Fulfillment by Amazon (FBA) has 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 enables millions of merchants to leverage Amazon’s distribution network and customers for substantial financial rewards.
A well-developed FBA business is an attractive online business to own and has become an attractive investment opportunity for business buyers. In this post, we leverage our experience selling over 1,000 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 Amazon FBA business.
The Fulfillment by Amazon (FBA) Market and Current Trends
The e-commerce market is booming, with global sales expected to increase nearly 14% in 2021. Q1 2021 saw +39% YoY growth, and sales are projected to reach $4.2 trillion by the end of the year, according to the Adobe Digital Economy Index. This increase is partly due to the pandemic shifting consumers’ behavior— with most people spending an extra hour online per day in 2020, a trend that is holding fast.
Amazon is a significant leader in the e-commerce market, with more than 300 million active customers in more than 180 countries and 150+ million Prime members worldwide.
A considerable portion of Amazon’s business comes from third-party sellers. In fact, Amazon’s third-party e-commerce sellers sell more products on Amazon via its Marketplace platform than Amazon sells itself. Third-party marketplace sellers first joined Amazon in 1999 and now account for more than half (58%) of Amazon’s business, while in 2013, they accounted for 40% of Amazon’s business. Third-party sales have been growing and continue to do so. Currently, third-party sales are growing at 52% a year, while first-party sales by Amazon are only growing by 25%.
The marketplace is vast and growing, with Fulfillment by Amazon (FBA) at its core. FBA provides its partners with tremendous opportunities. Products fulfilled by Amazon are housed at Amazon fulfillment centers. There are over 175 centers worldwide, and sellers benefit from Amazon’s customer service and unbeatable shipping policies, including Prime and Free Super Saver Shipping.
It’s no surprise to hear stories of how early movers in FBA made a lot of money in a short period of time. Tales of sellers going from 4 to 6 figures in monthly sales overnight are not uncommon. Some well-known bloggers like Spencer Haws at Niche Pursuits and Chris Guthrie at UpFuel have been experimenting very profitably.
With many successful FBA businesses up and running, it’s only natural that business owners are starting to think about their options for a potential sale.
FE International and Amazon FBA
For over a decade, the FE International team has advised on the valuation and sale of hundreds of profitable e-commerce stores, including Amazon FBA businesses. FBA businesses we’ve recently sold include a business in the beauty and skincare niche with 100% positive seller feedback and a c.21% re-order rate. Another one is a business in the hair care and beauty niche focused on providing premium organic hair and beard care products and supplements with 99% positive seller feedback rating and c.18,000 5-star reviews. We’ve also sold a business in the kitchenware and fitness products niche with a 99% 5-star positive feedback rating across over 6.1K reviews and a business in the air filtration niche with a 99% positive seller feedback rating and a 17% re-order rate.
As evidenced by the quantity of Amazon FBA businesses we are selling, it’s clear that these businesses perform strongly and are in high demand.
How to Value an Amazon FBA Business
To arrive at an accurate valuation of an Amazon FBA business, you need to look at its financial picture, consider other attributes that contribute to its valuation and then determine the appropriate multiple. For most Amazon FBA businesses, the Seller’s Discretionary Earnings (SDE) method is used almost exclusively to determine earnings or “net income.” However, for businesses in the $50 million range or more, the Earnings Before Interest, Taxation, Depreciation and Amortization (EBITDA) formula is almost always used.
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 revenue. Any owner compensation can also be added back to the profit number since this is a discretionary expense that a new owner could elect to reduce or eliminate. Adding owner compensation back into revenue helps uncover the true earnings power of the business.
More easily, seller discretionary earnings are 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 essential pieces of the equation and is affected by dozens of factors related to the business. Those factors span a wide variety of financial and operational attributes but ultimately boil down to the business’s transferability, sustainability and scalability. Any operational or market factor that directly or indirectly impacts these core drivers will influence the multiple.
At FE International, we consider dozens of factors on our internal valuation model to derive the value of an internet business. We’ve discussed this in-depth in our post on how to value an online business. Below are examples of questions to consider:
- How old is the financial history of the business?
- How has the gross and net income been trending for the last 1 to 3 years?
- Can a new owner replicate the cost structure? Can they realize any savings?
- Are there any anomalies in the financial history of the business?
- Is the market demand evergreen?
- Can all the revenue streams be transferred to a new owner?
- How influential is the owner to the earnings power of the business?
- How stable are earnings?
- How complex is the cost structure?
- How much of the owner’s time is required to run the business?
- What are the owner’s responsibilities? Are there high technical requirements?
- Are there employees or contractors in the business? How are they managed?
- To what extent is there a key-person risk within the business?
- What is the customer acquisition cost?
- What percentage of sales are from repeat customers?
- How do the business’s products rank in Amazon?
- How are the product reviews?
- How competitive is the niche?
- What are the barriers to entry?
- Is the niche growing?
- What are the recent trends and developments in the niche?
- What expansion options are available?
- How well-funded are competitors?
- Are there physical assets or specific regional responsibilities with the business?
- Are there any licensing requirements to run the business?
- Does it infringe on any trademarks?
- Does the business offer any unique advantages?
- Is the intellectual property protected?
- Are products sold under the business’s brand, or does the business sell already branded products?
While the general valuation drivers are a vital consideration, it’s important to note that every business is unique. The subtleties of the FBA business model mean that several FBA-specific factors impact the multiple within that range.
Finding the Earnings Multiple
More than likely, your FBA business is worth anywhere between 3.5x – 6.0x the business’s annual profit (SDE).
The SDE of Amazon FBA businesses is typically determined by looking at the last twelve months.
3.5x – 6.0x is quite an extensive range. If your business makes $100K in profit per year, that’s a potential valuation range of $350K – $600K, which is no small sum of money. How do you know where your business is in that range?
Generally speaking, the multiplier is affected by the factors listed above and, in particular, most sensitive to the following:
Age of the Business
An FBA business with a long track record demonstrates to a buyer that it has proven sustainability, and it is also easier to predict future profits. Businesses that are 18 months old are the preferred entry point, and at 24-30 months, they start to receive more of a multiple premium. Younger businesses are still sellable, albeit to a slightly smaller buyer audience who have higher risk tolerance.
Most purchasers of Amazon FBA businesses are not seeking a full-time job. 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 need a lot of work.
Many Amazon FBA business owners, especially those newer to the business, are used to wearing many hats and working long hours. While this is understandable and even admirable, in the early stages of building the business, a high level of owner involvement can negatively impact the business’s value. Hiring a team that would transition with the business once it is sold can help increase the attractiveness of the business. Sellers are looking for a professional organization with staff in place to keep things running.
Additionally, some processes can be automated or outsourced. Automating and outsourcing business processes wherever possible will increase the value of an Amazon FBA business and dramatically improve the owner’s work/life balance. It also makes the company easier to scale—after all, there’s only so much even the most driven entrepreneur can accomplish on their own.
Few people want to buy a declining business, and correspondingly few wish to sell one that is growing rapidly. The key is to sell a business that is trending consistently upwards.
Any kind of concentration in a business is a risk that a buyer must price in. If 90% of revenue comes from one product or one supplier, the buyer will want to know the terms of that arrangement and whether it is sustainable. A change could reap massive value loss otherwise.
As much as possible, relationships with key suppliers should be formalized and easily transferable to a new owner. Steps should be taken to ensure price certainty wherever possible. Too often, supplier relationships consist of little more than goodwill and a handshake.
For Amazon FBA merchants dependent on unique or branded products that cannot easily be replaced in the market, the loss of a key supplier can be devastating. As discussed above, for merchants with a high degree of supplier concentration, it is even more vital that there be a supplier contract in place.
Control of Product
Another factor contributing to the multiple is whether the Amazon FBA business owns the brand it is selling or has exclusivity to sell the brand through Amazon. When the Amazon FBA business owns the brand, they can set the price, which can increase the value of the business.
More than most other online business models, Amazon FBA businesses may find themselves highly prone to seasonality. Depending on the niche and the type of products the Amazon store sells—for example, a gardening store that does most of its business in the summer months—sales may fluctuate significantly based on the season. The longer the company has been in business, the easier it is to spot trends in seasonality and plan for them.
It can be advisable for Amazon FBA merchants to consider adding less seasonal merchandise to smooth out the peaks and valleys associated with a highly seasonal product.
Legal and Escrow for Amazon FBA Businesses
Amazon FBA business owners who are considering selling their business must retain legal counsel early in the process. If a reputable M&A advisor is being used to advise on the sale, they will advise on any legal steps that need to be taken. Certainly, non-disclosure agreements will need to be put in place before any proprietary information is divulged. And if a sale of the business is agreed upon, an attorney will help finalize the terms and the deal.
In these matters, it is wise to use an attorney with extensive experience in dealing with the unique intricacies of online businesses. A seasoned M&A advisor will be able to facilitate this.
Read about additional legal steps that sellers should take well before a sale in the article How to Value and Sell an E-Commerce Business.
What makes an Amazon FBA business more valuable?
Investors who want to buy an FBA business are looking for points of strength and differentiation. These are the most common areas of focus:
Best Seller Rank
Your key products Best Sellers Rank (BSR) is essential for your customers and sales and, therefore, an important metric for a potential business buyer.
While no one knows the calculation definitively 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, 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 excellent and sustained traction with customers. While you would expect fluctuations in BSR for new products, large unexplained movements for established products suggest a seller dumping stock or running aggressive promotions, neither of which are sustainable business activities.
From an operational perspective, 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 a 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 the future.”
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 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, which is attractive to a buyer.
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.
You can’t make any money if you don’t have items in stock. There have been many 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.
On Amazon, price and differentiation of products are what maintains an advantage over competitors. Many FBA businesses rely on having the lowest price or a truly differentiated offering to beat the competition. If you have an exclusive wholesale rate or a unique product, buyers will ensure this is contractual and can transfer with the sale on the same terms and for a sustained period.
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 setup where a lot of this work is automated or reliably outsourced will add significant value to the business at the sale (more on that below).
The split of products you sell by sales and margin is vital for buyers. If you sell ten products, but one accounts for 90% of revenue and profit, you have a single product business. If that product can be sourced by anyone else at the same price, 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 margin consistency. 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 significant issue if the supplier side has been locked in (as above).
Amazon has started allowing FBA market sellers to earn affiliate commissions on the customers they refer to their 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 favorable for business buyers. Suppose you can credibly demonstrate that the paid campaigns you have created are consistently generating profit. In that case, 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 an essential 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.
With a better sense of the FBA-specific valuation factors, it’s time to turn attention to what you can do to increase the value of your business before a sale.
Exit Planning for Your Amazon FBA Business
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 proper steps before a sale.
Naturally, not all of the valuation factors are addressable (e.g., competition in the niche), but there are several 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 essential component of the FBA business model. Aim to tie in suppliers and terms with contracts where possible. Have a straightforward operating procedure for working with each 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 maintain a reasonable 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.
- 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 will add more credibility to the business and is another avenue of customer acquisition.
- Brand Protection
It is worth ensuring 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 from 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 it’s 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 to become increasingly popular in the future.
- Cash Flow/Credit Terms
One of the most significant 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 it may preserve 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.
- Email 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 incentivizes customers to put their email into a landing page are both excellent 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.
- Account Health/Restricted Categories
All FBA seller accounts have a health status and must meet specific 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 to not fall foul should Amazon move the goalposts.
The above is a collection of strategies, but there are likely more depending on your specific situation. It’s worth speaking with an M&A advisor 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.
How to Make Your Business More Attractive to Potential Buyers
There are steps you can take to make your business more salable. A business can be valuable but also unattractive to operate. For example, a business might have unrivaled prices and great sales, but requires 80 hours per week to manage suppliers in China. Buyers are often not interested in acquiring a job.
Improving the attractiveness of your business is 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.
It will help if you have detailed financials prepared for the sale of your business. If you’ve been using an accounting application like QuickBooks, this 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 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 an M&A advisor, they will help with this.
It’s also helpful to have any analytics you have for the business at hand. This can be ad campaigns, email data (if captured) and traffic data for a brand site if you have one.
- Operation 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.
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 crucial driver of valuation. To the extent you can reliably outsource tasks to virtual assistants or contractors, you’ll benefit from the premium attached to more passive businesses. 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 to selling.
- 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. The value uplift you receive for the whole business will likely 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, found a new supplier and organized a marketing strategy, consider using this as an additional marketing tool to sell your business.
When you have a better sense of FBA valuation drivers and some ideas for an exit strategy, it’s time to consider the sale itself.
Who Usually Buys Amazon FBA Businesses?
The answer to this question depends on the size of the Amazon FBA business. For businesses valued under $1 million, the buyers are often individual operators looking to enter the space or people with e-commerce businesses looking to expand their reach regarding the number of products or type of products sold. Many larger FBA businesses are sold to aggregators, which are consumer good companies that only acquire existing Amazon FBA businesses. These investors buy up Amazon FBA businesses and capitalize on (generally) low-selling multiples. They are looking for third-party businesses to acquire in order to build a portfolio of businesses and grow them exponentially. Like any buyer in the e-commerce space, they are looking for businesses operating with steady growth for a few years, solid and verifiable financials, and seasonality—having a product that outlasts high and low peaks in the business.
The following aggregators have raised substantial capital from investors, and we plan on seeing more aggregators enter the FBA space as e-commerce continues to dominate the retail market in 2021:
How to Sell an Amazon FBA Business
If you’re looking to sell your Amazon 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
- M&A advisor – 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 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 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.
- Process – you must 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 several 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 like 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, creating more competitive tension amongst buyers. It is most suitable for businesses less than $5,000 in value and is used mainly 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 many are searching 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 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 an M&A advisor but rely 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.
M&A Advisory Firm
Selling your FBA business with an M&A advisor is likely the best option to consider. If you have a large business for sale in the $1-100M valuation range, you don’t have a lot of experience selling a business and/or you want to maximize the sale value.
An M&A advisor 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 your valuation and the best deal terms for your legal protection and economic benefit.
- Large distribution – if you list with a well-established, reputable M&A advisor, you’ll gain access to their network of qualified and experienced business buyers. This means your business will be in front of a large, highly targeted investor audience that will be able to execute and close a deal in a timely manner.
- Full process – a good M&A advisor 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 M&A advisor will know how to value your business based on 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 an M&A advisor, 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 prepared to do so.
- Fees – an M&A advisor will typically charge up to 15% of the sale value of the business upon successful closing. If you hire the right advisor, 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 an excellent example from Tim Seidler, who sold his business with FE International for $100K more than he thought his business was worth.
An M&A advisor 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 is to target other business owners in the same or a complementary niche.
- No fees – if you find a buyer yourself and close successfully, it will cost you a lot less than the other options. 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 an M&A advisor 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 an inbound interest or you’re starting from scratch.
Understanding Financing Options
For most sellers of an Amazon FBA business, the desirable outcome of an exit would be a one-time all-cash payment. For many buyers, this is not an option they are willing or able to consider. Buyers typically seek to secure the best possible deal according to their available funds and risk profile. Often, to align the expectations of the buyer and seller, creative financing methods are employed. Here are the four most common financing methods used in the acquisition of an e-commerce business.
Cash typically forms the most substantial portion of the total consideration in acquisitions of e-commerce businesses. Buyers may limit their search to online businesses they can purchase with liquid assets, such as the money in their bank accounts. This can lead to buyers limiting their ability to make an offer on an otherwise desirable business. In this instance, many buyers turn to more creative and sometimes unconventional methods of raising cash. Some of these methods include:
- Cashing out retirement funds
- Borrowing against a 401k account or taking regular IRA payouts
- Revoking a Roth Contribution
- Small Business Administration (SBA) Loans
- Asset or collateral-based lending
- Bringing aboard a partner with cash and/or experience
- Peer-to-peer lending platforms like Prosper and Lending Tree
- Amazon FBA Aggregator
- Seller Financing
One of the most deployed methods of financing in online business acquisitions is seller financing. Seller financing allows the buyer to bridge the gap between their available cash and the purchase price of the business by using the cash flow of the business to pay the outstanding balance over a fixed period post-closing. A seller’s willingness to agree to this type of financing has the additional benefit of showing the buyer that the seller has confidence that the business will not decline going forward. Seller financing is popular in online business acquisitions because it eliminates the red tape of the buyer borrowing from a bank or other lender. However, it is critical to keep in mind that seller financing bears risks for both parties. Buyers must be realistic about future cash flow. A missed payment may prove costly and, depending on the agreement, can even result in the seller repossessing the business without paying back any cash consideration thus far received. Sellers should retain some collateral in the business until the buyer pays off the financing in full.
In an earn-out agreement, the buyer agrees to pay the seller a percentage of either profit or revenue over a fixed amount of time. Earn-out agreements are typically seen in acquisitions involving younger businesses, sites with inconsistent cash flows, or companies facing an uncertain future. With an earn-out, the buyer attempts to leverage the seller’s knowledge and resources to grow the business immediately after the sale is complete. To structure an earn-out, the buyer will need to forecast future cash flows based on historical data and micro and macro industry trends. For an earn-out arrangement to work for both parties, the buyer and seller must agree on what the site is expected to earn over the agreement term.
Given that earn-out agreements are based solely on projected revenue or profits, they carry a high degree of risk, particularly for the seller. The seller must be confident that the buyer can operate the business successfully and that they will not default on payments. Due to the additional risk, it is not uncommon for the seller to demand an extended earn-out period beyond the standard 12 months.
Because earn-outs carry a high degree of risk, sellers are advised only to consider such an agreement when the buyer has a track record of growing and operating businesses successfully. With inexperienced buyers, the risk that the business will not perform as the forecast is likely too great to make an earn-out satisfactory to the seller.
In a holdback agreement, the buyer retains a portion of the total consideration payable under the APA until certain mutually agreed milestones or obligations are met. Examples of such milestones include:
- The seller meeting mutually agreed upon commitments subsequent to the sale
- Employees continuing to work for the firm for an agreed period of time
- Long-term service agreements being honored and fulfilled
- Agreed upon targets being met, for example, maintaining monthly gross revenue averages
- Verification of agreed-upon revenues and costs that are difficult to evaluate thoroughly before the sale. Examples of this could include refund rates and chargebacks
Holdbacks carry a risk for both the buyer and seller as either party may under or overestimate the value of post-sale obligations.
Determining When to Sell Your Amazon FBA Business
If you are looking to shift your focus to a new venture, are interested in a lump sum payment, or want to free up your time, divesting might be the right choice for you and your business. Timing is critical when it comes to resulting in the most optimal outcome for you and your business. You should plan to sell your business when it is most attractive to potential buyers. If your Amazon FBA business has a high season, as many do, you should look to sell during or right after this period. For example, if your Amazon FBA business sells holiday lights, selling in January likely will make sense since sales and margins will be highest at that time of year, and your business will look most attractive to prospective investors.
Find Out What Your Amazon FBA Business is Worth
The best way to get a good sense of how much your business is worth is to speak to an M&A advisor. They will calculate your profit (SDE) accurately and advise on the multiple applicable based on their assessment of the business and previous transactions.
You can get in touch with FE International to receive a free valuation.
A good M&A advisor 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, but 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 Amazon 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.
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How Does the Exit Process Work at FE International?
FE International will walk you through the exit process from start to finish. It does not matter if you have never divested of a business before or are a seasoned pro; we are here to help. Our process is built with one thing in mind: minimizing your time commitment while maximizing the final sales price of your business.
Assessment and Valuation
We have discussed valuations at length earlier in this article. This stage is crucial since we get to know more about you, your business and your goals for a sale. We will ask questions about your business to determine an accurate valuation and the best time to sell. Valuation is complex and not as simple as “annual profit x 3”. Our valuations are not based on theory; they are based on data from actual sales we have completed over the past decade. We will let you know what your business is worth and how long we expect it will take to sell.
If you decide to work with us, we get a Representation Agreement signed which outlines our role, fee and exclusivity period. In most cases, we do not charge any upfront listing fees and only get paid when the deal is completed. Our fee covers:
- Valuation and pre-listing due diligence managed through a secure and audit-ready deal room
- Preparing sales materials
- A dedicated M&A advisor to communicate with and a whole M&A deal team dedicated to your sale
- All advertising costs related to the sale/finding buyers
- All negotiations directly with the buyer(s) and their representatives
- In-house legal, including drafting the Letter of Intent (the formal offer from a vetted buyer), purchase agreements and other documents required to complete an acquisition
- Escrow (Escrow.com or attorney escrow) facilitation
- Handover documentation formation
- Management of post-sale contractual obligations
Our sales materials are the very best in the industry. We prepare a detailed Prospectus for buyers that covers everything they need to know to make an informed offer on your business. This is usually 25-35 pages depending on the size and complexity of the business.
When preparing for the sale, we may ask for the following to be uploaded into the deal room:
- A detailed monthly profit and loss/income statement for at least the last 12 months
- Detailed answers to a custom questionnaire about your business
- Google Analytics access
- Access to any third-party metrics platforms you may use
- Supporting documentation for business and financial claims
Our upfront preparation is incredibly detailed and ensures your business is best positioned for a successful sale.
Marketing Your Business for Sale
At this stage, our Onboarding and M&A teams work together to identify and speak to suitable buyers for your Amazon FBA business. We have tens of thousands of vetted buyers looking for businesses to buy every day. On top of the buyers already in our database, we invest heavily into marketing your business (while retaining privacy) elsewhere.
Our advisors will deal directly with buyers on your behalf, answering questions, making calls, and negotiating offers. At this stage, there may also be more questions for you to answer facilitated by our M&A advisors to make the process as hands-off for you as possible.
Once we have discussed the business with all potential buyers, we will begin to narrow down to the most serious prospects and get offers from multiple parties. At this stage, you may be required to join conference calls with the buyer and your FE International lead advisor to discuss the sale.
We do all negotiations on your behalf and advise on appropriate offer structures, but buyers often like to speak to the business owners directly to feel comfortable with the acquisition. Again, this is hosted through your dedicated advisor.
Once an offer (or multiple offers) is negotiated and the best buyer(s) selected, a formal Letter of Intent (LOI) will be prepared by our in-house legal team. This outlines the terms of the offer and sets the timeline for due diligence and closing.
Due diligence is an essential part of every business sale and ensures the buyer is comfortable with the business and claims made during the marketing and negotiations. It can sound like an arduous process, but its purpose is straightforward, especially with an experienced M&A advisor on your side.
This process will vary depending on the buyer’s requirements (outlined in the LOI) and the complexity of the business but usually covers these six areas:
FE International will oversee the due diligence process through our secure deal room – we are always on hand to advise what is reasonable to expect in the process. Having verified much of the due diligence items ahead of listing, we have a 94.1% sale success rate.
Simultaneously, we will also start drafting the Asset Purchase Agreement (APA). To learn more about what buyers may look for, check out our article on advanced due diligence.
At this stage in the process, the buyer has been identified, the offer structure has been agreed upon, and due diligence has been completed. In most cases, FE International’s in-house legal team will draft the APA on your behalf, which forms the deal’s legal basis, but we also advise having your own attorney/lawyer review the agreement.
Once the contract and terms are agreed with the buyer and seller and the contract is signed by both parties (facilitated by FE International), the deal moves into Escrow ahead of the transfer. We use either Escrow.com (more about their process here) or attorney escrow, depending on the size of the acquisition. Both options keep all parties safe and secure.
Throughout the transfer process, we will manage the process to ensure a seamless handover of assets. Once everything has been transferred (per the APA), funds will be released to you (this is when we get paid), and the acquisition is complete.
Transferring Amazon Seller Accounts or Listings
FE International has extensive experience advising Amazon FBA business owners on valuations and throughout the exit process. A key component of divesting of an Amazon FBA business is transferring the products to the new owner. There are two ways to transfer information from one Amazon seller account to another— via an Amazon account transfer or an Amazon listing transfer. With an Amazon account transfer, the previous owner hands over their entire Amazon seller account to the new owner. The second transfer method is an Amazon listing transfer, where the seller transfers specific Amazon Standard Identification Numbers (ASINs) to the buyer. The terms of the deal will determine whether the entire Amazon seller account or just specific listings should be transferred. We have also outlined the Amazon seller account transfer process.