November 2, 2021
THE RISE OF AMAZON AGGREGATION M&A
By Tessa Trevelyan Thomas of BDB Pitmans LLP
As e-commerce and Amazon have grown rapidly through the Covid-19 pandemic, so too have e-commerce aggregators, leading to a new emerging M&A sector: Amazon aggregation M&A.
Born in the US in 2018 with Thrasio (now reported as being valued at over US$5 billion), Amazon aggregators are spreading rapidly through Europe and worldwide. There are now over 80 active aggregators and the sector has seen significant capital influx – over US$10 billion has been raised by aggregators since April 2020 (according to Marketplace Pulse). Their aim is to acquire and consolidate third party brands selling on Amazon. Some aggregators are now extending beyond Amazon to other online channels such as Shopify and direct-to-consumer (DTC) businesses selling on their own websites. This is a fragmented marketplace with many Amazon FBA (Fulfilment by Amazon) brands being run by young entrepreneurs from their spare room or keen to move on to their next challenge. Amazon aggregators bring quick access to an exit and money for the sellers of a brand and in turn seek to maximise profits through consolidation of brands by creating efficiencies in supply chains and marketing, boosting sales and expanding the reach of each brand.
From our experience in this sector, here are seven key points to consider when embarking on buying or selling an Amazon brand:
These deals tend to be run on a speedy timeline, with 45 days being the market norm for the period from heads of terms to completion. This is faster than a standard M&A process, but Amazon aggregators are increasingly experienced and capable of efficient processes against a background of increasing competition.
Amazon FBA businesses are usually valued on a multiple of the last twelve months SDE. EBITDA (earnings before interest, taxation, depreciation and amortisation – a more standard valuation for M&A) is often used on larger deals. SDE instead is seller’s discretionary earnings – this is generally the average net profit of the business over the last twelve months plus any “add backs”. Add backs vary from deal to deal and are subject to negotiation but are generally business expenses that are of a personal benefit to the seller, such as the seller’s salary, pension contributions, health benefits, travel and other seller discretionary expenses. Multiples in this space started as low as 2x but the increasing competition has been driving them up quickly. Factors such as the age of the businesses, strength of the brand, product range, growth potential and risks of the brand will affect the multiple that aggregators will be willing to pay. Sellers should consider whether they need corporate finance advice to get the best valuation.
Asset deals are the norm for Amazon aggregators in the US – this means the aggregator only buys the assets of the business, such as the stock, brand, intellectual property, trademarks, contracts, Amazon and other online accounts and website. The aggregator does not buy the shares in the business. However, share deals are the norm in the UK because they are more tax efficient. A share deal allows a UK seller, subject to certain conditions, to make use of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) thereby reducing the rate of capital gains tax (CGT) to 10% on the first £1 million of the seller’s lifetime gains. There is much speculation that CGT rates may change imminently both in the UK and the US which could affect the structure of these deals, although the UK’s recent October budget did not change UK CGT rates.
As with most deals, sellers want cash, ideally upfront at completion. Most commonly, these deals will involve a completion payment and a separate payment for inventory as at completion. There is often a stabilisation or stability payment twelve months post completion if the brand performs in line with agreed expectations. Earn-outs are also common, particularly where there are risks and uncertainty in the business model (e.g. the impact of the pandemic on sales or supply issues) or if the seller remains involved with the brand post-completion. An earn-out is usually paid over two or three years post completion and depends upon the brand’s performance in that period. Consideration shares (with equity being offered to the seller in the holding company or acquisition vehicle) are now becoming more common.
As with any M&A deal, due diligence is the first major step once basic deal terms have been agreed. Through a data room and a series of DD calls, Amazon aggregators will cover the standard areas in their due diligence (legal, financial/accounting, tax, operational etc) but they will also look closely at the Amazon and brand related issues. DD will therefore also include review and evaluation of information on Amazon Seller Central accounts, traffic and key Amazon metrics, customer reviews (any fake reviews will be an issue), compliance with Amazon terms and conditions (any account suspensions will also be an issue), intellectual property rights and protection, and data protection compliance.
The first step is agreeing a letter of intent – this will include the basic deal terms and price and usually an exclusivity clause (preventing the seller from negotiating a deal with another purchaser) and confidentiality provisions (a separate non-disclosure agreement may also be signed). The key document to the deal in the UK is then the share purchase agreement (SPA). This is usually drafted by the aggregator’s lawyers and will document the transaction and allocate risk between the parties. It will include provisions on price, warranties from the seller on the business, indemnities from the seller on any material issues with the business, limitations on claims that the buyer can make against the seller and restrictions on the seller post-completion (e.g. to prevent the seller from setting up a competing brand immediately post-completion). Other transaction documents include a disclosure letter (containing disclosures from the seller against the warranties) and a service agreement or consultancy agreement (if the seller is staying on with the brand post-completion).
The process of migrating control over e-commerce accounts to the aggregator is key to the end of the M&A process. The completion payment will not be released to the seller until migration is complete. On a share sale (as is more standard in the UK), this will be more straightforward assuming all accounts are in the name of the target company. The process is more complex and can take several days or more on an asset deal.
If you are a brand seeking to sell to an Amazon aggregator or an Amazon aggregator seeking to acquire a brand, get in touch with Tessa at email@example.com or Mireille at firstname.lastname@example.org.
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