Buyer Demand Skyrockets in 2022. Demand & Supply Likely to Increase in 2023.
There’s an overwhelming sentiment that tech is in trouble. Not only will this pass and valuations settle but this catch all assessment is actually less suitable in the world of main street and low to mid 8-figure deal sizes.
In this report, we break down buy-side demand for 2022 in what may become the most turbulent economic period in over a decade.
The US and Europe are facing rapid inflation rates with the UK recording a 41 year high according to Deloitte Insights. High inflation can be attributed in part to supply chain issues, steady demand, and energy uncertainty. This has led to countries increasing interest rates in an attempt to cut spending. In the US, the Federal Reserve is relying on a decline in consumer spending as it seeks to slow the economy sufficiently, however this has not yet transpired. Specifically, retail sales were up 1.3% from the previous month and up 8.3% from a year earlier. This implies that the tightening has not yet worked and is likely to lead to further increase in interest rates in 2023.
What happens next? At least as it relates to online business transactions and specifically the Flippa ecosystem, the mass uncertainty is not impacting demand.
Not only has there been growth in demand across all buyer types but we have seen very well capitalized strategic buyers and established operators enter the space in record numbers. Our relationship management team is reporting high confidence as this cohort moves downmarket where valuations are more stable. To put it simply, acquisition activity is likely to grow faster when alternative pathways to growth are increasing in cost.
Deal making still looks inexpensive, with many buyers recording 25-50% annualized returns. This should translate to strong results for online business owners looking for an exit. Those with consistently good performance will be rewarded with good multiples and in the face of the most challenging economic circumstances we expect the market for online business M&A to flourish.
As we’ll point out when reviewing transaction data, valuations have never been overly high in main street and lower middle market sized digital assets and we don’t expect this to change. With transactions in our assessment ranging between $50,000 & $50 Million, these businesses are not positioned like aspiring unicorn pitch decks, rather they are legitimate businesses with loving customer bases and we think this trends toward a faster growing market rather than a slow-down. Buyers will move to more predictable and less speculative asset types and this will lead to sophisticated buyers like family offices and private equity moving downstream as they hunt for bolt on opportunities.
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#1 The Americans Lead the Way
While the market for digital assets is global, the American buyer dwarfs all others. For context, Flippa is headquartered in Australia with a globally distributed staff base. We are heavily dependent on organic and word of mouth referrals so there isn’t really a marketing bias toward one market vs. another. Despite that, US acquisition intent was literally 5x that of the next five largest markets (Pakistan, United Kingdom, India, Canada and Australia).
Chart 1 shows Search by Country in 2022. We’ve taken 50 weeks of search data and segmented it by user location to show the Top 20 markets.
One thing to logically conclude is that US centric businesses will find an exit pathway easier. While buyers and investors will certainly look at globally centered digital assets, we still have 5x the number of US to US transactions than we do US to Rest of World.
#2 Shopify Leading the Pack BUT Content is (Still) King
Flippa recorded a massive 4.6MM queries this year and Shopify based Ecommerce businesses dominated buyer demand in 2022 with 3.6% of all queries. This equated to 19 searches per hour and a total of 169,000 queries. Ecommerce as a business model is highest on the list for both professional acquirers and first-time buyers and Shopify’s place at the top of the list is no doubt a function of the platform’s extraordinary brand awareness and huge variety of stores available across all acquisition budgets. Interestingly, there was a peak in search volume with the closure of Shopify’s Flippa clone, Exchange Marketplace.
Rounding out the top 5 search terms and way out in front of the rest were Blog, Amazon, Adsense, and SaaS. Given the relationship between Blog, Adsense and other content related queries, content dependent assets are still attracting enormous buy-side attention with ~300,000 unique searches for content related assets. As they say, content is (still) king.
Clearly, most buyers will start their search mandate thinking about a business model or platform. Acquirers will typically orientate to a business model they know best or a model where they have a complimentary skillset.
Search for Amazon powered businesses was at its peak during Q1 and Q2 when the FBA aggregator rush was still peaking. Despite a drop off here and increases to third party seller fees and a reduction in affiliate payouts, acquirers for Fulfilled by Amazon (FBA), Fulfilled by Merchant (FBM), Kindle Publishing (KDP) and the Amazon affiliate offering known as Amazon Associates, buyers are still in market and this will no doubt please Amazon business owners fearful of a short-term cooling in their market. If you are sitting on an Amazon business and want to sell, there’s still a very large acquirer base waiting to capitalize on maturing assets.
Chart 2 charts the keyword search volume over the period of 12 months.
#3 Make Money Helping Others Get Fit
Buyers are searching for Fitness related assets and doing so over 5,000 times monthly. Not only was this the top ranked vertical based search in 2022 but we expect this demand to continue into 2023 as it’s mostly recession proof. Companies in this space are likely to see very strong buyer demand in 2023 and may be able to command higher multiples.
Crypto was overall very hot but dropped off substantially. We have briefly analyzed the market forces driving the cooling market below. Other categories with material buy-side demand include Travel, Health, Finance, Pet and Real Estate.
#4 Crypto Plummets
Flippa acts like a micro economy and is a proxy for investor sentiment. You want to buy businesses when there’s a strong user demand and you don’t want to buy businesses where there’s not. This is no more clear than the search volume for Crypto related assets.
Accordingly, we expect a further slowdown in Crypto and NFT related queries on Flippa. With investors shell shocked, related digital assets in the space will lose users and suffer performance impact. This will not only impact the number of buyers but likely also multiples. Buyers looking to buy online businesses won’t chase speculative asset types.
Chart 3 plots Crypto related search volume mapped against key industry events. Back in January ‘22 search for Crypto related assets was at a high of ~4000 searches per week, showing buyer and acquirer appetite at its peak.
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#5 Net New Registered Buyers Top 170,000 and $36 Billion in Liquidity
This year 170,000 new buyers joined the Flippa platform with these buyers segmented into three distinct type(s) – Institutional & Company Buyers, Acquisition Entrepreneurs and Side Hustlers.
Institutional & Company Buyers will typically be a Private Equity, Family Office or private company looking to buy to bolt on.
Acquisition Entrepreneurs are individuals, typically a high net worth individual or someone looking to buy to run and operate one or more businesses on a Full Time basis.
Side Hustler is an individual looking to buy for the purposes of supplementary income. These buyers will typically have an alternative primary source of income.
While by count, Institutional and Company Buyers represented just 7.3% of the net new buyer pool (7,687), their purchasing power is immense making up 58% of purchasing power at 21.2BN. In other words, there’s plenty of dry powder and this is an asset class poised to capitalize on a shifting investment landscape. The average company buyer has an acquisition budget of $2.7MM with some as high as $75MM, which is greater than 10x the buyer average at $213,000.
When looking at the Top 100 deals sold on Flippa for the year, 77% of the online businesses purchased were acquired by company buyers. Examples include a publisher in Florida who acquired a compliance blog for mid 7-figures to compliment their existing portfolio of sites. And, an app aggregator who paid mid 8-figures for a portfolio of apps.
Chart 4 shows the no. of registered buyers to December 22nd 2022.
#6 You Can Still Buy a Business and Achieve 30% Plus Annualized Returns
According to ATTOM, which is a market-leading provider of real estate and property data, rental yields were 7% for single-family properties in most of the US in the first quarter of 2022! Impressive but it would seem that buying an online business may still be the best performing asset class.
Across the board, looking at nearly 2,000 online businesses sold between $50,000 and $35,000,000, the average annualized net profit multiple is 3.0x.
As you would expect, SaaS assets command a premium and in 2022, these assets fetched an 8.28x annual multiple. On the other hand, Ecommerce businesses were the least valuable with annual profit or SDE multiples averaging just 2x although in some isolated cases we’ve recorded multiples as high as 5x earnings. An Ecommerce business typically has far higher operating costs and will operate at a lower margin. With certainty of performance less assured and acquisition costs higher to replenish inventory and acquire new users, buyers are more cautious.
Table 1 shows average multiples and across nearly 2,000 assets sold in 2022.
Of course, averages skew the result and in some cases under-value the high quality assets. For context, we can point to some specific examples to showcase potential for online business owners looking for an exit or buyers looking to negotiate.
The following asset examples yielded higher than average multiples:
- App: The highest achieved multiple for an app was for an iOS and Android design app portfolio out of Singapore which realized a 5.45x annual profit multiple and sold with a total transaction value of $35MM. Enquire at [email protected] if you would like a valuation consultation for your app.
- SaaS: The highest achieved multiple for a SaaS business was 10.5x annual SDE. In this case, it was a short-term rental compliance monitoring SaaS for property management professionals, municipalities, and mortgage lenders. This was a $630,000 transaction. Enquire at [email protected] if you would like a valuation consultation for your SaaS business.
- Ecommerce: The highest achieved multiple for an Ecommerce business was 6.5x annualized SDE. The business sold vitamins and supplements and was sold to a competitor. This was a $10.5MM transaction. Note: Multiples for Ecommerce businesses are adjusted to exclude the value of inventory. Enquire at [email protected] if you would like a valuation consultation for your Ecommerce business.
- Content: The highest achieved multiple for a content site was 7.63x annualized net profit. The business was a compliance blog focused on GDPR and related regulations. This was a $5.2MM transaction. Enquire at [email protected] if you would like a valuation consultation for your Content business.
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