Technically the value of a business is equal to the sum of its future cash flows. Since the future is unknown, we have to estimate what the future will look like for a given business.

For DTC brands the most important factors that help buyers decide what the future is likely to look like, and therefore how much the business is worth today, are:

• Scale (net revenue)

• Profitability

• Growth rate

• Intellectual property

• Defensibility from competition

• Brand equity

• Market dynamics in the product category

• Systems, processes and people

Scale

Larger businesses are worth more, for a number of reasons. Larger size is typically associated with greater market share, stronger defensibility from competition, more well-developed systems, processes and management, and greater brand equity. From the buyer’s perspective, the acquisition has to be large enough to be worth their time and effort, both on the due diligence processes involved in acquiring it and the extensive work involved in integrating the business post-acquisition. Larger businesses meet the minimum size threshold of a greater number of serious buyers, and by their nature are more rare, so competition for them is fiercer.

Profitability

Stronger margins are more attractive than weaker margins. Since achieving (and maintaining) strong margins is difficult in a free market, those businesses that are able to do this are rare and valuable. DTC investors were willing to overlook profitability in favour of rapid growth in the early part of this decade (and in rare cases they still are), but the overwhelming trend is for both investors and acquirers to value profitability much more highly now.

Note that in consumer products, brand equity is still arguably the most important factor. Large brands with outstanding brand equity can achieve good exits prior to reaching profitability. But this is exceedingly rare. Profit is king for most buyers and in most deals.

Growth Rate

Growth momentum is taken as an indicator as to the future growth trajectory of the business. In simple terms, acquiring a business on a steady growth trajectory is a much more attractive opportunity than acquiring one that is in decline, since for the latter business the future looks worse than the past, unless something changes.

The combination of solid growth and strong profitability is rare, since most of the levers available to achieve growth cost money (thereby lowering profitability). So those brands who manage to achieve both, and can feasibly continue this into the future, are highly valuable.

Intellectual Property

Compared to other sectors like technology, intellectual property does not play as key a role in valuations in the consumer product sector. However, where it is present, it is valuable.

All brands should own their trademarks. In the case of consumables (food & beverage, fragrances, cleaning products for example), unique product formulations add significant value.

In hard goods, utility patents that protect the defining feature of the product are valuable, but generally quite rare. Even when present, operators must contend with the fact that intellectual property is not respected in the same way in the Far East and must be prepared to compete with copycats.

Defensibility from Competition

With or without a great deal of intellectual property, buyers will assess the potential for competitors to enter and take market share from the brand. Many factors contribute to this, including the supply chain, product complexity, regulatory barriers, brand equity (see below) and market dynamics.

Brand Equity

Brand equity is one of the most important assets to the buyer in a CPG brand acquisition, yet it is the hardest to define. One way to think about brand equity is the additional value captured from consumers in excess of the value from tangible product benefits. In other words, “how much more a consumer will pay for your product compared to an exactly equivalent one without your brand”, multiplied by the scale you’ve achieved.

In product categories where IP is usually minimal (apparel for example), the main defensibility for the business is its brand. This can be incredibly valuable.

All DTC and retail businesses must pay a great deal of attention to their brand. Even those with extensive IP will find that without a strong brand that resonates with consumers, their sales will be muted.

Market Dynamics in the Product Category

E-commerce is, by its nature, competitive and rapidly evolving. The same factors that enable founders to profitably grow a DTC business from zero to $100m in 3 years in this sector, also enable the rapid rise of competitors. Some categories, such as certain subcategories within consumer electronics and toys, are known to be particularly susceptible to competition. Each category has its own market dynamics, which buyers seek to understand in depth before making an acquisition.

In many cases the product category itself can be growing rapidly, creating a “rising tide” that lifts all boats. Here buyers must discern whether the new trend is here to stay – in which case the winners will be immensely valuable over the long term – or a fad, in which case the popularity of the category and the brands within it will fall as quickly as they rose.

Systems, Processes and People

One of the “miracles” of e-commerce is the fact that founders can build substantial businesses with very small teams. When it comes to selling the business though, a small team is a weakness rather than a strength. Buyers need to have confidence that the business will continue to perform equally well post-acquisition, so those businesses that demonstrate robust systems, strong teams and (for larger acquisitions) a professional management layer below the founders, are more valuable.

Many systems are necessary but one to consider in particular is the new product development (NPD) pipeline and the systems for bringing successful products to market. Since new product development is a central part of a DTC & retail brand’s growth strategy, it is an important component of the valuation. The larger the business, the more sophisticated and well-developed this should be.

Other Factors

Many other elements play into the valuation of an e-commerce business. Customer acquisition and performance metrics (CAC, LTV, AOV, MER and many others) are important, but ultimately these are merely factors that contribute to the growth and profitability of the business as described above. Supply chain factors, distribution, manufacturing, sales channels and many other elements all contribute to the valuation of the business. But the key factors described above are the most important.

Investment banks like Hahnbeck use sophisticated models that incorporate hundreds of data points in order to calculate accurate business valuations for their clients. Our instant valuation calculator above incorporates the 10-20 most important valuation components, making it very useful as a quick, accurate guide to the valuation of an e-commerce brand.

A Note About Amazon FBA Brands

The well-publicised fall from grace of the Amazon “aggregator” sector has had an impact on the valuations of Amazon-centric brands. Without the Amazon aggregators to acquire these brands, founders must rely on all of the other potential buyers in the DTC and CPG space when they are looking for an exit.

Most acquirers and investors in the consumer products sector see Amazon and other marketplaces merely as channels rather than as self-sustaining business models in their own right, so success on one of these platforms alone is not enough evidence that the business will continue to be successful in the long-term. These brands must be able to transition outside of the platform and demonstrate success off-Amazon.

A number of outstanding success stories started on Amazon first: think Hero Cosmetics, for example. But in order to achieve scale, and to be valuable and saleable from an M&A perspective, they needed to become multichannel. The retail channel in particular is highly valuable. Amazon brands that can demonstrate success, and profitability, off-Amazon and grow these non-marketplace channels to >50% of sales will have real value. Amazon brands who cannot do this will generally struggle to find buyers. Amazon brand owners should use our valuation calculator above, for insight into the current value of their business and their options.