Fulfillment by Amazon (FBA) is a growing opportunity for savvy entrepreneurs. The market is growing so fast that there is a secondary market for buying and selling these businesses. Many looking to get into this space have taken to purchasing a pre-existing FBA business. But when it comes to selling a business, there’s always one all-important variable – the price.
In this article, we’re going to talk about the difficult task of valuing an Amazon FBA business for a sale.
First thing’s first, if you’re unfamiliar with an Amazon FBA business, let’s give a brief outline. FBA, or Fulfillment by Amazon, is a service offered by Amazon to help a business with their inventory and shipping needs.
FBA means that Amazon will fulfill your orders for you. A business ships its products to Amazon in bulk and Amazon processes them, packs them, and ships them when orders are received. The business is still responsible for marketing and selling its products (through the Amazon marketplace, of course). But, Amazon handles the logistical side of things, saving time and (hopefully) money.
Of course, there are fulfillment fees and a lot of fine print involved, but that’s the gist of it. Now that you understand the FBA process, let’s get into valuing one of these businesses for sale.
The Amazon FBA service is very popular, and it continues to grow alongside Amazon. The result is that many businesses are reaching a point of maturity where they are considering selling their business for a profit. Buyers and sellers need to settle on a fair purchase price, which is no easy task.
Determining this value will never be an exact science, but certain factors will always be relevant. These include net profits, age, type of FBA business, and more. These factors influence the value of the business more than any others. Let’s look at each in turn:
This factor is very important. Even within the FBA space, there are different categories of FBA business. The product the business sells dictates the category because it has a large impact on the potential competition. Let’s look at examples:
Resellers: FBA resellers are companies that resell a product on Amazon. They’ll buy a product in bulk (at the best price they can find) and then sell it on Amazon for a markup. They sell these products as-is, meaning items from a third party seller don’t have a brand or anything to tie themselves to the product.
This business will typically have the lowest valuation as far as an FBA business account. is concerned because there are essentially no barriers to entry. Anyone can enter this space, and as a result, it is very competitive. Buyers know that reselling is volatile, and the primary way to gain a competitive advantage is through efficient sourcing and operations.
Branded Goods: Other FBA businesses sell branded goods. These businesses purchase a product and apply their branding to help it sell. They can advertise and market under this brand, but they don’t own the product itself. In other words, other companies can buy an identical product from the manufacturer.
These businesses are more valuable than resellers because the brand delivers a competitive advantage that can’t be as easily replicated. Consumers may have developed brand loyalty, which would influence them to choose this FBA business again.
Properties: Finally, there is the most valuable type of FBA business. These businesses own and manufacture their products. They have the rights to this product, and no one else can sell it. It goes without saying why this is the most valuable type of FBA business because they have a distinct competitive advantage. No one can sell their product, and no one can enter their unique space.
Of course, the above factors don’t mean much if the business isn’t succeeding. Therefore, the valuation is determined by a business’s financial success. The best “bottom line” for measuring this success is net profit. Valuation of a business requires careful analysis of a business’s revenue & expenses, which culminates in profit.
Of course, these profit figures can’t be taken in isolation. Buyers will want to look at the history of success. If a business has been profitable for longer, this will drive the value up as well. As you can see, it can start to get pretty complicated as all the variables impact one another, which is why some professionals dedicate their entire careers to business valuations!
That is, of course, not all. Many other factors contribute to determining the value of an FBA business. Valuators will need to look at the competitive environment surrounding the business. How is the FBA space growing? How many competitors sell similar products to this business?
Valuators will also look at certain aspects of the business itself. For example, how does it diversify its products? Do most of their sales depend on one product? Is this product sustainable?
As you can see, these are all relevant questions in determining value. Each business requires individualized attention, and it requires consideration of all the above factors and more.
As you can probably guess by now, all of these factors combine to determine a business’s overall value. Valuing an FBA business will have to be done on a case-by-case basis. Effective valuation requires highly individualized attention, looking at the overall market, the competitive forces affecting the business, and the performance of the business itself.
Effective valuation is a time-consuming and research-intensive process, but it also helps savvy investors to identify value and hopefully receive a lucrative return on investment.