Amazon FBA Business Valuation
Similar to Amazon Associates affiliate websites, Amazon FBA businesses have been a hot seller in the online business M&A space.
Why build an ecommerce store from the ground up when you can hit your wagon to Amazon? Amazon is the largest international retailer and getting your products in front of their customer base can have huge revenue potential. Additionally, with the outsourced fulfillment, these businesses can be very passive and profitable.
All of these factors have led to the increase in the number of FBA businesses, the investor rush to buy FBA businesses, and the high multiples that they sell for.
Amazon FBA businesses sell for approx. 2.0-3.5x earnings. There is a good amount of broker data out there that suggests the average multiple is closer to the low-3’s (~3.1x). However, these are for brokered FBA businesses, which tend to be a class above the rest and tick the box on all of the factors we mention here.
5 Top Valuation Factors for FBA Businesses
- Type of FBA business
- Product concentration
- Amazon Best Sellers Rank (BSR)
- Competition and defensibility
- Age and financial trends
1. Type of FBA Business
While an FBA business is an FBA business, the biggest variance from one to the other is the products that are being sold. We classify FBA businesses into 3 types:
- Proprietary, branded sellers
- Private label sellers
The first type, proprietary and branded, receive the highest multiples because they have the most “secret sauce”, defensibility, and usually the least competition. Their products are unique, custom, one-of-a-kind, etc. and they are the only people selling it on Amazon.
Private label sellers come in second place for valuation. Private label will have its own brand, but the same products are usually also sold or available from other brands. Having a brand is important, so there is value there, but not having the uniqueness factor is a negative.
Reseller stores are selling other brand’s products and are the least valuable because they really have no secret sauce. These stores will have the most competition and the least value-add. Reseller stores are very difficult to sell because they are high risk.
2. Product concentration
Product concentration refers to the percentage of revenues that are generated by one, or a few, products only. If 80% of revenues are generated by 1-3 products, you have significant concentration.
Any form of concentration in a business equals risk. There are a lot of forces outside of an FBA owners control that can lead to a top product suddenly performing very poorly. To sell your FBA business for the highest multiple, you’ll want to have a diversified product set, and as little concentration as possible.
3. Amazon Best Sellers Rank (BSR)
BSR, or Best Sellers Rank, is an Amazon metric that combines sales performance and customer service. BSR is based on historical sales trends, but it’s also thought to be a good predictive tool for future sales growth.
Buyers love seeing a strong BSR that has consistently increase over time. A strong and growing BSR indicates to a buyer that the product is likely to continue experiencing consistent sales and volume growth into the future.
When buyers feel really comfortable about the sustainability and consistency of a businesses revenues, they are willing to pay higher multiples for it. BSR is a great metric to give buyers comfort and command a higher valuation multiple.
4. Competition and defensibility
Similar to any online business model, less competition is better. With that being said, competition is okay IF you have a competitive advantage over your competition. If your FBA store sells a proprietary or unique product, you likely have limited competition. But you also have a defensible position since no one else sells your product.
On Amazon, the playing field is level: everyone has access to the same competitors. There are things that you can do to market your business better on Amazon, etc. but marketing your business better or writing better product copy is not a defensible strategy. Having a brand that people love, a product that is higher quality, unique, etc. is defensible.
Before you sell your FBA business, try to build the strongest competitive advantage possible to get the highest earnings multiple.
5. Age and financial trends
The age of the FBA store and the financial trends are important for instilling confidence in a buyer. Young stores lack the data necessary to give the buyer comfort that the growth and financial performance are going to continue.
It’s synonymous to picking a mutual fund: do you want the one that has a 10% annual return over an 8-year time frame, or the one with a 10% annual return over a 2-year time frame?
Valuation is about risk, or perceived risk. And while you can’t rely on historical performance as a guarantee for future performance, it sure makes a buyer a lot more comfortable when a business has a sustained track record of growth and consistent profitability.
With FBA businesses, buyers tend to like to see at least 3-years of financial history.