Private equity (PE) isn’t synonymous with moving fast and breaking things.
The ideology that drove the startup world to expand and iterate as quickly as possible never seemed to bleed into the world of PE. The upper echelons of investors have been able to take their time when deploying large amounts of capital as they see fit.
Until now that is.
A new asset class is emerging that demands speed, flexibility, and an unorthodox approach to entrenched investment thinking.
Online businesses are causing a stir in the PE world. The Internet age is demanding PE investors reevaluate how they invest in order to take advantage of the booming growth of digital assets.
Let’s take a peek into the shifting world of PE investment in online businesses and explore the appealing valuations of online businesses that compel the largest inventors to open their wallets.
Why PE is Noticing Online Business Assets
A great example is one of our customers, Thrasio. They’ve purchased multiple Amazon FBA businesses from our marketplace.
They also have the distinction of becoming the fastest company to reach unicorn status in US history, reaching their billion-dollar valuation in 18 months through smart, strategic Amazon FBA acquisitions. Setting that record, all through the power of online business acquisitions, broke any lingering notions in the investment world that online businesses shouldn’t be taken seriously.
Reaching profitable unicorn status solely by running businesses on Amazon’s platform has turned heads. Now companies are springing up across the globe, trying to replicate Thrasio’s success and ushering in a new digital gold rush.
PE investors have realized that online businesses are uncharted territory where the rules are still forming and returns on investment (ROIs) can reach high percentages unseen in other well-formed industries. By acting quickly, they could swoop in on valuable businesses before the wider investment world noticed to compete and raise prices. This is why we’ve seen a significant increase in small online business focused PE firms spring up and top investors like family offices begin to engage with our marketplace.
And the types of online businesses being acquired aren’t limited to a single marketplace. As long as the asset is entirely digital and operates online (i.e. has no physical storefront), it can be bought and sold on Empire Flippers. This includes but isn’t limited to Amazon FBA, monetized content sites that leverage affiliate marketing and display advertising, productized services, and SaaS.
However, it’s not just competition and unicorn valuations driving them to buy; online businesses tick important boxes for potential PE investors.
What Attracts PE to Online Businesses?
There are many nuanced reasons high-net-worth individuals and PE firms are coming to the online business space. That being said, they have only six major incentives:
Most investors head into an acquisition expecting reasonable ROI, which is usually far below a delusional 100%. Aiming that high would result in careless investing strategies.
In the online space, however, 100% ROI is both completely possible and not uncommon. For investors who buy an online business from us and return to sell the same asset, we’ve witnessed ROI as high as 1,164%.
As we found in our ROI data studies across FBA, content-based businesses, and lesser-known digital assets, most buyers were able to reap a full ROI in just a few years.
These kinds of returns are boundless in comparison to traditional business acquisitions, which is why PE investors have hungrily descended into the online business space.
While online assets are lucrative, they’ve not caught fire in the general investment world. They have yet to experience a valuation bubble while remaining competitive, if not affordable, from an investor perspective.
The multiples are reasonable for now, with the average business selling for 2.5–4 years of profit up front. Depending on the size of the business and its scale potential, this can be a steal of a buy for a PE firm with capital to deploy.
By buying now, before online business investing solidifies, PE investors reap this benefit of being first in line.
Rapid Growth of Online Business Industry
We’d back up our statements with some empirical data, but the lack of any meaningful metrics show just how early days it is for PE’s engagement in our space.
One thing’s for sure, though: the Internet powers almost everything, so it makes sense that the lion’s share of commerce is heading online. It makes more sense for PE to buy into the online industry while doing so is still timely.
Now that markets are reeling and the world is adjusting to COVID-19, online business has become more important than ever. Online transactions have seen a growth rate in the past three months similar to what was experienced over the past 10 years. As people become accustomed to purchasing online, online businesses are ahead of the pack, already comfortable and equipped to deliver online goods and services.
Coronavirus has forced a global shift in a number of ways, including PE’s inability to ignore online commerce.
As demonstrated by companies like Thrasio, digging into one monetization form and building a portfolio of similarly structured businesses helps to realize economies of scale.
Rarely in the brick and mortar world can you get two businesses so closely matched in terms of operations. Online assets can give just that: operational structures that can be replicated almost verbatim across a portfolio. When a methodology or strategy works for one business, it’s likely it can work for similar businesses in the portfolio with minimal effort. That unique ability allows portfolios to scale much faster and smoother than other traditional business acquisitions.
Smart scaling isn’t limited to one monetization form either. The beauty of online assets is that they can be mixed and matched. For example, a portfolio can gain synergy by matching an Amazon FBA business with a monetized content-based business. A single large online asset can be a portfolio’s flagship while smaller businesses support seasonal earning fluctuations.
Any of these methods can allow a portfolio to take off at record speeds, without being slowed down by the typical five-year ownership and exit structure PE has used to build and time their portfolios over the past decades.
Flexible Deal Structures
The relative freshness of online businesses means there is greater flexibility in how deals are structured.
Most PE investors making digital asset acquisitions utilize earn-outs to stretch their capital and incentive sellers to performance pay down the road. They also take advantage of bolt-on acquisitions and execute their own roll-ups.
With no overarching formalities around how deals should be structured, they are open to creating deal structures that suit them best.
Affordable Buy in Levels
To get a foot in the door with trending business models, like SaaS, a typical PE investor would have to approach Silicon Valley startups and be ready to shell out millions.
But in the online space, the bar to get started in SaaS is lower, allowing investors to start in the low six-figures or even five figures.
As SaaS comes into higher demand and more people realize how scalable SaaS assets are, getting into SaaS will become more difficult and expensive at the elite level. Smaller SaaS companies have the same scale potential and are easy to acquire from marketplaces, allowing more investors to enter the SaaS market without a multi-million dollar commitment.
With the right acquisition, a PE group could develop a seven- or eight-figure SaaS business themselves, creating their own golden ticket without a hefty upfront investment.
How to Gain a Higher Valuation and Sell to PE
With all the buzz around PE buyers, you may be reading this and wonder how entrepreneurs can cash in on such interest.
To start, your business would need a valuation, which is easy to pick up via a quick valuation tool.
In the case of our marketplace, valuations are broken down like so: Monthly Net Profit x Multiple = Valuation.
Since our valuations are broken down by monthly net profit, the average multiple looks higher than other businesses valued on yearly profit. The average multiple online businesses sold for was 27.8x in 2019.
To gain a larger multiple, an entrepreneur can do a number of things to start: balancing their profit and loss (P&L) statement; hiring a team so they spend less time running their business; and ensuring operations are as efficient as possible prior to sale. One of the single most useful things a seller can do is to work with a broker who can give them a fair valuation and use a marketplace to attract many buyers.
If you wanted to buy into PE instruments, your options are limited as far as online businesses go. Existing PE groups, outside of Thrasio, are a collection of individuals who joined forces to form portfolios. However, these groups are exclusive and not open to the public.
In the case of wanting to sell directly to PE, working with a broker means the PE buyer connections are already established. It’s one of the fastest ways to get a foot in the door with PE, as they are quickly deploying capital in online assets. Additionally, the broker mediates negotiations, ensuring both sides are getting the most out of the deal and that the deal can be closed quickly.
Together, PE and Online Assets are the Future
Now that we’ve painted a picture of the rapid changes PE is bringing to online assets, it seems we’ve reached a point of no return.
PE has discovered they can make lucrative investments unparalleled by traditional brick and mortar acquisitions, while the online business space surges forward to dominate commerce.
Whether you’re a PE buyer or an online entrepreneur, now is the time to take notice of the massive shift and, better yet, capitalize on the changes in your own investment strategy.
Author: Sarah Nuttycombe
Sarah is a Content Specialist as part of the Empire Flippers Marketing Team. Before joining Empire Flippers she spent five years as an editor and producer for documentary films, working on shoots around the US, Europe, Australia, and Asia. Over the years she has bounced between her native Richmond, VA and 30+ countries for work and personal travel. Sarah is passionate about the digital nomad lifestyle so you’ll likely never find her in one place for too long.