In this post we will discuss what the typical due diligence process includes and how to...
In this post we will discuss what the typical due diligence process includes and how that is tailored to the special characteristics of Amazon FBA businesses. The good news both for Amazon FBA sellers and investors is that Amazon provides an API, to which several tools available in the market connect. However, financing due diligence is significantly lighter than selling due diligence, and that may well be worth considering for taking a decision.
In any case, investors will need a full picture of your business evolution, so prepare your FBA Business monthly profit and loss statement in detail.
When an investor buys an Amazon FBA business, an extensive review is performed covering at least the following topics:
· Commercial due diligence
· Legal due diligence
· Tax due diligence
· Financial due diligence
· Labor due diligence
You’ll probably think that most of the topics above may not be relevant for you. However, it’s just a matter of adapting each of the items to your Amazon FBA business:
· Commercial due diligence: at Boopos we use scouting tools to connect to the Amazon API and review your positioning. We will learn about your best matching keywords, your reviews, ranking, market share in your niche, strength and origin of your competitors, differentiated product offering, etc., by just analyzing this information.
· Legal due diligence: Given that you are not selling a company, this part of the process is significantly simplified. By just verifying your ownership of the different assets and their good condition, as well as agreements and contracts in place with relevant third parties we will have enough information for completing the legal documents.
· Tax due diligence: it will generally pivot around making sure the correct VAT and sales tax have been applied to your figures and some specific deal structuring elements depending on the jurisdiction you operate.
· Financial due diligence: If your business has existed for less than two years, it may still be doable, but we try to prioritize Amazon FBA businesses with a little bit more history. Use a professional bookkeeper if you haven’t done it so far, this will greatly improve our ability to analyze the information, but also your ability to read through your Amazon FBA business evolution and manage it, so it’s an investment that pays back. The financial statements generally provide the following non-exhaustive information:
– Revenues by marketplace, including any non-Amazon revenues.
– Refunds and returns
– Cost of landed products by marketplace. This includes the cost of products themselves as well as any logistics and freight cost to deliver them to the Amazon platform, and the breakdown should be made available too
– Cost of Amazon selling fees by marketplace
– Marketing costs
– Inventory and accounts payable
We have already discussed some of the different sources of information used in due diligence. The Amazon API is definitely a very powerful tool for analyzing the competitive position, your accounting and Amazon earnings statements are fundamental to get a clear view of your finances, together with order forms and agreements with your suppliers. All of these, are to be complemented by Amazon FBA business owner-investor interaction. This is very relevant and where we like to spend some time, while keeping the rest of the process streamlined. The goal of business owner-investor conversation is multiple:
· Clarify information provided
· Understand your Amazon FBA business issues and elements that cannot be assessed by the analysis of the information provided
· Identify potential areas of cooperation going forward
· Looking for two-way cultural fit
· Discussing expectations and anticipating deal-specific issues
Perhaps a last word of advice would be for you to have your Amazon FBA business always ready for a potential due diligence, even if you are not planning to get financing or sell in the short term. Circumstances change and you never know when you will have to open your books to third parties, and it will also help you keep good track of your Amazon FBA business.