With skyrocketing online demand, it’s no surprise that Fulfillment by Amazon (FBA) and Amazon Retail companies are becoming the new favorites among buyers and investors within the M&A industry. In 2020 alone, over 50% of units sold on Amazon were from third-party sellers, and with Amazon’s growth only accelerating, many investors are looking to get a slice of the e-commerce pie. The growth in companies looking to acquire FBA companies or Amazon Retailers and integrate them into their portfolios is increasing significantly, however, as the owner of an Amazon Retailer or FBA company, is now the right time to sell?
Why Sell an FBA company or Amazon Retailer?
According to Junglescout, only 47% of Amazon retail business owners are self-employed and live off their Amazon business’ income, 37% have other full-time jobs. Although an Amazon business may have initially begun as a secondary source of income, explosive growth, or time and resource constraints can make keeping up with the business particularly onerous. In other cases, perhaps the reliance on Amazon, with changing regulations, rules, and algorithms have made running the business feel unstable, and as a result, the owner seeks to exit into more predictable opportunities. In these cases, selling can provide the chance to exit into a different side project, or to take the passenger seat in running the business, so that the owner can focus on ventures that better suit their lifestyle. Given that many Amazon retail businesses and FBA companies fetch valuations in the low millions, and the thirst of buyers in the industry, now is an excellent time to sell.
How to Value an Amazon 3rd Party Retailer?
Understanding what the Amazon Retailing business is worth is crucial to successfully complete its sale. Although Amazon Retailers and FBA companies fetch strong multiples, careful consideration must be made as to not incorrectly value the business. The valuation calculated will vary dramatically depending on the business model; FBA versus private label or wholesaler versus drop shipping, all possess different key valuation drivers and measures of health. Of course, the final price paid at closing will vary depending on the deal structure and negotiations, however, sellers of 3rd party Amazon Retailers can assure an easier and more profitable transaction by focusing on these drivers, consistency, and clean financials.
Financials
Typically, buyers and investors of Amazon Retail or FBA companies pay attention to consistency and profitability. Gross margins, operating margins, and net income margins are given particular importance and compared over the history of the company to determine the efficiency of operations, the resilience of the business model, and in general the success of the company. The revenue breakdown, including geography and demographics, recurrence, and concentration plays a significant role in a buyer’s judgment of a fair price for the company as well. If any anomalies exist on the statements or any seasonality, it must be explained. Given the tracking and data collection provided by Amazon, communicating and providing these financial metrics during due diligence is made dramatically easier, allowing for buyers to have an easier time evaluating the FBA or 3rd Party seller.
Operations
The efficiency of operations, and any potential advantages specific to the business model of the Amazon 3rd party seller, contribute significantly to the value of the company. Questions about time and responsibilities required from the owner, skills, and experience needed for operating the business, employee breakdowns, and customer acquisition channels are common among all Amazon Retail company transactions. Specific questions based on the business model of the company, such as supplier relations for wholesalers and retail arbitrageurs, or information on property, plant, and equipment for manufacturers will also need to be answered. The answers to these questions will affect the valuation, and the premium paid for the company.
Market and Positioning
Unique to FBAs and 3rd party sellers, buyers, and investors within this industry pay extra attention to the company’s traffic, customer base, ranking, and rating on Amazon. Similar to financial metrics, it’s not enough to simply have a rating above 4 stars, the consistency and average trend of this rating matters to buyers, as it indicates the overall trend of demand and consumer opinion of the product. The product offerings ranking and traffic on Amazon as well as on Google play an important role in potential premiums paid for the company. Buyers will also assess the niche of the product category, including barriers to entry and the size and positioning of competitors.
Although FBA businesses have lightweight, easy-to-manage business models, often multiples used to value these businesses face significant downward pressure due to the heavy reliance on Amazon. Furthermore, the risks associated with Amazon, its customers, its ratings, and changing regulations can further drive potential premiums down. Given the small amount of power 3rd Party sellers have on the site, it is advantageous to expand or diversify operations such that customers can buy and interact with the business on a variety of platforms, including a company-run site. This would circumvent the heavy reliance and risk associated with only selling on Amazon, driving multiples to a more attractive level. Large changes to the operating model, however, cannot happen close to entering the market, and will as a result have to be implemented several quarters beforehand to establish consistency and history.
Deal Structures for Amazon Retail and FBA Business Transactions
Deal structures will vary dramatically based on the type of buyer as well as the asking price. Generally, deals are structured as an all-cash purchase, a vendor take-back (VTB), or an earnout.
Cash Purchases
Cash purchases are just that, cash paid at closing for the business at an amount equal to a multiple of the FBA’s or Retailers’ seller discretionary earnings (SDE) or other earnings metrics. These deals are advantageous when the seller seeks the funds from the sale of their company immediately. Often, deals will be structured as a certain amount paid in cash at close, and a portion of the price paid through the other methods below.
Vendor Take-Back
A vendor take-back is a type of financing agreement, where the buyer pays a portion of the purchase price over time through periodic payments, effectively loaning the seller. This type of deal is used in conjunction with other methods and is advantageous for purchasers who do not have immediate access to the required funds. As a seller, interest rates on buyer loans can increase the value of the deal, however, there is increased risk as the buyer can default.
Earnouts
An earnout is an agreement where the buyer pays a percentage of future earnings of the company to the seller over a period of time. It is popular amongst industry consolidators, as an earnout can be used to keep on owners as vested shareholders for the business’ transition. An earnout is useful for owners who feel the business is growing too quickly, and fear exiting too early; it can drive the value of the deal beyond the initial asking price.
Considering the excellent growth Amazon and 3rd Party Sellers have seen over the last few years, now is a perfect time to sell an FBA or Amazon Retail business. Through the use of a professional transaction advisor, FBA and Amazon Retailer owners can easily navigate the sales process, from initial consulting of the sale to valuation to closing the deal. Although FBA and Amazon Retail businesses are extremely unique, by understanding the differences in the sale of a 3rd party seller business, paying attention to key valuation drivers, being savvy to potential deal structures, and utilizing trusted brokers, owners of Amazon Retailer businesses can successfully sell their company.