Read Time: 5 minutes
ECommerce entrepreneurs that have built a profitable private label through passion and hard work can be tempted to try and sell their Amazon business on their own, without a clear exit strategy.
Having an exit strategy is essential because:
- The exit process can be emotional and emotions can lead to rash decisions. With no plan of execution, entering a M&A negotiation lead by emotion will lead to a poor valuation.
- You are selling to a laser focussed aggregator with an experienced acquisition team made up of lawyers, accountants, former sellers, marketing and brand experts. All the buyers we work with operate with integrity, but their business objective is to acquire your brand for the best price.
Ecommerce owners that enter the intensity of due diligence without the right team behind them, the proper preparation and strategy, always exit with a sub-optimal valuation.
To better understand the process of selling your eCommerce business, and some of the key touchpoints every potential seller should know, The Fortia Group conducted a seller survey (Q4, 2021) with 32 eCommerce entrepreneurs who successfully sold their business in the past 12 months.
In this post, we will discuss some of the results from that survey. We will highlight the key takeaways which (spoiler alert) all point to conducting a thorough preparation of your brand before engaging buyers for an exit.
Are you thinking of selling your eCommerce business in 2022 but don’t want to enter some binding contract right away? The first step is to get a thorough valuation of your business – sign up for a free valuation call today.
Seller Survey Results and Key Takeaways | The Fortia Group
Here are seven of the top questions we asked 32 Amazon business owners who sold their brand.
#1 How Many Letters of Intent (LOI) Did You Receive?
(Fig.1.1) 28/32 sellers answered
- 36% received one LOI
- 78% received three or less LOIs.
- Only 3 sellers received more >5 LOIs.
Many of the Amazon FBA sellers we spoke with had been cold-called by aggregators with an offer. As you can see (Fig.1.1) many of the FBA owners took the first offer thinking this was their only chance to exit.
In Q1, 2022 we oversaw an exit process for a brand. After preparing the brand for due diligence we ran a professional auction which achieved 12 LOIs, with 7 buyers increasing their bid to secure the asset.
Key Takeaway: If you have built a successful private label we would advise against taking the first offer – no matter how good it looks.
#2 Too Many Entrepreneurs Sign LOIs Too Quickly, Agree or Disagree?
(Fig.1.2) 27/32 answered.
- 67% agree with “too many entrepreneurs sign LOIs too quickly.”
- 33% disagree.
Many of the eCommerce entrepreneurs that instruct The Fortia Group to run their exit process have spent the last 3 – 5 years painstakingly growing their private label. Rushing into the sale of your business only favors the buyer.
As one seller commented, “It is easy to get excited when you see the LOI and figures for your business.”
Beware of these tactics:
- Pressured deadlines: An aggregator calling with an offer on a Tuesday that will expire on the Friday. This tactic is aggressive, and when encountered should be a clear warning for the seller.
- Gimmicky gifts: Brokers offering signing bonuses (like prepaid credit cards) to sellers if they complete your exit in a short window of time. Depending on the deal structure (SPA Vs. APA), we run an exit process in 30 – 60 days. However, we would advise on extending the deadline if it meant a better deal for the seller.
- 0% broker fees: Brokers that only charge buyer fees have preexisting referral contracts with each aggregator – some more favorable than others. This means, it is in the best interest of the broker (not the seller) to sign deals with certain aggregators. This is not a transparent process, and goes against 100 years of M&A practice.
Key Takeaway: You should take your time. You should run a proper process and get multiple offers, never just sign the first one that comes along.
#3 What Were the Net Margins of Your Brand at Exit?
(Fig.1.3) 28/32 answered
- 93% had net margins >15% at exit
- 43% had net margins 25 – 30%
- 23% had net margins 20 – 25%
Net margins are a key metric which inform your SDE (Seller Discretionary Earnings) or EBITDA (Earnings before Interest Taxes Depreciation Amortization), on which your final consideration is based. If calculated correctly, higher margins signal opportunity for potential buyers.
Increased headwinds (rising supply chains costs, PPC etc.,) of 2021 saw a lot of brands begin the year with >20% margins, but finish with >15% margins.
To calculate SDE in the due diligence phase of the exit process, the aggregator will look at “add-backs.” These are one off business expenses that can be factored back into the net margin, increasing the final valuation.
During this phase, having an experience exit team in your corner is essential because:
- Negotiations heat up when looking at potential “add-backs.”
- Calculating the valuation multiple is more art than science, there is more opportunity to negotiate favorable (and unfavorable) terms, depending on your understanding of M&A.
- All the while this process is playing out, the business requires the full attention of the owner to run like clockwork. If the owner gets distracted and there is a dip in performance, it will be reflected in the final offer.
For an in-depth look at SDE, see section 6 of Exit Guide for Amazon FBAs [Free Download]
#4 What Multiple did You Get for Your Brand (Including Deferred)?
(Fig.1.4) 23/32 answered. One also received stock as compensation.
- 43% negotiated 4 – 5X multiple
- 17% negotiated >5X multiple
Note: It’s important to note that in the last 12 months the market has begun to mature and multiples stabilize.
Two things we repeat at The Fortia Group are “Sticker price isn’t always the best price” and “The devil is in the details.” They remind us to always examine the structure of the deal, not just the offer.
For example, an aggregator could offer you a 10X multiple for your brand, including the deferred component. When you look at the deal, 4X is upfront, and 6X is conditional upon hitting specific targets. These can be revenue targets, SDE targets, or both – but all of which could be completely unrealistic.
At the end of the earnout period, the business owner might be left with only a 4X multiple. Deferred payments often favor the buyer.
Key Takeaway: Due diligence is a two-way street. Sellers need to do more due diligence on prospective buyers, ensuring they can meet the demand of the deferred component, or negotiate more payment upfront.
#5 What Was The Split Between Upfront and Deferred Consideration?
(Fig.1.5) 24/32 answered. 4 received 100% upfront.
- 58% negotiated 70 – 90% upfront
- 25% negotiated >90% upfront
The deferred component of a deal is a de-risking mechanism – it always favors the buyer. At The Fortia Group we run a professional auction for a brand to create demand and drive up the valuation. This allows us to negotiate a higher upfront payment.
On rare occasions, an entrepreneur will negotiate a deal where they stay on as an executive and continue to advise on the business. Depending on the earnout, this can earn the founder a second payout if the business meets certain milestones. However, this is more germane to a PE firm’s modus operandi.
In our experience, the aggregator model is built to acquire 100% of the business, to scale it where the FBA owner could not.
Key Takeaway: Negotiating a higher payout upfront is often a better outcome.
#6 Was The Earnout Based on Revenue or SDE?
(Fig.1.6) 25/32 answered. 4 others had no earnout ie. 100% upfront.
- 84% earnout based on SDE
- 16% earnout based on revenue.
The deferred component can be a stability payment, an earnout, or a mix of both.
- Stability payment: Usually a delayed payment if there are questions or unmet targets in handing over the assets.
- Earnout: Extra compensation tied to a specified timeline if the business hits certain revenue or SDE milestones.
In our experience, earnouts need to be simple to be successful. Revenue based earnouts are cleaner and simpler – an overall number. SDE is bound to margins. If the buyer does not properly invest company resources into the brand for the earnout period, margins can shrink and disqualify the deferred payment for the seller.
Key Takeaway: Deferred components like an earnout are determined by buyer performance. To achieve a successful earnout, it’s important to be confident in the buyer and their track record of growing brands.
#7 Was There a Difference Between Letter of Intent (LOI) and the Final Valuation?
(Fig.1.7) 32/32 answered.
- 52% Yes, there was a difference between LOI and final valuation.
- 48% No, it remained the same.
One seller said “My original SDE calculation was not 100% accurate so the valuation dropped 4% as a result.”
Letter of Intent (LOI) is a non-binding agreement, signed in good faith by both seller and buyer stating the intended terms of the offer. Breaching LOIs can be more damaging commercially and reputationally for the buyer than incur any legal ramifications.
That said, a LOI is the pivotal first step in an exit process, as it measures expectation before the real negotiation takes place. It’s a waste of time to continue the exit process if the LOI is not right.
In a recent webinar we hosted “Demystifying LOIs,” legal experts on both sides of the deal (seller and aggregator) emphasized the need for thorough preparation before engaging a LOI.
Key Takeaway: eCommerce owners that prepare their business to exit, from legal setup and financial statements to product listings, enjoy a smoother exit process from LOI to final valuation.
Thinking of Selling Your Amazon FBA in 2022? Partner with Fortia
If you are thinking of selling your business in 2022, here are two ways we differentiate from brokers and get you the offer you deserve:
- Exit Strategy: We prepare an eCommerce business for sale (Exit ready). While the components of each type of business are similar, at The Fortia Group we provide a personalized plan for your FBA business. Our exit team works with you to get every aspect of your FBA business presentable from legal and financial setup to supply chain and product roadmap.
- Exit Process: When the time to sell is right, we run a professional auction for your brand. We have >130 potential aggregators, PE firms and family owned strategics that are looking to acquire eCommerce assets. Presenting to a large group of trusted buyers achieves multiple offers and gives you options with regards to deal structure and deferred components.
Is 2022 the right time to exit your Amazon FBA? The first step to a successful exit is to schedule a free valuation of your business.