Amazon and Amazon FBA (fulfilled-by Amazon) businesses are on the rise. Third-party sellers on the Amazon platform now account for over half of the platform’s sales, with many sellers able to grow rapidly using Amazon’s seller infrastructure.
Moving forwards with your Amazon or Amazon FBA business is an exciting process, but it’s important to pause for breath and take stock of its value. Whether you’re looking to attract investment, raise finance or sell completely, you’ll need to know what your Amazon business is worth.
In simple terms, the business’s value is measured by metrics like growth and profitability. However, if you’re looking to exit and move on, you’ll need a more accurate assessment. After all, you wouldn’t want to underestimate its value and lose out.
The Key Figures
The value of your Amazon business is calculated from its profit margin (not turnover).
For example, if your business made £500K in sales over the year and your profit was £100K, then your business value is based on the latter figure.
Typically, you can expect a valuation between 2-6 times the profit margin for Amazon FBA businesses (Annual Business Profit x Between 2-6 = Value), so in this example you would expect a valuation between £200K – £600K.
But these aren’t the only factors to consider when valuing your business, as profit can only mean so much. Read on to determine how much your Amazon FBA business could be worth.
Factors that Determine the Value of an Amazon Business
Whilst the equation above is how to value an Amazon business in it’s simplest form, there are a number of factors that determine its value and whether or not it is saleable at all.
Any prospective valuation will look at valuing the assets of the business, analysing a whole host of figures from across the business including:
- Fixed assets such as business premises
- Physical assets such as stock
- Digital assets such as your website/s
- Intangible assets such as trademarks, brand recognition and loyalty
In order to get a complete picture of these, it’s important to have accurate accounting for as long as possible leading up to the valuation.
The intangible assets can be a big win on this front: if you can prove a wide appeal for your products including genuine brand loyalty from your customers, you could greatly increase the valuation of your Amazon business.
Here are some crucial factors for valuing your Amazon business:
If your product offering is fairly unique and in a less competitive space, it is more likely to be valued highly.
A buyer may also look at the potential for the product niche to grow in the future; how will this change with consumer trends?
A product that sells all year round as opposed to only at certain times of the year will also help the business’s valuation.
Also worth considering is the split of sales across different product SKUs.
If one product makes up the vast majority of your sales, this is a lot less attractive than a more even spread across multiple product ranges.
Having a diverse portfolio of products that sell all year round can help you get more money for your Amazon business.
Business History & Reputation
Buyers prefer to invest in well-established companies with a stable sales history.
The more years of operation and the better your track record, the higher the value.
This also helps to mitigate against risks of investing in ‘quick win’ businesses that may not be a solid long-term investment.
A longer sales history allows a potential buyer to track growth trends and make accurate earning predictions.
If your business can demonstrate steady growth over a number of years, this will make it much more of an attractive investment than a business with peaks and troughs in sales.
For Amazon sellers another important metric to determining a seller’s history would be the ‘Amazon Best Sellers Rank’ or BSR rank, which looks at sales and customer service history over a number of years.
Brand loyalty for your products could be proved by how many of your sales are made up of repeat orders, the size of your social media following, engaged email newsletter list and positive reviews.
In some cases it will be better to registered as a limited company so you can sell your business easily.Find out more about limited company vs sole trader here.
The security of your supply chain can affect your ability to maintain stable pricing as well as fulfil orders in a timely fashion.
Having trusted relationships across the supply chain can have a positive impact on your business’s value.
Even better, if you have trademarks or agreements in place with suppliers to be their sole distributors, you will find this value becomes even higher.
Business Management Requirements
The time and effort required to run your business can have a big effect on its value.
For example, if you employ a big team to run the day to day operations and it requires a lot of input from the current business owner, a potential buyer might think twice about the impact on their profit margins.
For buyers, the less effort it requires to run your brand, the better.
Because your Amazon business’s value is calculated by multiplying profits, the lower your fixed and variable running costs, the more profitable your business will be to a new owner.
Amazon FBA can be a great source of passive income, but only if the effort required to run it is minimal.
How easy your business is to run can depend on a number of factors, including your brand portfolio and your sourcing requirements.
That said, if the buyer is representing a larger organisation with the capacity to handle more complex business operations, they may be less concerned with a more hands-on approach.
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Get Specialist Financial Advice for your Amazon Business
If you would like to get your business finances in shape ready for a valuation, Your Ecommerce Accountant can help.
We are specialist Amazon seller accountants that can help you stay in control of the finances.
Whether it’s day-to-day bookkeeping or long-term strategic planning we can help.