Starting and scaling an Amazon eCommerce business is one of the most lucrative ways to make money online.
A lot of work goes into sourcing the right products, creating a successful brand, establishing the right distribution channels and all the other components of running an Amazon business. The financial rewards involved can be well worth the intense work required, and the entrepreneurial risk assumed.
Chances are, if you’re reading this, you have created a successful Amazon eCommerce business yourself. Or at least you may be in the process of doing so. Your Amazon eCommerce business may be an FBA, Merchant Fulfilled, Wholesale business model or a mix.
You have two choices in the future of your Amazon business. Either you keep growing the business and run it for cash flow, or you sell it and cash in.
For most owners, the exit strategy will ultimately involve selling the business. You may be wondering why. Why can’t you just keep growing the business and run it for cash flow indefinitely?
Why Selling Your Amazon Business Matters?
Selling your business is an option you should consider for several reasons:
- Most entrepreneurs are creative personalities. They typically build a business for 2-3 years and then would like to move on to the next exciting opportunity. If this is you, you wouldn’t want to remain stuck in just one business.
- At some point, future growth will require larger injections of capital and greater owner involvement. Such additional investments may not be what you’re looking to commit to.
- After running your business for many years, you may need a longer break to avoid burnout.
- We can never predict the future. If your company starts flat-lining, your valuation multiple will go down significantly. And if your business enters a downtrend, you may not even be sellable anymore!
These are all strong reasons when considering if you should sell. Selling is the most efficient way to lock in value for the long hours you put into building your business.
To be ready to sell your business, you should prepare in advance. And we don’t just mean a few weeks in advance, but many months (or even years) in advance.
The decision to sell will have significant consequences on the way you run your business. It will impact the diligence you take with financials, how you file tax returns, and other operational matters. We will go over the steps you can implement to increase the value of your business later in this post.
Now, let’s have a look at the primary way to structure the sale of an Amazon business.
What’s The Best Way to Sell Your Amazon Business?
Amazon businesses are complex eCommerce companies that must be marketed confidentially to strategic buyers. Selling such a business is different than selling a brick and mortar company.
Your best bet is to contact a broker that specializes in eCommerce companies. The broker will walk you through the steps to prepare for a sale. The process may involve SBA loans, legal matters, deal structuring, due diligence, negotiations and the post-closing transitions.
With a broker, you’ll also be able to find the right buyers quickly and get the highest sale price!
Lots of Amazon business owners are unclear about exactly what they are selling. Amazon states that Seller Central Accounts are not transferable. But when selling your Amazon business, you don’t sell the account itself.
You sell the cash flow producing assets. They are mainly your inventory, ratings/reviews, intellectual property (trademarks), and the search history/position of your ASINs. You effectively sell the rights to sell on your Amazon account.
If you run your business through a corporation (either C or S) or through an LLC (and we highly recommend that you run it through one of the three entities), then the sale will either take the form of an asset sale or a stock sale.
A stock sale is usually better for you, the owner, in terms of taxation. It also makes for a smoother transition with your Amazon store. There is no need to change the EIN in your Seller Central Account. You just have to modify the password and possibly the bank account.
Thus, a stock sale greatly simplifies the transaction. However, buyers tend to be more reluctant to use this option. Through a stock purchase, buyers must also assume the company’s liabilities, which increases their exposure to risk. Nevertheless, this is not an obstacle that can’t be overcome with representations & warranties in the purchase agreement.
eCommerce companies that have major retail contracts with companies like Walmart also benefit from a stock sale. In this case, no language to the retail contract needs to be changed or modified.
At Bizsold, we always recommend our Amazon sellers sell as a stock sale.
Asset sales are also an option. In an asset sale, the buyer is purchasing the assets, but not the liabilities of the company. The buyer will typically form a new LLC or corporation to conduct business through.
The transfer of Amazon businesses using an asset sale is more difficult due to the need to change the EIN in the Seller Central Account. On the other hand, asset sales do tend to make for shorter negotiation periods and less legal work. So that is something else you may want to consider when deciding which is best for you.
When Should You Sell Your Business?
First and most importantly, as we mentioned before, you absolutely must sell while you’re growing. Doing so will help you get the maximum value for your business.
Buyers typically prefer older companies, but it’s still possible to sell a new business. Older companies have longer financial track records, and this makes them less risky to a buyer.
If you’re unsure what the future holds for your business, then that may be a sign that you should get in touch with a broker and start planning for a sale. Selling on the way up plays a much bigger role in your valuation than the age of your company.
Here at BizSold, We’ve successfully sold some very young Amazon businesses. We recently sold an Amazon FBA company that was less than a year old. It is very doable if your business is profitable.
Another key indicator brokers look for is annualized earnings, specifically cash flow, surpassing $50,000. Once you reach this level, your business has the potential to attract more serious buyers.
Now that we’ve gone through explaining the why, what, and when of selling your Amazon eCommerce business, it’s time to look into valuation and the selling process itself.
The rest of this post will show you, first, how buyers & brokers value Amazon businesses. We’ll go in detail over the steps you can implement to increase your value.
Second, we will outline the process you can expect to go through while selling your business. By understanding this process, you’ll be more familiar with the intricacies involved.
Let’s get to it!
How To Value Your Amazon Business?
Before we get into the nitty gritty of a proper online business valuation, here’s a list of relevant questions. You should consider your answers to them as you read the rest of this guide.
Amazon Business Valuation Questionnaire
- What are the company’s year over year and monthly growth rate?
- For how long has your business been active on Amazon?
- Number of Products Sold on Amazon and Company/Product Ratings
- What are the company’s ASINs ranks for corresponding keywords?
- How many (and which) products are Best Sellers and for what categories?
- Does your business sell its own branded products, other brands or a mix of both?
- Does the company sell multiple branded products?
- Are you selling products across several different categories?
- Does the company sell any products via FBA or Prime? If so, does your business use the FBA program to sell internationally?
- Is your Amazon business operating in a closed category?
- Does the company sell wholesale to Amazon through Vendor Central and does it make use of the additional marketing features?
- Does the business have other sales channels (such as your own branded website)?
- Do you have contracts in place with your suppliers and manufacturers?
- Does your business get any revenue through a Subscription / Recurring Revenue model?
- Do you have Brand Ambassadors or influencers who frequently blog about your products and bring them to more consumers?
- Do you have any scaling opportunities planned for the immediate future of your business?
We ask all our clients selling an Amazon eCommerce business to complete this questionnaire.
We’ll go through the specifics mentioned in each question, so please have your answers in mind while reading through. Your answers can reveal ways through which your own business may be able to increase its market value. It also gives a broker an indication of what your value multiple should be.
Amazon eCommerce companies tend to sell somewhere between 3-5x Earnings. But this depends a lot on the specifics of the business. Some companies sell for higher multiples and some lower.
Some of the factors that can influence your multiple are:
- Your unique value proposition.
- The role you as the owner play in the operation of the business.
- The strength of your brand.
- Your distribution channels.
- The future growth of your industry/company.
- % of revenue that is recurring.
These are particular factors for each business. We highly recommend discussing your particular situation with a broker. If you’re ready to sell, you can contact us here. We have extensive experience selling Amazon companies and are ready to help.
To get more specific, what we mean by “3-5x Earnings” depends on the size of your business. We’ll now explore this in more detail.
Calculating Earnings for Small Businesses
SDEs are calculated by taking your net income from your P&L statement and adding back any discretionary owner expenses. These are things like travel expenses, meals & entertainment, office expenses, owner salary minus owner replacement cost, and other expenses that the new owner will not have.
Brokers and buyers are very familiar with this. It’s natural to run your company in a manner which helps you pay the least amount of taxes possible.
The net income looked at by the broker will typically be the Trailing Twelve Month Earnings, (TTM). However, if your company is growing very fast (20%+ year over year), then this would not be an accurate valuation.
To take rapid growth into account, what the broker will use instead of the Trailing Twelve is a forward extrapolated proforma P&L. This is known as a Forward Multiple.
Even for high growth companies, your multiple will likely still be within 3-5x earnings. However, it will be based on a new set of financials, effectively enabling you to sell at a higher price.
Calculating Earnings for Middle-Market Businesses
Middle-Market businesses have revenues in-between $10-500m. They typically have EBITDA >$2m. For such companies, brokers will use EBITDA, and not SDEs, as the earnings for valuation purposes.
Apart from this, the valuation process will be similar to the assessment for small businesses.
One key difference is that middle-market companies tend to achieve higher multiples. They are more attractive to buyers as they usually have more established brands and business models.
Another difference is that middle-market businesses attract more financial buyers. We mean especially private equity groups and other institutional investors who have access to larger amounts of capital. Such companies tend to require greater confidentiality in marketing them, and so benefit more from being sold through a broker.
Similar to small businesses, high growth middle-market firms will take into account future earnings in their valuation.
Here at BizSold, we offer any Amazon business owner a FREE valuation report – get yours now!
How To Increase Your Value?
Now that you understand how brokers & buyers will evaluate your business, it’s time to look at factors that can increase your multiple. These factors will make buyers more excited about your business. And more eager buyers means they’re willing to pay more!
- Expand internationally through other Amazon stores in different countries.
Buyers like to see a business with international scope. Having a more diversified revenue source makes your business less reliant on a single market.
- Revenue coming from multiple ASINs/products.
Buyers don’t like to see a significant share of your company’s revenue depend just on one or two products. A diversity of products makes your business more capable to respond to future changes in the market.
- High ranking products on Amazon’s Best Sellers lists.
The higher your products rank, the better. In addition to generally showing higher in the search results, best seller products indicate consistently high inventory turnover.
Buyers like businesses that develop their own distribution channels. A branded site opens up new sales channels and makes you stand out from the competition.
- Sell through FBA/Prime.
Having a sales channel through FBA/Prime attracts buyers because it causes your products to appear higher in Amazon’s search results.
- Make use of Brand Ambassadors to blog and spread the word about your products & brand.
This innovative way of marketing is beneficial for Amazon businesses. It produces customer awareness & brand loyalty, which are valuable intangible assets as well as competitive advantages.
- If possible, also have a subscription / recurring revenue stream.
Recurring revenue gives your buyers a greater degree of certainty in the future sustainability of your sources of income. It is one of the main ways of increasing your company’s attractiveness on the market.
- Sell products under your own brand – not other brands.
Having your own brand of goods is one of the most valuable assets your business can have. Buyers love to see a company that differentiates from the competition and creates its own unique brand.
If you don’t already have your own brand, we highly recommend you create one before trying to sell your business!
- Register trademarks to protect your brand.
Registering a trademark for your brand is yet another way to add value. Buyers love seeing that your company has substantial intellectual property. Trademarks will be one of the key assets they’ll be looking to acquire.
- Protect product lines through contracts.
It’s understandable that you can carry on doing business with your suppliers based just on emails. However, buyers like to see actual contracts. They will be willing to pay more if you can show them such signed agreements. Even one-page agreements are better than just emails.
- Sell at the beginning of a scale opportunity if possible.
Buyers love to see that your business has growth opportunities ready to implement. Such opportunities are one way to generate excitement for your business and see fast, immediate growth. It will drive up your value tremendously.
We have repeated this point before. However, it is the most important of all. For a higher multiple you must sell on the way up.
- Expand to other online marketplaces.
You can seek to expand to places like eBay, Walmart, Jet and so on. The more distribution channels you have, the less reliant you are on just Amazon. Amazon can always make sudden changes in the future. These may negatively impact the business. Buyers want to hedge against such possibilities, and a business that activates on several online marketplaces gives them this opportunity.
- Where possible, develop a wholesale side to the business such as through Vendor Central.
Vendor Central adds a wholesale element to the firm which increases your means of reaching the market. It also gives access to additional marketing options. Since it’s only possible to join Vendor Central through invitation, buyers may want to acquire it as a strategic asset.
- Running a business in a closed category can be a strategic asset
Amazon has ‘closed categories’. These are categories where sellers require approval by Amazon before they can list products. Being in such a category offers a substantial competitive advantage to your business. It also makes you a likely target for buyers looking to get an entry in that market.
So there you have it! These are the best ways of increasing the value of your Amazon eCommerce company. Not all points may apply to your particular situation, but do take them into account where possible. Your buyers most certainly will!
What Is The Sales Process?
Now you understand the why, what and when of selling your Amazon business. You also know how to value your business and how to increase its value. It’s time to discuss the sales process itself.
We divide the sales process into 6 major steps. We’ll go through each, one by one. You can expect the sales process to take 3-7 months. Larger deals tend to take longer, principally because of increased transaction complexity.
But before we go into it, let’s briefly look at the two most important rules during the sales process.
Keep your inventory high. Don’t reduce inventory unnaturally or stop buying stock in the middle of the deal. We’ve seen a few deals fall through due to inventory issues. Don’t let this happen to you. Aim to keep things going as if you were not having a sale at all.
Maintain growth. This point is also significant. One of the worst things that can happen is to see your profitability go down during a sale. It’s important to keep your primary focus on running your business. A good broker will oversee and guide the sales process. With a broker, you’ll have the time you need to run your business as before.
Now let’s look at the sales process itself.
1. Finding the Right Broker
When selecting the right broker for your Amazon business look for the following key points:
- The brokerage specializes in selling internet businesses.
- The broker has access to wealthy, high net-worth buyers, private equity groups, and other institutional buyers.
- There are no upfront fees. The only time you should get charged is on successfully closing the deal. This way, the broker only wins when you win.
- The broker has a network of professionals including lawyers, CPAs, tax advisors, consultants and other advisors required in an M&A team.
Here at BizSold, we specialize in internet firms. With a list of 50,000+ high net-worth buyers, we can always find the right buyer for you. We have no upfront fees. Our commissions range between 3-10% depending on the size of the deal. We have our own in-house CPA and have access to an extensive network of professionals.
If you’d like to get in touch with our team, please don’t hesitate to contact us here. We can help you sell your Amazon business quickly at the highest price!
2. Company Analysis, Valuation, and M&A Strategy
In this step, the broker will analyze your financials and come up with a valuation assessment. In addition, together with you, the broker will develop the M&A strategy.
This period also involves the preparation of the books. Most important will be a business memorandum which will describe your entire operation. It needs to be concise and to the point. In general, not all details will be provided in it to protect confidentiality.
The business memorandum is one of the primary business documents that buyers will ask to see.
Once all documents and strategy are ready, it’s time to move on to the next step.
3. Confidentially Marketing Your Business To The Right Buyers
The broker will release information to buyers depending on the level of commitment that they make. Typically brokers go through many people before getting them in touch with you.
The broker will ensure that the buyers show interest, show synergy, and are ready to move forward.
Brokers have a lot of experience at weeding out tire-kickers. These are people who just want to find more about your business without actually intending to buy. Many buyers, especially under the $1 million benchmark, tend to fall into this category.
A broker’s process of qualifying buyers helps save you precious time and protect the confidentiality of your business.
Once the broker finds the right buyers, they will introduce them to you, and the negotiation phase can begin.
4. Negotiations & Letter of Intent (LOI)
In this step, you’ll be negotiating with the buyers. The main points of negotiations tend to be contract terms, training periods, financing and the like.
One quick note about financing via SBA loans.
Buyers will often buy most smaller companies (with a value less than $4 million) using bank finance. However, if you are running your business through a non-US entity, your buyer will not be able to use the Small Business Administration 7(A) Loan Program.
This doesn’t mean you won’t be able to sell a non-US business. However, it does mean that you won’t have access to the SBA program. Nevertheless, you will still usually be looking to sell to a US buyer.
In case you are running your business through a US entity we highly recommend taking advantage of the SBA program.
The great advantage for you as a seller is that you get 85-90% of the total value at closing. It also helps increase selling price, making it attractive from the seller’s side. From the buyer’s side, the 10-year amortization period is also a big plus.
When using the SBA program, you need the right broker to ensure that the loan doesn’t fail in underwriting. Most SBA loans do. To avoid this, you’ll need clean financials, a sound business plan, and other similar documents. The right broker can help you prepare these key documents.
Here at BizSold, we have extensive experience with SBA loans. If you’re interested and your business qualifies for the SBA program, please get in touch. We also have a more detailed guide about the SBA program if you want to find out more.
If SBA loans aren’t an option, you may need to use promissory notes or earn-outs to increase your selling price. The disadvantage of this is that you’ll get a larger share of the money after the closing date. This future payment also generally depends on your business hitting certain pre-agreed key performance indicators. Find out more about the advantages and disadvantages of earnouts here.
One other thing to keep in mind is that most buyers will ask you to sign a non-compete agreement.
During this step, you’ll also get a commitment from a buyer through a letter of intent. Having said that, let’s move onto the next phase.
5. Structuring the Deal & Drafting Purchase Agreement
This step involves tax guidance, agreeing on the structure of the transaction (asset or stock sale) and due diligence.
We recommend using an independent transaction lawyer to draft the primary documents. If either the seller’s or the buyer’s attorney draws up the documents, the other side will usually make a lot of amendments. Such disagreements can drag the time it takes to finalize the deal excessively. It’s better to avoid them.
After completing the documents, each side’s attorney can review them and make the necessary amendments. Once both sides agree upon all the clauses, we can move to the next phase.
6. Execution & Closing
This period involves final negotiations between the two sides, and signing the purchase agreement, transferring the money and the assets.
On closing day, you must have a minimum level of inventory. This inventory is necessary to run the business. It counts as working capital and must be there upon closing.
There may be post-closing steps required from the seller depending on the agreements made previously. For example, private equity groups may want the owner to stay on board for some time after the sale. This is known as a transition period.
Owner involvement after the sale is something to negotiate on. Larger financial buyers typically want your knowledge and experience in running the business. They’re ready to adequately compensate you if you choose to stay on. In addition, they will often let you do only the work that you want to do.
This wraps up our guide to valuing and selling your Amazon eCommerce business. We have gone through the importance of selling your Amazon business, the form of the sale, and when to sell.
We’ve also investigated how to value your Amazon business. Remember these most important points with regards to increasing your value:
- Sell while your business is growing.
- Try to diversify both regarding products sold and distribution channels.
- Have your own trademarked brand.
- Make use of a mixture of FBA / Seller Fulfilled / Wholesale where possible.
Don’t hesitate to go back to the more detailed advice presented previously in the guide. It will help you get the highest value possible for your business.
And finally, we’ve also covered the sales process itself, from choosing the right broker to closing the deal. We hope you now have a clear grasp of the entire process.