What Do Buyers Look for When Buying an FBA Business?
Amazon has seen rapid growth in the last few years, with sellers generating thousands and millions of dollars in revenues. And as more mom-and-pop stores continue to make it to the top of the marketplace, investors have got their attention firmly focused on their next acquisition target.
But what do buyers even look for when buying an existing Amazon FBA business? What are the things that make them go crazy, and what things put them off?
This blog answers it all!
What you’ll learn:
- Why People Really Want to Purchase Amazon Businesses
- The Types Of Buyers and Their Psyches
- What Buyers Look For When Buying an Amazon Store
- Metrics Buyers Check
- Questions To Ask Potential Buyers
- How Much FBA Businesses Sell For
- How Selling an Existing Amazon Business Works
But first things first – let’s answer a few common questions:
Can You Sell an Amazon Seller Account?
You can’t sell an Amazon seller central account, but you can legally transfer the ownership of your Amazon FBA store. The business transfer is relatively straightforward and partially facilitated by Amazon.
Why Do People Buy an Existing Amazon Business?
People buy an automated Amazon store for a couple of reasons:
Not all Amazon businesses succeed; in fact, many don’t make it past the 6-month mark. And it’s not because Amazon is not a good platform to sell on!
Common reasons include not understanding Amazon’s seller policies and launching products in ultra-competitive niches. This is why buyers prefer to avoid the problematic beginnings of a store and reduce the risk of failure by buying one instead.
Skip the Hustle
As an Amazon seller, you’re well aware of the time and commitment it takes to build a store from scratch. However, most people don’t have much leeway and prefer to buy out a turnkey FBA business so they can spend their valuable time elsewhere.
Get Steady Cash Flow
An existing business is already generating revenue, so the buyer won’t have to wait for sales to trickle in. Instead, they’ll have a steady cash flow and be profitable from the get-go.
Creating an Amazon store is a lot of work. One needs to create or modify product design, negotiate with suppliers, set up FBA product listings, create amazon PPC campaigns, focus on attracting customers, and work through trial and error to carve a space in their respective product niches.
That’s why many prefer purchasing a business—it’s much more convenient than creating one from the ground up. All that’s required is to maintain business operations, increase traffic and sales via paid and organic efforts, and work towards enhancing brand image.
If one has the means, why take a risk and spend late nights on a startup business when you can just purchase an up-and-running primed Amazon business instead?
What Buyers Look for When Buying an FBA Business
The first thing that comes to mind when asking “what buyers look for when buying an FBA business” is usually sales revenue. However, intelligent buyers take a more holistic approach and evaluate businesses from multiple angles. These include:
Is the business growing (sales increasing or decreasing, profits increasing or decreasing)?
Rather than just taking a quick peek at the P&L sheets for sales and profit numbers, investors study two variables to figure out the growth pattern of a business. These are:
Top-line trends refer to the total of 12-month trailing sales. These reveal whether your sales are increasing or plummeting.
Bottom-line margins refer to the profits accrued by your business after deducting all expenses incurred and are the increase or decrease of your earnings over time.
The comparison of both of them enables us to figure out how much a business is worth.
From a monetary perspective, a business with high top-line margins but average bottom-line margins may be more appealing than a business with low sales and increased profits.
On the flip side, when you look from the development perspective, a business making fewer sales but showing steady growth will attract more buyers than a business making more sales but has plateaued over the last year.
Are you selling globally?
Buyers prefer businesses that span across multiple regions. That’s because selling globally increases your revenue channels, diversifies your audience, and allows room for experimentation. A strategy that doesn’t work in one region may deliver stellar results in another.
International selling also gives the buyer security that the others won’t be affected if they face problems in one country. For example, if you’re having inventory troubles in Amazon UK, your whole seller central account won’t be on hold; instead, your Amazon US or Germany account will remain operational.
Is your business operational on multiple platforms or Amazon only?
The saying “don’t put all your eggs in one basket” applies in this scenario. Although Amazon offers many opportunities for creating and taking your business further, sellers shouldn’t forget that the fate of their business lies in the eCommerce giant’s hands.
Organizations that sell their products on other platforms, such as their website, eBay, Walmart, or Shopify, in addition to Amazon, are naturally worth more than those that only sell on Amazon. They carry lower risks.
If you diversify, your brand won’t be destroyed if you have a temporary or permanent account suspension in one marketplace.
You must engage audiences across various online channels to achieve brand awareness, customer satisfaction, sustainable traffic, and ultimately, consistent revenue sources.
Does your business have an actual brand presence? How well are you leveraging it?
Buyers want customer engagement, meaning you should have a strong brand presence outside of Amazon. This can be in the form of a social media page or a YouTube channel.
Make sure everything’s pristine—upload high-quality images and videos and use compelling content in your product listings. Create a brand persona where everything ties together into one brand identity.
Then, proceed to leverage your presence to boost sales. Keep communicating with your customers through emails, social media posts, comments, and more.
Are there any built-in growth opportunities?
The very reason a buyer wants to purchase a store is so that they can grow it further. Businesses that survive the initial years have more significant potential for growth. Therefore, your business should provide opportunities for further scaling.
Remember, potential buyers will evaluate your store to determine if there’s room for growth.
This can be in the form of untapped market opportunity (adding bundles, variations, or even starting a new product line), underperforming SKUs, ad campaigns that can be tweaked, under-optimized product listings that still generate a healthy amount of sales, and so on—be sure to identify these points.
Now, let’s move on to the most significant stakeholder in the success of your business, what buyers look for in your product portfolio.
How many products do you sell, and how healthy is their distribution?
A potential buyer will check the number of SKUs you sell. Usually, buyers don’t prefer single SKU stores as these are risky. A single ASIN suspension can jeopardize the entire business.
On the other hand, you shouldn’t own too many products either, as these can create unwanted inventory management woes.
Maintain the right mix and try your best to ensure that sales are distributed evenly. One SKU shouldn’t be the sole breadwinner—the more even the distribution, the safer your business appears to outsiders.
Is there consistency across your product catalog?
When building your product portfolio, you should choose one category and stick to it. If you have multiple products, they should be connected in some way, at least. Buyers don’t prefer an assortment of product catalog.
For example, if you sell necklaces, your product catalog can contain rings and bracelets, but it should not have items like hair brushes, socks, etc.
The synergy between ASINs makes it easier to create a stronger brand.
What impact does seasonality have on your business sales?
Buyers seek out Amazon FBA businesses that maintain consistent sales throughout the year and don’t sell seasonal products.
Because seasonal items can create uneven cash flow, which isn’t healthy for any business, moreover, if any logistic mishap occurs during the peak period, you can miss out on the chance to make money.
Every product has seasonality to some extent, but you don’t want to sell an item that runs only during summers and remains dead for the rest of the year.
How much inventory do you have in reserve for the new owner?
Taking over a new business and learning its ins and outs can take time. No one wants to be dealing with the pressure of going OOS, especially when they are still in the first few months of their ownership. Every investor wants the transition period to be smooth. Having excess inventory in reserve helps with that.
Where do you stand in terms of defensibility?
If you sell a run-of-the-mill product that lacks differentiation or has a low number of product reviews, your competitors will soon sweep you out of the race.
To prevent this, you must differentiate through packaging, bundling items, adding new features, or introducing post-purchase benefits. The way you formulate your A+ content, design your listing pictures, and write a sales copy can be differentiating factors too.
Unique products strengthen a business and help it rise above the noise.
Note: Keep tabs on competitors’ product reviews, especially the ones with 1-3 star ratings. Identify areas where they fail to address customers’ pain points and ensure your product doesn’t have the same flaws.
Is the product commoditized?
It’s always better to sell standardized, marketable products that are known to have a demand. This prevents them from going obsolete in the future and mitigates any risks for the new owner.
But beware not to sell what is readily available at every store.
Is your business well protected?
Buyers look for a surety that they are investing in something safe. Having intellectual property rights such as trademarks or patents offer them exactly that. They protect your Amazon business from counterfeit attacks, listing hijackers, and potential lawsuits.
Ensure you are not ignoring this all too important administrative facet of your business.
How old is your business?
While young, thriving businesses look good on paper to acquire, they are not often the smartest of investments. They haven’t been challenged by the competitors and the market conditions yet, moving under the radar unnoticed.
Experienced buyers are aware of that and know how this can exaggerate the growth and profit numbers. They are less likely to bet on a horse that has just learned to race.
So what should be the ideal age of your business before you even think of putting it on the market?
It should at least be one and a half to two years old. Relatively aged businesses are time-tested and have lower chances of failure.
They essentially have an established customer base with comparatively stable revenues. Due to this, buyers can better gauge the Return on Investment (ROI).
Is the business well documented?
Investors look for businesses with clean documentation. These include all your financial statements, supplier agreements, third-party product testing, inspection certificates, etc.
A good business will also have straightforward standard operating procedures (SOPs) that allow smooth sailing of operations.
How to make sure your documentation process is at par?
Check your accounting data and tax returns regularly. Maintain historical records, especially those generated over the last 12 months, as these are often used to calculate and determine the value of your FBA business.
Do your due diligence to verify supplier information and contracts whenever you onboard a new vendor. Make sure all the records of returns, late shipments, and other issues with manufacturers and freight forwarders are well documented.
Is the business easily transferable?
A good purchase requires a smooth transition from seller to buyer. For an investor, this includes being well acquainted with the product the business is selling, its supply chain, and any special skills that might be needed to run its operations.
For example, sellers in the medical category may need to have specializations or specific licenses to list their products. As such, a potential buyer may want to know if the licenses will be revoked if ownership changes hands or will the business continue as usual.
Other important questions an investor might ask: Will the current owner help with the transition? If yes, how long will they help, and with what tasks? What will be the mode of communication between the two parties? Will, the seller be comfortable connecting the buyer with their suppliers and forwarding the old contracts?
As a seller, you are responsible for maintaining open communication with the buyer and addressing all their reservations.
Do you have staff?
Virtual Assistants (VAs) can help with bookkeeping, customer service, supply chain management, and other related tasks—the simple things that you shouldn’t be wasting your time on in the first place as a business owner.
A potential buyer will want to know if you have any staff onboard to assist with the operations. They might even pay you a premium for that.
3 Metrics Buyers will Check Before Buying Your Business
We’ve discussed in detail what buyers look for in an FBA business before investing in one. However, there is more to this process.
Investors may also ask for a few essential metrics to help them determine how well your business is performing to come up with a fair valuation.
Product performance metrics
The first thing buyers check is how well the customers are receiving your products. As a seller, you’re well aware of the importance of reviews. They form the backbone of a successful business, lending credibility to your products. The more positive reviews you have, the better.
Also, potential buyers may want to know where your products stand against others in the niche to evaluate how much further work needs to be done to top the sales charts. You must provide them with the BSR data in your relevant category and subcategory.
Seller rating is another crucial listing metric investors might want to look at.
Paid advertising metrics
Paid advertising metrics are crucial to potential buyers because they tell whether a product is bleeding on the advertising front, which is not what you want if you aim for a healthy profit margin. In this regard, your conversion rate is significant.
Meanwhile, ACoS helps gauge your ad campaigns’ efficiency and if there’s scope for improvement.
The well-being of an FBA business depends on how you manage inventory, which explains why buyers focus heavily on inventory performance metrics.
The Inventory Performance Index (IPI) significantly impacts your seller’s central account and shows potential buyers if your inventory is well planned and managed.
What is a good IPI score?
A score of 550 or above is generally considered a good IPI score. Still, anywhere above 400 is acceptable. However, the latter places you at risk of falling below the threshold, which might compromise your inventory stock limits or result in extra fees.
What affects Amazon’s IPI score?
Your IPI score is affected by the excess and aged inventory you have and the balance between your sold and on-hand stock.
You can also improve the score by avoiding long-term storage fees, keeping your listings errors to a minimum, fixing them asap, and avoiding possible OOS scenarios.
Important: Follow these best IPI practices to avoid costly mishaps!
What is a reasonable FBA sell-through rate?
A good FBA sell-through rate is anywhere between 3 to 7. However, buyers prefer rates higher than 7. The sell-through rate is calculated by the number of units sold in a day divided by the average inventory in stock for the past 90 days.
What Questions to Ask When Vetting a Prospective Buyer?
There’s always a risk of being scammed when putting up an Amazon business for sale. That’s why you should always vet prospective buyers.
Ask the following questions:
How big is your operations team, and what does your portfolio look like?
This question is mainly for aggregators, syndicates, and, in some cases, entrepreneurs. You should get a complete rundown of your potential buyer; their credentials, work ethic, the founder’s background, team info, and more.
Asking these questions will help you decide if they’re legitimate or not.
How many acquisitions have you completed?
Ask your prospective purchaser about their previous deals: how many acquisitions they have completed, the types of businesses they’ve acquired, and more. See if they’re experienced enough and worth having a conversation with.
How would you like to structure the deal?
This is probably the essential query. How will the deal happen? Be upfront with your purchaser from the beginning and get the details cleared out rather than obstacles down the road.
What is the guaranteed upfront payment? Will the transfer happen on a business-for-sale platform? You should also ask for proof of funds to ensure they’re serious about purchasing your Amazon FBA business.
How do they plan to grow the business?
If you plan on retaining equity in the business, you should question them about their plans for the store.
Do they understand the category you’re selling in and what changes they plan on making? You should also check if they have an excellent post-acquisition performance track record.
Are they experienced in buying FBA businesses in your country?
Suppose you don’t have a business in the same country as your purchaser. In that case, you should ensure they have experience buying companies in your area, as transferring ownership of FBA businesses in the EU can get a little complicated.
What will be my commitment post-acquisition?
If you’re selling to a private entity, then this question is a must-ask. Even if the buyers are individuals or aggregators, you should always be informed of the expectations between both parties.
Will they require your assistance post-sale? What will be your contribution to the brand? These (and the previous two questions) are crucial, especially if you plan to retain equity in the business. There needs to be a clear understanding of your influence in the company and the balance of power.
How Much Do Amazon Businesses Sell For?
Amazon businesses often sell for multiples ranging anywhere from as low as 1.5x of their yearly earnings to as high as 4.5x or more, depending on the performance and appeal of your business.
Alternatively, some platforms and sellers charge based on monthly profit multiples. These extend between 20 – 50 months.
For example, if your 12-month earnings are $1,000,000, you can expect to receive approx—$ 1.5 million to $5 million for your venture, depending on the valuation.
Note: We usually don’t add inventory costs to the selling price but as an added asset.
How Does Selling an Existing Amazon Business Work?
Here’s how Amazon sellers go about selling their stores:
- You decide to market your business.
- You will now value your business and develop a business prospectus containing details about its finances, operations, market analysis, etc.
- Next, you search for buyers and/or list your business for sale. At this stage, you can:
- List your business for sale on a classified platform or business-for-sale network.
- Sell through an auction platform.
- Hire a professional broker or an M&A advisor to trade the business on your behalf.
- Approach possible buyers and sell the business yourself.
- Once a buyer shows interest, it’s time to start negotiating a deal.
- After both parties agree on the terms and conditions, hire a lawyer or legal team, get the contracts drawn up, and finalize the deal!
- Money is usually held in escrow until everything is in order, but the profits belong to the buyer after the date of sale or as discussed. It can sometimes take months for the transfer of ownership to happen. Selling one item or listing from your business is called an Amazon listing transfer, where the seller transfers the specific Amazon Standard Identification Numbers (ASINs) to the buyer. In an Amazon business transfer, the previous owner hands over their entire Amazon seller account to the new owner. For this to happen, some changes must occur within your Seller Central account to begin the transfer of ownership. Charge and deposit methods: This includes the credit card associated with the account and the bank account where all proceeds are deposited. Account name and contact information: Update all account details to those of the new owner and provide them with the login credentials to your store.Tax information: Update the legal and tax info so the new owner can appropriately receive their tax documents by the end of the year.
- Finally, you give the new owner a run-through of your business operations and finalize the handover.
Do you need an LLC to sell an FBA business?
No, you do not necessarily need an LLC, but a legal entity is required. You can sell an Amazon business with either a sole proprietorship or an LLC. Nevertheless, if you have a big-scale business, then an LLC is recommended.
How are FBA businesses valued?
There are several methods you can use to evaluate your Amazon FBA business.
1. Net profit x multiple = valuation
Probably the most utilized approach out there, the profit multiple valuation method keeps net profitability as the critical element when determining value. You need two things when valuing your business using this method:
- An average of your net earnings, and
- A valuation “multiplier”.
The valuation multiplier is used to determine how stable an Amazon business is. To do this, buyers look at factors such as:
- Traffic, earnings, and SKU diversity
- Average review ratings
- The business’s age
- The strength of your supply chains
- The owner’s involvement in the business
A multiple ranging from 3-6x is then assigned to the business. You can further evaluate your account using methods number 2 and 3.
2. SDE method
We can evaluate a business further using SDE or Seller’s Discretionary Earnings. While the store makes the profits, SDEs (also known as adjusted earnings) are what the owner gets to keep for himself. It shows the investor/buyer what they will get. Here’s the formula to calculate it.
SDE = Revenue – Cost of Goods Sold – Operating Expenses + Owner Salary.
As an Amazon seller, you’re probably aware of how important cash flows are for reinvesting in the business or obtaining more inventory. However, you could use this amount for personal use, leave the money untouched, or take dividends from it.
So this equation subtracts the expenses and fees from the revenue and the amount the seller uses from the account. The SDE method is used to compute the value of small businesses worth less than $3-$5 million.
3. EBITDA method
EBITDA is similar to the SDE method but for medium to large-scale businesses worth around $5 million or more. It is an abbreviation used for earnings before interest, taxes, depreciation, and amortization. The formula used to calculate EBITDA is:
EBITDA = Net Income + Interest Expense + Depreciation Expense + Amortization Expense + Taxes
The EBITDA method calculates the net earnings of an account, adding back factors that reduce its income and allowing the buyer to make a fair comparison against other businesses.
And that’s a wrap!
Based on what we discussed in this blog, it’s safe to conclude that buyers wish to purchase thriving Amazon FBA stores. They look for indicators, metrics, and data that prove that your store is profitable, automated to some degree, and displays growth potential.
To sum it up, they want a stable business that’ll produce revenues for years to come. And that’s precisely what you should work on giving them.
Enough discussions; it’s time for you to improve your business and increase its valuation.