Will my Amazon business be targeted by private equity buyers?
There is a growing trend in the Amazon market place of successful third-party Sellers being bought up by private equity companies aiming to consolidate assets, cut costs and deliver profits.
The practice is commonly known as being a “roll up” - where a private equity group buys or forms a company, which then acquires other companies in the same business. The goal then is to cut unnecessary costs, increase efficiencies, develop greater scale and provide more opportunities for the investor to make money.
It’s a common practise in business generally, but has been happening more and more on Amazon of late. Companies that sell mainly unbranded, well-reviewed products on Amazon marketplace are being bought up by businesses created just to consolidate those Amazon Sellers. These businesses are doing it because the risks are relatively small compared to the non-ecommerce world - Amazon continues to grow at present yet the cost for buying up these Sellers is relatively low compared to profitable companies elsewhere.
In an article on the subject on Forbes this week, Josh Silberstein - co-chief executive of Thrasio, the largest Amazon seller rollup that has raised over $1 billion in total capital - explains that the cash-at-closing component of their deals had been 2x EBITDA (earnings before interest, taxes, depreciation and amortization) in the past.
Forbes journalist Richard Kestenbaum noted: “Now with the entrance into the market of other rollups, the competition for acquisitions is more robust and 2.7x-2.8x is ‘more typical.’ That price, albeit higher than in the past, is still much less than profitable consumer companies usually sell for.”
Kestenbaum added: “Silberstein says that the revenue of the companies Thrasio buys usually ‘increase by 156% annually’ and the payouts to sellers over time reach 6x EBITDA in total, a much more typical purchase price for consumer-related businesses. My experience with payments over time in mergers and acquisitions is that averages are tricky because company performance varies widely subsequent to an acquisition.
How quick can I Sell my Amazon business?
“Because each acquisition of an Amazon seller is very similar, they happen much faster than other types of deals. Where a normal acquisition takes 6-12 months, buying an Amazon seller can be done in weeks and sometimes days. And unlike other deals, the management of the company being sold usually doesn’t stay on past a short transition phase.”
So is your Amazon business likely to be targeted by private equity buyers, and if it is, should you sell? Thompson and Holt managing partner Craig Gedey has urged caution.
Gedey explained: “The first thing to note is that these companies constructing ‘roll-ups’ are generally only targeting well performing, profitable Amazon Sellers. They are looking for excellent ratings, a high conversion of browsers to customers, and profitable sales over time. So in that sense, if you are approached, you should take it as a compliment.
“But as outlined by Forbes, the selling price on Amazon can be significantly lower than for a profitable business outside this platform. The benefits to the private equity businesses are clear if they are successful in the practise, but it may be that you are selling a business that was sufficiently profitable for your own needs and has not yet reached its potential.
“Each case will be individual, so judge your situation on its own rather than comparing with others. The appeal to Amazon Sellers that are targeted is an immediate cash injection and move away from the risk of Amazon itself squeezing the profits from your business through increased fees or the pushing of its own brands.
“But if you are happy with the way your business is operating and believe you can grow further yourself, we would advise not rushing into any deals just for short-term gain.”
Worried about an Amazon suspension?
If you have found yourself suspended while selling on Amazon, contact Thompson and Holt for a free LiveChat to get your Seller business back online as quickly as possible.
Thompson and Holt are also offering a free months trial of their Monitor and Protect service to help sellers prevent a suspension of ASINs or an their account during the COVID pandemic, more information on how to protect your Amazon seller account from a suspension can be found here.