From investors to aggregate companies, the stakes involved in buying Amazon businesses are high as everyone tries to make their millions. It’s an interesting topic and ripe for comment. Yoni Mazor from PrimeTalk discusses how to calculate an Amazon business worth and make your Amazon exit so that it’ss mutually beneficial for both the investor and your business.
In today’s interview, PrimeTalk has teamed up with Michal Oron, the Co-Founder, and CEO of Fortunet, an investment banking firm and world leader in assisting Amazon sellers and Amazon business buyers. Fortunet has successfully closed 39 deals buying Amazon businesses. They focus on mid-to large-size companies generating at least $1 million in annual revenue, that are profitable, and which have up to hundreds of millions of dollars in yearly sales.
Michal Oron discusses how to calculate the worth of your Amazon Business and boost your valuation. If you are an Amazon seller and are curious about having an exit strategy and maximizing your investment, then this episode is for you!
Visit Fortunet for more information.
Learn about GETIDA’s Amazon FBA reimbursement solutions.
Find the full transcript below
Yoni Mazor 0:10
Hi everybody, welcome to another episode of Prime Talk today. This is episode number three, which is going to deal with the topic of how Amazon businesses are being evaluated and how the exit process can maximize evaluation. This is a special production for Amazon sellers on making an Amazon exit, basically how to sell the Amazon business. Because of the importance of this topic, basically to all Amazon sellers, Getida has decided to add Fortunet to help us and sellers understand the different aspects of selling an Amazon business. So once again, for episode number three we have with us Michal Oron. Michal Oron is the co-founder and CEO of Fortunet, an investment banking firm specializing in selling mid to large e-commerce businesses and mainly Amazon businesses. So Misha, welcome to the show. Once again, glad to have you.
Michal Oron 1:00
Hi Yoni, great to be here with you.
Yoni Mazor 1:03
Awesome, my pleasure. So give us a little bit before we dive into the episode, describe a little about Fortunet. What’s the purpose? What’s the background story, the experience, and dive into the topic we’re going to handle today in the episode.
Michal Oron 1:18
Fortunet, as you mentioned is an investment banking firm, we were established a bit more than two years ago with the idea that we should extend the best service that any amazon seller needs when they want to sell their business with the understanding that selling a business is a one time event life changing. This requires that you have a one shot game and you need to make sure that you get the best results. So we are a group of highly experienced people in this field, emergency physicians, Amazon experts and financial experts, and we combine all these experiences and knowledge in order to get results for clients. Today, we are discussing first the seller to sell the business. We spoke in previous episodes on why they should sell a successful Amazon business. When should they do it? Now we have come to the decision that you want to sell your business, what is your next goal, your next goal is to make sure that you get the best deal, right? And then what is the best deal, the best deal is the best economic results for you. And this is reflected in two components, two main components once one is the price, how much money you put in your pocket eventually. The second one is the structure of the deal, which eventually, of course contributes to the price which you get. But sometimes the value lies with the structure. When I refer to structure, I will mention a few points, which we’ll touch on later. Structure deals with the upside and downside that the deal includes. It deals with time because payment and the deal sometimes are stretched over time. So the time poses some value, as well as some risk or risk to the value.
Yoni Mazor 3:38
So you’re saying even if the price is negotiated, there are components of some timings that money can increase the matrimonial good or maybe decrease, correct?
Michal Oron 3:47
Yes, this is one example. I’ll get to it very shortly. And then another thing that is associated with the structure is tax consideration because certain tax considerations can lead to different favorable deal structures and all of these should be met. So I’ll start with valuation. Okay, we mentioned price and structure and started with price. And so when we look at valuation, first of all, maybe as a general background, it is important to understand that there are different approaches to evaluate businesses in general, not just Amazon FBA businesses. And these approaches can be divided into three kinds of methodologies. One is a cost approach, which represents how much it will cost me to establish the same business that they want to buy. This is what it’s worth.
Yoni Mazor 4:47
Okay, so this is on the buyer’s mind, the ones that the organization that’s trying to buy an organization, and what they have in their mind.
Michal Oron 4:54
Yes, this could be on their mind. This is not the approach that is implemented currently. On the Amazon m&a market. There is another approach that is a spoiler. This is also not an approach that is adopted, but just understand that there is such an approach and it is in the back of the mind of buyers, it is called DCF. This is a discounted cash flow, discuss discounted cash flow for the business, this is the present value of the future expected cash flow of the business. This requires longer historical data on the industry, it is quite an extensive exercise to be able to predict future cash flow. And this is not the chosen approach as of now in this market. And the third approach is the market approach. What is the market approach? Actually, this is a relative valuation. You evaluate your business and buyers evaluate your business in comparison to a valuation which was attached to compare the businesses. This approach actually uses the wisdom of the crowd of investors and of other business owners, because if the similar comparable business was sold for a certain price, after (and many such businesses were sold for a certain price,) you may think that accumulated knowledge of the crowd has something all of them understand this so you can rely upon this to a certain extent.
Yoni Mazor 6:36
Yeah, I think I think we might be the case for the current industry because like you said, it’s so fresh and so young. Old, traditional models, such as you know, a discount to discount the future cash flows, or how much will be the cost, the cost of setting up a business from scratch, these are more for established conventional industries that many business owners are familiar with. But because the industry that we’re in is so innovative, so new, and fresh, the data is so dynamic. The winning approach right now was, for lack of a better term, like the street approach. What’s happening on the street, you know, most of the buyers are doing this, this and that. So that’s kind of street wisdom and that’s pretty much the policy that’s in place, you know, structure these deals and these are merger and acquisitions, m&a deals.
Michal Oron 7:26
You are perfectly right, I would just add that the street approach as you call it (which I like,) is also applicable in more based and long-term existing industries as well. So you can see public companies are traded based on certain multiples as well, but you’re right that then other valuations will apply as well. And so their relative valuation usually will be reflected by the formula which takes into consideration certain ratios or multipliers.
Today deals that we see for Amazon FBA business that is the winning or leading formula will be certain multiples that will apply over the SDE, seller discretionary earnings, and I will repeat it because I assume that many sellers already are familiar with this formula and notion. SDE would be the profit, which is calculated by taking down the cost of goods sold, and all the charges and expenses are paid to the Amazon platform and all PPC and other marketing expenses as well as other expenses which are directly related to the business. Yes, he will not take into account the owner’s salary and non-recurring items. One-time expenses will not be calculated into the SDE. And then, the SDE for the trailing 12 months will be multiplied by today, three to five times. Let’s say that your SDE is $1 million; then your business may work based on today’s existing multiples between $3 to $5 million dollars.
Yoni Mazor 9:26
I have a technical question because I am familiar with EBIT DA – earning before interest tax amortization. That’s kind of the profits that an organization or business generates. And based on the EBIT DA, you can get multiple three, four, or five right on their earnings. So you’re saying as the SDE, seller discretionary earnings is essentially a new version of EBIT DA.
Michal Oron 9:50
You’re right. It’s kind of an adjustment that it is adjusted for the seller’s salary, the owner salary, and us: one-time, expenses, and indirect expenses. Let’s say if you pay fewer fees for your office, these will not be taken into account when we calculate the SD, whereas they will be taken into account for EBIT DA purposes.
Yoni Mazor 10:18
Just to clarify a little bit more. In the same way, many, many, m & a deals work on EBIT DA, on the Amazon selling side of a business, Amazon business is more than SD sides. SD becomes the new benchmark of calculating the multiple, or negotiating multiple, correct?
Michal Oron 10:34
Yes, you’re right. SD is not standard, but you can find it in relatively small businesses, which is still the case with Amazon FBA.
Michal Oron 10:48
Yoni Mazor 10:48
Yeah, I want to say that because it’s fresh and young, especially during most of the organization, you’re dealing with the owners, as opposed to m & two public companies. The owners don’t have a discretionary, many of them aren’t taking a discretionary. They’re not even taking a salary. Because it’s a big corporation, there’s a CEO who’s a trained professional and usually gets sold with the business, and there’s no such dynamic.
Michal Oron 11:10
That’s right. So, I mentioned that today, the average multiples vary between three to five. But for accuracy, it is important to mention that we can find deals with lower multiples than those and higher multiples. But this would be the average. I want to go over quickly, factors that are usually taken into account when we come to the buyers, mainly the buyers when they come to decide what the right multiple is. They look at the business. We said we want to compare one company to the other. So we’re looking at specific parameters and based on them, we decide whether the business is better or less successful. One major factor is what is the trend of the business; does it grow year over year, and whether it grows only on sales but also on profit? What is the age of the account? More the more years the account exists and successfully operates it worth more, the more it represents a long history. Are the products and the niche trendy or evergreen? Is it seasonal or constant performing? Constantly performing throughout the year? Reviews? How many reviews? What rating are the reviews? And what is the content of the reviews? I also see buyers that go and read the reviews themselves.
Yoni Mazor 12:52
Small question on reviews. Most of the reviews, just to clarify, are on the listing level rather than the actual account level. Correct?
Michal Oron 13:00
Correct. Absolutely correct. Yes, of course, this is what we’re looking at. And what is the competitive environment? Is it a very competitive niche, less competitive, high demand but low competition, etc.? Are the products differentiated by any means? Is there a patent that protects the product design for the utility of the product? How many SKUs are in the business? If this is a business with multiple SKUs, it may represent a big complexity that some investors may see as a decent or bad advantage. Another may see it as an advantage because it creates some kind of a barrier against competition. What is the health of the account? Was it suspended? Was there any manipulation of the reviews, all of these put at risk to their existence and good standing of the accounts for the long term and it can impact evaluation? And how complicated it is to run the accounts? We sometimes see very successful businesses run by a single owner just by working a few hours per week. This it’s almost a passive investment, and this is something that creates a lot of value. Is their business activities in one market or multiple markets? What’s your relationship with suppliers? Is there an exclusivity agreement in place? Are there good suppliers that support the business in the long term? Whether the products are of high quality? Are there many suppliers, too many suppliers? What are the return rates of the products in the business? The profitability, not only how much profit there is, but also the rate of profit? What is the percentage of the profit out of the sales?
Yoni Mazor 15:19
Before you sell it on the marketplace for $20, and it makes $5—net net net. So 25%, that’s the end net margin. So that’s what they look at? Now gross margin after, because you might be selling for $20, after Amazon fees, you can deduct $5. So you live for $15, that’s gross profit. Maybe the Cost of Goods is $2, for example, so $13, that’s gross profit. Are we talking about gross profit, or net profit, which would be $5 after you paid for the electricity, the car insurance, the parking ticket, and everything?
Michal Oron 15:50
So actually, we look at both. Gross profit is very important because this is the room that usually reflects how vulnerable you are to price reduction. How much flexibility you have in promoting different tactics to increase sales. The higher the gross profit here is, you have more money available to invest in marketing, etc. This is a very important factor, but also the overall profit. And here again, we look at the SD. If you have a healthy SD, it would be around 25% or between 20 to 30%. And we see, of course, cases of very successful businesses with 17 % 18% 19%. And we also see businesses with 40 and 50% of SD, which is great on the one hand, on the other hand, there is always a question of how sustainable such profitability is.
Yoni Mazor 16:53
So give me an example on SD, which is 50%. I’m not sure I understand the calculation of 50%. 50% out of what, of the sales? So you sold the product for $20. And then you’re left with $10 SDE because you deducted all the other costs of the sellers and how much it costs to keep the seller in the business.
Michal Oron 17:13
Exactly. That’s it. That’s exactly the case. 50%. So these are in general the list of factors that we would usually look at. Of course, there are other factors that we need to take into consideration when we analyze every business, and it depends on the business itself. Now I want to refer to the sale process itself. Because our valuation first lies with the strengths and weaknesses of the business, that’s for sure, that’s the main generator of the valuation that a seller can eventually get, but there is a lot of value hidden in the process for yourself the business that we run, and in theory, I would like to refer to kind of two parts of it. One part of the process is related to the business itself; it’s more an internal contribution of the business to the success of the process. So, this will start with telling the story of the business in the right manner. Here we need to be highly aware, and we I mean, the seller with the right consultants must be highly knowledgeable about the business, the risk associated with it, the opportunities that lie with the business, the competition and the and the built-in answers that the business poses against such competition, for example, leading position in strong keywords. This is a strong, long-term asset of the business, and projection of the business is also very important. Before you start the process, you must have a good projection for the future. This way, you can understand how much it’s worth.
The projections that you usually see throughout the deals are for how long, is the projection for 12 months?
Yes, at least for 12 months. Actually, in larger businesses, we try to prepare an outline of the projection for three years to understand the roadmap for growth for the business. It’s not a strong projection that someone can commit to, but the key is to understand what can be done here for the long run. But at least the projection for the next year. It’s very important before you start your selling process. It is important to create today’s value in the same process as to identify points for improvements. So not asking just for applause and kudos for the great work that was done today. But also try modestly to identify what can be done better; everything can be improved in the business, it’s a hidden value in the industry, and you can get it in a sales process if you know how to present it.
Yoni Mazor 20:33
You’re saying that here we have an interesting function of where you identify the weaknesses of your business, you present it during the sale, but you present it in such a way where it you know, by addressing them, it leads to opportunities to improve and increase in overall, because of that, there’s more room to for growth and earning more. And, by identifying that and focusing on your weaknesses, and presenting it, hopefully, you’ll get more out of your business, if you’re trying to sell it. It’s a very interesting component that I never really thought about how the mind is focusing on the minus, and you know, present this stuff as an opportunity.
Michal Oron 21:14
Since you’re so impressed by these as the more extreme equations, we try to present the adjustment to the profit based on such mistakes or imperfections in the way of doing business. For example, if someone took too many air shipments, which doesn’t make sense, it lowers the profits a lot. We may claim that these should be disregarded when we look at the profit. This is another rule of the same thing. Now about the process itself. We are working with the assumption that we are trying to figure out what is the right valuation based on comparison to other deals. The challenge with this approach is that there is not sufficient information in the market at any given time. It’s not that someone can know exactly how much the latest deal in the markets was evaluated for. Another challenge is that the market is very dynamic. So even if we have access to the recent deal that took place; it is hard to predict how much a certain business will be valued for based on this dynamic. The number of buyers is growing, and the demand is getting higher. It’s tough to predict exactly how much exactly, based on a comparison to other deals, a certain business will be valued.
Yoni Mazor 23:05
Let me just add here. You’re saying there’s no one single directory or database where everybody can tap into and kind of have a feel on what’s going on in the market entirely. Because if you compare this to real estate, every real estate deal is registered in, the law’s offices, the registration. In Israel, it’s called taboo, I believe. In the United States, I forgot what the name is. But every deal is registered either in the town or the state, or the federal government or whatever it is. You can have an archivist say in the year or 2019, 2020. These are all the deals; this is a maverick deal. You can have hardcore data on how to structure things. We’re here once again. We’re dealing with the innovative fresh industry, which is a bit more like you mentioned dynamic than anything else that’s out there. You know there is a street valuation but take it with a grain of salt because even the street is very dynamic with its nature, this is kind of the mood of things right now.
Michal Oron 24:03
Exactly, you are right. Even if we had a public registry of all those deals, then whatever was relevant a month ago may not be relevant in the next month. That’s the issue. What is the solution? What do you need to do to solve this challenge? First of all, you need for every deal and for every single seller to make sure that you tap the whole market, you should identify or most or all of your potential buyers, and you should make sure that your story which is well said, is shared with them to in order to get feedback and hopefully to get offers from as many potential buyers as possible.
Another essential thing in this respect that this process leads to is to learn from buyers to get their feedback and to listen to what you hear. And I can share from our experience that sometimes we learn from buyers that the business is exceptional and highly demanded. In other cases, we learn from buyers that there are specific concerns for the business that all of them share. We understand if either we should improve the story, the storytelling, not the story, the storytelling, maybe we missed the point, we need to clarify something better, or we should understand the business situation. So learn from the experience and the wisdom that is out there among those buyers. Another thing is to run a kind of auction. It’s not a public auction; of course, it’s an informal auction. But you need to create a dynamic of a deal in which you in which different buyers submit their offers. And then you buy this dynamic in which different buyers submit their offers, to the best result, adding to that, and negotiation is a good negotiation. You know what is a good negotiation? It’s not just being tough and playing hard to get, but also about being creative. And listen to what the buyer? What is the buyer’s view of the business? What is the buyer’s need out of such a deal? What is your best aspiration for this deal? What do you want to get, and then find a creative solution that will bridge any theoretical gaps between what you are looking to get out of the deal and what the buyer is looking to get out of the deal? This leads to, and now and here again, we talked about valuation, the price, the multiple, and then the deal structure. And the idea of all of this is to create a win-win situation. Okay, you don’t want your buyer to lose money. You don’t want your buyer to be sorry for purchasing your business. But you don’t want to be sorry for selling your business for not being at a sufficient price and terms. You should aspire for a win-win situation. And you should; if you like it, you should look for a way to make lemonade out of any lemons you meet in the process. And you do meet lemons here and there. And here I want to refer to certain real examples that I came across that we dealt with, just to point out different potential deal structures that can answer such obstacles or challenges and get to the best—very good result. One case that I want to refer to was a business with a different family of products. Okay, In defense of one brand that covers three or four, I don’t remember if these words have three or four families of products.
Yoni Mazor 28:24
What does that mean a family of products?
Michal Oron 28:25
Let’s say one product in the electricity market, another product in the home and kitchen.
Yoni Mazor 28:35
In the Amazon world, we call these different categories. In a seller’s view, we call it three or four different categories. So one brand or four brands?
Michal Oron 28:45
Yes, one brand has different categories. Altogether, it demonstrated huge growth, healthy profits. But when the buyers dig into the details of the business, it was apparent that at the same time that it grows all together, there is a single category that doesn’t grow, that declines. And which was a significant part of this business.
Yoni Mazor 29:20
That’s the category that’s diminishing and holds a lot of the correct revenue aspect, probably less than the profit aspects.
Michal Oron 29:31
Overall, if you’re looking at the sum of all the businesses together, it grew very nicely. At the same time, a significant component of it decreased at that time. So we got different offers from buyers. And those offers explained that although the business is great since a significant component of it shows the decline, the total multiple would be lower, Which didn’t make sense to us. Eventually, we were able to get to the following solution: We attached different multiples to the different family of products. Okay. You want to call them categories.
Yoni Mazor 30:11
Right? Let’s say there are four categories, four, three categories: one multiple on SD. And the fourth, the singular one, the more problematic one you said is the lemonade, you created different SD multiples for that specific category.
Michal Oron 30:26
Exactly. We circle this product out, and we treat it differently. So, we attached the two different multiples we also defined for this specific product a recovery plan. So, we gave the deal the possibility that this product will recover eventually and regain the same growth as all the other products in the account. In case that he does achieve such an improved result, it will ultimately get the exact multiple, like the other products, and if not, then it will enjoy a lower multiple.
Yoni Mazor 31:05
Let me get this straight. You separated the category, and you define entirely different terms, and what these terms are saying is that over the next 12 months, maybe 24 months, there’s a plan or restructuring, a recognition plan, or whatever it is to fix this kind of situation and put it on a growth trajectory if that’s successful, the seller will get a better multiple at the end the story but if it’s not, you know, so they said they have their other negotiator multiple that was in place beforehand.
Michal Oron 31:36
Exactly. One kind of a deal. Which it’s a great result. I mean, and a great result, by the way, for both the buyer and the seller. Another case, another business, a great business that demonstrates great growth. This is a brand built without any specific topic, any specific niche. Just a brand that covers different unrelated products that are unrelated to the others, yes, and different all of them are in the home arena. Okay, home arena, but not the same story.
Yoni Mazor 32:25
How many of you remember how many SKUs are there, 1, is it 5, is it 50 to 500?
Michal Oron 32:29
About 100. A huge operation. Very profitable, growing products.
Michal Oron 32:31
More than 100.
Michal Oron 32:34
It’s a huge, I mean, huge operation around so many products and very profitable growing products. After we went to the market with this business, we understood that there are just too many SKUs to use that most buyers would like to absorb for such a business. It wasn’t a huge business, it’s a business with $1 million profit. At the same time, it is so successful, it is drawing. They pick the products in a very sophisticated manner. Every product is doing well. We thought, what are we going to do? It doesn’t make sense that this business will get a very low multiple because it is successful across so many SKUs and maybe too many SKUs. So what we’ve done with that, we analyze, we got back home,after we got the feedback from the market. And we analyzed that business again, and we identified a long tail of the business. So actually, most of the sales are being generated by 40 to 50 SKUs. And the rest contribute justly. And if we give up on them, that we lose a bit, we give up on a little off a little part of the SD, but we get much more comfortable to run business, which demonstrates a clearer path for growth for the buyer. In this case, we recommended that the seller give up on those dozens of SKUs, which actually contribute so little. And the total result is a better, better multiple.
Yoni Mazor 34:28
Interesting, interesting. So you’re saying out of let’s say 100 SKUs about, 60 of them are the heart of it. That’s where health is. And then 40 of them are so small, they still bring some profit, but it’s so small and so almost insignificant that you take it out of the equation. All of a sudden, the 650 percent that’s left the 60 skews that are left are increasing the SD to such a degree that it completely gives you more profit or better multiple, more economic gains then including the other 40. That was the mathematics of it?
Michal Oron 35:02
Exactly. Yeah, we lost some of the profit, which is not was not huge, but we got the higher multiple, and altogether, the result is better. Because we took some of the complexity out of business, which was unnecessary.
Yoni Mazor 35:17
And what affected was that there were 40 SKUs that were completely dropped or discontinued as a result.
Michal Oron 35:22
Another example, as it is well known in many of these deals, buyers, would like to distribute the purchase price to cash upfront and then to some deferred payments with different mechanics or for those different payments. These can be stability payments, growth, performance, payment based on future growth, revenue, or profit share, above a certain threshold exempt, etc. And this is like market dictation, which is very hard to beat. These days. In a deal where we identified that the buyer is interested in the long-term involvement of the seller in the business and not in involvement as the manager. It was a case where the buyer decided that he wanted to take full hold of the business’s management. But at the same time, it was very important for him to get long-term support from the seller, and support would, in this case, just buy a consulting of a few hours per month. That’s it, just to make sure to keep on going and developing very well. By the way, this is a relatively larger deal. Okay. So in such a case, what was agreed, is that the buyer would acquire 100% of the business, but 15%, out of this business would be considered as retained by the seller. The seller will get paid for this component during the next two years based on future performance, the future profit according to a predefined multiple. What is the benefit of this- for the buyer, it’s a risk mitigation, the buyer, buy this deal structure, the buyer makes sure that it is the interest of the seller to do whatever it can to support the continued healthy growth of the business. That’s perfect for the buyer, why this is good for the seller is because for the seller, it means that the chances that there will be a situation in which you will not get paid for the additional 15%, which is usually the component, which is the deferred payment. Instead of it becoming Yes or No, none or all or nothing payment. Obviously, unless the business is shut down or becomes a losing business, the seller will get paid for this