How to Calculate an FBA Business Valuation
Amazon FBA sellers have different approaches to managing their business. Some start selling on Amazon to make additional income and supplement a full-time job. Others start their business with the intention to sell it in the future.
Whether you’ve been planning to sell for months or have just started to entertain the idea, you should understand how to sell your FBA business. When valuing a business, buyers often use the multiples approach, which is based on the premise that similar assets should sell for similar prices.
This approach begins with creating an analysis comparing your brand’s financial metrics and operational qualities to those of similar companies. Several metrics should be examined, including earnings, market competitiveness, and room for product expansion.
Seller Discretionary Earnings
A monthly breakdown of seller discretionary earnings (SDE), or annual net profit, helps gauge consistency of sales. A steady increase in revenue and profit each month, or year, makes your business more attractive to buyers.
When calculating SDE, deduct your business’s operating expenses from total revenue. For Amazon FBA businesses, many fees are already calculated as part of the operational structure. These include costs for packaging, shipping, and storing inventory at the Amazon warehouse. Operating expenses also include the cost of providing customer service, which is often an extra salary expense for business owners.
Researching and reviewing competitors in the space can give you a basic idea of your FBA business valuation. It’s important to review data and adjust operations where necessary to stay competitive with similar companies in your category. Buyers are looking for proof of stable customer demand and potential for growth in the future.
Strong inventory management and inventory diversity are valuable to a potential buyer. Maintaining multiple SKUs, a diversified supply chain, and effective use of targeted keywords will lead to strong lead generation.
Further, diversification reduces your risk of relying on a single product to generate sales, or a single customer. If a supplier’s quality declines, do you have another option? When Amazon’s algorithm changes, are your targeted keywords enough to push your products to the top of the search? Do you have a diverse set of products that customers love? You should consider these as you scale your business, because buyers will be asking the same questions.
Strong, reputable brands will generate higher valuations. Ensure your targeted keywords and phrases are effectively driving search traffic to your site. Consider how high your site ranks, and your advertising cost-per-click. The ranking and cost of your online presence demonstrate demand for your brand and the investment necessary to maintain sales.
Many successful companies find new customers through Instagram and other social media to build brand awareness and loyalty. Do you acquire customers through organic or paid efforts? Do you have a significant number of repeat customers? What’s the average purchase volume per customer? Reviewing this data on a monthly, quarterly, and annual basis will illustrate the strength of your brand.
After calculating your net profit, competitive landscape, longevity, product diversity, and brand value, you’ll have a better estimate of your business’s value. Other factors to consider are revenue trends, source of online traffic, any technical knowledge necessary to operate the business, and potential for future growth. These establish how transferable, marketable, and sustainable your business is.
Before considering a sale, here are a few ways to improve your Amazon FBA business.
Improving Your Amazon FBA Business
To increase your FBA business valuation, make sure you’ve set up your business to operate as effectively and profitably as possible. Product listing optimization and effective advertising are two critical components of building a strong brand.
Product Listing Optimization
Well-written product pages help drive sales. The basics of Amazon page optimization include following the platform’s photo and character count requirements for titles and descriptions. Provide clear, hi-res images, videos where applicable, and information that’s targeted for competitive keywords. These tweaks to your product pages can improve the searchability and user-experience of your product listings, boosting organic sales.
Maintaining competitive pricing can also have a positive impact on your business. Set up automated pricing through your seller central account to adjust prices and increase your visibility among online shoppers. Also, determine which items are eligible for Amazon's special promotional offerings, such as free or next-day shipping. This will entice buyers and generate repeat purchases.
Advertising via sponsored products, coupons, and other exclusive discounts allow you to attract more buyers in different ways. Set an advertising budget and track its impact on sales. Optimize underperforming ads by using new, creative copy to boost your return on investment. Using Amazon’s ad tools can make your advertising more effective, increase sales, and ultimately, improve the value of your business.
Once you’ve established that your company is in a viable selling position, you’ll need to prepare it for sale.
Preparing Your FBA Business for Sale
Maintaining detailed documentation throughout the course of your business will save time and money down the road. One of the most important and time-consuming components of preparing your business for sale is organizing financial records and reports.
Buyers will request financial documents that include monthly and annual revenue and expenses. A business that has declined in revenue over the years is less valuable than a company that has increased consistently every year. Buyers take into account economic anomalies, but are mostly interested in your company’s ability to weather market shifts. The potential of your company is as important as current year revenue.
Operational processes are also an important part of preparing your business for sale. How do you produce, ship, and manage your inventory? Which suppliers do you use? How long does it take to fulfill inventory? Tracking this data on a regular basis makes it easier to create these reports when buyers ultimately request them.
Transferring your operations to a buyer also includes any operations outside of Amazon FBA. For example, if you have a direct-to-consumer website, how much revenue does it generate compared to your Amazon site? At Forum, we look for brands that generate 70 percent or more of sales through Amazon FBA. Additionally, since Amazon has a streamlined process for its logistics, it requires less of a learning curve for a new business owner.
In conclusion, performing a full FBA business valuation requires organized, detailed information and analysis. Once you understand the basics of what buyer’s consider when they evaluate acquisitions, ensure your brand is in a position to earn an offer worthy of your hard work.