Market Report E-commerce M&A 2022

After two heady years, we look back on a remarkable period in which e-commerce grew at an unprecedented rate: not only did online spending increase by over 50% in two years, but the number of active online businesses also grew rapidly during this period.

In this issue we share our views on Corona's impact on e-commerce and the subsequent developments on the valuation and pricing of e-commerce companies: what is the current status and what is the outlook?

Together, Businessforsale.eu and OvernameAdvies.nl have insight into many Dutch and Belgian e-commerce transactions, from large to small. From this data we conclude that online businesses (comparatively and when compared to classic SMEs) still change hands for relatively low acquisition sums.

With the knowledge that Dutch companies are already relatively cheap internationally, does the state of local e-commerce still represent a good entry point for buyers?

Download the whole report (in Dutch).

2. The state of the market post-Corona

Size of the market

Both 2020 and 2021 were special years in which the Dutch e-commerce sector grew disproportionately fast. For example, online sales in 2020 were as much as 43% higher than in the previous year, and that is the highest growth measured by CBS in the past twenty years within this segment. Omnichannel players (both offline and online sales) did particularly well. Pure players (online sales only) ended up with 36% growth.

Unfortunately, the corona crisis continued in 2021, with the result that much offline retail could be partially not open or limited that year. Following on from 2020, the e-commerce industry was therefore able to show fine growth figures (albeit at a slower pace) in that year: in 2021, online sales were again 24% higher than in 2020, and omnichannel parties also grew fastest this year.

Thuiswinkel.org indicates that now 97% of all adult Dutch people buy online, bringing the total number to 14 million online consumers. An interesting statistic here is that currently 12% of all retail spending takes place online. This is impressive and involves large volumes (373,000,000 purchases), but we can also conclude that 88% of purchases are apparently not yet taking place online: there seems to be potential for further growth of e-commerce within the retail industry (total volume in 2020: 124 billion).

We do see a general expectation among many business owners that the short term is likely to bring negative growth first, assuming no new lockdowns follow. This is consistent with the numbers we have seen from most online stores in the first quarter of 2022. Relative to pre-corona levels, growth will nevertheless remain high on average. Starting in 2023, we expect (slowed) further growth.

Number of online businesses

The exceptional growth in sales volume, especially in the period from mid-2020 to mid-2021, was accompanied by a sharp increase in the number of online stores. During the peak in the third quarter of 2020, that number even briefly reached 3,000 new online businesses in one month. Meanwhile, this growth has leveled off and is back to the pre-corona level of several hundred per month.

Zooming in on the online businesses that have been added, it becomes clear that many new online businesses are not pure players: the extra growth came largely from traditional retailers who opened an online business as a (temporary) replacement sales channel during the lockdowns. We expect that some of these new online businesses will eventually be discontinued and that, as a result, the total number of online businesses in the Netherlands will not grow further, or will grow to a limited extent, in the coming years.

3. The valuation of online businesses in 2022

An important question for (aspiring) online business owners is what impact the aforementioned developments have had on the valuation of the online companies. Before answering this question, we will first take a small step back. Because to properly answer this question, it must first be clear how an online business can be valued at all.

How are online businesses valued?

More than twenty years ago, around the turn of the century, the wildest valuation methods for online businesse were doing the rounds: the dot com hype was in full swing and people did not really know what to do with the new phenomenon of the online business. This gave rise to excesses such as the 'eyeball metrics' in which online businesses were valued based on the number of page views.

More than 20 years later, we can conclude that nobody still uses eyeball metrics as a valuation method and that the 'old-fashioned' methodologies are perfectly applicable to online businesses: with 2 decades of track record and more predictable growth figures, the discounted cash flow, for example, is a good method to set up a solid valuation for an online business.

Scenario-based discounted cash flow method

We ourselves like to work using the scenario-based discounted cash flow method: by creating different (top-down and bottom-up) scenarios based on selected value drivers, a range of outcomes can be predicted. By weighting these outcomes based on assigned (subjective) probabilities, the value is then determined.

Corona's impact on valuations

Corona has impacted virtually every company worldwide to a greater or lesser extent. It does not change the basic principles of a valuation, but it may change the scenarios that are created and the return requirements that are used.

In the case of online stores, we find that Corona generally has an impact on the outcome of valuations, and we see that impact reflected in several ways:

• At the macro level, online stores benefit from the Corona accelerated and (partly) structural shift of more retail sales from the "bricks" to the "clicks.
• At the industry (meso) level, increasing competition is visible. Furthermore, we see that well-positioned online businesses have been able to strengthen their positions in recent years with (faster) expansion of customers/mail files and a general increase in the number of searches (potential traffic).
• And at the enterprise level, specific weaknesses and strengths have become visible during the pandemic (think dependence on Asian suppliers or dependence on the entrepreneur himself).

So we see two opposite developments: on the one hand, more uncertainty seems to be priced in and on the other hand, scenarios are on average more positive than pre-Corona. Overall, therefore, online businesses post-Corona seem to come out of the pandemic well (even after applied "Corona normalizations") with higher valuations on average than before.

E-commerce vs traditional SMEs

We see throughout the market that SME online businesses are generally valued relatively lower than many other SMEs. This is not so much due to forecasts as to the higher returns demanded. Thus, in other words, more uncertainty is priced in.

E-commerce is therefore a young industry, and an awful lot has happened over the past 20 years (especially compared to more traditional industries such as manufacturing or childcare): for example, in 2002, online stores did not yet have iDeal as a payment method, and broadband Internet and fiber optics were not yet the norm. Furthermore, there have been major developments within search engine and advertising technology, and a range of new logistics solutions such as fulfillment and dropshipping have changed the rules of the game several times over. In short, the online business has evolved from novelty to a standard retail channel.

And yet another major shift is currently taking place within the e-commerce landscape: marketplaces (Amazon, Bol.com) are making their platform available for third-party sales, thereby accelerating their dominance. And with all these developments, who dares to look ten years ahead?

4. Online business prices

'Price is what you pay, value is what you get'. Warren Buffet expresses beautifully with this quote that price formation occurs in a situation with supply and demand and often deviates from the company value. Thus, a higher valuation does not necessarily lead to a higher price: in a situation of high demand, the price may be higher than the established value and in a situation of low demand, the price may be lower.

As a niche platform with full focus on e-commerce, we have insight into many transactions within one specific industry, which we have been recording on an anonymous basis since 2015. Here we notice that online stores are mostly offered at an asking price excluding the inventory value and that the range in multiples paid is very wide.

Asking prices

Many online business acquisitions are conducted through an asset transaction and the most valuable (visible) asset at online business is often the inventory. Presumably this is the reason that within e-commerce a habit has developed of using asking prices and settlement mechanisms based on an EBIT multiple to which the inventory value is added. Incidentally, we see this not only in the Netherlands: it is also done internationally for small but also for large transactions. Parties like Thrasio do something similar.

In terms of valuation, this approach is actually not correct: in principle, you calculate an enterprise value (using the discounted cash flow) and all operational assets fall under the calculated value. The EBIT multiple is the result when this value is then divided by the EBIT and it is primarily a rule of thumb that can be used to quickly get an impression an applied value (or asking price).

However, the application of an EBIT multiple plus stock is practice and this context is important for assessing multiples used within e-commerce (and does not make comparison with multiples within other industries easy).

Multiple ranges

The range of paid multiples is as wide as the level and quality difference between acquired online businesses is: one can start an online business nowadays in a short time and buy revenue with advertising budget. But has value been created? For small online businesses with a short order history and many dependencies (think little organic traffic and one foreign supplier), relatively little is paid. Quite apart from the risks, the decision to start your own is then also quickly made.

On the other hand, after more than 20 years of e-commerce, there are also online businesses that have built a solid business with 10+ years of history, a nice (1 million+) sales volume and a range of (partly) own products. For these online businesses, correspondingly higher multiples are paid.

Including a correction for inventory, we see that 90% of the online business acquisitions were paid a multiple in the range of 3 x EBIT to 5 x EBIT. For online businesses at the lower end of this range, this sometimes means that they are transferred for the current inventory value.

When we compare the (average) multiples paid in the pre-Corona period with the (average) multiples paid in the 2020-2021 period, we see no significant differences.

SME

Prices paid for online businesses depend very much on the size and performance of the company in question, its growth rates, its age, and a range of dependencies, existing or otherwise. Online businesses do not differ from traditional SMEs in this respect. However, online businesses do seem to have higher requirements for expected returns: where multiples for classic SMEs are in the 4-7 range, the lower end of this range represents a ceiling for many online businesses. And with the realization that Dutch companies are already relatively cheap internationally in the first place, Dutch e-commerce companies seem even more of a godsend for buyers.

And it shows: in recent years more and more investors are stirring in the market. Internationally, these include parties such as Thrasio and Berlin Brands, but also locally, investors are actively working on buy-and-build strategies. One local party employing a similar strategy is Dwarfs. The aforementioned parties have a preference for sales accounts at marketplaces, but we also see parties that focus on serially acquiring regular online stores.

5. Value drivers in e-commerce

A common question is where the value of online businesses lies: what are the factors that determine margin and growth and the ability to hold both? These factors are called the "value drivers" and they influence previously mentioned elements: they reduce risk or increase growth and/or profitability.

To determine what the most important value drivers are within e-commerce, we conducted a survey of the largest online stores in the Netherlands. The results provide a clear picture of what professional players see as the most important value drivers for an online business:

Interestingly, the number of website visits and page views (the most important value driver in the literature twenty years ago!) was only explicitly mentioned by one respondent. And this also seems perfectly logical, since website traffic by itself does not mean that much (anymore).

6. The future of online store acquisitions

The takeover market follows developments in the market as a whole with some delay. What we have seen within e-commerce for several years is that online businesses have mainly two choices by which they can maintain success over time: create volume or dominate a niche.

We think that for many online stores, the latter option is a good choice. Especially when owning their own brand and/or own products, choosing and dominating a niche is a good strategy to maintain margin. Moreover, it is a strategy that the really big players (including the marketplaces) cannot copy so easily.

Many online stores seem to be moving more and more in that direction, (rightly) valuing the importance of their own intellectual property rights more and more highly.

A second movement is the success of sales accounts on marketplaces. An increasing number of entrepreneurs are now starting up online sales without having their own online business. Whereas a sales account was no more than an additional sales channel a year or two ago, it now increasingly constitutes a real shop-in-shop. For these entrepreneurs, an online business of their own only follows after proven demand for the product range.

For the time being, we do consider these to be companies with a relatively high risk profile, given the high degree of dependence on the market place in question. Moreover, in practice these companies do not always seem to be transferable. The impact of this movement on the takeover market will therefore have to be seen in the coming years.

Download the Marketreport E-commerce M&A 2022 (in Dutch). 

7. References

Websites

Kamervankoophandel.nl

CBS.nl

Thuiswinkel.org

Retailinsiders.nl

Articles

Koller, T., Goedhart, M. & Wessels, D. (2015). Valuation: Measuring and Managing the Value of Companies. New Jersey: John Wiley & Sons Inc.

Scholten, S. (2020), From Eyeball to Hardball, Webshopovername.nl.

Trueman, B., Franco Wong, M.H. & Zhang, X. (January 2000). The Eyeballs have it: Searching for the Value in Internet Stocks. Berkeley: University of California.

Weesie, E., Ibrahimovic, A., Denis, M. en Van Teeffelen, L. (2022), MKB Overname Monitor Tweede Helft 2021: Strategische partijen domineren overnamemarkt, Hogeschool Utrecht/Bedrijventekoop.nl.

About Businessforsale.eu

Businessforsale.eu is the primary platform for buying and selling online businesses in the Netherlands and Belgium. Currently there are over 350 online businesses, websites and sales accounts for sale and more than 30,000 e-commerce buyers are actively looking for an acquisition candidate through the platform.

About Overnameadvies.nl

Transactions of web companies with an expected value of more than €1mln are supported by the experienced team of Overnameadvies.nl. Sales processes are tailor-made and are characterized by a personal and carefree approach.

Sander Scholten

Co-founder and owner of Webshopovername.nl, Businessforsale.eu and Overnameadvies.nl. Sander has a master's degree in acquisitions and business valuations and has set up several web companies over the past 15 years. His specialism lies in acquisitions and e-commerce.