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Acquirers are allergic to risk, which is why your dependency on a single supplier can drag down the value of your business.
A supplier could be a vendor who sells you raw materials, but it can also be a sales channel used to advertise and promote your wares. For example, if you get many of your sales from Google organic search, you likely live in fear that Google will change its search algorithm. If you pick up most of your sales from the Shopify App Store or iTunes Store, you likely worry about your platform risk.
And if you’re making most of your sales on Amazon, expect to take a haircut when you go to sell your business.
How Beast Gear Approached Its Dependency on Amazon
To see how sales channels like Amazon can be both a blessing and a curse, let’s look at the story of U.K.-based Beast Gear. The Beast Gear story started when Ben Leonard found himself in bed with a heart problem in his early 20’s (He’s fit and healthy now.) His doctors told him to rest. Sad to not be able to go to the gym, Leonard cleared out his bag and noticed some of the accessories he used had worn out prematurely.
The experience sparked an idea.
Leonard decided to launch a brand of fitness accessories made to last longer and cost less than the alternatives. He named his fledgling company Beast Gear. Leonard borrowed around 1,000 pounds from his father. He ordered 250 skipping ropes with the Beast Gear logo and began selling on Amazon.
Three years later, Beast Gear was turning over more than 4 million pounds — 95% of which were sales made through Amazon. Leonard knew he had become too dependent on Amazon, so he worked hard to build his brand “off Amazon.” He created a Beast Gear website and a YouTube channel where he featured his instructional videos. He built an Instagram following and interacted directly with his customers. Leonard created an innovative chatbot workflow that encouraged people who bought Beast Gear on Amazon to register an email address with Beast Gear. That way, Leonard was able to send new product announcements to his list, bypassing Amazon altogether.
Despite his efforts to build his “off Amazon” presence, Leonard still felt vulnerable: “We lived in fear Amazon would push the big red button and de-platform us for whatever reason.”
When Leonard went to sell Beast Gear, he was connected to Thrasio, a private equity group rolling up e-commerce brands. Thrasio’s co-founder loved “the moat” Leonard had built off Amazon, which made Beast Gear somewhat less exposed to the vagaries of Amazon’s search results. Still, Thrasio knew Beast Gear depended on Amazon, so they offered Leonard around three times EBITDA for Beast Gear. That’s less than Leonard would have received had he had a more diversified sales channel.
Leonard’s work to build an off-Amazon brand made his business sellable. However, his valuation was somewhat discounted because most of his sales were still coming in thanks to Jeff Bezos & Co.
The moral of the story? Work hard to reduce your reliance on a key supplier — including any sales channels you rely on. Not only will a diversified sales channel make your business sellable but it will also help you avoid the valuation discount associated with being too dependent on a single platform.