Business Valuations for an Amazon FBA Business You Intend to Sell

Most online businesses undergo the same process for identifying appropriate value. This is known as using multiples of seller discretionary earnings or what is also referred to as seller discretionary cash flow.

This term refers to the profit that is left over for the company owner after all the costs of the sales and non-discretionary operating expenses are removed from the gross income. The owner’s salary should be included with this profit number when it comes to selling an Amazon business.

Understanding Amazon FBA Business Models

Long-term success can be achieved by an Amazon seller with the right business model. Your chosen method of selling products on the eCommerce giant helps launch, build, and systematize your Amazon sales effectively.

There isn’t a universal approach that works when selling on Amazon, so it’s important to make a thoughtful decision from these business models:

• Private Label. Existing products that are sold under the owner’s brand.
   
• Wholesale. The owner profits from products bought in bulk at a discounted rate from existing manufacturers, suppliers, or distributors by selling them on Amazon.
   
• Retail Arbitrage. The owner earns by buying retail products at discounted rates and selling them on Amazon.
   
• Online Arbitrage. The seller purchases cheaper products from other online retailers and resells them on Amazon.
   

Valuation Methods for Amazon FBA Businesses

When planning to sell your Amazon FBA business, professional brokers such as the WebsiteClosers.com team generally suggest two methods to appraise your company:

Earnings Before Interest, Taxes, Depreciation, and Amortization or EBITDA

EBITDA provides a clear view of a company’s profitability by focusing solely on its operational earnings, excluding non-operational expenses.

A company effectively managing its operating costs relative to its revenue will have a higher EBITDA margin. It is an indication of a profitable online business.

Seller’s Discretionary Earnings or SDE

This method is ideally suited for small online businesses. It represents the profit before tax and interest, excluding the owner’s compensation, non-cash expenses, unusual one-time investments, and any income or expenses unrelated to the business.

Calculating Seller’s Discretionary Earnings (SDE)

The SDE is typically considered revenue minus the cost of sold goods minus operating expenses plus owner compensation. In order to value an FBA company when selling an Amazon business, the first step is to calculate the SDE. Then the person must devise a multiple to apply to it. This is one of the most critical pieces of the equation and one you should discuss directly with your online business broker when selling an Amazon business.

1. Calculate Earnings Before Tax (EBT). The calculation begins with the income before taxes, including all expenses except government taxes.
    
2. Adjust Owner’s Salary: The owner’s salary often reflects personal preferences rather than market standards. To normalize, adjust the salary to align with what a replacement would earn, removing any excess compensation.
    
3. Include Non-Cash Expenses (D&A): Depreciation and amortization allocate the cost of long-term assets over time, but the actual cash expenditure occurred at purchase, so these non-cash expenses are added back.
    
4. Recalculate Without Interest Expense. Interest costs reflect debt financing decisions made by current management. Since a new owner may restructure financing, it’s essential to exclude these costs to present a clear financial picture.
    
5. Exclude One-Time Expenses. Non-recurring expenses, such as legal fees or bad debts, are exceptional costs unlikely to continue in the future and should be removed from financial projections.
    
6. Remove Discretionary Expenses: Discretionary costs like personal travel and entertainment, which don’t directly relate to core business operations, should be excluded to accurately reflect profitability.

Key Factors Influencing Amazon FBA Business Valuations

Owners selling their businesses must have a clear picture of the potential value before they even list the company for sale. Working with an online business broker to sell an Amazon business can make it much easier to identify the right sale price.

You want to have a broad picture of all of the different numbers included in an Amazon business for sale. However, the true value of the company is extremely important to know.

When preparing to sell an FBA business, understanding SDE is necessary, as it plays a key role in determining the business’s value. SDE represents the profit left after all expenses have been deducted, and the valuation is typically calculated by applying Amazon FBA valuation multiples to this figure. They are influenced by various factors, including the business’s financial health, infrastructure, and operational efficiency. 

Additionally, each Amazon FBA business has unique characteristics that contribute to its value. To increase the Amazon FBA business value, it’s essential to consider factors such as the business’s history, brand reputation, customer loyalty, operational efficiency, and potential for future growth.

Preparing Financial Documents for Valuation

Part of how to value an Amazon FBA business is presenting your accurate financial statements. Accuracy can be achieved only if the business owner provides all the latest, necessary financial documents. This not only guarantees a fair and accurate valuation but also lays the groundwork for a smooth and successful sales process.

Below are the financial documents that reflect the true state of your Amazon FBA Business’s financial health:

• The Profit and Loss (P&L) statement highlights a business’s revenue and expenses, revealing net profit or loss—vital for determining its resale value.
   
• The balance sheet is crucial for business valuation, offering a snapshot of assets, liabilities, and equity at a given time, revealing overall financial health.
   
• Tax returns verify the accuracy of financial statements, highlighting discrepancies and providing a full picture of a business’s income and expenses.
   
• The cash flow statement tracks a business’s cash movements, highlighting liquidity and cash generation, which are key for evaluating financial health.
   
• Accounts receivable and payable reveal a business’s outstanding debts and receivables, which are required for assessing its financial management and stability.

Non-financial Factors Affecting Valuation

Did you know that part of how to value Amazon FBA business involves appraising a company’s non-financial factors? Among the top non-financial aspects that boost business value include exceptional customer support, well-documented procedures, and a low employee turnover rate. 

Outstanding customer service builds lasting client relationships and ensures a steady income stream. Thoroughly documented procedures enhance operational efficiency and provide stability during staff changes. Competitive pay, benefits, and a positive work culture help maintain a skilled and dedicated workforce.

Common Pitfalls in Amazon FBA Business Valuations

Being unprepared for an Amazon FBA business exit can lead to delays and complications. Without sufficient time to organize documents, automate processes, and vet buyers, the sale process can be significantly slowed.

Poorly maintained financials and unresolved legal issues are major pitfalls when selling an Amazon FBA business. Disorganized financial records can deter buyers and lower the business’s value, making it crucial to keep balance sheets, tax records, and accounts in order. Similarly, unresolved legal issues, such as pending lawsuits or missing permits, can scare off potential buyers and stall the sale process.

Ensuring clean financials and addressing all legal matters beforehand not only boosts buyer confidence but also facilitates a smoother, quicker sale.

Improving Your Amazon FBA Business Value Before Selling

At the end of the day, a business owner will always want to sell their business at a higher price. Though it may seem counterintuitive, planning your exit strategy early on is ideal for building a company that will eventually sell well. Professional business brokers can help you with due diligence, addressing your company’s financials, legal matters, and other essential factors to ensure a successful and profitable sale.

Working With Professional Valuators and Brokers

Amazon FBA business valuations completed by online business brokers can be extremely important in figuring out what your Amazon business is worth.

They will also be able to tell whether or not you are being realistic with your valuation and can help you identify the right potential buyers. When you sell your Amazon FBA business, the process doesn’t have to be difficult, especially when you have the support of experienced online business brokers to assist from end to end.

If you are a business owner who has grown your company quickly and is unsure of your next step, sitting down with a business broker can help identify all possible gains of moving forward with a sale.