As an Amazon FBA entrepreneur, you have no doubt poured hard work and long hours into growing your business.
You deserve to get every dollar possible from your business, and sometimes the way to get the very most from your business is to sell it.
In the same way that many ecommerce entrepreneurs may miss out on opportunities to take advantage of a capital advance simply because they don’t realize it is available to them, many FBA sellers have no clue that there’s a next step they can take to make even more from their business. When selling your business you can walk away with two-and-a-half to four years of profit upfront, on top of all the money you’ve brought in from years of running the business. Selling your business can lead to a life-changing amount of money all at once, and could allow you to leverage your money to fund other business ventures.
How much you walk away with largely depends on securing a solid valuation for your business. To ensure you get the most for your FBA business, we will be sharing the top ways you can shape your business now to secure a solid valuation down the road.
Let’s dig in.
How Amazon FBA Valuations Work
A valuation for an FBA business is a snapshot of its worth on a marketplace. It will take business performance data into account and set that against a multiple.
A multiple of a business’s net profit is used to determine a base sales price for that business.
Every broker is different, but Empire Flippers uses a monthly multiple so from here on out that’s what I’ll be using. Our multiple is six to twelve months’ average net profit multiplied by 20 to more than 60, depending on the state of your business. The multiple depends on a number of factors, including business age, numbers of social media followers and email list subscribers, and traffic diversity.
To put a monthly multiple into perspective, if a business earns a net profit of $2,000 a month, then the multiple might be 30, making the business worth $60,000.
Here’s a simple formula to visualize how valuations break down:
Monthly Net Profit x Multiple = Valuation
According to the 2020 Empire Flippers Industry Report, Amazon FBA businesses sold for an average multiple of 26.2x. With the whole world inside in 2020 ordering online, many of our FBA businesses benefited from increased demand. Right now we are seeing a rise in institutional buyer appetite for FBA so we anticipate that there could be a higher multiple average this year.
What that means is that FBA is more valuable than ever, and it’s a good time to understand your business’s worth. With this quick and easy valuation tool, you can get a valuation for your business within minutes.
The beauty of valuations is that they’re never fixed. The sooner you know how much your business is worth, the sooner you can use this as a base to build off of. You can have time and knowledge on your side to grow your business to new heights, walking away with the best valuation possible for your business.
Let’s go over six ways you can gain your optimal valuation.
How to Increase the Valuation of Your FBA Business
Through every step of business ownership you have the chance to shape your business into one that is open to every possible growth opportunity. Whether that’s expanding your inventory with the help of an Instant Advance to uplevel your operations or hiring on new team members, the changes you make can totally transform your business.
The same goes for you selling your online business. With just a few simple tweaks, your business can see a wildly higher valuation. Here are the steps entrepreneurs selling their businesses take to get their highest multiples and secure buyers.
The more complex your operations, the more likely buyers will be scared away from your business. An FBA business should not be hard to run. The design of the platform is to have Amazon do most of the hard work for you.
Yet, if there’s a will there’s a way, and plenty of entrepreneurs find ways to make their operations harder than they need to be.
For example, some business owners will personally check stock between the suppliers and Amazon’s fulfillment centers. They may have inventory sent to their homes as a pit stop between locations. While it is important to check the quality of inventory, doing it yourself and muddling operations is a death sentence for a valuation.
It’s crucial to simplify operations as much as possible. Your goal is to have a buyer look at the operations you’re running and inspire them to think they could easily run operations from day one of ownership. That means removing yourself from the equation or getting rid of any clunky or unnecessary operational measures. That means having your supplier do quality checks before sending to Amazon.
It also means creating clear cut standard operating procedures (SOPs), which we’ll explore more next.
An easy-to-understand SOP means an easy-to-understand business.
Most entrepreneurs underestimate the importance of SOPs until it’s too late. If you’re going to sell your business and you don’t have any directions to hand over to the potential buyer, it’s going to be tough to convince the buyer that your business is easy to run. You should have the framework for running your business ready to go so they know exactly how it operates and can quickly decide whether or not they can see themselves taking over the business.
Build out SOPs early not just for the buyer’s benefit, but for your benefit as well. You may find that SOPs help you optimize your operations in the process.
SOPs are one of the easiest, most cost-effective ways to improve your valuation. After a few hours of writing out SOPs, you’ve created a valuable tool to help run and sell your business.
Building a Strong Brand
In today’s competitive FBA landscape, establishing a brand for your products is essential. Brands communicate professionalism and trust, giving customers a name they can identify with.
It’s easier than ever to build a brand on Amazon. Tools like Amazon A+ Content help you build out dynamic visuals and listings and Amazon Brand Registry helps protect your brand from copycats. A strong brand even allows you to build your business off Amazon’s platform with the help of social media or an email list.
A brand equates to longevity and fortitude, qualities buyers are looking for in an FBA business, thus helping your valuation.
Hire Support Teams
Having a team in place to support your business can also help sweeten the deal for buyers.
A team of virtual assistants (VAs) willing to stay on with a new owner means a buyer can take advantage of a team that already knows how to run operations. Think back to the example mentioned above about optimizing operations. With a team in place, you remove yourself from the operational process, meaning less work for you and ultimately the buyer.
Businesses that have support teams demand a higher multiple because the buyer knows that they can come in and run the business for hours per week instead of 50. It’s a massive incentive for the buyer that helps get your business sold quickly.
Balancing SKU Count
Again, put yourself in the buyer’s shoes when thinking about your SKU count.
If your business has thousands of SKUs, a buyer may think they are difficult to manage and bypass your business. Lower SKU counts with solid performance are in high demand because there are fewer products to oversee, leaving more energy for optimizing a smaller number of listings compared with businesses with hundreds or thousands of SKUs.
If you can operate from a sweet spot with just enough SKUs to maximize performance and opportunity within the niche, this will almost assuredly capture buyer attention. When your business has this kind of indicator of buyer desirability, your multiple will reflect this.
Have a Well-Aged Business
If your business is only a year old, it may be sellable but it likely won’t garner a high multiple.
This is because with age comes experience. The longer your business has been around, the more it’s had to make it through challenges like algorithm updates and increasing competition. With all the time and weathered storms, it’s had to be strong to survive.
Not to mention, the older your business is, the more data you will have. This data will give an accurate picture of performance and earnings, which will be critical for most buyers to have as they decide whether to acquire your business.
Ready to Walk Away with More for Your FBA Business?
Hopefully, with these six growth tactics in hand, you feel ready to get your best valuation yet.
Now is a good time to start implementing changes, big and small, to your FBA business so you can watch it reap higher monthly profits and set you up for a stronger valuation when you are ready to sell your business.