You wouldn’t enter a poker tournament without being prepared, would you? A solid poker player knows the rules of the game. In the words of Kenny Rogers:
“You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done.”
If you are a successful Amazon seller, you know that poker is really no different than setting yourself up for an exit strategy. You really have to know your stuff to be a worthy opponent – both in the game of poker and the game of aggregating.
In the past few years, a new business model has taken off, focused on the acquisition and aggregation of Amazon sell-side business. Companies serving this section of the market have raised tens of millions of dollars and some have achieved unicorn valuations. This sea change has the potential to upend Amazon’s reputation as a disjointed group of owner operators utilizing FBA to make a living.
Amazon represented 38% of all digital sales in 2020 according to eMarketer, with no indication of slowing down. This type of market opportunity has attracted new buyers – flush with capital – to seize the chance to take a piece of that pie. The majority of companies doing acquisitions are exclusively focused on FBA businesses, intrigued by the prospect of taking a business or product that already has a good track record and increasing its multipliers for larger net profits.
What Are Buyers, M&A Companies, and Aggregators Looking For?
As a precursor to this long, sought-after question, it’s important to note that not all prospective companies look for the same thing. Some have requirements of your tenure in the space (i.e. you have to be selling over a year on Amazon). Some have a monthly sales base your Amazon brand has to meet to even be considered. Some want full-ownership over your assets and operations while others keep their sellers on board via promises of commission in sales or equity.
But, despite these stipulations, all buyers consider four main factors when determining the valuation of your company.
Your Amazon company’s assets include things like inventory, employees, suppliers/manufacturers, overhead and operations, and your Amazon storefront. Interested buyers will even look at your reviews and ratings to determine the value of your assets.
One of the main metrics that buyers look into when deciding the value of your company is your sales history, profit margins, and potential growth evaluation. Obviously, no aggregator is going to invest in a company that isn’t already doing well, or (at the very least) has a lot of potential to do well. Amazon businesses with a history of good sales and profits are going to be more enticing to interested buyers. However, such metrics aren’t always a make-or-break deal. If a buyer or broker sees a lot of potential in a product you are selling, they may still be interested in purchasing – but they will probably low-ball their offer.
As a general rule (according to Capforge), “While each aggregator is different, most want to see that you made at least $200k in annual net profit. On top of that, they’re going to want to take a look at your profit margins.What’s a good profit margin? For most aggregators, the answer is at least 15%. Some may be okay with 10%.”
The vast majority of aggregators are looking at market projections to ensure that the product they are purchasing is evergreen. Just because something is trendy or in high-demand currently does not necessarily make it a good project to acquire for long-term goals. Aggregators are interested in supply-and-demand. They want to ensure that the products they invest in will be needed for a long time to come.
Categories like Home & Kitchen, Sports & Outdoor, Pet Supplies, and Baby tend to be the highest on aggregators’ radar because these items are essentials that people will buy, over-and-over again.
Any products that are returned often (apparel) or require certifications (medical devices or supplements) or are costly to ship and store (furniture) are often overlooked as being too much of a headache to bother with.
Brand Registered/Patented Products
Though not necessary, M&A and aggregating companies favor unique products that are patent-protected. Not only do trademarks and patents ensure the protection of the product, but this is seen as an advantage because there is less chance of copy-cats and competition.
According to Rich Goldstein with Goldstein Patent Company: “People often consider an investment in IP as how it will impact their bottom line during the operation of their business. In other words – will this IP slow their competition enough to justify the cost of the IP in terms of revenue dollars saved or gained? But the most significant ROI from IP often comes later. So they are surprised to discover the major unexpected impact it has on the business’s valuation. At such a moment, the initial investment in IP may actually pale in comparison to the return.”
How Can I Increase the Valuation of My Amazon Brand?
Making Smart Financial Plans for an Easy Exit
We had the opportunity to speak with a spokesperson at Elevated Brands (One of the top M&A companies in the Amazon space) and here were some of his suggestions:
“Whether you are looking to sell your business today or just getting started on Amazon, there are a couple of items that you can do to put yourself in a better position. The first would be to have a separate Amazon store for each Private Label brand that you own. While this may seem like more work for you, down the line, you may only want to sell one of those brands and it would create headaches for you and your acquirer.
“Another easy way to position your business would be to have a separate bank account for your private label brand. Additionally, you should work with a CPA and use accrual accounting not cash accounting if your business is growing and inventory is increasing in line with the growth – profit on a cash basis will be lower than on an accrual basis – meaning you’ll be leaving money on the table.
“Lastly, you should start building a brand presence on and off Amazon. Creating social media accounts can take a long time before they start to get meaningful followers, but simply locking in the names and having a basic page will help to organically create a list of potential high converting customers.”
Factoring in Overhead When it Comes to Your Profits
According to Yoni Mazor, CGO at Getida:
“Most Amazon sellers are obsessed and hard focused on growing their revenue and gaining market share which is a good thing. However, they often tend to overlook and understand the costs structure and variety of fees involved in selling on Amazon. This in turn can take a serious toll on the profitability of an Amazon seller or even worse, having sellers not even realizing that they are losing money as a business. Preparing your Amazon business to be sold and making a successful exit should be heavily tied and focused on the ability of your Amazon business to turn a healthy profit over time. This is the main reason any organization wants to buy another, and the world of Amazon sellers who are trying to make an exit is no different in that regard.
“One interesting method that helps Amazon FBA sellers increase their profit in a quick and effective way is auditing their FBA transactions for any discrepancies and maximizing the FBA reimbursements that they are eligible to receive. All the newly found money will then streamline right into the pockets of the sellers and provide a healthy boost to their bottom line profits. If you are about to sell your Amazon business, This method of profit-boosting should be in your playbook.”
Not Adding More SKUs To Appreciate Your Company’s Value
It would seem as though adding more products to your storefront would make it that much more attractive to aggregators, but the reality is that it could actually hinder a buyer’s desire to invest. Why? According to Yael Cabilly at Fortunet:
“As expected, the majority of survey participants emphasized that, when it comes to SKUS, it’s less about the number and more about the profit. Even though the spread seems fairly even, in interviews, we have confirmed with buyers their overriding tendency to look for easier businesses to run, with a significant SDE per SKU. From our experience, businesses with a large number of SKUs (1000 +) meet the investment criteria of a relatively small number of aggregators who have the capabilities to manage more complicated businesses.”
Making Sure Your Inspection Process Is Up to Standards
Believe it or not, how you handle your supply-chain has a direct effect on how your company’s valuation will be determined. Remember: when acquisitions are on the table, one of the things buyers look at are assets which include who manufacturers your units, who inspects them, and who ships them. If you are cutting corners with your quality control management, you can rest assured that it will negatively influence your selling price.
Statistics show that 91% of 18–34-year-olds trust online reviews as much as personal recommendations. Furthermore, 93% of consumers say that online reviews influenced their purchase decisions.
Even more shocking is that studies conclude that people who are satisfied with a product are only 1-2% likely to leave a positive review. Conversely, people who are dissatisfied with a product are 66% likely to leave a bad review. Those are already bad odds stacked against an Amazon seller. But if you are providing your customers with defective products, the odds are even more stacked against you.
Thus, it’s incredibly important to make sure you implement proper quality control before faulty products get in the hands of your customers. Remember: aggregators are looking to purchase your listing/storefront, so if you have negative reviews, this can devalue both your assets and your profits.
As Movley’s founder, Sajag Agarwal explains:
“Returns, low ratings, and bad reviews due to poor inspection implementations CAN be avoided. And avoiding these issues make your company significantly more attractive to potential buyers. Remember: aggregators are not interested in a company that has high failed-inspection rates that correlate to a bad customer experience.”
While the market demand for Amazon businesses is incredibly high right now, this means that competition to be sought after is high as well. You need a winning hand to make money playing poker, right? And this is really no different. Make sure that you have control over your “cards” before betting against the house.