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As a direct result of 2020’s global commotion, businesses were uprooted, organizations succumbed to forced digital transformations and ecommerce accelerated at record pace. The changes for businesses caused a “Gold Rush” type effect as Amazon became a mecca for small businesses seeking a chance to survive during a global pandemic. Sellers rapidly joined the online retailer’s marketplace to sell and move products, and their success served as a catalyst for others to follow suit. In fact, from January to March 2021, an additional 280,000 sellers joined the 1.9 million who were already actively selling on the marketplace — and it’s estimated that an additional 1.2 million will join by the end of 2021.
However, not only did this rush to Amazon benefit small businesses, but it was also an opportunity for investors to observe the industry with a watchful eye and seek out profitable business opportunities.
And now, with this ecommerce explosion and renewed energy from sellers and investors, some Amazon business owners are plotting their next move — an Amazon-business exit strategy. Sellers are ready to leave the day-to-day of online business management and planning to move ahead without their business and with fatter pockets thanks to a buyout from an interested investor.
But how can you plan a successful exit? How do you know when to sell an Amazon business? What does the process look like and who may want to buy? The first step is to grab a calculator and start crunching. Be prepared with the right data so when the opportunity comes along, you can be ready to make the move.
Related: Guide to Starting a ‘Fulfillment by Amazon’ Business
$1 million is much more than $950,000
Amazon’s Q1 2021 sales revenue exceeded expectations hitting $108.5 billion, which is up 44% year over year. Of that increase, third-party sellers generated 55% of paid units on the Amazon platform.
In addition, nearly one in ten active Amazon sellers was able to generate more than $100,000 in annual sales in 2020 and 1% of those sellers were already generating $1 million in sales.
In general, the higher the revenue, the more likely a seller is to generate interest. Large buyers are specifically interested in buying Amazon businesses that bring in at least a million dollars per year — and that’s their cutoff. Amazon businesses with sales revenue of $950,000 and below will be missed by such buyers — and they’re often the buyers with the deepest pockets. So that’s the Amazon seller goal — put in the time and effort it takes to generate the highest revenue possible and that effort can pay off tenfold.
Running a growth potential analysis, or GPA, on your business will indicate whether or not your business is likely to hit the million-dollar mark — and if so, how long that may take.
The audit will expose opportunities to adjust a few levers, ensuring that you’re implementing Amazon’s complete suite of seller tools to boost revenue. For example, do you know the average product conversion rate (called “user session percentage”)? Is the business using Amazon’s demand-side platform, or DSP, to run profitable ads? Implementing these tools and making other incremental changes could quickly lead to a more profitable business — and, therefore, a more appealing prospectus for potential buyers.
Related: 3 Trends that Can Boost Your Amazon Business in 2021
Get an accurate valuation
Remember that the value of an Amazon business comes from its potential to drive revenue and produce a profit. So calculating that potential is a must.
Let’s say that an Amazon business achieved $1 million in sales in 2020. Out of that revenue, the seller’s discretionary earnings (the SDE or more simply put, the profit) was $250,000. The market is likely to offer 2-4 times the SDE if the business seems like the right fit. This could be based on the products being sold, number of SKUs, overall growth, attractiveness to the buyer and the transferability of the business. If a buyer is interested, the business value would likely be between $500,000 and $1 million, and the sale number would fall within that range.
Another number to know is the EBITDA (earnings before interest, taxes, depreciation and amortization). This factors in existing inventory, unsold products and inventory purchased with profits. This number demonstrates the general health of the business and helps predict future performance.
For Amazon businesses with EBITDA less than $1 million, the valuation would be $2-4 per every dollar of revenue. However, once a business crosses the $1 million threshold, the valuation jumps dramatically and the market is likely to pay 5-7 times earnings, which is more than double the value below the $1 million seller goal.
Related: Is Selling on Amazon Still a Profitable Business?
Find interested buyers — and negotiate
An Amazon business can be sold by the business owner or by using a broker. The smaller the business, the easier it is for an owner to conduct his or her own sale.
However, an Amazon business with a $1 million valuation would benefit from a broker who can help find the best price and negotiate toward the high end of the 5-7-times multiples. The broker is likely to charge 10-15 percent of the gross sale price, but with skin in the game, he or she will help get the highest possible sale price and make the transition as smooth as possible.
Once a buyer is interested, the price is negotiated, and the deal is “done,” it will take 3-4 months for the initial owner to walk away with the full earnings.
If an Amazon business has the potential to hit $1 million and isn’t there yet — even if sales are at $999,999 — it makes sense to wait it out. A purchase price that looks good today could look incredible tomorrow if the revenue hits the coveted threshold. So evaluate the numbers, audit the business and get a 360-degree view of the value — and then make your move.