The Amazon FBA business model has proven to be an attractive acquisition opportunity for buyer types of a varied demographic. From Private Equity to individual Entrepreneurs, Amazon FBA provides investors with a low touch business model generating strong returns, with many success stories available to review it would seem a perfect fit to those with an interest in Ecommerce and the CPG (Consumer Packaged Goods) industry.
However, whilst the business model seems straightforward and operational management looks comparatively easy, there are many considerations an acquirer needs to review before buying such a business. Acquiring any business requires careful thought and analysis, we’ll be answering the question by focusing on considerations related to the deal and our next article will focus on considerations relating to operating an Amazon FBA Business.
The key to any successful acquisition occurs before any negotiations, LOI’s (Letter of Intent) or even business analysis. Prior to diving in, a clear understanding and strategy as to the objective of the purchase is crucial, specifically, why are you buying an Amazon FBA business? Is it to manage as a lifestyle brand or a bolt on acquisition to a larger group?
An extension of this is planning, how will you manage the business? How will you improve your FBA brand? There are literally hundreds of questions that need to be answered when considering this type of business.
Assuming a clear strategy has been developed, from a transaction perspective broadly speaking there are three areas: Deal Structuring & Price, Due Diligence and then Transition Period.
From a Price perspective, there is no secret it is a very good time to be a buyer of an Amazon FBA or an Ecommerce brand, average multiples are lower than the covid boom with average multiples being around 2 - 4.5x and there is an influx of businesses for sale on the market. Like any buyers market, an acquirer can be more bullish on the total multiple and push for a more favourable deal structure. Understanding valuations is key, Amazon FBA businesses are valued using a multiple of Seller's Discretionary Earnings (SDE) with the determining factors broken down between Quantitative and Qualitative factors.
It is crucial to consider your budget and review potential deal structures by modelling any deferred consideration into your cash flow forecasting. Linked to deal structures is the ongoing involvement of the current owner, many acquirers in the past have not factored this into their offers and have suffered as a consequence. The current Amazon FBA brand owner is an expert in all of the niche nuance in relation to the business, from supplier relations and contingency plans, to customer service and Amazon Account Management. It is key to have the seller available for an extended period of time to assist you in the transition and ongoing management of the brand.
Due Diligence is the most important phase of the deal process, again, this can be split into 3 areas: Financial, Operational and Legal Diligence. Financial Diligence is quite obvious, this is analysis of the brand Profit and Loss (P/L) statement and rebuilding this document to ensure the reported revenues, costs and profitability is correct. From here analysis can be conducted on the broader financial health of the business and a view can be generated on where optimisations and improvements can occur. For example, the COGs calculations are crucial, many FBA business Profit and Loss statements have discrepancies on this line item (with costs unintentionally being omitted (tariff classifications, incorrect freight etc) or the statement being built on a cash vs accrual accounting methodology). Upon understanding the COGs, a buyer can analyse the possibility to improve these, as these are a core fixed cost on an Amazon FBA P/L. We would always recommend any buyer to engage with a third party to conduct a full P/L rebuild, such as through a professional advisor like Chapter International or Quantacap.
Operational Diligence is also key. Specifically, reviewing supply chain relationships in detail (any contracts, risks associated with these), broader operational process (how is the business operated, any staff, what are their roles?), are they complying with Amazon Terms of Service (particularly around Product Insert Cards). This is very important, as typically Amazon has an ‘act first, ask questions later approach’, i.e if there are any questionable practices by the current brand owner and Amazon become aware, they can delist the account / listing before giving you the opportunity to explain. Furthermore, Amazon’s Seller Support is notoriously challenging to navigate.
Legal Due Diligence is specifically relating to verification of patents, trademarks, licences and any history of lawsuits. Trademarks enable Amazon Brand Registry and as such is fundamental to any Amazon FBA business, ensuring that these are in order and owned by the correct entities and Founder is key. Furthermore, if a brand has a clear differentiator / IP, verifying the ownership of this is crucial. Considering how the due diligence process will be structured from a legal perspective is key, and engaging with appropriate advisors is key to dampening any risk.
As discussed in this article, when buying an Amazon FBA business there are many considerations specifically relating to the deal. We have provided the headlines on the transaction itself, however there are a vast array of other considerations relating to owning and operating an Amazon FBA business, from day to day management, navigating Amazon and their various challenges, growth strategies and compliance considerations, all of which will be analysed in our next article.
Any successful acquisition or exit is underpinned by sound advice and a team of experts that has direct experience executing such transactions. Chapter International can be your perfect partner to aid you in your sourcing and purchasing of an Amazon FBA business. We have an extensive network of over 60,000 Amazon Sellers across the globe and across various categories. Please reach out to us at firstname.lastname@example.org for any questions.
If you are interested in selling your brand, we offer a complimentary valuation, please complete our valuation calculator found here: Valuation Calculator.