend and profitability.Common acquisition measures used in valuations are CAC, ROAS, CPM and CPC, the emphasis on each will depend on your particular business dynamics. For a repeat purchase business a higher CAC is often considered acceptable as it’s evaluated against customer LTV. For businesses more reliant on one time purchases the lowest possible CAC is more favourable with more emphasis placed on CPM/CPC and ROAS by channel.
Platform Concentration: How many ways can a person purchase from you? Just like in physical retail the wider your distribution the greater your opportunity to make a sale. Being where your customer is, is important in maximising your revenue opportunities.Not all products suit all channels, investors will want to see you are putting your energy into the right ones. Select platforms that match your target customers shopping behaviour. If they use Instagram to window shop products in your categories, enable Instagram shopping. If people search for your specific product on google, then invest in google shopping.

Investability Score Factor: Financial

Like any other business your financials play an important role in your eCommerce valuation. Even if you are not profitable yet or you’ve operating at breakeven, investors need to see that you are on the path to profit so they will receive a return on their capital.

Impact on eCommerce ValuationInsight
Annual Revenue: Annual revenue is the fundamental measure used to calculate your earnings that the valuation multiplier is applied to. The higher your revenue the higher your valuation so the faster and bigger you grow the sooner you’ll reach the exit value you seek.Capital is often the limiting factor to how fast you can grow your revenue. Having access to performance capital is crucial to supporting your next volt. Many eCommerce businesses fail because cashflow can’t keep up with growth leading to debts they can’t service or because they can’t fund growth and so fail to achieve the economies of scale needed to become profitable.
Gross Margin: Gross Margin ultimately indicates whether your business can become profitable. High COGS can be a sign of a business that simply isn’t viable long term no matter how lean your sales and marketing costs.COGS are often high at the beginning of your eCommerce journey. A crucial part of your exit strategy is having a plan to optimise and reduce them over time. Demonstrating the ability to scale while reducing COGs and become more profitable over time will increase your valuation.
Average Order Value (AOV): Growing AOV is often overlooked yet many investors prioritise eCommerce brands with a high Average Order Value, as this demonstrates a healthy cashflow that can be reinvested back into marketing and business optimisation increasing revenue and profitability.AOV and ASP erosion through over reliance on promotional activity is a common pitfall for many eCommerce businesses who are chasing revenue targets. Access to performance capital can prevent this spiral and allow you to focus on tactics such as bundling, loyalty programs, cross sell and upsell to drive up AOV and reduce the pressure on generating short term cashflow to fund future sales and customer acquisition.

Investability Score Factor: Data and Tech

In traditional business physical assets are factored into a valuation, for eCommerce the assets that count are their technology and data infrastructure and customer database.

Impact on eCommerce ValuationInsight
Tech stack maturity: In the same way an investor may want to see manufacturing innovation. Tech stack maturity in eCommerce brands is crucial. This includes a well managed and up to date eCommerce platform and ensuring you have the right integrations and capabilities to stay ahead of the curve, protecting your business and maximising your valuation through higher profitability.Capital is often the limiting factor to how fast you can grow your revenue. Having access to performance capital is crucial to supporting your next volt. Many eCommerce businesses fail because cashflow can’t keep up with growth leading to debts they can’t service or because they can’t fund growth and so fail to achieve the economies of scale needed to become profitable.
Reporting framework: Driving growth and profitability in eCommerce comes down to your ability to understand your key revenue levers. Developing your performance data maturity and being able to pivot off data through reporting sophistication not only helps validate your eCommerce business model but allows you to forecast future revenues with more accuracy increasing your valuation multiplier.COGS are often high at the beginning of your eCommerce journey. A crucial part of your exit strategy is having a plan to optimise and reduce them over time. Demonstrating the ability to scale while reducing COGs and become more profitable over time will increase your valuation.
Customer database: Your customer database is treated like an asset, the bigger and healthier it is the higher your valuation multiplier due to your ability to predict future revenue and reduce the reliance on acquisition marketing spend to drive sales.AOV and ASP erosion through over reliance on promotional activity is a common pitfall for many eCommerce businesses who are chasing revenue targets. Access to performance capital can prevent this spiral and allow you to focus on tactics such as bundling, loyalty programs, cross sell and upsell to drive up AOV and reduce the pressure on generating short term cashflow to fund future sales and customer acquisition.

What sort of multiplier can I expect?

The key to driving up the multiplier is leveraging these valuation factors to maximise your businesses future profitability, competitive advantage and predictability. Focusing on developing better performance in each of these areas throughout the life of the business will lead to a bigger exit down the track. Another consideration that increases the attractiveness of your eCommerce business is how easy it is for another owner to come in and take over, this is where developing a true turn-key strategy opens up the market to a wider range of exit options. Most eCommerce businesses will garner an exit valuation multiple of between 2.5x to 5.0x earnings, depending on how well they optimise these factors.

How to gain the advantage and increase your valuation

Of course a successful exit can never be guaranteed, but not having a plan greatly increases the odds you won’t achieve your goals, after all if you don’t know where you are going you’ll never get there. By thinking ahead and building eCommerce valuation drivers into your eCommerce performance goals, milestones and business roadmap from the start, you set a clear definition of success and can set a timetable for charting your progress.

You may be wondering where to begin or if there is a one size fits all template you can download to work through. Partnering with experts to give you the right advice on your eCommerce Valuation and a clear path to investment is imperative to your success. DigiVest have created a system to support Founders to do exactly that not only helping you identify early what your goals should be but partnering with you along the journey to help you achieve them.

This starts by validating your business model and assigning you a dedicated Investment Portfolio Manager who will identify your pathway to capital and exit. The combined DigiVest team then works in tandem with our Founders to achieve their target valuation, while your Investment Portfolio Manager works to achieve the key performance metrics that will give you access to funding at the right time ensuring exponential growth through our Performance Capital solution.

And because we have skin in the game we are motivated ultimately by maximising your potential exit value, not retainers. Our unique model supports you with five specific teams, each working together to optimise every lever of your eCommerce valuation. By having experts focus on each of the areas that impact your valuation, we can not only deliver short term revenue goals but also stay focused on the bigger picture of achieving a higher eCommerce valuation and maximising your exit value. Speak to our team today and find out how we can help you exit successfully.

*Source: https://www.imd.org/research-knowledge/articles/why-you-will-probably-live-longer-than-most-big-companies/

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