OCT 4, 2021

How to Calculate an Amazon Business's Valuation

Fulfillment by Amazon, or Amazon FBA, has become a powerful tool for entrepreneurs to succeed on Amazon in recent years. While you get to focus on sales and marketing for your business, Amazon is busy fulfilling, packing, and shipping your orders for you. Pretty great right? This feature means that your business, once it reaches a certain level of success, pretty much runs on its own with minimal effort from you. If a buyer is searching for a turnkey business to purchase, they will typically consider buying an Amazon FBA business, as these businesses are already established enough, and ready to be bought . These businesses have a likely successful trajectory which is a win for any buyer.The real question is: if you have an Amazon FBA brand, and are ready to sell, how do you know how much to sell it for?

Your Amazon business' value is calculated by balancing your sales and salaries with your costs, then multiplying that by a multiple determined between you and the buyer as an assessment of risk. Let’s break this down a little further.

The first component of the calculation is your profit or Seller’s Discretionary Earnings (SDE). This value is determined by adding your total sales and salary for the past 12 months, then subtracting the cost of goods and expenses. These goods and expenses include the cost of your product, packaging materials, and additional expenses necessary for your product to exist.

Let's look at an example in two parts. First, let’s say you have $500,000 in sales, you are giving yourself $50,000 in salary, and all of your expenses cost $200,000. In this scenario, your salary and additional expenses make up your SDE of $350,000, which will get multiplied by a to be determined number in part two for your total value.

Part two of the process is determining the multiple applied to your SDE. The multiple is based on the risk factors that a buyer is taking on when buying your business. In our example above, a multiple of 2 or 4 would mean the value of your business is between $700,000 (2 x 350,000) and $1.4 million (4 x 350,000).

Possible risks include:

  • The age of the business

  • Your products

  • Your Inventory Performance Index (IPI)

  • Your branding

  • Your supply chain

  • Your Best Sellers Rank (BSR).

A buyer is more likely to accept a higher price on a business with less risk. They will not want to spend a lot of money on a high risk business to potentially lose it.

The age of your business is a critical factor because it speaks to the stability of your business model and your track record. It is easier to see the strengths and weaknesses of a business with more data. The “older” your business, the more data you’ll have to analyze and work with. So, a business two years or older with a proven track record is a great starting point, which will make the buyer feel more comfortable when looking at your proof of success.

Second, your Inventory Performance Index (IPI) score will show how well you manage your inventory over time. Specifically, your IPI is a score out of 1000 that considers how well you balance your inventory and sales, ensuring that you fix any out-of-stock listings and keep popular products in stock. Inventory management not only shows the strength of your supply chain and that you can keep products in stock, but also shows that your business follows the best inventory management practices. An IPI score over 450 means your inventory is performing well, and if it is over 550, it indicates that your inventory is a top performer.

Next, a buyer will look at how similar your products within your product line are to one another. Imagine for a moment that you sell something highly profitable that is just a fad, or something is only relevant for a short period of time. If your sales are based on this one, trendy product, it introduces a greater level of risk as the product is not a long term staple. The buyer will also compare your products to other businesses and other products in the market. If it is There are higher risks associated with selling a niche and highly competitive product as it may be challenging to keep a steady profit depending on the market demand for the product. If you have developed a strong branding and have built a loyal following, this will alleviate a portion of that risk

Lastly, a buyer will look at your Amazon Best Sellers Rank (BSR). This is calculated based on your business’ Amazon sales and is updated every hour. If your BSR is high, that is a good sign to potential buyers because that means you are selling a quality product.

Balancing these factors will decide the multiple for your SDE when evaluating your Amazon business value. Let's continue with our example and say that you and the buyer settle on a multiple of 2.5 because you have a relatively new business with unique branding. In this case, the value of your Amazon business is $875,000. Not bad!

While the value of your Amazon business gets based on a couple of factors, fortunately, you can control most of them. If your valuation does not come in as high as you want, work on the factors that determine the multiple and reduce the risk for a buyer because that will ultimately net you more money. With hard work, determination, and following the correct guidelines, you’ll eventually reach your goal and successfully sell your business.

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