This post is a guest piece from our friends at Empire Flippers.
You’ve invested your time and money into building an Amazon FBA business, and now you’ve got a solid-earning asset on your hands that provides you with regular income.
But what comes next?
There are many FBA entrepreneurs who haven’t given any thought to having a profitable exit strategy in place for their businesses, often because they didn’t even realize it was an option for them.
The truth is, successful FBA brands are a highly desirable asset to investors looking to add to their portfolios.
Selling your business could allow you to unleash a substantial amount of capital that can take you to the next step of your entrepreneurial journey.
So how do you know if this is the right path for you? And how can you figure out what your business is worth?
We’ll get into all that and more as we explore what buyers look for in profitable businesses.
Master eCommerce with the 99-point Brand Growth Checklist
Keep and Scale or Sell and Build?
When you’ve poured time, energy, and capital into creating something successful, it can be hard to walk away. That’s why some entrepreneurs prefer to focus on scaling their businesses instead of exiting.
So how do you know when it’s time to exit?
Some of the top reasons successful sellers give for moving on from a business are wanting to focus on new projects, having big changes in their personal lives, and retiring.
While they could have invested more money and energy into scaling their already successful brands, many of them felt they lacked the capital, time, or skills to take their businesses to the next level.
Others enjoyed the thrill of the launch and found their passion waning with day-to-day maintenance.
Instead of being content to hold a merely stabilized (or even depreciating) asset, they passed the baton to someone with the resources to grow the brand and used that capital to fund new businesses, dream vacations, college educations, and home purchases.
How much are they walking away with?
The average sale price of an FBA listing on our marketplace in 2020 was $538,741 at a 28.5X multiple. By 2021, that amount had skyrocketed to $1,246,759 at a 40X multiple. That 231% increase in sales price makes it easy to understand the appeal of an exit right now.
But how are they figuring out how much their businesses are worth?
Let’s take a look at the formula used to value businesses, how multiples are determined, and how it all fits together.
The Basics of Amazon FBA Businesses Valuations
At Empire Flippers, we use a straightforward business valuation method to determine listing price:
12-Month Average Net Profit x Multiple
You might have seen other people talk about annual net profit instead of monthly net profit. So why do we use a monthly average?
Using one or the other isn’t going to give you a radically different valuation. We prefer to use monthly net profit because it gives potential buyers a better overall picture of a business’s financial performance.
When you’re choosing a pricing period, there are typically three you can use: 3 months, 6 months, and 12 months. We’ve found that 12 months is the gold standard, because it gives a better view of traffic and revenue earnings.
Then there’s the multiple. In simple terms, it’s an industry figure used as a multiplier to give a more finessed idea of what a business is worth.
There are a lot of factors that go into a multiple, including brand strength, age, diversity, and additional assets, which we’ll get into in a minute.
Before we dive into what influences a multiple, if you’re wondering how much your specific Amazon FBA business is worth, you can try out this free valuation tool.
After you input some basic details, you’ll get a rough idea of what your business is worth in just a few minutes.
To know why it’s worth that much, let’s see what affects the monthly multiple so you can increase your valuation.
What Influences a Multiple?
Understanding what influences a sales multiple is essential not only for figuring out how much your business is currently worth, but also for giving you benchmarks to focus on so you’re walking away with a life-changing exit.
The strength of your brand is one of the most important factors in determining a multiple.
But what do we mean by brand strength?
One area we look at is customer reviews and store ratings. High product ratings indicate quality products, while high store ratings demonstrate that the business is well run, with consistent customer satisfaction and no quality-control issues.
Additional indicators of brand strength are the badges and rankings given by Amazon. Earning a coveted “Amazon’s Choice” badge or high best-seller ranking shows there is high demand for your products.
Traffic and Platform Diversity
What are your sales channels? And how are you driving traffic to your listings?
Sellers who have an omnichannel presence, even if they’re still using Amazon multi-channel fulfillment for all orders, tend to have more valuable assets on their hands.
The same holds true for sellers who have built an off-Amazon marketing presence to drive traffic to listings.
By diversifying your revenue streams and traffic sources, you’re mitigating the risk of putting all your eggs in one basket by relying solely on Amazon and PPC campaigns for sales.
Age of FBA Business
You don’t often hear the term “old is gold,” but it’s definitely the case when it comes to valuing profitable FBA businesses.
In fact, when we analyzed the sales on our marketplace, we found a positive correlation between the age of a business and its sales multiple.
The older a business is, the more established and stable it appears to potential buyers.
When sellers have a few years under their belts, they’ve proven they have in-demand products with lower risk of sudden downturn. They’ve also had time to establish a brand and possibly even build an engaged community of buyers.
While there are exceptions to the rule, the more time a seller spends building a business, the more opportunities they have to streamline processes. This typically results in a more “hands-off” business as far as owner involvement goes, which is attractive to buyers.
There’s a misconception that the more hours a seller spends on a business, the more valuable it is to a buyer. Some sellers mistakenly think that a greater time commitment indicates they’re more implicated in the growth of the business.
This isn’t the case when it comes to selling Amazon FBA businesses.
Limited seller involvement in a profitable business actually indicates that it runs efficiently without the seller. It shows that automations and processes have been put in place to make the business a more passive source of income.
Some of the ways we’ve seen sellers automate their businesses include outsourcing day-to-day tasks to VAs, PPC agencies, freelance graphic designers, and freight-forwarding companies.
In fact, some of our most successful sellers have streamlined their processes so they’re only checking in on their businesses a few hours per week.
If you’ve built up a highly successful 7-figure brand that has caught the attention of a brand aggregator, though, the amount of time spent on the business won’t be as much of an issue. These companies have dedicated teams in place to manage operations, so they’re able to streamline business processes from the start.
The number of SKUs you’re managing for your business and how diversified your sales are also play a role in determining your sales multiple.
For the first point, you want a manageable number of SKUs. We’ve found the sweet spot is between three and eight. If you have fewer than three, there’s a higher risk of downturn if you experience supply chain disruptions. If you have more than eight, you may spend more time maintaining product listings.
It’s not uncommon to see double-digit SKU numbers if best-selling products come in different color and size variants. But these are often not individual product listings that involve increased time commitments, updates, and advertising costs.
The second point in SKU management is sales diversification. You’ll have a hero SKU, and that’s fine, but there should be at least moderate diversification of revenue across your products. Your hero SKU shouldn’t make up 50% or more of your total revenue, or it will be seen as a risk factor, just like having too few SKUs.
Email marketing remains one of the most powerful tools in the marketer’s toolkit. As an FBA seller, you’re in a prime position to build one up with every sale you make.
An email list gives you access to customers that is independent of search engines and PPC campaigns. It gives you diversity in traffic, which reduces your marketing channel risk.
It’s also a great way to connect with your customers when you want. You can use it for general content marketing, promotional pushes, and even general brand awareness.
An email list can be easily automated and allows you to segment your audience and guide them through purchases. It’s also an excellent way to build brand loyalty.
Even if you haven’t monetized your email list yet, just having one gives you a potential bargaining tool.
Common Mistakes People Make When Preparing to Sell
As you can see, several factors influence the monthly multiple. After reading what elements we consider in a valuation, you might think your business will fetch you a high price. But before you sell, you need an exit plan.
Part of making an exit plan is avoiding the pitfalls some sellers face when preparing to list their businesses for sale.
One of the most common pitfalls we see is sellers who stop maintaining the business, hoping to offload it quickly or when “things calm down.” This is one of the worst mistakes you can make. Keep the business going to protect the consistency of your finances and sales. Otherwise, you can greatly diminish your ability to sell.
Another pitfall is overvaluing your business. You’ve put so much into it, and it may have unlocked serious financial milestones. These emotional attachments can be hard to look past. But if you want to sell, you have to be realistic about market conditions and what your business is offering now.
You also need to be flexible. If you know the value of what you have, set a minimum threshold, but be prepared for some leeway and haggling down to your minimum. Being too rigid will narrow your buyer pool and could reduce your chances of a sale.
On the flip side, understand that large sales take time. Worrying that no one will buy your business could lead to FOMO setting in. That could end in you accepting the first deal that comes your way, even if it’s way lower than what you wanted or could realistically get.
So what are your options when it comes to selling with the highest chances of getting the right deal?
Best Places to Sell Your Business
When it comes to selling your business, you have two choices: you can sell privately or you can go through a broker.
There are benefits to selling privately. Less red tape means you can get the deal done faster, but there are no protections in place for first-time sellers. You could walk away with serious money on the table when you’re up against tough negotiations with savvy investors.
You also run the risk of coming across tire-kickers, or people who say they’re interested in buying your business but just end up wasting your time.
When you work with a broker, you get white-glove service from beginning to end. A broker can help you fairly value your business, connect you with eligible buyers, provide guidance during negotiations, and help you migrate your assets.
But what about commission?
It’s true that working with a broker does come with fees. But the balance to that is when you have a broker on your side, you’re likely to get a better deal, even after commission fees are taken into account.
Start Your Next Chapter
Now that you know that you’ve got a lucrative asset on your hands that could help you get to the next stage of your entrepreneurial journey, you’ll want to start thinking about putting together an exit strategy.
Even if you’re not ready to take the leap today, you still want to be prepared for when that day comes.
We’ve seen sellers with all different types of FBA businesses walk away with exits ranging from five figures to eight figures. If you’re looking for a huge windfall of capital that you can use to meet your next goals, consider what selling your FBA business could do!
Author Name: Michelle Lindner
Bio: Born in California, Michelle has spent the better part of the last 20 years bouncing around between the US, Europe and the UK. She has been working as a content marketer since 2005, picking up degrees in Social Sciences and Archaeology along the way. She loves travel, interior design, and renovating her 300-year-old farmhouse in South West France.