April 11, 2022
Ah, Amazon. Home to buyers, sellers, and now, aggregators?
Firms like Thrasio, Boosted Commerce, and SellerX are fast becoming investor household names. But, not in the traditional sense—investing in tech startups or growing Silicon Valley breakthroughs?
These investors are FBA Aggregators. Or what you might call FBA acquirers.
They thrive on scooping up successful Amazon-native brands.
These Amazon-seller aggregators have attracted over $6 billion in funding since the second quarter of 2020. In the first four months of 2021, these aggregators have already invested $2.5 billion into buying up Amazon businesses.
Screenshot: Marketplace Pulse
Aggregators are not the only players.
Individual buyers and institutional investors have their eyes set on successful Amazon brands too. Some acquisition firms and individual buyers do not disclose their funding volume.
So we can safely assume that the total circulating capital in the Amazon business acquisition space may be higher.
However, all buyers–individuals, institutional investors, and FBA business aggregators—share the same goal. That is they acquire private-label businesses under a platform company, cut redundant costs, increase efficiencies, and scale up revenue by up to 156% a year.
Amazon-native sellers cash out from their hard work. FBA business buyers gain a proven, thriving business. Amazon brand buyers return to the market to buy up even more FBA businesses, driving the Amazon Acquisition boom.
Let’s explore this acquisition market and what to expect from it.
Amazon private-label businesses are in high demand, and aggregator firms are buying them off to leverage their existing business structures.
Third-party sellers drove 55% of Amazon’s revenue in the first quarter of 2021. With the flexibility to apply multiple Amazon business models, sellers can optimize their profit margins considerably.
However, launching a brand that would eventually become successful carries lots of uncertainties and risks, plus it’s a daunting task. While it may appear to require less cash than buying up an existing Amazon brand for $15 billion, acquisition offers a safe shortcut.
Buyers acquire the years of hard work and proven business of the seller. As a result, these acquirers drastically reduce the risk of business failure and the complexities of starting from scratch.
Acquisitions come with tons of benefits for buyers:
These are assets the FBS business seller garnered over the years.
Besides, Amazon’s evolution as a trusted marketplace for sustainable brands holds more appeal to investors now.
While speaking on the BuyBox Experts podcast, Chris Bell, CEO of Perch, explained a few reasons for this boom in the market.
And of course, this all boils down to one thing—aggregators are just private-equity firms looking to make profits off of a tried-and-tested structure.
If they can’t replicate a profit structure, then there’s no buying it.
Now you may be wondering what your business is worth to these FBA acquirers, and how do you know when your business cuts it for them.
The criteria are slightly different for each aggregator. For example, Boosted Commerce reached out a while back wanting to buy an Amazon business I operate.
They gave five-point criteria I must meet to qualify for the acquisition, covering:
In practice, you should use these metrics to gauge your business if it qualifies for an aggregator buyout. These are not set-in-stone standards, a business without such healthy numbers could still be acquired by individual buyers.
An individual looking to buy and grow an Amazon business may not be so concerned about a significantly profitable Amazon business.
But if you’re looking to sell, here’s what buyers are looking for:
Buyers need legitimate proof of ownership before acquiring a business. Depending on the geographic location they’re targeting, the required registration documents may differ.
For instance, Boosted Commerce requires documents showing that your business is a US-based LLC or C-corp. But this is because they’re interested in acquiring businesses operating in the US, only.
On the contrary, Perch is interested in Amazon businesses operating in Asia, UK, the EU, and North America. They might require documents showing you’re authorized to operate a business in these regions.
Also, you must register your brand on Amazon. It offers them brand security, leverage, sustainability, and protection against counterfeit brands on the platform.
Aggregators acquire Amazon businesses for the long haul. Therefore, they need product categories that are both sustainable and stable for a long time. In addition to this, your SKUs must be easy to scale and handle when you exit.
Boosted Commerce, for example, wants you to have been in business for two years or longer.
Amazon seller acquisition companies only acquire businesses with a portfolio of profitable products. That means they’ll skip over fad-products with high revenue numbers but little profits.
Potential products must rank high in organic search, have high product quality ratings, and have a strong potential for growth. Most buyers are looking to purchase businesses with $100,000 annual profits or higher.
Some aggregators want businesses with over $1 million in profits. In the Boosted Commerce example, they want businesses with $250,000 to $2 million in annual profit.
A business’s revenue history helps determine the Seller’s Discretionary Earnings (SDE), which impacts the value of the brand.
Image Source: Perch
Brands with a high-performance history of more than one year attract buyers. It shows them that the product has proven demand and market for growth.
Businesses with more revenue and fewer SKUs are more attractive.
You’re likely to close the deal if you make $500,000 in revenue from 5 SKUs, or variations of them, instead of $1 million from 500 SKUs.
It gives acquirers room to focus on managing a few products in one category, instead of a myriad of products in diverse categories.
Buyers prefer businesses with double-digit margins based on their earnings before interest, taxes, depreciation, and amortization (EBITDA), and at least $250,000 annual net profit.
The metrics differ for each aggregator, but for household names like Perch and Thrasio, your Amazon business must generate above $1 million yearly to make the cut.
Image source: Perch
Additionally, each aggregator has an area of interest and niches they avoid.
However, companies with an open-minded approach market themselves as “category agnostic,” and won’t mind businesses in an unpopular niche so long as they’re a great fit.
Amazon raked in 84% net profit in 2020 compared to 2019. This tremendous growth opened an untapped market several investors are only starting to explore.
Flushed with cash from successful funding rounds, most acquisition firms operate through buyouts, and others offer a revenue-share model with the seller. In some cases, the owner exits their business altogether.
But, the business model is more or less the same. They take complete control of an Amazon brand and use market expertise to streamline business operations.
Here’s how it works:
Some FBA acquirers, like Thrasio, use this process to acquire a swath of Amazon brands in 30 days or less.
Once they’re in full control of a business, they proceed to take control of its channels of operation, including:
Budgeting would usually be run by a team of experts to drive growth across the new owner’s portfolio.
Thrasio, for example, generated sales of $16.5 million within two years of acquiring Angry Orange, a pet supplies brand. They’d acquired Angry Orange for $1.4 million in 2018 and drove it to 8x profits by redesigning its packaging and social media influencer marketing.
Image Source: Thrasio
Though these figures hold much appeal to investors, new entrants might find it hard to replicate, if they lack adequate funding.
For every market with a flood of capital, it’s normal to see valuations shoot up drastically and loopholed with risks.
Profit. Loss. The Amazon seller acquisition market is no different.
Several players with a stake in the market are ushering in a wave that’s changing Amazon’s landscape. Not all these changes are quite apparent at the moment. But if you plan to exit, you should embrace or at least be wary of them.
Here are some of them.
The Amazon acquisition market has sprung up a lot of brokers.
Successful entrepreneurs who made a clean exit at the beginning of the wave are now helping others do what they did.
Of course, this is not new. There are public listings (or flipping?) sites for entrepreneurs looking to sell their online businesses. Individual acquirers or those with lesser investment capital will ‘aggressively bid’ on it through consultations with the brokers.
But the surge in funding capital has flipped the business model on its head, with some of these brokers sitting on the board of acquisition firms.
Jason Boyce sold one of his Amazon brands years ago, but not to an aggregator. In an interview with Crunchbase, he said, “I wish I had hung in there. The valuations now are insane.” Boyce, who runs Avenue7Media as CEO, acts as an FBA acquisition consultant and sits on the board of Unybrands.
The Chinese Amazon market also has strong contenders. For example, Neo Zheng, a former Amazon seller and co-founder of FBAFlipper—a Chinese brokerage firm—has closed nearly $70 million from eight sales since it was founded in 2020.
This shows the turf is stiff for both aggregators and acquisition consultants.
The accelerating shift in Amazon’s landscape is also piquing VC investor interest.
As more money floods into acquisitions, it’s not impossible to picture sellers creating an Amazon-native brand just to sell it to a larger company in two years, as Silicon Valley startups do.
VC firms like Yardline Capital (now acquired by Thrasio) are already making their move.
By injecting up to $1 million in fast-growing businesses on Amazon, Shopify and Etsy, Yardline helps small sellers expand and exit their businesses when ready.
Some aggregators, such as Elevate Brands, leverages a similar data science strategy to make the best acquisitions and offer a fair valuation of third-party Amazon businesses.
The Amazon acquisition wave may bring on a scramble for acquisition-friendly products among third-party sellers.
While this might offer aggregators more options, the market economics will likely suffer in the long term. For instance, there’ll be more supply and less demand for these products when it peaks, and Amazon might change its algorithm or policies to fix the imbalance.
Unfortunately, counterfeit brands might want to take advantage of the boom to disrupt the activities of genuine brands with black hat tactics.
This could affect not just Amazon seller aggregators but third-party sellers too. That’s why it’s necessary to register your business on Amazon as it grows. Even more importantly, you want to connect with successful sellers who can offer help and support when you need them.
Here’s what you should expect in coming years, along with Amazon’s shifting landscape and the fervor in the acquisition space.
Every entrepreneur in this space wants to piggyback off Amazon’s billions because there’s lots of money to be made. That said, Amazon is likely to see a barrage of seller accounts leveraging this opportunity.
Some of these accounts could be from former Amazon business owners with successful exits, looking to begin the startup cycle again.
Though, newer sellers may want to try their hands on these opportunities too.
Amazon has staggering ecommerce market power.
Consumers spent $188.91 billion shopping on Amazon in 2018. The growing number of small sellers and large brands such as Nike, Apple, Steelcase, and others selling DTC products on Amazon’s marketplace contributed to its growth.
Coupled with Amazon’s loyalty program—Amazon Prime—that shrinks shipping costs and delivery time for customers, the business behemoth has an unyielding market presence that is appealing to investors.
The acquisition boom is only a case of “if you can’t beat them, join them,” with aggregators making lemonades from Amazon’s low-hanging lemons.
Thrasio and Perch achieved unicorn status on Amazon’s acquisition market in a relatively short time.
New entrants may have to develop a strategy against these early-bird-Amazon-aggregators, or they won’t last long. However, developing a unique strategy might be increasingly hard to do as investors with different funding strengths are flooding the market.
Expect investors who can’t keep up to opt for a workaround strategy such as adopting Amazon’s existing arbitrage model.
They’ll finance the arbitrage process for a higher stake (and revenue-share) in the company, similar to what VC investors do.
That way, owners retain part-ownership of their businesses while scaling them.
Since buyouts, clean exits, and revenue-share models are a thing in this space, expect a hybrid modus operandi soon.
Firms like Factory14 already operate that way. They allow the original founders of the Pro Bike Tool to run the business as employees while keeping full ownership of the brand.
Amazon businesses are surprisingly simple but complex to run. So, a few things are going to happen in the acquisition space in a few years.
One, it’s a dog-eat-dog space. FBA acquirers will reduce the complexity involved in running Amazon businesses. It won’t matter if they have five products or ten; five brands or fifty.
These buyers will tackle and defeat Amazon-seller related issues on a much larger scale than the average seller:
This means the weak won’t survive.
Two, the market will peak, then dip. Think of it as a pump and dump, but there’s an ebb coming, and soon. It’ll happen when saturation hits and true market leaders emerge.
At the moment, it is relatively easy for new aggregators to raise seed funding to dominate regions across the US, UK, or Asia. But once the market peaks, new entrants will find it harder to raise capital to compete, let alone dominate a region, ultimately leading to a drop in valuations.
Consequently, with the accelerating trends happening concurrently in this space, it is safe to say that the Amazon acquisition boom is only getting started.
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