FBA aggregators are becoming more common in e-commerce. For business acquisitions, the top five companies raised over $2 billion.
If you’re thinking of selling your Amazon business to an FBA roll-up company, do your homework first. Knowing your options will help you negotiate better deal terms and a higher selling price.
We’re going to look at why e-commerce roll-up firms exist, how they impact the marketplace and how you can maximise your profits by selling effectively.
FBA roll-ups are companies that specialise in Amazon acquisitions. In other words, they want to buy a lot of FBA businesses and run them themselves.
Like most new business owners, aggregators want to grow their Amazon businesses. The fact that they are well-funded and backed by venture capital allows them to optimise marketing, renegotiate supply chain agreements, and use specialised staff to perform various tasks.
A roll-up buyer, a private equity firm, an FBA brand investor, and an aggregator are all examples of aggregators.
Despite their complex operational infrastructure, their strategy is simple: buy e-commerce businesses at 2-3X multiples and instantly the brand becomes ten times more valuable in their portfolio.
Like any other business buyer, FBA roll-up executives want the best deal. They frequently target Amazon sellers who are unaware of their true worth. They contact the owner of businesses that meet their criteria and then make an offer, which is usually pretty low relative to the true value
On the surface, selling your company to an aggregator seems appealing: they pay cash, close in 30 days, and there are no broker fees. Such a deal entices inexperienced Amazon FBA sellers.
But, if you dig deeper, aggregators have some unappealing characteristics…
Almost all aggregators fail to advertise that they want several months’ worth of inventory, a “stability payment,” and an earnout.
Also, aggregators do not want you to market your company. Why? They know that if they have to compete with other buyers, they must offer a higher purchase price.
Even if a sculpture is flawless, an auctioneer will struggle to get a high price with only one bidder. If the auctioneer sells the sculpture to multiple bidders, the atmosphere of competition will drive up the price and reward the seller.
A smart auctioneer would never sell to a room with only one bidder/competitor.
An experienced broker like Ecom Brokers can help you connect with a large pool of qualified buyers looking to buy Amazon businesses. More buyers mean higher purchase prices and more deal structures to choose from.
If one aggregator sees value in your company, so will many others.
“What are my goals for selling my business?” These questions must be answered before accepting an offer.
Your goals will dictate which deal structure is best for you. Begin by clarifying what a “good” deal means to you:
How much involvement do you want in the post-sale operations of the business?
Various deal structures and exit strategies come with an opportunity cost.
The first thing to consider is whether you want to stay involved or not.
If you’re sick of Amazon or want to start a new project, you may want to leave your current company. If so, look for a buyer who doesn’t expect you to stay involved after the sale.
But if you enjoy running your company but don’t want the responsibility or risk of being the sole owner, it might be worth negotiating a deal that allows you to keep a key role in it.
Staying in the business after the sale usually means keeping equity.
Keeping a share of your company allows you to share in future profits if the business grows. People who believe in the future of their company often welcome the chance to keep a stake.
Others prefer to receive the full purchase price in cash at closing (or, shortly thereafter). In these cases, the Amazon seller accepts a one-time payment in lieu of future profits.
While there are exceptions, most sellers value getting the best deal over saving a few weeks.
A business owner in financial difficulty may have no choice but to sell quickly. The best financial deal may not be worth it if a seller is facing foreclosure or another personal emergency.
If you’ve spent years building a valuable business and planning a sale, why would you waste money?
While selling directly to an aggregator is quick, it is not always profitable. Get an accurate valuation and let a diverse pool of buyers compete for your business.
Accurately valuing your company is critical to securing the best deal. Even the most successful and intelligent entrepreneurs make mistakes.
When selling directly to an aggregator, they will happily overlook errors if it benefits them.
Professional advice is strongly advised when valuing your FBA business, but understanding the process is prudent.
The Seller’s Discretionary Earnings and the multiple determine the value of your company. Aggregators want to push both of these down.
Seller’s Discretionary Earnings (SDE) are earnings that the seller can spend at their discretion.
SDE is the pre-tax profit before interest, one-time investments (e.g., an accounting audit, an educational conference), non-cash expenses, the owner’s benefits, and non-related income of expenses are taken into account. (The next buyer will not be required to bear these costs.)
In other words, SDEs are earnings that the seller can spend as they wish.
Accounting experts will tell you that SDE and net income aren’t the same things. This article will explain how SDE is calculated.
Seller’s Discretionary Earnings show the company’s profitability. Buyers use this data to forecast future earnings and compare it to their investment strategies.
The value of your Amazon brand is determined by multiplying SDE by a number known as “the multiple.”
Calculating SDE multiples using Profit and Loss statements is both an art and a science.
The multiple is determined by four main areas of your business:
Clearly, buyers prefer growing companies. For this reason, companies with consistent, steep growth will be valued higher than those with plateaued or declining growth.
Risk, like growth, reduces a company’s value. For example, a brand with only one SKU may deter buyers from paying much for your FBA business.
Documentation refers to your e-commerce business’s systems and organisation. You will be valued higher if you have detailed Standard Operating Procedures and organised financials.
Transferability refers to how easily a new owner can take over and run your business. Your business is highly transferable if someone could easily take over and succeed. The multiple will be lower if running your business requires extensive specialised knowledge or skills.
Along with calculating SDE and the multiple, you must consider add-backs. This is key area where aggregators will take you to the cleaners if you don’t have this done by a professional.
Owners who are unaware of all add-ons will end up paying “dumb tax”. It’s payable to the buyer in the form of a big discount on the deal price!
In short, an add-back is a cost that the new owner will not bear. In other words, add-backs are expenses incurred while running your business that the buyer avoids. A one-time website audit, a PPC webinar series, or a mastermind membership are unlikely to be taken on by a new owner.
When selling your company, create a list of add-backs that includes all eligible expenses. “Add-backs” are expenses that are taken out of your net profit before you value your business.
Because add-backs increase your company’s value, you must not exclude any expenses that qualify as add-backs. This can lead to a lower business valuation. Buyers love it when you don’t do this properly.
Some add-backs, like personal travel expenses, are well-known. Other add-ons are uncommon and easily missed. Because there are so many expenses that can be added back and each business is unique, it’s always best to consult a qualified advisor (hint – Ecom Brokers).
The inclusion of add-backs increases the value of your company, so do not exclude any expenses that qualify as add-backs.
SDE and other FBA roll-up companies won’t notify you if you miss an add-back! An error of this magnitude can cost a company tens of thousands or even millions of dollars.
When preparing to sell an e-commerce business, it is critical to determine the best deal structure.
You can sell your FBA business in a variety of ways. Among them are:
In all-cash transactions, the full purchase price is exchanged at the time of purchase. All-cash transactions are ideal for sellers who want to quickly and completely exit their business. Of course, all-cash transactions require the buyer to have sufficient funds. Typically, the aggregators have plenty of money!
A percentage of the purchase price is withheld by the buyer and paid to the seller later if certain performance metrics are met. This s common if the seller is going to stay involved after the deal.
The seller finances a portion of the purchase price. For example, the buyer pays only 60% of the purchase price at closing and makes monthly interest-only payments until the seller receives the remaining 40%.
In a partial buyout, the seller keeps a stake. As a result, the seller often remains active in the business. Even more, money can be made when the whole business is sold at some point later.
Some transactions include post-sale consulting agreements where the seller advises the new owner. They are frequently used when a new owner is unfamiliar with the business model or wishes to train employees.
While some deal structures are more common than others, there are virtually infinite possibilities. But the aggregators don’t want you to know that!
Selling directly to an Aggregator can make sense for sellers in a hurry.
A better valuation, more offers, a higher sale price, and a wider range of deal structures are all advantages of going to market with a qualified broker.
Bottom line…you shouldn’t sell direct. Use Ecom Brokers
When you go direct, you don’t get a good enough price or the best terms. We get the best price to reflect the true value of your business because we market it to all potential buyers when we handle it for you. It is far too much work to do on your own.
You’ve worked hard on your company, putting your heart and soul into it. Now try to sell it. It’s a massive amount of work. Not only are you attempting to set up the sale, but you are also attempting to run the business.
Consider everything you do for your business, then add preparing it for sale, marketing it, and answering all of the potential buyer’s questions (which are numerous). It’s not enjoyable.
You need experts to do it for you, and they must do it well. That’s Ecom Brokers.
You understand your industry better than anyone else. We are, however, e-commerce experts, having built, scaled, and sold international 7-figure brands. Add to that our 20+ years of financial experience, and you have the ideal combination. We’re not just brokers; we know the e-commerce game inside and out, which is critical when looking for the right partners to sell your company to. We’ll get you ready to sell, find a buyer, and close the deal.
Ready to sell your business for the best possible price? Start by clicking the link below! No obligation, no hard sell. Just solid, professional advice.