Selling Your Business to Thrasio (the Basics)
November 24, 2020 Jenna Craig
Whether your company has grown beyond the size you want to manage, you’re pivoting your focus toward a new venture, or you’re just curious about what Thrasio does, you don’t have to be an expert in FBA acquisitions to start thinking about exit strategies.
In the two years since Thrasio was founded, we’ve bought nearly 100 FBA businesses. We’ve learned quite a bit about how much sellers can expect to sell their business for, what makes a business desirable to us, and what sellers can anticipate from the acquisition process.
The value of an FBA business
Current market rates for selling FBA businesses are 2 – 4x your Trailing Twelve-month Earnings/ Profit. You’ll often see this written as TTM EBITDA or TTM SDE (Seller Discretionary Earnings).
If your business has Operating Expenses that do not directly relate to the success of your business, those are typically considered “add-backs” and we will add those back to your profit-making that upfront payment higher.
Add-backs are things like Owner’s salary, office rent, and if you have any other expenses running through your business (once we had a pet product owner who ran her dog’s food through the business, we wouldn’t include that as an Operating Expense) – since Thrasio won’t be running those expenses through the business when we own it, we don’t count them.
2x – 4x is standard across the industry at this time. Thrasio estimates we do about 40% of the transactions in this industry in the US today and these are the rates that most buyers and sellers are transacting at. What gets closer to the 4x than the 2x?
• Size of business – the larger your TTM EBIDTA/ SDE, the more we’re typically willing to pay for a business
• Secured Intellectual Property – Patents, Trademarks, Brand Registry and even having exclusives with a manufacturer are helpful in increasing the value
• Overall market size for your products and opportunity for growth
• Reviews, Ratings, and Rank (see below). Brands with 1 or more highly ranked (top 10) products in their category demand higher multiples
For a ballpark estimate of what your FBA business might be worth, multiply your seller’s discretionary earnings (trailing 12 month’s net profit + owner’s expenses) by 3 or 4.
TTM Net Profit= $1,200,000
Operating Expenses = ($200,000)
TTM EBITDA – SDE = $1,000,000
Multiply by 2.5x
Expect an upfront payment of $2,500,000 for your business + Performance Payments + Inventory at Landed Costs.
What are we looking for?
R3: Reviews, Ratings, and Rank…and Category
We look for products or brands with hero ASINs that have at least 500 (predominantly positive) reviews acquired organically. That gives social proof that the product is a leader in the category. Incentivized or purchased reviews need not apply.
A rating over 4 stars proves the product’s quality and shows the brand can sustain its position over time.
What’s the product’s ranking on high volume keywords (most popular search terms)? If a seller has been able to rank well in a competitive category, it often provides an indicator to us that you’re also doing other things well—investing in marketing, managing stock-outs, and optimizing your listings. But, we don’t *only* look at high-ranking products. We evaluate niche products we think can perform even better after our playbook is applied.
Our sweet spot is in everyday hard goods selling on a private label—everything from kitchen utensils to pet supplies (we don’t buy resellers or retail arbitrage). We stay away from trendy items like apparel, tech products that will be obsolete within a few years, and food/grocery. We go for items that are likely to be found in every household, office, or car.
We’re not interested in big seller accounts with moderately successful ASINs. Unlike a lot of buyers, we embrace the smash hit hero ASIN that does $3M in revenue because we can spread the risk across our portfolio of nearly 100 brands.
R3 must be organic. If you have achieved this through black-hat tactics or are violating any Amazon Terms of Service, this will decrease your multiple or potentially disqualify you from being an acquisition.
How long does it take to sell my FBA business?
Migration of all of the assets during the transaction takes about 30-40 days.
After we chat a few times and decide we’re a good mutual fit to work together, we’ll go through negotiations and sign a letter of intent (LOI). Once we sign a LOI, we’re 98% positive we’re going to be buying your business.
Note: There’s nothing legally binding about signing an LOI other than an exclusivity period while we work through diligence under NDA. There’s often a misconception that after the diligence period, the buyer will try to work down the price—we don’t do that. And the proof is in the 98% acquisition rate of deals we close after LOI.
After LOI, the clock starts. This is when our diligence team will start working through your Seller Central accounts and other platforms so we can validate the costs of goods sold. We’ll take a look at your IP and legal agreements, and recreate your P&L.
If you’ve never sold a business before, this might sound nerve-wracking. We’ve bought companies whose financials were handwritten on loose-leaf paper, and a company whose listings got suspended the day of closing. Rest assured, nothing scares us. So if your business is not in tip-top shape, don’t worry.
While in due diligence, you will be meeting with our teams from different departments (Brand Management, Creative, Marketing), so we can learn how to properly run your business to its highest potential, and ensure that your earnout continues to grow.
Then, assuming you’re a US-based company, you’ll wrap up any negotiations in the Asset Purchase Agreement and we put the payment in an escrow account. Migrating the assets takes about 7-14 days. Once we’re migrated, we’ll release the funds from escrow, and you’ll get your first payment.
Depending on how we’ve structured the deal, you’ll receive additional stabilization and earnout payments. Stabilization payments are paid to sellers when the business continues to operate at least at the same level as it did when you sold it to us (based on net revenue), and are usually paid 12 months after closing. We’re confident that the businesses we acquire will maintain profitability within the first year of acquisition, so we offer this additional payment as part of our negotiations to seal the deal with sellers.
Earnout payments are paid to sellers whose brands have grown under Thrasio’s portfolio. Companies we acquire typically see about a 150% increase in profitability. With earnouts, sellers get to participate in the upside of selling their business. A typical earnout increases the size of the total payout by about 37%. They’re usually paid 12 and 24 months after closing, and are often based on EBITDA. Other buyers can’t offer earnouts because they don’t have the proven record of success that our operations team has proven time and time again.
Are we a good fit?
Over the last two years, we’ve been in business, we’ve analyzed over 1,000 FBA businesses. We’ve learned that raising capital and buying a business is the easy part of the process. The real skills come into play post-acquisition when we start operating and growing the business.
We have the invaluable experience of acquiring and operating nearly 100 businesses (check out what they think of us here). Each of our specialized teams can tease out what we got right, what we got wrong, what we are really good at, where we struggled, etc. We can now take that knowledge and look at a business with a very different lens than someone who has yet to make an acquisition.
As Ken Kubec, VP of Acquisitions, says, “they will have to take their lumps and earn the scars.”
If you’re at all curious about selling your business, we’d love to talk to you.
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