While owning an online business is one of the most lucrative career options today, calculating its value can be ambiguous – many sellers undersell their business. In contrast, others face a hard time selling because of overvaluation.
This stems from the factors affecting the value of your amazon business, i.e., the value drivers differ from traditional businesses. You’re Amazon or Walmart Marketplace business could very likely be worth much more than you think.
Valuating your business is crucial if you’re looking to sell it or simply looking for ways to make it more profitable. Let’s dive deeper into how you can arrive at an accurate figure before approaching prospective buyers.
How to Calculate the Value of Your Amazon Business
A major chunk of Amazon businesses is run by third-party sellers leveraging Amazon’s FBA services. FBA businesses account for 58% of all sales on the platform. PE firms, entrepreneurs, and even other FBA businesses have ventured into acquiring steadily-growing Amazon businesses in recent years.
With the recent uptick in businesses acquired by Amazon seller aggregators (around $13bn raised in the past two years), you might be considering going the same route. So how should you go about evaluating your FBA business?
The most common equation used to evaluate an Amazon FBA business is:
Valuation = Net Profit x Multiple
The ‘Net Profit’ is an average of your business’s past 12 months’ profits. Methods like SDE (Seller Discretionary Earnings) or EBITDA (Earnings before interest, taxes, depreciation, and amortization) are used to calculate net profit, depending on the size of the business.
The tricky part is the ‘Multiple.’ A lot of factors go into deciding a reasonable multiple for your business – age of your business, earnings history, current inventory, and competition in your niche, your supplier relationships, brand strength, unique product mix, Amazon reviews, and many more.
Most FBA businesses fall in the 20-60 multiple categories, depending on the size of the business.
It might feel a tad complicated how all of these factors yield an exact multiple, but there are industry-standard methods of arriving at a logical figure. Most of the full-service consultants in the field today can help you evaluate and sell your business to get you the best deal.
Factors Affecting Valuation of Your Amazon Business
It doesn’t matter if you’re not looking to sell just yet. Knowing what factors affect the valuation of your business will still help you grow and scale your Amazon business. As you figure out areas where your business is lacking, you can plug the leakages and build on your strengths to ramp up for a decent future valuation.
Let’s take a look at some factors impacting the valuation of your FBA business:
1. How Differentiated Your Business Is
One of the biggest challenges as an FBA business entrepreneur is dealing with copycat sellers. Protecting your brand from deliberately duplicate listings is one of the hardest things to do on the platform.
Plus, unless you own a trademarked brand and have full control over your product listings, you’re not going to rank in the most desired businesses to acquire. Potential buyers will view a business protected against copycat sellers as valuable purchasing assets.
2. Diversity of Your Product Mix
Having six-figure sales is not enough if your product mix concentrates on just one or two high-selling products. A diversified product inventory will reduce potential risk due to external factors and increase buyers’ confidence in your amazon business.
However, having too many products (more than 20) can also complicate the business, so focus on building a balance.
3. Strength of Your Operations
Your supplier relationship will ensure any potential buyer is not buying into a ton of hassle as well. Contractually-protected prices that will transfer with the sale of your business and seamless supplier-interaction operations will add a lot to your multiple.
The more automated you can make your operations, the better valuation you’ll get – the less time a potential buyer needs to commit to run your business, the better.
4. Your Reviews and SEO
A business having a considerable amount of positive reviews is always a lucrative buy. Positive reviews will also boost your organic search ranking and reduce your ACoS (Advertising Cost of Sales).
Best-seller and Amazon’s Choice badges will further boost buyer confidence in your amazon business as they’ll know they’re acquiring a well-established entity.
Social proof will always convince prospective buyers of your brand’s already established strength.
5. Income Stability and Business Age
A record of unstable earnings indicates problems in the operations and handling of the business. This is not very lucrative for a potential buyer and can significantly lower the amount your business is valued at.
On the other hand, a stable income is not just indicative of a sustainable store but also a well-managed system and operations.
6. Social Media Presence
Your brand recognition on social media counts for a lot when evaluating your business and arriving at the multiple. When your customers are not just discovering you on Amazon but are also engaged with your brand on community platforms like Facebook and Instagram, you know you’ve done something right.
You can leverage these platform relationships as additional valuable assets to bump up your multiple.
7. Time Required of The Owner
Suppose your business is making a net profit of $150,000, but you have to dedicate more than 40 hours per week to it. On the other hand, another brand is making a net profit of $30,000, but the owner needs to spend only 5 hours with it. The latter will seem much more lucrative to a potential buyer than the time involvement is more.
This can be possible only with the automation of business processes and employing skilled team members.
In the End, whether you’re an entrepreneur looking to liquefy your FBA business or simply curious about how to make it more valuable, knowing the relevant value drivers will keep you in good stead.
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