04 Apr Why The Illusion of Paying Nothing Could Cause Sellers to Lose Millions
Amazon sellers are inundated with choice when seeking an intermediary to represent them in a high-value M&A transaction and selecting a “pay nothing” service could potentially lead to a significant loss. In some cases, it could literally cost millions.
Consequently, as a seller it is imperative that you make informed decisions that will ultimately serve your best interests. This is especially important because some individuals or intermediaries may purposefully embellish or misrepresent the services they offer.
How “Paying Nothing” Could Cost You
Such is the case with marketplace listing services for FBA businesses that tout “pay nothing” 0% commissions for deal closings. The concept is novel and could be quite appealing to some sellers who do not understand the importance of a complete intermediation process.
Other sellers may be enraptured by the allure of executing a strategic exit while paying nothing and avoiding a fee. However, this type of service can be much more costly than a saved commission payment.
Setting Sellers Up to Lose
You probably wouldn’t offer to work for free, and it stands to reason that a qualified intermediary wouldn’t either. So, if a marketplace listing service is being paid nothing by you (the seller), then what exactly is their incentive to facilitate the transaction?
When an intermediary is not paid a fee or commission by the seller, they work for someone else by default – most likely the buyer. This is similar to engaging with buyers directly, except it’s even more dangerous because inexperienced sellers may not even realize it’s happening.
“Pay-nothing” marketplaces make the following claims:
- They claim to be match makers only.
- They claim to have deep networks of buyers.
- They claim aggregator firms have just as much experience as qualified intermediaries because they’ve bought several businesses before.
- They claim that transaction success is just as high when using a true intermediary.
Unfortunately, these claims often turn out to be false.
The Harsh Realities of Paying Nothing
A fully optimized M&A process consists of more than a focused network or listing service. Endeavoring to secure the maximum value for your unique Amazon-based asset without appropriate representation is ultimately a disservice to you.
The first problem is known as “signal effect.” This occurs when buyers (in many cases, Amazon aggregators) tend to bid less when they know that a process only includes other aggregators and that sellers have no real representation.
To understand the impact of signal effect, you can compare transaction multiples between deals closed with and without intermediation. The difference is clearly in favor of transactions conducted with an intermediary utilizing a professional Investment Banking methodology.
Although “pay-nothing” marketplace platforms may ostensibly be designed to promote competition, in reality many sellers experience the opposite. The false promise of a lucrative payout absent any fees or commissions is a mirage, soon to be replaced by disappointment.
You Get What You Pay For
Marketplace listing services lack the institutional experience and expertise required to achieve the optimal outcome from a transaction. This is another substantial drawback of the pay-nothing model that translates to less money in your pocket. Worse yet, it’s intentional.
A representative who works for the buyer won’t conduct a thorough analysis of your business to ascertain its true value. Rather, they are attempting to set up businesses to be acquired for the lowest possible price by their clients. Adding insult to injury, the buy-side referral fee does indeed factor into your overall valuation.
Thus, the very nature of “pay-nothing” marketplaces is contrary to your objective as a seller. In-depth analysis, industry research, targeted outreach, and true sell-side investment banking representation are critical to completing due diligence and securing the optimal outcome.
Process Dictates Outcome
Marketing a deal with modeled proforma financials and robust, high-caliber marketing materials sets expectations and helps ameliorate discovery risk in due diligence. Marketplaces do not offer this service, which effectively requires sellers to run their own deals.
Moreover, closing values received from a higher transaction multiple (achieved through proper representation) easily surpass fees associated with representation.
An experienced Investment Banking professional completely manages the transaction process, empowering you to maintain focus on running your company. This translates into reduced risk of performance slipping ahead of closing, and better closing value.
Paying Nothing Could Cost You Millions
Purported “pay-nothing” services simply aren’t designed to optimize transaction value. Instead, they appeal to sellers by targeting an emotional need to avoid an intermediation fee. The goal is to convince sellers they are saving money while delivering them into the hands of savvy buyers.
However, the amount of business value that could be lost using this approach is likely a multiple of what a transaction fee would be. The net result is effectively paying nothing to ultimately lose millions. Be wary of these representatives and always adhere to the old adage: if it sounds too good to be true, it probably is.
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!