How Aggregators Evaluate FBA Businesses

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Daniel, SellerX’s Head of UK Investments, explores what aggregators look for and the specifics of deal structures

Daniel Calleja, a seasoned entrepreneur and now Head of UK Investments at SellerX, sits down with Yagmur from Eva’s podcast, Amaze on Stream.

They talk about how aggregators look at business value, how a sale actually works, and the challenges that might come up in an acquisition.

Yagmur:

Hello everyone, welcome back to Amaze on Stream Podcast series. This is Yagmur from Eva team and today I’m very happy to host here, Daniel Calleja from SellerX. And hello there Daniel, welcome. How are you?

Daniel:

Hi, very good, very good. Very excited to be talking with you today.

Yagmur:

Yeah, thank you. I’m really happy to have you here actually. And just as a little introduction to the guys out there, Daniel is the Head of Investment UK at SellerX and which is actually one of the partners of Eva, and they’re helping the entrepreneurs realize the next stage of their businesses. And also their lives, I would say.

Yagmur:

So I will give the floor to Daniel first because I’m really excited. And I’m really curious about SellerX and how it works in general. Daniel, can you start with talking about the main motivation behind starting SellerX or generally what is the problem that SellerX solves for its customers and how do you help the entrepreneurs in general?

Daniel:

Yeah, absolutely. So, to be fair, it’s quite an interesting story. SellerX started a year ago now, we actually had a one year celebration earlier this month.

Yagmur:

That’s good.

Daniel:

And it started during COVID, both our two co-founders were stuck in Germany. One of them, he comes from a bit, from a financial background. He’s worked in private equity, he’s done a lot of rollups. And the other one comes from more like an e-commerce background. And he started a really really successful business in Brazil that he grew to a billion of sales. And they started seeing basically all the trends that were happening in the space. How big Amazon was becoming. How a lot of sellers were growing their businesses.

Daniel:

And they thought, look, this is a great opportunity to start and do something like this. And I mean, it’s also super interesting from my side because personally, I used to be an Amazon FBA seller and I was doing that on the side and I sold my business around the same time. So it was a great time when I started looking at these things. So from something that wasn’t really there with the explosion of Amazon, it gave the opportunity for basically bigger players to come in and help and grow these businesses into large brands.

Yagmur:

Wow, sounds great. I didn’t know that you were an FBA seller. It must be tough, huh? As far as I know, being an FBA seller on Amazon is not an easy task.

Daniel:

Yeah, to be fair it’s super interesting, right. Because when I started, it was 2017 and it was a completely different world. Back in the day it was, I would call it fairly easy. You didn’t need software, you didn’t need specific platforms. I used to use jungle scout. That was the only thing I used too. But now, you really need help in order to have a good business. You need infrastructure. Like Amazon has become so complex.

Yagmur:

Yeah.

Daniel:

And so competitive that you really need to, sort of the best tools to be successful.

Yagmur:

Yeah, competition on Amazon is just getting hot, every day more and more. So that’s so normal that we are, not we but the sellers on Amazon need a lot of tools and a lot of experience to become successful, I would say. And also, we can say that SellerX is founded on a solid experience because your co-founders and founder, they have very solid experience on also financing. That’s perfect. And how do you help the entrepreneurs? In which sense do you help them?

Daniel:

Yeah. So basically, the way I see it is if you’re an Amazon entrepreneur or an entrepreneur in general, and it’s a beautiful story, right? You’re creating something from nothing. You’re creating a product, you’re growing it. But the same time, I think there’s always a stage where you run into problems, right. And these can come in many ways, right. You might be tired of the increasing complexity. You might be very good at designing, finding a product, getting a good idea, but you might not like all the logistics that come around with it and all that admin.

Daniel:

Or a lot of the times, what you see is people that grow their business and they start something that’s doing extremely well. And what they find is they don’t have enough capital to keep it growing. So this is really why I see where we step in, right. We provide help, founders an excellent opportunity. We allow them to first of all monetize on all their money, on all the value that they’ve created. It’s a good way for them to make money.

Daniel:

But more importantly we help them, providing expertise in order of taking their brand and growing it into a global brand. And our mission or our vision, what we want to say is we want to become sort of the digital Proctor and Gamble. So have a big pool of brands that we think that are going to be very good consumer products that we can grow and take everywhere around the world.

Yagmur:

Wow, sounds great, hope so one day. And I also wonder, you are not just an aggregator as far as I know. So how do you differentiate yourself from the other aggregators in the market?

Daniel:

Yeah, very good question. It’s actually one that I get quite often, right. Because the space has been booming recently, there’s a lot of players in the space and it’s becoming quite competitive also, not only on Amazon but also in the aggregator space.

Yagmur:

Yeah.

Daniel:

So the way I always say it is, I think there’s three main differences between us and some of the other players. Number one is when you look at the space, there’s a lot of aggregators, but there’s only a few of us that are global, right. I think there’s only three or four that can really claim they’ve got a global presence. For context, I sit in London, our headquarters is in Berlin, we’ve got an office in Miami, another office in Shenzhen. We’ve got a team of 300 people now. So it’s growing very, very quickly and we’re very large and we’ve got sort of this global infrastructure to actually take those brands that we acquire to a global scale.

Yagmur:

Mm-hmm.

Daniel:

The second one, I think it goes to something you said, right. The expertise and the knowledge that we bring. We’re both multicultural, I have an incredible background in terms of e-commerce. Philip, who’s the other co-founder comes from finance, but then we’ve made a lot of very senior and powerful hires, in the sense that we hired the ex-head of Amazon FBA in Europe to be our Chief Marketing Officer. We had the ex-head of Amazon 360 program to be our growth manager. So in that respect, we know Amazon is complex and we bring in a lot of Amazon expertise to grow these brands. I told you right, I sit in the investment side, but I used to be a seller as well. So we understand it’s a difficult marketplace and the more knowledge we can bring from Amazon the better.

Yagmur:

Yes.

Daniel:

And then the third one, which is something as well we’re quite proud of, it goes to the core of our values. Which is SellerX, the X stands for the variable that each seller is different and they may want and need different things. So that’s where, it means that despite being quite big, we really try to tailor our offers to the needs of the seller. This comes in many ways, right. We work with sellers that wants to sell their business and then go and do something else. We’re happy to do that. Or we work with sellers that sort of want to continue being involved in the brand and continue to maintain upside if the brand grows and to come and work for us at SellerX. And we also have a lot of sellers like that, that are now part of the SellerX family. So in that respect we tend to be very flexible to adapt to whatever the seller wants.

Yagmur:

Oh okay, sounds great. Actually, I just wondered that, you just told that you are a global aggregator and which is not very common in the market as a tool. And is it that you can acquire an Amazon business from each marketplace that Amazon is offering now? Is that correct? And are you able to grow all of them? Regardless of, if it’s a small one, if it’s a big one?

Daniel:

Exactly. So that goes to our, we call it growth levers. In terms of, we’ve got four. I can tell you about that, basically I know I’m starting to bring in lists but yes, that’s definitely the strategy. Once we see a product that’s doing really well in Amazon, super competitive. We try to take it to other marketplaces because there’s a lot of synergies between if you’ve got a best seller in the US, you can then bring it to Germany or to UK or to Spain that traversed Amazon’s review transferability, you can take over. And it doesn’t work on all the times and obviously some products are very specific to specific marketplaces and customer taste may be different around the world. But the value proposition is, we do the analysis, we look at it, if it makes sense, we’ve got local teams that can help and bring it everywhere.

Yagmur:

Okay, cool. What if I’m a small business owner and I want you to acquire me? How do you work in that sense? Do you also acquire very small businesses to grow? Or is there any specific metrics you’re looking at?

Daniel:

Yes, basically that question we get a lot, in terms of what are the metrics. Answering your question on the size.

Yagmur:

Yeah.

Daniel:

Realistically, once you’re doing 1 million in sales, that’s sort of the benchmark that we’re looking at. If you’re doing 1 million in sales or you’re in the path to do 1 million in sales very soon. So you’re doing 500K a year, but you’re in the path that in the next six months you’ll be doing 1 million in sales. Then it becomes very interesting to us because we know that they can grow and we put in the right investment in terms of people and money. We can take it to a next level.

Yagmur:

Mm-hmm.

Daniel:

Answering a little bit more your question about what we look at it, in terms of products. We’ve got a couple of our criteria. I think the number one is obviously the category, we want to make sure we focus on specific categories. One is, we call it evergreen categories. So we like things that are always going to be needed, to say it that way. Things like home and kitchen, sports, gardening, beds. Those things, we love them because you’re always going to need these things. Things we stay away, like everything, for example very fashion oriented.

Yagmur:

Yeah.

Daniel:

Everything very electronic, because there’s always constantly changing and it’s a bit more difficult to have something that’s going to stay forever.

Yagmur:

Yeah.

Daniel:

Then we obviously care a lot and there is the number one is about the product. We want products that are doing really, really well on Amazon. That have got a lot of reviews. That people are very happy. They’ve got a very strong positioning organically because that sends a very powerful signal, right. If you’re looking at a product that people love, they’re buying, it’s ranked really high in the most competitive marketplace in the world. It gives us a lot of confidence that it’s a product we can take everywhere, and everywhere is going to be successful.

Daniel:

The other thing, this a bit more specific, but it’s also super important to understand the operations of the business, right. So, how the business is run? Where they source their products? What’s the process? Who runs the business? What’s the role? What’s the, if they have dedicated people for customer service, etc. We like to dive very deep to understand the business. What we can do and what we can’t. Then similar to that, expansion, right.

Yagmur:

Yeah.

Daniel:

If we look at, I was saying before, right. Taking it to other marketplaces. We like to do the work there of, if we acquire this business tomorrow, what can we do with it? Where can we take it, where not? For example, we might buy a great product in Amazon Spain, but we see that it wouldn’t make sense to sell it in India for example. Because the customers are very different. But for example, we might see that it makes a lot of sense to put it into retail or to launch its own website and grow it directly from its own website. So that’s the growth opportunities that we can do.

Yagmur:

Mm-hmm.

Daniel:

And then last one, don’t want to say it’s less important. It’s probably one of the very important ones, we care a lot about the financials.

Yagmur:

Yeah.

Daniel:

So the growth, the margins, just a bit of specifically different stages of the PNL and the balance sheet to see if it’s interesting for us from a financial standpoint.

Yagmur:

Okay. So what’s interesting for me is that you’re also looking at, into the cost, employee part in the businesses that you are acquiring. Because for example, do you also continue, I really wonder that part. Do you also continue to work with the employees in that business? Or you just remove all the employees, you fire them and you just put your own employees, how does it work?

Daniel:

No, it’s a great question. This is literally number one concern for a lot of the business that we acquire. It’s like “What will happen with my team? What will happen with my people?” So the way we like to, the thing is we like to keep the employees that are part of the business. Because number one is the ones that they understand the business best, and they’re the ones that have grown it and do it. So the way it normally works is once we acquire a business, there’s a transition period, normally around three months. Where it’s a time where this business stays the same, the employees don’t leave or anything like that. And after that, it’s sort of when we evaluate. In most of the cases, most of the team stays, but in some cases there might be things when it doesn’t make a lot of sense.

Yagmur:

Mm-hmm.

Daniel:

For example, customer service. If we’ve got a team that do that certain customer service, and we already have a team that’s there, and there’s nothing particularly novel, then we might consider either working them together so they do everything or maybe just moving out or phasing out. In general it’s more the opposite. What tends to happen is a lot of the people that sell is either employees either prefer to go and do their own thing, rather than us not wanting them. But in general, I’m very happy. Most of the, actually in the room next door, I’ve got one of the businesses that we acquired, and literally all the employees are still there. So, that’s sort of the way, because that’s also when we do the analysis about looking at a business, we’re factoring in these employee costs. So it’s not something where we are going to take them off, right. We already accounted them when looking to buy the business.

Yagmur:

Okay. So it’s as good for the employees and the next door to hear that they’re not going to not be fired at all.

Daniel:

Exactly.

Yagmur:

Yeah, that’s nice actually, because I didn’t know that part and it’s very interesting in my opinion. And I also wonder how does your overall acquisition process, how the store owners would apply and how you evaluate them? Evaluate their businesses and how long does it take? I would just, would love to know the overall process.

Daniel:

Yeah, no, perfect. It’s a good question because it’s a new space and not a lot of people know how it works and everything.

Yagmur:

Yeah.

Daniel:

But the way it works, if anyone listening to this or anyone sends me an email, daniel@sellerx.com, or if you go to our website we’ve got a form that people can fill in. And the way it works is you go there, you say that you’re interested in selling your business and me or someone in my team will give you a call and tell you, “Hey, you’re interested, we’d love to chat.” And we have what we call our initial call. That’s sort of the first step. And there we just really want to understand about your business, your story, what you’ve done and why you’re interested to sell.

Daniel:

Then after that we’ll basically, if it’s interesting, we’ll basically ask you for a bit more information and another call. We’ll like to see for example, more of the financials, monthly financials to see sort of how the business is performing. But also understand a little bit better, the mission, the business going forward, your operations, etc. And we like to do quite a lot of work at that stage. Like that normally will take, depending on how quickly we send each other the information, etc. That would probably take three, four days. And once we happy with this and we feel like we’ve got a good understanding of the business. What happens is we’ll make you an offer for the business, which is called an LOI, a letter of intent. And there we outline, sort of the headline terms of the purchase agreement, which is basically the price, what’s going to happen after the business, what exactly are we acquiring, etc. Assuming you’re happy, you sign it. And we start a process, a period that is called the exclusivity period.

Yagmur:

Mm-hmm.

Daniel:

So what it means is, we agree to work together to, for the sale of the business and prepare all the documentation.

Yagmur:

Mm-hmm.

Daniel:

And this is like a four week process where we basically do due diligence. So we dive a little bit deeper into the financials. We dive deeper into the marketing, the supply chain, etc. And there’s a fairly busy process, whereas we follow documentation, make sure that you’re the actual owner of the business, make sure that we understand. So how you, your suppliers, how they go, how you’re doing things. And after that so, and the same time our lawyers are drafting the purchase agreement. So, and reviewing by yourself and your lawyers. So once it’s done, then we can sign. So the whole process takes about 40 days since the first call, and the due diligence things tends to take about four weeks.

Yagmur:

Wow, okay, great. I have wondered, is there any, have you ever experienced it, I just wonder, is there any business owner who tried to bargain on the valuation? Because you first sent a letter of intent.

Daniel:

No, of course, it’s very common. The letter of intent it’s, that’s when all the negotiations happen. And there there’s always like a, well a negotiation, right. Because it’s always a process in the sense of, “We’ll offer you something, this is what we think the business is valued,” but then you might be like, “No, my business is my baby, it’s worth way more to us.” So we try to bridge the gap there like, “Okay, why is it worth for you that?” And we try to, then you, “Look, this is why it’s worth for us this.” So there’s always like a bit of a negotiation. And that’s when I mean we can be flexible in the sense that say, for example, you tell me, “Look, my business is worth 1 million now, but look in two, three years, it’s going to be worth five.”

Daniel:

So we tell you, “Okay, we’ll pay you 1 million now. And in the next two years, or in the next year, we’ll pay you a percentage of the profits.” So you also have a lot of the upside if the business goes well. So it’s definitely a negotiation there.

Yagmur:

Yes.

Daniel:

And it goes to what I was trying to say at the beginning, right. We try to make it that you, you’re happy with the value that we’re bringing and we structure the offers. So you get basically a bit more for what you have to.

Yagmur:

Okay. So do you acquire complete [inaudible 00:20:16]? Or do you just, for example, the owner can keep the, not keep, get a commission each year? Is there any, this kind of agreement, for example, “I sell my business to you, but for lifetime I will get 15 percent of the revenue every, not revenue, but profit every year?” Is there, yeah?

Daniel:

Exactly. It’s called an earn-out. We wouldn’t go as far as saying for lifetime. The market standard is sort of one year, we’ve seen sometimes that it can go up to two years. But yes, it’s something that, because all these businesses are high growth businesses. So it’s a way for the seller to benefit from us taking over the business, right. Because [crosstalk 00:21:00] if your business selling only on Turkey and I’m like, “Okay, I’m going to take it everywhere around the world.” Then “Oh well, you’re going to be rich.” Yes, but let’s be rich together, right. We’ll give you a percentage of the profits in the first year and maybe in the second year. So you also benefit from the growth that the business is going to have long term.

Yagmur:

So it’s win-win, sounds great, cool. And I also wonder, is there any selling categories on Amazon that you think more profitable than the others? For example, I would love to buy the stores who are selling on the clothing categories more than the others. Do you have any of these kind of preferences?

Daniel:

Yeah, we focus on the ones I mentioned right, like evergreen categories rather than very tech. I think the way I see it, and obviously it’s a bit subjective right, I think there’s definitely some categories that command higher well, higher margins. And for me, the more the commoditized the product, the less the margin, right. The less product differentiation, the less brand value, the less people are going pay for it. Light bulbs, for example, they’re all the same or very similar, so it’s very difficult to assign a premium and when you see the margins are very thin, but you, I’m sure you see it on things more related to beauty, health, etc. There you can command a bit more of a brand and a premium and yes, it’s basically driven by competition and type of product.

Yagmur:

Okay, cool. So my last question would be, as we know that you just acquiring businesses and growing them. So you must be good at growing the businesses. Why do you recommend to the entrepreneurs to level up their business? For example, maybe there are some businesses who would love to level up their business first and then after selling it, to you or any other aggregator.

Daniel:

No, it’s a great question. I think the way I would say it is, if you think about your business. Number one is you need to have a very good understanding of your business financials first. So how you make money? How much are you making, etc. And here what’s great is there’s a lot of tools out there in the market that can link to your account and tell you sort of what’s your profitability, etc. Because once you have this insight, becomes much more easier to prepare to, for a sale, right. Like cleaning up all these things. A bit also on the institutionalization, like making sure you’ve got the right company set up, all the authorizations to sell the products that you may need, all the right certifications, these are all the things that you’re going to need down the line.

Daniel:

And so the earlier that you do the work and you have it, the better. Then, obviously this depends also on your capacity, your resources, your time, but the more you can sort of show the growth strategy and the expansion, the better, right. If you can already start growing a D2C channel, like your own brand, etc. That commands a very good premium, because it shows that people are looking for your brand, you’re building a brand aspect and people like it. And saying, if you’ve been growing your business in Turkey or Spain or wherever, and then you take it to France and it shows that it’s also growing. And shows that you also have VAT registration for the UK, all these things. It helps because it shows that the business can grow and it can be successful.

Daniel:

And yeah, to give you context on things that we’ve done before, like we’ve had sellers come that were a little bit too small for us, and we looked at their business and maybe for example, their marketing wasn’t that right. So we’ve put them touch with our internal marketing team. That’s helped them optimize the marketing. And then we’ve said, “Look, let’s connect in three months.” And in three months their business has grown, the profits have improved because they’re wasting less money on campaigns and PPC that are not relevant. And then they become an attractive target for us. So yeah, basically lots of little things. I think people out there, know their business better than anyone, but yes, the more brand identity, the more growth you can put in the business, the better.

Yagmur:

Perfect. Yeah, I hope that there is any small business owner would get just, they use this little information to grow their businesses. So that was a great conversation and thank you so much for that. I think that it was really informative and also it is informative for the businesses who would love to get in touch with SellerX I believe in future. Thank you for joining me here today Daniel.

Daniel:

Thank you, it’s a real pleasure. Have a really good rest of the day and obviously if you need anything or if anyone listening to this wants to connect, my email is daniel@sellerx.com, so feel free to reach out.

Yagmur:

Thank you so much. And for you guys out there, stay tuned till the next time.

Daniel:

Thank you, bye bye.

 

Alejandro Marco
Alejandro Marco

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