This completely changes where Amazon FBA is heading to in the future. It's got me trying to decide whether it's time to get out of the game and it may change your decision to get into the game.
The value of being able to see the big picture, seeing into the future and see trends as they're emerging, or even before they emerge, this skill is like seeing the future and it's literally priceless.
Imagine if you could go back to 2014 or 2015 with the knowledge that you have about how the world is today, in 2021. What decisions would you make differently? Would you start that Amazon business about five years earlier, or would you buy Bitcoin at $100?
Think about how much better things would be for you now, if you'd been able to make those better decisions back then. Today, it's exactly the same looking into the future. The more we know about where the world is going, about how Amazon is evolving from today into tomorrow, the better decisions we can make right now, and the better our lives will be at the end of the year, into next year and into the years to come.
A lot depends on the path that we take from here.
What’s Changing In Amazon FBA & Where Are We Headed?
I believe that we are reaching the beginning of the end of the golden era for solo entrepreneurs to be able to come into this Amazon ecosystem and start a successful business from zero, with no outside help, probably no capital or any excess outside funding, very little skills or experience to start, and potentially become millionaires or multi-millionaires.
Being able to do that with such a low baseline and a really good chance of success, is just an incredible opportunity. That's the opportunity that I think we're starting to near the end of. And again, I'm not talking about things that are happening today, but rather looking at where are we going to be in a year, or three from now.
I don't think this is ending because there isn't money to be made on Amazon anymore. I think it's completely the opposite. There is more and more money to be made on Amazon. You can see how quickly the space is growing at an incredible rate. COVID last year completely blew the whole space forwards by a few years as well. So, the pie is big and it's getting even bigger. That's not why it's ending.
I believe that it's the beginning of the end because bigger fish than you or I are starting to get into the game, and they doing so in a big way. And think big players with big money, teams of people, basically professionalizing the space.
Thras.io are the original player doing this. They started only a few years ago, but I believe they're the biggest one now. There are now probably 50 or 100 different firms doing the same thing. And this is again all something that's happened in the last couple of years, and that number will continue to grow. See the links at the end of the article for the full list.
What’s Driving The Amazon FBA Acquisition Boom?
I think two factors are contributing to where things are headed.
1. Most Amazon FBA businesses are bootstrapped with limited capital
Up until recently there's been a real constriction on capital being able to actually get into the space. So most of these businesses, really a lot of them, have been bootstrapped.
So again, it's this idea of this huge marketplace with all these small sellers. People like me, or like you, going into this with the desire just to change our lives. To live better lives. These businesses, like mine was, are bootstrapped. And up until recently, if you were going out looking for funding, you'd probably find that it was actually quite hard to come by. A lot of banks or traditional funding sources wouldn't really be too keen to lend to somebody starting an e-commerce business.
2. Amazon sellers don't want to build huge businesses
A second holdup is that us solo entrepreneurs, freedom seekers, we're probably not too keen on actually building out a team to do all this stuff for us. Maybe we want to do it completely ourselves, or maybe just have a few VA's, but that's generally about the limit of where we want to get to.
So overall, both of these factors, the lack of capital, and also just lack of desire to scale a team, these two factors mean that there is still a lot of potential growth left on the table, or basically money left on the table that no one is picking up. So what's changing in a nutshell is that bigger companies and capital has started to find a way to make its way into the space, to be able to just start collecting all of that growth that's not being realized by the smaller entrepreneurs.
And this is a normal part of an industry's growth curve. There is lots of opportunity left, but you starting to see that people are coming in wanting to apply scale, to apply large amounts of capital to this thing, so they can take that growth off the table.
FBA Rollups: Can They Operate Successfully?
These firms definitely are well-capitalized. They can pretty much raise almost as much money as they want to, and they're raising a lot. But the second aspect of is, you can put the money into the field, but do you have the skills to actually play on the field?
That's a doubt that I think we won't know the answer to for a while as it's basically going to remain to be seen whether a lot of these other players coming in are really able to run a successful Amazon business or not. Because that's the stuff that we're actually pretty good at.
I think inevitably the final answer will have to be yes, because normally when you pump money in and professionalize things it just evens out. So they'll get good at it, but how quickly? And how many mistakes or painful lessons will have to be learnt along the way? We'll see.
What Types of Amazon Businesses Are Being Acquired?
Full credit to: https://www.hahnbeck.com/fba-acquirers
“YES/NO” DECISION CRITERIA
- Private label - You are selling primarily your own branded products
- Minimize size - Above minimum net profit levels. $200k/$500k or more.
- Strong net profit margins - Generally 15% net margins, or above.
- Amazon focus - Each acquirer sets a minimum threshold of Amazon sales (30-80%).
- FBA preferred - FBM is less desirable.
- Brand registry - Trademarks & brand registry.
- No black hat tactics - The listings should not be at risk of de-activation.
- Stable product categories - The business should not be selling a “here today, gone tomorrow” product
How Much Are These Amazon FBA Businesses Worth?
This is the factor that really does make having an Amazon FBA, private label business, a lot more attractive than a lot of other business models where you may be generating cash flow but not building a saleable asset.
So the value in an Amazon business is calculated based on annual net profit over the last 12 months, times a number, known as the multiple. This multiple can vary wildly, for example between 2x - 5x.
So if you're earning $200,000 net profit in a year, a 2x multiple would be $400,000. Or a 5x multiple would be $1,000,000.
Amazon FBA Business Valuation Metrics
What can make you go from the 2x to the 5x? These are the variables (credit again to Hahnbeck.com). The better they are, the higher the multiple.
- Size - The larger the better.
- Net margins - The larger the better.
- Growth - A strong growth profile & expectation of future growth is better.
- High search rankings & review moats - It's better if your listing is embedded in the top position.
- Relatively few SKUs - It helps these businesses to scale if your SKUs are doing more revenue / SKU than less.
- Higher percentage on Amazon - The higher the better.
Will These Multiples Continue To Increase, Or Go Down?
That's a hard one to answer. I think there's a lot of varying opinions on this. Quite a few third-party observers or brokers have the opinion that the multiples are as high as they're going to get, because there's a bit of a bubble right now as these FBA acquirers compete to get into the space.
I think definitely if some of these firms start to fail and start to be not able to operate the business like they expect it to, and I think if that becomes public or visible, then those multiples may go down. But that one's up in the air. I think the key thing though, is that they're higher than they were before. And that indicates, or that is reflective of the way this situation is playing out where there's a lot of money trying to flow into this space.
Is This Good Or Bad For Amazon Sellers?
The more that I've thought about this, I've changed and gone backwards and forwards on whether it's good or bad & for whom.
I think it's pretty clear that if you're an established seller right now, you're on that pathway to actually selling and exiting your brand and particularly if you're planning to exit soon, this is great for you. I think a lot of people are going to be exiting their businesses in this environment because it's so tempting to do so. And if your business is on the bigger end... Again, most of these firms want these bigger businesses. So let's say you're doing $500,000 a year in profit, then you could probably easily go to most of these firms and just directly negotiate with them.
Even if you're on the smaller end, say $50,000 a year, you'll probably still be seeing the benefits if you sell your business because I believe that we're seeing a real halo effect where everything is just being dragged up. So while the bigger end of the market is really being pushed up by demand from these aggregators, the smaller end is also getting sucked into that vortex as well. So I think it's good for everyone who is looking to exit.
For sellers not thinking about exiting soon, there are a couple of other things to think about.
The 'Incubation Zone' of Amazon Is Sticking Around
First of all, I don't see any intention or moves that these firms are going to start launching their own brands. They seem to see that the reliable way to profitability in return on investment is just find the ones that have already succeeded or are succeeding that are leaving again that growth potential on the table and just buy those brands.
So it doesn't really affect the whole incubation area of the Amazon ecosystem. There's always going to be this space on the field where new players can still come in and grow new brands.
I do think it's going to get more competitive in the long term just because, again, going back to that analogy, more of these spaces are going to be rubbing up against these bigger, more professional players with more money who are probably going to spend more on advertising. They're probably going to understand the off-Amazon channels, as well as growth, like customer acquisition, for example.
The Amazon Space Is Not Dominated By Big Players Yet
Running some simple numbers, let's say Amazon total sales were $200 billion. If Thrasio has $1 billion, then they're probably doing about one billion in revenue, something like that, plus or minus. So Thrasio is 0.5% of Amazon's marketplace. It's really, really small. Then even if you add on all these other firms, which are all smaller than Thrasio, maybe you're looking at 5-10% of the marketplace.
Of course, I think that's going to grow over time. But this isn't an immediate thing. And I do think at some point there's going to be some tough lessons that these guys have to learn. They'll have to go through it the hard way to figure out how to actually operate these brands to scale them effectively. They won't all be doing it with a perfect track record. So I think that's going to be a rocky path for them. And there's probably going to be some correction or a number of corrections along the way.
These People Will Struggle In The New Future of Amazon FBA
The unfortunate side effect of Amazon FBA being popular as a really profitable business model, is that it attracts a lot of people who aren't really qualified to be starting this business.
These people will struggle in the new future of Amazon FBA. So go into this with the correct expectations. Understand that if building to sell is the pathway you want, that exit pathway, you're going to do well.
So is this change good or bad? It depends on who you are and where you're coming from.
Key Lessons & Takeaways
Build Your Amazon Business To Sell
This pathway is now more clearly defined, there's more money available to you if you follow that pathway. You have the playbook to follow (see above).
Most of the money that you'll ever make in your Amazon business will be when you sell it. If you never sell it, you'll never realize that gain. So try and get that business as far along that pathway as you can. So the bigger you can grow it to, the higher multiple you get, the more buyers will want to buy your business.
Focus on Amazon FBA
You don't need to stress yourself now, so early on to try and get across every single channel, every single platform. You will not be as capable of doing that as a company with a team of people can do it. Just focus on Amazon. Do it really well. Be the elite Amazon operator. That's my advice in terms of building your business to sell. I think you'll grow it faster that way, you'll make more money at the end of the day.
Have Conversations With Brokers & Acquirers
Next, start having conversations if you're thinking about selling, or even if you're not. Just go have these conversations at least with brokers. Again, the list of firms is going to be down below. So you can just go and start talking to these people.
Prepare 12-18 Months In Advance
This process could take a while and given that you want to build your business to sell, given that that's where most of the money is, you want to start looking at this pretty far in advance. 12 to 18 months ahead. So if that's you, start thinking about this now. Start writing down a list of actions you need to take, start inquiring with again, brokers or firms or whoever it is. Start thinking of what are you going to do differently to maximize the exit value of your business in 12 to 18 months.
I Will Invest In Your Amazon Business
Is this you?
- You're selling on Amazon right now;
- You're thinking about how to get from where you are right now to the larger end of the spectrum ($200k/year, $500k/year or up to $1,000,000/year in net earnings), where you can sell directly to these firms and make the real life-changing money;
- You have an immediate need for additional funding & strategic advice to get your business there faster;
I may be able to help you, or someone like you, to do exactly this.
I'm taking applications for a limited time only. If you are a successful applicant, I will be investing directly in your business ($5,000 - $100,000 or more) and acting as a strategic partner to help you grow faster, build to sell, and exit successfully.
To read more details, and make an application, go here:
Full list of FBA Acquirers:
Other Recommended Reading: