This is a guest post from Callum Armstrong at A2X. Learn more about Callum and A2X at the end of this post.
“Value” is in the eye of the beholder.
(Your interested buyers, that is).
It’s them that will decide whether your business is worth what you think it is. The good news is that you have direct influence on this.
In this guide, we’ll cover what makes your Amazon FBA business valuable, how to value it, and how to increase its value. Whether now is the right time to sell for you or not.
All with buyer criteria top of mind.
Ready? Let’s do it.
What Makes Your Amazon FBA Business Valuable?
Regardless of who they are, an Amazon business buyer will be weighing up two things when it comes to judging a business as an investment:
What about the business shows promise of growth? (Think strong product niche, few competitors, good stable sales, accurate accounts and raving customer reviews).
And what about it presents a risk? (Think seasonality, steady decline in sales, lots of debt or slow-moving stock).
That is where most buyer similarities end.
They will be looking for their own balance of growth and risk factors. Some will be more comfortable with certain things than others.
To attract the most buyers, you want to sell:
- When growth prospects are good
- When risks are minimal and/or well managed
- When you can present an accurate representation of your business (through your accounts)
- When your business operations are organized and easy to hand over
If these things are in place, whether you want to sell your Amazon FBA business now or not, you’ll be in a strong position.
How To Calculate The Value of Your Business
Let’s start with how you value an Amazon FBA business.
First up, it’s worth noting that even after you’ve calculated a value, this isn’t set in stone. Your business is worth what someone will pay for it.
But if you’ve done your due diligence, the number should be fair for what you’re offering.
There is a sum that you can do to find your Amazon FBA business’ value:
(SDE x valuation multiple) + inventory* + shipping = the value of your business.
Don’t worry, we’re going to break this down.
Seller Discretionary Earnings (SDE)
The first part of the sum is your SDE.
This amount represents the earnings of a business and is based on revenue, expenses, and addbacks.
- Revenue = What your business brings in. This is usually based on yearly figures, but for younger businesses, it may be monthly.
- Expenses = Your Cost of Goods Sold (COGS) and essential business operation expenses.
- Addbacks = Non-essential business operating expenses. These are usually one-off expenses and owner benefits. These can be a little nuanced, so asking an Amazon FBA broker for advice here is useful.
The SDE calculation is:
(Revenue – expenses) + addbacks = SDE
Hold onto that SDE number.
Valuation multiple
The next part of the sum is the valuation multiple.
Unless you go through a broker, this will be educated guesswork. And that’s why your final value may change based on buyer interest and feedback.
A good way to figure out your multiple is to look at what other Amazon businesses have sold for. You can see the relationship between sell price and yearly revenue figures.
Most Amazon FBA businesses have valuation multiples of between 2-5x. That means the business should sell for roughly 2-5x its SDE figure.
This step is more about getting a feel for where your business sits in the market as opposed to a fixed price.
The calculation
Now that you have your SDE and a rough valuation multiple, you can place them into the sum above.
The inventory figure should be at cost, and the shipping component represents the cost to get products to Amazon’s warehouses. These represent further essential expenses for the business to run.
Now we’ve covered how to calculate value, let’s see where we can increase it.
How To Increase The Value Of Your Amazon FBA Business
You have the ability to work on your business and make it more attractive to high-paying buyers.
As mentioned above, whilst every buyer will be different, there are baselines you can meet to get as much interest as possible.
Everyone wants to make money with minimal input, right?
So if you can make your business more profitable, transparent, and convenient, you’re onto a winner.
Value drivers for your business
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- Accrual accounts
“Not having accrual accounting is a big mistake. The potential investor needs to easily understand profitability month over month.
The investor will have more angst about your business and when buyer anxiety goes up, multiples go down.
Make sure that you have at least 12 months and preferably 24 months of solid, clean, accrual financials to share with the investors.”
Tyler Jefcoat, Seller Accountant.
Your accounting method can directly impact the value of your business.
Methods like cash accounting can skew your numbers, resulting in an inaccurate SDE multiple and depressed overall valuation figure.
You want to get what your business is worth, and accrual accounting is the way to do that.
Plus, when you are ready to sell, your accountant or broker will likely recommend a switch anyway. So save yourself the time and trouble by doing it now.
“Seller Accountant only does accrual accounting but almost all of our new clients are using cash basis accounting and need to switch in order to sell their businesses.”
Fortunately, by integrating A2X with your accounting software and sales channel, you can get this automatically, along with a suite of other benefits. No manual heavy-lifting required.
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- Accurate inventory records
Inventory is everything to your business.
If you have too much, you’ll pay unnecessary storage fees. And you might lose money altogether if they don’t sell.
If you don’t have enough, you’ll have unattractive “out of stock” labels all over your store. That’s off-putting to customers and to Amazon.
Knowing the patterns and fluctuations of your business is crucial to good inventory management. This is something that the accrual accounting method is vital for.
Recording inventory accurately is a fundamental quality of a resilient ecommerce business. Without this, you won’t get a decent valuation and buyers may consider your business too risky.
Make sure you’re using accrual and that your inventory management is the best that it can be.
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- Organized information
Do you like filing?
Are you an organized neat freak?
If not, you need to get with the program.
All the records and information for your business should be securely stored digitally, organized and easily accessible. Everything should be up-to-date and neat.
You want a potential buyer to be blown away. Imagine if you were to hand over your business tomorrow, could this happen with minimal friction?
Get a Google Drive or Dropbox going and start labeling.
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- No unnecessary expenses
A buyer will dig deep during the due diligence stage of the selling process. They’ll likely ask questions about every cent that exits your business.
Are you only spending on important things? What are those things giving back to the business?
Even if you’re not ready to sell yet, do you want to be losing money unnecessarily?
Cut expenses that aren’t serving your business.
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- No under-performing sales channels
If one of your sales channels has been steadily declining or under-performing for a while, it may be time to sever ties.
Have you thoroughly analyzed what’s going wrong and tried new things? If not, why? Could you defend your decision to a buyer?
Take this opportunity to think carefully about whether you’re selling in the right places and if closing one channel may help you better serve another.
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- Automated accounts and operations
Do fewer things to a higher standard.
Automation allows you to hand over the repetitive tasks to software so that you are freed up to do other things.
It ensures processes are consistent, reliable, and constantly working. These are tough things for human beings, but not for computers.
For example, A2X automates the most time consuming (but crucial) part of your accounting – revenue recognition and categorizing transactions. You can reconcile your accounts in a fraction of the time with A2X crunching all your transaction data and organizing it for you. And you know nothing has been missed.
There are a lot of options when it comes to apps and automation. So make sure you prioritize and get the most features from the fewest integrations.
- A great story
Humans love a compelling story.
We can buy into these. And it’s important for your business that you can describe its journey and its growth potential in a captivating way.
Buyers aren’t just weighing up your business. They’re also weighing you up too.
You need to capture their imaginations as well as their best offer.
Learn More…
It’s not unusual for Amazon sellers to start out with an exit plan in mind.
In fact, it’s very smart to do this. You should always be working on your business (not in it), so that if it comes time to move on, all your hard work will pay off.
To learn more about how to sell your Amazon FBA business and the steps to do before you get there, check out this comprehensive free resource.
You can also download your very own self-assessment tool to figure out whether selling now is the best decision; or if not, what you need to do to prepare for sale.
About the Author
Callum Armstrong is the content marketing manager at A2X. To help e-commerce sellers and their accountants succeed, the content team at A2X creates educational resources around e-commerce, accounting, and e-commerce accounting. Visit the A2X site to learn more about their seller services.