Amazon Aggregator Troubles Continue

John Di Giacomo:

Hey everyone, you are listening to the May It Please the internet podcast, which is a podcast brought to you by Revision Legal. And today, I’m joined, as always, by my business partner, Eric Misterovich. Hey, Eric.

Eric Misterovich:

Hey, John. How are you?

John Di Giacomo:

I’m good. It’s been a long time. I’m ready to get back into the swing of things. It’s been a short but fun summer. What about you?

Eric Misterovich:

Yeah, absolutely. School is starting back up and couldn’t be happier to have the kids back in school. So summer was fun. It’s over, and that’s a good thing, I think.

John Di Giacomo:

I don’t know. It sounds like you took on some new responsibilities. You’re coaching football now?

Eric Misterovich:

Coaching flag football. I’m very excited. I’ve been drawing up plays, getting the playbook together, but man, herding seven year old boys into running a play is a lot more difficult than I imagined.

John Di Giacomo:

So you’re not going to be running like a West Coast offense? You’re going to run the ball the full time?

Eric Misterovich:

No, it’s going to be a lot of running, and hopefully, we can get some misdirection and some reverses going.

John Di Giacomo:

Well, today, we’re going to talk about some plays that went bad. We’re going to talk about Amazon aggregators and the troubles that continue to plague them. And Eric, do you want to lay the background on this one and get us started?

Eric Misterovich:

Yeah, so we’ve been involved in helping people buy and sell online businesses for almost a decade now. And a few years ago, roughly 2020-ish, there was just an absolute boom of money that came into this space, really headlined by Thrasio, I think, who came in as the biggest aggregator and had this plan of buying a hundred Amazon businesses and rolling them up and hopefully, achieving some kind of economies of scale with operations. And that business model proved to be attractive to a lot of other people. And next thing you know, there’s 15, 20 of these companies that are playing with, frankly, other people’s money and going around scooping up all of these Amazon stores, paying pretty high multiples at that time. And it was a boom. We were as busy as could be.

Eric Misterovich:

I know there’s a New York Times article that came out around that time, explaining how they’re minting millionaires overnight and people are selling their Amazon businesses for astronomical amounts of money. I just remember a new deal would come in. I’d say, “Okay, what do you sell?” They’re like, “Glass jars.” It’s like, “Okay, what’s the purchase price?” “Four and a half million dollars.” It’s like, “Good for you. Let’s get this thing closed. That’s amazing.” So there was this boom in 2020, everyone’s buying Amazon businesses, and there’s free money out there for all these aggregators to play with. But John, of course, all good things come to an end.

John Di Giacomo:

They really do. And it’s quite unfortunate, because a lot of these companies really worked hard and did a lot of due diligence on some of the purchases that they made. However, the multiples were just crazy. Do you recall the highest multiple that you saw during this time period?

Eric Misterovich:

That’s a good question. It’s got to be, if we’re doing monthly multiples, I think it was getting above, man, maybe like 50 months times revenue, something like that. Something way too high.

John Di Giacomo:

Yeah, I remember seeing 12X EBITDA on some deals and just thinking to myself like, “That is crazy. I don’t know how you would ever pay that back.” But there was this big boom, partially due to COVID and other related things happening in the broader macro economy, that made e-commerce extremely lucrative for a period of two or three years. And I think everyone expected those things to continue. And of course, money started to dry up, because interest rates went up. And like you said, all things come to an end, but there’s these ongoing problems with these aggregators. And one of those problems arises out of the fact that they use deferred payment. Can you explain that structure, Eric?

Eric Misterovich:

Yeah. So every deal is different, but most deals involve some kind of upfront component for cash at closing and then, some kind of deferred payment. And that could come in the form of just a holdback amount, where there was no triggers to it, it was just maybe 10% of the purchase price would be paid a year after closing. That’s a pretty common term that protects the buyer. If there’s any indemnification issues, they have a little bit of money to play with. Some were performance-based, so there was earnout periods. Some of these had earnout periods that are lasting three, four, or five years down the road, where, if the business hit certain targets, they would receive a certain percentage of revenue above EBITDA or baseline EBITDA or things like that.

Eric Misterovich:

So sellers got into these positions where they’re owed quite a bit of money several years down the road, with, at the time, it looks like you’re selling to a very trusted company, someone who has a lot of money and backing, but that doesn’t necessarily mean they know what they’re doing. And that’s what came to be pretty clear. Once that first round of deferred payments hit, maybe 18 months after this boom period, we started hearing a lot of complaints.

John Di Giacomo:

And part of those complaints arise out of the fact that the deferred payments were often either

unsecured, meaning that there were no assets secured to protect against nonpayment, or they were secured by assets that were held by a special purpose vehicle, an SPV, that was a subsidiary of the parent company. So as the market collapsed and as the parent companies, the aggregators themselves, were unable to pay back the deferred payments, ultimately, there was no, or there appears to be, no recourse for some of the sellers for these deferred payments, because there’s nothing to take back. There’s only security at that SPV level. And so, about late 2022, maybe mid 2022, our phones started ringing. And a lot of these sellers, who we’ve represented a number of sellers and a number of aggregators, started to ask questions about “What do I do? I’m not getting paid.”

Eric Misterovich:

And it’s a real tough conversation when a seller comes to us and says, “I had this great business. This aggregator that I trusted took it over. They did a terrible job running it. However, we still hit our targets, but now, there’s no money. They’re saying there’s no money.” And then, we have to explain what their options are. And like you said, if they didn’t find some way to secure that earnout payment through the acquisition process, it’s too late now. And they’re in for a tough realization of, even though there’s a very clear breach by the buyer, the remedies that are available to the seller are extremely limited.

John Di Giacomo:

Yeah, we’ve had a number of tough conversations with sellers asking us, “What are the remedies?” And when you have security in an SPV, typically, that security is going to be second in time, meaning that there’s somebody who’s going to have priority over you. And that priority is typically given to the lender that provided the financing for the purchase of your business. So then, you’re left with some pretty tough choices. Do you file suit, which could be costly? Do you try to work out some kind of payment plan that extends the time to get paid? And a lot of our clients have started to opt for extended payment plans. And in having those conversations with the aggregators, the extended payment plans, we’ve pushed to get some additional form of security. We’ve asked for apparent security, we’ve asked for some other security that would provide some level of leverage for the seller. And in all those cases, the aggregators just say, no, they can’t do it, because they’re already overleveraged and their loans are being called in.

Eric Misterovich:

Yeah, that’s exactly right. What happens is, when everyone got that free money, it came with a lot of strings, and those strings are that those senior creditors have superior rights to all of the assets of the aggregator. And so, if you, as the seller, say, “Hey, I have a clear breach of contract, they didn’t pay me.” The answer is, you are completely right and you can sue them and you can get a judgment, but in order to collect on that judgment, you have to get around the senior creditor. And you’re probably not going to be able to do so. And so, you’re left in this situation of working something out. And the reality is that kind of has to be the solution, because even for the senior creditors, the contracts with the senior creditors have probably been breached as well.

Eric Misterovich:

They’re probably behind on payments owed to them as well. But the only way for that senior creditor to really get paid is for that business to succeed. And the business to succeed, it has to continue. It doesn’t really make sense for the senior creditor to sue these companies into non-existence, because they’re never going to get the money. So it ends up being the situation where everyone is mad. Everyone is kind of taking a hit on the original plan, but the best way to get money is for that business to continue. And that becomes a tough pill to swallow when you’re the seller.

John Di Giacomo:

Yeah, I completely agree. I want to pause here to make a mention of something, which is that, during this period of time, we had a number of sellers who would come to us and they would want really just partial work. They’d say something along the lines of, “I just want you to review this agreement and make edits to it. I’ll handle everything else.” And what we’re finding is that those sellers are in the worst position, because for example, two of the sellers who have approached us about not being paid by an aggregator failed to file financing statements. So if you don’t file a UCC financing statement immediately after getting security and assets and someone files before you, then you’re immediately second in time. So they had these opportunities to become first in time, but they failed to take them, because they were

DIYing the work, which is another reason why we always tell clients, “If you want to do this correctly, let us do it.”

John Di Giacomo:

And it just so happens that it didn’t work out in two cases that we’ve recently seen. In the cases where sellers have held back assets that could be grabbed, so physical assets, like domain names or trademarks or patents, in those cases, they’ve been in a better position to negotiate payment plans, where perhaps, someone in a worse position gets paid back over a five-year period, where those clients who have held back something, some physical asset or intellectual property, get paid back more quickly. So good news for them, bad news for people who didn’t do that. But let’s talk about the money. Where did the money come from for these aggregators? And why do you think it dried up?

Eric Misterovich:

Yeah, everyone’s got a boss, even these aggregators, and their bosses are private equity. And private equity injects this money, and they expect return. And like I said, they have the rights on all of those aggregator assets. So just to back up for a second, we’re talking about financing statements and all this stuff. It’s essentially like a mortgage on a property. You take a UCC financing statement, and you record it with the Secretary of State. That effectively puts a lien on all of the assets. And if the aggregator fails to pay back the private equity firms, then they can foreclose on those assets. So it’s very similar to a mortgage. And when we say the sellers are second in line, it means whatever rights you have to collect against the buyer, the aggregator, they’re always going to be subordinate to the senior creditor.

Eric Misterovich:

So that is where the kind of interplay comes in, where the technical aspects of what we’re talking about is you’re always second in line and you can’t seize assets. And a lot of times, you’re forced to sign express subordination agreements, which say you can’t even collect the money. It might put long limits on when you can file lawsuits or anything like this. So the aggregators are all funded by private equity, who are going to have extremely strong terms in their favor to get their money back. And once things started going wrong, it was really a compounding effect, where you remember the supply chain issues, nothing was showing up, inventory wasn’t there, they weren’t able to complete sales, the cost of shipment went sky high. So now, the margins that these companies were working on, they were out the window, because the cost of shipping went so high.

Eric Misterovich:

And we’ve had a lot of people in our circles look at this aggregator thing from day one and say, “This is not going to work. They’re hiring all these MIT and Ivy League grads to run Amazon businesses, that were operated by one person from their house and some virtual assistants, and now, they got all this overhead.” So it was just a confluence of problems that all kind of came at the same time with supply chain issues, rising shipping costs, overhead in the businesses, and not hitting their targets, which caused them to default or be on the verge of default with their lenders. And the lenders really putting the screws to them, in terms of not giving them more money to play with. And that’s where everything’s starting to tighten up.

John Di Giacomo:

And I think it’s important to talk about the really two types of financing that these aggregators received. One is private equity firms would provide credit facilities, and a credit facility is basically like a big line of credit. And credit facilities were provided with very little due diligence, and in large amounts, with no personal guarantees, because the market was so good, everybody’s making money. And in credit facilities, there typically will be an arrangement where there’s a period of just interest only payments. So a lot of these aggregators were taking advantage of the fact that they could buy a business now and pay interest only payments for a period of five years, for example, and take that five-year period, where there was no real movement on the actual underlying debt, to increase the value of the business, in the hopes that they would have enough funds to pay back the debt, when the interest only payments ended.

John Di Giacomo:

And unfortunately, that didn’t happen, because of all the things that you already mentioned, Eric. And then, in combination with that, interest rates went up. So historically, interest rates were lower. So people who were investing in private equity found that it was a good deal for them, so they wouldn’t put their money elsewhere in the market. But now, you can get a treasury bond or even a CD now and get a reasonable return, where historically, you weren’t able to do that. So that money has now dried up. So it’s created a perfect storm for the credit facility financing scenario.

John Di Giacomo:

And then, there was the other scenario, which was debt financing. So traditional venture capital, where a VC firm comes in and they provide cash in exchange for some level of… Excuse me, I said debt. I meant equity financing, where they provide some level of cash for equity, but no one wants to invest in exchange for equity in a business that is upside down. And so, you’ve seen leaks on Twitter, you probably saw this, Eric, of not just down rounds for these aggregators, where they’ve gone out and tried to raise again and there’s not enough money, but also almost complete evisceration of their private market share price.

Eric Misterovich:

Yeah, absolutely. We’ve seen those go around, and who knows what’s exactly true, but it makes sense. We have just seen these big aggregators, that were extremely active in buying, go down to almost nothing. And then, you hear all of the operational issues. The perfect storm really is the right way to think about this, because so many things went wrong. And they really all compounded, from operations to supply chain to interest rates. And it all kind of hit at the same time and has not put it at a complete standstill, but just such a dramatic change from the boom time in 2020.

John Di Giacomo:

Yeah, so now, we’re seeing a lot of restructuring. So many of the private equity firms, who invested in some of the large aggregators, invested in the other large aggregators. So there was a lot of playing within the same market, so that, now that there have been defaults, the shadowy figures behind the scenes are starting to consolidate the good assets and discard the bad assets. And decisions are being made about who gets paid back and who doesn’t get paid back. So we will see a lot more cutthroat activity in this market, I think, moving forward. But with all these bad things said, there are some aggregators still purchasing. There is still money being lent to aggregators. It’s just a different world. And before we jumped on here, Eric, you said that you know of at least one or two aggregators in the FBA space that are still working, right?

Eric Misterovich:

Some of them still exist and some are still buying. I think it’s a much more focused effort now. John, you had always questioned, “Well, what’s the point of buying an Amazon business that sells a knee brace and then, a coffee frother? How are those two things helping each other sell?” And I think, now, what you’re seeing is more focused aggregators on specific products, building out a real brand around them, rather than, I don’t know, drunkenly spending money on basically any business that’s turning a profit on Amazon. And so, aggregators still exist. You can certainly still sell your businesses. Multiples have come back down to reality, but it’s not completely over. It’s just this kind of boom time, where, as long as you were breathing, you were going to sell, that’s gone. And it’s probably a good thing, overall, for everyone to kind of get back to a baseline here of having a more structured plan, a more structured kind of space that you’re going to operate in.

Eric Misterovich:

Because I think the operations part of this, I’m guessing, turned out to be a lot more difficult to buyers than they originally imagined. When you have one seller and they’re completely in control of this business and you try to hand that off to a team of executives and a team of kind of underlings, things get lost and they don’t pay attention and the businesses don’t get the same amount of attention that one person poured their heart and soul into. So businesses are still selling. It’s not the same. Now, we’re starting to see aggregators selling themselves, when they get to a point of no return, which is an interesting twist on things.

John Di Giacomo:

Yeah, I think, in the SaaS space, definitely, there’s still a lot of activity. There’s a lot of activity in the Amazon, Walmart, Shopify adjacent services business. So we’re seeing a lot of M&A work there. And I think of the, let’s say, FBA or physical products aggregators, the ones that seemed to stay and are remaining are the ones that, like you said, had really competent operators and good teams, people who could really understand the businesses that they were acquiring, did good due diligence, didn’t buy from a lot of Chinese sellers. No, I’m not making a comment about Chinese sellers, but a lot of the problems that we saw with aggregators arose out of just jurisdictional issues, because somebody doesn’t disclose something. What’s your remedy? It’s nothing. It’s effectively… You can’t go over to People’s Republic of China and enforce a rep warrant and get any kind of reasonable result.

John Di Giacomo:

So that was a high risk choice, and it didn’t pay off in a lot of cases. But in the case of the underlying private equity firms, we’re definitely seeing tighter leverage ratios. So they want to see that the multiple is lower, that there’s sufficient cash on hand from the buying party, the aggregator, a lot more reporting requirements. So historically, aggregators didn’t report anything. They just wanted to know that you were still operating. And now, it’s monthly, quarterly deep dive reports, and in many cases, actual traditional audits, which is great, of finances. Whatever comes out of this, I think, will be a bit stronger, but it still remains to be seen what the future of these businesses are. And yes, I still think, if you’re going to do this, build a Sears. Don’t build five consonant Amazon brands. It’s just insane. Build a brand that matters. Build a Hexclad, build a Solo Stove. Don’t build random consonant laden Amazon brands.

Eric Misterovich:

Yeah, I agree. And if you’re a seller and you’re in this situation, where you have missed payments or missed payments that are on the horizon, yes, your options are limited, but that doesn’t mean rollover. You have the ability to really put some pressure on the buyer. You do have the opportunity to get some leverage, in terms of more communication, more reporting. There’s a chance they’re making mistakes, that maybe you can help them see. The point is don’t give up, and I would be a squeaky wheel the whole time. You maybe don’t decide to sue them right away, but don’t give up and really push them and make sure that you are being heard and you’re there and they understand it. It doesn’t mean you’re going to get a windfall, they’re just going to pay you. But there’s things that can be done. You’re probably going to have to look at some kind of restructuring. Not always, but maybe. And maybe that’s the best thing overall. But if you’re in that situation, certainly talk to an attorney, get your documents ready, and start that line of communication.

John Di Giacomo:

Yeah, I think that’s absolutely right. Well, do you have anything else to say, Eric?

Eric Misterovich:

No. Good luck to all the Amazon sellers out there. Stay on your buyers. Talk to an attorney before you sell. Understand what’s going on. Ask questions, because everything seems awesome when you’re going through the closing process. 18 months later, it’s a completely different story. Hire an attorney.

John Di Giacomo:

Yeah, hire an attorney, who will help you walk through this process. It’s something we do on a regular basis. Also, I just want to raise that somebody called me out on Twitter and said that Amazon aggregators were fine, nothing was wrong. Sup now, bro?

Eric Misterovich:

Twitter, it’s just a gold mine, isn’t it?

John Di Giacomo:

Everyone’s an expert. All right, well, thanks, Eric. I appreciate it. Again, this is may it please the internet. We’re glad to be back. Glad to be talking to you. We will see you next time.