The dream exit… for brands in the Amazon FBA space looking towards their endgame, there has been a lot of talk regarding ecommerce business acquisitions by large firms. We decided to tap our network of friends and experts to give more insight on the growing trend. Here is our interview with Coran Woodmass of TheFBABroker.
For those who don’t know you, how long have you been in the brokerage industry?
|So I started as an investor buying, building, and selling online businesses. Everything from online marketing to e-commerce. Had my biggest successes in e-commerce.
Shortly after I started seeing more deals than I was able to work on myself. Also discovered I’m more of a deal maker than an operator.
So Yeah, found my calling, came across to the brokerage side and that, that was late-2015. I launched TheFBABroker early 2016. So I’ve been at it a while now, five years, I’ll say.
That’s great! Knowing the current news right now with investors buying up Amazon FBA brands, what’s the deal with that?
There seems to be a surge, or at least a lot of people are talking about it in the press and writing articles about it. What’s your take?
|I think there is a lot of buzz right now [but] it’s not new. There’s definitely been a lot of capital around for a long time to buy businesses, in general.
The heat on FBA or Amazon related businesses is newer but it’s still not brand new. Essentially what’s happened is it’s gotten really tough, as you might have seen in the wider market, to get a good return on capital, in general.
So investors are really looking for any edge they can get to deploy capital profitably. With an Amazon FBA business or ecommerce business, as opposed to an online business [like] advertising or affiliate marketing or something, there’s products as well.
So there’s actually 2 types of return:
Normally getting in anywhere from 3-5x cash flow, depending on the size of the business or even lower in some cases. [Currently] there’s so many buyers that’s actually pushing it higher right now, which is great for our sellers.
Now the FBA business we ran, we looked at the numbers and we had a 40% cash on cash return just from our inventory. So every time we re-upped on inventory, we’re getting a 40% cash on cash return net in our pocket at the end of the day. And that’s really tough to find elsewhere.
So you’re getting a double dip of investment and also there’s more and more companies that are comfortable lending in this space. Also a ton of inventory financing options. Amazon has their own as well. There’s a perfect storm that’s happening.
Also, a couple of the companies that got in early on the acquisition side have now reached evaluations that are significant in the billions range, which helps as well because everyone thinks, “Hey, I can come in and acquire an unicorn [company] instead of building one from scratch and take all the risk of developing some crazy new rocket company or something.”
That’s incredible! I do see the lending side as well. We’ve been approached by a couple of businesses that are asking us if our clients would be interested.
That is definitely a space that’s also growing. Has there been any recent case studies that’s popped up that’s made this more of a noticeable trend as of late?
|Yeah, absolutely. Everyone knows about Thrasio and those types of guys, but there’s some new contenders that have come in and hit the ground running.
One of them is Branded. So if you look up “Branded’s Pierre [Poignant]” who founded it, it was underground for six months. Then when they launched, they launched with capital around $150 million in revenue, before even announcing that they were starting.
[Pierre Poignant] is also the co-founder of Lazada previously, so he’s got a pretty interesting background. There’s companies like this that have come out in stealth mode and then made a big splash.
I think that’s kind of ‘professionalizing the space’ a little bit and also opening up doors for more capital.
It’s going to be interesting in the next couple of years to see who actually succeeds in some way, shape or form and who struggles because what we’re seeing right now is a lot of these guys are having trouble with deal flow because there’s not enough good deals to go around despite the huge amount of Amazon sellers on the platform.
Okay, so you definitely don’t see this slowing down anytime?
|No, no, it’s definitely accelerating. So these groups call themselves aggregators or consolidators. They’re only one type of buyer in this space.
They get the most press [right now] because they’re raising lots of capital to go do what they’re doing but they’re only one ‘buyer type’.
So even after this wave flushes through, there’s still going to be capital available to buy Amazon-based businesses.
There’s still going to be buyers if you’re looking to sell. It’s just right now there’s a lot of noise around this topic, but it doesn’t mean that it’s a short term thing.
That’s good. And then for brands looking to exit, what are some attractive, noteworthy factors that these investors look for?
|If I was an FBA seller right now, would I sell my business? Well, it depends, right? Is my business ready to sell?
And is the business at a value that’s at a meaningful number to me that actually moves me forward, financially?
That’s where I’d start before anything else because you’ve built a cash flowing asset [which is] really hard to do, and you shouldn’t give up that cash flow easily, in my opinion.
There’s reasons to sell, there’s reasons to not sell.
So that’s really the first out of two questions we go through with clients. In regards to buyers, the buyer types range drastically.
I’ll explain what some of the aggregators are looking for:
That’s the type of stuff they like to buy because they get the diversification by buying 60 or a hundred brands.
As opposed to a traditional investor, they want your business to be diversified. So if you’re wanting to appeal to an aggregator, you’re probably already there, because most FBA businesses launch, test a bunch of products, and then 1 or 2 products become the home run successes to get to that 7+ figure range.
And that’s really what they’re looking for.
[When it comes to] good net margins it is around the 30% range. That margin range is what we see as the average of sold businesses that we’ve tracked.
So they’re actually looking for really strong returns on capital as well. It’s not just, “Hey, I’ve done an FBA business.”
It’s “How profitable am I? What’s the trend of the business?” They want businesses that are growing at a fast rate because they get their capital back faster.
If the businesses kicking off $1 million dollars in cash flow a year as a net profit, then they buy that at $2 million, then 6-12 months later, it doubles, they get their investment back faster. I know that’s a very loose example but you can run the math after *laughs*.
How important is advertising when it comes to evaluating or exiting for your Amazon FBA business?
|I’d say optimized advertising campaigns are the most important thing. Basically you’re fighting against the market.
So what we see over time with any Amazon businesses is ‘margin compression’. One of the biggest actors behind margin compression is actually advertising.
If it’s not optimized and monitored by a professional firm like yourselves, it can get out of hand. That can actually push your net margins down YoY (year over year).
So your revenue could be going up, but your margin is going down and that’s less attractive to an investor. Any investors. Not just these aggregators. So yeah, I’d say it’s critical.
And the way that the advertising is becoming more and more complex over time, it’s even more important to have that optimized.
What are some advice that you’d give to an Amazon business owner if they’re approached by an aggregator?
|Get some help! *laughs* There’s one reason, and one reason only you’re getting contacted: to get better deal terms.
It’s to get a better deal for the aggregator. It’s not to get a better deal for you. They want less competition.
They don’t want the business to be properly prepared for sale, which often improves the value of the business just by understanding investment metrics.
And never ever let a buyer do your books for you. That’s probably the biggest mistake we see. An aggregator is not the right fit as a buyer for every business.
How do you normally help business owners looking to exit? What other advice do you have for them?
|So it depends on:
One of the biggest things that stops deals from closing is [discovering] problems down in due diligence. So we spend a lot of time with our clients upfront, figuring out exactly what the business looks like to an investor, which is really hard to do.
Even if you invest in say property or something like that, it’s hard for you to look at your own business objectively, like an investor.
We’ve got a lot of experience doing that.
So we have a checklist over a 100-points long that we go through with every client before we go to market [because] we want to make sure the business is ready.
We want to make sure that the thing can close because otherwise it’s a waste of everyone’s time.
If you are eyeing an exit in the next year, we recommend educating you and your team with TheFBABroker’s mini workshop on the subject.
For more information about Coran and his team, you can check out the following links: