Valuing Your Amazon FBA Business
Fulfillment by Amazon (FBA) is now one of the best ways to make money online. With the success of FBA, numerous business owners are currently weighing their options to sell on the platform. Trying to determine the actual value of your FBA business can be an arduous task. After spending the time and energy in developing a business, an owner needs to know what their business is worth, not only for tax and legal purposes but also to track the business’s performance, assess opportunities, and develop an exit strategy. In deciding how to value your Amazon FBA business, the first step would be implementing one of the two most common metrics used: The SDE and the EBITDA methods.
SDE and EBITDA
The Seller Discretionary Earnings (SDE) and the Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) methods measure the performance of your Amazon FBA differently. Smaller companies ($500,000 to $1 million) use SDE; however, larger companies ($1 million and over) implement the EBITDA method. The SDE method calculates how much money the owner will actually take home using the equation: Revenue – Cost of Goods Sold – Operating Expenses + Owners Salary.
The EBITDA is used to show a potential buyer or investor how much your Amazon FBA business is earning. The formula for EBITDA is: Net Income + Interest Expense + Depreciation Expense + Amortization Expense + Taxes. Either method can be implemented. However, it’s important to consider add-backs. Add backs are expenses that are not required to maintain the business.
Every Amazon FBA business is unique; however, it’s crucial to consider the valuation drivers and how they can increase the value of the business if a sale opportunity arises. Let’s take a look at a few drivers that are important to Amazon FBA Businesses:
- Age of Business– The duration of your Amazon FBA business will determine its sustainability and future profit for a potential buyer. Depending on the buyer’s risk tolerance, they can decide to invest in a business that is 24months old instead of one at 12months. However, there are buyers that prefer a slightly younger business for many reasons. Growth is attractive.
- Trends– Not many buyers will be attracted to businesses that are declining, and in the same breath, no business owner wants to sell a rapidly growing business. The key is to have and sell a business that is trending, and one that most can predict will trend for a long time. Buyers are attracted to businesses that are consistently trending upwards.
- Level of Owner Involvement– Most business buyers are seeking businesses that will allow them time to focus on the growth of the business and not the operations. They often have more than one business and will not have the time to focus solely on one. Buyers, in this case, are more interested in passive income.
- Financial Performance– The finances of your Amazon FBA business tell the story of your history. Being financially stable is an important aspect for a buyer. Be careful not to over or under-stock your products. It is also important that your financial records/statements are sound. Hiring an accountant to compile your financial statements will increase buyer confidence and your valuation.
- Products– Many business owners prefer to select and focus on a specific niche as that may be where their strength lies. However, it’s best to diversify your business and provide a variety of products as within the same niche. Popular niches include: home & garden, baby products, beauty, and sports/outdoors. Buyers prefer to buy brands over a collection of products.
Preparing your Amazon FBA business for valuation can be an exhausting process, especially if you are unfamiliar with the steps. A valuation provides the business owner with beneficial information that indicates the true value of the business. To make the process easier, you can use the FBA Valuation Calculator from Dragonflip that will help to determine the market value for your Amazon FBA business. Dragonflip aims to successfully connect buyers and sellers, creating mutually beneficial solutions.
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