Most people start an Amazon business with the goal of generating current income, but give little thought to maximizing the value of the business for an ultimate “exit”. Even if a sale isn’t something you’re considering today, good practice is to start incorporating value enhancing strategies sooner rather than later. Some factors that have a significant impact on value can take months or even years to implement (and are generally good for your business even if you decide to never sell it), so it’s worth incorporating these improvements as soon as possible.
Before we discuss what you can do to actually enhance the value of your business, I’d like to provide a little bit of context as I’m sure many of you may be wondering what kind of an impact your efforts can have. Having had conversations with several brokers who specialize in profitable Amazon businesses, the valuation multiple for a profitable and de-risked business can generally range between 2.5x and 3.0x annual earnings (excluding inventory). I’d like to stress “de-risked” in that sentence because that’s what we’re striving for; a highly profitable business may fall well short of this valuation range if a potential buyer sees a lot of risk. Of course, keep in mind that there will always be exceptions (some businesses with their own brands, consistent year-over-year growth and multiple growth opportunities may push higher than the 3x valuation), but let’s dive into simple example of with the numbers.
Assuming net profit before taxes of $300,000 last year, a well-run business may be worth anywhere from $750,000 – $900,000 using the valuation multiples provided above. That’s a $150,000 difference in value, or about 20%. However, I’ve seen businesses sell for closer to 2.1 or 2.2x earnings, because they weren’t as well run. The owner of this business may have left $90,000 – $270,000 on the table because he hadn’t properly prepared his business for sale.
Drivers of Value for an Amazon Business
In order to maximize the value of a business, we have to first understand what buyers are looking for. In most cases, value is driven by a combination of cash flow and risk. Simply put, cash flow has a positive impact on the value, while idiosyncratic risk has a negative impact. (Idiosyncratic risk can be thought of as the factors that specifically affect your business and can be substantially mitigated or eliminated through diversification. It has little or no correlation to market or systemic risk.)
Anyone interested in purchasing an Amazon business will want to know:
- How profitable your business is today and what are reasonable (quantifiable) expectations for profitability going forward;
- hat amount of work/complexity is required; and
- If there is significant risk in achieving those expected results.
In order to maximize the value of your business, you want #1 to be as high as possible, while minimizing #2 and #3. Of course, these are very broad objectives that are difficult to isolate, but many business decisions you make will have an impact on at least one of these areas, so always keep these objectives in mind.
That being said, every business is unique and making decisions is often about weighing the pros and cons. With so many potential variables, it would be impossible to give categorical advice on how to specifically optimize a business without understanding the surrounding environment, so let’s actually shift to thinking about this from the buyer’s perspective. Buyer requirements generally tend to fit within a basic framework and are easier to outline, so rather than focusing on how to best structure your business, imagine what you would look for in a potential acquisition, and try to apply those lessons to your own business.
To guide you, I’ve outlined 14 business characteristics that may impact the value of an Amazon business, organized into the three core areas I mentioned earlier:
Profit Margin / ROI – the higher, the better
Stability / Growth of Income – a stable or growing business is more valuable than a volatile or declining one
Work / Complexity
Owner Workload – how much work on behalf of the owner is required to run the business; passively managed businesses are more valuable than actively managed businesses
Overall Complexity of the Business – complexity has advantages and disadvantages: it can negatively impact the value of your business if it makes the transition for a new owner difficult; however, it can add value if it creates barriers to entry for new competitors
Availability of Resources – will existing suppliers, employees, etc. be available to the new owner?
Age of Business – ideally you should have been selling anything that’s a significant contributor to revenue for at least 18 months
Strength of Brand – the stronger the brand, the more valuable the business
Diversification of Income (Products on Amazon) – businesses that rely heavily on one or two products will be less valuable than businesses that have a well-diversified base of products
Diversification of Income (Sales Channels in addition to Amazon) – business that rely heavily on Amazon sales will be less valuable than businesses that also have meaningful revenue off-Amazon
Intellectual Property or Other Sources of a Competitive Advantage – anything that provides you with a business advantage or restricts competition will add value to your business
Existence of Barriers to Entry of Market – similarly, any other factors that restrict competition will add value to your business
Accuracy and Reliability of Financial Information – can your discretionary earnings claims be verified through Amazon reporting, bank statements and credit card statements
Existence of Potential Liability to New Owner – anything that creates a potential liability for a new owner will reduce the value of your business or require funds to remain in escrow
Quality of Products – this may be a subjective assessment, but can be evidenced by the quality and quantity of Amazon reviews
Putting it All Together
As you can see, most of the points mentioned are related to risk. This shouldn’t be surprising if you’re familiar with the process of a standard sale. Typically, a buyer will make an offer and issue a Letter of Intent based on a limited amount of information that’s presented early on, but may spend weeks on due diligence to identify any potential risks. If any undisclosed risks are identified, a buyer may use that to renegotiate the price of the sale. That’s why it’s important for you to be aware of any risks within your business and attempt to mitigate them in advance of a sale, or at least address them with the buyer early on. As I mentioned in the beginning of this post, some of these recommendations may take months or years to implement, but you can add value to your business by thinking about them now.
One additional thing to note is that most buyers will want to know why you’re selling your business. This also falls into the “risk” category as buyers know there is asymmetric information. In other words, as the seller you will always know more about your business than a potential buyer so there’s an inherent level of distrust about why someone would sell a “good” business. It’s very important that you have a legitimate answer to ease a buyer’s concerns. For instance, a buyer will place a different value on a business that’s being sold because the owner wants to retire and spend more time with family versus one that is selling because of an influx of competition.. If you don’t have a good answer to why you’re selling the business, buyers may assume there’s something you’re not telling them. The best answer is an honest one, even if it’s personal or embarrassing (you hate your partner, you’re getting divorced, you need quick cash, health issues, etc.)
The above issues only touch the surface of what can impact the value of your business, but they at least should give you a good indication of how the buyer views a purchase. If you’re interested in selling your business right now, but don’t meet all the requirements noted above, don’t be concerned or discouraged. If you’re confident you have a good business, your business may still be very “sellable”, so implement what you can and move forward.
Of course, each business is unique so if you are seriously considering a sale, I would recommend speaking with a broker who specializes in the sale of Amazon businesses – they can provide more specific guidance that’s appropriate for you. A good business broker can also help you identify and address risks in your business early on in the process, or at least set buyer expectations to reduce the chance of a price reduction later on. Since finding the right broker is another important part of the sales process, I’ve created a separate post specifically on this topic. If you’re considering a sale, be sure to read my post on Choosing a Broker for the Sale of an Amazon Business.
There aren’t many resources to help people Buying an Amazon business as most brokers have a duty to act in the best interest of the seller. If you are looking to buy an Amazon business and need some guidance, feel free to reach out to me.