Costas Xyloyiannis

With inflation hampering product sales and price rises, manufacturers have profits to protect. Many will react, as the sector has done for decades, by beating down their suppliers on price.

All this does, though, is bounce the problem around the supply chain. It drains suppliers of the resources they need to deliver vital enhancements — including supplies, information, and ideas — which brands require to be competitive.

So, how can manufacturers protect profits while keeping clear of significant risks and open to new opportunities?

By helping their suppliers be data-sharing trading partners, brands can keep a competitive edge despite inflation.

Here’s how:

1-See suppliers as collaborative partners.

The best thing brands can do to cut costs through suppliers is to partner with them through collaboration. This empowers suppliers to give their best, and when suppliers can give their best, brands are better placed to extract the value they need — such as quality ingredients, compliance information and ideas for innovation — in addition to reducing costs.

Therefore, the solution to managing profits in inflation is not to squeeze suppliers. It’s to give them a helpful experience. If there is one thing brands really need in order to collaborate with their suppliers, it’s trustworthy data.

2-Build from the data up.

When better to establish dependable supplier data than the moment each new supplier is integrated? Data is at the heart of every good supplier interaction. Without it, suppliers have a tough time working with brands and struggle to provide essential information. And without this information, brands are blind to social and environmental risks. Additionally, they miss opportunities such as to innovate sustainably and elevate their reputations.

When suppliers struggle to work with a brand, they’re also less inclined to go the extra mile — a recent HICX study shows that suppliers are 20% more likely to prioritize an order if they’re low on stock for a customer-of-choice.

The best supplier data is in the form of a “single source of truth.” When data is considered trustworthy, brands can make the working relationship significantly easier. This simplifies what it takes to receive helpful supplies, information, and ideas.  Underpinning these goals is reliable supplier data, the collection and safeguarding of which should be established early.

3-Safeguard data integrity

Getting this right also requires brands to control how changes to the data are managed. There is a simple analogy with removing plastic from the world’s oceans — it’s pointless cleaning what’s already there while neglecting to address future pollution. Rather, invest disproportionately in preventing future plastic from entering the water.

The same is true with supplier data. A ‘single front door’ through which all new data and all changes to existing data must pass, is essential. That door has both a technical and a governance role: it disables any other systems from making changes and governs who can make changes and under what circumstances.

4-Smooth out communication friction.

When supplier data is compromised, brands can’t communicate well with all their suppliers. Too often, they send long surveys to suppliers to receive information to manage risks and opportunities. And too often, the task is irrelevant to many of the recipients.

For example, an initiative to determine how many product packaging suppliers in the U.S.A. comply with sustainability regulations might go to every packaging supplier in every country, including those who sell boxes for shipping. Each of these businesses would have to engage with the survey to determine whether it applies to them. This costs them time. Big brands might not directly feel the consequences, but logic dictates that it will be harder for these suppliers to give them quality information and work efficiently.

Thankfully, the reverse is also true. Brands that receive and store accurate supplier data — including contacts, plant-level, global and local data — properly and at the start of each new relationship can communicate better with their suppliers. This creates the perfect conditions to find cost-savings together, while keeping sight of compliance risks and ways to innovate.

5-Don’t accept supplier friction.

While it’s sensible for brands to steady these communication issues from the outset, suppliers face many other bugbears. Late payments, unrealistic expectations and confusing technology are just some of the challenges. Brands can invest in supplier relations by understanding the friction points that their people, processes and technology put on suppliers — and by adopting truly supplier-friendly mindsets and technologies to work with all suppliers from day one.

Forward-thinking brands lead the way

It’s one thing to give a handful of strategic suppliers a helpful experience, but if brands do so across the network, they can successfully reach their goals at scale. Every supplier should be treated as a partner. Encouragingly, forward-thinking brands such as Mondelez, Unilever, Mars and more, are already collaborating with all their suppliers.

We need more manufacturers to join the “supplier experience” movement. Because as we weather the cost-of-living crisis, the route to staying profitable and competitive is through mutual success.

About the author

Costas Xyloyiannis is co-founder and CEO of HICX, a supplier experience management platform.

Sign up

Sign up for a complimentary subscription to Digital Commerce 360 B2B News, published 4x/week. It covers technology and business trends in the growing B2B ecommerce industry. Contact editor Paul Demery at paul@digitalcommerce360.com and follow him on Twitter @pdemery.

The post Manufacturers: View your suppliers as valuable (data-sharing) partners appeared first on Digital Commerce 360.

The post Is offering cryptocurrency at checkout worth the reward for retailers?  appeared first on Digital Commerce 360.

“We worked quickly to resolve the technical issue, which has since been fixed,” an Affirm Holdings Inc. spokesperson said Jan. 16. The BNPL service did not confirm when on Jan. 12 it fixed the problem. The BNPL service provider said “this was not an outage but rather a brief technical issue,” according to the company. Affirm did not share the percentage of affected customers.

Affirm said customers will not be responsible for duplicate charges. The authorized payments are pending and will not be settled, according to the company.

14.4% of retailers in the 2022 Digital Commerce 360 Top 1000 database offer Affirm at checkout, including Amazon Inc., Walmart Inc., Target Corp., Wayfair Inc., Williams-Sonoma Inc. and others. The Top 1000 ranks North American web merchants by web sales.

The payment service provider also shared updates on Twitter.

Affirm took to Twitter on Jan. 12 to explain the technical issue that resulted in multiple pending charges.

Affirm duplicate charges frustrate consumers

That hasn’t stopped shoppers from voicing their frustration online. One Twitter user said she had been auto-drafted more than her loan amount. Instead of the $12, the Twitter user said Affirm charged them $73 five separate times.

Another Twitter user said the charges affected her mother’s Affirm loan.

“She used Affirm because she’s retired and on a fairly fixed income,” she told Digital Commerce 360. “The hold put her in danger of having her car note and other commitments not clearing the bank. It’s a three-day weekend, so the holds still haven’t dropped [as of Jan. 17].”

Affirm told Digital Commerce 360 that it is not able to reverse the duplicate pending charges. The consumer’s financial institution must remove the pending charges. Then, it will no longer appear in their transaction history. Affirm consumers can expect to see the pending charges automatically removed from their transaction history in three to seven days. 

“Consumers who received an overdraft fee from their financial institution as a result of this issue can contact Affirm, and we will reimburse them,” an Affirm spokesperson said.

“We understand the impact issues like these can have on people, and we sincerely apologize for any confusion or inconvenience this may have caused,” a spokesperson said.

Sign up

Stay on top of the latest developments in the ecommerce industry. Sign up for a complimentary subscription to Digital Commerce 360 Retail News.

Follow us on LinkedIn, Twitter and Facebook. Be the first to know when Digital Commerce 360 publishes news content.

The post Some customers distraught after duplicate charges from BNPL service Affirm appeared first on Digital Commerce 360.

Blake Rouse

With the exponential growth of ecommerce and mobile shopping, the competition for online sales is fierce. Customers expect fast and convenient shopping experiences. Every second counts — literally.

A study by Portent found that the highest ecommerce conversion rates occur with a page load time between 1 and 2 seconds, with rates decreasing an average of 0.3% for each additional second. In order to compete, business owners and developers must constantly optimize for performance, though speed is not the only factor that impacts online sales. A host of other important differentiators — such as user flow, ease of use, flexibility, security, and others — also require regular assessment.

Payments as a Priority

One such area of assessment that is moving up on the priority list is the online checkout experience and the underlying technology that supports the payment process. ​​According to a recent survey conducted by S&P Global, 72% of C-suite respondents stated that modernizing payments infrastructure — such as adding new payment gateways and processing capabilities — will have a highly transformative impact on their business over the next three years. Meanwhile, 37% of merchants said their businesses plan to make investments payment processing investments over the next 12 months, positioning payment processing as a top-four area of commerce technology investment for merchants. For those doing business online, payment acceptance is no longer a simple matter of processing transactions. Instead, payments are now integral to a business’s success and key to its overall strategy.

Integrated Payments and the Customer Experience

Integrated payments is a term coined to describe embedding the payment process within the user flow so there is no interruption in the checkout experience. Utilizing this approach reduces friction, eliminating unnecessary barriers to the sale.

For example, a redirect to a third-party payment site or an inability to accept a customer’s preferred payment method would introduce friction to the checkout process, making consumers more likely to abandon their shopping carts. Shoppers who are diverted to a payment website that does not match the original brand’s look and feel may become confused and abandon the sale.

Likewise, ecommerce businesses should not underestimate the importance of accepting the latest payment methods, such as digital wallets, which offer the ability to check out in just a few clicks — making completing a purchase quick and convenient. In this case, mobile shoppers are more likely to abandon their cart if unable to use a digital wallet, forcing them to enter credit card details. Ultimately, optimizing payment processes can make a significant impact when it comes to improving the customer’s experience, increasing the likelihood of a successful transaction.

Integrated Payments Connect Systems and Data

Another added benefit to this model is that payment processes are connected to back-office infrastructure — tying transaction data to internal software systems, such as accounting, CRM, ERP, and other applications. Typically, this integration is accomplished by using a payment gateway that facilitates payment processing while also linking payment systems to other software. This gateway creates a constant flow of transaction data to all systems automatically — resulting in not only improved customer experiences but also a myriad of other business benefits, including increasing savings and greater efficiency. Here are a few of these critical benefits in more detail:

Lowered Administrative Costs

As data flows from one system to another in real time, there is no need for the manual data entry that would likely occur if payment systems were not integrated with other administrative solutions. By eliminating this task, administrative costs are reduced, and time is freed up to work on more business-critical projects.

More Efficient Reconciliation

Integrated payment solutions also allow for more efficient reconciliation. Matching payments with the right deposits and invoices is time-consuming and tedious, especially if you have multiple merchant accounts and vendors. With an integrated system, transaction information syncs with other critical accounting systems. This makes it easier for business owners to monitor cash flow and ensure accurate records.

Reduced Errors

A reduction in errors is another key benefit of embedded or integrated payment processing. With manual data entry, a single error replicated across multiple systems can cause a slew of other problems for accounting, inventory management, or other processes. Business owners are forced to double back and find out where things went wrong, inevitably taking time and money to fix the mistake. As a business expands and processes more transaction data, it becomes even harder to keep up with manual data entry — a mistake at this stage is incrementally multiplied. An integrated payments solution removes this risk because all systems can communicate with each other in real-time.

Enhanced Business Intelligence

Without payment integration, data variations across back-office software may result in poor or inaccurate business intelligence. An integrated payments solution delivers a single source of truth. With all customer and transaction data centrally stored and managed, businesses can have greater confidence when generating earnings reports, drafting budgets, and conducting forecasting.

Greater Scalability

Laying the groundwork for efficient payment processes and systems reduces growing pains as a business scales. While many new apps and startups can get bogged down by the problems created by disconnected payment processes and systems, online businesses that implement an integrated payments system can grow unencumbered. Lowered costs, improved reconciliation, reduced errors, and greater data accuracy provide online businesses with scalability.

Integrated Payments Pay Off

With the capacity to reduce friction and improve conversions, plus the potential to reap a multitude of business benefits, it’s easy to see why many executives and business owners are planning to modernize payment infrastructure. More than just a means to transfer money, an integrated payments solution delivers a competitive advantage for ecommerce businesses and is becoming a vital component of a winning business strategy.

About the author

Blake Rouse is senior director of business development at Cardknox, a payment technology provider. He has worked in the fintech industry for more than 14 years and can be reached at brouse@cardknox.com. 

Sign up

Sign up for a complimentary subscription to Digital Commerce 360 B2B News, published 4x/week. It covers technology and business trends in the growing B2B ecommerce industry. Contact editor Paul Demery at paul@digitalcommerce360.com and follow him on Twitter @pdemery.

Follow us on LinkedIn and be the first to know when new Digital Commerce 360 B2B News content is published.

The post Reaping the benefits of integrated payments for B2B ecommerce appeared first on Digital Commerce 360.

The use of short-term credit, most notably via supply chain finance, has become a lifeblood to companies dealing with a range of issues from COVID 19-related lockdowns to rising input costs in an inflationary environment. With few tech entrants into the sector — and the spectacular failure of Greensill Capital — the industry remains dominated by established lenders such as Barclays Plc and HSBC Holdings Plc in the United Kingdom and Deutsche Bank AG in Germany.

Pure-play BNPL firms have seen their valuations crash this year. This comes as rate rises across the world challenge the viability of their business models. But plenty say the ease of use such upstarts can bring to age-old credit products will prove a winning formula in this part of the market.

“These B2B BNPL companies can easily win over market share from slow-moving traditional banks,” said Lily Shaw, an early-stage investor at North American venture capital firm Omers Ventures, which is not currently invested in the sector but is actively looking at the space. “Banks’ risk profiles are set up in such a way that they can’t move fast enough.”

Berlin base for B2B BNPL

Billie and Mondu are approaching the model through a B2B BNPL lens. They’re offering small businesspeople a similar experience when buying office equipment as a fashionista would when buying a Gucci handbag using Klarna or Afterpay.

“If a typical transaction on business-to-consumer BNPL is about 80-to-90 euros, our typical transactions are about 10 times that size,” said Aiga Senftleben, co-founder of Sequoia-backed Billie.

The Berlin-based firm works with banks as financing partners and operates currently in Germany, Austria and Sweden. It was valued at $640 million in its last funding round.

Mondu co-founder Malte Huffman said that it is hoping to make inroads into the trade finance space, especially given that more and more business transactions are being conducted online.

“We believe there’s a $200 billion market opportunity for B2B BNPL just in Europe and the U.S.,” he said.

In Germany alone, for example, ecommerce business transactions surpassed 200 billion euros ($204 billion) in 2021.  That compares with 86.7 billion euros of business-to-consumer ecommerce, according to data by Statista, a research firm.

Growing pains

Despite their stark valuation declines, BNPL companies such as Klarna, Afterpay Ltd. and Affirm Holdings Inc. have shaken up the ecommerce sector. Their customer-friendly apps and popularity with 18-24-year-olds force many traditional banks such as Natwest Group Plc to launch competing offers.

The advantage these B2B BNPL startups have is that traditional banks may step back from this sector amid the deteriorating economic outlook. They will thereby reduce the competition, according to Jeff Tijssen, head of global fintech at consultancy Bain & Co.

“It does solve some important cashflow issues for businesses, and you have some big investors such as Sequoia and Klarna involved,” he said. “The slowdown in the economy will give them opportunities but could also have a negative impact. It’s still early days.”

Sign up

Stay on top of the latest developments in the ecommerce industry. Sign up for a complimentary subscription to Digital Commerce 360 Retail News.

Follow us on LinkedIn, Twitter and Facebook. Be the first to know when Digital Commerce 360 publishes news content.

The post Buy-now-pay-later firms switch from Gen Z to B2B buyers appeared first on Digital Commerce 360.

The PayPal job cuts will ultimately save the payments giant about $260 million this year. That includes approximately $100 million in stock-based compensation, according to a regulatory filing Wednesday, Aug. 3. PayPal is looking to the staff cutbacks as a way to reduce expenses and satisfy investors, who have punished the firm’s shares in recent quarters.

Earlier this year, “management initiated a strategic reduction of the existing global workforce intended to streamline and optimize our global operations to enhance operating efficiency,” PayPal said in the filing. “As part of this effort, we are focusing on reducing redundant operations and simplifying our organizational structure.”

In all, the San Jose, California-based company recorded $90 million in total restructuring and other charges for the quarter. The remaining amount came from PayPal’s efforts to shutter offices. It says it continues “to review our facility needs due to our new and evolving work models.”

The firm expects PayPal job cuts and other activities to cost it an additional $15 million in restructuring charges this year.

PayPal has been in the midst of a series of management changes. It announced Tuesday, Aug. 2, that Blake Jorgensen will take over as chief financial officer after John Rainey left to join Walmart Inc. earlier this year. The company said it is also conducting an external search for a new chief product officer following the departure of Mark Britto later this year.

Jorgensen joins PayPal from Electronics Arts Inc., where he was both chief operating officer and CFO. He is also a former CFO of Levi Strauss & Co. and Yahoo! Inc.

Payments volume

PayPal has faced pressures in recent quarters from supply-chain disruptions and once-in-a-generation levels of inflation that hindered ecommerce spending. And EBay Inc., PayPal’s former parent company, has been rapidly moving payments away from its platform. Payments volume climbed 9% to $339.8 billion, missing the $344.3 billion average of analyst estimates Bloomberg compiled. It’s also the smallest increase in at least two years.

PayPal said earlier this year it was pivoting away from a previous strategy of trying to add millions of new users. Instead, it is seeking to encourage existing customers to use its app more frequently.

The firm showed progress on that front: Transactions per active account climbed 12% to 48.7 in the quarter. It continues to expect to add roughly 10 million new users this year.

The company now expects total payments volume for the year to climb 16%, compared with an earlier range of 15% to 17%, according to the statement.

“We are advancing our priorities and sustainably improving our cost structure,” interim CFO Gabrielle Rabinovitch said in the statement. “We are focused on creating value for our shareholders and strengthening our position as a leading global digital payments platform.”

Sign up

Stay on top of the latest developments in the ecommerce industry. Sign up for a complimentary subscription to Digital Commerce 360 Retail News.

Follow us on LinkedIn, Twitter and Facebook. Be the first to know when Digital Commerce 360 publishes news content.

The post PayPal job cuts cost the company $71 million in Q2 appeared first on Digital Commerce 360.

Businesses are typically valued as a multiple of EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). EBITDA is a shorthand for pre-tax cash flows. Theoretically, it may not be correct to use EBITDA, but it is the industry standard.

EBITDA multiples can range from a low of 2x-3x to 15x-20x or above. Most profitable e-Commerce businesses sell for between 5x and 15x EBITDA.

What drives the difference?

What do buyers want?

Businesses are valued on many dimensions, but four characteristics stand out:

1. The industry in which the business competes
2. The size of the business
3. The potential for growth of the business
4. The profitability of the business

The Industry

Industries that are expected to see growth are more highly valued than slow growing, mature industries. Also, non-inventory service businesses are valued more highly as the marginal cost of goods can be practically zero. A company which sells widgets must have and ship widgets. That is a real cost of goods.

Size

Size is valued for several reasons:

1. Large companies presumably have stronger management teams and more systems and controls than smaller ones. Therefore, they are not as “fragile.”
2. The larger business may “move the needle” on the income statement of the acquiring firm.
3. Businesses with scale provide the opportunity for more debt capacity. Debt capacity lowers the amount of equity needed to purchase the company, and, therefore, increases equity returns.

Growth

Acquirers buy the future. That’s why growth is important. 5%-15% sales growth is “normal.” However, 20%-30% growth per year is exciting to buyers.

Profitability

Isn’t this why we are in business?

What else drives value?

Proprietary products are important to e-Commerce businesses because they provide a barrier to competition from the likes of Amazon and others. Price comparisons are more difficult if the products are not the same.

A strong management team provides comfort to the acquirer that the business is not overly dependent on one individual.

Strong and accurate financials, both past and present, provide the basis for confident forecasts of future performance.

A large customer database that can be remarketed to drive LifeTime Value (“LTV”).

A large source of qualified prospects provides confidence that the business can continue to grow.

Repeat business drives LTV as a company remarkets to customers. Prior customers typically respond better and spend more than prospects.

High search engine rankings are important, but they are out of one’s control. SEM, emails, snail mail, and paid marketing are in a company’s control, and therefore are valued. As the budget for marketing increases, sales and scale should presumably increase accordingly.

High average order value typically enables significant spending for customer acquisition.

Strong reviews and high net promoter scores are nice selling points.

What diminishes value?

Working Capital Requirements

Businesses that carry and ship product have inventory and fashion risks. Also, as a company grows, investment in additional working capital eats into available cash flows. Furthermore, obsolete or slow-moving inventory typically penalizes the purchase price.

Poor Information Systems

Information is needed to invest. Poor systems reduce the confidence in the numbers. Furthermore, it points to needed future capital investments.

Concentration

Vendor or customer concentration (typically greater than 25% of purchases or sales) creates risk that changes made by 3rd parties will affect sales and profit.

Remember, too much reliance on Amazon and other marketplaces is problematic. Amazon is a competitor, not your partner.

Don’t let any one marketplace represent more than 10% of annual revenue. While there are companies that specialize in buying Amazon only brands, these investors typically only pay a modest EBITDA multiple. Many traditional acquirers don’t like marketplaces because…

1. Some marketplaces own the customer, making it difficult to remarket.
2. Marketplace fees are
3. A marketplace has access to the company’s data and may knock off the product or force a company into a wholesale relationship.
4. Marketplace changes rules without regard to one’s businesses.

Can an unprofitable e-Commerce company be sold?

Yes, but these are some questions to consider:

1. Is there a path to profitability?
2. Can the acquiring company reduce expenses or increase sales to make the acquired company profitable?
3. Are there proprietary or unique assets that bring value to a buyer?
4. At what price?

Other e-Commerce Specifics

What is the effect of drop-shipping inventory for those companies that use drop ship as a strategy?

There are two conflicting philosophies:

1. Typically, the business is a low working capital company, which increases value.
2. However, the products are not proprietary. That characteristic is more important unless the business has a lock on the customers. The value of a business is either in owning the product or owning the customer.

The Process of Selling an eCommerce Business

The process of selling an e-Commerce company is very similar to the process of selling most firms. There are four significant phases to this process.

Preparation (1-2 Months)

Once a contract is executed with an Investment Bank, the process really begins. Over the course of the next four to eight weeks, the Investment Banker will prepare three key items:

1. Potential acquirers list and contact information

• This list will include all the potential acquirers, both financial and strategic, that the Investment Banker will approach. The seller typically has a great deal of influence on this list, particularly the number of prospects and the individual strategic prospects.
• A list can vary from one prospect to several hundred. A more targeted list diminishes the likelihood of a successful transaction than a broad one. But many sellers do not want the risk that the market finds out the business is for sale.
• Like direct marketing, if an Investment Banker approaches a hundred potential acquirers, only around fifty may sign NDA’s to receive a copy of the CIM. Then, only ten to fifteen may put in an Indication of Interest (“IOI”)
• Finally, five to ten may put in a “nonbinding offer.” So, while a client may know the perfect buyer, the process is a little bit of a numbers game. There is a saying among Investment Bankers, “One buyer is no buyer.”

2. Confidential Information Memorandum (“CIM”)

• The CIM describes the business in great detail. It should contain all the information necessary for a potential acquirer to decide whether to submit a preliminary bid and its value. CIM’s can range from about twenty-five pages to a hundred pages or more.
• The company’s history, financial data, e-Commerce data, products, operations, and management team are all discussed in the CIM.

3. Executive Summary or Teaser

• The Teaser is typically a one-page summary of the selling points and description of the company. Most are presented on a confidential no name basis, as the teaser is designed to attract potential acquirers to sign an NDA in order to receive the CIM.

Other Preparation Tools

Seller’s Quality of Earnings reports (“Q of E”) are quickly becoming the norm for well run processes. An accounting firm is hired by the seller to review the financials, make adjustments, and examine the ongoing expenses. Buyers will typically perform a Buyer’s Q of E during due diligence. Therefore, in recent years, sellers have been going on the offensive by preparing a Seller’s Q of E to anticipate likely issues raised by a Buyer’s Q of E.

Marketing (2-3 Months)

Once the Teaser and CIM are complete, the Investment Banker will reach out to the prospective acquirers via email, phone, and snail mail. The Banker will use the Teaser, and phone conversations, to entice the potential buyer to sign an NDA. The NDA specifies that the potential acquirer will keep the information and potential transaction confidential, and to use the information only for the purpose of evaluating the acquisition. Typically, the acquirer is allowed to share the information with its advisors, if the advisors agree to abide by the NDA. After 1-2 months, the Banker asks for preliminary bids in an Indication of Interest. After IOI’s are submitted, several potential acquirers are invited to meet management, tour facilities, and ask questions directly of the seller. This management meeting is a precursor to asking for a Letter of Intent (“LOI”). Not everyone who submits an IOI is invited to these management meetings. Only those with “acceptable” IOI’s are invited.

Negotiation (1-2 Months)

After management meetings, the Investment Banker will ask for Letters of Intent from the interested parties. Here all the key business terms are laid out, including price, type of consideration, key representation and indemnity principles, and sources of capital. The Investment Banker and client will negotiate with those that submit LOI’s to increase value and improve the terms for the seller. It is quite usual to create an auction where one buyer tries to outbid the other. Eventually, an LOI is signed with one potential acquirer. The LOI spells out the key terms but is not binding. Diligence must be performed to verify all the data presented and to uncover all the known and unknown liabilities. The LOI is like a formal handshake agreement.

Diligence and Closing (2-4 Months)

Diligence can be very exhausting. First, all the facts of the business, including sales, profits, marketing, current liabilities, costs, and payroll are confirmed and examined. Secondly, all the legal documents are examined. Contracts, corporate documentation, and employee benefits must be up to date and complete. Lastly, all the liabilities and assets are reviewed. Tax liabilities, environmental conditions, information systems, and inventory quality are all examined in detail. Diligence enables a buyer the opportunity to perform an extremely thorough examination of every nook and cranny of the business. There are several areas of diligence that consistently arise as issues for e-Commerce companies.

1. Sales Tax Liability: Ever since the Wayfair ruling, companies are responsible for remitting sales taxes to each jurisdiction. Any liability for not submitting is with the seller. Most buyers require the seller to pay the taxes and be current with each state and jurisdiction by closing.
2. Escheatment: Though not as much an issue as sales tax, buyers may require the amount be remitted before closing.
3. Aged & Obsolete Inventory: While entrepreneurs often carry inventory that is more than a year old, or slow to sell, buyers typically discount the value of old inventory. This becomes an issue when calculating Net Working Capital Adjustments.
4. Privacy: Regulations in California and Europe are driving privacy policies and cookies. Being up to date on all regulations is necessary to make sure that the company is PCI compliant.
5. Covid-Bump: Normalizing sales and profits to accurately estimate the effect Covid had on the business is typical.
6. Cyber Security: Proper software and procedures are examined.

Diligence may also include a Seller’s Quality of Earnings report. Other reports prepared by expert third parties (accounting, tax, employee, and HR) are typical. The buyer wants to know exactly what they are buying.

Concurrent with diligence is the preparation of the definitive documents. Purchase and Sale documents (“P&S”), employee contracts, and non-compete agreements are all legal documents required to close the transaction. The P&S is the key document. In it, aside from the price, are the conditions and warranties agreed to by the buyer and seller. Using an experienced M&A lawyer is just as important as using an experienced Investment Banker.

Closing is the fun part. Documents are signed, sometimes over a dozen of them, and the payment is wired. Congratulations, your company is sold!

What can an owner do to smooth the selling process?

• Get the business modeled in Excel. This will help both parties understand what drives profits and sales.
• Know the Cost of Acquisition (“CoA”) of a new customer and the LifeTime Value of customers. Businesses should be built upon the premise that LTV is greater than CoA.
• Have historical financials audited if the company has sales greater than $50MM. If the company has sales between $5-50MM, then at least have an accounting “Review.”
• Keep all software licenses current.
• Collect relevant e-Commerce data over time:
  • Cost of Acquisition by Channel
  • LifeTime Value by Channel
  • Repeat Customer Rate
  • Visits and Conversions
  • Ad Spread by Channel
  • Seasonality
  • Shipping Revenue
  • Fulfillment Costs
  • Average Order Size
  • Merchandise Gross Profit
  • Sales

Does a business owner need an Investment Banker to sell? Technically, no.

However, a good Investment Banker will increase the realized value of a business in a few ways:

1. An Investment Banker lets executives focus on running the business;
2. An Investment Banker has experience negotiating deals;
3. A good process will result in a competitive auction to increase the value realized;
4. An Investment Banker knows many of the likely buyers.

Why hire an investment banker?

1. The lower middle market is inefficient. An Investment Banker will attempt to source multiple offers. The offers may be wildly different. It’s not unusual for the highest offer to be 2x-3x the value of the lowest offer.
2. Running a process with multiple potential acquirers increases the likelihood of a successful transaction. Although there may be a “perfect buyer” on paper for the business, there is no guarantee that the perfect buyer will be ready, able, or willing to purchase the company.

What should a business look for in an Investment Banker? Prior, successful transactions in the applicable industry.

Expect to pay an Investment Banker both retainers and success fees. A good Investment Banker will charge monthly retainers. This lowers the bank’s risk and ensures that an owner is serious about selling. Without a retainer, do not expect a robust process. However, the success fee should be 80-90% of the total compensation. The Investment Banker “makes money” only if the deal closes. This arrangement aligns the interest of the potential seller and its banker.

Why do deals not close?

A good Investment Banker should close 75%-90% of retained processes. However, deals do not close for a variety of reasons.

1. The number one reason why deals don’t close is because the company’s underlying performance does not achieve the predicted forecasts.
2. The second reason is “deal fatigue.” If a company is less prepared for a process than it should be, the process can drag on. The buyer and seller just give up on processes that are not smooth and orderly.
3. Additionally, deals do not close because diligence reveals there are liabilities that were not previously disclosed. For instance, sales taxes need to be paid in every state. They are the responsibility of the seller, yet not every e-Commerce company remits sales taxes consistently.

75-90% of deals should close

Stuart Rose is a Partner at Mirus Capital Advisors. You can reach him at rose@merger.com.

The post Preparing an eCommerce Company for Sale and Maximizing its Value appeared first on Digital Commerce 360.

Linda Cruz, a mother of four from a small town near San Antonio, Texas, started out using Klarna’s interest-free loans for occasional, large purchases. For example, she got a new air conditioning unit after hers died during a heat wave last summer. But as prices started to rise for essentials, she started using it for groceries, too.

Cruz, 37, is a bail bonds agent and her family’s sole earner. She gets paid bi-weekly and said Klarna is a useful budgeting tool. It lets her take care of her bills when she gets a paycheck.

“I noticed that I could buy essentials with it, and not have to pay everything up front. And it wouldn’t affect my pocket as much,” Cruz said. “When you break it up into the four payments, it’s bi-weekly. And I make sure it’s going to fall on the weeks of me getting my paychecks.”

Klarna extends interest-free loans that let consumers spread payments for purchases over multiple installments, instead of all at once. It makes money by charging retailers a small fee on every transaction and from interest on longer-term loans.

The Klarna model

The 17-year-old company has embraced the shift in the way people use its credit. Co-founder and CEO Sebastian Siemiatkowski runs Klarna. The company has struck partnerships with gas companies such as Chevron Corp. and developed an app that can be used in physical stores at retailers, like Walmart Inc. and Target Corp., as it hunts for new users. But interest rates for its own debt are rising. And Klarna’s burning through hundreds of millions of dollars per quarter. That makes the company more vulnerable to defaults from customers living paycheck-to-paycheck.

“This puts pressure on the Klarna model,” said John Colley. Colley is a professor of practice in strategy and leadership at the UK’s Warwick Business School. As users’ disposable wealth shrinks, “Klarna will be sat there with substantial bad-debt risks. Their customer base is likely to be sub-prime anyway.”

A representative for Klarna disputed the idea that the company’s customers aren’t creditworthy. The representative said credit agencies consider 93% of UK customers prime or better.

But Klarna is particularly vulnerable because higher interest rates, aimed at curbing inflation, boost its own borrowing costs. The prospect of a recession also means consumers will have a harder time paying back their debts.

Borrowing costs

In a recent study looking at the buy-now-pay-later industry in the UK, Barclays Plc bank and debt charity StepChange found that 36% of users say this form of lending has become more appealing since inflation and energy costs began to climb.

“The risk that you are building up is a debt problem that could be exacerbated by the cost-of-living crisis,” StepChange representative Sue Anderson said. The charity has seen an increase in clients that have buy-now-pay-later services as part of their outstanding credit.

“People don’t see it in the same way they see other types of borrowing,” Anderson said. “It is marketed as interest-free, but that doesn’t mean it is risk free.”

“The risk that you are building up is a debt problem that could be exacerbated by the cost-of-living crisis,” said StepChange representative Sue Anderson. “It is marketed as interest free, but that doesn’t mean it is risk free.”

Klarna is a “sustainable alternative” for American consumers who are used to credit card companies with fees and high interest, a company spokesperson said.

“If for decades it made sense to use a credit card to pay for groceries, we believe it’s better value for people to use Klarna’s interest-free products.”

The company had also complained about the StepChange survey, saying that Barclays offers an installment credit product with a 10.9% interest rate and calling the report’s conclusions “hugely patronizing.”

Default rate

Klarna’s net credit losses include defaults. The losses rose to 1.19 billion Swedish kroner ($110 million) in the first quarter of 2022. That’s up about 50% from the same period the previous year. Meanwhile, the platform is burning through cash, losing more than 7 billion kroner in the quarter.

A spokesperson said that absolute credit losses are higher year-over-year because of a surge in new users following an expansion in 2021. Credit losses as a proportion of the total customers spend with its service have declined.

While Klarna doesn’t disclose its default rate, the company evaluates customers’ ability to repay on every transaction and losses are consistently less than 1%, a spokesperson said.

Klarna’s cost of borrowing in the open market has risen sharply in the first half of 2022. A February 2024 floating rate bond has seen Klarna’s discount margin climb to 318 basis points. A discount margin measures the credit spread over benchmark borrowing rates. That pushed the company’s two-year borrowing cost above 4%. And that’s more than double what it was at the start of the year.

Still, for customers like Darrin Givens, a musician and producer from Detroit, Klarna has become an important tool for both discretionary spending and essentials.

“I used Klarna for gas on a trip back home before I made my move from Mississippi to Michigan,” the 32-year-old father of two said. “I stopped at a Chevron and saw that they did Klarna in store and did it through the app. It was fairly easy, and I would do it again.”

Sign up

Stay on top of the latest developments in the ecommerce industry. Sign up for a complimentary subscription to Digital Commerce 360 Retail News.

Follow us on LinkedIn, Twitter and Facebook. Be the first to know when Digital Commerce 360 publishes news content.

The post Klarna customers look to BNPL for groceries as debt risk rises appeared first on Digital Commerce 360.

After months of consultations, the Treasury confirmed that lenders will be required to carry out affordability checks on customers and ensure advertisements are fair. The Financial Conduct Authority will need to approve providers, and borrowers can take complaints to the Financial Ombudsman Service.

The rules will take time to change. The government aims to lay secondary legislation by mid-2023, after which the FCA will consult on its regulation. It comes as companies from Apple Inc. to Klarna Bank AB race to offer shoppers the chance to pay for small items in installments, which are interest-free if they pay on time.

“By holding buy now, pay later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the U.K.,” said John Glen, economic secretary to the Treasury.

The government also confirmed that other forms of short-term interest-free credit will be required to comply with the same rules. That includes paying for dental work or larger items like furniture. With inflation at a 40-year high, U.K. regulators told lenders of all forms they need to offer more support to struggling borrowers.

BNPL among the Top 2000

45.7% of Digital Commerce 360’s Top 1000 online retailers offered a BNPL option in 2021. That’s up from 28.2% in 2020. The Top 1000 are North America’s leading online retailers in order of most web sales.  And 7.4% offered two or more BNPL options, an increase from only 1% in 2020.

Small- to mid-sized retailers are also offering BNPL, with 32.9% of Digital Commerce 360’s Next 1000 offering at least one BNPL option. The Next 1000 lists retailers ranked Nos. 1,001 to 2,000 by online sales.

Sign up

Stay on top of the latest developments in the ecommerce industry. Sign up for a complimentary subscription to Digital Commerce 360 Retail News.

Follow us on LinkedIn, Twitter and Facebook. Be the first to know when Digital Commerce 360 publishes news content.

The post BNPL lenders to get tighter UK regulation appeared first on Digital Commerce 360.

Stockholm-based Klarna said its virtual shopping tools are being used by about 300 brands including Levi’s and Hugo Boss, allowing customers to interact directly with shop assistants when browsing online.

“We replicate the brick-and-mortar experience of receiving personalized advice from an in-store expert and bring it to the online realm,” said David Sandstrom, Klarna’s chief marketing officer.

Acquiring social shopping platform Hero

The new merchant-facing app comes after Klarna’s acquisition in July 2021 of social shopping platform Hero. Adam Levene, Hero’s founder, said customers are more likely to make a purchase after speaking with an in-store expert online.

The platform also has the potential to reshape the working day for sales assistants. They could be sharing videos and photos of items during quieter times in the physical store. They can even do so while working from home, according to Klarna. It could mean stores, which were forced to overhaul their business models during the pandemic, become more like content creation studios, with fewer or no customers but a bustling online presence.

Klarna said it would not be responsible for training retail staff in this new role. But it said it would offer tutorial videos on the app. Retailers will also be responsible for allocating time for virtual shopping assistance. Retailers pay a onetime set-up fee to use the platform. Sales representatives will be able to toggle their availability to chat, and can log credit or commission for sales on the app.

The virtual shopping feature is going live in 18 markets. In North America: the U.S. and Canada. In Europe: the U.K., Norway, Denmark, France, Poland, Netherlands, Belgium, Germany, Austria, Switzerland, Spain, Portugal, Italy and Sweden. It will also be available in Australia and New Zealand. The offering will roll out to additional countries later in the year, Klarna said.

Emerging from the pandemic

Buy-now-pay-later credit use exploded when the COVID-19 pandemic drove shoppers to online stores. Klarna was valued at $45.6 billion in its most recent funding round last June, which made it Europe’s most valuable startup.

Financial regulators are looking at tighter rules on these increasingly popular short-term debt products, and Klarna has said it will start providing information on UK customers to credit agencies.

Klarna has been seeking to expand beyond its buy-now-pay-later service. In November 2021, the firm announced it acquired PriceRunner to incorporate more product information into its app. PriceRunner is a Nordic comparison shopping service.

Stay on top of the latest developments in the ecommerce industry. Sign up for a complimentary subscription to Digital Commerce 360 Retail News.

Follow us on LinkedIn, Twitter and Facebook. Be the first to know when Digital Commerce 360 publishes news content.

The post Klarna looks to traditional retailers in further push for hybrid shopping appeared first on Digital Commerce 360.