How Valuations Work for Amazon FBA Business Worth
It’s unlikely that you’ll be running your FBA store for the rest of your life, but have you ever thought about what your alternatives are? You might reach a point when you can’t scale the business any further because of capital restraints or if you don’t have the skillset to take it to the next level.
There are a couple of options for you—you can either maintain the business, or exit by default or design.
You might not need to sell the business, but planning an exit on your terms means you’ll be able to leave with a huge sum of money that you can strategically reinvest in anything you want. Many Amazon sellers negotiate favorable deals so they can afford to buy a house without a mortgage, build up a huge nest egg for their children’s college funds, or raise money to start a new project.
The great news is that FBA businesses are really attractive assets for investors with different budgets. We interviewed dozens of buyers and found that 71% of new business owners either maintained performance levels or grew the business after the sale.
With that said, let’s see exactly how an FBA business is valued so you can start your exit planning on the right foot.
How Amazon FBA Businesses are Valued
Valuation = Average Monthly Net Profit x Multiple
This formula would give you a brief snapshot of how much your business is currently worth if it were to be sold on a marketplace like Empire Flippers. As you can see, your business performance data is taken into account, reflected by an average monthly net profit and increased by a multiple.
You might see other valuations use a relatively small multiple of 3x or 4x. These formulas use EBITDA, or annual profit, instead of monthly net profit. The difference is somewhat negligible, but we use the latter because we feel it gives a more granular view of the business’s performance.
It’s simple to calculate the average monthly net profit—just add the total net profit over 12 months and divide by 12. But how do you find out if a multiple is 40x, 50x, or even 60x?
The multiple takes several factors into account, such as pricing windows, the business’s age, and also traffic diversity, to name a few.
Pricing Windows
The most common pricing windows to calculate the average monthly net profit are 12 months, 6 months and 3 months, with 12 months being the gold standard.
If it’s your first time selling, we recommend sticking to a 12-month pricing window because it gives buyers a better view of your business’s traffic and earnings. A shorter pricing window might overinflate how much your business usually earns due to a peak season, or massively underrepresent its performance if the data captures a quieter period of the year.
Some sellers may be tempted to choose a shorter pricing window if their business only just started turning a profit. But in this case, it’s best to wait another 12 months before submitting the business for sale. With more time, you can increase your profit margins and grow your business further to increase its valuation.
Age of FBA Business
As mentioned above, older businesses tend to receive higher valuations. With time, you can optimize your business so there’s less owner involvement and more opportunity to find product-market fit.
As long as the time is well spent, you can streamline your business so it runs efficiently. As a result of lowered costs and better processes, an FBA business will profit in terms of its operations and having a better bottom line.
Different Traffic Channels
One of the best ways to mitigate risk when it comes to your FBA business is by creating different traffic channels.
It’s important not to neglect the organic search side of things, as many FBA owners rely on PPC advertising to bring more customers to their storefronts to promote their product listings outside.
Mastering Amazon’s ranking algorithm will help you rank for the best keywords so that your products are among the top results when customers are searching for related products. It’s a more cost-effective marketing approach since you just need to optimize your product listings. Although paid advertising can expand your reach to a wider audience, nurturing your organic search rankings can save you time and money, all while drawing in similar traffic numbers.
Multi-channel selling is one way to expand your business’s reach outside of Amazon. Selling your products on other eCommerce marketplaces not only creates another revenue stream, but you gain access to different audiences that might prefer shopping on one marketplace more than others.
If you sell outside of Amazon, this mitigates the risk of a drop in revenue if your paid advertising is stopped unexpectedly or listings are taken down due to a breach of Amazon’s terms and conditions.
Social media is another traffic channel that can drive customers to your products. The key to success for social media is choosing the best platform to nurture a strong following. For example, Pinterest might give you the best engagement if your products are visually appealing, while Instagram could be the better choice if customers love to take selfies while using your products. A large social media following will positively influence your FBA business’s valuation as a reflection of your brand’s strength and how satisfied customers are with your products.
Customer Reviews and Ratings
Social media is a softer measure of brand strength compared to reviews and ratings left by customers on your Amazon storefront.
In the same way that the age of an FBA business influences its valuation, having more positive reviews and a higher average rating will result in a higher multiple. Simply put, these are solid indicators of a strong brand. With enough positive customer feedback, smaller brands can stand toe to toe with bigger brands by earning the Amazon’s Choice badge.
Earning an Amazon’s Choice badge means your products will be recommended to potential customers who are searching in a category for the first time, meaning they’ll see your offerings before looking at other products. FBA businesses with a high average rating across their products and a best-selling product with the Amazon’s Choice badge are common traits of businesses that sell for high six figures or more.
One way to improve your chances of earning an Amazon’s Choice badge while protecting your brand is by signing up for Amazon Brand Registry. In doing so, you secure a trademark for your products and gain access to a wide variety of tools that will help you market your offerings to increase conversion rates. As your Amazon storefront racks up positive reviews over time, you’ll stand a better chance of earning an Amazon’s Choice badge and even the Best Seller label.
Keep in mind that bad reviews and negative feedback aren’t all lost causes. Having a system in place that helps you spot negative reviews so you can respond and provide customer service could lead to some bad reviews being withdrawn. It might even win a customer over, with an initially bad experience being turned into a great one.
A Monetized and Built-Up Email List
We’ve spoken about diversifying your traffic sources, but we’d be doing you a disservice if we didn’t also talk about email marketing. To be sure, having a monetized email list with many subscribers can increase your multiple.
As one of the oldest digital marketing channels in the world, email marketing still gives high ROI compared to other more modern approaches. So what’s the secret sauce?
The power of an email list lies in the fact that subscribers opted in because they’re interested in hearing about your products or service offerings. Some people grow their email list by offering a free downloadable info product or a regular newsletter with new promotions and product launches. Whatever your service offerings are, a well-maintained email list is a powerful asset that will help to increase your multiple.
If you’re thinking about selling your FBA store but don’t already have an email list, we recommend that you focus on building on your strengths instead of sinking time and effort into email marketing. Building a list up takes time and a lot of trial and error, which could be better spent optimizing your business in other ways.
Number of Active Products
The range of products that you sell on Amazon influences your multiple and also affects the types of buyers interested in your business.
A smaller FBA brand can afford to have many active SKUs as the seller is still experimenting with what works, or they might have built their entire brand around a very small number of SKUs. We’ve found that these types of businesses attract investors who are newer to the FBA space and want to run their own business for the first time. They won’t mind spending more time learning the ropes and getting stuck in with daily tasks.
On the other hand, private equity (PE) firms eyeing up larger FBA businesses for acquisitions tend to prefer less than 30 SKUs. This SKU threshold represents a manageable number that doesn’t require a lot of time or effort to maintain product listings. In addition to the man-hours required for upkeep, it’s important to consider how the revenue split across the SKU range factors into influencing the multiple. If your business has more than three SKUs, for example, a single SKU shouldn’t make up more than 50% of the total income.
A product that has the lion’s share of profit is a considerable risk for the buyer. If that product listing is taken down because Amazon decides it breaks their terms of services, the whole business’s ability to stay afloat could be crippled. Having too many SKUs also puts you at risk of running up long-term FBA storage fees. So what’s the best number of SKUs for your business?
The key is to have a range of SKUs that’s manageable for the right buyer while all products contribute their fair share in generating revenue. There are ways to sell slow-moving inventory, but it’s recommended that you trim your SKU range to a manageable number in order to lower expenses.
Who Would Buy Your Site?
Amazon FBA businesses are highly lucrative assets. That’s why we’ve seen an increasing number of buyers on our marketplace who were willing to pay an average of $538,461 in 2020.
The FBA model appeals to many types of buyers. Whether they’re looking for something small to get started in eCommerce or they’re a brand aggregator looking to build their portfolio aggressively, we’ve discovered that there’s a buyer for every type of business.
Buying a business helps an entrepreneur skip the grueling startup phase that demands blood, sweat and tears to make it work. They’re looking for a turnkey solution, which is why the more you optimize your business to lower the new owner’s workload to a minimum, the wider you grow your buyer pool. With that said, you might also consider lowering your expenses as much as possible to get the highest possible valuation price. Keep in mind that a higher listing price might not attract a large pool of qualified buyers.
If buying your business looks more like inheriting a job instead of an investment, it’ll deter interested buyers from making serious inquiries.
We recommend that you keep your software subscriptions and inventory logistics systems in place as you’re preparing to sell your business. If there’s further room to optimize beyond your scope, remember that you can highlight these areas as potential opportunities for a buyer to scale the business.
Best Places to Sell Your Business
While DIY auction sites and marketplaces do exist, we strongly recommend that you avoid these types of exchanges because there isn’t any built-in protection for buyers or sellers. The lack of procedures and information available for proper due diligence puts you at risk of entering into bad negotiations or entertaining too many tire kickers (people who like to window shop without ever putting up a serious offer).
Some sellers prefer going down the private sale route because they believe they can sell for a much higher price without paying a broker’s commission fee. While this may be true to an extent, negotiations are much more difficult for first-time sellers if they receive offers from savvy investors who know how to wrangle deal terms to work in their favor. And unless you have a wide network of contacts with sufficient capital to pay what you think your business is worth, it might be a long time before you even receive an offer.
Many sellers who go down the private sale route end up cashing out for much lower than what their business is worth due to the fear of missing out (FOMO). This is understandable, especially if you go weeks, months, or even a whole year after announcing your FBA store is for sale without receiving an offer. When the first serious offer comes in, even if it’s far below what you wanted, you accept it because the FOMO kicks in.
When you sell on a curated marketplace like Empire Flippers, your site is placed in front of a huge audience of qualified buyers who prove they can afford to buy your business. A good broker will also help you actively market your listing to increase its exposure. Using a broker helps you filter out investors who aren’t serious because experienced business analysts help set expectations of how much you’re willing to sell for early doors. The range of services on offer when you go through a broker ultimately streamlines the sales process so you can focus on working out a good deal instead of worrying about whether the business will sell or not.
Start Planning Your Exit Today for Increased Profits and a Higher Valuation
There’s never been a better time to sell than now. The market demand for FBA businesses is increasing and this trend looks to continue into the foreseeable future. We recommend that you start preparing your business to sell as early as possible. Even if you aren’t thinking about a sale, you’ll optimize your operations, which in turn can lead to higher revenue.
If you’re interested in finding out how much your business is worth, try our free valuation tool. It’ll give you a ballpark estimate in minutes so you know how much you can negotiate for.
Considering a sale in the near future? Schedule a call to speak with one of our business analysts, who will guide you in the right direction to start your wealth-building journey.
Author name: Vinnie Wong
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