Back in 2020 and 2021 and into 2022 we were getting flooded by two kinds of calls – ecom sellers who wanted to get their books together so they could sell their businesses and ecom business buyers wanting to know if any of our clients wanted to sell.
We had built out a specialty in ecommerce accounting so it wasn’t a surprise for us to be getting calls about the topic but what was surprising was how fast this industry of trying to roll up ecommerce sellers had exploded.
We wrote a blog article about ecommerce aggregators as they were known in early 2022 and immediately got calls from brand buyers we hadn’t included wanting to know if we could add their names! At one point there were over 80 of these on our radar and likely twice as many more we didn’t connect with.
What was the idea behind this gold rush plan? It’s pretty simple – the aggregators were generally founded by Wall Street types who would first raise a bunch of money ($10M-$1B or more) and then start buying up primarily Amazon sellers who were doing mostly between $500K-$5M in revenue. They were paying anywhere from three times to as much as seven times the last twelve months’ profit of the businesses they were buying.
The idea then was to take this collection of brands and bundle them under one entity and sell that entity to someone even bigger for a multiple of 15 or 20 times the trailing twelve profits. Or more.
In other words, to buy things for 3 to 5 times their profits and then turn around and sell the same items for three to five times what you paid for it for without actually adding any value along the way. Sounds like a Wall Street kind of plan!
So what happened? How did this grand plan work out? And what can you learn from this about planning the growth of your own business?
Here’s what happened. Just recently, the largest of these buyers declared bankruptcy. As did many of the others, without it making the news, aside from nearly all the other ones who just shut down.
We heard from some of our clients about missed installment sale payments and in one case one of our clients took back the company he had sold less than a year later, with sales cut in half and the business needing to be rebuilt nearly from the ground up.
Why didn’t it work out? In my conversations with most of these firms, it became pretty clear to me that while they had spent plenty of time raising money and making spreadsheets that showed amazing valuation growth they had invested almost no resources in operating these companies once they were acquired. I used to joke that the entire operations end of some of these companies was two interns from an MBA program somewhere.
As you can imagine – each brand they bought was someone’s full-time passion and daily work obsession, but once acquired the whole day-to-day process was turned over to someone who was also trying to manage and run a dozen other similar-sized operations at the same time, and without the devotion or personal investment that an owner has in treating it like their baby.
There were some of these that made it and some still going but the big difference is that these tended to be ones who had a theme and a purpose behind the brands they bought that did add value to the whole (like all natural brand products or all pet products) and they invested in operations and growth with just focusing on a flip.
The guys at the top of the ones who didn’t make it were just looking at these businesses as numbers on a spreadsheet and projecting a “conservative” growth rate of 10% or 15% a year and holding everything else constant. They dramatically underestimated the amount of work required to keep on top of running these businesses and as a result, didn’t dedicate nearly enough manpower to that effort.
They also didn’t account for the fact that many of these “brands” were simply products ordered from overseas cheap and sold here on Amazon but which had no redeeming differentiation, making them easy prey for competition and they weren’t spending time or money working on that problem.
Basically, they were too top-down in their analysis, looking at these businesses as essentially plug-and-play revenue generators instead of individual businesses with their own needs, challenges, threats, and opportunities. You can look at the big picture from time to time but then you also have to get down in the weeds to understand the whole situation – all of one or all of the other is going to be limiting either way.
Most small business owners in my experience spend too much time in the weeds – working on today’s problems and never doing any longer-term planning and as a result five years from now their business doesn’t look much different than it does right now and they are still the ones on call for every problem and decision.
But being too high level with the planning can also backfire as was the case above. If you just take today’s business and project out a certain growth percentage and then impress yourself with how much money you will make and how well you’ll be doing you haven’t really helped yourself either. That plan is too far from the day-to-day.
The happy middle ground is to set a target goal for revenue, but also one for clients or product sales and also one for headcount or management hires, and also ones around lead generation and website traffic and everything else you really need to make that happen.
It’s easy to throw together a spreadsheet and plug in big numbers. Even Wall Streeters can do that!
But then connecting those goals down to the steps you need to take – the detailed plans and specific short-term and medium-term objectives to get there is what makes that vague plan much more likely to actually come to fruition.
So the lesson from the failed aggregators is not to fly too high and ignore the on-the-ground reality. The lesson from most small business owners is to take the time to look up and think longer term. And the lesson from me is finding that middle ground between fantasy spreadsheets and no plan at all is where successful growth actually lives!
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