| Feb 28, 2022

6 Reasons Why Amazon Private-Label Deals FAIL

As an Amazon seller, you have the power to control the sale of your business. These are six important red flags to look out for when considering selling your platform.
By Yaz Malas |

<1 minutes

In 2020 alone, over 200 thousand new third-party (3P) sellers joined Amazon’s Marketplace. This boom brought a new market of buyers aggregating these 3P businesses — companies like mine that are able to scale top-selling brands and over $13 billion in investor capital to do it. Amazon sellers now stand to gain even more if aggregators want their brand, but navigating those transactions for the first time can be confusing, and many will crash and burn. To successfully exit your business, avoid these six common pitfalls that can kill an exit: 

1. Beware of Cash-Poor Buyers 

If an aggregator offers to buy a business before they have the money to finance that transaction, the deal could fail. It may sound obvious, but it happens more than you think. Some aggregators use Letters of Intent (LOIs) to get a better valuation on paper and raise money with their investors. They claim a bunch of businesses under LOI before they have the capital to pay for it, making promises to sellers they don’t even know if they can keep. These deals can fall through if the funding isn’t secured. 

Sellers should look for a proven track record of buying and scaling businesses to avoid wasting time and money on an aggregator’s failed promise. Make sure a buyer has strong sponsors with the money, people, and experience to support them. If you believe your business is already spoken for, you might turn away other potential buyers, so only depend on an aggregator if you know they can meet their obligations. 

2. Broken Promises From Fake Decision-Makers

When selling your private-label business, make sure you’re talking to a legitimate decision-maker. Real decision-makers are on the investment committee — anyone else is a fake whose promises can lead to a failed deal. These people might present an offer as though they were decision-makers but the final decision rests with their boss, who may ultimately say no when they see it. 

Fake decision-makers could be prospectors testing the waters on viable purchases. They may be compensated by how many LOIs they distribute, regardless of whether or not they close. Until you talk to someone who makes decisions about investments, you can’t depend on a fake decision-maker’s claim. Before you let the prospector sweet talk you, make sure you’ve spoken to a real decision-maker first.

3. Choking Down Too Much, Too Fast

Aggregating companies, or roll-ups, have been around for decades, and one of their most common mistakes is biting off more than they can chew before they’re ready to swallow.  When roll-ups attempt to grow faster than they can scale their teams and systems to accommodate, they can fail. They take on too much debt and pay more than they can afford — a recipe for disaster. Quickly, these companies start underperforming and can even go bankrupt. If an aggregator defaults on a deal before closing, it never closes. If they default after, ongoing obligations will likely go unpaid, and your brand will get no attention until they can liquidate or sell. If you’re lucky, the brand survives, but chances are slim.


4. Not Asking Enough Questions

A buyer should know enough about what they want in a brand to ask the right questions before getting into a deal. If they don’t, this puts more risk and responsibility onto the seller, already concerned with keeping the business in good shape to sell. Unless the buyer asks the right questions upfront, they might discover adverse material during due diligence that would turn them off from the sale.

The aggregator should be as much of a guide through the acquisition process as they are a potential partner, but unless they ask the right questions, first-time sellers might not know what information they’re missing. To find out where you might need to do some extra work as a seller, ask about their due diligence processes on your supply chain, growth history, and legal issues. This lets you present all the right information, ideally pre-LOI, to give aggregators a clear picture of all the key risks that come with your brand, even if they don’t know what questions to ask. By being proactive and asking questions yourself, you can give them sufficient answers to avoid unpleasant surprises.

5. Sellers Become Blinded by Selling

A deal’s not done until it’s done, and sellers need to keep their heads in their business until then. After receiving an offer, a seller’s focus can go from running their brand to selling it, and their business suffers. At first, little things begin to fall apart: deals are poorly optimized; shipments are late; communication is less effective. Eventually, when sellers lose commitment to their brand, performance falls off a cliff.

The aggregator who saw a business doing a million dollars in revenue watches those numbers decline as the seller loses focus in the time leading up to the close. They either end up back at the negotiating table, or both sides get frustrated and give up on the whole thing. Unless you continue to run your business until the transaction is closed, you risk losing the deal.

6. Time Kills All Deals

The more time passes, the more frustration can arise. Closing a sale generally lasts 30 to 45 days, but that can vary depending on the company. Our average is about 27, but some can take up to three months. An aggregator should tell you upfront how long you should expect the sale to close, but if they take longer, it can be a bad sign.

An aggregator who gives no expectations upfront is also less reliable, especially when they take longer than the industry standard. A lot of issues arise. Sellers get antsy waiting longer than expected. They get frustrated and lose faith. Vacation plans or investment opportunities are missed. Deals can easily fall through when emotions are so high.

As a seller of a private-label business on Amazon, you have the power and responsibility for that sale to be a success. Not all buyers are created equal, so do your homework and take a good look into their experience. For the best deal with the best value, it’s worth the effort to find the best aggregator for you.

Achieving the ultimate goal of selling your Amazon Marketplace business can seem daunting – but by looking out for and avoiding these common pitfalls you will be able to successfully exit your business!

Yaz Malas
Executive Author

Co-Founder and Co-CEO, D1 Brands

Yaz is the Co-Founder and Co-CEO of D1 Brands, a team of experienced Amazon third-party sellers. view profile


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