Small brands selling successfully on Amazon are suddenly a hot commodity.
A new class of companies has emerged in recent years that raise money to acquire niche Amazon businesses. These buyers aim to build those brands’ sales and profits by backing them with greater financial and technical resources. Hahnbeck, a U.K. consulting firm that advises companies on mergers and acquisitions, has identified 31 such firms.
The seven that disclosed their funding, all launched since 2018, have raised more than $1 billion, according to Crunchbase, which tracks investments in private companies.
The number of firms looking to buy Hunnibi put the three young Canadian founders of the Amazon seller of honey pots and dispensers in a strong position when they began asking around last year about the value of their business. They soon had offers from four buyout firms. In May, they sold their brand to Perch, which has acquired 20 Amazon brands in the past year after raising $133.8 million in financing, according to Crunchbase.
Having buyers competing with each other helped the Hunnibi owners negotiate a better deal, says one of the three founders, all in their early 20s when they founded Hunnibi in 2015.
“It’s a seller’s market,” says the co-founder, who asked not to be identified by name. “There’s a race to see who can buy up the most Amazon accounts and build a portfolio of Amazon products. The multiples and prices will continue to rise until it reaches an equilibrium. The competition helps with getting a decent offer.”
He would not say how much Perch paid, but said he and his partners got 70% of the purchase price up front, with the rest due over the next year, with the amount to be paid based on the performance of the Hunnibi brand.
What buyout firms pay for Amazon brands
Buyers are typically paying 2.5 to 4.5 times EBITDA—earnings before interest, taxes, depreciation and amortization, a common measure of profitability—for Amazon brands, says Taliesen Hollywood, founder of Hahnbeck, which has advised a couple of Amazon brands negotiating with potential buyers. Larger brands, such as those with $1 million in annual EBITDA, command multiples at the high end of the range, while smaller companies get less. Hollywood says buyers typically want to see a minimum of $200,000 in annual profits.
The Amazon brands that buyers seek to snap up are typically those with revenue under $10 million, making them too small to appeal to the larger retailers and private equity firms that typically buy retail businesses, Hollywood says. This new group of Amazon brand acquirers usually look for businesses generating at least $750,000 in annual revenue and prefer companies with at least $2 million in yearly sales, he says.
Like the Hunnibi co-founder, Hollywood says the bidding war for brands has driven up the multiples of EBITDA that buyers will pay.
“The entire range has shifted up,” he says. “A company that might have gotten 2x [2 times EBITDA] before might now get 2.5x.”
Sellers also can get more favorable terms, Hollywood says. For example, they can demand the buyer acquire the entire company—taking on the risk of possible lawsuits for defective products sold in the past, for example—rather than just acquiring the product that’s selling successfully on Amazon.
Amazon is No. 1 in the 2020 Digital Commerce 360 Top 1000, a ranking of North America’s leading online retailers and No. 3 in the Digital Commerce 360 Top 100 Online Marketplaces list of the world’s leading multi-merchant shopping sites.
Thrasio acquires nearly 100 Amazon brands
Of the acquiring companies that have disclosed their financing publicly, Thrasio, based in the Boston suburb of Walpole, has by far raised the most—$396.5 million—since its founding in 2018.
Thrasio had purchased 90 Amazon brands by early December 2020 and expects to have close to 100 companies in its portfolio by the end of 2020, says Joshua Silberstein, who co-founded the company with Carlos Cashman. He says those companies are producing $500 million in annual revenue and that Thrasio will make a profit of $100 million in 2020.
What’s more, he says, Thrasio is growing the businesses it buys. He says the EBITDA of the brands it has purchased has increased by an average of 156% since Thrasio bought them.
In 2021, Thrasio projects its Amazon businesses will generate $1.3 billion in revenue on Amazon, and additional sales from the ecommerce sites Thrasio is starting to build on the Shopify ecommerce platform for some of those brands. Thrasio also plans to roll out new products for its acquired companies, 250 to 500 new items next year versus 20 in 202o.
Furthermore, Thrasio is expanding internationally. “We have M&A [merger and acquisition] teams on the ground in the U.K., Germany and Japan,” he says.
How Thrasio increases sales of acquired brands
Silberstein says he and Cashman founded Thrasio after studying data of companies selling on Amazon and finding that many small sellers made strong profits on their first one or two products, but that profit margins declined as they introduced more items.
“We talked to sellers and asked them why, and they told us that Amazon is an incredibly complex place,” he says. “There are a ton of functions you need to do well. It’s one thing to do that for one product when you get started, but when you get to a point when you have a one- or two-person team managing more products it gets harder and harder to do things well.”
Josh Silberstein, co-founder, Thrasio
Thrasio and other companies buying Amazon sellers believe that a company with lots of resources can manage the complexities of Amazon better than small brands can.
Silberstein says Thrasio, with 600 employees, improves the performance of its portfolio companies in many ways. He says they find better suppliers, consolidate shipments from Asia into full container loads to reduce transportation costs, and improve creative assets like product photos and descriptions.
Better photos and snappier copy improves conversion. That’s tremendously important for ranking well in Amazon search results because Amazon’s A9 algorithm for ranking products puts great weight on conversion rate, Silberstein says.
“That makes sense because Amazon’s mission is to drive a great outcome for customers,” he says. “Amazon wants to find the products people are more likely to buy when they look at them and bring them to the top of the search page. 80% of the algorithm is conversion rate and the rest is sales velocity.”
In other words, products that sell rise to the top of Amazon search results. And Thrasio, with 75 employees just focused on Amazon marketing, Silberstein says, can drive sales more effectively than the typical Amazon entrepreneur running a business with a handful of staffers.
Which Amazon brands are most attractive to acquirers?
Developing new products in categories like consumer electronics and fashion—categories in which the hot products change all the time—is not something acquiring companies like Thrasio see as their core competency.
“We take great products and scale them, we don’t launch Bluetooth headsets every six months,” says Chris Bell, founder and CEO of Perch. Perch, which has raised $133.8 million according to Crunchbase and has acquired 20 Amazon brands since closing its first deal in January, focuses on categories such as housewares, toys and games and medical devices.
“These are stable categories,” Bell says. “We expect people will be buying these same things in 15 years. If we manage these brands well, we can continue to be a share leader for 15 years.”
The acquirers say they also look for products that have lots of good reviews. That’s especially valuable now because Amazon has cracked down in recent years on various schemes designed to produce fake reviews. That means that brands that legitimately accumulate good reviews can be tough to dislodge from top spots on Amazon search results.
“It’s almost impossible to knock a listing with 10,000 reviews out of the first, second or third spot on Amazon search results,” says Trevor George, CEO of Blue Wheel Media, a digital marketing agency focused on ecommerce.
Silberstein says Thrasio saw the power of reviews after acquiring the Dark Iron brand of weightlifting accessories whose top product had 4,000 reviews and an average score of 4.6 out of 5, when no other competitor had as many as 1,000 reviews. That product held the top spot in search results for 717 out of 727 days.
“That’s a real long-term advantage,” Silberstein says. He also notes that Amazon shoppers will pay a few dollars more for well-reviewed products. When Thrasio tested raising the price that popular Dark Iron product a few dollars it didn’t depress sales, he says.
Other acquirers agree. “Our ideal candidate has that five-star review moat and is one of the leaders in its category,” says James Stein, co-founder and chief operating officer of Recom Brands, which had acquired nine Amazon brands as of early December and aimed to have a dozen in its portfolio by the end of the year. (Recom Brands has not disclosed how much money it’s raised, but plans to announce its funding early in 2021, Stein says.)
Acquirers also favor sellers that use Amazon’s Fulfillment by Amazon service to warehouse products and fulfill orders because those companies’ cost structures are well-defined and they have fewer employees, says Hollywood, the U.K. consultant. “Merchants that are fulfilling stock themselves have a lot more moving parts to their businesses compared to those who use Amazon for this,” he says.
Thrasio looks beyond Amazon
Most of the acquiring companies focus on what they see as a huge opportunity to acquire small Amazon brands. “The action is on Amazon and we’ve got to stay focused and make sure we are optimizing there,” Stein says.
But Thrasio is already moving beyond Amazon to explore opportunities for its brands on the Walmart and Target marketplaces and social media sites like Instagram and TikTok, Silberstein says. And the company views its brands selling through ecommerce sites on the Shopify platform as an important way to gather consumer data and increase sales.
Silberstein says that Amazon sellers only know what a shopper buys from them on Amazon, but not the other products she may buy at the same time, nor the other products she may have viewed. Plus, Amazon doesn’t provide the consumer’s email address, which would enable the seller to do follow-up marketing.
On a brand’s own website, he says, the brand can see what shoppers look at before they purchase and analyze how different demographic groups browse. The retailer also can bundle products in ways that it can’t on Amazon, and it obtains a buyer’s email address for remarketing.
“The ability to get close to the consumer and understand what they want and communicate with them is really not there on Amazon,” he says. “What you can do to get the best outcome is not as robust as if you can actually have a dialogue and a relationship with the customer.”
Advice for Amazon sellers on selling strategy
The emergence of all these companies seeking to buy Amazon brands comes at a good time for small merchants on the marketplace, which are facing greater competition than in the past, says George of Blue Wheel Media, who also is CEO of Trevco, a manufacturer of licensed apparel from brands like Warner Brothers, Dreamworks and NBC/Universal.
He says more large consumer goods manufacturers are now selling directly on marketplaces like Amazon, as are the Chinese factories that produce so much of the world’s household goods. “It’s hard to compete with that unless you’re vertically integrated and have a real point of differentiation,” he says.
For brands tired of competing with bigger players, there is ample opportunity to sell out: George says some clients in categories these acquirers favor are getting emails every week or two from companies looking to purchase them.
But before they enter those negotiations, Amazon sellers should get their financial records in order, advises Trent Dyrsmid, founder of Flowster.app, which provides software to help companies sell on Amazon.
Based on his own experience in selling an earlier business, Dyrsmid says the period after a buyer and seller enter into a preliminary agreement can be stressful for the seller, as the buyer typically requests lots of information about the business before finalizing the purchase.
“If you’re not well prepared beforehand, the amount of requests for information from a potential buyer is going to be significant, which would mean all those hours you’d spend growing your business you’re spending coming up with reports and paperwork,” he says. That could lead to the business going downhill—and the buyer, seeing that, lowering its offer, he says.
To avoid that, Dyrsmid says, “Get a really good accounting firm so your books are in order. If your financial recordkeeping is in order and you have your processes documented, the due diligence process will not be a huge distraction for you. You can have the business perform on the trajectory it was and have the happy exit you were looking for.”
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