How to Make your Amazon Business Sellable
Selling your Amazon business is one of the biggest opportunities available to Amazon native-businesses today. Companies that acquire Amazon businesses have collectively raised US$10.9 billion in funding since April 2020. Aggregators are aggressively looking to acquire new brands with a potential of 1000 Amazon FBA brands expected to be sold in 2022.
IndiaSourcing.net explores the questions of the when and how of selling an Amazon business in a conversation with Ben Leonard, founder of EcomBroker.
EcomBroker came about as a result of a gap that Ben noticed in the industry when he sold his brand of online fitness equipment for US$6 million after building the business for three years. Where was the brokerage that had the experience of the seller, the broker, the accountant and the ecommerce expert? Ben shares his experience and wisdom on how to sell your ecommerce brand.
Ben is also the Resident Expert for Exit Strategies at India Sourcing Mastermind, where he guides sellers on how to make their business exit-ready.
Ben Leonard is the Resident Expert for Exits at India Sourcing Mastermind
Watch the full video interview with Ben or read a summary below:
Why sell your ecommerce business
While the question should not just be why do you want to sell but also how to make your e-business more sellable. There can be many reasons for wanting to sell:
- You may need the money to start a new project, to have a more comfortable life or to be able to travel.
- Sometimes, you may not have the resources to take your business to the next level.
- You may have simply lost the passion for the current business and are looking for new options.
- A more compelling reason to sell is also because the business has almost peaked and you want to sell out before you reach your maturation date.
- Your business may be going well and in demand and you want to exit to maximize your returns.
How to make your business more sellable and valuable
Here’s a list of items that could potentially increase the value of your business, and make it more appealing to buyers,
- Timing: A business will have more value when you are starting with the intention of making it sellable in the long run. It is attractive to a buyer when the business is showing a growth trend but it has still not maxed out. This leaves something for the buyer to add on and accelerate and eventually exit with a profit.
The best way is reverse engineering your exit. Find out what your business is worth now and plan on how much you would like to sell it for. The questions the buyer will always ask are, has the business grown, has it plateaued or is it nearing closure? Has the business been stable? Is it showing negative trends?
It is advisable to have a business online for at least a year to 18 months to be able to show a good track record. - Stability: Products under the categories of supplements, food, health products, fast fashion, and complex electronics are not very appealing to buyers as they usually are not ready to take a risk on these products. However, products falling under some categories like home and gift items, toys and games, baby products and sports goods are attractive for buyers.
- Ease of transferability of the business is important. A buyer will show more interest if all paperwork and documentation is in order. The systems, operations and procedures along with the accounts of your business should be readily presentable.
- Profitability: This is one of the most important aspects that buyers take into consideration.
- Diversification: Some buyers may look at diversification. Is your business spread over various brand channels on the net or are you running it from your website only? Is the nature of the product of a branded value or is it just a trinket? What is the range of the product delivery, domestic or international or both?
- Branding and IP: A patent for a product is an asset that can prevent your business getting into any legal trouble while selling it. However, if you are dealing with a singular product, a possibility of a supplier backing out or a patent infringement may compel the product to go offline. That is why diversification is always advisable.
- Supplier relationships: You must have a good relationship with your supplier, and they should adhere to important international standards.
- Automation: An automated business is relatively easy to run. You should also consider automating your social media, PPC, email marketing and external traffic. This adds value to the business.
- Accrual accounting: Having your accounts on an accrual basis instead of on a cash basis puts you in a much stronger position of selling.
How is an ecommerce business valued
Ecommerce business is typically measured by a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) and SDE (seller’s discretionary earnings). These two are the measure of the financial performance of a business.
EBITDA is usually used for businesses worth more than US$1.5 million. It allows investors to compare businesses against others in the same industry by removing expenses and thereby skew a fair comparison.
SDE is used in ecommerce as the most common metric to value small businesses. SDE is usually for businesses worth less than US$1 million and is calculated by taking your net profit and adding back some discretionary expenses. It indicates to the investor how much they would make if they were also working on it full-time.
It is important that EBITDA and SDE is calculated by a professional who not only understands accounts but also how to value a business.
To get the correct value, the add backs and adjustments made in the business also need to be considered. Add backs are the personal, repeated expenses incurred by you in terms of travel, salary and also those that are one-time costs, like product photography. Adjustments are changes that happen in the profit and loss of the business. All this helps in the overall valuation of the business.
The business value is also attributed to trademarks and patents. It is a good idea to hire an intellectual property rights attorney to register your trademarks and patents, not just in the countries you’re selling in but also the countries you are sourcing from.
Presently, you may have a unique product but you may lose enormously if another brand has the same name. That will fetch you very little value for your business.
If you own several brands and sell all on the same Amazon account, you have both the options of either selling only one brand or your entire company. Selling one of your brands is like an asset sale and the sale will depend on how attractive the brand is to the buyer.
In the UK for example, most ecommerce business owners prefer to sell their company rather than one brand because they’ll benefit from entrepreneurs’ relief on capital gains tax by paying only 10% rather than 20% tax if they choose to sell only the brand as an asset sale. For that reason, many sellers across countries prefer to sell the entire business entity.
How can you sell
As an individual, selling your business can be hard work. Here are some ways to sell the business:
- Sell directly to a buyer: Buyers are always on the lookout for what is on sale and they would normally be offering you much less than what your business is worth.
- Flip it: You can decide to go through the process of flipping it, where you use a generic flipper service. These services are expensive and may not fetch the amount expected. Still, this option can be taken by businesses that are very small.
- Hire a consultant: Another option is to hire a consultant who works for a low fee of 5% and they broadcast your business to all the buyers on their list. An interested party can pay a referral fee to the consultant and get the deal going.
- List on a marketplace: In the marketplace model, there is no fee charged to you but a fee is taken by the buyer. The buyer in turns takes the same amount from you as part of your selling price.
- Hire a qualified brokerage firm: One of the best solutions on how to sell your brand is to hire a qualified brokerage firm.
Why use a qualified brokerage
A brokerage comprises experts who have experience of acquisitions and mergers and also in accounting. A brokerage works with you on a commission basis.
Here are some criteria to consider when choosing a brokerage:
- They need to work with you until YOU are ready to sell.
- They need to help you build a business to sell, analyze it and present it to a buyer. They need to position your business in such a manner that it looks lucrative enough to buy. This involves market research and setting a timeline for sale and estimating the value of your business and then sending proposals to prospective buyers.
- They need to organize and calculate the numbers and add value to the business.
- They must position and present your business to the right buyers, including aggregators, competitors, brick & mortar businesses, or private equity.
- They need to structure the deal to suit you so that you get from the deal the terms that are appropriate for you.
- They will also make sure that the deal is legally tight and you are protected.
Summary
As an ecommerce business owner, start thinking about where you want your business to be in the next 3-5 years. Find out what your business is worth now, and reverse engineer the exit, or find out what it’s worth so you have a reference point.
When you reach a point where you are relatively stable or expanding or thinking of increasing your business, it is then you start thinking of selling.
The number 1 mistake people make is not planning, and then doing it alone or selling it via a generic service and not getting the full value of what their business is worth.
Ben let go of his own business at the point of “peak romance”. That is the point where a business owner holds the romantic notion that their brand could be huge. That is when the potential value of the business is the greatest and it is ripe for sale!