How much is your FBA business worth? You'll learn how Empire Flippers calculates FBA valuation in this guest article.
You’ve built up a successful Amazon business, but what comes next?
There may come a time when you need to consider moving on from what you’ve built. That might be for personal reasons or a reduced passion for the business. And when the time comes, you’ll want to have an exit plan on your terms ready to go.
If you haven’t considered selling your business as an option, you’re not alone. Many business owners don’t realize that they can potentially unleash a significant amount of capital by selling. That’s capital that can be used to fund retirement, a new home, or even a new passion project.
But how do you know how much your business is worth? Let’s take a look at what goes into brand valuations and how to sell an Amazon FBA business.
At Empire Flippers, we use an uncomplicated valuation formula:
Average Monthly Net Profit x Multiple
Calculating your average monthly net profit is easy. You take your annual profit and divide it by 12. The reason why we use average monthly net profit is that it provides buyers with a clearer picture of the financial performance of your business.
Once you have your average monthly net profit, then it’s time to add the multiple. A sales multiple is an industry figure that is calculated based on a range of factors that commonly determine the value of a business and is based on comparable businesses or previous deals. So how do you calculate a multiple?
There are several factors to consider. Two of the main ones are brand strength and average monthly profit. These are especially important because they demonstrate the quality of your business. But there are other factors, like the age of the business, market diversity, and revenue split, that can also impact the multiple of your business.
For example, a four-year-old business with steady growth, a solid range of products, and a lot of positive reviews may get a sales multiple of 40. However, a one-year-old business with limited market diversity and fewer product reviews may get a sales multiple of 25.
There are several pricing windows used in business valuations: three months, six months, and 12 months. There might be a few reasons why a seller would need or want to use a shorter pricing window, but 12 months is the gold standard and is what we recommend for all first-time sellers.
A longer pricing period gives buyers a better idea of your business’ financial health. By factoring in seasonal or one-off fluctuations, buyers can see the overall growth of your company over time.
Older businesses tend to receive higher valuations than newer ones for two reasons. The first is that buyers see older businesses as resilient and located in a profitable niche.
The second reason is that seasoned owners have often streamlined their businesses to make them as efficient as possible, which is attractive to buyers looking for passive income streams.
If we take two similar businesses, an established owner making $20K per month in net profit working only five hours per week may have a higher overall valuation than a new owner making $40K per month working 30 hours per week.
The more streamlined you make your business, the better. Buyers usually want an investment, not to acquire a job!
One of the ways seasoned owners streamline is by scaling down their products to focus on scaling overall growth. Businesses with larger teams can manage more SKUs, but for most solopreneurs, the sweet spot is between three and eight SKUs.
Although it seems like the more SKUs you have, the more profit you’ll make, that’s not necessarily true. Large numbers of SKUs can be difficult to manage effectively, even for small teams. And when it comes to data, your revenue-to-product ratio is lowered when you overextend your SKU count.
On the other hand, while it’s good to focus on a few core products, offering less than three can be risky as well. If you’re reliant on just one or two SKUs, inventory disruptions or suspensions can heavily impact your business.
The businesses that get the highest multiples usually have an even split of revenue across SKUs. Being able to give your full attention to all your products will help increase your rankings and ratings, both of which contribute to brand strength.
How your brand is viewed is an important component of its overall strength. We take an Amazon store's reviews, ratings, and rankings into consideration when it comes to brand strength.
High ratings and many positive reviews show consistent customer satisfaction and a clear need in the market, which adds to the value of your business.
Along with reviews, getting coveted badges like “Amazon’s Choice” or “Bestseller” is also a sign of brand strength and reliability. It shows that not only are you reaching the right customers but that Amazon recognizes your products’ quality and demand.
You can also proactively enhance your brand strength by trademarking your products. Copycats will always be a problem, but reducing a point of failure in your business will only make it stronger. If you haven’t already done so, enroll in the Amazon Brand Registry to protect your brand against trademark infringement while unlocking more tools to help you promote your products.
Many FBA business owners build up email lists or create social media pages to keep customers in the loop or highlight new products or discounts.
Having a robust email list or significant social media presence provides more value to your business because you can target an addressable and highly qualified audience.
These are people who are either familiar with your business or are interested in your products and actively opt-in to receive content or offers from you. When properly managed, conversions from these channels can significantly add to your monthly revenue and show that you have a supportive, engaged base.
Using these channels to engage customers is also a great way to build traffic diversity so you’re not relying solely on Amazon or search engines, which brings us to our next point–diversifying your traffic.
Expanding your product line to off-Amazon channels can also increase the value of your business. There are lots of different avenues to explore, from opening your own Shopify account to using eBay, or to listing products on Etsy.
Creating a diversified eCommerce presence opens you up to a different audience. Your brand reach increases and possibly drives more sales from other platforms, both of which will have a positive impact on your sales multiple.
If the idea of entering the eCommerce space doesn’t sound appealing, you can still get more market diversity by expanding to international Amazon marketplaces.
Now that you understand a little more about what goes into valuing a business, you’re probably wondering where you can list your business for sale. There are two main choices on how to sell an Amazon FBA business: selling privately or through a broker.
Selling privately may seem like an attractive option to avoid paying broker commissions, and it does work for some businesses. But there are potential downfalls, such as encountering “tire-kickers” or savvy buyers.
Tire-kickers are people who contact you but aren’t really interested in purchasing your business or don’t actually have the capital to do so. They’ll throw out low-ball offers that waste your time and energy that could be spent on entertaining worthwhile offers.
Two of the biggest buyers in the FBA space that you could encounter right now are investment firms and savvy high net worth buyers. They know how to negotiate in their favor, which can result in a less-than-stellar deal for first-time sellers. Working with a broker can help both sides walk away feeling like they’ve secured a fair deal.
As professionals in the space, brokers have access to a much wider qualified buyer pool. Having qualified buyers eliminates low or non-serious offers. It also gives you the chance to present your business to a targeted audience, which could generate competition among buyers and lead to a larger exit for you.
If you’re ready to get started planning your exit, you can schedule a call with one of our business analysts to find out more about the process and talk through the next steps.
But if you’re not quite ready to take the leap, you can still check out our free valuation tool to get an idea of how much your business is worth. At the very least, you’ll have a ballpark figure of how much it’s worth if you decide that now’s the time to exit.
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