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.
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 anyway.
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.
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.
To measure the price of a FBA business we look at the monthly average Seller’s Discretionary Earnings (SDE). SDE are profits before salaries, interest, depreciation, amortization and taxes. We use this metric 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 is not included in this selling price and is also measured using SDEs -generally being the equivalent to about 6 SDEs- and paid on top of those 25-36 SDEs, taking the final selling price to between 31 and 44 times SDE.
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.
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:
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.
Fortunately, since most of the financial information comes directly from Amazon, it can’t easily be faked.
Aside from that, we make sure that the cost of goods is correct.
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.
There are many ways we improve businesses. We can categorize them in seven items:
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.
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.
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.
Reach out to the team at Alpha Rock Capital and lets see what we can do together
Alpha Rock Capital (ARC) is a US-based Digital Acquisition Firm. We acquire Online Businesses that own Digital Real Estate, which is a term we use to describe valuable online locations such as the ranking of results on platforms like Amazon or Google or high traffic domains. Analogous to how physical real estate derives value from traffic and placement, we specialize in acquiring underappreciated and profit optimizing high traffic online businesses.
Digital Real-Estate encompasses a broad range of locations that attract human attention, from Amazon listings to Google search results and social media. ARC specializes in the acquisition of online businesses and is currently aggressively pursuing a broad range of opportunities in the Amazon FBA and affiliate website market segments.
These businesses rely on being able to rank first on Amazon and Google search results, as whoever occupies the top slot will inevitably get the most traffic and sell the most products. On Amazon, the value of an FBA business is achieved through selling the most units and acquiring the most 5 star reviews, which in turn creates a high barrier of entry for competitors.
The ARC methodology follows an efficient and stringent acquisition process that leverages calculated risk and data-driven metrics to guide our investment decisions. The A.R.C. methodology is as follows:
Optimize and Operate; based on our analysis during the due diligence process, we immediately begin optimizing the new business and integrating it into our systems. Due to the nature of e-commerce, we iterate rapidly and experience the results instantaneously.
Digital Due Diligence and M&A; we identify investment opportunities by analyzing data points for indicators of mismanagement (such as stock and fulfillment issues, supply chain management etc.) and opportunities for growth via increased traffic (PPC, SEO etc.) and product variation. To ensure credible due diligence, we acquire data and P&Ls of potential acquisitions directly from Amazon and verified brokerage companies with a strict vetting process.
Supervise, Scale & Sale; we continuously monitor and track our portfolio in search of opportunities for additional scale and profit optimization. In a rapidly changing market environment, our management team continuously monitors competition, price levels and keeps up to date with shifting regulations around the globe. Additionally, once we begin to see that further optimizations of a company provide diminishing returns, we offer our digital assets up for sale to further reinvest the returns into the company.
Some of the The rise of the Internet has made it easier than ever before to start a new small business. While this has improved the lives of those able to capitalize on it, it has also significantly increased competition. Like all small businesses, 8/10 online businesses fail to become sustainably profitable, and the ones that succeed need to fight harder to survive.
Of the businesses that survive and manage to gain rank, many have been started by individuals new to business. This means that many owners are short on time, capital, and overall business acumen which can lead to many mistakes that reduce overall profitability.
As there are a large supply of these businesses and relatively low demand for them, we have the opportunity to acquire these already profitable businesses at low multiples with many opportunities to increase their profitability. This is akin to buying a lottery ticket once they have already begun reading the winning numbers, as our chances of success increase exponentially.
While the general ecommerce market remains crowded and fiercely competitive, the upper layer of small successful, but mismanaged businesses is a growing uncontested market space. As of March 2019, there is a supply of over $400 million FBA businesses for sale.
It is within this growing trend that ARC seizes its investment opportunities. We will continue to expand not only through FBA businesses but also through several other verticals of online businesses providing opportunities for high returns. We are always looking for new partnership and acquisition proposals, so please feel free to reach out to us using the contact form below.
Reach out to the team at Alpha Rock Capital and lets see what we can do together