When to exit an FBA business is a tricky question. Factors internal and external affect that decision, which means the right time isn’t always up to you. Even so, there’s a lot you can do once you’ve decided, even if the exit is still a ways off. Here are the conditions to look for when deciding whether or not to exit, as well as how to plan an exit strategy.
To learn more about this topic, register for this webinar featuring our own Adam Epstein on February 15, 2022.
Internal conditions to look for when exiting
The most important condition to look for when exiting an FBA business is the status of your business itself. Is it profitable? Is it growing? Is it scalable? These three things will make it attractive to a brand acquisition company. However, it’s a little more nuanced than that, and while every business is different, there are a lot of similarities that buyers look for.
Product differentiation relative to the competition is perhaps the most important factor. A successful product concept is unlikely to be unique for long, and once a market is flooded with nearly identical designs, the one with the best price-to-quality ratio is going to be the one to come ahead. This creates a race to the bottom -- nobody wants to acquire a brand in that race. Therefore, while there will inevitably be imitators, having a product that’s differentiated in a way that makes it appealing beyond just the price point creates a more sustainable, profitable path forward.
In the same vein, SKU density provides multiple avenues for making profits in a similar category, even if customers are looking for slightly different products. A business that offers a variety of product types but several largely similar products within each type is less likely to lose out to the competition. When a customer wants a product you sell but in a different color, for example, if you offer multiple colors, they’re still likely to end up picking your product, instead of an almost-identical competitor in the color of their choice.
Finally, a history of, or infrastructure for, new product development underscores the ability of the company to maintain product differentiation and SKU density. For example, when we acquired FoxyBae, a consistent new product pipeline allowed us to incorporate an infrastructure to increase development once they were a part of our team.
Combined, these factors show a company able to build, grow, and keep growing.
External conditions to look for when exiting
Next, what’s going on outside the company matters when exiting. What do multiples look like? What’s the market for your product? Are there global commerce issues that might lower your value?
The first one is crucial, because multiples are always changing. Even if every condition is perfect, multiples were lower in 2020 than in 2021, when they rose up to 4-5x. But while they’ve been growing steadily, they may not do that forever as the brand acquisition space matures. Then again, they may continue to get higher as more and more money pours into the space. Being ready to sell ahead of time allows you to capitalize when multiples go up.
At the same time, while average multiples have gone up to 4-5x, this isn’t flat across all industries. This may be one of the most volatile factors moving forward, and is one of the reasons that brand acquirers tend to go for more stable categories. Even so, if the multiples are lagging behind, the time may simply not be right, but doesn’t mean it won’t be forever.
Finally, there are the really, truly unpredictable factors, the supply chain being top of mind (not to mention the pandemic that’s been going on for multiple years). Computer chips, blue paint, even breakfast cereal can be hard or impossible to get. Product recalls, legislation, fee increases, storage decreases, weather, all of it can create uncertainty, all of it can affect the value of your business, the ability of a business to acquire you, and the money available to make the purchase.
In short, it’s important to keep an eye on the factors that will affect the value of your business so that you’re not selling at a suboptimal time -- even if you’re doing everything right on your end.
Planning an Exit Strategy
Once everything is lined up and you’re ready to hand off your business, it’s time to make an exit strategy. Even before you’ve picked a company you’d like to do business with, there are steps to take that will not only increase your valuation but will also make it easier to hand off to the right company.
The first is your financials. There are a lot of ways of getting these in order, including moving to accrual-based accounting, but the most important thing to note is that this is going to happen at some point in the process no matter what. However, if the buyer is forced to do it during due diligence, it’s going to affect speed of close, which is going to cost you money. Besides, it’s best to have an accurate understanding of your finances in order to get a proper sense of your valuation, which will give you a better idea of what kind of offer you should be looking for.
The next is to have your marketing, sales, and customer data organized in a way that makes the transition easy. Not only will this benefit your company in the short term, but it will help whoever buys your brand seamlessly incorporate your colors, logo, and messaging. Make it as easy as possible for them to keep growing your brand.
Finally, do your research. There are more than 80 brand acquirers out there right now, and they have a lot of money. But they’re not necessarily the right buyer for your brand, in the same way that not every customer is the right person to buy your products. Knowing who the right buyers will be ahead of time will save you time, rather than getting caught up in extensive (and potentially expensive) negotiations with the wrong brand acquisition company.
When the time is right
What you’re trying to accomplish by selling is ultimately up to you. It could be a payday, it could be a chance to start something new, but no matter what, we hope the tips above give you a sense of how to make sure you’re selling at the best time for your goals. To learn about the conditions to look for when exiting and how to plan an exit strategy, sign up for the webinar on February 15. If you’re ready to exit, contact us today.