Given the vast scale of the internet and the importance of online enterprise to the global economy, online businesses are at the heart of much M&A nowadays. Even if firms aren’t 100 per cent online-based, the vast majority of companies will have an online presence and carry out a significant proportion of their business via the internet.
This was true prior to the COVID-19 pandemic, but it has also intensified since. COVID-19 prompted many businesses to completely rethink their online strategy: whether they were retailers forced to give their e-commerce operations the attention they had long neglected or office-based businesses that suddenly had to work remotely, communicating and collaborating via the cloud.
This has had a knock-on effect on M&A activity, making acquisitions of online businesses more vital than ever. According to recent figures from law firm RPC, more than half of UK retail M&A transactions involved e-commerce businesses, while the bulk of the remainder were omnichannel retailers and only a small fraction pure brick and mortar businesses.
As with many industries, however, the M&A market for online businesses experienced significant changes last year. The market followed the same pattern that has been seen across numerous sectors: a peak in activity during 2021 after dealmaking appetite built-up during the height of the COVID-19 pandemic, followed by a correction towards more normal figures during 2022.
As well as the end of the pandemic, there have also been a number of geopolitical and economic developments that have taken an impact on the broader M&A market, while there are also trends specific to the online marketplace that make it pertinent to use the mid-point of 2023 to take stock and examine the state of the market.
Defining online businesses and online business M&A
Despite the vastness of the market for online businesses, they can in fact be conveniently categorised into three main types, although there are of course wide-ranging subcategories within these. The three main types are: SaaS (software-as-a-service) business; content sites; e-commerce businesses.
A SaaS company provides software to remote users (customers) via its servers. The business maintains the software, servers and databases that enable users to access their service online (often in the form of an application). SaaS businesses often work on a subscription basis, with users paying a monthly fee for the service that may increase or decrease depending on factors such as: the number of devices or users accessing the service; how much technical support is require and the amount of data used.
SaaS businesses can vary extremely widely, but examples could include data management firms, firms that provide automation services for marketing or social media, such as Hootsuite or SocialPilot, customer relationship management (CRM) providers, such as HubSpot or Pipedrive, or web hosting servers, such as Google Cloud or Wix.
Content sites include multimedia outlets such as blogs, news providers, industry publications, audio providers and video hosting sites. They will typically operate either through subscriptions, with content limited partly or entirely to paid subscribers, or offer their content for free, while generating their revenue through ad space for other companies, although many content sites will operate using a hybrid model of both subscriptions and ad revenue.
Finally, e-commerce businesses operate by selling a service or product online, either to other businesses (B2B), to consumers (B2C) or by acting as a platform for users to sell to consumers (consumer-to-consumer). B2B sites include a wide array of businesses, such as wholesaler Alibaba or freelance platform Upwork. B2C sites can range from small retailers to huge multinational operations such as Amazon. Consumer-to-consumer sites meanwhile include platforms like second-hand clothes site Depop or creator marketplace Etsy.
E-commerce potentially has the most diverse array of business models within the online businesses market, with five distinct value delivery methods:
White Label - The concept of white labelling revolves around a company rebranding and retailing a product with its own unique name and logo. However, the product itself is generic and sourced from a third-party distributor or manufacturer. This strategy aims to enhance brand recognition while reducing manufacturing expenses, and it finds popularity in industries like fashion and cosmetics, where product replication is widespread.
Private Label - A private label product refers to an item that a retailer commissions from a third-party source but sells under its own exclusive brand name. Unlike the white label approach, the retailer has complete control over various aspects of the product, including specifications and packaging. To consumers, these products appear as genuine offerings from the company itself.
Wholesaling - Wholesaling is a business-to-business (B2B) e-commerce model centered around selling products in large quantities and at discounted prices to other businesses. Acting as intermediaries between manufacturers and distributors or retailers, wholesalers typically provide significant discounts on the products they offer.
Dropshipping - Dropshipping is a rapidly expanding e-commerce model where marketing and sales are conducted for products that are fulfilled by a third-party supplier. In this arrangement, dropshippers serve as middlemen, linking buyers with manufacturers. By leveraging tools that integrate inventory from suppliers worldwide into their online stores, dropshippers streamline the process.
Subscription - Service Dating back to the 1600s, the subscription service model has experienced a renaissance in the age of e-commerce. Instead of solely delivering books or periodicals, modern businesses across various industries now employ subscription services to provide convenience and cost savings to their customers.
2023: The State of online business M&A
2021 saw a boom in M&A activity – not just in online business deals, as it occurred across a wide range of industries. By contrast, 2022, with its emerging economic events such as the cost-of-living crisis and geopolitical upheaval such as Russia’s invasion of Ukraine and escalating tensions between the US and China, saw M&A return to more normal levels. This was perhaps also helped by a significant degree of pent-up dealmaking appetite (with M&A largely pausing during the COVID-19 pandemic) being quenched in 2021.
With some notable exceptions, this pattern was largely the same within the online business M&A marketplace. Empire Flippers, one of the leading platforms for selling online businesses, stated after examining its figures for 2022: “The overarching conclusion we’ve drawn from the data is that the market is normalising after a 2021 peak. The peak was more prominent for certain business models over others, but regardless, we believe we’re now seeing longer-term stabilisation, and that market conditions of 2020-2021 are likely not returning.”
In 2021, Empire Flippers sold 335 businesses, a figure that dropped to 315 last year amid an overall slowdown in activity. However, this remained significantly higher than figures recorded in the years leading up to the COVID-19 pandemic (274 in 2018 and 272 in 2019).
One of the key tensions that has emerged since the booming days of 2021 has been a divergence on valuations. Again, as seen across other industries, many owners looking to sell their online businesses are seeking multiples and valuations that reflect the highly active 2021 market. However, with economic headwinds widespread and financing conditions tight, buyers are often unwilling to meet these valuations, something that has been dragging on M&A activity.
Illustrating this disconnect between seller valuations and what buyers are willing to pay, Empire Flippers tracked the average days on the market for online businesses. They found that, for e-commerce businesses, the average time to sell after listing in 2021 was within 32.56 days. However, in 2022, this almost tripled to 93.36 days, higher than the pre-pandemic (2019) average of 92.5 days.
For content sites, meanwhile, although the increase was less dramatic, average days on the market still increased from 39.15 days in 2021 to 49.93 days last year.
Empire Flippers writes: “Holding onto valuation expectations of the past has created a misalignment in the market, where sellers are unwilling to lower their valuation multiple and buyers are unable to justify purchasing businesses at the proposed valuations.”
“This misalignment can create distrust between sellers and buyers during negotiations, and ultimately lead to longer sale times or deals not going through at all.”
“Overall, 2022 marked the highest days on market for every business model, indicating buyer resistance or hesitations to purchasing. It’s clear that this has become more of a buyers market, and sellers will likely need to be more flexible during the negotiation phase to sell their business.”
Earnouts keep activity ticking
In a recent insight, we detailed how – amid the ongoing tough M&A conditions - earnouts are increasingly enabling buyers and sellers to bridge valuation gaps and strike deals that can satisfy both parties: with sellers able to get a total consideration that comes closer to their own valuation and buyers able to pay a lower upfront fee and insulate themselves from some of the risk inherent in acquiring a business during a period of severe economic uncertainty.
This is a trend that has also been apparent in online business acquisitions, at least in certain types of acquisitions and for deals involving bigger firms. Returning to Empire Flippers’ figures, during 2022, 40 acquisitions of e-commerce firms involved an earnout and, while this was down from a record 51 earnouts recorded by the platform in 2021, this drop came amid an overall decline in e-commerce transactions.
Earnouts were also popular for deals involving content sites, with 20 during 2022, compared to 12 in 2021.However, the main trend in terms of online business sales involving earnouts related to the size of the businesses involved.
In terms of deals involving businesses acquired for under $300,000 (£237.2k), 13.92 per cent of deals involved earnouts (compared to 9.33 per cent in 2021). For transactions involving businesses acquired for up to $1 million (£790.6k), 43.08 per cent involved earnouts (up from 41.89 per cent a year earlier).
The highest number of deals with earnouts was among businesses acquired for between $1 million and $5 million (£3.9 million), with 83.33 per cent of such deals involving earnouts, compared to 66.67 per cent in 2021 (although the volume of deals involving earnouts fell from 22 in 2021 to 10 last year). Meanwhile, the number of $5 million plus deals involving earnouts overseen by Empire Flippers remained steady at 1 from 2021 to 2022, although in 2021 this represented 33.3 per cent and in 2022 100 per cent, as deal volume declined.
Deal trends by sub-sector
E-commerce – Activity falls, but online defines retail
Of all the various winners and losers to emerge from the COVID-19 pandemic, perhaps the biggest beneficiary was the world of e-commerce. Online retail was, of course, already a booming marketplace prior to the pandemic with the rise of the internet and, subsequently, smartphones enabling users to buy virtually anything online at the push of a button.
Online retail activity was massively accelerated, however, during the COVID-19 pandemic as lockdowns forced stores to close and shoppers to remain at home. Even in the wake of the pandemic, the change proved to be long-term, leading to the decline of many businesses that had previously largely ignored their online offering in terms of brick-and-mortar businesses.
This, naturally, extended into heightened M&A activity, especially when combined with the pent-up dealmaking appetite that had accrued during the slow period at the height of the pandemic. According to a report from Hampleton, the digital commerce sector (which it splits into five subsectors: internet services and portals; digital commerce software; agencies & service providers; media, social & gaming; online retail – which includes e-commerce businesses) saw a 38 per cent increase in M&A activity 2021, with 2,370 deals compared to just 1,722 in 2020 and 1,386 prior to the pandemic in 2019.
However, despite Q1 2022 seeing a “historically unprecedented high” of 699 deals, economic uncertainty, geopolitical upheaval and an overall normalisation of M&A activity saw dealmaking in digital commerce decline during 2022, with Hampleton recording 2,167 deals, a 9 per cent decrease from 2021.
Looking specifically at online retail, transaction volume fell 32 per cent year on year in 2022, to its lowest volume since 2015. Overall, Hampleton’s figures show that the subsector accounted for an 18 per cent share of digital commerce dealmaking activity, the second lowest of the five subsectors.
Empire Flippers, meanwhile, recorded an even more dramatic decline in deal activity involving e-commerce businesses with total sales volume falling 69.6 per cent from 2021 to 2022, with last year’s figures – unusually – even lagging behind pre-pandemic numbers (2022’s total sales volume according to Empire Flippers was 29.34 per cent lower than 2019’s).
One of the main factors behind this has been a decline in activity involving Amazon FBA (Fulfilment by Amazon) businesses. In 2021, Amazon FBA businesses accounted for 31.64 per cent of all e-commerce businesses sold by Empire Flippers, a figure that fell to 25.4 per cent in 2022, with a 24.5 per cent decrease in purchase volume as previously highly-acquisitive FBA aggregators paused their activity to focus on growing and maintaining businesses within their existing portfolios.
The total sales volume for Amazon FBA businesses, meanwhile, fell 64.07 per cent from 2021 to 2022 (although 2022’s sales volume was 43.15 per cent higher than 2019’s), driven by a drop in acquisitions worth $1m-$5m and $5m plus.
E-commerce also saw a drop in valuations from 2021 to 2022, with Empire Flippers reporting a drop in listings multiple (a business’ valuation when it first comes to market, calculated as a multiple of its average monthly earnings) from 41.96x in 2021 to 39.34x in 2022, while sales multiples (the valuation when a business is sold) fell from around 37.5x to 34.35x in 2022.
Hampleton recorded a similar trend, with median EBITDA multiples for M&A deals involving online retail businesses seeing a steady decline throughout the final three quarters of 2022, ending with an average of 9.4x in Q4 2022, the lowest figure seen since 2016.
Despite this, e-commerce remains an absolutely central component of M&A in the retail sector and last year’s declining figures are likely to represent more of a correction from 2021’s inflated figures than a genuine loss of interest in dealmaking in the online retail space.
Indeed, even with this decline, e-commerce continued to dominate wider retail M&A. Turning to the UK market, research from law firm RPC found that, of the 34 confirmed deals in 2022 targeting retailers, 18 involved e-commerce firms, while 13 involved omnichannel firms (those with both online and physical operations) and just three involved pure brick-and-mortar retailers, indicating that the shift towards online and omnichannel retail since COVID-19 is persisting.
One key trend that has emerged in UK retail M&A since the pandemic is distressed acquisitions in which buyers cherry-pick elements of collapsed big-name retailers – such as stock, intellectual property and online operations – leaving behind bloated networks of physical stores and integrating the well-known brands into their e-commerce offering.
As retailers that have been overly reliant on physical shopping continue to struggle in an uncertain economy, distressed acquisitions seem set to continue. With stronger sales since the pandemic and lower overheads and debts, opportunistic e-commerce firms would seem set to be the most natural buyers for these kinds of struggling businesses – or at least parts of their operations.
SaaS – Digitalisation and software uptake continues
While activity may have declined in the e-commerce space, one subsector of online businesses that saw increasing M&A activity during 2022 was SaaS, as the trend for businesses to digitise operations and sought software solutions to make their operations more efficient and cost-effective.
According to a report into 2022’s SaaS M&A by Software Equity Group (SEG), global deal volume increased 21 per cent from 1,786 deals in 2021 to 2,157 last year. The report identified the key drivers of this growth in activity being the involvement of private equity firms – with 59.5 per cent of all deals either being done directly by a private equity firm or else by a private equity-backed company, more than compensating for a lack of M&A activity among public firms – as well as strong dealmaking activity in key verticals such as healthcare (which accounted for 19 per cent of all SaaS deals as healthcare providers sought to improve patient care and manage costs), financial services (11.9 per cent of all deals) and real estate (9.8 per cent of all deals).
While activity increased, SEG did, however, track a drop in valuations among SaaS firms from the highs seen in 2021, when firms sold, on average at a 7.3x multiple of EV/revenue. In 2022, the average EV/revenue multiple dropped to 5.6x, although this remained comfortably higher than the pre-pandemic average of 4.9x EV/revenue seen during 2019.
Turning to the European market, meanwhile, a report from GP Bullhound covering the first three quarters of 2022 showed that several mega deals during the year to date at the time had pushed European deal value to record highs, with activity in the first three quarters eclipsing 2019 and 2020 combined.
Amid this rush of activity, dealmaking volume was led by the UK, which was the most active market for SaaS deals. The UK, along with France, Germany and the Netherlands accounted for 65 per cent of European deal volume. While UK deal activity fell 4 per cent from 2021, this was in comparison to a broader 12 per cent decline seen across the broader European ecosystem, with the UK representing 28.6 per cent of total European deal activity for the first three quarters of last year.
On Empire Flippers, SaaS activity again saw an increase, with total sales volume rising 48.78 per cent from 2021 to 2022. Even more indicative, though, of the growing M&A market for SaaS businesses, was the fact that 2022’s total sales volume was 519.16 per cent higher than pre-COVID in 2019. Purchase volume, meanwhile, was up 12.5 per cent from 2021 and 80 per cent from 2019.
Turning to the future of the SaaS market, AI has broadly been identified as a key trend in the further development of the sector and could also prove to be a major driver of M&A activity, with AI assistance bridging technical gaps and enabling buyers lacking in highly-developed digital and technical skills to become owner-operators at SaaS firms.
Founded in 2015, Advizzo is a utilities software company that has developed an SaaS product enabling commercial organisations – with clients including Southern Water and Dubai Electricity and Water Authority (DEWA) - and their consumer to improve cost efficiency and energy sustainability.
In June 2023, the company was snapped up by specialist energy infrastructure assets manager Calisen Capital, after Advizzo CEO Patrice Guillouzic engaged KBS Corporate to find a buyer to help the firm reach the next stage of growth.
KBS Corporate Associate Director George Barnes said: "Energy and utility companies are incentivised to deliver energy efficiency or risk significant fines related to their global turnover. Advizzo enables smart-meter vendors to leverage the data, which has until now been an unused asset in changing customer behaviours.”
Calisen Group CEO Sean Latus added: "Advizzo’s capabilities in the water sector provide Calisen with an opportunity to expand its offering and assist water companies with their net zero goals, contributing to a greener and cleaner environment."
Advertising drives content M&A
Empire Flippers data shows that content sites were the top selling business category during 2022, with 153 businesses sold, driven in particular by advances in technology that could fundamentally change the way that content sites operate.
Sales of content sites on Empire Flippers were dominated by display advertising businesses, with 89 such companies sold – the highest volume for any business model tracked by the site. Overall, purchase volumes for display advertising-focused content sites increased 56.14 per cent from 2021 and 154.29 per cent from 2019. Total sales volume, meanwhile, increased 78 per cent from 2021 to 2022. This comes after several years of year-on-year growth, with total sales volume increasing 499.33 per cent from 2019 to 2022.
There are a couple of key factors driving this trend and they could come to shape the content site M&A market for several years. Firstly, display advertising is profitable and easily monetised within content sites, especially in comparison with previously dominant monetisation models for bloggers and other content creators such as Amazon Associates.
Secondly, the rise of generative AI tools means that content is now easier and quicker to produce, enabling smaller content businesses to focus more on investing in other sources of revenue and potentially using funds to acquire lucrative display advertising services and systems.
Earlier this year, UK display advertising firm Skycon was acquired by listed sports media group Better Collective. The deal formed part of Better Collective’s strategy of investing in its paid media division in order to build scale and more resilient revenue.
Better Collective co-founder and CEO Jesper Søgaard commented: "We have invested heavily in growing our paid media division to reach its current significant scale, while we also have invested in moving revenues to recurring revenue share contracts.
"During the past year, our efforts have proven successful and acquiring Skycon will be highly synergistic to this journey. Skycon is a great business, which is built on Better Collective's favoured revenue share model. It is a perfect fit as we can leverage our leading skill set within media buying to grow Skycon’s revenues.
"We also see a clear path to further growth as the asset can be scaled across more of our business partners, into new territories, and optimised with our unrivalled first party data in sports media. This acquisition will further deepen our moat."
The shift towards advertising as the driving force behind content M&A is borne out even further by dealmaking activity from the UK’s media sector in 2022. According to BDO’s analysis of UK media M&A in 2022, 49 per cent of deals were in the marketing services, advertising and PR sub-sector.
BDO’s Global Head of Media and Entertainment Andy Viner wrote: “Changes in the way we work and communicate could also force media players to further explore the full potential of data analytics, advertising and the metaverse.”
Despite a shifting dealmaking environment following a hugely busy 2021, 2022’s activity was still by and large far more resilient than pre-pandemic figures, while the fundamentals underlying online business M&A remain strong at the midway point of 2023.
While sellers might not be able to attract the same valuations they could during the booming days of 2021, there is still a strong market for online businesses, particularly as key trends – such as AI, display advertising and online retail – continue to develop, pointing to a thriving dealmaking market over the next 12-24 months at least.
The company is an automatic and industrial door supplier, installing a variety of systems, including but not limited to, automatic doors, fire resistant shutters, entrance barriers, roller shutters and garage doors.
Well-established company operating for over 23 years. Offers a range of driving positions, which include day runs, local runs, local shunting, nights out and tramping.
The company is a business-to-business wholesaler of cask ales, continental lagers, and craft cider. Since its establishment, the business has cultivated strong relationships with high-profile and local breweries, gaining exclusive access to their pro...
Please choose your settings for this site below. For more information please read our Cookie Policy
These cookies are necessary for our website to function properly and provide you with access to all features.
These are analytics cookies that help us to improve the way our website works.
These are used to improve the functional performance of the website and make it easier for you to use.