What Kind of Multiple Will Thrasio Pay for My FBA Business?
October 5, 2021 Gwen Sylvester
Hands down, it’s the number one question we hear from FBA sellers. Thrasio dealmaker Gwen Sylvester explains how we arrive at an answer.
Hey Gwen, My ecommerce business does $1.5 million a year and gets great reviews. I’m thinking of selling. What will Thrasio pay me for my business?
—Question from an FBA Seller, White Label Las Vegas
Sellers ask me this kind of question all the time at conferences, over the phone, and at industry events. I always wish I could give them an answer on the spot.
We get it. If you’re considering an exit, it’s one of the first things you want to know. But before we can give you even a ballpark figure, we need to have a little more information. And that takes a little more time.
Any reputable buyer will say the same. Understanding your company’s baseline finances and operations is critical to giving you an accurate valuation. In fact, if you ever receive an offer from a buyer who doesn’t ask for more information about your business upfront, proceed with caution.
Here’s why: after a buyer makes you an offer, and you agree to it (or a negotiated version of it), you’ll sign a Letter of Intent (LOI). This preliminary agreement starts the deal process and should include an exclusivity clause, which stipulates that you’ll no longer speak with other potential buyers. If you accept an LOI from a buyer who doesn’t evaluate your company properly, you’ll be locked in—and during due diligence, you may find that the buyer might want to drastically reduce the initial offer. You’ll be stuck until the exclusivity period comes to an end. It’s an unfortunate bait and switch, but it happens often.
Since we got our start in 2018, Thrasio has evaluated thousands of ecommerce businesses. That kind of experience means that we know how to value companies quickly—and accurately. For sellers, the valuation process is pretty straightforward. We’ll ask you for a couple of documents, such as an accrual profit-and-loss statement and reports from Amazon or other revenue-generating channels. We’ll ask you a few questions about your business. After that, we can typically provide a valuation in less than a week.
How Thrasio views the business-valuation process
We approach the valuation process as a partnership between buyer and seller. We love working with entrepreneurs and have a lot of respect for what it takes to grow a successful ecommerce brand. We want to hear the story of why and how you grew your business and your ideas for future growth. Both of these are very helpful to us during valuation.
We also want to hear what your ideal exit looks like. Do you want to stay on and help run the brand? Are you looking for all cash upfront or are you open to a deal with less upfront and uncapped earnout? These are the kinds of conversations we’ll have with you as we get to know one another.
A lot of the evaluation work happens behind the scenes. We’ll look at things like competition in your category, the ratio of sponsored to organic revenue you’re driving, and opportunities for expansion. When we do arrive at a purchase price, we’ll provide you with a thoughtful explanation on how we got there. Transparency is part of our commitment to sellers and part of how we do business.
Thrasio’s approach to multiples, explained
This is where the concept of multiples comes in. By definition, a multiple is simply a business’s net profit, also known as EBITDA or seller’s discretionary earnings (SDE), multiplied by a number. Multiples indicate how much buyers are willing to pay to acquire your brand. Sellers look at multiples because they give them an understanding of market rates and a quick, rough way to estimate the value of their businesses.
Just a few years ago, FBA sellers could expect to receive about 2x the value of their business. That’s because the concept of buying and selling FBA businesses was fairly new, and there wasn’t a lot of competition. Companies buying these kinds of businesses were also new to evaluating them, so we were building our own models and valuation formulas to fit the unique attributes of the industry
In the past few years, the market has changed. There’s a lot more buyer competition, and that’s driving up prices. As a result, ecommerce brands now trade at 3x, 4x, 5x, 6x, and above. While that’s good news for sellers, you also want to make sure your buyer is established, well-financed, and reputable; we’ve heard from many sellers who’ve had a deal fall through unexpectedly post-LOI, because a buyer wasn’t financially equipped to close.
Thrasio’s ability to grow ecommerce businesses sets us apart. We’ve become highly adept at scaling brands, developing new markets and channels for products, and even creating new product lines that meet shifting consumer demand.
That has a measurable benefit for sellers. What Thrasio refers to as the “multiple” is usually just the upfront cash payment. That’s significant, but it’s not the only piece, because our deals are typically structured with a business’s future growth in mind.
Our typical deals structure includes individual payments in four parts:
1. Upfront payment based on the multiple of a seller’s discretionary earnings
2. A payment for all sellable inventory
3. A stabilization payment one year post-acquisition
4. An earnout payment two years post-acquisition. (An earnout is a payment, or payments, based on a brand’s performance, typically over several years.)
While this is often the structure we end up using, Thrasio has completed more than 150 acquisitions. We can structure any deal to meet the needs of the seller. For example, some sellers prefer more cash upfront and little or no earnout. But the majority do choose the earnout structure because of the uncapped upside they’ll earn as Thrasio grows the profitability of the business.
Let me give you an example. If your seller’s discretionary earnings are $1 million annually, and we offer to buy your brand at a 4x multiple, then you’ll receive $4 million upfront. There will be additional payments for your inventory, a potential stabilization payment, and an earnout payment.
The bottom line? Reach out.
There’s a lot that goes into determining the value of a brand. In a nutshell, we acquire companies that are poised for growth but may need more capital, human power, or marketing investment to reach their full potential.
Your business could be worth more than you think. Don’t hesitate to find out. I’d love to have a conversation and learn more about you and your business.
About the Author
Gwen Sylvester is the senior director of acquisitions at Thrasio. Gwen started her career in finance in a private investment office and then pivoted to corporate development, where she spent 8 years in the early childhood education space. Gwen lives in Portland, Oregon, and enjoys spending time in the great outdoors.