Buy an Amazon FBA Business: 5 Expert Investor Tips

In recent years many e-commerce entrepreneurs have been leveraging Amazon’s customer base and fulfilment infrastructure by using their Fulfilment by Amazon (FBA) program, sometimes for huge financial returns.

Examples include Spencer Haws from Niche Pursuits who made nearly $40,000 within 30 days of recently starting his FBA business. Previously, Spencer had been involved in many other online business pursuits and was surprised by “how hands off the FBA business (model) is”. Similarly, Chris Guthrie from UpFuel made nearly $3,000 within 30 days by focusing on high quality materials, a solid product listing and through building up a number of product reviews on Amazon. He has seen ~$10,000 in monthly sales.

With these and other FBA businesses starting to mature, business buyers have been increasingly circling the space for potential investment opportunities.

In this post, we explore FBA businesses as a tenable and exciting investment opportunity for online investors. We explore the FBA model in detail, drilling down on some of the factors that investors should be aware of when looking to buy an Amazon FBA business.

What is FBA?.

FBA is a method of  selling physical products online using Amazon’s storage and fulfilment infrastructure. The approach has been around for nearly 16 years and Amazon has been accelerating the adoption of it in recent years by allowing marketplace sellers access to Amazon Prime as an incentive for using FBA.

Private labelling is the most popular use of FBA. The process of private labelling is as follows:

• Find a popular product category on Amazon
• Analyse the competition
• Identify a similar product (with additional features or a better price)
• Order inventory (1)
• Establish a unique brand (“label”) and apply it to the product
• Ship products to Amazon for warehousing (2)
• List the product on Amazon for sale (3)
• Amazon completes order fulfilment when a sale is made (4, 5)

The FBA method above is focused on creating a unique private label rather than reselling a commonly branded product (i.e. retail arbitrage). It is private labelling, rather than the latter that has attracted the most attention from online investors who have noticed significant growth in FBA businesses.

The Fulfilment by Amazon (FBA) Market

For online entrepreneurs, FBA presents a fantastic opportunity to leverage Amazon’s trusted brand and best in class fulfilment model to target the growing number of online consumers. Typically there are a number of moving parts when it comes to managing an e-commerce business. With FBA however, checkout, storage, fulfilment, shipping and customer support are outsourced, making the business much more passive in nature and thus more attractive for investment.

FBA ‘Right’ Opportunity For Me?

Naturally, the right business for a buyer depends on the person in question and their individual preferences. Different buyers have different skills, level of experience, risk appetites and time to commit to certain projects.

It’s important to approach FBA business search with an open and flexible mind. Those who like the idea of managing an e-commerce business but lack the necessary time required to operate fulfilment are likely to be a good fit for FBA. Below provides a summary of the considerations:

Specific Skills / Tasks:

• Writing/editorial – product and service pages need to be well-written and kept up to date
• Inventory management requirement – business owners should be numerate and savvy when it comes to negotiating commercial terms and supplier agreements to limit reliance on revolving credit facilities
• The ability to deal with suppliers effectively is absolutely key

Looking at the list of cons above, a lot of entrepreneurs will relate to starting an FBA business from scratch. Once the FBA business is established and has built momentum, it will run without too much overhead. As such, FBA businesses present great opportunities for investors.

Buying an Amazon FBA Business: 5 Essential Tips

Over and above the usual investment criteria, buyers should focus on the following items when evaluating an FBA business for sale:

1. Favorable Supplier Dynamics

The supplier dynamics of an FBA business are critical. The three elements that buyers should look at are lead times, trading terms and the operational setup.
Lead Times – an FBA business cannot make money if Amazon has no items in stock to sell, it is important therefore to find out from the seller as much as possible about their supplier’s product lead times. The shorter the lead times, the better.

1. What is the average lead time for each product in the product mix?
2. How often have product shipments been late in the past?
3. History of slow down times e.g. holidays?
4. What contingencies have been agreed with the supplier in the case of late shipments?
5. How does customer demand for each product fluctuate across the year?

Supplier Terms – product price and differentiation are extremely important when looking to acquire an FBA business. Both are crucial for maintaining competitive advantage and sales. It is important therefore that pricing agreements, exclusive arrangements and product trademarks pass with ownership.

1. What pricing agreements/discounted rate cards are in place today?
2. What credit terms have been agreed between the seller and the supplier(s)?
3. Who owns the trademark for the product(s)?
4. Who insures the safe delivery of the items?
5. Has the potential sale of the FBA business been discussed with the supplier?

Operational Setup – as discussed above, supplier management is one of the most important skills required when looking to takeover an FBA business. As a buyer, it is important to ensure that supplier(s) are well setup and that the seller has honed supplier management processes in place.

1. How many supplier(s) are there in total?
2. Where are the supplier(s) based?
3. Is there a single point of contact for each supplier?
4. What language does the main point of contact speak?
5. Does the seller have well-documented processes written up ready for handover?

 2. Carefully Selected Product Mix

Examining the product(s) that the FBA business sells is critical when evaluating an acquisition target. Conducting a deep-dive into the type/mix of product(s) is recommended. Focus should also be placed on the product roadmap, concentration and margin.

Product Roadmap – as an investor, it is important to be recognize potential growth opportunities for the FBA business. A big opportunity for most FBA businesses is to add an additional SKUs. Checking related products is a good way of gauging whether there is room to expand into related product categories, over time.

1. What products does the seller recommend adding to the portfolio?
2. Would the current supplier(s) be able to manufacture these product(s)?

Product Concentration – if the business has ten products but one product accounts for 90% of revenue and profit (high product concentration), then the business is effectively a single product business. A single product FBA business poses a higher risk and will have a lower valuation.

1. How many products does the FBA business have?
2. What percentage of total sales/profit does the most popular product account for?
3. How do the sales trends for each product look?

Product Margin – the target profit margin for an FBA business should be around 30-50% of gross sales. With Amazon fees, commission, shipping costs (to Amazon), refunds and chargebacks to factor in, it is important that there is some margin buffer. Sales price, SKU cost, shipping costs, warehousing etc. all need to be understood in detail, therefore.

1. How has the product(s) sales price fluctuated over time?
2. What is the unit cost of each SKU at different order volumes?
3. What are the product dimensions and associated shipping/warehousing costs?

 3. Healthy Amazon Profile/Trends

As an FBA business is partly reliant on the Amazon, seller profile, it is important that buyers spend some time evaluating the current owner, their Amazon profile as well as customer feedback that is tied to the product(s).

Seller Account – all FBA seller accounts have a health status and must meet certain criteria if selling in a ‘restricted category’, e.g. beauty, health and personal care. Buyers should ensure that the seller’s account is in good health, even if the business does not operate in a restricted category. It is important that the seller has not fallen foul of Amazon’s standards and that negative seller feedback/customer service queries are consistently responded to and resolved with Amazon.

1. What is the ‘order defect rate’ percentage for product(s)?
   • <1% is considered good
2. What is the pre-fulfilment cancel rate for product(s)?
   • <2.5% is considered good
3. What is the late shipment rate for product(s)?
   • <4% is considered good

Product Reviews – as reviews are closely correlated with sales and conversions, buyers should analyze product reviews, checking that positive sentiment has been growing rather than falling, over time. Customer feedback is important; investors are likely to notice any underlying risk by paying close attention to what customers are saying about the product(s).

1. How many reviews are there for each product?
2. What proportion of reviews are organic vs. tied to promotional activity?
3. What are the common themes/issues raised in customer reviews?

Best Seller Rank (BSR) – Amazon’s Best Seller Rank is an indicator that looks at recent and historical sales of products sold on Amazon. Like keyword rankings in organic search, buyers should look for consistency and improvement in the BSR. Consistent, steady improvement shows that the business has grown organically and is less reliant on aggressive marketing campaigns. Like all business investment opportunities, it is good if there is some room for improvement here / untapped upside.

1. What is the average BSR across all products (lower the better)?
2. How has BSR trended over the past year? If it fluctuates, why?
3. How could BSR be improved over the next 3-6 months?

 4. Trends in Product Niche

When evaluating an FBA business, buyers should look at trends in the niche in general. Tracking product search trends and being on top of niche competitiveness will be important when establishing whether or not to move forward on a potential acquisition.
Sustainability – generally speaking, FBA businesses that sit in evergreen niches are likely to be less risky than those that are based on short-term product demand curves (i.e. fads). It is important that buyers establish whether or not demand for the products on offer will stay strong/grow over the short to medium-term.

1. Is the mix of products likely to be popular in 5 years’ time?
2. Under what circumstances would the products become obsolete?
3. Where is niche in its lifecycle (i.e. startup, growing, mature, declining)

Market Size – closely linked to the above, the size and growth of the market will play a role in determining the potential upside for an FBA business. Popular products are great, but if it is only popular with 100 people, there may be a problem.

1. Are there less or more people searching for products related queries than this time last year?
2. Are the products likely to be popular in emerging markets?

Competition – investing in an FBA business that sits in an evergreen, growing niche may seem like a great idea on the surface, but if the niche is completely saturated, it may prove difficult to grow from what it is today. Evaluating the number of products, average BSR (and number of reviews) in a specific category will give a good indication as to how competitive the FBA business is within the space.

1. How many sellers are there on Amazon with a similar BSR to the target FBA business?
2. Are other products very similar in terms of feature set/functionality?
3. Are there barriers to entry or is the product easily replicable?

 5. Other Assets Available

Buying an FBA business is different from other business models in the sense that there is likely to be less in the way of assets to take over. That is not to say that FBA businesses are completely standalone. Buyers should look for FBA investments that come with other assets that may help with customer acquisition down the line and reduce the traffic reliance on Amazon and their T&Cs.
Branded Authority Site – if an FBA business has a corresponding blog or accompanying content based website, referral traffic can be sent to the FBA product on Amazon. This is even more lucrative if the seller has an Amazon Associates Account that earns a commission on each product purchase.

1. How much traffic does the website get?
2. What are the traffic sources?
3. What are the conversion rates?
4. What kind of content requirements does the site have?

We have previously discussed at length what to look for when evaluating a website.

Historic Campaign and Conversion Data – when looking to buy an FBA business, investors should look to understand the type of marketing activity that has taken place in the past as well as campaign performance. As a new owner, having this data will help to drive promotions/marketing campaigns post-sale which is likely to be an important part of the business.

1. What promotional campaigns have been carried out?
2. What were the results?
3. What was the cost and ROI?
4. How well did it convert? How does this relate to industry benchmarks?
5. How regularly should they be carried out and at when in the year?

Mailing List – as most online entrepreneurs advocate, it is important to build a subscriber list as early as possible in the online business lifecycle. That said, it is a little trickier with an FBA business as visitors land on Amazon and are likely to be one-time product viewers. However, the seller may have built up a mailing list using other methods, which could be valuable for on-going marketing / new product launches. This is often present when there is a branded authority site.

1. Is there a mailing list of any kind?
2. Is the list purged and is there an active auto-sequence?
3. What is the open rate and click-through-rate?
4. What is the average revenue per click?
5. What cost/time would it take to build a similarly sized mailing list?

It is important that buyers take the time to familiarize themselves with some of the metrics that make FBA businesses tick. As with all business models, there are nuances that need to be understood when evaluating investment opportunities. The criteria above is not exhaustive but should provide enough detail so that buyers feel comfortable vetting FBA opportunities that come their way.

Should I buy an FBA Business? 

Buying an established FBA business can be an excellent path into e-commerce without the headache of managing fulfilment, storage and customer service.  Investors who move early are likely to see a fast ROI. As always, buyers should tread cautiously. It is important to ensure that FBA is a good fit and that the acquisition target meets some or most of the criteria outlined above.