[Case Study] Why This $1.94M FBA and eCommerce Business Caught Private Equity’s Eye
March 30, 2020
In business, they say you should always solve a pain point for your customers.
While that’s a general good rule of thumb figuratively, one FBA seller took this advice literally and turned it into a multi-million-dollar business.
He built his FBA brand entirely around pain relief products and went on to become a highly-reviewed Amazon Bestseller, selling on international Amazon Marketplaces. The business was growing at such a rapid rate that, when it came time to sell, it caught the eye of private equity (PE).
PE wanted the business so much that they paid the seller $1,940,000 for it.
If you want to know the secret to attracting PE money and how you, too, can build a business a PE can’t refuse, read on.
The Breakdown of a PE-Worthy FBA Business
The business was an exciting mix of stable growth and growth potential.
The 15-SKU business was selling in the USA, Canada, Mexico, UK and Germany. It had trademarks in the USA and China, and was a part of Amazon Brand Registry 2.0. When comparing the previous and most recent 12-month average monthly net profits, the business had a growth rate of 49%.
Not only was growth rising, but the business also achieved what so many FBA hopefuls aspire towards—building a true brand.
The brand was well-developed and had loyal customers who had left 5,896 reviews with an average rating of 4.3 stars. The Best Sellers Rank (BSR) had been very stable in the year leading up to the sale and it had gained the coveted “Amazon’s Choice” badge on its products.
As it turns out, solving a literal pain point for customers builds diehard fans.
Although the business was taking Amazon by storm, it deepened its value proposition by expanding off the Amazon Marketplace to build an extensive eCommerce presence.
The seller added a Shopify store and, despite traffic not being driven to the site, it had an email list of 2,500 customers. It also started selling online with Walmart, which added sales opportunities and spread the risk profile of the business.
International expansion gave the business further growth opportunities. The brand had launched on Amazon in the UK and German markets. It had a presence there for over two years and had gained a decent amount of reviews without aggressive marketing. This opened up opportunities for a buyer to come in and capture more sales with increased marketing in those regions.
The business was doing so well that even Amazon took notice. Amazon accepted the brand into Amazon Exclusives, which was a huge accomplishment . By being approved for Amazon Exclusives, the business could have access to unlimited Lightning Deals at no charge, Deal of the Day and Amazon email promotions, Subscribe & Save, brand protection from Amazon, meetings with customer service representatives, Amazon Prime Day and Cyber Monday deals. When the seller submitted the business for vetting, they predicted this could boost sales by 45%.
The seller managed to achieve all of this by only working 1–2 hours per week. He used a VA in the Philippines to handle customer service, inventory management, Amazon marketing and store management. The VA contract would be included in the sale to ease the transition of the business to the buyer.
So, what happens when a growing business of this caliber goes live on our marketplace?
Powerful buyers take notice.
PE Competes for the Business and Makes an Offer
For a business this size, it’s natural for PE to arrive at the deal table. FBA businesses over the $1,000,000 mark fit right into their investment strategy.
Two major funds with a history of building FBA portfolios showed interest in the deal. They each set up a couple of buyer-seller calls to get to know the seller and perform their initial due diligence.
One of the PE groups pulled ahead, wanting to act fast on the business. In a matter of 32 days their offer was made.
Here is the breakdown of the final deal:
- Price Sold: $1,940,000
- Upfront payment: $1,340,000
- Included inventory: $54,000
- Earnout:$150,000 holdback payment and up to $450,000 in incentive payments
The seller was able to walk away with a full wallet of over $1M in cash up front. That’s a solid outcome for a business of this size.
“But what about that earnout?” you might ask.
Don’t worry, we’ll break down what that all means next.
Understanding Earnouts with PE
Earnouts can sometimes strike fear in the hearts of sellers, but that often comes from a place of misunderstanding.
So, let’s dig into this earnout example and why it would come into play in this deal.
Many elements of this earnout are typical of a PE deal structure.
Right off the bat, sellers should know that, when working with PE, an earnout will almost always come into play. Certain elements of an earnout are to protect the investment of the PE group.
To start, the $150,000 holdback payment is a common facet of purchase and sale agreements: it allows the fund to mitigate risk. It’s guaranteed payment unless an issue that can harm the business arises, such as false details in the asset purchase agreement. It’s a line item of about 5–10% of the business value added to protect the fund from the potential downside. As long as the terms unfold as planned, the holdback payment is paid out at an agreed-upon date.
The other part of the earnout was performance-based incentives. The remaining $450,000 would be paid in increments at certain dates if the performance milestones were met.
Sellers shouldn’t fear performance-based earnouts. In this case, the business had been handed over to FBA subject matter experts with large teams to run and scale it. It’s in their best interest to see the business blossom and they have the capability to ensure it does, which means you, as a seller, are in good hands.
If the business has really proven itself, and inspired large buyers to buy, it shouldn’t have an issue meeting the earnout requirements.
It’s easy to get caught up in the fear of waiting for your entire payout and bypass a huge benefit of an earnout: securing a large upfront sum from a skilled buyer. Average buyers would struggle to shell out over a million dollars in cash up front, but PE can do exactly that. Your business transfers to good hands and there is added peace in that.
Remember, sellers are never alone in this process. The added benefit of working with a broker is that we monitor the earnouts and ensure all terms are met and earnouts are being paid.
How to Get Your Business Noticed by PE
If you’re excited by the prospect of a PE buyer and want to catch their eye, here are a few preparations you can make before selling.
Deepen Customer Relationships
The number of positive reviews could speak for themselves but the seller was able to prove that the business had over 50,000 repeat customers that purchased products. This business was proof that creating a product customers love and trust reaps dividends.
Being able to prove the loyalty of your customer base with the right stats will speak to PE firms who would like to build off your foundation. Show them how your customers work for you and so will PE.
Minimize Risk
The business had already protected itself by becoming an established brand in a well carved out niche. It went one step further by adding contingencies in its SKUs.
The product came in various colors, so it minimized risk of running out of stock in one variant and customers turning away from the product. Since many of the products were bestsellers, customers felt comfortable choosing another color if their favorite was sold out. This insulated the business from the considerable repercussions of running out of stock.
The same strategy could also be applied to any business selling products online. Since PE is so diligent about mitigating their risk in investment, it will benefit you to do the same.
Simplify Operations
Despite the size of the business, it was a fairly simple operation.
The only marketing was within Amazon PPC which was done by the VA. The seller was including the VA contract so that the VA could continue running operations as usual. He threw in extensive SOPs for the buyer so they could understand operations.
The business was all FBA and had built up a good supplier relationship, with trust, over the years. In case of any issues, a backup supplier was also on standby.
If PE doesn’t have to optimize your operations, you can command a premium for it. For this business, it smoothed operations, making it an easy sell to PE.
Build a Business PE Can’t Refuse
PE buyers are some of the savviest out there, so they’re well-prepared to realize optimization and growth opportunities.
In the case of this business, the road map to growth was crystal clear.
The seller had laid out what complementary products could be added right away––going as far as doing thorough research on which factories could be used, the negotiated costs and fully-written listings. The business had a list of 100,000 users to be marketed to, as well as the subscriber list of 2,500. The seller was also prepared to help the buyer with offline marketing efforts and driving traffic from Google and Facebook.
With all that preparation, it becomes painstakingly obvious how much potential the business had, meaning it was much more likely to get a larger upfront sum in the deal and a better deal structure overall.
You may read all this and think your business checks all of the boxes on PE’s wishlist. That’s great news. Having PE notice your business is an exciting prospect and we can work with you to help you catch their eye.
You can set up a call with one of our business analysts to plan your exit strategy and we can guide you through getting in front of PE. We’re also here for PE buyers who want more high-performing businesses and we can jump on a call to discuss your buying criteria.
