Walking away from an FBA business you’ve poured sweat and tears into isn’t easy.
If you’ve come to terms with taking this big step in your entrepreneurial journey, congratulations, one of the hardest parts is done!
But making a profitable, safe exit from your business isn’t as simple as listing it on Craiglist and moving on. There are a lot of moving parts to the sales process that often catch business owners off guard.
Carefully preparing your business for sale may take a little time, but it will pay you dividends in the long run. Trimming the fat and streamlining your operations will make your FBA business more attractive to buyers and can lead to an increased valuation, and more cash in your pocket.
The good news is, you don’t have to figure this all out by yourself. In this article, I’ll provide you with a blueprint to guide you through each step of your Amazon FBA exit strategy.
Define Your Objectives
Why are you selling the business?
Very few business owners sell their businesses on a whim. There is usually a strong motivation driving the sale, and this will influence many of the decisions you make during the sales process. Here are some of the most common reasons why online entrepreneurs sell their businesses:
- To raise capital for other projects – This capital is often used to buy a house, purchase a new business, pay for college tuition, or to prepare for retirement.
- They don’t have the capacity to grow the business further – Scaling an online business requires a lot of resources, such as time, growth capital, a larger workforce, and advanced skills. Many business owners exit their businesses once they’ve maxed out their ability to grow the business further on their terms.
- A desire to move on to bigger things – Online business owners are an ambitious lot. Once they’ve succeeded in building up a successful business, and overcome the inevitable obstacles along the way, they’re often anxious to move on to the next challenge.
- Loss of interest or a lack of time – Another common reason for entrepreneurs to sell a business is that they simply don’t have the time to dedicate to it. Often, this is because they are running other businesses simultaneously, or have a young family that takes up a large portion of their time.
What are your desired outcomes?
Your motivations for selling your business play a big part in the outcomes and objectives you wish to achieve from the sale. If you’re selling the business to raise capital, for example, you’re less likely to negotiate an earnout as you’ll want as much upfront cash as possible.
Another important thing you need to consider is how much money you’d like to make from the sale of your business. If you have a specific figure in mind, you should have your business valued as soon as possible to see if you are on track to reach this target. If not, you may have to delay the sale by a few months until you reach your target.
Finally, you need to set a realistic timeline for the sale. Small businesses (under $100k in value) tend to sell extremely quickly, often in a matter of days, or even hours. Large businesses (over $1 million) can take a few weeks or months to sell. If you’re working on a tight timeline, best get your business on the market sooner rather than later.
Choose a Method of Sale
There are a variety of places to sell your online business, the most common being on a marketplace, at an auction, through a broker, and through a private sale.
Each of these methods has its own unique advantages. Private sales are often the fastest way to sell a business as there is no middleman or bureaucracy slowing things down. Competition at an auction can drive your sales price up, netting you a larger profit.
Brokers and curated marketplaces offer the benefit of a larger pool of interested buyers. They also offer a greater level of protection, helping to guide inexperienced sellers through the sales process with fewer hiccups along the way.
One avenue to be wary of is DIY marketplaces as they are often unregulated and attract many scam artists.
Shift Your Priorities
Running a business to grow and running it to sell requires two different mindsets. Essentially, the driving force behind your motivation needs to shift away from “what do consumers want?” and over to “What do potential buyers want?”.
Instead of advertising your products or content, you need to figure out how to advertise the business as a whole.
Streamline your business
Much as you would spring clean your house before guests come over, you need to reduce the clutter in your business before showing it to potential buyers.
Buyers value simplicity, so shift your focus away from scaling your business, to reducing complexity and redundancies within your existing operations.
The key thing to focus on here is reducing your level of involvement in the business. Over at Empire Flippers, one of the most common reasons we reject businesses submitted to our marketplace is the high level of owner involvement needed to keep the business running.
Take stock of the daily tasks you do in order to maintain the business and find ways to automate or outsource the work.
This is particularly important when it comes to inventory management and storage. If you self-store inventory, you are alienating a large percentage of buyers who either don’t have enough space or aren’t in the right geographical location to store the inventory themselves.
If you are unable to send your inventory directly to Amazon due to their fluctuating inventory limits, consider making use of a 3PL warehouse instead. This gives future buyers more options when it comes to regulating stock levels and avoiding Amazon storage limit penalties.
Avoid unnecessary risks
Exploring new growth opportunities comes hand in hand with a fair amount of risk. As a business owner, some of the growth techniques you experiment with may backfire or have lackluster results. While this is a setback, you can usually rectify these setbacks over time.
Once you make the decision to sell your business, you lose the benefit of time. One of the key things buyers look for in a potential business acquisition is a steady track record and stable earnings. As you prepare to exit, you cannot afford to take risks that may cause anomalies on your balance sheet.
While you want to avoid taking big risks, that doesn’t mean you can’t pursue quick wins like SEO optimization techniques or creating social media accounts that may add some last-minute value to your business.
Don’t go into autopilot
As you gradually reduce your involvement in the business, don’t step back to the point where you are no longer maintaining it.
You need to ensure that finances and sales remain consistent in order to achieve a good valuation.
You may be anxious to sell the business and move on with your life but keep in mind that the more your business falls into disrepair, the longer it will take to sell.
Create a Roadmap for Buyers to Understand Your Business
It’s easy for buyers to become intimidated by all the moving parts of a business. Once you’ve streamlined your business, create a blueprint to help buyers understand the ins and out of your unique processes.
Here are some key documents you can put together to ensure a smooth transition of the business to the new Buyer:
- SOPs – A standard operating procedure is a document that provides clear-cut instructions on how to complete certain tasks and processes. This will help interested buyers understand what skills and employees are required to effectively run your business.
- Generate a P&L statement – A profit and loss statement is a summary of your business’s revenue, expenses, and costs during a specified time period. This allows interested buyers to easily view and understand your profit margins.
- Get your paperwork in order – Start tracking down important paperwork like your registration documents, trademarks, certifications and certificates, supplier agreements, and employee contracts. Collecting and collating these documents early on will save you a lot of stress as you get into the nitty-gritty details of the business transfer.
Determine the Value of Your Business
Let’s face it, you’re not selling your business because you love paperwork or negotiating with buyers. At the end of the day, what matters most is the amount of cash you’re going to walk away with.
Just as some parents think their precious children can do no wrong, many entrepreneurs overvalue their FBA business because they are too heavily influenced by the money, time, and emotions they’ve invested in the business.
The numbers and formulas that go into a valuation don’t take these emotions into account, but they do provide an accurate representation of your business’s worth.
The key factor that will influence your valuation is your net profit. After all, the more money your business makes, the more people are willing to pay for it.
The Empire Flippers valuation formula
Each marketplace or broker has its own way of calculating the value of your business. Most of them follow a similar formula with a few tweaks here and there.
Here’s the formula we use to determine the value of your FBA business.[/vc_column_text][vc_single_image image=”5558″ img_size=”large”][vc_column_text]First, we give the business a sales multiple. When calculating the multiple, we carefully consider the various elements of your business to determine its sustainability.
We look at growth trends and the stability of your earnings to determine if the business is growing or declining. We look at the diversity of your SKUs and the strengths of your supply chain to see if you are flexible enough to survive changes within the industry.
We also check to see if you have any registered trademarks and are a member of Amazon Brand Registry. While these requirements aren’t crucial, they do allow you to build a moat around your business and provide a layer of protection from copycats and competitors.
The higher the multiple, the better. In 2021, our average sales multiple for Amazon FBA businesses was 40x. This may seem phenomenally high, but keep in mind that we use a monthly multiple instead of the annual figure that most other brokers use.
Once we’ve calculated the multiple, we simply multiply it by your net profit over a rolling 12 month period (to account for any fluctuations or seasonality during the year) to calculate the 1value of your business. Easy as pie!
SDE vs. EBITDA
Another formula that you might come across is the Seller Discretionary Earnings or SDE formula. The aim of this method is to calculate how much money the business owner actually takes home.
The formula looks something like this:[/vc_column_text][vc_single_image image=”5557″ img_size=”large”][vc_column_text]Once you’ve inputted your figures into this formula, multiply your answer by the multiple to calculate the valuation figure for the business.
The final valuation formula is referred to as EBITDA, or earnings before interest, taxes, depreciation, and amortization. Catchy, right?
This is a much more in-depth calculation, often used to value businesses that are worth more than $5,000,000 and have a lot of moving parts. I’d suggest leaving this one to the accountants.
Prepare Your Business to Pass the Vetting Process
If you choose to sell your business on a curated marketplace or through a leading broker, your business will need to pass through a vetting process.
If your business doesn’t meet the minimum vetting requirements, you’ll address the relevant problems before resubmitting your business for sale.
This vetting process differs from broker to broker, but I’ll walk you through the Empire Flipper’s vetting process, to give you an idea of what to expect.
First, your business goes through what we call the “five-minute check”. During this process, businesses are screened to see if they meet our minimum submission requirements. These requirements include at least 12 months of solid earnings history, a minimum of $1,000 per month in net profit, and over 50% of your income must be derived from multiple products and not one single customer.
We also verify the seller’s identity during this stage.
Once your business has passed this screening process, it moves into the “in vetting” queue. During this stage, our vetting team combs through your business’s finances to ensure that it is profitable after expenses and that the revenue streams are legitimate.
We also ask for documentation to help us create a P&L statement. This includes detailed information about revenue courses, inventory management and backorders, or tracking IDs for content sites. This gives us a clear picture of how sustainable your business is.
We also check for any pending legal action against the seller as well as the validity of trademarks and account statuses.
The truth of the matter is, 91% of businesses don’t pass our vetting process. But don’t let that figure scare you. In most of these cases, the seller was simply unprepared. If you’ve read this far, you’re already ahead of the curve!
If you sell your business through a private deal or DIY broker, the vetting process is often less rigorous or skipped entirely. While this may sound enticing, it means you’ll have to spend a lot more time doing your own due diligence to ensure a trustworthy transaction.
Identify Growth Opportunities for Buyers
The final step in preparing your business for sale is making it appealing to buyers. This means not only identifying the business’s strengths but its weaknesses too.
Remember, interested buyers are looking for ways to grow your business further. Weaknesses, like poor inventory management, or a lack of marketing knowledge can be turned into growth opportunities for buyers with the right skillset.
A great question to ask yourself is, “If I decided to keep this business, what are some of the ways I would grow it further?”
In terms of marketing, we’ve found that many business owners identify optimizing PPC campaigns, creating a social media presence, and building out a monetized email list as potential growth opportunities for buyers.
Other common growth levers include expanding into shoulder niches and launching the brand on other ecommerce platforms, like Shopify. As the ecommerce industry continues to boom in Europe, we’ve also seen many sellers identify expanding into the Amazon European marketplaces as a fantastic growth opportunity.
Try browsing through a few marketplaces and broker’s websites to see how they write out their listings. This will give you an idea of common selling points that can pull from.
Develop a post-sale plan
In some cases, FBA sellers are so excited to sell their business that they don’t stop to think about what to do with their time or capital after the sale.
You could invest the capital into real estate or toward your retirement if you don’t need the money for more pressing matters.
Once the excitement of selling your business wears off, life without the challenge of scaling a business can seem a little empty.
After a well-earned break, you could jump back into the fray and build another business. You can use the proceeds from the sale as growth capital for a new business, or use the capital to purchase an established business and skip the foundation phase altogether.
Whichever option you choose, the experience gained from your previous business will go a long way to propelling your new business to greater heights.
The Best Time to Sell Your Amazon FBA Business
“When is the best time to sell my Amazon FBA business?” is a very important question, and an area where any FBA sellers trip themselves up.
Many business owners make the mistake of trying to time the market but in reality, the best time to sell your business has more to do with the business itself than market conditions.
The best time to sell your business is when it has achieved about 80% of the goals and objectives we spoke about earlier in this article.
When your business is running smoothly and is close to reaching your desired valuation level or annual sales figures, put it on the market.
As we’ve discussed, the sales process doesn’t happen overnight, so get your business close to the mark in terms of your goals, and let it cruise to the finish line as you process through the sales process.
Build your business with the intention to sell
Building a business with a sale in mind allows you to streamline your operations and involvement in the business, and build a moat around it to protect it from competitors.
Whether you ultimately decide to take the plunge and sell your business or not, optimizing your processes and building an attractive asset will benefit you either way.
If you do decide to sell your business, you’ll have built up a valuable asset that will likely earn you one of the biggest windfalls of capital you’ll ever receive. The large sum of money you’ll make from selling your business has the potential to change your life, maybe even allowing you to quit your job and pursue your dreams.
Regardless of the path you choose, you now have a roadmap to follow to prepare your business for sale and get one step closer to achieving your entrepreneurial goals.