Customer Base, Digital Capabilities and Strategic Synergies are Driving Valuations in DTC Mergers and Acquisitions

Photo courtesy Natee Meepian, Adobe

The mergers and acquisitions market remains strong for direct-to-consumer firms that operate across a spectrum of channels, but investors are now going back to the fundamentals and targeting companies with evidence of economic success. The mentality of “growth at all costs” is fading — and those that have pursued that path without a strategy for profitability are now finding they can no longer raise the capital they need to continue their growth.

Valuation rationalization is taking hold and companies in the consumer field — like many others — are finding that financing is becoming more scarce and more expensive. For some, consolidation via merger or acquisition is an attractive route for achieving the scale and attaining the financial support they need. For others, it is necessary for survival.

Why Retailers are Interested in DTC Brands

Corporate retail businesses often find DTC businesses to be attractive targets because of their relatively strong product margins, ability to extend their consumer outreach and online marketing disciplines. Not only are their product lines important, but their digital capabilities, which can be easily applied to additional merchandise, and their ability to analyze customer preferences and market more effectively, can be of significant value to a larger retailer. These types of synergies can be extremely valuable.

A good example of this trend would be Tuft & Needle, an online mattress and bedding brand that was acquired by Serta Simmons. Tuft & Needle received capital it needed to expand, and its products are now sold in stores as well as online. And Serta Simmons acquired a hot new brand and new customer base that shopped for its mattresses in ways that Serta Simmons wasn’t capturing.


Another would be the recent acquisition of wardrobe essentials brand Richer Poorer by the parent company of Francesca’s, a specialty retailer of fashion, accessories and lifestyle products.The acquisition bolsters Francesca’s channel reach, leverages its robust wholesale network, introduces new product categories to the acquirer’s portfolio mix, and allows the company to grow its share of the Gen Z and millennial women’s segments.

Don’t Forget the Supply Chain

Another factor that investors are often concerned about, but that is often overlooked, is the target company’s supply chain. Global events (ranging from pandemics to wars to tariffs to embargos to cybersecurity) and domestic ones (ranging from ESG to fair wages to child labor and equitable treatment of workers), put supply chains under pressure in ways that are constantly shifting and sometimes difficult to anticipate. Sellers should realize from the outset that this area of their operation is going to be carefully scrutinized.

If You’re Thinking of Selling, Now May be the Time

Clearly, for companies that have been around and have a strong customer base, a solid niche in the market, good margins and depth of talent at the executive level, now is a good time to pursue a sale. Interest rates have likely peaked and, even at their current level, still are not as high as we’ve seen during some periods in the past. Recent bank crises have caused some tightening in the marketplace, but there is still an ample supply of potential buyers looking to grow or diversify their business through acquisition. And private equity firms that have had funds on the sidelines during the past two or three years are eager to put that money to work.

Understanding what financial or strategic investors prioritize — the synergies that can add value to a combined entity — and being able to differentiate the company as filling a distinct niche and reaching a distinct customer base, can be the key to attracting a strong valuation. Sellers that have defined their value proposition and are able to present a clear and compelling story to a targeted list of well-vetted potential investors are the ones most likely to get their deals done.

Harry Chevan is a Managing Director at Oberon Securities, bringing 20 years of investment banking experience to the company. He focuses on middle-market, omnichannel consumer and business marketers, digital and traditional media, marketing and business services, and ad tech.

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