Building an 8-Figure Amazon FBA Business and Selling It for $1.1M Over the Original Price
Updated on June 1, 2022
Throughout your entrepreneurial journey, you’ve probably heard that building a 5-figure business is different from building a 6-figure business, which is then different from building a 7-figure business.
You may be wondering, then, what are those differences, and what would it actually take to build an online business large enough to fully retire from?
In this case study, we’ll examine an Amazon FBA business that sold for $10.3M just 18 days after being listed on our marketplace. We’ll dive into some of the characteristics that led to it being a highly sought-after acquisition and discuss how working with a broker helped create a competitive buying scenario that enabled the seller to earn more than $1M over the original business list price.
Lastly, we’ll include advice from the seller about the realities of building a business of this size in the current Amazon FBA landscape and some important things to prepare ahead of time for a successful exit.
About the Business
This business is an Amazon FBA and ecommerce business that was created in July 2015 in the children’s niche and featured two separate brands comprising 39 SKUs for children’s toys.
The products had a 4.4–4.8-star average rating, and the top-selling products had the unique competitive advantage of being original products on the marketplace, created using custom molds designed by the seller.
At the time of listing the business, it was generating an average revenue of over $700,000 per month, and with a net profit margin of 25%, it was making an average profit of over $170,000 per month.
The business earned income almost entirely from Amazon FBA, but the sellers had tested selling its products on Shopify, Walmart.com, and eBay. The business also sold almost predominantly in the U.S. marketplace, with limited sales in Mexico and Canada.
Valued and Listed in 30 Days
The sellers connected with Empire Flippers to sell their Amazon FBA business and began the vetting process with us in January.
The vetting process included building the profit and loss (P&L) spreadsheet, compiling a list of the assets included in the deal, calculating a valuation, and preparing it for presentation to buyers.
When compiling the P&L, the vetting advisor ensured all expenses were properly organized into each month, especially advertising expenses, which usually appear one month later and can potentially skew monthly profit figures if recorded in incorrect months.
The vetting advisor also helped to define add-back expenses, which are usually one-time expenses that do not affect ongoing business performance and should therefore not be counted against the valuation. In other words, removing these expenses helps maximize the valuation.
Thirty days later, the business was valued at $9.2M and listed on the marketplace for sale. Upon going live for sale, things moved pretty quickly.
If you’re interested in how the business was valued, or what your business could be worth, feel free to take a look at our free online business valuation tool.
The Select Listing Process for Highly Competitive Deals
The select listing process is a sales process offered to high-value businesses designed to help buyers and sellers through the negotiation and sales phase, especially on highly competitive deals.
As opposed to racing to be the first to place an order on a business, buyers can place their offers alongside other competing offers and have a chance of being considered.
Sellers have set timeframes to choose from the initial best offers, and buyers in the final round have the opportunity to amend their final offers for a chance to win the deal.
There are two rounds in this process that are designed to filter down offers within a structured timeframe.
The first round looked like this: after this deal went live, 10 buyers scheduled calls to interview the seller. Out of the 10 interviews, five buyers submitted offers for the business.
In the second round, the seller scheduled calls with the buyers from the first round to better understand who the buyers were, their experience with operating this type of business, and their plans for growing the business.
Six days later, the seller decided which buyer to move forward with and closed the deal with a signed letter of intent (LOI) from the seller, indicating the intent to purchase after a period of 30 days of due diligence on the business.
Not every business is qualified to be part of the select listing process, but if you’re interested in this program and curious as to whether your business qualifies, here’s a more detailed article on the select listing process that discusses the criteria we look for in this tier.
How Did the Seller Choose the Buyer?
According to the seller, choosing the buyer wasn’t just about going with the highest bidder. The payment structure for deals at the 7-figure level and beyond usually involves a combination of a portion of the payment made upfront in cash and the remainder paid out via an earnout.
For the seller, it was important to work with a buyer who they felt confident would be able to grow the business and meet the performance-based earnout requirements.
In this case, the buyer wasn’t a solo operator but a team of specialists with vast amounts of experience operating Amazon FBA businesses.
The Deal Officially Closed
The buyer and seller agreed to a payment structure of $6.8M cash up front for the business, upfront payment for inventory, and an earnout payment where the seller would pay 50% of all profit above $1.7M per year until a final payout of $3.5M was reached.
As mentioned during the vetting phase, this business was originally valued at $9.2M. However, due to the competitive bidding process for this deal that allowed the pool of buyers to amend their final deals, and the fact that this business was a highly desirable acquisition, the seller closed on a deal for a total of $10.3M, or $1.1M higher than the initial valuation!
From entering the vetting process to closing the deal, the entire process took two months and 20 days.
It’s worth noting that not every business on our marketplace will experience a scenario where the listing price increases or the price increases in this magnitude.
So, what made this business in particular so highly sought-after?
Being in a position as a seller where you can choose from a list of buyers competing to win your business is the formula for a dream exit. So what was it about this business and deal that created this selling scenario?
At baseline, the business generated healthy sales volumes and profits and saw particularly strong spikes during the holiday season, generating over $500,000 in profit during the peak months.
Perhaps the most important feature, however, was how it was differentiated in the market. One thing that buyers look for with a business of this size is its ability to remain competitive in the market and continue to grow well after being acquired.
One of the most compelling parts of the business to satisfy this requirement is that it wasn’t selling me-too products but rather sold custom products that were highly rated and trademarked as a barrier to entry from competitors.
Last were the growth opportunities. The business accomplished this level of success predominantly within the U.S. market and on Amazon FBA. This can be seen as a clear growth opportunity for buyers who have experience selling on international Amazon marketplaces or on ecommerce sites besides Amazon.
How a Broker Enabled This Seller to Earn $1M Over the List Price
The seller says that, in retrospect, one of the most important things they did for such a successful exit was working with a broker.
First, this deal reached the valuation that it did because buyers knew they were competing against each other to win the deal. Without this dynamic created through the broker, buyers would naturally try to pay the lowest amount possible, likely for less than the original sale price.
Second, the deal was completed far faster than it would have if working privately. In addition to finding qualified buyers, working privately would require individual negotiations and separate periods of due diligence, all of which could potentially not end in a deal. The trust that buyers have in working with a broker such as Empire Flippers makes 8-figure deals closing within a couple of months a possibility.
Third, by working through a broker consisting of M&A specialists, the seller had a team working for them to help with constructing the financial information, legal documentation, and sales calls. This allowed the seller to simply arrive at the scheduled call times to meet the prospective buyers and decide on the deal that worked for them.
How to Build a Business of This Size and Be Exit-Ready
The seller offered some parting advice pertaining to building a business of this size and how to be ready for the exit well ahead of when you actually decide to exit:
Take the time to differentiate your product: In the increasingly competitive landscape that is Amazon FBA, it’s usually not enough to just slightly improve a product and slap a logo onto it. This strategy for product selection and creation leaves you vulnerable to competition, who in many cases could be the manufacturers themselves and who can replicate your product and will always beat you on price.
Advanced Amazon FBA owners understand this, so owning intellectual property in the form of blueprints, formulas, custom molds, trademarks, or anything that creates a barrier of entry and makes you stand out can be incredibly valuable to acquire.
Do not treat this as a get-rich-quick scheme: For the first three years, the seller didn’t take any money out of the business, investing everything back into buying inventory. It was only by years four and five that they started taking some of the profit out. If your goal is to build a business of this size, you must be willing to be patient and reinvest.
Get your books in order: Buyers who purchase businesses of this size are usually highly experienced at reviewing financial information. As a seller, it’s important to have your financial information organized, revenue prosperity recorded, and business expenses justified. Working with a broker can usually assist in this though implementing proper bookkeeping practices from the beginning can significantly reduce the amount of work in preparing your business when you’re ready to sell and reduce issues or questions related to finances during the sales process.
An 8-Figure Exit Is Possible
This seller did not come from money or have any special advantages that other entrepreneurs do not.
What they did have was the willingness to learn how to thrive in a particular market, the patience to grow a high-quality business, and the resources that helped them achieve their exit.
These are resources available to any seller, including the team to help you with your exit. If you’re interested in understanding how “exit-ready” your business is or what you should do to prepare it, we recommend speaking with a business advisor.
If you’d simply like a general estimate of what your business could be worth, feel free to try out our free online business valuation tool.
With the proper adjustments and knowledge, you, too, might be closer to an 8-figure exit than you realize.
