The post-Covid e-commerce hangover has hit Roman Kahn. He launched his first direct-to-consumer brand in 2013, acquired others, and in 2021 founded Peak 21, an aggregator with equity investors. The outlook was good.
Fast forward to 2024, and many e-commerce businesses are struggling. Mergers and acquisitions have collapsed. But Kahn perseveres. His team examines dozens of purchase candidates each month, albeit with caution.
In our recent conversation, Kahn shared his investment criteria, current market conditions, and recovery forecasts. The full audio is embedded below. The transcript is edited for clarity and length.
Eric Bandholz: Give us an overview of what you do.
Romain Khan: I am the founder and president of an e-commerce holding company called Peak 21. We buy, develop and sell brands directly to consumers. My DTC experience began in 2013 when my wife, Jennifer, and I launched Linjer. We used to sell leather bags but now it’s mainly jewelry. We launched it on Indiegogo.
By 2016, we were generating a few million dollars in annual revenue – big enough for Jennifer and I to quit our jobs to work there full time. In 2017, Linjer generated EBITDA of $1 million – earnings before interest, taxes, depreciation and amortization. By then we had raised quite a bit of money on Kickstarter and Indiegogo and gained street credibility. People were contacting us and asking us how we did it. We decided to diversify. We needed more brands and the meta ads worked well.
I took that million dollars in cash, our credibility, and combined equity and cash to invest in three other DTC companies. Each earned less than $1 million a year. In 2019, we had a turnover of $50 million as a group.
When Covid hit in 2020, revenues soared to $100 million a year. In 2021, investors were knocking on our door, including Jeffrey Yan, whose family owned Forbes Media until this year. He came to my office and told me I needed to bring in outside capital to buy bigger companies.
We created a special purpose acquisition company – a blank check company – called Peak 21. Jeffrey Yan and others invested eight-figure equity. We are now using this SPAC to buy companies. We are looking for brands with between $5 million and $50 million in annual sales.
Bandholz: Who is the ideal candidate for an acquisition?
Khan: The pool is shrinking. I have spoken with many owners. My acquisitions team speaks with over 100 companies every month. Only about 10% have product-market fit that can grow on small budgets. Our main criterion now is size. We look at the fundamentals. What is the customer acquisition cost? And the rate of regular buyers? The best scenario is that 70% of first-time buyers return in the first quarter. We know that the investment will likely pay off at the same rate.
Second, we look at customer purchasing habits. For example, we own a company called Nutrition Kitchen. This is a daily meal delivery service. Daily rather than weekly or monthly habits play an important role.
Beyond consumables, we look at contribution margins at three levels.
First, we calculate revenue (net of taxes and coupon-based sales) and shipping collected at checkout. This leaves us with the “first profit contribution” – PC1.
Then we deduct about 10 variable costs, such as warehouse storage, picking and packing, shipping costs, returns and exchanges. This results in a second profit contribution – PC2.
Finally, we deduct marketing to determine PC3.
From PC3, we subtract operating expenses to arrive at EBITDA.
A key acquisition metric is a PC2 of 50% or greater while maintaining a competitive suggested retail price.
Bandholz: A hundred candidates per month is a lot to review.
Roman: Many e-commerce businesses are struggling right now. Revenue and EBITDA are down. Of our six main brands, two are in serious difficulty. Overall we are doing well. We are growing with a diversified portfolio. But these two are a nightmare. We have loaned over $1 million to each in the last 24 months. So it was hard. Many founders wait until 2025 or 2026 to sell.
We buy businesses in four ways. One is cash. Second, seller financing. The third is through debt, where we borrow money based on the value of the acquired business. This path, I must add, is very difficult today. The fourth method is a stock swap in which we acquire a company holding Peak 21 stock. Money is tight right now. Our willingness to pay a lot of money up front is low to non-existent. We are often the only real buyers when talking to a business.
For the market to improve, two things need to happen. First, investors need to overcome losses from aggregators such as Perch, Thrasio and others. Second, interest rates must fall. Once that happens, liquidity will ease and hopefully the market will come back, probably by Q1 2026, in my estimate.
Bandholz: How can listeners contact you?
Khan: Our website Peak21.io. They can send me a message X Or on LinkedIn.