As a mergers and acquisitions firm for the internet, software and technology sectors for the past twelve years, iMerge has witnessed many changes.

One in particular is the continued battle against net profit margin erosion for those in the B2C etail product space.  In the early 2000′s an e-commerce business selling electronics could easily squeak out net profit margins in the low double digits while others outside of the electronics space saw even greater net profit margin percentages. Today, those numbers are unique feats to achieve.  With the rare exception, when reviewing the P&Ls for product (vs service) based e-commerce businesses we see a continuous slow decline in the net profit margin percentages.  Some of these businesses maybe going gangbusters with excellent year over year growth in both gross sales and EBITDA (earnings before interest, taxes, depreciation and amortization).

Why would e-commerce business valuation multiples decline for these businesses?

Even though the gross sales and net profits for our example are increasing each year the net profit margin percentage is eroding.  In addition, the gross profit margin is likely eroding as well.  An ecommerce business owner maybe getting better pricing from vendors as volume increases but the economy and price competition forces him/her to keep prices low.  Just this week JC Penney announced they would permanently lower all product prices by 40%.  Also, do not forget competition from free shipping, even for returns in some cases.

Speaking of competition etail businesses are getting it from both sides.  On one side low entry barriers enable a constant barrage of competitors.  On the other side are the behemoths such as Amazon, who coincidentally is also experiencing erosion in its net margin percentages.  The Amazon model is being or will be adopted by others such as Walmart, Sears, JC Penney.  BestBuy will allow others to sell electronics, in exchange for an affiliate fee, on their website.  In the brick and mortar world as Walmart did to Main Street, Amazon, Wayfair (formerly CSN Stores) and others are doing to “Cyber Street”.  Take a walk down this virtual Cyber Street and you will see all the major chains on both sides with their SEO ranked signs pitching products in the windows.  The only way the little guy will be able to survive is to sell products from within these major chains at much smaller profit margins.

In a battle to survive the economic throes of the Great Recession, ecomm business owners cut costs in all the same areas.  Those with excessive amounts of debt are no longer with us.  The remaining others are battling it out on a relatively flat playing field trying to find the edge in SEO, improved conversions, continued expense reduction, better inventory management and technology enhancements.

Mergers and Acquisitions Increase To Get Closer To The Manufacturer

In the continued pursuit to gain any edge, iMerge expects to see a growing trend in the acquisition of specific distributors by those who are experts in owning and operating ecommerce businesses.  By acquiring distributorships who carry products that are or would sell well online, these buyers can use their expertise to blow out the often weak internet sales channel while taking advantage of higher margins.  In addition they can provide a value added service to all of its B2B online customers to improve their own sales.  Distributorships concern of their online B2B customers leaving because they become a competitor is long diminished.  In the fog of the Internet, online B2C business owners predominantly focus internally on what he/she can control to gain some level of expected profit on each sale.  The fact his/her distributors are competitors is not relevant.  That is until its realized it might be advantageous to own them.

To learn more about iMerge please do not hesitate to contact us.

According to just released numbers from Dealogic the total dollar value of corporate mergers and acquisitions for 2011 has reached $2.7 trillion, about even with 2010′s $2.74 trillion in closed m&A activity.

Considering 2010 was viewed as a road to recovery from the doldrums of 2009, coming up short in 2011 is problematic.

What happened?  Europe is to blame.  The continuous uncertainty within the Eurozone has many investors taking a wait and see approach in the hopes of gaining some clarity.

However, in the face of a pending tax squeeze coming to US business owners in 2013, we anticipate 2012 to be a more robust year as those giving thought to exiting pull the trigger.

To learn more about upcoming tax changes please do not hesitate to contact us.

According to Thomson Reuters investment banking fees ending September 2011 for the quarter were $16.2 billion the lowest level since the doldrums of  the financial crisis in 2009.  Total fees collected dropped  by 36% in the third quarter, amid global economic uncertainty. Mergers and acquisitions, are down 23%.  Worse fees collected  from equity and debt capital raising services skidded by a whopping  55% and 46% respectively.

“Volumes of global M&A activity dropped almost 20% in August compared to July…” Dirk Pahlke, responsible for Rothschild’s German M&A advisory told Dow Jones Newswires, saying current market conditions point to subdued activity in coming months.  via M&A activity seen subdued till year-end – MarketWatch.

Merger-and-acquisition activity involving venture-backed Massachusetts companies is down 15 percent so far this year compared to 2010, according to data from Dow Jones VentureSource. via Venture-backed M&A activity down 15% in Mass. – Boston Business Journal.

According to global deal tracking firm Dealogic, the value of third quarter M&A deals stood at just US$633.3 billion, down 19 per cent compared to US$783.5 billion in the corresponding period last year, which is also the lowest quarterly total since the second quarter of 2010.  via Global M&A deals in Q3 down 19%.

A more rudimentary measure, but indicative of the declining trend, is the review of press releases and completed transactions found on dozens of m&a firm’s websites clearly showing twenty to fifty percent declines in mergers and acquisitions in 2011 when compared to 2010.

At the macro level its difficult to spin any report in a positive manner.  Lurking just beneath the surface lies numerous festering wounds that need attention.  European countries and its banks are in a real tight spot and without the aid of more bailouts, a moral hazard few will continue to tolerate, defaults are likely.  In this country Bank of America finally admitted with its acceptance of a very expensive $5 billion from Mr. Buffet that it is broke.  They continue to raise capital they claim was not needed by selling off assets.  Not helping is the continued decline of real estate and the lack of any activity even at these ultra low interest rates.  Throw in some very poor consumer confidence ,  a negative GDP when using the CPI number (revised GDP less CPI= Negative) and stagnant unemployment it has all the signs of a recession.

Buyers these days are like those participants on Hillbilly Handfishin who are squeamishly treading murky waters while being asked to stick their hands in some hole hoping its not going to hurt when its chewed off.  Most buyers simply won’t participate.  Those that remain in the water are going to seek further relief from the risk they are taking.  Therefore,  how to value a company in these uncertain times requires an understanding of the various methods listed below.  If you would like to learn more in depth about each method and how we may value your internet, software, SaaS, cloud or technology company, please complete the short form below.

How to Value A Company

• Basic Methodology
• Company Valuation Using Rule of Thumb Methodology
• Analysis of Capitalized Earnings
• Analysis of Excess Earnings Methodology
• Analysis of Cash Flow Methodology
• Analysis of Balance Sheet & Tangible Assets Listed Methodology
• Build vs Buy Approach
• Analysis of Intangible Assets Methodology

Your M&A advisor has successfully negotiated the final details of your merger and acquisition term sheet including how the deal will be allocated for tax purposes.  Closing is set to take place in four weeks, no problem you say, its just a matter of transferring the agreed upon terms to the legal docs, right?  Wrong, poorly managed this phase can become rife with delays.  M&A deals are cyclical in nature and one or both attorneys may be buried with other deals with everybody fighting to get their folder to the top of the pile.  In addition, left to their own devices lawyers will clearly show the value they bring to the table and the next thing you know there are a few dozen more issues to negotiate.  The delays pile on as the lawyers work to remove all the pretty colors from the “track changes” that riddle the closing documents.  Its inevitable the blame game starts, its the seller’s or buyer’s attorney’s fault, or perhaps the clients themselves are not responding to inquiries from their attorney.  Perhaps the m&a advisor took his/her eye off the ball and caused delays.

The reality is the majority of delays result from lawyers doing their jobs in m&a transactions and making sure that the client is getting the proper advice.  However, personalities get in the way and clashes of unmanaged one up-man-ship lead to arguments over whether a comma is necessary.

Recognize that it is easy to sit behind a desk, phone and computer and both be miles apart literally and figuratively on the legal docs.  At iMerge, our m&a advisors, while often times facing resistance, insist on either virtual real time usage of secure data rooms with all parties communicating in marathon sessions to see and implement the finalization of the legal docs or the alternative being face to face locked in a conference room. Face to face meetings on neutral turf in which the parties cannot “hide” tend to be more effective although they come with additional expenses and delays trying to get everybody’s calendar in sync to travel, the “lets get er done” mentality is more robust.  Its amazing what terrible coffee in a dull conference room on the coldest day of the year in Minneapolis can accomplish.

So make sure the attorneys do not have free reign of the place, better yet work with a highly experienced , like Seattle Washington based m&a advisor firm, iMerge Advisors, that will strive to make the process proceed smoothly.

Entering a Google search to help determine what the value or worth of your blog or forum is leads you to many web based calculators. Most who enter the requested data into these value or worth calculators recognize its a gimmick designed to satisfy one’s curiosity.  Out of curiosity, using the  Huffington Post data the calculator returns a valuation of $64,551, 749 dollars, a far cry from the $315 million Arianna received from AOL.  AOL paid an extremely healthy 9x multiple of reported gross revenues of $35 million.  Perhaps this is the acquisition they get right?

Outside of the top 25 largest blogs or forums who may be lucky to benchmark their valuations based on the multiples paid for Huffington Post, the rest of the crowd will have to rely on the more mainstream multiples of EBITDA.

To learn more about current market conditions and to sell your blog or forum with expert guidance please do not hesitate to contact an m&a advisor at iMerge Advisors.

A review of closed transactions by iMerge Advisors, other firms and acquiring companies themselves helps establish benchmarks as to what blog and forum owners can expect for valuations multiples.  For example, the publicly traded company, Crowdgather (CRWG.ob) has acquired several forums of the past year and a half.  Recently, Crowdgather acquired PbNation.com for $3.2 million ($1.4 million cash 1.150 m shares of stock at .87 cents) along with an additional $800,000 if certain performance measures are met.  Further analysis of SEC filings indicates multiples paid of EBITDA range from as low as 2x to a high of 6x.  Its important to note that on average all deals included approximately 50% stock in CRWG as part of the terms of the transaction.

Recently a buyside client of iMerge Advisors entered into a definitive agreement to acquire a forum in the wedding vertical for a 3.67x EBITDA multiple.

Blog or Forum valuation multiples will be based primarily on earnings with added consideration for growth rates in revenues, traffic, members, activity levels and SEO rankings.

To speak with an M&A advisor about current market conditions and to sell your blog or forum with expert guidance please complete the form below.

For year to date 2011, within the Internet and application software industry, business valuation multiples remained steady. However, there was nearly a 50% decline in the number of announced transactions.  During the first six months of 2010 there were approximately 17 privately held completed deals within the Internet or application software industry versus 9 deals for the same time period in 2011.  In 2010 there were two transactions over $1 billion dollars;  Stone Point Capital and Hellman & Friedman’s acquisition of Sedgwick Claims Management Services at an estimated 2.0x multiple of gross revenues and Madison Dearborn Partners acquisition of 51% controlling interest of TransUnion for $1.02 billion dollars which equates to a 1.8x multiple of gross revenues.   For 2011 the largest announced deal appears to be KKR’s $425 million dollar deal for Ipreo.

February 2, 2011 – Lake Capital, the lead investor, acquires equity in Empower Software Solutions, reportedly for $140 million a 2.2x multiple of gross revenues

May 11, 2011 Arlington Capital Partners recapitalizes and acquires equity in Iron Data Solutions, reportedly for $130 million a 5.2x multiple of EBITDA

May 23, 2011 – Kohlberg, Kravis, Roberts (KKR) announced a definitive agreement to acquire Ipreo reportedly for $425 million a 12.1x multiple of EBITDA  or an estimated 1.5x multiple of gross revenues.

A review of the 47 announced transactions within the Internet software and application software sector for the past eighteen months establishes a range (per individual announced deal) of business valuation multiples from .06x on the low side to 9.3x of gross revenues on the high side with the majority of the deals falling within 1.8x to 3.4x multiple of gross revenues.

[Post: http://www.imergeadvisors.com/2011/06/internet-application-software-business-valuation-multiples]

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“If I sell my business today what kind of acquisition multiples would be paid?”  In one form or another this is a question our clients all have.  This article will breakdown the various acquisition multiples paid across a few of the more common technology sectors. For specifics please feel free to reach out to one of our advisors for a complimentary and confidential discussion about your business.

E-commerce business acquisition multiples of earnings (EBITDA)

3 x multiples of EBITDA for non-subscription  e-commerce sales vs 4-5 x multiples for subscription based

As the most common entity type on the internet, e-commerce businesses represent the highest volume of transactions.  To better narrow down valuations within this sector we need to further define and breakdown this vertical into two parts, one time sale vs subscriptions. For example lets look at two B2C eCommerce businesses that sell cheese, the cheese club of the month vs fine cheese selections.  For the sake of discussion, lets put aside that these two should be both, an online retail store that also has cheese club of the month program.  So why would higher acquisition multiples be paid for the cheese club of the month? Simply put, with all things equal including marketing spend rate, the cheese club of the month will be starting with a guaranteed amount of billable revenue on day 1 on the following month (less cancellations). Whereas the fine cheese selections website starts at $0 next month.  Sellers like to point out that based on last month’s revenue, expectations are highly relevant that the new months revenues will be around or above last month, fair enough statement.  Lets look at this from a different angle which is lifetime value of the customer.  With the cheese club of the month we know the average program rate for its 1000 customers is $29.00 per month with the average customer staying a member for 8.5 months, a lifetime value of ($29.00 x 8.5 = $246.50/each).  For the fine cheese selections store the average order is $59.00 with an expectation of 491 orders for the month ($29,000 in revenue).  We also know that on average 25% of customers  (5892 orders/yr * 25% = 1473) will place two more orders in the next 8.5 months ($59.00 x 3 x 1473/12 x 8.5= $184.68/each). Additionally if marketing and SEO were to be turned off the last day of the month, the fine cheese selections website would get about 122 repeat orders (following month) or $7198 in revenues  whereas the cheese club of the month would see renewal billings (assume 10% attrition) or $26,100 in revenues.  Therefore valuations paid on subscription models will likely be in the 2x gross revenues or 4-5 x EBITDA.  For the traditional product based e-commerce business multiples paid will be 3x EBITDA not including any inventory.

SaaS or cloud computing acquisition multiples of earnings

Like subscription sites, acquisitions multiples for SaaS or Cloud computing companies is based on a multiple of revenues.  There is a separate post on valuations paid in this sector and comparatives listed.  To learn more please browse over to that post.  If you would like to get into the specifics for your business and current market conditions please do not hesitate to contact us at iMerge Advisors.

[Post: http://www.imergeadvisors.com/2011/06/acquisition-multiples-paid-for-technology-internet-e-commerce-saas-businesses]