How do Amazon FBA Valuations Work?

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\n\nObtaining a business valuation is just the starting point of the sales process for Amazon FBA owners looking to make a profitable exit. Even if you are not ready to list your FBA business for sale anytime soon, you should at least consider getting a valuation done to give you an idea of how far your business currently is from your exit goals. \n\nWe recommend that all Amazon FBA owners determine the value of their business once they have built up a year of profitability, and at regular intervals thereafter. This will help you keep an impartial valuation of where your business is now in relation to similar assets currently on the market.\n\nUnderstanding how valuations are calculated will also help you improve your business. The general valuation formula we use is as follows: \n\nsales price = monthly net profit × multiple + discounted assets (if any) + wholesale inventory (if any). \n\nNet profits are determined by taking the revenue from a period of six to 12 months and subtracting any costs (costs of goods, marketing spend, trademarks, hosting, etc.). If your business is seasonal, we’ll try to use a 12-month average to account for this. If your business is showing signs of recent growth or decline, we will use a shorter pricing period to reflect this more accurately. \n

\nYour Amazon FBA multiple will be dependent on a few different factors. These include your FBA business’s 1) age, 2) social media following, 3) number of email subscribers, and 4) traffic diversity. \n\nYour multiple is what the net profit will be multiplied against to determine the actual price of your business. Some brokers will use yearly multiples, like a 2x or a 3x, with the same multiple in monthly terms being 24x or 36x.\n\nBecause some Amazon FBA businesses have not been around long enough to accurately reflect their average earnings over a year, they will often use a monthly multiple. The longer your FBA business has been around, the better your multiple will be. The reason for this is that older businesses can use averages calculated over a longer period (usually a 12-month average) and have more data to support their stability, which is a huge factor in increasing their multiples. \n\nClearly, the time your business has been around and the amount of net profits you earn are vital to increasing your valuation, but what else can you do to increase your multiple?\n

1. Use a Third Party for Quality Control

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\n\nWhen you are planning to sell your FBA business, the first thing you should be looking at is how to minimize the workload the new owner will have to take over. Many Amazon FBA sellers actually have their products sent to them personally to be packed before they are sent off to their desired fulfillment warehouse. \n\nThis is a huge red flag for someone who wants to get that six-figure exit.\n\nSure, having someone else do quality control for you is an added expense, but someone looking to buy an Amazon FBA business is not interested in sitting in their garage all day packaging products. FBA buyers are looking for an asset they can grow—one that typically requires minimal sweat equity on their part. \n\nAs the workforce continues to become more remote, a potential buyer might not even have a home to work out of, let alone a dedicated garage to store product inventory. These buyers might be digital nomads working from a coworking space in a new country every other month. In this case, packaging all their own products for a newly acquired Amazon FBA business is definitely out of the question. If you are doing this task on your own, consider sourcing help from a 3PL service provider to ease the transition to the new owner. Having a service, like a fulfilment center, setup prior to listing your business for sale not only gives you added quality control over trusting Amazon alone, but it will also help you demand a higher multiple and therefore ensure that systems are in place for a new owner no matter where they might be in the world. \n

2. Diversify your Products

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\n\nIf you’ve been selling on Amazon for some time now and only have one product, SKU, you may want to consider adding more to your product line. Having only one product with one main supplier that only sells in one market is not exactly something investors are going to be gunning for. Instead, try to diversify your product line with multiple SKUs, each of them with multiple suppliers. These suppliers should be used to help manage your growth and allow you to expand into markets outside of the US.\n\nSetting up multiple products and selling in different markets will ensure that the business will be stable and that your asset will remain steady should an issue arise. Amazon FBA buyers are usually looking for a business with multiple products—products that can be diversified with variations in size and color. Having this product diversification will not only keep you from placing all of your eggs in one basket, but it will also be a huge selling point in getting you closer to that six-figure exit when the time comes to list the business.\n

3. Create a Brand

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\n\nWell, yes and no. Building a brand for a group of related SKUs isn’t a bad idea, and many FBA owners have had great success in doing so. The benefit of establishing a brand for your products is that you can create your own website, build an email list that you can then monetize, and so much more. Creating a brand for your products will also help you set yourself apart from other vendors who might be selling a similar product within your niche. \n\nOne thing you should pay close attention to is how much effort will be needed to establish a trademark and brand for your products. For instance, if your products happen to be in the medical field, you may have a much harder time establishing a brand; therefore, your brainpower might be better spent on researching new SKUs to add to your growing list of products. \n\nSure, the extra safety gained through creating an umbrella brand for your products does make your business more valuable, but remember: This will be a more long-term goal for most. When you branch out into other channels away from Amazon’s platform, you should be prepared to take on more marketing, advertising, and general business tasks doing so. For immediate results, focus on researching more products to add to your Amazon listings. When looking to make that six-figure exit down the road, establishing a business brand will set you apart from the competition and give buyers something more than just an easy-to-duplicate list of products.\n

4. Document your SOPs and Train your Team Members

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\n\nThis is one of the biggest factors that can help you reach your business goals and acquire the most from your Amazon FBA asset when you exit. Aside from the obvious figures of revenue and business age, SOPs and trained team members should document every task required to manage your FBA business. You should document these processes to the point that if you were to hire someone with zero experience, they could easily come in and perform the same operations with little supervision. Think of this process as building an engine with a series of cogs and belts that need to be in full working order to make the engine run. \n\nDocumenting all your standard operating procedures is your way of creating the manual for how your engine should run. Once created, anyone can come in and make the engine run smoothly and efficiently.\n\nAnother factor to getting closer to the six-figure exit goal is having one—or a team—of employees or contractors who can work on your business to keep your time spent on the asset to a minimum. Like using a 3PL service to handle packaging and shipping operations, your trained team of VAs or outsourced help is an added bonus to a buyer who knows they will not be the one physically managing and running every aspect of the business. \n\nBuyers will usually want to keep any trained VAs or employees you have to expand the business further. This is much more difficult when you as the seller perform these tasks all on your own. A trained VA or employee is very valuable to a buyer, especially one who wants to offload business operations to focus more on scaling the business. \n

So When is the Selling Season?

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\n\nYou may now be wondering about seasonality, because let’s face it—almost every Amazon FBA business has a large boost in sales during the holiday season. This fact might have you undecided as to whether you should sell your Amazon FBA business now or wait until after the holiday season to gain all that positive revenue data. \n\nWell, the answer you are seeking really depends on your business goals.\n\nFor seasonal businesses, the earnings will need to be documented over a longer period to gain a better perspective on the overall revenue both before and during the holiday season. As a result, you may not impact your multiple much waiting it out and selling after the busy holiday season. On one hand, if your business is still relatively new, you may want to wait until after the holidays to show potential buyers what your income numbers are capable of. On the other hand, selling before the busy season can be used as a negotiation strategy from a sales perspective.\n\nThe new buyers will want to make the deal happen sooner rather than later, knowing that they can benefit from the holiday uptick in revenue right out of the gate without having to wait around during the “normal” months for this season to come around. Listing your Amazon FBA business for sale before the holiday can lead to a deal being made more quickly due to the time pressure on the buyer. \n\nThere are plenty of reasons why someone would want to sell their Amazon FBA business (for example, one couple sold their business on our marketplace to fund their retirement). The reasons detailed in the post are motivating most sellers to find a profitable exit for themselves. \n\nSelling your Amazon FBA business can be a rewarding payday—in fact, for most, it will be the largest capital gain they ever receive in their lifetime. \n\nWhether this is your first digital asset or you happen to be a sequential entrepreneur with a portfolio full of online assets already, you can see what your business is worth today compared to similar businesses in our marketplace. Having an idea where your FBA business stands on the market using our valuation tool will give you the insight you need to improve one aspect of your business or another. Updating your FBA business model using the tips we have covered in this post will not only help you increase your net profits, but it will also give you the upper hand in optimizing your business to reach that six-figure exit goal faster.“}]}],”section_settings”:””},”scripts”:{},”css”:{},”css_page”:””,”template_setting”:{“settings”:{“id”:”settings”}},”template_setting_top”:{},”page_setting”:{“settings”:[“lock-mode-off”]},”post_type_setting”:{“settings”:{“image”:”https://shiphype.com/wp-content/uploads/2020/12/Four-tips-for-preparing-your-Amazon-FBA-business-for-a-six-figure-exit-_shiphype.png|314|706|999993772″,”excerpt”:”In 2019, FBA businesses sold for an average of $279,253. Here are 4 tips to help you maximize your sales premium when it’s time to exit your business.”,”extra_1″:””,”extra_2″:””,”icon”:{“icon”:””,”icon_style”:””,”icon_image”:””}}}}

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Should you hire a FBA Prep Center?

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\n\nAs your Amazon business grows, you’ll find yourself spending a lot of time preparing items to send to amazon. For those of you selling 100s or 1000s of units every month, you know exactly what I’m talking about.\n\nAt this point, you usually have 2 options:\n

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1. Hire Staff

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2. Hire a Prep Center

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\nHiring staff might seem like an easy option but it’s not as simple as that. You also have to find warehouse space to ship products from and there’s a lot of overhead cost that comes along with that. You’ll often find the time you saved hiring staff is now being spent on managing staff and you end up exactly where you started. \n\nDon’t get me wrong, hiring staff isn’t a bad option but it’s important to know what you’re diving into.\n\nIf you’re looking to truly automate your FBA business, Prep Centers are a much better option. They offer the flexibility and ease of scale. Sales aren’t always consistent and with Amazon changing policies often, you have to be prepared for the worse. \n\nAll Prep Centers aren’t made equal so it’s crucial to do proper research before moving forward. I’ve listed some of the things you should look for when searching for a fulfillment center.\n

Location

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\n\nThis is the most important one. You want to search for a Prep Center in the country of the amazon website you wish to sell on. If you’re selling on Amazon.com, you want to look for Prep Centers in the United States. If you’re selling on Amazon.ca, you want to find Prep Centers in Canada.\n\nOutside of that, the city within the country is also pretty important. After you’ve sent a few shipments to Amazon, you’ll also know which fulfillment center they want to ship your items to.\n\nThis isn’t a big deal if you’re shipping parcels but if you’re sending your items in pallets, you want to be as close as possible to Amazon to save on freight costs.\n

Turnaround

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\n\nThe turnaround is the time the prep center takes to prepare your items for Amazon from the moment you provide them instructions. Most prep centers advertise 24 hours but there are some that take 48 hours or longer.\n

Pricing

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\n\nThis is really important. You’ll see all kinds of ranges and price models people are using. Some charge by the piece and some charge by the hour. Some provide free receiving and others provide free storage. Some provide nothing for free.\n\nOther prep centers also charge a monthly fee in which they’ll include a set amount of items.\n\nThis can be quite confusing and the solution to this is to calculate.\n\nI recommend creating a price table in excel/google sheets and run some scenarios on how much it would cost for a shipment. You want to try this at 100 units and also at 1000 units to get a real comparison.\n

Minimums/Hidden Charges

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\n\nIt’s important to know if there’s any minimum charge you will also have to pay for. Some prep centers have minimum storage fees and others have minimum pick and pack fees. A lot of prep centers don’t have any minimums. Best thing is to pick up the phone,  call and ask.\n

Services Offered

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\n\nDepending on your business, you might not need all the services the prep center offers.\n\nPrep centers usually bundle their services together and charge a flat rate. This might work for someone who needs all the services but if you just require the prep center to forward packages, a prep center with more flexibility will work better.\n\nThere’s some prep centers that won’t do anything outside the normal counting, labeling etc.\n\nIf you need returns handling or FBA Removal services, make sure to ask to ensure the prep center can handle that.\n

Contracts

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\n\nWhen signing up with a prep center, it’s important to know if there is a minimum time commitment. Besides asking the prep center, it’s also important to ask yourself if you’re okay with that? Most likely not. \n\nMost prep centers don’t have a minimum contract which is great.\n\nBut keep in mind that contracts are not always a bad option. Depending on your business, you might even prefer being in a contract. If they’re offering you better rates for a longer commitment, that might be something that appeals to you.\n

Capacity

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\n\nWith the current landscape, a lot of prep centers are overwhelmed and most are at full capacity. You’ll have to call around to see if they’re even accepting new customers.\n

FBM

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\n\nAs the market changes, a lot of sellers are now looking into Seller Fulfilled Prime services. Some prep centers are also Third Party Logistics providers meaning they can ship orders to your customers directly. It’s convenient if the prep center you’re using can facilitate both FBA and FBM services for you.\n

Customer Service

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\n\nWhen it comes to prep centers, communication is key. When using a prep center, you’re entrusting a third party with your goods. If someone has your goods and they’re hard to get in touch with, that’s trouble.\n\nYou can’t fully know how good a company’s customer service is until you have real problems but there’s some easy ways to check. \n\nYou can start by filling out quote forms on their websites or sending them an email. See how long they take to respond. If it’s anything more than 1-2 business days, that could be alarming.\n\nAlso, you can try calling them to see if they’re picking up the phone.\n\nNote: Btw, just because someone didn’t pick up the phone the first time you called them doesn’t mean they won’t pick it up at another time.\n

Submitting Orders

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\n\nLike we said in the last point, communication is key. With every prep center, you should ask them how you’ll be submitting orders to them. Most prep centers take instructions over email and surprisingly some only over the phone (when I say some I mean very few). Nothing wrong with that as some sellers might prefer that.\n\nThe most advanced prep centers have a dashboard where you can login and track your inventory. You’ll be able to provide instructions and select services you need. As those services are completed.\n\nThe good part about dashboards is that you can also see your past orders all in one screen.\n\nBut keep in mind that all dashboards are not equal. Some are really good and some are really bad. Every company is different and their software is also different.\n

Bonus = Storage Options

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\n\nDepending on the number of unique SKUs you carry, the size of your items and the quantity you keep in stock of each, you’ll require different storage options..\n\nMost prep centers only offer pallet storage and others will have bin and shelf storage. If you’re selling small items, you might never need a pallet so you could find yourself overpaying.\n\nThese are the main things to look for when choosing a FBA Prep Center. You should be able to find most of this information on their website and if you can’t, just call them and ask.“}]}],”section_settings”:””},”scripts”:{},”css”:{},”css_page”:””,”template_setting”:{“settings”:{“id”:”settings”}},”template_setting_top”:{},”page_setting”:{“settings”:[“lock-mode-off”]},”post_type_setting”:{“settings”:{“image”:”https://shiphype.com/wp-content/uploads/2020/10/10-Things-to-Look-for-When-Hiring-a-FBA-Prep-Center-in-shiphype.png|314|706|999993759″,”excerpt”:”As your Amazon business starts growing, you’ll find yourself spending a lot of time preparing items. It’s a good idea to hire a Prep Center. “,”extra_1″:””,”extra_2″:””,”icon”:{“icon”:””,”icon_style”:””,”icon_image”:””}}}}

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