What Does the Fed Rate Hike Mean for Amazon Sellers and Other Small Businesses Looking to Exit?
In 2021, US housing prices rose to all time highs. Nationally, we witnessed an increase of 19% and in certain regions, like Phoenix, we saw increases as much as 32%. Prices were driven by historically low interest rates and access to cheap money.
Housing prices were nothing compared to the rise of an emerging asset class: ecommerce brands. According to research by Moonshot Brands and Marketplace Pulse, the multiples paid for Amazon 3rd Party Seller accounts increased by over 300% from 2019-2021.
What Caused High Prices for Amazon Third Party Seller Accounts in 2021?
It's been well documented that the perceived success of Thras.io and others led to a rush (including by us at Moonshot Brands) to enter the market. We worked hard to develop a differentiated thesis as part of Y-Combinator and raised a combination of debt and equity capital. Marketplace Pulse reported over $12B was raised by new platforms.
It's important to note that the vast majority of this capital is debt. Similar to how buyers in the housing market might put down 20% of their own money and then borrow 80%, most aggregators use leverage to acquire third party sellers.
Covid Ecommerce Bump Drove Prices Even Higher!
As we noted in our last newsletter on the amazon aggregator market, inflated ecommerce sales in 2020 led to significant overpricing of assets in 2021. As we reviewed opportunities in the second half of 2021, we could not justify the double whammy of INFLATED MULTIPLES and COVID COMPS. Aside from acquiring a distressed portfolio, we sat on the sidelines waiting for multiples to normalize and for covid comps to work their way through the system.
What Does the Fed Rate Hike Mean for the Amazon 3rd Party Seller Market?
It's remarkable to watch market forces in action! Just like the housing market has slowed down as buyers realize they need to pay more in interest and therefore can afford to pay less for houses, Amazon Aggregators funded by debt have had to bring down their acquisition pricing. And just like the housing markets, where sellers don’t want to sell because they still have 2021 prices in mind, the pace of transactions has slowed to a crawl in the ecommerce market.
We believe that the ecommerce market for sellers will continue to lack liquidity and multiples will stay low for as long as there is risk of an economic recession. Multiples could drop even further in tandem with any future interest rate increases by the Fed. Buyers will have very limited appetite to buy businesses if they think that the acquired earnings could be insufficient to cover their own costs of debt capital (i.e. interest charges).
This lack of liquidity is now often combined with a surplus of available inventory in businesses that are for sale, pressuring multiples down further. At Moonshot, we have reviewed over $2.5B in deals in the last three months. But the process of price discovery is taking longer as sellers come to grips with the realities that are pushing down asset prices:
- There are fewer buyers in the market. Aggregators who overpaid and over-hired are pausing acquisitions, laying off workers, or in some cases shutting down completely.
- Sales and EBITDA are down in 2021. Across the industry, increased shipping costs, COGS, advertising costs, and Amazon fees are eating into 3rd party sellers’ trailing 12 months profits, the key input into how much buyers are willing to pay for assets.
- Rising interest rates make it more expensive to service debt, so aggregators can afford less. Just like home buyers have to take into account their monthly payments, aggregators will have to pay lower prices if they want to service their debt from the same earnings streams.
- As we enter into a recessionary environment, future cash flows from many product categories are increasingly uncertain, increasing acquisition risk.
We see the market returning to 1x - 1.5x SDE multiples for smaller assets and settling in between 2.5x - 3.5x TTM SDE for larger, well-established, high-margin businesses. For sellers, these can still be life-changing outcomes. We’ve also observed that many sellers are not as well equipped as larger platforms like Moonshot Brands to weather the coming uncertainty. Now is a good time for them to join up with the right platform.
At Moonshot Brands, we and our investors believe our thesis has only become stronger as we Scale Ecommerce Brands Globally by:
- Leveraging technology to drive unique insights and operate efficiently;
- Building omnichannel to diversify our revenue and upside opportunities, building long-term value; and
- By practicing disciplined investing through cycles
Through the second half of 2022, we anticipate closing more deals than we did in all of 2021. We can’t wait to continue on this journey, bringing together the best sellers and our team of operational experts at Moonshot Brands to grow remarkable businesses.
About Jesus Sotelo Ayuso, Chief Investment Officer
Jesus has 12+ years of experience in entrepreneurial finance and world-class centers of excellence (e.g., MIT and Bridgewater Associates). At Bridgewater, Jesus joined the Portfolio Management group, contributing to the investment and oversight of Bridgewater’s ~$150 billion USD AUM. As an executive and advisor, Jesus has led the creation of different investment vehicles: structured and managed portfolios in Mortgage Backed Securities (USD 4 bn), established operations of recently listed REIT in Energy (USD 1bn), amongst others. Jesus completed his MBA at MIT Sloan with a GPA of 4.9 / 5.0. While at MIT, Jesus developed a system to merge stock and debt fundamental analysis with quantitative finance techniques