- Posted on April 6, 2022
- by Benedict Dohmen
How Does A Buyer Value an Amazon FBA Business?
To negotiate the best deal at your FBA valuation process, it’s crucial to understand the buyer’s perspective. From their side, acquiring a business is a purely financial decision.
As the founder of the business who’s spent years of hard work getting to this point, you may feel differently – but it’s important to separate yourself from the emotion of the selling process. Focus on how the buyer will determine the value of your business.
Once you can think from the perspective of the buyer, you open up a stronger negotiating position to obtain the best deal possible from your Amazon FBA business sale.
Table of сontents:
How do I value my FBA business?
By now, you’re probably asking yourself; “how much is my Amazon business worth?”.
The first figure to start with is your net profit. Ensure your financial statements are in order – the net profit is what you take home after all expenses are paid. This is usually calculated across a timeframe of 12 months.
This number is your strongest asset when selling your Amazon FBA business because it allows the buyer to see the value your business brings in – even if you’ve been operating at a loss over the past few months.
If your financial statements aren’t in order, hire an accountant before setting up any buyers’ meetings. Ask them to review and clean up your documents – this will help you understand your business better, and determine if it’s the right time to sell.
The review could uncover anything from outstanding debt to missing documentation – or evidence that you could work an extra year and exponentially boost your net business value.
It can be better to grow your business first, and then plan the steps of your exit.
This way, you can make sure that you get the best value out of the sale. The best way to do this would be to get in touch with Amazon aggregators like Benitago – which offer fair, transparent valuations for your business.
How much do Amazon businesses sell for?
The price will be determined by a multiple of the SDE (Seller Discretionary Earnings) number.
The SDE (Seller Discretionary Earnings) is calculated when you’ve determined your net profit and your add-backs. Our detailed guide teaches you how to calculate SDE, and what is categorized as an add-back.
The exact multiple by which the SDE is calculated depends on a range of different factors, including the industry. It varies from 1.5x, up to 6x or 7x. At Benitago, we usually pay 4.5 – 5x the SDE – a straightforward and competitive rate across most industries. Plus we have the Agreggator Match Guarantee.
Always take into consideration the external and internal factors that might affect this number – it will generally be one of the first things a buyer would like to discuss during negotiations.
How much is my Amazon business worth?
When approaching an Amazon FBA business for acquisition, there are three key questions that a good buyer will want to focus on:
- How old is the business?
- What type of business is it?
- How profitable is the business?
To establish that your company has a solid track record, buyers usually prefer businesses that are over 3 years old, but that’s not a hard and fast rule.
Due to logistics complexities, they tend to avoid businesses that sell perishable products like food. Consult the buyer’s portfolio for more detailed information about their preferences. If your niche aligns with other businesses they own, they may consider your business an easier – and therefore more valuable – opportunity. Ultimately, the profit that your business makes will be the deciding factor.
In our ‘How To Sell an Amazon FBA Business’ guide, we go into more detail on the below categories, and the kind of businesses that buyers are looking for.
An established business will attract the most potential buyers because it’s proven to be self-sustaining. Usually, it’s easier for buyers to get a business back on its feet, compared to building it from the ground up.
Growth
Before making a purchase, the buyer will look at the history of your business. Is there a steady growth trajectory, and will it be profitable in the future? They’ll also look at how your business will keep up with the competition, and frequent changes.
After a sale, the buyer will be investing their own time and resources to grow the business – they want to ensure the business has a bright future, with potential for growth and expansion.
This is where your ‘growth strategy’ comes into play. If you don’t already have one, start looking into ways you can present your business to potential buyers. Investors will want to know the strategies that made the business successful, and how you plan to move forward.
Unless you have that in writing, the Amazon FBA buyer won’t be able to make a correct evaluation. As an integral part of creating a business strategy, this will be one of the first things a potential buyer looks for.
If a business lacks growth potential, it’s unlikely buyers will be interested.
Diversity Of SKUs
Ideally, you’ll have multiple successful SKUs across different categories, but in the same niche. This will make you stand out from the competition, as well as providing a safety net if Amazon closes your listing – or if the product’s popularity starts to decline.
Multiple SKUs provide a safety net for your buyer and offer larger profit potential than just one product. Sticking to one flagship product isn’t sustainable long-term, so if you only offer one SKU (Stock-Keeping Unit), now is the time to diversify.
A survey conducted by Jungle Scout in 2017 found that out of 2500 Amazon sellers, the most successful ones were those with at least 10 parent SKUs.
It’s crucial to have more than one avenue for profit in a business – and multiple SKUs show you’ve built up your business carefully, and developed your brand for optimal long-term growth.
Owner Involvement
It’s natural to want to be heavily involved in your business – but when you’re thinking about selling, take a step back and limit your involvement as much as possible.
Hire managers and supervisors, and train your team to manage the process of selling. The business should run like a well-oiled machine – without you needing to step in constantly.
In addition to making your life simpler, this will also increase the value of your business. A new owner won’t want to spend hours every day supervising employees or checking the workflow.
A well-run, self-sufficient business looks more professional, and it shows that you took the time to invest in growth.
Keep in mind that buyers are looking into owning a new business – they want to be the bosses. If they see that you aren’t ready to let go, they just might take a step back, and it can harm the value of your business.
Reviews
Reviews will make or break your brand. We always emphasize to our partners that your reviews reflect the quality of your product – if they’re below 4 stars, it shows the product has some flaws and should be inspected before the final sale.
If you don’t have enough reviews, it’s a good idea to try and grow them before putting your business up for sale. There are many great ways you can do this.
- Request A Review
Amazon’s handy request a review feature lets you reach out to existing customers who haven’t left reviews on your products just yet.
- Buy Reviews
Some sellers might think it’s unethical, but you can reach out to influencers and professional Amazon reviewers to review your products. This way, you can control the flow of reviews, ensuring higher ratings.
Key takeaway
All of these factors will determine the final price of the business. Buyers and brokers use different calculators to determine this value, but those numbers aren’t always correct – they will constantly be asking themselves; “Is this Amazon business worth it?”
The thing you should always keep in mind is that you should do your research. It’s not always a question of asking someone how to value a company based on sales, as many factors come into play – some of which will seem unexpected unless you do your due diligence.
The best thing you can do is to sit down and write a sheet of all the pros and cons of your business, bearing in mind the points mentioned above. Then, you can calculate a fair price for your Amazon FBA business – and arm yourself with as much information as possible to defend it during negotiations with buyers.
When in doubt, don’t be afraid to approach a professional to do it for you. If you’d like a free valuation, contact us by clicking the ‘What is My Business Worth?’ button.
Now it is your turn – do you have a question for the Benitago team? Or maybe you want to start a conversation with like-minded individuals? Feel free to share your thoughts in the comment section below!
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