Selling to a consolidator, a Fulfilled by Amazon brand's perspective

Selling to a consolidator, a Fulfilled by Amazon brand's perspective

Our FBA team recently hosted a virtual roundtable with Simon Staines, founder of HIKS Products, an outdoor sports equipment business, who recently sold his company to Profound Commerce, a Fulfilled by Amazon (FBA) consolidator. Here are some of our key learnings from the roundtable discussion. 

HIKS, founded in 2014, is a brand that operates across multiple retail channels, at the time of sales the majority of its sales coming from the Amazon platform. With multiple sales options available on Amazon, Simon sold through a blend of FBA and seller fulfilled prime (SFP) and Amazon vendor. They had their brand registered with Amazon and participates in a variety of Amazon exclusive programs. The pandemic created the need to grow the business significantly and Simon decided to sell the business to a new owner who would be able to invest considerable sums into stock to enable the brand to scale quickly.
 

Amazon SFP vs FBA

Being a relatively small business Simon chose to use SFP to maintain control and flexibility of the customer experience. When the company started showing the Prime badge Simon experienced a 30%+ uplift in sales on Amazon.

It’s important for vendors to recognise the value of FBA for their smaller products and keeping SFP for the products which are large and bulky. This prevents the larger storage and pick fees using FBA.

Simon: “Our choice was driven by where was the best and most economical operational channel to push our products through”.

One of the downfalls of SFP to consider is that the prime badge can be temporarily lost if deliveries are not fulfilled in the time frame needed, which can be tricky if an order comes in close to carrier cut off’s or on weekends. But there are strategies you can use to by using FBA and SFP together to maximise sales and profitability.
 

Amazon vendor scheme

The Amazon vendor scheme is a useful channel to gain product and brand awareness, increase listing visibility and have amazon optimise listings. Algorithms are continuously changing on Amazon, so they are always best placed to optimise listings and product visibility.

Amazon brand registration is recommended if you own your own trademark. Amazon gives access to exclusive programs and Vendors will get to see advertising innovations first which can result in much lower advertising cost. As a brand owner you are also seen as trusted by Amazon. If you do come to sell the business, brand registry is an important and valuable aspect to any aggregator.

As a seller you are unable to control Vendor stocks, so it is essential to look at your margins and the channel you want most sales to go. Some businesses accelerate vendor stocks for a short time while a product at the start of a peak season, then throttle this to make better margins using FBA & SFP. If you can manage this process, you can really maximise your profits.
 

Key areas that acquirers are looking at

Simon, HIKS: “There are so many aggregators in the market with slightly different models. BDO understood what the aggregators were looking for and therefore knew who to place our business in front of.”

There are a lot of potential buyers fishing for information, they want to know more about the market and strategies than they do about the business itself. It’s advantageous to find a way to filter buyers who are interested in your market sector, understand the shape of the company, and are interested in the company and its potential from the outset.

If you want to sell your business, the first stage is to send a data pack to prospective buyers, working out adjusted EBIT calculations to use this as your multiple. This was something that can be difficult for business leaders to do without the help of a third party. It’s about giving enough information to create interest but not too much so competitors can delve into your business.

Multiples depend on what industry you are in and can vary dramatically. The normal levels are 4x-5x depending on the market, size of business and strength of your brand.

Lorna Hopkinson, BDO: “Consolidators used to be quite purist around the way that they would acquire businesses and almost robotic in their acquisition criteria and metrics. Over the last six months we have seen a shift. Consolidators are looking at quirkier, wider reaching brands, and bigger brands selling across multiple platforms. We have seen multiples push up for bigger businesses as there are fewer of them. They are still very focused on the last 12-months performance, but we have seen more openness to % of sales on Amazon, to multiples being flexed for brands that are not currently trading on Amazon. It’s easier for them to acquire bigger businesses, as this saves them time and resource.”

While there are other exit options available to brands, Simon felt the aggregator route was the best funded, due diligence is normally a very stressful process and most aggregators are relatively light touch compared to Private Equity and other funding options. A lot can change in the market during the due diligence process and once they had made the decision to sell, they wanted to get it done.

Simon, HIKS: “If I could go back four years, I would have borrowed money and grown the business quicker by putting a lot more investment in stock and products”.

We have seen aggregators being so focused on deal flow that they are low on resources to actually integrate businesses once purchased and are therefore keeping existing structures in place for longer. From an aggregator’s perspective, whilst they have access to sizable funding lines, the focus will be on acquiring brands, with a view of switching to optimisation and change once deal volumes slow.
 

Is 2022 the right time to sell?

It is becoming increasingly difficult to compete on Amazon and it can be hard for brands to judge when the right time to exit is.

Jonny Halmer, One Retail Group: “The appetite for acquiring smaller businesses is becoming less so. You want to find a balance between a healthy pricing period of the last 12 months trading that represents your growth, coupled with what is happening in the market. 2022 is going to be a year of heightened competition as aggregators consolidate, and some will fail. As inflation and rising energy bills come into play this will also have a knock-on effect to multiples.”

Simon, : “In my opinion now is the right time to sell. It is only in the past 12 months that mainstream investors have been looking at the aggregators and pushing money towards them so a lot more investment firms are out there looking.”

It is very tax efficient at this time for investors to push money into aggregators via certain investment tools. With current inflation and pricing, consumers are investing, investors are putting the money with aggregators because it is a fresh growth model that is also tax efficient. In 12 months’, time funding will become far more selective as aggregators start to fall over. It is however, important to look into the performance of the aggregator you are talking to if you care where your brand ends up.

Read our last FBA roundtable write up for more on how to get the best from the platform itself and if you would like to opportunity to join one of our roundtable events in the future, subscribe now.

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