A post-COVID-19 e-commerce hangover is hitting Roman Khan. He launched his first direct-to-consumer brand in 2013, acquired other brands, and in 2021 founded Peak 21, an aggregator with equity investors. The outlook was good.
As we move towards 2024, many e-commerce companies are struggling. Mergers and acquisitions intensified. Still, Khan perseveres. His team carefully reviews dozens of potential purchases each month.
In a recent conversation, Mr. Khan discussed his investment criteria, current market conditions, and predictions for the recovery. The entire audio is embedded below. The transcript has been edited for clarity and length.
Eric Bandholz: Please give us an overview of your activities.
Roman Khan: I’m the founder and president of an e-commerce holding company called Peak 21. We buy, grow, and sell direct-to-consumer brands. My DTC experience with him began in 2013 when my wife Jennifer and I started his Linjer. We used to sell leather bags, but now we mainly sell jewelry. Released on Indiegogo.
By 2016, our annual revenue reached millions. This was big enough for Jennifer and I to quit our jobs and take on this full time. In 2017, Ringer generated her $1 million in EBITDA (earnings before interest, taxes, depreciation, and amortization). By that time, we had raised significant funding on Kickstarter and Indiegogo and had built some street cred. People have been reaching out to us and asking how we did it. We decided to diversify. We needed more branding, and meta ads were working well.
I took that $1 million in cash, our street cred, and invested it in three other DTC companies with a combination of sweat equity and cash. Each had annual revenue of less than $1 million. By 2019, the group had achieved sales of $50 million.
After the coronavirus outbreak in 2020, revenue ballooned to $100 million a year. In 2021, investors knocking on our door, especially Jeffrey Yang, whose family owned Forbes Media until this year. He came to my office and said that we needed to bring in outside capital to acquire a more prominent company.
We started a blank check company called Peak 21. Jeffrey Yang and others invested his eight-figure stock. We’re now using it to acquire companies. We’re looking for brands with annual sales of between his $5 million and his $50 million.
Bandholz: What is the ideal acquisition candidate?
Clan chief: The pool is shrinking. I spoke with many owners. My acquisitions team talks to over 100 companies every month. Only about 10% have the product-market fit to grow on a budget. The main criterion now is size. Let’s look at the basics. What is the customer acquisition cost? And what is the repeat purchase rate? The best-case scenario is that 70% of first-time buyers repeat in the first quarter. You know your investment is likely to work out at this rate.
Second, look at your customers’ buying habits. For example, we run a company called Nutrition Kitchen. This is a daily meal delivery service. Daily habits, not weekly or monthly, play an important role.
Beyond consumables, we consider contribution margin at three levels.
First, calculate your revenue (excluding taxes and coupon sales) and shipping charges collected at checkout. This leaves you with “Profit Contribution 1”, or PC1.
Approximately 10 variable costs are then deducted, including warehousing, picking and packing, shipping, returns, and exchanges. The result is a profit contribution of 2, or PC2.
Finally, subtract marketing to determine PC3.
Calculate EBITDA by subtracting operating expenses from PC3.
The key acquisition metric is achieving 50% or more PC2 while maintaining a competitive MSRP.
Bandholz: Screening 100 candidates every month is difficult.
Clan chief: Many e-commerce companies are currently struggling. Revenue and EBITDA are down. Two of our six major brands are facing significant challenges. Overall it’s okay. We are growing with a diverse portfolio. But those two are a nightmare. We have lent each of them over $1 million in the past 24 months. So it was difficult. Many founders are holding off on selling until 2025 or 2026.
We acquire companies in four ways. One is cash. The second is seller financing. The third method is to use debt, which involves borrowing money based on the value of the acquired company. I would like to add that this path is currently very difficult. The fourth is a stock exchange in which we acquire a company that holds shares in Peak 21. I’m short on cash right now. There is little or no appetite on our part to pay significant amounts of cash upfront. When we talk to companies, we are often the only real buyers.
Two things need to happen for the market to improve. First, investors must overcome this problem. Losses due to aggregators, perch, trasio, etc. Second, interest rates must be lowered. Once that happens, liquidity will loosen up and hopefully the market will come back, probably by Q1 2026 in my prediction.
Bandholz: How can listeners contact you?
Clan chief: our site is Peak21.io.they can message me X or linkedin.
