Introduction
In the nearly 30 years of Amazon’s existence, millions of people have used the e-commerce platform to build their own businesses, many of which are now thriving and bringing in millions of dollars in revenue every year. At the same time, many successful Amazon store owners are looking to sell their companies and move on to other ventures. However, Amazon sellers who start researching the possibility of selling their business quickly discover that there’s very little reliable information regarding Amazon acquisitions available to the public. For the most part, business owners have to work their way through countless myths and conjecture widespread in blogs and forums, trying to determine what is and isn’t true.
In light of this situation, Nuoptima’s team has reached out to over 20 Amazon aggregators and gathered valuable information to help prospective sellers position their business for acquisition and get the best possible deal. We’ve laid out our conversation-based insights in a series of articles, which have already covered aggregator preferences and requirements for acquisition targets and typical Amazon acquisition deal structures. We will focus on common misconceptions Amazon business owners have regarding factors that can increase or lower the valuation of their business.
Factors that influence the value of an Amazon business
Many Amazon business owners who are looking to sell their business believe that having other sales channels in addition to Amazon can help strengthen their brand, improve the chances of their business getting acquired, and ultimately increase the valuation of that business. However, our conversations with representatives from over 20 Amazon aggregators showed that this notion holds true only in a small number of cases. In reality, most interviewees said that other sales channels don’t necessarily increase the valuation of the business. The majority of responders mentioned that additional sales channels have a positive effect on the price of the business only if they bring in a significant amount of sales revenue.
Many of the Amazon brands might have a DTC presence on Shopify/ Woocommerce, however, most of the traffic is being achieved through expensive advertising on Google or Facebook. In many cases, we see 1-2-year-old websites without organic traffic with a negative return on ad spend (ROAS). While it is good to see that a brand tried to build a presence outside Amazon, it does not represent the same MOAT as a great listing on Amazon and therefore the additional value is not justified.
So what does this mean for you as a business owner? The answer depends on whether your plans are short-term or long-term. If you’re planning to sell your company in the near future, it’s most likely not worth the time and effort to invest money into setting up new sales channels just for the sake of diversification. However, if you are not looking to sell just yet and want to grow your business long-term, it could be a great growth opportunity for your company if done right. Investing in SEO (content and backlinks) will give you a similar position in Google Search as you have with Amazon (although it might take longer and will be more costly).
Many Amazon business owners we’ve worked with worry that their acquisition prospects could be negatively impacted by the fact that their products are manufactured in China. This is an interesting example where some of the larger aggregators such as Thrasio and Berlin Brands Group have teams in China and can leverage the supply chain in China to their advantage and deal with issues straight away. Many of the smaller aggregators are neutral about China. With the recent global supply chain risks, we anticipate that local manufacturing might increase in attractiveness.
Today, there are over 2 million sellers on Amazon offering countless products. Naturally, in this environment, exclusive products are hard to come by. Many sellers source their inventory from the same suppliers located in China or elsewhere, making it challenging to win buy boxes and attract buyers. This makes companies that own patents or rights to specific product designs quite attractive for aggregators. This is backed up by the fact that 60% of interviewees we talked to said that companies that own patents for their products are generally valued higher. However, the proportion of responders who said that patent ownership doesn’t necessarily result in a higher valuation is also significant. Some responders mentioned that many patents could be circumvented relatively easily, rendering them useless. Plus, many aggregators are able to successfully grow businesses even without patents or exclusive rights to products.
Conclusions
Our insights gathered from conversations with numerous aggregators and industry experts show that many notions held true by the Amazon seller community don’t necessarily reflect the actual state of things in the industry. Business owners who are looking to sell their companies at the highest possible price should critically examine their operations and take steps to mitigate risks and make improvements that can give the company a real competitive advantage and pave the road to long-term success instead of making changes that improve the business only on paper. A big area for further research is comparing multiples paid by the size of the business. At NUOPTIMA and Alphagreen Group, we see higher multiples being paid for much larger deals while smaller deals are not being picked up anymore or having to decrease their valuation expectations significantly to be of
interest to buyers.
