What Is Your Amazon Business Worth?
Are you ready to cash out of your Amazon FBA business and really reap the benefits of all the blood, sweat and tears you’ve poured into product development and launching of new products, inventory management, branding, marketing and sales (to name a few)? A smart way to do this is to sell your business to a qualified cash buyer that understands what it takes to build and operate successful Amazon-based business.
But is your business in a position to sell and, if so, what is your business actually worth? Here, we help you decide if this is the right decision for you and give you a sense of what your business could be worth in the event that you decide to explore a sale.
Why Sell Your Amazon FBA Business
Selling your Amazon business is a big decision. You have most likely grown an emotional attachment to your brand and products after laboring and enduring many sleepless nights to get your business to this level. You have battled with Seller Support, counterfeiters, stock-outs, hi-jackers, failed product launches, etc. You have also had to figure out how to finance your business’ growth up to this point and undoubtedly borrowed money from banks, friends, family, etc.
Selling your business is the ultimate way to turn your paper profits into real profits. You are probably paying yourself a fraction of the actual profit the business is generating due to re-investment for growth and tax treatment.
When you do pay yourself, those profits are subject to the ordinary income tax rate vs. capital gains tax in the event of a sale. Amazon business sales are commonly treated as an asset purchase. As such, the seller pays capital gains tax on the proceeds of the sale of assets (~20% at the highest bracket) vs. ordinary income tax (~37% at the highest bracket + state taxes). If you are paying yourself out of the business, you are most likely paying ordinary income tax on your annual profits.
Assume you are generating $2M in annual revenue on Amazon (congrats — you’re among the 1% of sellers!). If you generate average Amazon contribution margins of ~25%, you are generating ~$500K in Amazon contribution profit, before your own operating expenses (software, personnel, office space, 3PL, etc.). If operating expenses account for another $75K, that leaves the business with $425K in taxable income. Assuming a blended ~40% federal and state tax rate, you are left with ~$255K of take-home profits. If you generated $2M in revenue and you averaged 20% cost of goods sold in the prior year, you invested ~$400K into inventory. Let’s then assume you are targeting ~50% growth next year. At a forecasted $3M in revenue, you will have to invest ~$600K into inventory over the course of the year. If we assume all else equal (margins, inventory turns, operating costs, etc.), you would have to provide an additional ~$200K in capital investment into the business to achieve the growth targets. That ~$200K investment will eat up all of your take-home profits from the previous year, unless you find alternative sources of capital investment. So the ultimate annual take-home pay, in reality, is probably in the range of ~$50K post tax.
Now let’s explore the asset sale. If you are generating ~$2M in annual revenue, you are mostly likely going to be generating ~$425K in taxable income. Assume you are able to find a cash buyer to purchase the business for 2x trailing twelve month’s cash flow, the purchase price would equate to $850K in cash. After you apply the highest bracket of capital gains tax of 20% to the purchase price, you would net ~$680K in cash in a worst case scenario. If you were to continue running the business it would take you realistically 5+ years to net the same amount of cash flow with a high level of risk associated with it.
By selling your business you are able to realize the true economic value of the business you have built and reduce your overall risk profile.
Is Your Business Even Sellable?
This is a very important question. If your Amazon FBA business is a well-oiled ecommerce machine with lean overhead, high margins, and ample growth opportunities, chances are you’ll find a cash buyer at a great price. After all, having efficiencies in place that ultimately allow your business to run and make money without you is a huge asset. It is important to note that just because you decide to sell your business, it does not mean that you will sell it. In fact, the majority of businesses that get listed on the market do not actually sell. At the end of the day it really comes down to how great of a business you have built and what the business is worth to a potential buyer.
Calculating Its Worth
Calculating your business’s value depends on a number of variables. To start, you’ll want to focus on two main components of which all negotiations are based:
- Your net profit — or the trailing 12 months of cash flow (often referred to as Seller’s Discretion Earnings or EBITDA)
- A multiple applied to the above number — this multiple is based on each buyer’s risk tolerance and perceived value of your business, so it is discretionary and ultimately gets negotiated between the two of you.
At the end of the day, prospective buyers care most about risk and their biggest consideration will be “How much risk are we assuming?” Unfortunately, Amazon FBA businesses tend to be risky by nature. For instance, Amazon could freeze or suspend product listings (even accounts) with no warning or legitimate reason. As a result of idiosyncratic risk factors, Amazon FBA businesses tend to sell at lower multiples than other e-commerce businesses.
When negotiating the business price with a prospective buyer, make sure you put yourself in their shoes. What would be most attractive to them? Knowing what you do as an FBA seller, what would you look for in an FBA business? How can you de-risk things for them?
While the cash flow multiple will ultimately be based on the buyer’s own perception of value, here are some areas you should expect them to factor in and their potential impact on valuation.
Don’t be surprised if one buyer weighs some of these variables more heavily than others — it all depends on their own size, resources, and experience with Amazon FBA businesses. Some buyers may have a distinct acquisition strategy focused on acquiring direct to consumer brands vs. Amazon-based brands. Other buyers may view direct to consumer sites (Shopify, etc.) as a negative as it increases operational intensity.
To get a sense for what your business could be worth, you need to speak with prospective buyers and other knowledgeable participants in the Amazon ecosystem.
In the meantime, you can get a sense for what your multiple could be based on this chart of median trailing twelve month cash flow multiples for Amazon FBA Businesses.
Ultimately, there’s no way to set the actual price without going through the process and seeing where your business falls in the market at a given point in time. Similar to most assets, the market always sets the price. You could have a price in mind, that doesn’t mean the market will always agree with you.
It is important to remember that you know more about your business than anyone else. When you decide to explore a sale, you should prepare to educate the market about your business. Be prepared to have supportive documents (summary, annual/monthly profit and loss statement, cash flow statement, revenue breakdown, etc.) that can lead to fruitful discussions and a quicker process overall.
Let us know if you are interested in learning more about the sales process.
If you’re not quite ready to sell, you’ll need to keep your business growing. To keep investing in your business to get the valuation you’re seeking, get capital from Payability. Reinvest in your Amazon business faster to reach your desired exit sooner.