Why is now a worse time to sell your brand?
Lets make private equity public, a newsletter that doesnt mention AI
Ecom exits peaked in 2021.
Why is that?
Lets explain investment vehicles using something everyone understands- Real Estate.
Because even the dumbest person can make it in real estate ;)
Private Markets as Real Estate Players
Just bare with me, it makes sense
Single family home buyers = Long term index fund holder
Your house isnt an investment right? You need to live somewhere
But you dont want to waste money on rent, you want to build equity
This is the same as a market investor
You are investing dollars in the sp500 to beat inflation
This is the final buyer of most assets
Land Speculators = VCs
Who is buying up land in west texas, 500 miles from the nearest water source? Its VCs
They are trying to strike oil, gold, whatever
They have their methods, but it is basically educated guessing
House flippers = Private Equity
You buy a dump, slap a coat of paint on it, and bam double your money
Thats the PE dream
Come in, do minimal work, minimize the holding time, sell it to some sucker
Grouchy old couple living in a paid off house from the 70s = You and Your brand
Who do you want to sell too?
VCs arent interested unless you might be sitting on an oil field
Single family buyers are picky and you need to cross off their must have list
The house flipper is sitting there, waiting for the chance to buy
They will knock the walls down and they will underpay you
But their money is green
Brands have 3 main exit strategies.
Private equity
The vast majority of exits happen here
I would guess 70%
Public Markets
Going public allows normal people and more serious institutions to buy shares of your company
Strategic acquisitions
Being bought by a bigger brand doing something similar to you
Typically they are public, so they have access to debt to finance the transition
In 2020 and 2021 Ecom was seen as a highlight in an otherwise shitty time.
On top of that, we reached the peak of a ten year cycle.
The moons aligned on ecom in a way it hasnt ever before.
People had to shop online.
Everyone from retail traders to hedge funds were franticly trying to get into ecom.
Free money made debt cheap and valuations high.
Think about it like in monopoly.
The cheapest property is $60 bucks.
But what if halfway through the game everyone got 10x their cash position?
Still only a finite amount of properties, but now everyone is way richer.
The value of that property goes up in proportion to the increase in capital.
They didnt print new properties, they only printed more money.
This is the ecom bubble.
So in 2022
Public markets have soured on ecom brands
Because the ones that went public were more hype than real business
Public markets want to see profit and the ones that crossed the finish line were running on fumes and debt
Strategics move at their own pace
And as a basic rule, they cant pay a higher multiple than they trade at
It happens, but very rare
This means if Yeti is trading at 20 Price to Earnings ratio, it isnt buying you for 30
Plus, they buy what they want on their timeline
These plans are often in the works for 2+ years
That leaves private equity
They are designed to pay less than what your business is worth
This isnt a knock on them, but just the way they function
House flippers arent buying the new construction homes
They arent the final buyer, they are Shepards to the public market or a strategic
Because of that, they will pay less than whatever the public markets trade at
Multiples
Small ecom brands used to trade at 2-4x earnings.
That pushed as high as 8x during the bubble.
When you hit 8 figures a year in earnings, you get a kicker on your multiple, typically 2x.
So that means a rather large ecom brand could get 16x earnings in 2021.
This is just a guide- subscription, CPG, and beauty all get an additional kicker of 1.5-2x.
Now?
A great brand with 8 figures in EBITDA is probably getting 8x, not the 16x it would a year ago.
So why sell?
Some people need to sell.
Everything above was about healthy brands, but the fact is there are a lot of unhealthy brands.
House flippers love a good foreclosure, and thats the bankruptcy market.
More and more brands are heading to bankruptcy.
As good as BFCM was, it wasnt enough to pull a lot of these brands out of the water.
Too much inventory, too much debt, and the inability to get more debt is a storm that sinks ships.
Private equity will be there to pull a few out of the water and into life rafts.
But it will be painful for everyone involved.
People will get wet.
2022/2023 is all about opportunistic acquisitions.
Its actually a return to form for most PE groups.
This is where they like to play.
Ridge’s POV-
We almost sold in 2021.
The stars aligned and we were offered enough money to where I could live out my days as a batman villain.
But that deal fell apart.
The cracks in the public market started to show and the buyer couldnt get the money.
But- we dont really want to sell.
Unless you have too, right now is a pretty shitty time to do any sort of transaction.
Ridge puts up 8 figures a year in EBITDA.
We have a great team who loves building.
I get to do whatever I want to grow this brand every day.
As much fun as it would be to dress like the penguin and terrorize a city, I am living the dream.
Ridge will cross 9 figures in EBITDA by 2026.
No debt, no banks, no investors.
Why sell your dream to a house flipper?