We’re seeing a lot of misinformation about Amazon FBA valuation multiples and we thought it would be helpful to correct some misconceptions. At Hahnbeck we speak to the buyers of these businesses day in and day out. We test the limits of what they will pay for different assets and we have a thorough understanding of the market. We hope this guide will help sellers to have a clearer understanding of the current market dynamics, especially with regard to valuations.
Multiples Have Not Doubled In The Past Year
Multiples were already very high at the end of 2020 and start of 2021. Most of the increase had occurred during 2020 but even then the multiples didn’t actually double.
Hahnbeck was among the first to report a 6.0x multiple of SDE for an FBA business at the start of 2021, but our results are above market.
Average multiples have stayed strong since then, but the range has widened (see below). Over the course of 2021, aggregators have become much more selective, saying “no” to the vast majority their deal flow but bidding more fiercely on the businesses they really want.
This Is Not A Buying Frenzy
The situation in early 2021 when so many of the aggregators attained their first large funding rounds and were eager to scale up their acquisitions, has not continued throughout the year. The first few months of 2021 could be described as frenzied, but by the middle of 2021 the situation had become much more stable.
This has continued to date. As the media spotlight on Amazon FBA deals has made all sellers aware of the potential of selling their businesses, the deal flow to aggregators has increased enormously. While this sounds like a good thing, it is also a headache for them, as they have to sift through a huge number of deals to find the ones that they are interested in. They allocate their M&A team’s limited resources (i.e. their time) carefully, weighing the opportunity cost of time spent analysing one deal vs the other deals they could have analysed.
All of this can be frustrating for sellers, who expect instant feedback and very quick progress, since this is what is promised on so many of the aggregators’ websites.
There is variance here too. Currently a number of aggregators are aggressively acquiring as they try to hit acquisition targets before the end of Q1. At the same time, several prominent aggregators are on “pause” right now — effectively not acquiring at all for the time being, for various reasons. It’s almost impossible for a seller to know which is which on their own.
Multiples Remain High But The Range Has Widened
Note: before we go further it is important to ask the question “A multiple of what?” We explain on this page the different ways multiples can be described — it can be very misleading. It is rare for someone talking about multiples to state whether they mean the total deal value or only the up-front amount, and whether or not inventory is included in the calculation. In this article we will refer to multiples of SDE, based on the guaranteed consideration (up-front and guaranteed deferred), excluding inventory. Please bear in mind that other sources on the internet will be referring to multiples that they have not defined, or that may include inventory or non-guaranteed deferred payments and therefore are not comparable.
Before the bulk of the Amazon Aggregators entered the market, small Amazon FBA brands with net profits (SDE) in the region of $500k were selling for 2.5–4x multiples, generally speaking. Smaller ones were selling for lower multiples, if they sold at all. There were relatively few buyers for much larger ones.
By early 2021 good $500k SDE Amazon FBA businesses were selling for 3–6x multiples.
Over the course of 2021 and into 2022 where we are now, this range has broadened further: while most are in the region of 4–4.5x, in exceptional cases multiples of 7x are achieved, while at the other end of the scale, some businesses of this size are selling for less than 3x multiples.
For larger businesses, the increasing scale and capacity of the larger Amazon aggregators has had a positive impact on demand, so those with SDE above $1m (assuming strong metrics in other aspects of the business) are more reliably selling for higher multiples, although the range is still wide. We have heard of businesses of this size selling for less than 3x multiples (not Hahnbeck clients) while we have direct experience of our own clients’ businesses selling above 6x.
Why has the range of multiples widened so much? There is less urgency amongst most of the aggregators to make acquisitions, and more pressure on them to buy at lower multiples in order to keep their debt to earnings ratios down. At the same time, they are increasingly becoming more strategic with their acquisitions — looking for specific platform capabilities, operational expertise or synergies with their existing businesses. They will bid fiercely for those businesses that represent a strong strategic fit for them, while being happy to let other opportunities go. For those businesses that they are happy to “let go”, this means bidding low.
Seller Expectations Are Out Of Step
People tend only to talk about the best deals and the highest multiples, which can be misleading. Seller expectations have risen much faster than multiples, because every seller has heard of someone who sold their business for a 6x multiple. In the same community there will have been others who sold their businesses for 2.5x, 3x and 3.5x but are not loudly broadcasting the results to the group. Most will have sold somewhere in between.
Our own results don’t help because, although we report our average multiples, including our highest and lowest, our results are well above market. The reasons for this are below.
Remember that most of the funding that the aggregators use for acquisitions has been raised in the form of debt. This funding typically has covenants that limit the multiples the acquirer can pay. The acquirer can exceed this limit in exceptional situations by topping up the price using cash raised in the form of equity, but these are exceptional situations. On average, the aggregators are required to maintain disciplined (i.e. low) multiples. This means that for every deal you hear about at 6x there were probably three or four deals that closed at below 4x.
It’s also important to bear in mind that exceptional circumstances sometimes result in higher multiples, and sellers who hear others describing very high multiples might not be aware of the details. Much can change during due diligence, and sellers whose SDE has fallen substantially but who manage to maintain the same or only slightly lower price will end up with a higher multiple, for example.
How To Get The Highest Multiple
In this context the logical question to ask is how does one achieve a valuation at the higher end of the range? Within the range of what is possible for any given business, how do you get the highest price?
We’re in a good position to answer this, since our results are consistently well above market.
The answer comes down to finding the buyers who have a strong strategic fit with your business. The buyers who do not want to buy your business, or who will only pay a low price, don’t matter. They key is finding the buyers who see a strong strategic fit between your business and their own, and prioritise acquiring your business over the other opportunities they are looking at.
The strategic fit might be related to the category of products you sell, your supply chain, your distribution, your expertise, or many other factors. The buyer will be executing a multifaceted business strategy and your business may fit perfectly into one or more elements of it. This will make your business a high priority for acquisition.
Part of the value we at Hahnbeck bring to the table is finding the buyers who have a strategic fit with our clients’ businesses. By understanding the buyers and some elements of their strategies we are able to highlight the aspects of our clients’ businesses that fit with the buyer’s business. This is how we have been able to achieve such outstanding results (a 5.51x multiple of SDE in guaranteed consideration, on average over the last 12 months, as of Feb 2022; as a multiple of EBITDA the number is 7.38x with the highest individual deal being 9.20x in guaranteed consideration).
In some of these sales there were as many as 10 different bidders. But even in these cases most acquirers said “no” and many others made low offers. They didn’t have a strategic fit with the business and it wasn’t worth it for them to make the acquisition, or to make the acquisition at a high price. But in every case, the lowest bidders don’t matter. Only the highest bidders do. Finding the buyers with a strong strategic fit, and making the right case to them, is everything. This is how to get the highest multiple for any business.
Please remember that there are other factors to consider besides price: the terms of the deal matter enormously. Also the reputation of the buyer, and other factors. It’s easy to make a high offer, but not every buyer can close the deal. We help our clients to navigate all of this, and it is not always the buyer with the highest offer who wins.
“Finding the buyers with a strong strategic fit, and making the right case to them, is everything”
Other Benefits
When a strong strategic fit exists between buyer and seller, there are other benefits beyond the price. The seller usually feels much better about selling to a buyer who really values their business. They often see eye-to-eye on strategy and growth opportunities. And during due diligence, the inevitable speed bumps that occur are much less likely to completely derail the process when there is a strong strategic fit and it is not merely another add-on acquisition.
How To Find The Right Buyers
How do you actually know which buyer will see a strong strategic fit between your business and their own? This is how we do it.
Firstly, we know the buyers. We’ve had so many conversations with key people at the aggregator firms about why previous targets were or were not a good fit, that we have a lot of data. Some of them actively keep us abreast of developments in their strategy so that we can find the most suitable acquisitions for them. For the others we make it our business to find out, where we can.
Beyond this, it is a matter of approaching everyone — the whole market (excluding only those whose acquisition criteria specifically excludes a given business). Besides the Amazon FBA aggregators, we also approach strategic buyers and PE firms that are relevant to our client’s business. This is important because you never know which firm has recently changed their strategy in such a way that it is now a perfect fit for this business. Running an inclusive process is the best way to find them.
The way to do it is to talk only to the buyers who have reached out to you. Their email says “We’re really interested in your brand” so they must have a strategic interest, right? Wrong. These emails are sent out in bulk, with only the key details (your name, the name of your brand) changed. They are designed to pique your interest so that you will respond and engage with them, at which point they will be able to assess your business properly for the first time. Our clients forward these emails to us. On many occasions they’ve been sent by junior members of staff at an acquiring firm where the senior people had previously evaluated the business in detail and already said “no” to it. The deal origination department of the aggregator firm (the department sending out these emails) is sending out thousands and thousands of these each month, and although they are designed to appear highly targeted, they are not. Usually they are merely filtered on basic size and category criteria.
The best way to find the right buyers is to use a professional M&A firm who specialises in this sector, knows the buyers well, and has a track record of getting outstanding results. Hahnbeck is the best example in the e-commerce sector.
Not Every Business Sells
Another common misconception is that in a seller’s market every business sells, and that the buyers are simply “shopping” for businesses as if they are putting them one by one into a virtual shopping trolley. This is simply not true.
When the best offers for a business are not in line with the price and terms that the seller will accept, the business doesn’t sell. This is a relatively common scenario in the Amazon FBA M&A landscape — it just isn’t one that is discussed very often. Thankfully for our clients this situation is rare, but it does happen. In the wider market it happens all the time.
There are many factors that can play into this situation, but the two most common scenarios are where (i) something important about the business changes for the worse during the process and buyers lose interest, and (ii) no buyer with a very strong strategic fit can be found, and the seller has price expectations at the higher end of the spectrum, so the best offers are too low compared to the seller’s expectations.
In the first case it is usually the financials — everyone expects fluctuations in performance but when a business goes into a steep or continuous decline according to key financial metrics, buyers get nervous. In this case the business usually has to turn things around before coming back to market and presenting a more positive picture. This is why it is absolutely critical that sellers continue to focus on running the business during the sale of the business. The ideal scenario is for it to continue to grow according to all key metrics throughout the process, so the buyer has no reason for concern. Not all factors are under the seller’s control obviously. But we have seen situations where sellers have mentally departed from their business even before sale. They starve their business of resources (both money and their own attention), allow it to decline steeply, and still expect buyers to be interested. This method is almost guaranteed to result in no sale, or a very poor result, and is not recommended.
The second case is a reality sometimes too, and in these situations the solution is usually to gain as much knowledge as possible from the market about what is and is not attractive about the business and its metrics, then take the business off the market and look to change those factors that can be changed, before bringing it back to market in future. Thankfully this is relatively rare for our clients.
It is important to have realistic expectations before sale though: typical multiples for great businesses are in the 4 to 4.5x range at the moment (multiple of SDE, guaranteed consideration, excluding inventory), but the range is very wide. We’ve managed to achieve higher than this for our clients. But if a seller’s expectation is to achieve the highest end of the range, especially when selling on their own without our support, disappointment is the statistically most likely outcome.
The most important thing is to run the sale process optimally: if this is done well, the process will find whatever the highest price and best terms are in the market. This is where Hahnbeck can help.
There is one more “truth” that is useful to bear in mind, although it isn’t about valuations:
Deals Don’t All Close In 30 days (or 45… or 60…)
We’ve had some deals close in less than 30 days, but most take much longer. The fastest completions are where deal is an asset purchase (rather than share purchase), the business is relatively straightforward, with only a small number of SKUs, selling only in one marketplace, with a relatively simple supply chain and good accounting records. In these cases, deals can close very quickly — we’ve had two deals close in 26 days or less. The longest take many months.
Importantly, a lot depends on the buyer. We’ve seen some criticism of aggregators for not doing “enough” due diligence — i.e. speeding through it so quickly that the seller’s lawyers wonder if they are leaning heavily on the reps & warranties to protect them rather than actually confirming everything they need to before closing. This “high speed diligence” approach appears to be changing: buyers are taking more time and being more thorough. Deals are still closing but 90 day exclusivity periods are more common, with deals closing at between 60 and 90 days if there are no added complexities.
Conclusion
The range of valuations of Amazon FBA businesses has widened considerably. Most of the discourse in Amazon seller communities is around the highest valuations, not the average ones. This has the effect of giving sellers the impression that average valuations are much higher than they are.
To get the highest possible valuation (and best terms) for a business, the sale process has to be executed well, so that the buyers with the strongest strategic fit are found. This is where Hahnbeck can help.
Besides this, Hahnbeck provides a lot of support throughout the deal process, advocating for and protecting our clients’ interests from the very start right through due diligence to closing. If you would like to discuss your business and your exit plan please don’t hesitate to contact us at info@hahnbeck.com or on +44 203 669 1654.
Note: the data in this blog post are from our own clients’ deals, knowledge of other deals we are a party to and information reported to us directly by the buyers of these businesses. All of our data relates to businesses with enterprise values of $2m (£2m or EUR2m) and up.
We have some clients with enterprise values above $100m: the above multiples do not apply to them.
Originally published at https://www.hahnbeck.com on February 14, 2022.
