What Thrasio Tells Sellers About Maximizing Their Amazon FBA Valuation
March 24, 2021 Jenna Craig
One of our top seller FAQs is how to maximize a valuation. It’s a tough one because there’s no one perfect answer for everyone. In business, and especially on Amazon, there are no guarantees.
We have guidelines on what we look for when evaluating a company for potential acquisition, but those change over time as both Thrasio and the FBA market evolves. Ecommerce is one of the fastest-growing industries in the world. Nowadays, your brand could grow with a company like Thrasio, giving you an earn-out you wouldn’t have dreamed of last year. If you’re hellbent on a higher upfront multiple, you could be short-changing yourself in long-term growth in the long run.
It’s never too early to start thinking about what you want out of an acquisition deal, so you can start gearing up for an ideal exit.
What Thrasio looks for in an acquisition
You’ve heard Ken Kubec talk about our acquisition criteria before on podcasts, at events, and we’ve written about it here. FBA businesses that fit that formula are companies we’d like to take a look at regardless. However, if you want to make more on your multiple, the benchmarks get a little steeper.
Brands commanding a higher multiple are often characterized by the following:
• Hero ASIN driving 70% or more in total revenue
• A Best Seller Rank of 1-5 within the subcategory
• Robust review moat (30% or more reviews compared to the next-best competitor)
In essence, to command a high multiple, you need to be operating a brand that’s already in a leadership position on Amazon. Yet, it still has untapped potential for Thrasio to grow the brand into (ex: selling on International Amazon markets, other ecommerce marketplaces, etc.).
Two methods to mounting huge revenues on Amazon
There are two schools of thought on how to increase growth on Amazon:
Method #1: Spray & pray
This method describes sellers who operate a brand with more than 500 ASINs that each does moderately well. The major pro to this strategy is that you’re still reeling in revenue through your other listings when you have a few ASINs suspended.
Method #2: Hero ASIN
This method describes a brand with one successful ASIN driving the majority of total revenue, at a minimum over 50%. This is what we go for at Thrasio.
There’s nothing wrong with the “spray & pray” philosophy – it just doesn’t work for Thrasio’s model. We can mitigate our risk for suspensions and black hat tactics across our entire portfolio, making hero ASINs more efficient to manage overtime.
What about marketing activity?
We value marketing activity, but it’s not just about being active on social media or having 10k emails in your database. To leverage marketing in the valuation of your business, you need to prove consumer engagement. If you’re bringing marketing activity to the negotiating table, be sure to bring receipts in terms of conversion rate and ROI.
The same consideration goes for D2C or other channels your brand may have broken into. Thrasio is primarily an FBA operator, but we do operate brands in different spaces. Having a Shopify site just to have one won’t necessarily grant you a higher multiple, but a Shopify site driving 30% or more of your company’s revenue will.
We reward higher multiples for:
1. Good margins
If you’re looking for a higher multiple, there’s no better avenue than tightening your budget. Reduce packaging fees or COGS if you can. But more than likely, the majority, if not all of your savings, are going to come from expenses. If your expense isn’t going to end up on your P&L as an add-back, it may hurt your multiple.
Since valuations are based on seller discretionary earnings, everything you write off as a business expense will impact your valuation. If you’re writing off your vehicle or travel expenses, you need to realize that the next owner (Thrasio) will not take over those costs. Being frugal with your add-backs can give you a better platform to negotiate from.
2. Winning in a larger category
It goes without saying: higher EBIDTA is going to translate into a higher multiple. But category size also has an impact. Being a top seller in a niche category isn’t always valuable as being a middle-weight competitor in a larger category where there’s more market share to grow into.
Another way to consider a category size is whether or not your products are consumable. If your brand sells a consumable product with the potential to join the Subscribe & Save program or something that’s going to cultivate repeat customers, your brand will command a higher multiple than those that don’t.
3. Great branding
We’re constantly talking (and blogging) about branding. Branding is truly a pillar of Thrasio’s overall strategy. Currently, Thrasio employs more than 60 creatives who ensure our brands convey the quality and trustworthiness that the rest of Thrasio’s teams work hard to make true. A cohesive brand strategy is essential to expanding into omnichannel opportunities, so having a recognizable brand in place will add value upfront.
If all of your brand’s products encompass one category or brand identity, your branding will add value and be considered in developing your offer. If you have a storefront that sells spatulas and tongs, that brand is leverageable. If you have a storefront that sells things as disparate as spatulas and birdcages, that may not translate into an overarching brand identity that commands a higher multiple. We buy FBA businesses with mismatched products in far different categories all the time, so it’s not always a bad thing. But it won’t make your brand name part of your valuation.
4. Smart growth
If you’re a 6-figure seller, you know it’s a lot of hard work to run an FBA business. And if you’ve ever sold a company before, you know that every deal is nuanced, so none of the above advice is going to guarantee you the offer you want with us or any other buyer.
However, size is one of the standard exceptions to the “no silver bullet” rule on commanding a higher multiple. If you’re preparing to sell in a year or so, focus on scaling your revenue and seller discretionary earnings on Amazon rather than trying to scale laterally through new products or channels. Scaling on Amazon is easier said than done, so if you’re struggling to keep the momentum going, it might be time to start thinking about an exit.
“It’s the chicken and the egg problem,” says Thrasio manager of acquisitions Kevin Flaherty, “It’s tougher to significantly grow a bigger business than it is a smaller one. If you’re pulling in $5 million in net profit, and you want to see 150% growth in 12 months—that’s $12.5 million in revenue—an improbable target to hit. 150% growth is much more achievable when you’re taking a company from $250 – $600 thousand.”
Think about your exit
Take some time to do a thoughtful forecast for your own business. Where do you think you can take it in the next 1-3 years (realistically) given the resources and capital you have? Now, imagine what a team of experts at Thrasio can do with it. This is why Thrasio is the best option for many people when selling their business, are able to scale your businesses more quickly than you can alone.
It’s never one single thing that makes a business successful. Thrasio has over 500 specialized employees. That’s 500+ magic buttons we can press. If each Thrasher can affect 1% of change to a given brand or ASIN, we’ve 5X-ed your business, and you’re sitting in Bali watching your earn-out hit your bank account.