3 Factors That Can Maximize an Amazon Business Valuation
The eCommerce trend is rapidly growing and doesn’t show any signs of slowing down. As Entrepreneur.com explains: “The COVID-19 pandemic has caused a massive shift in consumer behavior — not just what people are buying, but how, when and where they’re buying it.” The same article provides some interesting data:
The eCommerce sector will grow at a 17.8% rate in 2021.
73% of shoppers will continue to purchase essentials using eCommerce after the pandemic is completely over.
Groceries now account for 12% of eCommerce sales.
Businesses that sell through the Fulfillment by Amazon (FBA) system are particularly attractive to buyers, and an Amazon FBA business valuation is important if you’re considering a company sale. To maximize your business value, work with an experienced business broker.
Operating as an Amazon third-party seller is attractive to potential buyers, for several reasons.
The Power of Amazon
As of 2019, there were 112 million Amazon Prime Members in the U.S. spending, on average, $1,400 annually using the website. Most consumers use Amazon, and are familiar with the purchasing and shipment process. FBA sellers use Amazon’s network of fulfillment centers to deliver products to customers.
Third-party sellers drive more revenue to Amazon than the company’s direct-to-consumer business. Sales by third parties account for 58% of Amazon sales, and the business is growing at 52% a year. In fact, third party sellers sold $3.5 billion on Amazon Prime Day in 2020.
Discuss your FBA operation with a business broker, who can help you identify ways to increase your company’s valuation.
3 Factors That Drive Company Value
Generally speaking, the Amazon business value depends on the popularity of the products, the reliability of suppliers, and the company's marketing efforts.
1. Product Selection
Consumers are purchasing a growing percentage of essential products and grocery items on Amazon, as well as personal care and fitness-related products. This article lists some profitable product categories, including baby items, jewelry, sports apparel, and electronics.
Amazon provides a number of tools to analyze FBA sales, including Best Sellers Rank.
Many successful businesses operate in a particular niche, and the same is true for FBA operators. Niche firms can dig deeper to find out what their customers want, and the problems clients are trying to solve. There may also be less competition working in a niche.
2. Building a Brand
Successful FBA sellers drive traffic to their websites by providing content that solves customer problems and educates their target audience. Firms write blog posts and produce video content to attract interest, and to drive repeat business. Many offer downloadable content in exchange for an email address, and market to their email list.
Customer product reviews are also valuable, because many shoppers search for reviews before making a purchase. The best companies automate their process to follow up with customers after the sale, and to ask for a product review.
3. Reliable Suppliers
To fulfill orders for customers, you need reliable suppliers. The best FBA businesses have suppliers who charge reasonable prices, and ship items in a timely manner. Ideally, you should enter into a written contract with suppliers, so that the pricing and shipping terms are clearly stated.
If you can consistently drive sales of products that generate repeat business, you can demand a higher Amazon business valuation. Potential buyers also value firms that generate revenue from a variety of products, and don’t rely on a small number of products for the majority of sales. Finally, purchasers are looking for opportunities to create smooth transactions for the new owner.
A business broker can summarize the factors that make your company attractive, and create marketing materials to promote your firm. There are several metrics that can be used to value your FBA business.
Valuing Your Amazon Business
Businesses are often valued based on a multiple of revenue, cash flow, or earnings before interest, taxes, depreciation, and amortization (EBITDA).
However, FBA companies are typically valued based on the seller’s discretionary earnings (SDE), or the future income the business can produce for the owner. The calculation is based on this formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses)
SDE adds back business expenses that have some personal benefit to the owner, including vehicles used by the owner, charitable donations, and the owner’s salary. An FBA business may be valued at three to six times the SDE, and businesses that have a longer history of generating earnings are valued at higher multiples.
Managing your business is time consuming, and working on a business sale can feel overwhelming. Find an experienced business broker to serve as your trusted advisor throughout the process.
Raincatcher for Maximizing Amazon Business Valuation
Raincatcher’s mission is to help entrepreneurs buy and sell remarkable companies. They have helped over 11,000 businesses, and their professional brokers have decades of experience. Work with a Raincatcher business broker today to evaluate your Amazon business, market it to qualified buyers, and to sell the company for an attractive price.