🧦 DG Hill Deal
Acquiring a Semi-Distressed Amazon FBA Clothing Business
If I have learned something about business, it is that you never say no even if you do not want to do a deal initially. You offer what you believe will be very profitable for you.
In this week’s edition, I’m sharing the story of our acquisition of DG Hill. It’s a fashion brand that offers a range of apparel, such as winter socks and pajamas.
Their initial offer was $2,000,000. We offered $500,000, and they accepted.
Let’s get into it.
Chancing Upon the Deal
A broker contacted us in February 2023 about a semi-distressed deal. The owner had sold another brand a few months before, and his operational team had left.
The business hadn’t ordered its best sellers, and it would run out of stock for the three months left in the winter season.
Performing Due Diligence
We had to perform due diligence quickly and discover why the business became distressed.
DG Hill was launched in 2017. In the past five years, it posted these figures:
- 2018: $4.5MM and $1.0MM SDE
- 2019: $6.1MM and $1.0MM SDE
- 2020: $5.7MM and $1.3MM SDE
- 2021: $8.2MM and $1.8MM SDE
- 2022: $7.1MM and $900,000 SDE
In this environment after the COVID bump, the trailing years of income have to be discounted.
Aside from historical financials, we also had to consider the competitive landscape. This is a high volume, low margin brand in clothing, with competitors such as Amazon Basics, Hanes, and Fruit of the Loom. We will require lots of capital to scale, and debt is not cheap anymore.
Considering the fierce competition from established brands, it was a deal that we were very cautious about. But if the deal is good enough and we can make our money back in 1 year or less, we will do it.
We managed two possible scenarios for the 2023-2024 season, which runs from April to March, with a low season of 6 months from Q2 to Q3 and a high season in Q4 and Q1.
- We lose half the revenue and SDE, which leaves us at around $400,000 SDE after acquisition expenses.
- We maintain the revenue and SDE, and end up around $750,000 SDE. This would be a great outcome as we make our money back and more in the 1st year.
Closing the Deal
We closed the deal for a $100,000 down payment and assignment of the $400,000 Amazon loan. This was later paid down in Q3. We acquired $1.5MM worth of inventory from the previous owner on consignment to be paid in 1 year as we sold it.
We sent Jacob, our CMO, to Chicago to check the inventory and the warehouse. We had to send 13 trucks immediately to Minnesota, which was a challenge, but our warehouse managed to onboard everything in just a month.
In the six months following the acquisition, we found new suppliers with a 30% lower cost of goods, raised $500,000 from friends and family to reorder the best sellers, and revamped and reranked the listings in preparation for Q4.
Cheers to our team for the hard work put into this turnaround and to an exciting and profitable Q4 and Q1!
Some points I want to highlight:
- We could do this deal only because we own a warehouse in Minnesota.
- We have a team in China who can source products more cheaply and fly to the factories on short notice.
- We have established systems and an operational team (with over six years of experience managing e-commerce businesses) trained to move into a new project within 24 hours.
These key factors helped us be in a very good position moving forward.
With a few more aggregators going bankrupt in Q1 2024, I am seriously considering an amalgamation of all our businesses into one company, raising a $5MM seed round, with us contributing $3MM worth of assets at 2.5x SDE and raising $1.5MM in cash for inventory, and then raising a $10MM Series A to acquire most of the bankrupt brands at 1x SDE or less.
We would be profitable on Day 1 with a massive upside.
Until next time!
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Founder & CEO of Inversal