Don’t Start an Amazon FBA Business, Buy One!
If you’re considering buying an Amazon FBA business you’ve probably also considered starting an Amazon FBA business from scratch. We nearly always suggest purchasing a business over starting one from nothing. Let someone else deal with the growing pains and you can focus on growing an already established business.
So what should you look for when buying an Amazon FBA business? This guide to buying an Amazon FBA business will help ensure you’ve done your due diligence on the business you want to acquire and you can feel confident in your purchase. You’ll be an FBA business owner in no time!
What is an Amazon FBA Business?
FBA stands for Fulfillment by Amazon, which is a selling method offered by Amazon that allows sellers to send products to any Amazon warehouse to store, and in return Amazon ships the merchandise to customers. This service allows sellers to make the most of Amazon’s powerful distribution network and customer base.
In other words, when a customer submits an order for a purchase through your Amazon FBA store, Amazon picks the product stored in their warehouse, packages them, and sends it to the customer’s address.
The Fulfilment by Amazon Business Model
With your traditional eCommerce store, you’re in charge of shipping, handling, and any additional costs and fees. The Amazon FBA program takes care of all of it by allowing you to warehouse your merchandise and ships all inventory to your customers.
You won’t have to worry about the pain and headaches that come with refunds and returns. Amazon will handle any customer-service related aspects to your business as well.
You’ll be in charge of marketing your products effectively so that your customers can easily find you, like writing conversion-driven copy for Amazon listings and titles.
From here, you’ll never have to lift a thumb or break a sweat. Your only job is to ensure that your inventory remains updated and ships to an Amazon warehouse.
Amazon charges the seller a referral fee depending on the category of products sold. In other words, the seller pays Amazon a percentage of the total selling price of a product, including all shipping and handling costs and any gift-wrapping services. The referral cost is in addition to the seller’s plan fees.
Each seller has the option to choose from an individual plan or professional plan. If you’re just starting off with selling, Amazon’s pricing page gives you a breakdown of each plan and helps you decide which service is more suitable for your business type.
Each seller has the option to choose from an individual plan or professional plan.
For example, the individual plan is a great plan for those starting off in the Amazon FBA space and are unsure on what to sell.
The professional plan places you on top product pages and is good for rapidly-selling items.
There are additional fees for product shipping costs and some sellers may incur fees for long-term storage at warehouses, optional advertising services, or premium account services.
Before using Amazon FBA, it’s important to understand each plan feature and the costs of additional services.
There are also Amazon Referral Fees. For every item sold, sellers pay Amazon a percentage of the total price—including item price, shipping cost, and any gift-wrapping charges—or a minimum amount, whichever is greater. Referral fees are in addition to selling plan fees.
Before purchasing an Amazon FBA business, make sure to conduct your research, especially in a saturated marketplace like Amazon. And this guide is the perfect place to start!
What to Consider When Buying an FBA Business
Product/Industry
Before purchasing an existing FBA business, you want to make sure it has a USP (Unique Selling Proposition). In other words, the niche you choose will be profitable and allow you compete in the market. Researching profitable products involves looking into the customer demand, existing competition and supplier/production costs.
By picking an industry you’re passionate and knowledgeable about, you can add value to your niche of choice, giving you an edge over your competitors. For example, you can use your knowledge to write strong product listings.
Thoroughly understanding your competitors and creating a concrete strategy to stand out from the rest is crucial to successfully running your business in the long run. At the end of the day, the FBA business you’re looking to purchase must have a promising opportunity for growth and expansion.
Research is key, look at other listings in your product category to understand how they list their products. Analyze social media platforms, blogs, and product reviews if they are available as these will tell you how customers view existing products.
For example, electronic gadgets are a popular selling niche on Amazon. Perhaps if you feel that the traditional manufacturing and disposal process is harmful to the environment, you would look to sell products that are sustainable and this would be a new unique position for the business. Selling your electronic products with sustainable materials and positioning your business as a socially conscious company could result in new growth not previously achieved by the previous owner.
If you find a FBA business in a profitable niche but the existing products have a low star rating, this could be another opportunity for you to improve upon and grow the business.
Suppliers
When it comes to running a successful FBA business, a reliable, efficient supplier plays a major role.
If they don’t deliver on time or fail to meet quality standards, this could affect your reputation and lead to problems down the line. It’s important that all parties involved understand each other’s terms and conditions.
For example, do they offer an extended warranty? Do they give refunds if something goes wrong? What happens if you change specifications after ordering? Will they be able to make changes quickly enough?
The right supplier will not only deliver products at great prices, but they’ll deliver them in a timely manner as well. Consider how you can respond to supply chain disruptions from labour, raw materials sourcing weather, and location-specific operating circumstances such as power outages or local COVID restrictions on the movement of employees.
If you can, check the supplier’s credit history. Talk with other businesses who have used the same supplier in the past and gain insight on their experience.
When acquiring an FBA business an affordable supplier may be your top priority, but it’s important to keep in mind that cheap is not always the best. If your supplier’s products or services are of poor quality, consider the hefty costs that may come along with refunds, replacements, or returns.
Have a backup plan in place: If you’re selling a niche product, consider forming relationships with experienced suppliers who have worked in the industry for a long time. If one supplier discontinues carrying your products, you can work with another supplier to fulfill your merchandise needs.
Take into account the advantages and disadvantages of sourcing domestically or overseas. Domestic suppliers can mean faster shipping whereas sourcing overseas can come with delayed times and higher shipping fees due to long distances. If you do have supply issues, can you source products elsewhere or would you need to pivot to entirely new products.
Think about any social causes your business aligns with.
If your business has strong environmental credentials, you want to make sure that your supplier’s product packaging system and environmental processes coincide with your company’s values. You should also consider labour practices and fair wages as these are becoming increasingly important to customers.
Accounting and Financials
One of the most important things you can do before acquiring an FBA business is check its financial history. Taking the time to thoroughly understand a company’s financial statements and history will make your decision on whether or not you want to acquire a business much easier.
If you need support in analysing financial statements or undertaking any other area of due diligence, Flippa’s Due Diligence service is a great solution. We offer verification and assessment of the online business you’re looking to buy so you can rest assured that the information the seller has provided is accurate and correct. There are three different types of due diligence offered by Flippa, you can select the right option for you depending on the complexity of the business. Find out more about Flippa’s Due Diligence services here.
All Amazon FBA stores have a seller account where you can check penalties, metrics, and performance of the business.
Make sure you thoroughly understand the product demands of your niche and how well it will sell in the future.
Check the business’s profit and loss statements, as this will provide you with a window on how well the business is performing and will continue to perform.
If your business depends on other external services, take those funds into consideration as well. Does the seller spend money on promotional launches? Do you have to factor any additional expenses to successfully run the business? Thoroughly understand if there are any one-time or unusual expenses before completely acquiring the business. This will help you set a realistic expectation of the business’s return on investment.
As an Amazon FBA seller, you may have a sales tax nexus. This literally means that you’re “tied” to a state or “connected” to it.
For example, if you’re using an Amazon warehouse to store your merchandise, the state considers you as having a nexus. Check local Secretary of State rules that trigger additional expenses and taxes, insurance and tax filing requirements. If you’re using things like roads for deliveries, most states require that you charge your buyers a sales tax.
[Glossary pull out] Sales tax nexus is the connection between a seller and a state that requires the seller to register then collect and remit sales tax in the state. Certain business activities, including having a physical presence or reaching a certain sales threshold, may establish nexus with the state.
Take into account any storage, referral, and shipping fees as this can affect your gross revenue. Labor shortages and fuel prices are rising in cost, so have a clear understanding of how this might impact your business in the short and mid-term. Thoroughly checking these figures with the seller will ensure that you’re aware of the business’s net profit.
Traffic Sources
Whether the store depends on internal or external traffic, take time to fully understand where the majority of an FBA’s traffic source comes from.
Through internal traffic, your customers are organically searching on Amazon for your product. If an Amazon FBA store largely depends on external traffic through Facebook or Google ads, make sure you’re aware of that too.
Generally, the higher the sales an FBA store has, the higher the search ranking, which in return influences Amazon search’s algorithm and allows higher visibility of your business. It may also mean spending on additional Amazon merchandising opportunities and programs in order to maintain high search rankings. Study the Amazon search tips and advice forums from other FBA sellers to learn tips and tricks that will improve your FBA store.
Opportunities for Growth
When purchasing an Amazon FBA store, you want to ensure that there is a potential for growth.
This is where your skills can come in handy. If you plan on running the business on your own, ideally you want to acquire a business that you’re passionate and knowledgeable about.
For example, if you have strong skills in marketing or copywriting, you can amplify your amazon listings and expand the reach of your products.
Additionally, you can consider expanding your product inventory. For example, if you only carry adult swimsuits, you can add children’s swimsuits to your inventory. If you’d like to expand your brand, perhaps you’d want to add international shipping as a part of your services.
Furthermore, when purchasing an FBA business, you want to ensure that the business you choose will perform well in the long run. If it is a competitive niche, look for ways that your business can stand out from the competition. This can look like selling products at competitive prices, higher quality, and on demand.
How to Value an FBA Business
Before purchasing a business, it’s important to understand how much it’s worth.
An accurate valuation will provide you with a current market value and also assess the business’s performance.
Doing a valuation also serves to prompt potential buyers to reflect on the business’s operations and costs and casts the information from an objective perspective. In other words, the valuation is driven by facts and figures and that’s what you want to see.
An online valuation tool like Flippa’s is created with historical sales data from a wide pool of digital businesses and offers buyers and sellers instant price points and insights.
Understanding the Numbers
An FBA business valuation can be calculated by the Seller’s Discretionary Earnings (SDE), which is essentially the net profit of the business.
The valuation formula is then calculated as follows:
Annual Net Profit (Cash Flow) x Multiple (Years) = Valuation
The multiple is the number of years that the cash flow is worth.
Potential buyers sometimes view a company’s multiple as the amount of time they can expect to gain back the money they initially put down to purchase an asset.
For example, an Amazon FBA store is up for sale for $4,000 with a multiple of 2x.
Assuming that revenue remains consistent, the buyer can expect to receive their money back in 2 years.
Of course, it’s important to note that this is only if income remains consistent. Putting in the work to ensure that your FBA business successfully thrives is important.
The first step of a valuation will give you the opportunity to fully understand the company’s value before officially purchasing the business.
Starting vs Buying an FBA Website
Admittedly, starting an FBA business from scratch is no easy task. Some people start businesses from the ground up and fail, while it takes others years to successfully run a business.
Starting your own FBA business can be exciting: you have an idea for a product to sell and can’t wait to share it with consumers.
However, an already existing business has traction.
During the beginning of the growth phase of a business, there can be many hefty costs that come along with starting an FBA website. If you purchase an existing FBA website, the majority of the heavy lifting would be done for you.
Purchasing an existing FBA business gives you an opportunity to grow and scale your business with already existing momentum.
That’s why it’s important to purchase a business that has the opportunity to grow. And here’s some information on how much money you can make with an Amazon FBA business.
