DTC Briefing   //   December 6, 2022  ■  7 min read

DTC Briefing: 3 founders on what the acquisition market is like right now

This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. To receive it in your inbox every week, sign up here.

As the pandemic-induced e-commerce boom has cooled, it’s gotten more difficult to sell a direct-to-consumer business. 

Globally, M&A deal volume was down 13% year-over-year in the first seven months of 2022, according to Boston Consulting Group. Meanwhile, deal volume was down 32%. 

While there’s been a recent spate of acquisitions in the e-commerce space — within the past month, Victoria’s Secret has announced plans to acquire Adore Me, while French pharmaceutical giant Biocodex acquired supplement brand Hilma —  many of these deals had already been in the works for months, obscuring just 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 compared to the heyday of the pandemic. And, industry insiders warn, it’s only going to get harder should a recession hit. 

In order to get a better sense of what the acquisition landscape is like right now for DTC brands, I spoke with three founders who sold their businesses at various stages this year: Ju Rhyu of Hero Cosmetics, who sold her acne care business to Church & Dwight for $630 million, Patrick Coddou of Supply, who sold his razor business to Foundry Brands, and Hilary McCain of Sweet Reason, who sold her hemp-based beverage brand to another CBD beverage startup, Cann.

While both Supply and Sweet Reason were acquired for undisclosed sums, Hero’s acquisition paints a picture of the type of valuation e-commerce brands can get these days: Hero did $115 million in sales over a 12 month period ending on June 30, and generated $45 million in EBITDA over that same period. As a result, Hero was acquired for $630 million, or roughly 14 times EBITDA.

Their stories had a few themes in common: gone are the days when acquirers only cared about revenue growth. These days, acquisition multiples are based on EBITDA and profitability, and that will only become more valuable should a recession hit. What’s more, being a DTC brand no longer makes a startup special — instead, acquirers are looking for startups that they think can help them reach new demographics or catapult into new markets. 

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

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

Not only does that mean that founders need to have the cash flow to support their business for a year while they go through the sales process, but they also need to juggle investor and employee expectations — who might have questions about what a potential sale might mean for them — while still growing their business. “There’s a lot more complexity in managing people through a sale process than I think most people expect,” she added. 

And in some cases, changes in operating conditions can cause the sale process to take longer. Supply’s Coddou said that he started considering selling his business in the spring of 2021. But shortly thereafter, his company’s growth started to take a hit, which he attributed to Apple’s iOS14 update. 

“Right after we went on the market, our business started performing very poorly, and spooked a lot of potential buyers,” Coddou said. 

As a result, Coddou decided to pause the hunt for a buyer, and rebuild Supply’s approach to marketing. Previously, Supply had relied largely 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 one-fifth or one-tenth of [an agency’s] attention on my ad buying,” he said. Over the past year, he has hired roughly six full-time marketing employees.

“By this spring, things were looking really good for us,” Coddou said. “And we called a bunch of people back and said, ‘hey look at us now,’ and we got some interest again.” Supply’s sale closed in the summer, right around the time that it hit a record high in its trailing 12 months EBITDA — though Coddou said it has continued to increase since then. 

An attractive acquisition starts with profitability, and a compelling story
Coddou said that his biggest piece of advice for founders looking to sell – especially those who are doing under $20 million in revenue – is that “nobody cares if you have a sexy product…nobody cares about any of [the other parts of your business] if you don’t have profit.” 

Coddou added that while buyers will want to verify 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.” 

Sweet Reason’s McCain said that her biggest piece of advice to founders is to “have a very clear, compelling reason that you want to sell…[acquirers] want to buy into your plan and your dream of what the future can hold.”

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

What makes a compelling story will vary depending on if the acquirer is a private equity firm or a strategic. In McCain’s case, she wanted to expand Sweet Reason into THC, and wanted the help of a larger brand in order to better navigate changing state-by-state laws and working with dispensaries. “It’s a really unique industry, and Cann has figured it out,” she said.

Preparing to sell in a recession means shoring up the basics
While no one knows yet exactly whether or not a recession will hit next year — or whether the U.S. is already at the start of one — any type of economic downturn could lead at least some companies to put the acquisition process on hold. 

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

She also advises startups that “a lot acquirers are probably going to be asking companies now that we’re in a recession — or soon to be in one — is, how will that impact the business? Is your product or business a must have versus a nice to have?’ Companies should definitely have a point of view on that.”

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

“It goes back to making sure you’re building the best sort of business that you can with really great economics and fundamentals,” Rhyu said. 

What I’m reading

  • For another take on what the acquisition environment is like for DTC startups right now, Business of Home took a look at who is still buying startups right now, interviewing executives from Pattern Brands and Open Store among others. 
  • Former Glossier chief marketing officer Ali Weiss has been named the chief executive of baby gear rental startup Loop, making her one of the few DTC CMOs to make the leap to CEO. 
  • Everlane continues to take on more debt, with investment firm Gordon Brothers announcing last week in a press release that it had provided a $25 million loan to the DTC apparel company. 

What we’ve covered

  • How floral delivery company FTD has overhauled its business following bankruptcy, moving its website to Shopify and adding more non-floral delivery options like snacks and alcohol. 
  • Roughly one year after going public, online wine seller Winc has filed for bankruptcy. Winc had been hurt the past few quarters by a decline in its DTC sales, as more people resumed buying alcohol in stores. 
  • Even as the cost of processing returns is getting more expensive, startups are avoiding charging for returns out of fear of alienating customers. Here’s how brands like Beekman 1802 and Caraa are handling returns