Fulfillment by Amazon (FBA) has quickly become one of the largest and most exciting ways to make money online. Labeled by some as a new frontier in peer-to-peer E-commerce, FBA is enabling millions of merchants to leverage Amazon’s distribution network and customers for huge financial rewards.
A well-developed FBA business is an attractive online business to own and has become an appealing investment opportunity for business buyers. In this post we leverage our experience selling over 350 internet businesses and go in depth on how to value an FBA business, what makes it more valuable to a buyer, how to increase its value before a sale and how to sell an FBA business.
The Fulfillment by Amazon (FBA) Market
Amazon has remained secretive about the adoption of FBA thus far. In early 2015 they announced that the two million third party marketplace sellers they have accounted for over two billion units sold on Amazon.com in 2014. That is double the number for 2013 and nearly 40% of all the items sold across Amazon.
The marketplace is huge and growing, with FBA at its core. Amazon saw a 65% increase in the number of merchants migrating to FBA last year. Estimates in 2013 placed the value of annual FBA sales at $4bn, this is now likely closer to $10bn.
It’s no surprise then to hear stories of early movers in FBA making a lot of money in a short space of time. Tales of sellers going from 4 to 6 figures in monthly sales overnight are not uncommon and some well-known bloggers like Spencer Haws at Niche Pursuits and Chris Guthrie at UpFuel have been experimenting very profitably too.
With a lot of successful FBA businesses up and running, it’s only natural that business owners are starting to think about their options for potentially selling.
First question though, what’s it worth?
How to Value an Amazon FBA Business
FBA businesses are valued in the same way as most online businesses, using a multiple of seller discretionary earnings (“SDE” or sometimes also called “seller discretionary cash flow”).
SDE is the profit left to the business owner once all costs of goods sold and critical (i.e. non-discretionary) operating expenses have been deducted from gross income. Any owner salary can be added back to the profit number too.
More easily it is described as:
To value an FBA business you first calculate its SDE and then devise a multiple to apply to it.
The multiple is one of the most important pieces of the equation and is affected by dozens of factors related to the business. Those factors span wide variety of financial, traffic and operational aspects but ultimately boil down to the transferability, sustainability and scalability of the business. Any operational or market factor that directly or indirectly impacts these core drivers will influence the multiple.
At FE International, we take into account dozens of factors on our internal valuation scorecard to derive the value of an internet business. We’ve discussed this in depth in our post on how to value an online business. Here’s an example of the types of questions to consider:
Ok… But How Much Is My Amazon FBA Business Worth?
More than likely your FBA business is worth anywhere between 2.0x – 3.0x the annual profit (SDE) of the business.
The SDE could be the number over the last twelve months or it could be the annual run rate implied by the last 3 or 6 months of trading, depending on the financial profile of the business. An expert will help decide (more on that below).
So 2.0x – 3.0x is quite a big range. If your business is making $100K in profit per year that’s a valuation difference of $200K vs. $300K, which is no small sum of money. How do you know where your business is in that range?
Well *generally* speaking the multiplier is affected by the factors in the table above and in particular most sensitive to the following:
- Age of the business – an FBA business with a longer track record demonstrates to a buyer that it has proven sustainability and is also easier to predict in terms of future profit. Businesses that are 18 months old are the preferred entry point and at 24-30 months start to receive more of a multiple premium. Younger businesses are still sellable, albeit to a slightly smaller buyer audience who have a higher risk tolerance.
- Owner involvement – part of the appeal of running an internet business is the potentially passive nature of the income it brings. Businesses that require relatively little time (e.g. 5-10 hours per week) are comparably more attractive than those that require a lot of work. Outsourcing can help here (see more on that below).
- Trends – few people want to buy a business that is declining and correspondingly few want to sell one that is growing rapidly. The key is to sell a business that is trending consistently and ideally modestly upwards.
- Concentration – any kind of concentration in a business is a risk that a buyer must price in. If 90% of the revenue comes from one product or one supplier, the buyer will want to know the terms of that arrangement and whether it will sustain. A change could reap massive value loss otherwise.
The diagram below should give you a good feel of where your business could be:
Whilst the general valuation drivers are a key consideration, its important to note that every business is unique and the subtleties of the FBA business model mean that there are a number of FBA-specific factors that impact the multiple along that range.
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What Makes an Amazon FBA Business More Valuable?
Investors looking to buy an FBA business are looking for points of strength and differentiation. These are the most common areas of focus:
The supplier dynamics of an FBA business are critical. The three elements that buyers typically look at are lead times, trading terms and operational requirements.
Lead Times – You can’t make any money if don’t have items in stock. There have been a lot of stories of FBA sellers with successful operations running out of inventory and then having to wait 1-2 months to get stock back in.
A buyer will want to be sure there are strong controls in place on the production and shipping lead times to ensure they don’t run into similar inventory difficulties. This is very important to demonstrate.
Terms – Generally speaking on Amazon, price and differentiation of products are what maintains advantage over competitors. Many FBA businesses rely on having either the cheapest price or a truly differentiated offering to beat out the competition. If you have an exclusive wholesale rate or a unique product, buyers will look to ensure this is contractual and can transfer with the sale on the same terms and for a sustained period.
Operations – If you work with dozens of suppliers, you potentially have dozens of points of contact and product/shipping considerations. Buyers want simplicity and ease. Having an operational set up where a lot of this work is automated or reliably outsourced, will add significant value to the business at sale (more on that below).
2) Product Mix
The split of products you sell by sales and margin is an important consideration for buyers. If you sell ten products but one accounts for 90% of revenue and profit, then in reality you have a single product business. If that product can be sourced by anyone else at the same price, then you don’t have a defendable business model.
The two things buyers are looking for are low concentration (what percentage of total sales/profit does a product account for) and the consistency of margin. A margin of 30-50% is respectable, but items that fluctuate in profitability can concern buyers. Low product concentration (<20%) is desirable but not a major issue if the supplier side has been locked in (as above).
3) Best Sellers Rank
The Best Sellers Rank (BSR) of your key products is an important metric for your customers and sales and therefore an important metric for a potential business buyer.
Whilst no one knows definitively the calculation behind BSR, it is widely thought to be a function of most recent sales and a predictive algorithm based on historic sales.
The key to an attractive BSR from a buyer’s perspective is consistency and growth. Much like the way buyers look at keyword ranking positions and trends when reviewing the organic search traffic of a website, the way they look at BSR on FBA businesses is very similar.
If your products show a consistent BSR that has grown gradually over time that sends a strong signal to a buyer your products have good and sustained traction with customers. Whilst you would expect fluctuations in BSR for new products, large unexplained movements for established products suggests a seller dumping stock or running aggressive promotions, neither of which are sustainable business activities.
From an operational perspective too it makes sense to go slow and steady. As MakeUseOf says:
“When it comes to ranking highly on the Amazon Bestsellers lists, as the ranks are based hourly, then a quick spike in sales due to a successful marketing campaign, followed by a lull in sales a couple of days later will only serve to see the product’s rankings quickly plummet. It’s far better to space out a product launch over a period of week, so Amazon can collect consistent historical data to make predictions on future sales. This will thereby make it easier for you to break into higher spots on the ranking table in future.”
4) Brand Site
A dedicated brand site for your FBA business makes sense if you’re starting to build a brand presence on Amazon. From a customer perspective it means that direct searches for your brand arrive on a legitimate looking corporate website that reinforces the quality of your business and also drives traffic back to those products on Amazon. You can also add an email opt-in to create a list for additional marketing.
From a buyer’s perspective, a brand site is another asset of the business they get to acquire and another potential source of traffic, emails and customers. An active content strategy (e.g. blogging about the products) will drive more traffic to the site leading to greater awareness of the brand and likely more sales, all of which is attractive to a buyer.
5) Amazon Associates
Amazon has started allowing FBA market sellers to earn affiliate commission on the customers they refer to their own products. This means that if you have a flourishing brand site, you can earn 4-10% affiliate commission on sales coming through that site (and others you own) of your products. This commission is not added to Amazon fees or taken out of your revenue and therefore is another lucrative income stream for the buyer adding further revenue diversity.
Consistent advertising spend and profitable campaigns are a positive for business buyers. If you can credibly demonstrate that the paid campaigns you have created are consistently generating profit, this indicates that paid marketing works for your business, which is a second avenue of growth the buyer can explore.
The level of competition in the niche that the business operates in is of course of an important aspect of any business sale, not just FBA. To a certain extent this can be offset by proven competitive advantage in the business (differentiation and price), so sellers should focus more on improving those areas than worrying about the competition.
Ok so with a better sense on the FBA-specific valuation factors, its time to turn attention to what you can to increase the value of your business before a sale.
What Can You Do to Increase the Value of Your Amazon FBA Business Before a Sale?
An exit strategy for any business is crucial before a sale.
You can add hundreds of thousands of dollars of additional value to a business by taking the right steps before a sale.
Naturally not all the valuation factors are addressable (e.g. competition in the niche) but there are a number of strategic moves you can make to increase the value of your FBA business before a sale.
Below we discuss eight key topics to think about in the run up to the sale.
As discussed above, suppliers are an important component of the FBA business model. Aim to tie in suppliers and terms with contracts where possible. Have a clear operating procedure for working with each one that can easily be handed off to a buyer. Document and automate that process if possible (more on that below).
Favorable storage terms with suppliers can also be a positive if it is possible to negotiate this for bulk orders and still maintain a practical lead time for shipping the inventory to Amazon. This is to reduce the storage fees paid to Amazon and reduce the business’ overall exposure to increasing storage fees in the future.
2) Brand Site
Create a brand site if you don’t have one already and start actively driving traffic to it. Sign up to the Amazon Affiliate program and make sure you’re earning the affiliate commission for the customers you are bringing to your products.
Actively blogging about the products and niche you are in will add more credibility to the business and is another avenue of customer acquisition.
3) Brand Protection
It is worth making sure that all the products you sell have been registered through Amazon’s Brand Registry. This will preserve the integrity of your brand and stop other sellers trying to sell products on your listing. It also reduces matching errors in search.
Ultimately, it makes your business more defendable and thus more valuable to a buyer.
An interesting way to build differentiation around your business is to apply for Frustration Free Packaging. It requires some administration on the owner’s part to get into the program but once its up and running, your products rank higher for sellers that filter for this option.
With pressure on companies and customers to consume responsibly, FFP is likely going to become increasingly popular in the future.
5) Cash Flow / Credit Terms
One of the biggest issues for Amazon FBA sellers is cash flow and finding money to reinvest in greater supplies but lacking the reserves to do so. Advantageous credit terms with suppliers can help a lot with this, though may be the preserve of only very high volume businesses.
Simply put, well-reviewed products are well revered by customers and investors alike. Using a tool like SalesBacker can automate post-sale customer follow up and significantly increase the number of reviews on your products. This is likely to create a halo effect around your products for future sales and is a positive selling point to investors.
7) E-mail Capture
One of the main gripes with FBA is the loss of customer information to Amazon.
Driving email opt-ins on your brand website or including a business card with your product that provides an incentive for customers to put their email into a landing page, are both good ways to build a list.
Email lists are valuable for generating traffic to your products and creating interest in future product launches. They can be a sustainable traffic source and an awareness generator for your brand, both of which are valuable to a buyer.
8) Account Health / Restricted Categories
All FBA seller accounts have a health status and must meet certain criteria if you sell in a restricted category e.g. beauty, health and personal care etc.
Below are the requirements that must be maintained to sell in a restricted category:
- Order defect rate: < 1%
- Pre-fulfillment cancel rate: < 2.5%
- Late shipment rate: < 4%
Even if you aren’t selling in a restricted category you should still be around these levels so as to not fall foul should Amazon move the goal posts.
So the above are a handful of strategies but there are likely more depending on your specific situation. It’s worth speaking with a broker to formulate those before a sale.
With a better sense of the value levers, it’s now time to think about the salability of your FBA business.
Salability? What Do You Mean Salability?
Salability refers to the attractiveness of a business to own. A business can be valuable but also unattractive to operate. For example, it might have unrivalled prices and great sales, but require 80 hours per week in managing suppliers in China. Buyers are often not interested in acquiring a job.
Improving the salability of your business is all about making it look appealing to buyers from the outside and the inside. There are a few tips you can roll out quite quickly that will dramatically improve this.
Have detailed financials prepared for a sale of your business. If you’ve been using an accounting application like QuickBooks that will help but if not, make sure to bring your accounts up to date and keep them that way going into a sale process.
Serious buyers don’t want have to go through months and months of financial records and tax returns trying to piece together the financial picture. If you decide to work with a broker they will help with this (more on that below).
It’s also useful to have to hand any analytics you have for the business. This can be ad campaigns, email data (if captured) and traffic data for a brand site if you have one.
2) Operating Procedures
Taking over a business is essentially taking over a series of tasks and continuing responsibilities. Sellers that have documented their daily/weekly/monthly processes and procedures find handing over their business to a buyer is much easier. Transition time is reduced and there is generally less work in the first few weeks post sale.
Important still, buyers are willing to pay a premium for well-documented businesses, so it’s worth taking the time to put standard operating procedures in place and documenting these for handover.
As discussed in the general valuation factors, the time the owner spends in the business is a key driver of valuation. To the extent you can reliably outsource tasks to virtual assistants or contractors, you’ll benefit from the premium that is attached to businesses that are more passive in nature. We’ve written previously on the best ways to go about doing this.
Sellers should not underestimate the ‘power of passivity’; it is a potentially significant value driver for your overall business sale. Business owners that have reliably removed themselves from operations can expect to receive a substantive uplift in valuation multiple when it comes sell.
4) Powder in the Keg
Leaving some ‘powder in the keg’ for a new owner in the form of immediate future upside can be a deal sweetener that brings more buyers to the table.
For example, if you’ve just negotiated 2-3 new products and written the sales copy for the listing, consider holding off and gifting them to the buyer. Its likely that the value uplift you receive for the whole business will be more than the additional sales you might have got from releasing the products in the short term.
Similarly, if you’ve evaluated a new market (say Mexico where FBA has just opened up), found a new supplier and organized a marketing strategy, consider using this as an additional marketing tool in the sale of your business.
Ok, now you have a better sense of FBA valuation drivers and some ideas for an exit strategy, its time to consider the sale itself.
How to Sell an Amazon FBA Business
If you’re looking to sell your FBA business you have four main options available to you:
- Marketplace – list the business for sale on a classified business-for-sale network like BizBuySell or BizQuest.
- Auction – sell through an auction platform
- Broker – hire a professional broker to sell the business on your behalf
- Direct – cold approach potential buyers and sell the business yourself
There are advantages and disadvantages to each of these approaches, which we cover briefly below.
Selling your FBA business on a marketplace means preparing information on your business and posting a listing in order to generate interest from buyers that peruse the listings. A popular marketplace is BizBuySell.
- Low cost – a listing fee with added features is only a few hundred dollars
- Large distribution – if you list on a large, reputable business-for-sale network then its likely your ad has the potential to be seen by a lot of visitors.
- Low demand – marketplaces serve a high volume of listings daily and standing out from the crowd is often a problem. Most buyers perusing the listings look for listings with brokers (who use them as well) as they know the listings are likely pre-vetted. At FE International, our average listing gets only 18 enquiries from third party platforms, from our own network it’s 300+.
- Process – you personally have to take care of the process of vetting qualified buyers, sending out non-disclosure agreements, answering questions about the business, negotiating offers, running due diligence, preparing a contract for sale and facilitating the transfer of funds/assets. If you don’t have experience in a business sale process, you could come stuck in a number of places. It will also take your time and attention away from running your business.
A marketplace listing can work if you have a lot of experience selling businesses and you have the time to run a sale. Otherwise it can be a long, high effort way of finding a buyer. A marketplace sale on average takes about 6-9 months.
Selling your FBA business on an auction platform is similar to a marketplace listing in that you’ll prepare similar information and run the process yourself. The difference with an auction scenario is that there will be a fixed period for the business to sell, which creates more competitive tension amongst buyers.
For online businesses, Flippa is the most common auction platform. In general it is most suitable for businesses less than $5,000 in value and is most commonly used for domain sales.
- Large distribution – if you list on a large network then it’s likely your ad has the potential to be seen by thousands of visitors.
- Set timeframe – if you list for 7, 14 or 28 days, you have some certainty over the length of time to find a buyer, assuming a suitable one is found.
- Buyer qualification – many buyers on auction platforms are not seasoned business purchasers and a lot are looking for their first purchase. This means many are looking for smaller business sales (<$5,000) and are inexperienced in the sale process, which can cause difficulties during due diligence and closing.
- Value – most buyers on auction platforms are looking for cheap business sales and the typical multiple for sale is 0.5x – 1.5x. This is likely substantially lower than what you would want to get for your business.
- Process – as above you are responsible for running the process end-to-end. This is likely going to take up quite a lot of your time.
- Fees – auction platforms such as Flippa charge a fixed listing fee and a success fee of 10% upon closing, so they are substantially more expensive than a marketplace and similar to a broker, but relies on you to do everything.
An auction platform works well if you’re looking to sell a small business very quickly and for a cheap valuation.
Selling your FBA business with a broker is likely the best option to consider if you have a large business for sale ($20,000+), you don’t have a lot of experience selling a business and/or you want to maximize the sale value.
A broker will take care of the entire process end-to-end, from creating marketing materials to contacting buyers, negotiating offers, coordinating due diligence, drafting the contract for sale and facilitating the transfer of assets/funds through Escrow. They will also help advise on you valuation (more on that below) and the best deal terms for your legal protection and economic benefit.
- Large distribution – if you list with a well established, reputable broker you’ll gain access to their network of qualified and experienced business buyers so you’ll be in front of a large, highly targeted investor audience. Their buyers will be able to execute and close a deal in a timely manner.
- Full process – a good broker will take care of the process end-to-end, once you’ve provided enough information for the initial marketing materials. You won’t have to self-support negotiation, due diligence or contracts etc. This frees up time to continue running your business or doing your day-to-day tasks.
- Maximum value – an experienced broker will know how to value your business based off market insight and previous transactions. They will aim to court several offers and negotiate the highest one with the best overall terms.
- Upfront requirements – to work with a broker you’ll need to be organized and have information on your business ready. Their buyers are highly motivated, organized and willing to execute for the right business, but need the documentation ready to do so.
- Fees – a broker will charge typically up to 15% of the sale value of the business upon successful closing. That being said, if you hire the right broker in almost every case, the net proceeds to the seller (sale value minus broker fees) are higher than those from a marketplace, auction or direct sale. Here’s a good example of Tim Seidler who sold his business with FE International for $100K more than he thought his business was worth.
A broker is a good option if you don’t have a great deal of experience valuing or selling businesses, don’t have the time to spare and want maximum proceeds from the sale of your business. A brokered sale usually takes between 4-8 weeks depending on the size of the business (larger businesses can take longer). You can learn more about the process here.
The final option is to directly approach potential buyers (cold email or call) and persuade them to buy the business. The most efficient way to do this is target other business owners in the same or a complementary niche.
- No fees – if you find a buyer yourself and close successfully it’s going to cost you a lot less than the other options. It’s likely you’ll only incur fees for legal advice.
- Finding the buyer – you’ll be required to do the research and outreach work necessary to find a buyer and may end up divulging sensitive information to competitors. Typically cold outreach has a low success rate – most business brokers avoid this route when selling a business.
- Process– similar to marketplace and auction, you are responsible for running the process end-to-end.
Direct works if you’ve been approached yourself (though you should still consider a broker to run a competitive process for value maximization) or if you don’t mind trying with a low chance of success. A direct sale can take 3-24 months depending on whether you’ve had inbound interest or you’re starting from scratch.
Here’s a summary of the options:
How Do I Find out What My FBA Business Worth?
Now you know all about valuation, exit strategy and sale options for your FBA business, the best way to get a good sense on how much your business is worth is to speak a broker. They will be able to calculate your profit (SDE) accurately and advise on the multiple applicable based on their assessment of the business and previous transactions.
A good broker will give you the best advice on exit strategy and timing, irrespective of whether this is in their short-term interest. The best advice might not be to sell right now, instead to do three things to lift the valuation and come back in 3-6 months with a more valuable business for sale. That’s a win for everybody.
If you run an FBA business and you’re considering a sale at some point, get in touch with us to see how we can help maximize the value of your business and find you the right buyer.
Are you interested in selling your FBA business?
Fill out this short form and get a confidential valuation.
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