"A Beginner's Guide to M&A" | FAQs From Hampleton's Webinars (#6)
Since the start of the outbreak in March 2020, Hampleton Partners has provided tech business owners with regular webinar updates regarding M&A prospects in the current climate.
In this blogpost, we have compiled questions frequently asked during our webinars – and their answers – through which we aim to provide "A Beginner's Guide to M&A".
What can I do a year ahead of a potential M&A process?
There are several things you can do make your company M&A or exit-ready. First, ensure you “get your house in order”. This means checking – and where applicable, resolving – any contract, accounting or legal issues; more generally, ensure your paperwork and finances are in order, as investors comb through these documents thoroughly during the due diligence phase.
If you are going to market next year, you will be selling on the numbers you turn over between now and then. As such, when putting together your business plan for the coming years, your projections should be confident but realistic. Aim to outperform your (reasonably ambitious) plan by 5-10%, but avoid hockey-stick planning, as this could make a decent performance look disappointing in future.
What is the right metric to value my business?
Revenue-based valuations often apply to earlier stage, strong growth cases. Once a company has matured, its growth rate usually slows down and its EBITDA becomes positive, with more cash at hand. Therefore, the younger the company and the faster the growth, the more appropriate it is to use the revenue metric, as younger companies rarely have positive EBITDA. In many other cases, investors and buyers would favour the EBITDA metric.
When negotiating with a buyer, it is very complicated to pull away from an EBITDA valuation basis back towards a revenue multiple. To achieve this convincingly, your company would need to show steep growth to a prospective buyer – who may be convinced it would secure a cheaper price tag on an EBITDA valuation anyway.
In the tech industry generally (and in some sectors specifically), younger companies may reinvest much of their revenue into building stable tech teams, which itself can influence and stabilise revenue or EBITDA multiples.
In the Digital Commerce sector, we’re also noticing another differentiator: the growth rate. If your company is growing 10% every year, but the market is seeing 20-30% annual growth, neither the revenue nor the EBITDA multiple matters anymore. So, if you are faring well and looking for a goal, aim to beat the market growth rate.
Does the FBA roll-up trend apply to other marketplaces, or only Amazon?
Currently, investors are pouring money into the Amazon roll-up ecosystem because Amazon is the only reliable full-stack marketplace ecosystem. Other marketplaces lag behind on many fronts. However, this could change because several verticals and product groups are often not positioned to their advantage on Amazon.
Going forward, the roll-up trend will probably penetrate the social commerce ecosystem (but not influencer/celebrity brands) and brands with interesting social media channels and product assortments.
Read more in our previous FAQ blogs: