In essence, “earnout” refers to a structured kind of financing in an online business, which allows the buyer to settle a significant part of the payment. The remainder is then paid off through an arrangement between the buyer and the seller over a given period.
We’ll explore more about this concept in the remainder of this article, but first, let’s learn more about FBA businesses.
What is an FBA Business?
An FBA business is an Amazon business plan that stands for Fulfilled-By-Amazon. This is how it works:
An agreement is set up with a producer, supplier or factory, mainly in China, to provide a product that will be shipped to America and eventually stored in an Amazon warehouse. Amazon then helps you sell the product and delivers it to the customer themselves, thereby fulfilling the order. Basically, you make money using Amazon’s enormous platform each time someone buys your items. As long as you have the stock, you can keep making money.
Your website sells the product through Amazon. They are ideal for people who are used to the Amazon affiliate business, as there are lots of Amazon affiliates to sell your product.
It is a very productive business model as you could have several affiliates pushing traffic to your site. While it may not be easy establishing a lot of traffic right away, it can certainly be profitable in the long run.
How Do You Sell an FBA Business Through Earnouts?
Selling an FBA business through earnouts is a smart way of earning more money for your website.
If the FBA business is quite large, the earnout arrangement may be an even more desirable option. It provides a win-win scenario for both buyer and seller, although it is often wrongly believed to be only beneficial for one party. The larger the value of the business, the better the earnout.
This is how it works. At the time of the transfer to the buyer, a partial upfront payment is made, and although there is no strict rule as to how much this payment should be, it’s typically about three-quarters of the total amount.
The outstanding balance is then negotiated over time depending on different criteria. One of the most important things to consider is whether the business is making the required profit while using milestones like monthly or quarterly targets.
Why Sell an FBA Business Through Earnouts?
For business owners, this doesn’t seem to make much sense. Getting all of their money up front certainly looks like a better alternative. However, this is not always correct, especially for an FBA business. Earnouts are often a better way of selling your business faster and helping your buyer achieve profitability. So, earnouts can work in the interest of both parties.
More importantly, selling your business through earnouts often earns you more money in the long run than getting all of the money upfront. This is because you can negotiate specific terms during the process that may make you more cash, especially if the business performs particularly well.
Earnouts are also better for buyers as the process can be easier than traditional financing methods, which can be long and exhausting.
In conclusion, if you’re considering an earnout for your FBA business, you likely won’t regret your decision! If you have questions contact us today!