Amazon sellers have the opportunity to have Amazon itself store their items and send them to customers when sold, in exchange for a fee. This is called Fulfillment by Amazon (FBA).
Whenever those sellers decide to sell their businesses, Alpha Rock Capital comes into play, acquiring them and using our expertise to operate them and further increase their profitability and value.
Why We Buy FBAs
Because when we acquire a business this way, we know we are investing in something that has already proved to be successful. We have a good idea of the kind of expected returns we can get when acquiring it, by considering its historical data and whether we can improve it in any way.
If we started a new business from scratch and launched new products through said business, we would be less certain what to expect.
In some way what we do is similar to buying winning lottery tickets. We let entrepreneurs try new ideas and when they come out with something that works, we buy it from them.
Where We Buy FBAs
We acquire them at online marketplaces specialized in FBAs. Before any business goes for sale, they go through a rigorous due diligence process, thus we are confident that what is finally listed is safe to buy.
How Much are FBAs
FBA businesses are priced based on their historical monthly average Seller’s Discretionary Earnings (SDE). SDE are profits before salaries, interest, depreciation, amortization and taxes. This is the metric used because these businesses are small, unipersonal and generally don’t draw any salary, with owners taking their compensation from profits.
FBA business are sold for between 25 and 36 times their monthly average SDE, with the multiple being higher for larger businesses. Inventory, which is generally around six times monthly SDE, is not included in the listed price. Therefore, we end up paying between 31 and 44 times SDE when buying a new business.
We focus on businesses sold in the $100,000 to $500,000 range. That’s because they are generally run by individuals, and therefore quite improvable. And, at the same time, they are too small to attract institutional investors.
How We Choose FBAs
Before buying any business, we carefully study all the available options on the marketplaces we trust the most. We run each of them through a vetting process based on various factors, such as:
- What category do the items sold belong to?
- Does the seller own a trademark?
- Does the business sell outside of the United States?
- How many different products do they sell?
- How many suppliers do they deal with?
- How good are the business listings on Amazon?
- Can the cost of goods be reduced?
- How stable are the returns?
- What’s the product price, both in terms of SDE multiple and volume of inventory needed?
After we rate each individual business, we select the ones we like the most and appoint a call with the seller to know more about the business and potentially make an offer.
How We Perform Due Diligence
Fortunately, since most of the financial information comes directly from Amazon, it can’t easily be faked.
On addition, we make sure that the cost of goods is accurate with the help of sourcing agents we work with.
How We Operate FBAs
We have an in-house team that just deals with operating FBA businesses. It is currently run by David Abusiewiez with three other account managers.
How We Improve FBAs
There are many ways we improve businesses. We can categorize them in seven items:
- Suppliers. We look for alternatives to the current suppliers and negotiate discounts for higher volume of orders.
- Product Variations. If we spot potential for product variations that could convert in sales, we see them through.
- Logistics. We reduce logistics costs by looking for more efficient transportation methods.
- Inventory. We can also capitalize on our size by renting a warehouse instead of keeping all of our stock on Amazon’s warehouse.
- Listing Improvements. Keywords, descriptions and images are optimized to increase search presence and better attract customers.
- Pay Per Click. We optimize the use of PPC options within Amazon, to increase exposure and conversion.
- Market Expansion. If products sell exclusively in Amazon US but have potential overseas we can take them to other Amazon markets.
How We Compare With Competitors
Not only we run our businesses in a productive way, but we are also remarkably efficient.
This is because we are based in the Philippines, so salaries are considerably lower than those that would have to be paid in other places. The difference is especially big compared to the US, where most of our competitors are.
What Are Our Risks
As we only sell on Amazon, we depend on that platform’s existence. However, we find its disappearance very unlikely. It has grown all over the world for decades and there is no reason to expect this to change. Instead, we think that marketplace will keep gaining market share, especially outside the US, where it’s still relatively small.
A more plausible risk would be a considerable increase on the fees that Amazon charge sellers. This, however, is also unlikely, since Amazon’s business comes mainly from having other businesses sell on their website, and forcing said businesses out of their platform due to unbearable fees would be akin to shooting their own feet.
Alpha Rock Capital intends to create opportunity for the less fortunate and to add value to society through Impact Investing. You can read on how we do so here.