How to Calculate FBA Business Valuation

There are different routes to take as an Amazon FBA seller. Some start selling on Amazon as a side gig to make some passive income and supplement a full-time job. Others focus solely on building a thriving business and brand. And, then there are those who set out with the intention to eventually sell.

Whether you’ve been planning to sell for months or have just started to entertain the idea, knowing how to sell your FBA business and understanding the factors that contribute to an FBA business valuation is important. Buyers often use the multiples approach when determining your FBA business valuation. Sometimes the value dependent on where to sell your FBA Business, but it’s generally based on the idea that similar assets should sell for similar prices.

In short, this breaks down to creating a competitive analysis that illustrates financial and operational similarities to other companies to predict growth and changes in the market. Though there are several determining factors involved, a few of the essential metrics include earnings, market competitiveness, and room for product expansion. These show visibility into how sustainable and scalable an Amazon business is to better determine its value.

A monthly breakdown of SDE (annual net profits) helps gauge consistency in revenue. A history of success and a steady increase in sales makes your business more attractive to buyers.

When determining your SDE, deduct any expenses that are necessary to operate your business from your 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. It also includes the expense of customer service support, which is often an extra salary expense for business owners that aren’t set up through Amazon FBA.

Researching and reviewing competitors in the space and how your company compares can give you a basic idea of your FBA business valuation. It’s important to review data reports and adjust operations where necessary to stay on par with similar companies in your category. Proof of competitive stability presents less risk to a buyer and greater certainty of growth potential for years to come.

Strong inventory management and diversifying your inventory are also valuable to a potential buyer. Maintaining multiple SKUs and a diversified supply chain, as well as targeted keywords and lead generation presents less risk than relying on a single source for the operation of your business.

If a supplier quality declines, do you have another option ready to go? When Amazon’s algorithm changes, are your targeted keywords enough to push your products to the top of the search? These are the kinds of questions that you should consider as you grow and scale your business. It also determines what buyers will consider when assessing your company’s worth, and can give you a higher valuation.

The same diversity concept is important for the inventory you have available for customers. The idea is not to put “all your eggs into one basket” but rather have multiple ways to fulfill consumer demand.

Building a strong, reputable brand is another big factor when considering your FBA business valuation and preparing your business for sale. Determine how competitive you are for key phrases that drive search traffic to the site. How high do you rank? What is your advertising cost-per-click? The placement and cost of your online presence play a part in showing how in-demand your brand is and how much money must be invested to maintain organic sales.

Many successful companies find new customers through Instagram and other social media sites to build brand recognition and loyalty. Do you largely acquire customers through organic or paid efforts? What percentage of customers have bought from you before? What’s the average sale value? Calculating these types of metrics on a monthly, quarterly, and yearly basis will illustrate the strength of your brand and the consistency of sales.

After determining your net profit, competitive landscape and longevity, inventory diversity, and brand value, you’ll start to have a better estimate of what your business is worth. Other factors to consider are revenue trends, source of online traffic, any technical knowledge necessary to operate the business, and how much growth opportunity is available. Each of these establishes how transferable, marketable, and sustainable your business is.

Potential buyers can then use this information to compare it against other similar businesses in your sector to determine the valuation of your company and to hopefully craft an offer. Many buyers have a minimum criteria for what they’ll consider for purchase. During your assessment, you may find your business doesn’t measure up against competitors as well as you’d like or you haven’t reached the type of financial success you’ve envisioned. Before considering a sale, here are a few ways to improve your Amazon FBA business.

To raise your FBA business valuation, make sure you’ve set up your business to operate as effectively and profitably as possible. This requires constant attention and maintenance on all levels of growth, which ranges from product listing optimization to creating new creative for your ads.

Another way to improve your business is by maintaining competitive pricing. Set up automated pricing through your seller central account to adjust prices and increase your visibility among online shoppers. Also, determine which of your items are eligible for Amazon's special promotional offerings, such as free shipping or next-day shipping, to entice buyers and keep them returning to your business. One of the driving factors in customer satisfaction for online businesses is how fast they’re able to receive their order.

Advertising via sponsored products, coupons, and other exclusive discounts allow you to attract more buyers in different ways. Set a budget and track how well this elevates your product offerings and overall brand. Optimize ads that aren’t performing as well by using new creative and catchy copy to boost your return on investment. Using Amazon’s ad tools in addition to other brand amplification, such as social media and email newsletters, will help push your business ahead of competitors and ultimately, improve the value of your business.

These are just a few of the many ways to boost sales and create a strong brand presence online. Once you’ve established that your company is in a viable selling position, you’ll need to prepare it for sale.

Maintaining detailed documentation throughout the course of your business will save time and money down the road. One of the biggest parts of determining FBA business valuation requires organizing financial records and data reports. These types of records will show proof that your business has created a steady and stable stream of revenue over the years.

Financial documents showing your year-over-year revenue growth and expenses are part of the reporting buyers will want to see. A business that started strong but has declined in revenue and customers over the years doesn’t show as much business value as a company that started out with lower revenue but has increased every year consistently. Buyers take into account economic anomalies but are mostly interested in how your company is able to weather market shifts and continuously build a reputable brand. The potential they see for your company is as important as how much revenue it currently maintains.

Operational processes are also an important part of preparing your business to sell. What logistics are involved to 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 and show the operational process from start to finish.

Determining the transferability of operations includes any efforts outside of the Amazon FBA model. For example, if you have a separate website aside from your Amazon FBA account, how is revenue comparable to what you sell through Amazon? What kind of technical requirements must be assumed by a buyer during the transition phase? At Forum, we look for brands that receive 70 percent or more of their 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.

As you can see, the process of performing a full FBA business valuation requires a lot of organized, detailed information and analysis. However, knowing what your company is worth makes a difference if you plan to sell it in the future. Once you’ve figured out the basics of what’s required to pique a buyer’s interest, ensure you’ve positioned your business in the best light to earn you an offer that’s worthy of all the hard work you’ve put into growing your company.

Sources:
https://www.investopedia.com/terms/m/multiple.asp
https://sellercentral.amazon.com/gp/help/external/G43381?language=en_US

FBA Business Valuation

Market Competitiveness

Seller Discretionary Earnings (SDE)

Diversified Product Line

Brand Value

Improving Your Amazon FBA Business

Product Listing Optimization

Advertising

Why are third-party sellers winning?

Preparing Your FBA Business to Sell

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