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Amazon FBA valuations

Why Amazon FBA Sellers Should Cash Out on Their Businesses and Sell Now

Guest PostGuest Post
June 17, 2021

Editor’s Note: This is a guest post written by Sarah Nuttycombe, Content Specialist at Empire Flippers

Ever wake up with a good feeling? Where you don’t quite know why, but you can sense it’s going to be your lucky day?

Without knowing it, many Amazon FBA sellers have entered a time period that leans heavily in their favor. It’s more than a lucky dayit’s a lucky season

This lucky season could also be thought of as “The Season of the Seller.” It captures the wild growth of the Amazon FBA space and the sharp rise of FBA valuations, thanks to increased buyer demand and institutional capital flooding the acquisition space. 

We’ll go over why this is such a great time for FBA sellers and how they might be able to cash in on their business’s full worth. We’ll also explore how business valuations work so you can gain in-depth knowledge of what makes a business valuable to buyers. 

Let’s jump right in. 

An Industry Geared Toward Sellers

Every year, we release our State of the Industry report. This report contains a cumulative examination of all the businesses that have sold on our marketplace. We then take that data and compare it to previous years’ data to understand what’s happening across all online monetizations. It’s the only data-driven study of the online business industry, and since it dips into almost every way of monetizing online, it provides a fair analysis of what’s going on in the world of online business. 

The average list price of a business on our marketplace ($284,838.04) was up 58% compared to 2019, while the average sale price had increased 73% to $269,200.81. What this all means is that demand for online businesses has risen across the board, and now sellers are able to walk away with higher sales prices than ever. 

But where the rise is most prolific is in Amazon FBA assets. Private equity (PE) has gone into aggressive capital raising, with Forbes reporting $1.5 billion raised from about 1015 groups. That’s only a snapshot of the money filling the space, and more groups are raising capital every day. They are looking to acquire strong FBA businesses for sums ranging from $500K up to the eight-figure range. When they acquire these businesses, they typically add them to a portfolio of other Amazon FBA businesses and utilize the capital on hand to scale and optimize the business so it achieves even greater profitability. 

The increased buyer demand for FBA businesses caused their value to shoot right up. Here’s the data we found for FBA businesses in the past year: 

  • The average list price went up 55%.
  • The average sale price went up 80%.
  • The average sale multiple (TTM) went up 14%.
  • Total sales rose by 98%.

If you’re an FBA business owner, this is a big deal. Now that buyers are rapidly buying up FBA businesses, if you own a solid FBA business, you can walk away with a sale price that could be 80% more than what you would have gotten a year ago if you tried to sell. That’s huge! 

Since demand is up, competition is fierce among buyers. That means the ball is in the seller’s court. Not only can they walk away with much more cash, upfront no less, but they can also benefit from deal structures that suit their needs. That might mean a performance earnout where they accept slightly less cash for the business at the time of sale as part of an agreement that they will continue to earn money after the sale from the business’s good performance. 

Alternatively, sellers can be more choosy and have little to no earnout period (an agreement where a certain amount of the sale price is paid out in installments) if they desire to become completely detached from the business and walk away with all the cash in hand.

How FBA Valuations Work

A valuation is a snapshot of how much your business is worth and how much money it would make if it sold on a marketplace. It takes into account business performance data and sets that against a multiple. 

business valuations

A multiple is a multiplier of a business’s net profit (profits after expenses). For example, if a business earns a net profit of $2,000 a month and the valuation estimates that the business should sell at a value of 30x, that means the sale price would be $60,000. 

Here’s a simple formula to visualize how valuations break down:

Monthly Net Profit x Multiple = Valuation

A typical multiple takes into account a 12-month average net profit, though depending on the state of the business, that pricing window could instead be six or even three months. Besides the net profit, the final valuation takes a number of factors into account. Let’s dig into these other factors and discuss why they matter: 

  • Business age A business’s age impacts valuations because it signifies risk. For example, if a business is less than a year old, even though it may be doing well, it would still be considered a riskier investment for a buyer. The business would be too young to have withstood changes in the market or things like algorithm updates. It doesn’t have a long track record of profitability. In contrast, a business that has years behind it can demonstrate a long history of solid earnings or even bouncing back from periods where sales might have been low. 
  • Social media Social media isn’t a make-it-or-break-it element of valuations because we understand that social media followings won’t always be a good fit for certain monetizations or businesses with a smaller traffic size. However, when a business submitted for valuation has a large, engaged social following, that can be an important boost for the valuation because it shows the business has brand loyalty and diversified traffic. Note that we included the word engaged since simply having a large count of followers on social media doesn’t mean much unless they are engaging with your content or converting into sales. We can see when a follower count is fake as well, which would ultimately bring down a valuation. 
  • Email list An email list is another important signifier of consumer loyalty. Particularly for eCommerce businesses, an email list can be a powerful way to boost sales and engage with your audience. It also gives you more direct contact with and control over your customer data, which is not typically possible on platforms like Amazon. Having an email list with a sizable subscriber base and automations in place to help boost conversions can have a significant impact on the final valuation because some buyers prefer to buy businesses with an email list they can scale. 
  • Traffic diversity Diversity is everything when it comes to traffic. While some businesses may be pretty limited to one traffic sourcelike Google or Amazon’s algorithmif your business can prove it generates traffic from other sources, it will be a huge value-add to buyers. That might mean demonstrating traffic from paid ads, social media, or an email list alongside SEO on Google or Amazon. If you have more than one traffic source, your business will stand stronger against algorithm changes that could otherwise sink your business entirely.

The beauty of valuations is that they’re never fixed. The sooner you know how much your business is worth, the quicker you can use this knowledge to plan your next steps. You can have time and knowledge on your side to grow your business to new heights or make changes to the business to help it gain a higher valuation. 

As an added bonus, you don’t even need to be in the process of selling your business to get a valuation. With this free valuation tool, you can get a quick and easy valuation within minutes.

How to Make the Most of Your Valuation

Valuations are a great first step, but it’s up to you to decide what to do with your newfound worth. It’s a great starting point to figure out whether you’d like to improve your valuation. 

There are a few things you can do to raise your business valuation. You can make tweaks to the valuation points already mentioned: social media, email lists, traffic diversity, or holding a business until it’s a bit older, or you can implement any of the following changes to boost your valuation: 

  • Lower your stock keeping unit (SKU) count If your business has thousands of SKUs, a buyer may think the business is difficult to manage. Lower SKU-count businesses with solid performance are in high demand because they have fewer products to oversee, leaving more energy for optimizing a smaller number of listings. Additionally, managing inventory and logistics is much less of a headache. If you can operate from a sweet spot with just enough SKUs to maximize opportunity within the niche while still ensuring that it’s easy to run, this will almost assuredly capture buyer attention and lead to a higher multiple. 
  • Create SOPs Standard operating procedures (SOPs) are guidelines for how to run your business. They consist of detailed directions for every element of your business. SOPs are one of the easiest and most cost-effective ways to improve your valuation. When you create detailed SOPs, you’re creating a roadmap for your business’s operations and making it possible for a buyer to acquire your business and understand how to run it on day one. By having them in hand during the deal process, a buyer can look over the SOPs and quickly decide whether they can see themselves taking over the business. SOPs sweeten the deal for buyers and help you discover how to optimize your own operations. 
  • Use a 3PL — Third-party logistics (3PL) can have a powerful impact on your valuation. A 3PL can help cut you as a seller out of the equation when it comes to handling inventory or logistics. While Amazon does carry out a lot of the logistics for sellers, there are still inventory checks that need to be done, and some sellers may need to bundle products together. Trying to carry out those tasks yourself may hurt your valuation since a buyer doesn’t want to buy a job to dothey want to buy a business that runs hands-off. A 3PL can help with those tasks and do important things like get your product from your supplier to Amazon or even handle the shipping logistics to customers entirely. It all depends on your needs, but most importantly, a 3PL enables efficient operations, which will be key to getting the highest valuation possible. 
  • Build a brand It’s hard to survive on Amazon or the world of ecommerce without a brand these days. Buyers, especially private equity (PE) buyers, are hunting for strong brands they can scale. If you are merely selling a loose set of products on Amazon with no discernible brand name that customers will remember and want to come back to, that will hurt your overall valuation. In contrast, if you build a strong brand supported by social media, email marketing, strong photography, and video elements, then you become more than what you sellyou can become a recognized household name. Buyers will pay top dollar for a brand that has been built out, and that’s why branding is key if you want to raise your valuation. 
  • Use virtual assistants To expand on operations optimizations, if you are solely supporting the operations of your business, you are likely spending long hours on the business. Again, buyers don’t want to buy a business that feels like a full-time job. You should aim to cut down your hours spent on the business by outsourcing tasks to virtual assistants (VAs) who can handle things like customer service or inventory management. If you already have VAs in place who would be willing to continue on with the buyer, it’s a value-add for the buyer as they won’t have to go through the effort of hiring people themselves and will already have experts who know how to run the business. As a result, your valuation would improve because you’ve got the right team in place to hand over to the buyer. 
  • Use smart automations All of these steps should be used to optimize operations. One of the easiest ways to optimize is to use automations and smart software to help your business run to the best of its ability. You should automate payment processing so that you have time for more pressing matters, use SEO tools for ecommerce brands, and make sure to use the right tools for product research. The more you automate routine tasks and keep up with competition through research and tools, the more valuable your business will become. 

All of these are ways you can drastically improve your valuation and gain an idea of how to improve your business overall. 

Furthermore, let’s say that the valuation isn’t quite what you were hoping for, and you find out your valuation might have been lowered because of your inventory handling practices. 

If you are spending 50 hours per week running your FBA business and doing things like quality checks from your garage, then that will also hurt the valuation. Remember, a business becomes more valuable when it has clean operations and runs with minimal effort. This might mean using a 3PL company or your supplier to do quality checks for you before inventory is sent to Amazon. 

Additionally, hiring a small team of virtual assistants to run operations will enable you to spend less time on the business.. 

Your valuation may give you an idea of what you could earn in a sale, but it can also be a roadmap. 

Your roadmap starts when you know your worth and what you’d like to walk away with in a sale. You can then go into the next year or so of owning your business while systematically improving it and growing sales to earn an even higher valuation when it comes time to exit. 

Of course, there are many sellers who may fill out our valuation tool and be pleasantly surprised at their projected sales price. FBA businesses are selling for higher multiples than ever, so if your business merits a healthy valuation, it’s worth considering whether this might be the best time to exit your business. Demand is at its highest now, but no one has a crystal ball to see how long it will go on for. 

While billions of dollars flood into the FBA acquisition space, you may decide that now is the time to walk away from your business with cash in hand. That capital could turn into new opportunities, such as early retirement, a new house, or buying another business to run. 

How would your life change with five, six, or seven figures in hand? Start with your valuation, and the vision of what you could do next will start to fall into place. 

Sarah is a Content Specialist at Empire Flippers. Before joining Empire Flippers, she spent five years as an editor and producer for documentary films, working on shoots around the US, Europe, Australia, and Asia. Sarah is passionate about the digital nomad lifestyle so you’ll likely never find her in one place for too long.


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