"Build" Guide - how to Build your Private Label Business
Just over 3 years ago, Coran and his wife left Australia and their corporate jobs and began traveling. They had online businesses at the time and soon began buying and selling websites to fund their traveling. He liked the process of building a company to sell it rather than building to for the income. He struggled to keep his attention on one thing.
For this interview Coran create a package of tools for Amazing FBA listeners at http://thefbabroker.com/amazing. So do check that out.
About a year ago he got into the brokerage side of things after people began asking him to review and vet websites that were for sale and help negotiate the sales. As of about a month ago he has been dealing exclusively with FBA businesses.
Most people do this backwards. They build up a business and it’s making money and then they decide they want to sell it. Maybe they want to focus on something else, maybe they want to cash out and pay off the investment. That’s a terrible time to sell. Odds are, you won’t be structured in a way that is attractive to sellers. The first thing you need to think about is who you are going to sell to and what they are looking for.
Let’s say you have a private label business that’s been operation for an year and half to two years. So you have a bit of history and you beginning to think about exiting. Reasons that Coran decided to sell his companies were that he might need the cash flow for something else or he was getting bored with the business.
Coran breaks Amazon businesses down into three types, retail arbitrage/wholesaling, private label, and unique or proprietary.
For retail arbitrage/wholesaling, unless you have exclusive rights to selling on Amazon, the chances of your income being taken away is very high. What an investor is looking for is a return on investment. They will pay a certain multiple for a business with the intention of getting that money back first. So with wholesaling, for almost all cases, your only asset is your inventory, so if you lose your means of selling it, you’re just stuck with a load of stock.
Private label is the most popular way to sell on Amazon. There is a barrier of entry so your products have a shelf life of 6-12 months. That means that if you have one product that you haven’t differentiated, you just stuck your label on a product and built the brand, it’s not super defensible. So it will sell at a lower multiple. You can definitely sell these companies, you just have to put a little work into it.
Unique or proprietary products are much more defensible. You may have taken negative comments on your products and tweaked them. So you might have a unique mold or something that makes your product unique, that will sell at a higher multiple. The more you can make a private label product better or unique, the better it will be when it comes time to sell.
For example, Greg Mercer at Jungle Scout ran a case study where he made his chop sticks a little longer. While not super defensible, it is unique, and if you build your brand around that it sets you up in a better position.
There is a debate among brokers as to what the minimum amount of time is. For Coran, a year is still young. You certainly want 12 months of history. There are a few reasons for this. One, you want to see if there is any seasonality involved. An investor wants to work out their return on the longest history possible. There is also something to be said for a product that takes time to gain traction. Seems a bit counter-intuitive but an investor will look at a product and think, “What’s to stop me from doing this myself?”, so a product that takes time to get established show the investor that this company is worth buying because it will take that much more time to get it going if he/she wanted to start from scratch.
Most importantly, when it come to age of a company, you want the company to be established. For online companies, that typically means 3 years. Compared to offline, like brick and mortar businesses, 10 years is a long time.
Even if you’re not thinking of selling your company soon, now is the time to start preparing for it. A year, year and a half out, you want to make sure your products are defensible and that you have products that will add value to your company when it comes time to sell.
Coran is working on two businesses, trying to get them ready to be listed. One business is completely private labeled, very little in the way of differentiation. It’s just brand. He has 20 products. That business is attractive because of the wide range of products. Out of the 20 products, most of the income comes from three products. It is all on Amazon and bringing in a million in sales a year.
The other company has only one product that is unique. It’s is their own formulation and their own brand. 70% of their income is coming from Amazon. They also sell on Amazon US and Amazon UK. 30% of their income is coming from their Shopify store. So they have several layers of defensibility.
The gold standard, according to Coran, is a third company he is working with. They have 10+ uniquely formulated products. Multiple sales channel. 70% through their e-commerce channel, 30% on Amazon.
The less reliant you are on one thing, the better. Multiple products, multiple sales channels, multiple traffic sources. So if you have a private label and don’t want to focus on unique products, focus on finding sales channels outside Amazon. That way, if one thing takes a hit you have hedged your bets.
You need to look at it from an investors perspective, they are looking for a return on investment (ROI). Their in for $1,000,000 and their making $200,000 a year on it, that’s the ROI. They way we value Amazon businesses is net profit. The best way to look at this is: what is your annual net profit. If your business has been around a year and making decent profit, that’s not as attractive to these kinds of buyers. The important thing to consider I: what is your profit right now? When working with clients, Coran finds that most people over-estimate their profits. Oftentimes it’s as much as half of what they thought it was once they put in their numbers. If you want to find out what your business is worth, use Coran’s tool for that.
The longer your business has been around, the better
The more profit you’re bringing in, the more attractive your business will be
Diversified traffic sources
The strong the competition, the more wary investors will be
Profit and Loss Template – Use this spreadsheet to help determine how much money your are actually making.
It starts with your total sales and revenue. From there it takes out the cost of sales. This is your Amazon fees, packaging, shipping, etc. All the costs associated with selling that item. Then it takes your operational costs out. The is refunds, ads, web hosting, salaries and other drawings, etc. All the costs that are associated with running your business. In the end you’re left with your net revenue.
In regards to salaries and other drawing from your business, when it comes to selling the business you can add that back into your profits. The reason is that your investor might not want to draw anything from the business. So you want to present them with the profits including what you are drawing from it. Then they can decide what they want from it. If they are looking for an income, they can look at the net revenue and determine how much they can draw. If they are looking for growth, they might want to leave everything in and use that to grow the company.
If you don’t add back your salary, it makes it much more difficult for them to find it. You want to make it as easy as possible for your buyer.
Typically, from about $20k to $2.5mil, you’re looking at individual investors. Above that, from $2.5 to $5 million there is a bit of a black hole because individual investors don’t have that kind of capital. Some do, but it’s rare. Above that $5 million mark your are looking at private equity firms and larger businesses.
Let’s talk about the $20k to $2.5 million. These individual investors’ primary driver is fear of loss. They don’t want to lose their investment. So they are looking for an ROI better that what they would get if they left it in a bank or mutual fund. Within this groups of investors, you have a few different types.
Many of the buyers Coran worked with early this year, didn’t know anything about Amazon. They were former business people that have retired and got bored with brick-and-mortar businesses so they started buying up FBA businesses. This type of buyer has business experience, but may not be tech-savvy or have and understanding of online business. They will typically look for a business that have been around longer.
You may need to educate them on how easy it is to run an FBA business compared to something with staff, overhead, or property. You can offer support and virtual hand-holding until they can run the business themselves. You will also want to upfront about everything, good and bad, about your business because if they find something down the road, they will bolt faster than other types of investors. Like we said, they have that fear of loss.
Another thing you’ll want to do is create procedures. Write them out as if it’s for your grandmother. Stuff like writing out how to log in to seller central. If you have staff or contractors that can transfer to the new owners, that would be awesome. Also, if there is opportunity for discounts from your suppliers for larger purchases, have that as well.
You also have high-paid executives make $100-200k a year and are looking to replace their income so they can live a life of leisure.
Another is actual online entrepreneurs and other FBA businesses that may have rolled other businesses for profit. They have a large pool of capital and are looking for a competitive advantage. They will be looking for ways to boost the business’ profit. Not only are they looking to get a better return than the bank, but are also looking to add value.
Keep the buyer types in mind, but don’t build your business around it. You would limit your buyer pool to one particular type. However, it would be very difficult to build your business so narrow as to limit it to one buyer type unless you built a massive business to appeal to private equity.
Writing procedures will always be a big help. Have your spouse of a friend, that doesn’t know anything about selling on Amazon, follow your procedure and see if they can do it. Get your staff to write procedures about what their doing.
We discussed the gold standard before and how you need to have so many products, be defensible, diverse traffic, and age. As you fall short in different categories, that narrows the pool of buyers as well as lowers the value of your business.
As far as selling to another Amazon business, Coran hasn’t done that yet but it’s an interesting idea. Typically a strategic buyer will be willing to pay a premium because they will be looking to apply their expertise to the business and add value. However, most of the FBA businesses Coran deals with tend to struggle with cash-flow and have a hard time keeping up with inventory. So an Amazon business will have to be fairly large in order to have the capital need to make that purchase.
Also, if you open your business up to your competitors, it will give them an inside look into your business with could hurt you in the long-run.
Coran only works with a handful of qualified buyers and sellers at a time. The buyers are legitimate. They have the cash and have typically bought before and if he brings them the right business then he knows they are buying.
The next level down depends on how you advertise your business. If you’re using a broker, you’ll need to talk to them. For Coran, if that initial buyer pool isn’t interested, but it’s still a good business, he go wider and tap into his network of classified sites and other brokers that may have buyers. In that case, they will talk among themselves trying to find buyers for that business. They keep the information out of the public space as much as possible.
One thing that’s helpful is to add more products to a packet. A recent sale he did was where they had twice the amount of items to package, their packaging was great. If you don’t skimp on the packaging and your brand is strong, it adds a layer of protection that someone will have to get past if they want to compete.
Absolutely. Unless you can build out 50 or 100 products, which would take a ton of capital, you’ll need every advantage you can get.
Yes. Brand registry on Amazon is great. Having a patent or registered trademarks is very good. A patent is good because while expensive, and won’t increase the multiple that an investor is willing to go for, it will make it more attractive compared to other businesses. If a buyer is looking at three or four businesses they are trying to decide between, this may give you an edge to sway them towards your business.
Research existing patents on your private label items. Coran spoke of someone that is looking to expand their product line but is now caught up in a patent lawsuit over a very basic item. If you sell your business, the buyer will be liable for the history of every item so they will definitely be looking into any patent infringements prior to buying. Also, if there is a lawsuit while your selling, any possible sales will be over. If is shortly after a sale and there is an earn-out deal, it will complicate things.
When your selling a business with ongoing income, the multiple they paid is linked to that income. Often, to reduce the risk for the buyer, they will offer you 70% or 80% of the purchase price upfront. Then there will be an earn-out, which could mean different things. It might include 90 days of support, in which you help them run the business until they get a handle on it. Sometimes it will be linked to income, which is something Coran tries to avoid. He has seen earn-outs of up to 12 months. They might leave 10% to you in equity in order to keep you involved in running it.
Since you are, potentially, legally involved in the company for 3 to 12 months following the sale, you don’t want to sell something that violates patent laws.
Considering the complexity of patents, and patent laws, the best thing you can do would be to hire an attorney that specializes in patents. It will cost money, but when it’s time to sell your business this is the best way to do it.
As an ongoing business there are some tools that can help you do a quick patent search, but noting can compare to hiring an expert.
The important thing, if you find a buyer, hire a lawyer. You’ll want to protect yourself from any issues.
You can use services like escrow.com. It’s a very popular service when dealing with these types of transactions.
Flippa.com – The downside is that all transactions are public. So you don’t want to use this with an indefensible private label business. Definitely not recommended. They do have a service called deal flow, which is semi-brokerage. The listings can be confidential and you have access to more buyers.
Empireflippers.com – Coran has worked with them in the past and is highly recommended.
There are individual brokers out there. There are websites that have websites listings, but only if you have a lot of time to invest in it.
Coran, admits he may be biased, but he says the best way to go is with a broker. The deal structures can get complicated and you want someone who is going to be personally vested in achieving a successful sale.
As far as any FBA sales is concerned, they range from 1-3x EBITDA. With this situation, err on the lower side of things. Probably expect 2x, and you can move up or down from there. Let’s say the products are equal in revenue and you’re getting sales from somewhere other than Amazon. In this scenario you’re looking at 2-2.5x EBITDA; that would translate to about $120,000 – $150,000. In this. we’re talking about USD since most buyers use the US dollar.
We only deal in asset sales. So the company is on top of that and what we’re selling is everything underneath that. That would be your products, your brand, you website, your actual inventory, the central seller account, etc.
A sidenote about the seller central account, you can’t sell it outright. What you can do is transfer it to a new owner. Amazon doesn’t like it if you claim to be selling the account. So you just transfer business information, addresses, in the US it would be the EIN etc.
Things can get difficult if it’s a UK seller. Many in the US will be out automatically so it’s easier to just sell it to a buyer in the UK. However, since it’s an asset sell, you can definitely sell to someone in the US. The one thing that can be affected by selling to someone in another country are your suppliers and contractors. You will need to make sure they are comfortable working with someone in a different country. Some may have terms, like 60-90 day terms that might not be transferable. So you will need to work that out with your supplier. This is can be avoided if your selling within the same country. If your supplier is in China or other parts of Asian, they’re used to dealing with foreign companies.
Coran is currently speculating in the UK, he’s trying to build connections with buyers in the UK. In his experience, it is very limited since most buyers are in the US. If you want to build a UK business to sell, it will be difficult.
If you have a foothold in the US, even if it’s not the bulk of your sales, it will attract more US buyers so you would want to sell it all together.
Coran refers back to the gold standard. Being more defensible, have more products that are unique. People are becoming more familiar with the business model and are looking for where you are beyond Amazon.
Make sure to get the toolbox Coran set up exclusively for Amazing FBA listeners at thefbabroker.com/amazing. Also, take advantage of his off to have a one-on-one chat that is only available via this link.
Read The Snowball. It’s about Warren Buffet and talks about business and who’s buying and how to be defensible.