8 keys to know if your FBA Business is attractive for investors

If you want to obtain financing or sell your FBA Business but you do not know where to...

June 28, 2021
How to Value

8 keys to know if your FBA Business is attractive for investors

If you want to obtain financing or sell your FBA Business but you do not know where to start, the first thing is to know if your FBA Business is attractive for investors and financing providers.

Before getting started with numbers, you need to know that a strong FBA business with barriers to entry, room for growth and high visibility in earnings will always be more appreciated than a volatile and uncertain niche operation. The following factors should be taken into account to value an Amazon FBA business:

1. Your FBA Business: Do you have a product and a brand?

Amazon FBA businesses usually fall into one of these three categories:

a) Reseller of third party products: you sell products that are produced and/or branded by others

b) Private label supplier: you supply products that either Amazon or someone else sell under their own brand

c) Own brand: you have created a brand and sell your products under it

When making an investment decision, own brands are either a plus or a must have for FBA Amazon investors and acquirers. For Boopos, it is not a specific eligibility criteria but certainly a plus.

2. Would newcomers be able to replicate your offering easily?

Even if you own a brand, if your product is directly sourced from a marketplace and customized with a logo, others will be able to do the same thing.

Actually, the most attractive niches are already populated with manufacturers providing their own products, and it’s Amazon’s strategy to have that happen, as it lowers the prices in the marketplace and makes it more competitive compared to other platforms.

3. Do you hold a significant market share in a specific niche?

The Amazon API is able to provide a very valuable set of information for the merchant ecosystem. Also, FBA Amazon investors can dig into this source to find out about the competitive position of a certain target.

These are some of the questions we seek to answer:

· Do your SKUs hold a significant percentage of revenue generated within specific keywords?

· Are competitors stronger than you, not only in size but in product creation capabilities?

· Are there many new entrants in your niche?

· Where are your competitors from?

· Is the niche concentrated within only a handful of players, or is it spread throughout a big number of operators?

4. Which marketplaces are you selling on?

The .com marketplace can be quite competitive. It is held the lion’s share of Amazon’s business and many FBA Business entrepreneurs hail from there, so it is the most obvious choice when selling. However, if you manage to secure a strong position in smaller marketplaces like the European ones, you will find less cutthroat competition and will not bear so much risk of new entrants or disintermediation.

5. For how long have you been in business?

Most Amazon FBA businesses have had a short life so far and are seasonal. Having at least 24 months of existence gives Amazon FBA investors the ability to compare year-on-year metrics and understand whether your financial and commercial performance is consistent or related to non-recurring factors.

However, comparability and predictability are better achieved when your FBA business has at least 36 months of existence, or at least 3 consecutive annual high season campaigns. Otherwise, investors may apply a discount to your valuation (Read more about the right metrics in this post) or a higher financing cost.

6. What’s the complexity behind your FBA business?

The basic metric behind business complexity for Amazon FBA merchants are the hours that you and your team, contractors and assistants spend managing and operating the business.

A simple FBA business with a lean team and limited number of operational issues is easier to transfer and usually requires less structure cost.

7. Is yours a high margin FBA business?

High margin FBA businesses are worth more because they are less risky and you need to sell less to make the same amount of money. Let’s see this through an example of two businesses with the following metrics:

· Business A: $1MM revenue, $300k net profit. Average selling price $100

· Business B: $2MM revenue, $300k net profit. Average selling price $100

For making the same amount of profit, business A needs to sell 10,000 units and business B needs to sell 20,000 units. For every additional unit sold, business A makes extra $30, while business B makes only $15.

8. Can we expect your FBA business to grow at significant rates going forward?

Current trends and market dynamics are good indicators for estimating short-term future performance and have a reasonable idea of mid- and long-term growth potential.

At Boopos, we involve our product innovation team to work with FBA Business owners to understand their product offering, barriers to entry and evaluate the potentialities of their brands: if there is room for launching new SKUs and/or boosting sales of existing SKUs with different strategies, we will detect that and factor it in our decision.

We’re also open minded on your selected geographies.