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    Tuesday, July 6, 2021

    How to Calculate Amazon Business Valuation

    With more than 300 million active customers located in 180 countries across the world, Amazon is a global leader in the e-commerce market today. Interestingly, more than one-third of Amazon’s business comes from third-party sellers who sell more products through the Amazon marketplace than Amazon would itself sell on its own. In continuation with this trend, third-party sales on Amazon have only been growing further at 52 percent per year, in comparison with the first-party sales that have been growing at 25 percent in a year.

    This huge expansion and growth of Amazon’s marketplace can be attributed to the Fulfilment by Amazon (FBA) policy that offers great opportunities to its partners or sellers who benefit from Amazon’s warehouse facilities for their products, customer service, and impressive shipping terms. So, it comes as no surprise to listen to several success stories of sellers who leveraged FBA and minted money in no time.

    How to Value an Amazon FBA Business for Sale

    With myriad FBA businesses successfully running and expanding, it only makes sense to evaluate the potential of an Amazon FBA business for sale by calculating its worth. The worth of an Amazon FBA business for sale can be calculated by considering the business’ financial picture, factors that affect its valuation like the Seller’s Discretionary Earnings (SDE), and the determination of a multiple to apply to the SDE.

    1. Seller’s Discretionary Earnings (SDE)

    SDE is the net profit earned by the business owner after the deduction of the cost of goods sold and any critical operating expenses from the business’s gross revenue. Discretionary expenses like the owner’s compensation/salary are added to the revenue to unearth the real power of the business’s earnings.

    The SDE of the FBA business for sale is usually computed based on the pricing window, i.e., the length of the time profits are calculated over. While a 12-month pricing window is a gold standard to accurately calculate the SDE or net profit, a 6-month, or a 3-month pricing window may also be used, depending on the state of the business.

    SDE = Gross Revenue – Cost of Sold Goods – Critical Operating Expenses + Owner

    Compensation or Salary

    The above formula is typically used for businesses worth 50 million USD or less. For businesses worth above 50 million USD, a much more detailed method of earnings before interest, taxes, depreciation, and amortization (EBITDA) is employed to calculate the net profit of an FBA business for sale.

    • Determining the Earnings Multiple

    The Multiple is a key aspect needed for the calculation of the value of Amazon’s FBA business for sale. The multiple is affected by the following factors listed below:

    • Age of the Business

    An FBA business with a longer track record instills buyer’s confidence through its sustainability that demonstrates its ability to record profits in the future. Businesses that are 18 months older are preferable for sale as they can fetch more of multiple premia at 24-30 months.

    • Trends

    The key to increasing the worth of a business is to sell it when it is on a continuous upward trend. Not many people would be interested in buying a business that is on a decline or one that is growing rapidly.

    • Nature of the Product

    Any FBA business for sale is most likely to be prone to seasonality, and its product sales may fluctuate depending on the season. The longer the business has been operational, the easier it becomes to recognize trends in seasonality and plan for them.

    So, it is beneficial for an Amazon FBA business for sale to consider including less seasonal products and iron out the highs and lows associated with a highly seasonal product.

    • Owner Participation

    Most Amazon FBA businesses are owned by entrepreneurs who wish to be deeply involved in the early stages of the business. While this might be a good sign, it has the potential to ruin the attractiveness of the business. Hiring an organized team or staff and employing practices such as automation and outsourcing reflects the professional nature of the business which buyers often look forward to.

    • Product Ownership

    The ownership of a product is a key factor that affects the value of the Amazon FBA business for sale. If Amazon FBA business owns the product brand being sold, they can fix the price, and also jack up the value of the business.

    • Legal Counsel

    Hiring a legal team or advisors early on in the FBA business can help gather valuable advice on the sale, as well as finalize the terms and conditions of the sealed deal.

    Conclusion

    To sum up, the valuation of an FBA business is calculated by applying multiple factors to the net profit. You may click here to find a detailed guide on how to value and sell your Amazon business. At the end of the day, one must remember that the value of an Amazon FBA business also depends on the risk appetite of the prospective buyer. So, the sellers must put themselves in the shoes of the prospective buyers, and think like them while negotiating the business price.

    Also, to get a sense of what your business could be worth, ensure that you interact with prospective buyers and other educated players in Amazon’s ecosystem. Finally, when you decide to explore a sale, be prepared to educate the market about your business with supporting documents like summary, profit/loss statements, revenue, and cash flow figures that can lend credence to your discussions.

    Photo credits: Photo by Pixabay from Pexels



    source https://nrinews24x7.com/how-to-calculate-amazon-business-valuation/
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