CEO of Urtasker.com, a full-service Amazon marketing agency helping brands grow both on and off Amazon.
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The valuation of your FBA (Fulfillment by Amazon) business depends not just on how well your business is performing but on a number of other factors as well. In my experience with helping Amazon business owners have a profitable exit, I’ve found that healthy Amazon businesses have a resilient supply chain, impeccable financial records and a clearly differentiated brand.
In order to maximize your profit when selling your FBA business, you’ll need to be aware of how you can improve these growth factors to achieve the best valuation possible. Selling an FBA business is a long game, and you should plan for it well in advance, knowing what you need to do both years before a sale and during a sale.
Here’s how an FBA business is valuated and the steps you need to take during the months and years leading up to the eventual sale.
How is the valuation of an FBA business calculated?
The most common method used to calculate the value of an FBA business is the SDE (seller discretionary earnings) method. This uses your average monthly net profit over the past 12 months and the “seller multiple”: Valuation = Net Profit x Multiple
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While the SDE denotes the final profit earned by the owner after deducting all operational costs, the multiple is not so straightforward. It’s assigned by the buyer or the broker involved based on factors like your business’s growth prospects, the strength of your brand, your product mix and operations, and the level of automation in your business.
Fortunately, you can work on improving all these areas to guarantee a favorable result during the valuation phase.
What To Do Before The Sale
Building and sustaining an FBA business deserving of a strong valuation takes years of forward-looking strategy. Even if selling your business is not on the cards anytime soon, there are certain areas you should always try to improve on, as they’ll inevitably help grow your business.
Firstly, any business hoping to be acquired should have a track record of ideally two years, and one year at the minimum. Your operations and business processes should be mature enough to ensure a smooth transfer of ownership.
Next, you need to implement a coherent strategy covering various factors that go into the calculation of the multiple. The age of your business, your product mix, brand recall, the strength of supplier relationships, supply chain processes, and last year’s sales and profit record will determine the multiple your business can justify.
Reduce Risk Exposure
No business is immune to risk. Be it unpredictable market forces or competition from other sellers, any successful business will always be at the risk of a decline in sales or a hit to its brand value. As a business owner, you should focus your efforts on two primary risk sources: copycat sellers and a concentrated product mix.
Copycat sellers are a sad reality. Your excellent product listings and high-quality images can easily be copied by these opportunistic sellers, hurting both your brand and sales. Make sure you obtain trademarks and sign up for Amazon Brand Registry to maximize the chances of protection for your brand.
As for your product mix, it’s never a good idea to be dependent on one or two products for a majority of your sales. You should have a healthy product mix, distributing profits across multiple products so that you’re sufficiently protected against any unpredictable market changes.
Strengthen Operations
When a buyer acquires an FBA business, their intention is to onboard an asset that doesn’t take too much of their time but still keeps earning revenue for them. If your business doesn’t have adequate automation, it won’t appeal as much to prospective buyers—or worse, you’ll have to sell it at a much lower valuation.
Your supplier relationships are a huge part of selling your FBA business. Keep working on improving them regularly so the transition to a new owner is seamless. You should have a wide variety of suppliers across different locations to safeguard any bottlenecks.
Ensure Airtight Records
Financial records and structured SOPs (standard operating procedures) play a huge role in deciding the multiple your business can command. Potential buyers want a business that has thoroughly vetted financial records and best practices in place before they invest in it. An absence of documentation sends a message to the interested parties that either you aren’t serious about your business or you aren’t capable of running a well-oiled business machine.
Either of those perceptions will hurt your business valuation and decrease the profit you can generate. Thus, always get your affairs in order as you approach the sale. As your financial records are the deciding factor of your valuation, take the help of experts if you need, but your financial and operations documentation should be airtight.
How To Find The Right Buyer And Ensure Fair Valuation
You can choose to find the right buyer by exploring your personal network and trying to get an accurate valuation from either the buyer or by calculating using the formula above. As you may have guessed, this will rarely be the best choice. Business owners will either undervalue or overvalue their business, hurting the chances of acquisition.
You can list your business on an online platform and hope to get a good deal. But you’re severely limited to the pool of buyers and risk buying into restrictive policies.
The most profitable option, in my opinion, is to take the help of a brand accelerator. You not only get the largest pool of buyers and access to industry-leading financial and legal frameworks, but you also have much more control over the entire process from start to finish. Expert assistance can completely turn your business around and also help you ensure you’re getting the best possible deal for your business.
Planning an exit can be daunting and overwhelming. But the right time and right preparation will position you for an incredibly profitable exit, making sure it’s worth the efforts.
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Author: Omer Riaz, Forbes Councils Member
