Green Exit-Lights Ahead: Financial Preparation Meets Market Opportunity

Key takeaways for ecommerce brands:

1) After years of dwindling investor interest, the DTC space is expecting an M&A rebound in 2025. This revival comes with a shift in expectations – instead of seeking unicorn valuations, buyers and sellers are focusing on $100-200 million exits.

2) During due diligence, potential buyers concentrate on revenue quality, cost analysis, inventory management, and profitability measures.

3) Success in the current market requires founders to be opportunistic and thoroughly prepared. This means having all financial documentation ready before market windows open, understanding current valuation multiples, and being realistic about exit expectations.

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It's been a rough couple of years for founders looking for an exit. Celebrated for yielding higher  and deeper engagement with consumers during the 2010s, DTC brands have fallen out of grace with potential buyers and investors. In the U.S., for example, companies at the intersection of ecommerce and consumer products saw a 97% drop in funding between 2021 and 2023.

Even in thriving verticals like beauty, the narrative has been that consumer brands haven’t lived up to their valuation, persuading most buyers to remain cautious – particularly when it comes to brands without long track records.

Despite this backdrop, the DTC space is expecting an M&A rebound in 2025. The general consensus is that an improved economic environment should result in more players looking to make deals with DTC brands. Per Patrick O’Quinn, managing partner at investment banking platform Axcel, there has been “general confidence on both the brand side and the investor side. I see a movement towards much more M&A in the back half of ’25 and beyond.”

From Unicorns to Reality: The Pragmatic Path to DTC Exits 

On the founders' side, that confidence stems first and foremost from pragmatism. “They’re saying, ‘Look, we’re ready to move on – we’ve had a number of conversations with prospective acquirers,’" shared O’Quinn, “‘We know what the market is going to tell us.’”

What's certain is that – unlike the previous DTC boom – the market is not focused on finding the next unicorn. In the 2010s, noted Chip Longenecker, a serial ecommerce entrepreneur and founder of Tonic Ventures, a fund that invests in consumer brands, “there was only sort of binary outcomes – either we become a billion-dollar business, or we totally implode.” The focus now, he said, is on $100 million or $200 million exits. 

As prospective sellers gauge the market and valuation dynamics, one thing is clear: in the current climate, DTC exits require founders to be extremely opportunistic. “One of the pieces of advice that I regularly give my clients,” said Kenny Kraft, managing director of Houlihan Lokey, an independent investment bank, “is to be mindful of market windows and be ready to seek them out when you find a cooperative window.”

The Due Diligence Checklist: The Financial Metrics That Make or Break Your Sale

Being ready means, among other things, getting your financial ducks in a row. Pulling sales reports from Shopify won’t cut it. At a minimum, here is what potential buyers will want to see in any due diligence process:

• An ecommerce-tailored profit & loss statement (P&L) for the last 3 years
• An ecommerce-tailored balance sheet for the past 3 years
• A 12-week rolling cash flow forecast 

In addition, here are the main aspects buyers will assess when reviewing your financials:‍

1) Revenue

Make sure you have this data readily available:

• ‍All sales data
• Pricing models
• Customer retention rates
• Revenue growth over time

In deals with ecommerce brands, buyers typically perform a risk evaluation focusing on the composition and concentration of your revenue. For example, if more than 10% of your revenue is coming from a single wholesale customer, the buyer may want to delve deeper into the relationship's history to fully assess any potential risk, so make sure you have all of the relevant background information prepared.

Other revenue-related KPIs buyers will want to see include:

• Low CAC (Customer Acquisition Cost)

Low CAC indicates your ability to acquire customers efficiently and effectively – usually a sign of a strong competitive position in the market, along with a low CAC payback period. 

• High Customer LTV (Lifetime Value) 

Customer LTV is the amount of revenue a customer will generate throughout their relationship with your brand. A high LTV indicates that you’re able to successfully retain customers. The best benchmark to focus on is your LTV:CAC ratio, which shows how much you spend to get the customer compared to what you make from the customer. Aim for a ratio of at least 3:1. 

• High AOV (Average Order Value) 

‍AOV gives potential buyers insights into your customers’ purchasing power and enables them to evaluate opportunities for growth from existing customers. If the AOV is too low, it just won’t work due to the increasing CAC costs.

2) Cost Analysis, Refunds and Chargebacks‍

Buyers will want to understand granular details of your expenses - how much are you spending on COGS, what’s your contribution margin, and what’s your ad spend. Additionally, buyers will also look carefully at refunds and chargebacks to assess quality issues within the brand.

3) Inventory‍

When buying your brand, buyers are also purchasing your inventory. Here is what they will want to know: 

• ‍How many months worth of inventory do you have on hand for each SKU?
• How much will it cost to order new inventory?
• Where are your suppliers located and what is the shipping process? In case of supply chain issues, is there a plan B?
• How is inventory fulfilled: using a 3PL or FBA? Are there more efficient ways to do this?

Also, be prepared to answer any questions on product concentration, which will help the buyer understand both inventory and pricing risks. For example, if there is a high concentration of a single item, it shows how much your revenue is dependent on the particular item as well as on the supplier of that item.

4) Calculate your SDE (Seller's Discretionary Earnings)‍

Potential buyers will often use SDE in the valuation of smaller businesses (often if they are less than $5 million in revenue) they are looking to buy, as it is extremely helpful in understanding the recurring cash flow.

Larger businesses primarily use EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization) instead of SDE.‍ EBITDA and SDE are similar concepts. The main difference is that to calculate SDE, you also need to add back, amongst other items, the owner's compensation. In smaller businesses, owners may take money from the business in different ways. While one owner may take a salary throughout the year, another may withdraw everything left in the company's account at year-end.

As a business owner, you’ll want your SDE to be as high as possible, since the value of your business will often be based on a multiple of SDEs. ‍For example, if your SDE is $300,000 and you receive an SDE multiple of 2.5x, then the business would have an implied value of $750,000 ($300,000 times 2.5x). For smaller ecommerce brands, the average SDE multiple has recently been between 2.0x and 4.0x.

Calculating the SDE includes adjusting the net profit for certain expenses, including discretionary expenses, in order to find the real recurring profit of the business. 

New Horizons: Seizing Tomorrow's Opportunities

The DTC landscape has been through a turbulent period, with dwindling investor interest and a sharp drop in funding painting a grim picture for founders seeking exits. However, the tide is beginning to turn. As economic conditions will hopefully improve (and interest will finally come down), industry leaders anticipate a resurgence in M&A activity for DTC brands, particularly for those aiming for realistic, mid-range exits rather than unicorn valuations.

This shift presents a renewed opportunity for brand owners to capitalize on their efforts. And preparation, especially on the ecommerce financial statements front, is key. Today's buyers expect comprehensive ecommerce financial statements, from detailed P&Ls to granular metrics like CAC and LTV ratios. For founders looking to position themselves for a successful exit, investing in modern ecommerce accounting software isn't just about maintaining accurate books – it's about being ready to seize opportunities when market conditions align.