How to Increase the Value of Your Amazon FBA Business
You’ve put in the time and hard work to build a successful Amazon FBA business. But now you might be wondering: What comes next?
You could hang on to your profitable business, but with increasing pressure on Amazon sellers from supply chain issues, inventory limitations, and inflation woes, you might be wondering what the best option is for you when it comes to the future of your valuable asset.
If you’ve never considered selling what you’ve built, you’re not the only one. In fact, most Amazon FBA sellers aren’t even aware that it’s possible to sell their online businesses.
Not only is it entirely possible to sell, but we’ve also seen sellers just like you walk away with life-changing amounts of money. We’re talking six, seven, or even eight figures’ worth of capital that can be used for acquiring and scaling new businesses, funding retirement, diversifying investment accounts, and more.
So, how do you know how much your business is worth? Let’s take a deep dive into valuations and look at some strategies for increasing yours!
How a Valuation Is Calculated
You can use several different methods to calculate the value of a business. At Empire Flippers, our valuation formula is straightforward and can be summed up as follows:
Although the formula is uncomplicated, you might be wondering what a multiple is. In short, it’s an industry figure that is used as a multiplier to get the final valuation of a business. Many different factors affect the multiple, including the age of the business, defensibility of the brand, inclusion of additional assets, and revenue diversification, to name a few.
You probably also noticed that we use monthly net profit instead of annual net profit. The reason we use a monthly figure is because it gives buyers a clearer picture of a business’ baseline financial performance.
So, if you have a business that has been valued at 43X, that refers to a figure 43 times your monthly net profit.
This signals how long buyers will be invested in the business before they begin seeing returns, given absolute stability.
Quick Ways to Increase Your Valuation
Now that you have a general understanding of how a valuation is determined and what a multiple is, you might be wondering how you can increase yours.
Obviously, increasing your monthly net profit can help, but there are other quick wins you can put into action to increase your multiple (and therefore your valuation).
Extract Yourself from the Business
It’s a common misconception among sellers that buyers want to invest in a business where the seller is spending part-time or even full-time hours running everything.
The rationale seems sound. After all, it shows how dedicated the seller is to growing the business.
But the truth is that most potential buyers are looking for passive investments they can scale, not a full-time job. Most buyers want to see a seller working less than 10 hours a week on a prospective business.
To reduce your involvement, start looking for ways you can outsource some or most of your current tasks. Many of our most successful sellers use VAs, PPC consultants, and freelance supply chain managers to reduce their workload prior to sale.
Tighten Your Processes
Many Amazon sellers are in the same proverbial boat when it comes to supply chain issues, especially when dealing with overseas suppliers.
But what does the rest of your supply chain look like? For example, where are you storing your inventory? How is it getting to Amazon warehouses?
A popular way for our sellers to streamline their supply chains is by using 3PLs to receive, store, and send inventory to Amazon warehouses.
Get Your SKUs in Order
Striking the right balance with SKU count is an area a lot of Amazon sellers find challenging.
We’ve found that for most one-person operations, the sweet spot lies somewhere between three and eight SKUS.
If you’ve got fewer than three SKUs, you run a higher risk of business failure due to stock outages. If you’ve got more than eight, you could run into logistical problems trying to manage them.
A high number of SKUs could also come with a deadweight SKU problem. That’s when the majority of your revenue comes from a few products, with the rest of your product line drastically underperforming.
It’s great (and even normal) to have a hero SKU or two, but you don’t want to put all your eggs in one basket. Buyers want a business that has solid revenue diversification because it inspires confidence that the business will continue to perform well.
Launching new products or culling underselling ones are quick wins you can score before listing your business for sale.
Increase Your Brand Strength
Another thing buyers are often interested in is the strength of a prospective brand. But how do you know if you’ve got a strong brand?
One way is to look at how your customers react to your products. What do your reviews and ratings look like? If you’ve got a high number of strong reviews, that’s a great sign that you’re selling quality products.
But from a buyer’s perspective, there’s more to brand strength than just product quality.
They also want to see a highly defensible brand. Copycats will always be a problem, but have you taken steps to protect what you’ve built?
The best thing to do is be proactive before you list by trademarking your brand and registering with Amazon Brand Registry. If you’re worried about the amount of time it takes to get a trademark approved, going through the Amazon Accelerator Program could speed up the process.
Build Your Community
Do you have an email list? If not, building one can be a low-hanging fruit to increase the value of your business.
Having an email list gives you a willing and engaged audience. Building and monetizing one can increase your sales and create a strong sense of brand loyalty.
Aside from increased sales, the biggest benefit of creating your own community through email is that it reduces your dependence on third-party advertising and search engines. You’ve got a controllable asset that you can use to drive traffic whenever you want.
One of the easiest ways to use your email list to engage with your customers is by sending out a newsletter featuring products, highlighting promotions, or building buzz around a product launch.
How Much Could Your Business Be Worth Right Now?
The thing to understand about exit planning is that it’s a process. You’ll want to make sure you’re not leaving capital on the table by forgoing quick wins, so having a proper plan in place is essential.
You may not be ready to sell now, but you also don’t want to leave your planning to the last minute.
But even if you’re not ready to let go of your baby quite yet, you can still get an idea of what your business is worth by using our free valuation tool.
Once you’ve gotten your preliminary valuation, you can take the necessary steps to increase the value of your business so that you’re exiting on your terms with the largest amount of money possible.