Tag: Selling on Amazon FBA

Chances are, you probably sell on Amazon because you recognize the huge potential ROI there.

But have you ever stopped to think about your next step after your FBA business? Many FBA owners have never considered selling their business—or even know the option is on the table!

We wanted to share why selling your FBA business could help you build an even better business and be the best thing for your entrepreneurial journey. Let’s explore the reasons FBA owners sell their businesses.

The Truth about Selling Your FBA Business

Selling an FBA business boils down mainly to personal or business-related reasons. 

In terms of personal reasons, we’ve seen sellers exit because of an event or goal that meant they no longer had time to manage the business. Some of these reasons include a death in the family or wanting to spend more time with their kids.

Business-related reasons tend to revolve around raising capital for another project or losing motivation to stay with the business. 

Whatever their reason for selling, some FBA sellers have received two to four years of net profit in cash in one payment. That’s the biggest windfall many entrepreneurs have ever received in one go.

But don’t start counting your chickens before they hatch: first, let’s dive into understanding how FBA businesses are valued.

FBA Business Valuation

Online business brokers and individuals working in mergers and acquisitions (M&A) usually value businesses by a multiple of earnings before interest, tax, depreciation, and amortization (EBITDA). EBITDA represents a business’s annual profit, and it is multiplied in the range of two and four times.

The valuation formula we use is:

Valuation = 12-Month Average Monthly Net Profit x Multiple

There’s not much difference between the two formulas. We stick to the average monthly net profit because it gives a more granular view of an FBA business’s performance than an annual profit figure. 

While average monthly net profit is easy to calculate, determining the multiple is a bit more complicated as it takes into account the business’s age, traffic sources, branding, product line, and pricing window.

Age of FBA Business

A profitable older brand tends to be valued more highly than a younger one because it has survivability.

Unexpected market demands and changes place stress on FBA businesses, which can seriously affect cash flow and average order values.

A business’s ability to scale and grow through these challenges shows buyers that it’s resilient. While you can’t directly influence your business’s age, the takeaway here is that age works in a seller’s FBA business’s valuation, which is why a long-term Amazon selling strategy pays off more than a short-term plan.

Diversity of Traffic Sources

One of the greatest advantages of selling on Amazon is being able to leverage their brand, which customers love and trust.

However, selling on a single marketplace can lower a business’s multiple because if that source of traffic is shut down, there’s a higher risk that the business will be negatively impacted.

Amazon is well known for delisting products and shutting down stores for minor infractions. While you can prepare to ensure you fulfill Amazon’s requirements, increasing the number of traffic sources through multichannel selling is a good way to minimize your business’s risk and increase its multiple.

Branding

Branding has a smaller influence on the multiple than the other factors listed here since it’s hard to quantify how strong a brand is .

That said, the number of customer ratings and reviews, as well as how high the ratings are, play a part in determining the multiple. If people mention the FBA brand on social media, the context is also taken into consideration. Are customers raving about a store’s products and recommending them to their friends? Or are their experiences mixed, with varied reactions toward the customer service or the product’s functionality?

A strong brand is an attractive asset to a buyer, but it has less weight than the other factors that affect a multiple.

Product Line

There isn’t a perfect number of products that will help you gain the highest possible valuation. A couple of key things to keep in mind are the amount of work it takes to manage your product range and the diversity of the revenue generated by the products.

Let’s compare two FBA businesses in the home niche, both selling kitchen products. Business A has only one product, while business B has 50, and both generate $100,000 in revenue from sales each month.

Business A’s single product has the same risk as a single traffic source: if the product is delisted, the business’s cash flow is completely cut off. 

While it might look like business B won’t suffer from this issue, there are a couple of issues with its product range. For instance, if a single product generates over 50% of the business’s revenue, this is also cause for concern from a revenue-by-product basis. Managing all those listings could also consume most of your productive hours, time that could be spent growing the business in other ways.

We’ve seen the ideal range of products to diversify sales and be manageable without being overwhelming is between three and eight products. 

Of course, there are exceptions to the rule. Some buyers with large capital reserves won’t mind paying for a single-product FBA business because the potential ROI of a future flip may outweigh the risk. These types of buyers will probably make strategic acquisitions and have a team of optimization ninjas to increase the value of their assets.

Buyers who can afford to buy only a few FBA businesses will be much more cautious about a business with a product range that’s too large or small. They are likely to be solopreneurs who manage operations on their own, so the stakes would be much higher if the business didn’t work out as hoped.

Pricing windows 

Another thing to keep in mind is for how long you’ll calculate the average monthly net profit.

12 months is the golden standard because it provides a good view of the business’s traffic and revenue earnings and takes fluctuations in buyer demand, aka seasonality, into account.

If you started your FBA business less than 12 months ago, we’d recommend waiting before considering a sale. While you could shorten the pricing window to three or six months to reflect the profits, buyers will look at the business holistically and see that only a short window of data is available to help them decide whether to buy your business.

Again, there are exceptions to this rule. Some buyers with more capital means or a higher risk tolerance might make an offer for newer FBA brands.

Shorter pricing windows narrow the buyer pool, making it harder to find the right buyer who’ll offer you a reasonable deal. You might receive only a single offer and find yourself settling for a much lower offer than you wanted to ensure you close the deal.

Who Would Buy Your Site?

Now that you have a basic understanding of FBA businesses are valued, you might be wondering who would be interested in buying one. 

There’s a wide range of buyers with different levels of available capital and time, but all buyers recognize the power of selling on Amazon, and they want a piece of the ecommerce pie.

FBA businesses offer a lower barrier to entry for ecommerce entrepreneurship than full-blown ecommerce, which requires owners to manage many different moving parts. Instead of building a business from scratch, a buyer can acquire an existing FBA brand that’s generating steady profit.

To increase your chances of receiving a great offer and landing a successful deal, let’s discuss how to widen the buyer pool.

5 Ways to Optimize Your FBA Business

Buyers are much more likely to put down an offer after doing their due diligence if they think a business is a deal they just can’t pass up. So how can you make your business an asset that buyers will compete for?

By making it as hands-off as possible.

This is not to say that a less optimized business will attract zero buyers, but an FBA business that requires minimal work from the owner to maintain will be more attractive.

There are already some great tips for selling on Amazon, so we’ll focus on a few other ways you can improve your FBA business.

1. Use a Third-Party Logistics (3PL) Service Provider

Many sellers ship their inventory directly to FBA fulfillment centers, so storage and fulfillment are managed in one place. While it might be easier to allow a manufacturer to ship their products to FBA warehouses, it could be costlier than using a 3PL service provider.

Spend some time shopping for reputable 3PL solutions to see if there’s a more cost-effective route.

Another thing to consider is if you should use a 3PL as an additional storage facility. If stock doesn’t sell within six months, Amazon will charge long-term storage fees.

Depending on your products’ average turnover time, it might be better to hold stock in a warehouse and send batches of inventory to FBA centers according to your inventory forecasting.

While additional expenses sound like they should bring down your business’s valuation, removing essential services will in turn add extra burden and responsibility for the owner to manage and make the business a less attractive option.

A common mistake we see FBA sellers make is to cancel their 3PL solutions services, which brings down overall costs but adds 10–20 hours of work each week. The initial valuation price may increase but at the expense of making your business more hands-on.

2. Nurture Great Supplier Relationships

If you have exclusivity with your suppliers, ensuring that agreement will be carried over to the next owner makes purchasing your FBA business a more attractive prospect.

Establishing a strong relationship with suppliers saves the buyer the time and energy required to find reliable manufacturers, giving them one less thing to worry about, so they can focus on expanding the business in other ways.

Diversifying the number of suppliers the business owner can call on also works in a seller’s favor. The ability to order from multiple suppliers helps avoid dreaded out-of-stock situations for your top-selling products, especially during peak seasons.

We’re not advocating for drop surfing, where you’re encouraging suppliers to compete for your business by undercutting each other to offer the lowest price. Developing good relationships with more than one supplier opens up other manufacturing channels in case your usual supplier has production issues.

3. Optimize Product Listings

Creating a great product is only half the battle. Getting it in front of the right eyes is the other half.

Increase the chances that your products will appear to your target audience by optimizing the listings for SEO.

Search engine optimization will involve keyword research and the placement of target keywords in your copy’s title and body. Just don’t stuff the keywords in; Amazon’s search algorithm will deprioritize your listings if it detects too many keywords.

As an FBA seller, you can leverage Amazon A+ Content (formerly known as Enhanced Brand Content) to enrich your ASIN descriptions. A+ Content doesn’t get indexed by Amazon’s search engine but can increase conversion rates, leading to more sales.

4. Automation

Hiring virtual assistants or outsourcing time-consuming tasks frees you up to focus on your growth strategy. 

A great way to improve your own efficiency and automate more of your processes is by creating standard operating procedures (SOPs).

Well-documented SOPs will help a buyer keep the business running as it currently does, so it doesn’t drop performance after changing hands. SOPs are especially helpful to solopreneurs, streamlining the transition period by providing a resource they can refer to at any time.

If the new owner decides to outsource, they can use SOPs to train freelancers to operate the business as you did.

5. Build a Monetized Email List

Many FBA owners overlook using an email list as part of their marketing strategy, but to understand the power of email marketing, the real value lies in the audience it builds.

Gathering subscribers looks great, but the number remains a vanity metric if the list isn’t used properly. When you consistently deliver value to an audience through curated content, the email list becomes a valuable asset in itself because you don’t rely on search engine algorithms for your content to be found and you can address your audience any time.

However, if you are considering selling your FBA business and haven’t started an email list, I’d recommend that you use your time and resources to bolster your business’s strengths instead. 

Email lists take a lot of time, energy, and patience to get right.

You’re nurturing an audience from scratch, so you’ll need to experiment with the type of content you send out and to get all the elements aligned for the highest conversion rate.

The Myth of Timing the Sale

Deciding when to sell can be hard. Some sellers think they can time the sale like a stock based on market conditions and whether the forecast is bullish or bearish.

In reality, it’s extremely difficult to succeed with this approach. We’d recommend selling your FBA business when it’s at its strongest and performing optimally on the capital means available.

A buyer may be willing to pay a premium price for an FBA business generating steady sales that has products with Amazon’s Choice or Best Seller status in their subcategories. 

A business’s value is how much a buyer is willing to pay for it, which is why it matters where you list your business for sale if you want to succeed in landing a deal.

Best Places to Sell Your Business

There are really only two options: selling privately or using a broker.

A third option is to use a DIY marketplace, but we’d strongly recommend against using this type of service. DIY marketplaces charge a commission comparable to that of brokers, and you have to do a lot of the work to source deals and market your business yourself.

If you’re selling for the first time, a broker is the optimal route (even though we might sound biased for saying so).

If you go for a private deal, you risk running into two of the worst kinds of buyers: the savvy kind, who know how to negotiate a low price, and tire-kickers, the sort who make inquiries and non-serious offers, wasting your time. There’s also the need to attract many qualified buyers, which can be tough if you don’t have a wide network of suitable connections.

Then you have to worry about marketing your business and making it as attractive as possible without overselling.

There’s a mixed bag of brokers available. A reputable broker will have processes in place to attract buyers who can prove their buying intent with verified liquidity. When shopping for a broker, do your due diligence to see if they have such a system, as it helps both sellers and buyers.

You can register for free on a broker’s marketplace to talk about selling your FBA business and how they’ll help you handle the administrative side of things so you can focus on managing the different offers that come your way.

What’s Next? Preparing for Life After an Exit

We hope that by this point you’re aware of the amazing potential that selling your FBA business holds.

One of those possibilities is to buy another FBA business and keep your momentum going. After all, no one said you had to hang up your FBA hat and call it a day! The skills and experience you’ve developed could be used to scale a series of smaller businesses, so they reach their potential. 

In time, you could flip them for a profit, creating a money-making engine that provides five figures of capital for each deal you make.

In time, you’ll have built up an ecommerce empire.

This is just one of the routes you could go down. Of course, you can reinvest the capital in any way you want.

Whether you pursue a passion project or put the money from the sale in your kids’ college fund, the possibilities start with the knowledge that your FBA business is a highly lucrative asset to the right buyer.

This insightful guide was brought to you from Empire Flippers. Do YOU want to contribute to the Viral Launch blog with your expertise? Simply complete our brief guest blog post form and we’ll contact you if it it seems like a great fit!