13 Dec Amazon Arbitrage: How the Aggregator Trend Will Evolve in 2022
Amazon-based e-commerce businesses are in high demand at present, with various traditional blue-chip investors and digitally oriented rollup companies allocating substantial capital to acquire premium assets. One such class of acquirer, the Amazon aggregator firm, has proven its staying power in recent years – suggesting they will continue to play a pivotal role in 2022.
Enter the Amazon Aggregator
Perhaps the most significant development is the proliferation of new Amazon aggregator firms and rollup companies entering the space. Well-established FBA brands represent tremendous value and as acquirers vie for control of as many companies as possible, M&A deal flow has experienced an unprecedented surge which in turn has generated increased investor attention.
Read our latest Focus Report – Amazon Aggregators: A Profile of Risk and Return from the Digital Frontier
The aggregator model provides several unique advantages, including the ability to close transactions at a rapid pace and the capacity to quickly scale portfolio companies. Consequently, Amazon aggregator firms have been able to capitalize on the opportunity to acquire brands at a low price before deploying their expertise to drive exponential short-term growth.
The Aggregator Business Model
According to Ali Hamed, a partner with venture capital firm CoVenture, aggregators are estimated to operate at approximately 20% net margins. Aggregator firms represent $60 billion in addressable EBITDA at present, but CoVenture anticipates an increase to $100+ billion in the near future. Whereas some of these firms will undoubtedly falter, those that have discovered a winning formula will likely continue to be successful as they focus on expansion.
Amazon hosts 40% of all U.S. online sales, with barriers to entry becoming increasingly stringent. However, for aggregators that are able to establish and maintain a presence on the platform by assuming ownership of successful FBA brands, there is potential for creating a dominant foothold in the market. The business model is not without risk, though.
Drawbacks of the Aggregator Model
Our firm predicts that just as weaker hedge funds have failed in the past, underperforming aggregators will experience similar dissolution. Supply chain disruption and slowing consumer goods demand are significant obstacles to fledgling firms, many of which are already operating upside down, to achieve a lucrative public market exit in the future.
As a result, stronger and more profitable aggregators will be able to capitalize and secure additional market share. This will make it increasingly difficult for new entrants to close the gap without a significant competitive advantage and, given that most aggregators utilize the same model, the opportunity for differentiation will decrease with each successful public offering.
Implications for M&A Transactions
Multiples for Amazon-based and FBA companies will increase with time, compressing the current opportunity. While aggregator firms are poised to continue building and managing deal flow, they must also adapt in order to remain competitive as more capital flows into the space and increasingly fewer premium assets are available for purchase at low prices.
Similarly, as the inherent risks associated with the aggregator model become more readily apparent, founders may be wary of engaging with lesser-known firms – especially if they are approached directly and have not yet secured their own representation. Some aggregators may find their acquisition schedule is not sustainable when confronted with these obstacles.
Advice for Dealing With Aggregators
We caution against dealing with Amazon aggregators directly because doing so conveys to the market that you are willing to compromise. The aggregator model hinges on closing transactions quickly and affordably. As a seller, you can’t trust an aggregator firm to provide an accurate assessment of your company’s valuation.
Working with a qualified intermediary will help you achieve the optimal outcome, securing the maximum value for your business while ensuring you are completely satisfied at the transaction’s close. Don’t settle for less than you deserve by negotiating without representation and putting your trust in an acquirer that may not have your best interests in mind.
About Global Wired Advisors
Retaining an experienced Investment Banking professional is the first step in securing your financial future. Global Wired Advisors combines decades of transactional and operational expertise to provide institutional-caliber service to our Clients while helping them earn the maximum value for their digitally native or Amazon FBA businesses. If you’re considering a sale, or if you’d like to learn more about our process, click here to connect with one of our Advisors today!
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