Business Case for Amazon FBA Aggregators to Acquire Amazon Affiliate Sites – IRR over 50% Case Study Data
This article looks at the business case for Amazon FBA Brands or Aggregators to acquire Amazon Affiliate Sites in order to…
- Grow their brands sales velocity on Amazon
- Increase the moat around their brand(s)
- Deploy capital into the Amazon ecosystem at an attractive return
I have included both a Google Slide template you can modify and a Google Sheet financial model you can modify for your specific hurdle rates / cost of capital etc.
TLDR – For someone looking to review the viability of deploying capital to acquire an affiliate site to grow an FBA brand this post should help you present the business case and model the return. If an Amazon FBA brand deployed $1M in acquiring an affiliate site that drove 20% of its sales to the Brand it would result in a IRR of over 50%
- Google Slides – Presentation to modify to present this business case
- Google Sheets – Financial return model to modify
This graph shows the challenge FBA buyers are going to have where a ton of money has entered the space but the total value of FBA businesses sold in 2020 was a fraction of the funds that have been recently raised.
Where will the money need to go?
This post argues it will in part go into Amazon Affiliate sites…
My personal experience… This is a strategy I have personally executed converting an Amazon Affiliate site to launch and push an Amazon FBA brand which resulted in an incredible return. The results included…
Previous Case Study – Read Here
Some of the assumptions used in the analysis below are from the actual results of this case study.
In another case I used an Amazon Affiliate site and turned it into an ecommerce Brand resulting in a significant increase in the workload but also a huge increase in earnings.
Let’s take a deeper dive into the viability of buying affiliate sites to grow ecommerce businesses (specifically FBA businesses) at scale…
Business Case Definition:
We are looking at the business case for an Amazon FBA business to deploy capital and acquire Amazon affiliate sites in order to…
- Grow their brands sales velocity on Amazon
- Increase the moat around their brand(s)
- Deploy capital into the Amazon ecosystem at an attractive return
Strategic Benefits:
With almost $7B raised and 98% of it in the last 12 months for Amazon FBA aggregators to acquire Amazon FBA businesses and the estimated number of deals done in the previous year being a fraction of that $456 million (<7% of the funds raised!!) These aggregators are faced with several opportunities/challenges…
- With $7B raised in the space the competition to acquire good FBA businesses has gotten tight and expected to only get more competitive with multiples increasing.
- There is a need to find another location to deploy capital and help accelerate brands growth.
- There is a desire to differentiate from other brands/aggregators to demonstrate the ability to grow a brands/deploy capital at attractive returns in order to make the next round of fundraising easier.
- On Amazon the competition remains fierce and the ability to build a moat driving off amazon sales to Amazon to supplement other sales strategies is significant!
- Need to deploy the capital raised at attractive rates of return into the Amazon ecosystem
Financial Benefits:
To analyze the numbers I will walk through the analysis and then provide a link to a Google Sheet where the assumptions can be changed based on your unique situation.
Affiliate Site:
- Growth Rate = 5%
- For the actively managed site a low target growth rate of 5% per year is modelled.
- Acquisition Multiple = 3.5x
- Based on the current industry numbers an assumed 3.5x multiple to acquire Amazon Affiliate sites is assumed.
- Exit Multiple = 3.5x
- Assuming no change in the multiple while holding it.
- Affiliate Site Management Fee = 25% of earnings
- Whether you use a management service or build an in-house team there will be costs to manage the portfolio. This model assumes the costs will be 25% of the affiliate sites pre-acquisition revenue.
- Affiliate Commission on Amazon = 6%
- Amazon has a history of changing the affiliate commission and it depends on the site but using a 6% average commission should be accurate for the purposes of this model.
- Amazon has recently announced the Brand Referral Bonus program which might turn out to have significant savings when a Brand drives its own sales compared to a 3rd party affiliate on Amazon.
- % of Product Sales Driven to the target FBA Brands = 20%
- This is the key to this entire strategy. The 20% is taken from a couple of case studies I have done using this strategy.
FBA Business:
- Gross Margin = 25%
- The gross margin for each marginal unit sold for the target brand is assumed to be 25%. This will be very different for many brands and like all these assumptions can be easily adjusted.
- Sales Increase due to Velocity Increase = 10%
- For every additional unit sold through external traffic what will the increase in organic sales on Amazon be? In this model we assume for every 10 units driven by the affiliate site the increased sales velocity will drive 1 additional organic on Amazon sale.
Other Assumptions:
- Cost of Capital = 10%
- Each business will have their own cost of capital. Used a simple 10% for this model.
- Inflation Rate = 3%/year
- Definitely debatable if you have bought a used car or lumber in the last year but it is still the target and the simplest # to use for this model.
Example:
Now let’s work through an example given the assumptions above…
Lets say you are an Amazon FBA aggregator and you just bought an Amazon FBA brand selling a line of kids lunch containers (water bottles, lunch boxes, lunch bags etc) which have an average of a 25% gross profit margin.
You have found an Amazon affiliate site for sale ranking for many of your products making $285,714/year in earnings selling for 3.5x or $1,000,000. You agree to purchase and plan to close Dec 31, 2021.
Here is a simplified return profile given the assumptions above…
IRR = 52%
NPV = $1.65M
I am not an investment analyst so there could be some errors in my model. However, the assumptions put in here including closing on the last day of year 1 and picking assumptions that are below what the actual results were in case studies has me fairly confident these numbers should be able to hold.
Non Financial Benefits:
Although this strategy is primarily focused on the financial impact for deploying capital to acquire affiliate sites. For FBA brands there are additional benefits including…
Leverage for Future Product Launches or Brand Acquisitions
With an aggregator having a portfolio of affiliate sites it gives them the ability to create/update existing content to help push sales to either new products or a newly acquired brand.
In addition to having sales driven from the pages of the website the additional ability to build an email list and an audience to advertise to by using pixels to retarget on key pages becomes very interesting.
Differentiate vs other Aggregattors
Investors are looking to deploy capital into the aggregators that are able to multiply their dollars invested. Having another place to deploy capital to increase their FBA brand returns is an advantage when it comes to the competitive landscape of raising money.
Expand the Brands Moat
Finding a product with a defensible moat is a challenge on Amazon. Having the ability to drive sales velocity to your brands products and away from your competitors is one more tool in your toolkit.
Implementation Approach:
Option 1 – In House Team
For many FBA brand operators/aggregators it will make sense to build out an entire team to source, complete due diligence, close, onboard, maintain and grow affiliate sites.
Finding a successful affiliate site operator to lead the effort will always be a challenge but one many aggregators have had to overcome with their FBA brand management.
The most challenging portion of the process is likely the ability to acquire the right affiliate site, using advisors like FBACommerce.com can help with this step.
Option 2 – Outsource
Turnkey portfolio management solutions exist like BrandBuilders. With the amount of capital raised and how quickly it has been raised I am sure there are many of these aggregators looking to add a turnkey amazon affiliate portfolio to their operation. BrandBuilders has unique experience building thousands and managing hundreds of Amazon Affiliate sites.
If a partial outsourcing solution is required one of the most commonly outsourced tasks is content writing. One service specializing in Amazon Affiliate sites is ContentRefined.com which handles everything from strategy to publishing.
Service Providers:
Here is a partial list of some of the main service providers that could help an Amazon FBA Brand or Aggregator build up their affiliate site portfolio.
Brokers:
- EmpireFlippers.com
- Flippa.com – a challenge if not extremely experiences
- MotionInvest.com – Focuses exclusively on content sites and has the most Amazon Affiliate sites listed.
- List of website brokers here & here
Site Management:
- BrandBuilders.io – Complete Amazon Affiliate Site Management Solution
- Many other solutions if the purchase price of the site is $500k+
- Ross at FBACommerce.com for a complete solution including sourcing and diligence
- Guide to Website Operators
Content Creation:
Other Tools:
- SiteBuddy.io – Great for reviewing an Amazon Affiliate site to make sure all the links are working and identifying the lowest hanging fruit to improve a site
- Ahrefs – Needed for anything related to backlinks
- Change over Amazon Affiliate Links – Free Plugin
- Amazon Link Management – AAWP, AMALinksPro
Additional Reading:
- Amazon affiliate due diligence
- Website buying guide
- How to operate an amazon affiliate site (too detailed to mention here)
- NichePursuits.com
- Hekkup
- AuthorityHacker.com
- Many others
Summary:
The wave of funds being raised by Amazon FBA Aggregators compared to the amount of businesses available for sale (FBA deals that closed in 2020 equaled ~6% of the capital raised in the last 12 months) will force aggregators to find creative ways to…Deploy capital into the Amazon ecosystem at an attractive return.
The logical place for FBA aggregators to look is at acquiring Amazon Affiliate sites.
The financial results that a well executed Affiliate Site portfolio will generate for an FBA brand is extremely attractive.
Based on this financial model FBA brands that deploy capital acquiring an amazon affiliate site will achieve an IRR over 50%!
If you are an Amazon FBA Brand and are looking to learn more about executing this strategy contact…
- Ross at FBACommerce.com
- Kelley at MotionInvest.com
- Narcis at ContentRefined.com
- Amel at BrandBuilders.io
