As an Amazon FBA brand owner, most of the cash you’ll ever receive from your brand will come on the day you sell your business. How?
The market value of your brand is most likely much higher than every salary and dividend you took put together. However, most sellers we talk to don’t have a clue about how their business is analysed and thus don’t know how much they are worth.
In this article, we’ll go over what we, at BrandHero, are looking for in our acquisitions and provide tips on how you can prepare you brand to exceed your goals. But first, a quick intro on how your brand will be valued.
Valuation Basics
Amazon FBA brand valuations, like most business valuations, can be boiled down to three factors:
To get the most out of your exit, you’ll need to maximize the 3 factors.
For example: A brand in an attractive niche like pet supplements will have a higher valuation compared to a brand in apparel with the same profit because, among other things, there are more buyers in pet niche.
Simply put, mo’ money, mo’ buyers.
In practice, the 3 factors will determine the price multiple your business will be evaluated. The price multiple, combined with the net profit, will be the basis for the valuation.
To get your brand valuation you just need to multiply the price multiple of your brand x trailing twelve months’ profit.
For example:
This brand made $180k per month or around €2.15M in the last 12-months. To get the price, you multiply 40 x $180,603.00 x 12 months = $7,224,121.0m
Source: Empire Flippers
With the valuation basics out of the way, let’s move on to Listing quality.
Amazon is a listing game. It’s all about the individual performance of each product listing.
This is great for new sellers since you can quickly rank a unique product, even if you are still figuring out the right branding for you. But most importantly, this also means past performance does not equal future performance.
How can you guarantee that your listings are here to stay and grow?
This is the key to a high valuation since it will take care of the cash growth and reliability.
At BrandHero, we rank the quality of the listing by the following factors:
If you are not there yet, prioritize product differentiation and profit margins since they are by far the most important.
Efficiency and reliability are paramount in a successful FBA brand.
A simple stock out not only means no sales; it also means terrible rankings when your products come back in stock. If you can’t keep your inventory stock rates up, no buyer will look at your brand seriously.
Here are a few factors we look at to assess supply chain risk:
Additionally, we also look at the impact of raw material prices on the costs of the products.
For example: If your products are cork based and the raw material prices have gone up for the last 3 years, this will reduce the multiple you’ll be able to get for your brand.
Looking at the day-to-day operations, you should strive to make them as simple as possible for the new owner.
Think about it like this: would someone that knows nothing about your business be able to take it over tomorrow?
If not, document and outsource as much as possible to make the transition (and your life) as easy as possible.
If you are selling to an aggregator, this might not represent an issue since they will have the systems in place to integrate it. But if you make it easier for the next buyer to take over your business, you suddenly increase the pool of potential assets. Your brand is no longer just a collection of awesome listings, it’s a well-oiled machine any buyer would love to have.
Start by outsourcing warehousing, accounting, and customer relationship management. You’ll find that this allows you to focus on high-leverage activities like developing new products or experimenting with a different marketing channel.
Bottom line: the less work it takes to run the business, the more valuable it is.
Most Amazon FBA sellers will have plenty of success only figuring out the listing and operational parts of the business. But when it comes to selling your brand for top-dollar, you’ll find out that’s not enough to get high multiples.
You also need to think about building a defensible brand outside Amazon by creating a loyal customer base.
Showing at least some potential for the brand to enter other channels is very important to make the next owner excited about the growth prospects of the business. If your sales and competition say that you maxed out your potential on Amazon, you’ll need to find growth somewhere else.
Creating a loyal customer base will increase organic sales, make it easier to launch products, and give your brand higher recurring revenue. They are a sure way to improve margins and cash-flow stability, the two major drivers of any business valuation.
At BrandHero, we look for the following metrics:
Start by creating a website and newsletter and engage with your customers there. Then look at the channels your customers interact with and build your brand name there.
If you do your job well, your financials will paint that picture for you. They will sell your business for you.
But for that to happen, it is very important to have your financial data presented appropriately. Have your Income Statement (also known as Profit-and-Loss Statement) done by an experienced e-commerce bookkeeper monthly and present at least the latest 24 months. They must be presented on an accrual basis.
For FBA brands, these are the major captions we look at in a brand’s Income Statement:
Note that buyers are very picky, and they will ask about every fluctuation in your P&L.
For that reason, make sure you are able to explain any trends present in your Income Statement. If you can’t explain them, the buyer will assume the worst and assume there’s something fundamentally wrong with your brand, even when that might not be the case.
For Example: Your profit margins decreased for 3 months straight because you outsourced your Advertising to a bad marketing agency. They increased your marketing costs without increasing Revenue.
If a situation like this happens to you, be upfront about it. Depending on how good your financials are, the buyer can see it as a positive since it will be easier to beat your numbers in the following years.
Outside of having your financials in order, you need to look into any expense that might be considered an add-back. These are expenses that are added to the profit of the business when it comes to price negotiation.
Rule of thumb: if it is a one-time cost or it will not be incurred ever again, it should be added back to the profit of the brand. Owner’s salary plus taxes, one-time marketing costs, and legal advisory to create company policies are all examples of add-backs you should.
Like any other business valuation, it’s all about cash-flow growth and reliability combined with leverage while negotiating.
To evaluate your brand effectively, look at your listings and identify competitive advantages that allow you to maintain high-profit margins and no competition.
In your operations, make sure you never run out of stock by creating redundancies and being extra careful with inventory on hand. Additionally, make your business extra attractive by outsourcing every day-to-day activity you can.
Think about your brand outside of Amazon. Create a following by leveraging the platforms where your customers are.
Finally, do your financials housekeeping. Don’t skip on a good accountant and have every fluctuation explained.
And, in case you fancy a free business valuation, you may request it here:
M&A Analyst
As the year comes to an end, as Amazon FBA sellers it’s important to review your brand strategy and make any necessary adjustments before the new year. Here are some key areas to focus on as you plan for the future of your brand, to maximize its potential:
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