📉Distressed E-commerce Valuation
💵 Brands <$1MM revenue are worth $1
Welcome back to our newsletter, let me start this week with a bold statement.
In 2024, if your brand does less than $1MM in revenue and has less than a 15% CM3/SDE margin it is only worth $1.
Allow me to explain our logic in detail for this statement.
For <$10MM revenue brands, the usual metric used to value these assets has been CM3/SDE, which is profit before salaries of management. We have decided to change that and include the real cost to run a brand with “management market salaries.”
2020 to 2022: Historical Distressed Valuations
Historically, there wasn’t much data on what these brands have been selling for, since capital has been plenty for over 10 years, very few operators have shared their experiences over the past few years.
- High Growth – YoY of 100%+, trades at 8-10x revenue
- Growth – YoY of 50%, trades at 2-4x revenue
- EBITDA Positive – For <$5MM EBITDA trades at 3-5x EBITDA; For larger deals, can trade at 6-10x EBITDA
- EBITDA Negative/Turnaround – Trades at 0.2-0.5x revenue
- Pre-Bankruptcy/Liquidation – Trades at < 0.1x revenue
- Bankruptcy – Creditors taking over
Inversal is focused on 4 to 6, with a preference for EBITDA Negative/Turnaround because that is where we can return most of the capital to the debt holders by leveraging existing assets in the companies.
E-commerce underwent significant growth during the COVID years. A lot were hopeful this boom would continue for everyone. Because of this, many aggregators bought brands at their all-time highs. Thinking that they could continue capitalizing on this growth, they bought with too much leverage and ended up paying 10x EBITDA.
Hit by declining sales and revenue and the pressure from debt, distressed e-commerce brands now qualify as EBITDA Negative or worse (bankrupt). This is why it’s possible to acquire businesses dirt-cheap.
2023-2024: Inversal Distressed Valuations
This is VERY DIFFERENT going into 2024. Equity is hard to come by, revenue is declining year on year, and consumer spending will keep declining in 2024.
At Inversal, our model includes the two following scenarios:
- We expect brand revenue/profit to decline 20% after the acquisition.
- We apply a minimum management OPEX to the brand to determine its true EBITDA.
At Inversal, our minimum management OPEX budget is the following:
- $150,000/year OPEX for marketplace-only brands (Amazon/Walmart)
- $300,000/year OPEX for DTC brands (Shopify)
This means that any e-commerce business that has less than this $150,000/year CM3/SDE is worth $1 and we would only pay for the inventory.
In 2023, CM3/SDE margins are hovering at 15%, this means that most marketplace brands with less than $1MM revenue and DTC brands with less than $2MM revenue are worth next to nothing without the founder!
2024 vs 2021 Valuation
In 2024, we do not want to overpay for a business. Multiples are down, we expect revenues to decline from lower consumer spending and it is harder in general to operate with good margins.
Below are the numbers of a $3MM Amazon FBA business, what an aggregator paid in 2021, versus what we believe it would sell for now.
It is important to add the true management OPEX and to apply a forecast of a decline in profit in general, we can see how this business is now selling for less than half of the price paid in 2021 and if it was bought with $1.5MM in debt, the buyer will now most likely default.
We’ve taken a look at several distressed deals in 2023 and we expect more to come in 2024. We have to be smart about which businesses we should acquire and by how much. We like the ones where we make our money back in 1 year or less.
There is plenty of upside in what we’re doing. Once we shift a brand from turnaround status into growth mode, we can sell it for a premium and make a good return on our investment.
Let me share what we’ve been through while turning around distressed businesses.
Turnarounds require patience and don’t happen overnight. We often plan for the following timeline:
- Emergency Action – 1 month
- Integration & Analysis Phase – 2 months
- Strategic Change Phase – 6 months
- Growth of Renewal Phase – 12 months
The first 3 months are crucial to aligning stakeholders, vendors, creditors, and employees. Decisive action has to be taken immediately.
He also highlights the use of the 13-week model where you forecast cash flow over 13 weeks. This allows you to time expenses and track changes in the business. More importantly, Mehtab emphasizes the need for decisive and creative leadership.
As far as acquisitions are concerned, valuations are ultimately decided by the parties involved. We just try to reach a point where things work for everyone involved, especially us. If the deal makes sense, we’ll do it.
See you next Sunday!
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Founder & CEO of Inversal