Standing Out From the Crowd: Investor Selection Criteria in 2021

Last year was quite the ride and 2021 promises to be another tumultuous year. Traditional capital doesn’t typically like investing when there is so much uncertainty. When the COVID-19 pandemic hit, many investors began to hold their funds back and we’re waiting to see how things unfold.

But at the same time, crisis often precedes opportunity — and while M&A activity was down overall last year, when you look at the data more closely you will see a flurry of activity in one sector: e-commerce.

The pandemic caused a surge in online shopping and has changed our behavior in the long term. Different investment banks and consulting firms have their own assessments of what percentage of people will revert to pre-COVID shopping habits when the pandemic has cleared, ranging from 40% to 70%, depending on which report you read.

Overall, investors are betting that a significant amount of this shift will be permanent and have turned their focus to this newer asset class.

Halo Effect of E-Commerce

Compared to other industries, e-commerce is still in its infancy and wasn’t the focus of more traditional and blue-chip investors. However, in 2020 a new wave of investment vehicles began actively pursuing acquisition of e-commerce sites, their support businesses, and digital marketing firms to compliment other portfolio companies and help them scale. We expect this trend will continue in 2021.

Although an abundance of new capital has flowed into the e-commerce sector, many strategic acquirers are accountable to the companies they represent and need to secure a substantial return on their investment. This means they must complete a comprehensive due diligence process before striking a deal.

It can often take the investors months to conduct a thorough analysis of the company’s books and other pertinent records before making an informed decision to invest — even if the owner has anticipated the acquirer’s requests and prepared accordingly.

We always recommend building a business with a potential sale in mind. Of course, when preparing for an exit it helps to understand what prospective acquirers are looking for.

Here are the types of online and digitally native companies we see investors looking at right now.

Customer Loyalty Coronavirus Can’t Diminish

Whereas fad businesses typically struggle during recessions, legitimate businesses with true longevity can endure and even thrive. These companies stand out to investors because customers continue buying from them despite the hardships brought on by the pandemic.

These are typically niche businesses that have a strong brand presence and consistently perform in the top quartile. While many companies maintain a healthy level of diversification, they also tend to focus on highly defensible product verticals.

Low TACOS

This is one of the key metrics investors check before deciding to submit an offer on a business. Essentially, the TACOS (Total Advertising Cost of Sales) measures how much it costs you to acquire a new customer and reflects how effective your marketing is.

Strategic acquirers look for businesses that continually streamline efficiency, driving down their TACOS and maximizing the lifetime value per customer.

Companies with a low cost of customer acquisition and a high overall lifetime value get far more attention in than companies with high acquisition costs.

Recurring Revenue

Companies that generate recurring revenue are more desirable than companies that do not. A customer who completes a single purchase represents a low lifetime value compared to a customer who completes many subsequent purchases.

Thus, identifying opportunities to upsell, increasing average order values, and creating subscription-based revenue models makes businesses more attractive to prospective acquirers.

Maintain Clean Financials

Financials play a critical role in the M&A process, from obtaining an accurate business valuation to completing due diligence with as few delays as possible.

We advise our clients to keep accurate and organized records, seeking help from professional accountants as needed. This helps ensure a smooth and seamless transaction, as prospective acquirers will thoroughly analyze the company’s financial data and any discrepancies they uncover could delay or completely stall the sale.

Clean financials let an investor know you’re serious and that the information they’re presented with is correct.

Untapped Opportunities

Strategic acquirers look for businesses with rapid, short-term growth opportunities that drive ROI. These initiatives may involve streamlining for efficiency, launching new and improved ad campaigns, or leveraging manufacturing partnerships and exclusive distribution deals to quickly scale the company.

For example, we recently helped sell a luxury British nightwear company to a major online giftware retailer in the U.S. The acquirer could expose their products to a new, much larger market at a significantly lower operating and marketing cost than the company could have achieved prior to acquisition.

Conclusion

The past year brought many unexpected challenges, but the market has quickly adapted. Many investors are now actively searching for successful e-commerce businesses to acquire for their portfolio and as e-commerce continues to flourish, there will be many opportunities to earn the maximum value for your business.

If you are considering an exit and your business fits one or more of the above criteria, 2021 could be the perfect time to sell.