This article is part of our Internet Business Due Diligence series, in which we provide you with information on what makes a particular business model unique when it comes to due diligence. For more in-depth reading on due diligence, see our posts on Due Diligence of an Internet Business and Advanced Due Diligence.
If you’re considering making an offer on a Fulfillment by Amazon business, there’s a lot to consider before drafting your letter of intent. While FBAs are designed to make operations easy on a business owner, there are still a number of behind-the-scenes factors to examine.
FBA lets you streamline orders, fulfillment, inventory and payments, but you’ll still need to keep track of your supplier agreements, ranking factors and your competitive edge if you’re to maintain or grow a successful business.
Here’s what you need to know about due diligence on an FBA business.
It’s crucial to understand supplier agreements, as the supplier dynamics of an FBA business is key to its sustained success. You must be able to keep products in stock to make money, and good lead times are what make this possible.
There are essentially three elements that you need to look at:
- Lead times. Short lead times are ideal, especially for products that sell quickly. You can’t make money on inventory you don’t have, so a business must be able to keep stock moving.
- Terms. If an FBA has an exclusive wholesale rate or a unique product, buyers should look to ensure that the arrangement is contractual and can transfer with the sale on the sale terms for a sustained period.
- Operations. You likely want simplicity and ease of operations. If an owner is able to automate the work, or outsource it in a reliable way, this will add significant value to the business at sale. The less time-intensive, the better.
FBA Performance Metrics
The Best Seller Rank (or BSR) of key products is a very important metric for your customers and sales on Amazon. You can check this simply by searching on Amazon, but you should also obtain FBA Business Analytics access to see full sales reports, as well as stats on inventory, payments, customer concessions and removals:
You should be looking for consistency and growth when it comes to sales and BSR, and if a product’s BSR is growing gradually over time, that’s a strong signal that the products have a good and sustained traction with the customers.
Additionally, you should know if a seller has a negative history with its customers, as this not only hurts the brand, but Amazon has been known to place strict penalties on sellers with even a moderate amount of negative feedback or refunds. Amazon tends to be more lenient with its FBA sellers compared to third-party merchants, but you should still look into Amazon Return Dissatisfaction Rates, refund rates and other seller performance metrics.
Competition in the Niche
In evaluating an FBA business, it is necessary to research the competition to determine where the product stands in relation to its niche on Amazon. BSR and product reviews are used to make a realistic assessment of how products are performing.
It is very important that a seller’s products stand out enough on Amazon to rank. If the competition is selling a higher quality product at a lower price point than you can afford, the product is unlikely to sell as well as your competitor’s. As result, it will also have a lower BSR.
If the product niche is saturated, the business may not be set up to grow. Buyers should be looking to make sure that there is some competition (otherwise it means there’s not much of a market for your niche), but not so much that there isn’t any room for growth.
When researching a niche business, do a search on Amazon and take a close look at the top results. Generally, the more reviews a product has, the harder it will be to out-rank. If a product in the top five has fewer than 100 reviews, you’ve got a good chance of topping that. Conversely, a product with thousands of reviews will be difficult to beat.
For more general insight into search trends, there’s always trusty Google Trends, though it won’t specifically tell you how a term is doing on Amazon:
What Due Diligence Factors Do Not Apply to FBA?
Traffic verification is usually unnecessary for an FBA business, though if it has a dedicated brand site, this process is still relevant. Amazon is the owner of all customer and email data from FBA sales, because the sales are completed through the Amazon ecosystem and traffic verification is not tracked for individual FBA businesses.
If the FBA business has a dedicated brand site, however, the web traffic can be verified, but only for this specific portion of the business. The Amazon side of traffic will always remain a mystery.
As you can see, the success of an FBA business is very reliant on supplier relationships, as well as the product niche. Make sure to carefully evaluate opportunities for growth, as scaling may prove difficult in certain situations.
We’ve put together an Amazon FBA due diligence checklist for your reference: