Greg Elfrink

December 6, 2018

Hey, everyone!

Gregory here. Today, I’m introducing Melissa Platt, a content marketer for AMZ Advisers. AMZ Advisers helps Amazon FBA businesses create content marketing strategies and has acquired over 30 deals in the space.

If you’re looking to buy an Amazon FBA business, read our guide below and then set up a call with one of our seasoned business analysts, who can help you find a business that fits you like a glove.

All right, now that introductions are out of the way, I’ll give the “mic” over to Melissa!

New third-party sellers keep joining Amazon like it’s the hottest party in town, and, truthfully, it’s the opportunity of a lifetime.

The platform gives FBA businesses the chance to compete on level ground with traditional and prominent brands. The ability to grow Amazon sales and accounts in a relatively short amount of time makes FBA businesses an attractive opportunity for investors. With these kinds of businesses becoming more popular each year, a new industry has sprung around them to help them keep up and carry out all the work required for these negotiations.

Our client experiences at AMZ Advisers, an Amazon consulting firm, have shown us the importance of being cautious before closing a deal to avoid running into any surprises. In our half of a decade of operations, we have advised clients on 30+ acquisitions. We also began as, and continue to be, Amazon sellers ourselves, and, during our time on the platform, we have acquired multiple Amazon FBA businesses. We understand the pitfalls of Amazon in great depth. That’s why we developed a step-by-step guide on how to buy an Amazon FBA business and to help you avoid making some of the mistakes we have witnessed.

The Purchase Process

Buying an FBA business is a fairly simple and direct affair. Many brokerage platforms serve potential investors looking to acquire an Amazon FBA business, such as Empire Flippers. These business brokers are reliable, trustworthy intermediaries that can help make negotiations and acquisition go smoothly. It is important that any contract always include a period for due diligence and leave a window open for the buyer to walk away or make changes to the initial proposal if needed.

Performing Due Diligence on Amazon FBA Businesses

A thorough analysis of an Amazon FBA enterprise works the same as that of any other kind of business. The financial state of the company, its contracts, and its historical sales numbers are important to scrutinize. The main difference between Amazon-based businesses and traditional businesses is the sales channel that makes the business profitable. The Amazon platform has a full and complex system with algorithms that are important to understand. For example, Amazon’s A9 algorithm determines how products show up in search engine result pages and is key to the long-term success of any business on Amazon.

The A9 algorithm searches for the most relevant products based on the specific keyword search a customer makes on Amazon. It determines product relevancy by measuring the following:

  • sales history, that is, how long a product has been selling on Amazon
  • sales velocity, that is, how many sales a product gets on a specific keyword
  • conversions, that is, how many sellers search for a specific keyword that end up buying a product

It is important to understand that these metrics can be influenced by Amazon sellers both on the Amazon platform and off. Many Amazon business brokers can guide you through this phase to ensure that you have performed rigorous and meticulous work.

 

The 10-Step Checklist to Perform Due Diligence on Amazon FBA Businesses

Based on our experience working in the industry, we picked the top 10 key steps to follow before closing a deal and buying an Amazon FBA business. Performing a comprehensive analysis of the company you’re looking to buy based on these recommendations will help you make a well-informed decision. The following suggestions are the result of our many years of experience in advising and acquiring Amazon FBA businesses and the main areas we tend to focus on when buying a business ourselves.

 

1. Access the Accounting Records

Accounting records, including profit and loss statements and balance sheets, show a very interesting and accurate picture of how a company works. What a company spends money on shows you what it considers important, that is, its necessities. A thorough analysis of the company’s accounting records is your basis for determining whether the company is a good acquisition opportunity for you.

You need to review the records firsthand by getting direct access to the business’s accounting service. Many businesses use digital services, such as QuickBooks or Xero, so it should be pretty easy to obtain read-only user access from one of these platforms. It is very important to be detail-oriented and ensure that all the accounts are properly set up and that the numbers that the valuation is being based off of are accurate.

Another key element to check is the way the sales tax is being accounted for. Right now, Amazon sellers are responsible for remitting sales tax in each state, but that is beginning to change. Legally, each Amazon seller should be paying sales tax to states where they have a nexus, meaning any location they have an office or inventory stored in. Because of the number of locations Amazon has, this can require sellers to pay sales tax to a large number of states.

As of today, Amazon includes tax remittances in the total transfers that are made to Amazon Seller Central users. This is very important to keep in mind since not including the sales tax as a
business expense or including it within the business tax portion of a pro forma would inflate
the businesses valuation. Buyers use pro forma statements to project the future cash flows of the business and determine what the value of a business is today. Another valuation technique is called direct capitalization, where a capitalization rate (or cap rate) is applied to the current business’s net operating profit to arrive at a valuation. When you’re browsing the Empire Flippers marketplace, you’ll notice that the direct capitalization is used to give the business its valuation – this is because internet businesses in general can be a bit more volatile with cash flow so it often makes more sense to use a direct capitalization method.

Finally, keep an eye on the external products and services the business has been paying
for. Some may seem ordinary or even necessary, such as promotional launch services, but
these services are usually quite pricey and can make high sales numbers less profitable
than you may initially think. Furthermore, be suspicious of frequent low-price
payments through online services like PayPal, as some sellers try to pay for unethical
practices, such as buying fake reviews, through these services.

 

2. Know the Suppliers

An essential part of any business is its suppliers. The agreements with these external merchants are key to the success of a business.

While reviewing supplier arrangements, we’ve found it very important to not only dive into the contracts and understand the terms but also to learn what the lead times and unforeseen costs are. Make a point of talking directly with the manufacturer yourself before closing the deal to get an idea of what working with them will be like.

Make sure to discuss the following:

  • lead times, that is, how long it is going to take for the manufacturer to produce and ship each product
  • quantity price breaks, that is, whether you will get a discount for purchasing larger quantities of products
  • manufacturing standards, that is, whether the manufacturers have any certifications that can attest to the quality of their products and that you may need to submit to Amazon in the future
  • material costs, that is, what materials the products are made of so you can understand how the prices might fluctuate with changes in commodity prices

Be certain that both sides are aware whether the agreement is exclusive and whether you can trust the manufacturer to respect the terms. Another factor that is important to keep in mind is that foreign agreements are not always enforceable or only so at a high cost to you,
so ensuring a healthy and amicable relationship with the main suppliers is a priority before
moving forward.

It is a good idea to establish the best channels for communication with the suppliers. Speak with them on the phone to gauge their English proficiency to avoid future confusion and to set expectations for how responsive they will be to your questions. Trying to squeeze additional cost savings out of them could hurt the relationship and ultimately hurt the quality of your finished products. Establishing the orders through platforms like Alibaba can help provide you with a little extra protection in the form of escrow accounts, but, many times, it is difficult to enforce any agreements or contracts you have with suppliers in foreign courts.

In addition, take into account the shipping and handling parts of the business. Get to know
the current practices of the FBA business and determine what options are best and most
practical for the company. You’ll have to decide whether you need your own freight forwarder,
how the products will be shipped to prevent damage, the terms of the shipping arrangement (free on board [FOB) vs. cost, insurance, and freight [CIF]), and who will handle any
necessary customs charges.

A freight forwarder can help you navigate all the intricacies of shipping products internationally. They will organize the logistical side of your shipment as well as prepare any necessary customs documents that you may need. They can also explain shipping terms like FOB (i.e., at what point the buyer is responsible for the costs and risks of the shipment) and CIF (i.e., how the seller needs to get insurance on the shipments to ensure they arrive at the destination). We suggest hiring a freight forwarder to make sure all of these aspects are taken care of by experts.

Finally, we strongly suggest ensuring the legality of all aspects of the product. Make sure
all the terms of these agreements meet FDA or other regulatory standards. Ask an experienced
lawyer to review the process and for product safety data sheets, good manufacturing process (GMP) certificates, and/or quality management system (QMS) certifications.

Product safety data sheets detail potential hazards of a product and its materials, such as fire or environmental hazards. GMP certificates indicate that your manufacturer complies with the regulations and best practices for producing products like food, beverages, cosmetics, and dietary supplements. QMS certifications are given to manufacturers that have policies and processes that help to ensure consistent product quality, safety, and ethical standards.

 

3. Understand the Fee Payments

As mentioned before, it is important to get to know the way the industry works. Amazon
charges a variety of fees to all Amazon Sellers—ranging from 8–20% of the sales price just for listing the product on Amazon—and the fees vary depending on the product type. For example, consumer electronics have an 8% referral fee, and jewelry has a 20% referral fee. Overall, Amazon can take up to 35% in fees when you add in the FBA fees.

The main thing to focus on here is whether the fee payments are correctly accounted for in the business’s income statement. Amazon business reports tend to focus only on gross sales numbers and don’t show fees of any kind. Failing to account for these fees will result in a highly overvalued company. If you want to look at these expenses, you can check the transaction data in the payment records.

 

4. Study the Historic Advertising Data

Amazon only keeps advertising data for 90 days, so finding out as much about a business’s
advertising history as possible is an important task. Inquire about monthly reports for as far back
as the company may have data for because this information is key to gaining insight about the main keywords for the product. It is also important to determine how past campaigns performed.
There are different types of advertising on Amazon, and, depending on the campaign or
targeting type, you can use past data to optimize future advertising.

Automatic campaigns aim to obtain keyword research, while manual campaigns are used to optimize for the highest converting keywords. The main objective of these campaigns is to target profitable keywords in order to obtain sales at a very low cost. Other campaigns tend to focus on driving sales on a specific keyword to rank for that keyword, meaning higher bid spends and a lower average cost of sale (ACOS).

It is important to look at whether advertising costs have been fluctuating over time and
by campaign. This will give you an idea of how competitive the product market is. An increasing
ACOS advertising spend could mean that you would have to look for advertising opportunities
for related keywords if you want the business to keep growing. Advertising costs in Amazon
have been escalating exponentially in the last 2 years, and paid advertising on the Amazon
platform is now Amazon’s main source of revenue.

 

5. Research the Promotion History

Dive into the FBA account and thoroughly check for promotions. The report is available under
the fulfillment section and has a lot of information on each redeemed promotion. When sellers
give away enough products at a low price, they can get a lot of new customers and sales
organically, creating an arbitrage on Amazon. Every fulfilled promotion is counted as a sale and
will increase keyword ranking, which can also lead to more organic sales.

We once had a client who bought a business but didn’t do much research into its promotion history. What we found out was that the previous owner was giving away almost $30,000 per month in merchandise. This created an arbitrage with a monthly profit of $18,000. When our client purchased the business, the promotions were no longer working, making the sales drop and decreasing the investment’s value by more than 50%.

It was not pretty.

The seller did not disclose this information prior to the sale and explicitly stated that he was not using excessive promotions to influence the Amazon algorithm. Our client had to take the seller to court for withholding material information during the acquisition. Litigation can be expensive and messy, so it is better to be thorough during the due diligence period than to have to resort to legal action down the road.

 

6. Know Your Competition

Another key element of business is knowing your competitors. Do some research about your
competitors by looking at their prices, product reviews, and who fulfills their orders.
There are a lot of available tools that allow you to obtain a broad picture of the
competition environment and to get greater insight into the business profiles of your
competitors. Amazon’s A9 algorithm focuses on sales velocity; thus, low-priced products usually
do better. Decide whether these prices are manageable and whether they will still give you a
good margin.

We also suggest you take a close look at the reviews of the business’s top listings
and be aware of who is actually the brand owner. Amazon has developed a number of
private-label brands that they sell directly to customers. This is an important factor to keep in
mind since direct competition with Amazon would be far tougher than that with other sellers.

 

7. Review the Social Media Accounts and Email Lists

Strong, loyal bases of Instagram, Facebook, and Twitter followers are remarkable assets to grow an Amazon account. Loyal customers using social media platforms can become your biggest advocates, and offering promotions or giveaways can be a powerful way to broaden your advertising reach and generate additional sales and traffic to your product listings.

Email lists can also be extremely helpful. A list of past customers can be used to create Facebook lookalike audiences for additional advertising. You can also utilize drip email marketing campaigns to keep your audience engaged with your brand and coming back for future purchases. Both social media and email marketing are extremely helpful if you plan to launch additional products within the account in the future, as well.

It is very important that you include access to social media accounts, fan databases, and mailing lists as part of the purchase agreement. In addition, don’t forget to check the advertisement history to see how much traffic social media has driven for the brand in the past.

 

8. Review the Branding

Although name brands don’t necessarily mean much on Amazon, having the rights to the
branding you’re purchasing is a fundamental part of any agreement. Trademarks, patents, or
copyrights, if they exist, should be a part of the buyout. We would also recommend adding a
clause preventing the seller from selling the same product again, effectively a non-compete.
Remember to get the rights to all of the business’s selling platforms, including their social media,
eCommerce platforms, and webpage.

 

9. Check the Account Health

It is very important to keep in mind that Amazon has specific targets that sellers must
meet. Sellers who don’t meet those specifications get their accounts suspended. These targets relate to customer service, product compliance, and fulfillment. If you’re delivering defective orders, getting intellectual property complaints, or have too many shipping problems, your account health will be affected. Of course, Amazon gives some leeway for problems that are out of your hands. Natural disasters and inclement weather that cause delays are sometimes not accounted for. Either way, take a close look at the Performance Over Time report under
Account Health and express any related your concerns before buying an FBA.

 

10. Review the Tax Liabilities

As with all businesses, tax liabilities are something to keep in mind. Our best advice
is to consult with a CPA to guide you along the process and explain the liabilities that
the purchase entails. Generally, any prior liabilities should remain with the seller, but it is better to be safe than sorry and check every aspect thoroughly.

 

Amazon FBA is Booming, Cash Flow Opportunity (When You Buy Right)

Purchasing Amazon FBA businesses is a booming, cash-flowing opportunity, so it is very important to be meticulous and exhaustive while analyzing the transaction to avoid being scammed or running into unexpected surprises. Following our guide is a good way to consider all the aspects that a business transaction like this involves.

 

About the Author

Melissa Platt is a content marketer at AMZ Advisers and Precisely. Melissa and the AMZ Advisers team have been able to achieve incredible growth on the Amazon platform for their clients by optimizing and managing their accounts and creating in-depth content marketing strategies.


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