[Case Study] How Standard Operating Procedures Create a $1,000,000 Amazon FBA Business
May 6, 2020
Imagine working for just one hour per day.
Now, picture $100,000 entering your bank account at the end of the month.
Many of us with standard 9–5 jobs dream of this. You might be familiar with the saying that if you choose a job you love, you’ll never work a day in your life. While passion for your work is important, other factors can motivate you to put in the hours.
Flexibility over what you work on, when you work, and for how long you work are some of the main reasons people want to become entrepreneurs. The good news is that you can become an entrepreneur and start a business with massive potential on a shoestring budget.
While building a seven-figure online business with minimal resources has been done many times, it’s a long learning process.
One of the biggest pitfalls entrepreneurs face is failing to set up standard operating procedures (SOPs) to automate tasks. Having SOPs in place allows the owner of a business to be hands-off. Most of the vital responsibilities are assigned to someone else, and you can focus on your vision and the bigger picture.
A successful entrepreneur turns an idea from an abstract concept into an in-demand product. Setting up an Amazon Fulfilled by Amazon (FBA) business is a great way to handle the logistics of selling your product. However, the difference between a good Amazon FBA and a great one is its scalability. SOPs give your brand the infrastructure to make that jump in quality.
That’s how one FBA business sold for $1,000,000 on our marketplace, with $600,000 offered up-front in cash and $400,000 offered in earn-outs over the course of two years.
The business was so well-organized that the seller spent only five hours per week managing it. This is remarkable when you consider the many moving parts of an Amazon FBA business.
So how did the seller grow a million-dollar brand from scratch?
Creating a Money-Making Product
Starting a profitable business begins with a product that performs well in terms of sales. After this brand launched in 2016, it took only four months for the product to begin generating a profit.
At the time of sale, the Amazon Seller Account had 10 stock-keeping units (SKUs) and over 3,000 reviews with an average rating of 4.5 out of 5. The products’ excellent reviews resulted in a consistently high Best Seller Rank (BSR) throughout the year.
When an FBA business’s product has a high BSR, buyers know that your listings are highly visible on the marketplace. Buyers often look for businesses whose products have a good BSR as it indicates a strong sales performance. One way to improve your Amazon BSR is to optimize your listings and choose the best keywords.
The business sold its products originally on the US Amazon marketplace, before expanding to the UK, France, Italy, and Spain in 2018. The business subsequently experienced a 45% increase in revenue during the first quarter of 2019 compared to the same period in 2018.
With an attractive product range performing well in sales, the business naturally grew in size and operations.
How did the seller keep up with the growing demand?
Scaling a Hands-off Business
It’s common to find yourself wearing several job hats when you first launch your business. After all, you’re aiming to reduce expenses and keep the overhead low. However, every entrepreneur wants to spend their time growing their brand and avoid getting bogged down in administrative tasks.
Implementing SOPs and hiring the right people to carry out these SOPs gives you the freedom to choose what areas of the business to focus on.
In this case, the seller spent one to two hours each day managing the company even after the expansion to the different Amazon marketplaces. Their daily tasks included monitoring site analytics, looking for sales trends, and strategizing for future growth.
The owner hired a team of five people spread across different countries and delegated time-consuming jobs to them, so the owner could cover the other responsibilities.
First, the seller hired a sourcing agent based in China to find suppliers. Having someone based in your supplier’s country can be more helpful than doing a remote search yourself. A sourcing agent can check product authenticity and if manufacturers are genuine by making onsite visits, and they are able to communicate your requirements in the supplier’s own language. .
Next, the owner hired a freight forwarder to organize inventory pickup from the factory and ensure it was delivered to the Amazon warehouses. Hiring a freight forwarder prevents worries about the logistics of transporting inventory.
Third, the owner hired a virtual assistant (VA) based in the Philippines to work for 20 hours per week on the following tasks:
- Responding to customer queries
- Reaching out to customers after receiving negative feedback
- Monitoring business metrics
- Performing product and market research
Many online business owners hire VAs to save them time and money. VAs are cost-effective because of lower training costs and lower operating costs compared to hiring in-person assistants.
After you have decided how to systematize tasks efficiently, you can hire someone with the right skill set to take over these SOPs quickly. Hiring a remote VA means you save on renting office space and buying equipment.
Another step taken by the seller to systematize the business was to outsource pay-per-click (PPC) campaigns to a specialist contractor. This is a good example of delegating time-consuming jobs that require specialized knowledge. It may be helpful to learn how to use PPC advertising effectively for an Amazon FBA business. On the other hand, it can take a long time to learn how to market your brand properly, so hiring a contractor may be more time-efficient.
Finally, the last member of this seller’s team was his wife, who helped manage funnels, provided a second pair of eyes on inventory levels, and monitored the business’s financial account.
As this seller showed us, creating SOPs and outsourcing to the right people makes your business appealing to a wider variety of potential buyers. Scaling an Amazon FBA business can be difficult if you haven’t systematized the operations. More buyers are likely to notice your business if it is a turnkey solution and requires minimal work to maintain it.
A ready-made Amazon FBA business with successful products in different marketplaces is what the seller brought to the table.
Now the business was ready to enter our marketplace.
When a Buyer Needs Only One Call
Once all the financial and operational details of the business were gathered, this FBA business went for sale on our marketplace, and it wasn’t long before an interested buyer presented an offer.
Before taking this offer, the seller wanted to update the profit and loss (P&L) statement because of the business’s seasonality. While waiting for your business to be sold, it can be useful to update the financial information to show buyers a more accurate sales trend throughout the year.
Once the P&L statement was finalized, a buyer made an offer of up to $1,000,000. The deal was broken down as $600,000 in cash followed by earn-outs of $400,000. More specifically, if the business’s earnings before interest, taxes, depreciation, and amortization (EBITDA) surpassed a certain financial goal in the first 12 months and 24 months after the deal, the seller would receive $200,000 each year.
As we discuss in our ultimate guide to structuring deals, earn-outs are a tool buyers and sellers use to lower their risk. It is similar to purchasing a house in that you put down a down payment on a property before paying a mortgage to cover the rest of the owed amount. An earn-out allows a buyer to make a down payment to take over the business and to pay the remainder of the deal at a later date if the business achieves financial goals agreed upon during negotiations.
However, we advise that sellers avoid earn-outs if they want to be completely removed from their business after its sale. Earn-outs mean that the seller must wait for the buyer to pay back a portion of the sale, so they will still be involved in the business to some degree. Bear in mind that, if you opt to make the entire deal in cash, you will have less leverage to increase the overall sale price.
In this case, the seller wasn’t in a hurry to be divorced from the business and agreed to the two-year earn-out structure.
With the deal agreed on by both parties, the transfer was complete.
Set up Smart to Sell High
After building a business from scratch over the course of four years, this seller made a deal worth up to $1 million.
The seller was looking to raise capital to start a new brand and to invest in more real estate to expand their portfolio.
This example is just one of many reasons why entrepreneurs sell their businesses for a profitable exit. Whatever your reason may be, the case of this seller shows that a business that is prepared to be run without you can fetch a high price on our marketplace.
After all, people own businesses so they can work smarter, not harder. For many, that looks like working fewer hours while earning more than they would at a 9–5 job.
We know what it’s like to acquire and sell a profitable business. After working with thousands of entrepreneurs, we understand the impact of such a large sum of capital toward achieving your goals. We worked with this seller and applied our knowledge to broker a deal as smoothly as possible.
As for your business: keep scaling your brand by introducing SOPs, as this seller did. Those SOPs will help you step back and look at the bigger picture.
Once you have a broader view, you’ll see the opportunities that await you after your business’s sale.
