How to Acquire When Buyer Competition Increases

Recently I had the honor of doing a talk eCommerce Day about starting a Fulfilled by Amazon (FBA) business. Obviously there are a ton of benefits to starting through acquisition and being able to buy revenue, infrastructure, profitability or cash flow to get started. In the FBA business, there’s a lot of institutional capital coming in, which is increasing the valuations of company in that space.

 

What’s a first-time buyer going to do in order to navigate this?

 

Because there’s a certain type of private equity firm called an aggregator. These aggregators have raised a ton of money.

 

As of last month, it was $3.5 billion.

 

As of last week, it was $6 billion across 60 firms.

 

Quiet Light happened to broker, by our best estimation, 70% of all transactions with aggregators by the end of 2020. Based on our experience, they’re increasing the valuations overall in a way that we’ve never seen before.

 

In other words, the valuations are getting really, really high. Now, the thing is that they’re not as high as you might think.

 

Their primary strategy is to identify potential sellers through proprietary deal flow to get deals to come directly to them rather than working with brokers.

 

This is obviously dictated by their investors and the business plan so that they can buy companies as inexpensively as possible rather than running through a broker and potentially getting multiple buyers at the table.

 

What this is translating to is the use of more middle market deal structures than we’ve seen before. Historically, you might see an Amazon business selling for 2.5 or 3 times or maybe a 3 – 3.5 times; however, now they’re going for much higher multiples.

 

The thing is that if you really get behind the curtain and look at the cash down versus how much is based on earn outs, it’s about in line with what it was before.

 

Now, these private equity firms have two things going for them. One, if the business performs, they can afford to pay more because they’re getting multiple expansion by doing a roll-up. And they’re buying smaller businesses down here, but by buying a hundred firms at a million dollars each, you’re creating a hundred million dollar company, for example.

 

And $100 million dollar company is going to trade at a much higher multiple. Maybe they can sell that whole company for a 10X or a 12X or 23X if they were to go public.

 

The point is that they’re able to pay more, especially if those assets actually perform well whereas individual buyers who want to go out and buy an existing company are trying to extract the value of that business moving forward.

 

As a result, individual buyers are not excited about paying additional money on future profits. Unless it means there is less paid at closing.

 

What can you do if you want to be an FBA seller?

 

You can start from scratch.

 

This means that you subscribe to all the software, you take the class, you find out what people are looking for, you go to China, find the manufacturer, and then try your hand at your first product launch and hope you get the right results and the right reviews to get all those stars. You get everything to line up and get product market fit.

 

Now we know most companies, most startups don’t make it.

 

There’s probably a higher results starting up an Amazon business if you look at the last few years. I think there was sort of a golden window of opportunity on Amazon. I do think that it’s closing and closing quickly because of all of the competition of third party brands that have launched.

 

What could you do if you wanted to buy I business? Should you just go out and buy an FBA business?

 

You could but there’s a lot of competition these days, institutional firms have tons of cash and they want to close, especially if you’re going through a brokerage firm, like Quiet Light for example. They’re working with a lot of aggregators and they’re a repeat source of deals to these aggregators.

 

And so those aggregators really want to make sure that they’re closing on the deals they’re putting offers on. So, the confidence of closing when a seller goes with an aggregator is really high and that tends to be why they’re going with the aggregators right now.

If you wanted to buy an FBA business today, you could go out and acquire one but have to pay these higher prices. The valuations are not to a level where they’re insane yet. It’s just a level where it’s a little hotter than it’s been. I won’t go so far as to say that they’re overpriced.

 

There are alternative strategies that you can use to buy other online businesses. You could buy a content site, you could buy a SAS product, you could buy an information product business.

 

Let’s go to content for a minute.

 

Let’s pretend, I’ve got this idea and I want to start a business on Amazon.

 

My idea is a new deodorant.

 

I had this idea to start a new innovative deodorant product. I could do your typical startup and launch it on Amazon,

 

But what are other things that might increase or decrease my runway to success?

 

What are things that might increase my revenue?

 

You can look at these other online businesses such as a content site and say I want to buy a content site that’s targeted towards men in their forties that has to do with  grooming or home care products or just consumer products but getting that target audience right, getting that target audience on a content site, that’s already generating revenue that doesn’t have private equity firms creating a whole bunch of commotion trying to raise valuations.

 

This is a way that you might be a way that you can actually come in through the side door, still get that immediate revenue, still get that immediate infrastructure, still get that immediate cashflow, but then also build in infrastructure or marketing engine to push to your Amazon launch.

 

It doesn’t always have to be a direct hit. You have to think what are the things that can help me better succeed at accomplishing my goal? I’ve personally done this in the printing industry. I’ve personally done this in the fulfillment space. I’ve personally done this in home construction.

 

The thing is you can always come in from the side and build the company that you wish to see based on the company that you buy. If you are interested in buying a company in the next 12 to 18 months, or I should say six to 24 months, really check out the acquisition lab. We have world-class education group coaching a suite of tools to help you navigate this private capital market in a vetted community. We’re up to 180 buyers. We have done a bit more than 15 acquisitions in the last year. We’ve got about a 12% acceptance rate. So it’s a really strong group of people.

 

If we can help you, we want to and if we don’t think you’re a fit, we’ll let you know but don’t let that discourage you. We welcome all real buyers. Check out www.acquisitionlab.com to apply.