Originally published on May 21, 2019, updated June 24, 2020
In this guest post, Mike Begg of AMZ Advisers discusses what to look for when buying an Amazon FBA business.
Amazon continues to grow at a rapid pace. Amazon’s annual letter to shareholders highlights a huge piece of that growth; the dominance of third-party sellers. 60% of Amazon’s merchandise sales in 2018 were by third-party sellers. That roughly equates to $160 billion! Those massive numbers have investors looking at opportunities for buying an Amazon FBA business more than ever before.
The marketplace on Amazon is a challenge and experienced sellers and agencies have distinct advantages over the average investor. Knowledge of the marketplace and how it works requires in-depth experience. If you are an investor, we recommend working with someone who has that experience before purchasing an Amazon FBA business.
Our team at AMZ Advisers has seen the damage that happens when you don’t work with an expert. Buyers can easily get scammed. In this post, we are going to lay out a few of the most important areas to check before choosing to buy an FBA business.
Due diligence is a finance term which essentially means looking into everything before making an investment. Every time a person buys any type of asset and looks into the history, they are doing due diligence. Buying a home or piece of real estate requires thorough due diligence just as much as buying or investing in any business.
It is particularly important to be thorough on your due diligence when buying an Amazon FBA business. The market is constantly changing and evolving, and all sorts of black-hat tactics are being applied by large numbers of sellers. You need to make sure that the business you are buying is not employing those tactics. Not understanding them can lead you to quickly fail after acquiring the business.
There are dedicated marketplaces that help with the transactions themselves. Many of them even claim to screen the deals before purchasing the company. But don’t put all your trust in their work. Make sure you are being thorough in your own investigation.
Here are some the most important things to check for when buying an Amazon FBA business:
First and foremost, you need to see the account records. Managing the accounting records for an Amazon business is not an easy task. There are a variety of accounting services that specialize in Amazon selling and the challenges associated with it. Most FBA companies use programs like Quickbooks or Xero, which makes reviewing easier. However, if you look on the endless number of Amazon seller Facebook groups, you'll see that there are many doing their accounting in Excel files, which should be a huge red flag.
Advertising is Amazon’s main source of revenue and for good reason. You need to advertise to stay competitive on the marketplace and even to make your products visible. Try to get as much of the advertising data as you can. This should help you understand what you will need to spend to stay competitive. By looking at the Average Cost of Sales (ACOS), you will see how much advertising takes out of your margin.
The Amazon seller account health is extremely important to understanding the long-term viability of buying an FBA business. Each seller must meet specific metrics and failure to do so can lead to account suspension. Be very careful not to purchase a company with poor account health. There is no quicker way to have your investment go to zero than by having Amazon suspend you. Be sure to check the account's Amazon seller feedback score, as this is a key account health metric.
Amazon sellers have an extremely difficult time actually realizing the profitability of their sales. One of the many reasons is that they do not understand how Amazon fees work. Amazon referral fees can take anywhere from 8%-20% of your gross revenue – and are unavoidable. You can also be paying close to another 15% or more if you are using Fulfillment by Amazon to ship your product. Add in your cost of advertising and you can quickly be losing money.
Be thorough when you are checking the books and see how the fees are accounted for. You can do rough estimates on your own by checking the Amazon FBA Calculator. Make sure the seller isn’t artificially increasing their net profit numbers to deceive you.
There are many tactics that Amazon sellers can employee to influence the main parts of the Amazon A9 algorithm. Building sales history and velocity through product giveaways has been a long-employed strategy. In certain markets it can actually create a profitable arbitrage by giving away so much inventory.
Make sure to check for the promotion history. Look for the value and quantity of discounts that have previously been provided. Cheap sales still count as sales on Amazon so massive discounts are sometimes common. For example, one of our clients had bought a company that was giving away $30,000 in inventory a month. That just wasn’t sustainable for him, and he ended up losing big.
You should also consult with an account or lawyer when you are talking about tax issues. We are certainly not trying to provide any tax advice, but you should be aware of sales tax liabilities that you may receive from purchasing an Amazon FBA business. Some states like California are trying to collect back taxes on prior eCommerce sales. This can lead to a potential sales tax time bomb that can sink any Amazon FBA business.
There is no easy answer to this question, and it depends on the risk tolerance of every investor. The FBA selling game promises huge rewards but also is fraught with risk. Many of those challenges are completely out of your hands. Being thorough in your due diligence before buying an Amazon FBA business can help expose many of those risks. If you’re looking for more due diligence recommendations you can check out our full checklist to learn more.
Originally published on May 21, 2019, updated June 24, 2020
This post is accurate as of the date of publication. Some features and information may have changed due to product updates or Amazon policy changes.