How Do You Know How Much A Business Is Worth – Your FBA business? Most FBA owners have never considered selling their business—or even knew the option was on the table!
We wanted to share why selling your FBA business can help you build a better business and be the best thing for your entrepreneurial journey. Let’s examine the reasons for FBA owners to sell their business.
How Do You Know How Much A Business Is Worth
In terms of personal reasons, we’ve seen salespeople leave because of an event or goal that meant they didn’t have time to manage the business. Some of these reasons include a death in the family or wanting to spend more time with their children.
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Business-related reasons usually involve seeking capital for another project or losing motivation to stay in business.
Regardless of their reason for selling, some FBA sellers have received two to four years of net profit on a single payment. That is the biggest win most entrepreneurs have ever received at one time.
But don’t start counting your chickens before they hatch: first, let’s dive into understanding how FBA businesses are valued.
E-commerce brokers and individuals working in mergers and acquisitions (M&A) typically value businesses on a series of earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA represents the annual profit of a business, and is multiplied in the range of two and four times.
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There is no significant difference between the two formulas. We stick with average monthly net profit because it gives a more granular view of FBA business performance than an annual profit figure.
While the average monthly profit is easy to calculate, determining the quantity is more difficult as it takes into account the age of the business, traffic sources, brand, product line and price window.
An older, profitable brand tends to be valued more than a younger one because it has the potential to survive.
Market demands and unexpected changes put stress on FBA businesses, which can significantly affect cash flow and average order values.
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The ability of a business to develop and grow through these challenges shows buyers that it is resilient. While you can’t directly affect the age of your business, the takeaway here is that age does factor into the seller’s FBA business valuation, which is why a long-term Amazon selling strategy pays off more than a short-term plan.
One of the main benefits of selling on Amazon is being able to use their brand, which customers love and trust.
However, selling on a single market can reduce the volume of business because if that traffic source is shut down, there is a high risk that the business will be adversely affected.
Amazon is notorious for canceling products and closing stores for minor mistakes. While you can prepare to ensure you meet Amazon’s requirements, increasing the number of traffic sources through multi-channel marketing is a great way to reduce your business risk and increase multiples.
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Branding has less influence on quantity than the other factors listed here since it is difficult to determine how strong a brand is.
That said, the number of customer ratings and reviews, as well as how high the rating is, plays a role in determining the majority. If people mention an FBA brand on social media, the context is also taken into account. Do customers enjoy the store’s products and recommend them to their friends? Or are their experiences mixed, with different reactions to customer service or product performance?
A strong brand is an attractive asset to a buyer, but it weighs less than many other influencing factors.
There is no perfect number of products that will help you get the highest possible score. A couple of important things to consider are the amount of work required to manage your product range and the diversity of product revenue.
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Let’s compare two FBA businesses in the home niche, both selling kitchen products. Business A has only one product, while business B has 50, and both generate $100,000 in sales revenue each month.
A single product for Business A has the same risk as a single source of traffic: if the product is deleted, the cash flow of the business is completely cut off.
While it may seem like business B will not experience this issue, there are several issues with the product range. For example, if one product generates more than 50% of the business’s revenue, this is also a cause for concern from the revenue base for the product. Managing all those listings can also take up a lot of your productive hours, time that could be spent growing the business in other ways.
We’ve seen the best range of products to convert sales and manage without overdoing it is between three and eight products.
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Of course, there are exceptions to the rule. Some buyers with large capital reserves will not mind paying for a single-item FBA business because the potential ROI of a future turnaround may outweigh the risk. These types of buyers will probably make strategic acquisitions and have a team of improvement ninjas to increase the value of their property.
Buyers who can afford to buy only a few FBA businesses will be more wary of a business with a product range that is too large or too small. They are likely to be self-employed entrepreneurs managing their own operations, so the stakes would be higher if the business does not perform as expected.
12 months is the best standard because it provides a better view of business income and revenue and takes into account changes in buyer demand, i.e. seasonality.
If you started your FBA business less than 12 months ago, we recommend you wait before considering an offer. Although you can shorten the price window to three or six months to show profitability, buyers will look at the business as a whole and see that only a short window of data is available to help them decide to buy your business.
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Again, there are exceptions to this rule. Some buyers with more capital means or a higher risk tolerance may make offers on new FBA brands.
Short price windows reduce the pool of buyers, making it difficult to find the right buyer who will give you the right deal. You may only receive one offer and find yourself getting a lower offer than you wanted to make sure you close the deal.
Now that you have a basic understanding of what FBA businesses are worth, you may be wondering who would be interested in buying.
There are a variety of buyers with different levels of capital and time available, but all buyers recognize the power of selling on Amazon, and want a piece of the ecommerce pie.
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FBA businesses offer a lower barrier to entry for ecommerce entrepreneurship than a full e-commerce business, which requires owners to manage many different moving parts. Instead of building a business from scratch, a buyer can acquire an existing FBA brand that is generating steady profits.
To increase your chances of receiving a good offer and finding a successful deal, let’s discuss how to expand your pool of buyers.
Buyers are more likely to put down an offer after doing their due diligence if they think the deal is a deal they can’t pass up. So how can you make your business a property that buyers will compete for?
This doesn’t mean that a slightly optimized business will attract zero buyers, but an FBA business that requires little work from the owner to maintain will attract more.
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There are already some great tips for selling on Amazon, so we’re going to look at a few other ways you can improve your FBA business.
Many sellers ship their inventory directly to FBA fulfillment centers, so storage and fulfillment are managed in one place. While it may be easier to allow a manufacturer to ship their products to FBA warehouses, it may be more expensive than using a 3PL provider.
Another consideration is whether you should use a 3PL as an additional storage facility. If the stock is not sold within six months, Amazon will charge long-term storage fees.
Depending on the average sales time of your products, it may be better to hold stock in the warehouse and send a batch of inventory to FBA centers based on your inventory forecast.
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Although the additional costs seem like they should reduce the value of your business, removing essential services will add additional burden and responsibility to the owner to manage and make the business an unattractive option.
A common mistake we see FBA sellers make is to outsource their 3PL services, which lowers overall costs but adds 10-20 hours of work each week. The initial valuation price may increase but at the cost of making your business more efficient.
If you have exclusivity with your suppliers, ensuring that the agreement will be passed on to the next owner makes buying your FBA business a more attractive prospect.
Establishing strong relationships with suppliers saves the buyer the time and energy needed to find reliable manufacturers, and gives them one less thing to worry about, so they can focus on expanding the business in other ways.
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Changing the number of distributors a business owner can call also works to the seller’s advantage. Ability to
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