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In this episode of the eCommerce Evolution Podcast, Brett Curry sits down with Emmett Kilduff, co-founder and CEO of the Fortia Group, to discuss the current M&A climate for eCommerce brands and how to prepare your business for a successful exit. Emmett shares his insights from 25 years of experience in the M&A space, offering valuable advice for entrepreneurs looking to maximize their brand's value.
Key topics and lessons discussed:
- The current M&A climate for e-commerce brands and the impact of the COVID-19 pandemic on valuations
- Understanding the three main types of buyers (strategics, private equity, and aggregators) and tailoring your exit strategy accordingly
- The importance of focusing on bottom-line EBITDA margins and subscription-based revenue to increase your brand's attractiveness to potential buyers
- Common red flags and discount factors that can negatively impact your brand's valuation, such as poor manufacturing facility scores and supply chain issues
- The value of seeking mentorship and advice from experienced professionals who have successfully navigated the M&A process in your industry
Tune in to learn how you can prepare your e-commerce brand for a successful exit and maximize its value in the current M&A market.
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Chapters:
(00:00) Introduction
(04:17) The Impact of COVID-19 on M&A
(08:19) The Current Climate of M&A
(10:00) Current Valuations and Factors of a Healthy eCommerce Business
(29:45) Common Red Flags
(31:48) The Value of Subscription Revenue
(36:59) Conclusion
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Show Notes:
- Emmett Kilduff (LinkedIn)
- The Fortia Group
- Goldman Sachs 2024 M&A Outlook Report
- Grips Intelligences
- Monday.com
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Connect With Brett:
- LinkedIn: https://www.linkedin.com/in/thebrettcurry/
- YouTube: https://www.youtube.com/@omgcommerce
- Website: https://www.omgcommerce.com/
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Past guests on eCommerce Evolution include Ezra Firestone, Steve Chou, Drew Sanocki, Jacques Spitzer, Jeremy Horowitz, Ryan Moran, Sean Frank, Andrew Youderian, Ryan McKenzie, Joseph Wilkins, Cody Wittick, Miki Agrawal, Justin Brooke, Nish Samantray, Kurt Elster, John Parkes, Chris Mercer, Rabah Rahil, Bear Handlon, Trevor Crump, Frederick Vallaeys, Preston Rutherford, Anthony Mink, Bill D’Allessandro, Bryan Porter and more.
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Other episodes you might enjoy:
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Transcript:
Emmett:
It's quite fluid, right? You want to be selling your business when the category is going well and to get the highest price. So timing is everything in business.
Brett:
Well, hello and welcome to another edition of the e-Commerce Evolution podcast. I'm your host, Brett Curry, CEO of OMG Commerce, and today we're talking about m and a, something that I know every E-Commerce brand is either actively thinking about or it's in the back of your mind or it's your end game. And so we're going to be talking with a true expert in this space, especially DTC brands. And we're going to be talking about the current economic climate, where we've been on kind of an m and a rollercoaster over the last several years, and then what you should be doing to prepare and to get ready to maximize your outcomes, how to prep, how to think about this, how to be ready for anything. And so my guest today is Emmett Kilduff. He's the co-founder and CEO of the Fortia Group. I got to hear Emmett on an e-commerce fuel presentation. So tip the hat to Andrew Derian for Ka quasi making this introduction with that Emmett, welcome to the show, man. And how's it going?
Emmett:
Great to be here. Thanks for having me, Brett. It is going well. The light is at the end of the tunnel in terms of coming out of the doldrums of a tough two years for MA and e-commerce.
Brett:
Music to my ears, man. Music to my ears. So yeah, I heard your talk now a couple months ago. I loved it. It's not just your brilliant Irish accent, which I believe you could talk about anything and there'd be a certain number of people that would just listen to hear you talk, so that works in your favor, but that's not why I loved your presentation. Love the insight, love the perspective, and really it was helpful. It was helpful just to kind of frame how should we be thinking about m and a for e-commerce brands. So excited to dive in. Yeah,
Emmett:
Likewise. I can't operate an e-commerce brand. I wouldn't know what to do, but I do know m and a, having been working on it for 25 years and really enjoy working with interesting e-commerce entrepreneurs.
Brett:
Yeah, yeah. Super cool. So we're going to kind take this path of, hey, let's talk about where we've been and what we've experienced. I think your perspective on that will shed some light and set the stage a little bit. We'd love to talk a little bit about the current economic climate as well. What are we expecting? You talked about the light at the end of the tunnel. I think that's what everybody's feeling. And then there's always a few things it feels like, well, okay, is the rug just going to be pulled out from under us again or is there really a light at the end of the tunnel? So we'll talk about that and then we'll get into, yeah, how do you prep? How do you get ready? How do you make the most of your m and a activity? And so let's dive in. But before we do that, just a quick background. So you said 25 years in m and a. Walk us through that, just kind of the 32nd version, and who is the Fortia group?
Emmett:
So actually when I finished my degree in business and law, I selected a master's in e-commerce. This is way back in 1999. It was the first master's of its kind nearly globally. So I've always had an interest in e-commerce. At the time, it was more about the.com boom and then ultimate bust, and I wanted to get a piece of that deal flow. So I joined an investment bank called Credit Suisse, who had a banker called Frank Coron, a legend in the tech world. He was doing all the tech IPOs at the time, and so I joined that firm to get involved in the m and a and corporate finance deals. The Foria group then is, I saw a gap in the market a few years ago, Brett, to bring a Wall Street level of service and approach to smaller e-commerce. We're not a broker, we're not a listing website. We're trying to genuinely bring Wall Street. I worked at Morgan Stanley, one of the best firms in the world, best m and a firms in the world alongside Goldman Sachs and JP Morgan, and that's what we're trying to bring to your listeners.
Brett:
Yeah, I love it. That's awesome. So let's do this, Simon. Let's kind of walk through where have we been through this Covid madness, kind of lay that, not that we want to relive all the glory and the pain and suffering, but where have we kind of been on an m and a climate or m and a trajectory that's got us to where we're now?
Emmett:
Yeah, so I guess during Covid m and a was relatively easy. I remember one of the deals we had, we got letters of intent from several parties within five business days. In retrospect, that's just crazy. It's madness. Acquirers should not be moving that quickly, and entrepreneurs should not be looking for offers within 30 days. If you spent five years building a business, why try and rush an offer within 25 business days or 30 business days? One should be taking their time to get the right offer. So it was crazy. I think the peak was December 21. That's when some FBA businesses were going for seven x, which is crazy Amazon and DTC businesses, but lots of them are going for high teens. I don't think we'll get back to those levels. What's happened in the interim is global m and a across all sectors, one to two years ago was at a seven or eight year low and all these things, common cycles is the third cycle I've seen, and thankfully there's a great chart by Goldman Sachs, which shows that m and a has never declined for more than two years in a row.
It's never hit three years.
Brett:
Interesting.
Emmett:
So we've had our two years, we've had 22 and 23, we've had the declines in m and a volume. It should
Brett:
Be the bounce back year, then 2024
Emmett:
Based on prior data and with interest rates coming down, that should be the key catalyst to fuel cheaper debt, which is obviously key to drive m and a.
Brett:
And it is interesting. I'm actually, I'm looking at that chart now because sent it to me, you kind of see this trajectory of a few years, there's a peak, then it drops off, but a couple years and then it builds back up again. It's quite a pattern and interesting to be there. I really like that perspective that hey, we shouldn't expect those valuations to be what they once were. So if you're holding out for that, Hey, I've got an FBA business, I want to be at the seven to eight x multiple, or I've got a D two C brand that's doing okay and I should be at a 13 or 15 X multiple, that's probably not going to happen, right? There were so many unnatural things going on during the covid time period, the runaway valuation of homes. I remember we sold our used four runner. It was like three years old, we're just going to upgrade or whatever. We made money. The used car market was so crazy. I pocketed quite a bit of cash by selling a used car. When is a used car ever in investment? There's just so many unnatural things there, and I think we saw that with valuations as well.
Emmett:
And I think in this immediate six to 12 months post the correction, a lot of entrepreneurs didn't want to hear any of that. They still thought that they could get those high multiples and well, unless you were living under a rock, you eventually had to readjust your expectations. If you read the Wall Street Journal or the press, the markets were tough for acquirers all around the world. So I think today most entrepreneurs have realigned their expectations. There are still plenty who are waiting for 25 to do a deal, and we love working with entrepreneurs who don't want to exit necessarily today. We like to help prepare over a long period of time because when interest rates do come down, you would expect valuations will only go one way. They will not go back to 2021 levels, but if anything, they will increase.
Brett:
Totally makes sense. It's almost taking two years to reset some expectations. But I think most e-commerce brands, most agencies, most people in the space that I know, we've got our head in reality a little bit more right now in some ways, painfully. So. Let's talk a little bit about then, what are you seeing with the current m and a climate? Or maybe we just step back and say, Hey, what are we seeing in the economy in general right now, and what's leading you to say we're seeing the light at the end of the tunnel?
Emmett:
Yeah. Well, I think the m and a chart has proven that in history there are cycles and we should be towards the end of this cycle. So that's great context in terms of the here and now. Unfortunately, light head tunnel could have been sooner. We thought interest rates were going to decline in Q2, it's more likely to be Q3 or summertime due to inflationary figures in the states for the Fed and around the world. But the interest rates do look like they'll come down over the summertime, which is the ultimate catalyst to drive markets. So
Brett:
Cheaper debt just fuels buying.
Emmett:
Yes, and it increases the confidence at board level for corporates to do more deals for private equity to do more deals. So yeah, if you correlate interest rates versus m and a volumes, there's a relationship. So we're getting close, and if we were to talk again post Labor day, it'd be really interesting to look back at the impact the lowering interest rates is having, and I think we'll be set up for a good H two if not good fall.
Brett:
Yeah. So what are you seeing now then? So you're helping e-commerce brands right now, and you have throughout the peak and valley of Covid and post Covid. What are you seeing now? What kind of valuations are we seeing? What is the sale process like right now? What are you experiencing
Emmett:
In terms of valuations, the range for DTC LED brands, BigCommerce or Shopify LED brands? It's a little bit unhelpfully wide only because we're seeing such a wide range of quality. So today it's anywhere between, and excuse me, these are preferred profitable DTC LED brands. It's three X EBITDA up to 12 x ebitda. That's the typical range. Now, there are exceptions to the downside for distress and the upside if the stars align, and it's a massive business, a hundred percent subscription in an amazing category, that's a flavored du jour, but most is sort of three to 12, and there's a lot centered around the median. The median valuation for listed companies in the DTC space today is 7.1. So a lot of people would argue that unlisted private companies should be at a discount to the listed liquid big corporates, you can counter that by saying, well, if we're faster growth, et cetera, then you might want to premium. And we could go back and forth all day on that. But somewhere around 7% is doing quite well at the moment. Seven x, excuse me, for if you're getting seven x, that's doing quite well. We sold a business last year called J Flex Fitness for 7.1 times. It was a business out of Utah, DTC, doing single digit revenue, good growth, and it got 7.1 times and the entrepreneur was delighted.
Brett:
So single digit year over year top line growth,
Emmett:
The growth was double digit. Yeah, double digit growth. Single digit million revenue in terms of quantum.
Brett:
Oh, got it, got it, got it. Okay. Yeah, great, great. Makes sense. So if we're in a position where maybe it's a little bit of a fire sale or maybe distress is too strong of a word, but not a fully healthy business, then we're looking at maybe the three x, if we're going wild on subscriptions and crazy growth and super high profitability, maybe that 12 x, but around circling around that median of seven x
Emmett:
Is yeah, it's for a good business, it's for a very good business with hybrid purchase rate, and it's a brand with a capital B, not a product, all those metrics, and it's a competitive auction. Seven X is doing well today. Great,
Brett:
Love that. So let's talk about what makes that a healthy business. So to get in that median range or beyond, but let's not get greedy right away to get into that median range. What does our p and l need to look like? What does our EBITDA need to be? And then how do you look at this? Because you know how buyers are looking at this?
Emmett:
Yeah, well, I think before you get into things under the control of the entrepreneur, there's a few things. There's obviously the markets which you can't control, but there's also the category. So some categories are more interested buyers at different times. Right now, pet baby beauty are growing, they've high revenue growth and are put into price increases, whereas maybe home and garden isn't the category of most favor today. So you really want to, it's quite fluid. You want to be selling your business when the category is going well and to get the highest price. And so timing is everything in business. If you look at what you can control in terms of your own business brand metrics, the first thing is the quantum of revenue. How much revenue do you have? The more revenue you have, the more likely you've earned the right to sell to the three different types of institutional buyers who are number one strategics, sometimes gold corporates. Number two, private equity. Number three, aggregators. We talk about aggregators a lot in our world, but they only came into existence about four years ago. It's crazy. Before that, it was the other two. So if you've got big strategics won't look at a business unless it's doing in some cases 50 million or more. So now there are big and medium size, big medium and small strategics. Private equity won't really look at something unless it's doing at least 10 million. That's small private equity. So
Brett:
3 million top line and P is usually looking for the 3 million EBITDA or higher generally, or are you seeing some that are okay with two?
Emmett:
Yeah, yeah. No, most need to see a good quantum around three or more. Yeah, to bother. There's two types of private equity deals. There's platform deals and Boltons. So if it's their first entry into a category, it's a platform deal on top of which they'll do Bolton. So the platform deals need to be bigger, bigger than what we've just discussed. They need to be IT league tens of millions of revenue in, say if it's their first foray into pet on the back of which they might do deals that have less than 3 million EBITDA
Brett:
As a Bolton, right? Because you got a little bit of the multiple arbitrage. So now you're taking that 1 million EBITDA business and bolting it on and getting to a bigger thing to the platform, and now you're getting that increased multiple, which is certainly part of the game. Love that you backed up to the global. So let's just touch on a few things there and then we'll dive back into the specifics. So you said Pet Beauty and baby are kind of having a day right now, home furnishings, outdoor, not so much. Can you talk about maybe some of the reasons why and then anything we should consider in relationship to
Emmett:
That? Well, I think during Covid we were all stuck at home and we started to refurbish do some basic jobs in our house, in our garden. And so at that point in time,
Brett:
Lowe's and Home Depot breaking records, just crushing everybody's spending. That sty
Emmett:
Money there, like outdoor barbecues and outdoor heaters did incredibly well. But now that we're allowed out, again, beauty is huge During Covid, a lot of us bought pets, so pet supplies and accessories are huge and there's a lot of macro trends tailwinds there as well. It's fluid. So we work with a company called Grips Intelligence, who I think have amazing consumer transaction that data to identify the latest and greatest trends and movements. And we work with them to stay on top of the pulses, which categories are interesting or not interesting because we obviously want to try and invest our time into categories that are ultimately going to sell and
Brett:
Super interesting. And just one question here related to that data. We just talked about inflation. You mentioned that recently we're expecting some rate cuts here in q2, inflation, a little bit hotter here in the US than the Fed had hoped, like 3.2 or whatever it was. And so going to hold off on rate cuts. Are you seeing anything in the data that suggests inflation, even though it's been coming down, and I saw a chart you sent that, hey, inflation has been coming down steadily over the last what, year and a half or whatever. It's still high. And are we seeing how that's impacting consumer purchase behavior, especially with D two C brands?
Emmett:
Well, I think it's impacting growth rates at a very high level back of the envelope, Brett, it's impacting growth rates of e-Commerce Inc. And around the world. I think the like for likes have got easier, got over the comparing it to the covid years, but till inflation comes down and the interest rates come down, consumers are being cautious, still relatively cautious and are not spending as much as they might. And that's intentional. That's what the Fed is making happen, they're hoping
Brett:
For.
Emmett:
Yeah, yeah. They're doing a good job with that and hopefully will come out of that period of economic history or cycle in summertime as we mentioned.
Brett:
So back then to the specifics. So we're thinking about these three groups of buyers, right? Strategic PE and aggregator. It is crazy to think a little bit pre covid, like aggregators were barely a thing or not on anyone's radar. Is it useful to, as you're considering this process as a D two C brand, considering who might I be selling to most likely and what do they want versus what another buyer might want? Is that a useful process?
Emmett:
Yeah, absolutely. I mean, the best laid plans only survive contact with the enemy, right? Great expression. There's no point to developing your business and your exit strategy in isolation of the buyer will be or what they want. You might know what they want. They might want something you hadn't thought of. Different buyers look for different things. So a strategic will have much more synergies, revenue and cost synergies that can be brought into the equation. What
Brett:
Are they usually paying? A little higher multiples as well, right? Strategics usually pay the most in general,
Emmett:
Absolutely, but you have to be big enough to earn the right to pitch to them. But thinking through how their business is growing and what rationale, strategic financial and operational they might have for a deal is really important to find that right fit. It's slightly different with private equity, particularly if it's a platform deal and not a bolt on, which is more like a mini strategic. It'll be more financial than strategic in thinking. It could be about backing individuals to spearhead future m and a and give them the capital to do so. And then aggregators is different. Again, aggregators, it might necessarily be about strategic rationale. It might be just pure more financial and so on. So yeah, I bring it back, and this is a bit basic, but I bring it back to relationships, human relationships and marriage flirt date marry. You don't get married on your first date. You identify a potential partner, you understand how they work and how they think, and you try and flirt date, marry and see if there's a good fit there. That takes time and you need to identify who he or she might be and work towards a marriage.
Brett:
Yeah. Okay. So let's just pretend I've got a D two C brand and let's walk through how you would maybe advise me on who I should be thinking about in those three categories and maybe how I should be prepping my business. So let's say that I'm in the fitness apparel business. Let's say that I've got a 7 million top line and a million and a half in EBITDA or something in that range, or maybe call it anyway, let's say a 20% margin, so maybe 1.8. What would you be advising me on? How can I be getting ready for one of these three categories of buyers?
Emmett:
So the first thing we would do is what we call a valuation audit, which is a four week project where we look under the hood of the business in a lot of detail, look at all the data, all the financials, and we present back to the entrepreneur about how he or she can maximize the valuation for their business when they ultimately hit the green light on an exit process. And that includes thinking about who the buyers might be and what they might want and what they might pay for. So that's the first step. One is evaluation order. Step two then is flirt tape marry. So before we start flirting, we work with the client to identify all of the targets in those three buckets that you've mentioned. So let's take that example. There are plenty of DTC aggregators around the world that would take a look at that size business. And actually DTC aggregators are doing broadly better than FBA aggregators Brett,
Brett:
Which makes sense.
Emmett:
Some people just sort of say all aggregators are in trouble, which is not the case. There are some FBA folks doing well, but DTC generally are doing better. So I wouldn't discount that they might not ultimately give you the best multiple or the highest multiple, but you never know from a private equity perspective. The task then will be to analyze private equity firms and deal flow for who's got a bigger asset, a bigger platform asset that wants a bolt on, and that takes time. And then for strategics, it's too small to go to Lululemon with, so we need to identify the smaller competitors or folks in that field, or maybe an adjacent field that want to get into that field, or maybe someone in Europe wants to get into the states or maybe someone in FBA that wants to get into dtc, right? So there's all those things to go through.
Then we have our target list that we put into monday.com in those three categories, and then we start flirting. And flirting to us is a one page teaser. It doesn't include any sensitive information, but it includes enough to sort of get on the radar and get some feedback from folks, especially the oil tankers, the strategics who move slower to gauge whether there's genuine interest or not, and be quite frank saying, look, this deal's coming down the pipe in due course. What do you think? Does it interest you? What would you need to see for it to do? What should it do differently if to make it more interesting to you? If we have a two year window, we can make those changes or consider making those changes, and then we ramp it up. There you go, from flirting to dating and ultimately a formal process which gets you your marriage.
Brett:
That's awesome. Let's dive into the finances just a little bit because one thing that I've really seen, and this has become very clear as an agency serving D two C brands and we're all about accelerating growth. We want to take a good brand that's doing well and has some traction and just help them accelerate profitable growth. There was definitely a period of time when we would've leads coming to us and they're like, Hey, just we hear good things about you. Just do your thing. Just go, just grow the price. You quote, fine, let's just go. There's definitely been a shift over the last year and a half or so where e-commerce brands are saying, Hey, we got to be profitable, so we're focusing on our numbers, we're evaluating every expense, so we're looking a little closer at all our agencies. And so we've just been seeing this, right?
Brands are getting more, sharpening their pencils and looking at how do we become profitable. So can you give some recommendations as a D two C brand is looking their p and l looking at their balance sheet, what are some of the areas where you'd say, Hey, you should be in these ranges, these ranges for sg and a and these ranges for payroll and this kind of range for ebitda. I know going to vary. I know it's the buyer's going to different groups of buyers can have different perspectives, but what ranges or what guidelines would you give to somebody?
Emmett:
Yeah. Well, the first thing I'd say is, again, we want to come up a level because the buyers want different things at different times of the cycle. So pre correction, two years ago, people wanted to see revenue growth nearly at all costs. Right now, they want to see bottom line net margin is the number one thing. In two years time it'll probably be back to revenue. We'll have forgotten all the pain. And it's a bit like which sectors are categories come in and out of favor, he, baby beauty, et cetera. You need to sort of skate to where the puck's going to be if you want to sell today, its bottom line is the answer, Brett, as in EBITDA margin. That's the only thing I really care about. As an MA advisor in two years time, it's most likely interest rates have come down the world's normalized.
It's probably back to revenue growth. So that makes it tough for an entrepreneur because you actually need to be on top of the data points and be fluid. So if you're selling today, I would say it's not, it's not necessarily about gross margin or sg and a, it's about corporate EBITDA needs to be at least 15 to 20%. Got it. That's what I need to see. And a good trajectory not declining, obviously revenue growth, I'd rather see lower revenue growth and net margins, even incremental from 15, 16, 16 and a half 17. That's a good place to be today, but if you want to sell in two years time, that mightn't be the right answer. So you want to be spending more for agencies like yourself to chase growth and ideally have a good net margin, but maybe give up a little bit on the net margin so that you can chase revenue growth. It's tough, isn't it? Because it's fluid. It
Brett:
Is. It is. So what advice would you give to the DC brand that they've hit a blip, they've hit some bumps in the road. And so a few years ago it was almost unthinkable to have year over year decline in revenue or year over year declines, but now running into a lot of businesses, a lot of businesses are hitting us up that that's exactly what they've experienced. So it definitely makes sense that top line, slower growth or whatever is less of an issue than EBITDA declining. But how are you coaching a brand? So say within the last 12 months of that magical trailing 12 period, they've had some declines declining revenue and or declining ebitda. What advice are you giving them?
Emmett:
Yeah, my advice is depending on other factors, I would not go to market until you've got a clean 12 months and you're back growing again. Because otherwise it's a defensive conversation. If you're on the back foot explaining something negative like that, then it doesn't help you position the whole exit in the right way. So would, if you can hold things being equal personal scenario, business scenarios, wait until you've got better for
Brett:
Got it. So get that as much as you can get that trailing 12, clean, healthy, moving up into the right, you're going to be way better off. I've heard talking to a few other m and a advisors and m and a experts that as long as there's a narrative you can explain just about anything, but I like the way you put it. It's going to immediately put you on your defensive or on your back foot or from a posture of defense rather than posture of strength if that trailing 12 is not clean.
Emmett:
Look, especially in a tough market overall, it's a buyer's market right now today as we do this podcast, Brett. So yeah, the buyers have a lot of interesting deal flow and you want to package a positive story, and there's no better way to do that than having graphs that go that way across your
Brett:
Up to the right baby, up and to the right. Yeah. And so let's talk maybe about some common red flags or maybe discount factors would be a way to talk about this, but as you are diving into the numbers, you're doing your valuation of a D two C brand, what are some of the red flags or discount factors you're looking for?
Emmett:
If I think the biggest red flag to us from a due diligence perspective was when a US acquirer sent someone to order the manufacturing facility of it in China for a brand, and the score was 3.3 out of 10. It was the lowest score the acquirer had ever seen
Brett:
Of the manufacturing facility
Emmett:
Because they didn't live up to fire standards, human resources standards and other things, which I won't go into, but that killed the deal G, the investment committee at the choir said, under no circumstances do we want to be related with a business that might get us on the front of the World Street Journal or whatever. And that's one example of a red flag, that type of thing costs 700 books for an entrepreneur to go and do now to check how their manufacturing facility scores. If it's low, you change it. If you have to change it, you have to have a few quarters where you see everything washed through and business practice work. And so you've delayed your sell by nine to 12 months. So do that now so that you're ready for sale in a year or two years and diversify your supply chain. That's one example of a red flag. And there's 10 of these things that things that we've seen over the years that when we take on a new client, we try to ensure that they don't have these potential deal breakers.
Brett:
Yeah, totally, totally makes sense. What are some of the things, and I would assume that falls into this category, the manufacturer scoring so low. Are there any kind of surprising things where when you do your due diligence, you bring this to a D two C brand, they're like, whoa, I never even thought of that. That wasn't even on my radar. That would be an issue for a potential buyer.
Emmett:
Well, maybe on the positive side, a lot of brands, and it sort of surprises me that they're surprised when I explain, when we explain how much more valuable subscription revenue is to non-subscription revenue, and by subscription I mean proper recurring annual subtype revenue, not repeat purchase, which is also good, right?
Brett:
Good sign too, isn't it? Yeah,
Emmett:
Yeah, yeah. Proper subscription revenue, that's a game changer from a valuation perspective. And so when we say that to some folks, then they start to see, okay, well how can I double down on that and increase that stat? That's I
Brett:
Double my subscription rate. Yeah.
Emmett:
Yeah. And that's a massive impact on valuation.
Brett:
So what are some specifics there? So in terms of real subscription business, where does that start to get interesting? What kind of subscription rates or what kind of percentage of revenue or how does a buyer look at that, where they're like, whoa, this is a healthy subscription business?
Emmett:
Yeah, I mean, there's a supplement business that we're in contact with that is a hundred percent subscription, amazing. There's a business in the states that we're speaking with, and it has B2B contracts that are one year at the moment, and we're encouraging them, well, we're giving pretty strong advice that they should try and move those to three year contracts, which allows you to get a much better multiple on that portion of revenue when they come to market. I mean, it sounds so obvious, but a lot of the businesses don't think strategically. They're so busy just doing their day to day. I mean, an interesting point, Brett, when I worked at Morgan Stanley, every company we spoke to had a board at a cap table, had big shareholders, a lot of e-commerce folks I speak to, especially in FBA, because they're mom and pops, but even in DT dtc, they don't have boards, they don't have institutional shareholders.
So in a lot of ways they haven't been given mentoring or advice or they don't have a sounding board to sort of talk through a lot of the things, the advice that we bring to the table, whether it's working towards subscription or higher value income, et cetera. And I think mentoring and advice is really key. I'd encourage your listeners to, if they're in a pet business, reach out to someone who's sold a pet business and give here or she some share options to help guide a successful journey. We don't want every entrepreneur making the same mistakes as other entrepreneurs. That's not efficient. I'm rambling a little bit, but I think that's important. Advice and mentoring is important.
Brett:
I love it. And that's really what we've been on the m and a journey for about 18 months now, talking to PE groups and other agencies and strategics, and partially because we may want to be a platform and build something bigger, but also because all of our clients are considering m and a at some level, it's either the end goal three or five years down the road, or they're actively pursuing it or had a number of clients where they've partnered with PE groups and now they just buy a new business three or four times a year. And we get to help with that. We get to help grow the new business or the Bolton, which is super fun. And so, yeah, it's been a really interesting journey. Back to one more specific on the subscription business, because this is interesting to me. So we got the supplement brand that's nearly a hundred percent subscription. What about another supplement brand that was at 15% subscription rate or 15% of revenue is coming from subscription. Where do they probably need to get that to where that starts to become a real powerful narrative?
Emmett:
Yeah, it is a great question. And it's not as specific as saying 35%. I think it's at least majority with trends showing that you can convert the rest to subscription. In theory, I subscribe to a protein manufacturer, but they give me the option to do monthly or annually, and I always just go monthly just because sometimes I don't like being stuck into a long-term contract. If they said annually, and that was my only option, I'd go for it. I really like the product and then my revenue be worth a lot more to them from an exit perspective than not. So that's an interesting business question for folks and for people like yourself to think about.
Brett:
Yeah, we would shift, how do you shift the subscription model so that it doesn't tank conversion rates or take rates on the subscription? How do you keep people longer? All those things become important, but not just important to the health of the business in the short term, but it's going to have a pretty big impact on multiples in your ultimate valuation. Exactly. Which is really exciting. So Emmett, as we wrap up, want to talk about how folks can reach out to you, because I think it's become very clear to people that you know this game and you've done the Wall Street level, you work with D two C brands, you're just a wealth of knowledge and you can guide someone through this process. Before we talk about that though, how people can get in touch with you and stuff, is there anything else that we should have talked about that we didn't like? Questions that are coming up right now, or as you get calls or outreaches from D two C brands, what are they most wanting to know right now? Any hot topics we missed?
Emmett:
The most common question I get asked by entrepreneurs is when aware of valuations, which we've covered. My biggest piece of advice to folks is prepare early. If you fail to prepare to fail, please start to think early on about your strategic options and roadmap. And that's what s and p 500 companies do. That's what all companies with big aspirations should
Brett:
Do. Yeah, and what's so cool about you just beginning the m and a journey, and I think talking to someone like you early on is at a minimum, you are going to run a better business. You're going to start to view your business like an investor would, and you're going to make better decisions, better adjustments, you're going to improve the health of the business. Whether you decide to sell in 12 months or 36 months or whatever, you're going to run a better business.
Emmett:
And there's a great phrase in m and a that the best businesses get bought, not sold. So you want to make your business as viable as possible. And to do that, you need to understand how buyers work and have everything ready and how you know how to do that if it's your first rodeo. Yeah,
Brett:
So true. So emit then as people are listening, they're like, Hey, I got to talk to 'em and I need to talk to the Foria group. I need to kind of begin this process. How can they best connect with you?
Emmett:
Sure. Our website is www.theFortiagroup.com. Please email us at inquiries at the Fortia group do
Brett:
Com. That's FOR Tia a Fortia group, so the fort group.com. We'll link to everything in the show notes, of course, but do check them out. And Emmit, this has been a ton of fun. Really enjoy talking to you. I've loved getting to know the m and a space a little bit over the last couple years here or so, and you're one of the beacons, the shining lights in the space. And so thank you for taking the time and thank you for sharing your insights.
Emmett:
Yeah, thank you, Brett. Pleasure.
Brett:
And as always, thank you for tuning in. We'd love to hear from you. What would you like to hear more of on the show? And did you like this episode? Do you know someone who's considering selling their D two C brand or their agency or their whatever? Share this episode with them. That would mean the world to me, and I know probably help your friend as well. And also, if you haven't left that review on iTunes, we'd love that as well. And with that, until next time, thank you for listening. All that's a wrap. Hey, Emma, that was perfect, man.
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