Reviewing acquisition trends in 2021 & Outlook for 2022⎜ The Fortia Group ⎜ EP 197

Episode Thumbnail
00:00
00:00
1x
  • 0.5
  • 1
  • 1.25
  • 1.5
  • 1.75
  • 2
This is a podcast episode titled, Reviewing acquisition trends in 2021 & Outlook for 2022⎜ The Fortia Group ⎜ EP 197. The summary for this episode is: <p>Ryan Cramer of Crossover Commerce talks with Emmett Kilduff of The Fortia Group one on one as they discuss reviewing acquisition trends in 2021 &amp; what the outlook can look like in 2022.</p><p>---</p><p>Crossover Commerce is presented by PingPong Payments. PingPong transfers more than 150 million dollars a day for eCommerce sellers just like you. Helping over 1 million customers now, PingPong has processed over 90 BILLION dollars in cross-border payments. Save with a PingPong account <a href="https://usa.pingpongx.com/us/index?inviteCode=ccpodcast" rel="noopener noreferrer" target="_blank">today</a>! </p><p>---</p><p><strong>Stay connected with Crossover Commerce and PingPong Payments:</strong></p><p>✅ Crossover Commerce @ <a href="https://www.facebook.com/CrossoverCommerce" rel="noopener noreferrer" target="_blank">https://www.facebook.com/CrossoverCommerce</a></p><p>✅ YouTube @ <a href="https://www.youtube.com/c/PingPongPayments" rel="noopener noreferrer" target="_blank">https://www.youtube.com/c/PingPongPayments</a></p><p>✅ LinkedIn @ <a href="https://www.linkedin.com/company/pingpongglobal/" rel="noopener noreferrer" target="_blank">https://www.linkedin.com/company/pingpongglobal/</a></p><p>---</p><p>You can watch or listen to all episodes of Crossover Commerce at: <a href="https://usa.pingpongx.com/podcast" rel="noopener noreferrer" target="_blank">https://usa.pingpongx.com/podcast</a></p>

Ryan Cramer: What's up everyone. Welcome to My Corner of the Internet. I'm your host, Ryan Cramer, and this is Crossover Commerce presented by PingPong Payments, the leading global payments provider, helping sellers keep more of their hard- earned money. Hey everyone. Welcome back to another episode of Crossover Commerce. I'm your host Ryan Cramer, and this is My Corner of the Internet where I bring the best and brightest in the Amazon and e- commerce space. Before we get started today, I just want to give a quick shout out to our presenting sponsor, PingPong Payments, who's helping people save more time, money, and effort when it comes to paying their suppliers, manufacturers, or just receiving funds from your international marketplace that you're selling on. So, what does that look like? How do I do all that? Well, if you go to usa. pingpongx. com/ podcast, then you can find out all of our past episodes of Crossover Commerce, but also learn about how you can save time, money, and effort, and put more margins back to your bottom line, which is what every business wants to do clearly in this day and age when there's so many fees that come out from Amazon, but also just paying absorbent fees when it comes to shipping logistics. You can actually have a handle when it comes to managing your finances, by paying out in localized currency or receiving in localized currency and not paying those exchange fees right away by Amazon. So, what that can look like? Go ahead and sign up for free today, like I said, and just go to the podcast page and sign up and check out all of our past episodes of education and people that we've brought on in this space. Again, this is episode 197. If you're a fan of the show or if you're just tuning in for the first time, welcome on LinkedIn, Facebook, YouTube, Twitter, or if you're listening to us on your favorite podcast destination, thank you for just tuning in and listening for a little bit about some of the great information we'll be dropping for you today. That being said, again, 197, I'm I'm counting down, I'm throwing us out in the ether, we're going to have a great show when it comes to 200. We started this podcast about a year and a half ago, and my, what a great inaudible has been on for both myself, getting up almost every single day, and talking to the great people like our guest that we're going to be talking about today. The beautiful thing about podcasting is that you can do this and talk to people all around the world. So, today I'm going to be going on that virtual plane ride over to the UK. I'm going to take a step in the dark with our guest today, but really excited to talk about, again, my favorite topic of discussion on a day to day basis is innovation and what is happening currently in the space? How does a brand owner or entrepreneur really make their money? And a lot of it is going to be coming... Most of it I should say, most of it coming is for their exits, and that didn't happen for a lot of people until about two years or so ago, but businesses are popping up, we've seen lots of valuations, last week we talked about just numbers and reports. There's another fantastic, great report that came out even before then that was talking about trends and topics and just what the outlook looks like for 2022. So, that's what we're going to be talking about today. What we learned in 2021, where we're going in 2022, give it an international flare if you will, so I want to go inaudible and bring on our guest, his name is Emmett Kilduff of the Fortia Group. Emmett, thank you for hopping on and joining us on Crossover Commerce today.

Emmett Kilduff: Thank you, Ryan. Good to be here.

Ryan Cramer: Yeah, absolutely. So, again, I know I said UK, tell me again, where are you joining me from today?

Emmett Kilduff: Just across the Irish Sea in Ireland.

Ryan Cramer: In Ireland. Again, Northern Ireland, technically part of UK, but that was my fault, I bucked at the UKness of just guessing, but that's my fault. So, you're in Ireland, again, that's fantastic. So, tell me about yourself a bit, if people haven't heard about you. Again, pre- show, we were talking, popped on a call before this, you've been around for a long time, but the company Fortia Group has been around... May, so of 2021, correct?

Emmett Kilduff: Yes, correct. Yes. The Fortia Group, which specializes in e- commerce exits has been working with clients since May of 2021. Yeah.

Ryan Cramer: Got you. So, tell me a little bit about that background, why is that a space that you and your team got into? Give me some background of where we are today. So, you're an M& A group that's helping people exit, why do it now? Why today? Why now? What was the space for you guys to say," This is the opportunity we need to seize this moment."?

Emmett Kilduff: Well, I'm a former investment banker with Morgan Stanley and Credit Suisse, so I've always had an interest in corporate finance, investment banking, M& A. And I left Morgan Stanley back in 2012 to start a data startup called Eagle Alpha, which is going strong, it's nine years old. And it was through that, that one of our New Jersey- based clients happened to be best friends with Carlos Cashman, and he actually invested in the first round of Thrasio, so, I got an introduction to Carlos in the early summer of 2010 before the word aggregator was, frankly, well known around the world. And having spoken to Carlos at that time and having done a lot of time in M& A at Morgan Stanley, I thought" Crikey, there's a really good opportunity to work with e- commerce entrepreneurs around the world to make sure they get fair deals." So, I became executive chairman of my data business Eagle Alpha to free up time to become a CEO, co- founder of the Fortia Group. So, it was really stemmed from that conversation with Carlos, I got really excited opportunit. y

Ryan Cramer: Absolutely. Well, people coming into the space, they're trying to help people grow. So, your expertise in e- commerce that came through just looking at the space, you're a numbers guy, so it sounds you were reviewing trends, you were reviewing what the space was doing, how has it been transitioning from the finance side of the world, almost to the e- commerce side of the world where there's so many data points and comings and going? Is it that much different or similar than working in the finance world at the end of the day or is it pretty similar in that capacity?

Emmett Kilduff: Look, I think Amazon is the big data problem or challenge, I've always been data- driven in my approach, and I don't claim to be an e- commerce expert by any means but one of my co- founders is an e- commerce expert, so we're probably one of the few corporate finance firms that has an in- house e- commerce expert on the team. But it sort of brings me full circle back to my masters that I did in the year 2000, which was in e- commerce. Just as the tech boom was coming to an end, I did a master in e-commerce, it was probably one of the first of its kind globally. So, I've always had an eye on e- commerce even 21 years ago and it's great that now I can combine my M& A corporate finance skills with that initial hunger and interest in e- commerce 21 years ago.

Ryan Cramer: Well, that's really fun. And obviously e- commerce is learning every day when I bring people on the show, learning something completely different than when I went into it, what's been the biggest, maybe not shock but surprise, to you of either good or bad that... You said Amazon's a big data conundrum, it feels like a lot of Nazi, you have to untangle and completely just sit there and just take time to understand where it's coming from and just let it come to you, what's the biggest challenge or hurdle for yourself, maybe to understand the space, since joining Fortia Group, or co- founding I should say, not joining it, co- founding it?

Emmett Kilduff: Well, I think the biggest shock has been, in terms of pure numbers, is the quantum of capital raised in the last 15 months. It's been mind- blowing, staggering, there aren't enough superlatives describe what's happened, and having been in corporate finance for two decades, I haven't seen anything like it. At least 83 aggregators have mobilized, and their Amazon aggregators is also GTC aggregators, so call it 100 aggregators, have mobilized outrageously quickly and raised serious funds, both on equity and credit, to do roll up plays, I don't think that's ever happened in corporate finance. So, that's been the biggest shock or staggering stats that I've seen in the last year. There are other specific acquisitions which we might get onto later on in the discussion.

Ryan Cramer: Yeah, absolutely. We were talking, pre- show, just about the so many different companies that were coming into the space, and that will continue to happen, you've seen if you're paying attention to news, I say news in my world, my world and news is very niche in terms of... Probably like yourself, I'm a person who is where the movement's happening, the acquisition's happening, it might be big, it might be small, but we're here to pay attention. So, just kind of set the table for our listener, and for people, again, if you're listening on Facebook, LinkedIn, or YouTube, Twitter, any of those platforms, again, you can actually talk to us by putting your questions or your thoughts in the comments section, just go ahead and throw them in there as we're watching and talking live and we'll be able to answer those questions. So, if you have questions for Emmett or myself, please feel free to do so. Emmett, a couple things that we promise people is to look back at 2021. Again, news wise, I think that there's going to be painting this picture and I'll set the table for you. We saw just exorbitant amount of growth, I think every single month for the whole 2021, every single month was a billion plus in raised in capital fundraising, whether it be debt or equity or a combination of both, there's all these companies that are raising at an exorbitant rate. Is that, question number one, sustainable for you and your team and what you think this happening coming from this banking world or is this something that we're going to see taper off a little? What is the pace that we're on currently? And do you think that will continue going into 2022?

Emmett Kilduff: Well, if we break that down into, maybe, the number of aggregators and then the volume of funds that they raise, I think the number will continue to increase, however, there'll be less new starts that are, sort of, copycats of Thrasio. I think there'll be more niche aggregators, whether that's focused on specific geographies such as inaudible India, South Korea are a specific category, we're almost. I think it's probably too late now to start a me too, copycat of Thrasio given how many there are and how far along their cycle they are. And in terms of funding, I think that 12 billion number... The dollar number is going increase significantly in 2022, because if you look at the pattern that Thrasio has raised in its journey over just a three- year period really, a lot of the aggregators are following similar patterns, and the big credit funds, the big equity firms are starting to take note of this space and will back those aggregators that are doing well. But, of course, some aggregators will likely go bust or hit financial difficulty next year for various reasons, but the bigger successful ones that are focused on operations will continue to raise significant capital. So, I think we'll get well past 20 billion by the end of 2022.

Ryan Cramer: That's a big number to hit and I think... I'm right there with you. I think that there's a lot to be had still, I think people are still finding their way, especially in the one year anniversary, you saw a lot of people hitting their first acquisition milestones, lot of brands are finishing out these payment structures or schedules and deals, and you're really starting to get your footing. A little bit of a side note on that, do you think that... Although this is the space and this is the boom right now, do you think that the settings and situations are almost handicapping the growth potential of some of these businesses? And I mean by that is, because there's such shortage in difficulties in supply chain manufacturing, and that's really the biggest focus, like you've mentioned before, those people who are going to focus on that side of things are really going to stand out and be successful, do you think that in that arrow, not that anyone could see this coming, that is going to actually be the downfall to lots of different businesses because they didn't have a very good solution in place, whether it be their fault or not, you can't forecast a big consolidation or a big cluster in the ports or anything like that and there's... What's, kind of, your thoughts around that matter?

Emmett Kilduff: Yeah, I think at the brand level that we've definitely seen a lot of net margins come down throughout 2021. A lot of individual brands were 20% plus in Q1, are now closer to 15% for the tough headwinds that you've mentioned there on. I think at an aggregator level, that's quite sobering if you've got a big portfolio of companies and the margins are going lower, but of course, ultimately the best operators of these aggregators will win. And so, those that are set up well in terms of supply chain and technology and data, I think, will ultimately win, become the best aggregators. It surprises me, being a data and tech guy, that most of the aggregators are focused on acquisitions but not thinking about how to in integrate the brand management platform so that PPC speaks to supply chain and so on. I think firms like like Perch are doing some incredible work, Razors' doing a lot of really interesting work on from a tech perspective. But most of them aren't, and I think that'll come back to haunt them in due course, like to get to 20% net margins plus in the outer years to be a really efficient company, they need to be focused more on tech and data.

Ryan Cramer: So, for people hear that number, I hear it a lot too, and I understand the reasons why 20% net margin is a golden threshold that people want to hit. Why is that a number that sellers, brand owners, other businesses hear quite consistently in the aggregator world? What's the significance of hitting 20% net margin for aggregators?

Emmett Kilduff: Well, it all comes back to cashflow. 20% net margin business is a super efficient business and great for cashflow, which allows these types of roll up plays, raise more credit, that sort of one use case. But, obviously, ultimately they want to get sold or do an IPO on inaudible or another exchange, and there are businesses with those types of margins, are very attractive and will attract very high multiples.

Ryan Cramer: As the numbers would say, that's a safe bet, if you will for a lack of better term.

Emmett Kilduff: Yeah. And look, it's interesting to see... And this surprised me that when we did a survey of sellers in November, 43% of those that had sold had margins in the 25 to 30%, that was quite surprising to me, I didn't think that many sellers would have margins that high, the rule of thumb when you speak to an aggregator in terms of their acquisition criteria, they'd like to see... The second most important criteria is net margins above the threshold, and that's usually 20% net. But to have 43% of those that sold having 25 to 30%, that's amazing margins, especially throughout 2021. So, brands are achieving some serious margins, which is great to see still.

Ryan Cramer: Yeah. Well, in the capacity of what's going on with logistics and supply chain, do you think that hinders a lot of businesses and maybe slows down the overall nature of exits at the end of this year and maybe early next year? Again, I want to kind of put the picture in terms of data that you guys have seen as well, because that's consistent nature, that's what a lot of people are used to if that threshold's not being met, maybe it was around 23% and now they had to dip down because of cost reasons, PPC rising cost and things like that, to 18%, for example, there'd be like a 5% dip. Is that going to hinder a lot of the different brands or is there not that big of a jump or miss?

Emmett Kilduff: Maybe I'll answer that in two ways, one, is by looking at volume and, two, is by looking at valuation. From a valuation perspective, we believe that in 2021 there was approximately 300 to 400 Amazon FBA businesses sold. And we think that based on our survey of aggregators, there will be at least 1000 FBA exits next year. So, the volume is going to increase. Specifically on that, 40% of aggregators say they'll do at least 40 deals next year. So, the aggregators have raised this$ 12 billion of capital, they have to deploy it. So, there'll be a lot more deals, so that from a demand side, the demand side goes up. And from a seller perspective, for those that have seen margins come down from 20% to 15%, they will have to be more realistic on valuation multiples. That's the give here. There's no two ways about it, if the margins are towards 15%, it could still be a great business and there might be an easy or low hanging fruit waves to get back up to from 15% to 20% plus, but the buyers won't be paying the same multiples that you would've seen in H1 this year, first half this year.

Ryan Cramer: Absolutely. And that makes sense to me, and because of... There's this gray space that I think a lot of aggregators don't play in, and this is my perception again, lovely. I think there's so many great operations out there, I think a lot of them are looking at those, not vanity metrics, because you and I both understand those are metrics that you have to do to make sure that you have meat on the bone, to make sure that you can pay back your lenders, all those different things, those outside things, but when you come into the market and you say," There's going to be 1000 deals done next year.", I start to break those down in different capacities, that seems like the demand being so high, the math is going to work itself out naturally, is because you need to have brands to operate, you need to have cash flow, you need to have all these different things, aim for multiples to be at 4 to 8X right now of currently what's trading, according to Marketplace Pulse, data points such as yours, and other brokerages out there. You look at those trading points and say," Well, now is the right time to exit because I'm going to get the most money as well." but where's the trade off really for a seller if they're working with different brokers like yourself and they say," Are they're going to give me 3X or they're going to give me 7X?" but 7X might be sitting in a portfolio that may not be around because they're overpaying, they can't catch up in their funds and then it'd be passed on to somebody else. Do you see this snowball effect starting, Emmett? Or is it too early to tell still? I think there are a lot of-

Emmett Kilduff: Yeah. You did, I need to unpack that a bit. Specifically on the last point, I think as a e- commerce entrepreneur, typically we see 25% of the consideration is deferred. So, that's really important, you want to go and work with an aggregator who is going to be around so that you can have a good chance of collecting as much of that deferred revenue as possible. There's been a few deals this year where it's been a 100% upfront, it's definitely the exception rather than the rule, but in some cases, the entrepreneurs got everything up front. But that's not what we'd expect going into next year, especially with sort of supply chain issues and so on.

Ryan Cramer: Do you see more of those deals start to push more of the deferred on the back end then in that capacity? I mean, I understand why that would be the case or you would as, an aggregator, to push that as a nature, but was that where trends go? Do you think?

Emmett Kilduff: It's hard to tell. Earnouts invented by buyers many decades ago and they definitely favor buyers. They can work for sellers if they're very transparent and very clear for all parties involved, but in normal M& A outside of this space, in the bigger Wall Street space, most earnouts don't work, frankly, and there's been a lot of lawsuits about earnouts and we don't want to go down that route in our Amazon world. So look, clarity and simplicity are the two key points from an earnout perspective. I'd expected to say somewhere around it is, to be honest at the moment, which is about 25% deferred and 75% upfront, seems to make sense, it fit well with both sides of the market at the moment.

Ryan Cramer: Is there creativity that's going to come to, whether it be... How I envision this is you want to be the most successful you can possibly do, I know the brand owner, that 25% might be... It doesn't sound like a big percentage, but for a lot of sellers, if you're talking about millions of dollars or potentially more, that could be a lot in their pocketbook. So, with that being said, do you think that there's deals that will be necessitating of more hands on approach of once that transition period is happening? Maybe those transition periods... Along getting a little bit more in terms of advising, being able to look in at the accounts, what do you think is that nature as it evolves to make sure that everyone's hitting their marks and everyone's playing friendly, but again, the aggregators are operating and they're doing their thing without having too much input?

Emmett Kilduff: Yeah. I think in the normal world, earnouts are typically two to three years long, and management are retained, for a Shopify based e- commerce business that has a larger team than an Amazon business, you would expect two to three years as well. If we go onto the Amazon FBA world it's slightly different compared to what I've seen over 20 years, and most of the founders are kept for probably sub three months, it's a very short period of time. That may change as the pace of growth of the aggregators puts a lot of pressure on them, it's hard for them to keep finding new, great brand managers to run all these brands. And I know you've talked about that topic on some of your other episodes, and so we might see more founders retained and incentivized as brand managers, specifically, for example, if an aggregator goes into a new vertical for the first time, if it's the first time aggregator X, Y, Z does wellness, they might want to retain that founder of the first wellness acquisition to help them get smart in that category and then mentor, educate and lead the category and lead other brand managers over time so that they can then take the lead.

Ryan Cramer: For operation and brand management, is that why a lot of aggregators, in your mind, want to stay away from directed consumer even though it is potentially... And I say, again, every brand, every business, every product doesn't have to have a directed consumer website or opportunity, but is that where you think a lot of aggregators look towards the functionality of running on Amazon, because just almost more of the simplistic nature of it's easy to copy paste, drive traffic, run PBC, it's all within house, and it's easier to just learn the ecosystem instead of I have to now develop a marketing team, have to be creative at, to build an audience, there's a little bit more nuance to it albeit you have all the other additional pros and cons. The pros would be, I own my audience, I can tap into the recurring network, I have an actual brand, all that, you might be able to keep more margins. What's kind of the breakdown, if you will, of, do people still really want just Amazon or is that trending more the opposite direction?

Emmett Kilduff: Well, if you look at the history of roll up plays, which these aggregators are, you can have a roll up play of dry cleaning shops, you can have roll up plays of hairdressers, you can have roll up plays of various things, this in my view is the, relatively, simplest roll up play in the history of M& A, because the operation levels that you get... Say again.

Ryan Cramer: I was going to say, inaudible is the simplest M& A crosstalk

Emmett Kilduff: Relatively simple.

Ryan Cramer: Relatively simple. We'll say relatively.

Emmett Kilduff: Yeah. No, and please don't get me wrong, it's crosstalk easy, but it's the operational leverage of these brands on Amazon, it's amazing, and they're one or two person companies, you don't get that with a DTC Shopify based business who could have 70 or 100 people, which brings huge integration issues. So, the M& A integration is a huge opportunity, so a lot of the aggregators start there first. As you know, to win an e- commerce, to have really good brands, ultimately omnichannel, they have to work across all the channels, Amazon, PTC, other marketplaces and offline. And the aggregators themselves are going to follow that same path if they want to be successful. So, they're going to have... They'll start on Amazon because it's the simplest from an acquisition perspective. But they'll ultimately have to understand Shopify based businesses, e- commerce, and the offline. And we've seen that the bigger aggregators are going to get there first. We hosted two round table dinners with aggregators in November, the bigger ones are already doing GTC acquisitions. Some of the smaller aggregators at the start of the year, was interesting, they would say," We want 90% to be Amazon FBA." Now, that 90% has come down to sort of 60, 70%, so they're willing to accept more off Amazon Business. And that trend will continue, there are bigger businesses in the DTC world than there are on Amazon. In terms of having to deploy the 12 billion we talked about earlier, it can be quicker to deploy that buying a$ 100 million revenue DTC business, yes, it comes more from complications from an operational perspective, but I think we'll see a lot more big deals in DTC by aggregators next year.

Ryan Cramer: Well, in the nature and the data that you know, and the numbers you know, it makes sense that at the rate of which acquisitions are happening, and again, that's the 4 to 8X multiple that on average is being worked with, the only way you make math work is either you take something that is not on page one and you somehow elevate it into where there's this great opportunity, they just don't have the knowhow, there's great product, you have to elevate it to page one and the eyeballs and the traffic and the sales will take over from there. So, there's that margin from where it is now to where it could be, the pension show out. The other number they have to work with, or the situation you have to work with is, you have a top seller as in the number... I think this was even on your webinar, the number one selling pillow on Amazon for five straight years, in my mind that's a fantastic buy, that's a high floor, low ceiling acquisition if you're just talking about Amazon, how do I grow that at the multiple that I'm purchasing it? There's not much inaudible room because you can't go up from one, there's only the top ranked sales, you can't influx traffic unless somehow you're artificially saying just more pillows, that's a high floor position to be at. The way you grow that brand is either launching new products or new skills underneath it, children products or new variations, or you diversify it and you put it in some DTC platform, you sell it in a wholesale or retail. That's the only real way to grow at which you need to pay back, again, the funds, the equity, all that fun stuff that you're on the clock for, those are the only two really big avenues that you could do. So, what do you think about that in terms of those capabilities and people are" No, we're not going to go in there yet."?

Emmett Kilduff: Well, I mean, for context, the aggregators are raising their funding rounds at about 30 to 40 times EBIDA, three, zero to four, zero. So, if they're raising money at that rate and they're buying companies at four to eight, there's an interesting arbitrage there. The other important point for context is that DTC acquisitions typically trade at 10 to 12X, and so Amazon acquisitions are trading at let's call it 4 to 8X, but the smaller brands are probably trading at maybe three to five, six. But the bigger brands with great margins, great growth should be trading at higher multiples. When we survey the buyers, there is a lot of low hanging fruit for them to do, given that these brands are run by super entrepreneurs, but they're jacks of all trades experts at none with all due respect, they don't have the resource of an aggregator. And the first thing that these aggregators do is typically put it onto all the Amazon marketplaces, so if it's just in the States, let's bring it onto the UK and other... That's an easy win for an aggregator with resource. The other is brand optimizations. There's a top three way that they seek to increase value, which is, listing optimizations, better Amazon content and better PPC. Again, a lot of the PPC is run by the entrepreneurs, or in some cases, it's an agency, but it doesn't have the sophisticated or data- driven approach of an aggregator. And the third, which we've slightly touched on already is supply chain management. Whether it's choosing better suppliers, diversifying suppliers, maybe moving a supplier from China to the Western world to reduce risks, there's a lot of ways that good operational teams can make those valuations ultimately look like good value. But look, it's easy to spend money, it's easy to raise... Well, it's relatively easy to raise money, it's certainly easy to spend it and-

Ryan Cramer: And I was going to say,"Give me a checkbook, I'll start writing checks."

Emmett Kilduff: We can buy businesses, it's easy to buy them. The hard part is the operations crosstalk all these firms, they'll get you judged on that and.... We, interestingly, are working for a credit fund at the moment that's lending to aggregators and they're asking us to do deep dives into brands that's owned by aggregators to give a quantitative score as to what we think of the brands. Have they done it... How good is a brand? Has the aggregator done a good job by growing the brand? Where's the future growth? And that's been really enlightening and interesting work to do.

Ryan Cramer: That'd be interesting to see, almost like a future forecast modeling of, is this look like a good investment? Because ultimately, again, these are investments into a company, can they take it and grow? What's that growth component? Again, what's the reasoning behind that acquisition? Is it to have that stable income? Not a bad thing, but a lot of it is under the nature of growth potential. And, again, people are in the M& A world, they're a lot smarter than myself, and so I'm going to put you in that world of, they can see the numbers, ultimately, how many we're talking about? We talked about... I was asking this question, of the ones that you're working with on a day to day, month to month, week to week basis or whatever that looks like, isn't there a guarantee that you're going to see this consolidation at some point? We kind of all see it coming, there's going to be a misstep or two by one of them, they just can't operate, it's just not a functionality of which they can do, so they're either going to have to sell brands, they're going to sell off their entire portfolio. And we even just sold the acquisition this past week. Also making the first acquisition of a smaller aggregator, again, I'm sure that there's more that haven't been announced yet, so I'm just saying that's been publicly announced, disclaimer right there for the people listening to this as of December 14th in 2021. The acquisition of micro aggregators running five brands or so in different parts of the world, we're going to start to see that play I'm assuming, correct? Both the consolidation, but then also the acquisition of other players who are operating and running brands.

Emmett Kilduff: Yeah. This whole theme, the consolidators will get consolidated is really interesting, I think it'll start with more distressed plays as you're alluding to, and with smaller aggregators who can't either get the performance they want from the brands or can't raise further funding and therefore come to a dead end. And we're starting see that we've seen inaudible brands in Germany, we've seen, as you mentioned, Old Sam, we've acted for a small aggregator in a distress situation as well. So, the distressful is coming now and we'll build as we go into next year. If interest rates go up, which they will at some point, that'll also maybe fast track the distressed conversations. But I think, more interestingly, then is the exciting consolidation of high quality aggregators by the bigger aggregators. I think that'll start to come maybe towards the end of next year. I think the VCs and the investors that have invested into aggregators, most of them are still only a year old, or just over a year old, so it's probably too early for them to extract the return from those businesses. But I think in one to two years, that can be really interesting. And I think the first IPO will hopefully happen in 2022, probably towards the end of 2022, the share price of Ethereum isn't helpful for our space at the moment, it really was quite high towards the earlier Q1, 2021, but it's come down significantly. So that doesn't help as a comparable. It's not necessarily a pure aggregator, as you know, it started off as creating its own brands and then sought to become an aggregator or is seeking to become an aggregator. So, when that stabilizes, when maybe a Thrasio approach comes to market, I think that will fast track this, sort of, consolidation play.

Ryan Cramer: So, what's the missing component right now? Where are the weak points right now that this can all come crashing down, a house of cards if you will? We're all just blind to it and maybe it's... Is it too big now, is it too fast happening that it's just going to naturally still happen? All these projections that we're having, still going to happen or are we going to take off a rose clear glasses here in mid 2022 and realize we've all made a terrible mistake and we see the shaky nature of the ground? I clearly think one thing, but I would assume you would think the same thing, but is there a significant weak point in the space right now and how does that get mitigated?

Emmett Kilduff: Well, if we look at the deal flow, I think, given the quantum of aggregators there are now, if I was an aggregator I'd be... It gets tougher and tougher to find the real diamonds, to find the real, really great, great brands to acquire. I think the market's probably... The total addressable market of Amazon brands are probably smaller than one thinks. When two round table dinners with aggregators recently, although there's millions of Amazon brands, we think the addressable market is 40,000 to 50, 000 around the world, that are worth considering from an M& A perspective. It's a good number, but it's not massive, clearly it's growing all the time. But if you take, say, Germany, has just one case in point, that number comes down to three to 4, 000 targets with over €1, 000,000 in revenue. But actually, if we look at real targets, the number comes back down to maybe towards 1000, by real, I mean low skews, great margins, great revenue growth, and so forth. So, you do have... There's a race here for the aggregators to find the best brands, and that's definitely a risk that needs to be considered from an aggregation perspective. The second risk is the headwinds. We sat here last year, we wouldn't have forecasted some of the headwinds that came to e- commerce sellers in general, and specifically it's tough for Amazon sellers, whether that's supply chain or rising PPC costs. So, a lot of those are outside of our control as an industry to, sort of, macro type driver, and that makes it harder and harder to get towards that 20% net margin. So, that's a risk. If margins keep going down, it's going to be tougher for sellers to get the valuations they want, and ultimately for aggregators to get to the magic 20% net contribution number. But everything I've said isn't new, it's all fairly well known, it's not like there's a shock risk that is the ultimate barrier. We've said at the top of the call, I think there'll be at least$ 20 billion raised, that's a lot of smart money coming into the space, you can see that there's a lot of good deals to be done and upside to be obtained post these acquisitions. I think more people will look to do off Amazon deals. There's some aggregators actually already set up that are specifically looking at other marketplaces outside of Amazon, here in Europe, for example, in our database there's 19 aggregators DTC only brands. So, I think you'll see aggregators do more than solely focus on Amazon.

Ryan Cramer: Right. And in the market that's a hard place to actually stand out and find people, just because of the nature of brands are constantly trying to... There's different markets, there's different areas, again, there's different ways to play, does it ever makes sense, can be as simple as to, instead of looking outward, maybe look inward at the team and say," Why don't we just incubate our own brands and maybe niche down, maybe we get really good at home and garden, we get really good at baby clothing or something like that and we start to acquire, but we also sell if our brand's almost like a trade aspect of... We're going to be the aggregator for X.", does it make sense to make a move in that capacity?

Emmett Kilduff: Yeah, absolutely. I think some of the bigger aggregators have set up incubation approaches or teams, it takes longer to create equity value, creating all these brands, it's easier, it's quicker to do it via M& A which is clearly the main focus of all young creators, at least initially. Having done IPOs for Morgan Stanley for many years, I think when you go public, having an organic growth story, as well as an inorganic growth story, is important to the overall pitch to the Wall Street. So, I think you'll see those bigger firms that are looking to go public ultimately to exit will do more re- incubation. And some of the conversations we're having at the moment around incubation are fascinating, we're speaking to a lot of people that own Amazon agencies that want to set up an incubation machine, which is what we call them, are folks that have sold a seven or eight figure Amazon business, instead of setting up one new brand, they're setting up an incubation machine. So, a great example is John Lee, we sold Beli for John and Gummy supplements business in August, and he's now set up something called Spartan brands. He already has one brand under way and wants to build five or six really big brands, and then sell that incubator to an aggregator or a private equity firm in three to five years time for 100 million, 200 million plus type exit fee. So, yes, in fact, tomorrow we're having the first round table for incubators to brainstorm and think about how does one set one up? How does one structure it? How does one think about the exit in mind three years out? So, that's really exciting. I think aggregators will want to buy these incubators in two to three years time. If you look back in the last 12 months, aggregator was the main word or topic dojo, I think if you go forward, incubators is going to be a key word in the next 12 months.

Ryan Cramer: I had that same conversation with someone yesterday, I said, it only makes sense with the smart people in the space. There's some people that are just very talented, finding a niche, building something that's going to work and provide a good result, and then building it, and again, acquisition... It is crazy to think that within less than being successful than a year, some acquisitions are happening or even being talked about of a brand or a product opportunity, again, you might catch it before it takes off and all of a sudden becomes way... The profits, and you're not garnering and you're not capturing all of that. So, you want to catch it before it becomes really popular. So, it's finding that incubation space, I think would be really fascinating too. Is there anything else Emmett while I have you in the last couple of minutes or so of the podcast, what's kind of that, if you had to put on your fortune teller, again, no banker wants to say I'm a great fortune teller, but you follow the money. Following the money is in following data is something I always look by, so if you're following money, you're looking at some major raises, you're looking at some major companies, again, people have access to this capital it's just when they decide to execute it. You're going to follow the money and follow the trends into 2022. What are my three main takeaways from your report and from a brand I need to pay attention to as well?

Emmett Kilduff: Well, I think we will summarize them succinctly Ryan, in addition to our exit guide that we'll publish in January. So, we published sort of 70 page exit guide in June this year, and in the next iteration, we'll go into this in a bit more detail. But I think right now my thoughts would be, deal sizes are going to increase significantly. The aggregators are under serious pressure to deploy that capital, they can't do it at one million dollar acquisitions, it's just not scalable. So, we've seen a lot of aggregators have their minimum threshold revenue go from 1 million to three to 4 million, which means that a lot of smaller brands will have to wait longer to exit. So, that's point number one. I think valuations, there would be diversions of valuations. The really high quality brands will get valuations more towards six to 8X. But the brands that have struggled and gone towards 15% margins will stay in evaluations that we've seen this year, even probably two to four. So, there'll be a big divergence, that the really high quality brands will win out and get better valuations. And I think from an aggregation perspective, I think as we've touched on, some of these aggregators will go bust, so the brands need to be very careful that they've done due diligence on the aggregators that could ultimately own their baby, own their brand, and be responsible for giving them an earnout. And as a firm, that's very much plugged into the space where we're able to give advice to the starters as to who they should partner with. So, I think that will become more critical as we go into next year. Entrepreneurs get excited with LOIs, and actually in our survey, one of the things that shocked me, which I haven't mentioned Ryan was that 36% only received one LOI. And, that means a lot of entrepreneurs are going direct. That's crazy from an M& A perspective-

Ryan Cramer: As I was saying, that doesn't seem right.

Emmett Kilduff: That's not right. To get the best value deal, you need to run a proper formal auction process and have lots more people submit bids. But the devil's in the detail, so, you could have a small, new aggregator offer, higher sticker price, but of course their fair component might never come good because the aggregator might have gone bust. But the final thing I'd say is, the devils in the detail, will cost the terms anyway, no matter who it's from, don't always go for the highest price, it doesn't always mean it's the best deal for a whole variety of reasons. And, look, we're here to help at the Fortia Group, we love helping, make e- commerce entrepreneurs millionaires and move on to the next play.

Ryan Cramer: I was going to say, for you and the team there, what's the plan for going into... Obviously we're in the midst of the holidays, we have less than, what, we say 12 days until Christmas, what's the... You guys have had some exciting exits under your belt to help people facilitate. Like you said, I can't believe 30... You said 30... So, again, the statistic I heard is 36% are receiving one LOI, was that the statistic you said?

Emmett Kilduff: Correct. Yeah.

Ryan Cramer: Wow. Is that an education thing? Is that an education thing where all I hear is," Hey, come work with us, we're going to work with you, don't go through broker X, Y, Z.", is that an education thing or is that just ignorance is bliss?" I'm not aware of the situation they find me. We're going to walk through this process." and they handhold them through the process and they exit, they see the numbers and they're" Looks good to me."

Emmett Kilduff: Yeah, look, I think it's all of the above. I mean, if you're a big company in the States selling on wall street, you hired advisor and you run a competitive auction, that's happened for decades, 100 years that's been the process. And I think we need to educate Amazon entrepreneurs and e- commerce entrepreneurs that hiring advisor is not a bad thing, in fact, the stats show, there's a study by the university of Alabama which show that if you hire a good advisor they can get up to 25% more evaluation. Another stuff that shocked me Ryan was that 43% didn't have a lawyer review the LOI, let alone a corporate finance firm or an advisor. So, that's crazy, this is your big payday, you should be planning it really far ahead and do it right. As we look to next year, what really like to me is, we have a lot of mandates for exits in 2022, but also 2023, and we really like working with entrepreneurs really far out. I did the same with IPOs at Morgan Stanley. So, we build roadmaps to create as much shareholder value as possible over a sensible period of time. And so, I think... The listeners that want to exit in'22 or'23 should start preparing now, have a first conversation with that buyer, whether it's an aggregator or a private equity firm, and then sign an LOI in a few days time, that's crazy. That's not sensible, I don't understand it. And, yes, there lots of education to be needed, one should take their time, fail to prepare, prepare to fail.

Ryan Cramer: I love that. And of course, if people are curious and they want to learn more information, what's the best way to reach out with you or the team? How do they connect and engage with you if all this sounds amazing and they want to work with you or just learn more information?

Emmett Kilduff: Yeah, sure. So, please email exits @ thefortiagroup. com or email me direct at emmett. kilduff or Freddy @ thefortiagroup. com. Very happy to have an exploratory conversation about valuation with any of the brands or potential incubation machines that are looking to come to market next year.

Ryan Cramer: I love that there are people in the space that are seeing the ecosystem same way I am, so it's just a pat in my back that I'm not crazy and I'm not spewing nonsense out here on my podcast. No, that's fantastic. Emmett, thank you so much for hopping on today, I can't wait to see... You said more reports are coming, more data is coming, I'm assuming the team is going to be busier, a lot of events, and barring anything crazy happen in the world, which we've seen enough of that in the last two years or so, two years plus, we'll be seeing you on the road too. So, I can't wait to meet in person and go from there. But thank you so much for hopping on Crossover Commerce today.

Emmett Kilduff: Yeah. Ryan, thank you very much for having me. Really enjoyed it.

Ryan Cramer: Awesome. Thank you so much. And thank you ever again, everyone else who is hopping on Crossover Commerce and this is episode 197, which math serves me correctly, that's three away from our big 200 episode. Again, 200 episode planning to do on.... Let me throw up the graphic here if I can real quick. Also, new holiday edition, we're going to be doing 200, a holiday edition on December 20th, 2021. Still being planned, having lots of people... Sending invitations out shortly, it's like sending my Christmas cards to all my friends in the e- commerce space of who can attend my holiday party virtually, online in the podcast. We're going to have a lot of big things coming up, but tomorrow I'm really excited to talk about a little more marketing, we're going to ship back to the marketing side of things. I'm excited to bring on Gracie, inaudible. She is actually a big influencer in influencer marketing TikTok and Amazon live. Again, a lot of trends that brands are not just tapping into or haven't tapped into yet that are helping fuel their growth and moving forward. So, we're going to be talking about a lot of the things that she's seeing on the influencer marketing side, helping brands launch products, helping them grow business and driving revenue. That being said, I'm Ryan Cramer, this is Crossover Commerce, My Corner of the Internet, we're bringing the best and brightest in Amazon and e- commerce space. We'll catch you guys next up. Take care.

DESCRIPTION

Ryan Cramer of Crossover Commerce talks with Emmett Kilduff of The Fortia Group one on one as they discuss reviewing acquisition trends in 2021 & what the outlook can look like in 2022.

---

Crossover Commerce is presented by PingPong Payments. PingPong transfers more than 150 million dollars a day for eCommerce sellers just like you. Helping over 1 million customers now, PingPong has processed over 90 BILLION dollars in cross-border payments. Save with a PingPong account today!

---

Stay connected with Crossover Commerce and PingPong Payments:

✅ Crossover Commerce @ https://www.facebook.com/CrossoverCommerce

✅ YouTube @ https://www.youtube.com/c/PingPongPayments

✅ LinkedIn @ https://www.linkedin.com/company/pingpongglobal/

---

You can watch or listen to all episodes of Crossover Commerce at: https://usa.pingpongx.com/podcast

Today's Host

Guest Thumbnail

🎙 Ryan Cramer - Host

|Partnership & Influencer Marketing Manager

Today's Guests

Guest Thumbnail

Emmett Kilduff

|Co-Founder and CEO of The Fortia Group