How to Value an Amazon FBA Business—With Real Sales Data
Your Amazon FBA business is your pride and joy. Especially if you’ve started from scratch—you’ve invested so much and walked a rugged path to getting your business off the ground.
But when it comes to valuing your FBA business, you might think this hard work you’ve put into it counts for a lot. Unfortunately, it doesn’t.
This is why many entrepreneurs overvalue their FBA business: because they set their selling price based on what they’ve put into it and their perception of the business’ potential.
Getting an accurate valuation of your business is crucial to a successful sale.
In fact, even if you’re not planning on selling anytime soon, valuing your business is a great way to track its performance, as valuations are performance based.
We’ve sold hundreds of FBA businesses in our time, and we’ve seen the effect valuation has on the sale.
So, what goes into a valuation?
How to Value an Amazon FBA Business
The number one factor in valuing any online business is the net profit.
This is for the simple reason that the more money the business can make someone, the more it’s worth—although this isn’t always the case.
It’s best to take a 12-month average of the net profit to account for any dips or spikes in earnings or any seasonality the business experiences.
To start, we give the business a multiple. This is a figure that is calculated based on multiple factors, including the business’ age, model, and the number of products it sells.
To get a baseline valuation figure for the business, we multiply this multiple by the 12-month average monthly net profit.
There’s more that goes into a valuation that we’ll discuss later on, but first, there are a couple of other valuation methods you can use.
SDE vs. EBITDA
While the above example requires multiplying the net profit by the valuation multiple, the seller discretionary earnings (SDE) method involves calculating how much money the business owner actually takes home.
To get to this figure, use the following equation: Revenue – Cost of Goods Sold – Operating Expenses + Owner Salary.
Multiply this number by the multiple to arrive at the valuation figure for the business.
This method is used for the majority of businesses valued at $5,000,000 or less on our marketplace.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a bit more granular valuation method. It’s what accountants use to assess the profitability of a business, and it’s typically used for businesses worth over $5,000,000, as there are more moving parts with businesses of this size.
When using either of these methods, it’s important to take add backs into account.
Add backs are, for the most part, write-offs. They are expenses that are not recurring and not necessarily required to maintain the business. Examples include one-off business trips or having family members on a payroll. Accounting for these non-essential expenses allows you to show a more accurate reflection of the profitability of your business to potential buyers.
For your Amazon FBA business, you might be wondering, “Where does my inventory fit into the mix?”
What About Inventory?
We don’t usually include inventory in the list price for a business. This is because if the buyer isn’t able to sell the inventory, it’s essentially worthless. Also, if they’re not able to sell perishable goods fast enough, they’ll, well, perish.
But it’s still important that you have enough inventory on-hand for the transition of the sale to help the buyer with the acquisition.
While we said earlier that the net profit is typically taken over a 12-month average, it can also be calculated using a 6- or 3-month pricing window, depending on the state of the business.
What Are Pricing Windows?
When calculating the value of your Amazon FBA business, we use the average of your monthly net profits.
This is because if we were to take the annual profits, the finances wouldn’t account for any changes in performance over the course of the year.
The pricing window refers to the length of time we calculate the profits over, and the pricing window is chosen based on the state of the business.
Our exit planning team can help you to format your valuation to get the best possible price. Click here to schedule a free 30-minute call.
12-Month Window: The Gold Standard
This pricing window is what buyers are looking for. It gives the most accurate reflection of your business’ financial health because it takes into consideration any fluctuations or seasonality.
Since it gives the most accurate reflection of the business’ health, it makes the business more desirable to buyers.
The more buyers you have interested in your business, the more likely you are to sell it to someone who will look after it.
Not only does using this pricing window get you the most interest, it also gets you the best multiple.
The multiple is based on the fitness of a business. The longer a business’ financial history, the more established it is and, subsequently, the more it is worth.
6-Month Window: The “New Reality”
When a business is valued with this pricing window, it’s usually an indication that it has experienced a recent and big change.
It may have taken a hit from a Google algorithm update and declined as a result, or it could be experiencing an acceleration of demand.
That means the last six months most accurately reflect the new state of the business, a state that could very well continue into the next six months.
This pricing window is also useful for younger businesses that haven’t been around long enough for a 12-month pricing window.
Regardless, a six-month window will result in a lower multiple and less buyer interest than a 12-month window, as it is a smaller data set for buyers to refer to.
3-Month Window: The Small Window
We almost always recommend waiting until you’re able to offer a longer pricing window than three months.
A three-month shift in performance wouldn’t justify a three-month window like a six-month shift would, so this pricing window is reserved for very young businesses—usually ones five- to eight-months-old.
That puts a limit of about $100K for the valuation here, as it is highly unlikely a buyer would take on a business for more than that based on such a short pricing window.
Even if your business went from $0 to $100K a month in just three months; it’s better to wait for a longer window to get the sale price the business deserves.
What if My Amazon Business is Seasonal?
This is where a 12-month pricing window works wonders.
If your business is seasonal and thus experiences the same rises in sales year-on-year, looking at your average profits over 12 months allows buyers to see how that seasonality affects your business.
That said, despite common beliefs, it actually isn’t better to wait until you’re in the high season and earning the most with your business to try to sell it.
This is because the 12-month window will show the regular patterns, and any buyer will know that if they acquire the business, it is destined for decline.
Now that we’ve explained how pricing windows work, let’s circle back to look at what goes into the sales multiple.
What Goes Into a Sale Multiple?
Naturally, there are many factors to take into consideration when valuing your Amazon FBA business.
While some have a bigger impact than others, they all play a part in your business valuation.
Your earning trends are taken into consideration as part of your sale multiple.
Growth trends are an indication of the current and past state of the business. If the business is experiencing rapid growth, it could be for a number of reasons: you might have launched a product that has taken off, you might have run a marketing campaign that went viral, or there might just be a sudden increase in demand for your product.
We look at growth trends to uncover these reasons and get a better understanding of the state of your business.
Stability and Diversity of Earnings
Your financial data tells the history of your business.
The number one thing buyers look for when assessing a business is the stability of the earnings.
Unstable earnings indicate a problem with the infrastructure of a business. For an Amazon FBA, this is often a problem with inventory management, such as the business running out of stock or ordering too much stock.
Stable growth also indicates that the business isn’t founded on a fad product but instead has been well-built on a product that is evergreen.
Diversity of SKUs
It’s also good to diversify your SKUs. Having a range of different types of products means that if one starts to dip in popularity, Amazon delists your product, or worse still, a new law or change to regulations in the niche makes the product unviable, then your business can remain profitable by relying on the sales of its other products.
It also allows you the opportunity to increase the average order value, as you have multiple upsell options.
Trademarks and Amazon Brand Registry
Once you’ve established your business, protecting your brand is the next step.
Copycats will always be a problem in online business, and it’s no different for an Amazon FBA.
One aspect of your FBA business we look at when determining the sales multiple is defensibility, and a great way to make your business more defensible is to trademark your products.
Strength of the Supply Chain
The supply chain is the backbone of an Amazon FBA business. If your products aren’t produced and delivered to the customer, you don’t make sales.
This is why it is important to have suppliers that are consistent and reliable, are able to deliver short lead times, and who produce quality products.
It’s better if you have more than one supplier just in case your only supplier is unable to deliver for whatever reason.
The best way to make a business more salable and, in fact, the best way to scale a business is to make yourself redundant.
When you have reliable staff running your business for you, it allows you the time to focus on business growth.
Most online business buyers are looking for a business that is low maintenance, partly because of the point outlined above but also because they probably have a portfolio of businesses and don’t have enough time to invest in a high-maintenance business.
This is the most important factor considered when determining a multiple.
A business that has a proven track record of performing and profiting is the ultimate gem.
Many businesses grow rapidly or gradually over a small period of time, but one that consistently earns over a number of years has proven itself to be a stable earner.
It also takes time for a business to establish itself in a niche. A business that has been around for a long time and has shown consistent growth has likely established itself as one of the leaders in its niche.
Email List and Social Media
Some businesses have built up additional assets, and the potential within those assets is a big appeal for buyers.
An email list offers a warm audience for direct marketing to increase sales, and a social media presence increases awareness of your brand in your niche.
These are the two main audience sources that businesses use to build their brand, and they’re highly effective.
Your brand awareness isn’t just about the size of your audience: it’s also about your reputation.
Product reviews are the number one indicator of your brand’s reputation. Everyone knows that when shoppers are browsing the Amazon marketplace, they’re keeping an eye out for the gold stars.
That’s it for the factors that are considered to determine the sale multiple of your Amazon FBA business. Now, let’s dig into some data on FBA business sales.
Tracking Real Life Multiples from Our Marketplace
The number of Amazon FBA businesses being sold on our marketplace is increasing every year.
In fact, in 2020, we saw an increase of 24%, and in 2019, there was an increase of 41% from 2018.
To put a financial figure on this data, the average sale price of an Amazon FBA business on our marketplace increased by $538,741 in 2020—an 80% increase from 2019!
We’ve talked about the internal factors that affect the sales multiple of a business, but the state of the industry is an external factor that also affects the baseline multiple for businesses, and the growth of the market is reflected in the increase in the average sales multiples of businesses.
In 2020, the average sales multiple for Amazon FBA businesses increased 11% to 28.5.
The rate of growth of the Amazon FBA mergers and acquisitions (M&A) industry is starting to level off, but it’s still an exciting time for FBA owners who want to sell.
There is an increasing amount of interest from big-money investors and private equity. Online businesses as digital assets are in increasing demand, and this trend is showing no signs of slowing down. This is helping drive multiples and sales prices up.
As for calculating the value of your Amazon FBA business, there are automated calculators you can use to get a baseline figure. Unfortunately, these can only do so much, and most of those on the internet don’t give an accurate figure.
Not All Automated Calculators are Built Equally
Most online business valuation calculators are weak. They base their calculations on insufficient data and produce an unrealistic value for your business.
Their calculations aren’t based on real sales data collected from previous business sales. We know this because we’re the only online business broker who is collecting such a large amount of data. You can see this in our State of the Industry Reports.
Our valuation tool is based on data we’ve collected from the sale of over 1,400 businesses:
Online valuation calculators can give you a good ballpark figure sale price for your business if they’re based on real data, but if they’re not, they could leave you even more confused.
The best approach is to get a valuation from an experienced industry professional, and you should always do this before selling your business.
After using our valuation tool, you’ll be offered the option to talk with our sales team to discuss your valuation and get some free advice—no commitment required.
A High Business Valuation is Often Meaningless Unless…
Your business is your baby. In your eyes, it can do no wrong.
That’s why it’s natural when getting ready to sell your business to focus heavily on the sale price, as you want it to sell for the price you think it’s worth.
Unfortunately, this bias can set you up for failure.
By focusing too much on the sale price, you don’t pay enough attention to making your business an attractive asset.
Some entrepreneurs even do things that harm their business in their pursuit of obtaining a higher valuation, like cutting necessary costs and getting rid of team members.
They forget that a business earning $20,000 net profit each month that only requires 5 hours of work per week from the seller to maintain is way more valuable and attractive than a business earning $50,000 a month that requires 30 hours of work.
If you have a business with high profits, it doesn’t necessarily mean it will easily sell. As we’ve discussed, there are many more factors taken into consideration when valuing a business. At the end of the day, a well-built business receives a higher multiple and thus a higher valuation.
Thinking of your business as an investable asset rather than your pride and joy will go a long way in helping you make it more salable, attract more potential buyers, and thus get you a higher price.
Common Mistakes When Valuing an Amazon Business
When valuing their business based on biases, mistaken beliefs, and a limited knowledge of the M&A industry, entrepreneurs can make many mistakes.
These biases result in two mistakes we see almost all Amazon FBA sellers make when valuing their business.
Comparing Your Business to Other FBA Businesses
FBA sellers believe that if their business is earning a certain amount of money per month, they can check our marketplace, look at other FBA businesses earning the same profits each month, see their listing price, and get an idea of what their FBA business should be selling for.
This is a big mistake.
As found in a data study we conducted on sales prices compared to net profits, a business’ profits and sale price don’t always correlate.
This is for the reasons we previously discussed about the salability of the business.
Focusing Too Much on Potential
Everyone has the next one million, ten million, or hundred-million-dollar business.
It’s natural to get attached to your business. You’ve built it from the ground up, had important experiences with it, overcome roadblocks, and grown it to where it is today.
Because you’re in your business, you’ve probably got a good idea of where it can go in the future and how large it can grow to be.
The harsh reality is, that means nothing.
The future you see for your business isn’t necessarily what a buyer sees. More to the point, if we take you out of the equation as the owner of the business, can a new owner take the business to where you potentially could have?
You might respond to that question by saying a buyer with more capital and resources than you could potentially take it further. The point is, however, that there’s no guarantee.
What you can guarantee is how your business has performed in the past and how it is performing now. That’s what buyers look at.
There are many external influences that could deliver a huge blow to your business, including changes from Amazon and Google, industry changes, and competitors entering the market.
While these risks are out of your control, they still play a part in the online business world and lead to the unfortunate truth that no success is guaranteed.
We’ve covered a lot on how Amazon FBA businesses are valued. When it comes to selling your FBA business, the next thing to consider is when to sell.
When Should You Sell Your Amazon FBA Business?
We conducted a data study to discover whether our marketplace experiences any seasonality throughout the year, i.e. when most and least business sales happen.
We found no evidence of any seasonality throughout the year. What that means for you is the best time to sell is when it is best for you.
You could experience a big life change or be planning for a big life change, like purchasing a house with your partner or starting a family, or you might have a personal project you want to direct all of your attention to.
Getting Access to a Large Amount of Capital
For a lot of sellers, the amount of capital they receive for their FBA business is more than they’ve ever seen in their life.
Accessing that capital provides many opportunities not previously available to the seller.
We’ve had sellers who used the capital they earned from selling their business to give back to their family. Others have reinvested in new life projects.
Taking on a New Challenge
Choosing when to sell your business could be simply that you’re bored with the business and you want a new challenge. This isn’t uncommon, and you certainly shouldn’t feel guilty about it.
You could have another business you’re running that’s starting to take off, and you want to invest everything into the growth of that business.
It’s also not uncommon for sellers to invest the capital they earn from selling their business into real estate.
The reason you have for selling will play a part in the price you sell for and how you sell.
If you need the capital relatively quickly, you might be better off accepting a slightly lower price.
If you’re not in any rush, you might be better off taking the time to receive offers from buyers and even agreeing to a deal like an earn out, whereby you accept a percentage of the sale price upfront and the buyer pays you the rest over a period of months.
When you have an idea of when you want to sell, you need to start thinking about planning your exit.
How Exit Planning Will Maximize Your Valuation
Exit planning is the process of creating an action plan for the sale of your business. An exit plan involves defining your goals and putting everything in place to prepare for a smooth transition of the sale.
It usually involves clearing up your business operations, getting your financials organized, and fine-tuning your business so it is ready for a new owner to easily take over.
This is worth doing, even if you’re not selling right now, because it cleans up your business and helps it run more efficiently. It also helps you get clear on how your business is running and where its strengths and weaknesses are, and it could potentially make it more profitable if you iron out the weaknesses.
If you want to get an idea of what preparing an FBA business for sale entails, check out our blog post: how to sell an Amazon FBA business. It also goes into detail on what buyers are looking for.
You don’t have to do this alone, however. You can get advice from an industry professional who can guide you through the process.
When we do exit planning with FBA owners, we go over their business with a fine-toothed comb and identify the areas where their business is strong and where it is falling short. Our team knows what buyers are looking for and can help you prepare your business to match the demand.
Depending on the state and size of your business, it may be necessary to create a 30-day plan to spruce up your business, or it could be a several-month plan to give it a deep clean.
We provide this exit planning free and with no obligation. Schedule a free call today, and find out how the process will look for your FBA business.
If you think you and your business are ready to sell, consider sharing it with our vetting team to list your Amazon FBA businesses for sale.
It’s free to list on our marketplace and you can continue to earn from your store while we take care of selling it!