The M&A process is first and foremost about detailing the opportunity. Establishing the baseline of a brand today and understanding how it could scale under the acceleration of the aggregator is the key criteria for specifying a fair valuation.
However, there are a few things that can significantly derail that evaluation if not uncovered as part of the process. The top 5 disruptive factors that roll-ups need to consider:
Various factors can make stockout rates misleading from the surface: for instance, rather than developing a measured inventory and forecast model, sellers may manipulate pricing manually when inventory levels hit lows to adjust the demand side in order to avoid stockouts, or gamble with adjusting for seasonality in the moment to avoid long-term storage fees and other related costs even if demand spikes were foreseen. Understanding the planning and operations limitations of the past where a brand masked under- or oversupply of the product directly impacts the cost and opportunity assumptions of the growth model, and even raises a flag to systemic or supply issues.
Growth models are more than a trendline. Consumer demand and the environment around each product evolve quickly, so forecasts of future performance must include product momentum and competitive positioning. That means accounting for present and future performance indicators like ASIN rating, ASIN reviews, organic rankings and keyword performance, price point analysis, review counts, velocity, rating trends, quality, and more to truly forecast future performance and uplift potential.
It is essential to understand factors that led to an increase (or stabilization) in demand, especially as product contribution margins fluctuate. The goal is a reliable – ideally growing – contribution margin, but seasonality, discounts, advertising campaigns, price changes, or sometimes short-lived trends can heavily impact the demand side – and product contribution margins. Unpacking seemingly temporary costs at each planning level reveals the underlying physics that may be required to maintain demand at historic levels.
While the acquired supply chain and manufacturing setup will generally present an opportunity to decrease unit costs at scale and implement more favorable payment terms, huge risks can easily be overlooked and significantly harm the aggregator, particularly as scale grows. Those specifically relate to issues with consequences invasive to the whole portfolio, like unethical practices such as child labor or worker right issues at factories, quality variations, and the potential inability of a certain supplier or manufacturer to support the brand as it scales up. Pareto analyses and product teardowns can validate the assumptions underlying the growth model, but more importantly, can highlight virulent practices before they impact the acquirer’s entire standing.
Access to a seller account may not come along with its full history: ASINs may or may not have been transferred as seller accounts are updated, resulting in a potential shortage on historical data. It is essential to go back not just through available history, but the lifetime of each ASIN if possible.
Xapix not only centralizes the view on seller data, but also elevates and accounts for factors such as these so M&A teams can focus on engaging in full diligence with only the most promising sellers. Contact us to score your processes and see how uncovering these hidden factors can be automated.