If you’re thinking of buying an Amazon FBA business, now might be the best time. Every year, more sellers join this global Ecommerce platform. An Amazon FBA business affords smaller businesses with the ability to adjust the chance to challenge stable brands. Some sellers, once they have a presence on the marketplace, sell their Amazon FBA business for a substantial gain. Many of these have made a business out of this opportunity to set up stores to sell. It has become so common that a support industry has developed around the business model.
An Amazon FBA business can produce a generous cash flow, and investors who have caught on are jumping at the chance to purchase one. These transactions are not always as profitable as they seem at first glance, however. Many such buyers are taken off guard and later regret not doing their due diligence before throwing their cash at an Amazon FBA business. Take the steps below to ensure that you don’t become one of these disappointed investors.
Buying an Amazon FBA Business
The process of buying an Amazon FBA business is quite uncomplicated. Support platforms exist to help people search for such businesses for sale and contact sellers to begin negotiations. Flippa is one such platform where one could go to browse various listings. The first rule of thumb when using such a website is to contact the seller directly, negotiate a price, and get a contract written up. A period of due diligence should be part of that contract, as well as a provision that allows you as the buyer to drop the deal or renegotiate if due diligence uncovers any problems.
Your Due Diligence
Due diligence when buying an Amazon FBA business is not any different than for any other type of business or property. Due diligence is about exploring the business thoroughly to discover any issues that could negatively affect your purchase. They key here is to know what these issues could be, and how to spot them.
Buying an Amazon FBA business may be straightforward, but the platform is not. An understanding of the A9 algorithm is necessary, for starters. It’s what drives success – and failure – on the marketplace. If you don’t know how it impacts performance and how you can use it to influence sales velocity and conversion rates, then you won’t know what you’re getting until it’s too late.
Buying an Amazon FBA business also entails non-Amazon-specific due diligence. Review previous contracts and agreements and look into the business’s accounting and financial track records. If you need expert help, you can contact a broker who specializes in Amazon FBA business transactions to guide you.
If you’re prepared to tackle the process on your own, below are ten things that you need to check before buying an Amazon FBA business.
1. Amazon Seller Fees
If you are not already familiar with the various Amazon fees and how they work, acquaint yourself with them. Amazon charges about 15% for FBA fees as well as referral fees that can reach up to 20% of the sales price, depending on the product category. You need to know how an Amazon FBA business has been accounting for these various fees. Note that Amazon basically reports gross sales, so you need to calculate actual revenue after fees. Look at the transaction data in the payment reports to get an idea of the true value of the business.
2. Agreements with Suppliers
To be profitable, an Amazon FBA business must have stable relationships with the manufacturers and/or distributors that supply its inventory. Look carefully into what terms have been negotiated. Check the agreed lead times and if they have been consistently honored – look into how long it takes a supplier to have an order ready for FBA pickup, or how long it takes them to ship it to where Amazon takes over. Check whether the agreement is exclusive of if the supplier is sending the same product to other sellers. Investigate further to see if there are any other unforeseen costs that you should consider. Remember that agreements with overseas suppliers are most likely unenforceable, and if they are, will be very costly to prosecute.
Once you have checked on the business end, establish contact with the suppliers themselves. Confirm the agreements and if they will be honored with you as the new owner should you decide to buy the business. Talk about the above as well as manufacturing standards, Safety Data Sheets, GMP certificates and/or Quality Management Systems Certifications for FDA compliance. Getting expert help from a lawyer who is experienced with regulator standards is a good idea. Discuss material costs, quantity price breaks, packaging, shipping terms and arrangements, and customs charges. Note that you have more control over shipping when you use your own freight forwarder.
3. Amazon Account Health
Amazon has very strict requirements which include specific targets for product compliance, fulfillment and customer service. If these targets are not met, an Amazon account can get suspended. You want to know, for instance, if the business has incurred violations for intellectual property, defective orders, and/or shipping problems. These will have a negative impact on account health and decrease the value of a business. Don’t forget to take into account circumstances that are beyond a seller’s control but still affect these metrics. For example, a good Amazon FBA business will show where natural disasters played a part. If the account’s Performance Over Time is less than impressive, go over it with the business owner to get a clear picture of what happened. Confirm everything whenever and however you can.
4. Complete Accounting Records
A good Amazon FBA business will always have accounting records that you can go over. Most likely, they will be on a digital platform like Quickbooks or Xero. Once the due diligence period begins, get access to these records and check that they are both properly set up and reflect accurate numbers. Getting the help of a certified public accountant (CPA) is advisable to make sure you don’t miss anything.
For example, how is the business dealing with Amazon sales tax collection, which is a fairly new policy? Is the Amazon FBA business continuing to remit sales tax or has Amazon taken over? Either way, is it being properly recorded as an expense or business tax? Without this, the business could appear more valuable than it really is.
In connection, make sure to investigate for possible tax liabilities that may come about as a result of your purchase. You want to buy the actual brand (more on this below), so you want to make sure that any prior liabilities will remain with the previous owner. Get expert help from a CPA to explore any possible liabilities. For instance, A CPA can determine whether purchasing the LLC or business entity along with the brand will transfer sales tax and other liabilities to you, and help you make informed decisions about whether the purchase is a wise one.
5. Historical Promotions Data
Inspect what promotions the business has run so you can check whether they may be temporarily boosting sales. Look at the real numbers, calculating inventory versus price, and not failing to take into account free product being given away so you can see if an arbitrage resulted. Remember that giveaways are counted as sales, and this can in turn increase organic rankings and drive organic sales. Once the promotions stop, sales will tend to drop drastically, easily cutting a business’s value in half.
Don’t forget to investigate for incentivized reviews, too. Amazon banned this practice in October 2016, but some unscrupulous sellers have found a way around it. One way to see if this may be going on is to look for frequent low-price transactions on various payment services – how the business is buying these reviews.
6. Advertising Data Over Time
In connection, gather as much advertising data as you can, going as far back as possible. Amazon only stores this data for 90 days, so you need to check for any records that the business has preserved. You will want to know what main keywords have been used in campaigns, and a good Amazon FBA business should have historical records. Extra points for them is they have kept monthly reports.
If you are not already familiar with the various Amazon campaigns, learn about them or get expert help. You need to know how they work – what they target and how they can be leveraged – to be able to properly examine how they performed. One vital area to look into is the Average Cost of Sale (ACoS) over time to see if competition is high based on an increasing advertising spend or ACoS itself.
7. Analyze the Competition
Going deeper, you need to check for and analyze available information on keywords and what they say about the competition so you can make educated guesses about the business’s potential in terms of sales. You can use tools like AccuSales, Sales Estimator, and Sellics that summarize markets and make it easier to gain insight into forecasted sales data.
Look into competitors’ profiles as well to make a comparative analysis of fulfillment, pricing, and product reviews. Based on A9, you want to know about sales velocity and margins by checking where the price points are in comparison to your costs. Reviews will show you if the top listings for the same products are stable, and if you will be selling against Amazon private label brands, which signals trouble.
8. External Advertising and Marketing
Explore other platforms that you can use to advertise the business and drive traffic so you can project its growth opportunities as the cost of advertising on Amazon continues to rise. Get access to any websites and social media accounts being run by the business as well as any related ad accounts. Check how these accounts have been leveraged to boost sales on Amazon. Look into their following and how they have been driving traffic to their Amazon store through the platform. Identify how you can create or further improve on any platform-specific campaigns, whether organic or through ad accounts, and make projections based on the available opportunities.
If a brand has a good following, this adds value to the business. Make sure that these websites and social media accounts as well as all related ad accounts will be turned over to you, along with any email lists generated by the same, should you decide to buy the Amazon FBA business.
9. Branding Rights
Having a brand on Amazon is not always a big deal, but when you’re buying an Amazon FBA business, you should still make sure that you are buying all the rights to the branding. It is important to your future success that you have exclusive ownership of the brand. This includes any copyrights, patents or trademarks of the brand and preclude the current owner from selling the same product again. Finally, you want to have all the rights to the social media and website as well as any other platforms they may be selling on.
Purchasing an Amazon FBA business can be a great opportunity to increase your cash flow without having to go through the painful initial stages of setting up a business. You must conduct a systematic and exhaustive exploration, however, to avoid making a bad call. Carefully going through the due diligence items above will help you to identify and reflect on every potentially worrying aspect of the business that could affect its value. Due diligence when considering an Amazon FBA business purchase will reduce your margin of error and increase your chances of getting a good deal.