How to Value an Amazon FBA Business
Before we get into how to increase the valuation of your Amazon FBA store, it helps to first get a sense of how business valuation works.
At Empire Flippers, we use the following formula to calculate valuation:
[6-12 months’ Average Net Profit] x Multiple (Typically 20–60+)
Inventory is added as an additional cost.
The first part of that calculation, 6-12 months average net profit, should be easy for you to work out.
The second part is the valuation multiple. Some brokers will use an annual multiple, but we use a monthly multiple as it allows for more nuanced valuations.
The above formula provides a good guideline towards a valuation, but it’s by no means prescriptive.
Take for example the earnings chart of this listing that was valued at around $100,000.
The gross revenue and net profit is on an upward trend. Looks pretty good, right?
Now, let’s compare another listing that was also valued at roughly the same price.
The overall trend for gross revenue and net profit is steadily decreasing over the year. Yet, both FBA businesses were valued similarly.
Long story short, there’s a lot more that goes into the valuation of an FBA business simply because all businesses are unique. That’s why it’s difficult to present a graph where you can measure the progress and tally it up with a price.
Where all FBA owners who want to increase the value of their business can start is by creating a profit and loss statement.
To get a good grip on your finances a profit and loss statement (P&L) should be created. You’ll need to have a P&L made up before you list for sale and it makes it much easier to update it on a monthly basis rather than to go back years to build one.
Within your P&L, you should also make a note of your expenses. Freelancer’s wages, software, and anything else that has contributed to the running of your company. It’s common for one-off costs such as a conference to be considered as an addback. This means the expense gets added back into the net profit as it’s not a necessary expense to run your Amazon FBA business.
This feature is important when it comes to valuation as it improves your net profit which gives you a higher valuation. However, it should be approached with caution as buyers will ask you to justify any suspicious addbacks. Our experienced vetting team at Empire Flippers will help you to build your P&L and can advise on what should be considered an addback. If you go the route of doing it on your own then hiring a bookkeeper to check over everything is advised.
With your net profit and expenses sorted, there’s still the second part of the equation to consider. The valuation multiple will be based on a collection of factors, but let’s look at six ways you can improve it.
How to Increase the Value of Your Amazon FBA Business
Preparing your business for sale doesn’t mean you have to sell it right away.
In fact, we encourage Amazon FBA owners to think about the sale potential early on as it can help you develop your company brand and build a business that runs more efficiently.
Amazon Brand Registry
If you haven’t already applied to be a part of Amazon’s Brand Registry, we highly recommend that you look into it.
It allows Amazon FBA owners who manufacture or sell their own branded products to gain greater control over their listing page, and it offers more protection when it comes to copycat sellers.
To be accepted into the program, you will need to register your brand name as a trademark. This can seem like a hassle, but Amazon rewards brand-registered sellers greatly.
Once accepted, Amazon will provide you with software that helps protect your products from being sold by copycat sellers and hijackers. It even gives you ownership of the coveted buy box, which can increase your sales. In addition, as a trusted seller, Amazon will grant you greater control over your listing page, allowing you to create improved listing titles, descriptions, and product images.
All of these are things a buyer loves to see. It gives them confidence that they’re acquiring a well-established business that is protected against potentially devastating copycat sellers.
Diversification of Products
Finding a winning product is half the battle when it comes to launching a successful Amazon FBA business. Buyers know this, and it’s one of the main reasons they look to purchase established stores.
However, buyers also know that a store that only has one successful product is in a riskier position. What if more competition arises? Or there’s a supply issue that’s out of your hands?
Adding additional, complementary products to your store will have a tri-fold benefit. It not only means that you’re diversifying your risk and improving your potential reward, but it also boosts the multiple at which your business is valued.
We understand that your business might be your baby; something that you’ve nurtured from conception to profitability. It may be difficult to imagine entrusting someone else to help it succeed.
Delegation is a soft skill that many entrepreneurs struggle with; after all, you might not have had anyone to help you in the beginning. But by now, you have a business that you know the ins and outs of better than anyone else.
You should consider using this knowledge to outsource at least some of the work. Most buyers don’t want to acquire an asset that is heavily labor intensive.
To reduce the workload, you can hire freelancers from sites like Upwork. Hiring a virtual assistant can help you manage administrative tasks such as customer service, order processing, and inventory management.
If you’re spending a lot of time on your Amazon FBA business, you should consider outsourcing these tasks anyway. With the simpler tasks out the way, you’ll have more time to grow the business or more time to spend away from the desk!
Regardless of how you choose to spend that extra time, outsourcing the day-to-day tasks necessary to run your Amazon FBA store will make your business appealing to the widest pool of buyers and will increase the multiple at which it’s valued.
Establishing a Secure Supply Chain
The supply chain is the lifeline of your business. It should deliver exactly what you need when you need it.
Buyers will want to know exactly how the supply chain works in order to determine how secure the foundations are. To ensure the greatest stability, we recommend sourcing two suppliers from two different countries. That way if something happens to one supplier or restrictions are placed on a particular country, your sales don't come to a halt.
Establishing a great relationship with your supplier is considered a big asset to your business. When you’re looking to sell, reach out to your supplier and get a contract set up so that your current arrangement will stay in place for the new owner. This makes your business more attractive to buyers since they know they are protected from unexpected price hikes as soon as they take ownership.
Building a brand that people trust is a powerful sales tactic. Social media can be a great marketing tool that allows people to share stories and photos of your products. This acts as social proof and can help to increase your sales.
Buyers consider a social following to be a nice bonus. It means the business has a brand that is better established within the industry. People like to buy from businesses they know and trust.
It can take time to grow a social following, so setting up social media profiles early will pay off in the long run. The number of social media followers your business has does affect the multiple it will receive. A higher number of followers has a positive impact on the multiple; even better if you can find a way to monetize it.
Reviews, Amazon Choice, and Best Sellers
Another great way to prove trust is to have a high number of reviews on your product listing page. Getting reviews can be tricky but many Amazon FBA sellers don’t realize that they can request a review from their Seller Central. This sends an automated email to the customer asking them to review their experience with you.
Sellers who have done this have experienced big jumps in the reviews they receive. There is software available, such as Jungle Scout, that will automate this process. A high amount of positive reviews means people are more likely to buy your products which have several knock-on effects. If more people are converting it boosts your organic search ranking, makes your paid ads more cost-effective, and gives you more of a chance to become a best-selling or Amazon Choice product.
How to Maximize Your Exit
Applying some of the steps above to develop your Amazon FBA business will help you get the most from a sale.
The overall takeaway should be that thinking about an exit early on will actually help you to build a more profitable and streamlined business.
Even if you’re not looking to sell, the best way to track the success of your efforts is to get a regular, impartial valuation of your Amazon FBA business. You might be surprised by how much buyers are willing to pay to get their hands on an Amazon FBA store.
To get a free five-minute valuation of your Amazon FBA business, use our valuation tool. It uses real market data from the sale of over 1,000 online businesses to accurately value your business.
Getting a valuation and learning how to increase the value of your Amazon FBA business will be beneficial to you in more ways than one.