Background:
Ecommerce has had a staggering rise since internet broke into our lives. Many people switched to online shopping and companies such as Amazon, eBay, and Alibaba has opened the door for new entrepreneurs to fulfill their dream and open a business that doesn’t require a lot of capital. In 2019, a new market was formed- the FBA market. The idea is simple- successful brands on Amazon that reached their current potential will be acquired by institutional buyers or firms and they scale it to grow their revenues and EBITDA.
Aggregators:
According to Targo’s market research, the FBA acquirers market is booming. Companies have raised more than 7 billion dollars in 2020 alone. This massive market growth can be attributed to the shift in consumer behavior and the fact that brand owners struggle to scale up their brands after reaching a certain level of revenues.
Research shows that most the successful third party sellers hit their revenue ceiling between $3-5 million, and acquirers have the power to grow that valuation by 2.5-4x in just a few years.
Evidently, an average growth of 3.25x from pre-acquisition to post-acquisition is a strong margin. This average valuation is just within the first few years, and has significant potential for continued growth for years to come.
To emphasize the validity of the market, the top 4 market player has raised approximately $3B.
Although these large competitors have set the pace for the market, there is always room for entrance with the plethora of third party sellers out there.
Criteria (due diligence process):
As in any M&A process, acquiring brands on Amazon involves due diligence. Most companies are looking for brands which have the possibility to grow and expand but at current stance, cannot achieve their full potential. For instance, Thrasio, a leading FBA acquirer has developed the “R Cubed” model in which a brand’s success is measured based on 3 criteria:
- Review
- Rating
- Rank
Another market leader is Perch, that specify their due diligence process in gross numbers where the first part, which takes 2 days, includes reviewing the potential acquisition, confirm its interest and value the potential profit. Thereafter, they take 2-3 weeks to go through the business process, confirm the financial outcome, and prepare the legal documents. Lastly, in the next 2 weeks, the seller migrates their Amazon brand account to Perch and get paid once its finalized.
We can synthesis the 2 market leaders and benchmark these criteria to other market players and determine that FBA acquisition typically takes a month.
Summary:
FBA aggregators market emerged in 2018 and since then it grows rapidly. New acquirers are entering the market and generating high returns to their investors.
