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Last year, the majority of Amazon’s $386 billion in revenue came from third-party sellers — some of whom made up to $3 million in sales each. And those numbers are only going to get bigger: Third-party sales are currently growing at 52% a year.
It’s no surprise, then, that independent small and mid-size businesses are increasingly selling their goods via FBA (Fulfillment by Amazon). However, B2B and B2C stores aren’t the only option for making money via Amazon. Selling to an FBA aggregator has become an instant source of revenue for many owners. If this is something you’re considering now or down the road, set yourself up for the exit by making decisions now that will make you sellable in the future.
As someone who has overseen over $100 million in Amazon FBA exits and acquisitions, here are five key lessons I recommend all FBA owners keep in mind:
1. Consider the exit from day one
Create a business idea from the onset that has the potential to be sold. This will make your job easier when you do decide that you want to sell. Have your exit in mind from the get-go. You want to always ensure that you are in a stable, growing market with low competition. The most popular and successful Amazon niches include kitchen, outdoor/sports, baby, pet and home care.
2. Keep your financials organized
Have all your financials prepared for the sale of your business, ideally on an accrual (not cash flow) basis. Keep all your accounts up to date and have all your detailed financials ready for when the time comes that you are serious about selling. Keep track of your business analytics and have data (such as traffic, email and ad campaign data) ready and available for when the time is right. You will want to show a buyer that you have good lead times and favorable supplier transfer terms. If you do not already have those, it is recommended that you focus on these aspects of your business to determine it is time for an exit.
3. Document, document, document
Document all your operating procedures and make sure that as a seller you have all your standard procedures and practices laid out clearly for a potential buyer to have in place. I know from experience that buyers will pay a premium price for a well-documented business, rather than one that has no standard operating procedures (SOPs) in place. Potential buyers are looking for an Amazon sellers account that is in good health, is growing in their number of positive reviews and has a consistent best seller’s rank. Having all of this in place isn’t only good if you are selling. This is a best practice overall.
4. Put yourself in the shoes of a buyer
Buyers are looking to acquire a business with an infrastructure that can scale, and although aggregator buyers are looking to actively run these businesses, it is hard for them to take over solopreneur operations. They want to see that your business is in an evergreen niche — meaning it will outlast popular fads and bring in a consistent income for a long period of time, not just for a few months. If your business is seasonal, now might be the time to explore diversifying your offerings. Scalable businesses that are evergreen are in high demand and bring in top dollar, with many acquisition businesses like Digital Acquisitions raising eight figures in capital. (Disclosure: Digital Acquisitions is a client of my firm.)
5. Optimize exit timing
If you have ever considered divesting of your ecommerce business, now is the optimal time to do so. This is especially true because the Biden administration is proposing to increase the capital gains tax top rate significantly— from 20% to 39.6% plus an additional 3.8% surtax. Additionally, you can make the most of your sale by choosing to exit during a period of sustained growth, not after a seasonal peak. You should talk to an M&A advisor to optimize your sale for tax purposes.
Of course, the process of preparing to sell is more streamlined if you keep the above five lessons in mind. I have had clients who have executed these well from the beginning — built their business from the start as if they would sell down the line — and have found major success in doing so. Clients who did not implement these five attributes before selling their Amazon FBA business ended up not being able to meet their exit goals. Adhering to these lessons will not only set you and your business up for success, but by doing so early on you will also make your business more attractive for a buyer down the road.