Last week Amazon.com received regulatory approval for its $500 million acquisition of Quidsi Inc.
Actually, Amazon also assumed $45 million in debt, so the total acquisition price was $545 million...
So who or what is Quidsi? To begin, it's not a fancy or proprietary technology created by some technical genius who graduated from MIT or Cal Tech.
Rather, Quidsi is simply an ecommerce company. It operates three e-commerce websites: Diapers.com (baby care), Soap.com (health, beauty and household essentials) and BeautyBar.com (luxury beauty products).
Nothing too special. Except that the company has done a great job growing its brand, getting LOTS of customers, and keeping them loyal.
And for Amazon, these three sites (and their vast inventories and product mixes) will allow it to better compete with brick-and-mortar chains like Target and Wal-Mart. And that's what we call a "strategic acquisition" which also implies that the acquirer pays a huge premium for the company it buys (which it did). Also note that Quidsi supposedly had another buyout offer from Wal-Mart. This is EXACTLY what you want; two large companies competing to buy you; which results in a huge purchase price.
So, let's do some quick math for Marc Lore and Vinit Bharara, Quidsi's founders. The company had raised several rounds of venture capital before selling to Amazon, so let's assume that the founders were diluted substantially and each only owned 10% of the company at the time of the sale. Let's also assume that if they continued to run a successful company that each would make $250,000 each per year.
So, let's do their taxes.
If they lived in the state of New York, on a $250,000 salary, they would pay $58,069.50 in state taxes or 23.2%. They would also pay $67,617 in Federal taxes or 27.05%.
In total, they would pay $125,687 in taxes and take home only $124,314.
But, they sold their business. And assuming they owned 10% of the company each, they each received checks for $50 million ($500 million times 10%). But then, they'll have to pay 15% capital gains on that $50 million, so they'll each only walk away with $42.5 million (hopefully they'll be OK :) ).
So, here's the math that I really wanted to calculate:
How many years would they have had to run their business to earn the same amount as if they sold there business?
Well, the math is simple -- the $42.5 million they received from selling the business divided by the $124,314 per year they received from running the business.
The answer: 341 years.
Yes, Marc Lore and Vinit Bharara would have had to have worked 341 YEARS at a $250,000/year salary in order to take home the same amount they did from selling their business.
The moral of the story should be clear: build your business so that you can sell it to a strategic acquirer for lots of money. Period.