Introduction
In this insightful interview, Alex Michael shares his journey of acquiring Wallaroo, an Amazon FBA business generating $650,000 in annual revenue. Discover how he transitioned from a tech sales career to business ownership, navigated the competitive landscape of business acquisitions, and implemented strategies to grow the business by 40% within months of acquisition. This case study provides valuable insights for anyone looking to acquire an FBA business and scale it successfully.
Founder Success Story QnA
What were you doing before you decided to acquire a business?
I spent time in a few different industries before acquiring Wallaroo. I spent some time in oil and gas, did some investment analysis, spent a little bit of time in energy trading consulting, and then moved into the live event ticketing business for a while. From there, I moved into tech sales, which is where I was for the past four or five years before acquiring Wallaroo. All of that was probably spanning across an eight-year period or so.
How did you get the idea to buy a business instead of starting one?
Entrepreneurship for me was always sort of a foregone conclusion. I started a little company with some fraternity brothers in college, and it was sort of a matter of when not if for me. But it wasn’t quite clear how that was going to play out. I came across Walker Deibel’s book Buy Then Build, which I’m sure some of the folks listening have probably heard of. Anybody who’s read it knows it’s an awesome book, and that got me fired up about this whole world of acquisition entrepreneurship and this concept of de-risking by buying instead of building and how it’s a lot more accessible than one would ever think.
What was the timeline between reading the book and actually acquiring a business?
I read the book around mid-2020, and I didn’t put my first offer on a business until early to mid-2021. So there was definitely months in between. It was a long journey. First, it was just understanding the nature of the beast in terms of what all it would entail and whether this was a path I wanted to go down and how feasible it really was. You read something and it sounds neatly packaged and accessible, but the real world’s a little different. I let it marinate for a bit, then started diving more into understanding whether I wanted to go the physical business route versus e-commerce and Amazon. It was a lot of reading and letting things percolate. It definitely wasn’t a linear path.
How did you prepare financially to acquire a business?
When I started out, I probably had $20,000-40,000 of liquidity at most, which wasn’t enough. I was impatient at the beginning, so I got together with a friend who had access to more capital, and we explored getting an SBA loan together. We offered on a couple of businesses that didn’t work out. Over that time, I was continuing to work in my job and stack up more and more money. Eventually, I got to the point where I had enough liquidity to buy a business on my own. The down payment on my business was $70,000. In terms of having enough liquidity, the number was more like $100,000 to $120,000 because obviously, if you’re getting a loan, the business doesn’t want all your liquidity to just be thrown into a down payment, same thing as a house or anything else.
Why did you choose e-commerce over “sweaty and boring” businesses?
Sweaty and boring was appealing – the multiples on those businesses are a lot more attractive, and I certainly dug into that. But I’m 30, I’m single, and for me, it was like if I make this decision to anchor myself to a physical location, that’s for better or worse, you’re getting locked in. Whereas e-commerce not only provides more lifestyle flexibility, which is attractive to most people, but with the pandemic, online commerce isn’t going anywhere. If you find the right business, which I luckily did, there’s so much automation built into it and so much that you can leverage between software and supply chain. E-commerce just seemed really attractive. I had some very light e-commerce experience in the past, so I figured I could parlay that into “hey, I’ve done this before” sort of thing.
Where were you looking for businesses to acquire?
I identified the top three or four online business brokerages out there – the big names like Empire Flippers and FE International. But I really settled on Quiet Light as the one I wanted to work through. Once I stumbled upon Quiet Light, I knew I wanted to buy one of their businesses because they just do it right in my opinion. They vet their businesses very deeply and thoroughly, all the brokers there have done this before, you’ve got guys who’ve been on Shark Tank, you’ve got Walker who literally wrote the book on this. So that was both good and bad – good because I had a lot of trust in them, bad because there’s a whole bunch of competition and a much more limited supply of businesses because they’re very selective.
What was your experience with making offers before Wallaroo?
I put in offers on probably three or four businesses total. I tried to establish relationships with some brokers and say, “Hey, think of me when you have one of these deals, and here’s why I’d be a good buyer.” They appreciated that, but honestly, there’s so much demand that I don’t know that that really made much of a difference. I’d put an offer in on one of these deals, try to be as good of a buyer as possible – very communicative, straightforward, offer over asking price, put in an offer quickly. Inevitably, in the next week or so, the broker would come back and say, “Hey, they liked you, they thought it might be a good fit, but they just got a cash offer or more money or found somebody who’s a better fit.” That happened two or three times, at which point I was like, “All right, well, I don’t know if this is ever going to happen.”
How did you find and acquire Wallaroo?
I had kind of put this on the back burner for a while. I was looking into some different entrepreneurial ventures and was focused on my day job. I saw this listing pop up on my email from Quiet Light and thought, “Huh, that one looks interesting.” I had the first call with the sellers, and we just really hit it off. It was a couple of guys who had started the business in college, close to my age, really smart guys, super nice, super thoughtful, and we just clicked. I think that’s one of the big takeaways having gone through this process – that goes a long way, more so than when you’re buying a house or anything else because this is their baby, and they don’t want to just sell it and be done with it without having any sort of trust as to where the business is going. I put the offer in, figured I probably wouldn’t get it, but a couple weeks later I woke up to an email that said, “Congratulations, the business is yours.”
What is Wallaroo and what products do they sell?
The primary product is a leather phone wallet, a leather wallet that attaches to the back of your phone. For folks who are watching on video, it’s this little guy that you attach to the back of your phone, and it makes life a lot easier when you don’t have to carry a wallet or for women having to carry a purse. That’s the main product. There are a couple others – one has a ring on it, and there’s a standalone wallet as well. Those are the three products right now, but the leather phone wallet does 97% of the revenue.
Can you explain the SBA loan process you used?
I went through E-commerce Lending for the SBA loan process. It’s a pretty quick process. I basically said, “Here’s my updated personal financial statement,” and they said, “Okay, here’s about as much business as we think you can get.” Obviously, that’s not a commitment or anything, just an estimation. The business was listed at $630,000 or maybe $632,000, and I offered $675,000. E-commerce Lending had also pre-qualified the business and estimated 10% down, so my expectation was 10% down on the price of the business. The interest rate is about 6% (it floats with the prime rate), and it’s over ten years. SBA terms are incredible. There was no seller note on the business itself, but the inventory was actually structured as a seller note.
What was your due diligence process like?
I hired Centurica, who are the market leader when it comes to e-commerce due diligence. I knew this was a world that I didn’t know all that well, and this was another lesson – don’t skimp on things like lawyers, accountants, and due diligence. I hired them without giving it too much thought because they’ve been highly recommended, and they did an awesome job. Unsurprisingly, nothing turned up. They gave me a couple of things to look out for, but otherwise, everything was as advertised, and it was a clean bill of health.
What are the economics of the Wallaroo business?
The main product sells for $13.95. If I’m buying it from the supplier via ocean freight, it’s $1.71 landed cost, meaning production, shipping, duties, tariffs – everything to my doorstep. I learned that I can purchase via air freight for another 25 cents, which tightens up the supply chain tremendously. So $1.96 is the real landed cost for me at this point since I’ve shifted to air freight. Amazon takes about $5.13 per unit for fulfillment and fees, which has gone up a little recently. My net profit per unit is between 28% and 33%, which is about $4 per unit.
How did you handle supply chain challenges during the acquisition?
The supply chain challenges definitely made me nervous and gave me some pause. What assuaged my fears was that the sellers would send me the Wallaroo weekly update as we were going through due diligence. A lot of weeks, it would be about what’s up with the supply chain, problems they were facing, how it was affecting them, and what they were doing to address those problems. Not only did it help me understand what was going on, but it also exposed me to the fact that they were okay and could weather the storm. They were straightforward, forthcoming, and intelligent about how they dealt with all that. Every online seller experienced some challenges over that time, but it didn’t sink them.
Can you explain what an FBA business is for those unfamiliar?
FBA stands for Fulfillment by Amazon. All that means is that if somebody places an order for your product on Amazon, Amazon is handling the fulfillment and delivery of that item. Amazon has all these warehouses they’ve bought up across the world. You ship your inventory to them, they have various limits and regulations on what you can ship them, but they have some amount of your inventory. When an order is placed through their system, it’s fulfilled all through Amazon. You pay quite a bit to Amazon for that service, but the fact that they’re handling fulfillment and ensuring that those Prime orders are getting there on time is worth its weight in gold.
What is the Amazon flywheel effect and how does it work?
The flywheel effect on Amazon is basically a tax that you have to pay to Amazon via advertising in order to help your organic ranking. There are two ways your product shows up on Amazon: the paid side, which you’re paying for advertising (you see that little thing that says “sponsored” underneath it), and the organic ranking, which doesn’t say sponsored. Both of those things determine how much you’re spending on advertising and how well you rank organically, which determines the order in which people see your product when they search for a given search term. The concept of the flywheel effect is that there’s this virtuous cycle where the more you spend on ads, the more your organic rank increases (assuming you’re getting good reviews, delivering what you say, don’t have a high return rate, Amazon’s happy with you). The more you spend on ads, the more you get the organic side going, and then it just continues like that flywheel effect.
How much do you spend on Amazon advertising and what’s your return?
When I acquired the business, revenue was about $650,000 annually. I’m spending about $500 a day right now, so about $15,000 a month on Amazon ads. My target total advertising cost of sale (TACOS) is between 20% and 23%. TACOS is the dollars you’ve spent on ads divided by all your sales, which includes organic sales as well. So ideally, for every dollar I spend, I’m getting five back. There are two important metrics: ACOS (advertising cost of sale), which is the amount you spend on advertising divided by total attributed sales (sales happening directly as a function of ads), and TACOS, which takes into account the whole flywheel thing. TACOS is the actual functional metric because it tells you how much you’re spending on ads as a function of your total revenue.