How This FBA Seller Used Timing and Negotiation for a 55x Sales Multiple Exit
What could a 233% return on investment (ROI) in three years do for your future investment goals? What if you could negotiate a larger exit for yourself through steady growth and careful planning?
It sounds extraordinary, but that’s just what one of our marketplace sellers accomplished in 2020. It was an exciting sale for us, because our seller had previously bought the business from our marketplace in 2017. Now we had the pleasure of helping him get the most out of his investment.
We’ve mentioned to you before about the Season of the Seller. The influx of private equity-backed capital and institutional funding doesn’t seem to be slowing down. In fact, our 2021 Industry Report shows that the average sales multiple really began to skyrocket towards the end of 2020.
In Q1 2020, the average Trailing Twelve Months (TTM) sales multiple was 33.7x, which stayed more or less stable, even during the uncertainty of the pandemic. In fact, the average TTM sales multiple in Q3 was 33.6x. But by Q4 2020, the average TTM sales multiple was 40.9x—a phenomenal 7.3x increase compared to the previous quarter.
And that’s exactly what we can see in this story: a business with strong fundamentals, valued at an already impressive 38x multiple in a dynamic and fast-growing industry, ultimately selling at an unbelievable 55x multiple at the end of 2020.
So, how exactly did our seller see such incredible returns in such a short period of time?
Let’s take a closer look.
The 7-Figure Business
The business was simple and straightforward to operate. When the seller bought it back in 2017 for $330,000, it was a 100% Amazon FBA business with 4 SKUs in the outdoor niche.
After taking over the business, the seller focused on developing it into something attractive for investors. They focused on optimizing sales for existing products, adding only one new SKU in three years. But they were also forward-looking, doing market research and ordering samples for two potential additional products, which could be provided to interested buyers looking to expand.
Having quick avenues of growth lined up for prospective buyers is a smart move for sellers. Businesses with clear growth opportunities tend to entice more potential buyers and higher prices, because they provide a way for buyers to scale the business rapidly after purchase.
The seller’s workload was minimal, coming in around 8 hours per week. They mainly spent their time responding to customers, maintaining listings, planning inventory, and doing product research.
Although the seller enjoyed running the business and wasn’t in a hurry to sell, they ultimately wanted to explore different investment opportunities. That’s what led them back to our marketplace.
Some Concerns During Vetting
Once the seller had submitted their business for sale, one area of concern highlighted by our vetting team was that the seller was using a private warehouse to store partial inventory on occasion.
Although the seller was spending minimal time operating the business, they were still dealing with the logistics of storing some inventory in a private warehouse on occasion. The seller was then responsible for getting the inventory to Amazon warehouses.
The primary reason behind this was that the seller found that they could expedite shipping times by routing inventory to their own warehouse and then shipping low-stock inventory to Amazon as needed.
But the seller estimated that potential buyers could save 4 days per month by allowing storage and routing through a 3PL. While the ability to be more hands off would appeal to potential buyers, our vetting advisors knew they would want to see the costs involved.
After running the numbers, the seller came back with estimated costs of $255 per month for roughly 17 pallets.
However, they were careful to make it clear that this was just an estimate based on the average amount of inventory housed in their private warehouse. If buyers wanted to stock additional inventory, the price could fluctuate.
This may seem like a minor point. But when trying to evaluate business profitability and market it correctly to potential buyers, our team pointed out that it’s important to provide a full picture for buyers who might not have or want access to private warehouses.
Initially, the seller didn’t want to include their Seller Central account, which they were hoping to use for other business opportunities. Their biggest concern was that the account was tied to their personal email, and if they wanted to explore future opportunities, they didn’t want to be locked out of the account.
It’s a legitimate concern that we’re very sensitive to.
That being said, we highly recommend sellers include valuable assets like Seller Central accounts for a variety of reasons. Foremost, it makes a business far more valuable. When an account is transferred to a new owner, they inherit all of the account’s built-up attributes. These include:
- Seller Rating: not to be confused with individual product ratings, this rating is found on the seller’s profile and shows how customers feel about their interactions with the business. Established businesses have higher ratings, which translates to higher consumer confidence levels.
- Historical PPC Data: having access to this data can help buyers optimize their future paid search campaigns.
- Ungated Listings: this is especially useful for businesses in restricted, or gated categories. Purchasing an ungated Seller Central account makes getting to work faster and easier for a buyer.
- Inventory Performance Index: what determines the amount of inventory that can be stored at FBA warehouses. Older accounts come with higher limits than newer ones.
In addition, migrating a business with a Seller Central account takes far less time than transferring assets to a new one. As we’ll discuss later, an established account can be migrated in as little as 4 weeks. Without one, the process can take several months.
So what do you do in a case like this?
Fortunately, our team knew exactly what to do. Our Migrations Supervisor contacted the seller and assured them that our migrations team had a process in place to get his private email back and get the Seller Central account registered in the new owner’s name.
After speaking with our team and finding out more about the process, the seller was on board with transferring over their Seller Central account, and the listing was ready to go live with a valuation of $754,293.
64 Interested Buyers After Going Live
Within just a few days of going live, this listing received an incredible 64 unlocks from qualified buyers.
The significant interest in the business translated well to buyer-seller calls. The seller was flooded with potentially interested parties.
In fact, so many buyers were interested in speaking with the seller that our sales team stepped in to manage the flow and help guide the seller so they could negotiate the best deal possible.
So what made this business cause such a frenzy with our marketplace buyers?
For starters, it was a solid, established brand with a manageable number of products and high reviews on Amazon. In fact, the best-selling product had 2,500+ reviews and a 4.8-star rating. It also had excellent revenue and steady year-on-year growth. And the seller had prospective growth channels already lined up.
All of these are important factors for potential buyers, and they helped pique interest, but what moved buyers to act was what they saw when they dug deeper into the specifics of the business. The seller had a great thing going but they weren’t optimizing their paid advertising spend.
This is the type of opportunity FBA acquisition companies and private equity firms love to seize.
Although individuals like our seller might not want to spend their time and resources optimizing PPC ads, larger investment firms have entire teams dedicated to paid ads. For them, businesses like this are golden opportunities for fantastic growth.
While the listing gained a ton of interest, one slight bump in the road was a pending trademark application submitted by the seller. Although trademarks can be a significant asset to an FBA business, having a pending one at the time of sale can be a risk that some buyers don’t want to take on.
Initially, the trademark issue made some buyers hesitate. Some even wanted to make offers contingent upon the trademark being granted.
The seller wasn’t sure whether to wait out the existing application or pull it and refile, trademarking just the name and not the logo. They figured the latter would be a faster, albeit more costly, process.
The seller was sensitive to buyer concerns and tried to offer options to potential buyers. They even created a trademark strategy that they were happy to share with the right buyer.
Speaking in-depth with both the seller and our sales team seemed to ease some of the concerns. One potential buyer even rescinded the trademark contingency in their offer.
The Incredible 7-Figure Offer
With three potential over-listing offers on the horizon, the seller felt they were in a better position to negotiate the terms of sale. They asked our sales department to let buyers know that their priority was a full-cash offer, with the potential of staying on to help guide the buyer and stay invested in future earnings for a while.
They were in a position to optimize a mutually beneficial transaction.
After speaking with several buyers, they received an attractive offer from a private equity firm with the exact terms they were looking for. The buyers were highly experienced with mergers and acquisitions and had successfully handled several Amazon FBA businesses.
They offered $800,000 in cash up front, which was already over list price, with $50,000 to $300,000 in earnout potential contingent upon year-over-year growth of between 40% and 100% for the following year. That brought the total price to $1,100,000.
The offer was negotiated and accepted within just 10 days of the listing going live.
The seller wanted to have the sale fully completed, including migrations, by the end of the 2020 fiscal year. He wanted to keep the bulk of his earnings in 2020 for capital gains reasons.
This request gave our migrations team roughly 30 days to ensure the smooth transfer of all assets. But we were up for the challenge!
When Earnouts Benefit Both Buyers and Sellers
Earnouts are common with higher-priced listings. After all, buyers want to feel secure in their investments, and one way of doing that is to pay a lump sum up front, followed by installment payments over a specified period of time.
We often see high-ticket buyers proposing earnouts. But in this case, it was the seller who negotiated a higher payment in exchange for several months’ involvement with the growth of the business.
It was a smart move.
With this business, the seller had specific growth pathways that they were happy to share with the buyer. As mentioned earlier, they even had samples of potential products lined up. They had a solid vision for future growth but just didn’t want to be involved in day-to-day operations.
Instead of taking a payment at what the business was valued at towards the end of 2020, they saw the potential for astronomic growth with very little time investment on their part by taking a performance-based earnout.
This willingness to accept a performance earnout raised their ROI from 128% to 233%.
Sellers are sometimes hesitant to agree to an earnout, which is understandable. After all, part of selling a business is walking away from it once the sale is complete.
But when you’re looking at high-growth industries with multiples that have gone up by 49% in just one year, it’s worth looking into earnouts to maximize your potential profit.
Planning the Ideal FBA Business Exit
Our seller’s negotiated earnout increased their sales multiple from 38x to 55x. At the end of Q4 2020, they were slightly ahead of the curve, but we’re now regularly seeing 50x multiples for FBA businesses selling within days or weeks on our marketplace.
This is the perfect example of buy and hold. Our seller found a strong business on our marketplace. With minimal time investment over the years on their part, they were able to maintain steady growth, leading to a 7-figure exit in just three years thanks to the boom of FBA acquisitions.
It really demonstrates the strength of the marketplace right now. When this listing was first sold, we were already starting to see industry growth trends. Going into 2021, this buying pressure has increased.
With a 233% ROI, our seller had a fantastic financial exit. But this isn’t a one-off experience. Our FBA sellers are seeing more qualified buyers showing interest in a shorter amount of time and are experiencing financial exits that are nearly double what they would have seen last year.
And with e-commerce revenues on the rise and more institutional buyers entering the space, there’s no reason to think things will slow down anytime soon.
If this has got you thinking about timing your own exit, there’s no better time to set up a call with one of our business analysts.
You can also check out our free valuation tool, which can give you a starting idea of how much your business is currently worth.