This is a guest post from Empire Flippers, removing the friction from buying and selling online businesses and have helped people buy and sell over $400 million worth of online businesses.
When Amazon and DTC sellers come to the end of a year of selling, they tend to ask themselves: “Can I repeat the same level of success next year?”. This question becomes bigger every year as the markets and economy change.
With the huge task of running your business successfully for another entire year, you might also ask yourself: “Do I want to do the same again next year?”
There will eventually come a point in your life when it’s time to move on from your business:
When you get to this point, it’s time to start thinking about selling your business.
With careful planning and a solid exit strategy, you can free yourself from your business, hand it over to a new owner who has the capital and resources needed to take it to the next level and enjoy your capital reward for everything you’ve put into it.
Plus, you’re freeing your business so it can reach its fullest potential!
Your financial goals will probably be the biggest factors that dictate how and when you sell. We’ll cover how your business is valued in this article.
But to give you an idea of the current state of the Amazon and eCommerce mergers and acquisitions market, the average sale multiple—a figure that reflects the value of your business as an investment asset—for Amazon FBA and eCommerce businesses is 40.84X. This figure is multiplied by your monthly net profit to arrive at your business’ valuation, so if your business is earning $25,000 in monthly net profit, it could be worth over $1,000,000.
In this article, we’re going to walk you through the stages of preparing and selling your Amazon or eCommerce business to give you a clear exit plan. You’ll learn how to increase your business’ salability, profitability, operability, and overall strength.
So let’s get into it!
Buyers of $1,000,000+ businesses tend to be acquisition firms called aggregators. They’re funded by venture capital and family offices to acquire, run, and scale online businesses on behalf of investors.
These aggregators are typically looking for established brands with a few niche-dominating SKUs, a simple supply chain structure, good supplier relationships/exclusivity contracts, and a unique brand.
Other buyers of Amazon and eCommerce businesses are operators funded by high-net-worth individuals and institutional investors looking for a passive way to invest in online businesses.
You may have received offers from these types of buyers already, especially aggregators who are highly active in seeking acquisitions.
We’re going to talk about why you should be careful with these private offers in a moment. However, first let’s get into how you can prepare your business for a smooth, timely, and highly-profitable exit.
The process of preparing your business for sale requires you to go under the hood and see how healthy the engine is. You’ll look at operations, logistical efficiencies, profitability, the strength of its brand, and its longevity.
Doing this health check allows you to identify ways to make your business more efficient, profitable, and overall stronger. So even if you don’t want to sell your business any time soon, you should go through this process to optimize your business.
The first step is to prepare your business analytics data.
If your business is solely built on Amazon, then all of your analytics data will be in your Seller Central account.
If you’re selling on Shopify, Walmart, eBay, or any other eCommerce platform, then your sales data will be viewable on your business accounts. However, it’s beneficial to also install Google Analytics or Clicky onto your website for highly-accurate data.
Potential buyers of your business will want to see its sales data to assess its performance—make sure you have them sign a non-disclosure agreement (NDA) before giving them even just read-only access to your business platforms.
Amazon’s dashboard and software like Sellerboard may not tell you how profitable your business actually is as they’re not the most accurate financial tools. The best way to track your business finances is to log them yourself in a profit and loss statement (P&L) or have an accountant track your finances for you.
That said, be careful not to do what most entrepreneurs do and only hand over your figures to a certified public accountant (CPA) once a year; this keeps you blind to the money their business is leaking through the holes of irregular and poor financial management.
Many also don’t realize that a CPA does finances for taxes, not to increase a business’s profitability, so they never see where their business is losing money unnecessarily and where it can earn more.
The best way to manage your business’ finances is through accrual accounting carried out monthly by a bookkeeping firm that specializes in eCommerce.
The key metrics buyers focus on when analyzing your business’ finances are:
With accurate financials, you can calculate the true value of your business; avoiding overvaluing (which will get your business ignored) or undervaluing (which will lead to your business selling for too low).
Once you’ve got a clear picture of your business’s finances, you’ll see which SKUs are moving the needle and which aren’t. You should consider shelving the ones that aren’t to simplify the income streams for your business—when we vet businesses, we clear out the dead SKUs from your P&L that would reduce your valuation if you sold privately.
With a mostly hands-off supply chain, you’re free to focus on business growth.
If you’re self-fulfilling orders, imagine how much time outsourcing that process to a 3PL would save you.
Removing redundancies will make your supply chain easier to oversee. For example, if you’re sending inventory to a 3PL for quality control, but you’re finding that your supplier is consistently delivering high-quality goods, you might want to remove that step in the fulfillment process.
Having backup suppliers for your best-selling products secures your business’ income and makes buyers feel more comfortable about investing. To have the strongest-possible supply chain, you should source at least two different manufacturers for your products, ideally from two different countries.
Delivery time is also a key part of the supply chain, as consumers become increasingly used to fast delivery—three to five business days delivery has become the norm, so you should make sure your chosen fulfillment solutions are able to meet this demand.
A hands-off supply-chain foundation makes your business straightforward to transfer to a new owner.
The fastest and most straightforward way to get your cost of goods sold (COGS) down is to renegotiate rates with your suppliers. If you’re consistently purchasing their products, they’re highly likely to be open to negotiating.
Changing from air shipping to sea freight is another great way to reduce costs.
Margins make a big difference in value. For example, if your business is earning $1,000,000 in revenue per year with 25% profit margins, its sale multiple will be based on the $250,000 annual profit. But if the same business is earning the same revenue with 28% margins, the multiple will be based on the $280,000 annual profit. When you consider multiples are often over 4X annual profits, this is likely to make a $120K+ difference in valuation.
When evaluating your business, COGS is one of the most important valuation metrics buyers consider.
In a private sale situation, a buyer will typically calculate your COGS over the entire lifetime of your business. When we value businesses, we believe it’s more accurate to use your current COGS to calculate your profits as that figure is a more accurate reflection of where your business is at now. This can lead to a higher or lower valuation depending on what your COGS are now compared to the past.
A moat around your business makes buyers feel comfortable about investing.
The best way to build that moat is to apply for a trademark and register for the Amazon Brand registry to prevent competitors from copying your product and eating away at your sales.
Buyers want a stable asset. Making any moves leading up to the sale that could upset the steady track record of your business will hurt your selling position.
You can carry out some small quick-wins like listing page tweaks or PPC optimizations, but try to avoid any drastic marketing campaigns or launching products too close to listing for sale just in case your sales don’t increase.
Instead, focus on keeping your products in stock—the last thing you want is to miss out on potential sales. Even if you have to over-order a little bit, that’s ok as long as the buyer purchases your inventory at product landed cost outside of the sale price.
Buyers want an asset that’s easy to run. When your business operations are so well organized that anybody can easily learn the processes to run it, acquiring your business becomes easy.
The best way to organize your operations is to create standard operating procedures (SOPs) for all of your business operations. Document your supply chain process, too.
It’s best to also do this for the operations that are carried out by employees so the new owner can hand those SOPs over to new employees if needed.
The added benefit of doing this is that it will highlight operational inefficiencies in your business and allow you to improve its efficiency, in turn increasing its profitability.
A good relationship with your supplier is a valuable asset, but only if it’s continued on with a new owner of your business.
Let your supplier know you’re selling your business and try and ensure that the current relationship you have will stay in place. The last thing you want is for the buyer to take over and the supplier suddenly shoots up their rates. Also, get an exclusivity agreement if you can—this will increase the value of your business.
Good relationships with your employees are also important.
You don’t have to let employees know you’re selling, but if you can it’ll be good for the buyer to know whether they’ll be continuing with the business after the sale. Contracts are a good asset to keep employees on—the same goes for contractors.
If your employees aren’t continuing with the business—maybe they’re staying with you on another business—be sure to have high-quality SOPs the buyer can hand over to new employees. In addition, train the buyer on your business as much as you can for a smooth transition.
Once you’ve gone through this process of getting your business prepped for a smooth exit, it’s time to initiate the selling process.
There are two routes you can take to sell your business. Which one you choose depends on your situation.
If you haven’t yet been reached out to by a business buyer and you’d like to sell privately, you’ll need to market your business to potential buyers.
You can do this on marketplaces like Flippa or online groups, or you can reach out to business buyers and aggregators yourself.
You should reach out to multiple buyers to get an idea of what the market is willing to pay for your business, but beware when sharing business data. Don’t reveal too much without protecting yourself legally.
If you’ve received an offer from a buyer already, before you dive in and sell your property to the first buyer who knocks at your door, plan your exit and see what you can get on the market.
When you prepare and time your sale, you not only set yourself up for a smooth selling process without any unexpected costs, you give yourself the chance to sell when your business is on a growth curve and get the highest possible valuation.
While selling privately can go well if you receive the right offer, there are many issues that can be avoided if you sell through a broker.
The biggest benefit of selling through a broker is you get access to their expertise, trusted buyer contacts, and selling processes they’ve developed over years of transacting businesses.
If they have experience with eCommerce businesses, they’ll facilitate a smooth sale for you from carrying out a professional valuation to connecting you with the right buyer suited to your business with a proven track record who’s not going to run your business into the ground, and helping to mediate the deal.
Taking advantage of this concierge service is the easiest and most effective way to sell in the majority of cases.
While you’ll pay for the service with most brokers, don’t let this lead you to believe that you’ll make more money selling privately where you won’t pay a broker’s fee.
The off-market fallacy is the belief that you’ll earn more on the sale of your business privately than through a broker since you don’t pay brokerage fees. While this sounds logical, it’s not always true.
Your broker should be upfront with you on how much they think they can get for your business based on their buyer network and the value of your business and whether it’s suited to their buyers—we’ve turned away sellers who’ve received an offer we didn’t think we could beat.
When you sell through a broker, you get access to their buyer network. You can have buyers competing to acquire your business, as opposed to one buyer making an offer with their best interest of getting the lowest price possible for your business in mind.
Brokers work on your behalf to get you a bigger sale since they earn a commission on the sale price. Unless the broker works on buyer commission, in which case you should be careful as they will have opposite intentions.
Not only do you get to put your business to the market and see what you should be getting when you sell through a broker, but you also get their support and experience as they steward you through the sale.
If it’s your first time selling, you should sell through a broker because online business M&A is a subject that requires a lot of knowledge and expertise. Plus, things can get very messy if templated contracts are being thrown around and you’ll end up paying a fortune in lawyer’s fees to rectify the mistakes.
If you’ve received an offer, seek professional advice to make sure you’re being offered the right price.
There is a simple formula we use to calculate a business’ value:
Some brokers and mergers and acquisitions (M&A) professionals use your business’ annual profits to calculate its value.
When we value businesses, we take your monthly net profit as an average over the past 12 months to account for any seasonality or increases or declines over the year.
There are exceptions to this rule, for example, if your business has experienced considerable growth over the past 6 months, we may consider using a 6-month multiple as that timeframe is a more accurate reflection of the current state of your business compared to its past 12-month performance.
There are two main methods for calculating net profit:
The SDE method is commonly used for businesses earning up to $5,000,000 in annual revenue. The method assumes the business is owner-operated, so it takes into account the business owner taking home a salary.
The EBITDA method is more granular and is used for larger businesses. It uses a lot of the same methodology as the SDE method, but it assumes that the business is not owner-operated since large businesses tend to be run by teams of employees. Therefore, owner salaries are usually classified as expenses, because they’re considered as costs necessary to run the business.
This method of profit calculation shows how the business performs on a pure cash flow basis, taking the current owner out of the equation.
An important element of a P&L is add-backs. These are regular or one-off expenses of products, services, or activities not required to run the business. For example, if you ran a one-off marketing campaign a year ago for one month, then that expense can be classified as an add-back and thus won’t be taken from that month’s profits.
Some other examples of add-backs include:
By accurately categorizing add-backs, you end up with a P&L that shows the true profitability of your business.
The next element of the valuation formula is the sales multiple.
A sales multiple is a figure that represents the value of your business and is calculated from a number of trackable and intangible factors.
How your business is growing or declining shows how healthy it is as an investment asset.
Buyers will assess why growth or decline is happening in your business by looking at:
A stable earnings history is the gold standard in business as buyers want to see that their new asset is going to earn consistent returns for them.
A good way for your business to earn consistently is to have multiple sources of income and traffic, as your Amazon and PPC accounts are just a ban away from choking your income and traffic sources.
By selling on multiple platforms and driving traffic from multiple sources you support your business since it can still earn and drive traffic even if one source gets taken down.
Having a range of shoulder products to support your best-selling SKUs is a good way to solidify your earnings in case one of your main products is taken down or you have supply chain issues.
Just remember that having too many SKUs will make your supply chain too complex, which is an off-put for a buyer.
An important valuation factor is defensibility.
Trademarks and Amazon Brand Registry defend your brand against the competition. If you’re selling hard-to-qualify products with a high barrier to entry, this will work in your favor when your business is being valued.
Stockouts are the number one biggest threat to an eCommerce business, so multiple suppliers and exclusivity contracts are key elements of a highly valuable business.
If you have special, exclusive rates with your suppliers that will also boost your business valuation.
The best way to scale your business is to make yourself redundant.
The fewer hours you spend working on your business, the more valuable it becomes as long as it has a strong operational structure with employees, contractors, and software tools helping run the business.
This is an indication of your business’s proven track record and longevity. The older your business is, the more established it is in its niche and the harder it is to be taken down by competitors.
Another defensibility factor—this is the number one indication of your business’ reputation. You know how hard it is to get those thousands of positive reviews and the odds of competition taking your reigns become smaller the more reviews you get.
Strong reviews are also an indication of how loyal your customer base could be. A large audience of repeat customers is worth a lot of value to a business.
When assessing the health of your Amazon Seller Central account, a buyer will be considering:
Well-aged accounts with a good performance history, strong scores, and features that have been grandfathered into the account are the gold standard.
Businesses heavily reliant on organic Amazon or Google ranking or PPC campaigns for traffic are at risk.
When Amazon or Google penalizes your account or updates its policies, you lose sales.
Brands with multiple audiences on various platforms get a higher valuation because if one traffic source gets shut off, it has another one to keep people coming.
Email is the best audience asset you can own because it’s free from algorithms and you have direct access to your audience’s data.
Email lists and social accounts with large followings are some examples of assets that increase your business valuation. Another physical asset that you’re likely wondering about is your inventory.
When we sell a business, we leave it open to the buyer whether they want to acquire the inventory or not, so we don’t consider the inventory in its valuation. This is because if the inventory doesn’t sell, then it’ll cost the buyer to keep it—inventory is only valuable once it’s sold.
At Empire Flippers, we don’t take any commission on the cost of inventory. However, it’s important to note that some business brokers do. What happens to inventory should always be a consideration when you’re deciding on which broker to sell with.
Once you have a clear understanding of your business’s profitability, you can command the value that your business is worth, as opposed to going blind into negotiations and being bartered down.
Buyers have good intentions and most won’t lowball you, however, knowing what your business is truly worth based on accurate financials will allow you to set the price you deserve. And while a broker’s goal is to facilitate a fair deal, it’s in their best interest to get you the most amount of money possible for your business (but that’s not the goal for buyers, naturally).
Your business will likely sell with one of the two following deal structures:
A full-cash buyout is what it says on the tin: a buyer offers you all of the cash for your business in one payment.
An earnout is a deal where the buyer pays a percentage of the sale price upfront and the rest over a period of months or years.
We regularly hear of sellers receiving offers of 50% upfront from buyers off-market, but we get sellers of $1M+ FBAs an average of 83.7% upfront.
Earnouts can offer an opportunity for you to earn over the sale price. We’ll usually negotiate a performance-based element to the deal for sellers. Meaning if their business grows, they earn a bonus percentage of the profits over a set threshold.
There’ll also be a minimum threshold to eliminate the risk of you not earning the sale price in the event that the new owner accidentally (or intentionally) runs the business poorly.
This shouldn’t be a concern with one of our buyers as the majority have a track record of deals with us. But if you’re selling on your own, conduct due diligence on buyers to ensure visions are aligned and check the buyer’s history of achieving performance targets.
Unsurprisingly, you’ll receive and have to produce some contracts when selling your business.
The first one is a letter of intent (LOI). If you’ve already received an offer from a buyer, you’ll know what this looks like.
An LOI is a document indicating a mutual intention from a buyer and a seller of a business for it to be sold.
Usually, the buyer produces the LOI as their intent to buy the business, and the seller reviews and agrees to the terms to indicate their intent to sell the business according to the terms outlined in the LOI.
The purpose of an LOI is to set the expectations of how the buyer will conduct their due diligence—a detailed review of the business’ sensitive data to assess the legitimacy of the business. The terms should protect the seller’s business’ data, but a non-disclosure agreement (NDA) should also be signed to add another layer of protection.
The due diligence process usually takes about 30 days. During this time the buyer will need view-only access to your business’s financial information, analytics, sales data, and business operating accounts to carry out their assessment.
Once they’ve conducted their due diligence, it’s time to meet at the negotiating table.
It’s natural for you to see the potential of your brand. After all, you built it from the ground up.
However, many sellers get deluded by this vision of potential.
The reality is that buyers are looking predominantly at your business numbers and past performance—this is where there can be sticking points in negotiations. The seller is trying to sell the buyer on the future of the business with growth ideas that although well-thought-through, are not a promise of future success.
The buyer is taking on a lot of risks when they acquire your business. They don’t have you to run it, market changes are out of their control, and there are hinge points like your business’s reliance on Amazon that can negatively impact your business at a moment’s notice.
When talking about your business to a buyer, it’s best to share what’s worked and what hasn’t in the past and focus on how it’s performing now. Knowing the history of your business will help the buyer plan its future—let them see its potential on its own.
After the final handshake is made, it’s time to transfer your business to the new owner.
Migrations of eCommerce accounts on platforms like Shopify, Walmart, BigCommerce, WooCommerce, WordPress, and eBay are fairly straightforward.
Amazon is trickier as there’s more risk of your account being suspended in the process.
When transferring an account, you’ll need to make a number of changes to it. Make sure you understand Amazon’s policies well before making any of these changes. If you’re selling your business privately, check the buyer understands how the Amazon account migration works.
When we transfer accounts on behalf of sellers, we have a process we’ve created over the many years we’ve worked with Amazon that includes simply sending them an email and letting them know the business is being sold.
How quickly you’re able to sell your business depends on how prepared it is for sale. If your analytics and financials are unorganized then it’ll take a long time to organize them before listing for sale and presenting your business to buyers.
However, if you follow the steps above, you’ll be able to sell quickly.
The average time it takes to sell an eCommerce business on our marketplace is 21.7 days from the first listing to the final offer accepted. The migration process can then take another few months after that.
The benefit of selling through a broker is once you’ve listed for sale is that you can run your business as usual while they find buyers for you. If you sell privately, you have to actively search for buyers and manage them yourself.
If you sell privately, you should have the support of lawyers and work with a 3rd party escrow company that will act as a reliable middleman to facilitate the transfer of funds.
If you sell through a brokerage that offers an escrow service, they’ll collect the funds on your behalf.
As for an earnout deal, it’ll typically start from the moment the business is fully transferred to the buyer unless otherwise stated on the sales agreement.
And that’s it! Now you know how selling your business works and can use this guide to steward you toward a successful sale.
When you take the advice above, you’ll be able to sell your business for more money, faster, and safer than if you jump in without any preparation.
Regardless of whether you want to sell soon, in a year or so, or you’re not planning to sell at all, go through this process as you’ll increase your business’s profitability, and performance, and make it more defensible, securing, and increasing your cash flow.
Now you know how to prepare and sell your Amazon or eCommerce business for over one million dollars, it’s time to take action!
You can start going through the stages outlined above yourself, or if you’d like some expert guidance, you can talk to us on a free, no-obligation exit planning call. After outlining your exit plan, we’ll follow up with you regularly to see how you’re getting on and there’s no obligation to sell with us.