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4. [CASE STUDY] How We Sold a $1.7 Million Dollar Amazon FBA Business in 8 Months

[CASE STUDY] How We Sold a $1.7 Million Dollar Amazon FBA Business in 8 Months

What would it look like if someone gave you over a million dollars for a business you started just a few short years ago?

You might think of it as a pipe dream, but the truth is… it can happen.

That is exactly what happened to one of our sellers just a couple of months ago when they sold a $1.7 million Amazon FBA business on our marketplace.

It was our first million dollar sale, almost at the two million dollar mark, and it highlights how much we have grown over the last year (check out our new quarterly report here). As our business continues to grow, so do the list prices for the businesses that are sold on our marketplace.

With several dozen FBA sales now under our belt, we’ve cemented ourselves as the de facto leader when it comes to brokering Amazon FBA businesses between sellers and buyers. No other broker has sold as many Amazon FBA businesses in the 5-7 figure range and has made as many Amazon FBA millionaires.

This business in particular had a fascinating journey from the time of vetting all the way up to the actual sale. It was listed with us on August 15, 2016, and on April 23, 2017, it was sold, within eight months of going live.

It attracted a whole swathe of interested parties, including several different investor groups that typically pool their money together to acquire larger digital assets.

The business was listed at $1,753,000 dollars by the end and was sold for $1.7 million – within 4 percent of the final list price.

Let’s dive into how that happened, what went down, and some valuable lessons you can learn whether you’re a buyer or a seller.

Preparing and Listing the Business

You might be wondering why someone who is making $50,000 per month, with a $10,000 operating expense, would want to sell their business in the first place?

The reason is something we often talk about on Empire Flippers, and it’s usually wanting to avoid as many potential critical failure points in their business as possible. For this seller, that potential failure point was the fact that the vast majority of their income was coming from the Amazon platform specifically.

You can run an Amazon FBA business for years with no other platform at all generating sales and be totally fine, but it’s important to keep in mind that, at the end of the day, Amazon still isn’t a platform you own. You have no real control over it like you would with your own ecommerce store. The weight of this risk is viewed differently by some buyers/sellers, but everyone should still take this fact into account when acquiring this kind of business.

You might be making $40k net profit per month on Amazon, but at the end of the day you don’t own the platform, Amazon does, and you cannot control what Amazon decides to do.

Also, there is a risk of your account getting banned or listings taken down, and that could tank your business overnight, as you wait in Amazon customer support purgatory to figure out why it even happened.

Of course, playing on the Amazon platform has a lot of benefits too, such as leveraging Amazon’s monstrous amount of organic traffic and the fact Amazon is likely one of the highest converting websites around considering all the experiments they do. They know how to sell products like a Jedi Master.

All that being said, the seller was ready to diversify their income. They had decided they were going to use the capital from selling this business to purchase other businesses and to create new businesses that used various different types of monetizations and traffic strategies.

A smart move, and definitely something we recommend for any business – whether you’re buying, selling, or still growing the business you’re in right now.

It was through one of our podcasts on Amazon FBA that the seller first heard about us (and we have since continued talking about where Amazon FBA is going with true industry thought leaders).

This seller had a similar setup as many Amazon FBA sellers do – they had a branded website but the website was not really creating any sales for them.

After the seller submitted their business for sale and it went through our entire vetting process, their Amazon FBA business that was just a few years old was worth $1,529,886.60. Not bad for a few years worth of work, especially since that price (if you didn’t already see our highlights graphic) actually went up even further.

While the big payday is absolutely interesting, what makes this deal even more interesting for you (whether you’re a buyer or a seller) is how the negotiation process actually played out.

Understanding negotiations and creating effective deal structuring becomes even more important as you get into businesses that have higher valuation prices.

The Negotiation Process

The negotiation process is one of the most important parts of selling or buying a business. Good negotiations can lead to much bigger upfront exits with smaller earn outs for the seller, or help buyers get low interest financing that gives them a much larger runway to build up the business they have acquired.

The financial aspect is especially important in larger priced businesses, since financing in our industry is historically tough. There are just not that many tangible assets that banks consider to be good collateral, and so banks are usually pretty unwilling to put their money on the line for business acquisitions.

Originally, the seller didn’t want to do an earn out scenario for the business. Their reasoning was that the business was going to become much more valuable over the coming months. While doing an all upfront cash payment for a business this size is rare, he was correct that the business did become more valuable, which was reflected in the actual sales price.

The seller did end up agreeing with an earn out as he realized buyers were looking to mitigate some risk on their end and it was going to be a much tougher sale if he waited for a full cash offer.

On publishing the listing to our marketplace, we saw depositors starting to look and begin their due diligence process. While we had many individual buyers take a look at the business, there were a few larger investment groups that became very interested in the business.

The due diligence process can take a while before a serious buyer rises to the top. In this case, it was in September that one of the investment groups asked for an “exclusive” due diligence period.

Exclusive due diligence is where the listing is taken off the marketplace to give the buyer an extended period to look over the business without the worry of someone buying it out from underneath them.

Buyers use this time to comb through the financials and the operations of the business more meticulously than they might if they’re aware the business is still being marketed to other potential buyers.

This is NOT something we typically offer at Empire Flippers, but we discussed it with the seller and decided to allow it as a one-off this time.

The exclusive due diligence required a large upfront deposit to show serious buyer intent, and it started just two days after September 12, when updated sales numbers for the business jumped the listing price from $1,529,887 to $1,615,059.

This period also marked the first round of serious negotiations.

Enter Player Number One

This marked the first serious offer to come to the table.

During the entire selling-buying process, one of our Business Advisors works with both the seller and the buyer to help them negotiate a deal that works for both of them. While our fiduciary responsibility is to the seller, we believe in doing deals as much as possible where everyone (the buyer, seller, and ourselves) walk away happy with the results of the negotiations.

You will notice that our Advisors offer their counsel to BOTH buyer and seller throughout these negotiations.

The first offer was $750k upfront, with $375k paid out over 12 months and another $375k if the business made over $1 million in net profit for a year. ($1.5M total offer)

While the exclusive due diligence was agreed to, the actual offer itself was considered too weak of an offer by the seller. The seller ended up countering with $1.2 million cash upfront, $300k paid out over six months tied to monthly revenue rather than profit. We were uncomfortable with the exclusivity clause, so there was an addendum made to the due diligence period as well, giving them 30 days to act or they lose the exclusivity.

You might be wondering why the seller wanted the $300k to be tied to revenue rather than profit. The reasoning is that it protects the seller from the buyer manipulating profit, a metric that is actually very easy to manipulate, especially with larger businesses.

For example, if the profit of the business was $40,000 per month and the seller agreed to be paid monthly only if the business reaches a $30,000 net profit milestone, then the buyer could manipulate this number by significantly stocking up on inventory, hiring employees, etc.

This manipulation could theoretically go on indefinitely depending on how the deal is ultimately structured. That is why for sellers it makes a lot more sense to tie the deal structure to revenue, which is harder to manipulate, minus any large dips in the business, which would be something a buyer would want to avoid.

The investment group understood this concern right away; they were testing the waters to see how the seller would react to the offer.

It’s not a bad idea to start off with a lower offer than you think the seller might accept, of course. After all, if the seller accepts, you could get a highly profitable business at a deep discount.

When you don’t have an exclusive due diligence period, though…then time is your enemy and the longer you spend in negotiations, the more likely a buyer offering a much more reasonable offer will come along and snatch up the business from you.

The investment group then countered with a second offer – $1 million upfront and $500k paid out over 12 months tied to revenue. The $500k would be paid out in quarterly stipends tied to the revenue projections.

While this was a much better offer, we knew there was still room here for improvement. Our Business Advisor working on the deal advised the seller to counter with $1.1 million upfront and $400k paid out over nine months, with the entire $1.5 million sent upfront to be held by Empire Flippers and released to the seller upon meeting the agreed revenue conditions.

In this scenario, the earn out would also be paid monthly as long as revenue consistently hit $160k or better per month. The seller also wished for the exact inventory at time of sale to be added to the sales price.

This deal would have effectively given the seller a large sum upfront, plus a $44,444 monthly stipend during the nine month period. At the time of this offer, inventory was valued at $204k and would grow to $230k in just 30 days, so this was a nice chunk for the seller to counter with to see if the buyer would be willing to purchase it.

The seller modified this offer before being sent out though, wishing for the earn out to be shortened to just six months rather than nine months. This counter caused some concern to the investment group, leading them to wonder just how inventory was handled in the business; in physical businesses, your inventory can be a huge cost and is often not included with the actual sales price of the business.

The seller’s methodology was laid out completely for the buyer. The inventory was ordered on a rolling basis, enough to sustain the production and ship time. If it took the business one month to sell 1,000 units, then they ordered 3,000 units every three months as an example.

The lead times typically would be between 35-45 days depending on the product, with two to three days for the inspection report (which was done on the factory’s site) and then air freighting the product would take between 7- 10 days until actual arrival at Amazon. Altogether, the process took 50-60 days from the order until going live on Amazon.

The seller informed the buyer that they paid for the order 30 percent upfront and 70 percent right before it shipped to Amazon. In the case of defected items, it would usually be considered a wash unless the defect rate was alarmingly high, around the 6 percent mark, in which case, the supplier would be asked to replace the defective units at cost.

Once the investment group was clear on inventory management, they made their next counter. They still wanted the 12 month earn out of $100k paid out quarterly. That being said, they did say they could pay this out quicker if revenue goals were hit easily and ahead of schedule.

The exclusive due diligence period ended on December 20 with the buyer still negotiating with the seller. Ultimately, we decided the best thing we could do was to relist the seller’s business on our marketplace.

By relisting the business, we were able to create much more interest in the almost $2 million dollar listing. This renewed interest helped to create pressure on the investment group by reintroducing scarcity, making it imperative that they make a final decision that both parties could agree on.

It was a pretty clear example to us on why we should continue to NOT offer exclusive due diligence periods. It keeps the pressure on the buyer to close the deal!

Once the listing went live again on our marketplace, another contender entered the ring.

Enter Player Number Two

The new serious buyer for the business was another investment group, one that has acquired many of our businesses in the past. This buyer had never missed an earn out payment and was a seasoned professional when it came to acquiring online businesses.

When a buyer like this has a good relationship with the broker, it is a lot easier for our Business Advisors to talk to our sellers. We can reaffirm the quality of the buyer, and their integrity, and can cite the previous deals they have done with us as evidence.

When you’re buying a business, keep this potential advantage in mind. By cultivating a good relationship with the broker, the Business Advisor on the deal is more willing to go to bat for you with a seller when it comes to how reliable you are when financing and setting up deal structures.

On January 28, the second potential buyer submitted their first serious offer.

The offer was for full sales price of the business, with $450,000 on closing and another $450,000 after 90 days. There would also be 24 month earn out using 30 percent of the net monthly profit not to exceed 24 months.

If the 30 percent of net profit didn’t meet the remaining $927,000 owed to the seller, then a balloon payment would be made to make up the difference.

For those unaware, a balloon payment is when you pay a smaller monthly fee for the life of the loan. This smaller monthly fee typically will not cover the full loan amount during the term limit on the loan, and so one giant payment is then made after the loan term limit is over.

This can be an effective tool for buyers as it keeps more of their cashflow free to help expand the business, and as long as they understand money management it can be a great way to help keep their financial runway open in those first few critical months after acquisition.

The seller ultimately declined the above offer based on our recommendation to not base the earn out on net profit. As mentioned earlier, net profit can be easily manipulated. While it is an obvious advantage from the buyer’s perspective, it can be a risky disadvantage that the seller takes if they accept.

The seller again stressed with the new buyer that they wanted the earn out tied to net revenue instead. The seller also countered asking for $600,000 upfront after migration with an additional payout of $600,000 in 90 days. The remaining earn out amount in this case would had been $654,840 using 15 percent of the net revenue over a 24 month period, with a balloon payment mechanism added after the 24 month period for any remaining amount left unpaid.

The seller was also concerned about the long earn out. The longer the earn out, the higher the risk that the earn out might not be paid back. However, the seller did understand the buyer wanting them to remain somewhat tied to the success of the business.

When it comes to earn outs, a longer one often ties the seller more to the success of the business even after it is sold. After all, if the business suddenly flatlines, then the buyer may not have any way to continue paying the earn out. It is in the seller’s best interest to keep the business as healthy as possible from a consulting standpoint to make sure the earn out is paid in full.

While the seller was very reasonable in understanding the buyer’s concerns, this point is again when our Business Advisors stepped in to help the seller adjust the counter. As mentioned, this was a very sophisticated buyer and our Advisors knew they needed to keep the buyer hooked.

In fact, such a counter could kill interest in the deal, which might steer the buyer towards other options and lose the deal completely for the seller.

This kind of advice is one of the major benefits of using a real brokerage that can negotiate on your behalf and provide valuable, experience driven counsel. This counsel becomes ever more important as the scale of the business grows, if the seller is to get the best deal possible, since businesses at higher price points often translate to more complex deal structuring.

The Business Advisor suggested that there were two main counters that the seller could offer that the buyer might accept. The main issue was that in order for the seller to get a larger upfront payment, they would have to some give on accepting a longer earn out.

Here are the two counter offers our Business Advisor suggested:

• Counter Offer Option A: In this option, the seller would ask for $300,000 upfront after migration and another $300,000 paid out after 90 days. The remaining earn out would be $1,254,840 paid out using 40 percent of the net monthly profit paid out over a 12 month period, using the balloon payment mechanism for any remaining amount after that period. In this scenario, the seller would get the full list price faster even though they would get less on the initial migration and 90 days of the business.
• Counter Offer Option B: In this option, the seller would ask for $600,000 upfront after migration, with another $600,000 paid out after 90 days. The remaining earn out in this scenario would be $654,840 paid out with 20 percent net profit over 36 months using a balloon payment mechanism paid out for any remaining amount after that period.

The seller desired more upon the initial migration, which makes sense as more money now can often be worth more than money later. Our Business Advisor presented this offer to the buyer.

On February 28, 2017, Counter Offer Option B is accepted by the buyer. The buyer agrees to the seller’s counter, though the buyer warns that he must wait for the funds to be transferred to his account by his investors to proceed (a process that could take up to 30 days).

Having tested an exclusive due diligence period already (and was not happy with the results), the buyer is aware that the business will remain live on the marketplace during this period, which incentivized the buyer to get through this process as quickly as possible before other potential offers surfaced.

It was on April 5th when the APA contract was finally signed, both the buyer and his investor signing off, stating no more due diligence was needed.

The buyer did make a last minute change: asking if the payment structure could be $600,000 upfront after migration, $300,000 after 90 days, then another $300,000 after 180 days with the earn out amount still being $654,840.

Last minute changes like this one can be deadly for deals. When you have gone so far down the negotiation path, it becomes a risky move to change something; it has killed many deals that were in the last stage of being sold.

Our Business Advisor, the seller, and the buyer all hopped onto a Buyer-Seller Conference Call to iron out these last minute negotiations.

The Accepted Offer & the Making of an Amazon FBA Millionaire

After eight months (and a last minute phone call), all the negotiations were over.

A final offer was accepted by both parties for the price of $1,700,00 with $850,000 upfront after migration and a payout of $400,000 after 180 days. The earn out amount in this scenario would be $450,000 paid using 20 percent of the net profit per month until the full amount of the earn out was paid, without an earn out time limit.

The seller also negotiated to have access to the business for inspection of its operations within 24 hours after requesting it to the buyer.

This kind of request can be a smart move for a seller to do in an earn out situation to see what is really going on with the business. Since an earn out really does depend on the continued success of the business to be effective (usually), it can be wise for the seller to log in here and there and offer their expert advice to the new owner over the period of the earn out.

The business is marked sold, and the seller has exited their business.

In this case, our Business Advisor could literally tell the seller, “Congratulations – you’re about to be a millionaire!”

The Migration of a Seven Figure Online Business

After negotiations, migration is the next key portion of selling ANY online business.

If you can’t successfully transfer the business, then everything you have done has no point.

This is why we have a migrations team in place. Our migrations team has standard operating procedures on how to migrate online businesses, but they also are trained to handle unique issues that can pop up during the migration period.

It is only AFTER the successful completion of the migration and an inspection period by the buyer that the funds are released to the seller and the deal is truly done.

In this case, the majority of the migration was fairly straight forward in that the seller was also including their Seller Central Account. When a Seller Central Account is included with the sale of an Amazon FBA business, the major action of the migration is for the seller to create a new user for the buyer within the account, then give the buyer administrative control.

From there, the buyer changes all the pertinent information within the account such as:

• Tax information
• Bank account information
• Credit card information

At this point, you might be wondering what happens if you already own a Seller Central Account? After all, isn’t Amazon’s policy that you can only have one Seller Central Account?

At the time of writing this, that is true. However, also at the time of writing this, you can simply reach out to Amazon with a statement similar to this:

“I wish to apply for an exception to the one seller account policy. I have a second business and I need to keep them separate for tax & legal purposes as instructed by my accountant.”

This style of email alerts Amazon of your needs and is usually accepted with approval. This is a pretty reasonable request, so it is unlikely they would deny you.

With the Seller Central Account transferred successfully, the migration of the business was over and the seller was paid out the initial $850,000 with the earn out period starting.

A Good Tip for Sellers

The best time to start becoming a buyer of online businesses is when you sell an online business. You will have a measure of liquidity which you can leave on file with us, giving yourself more leverage when it comes to deal structuring.

For example, once this seller received their funds, they decided to leave $52k on file with us for future business acquisitions. After all, they were selling the business in the first place to get the working capital needed to build up new and more diversified businesses.

Keeping credit on file with us can be crucial in beating the wire race and making sure you get the exact business that meets your criteria before someone else snatches it up.

If you’re looking to diversify by selling your Amazon FBA business, then right now is a great time.

Buyers are Hungry for Amazon FBA Businesses

Back when I wrote this data driven analysis of Amazon FBA businesses and up to today, it really is still a buyer’s market for Amazon FBA businesses. The average sales price was right around a 20 multiple, similar to content sites monetized through affiliate marketing and Adsense back when those sites first came onto marketplaces wowing investors.

Now, that pendulum is starting to swing in a big way. We will be updating that piece of content with a follow up soon so you can see all the data, but it is worth knowing that multiples are going up and right now is the best time we’ve ever seen to sell one of these businesses.

Buyers love Amazon FBA businesses for a few reasons:

• They are easier to manage than traditional ecommerce
• They can often rely purely on Amazon organic traffic mixed in with some basic Amazon paid traffic
• These business have real, tangible products rather than something more nebulous like a hundred articles on a content site that has no real physical assets
• A good Amazon FBA business can grow far beyond just Amazon, opening up options to build real brands and doing multichannel selling – including selling in traditional brick and mortar stores like Home Depot, Walmart, and boutique shops

All of these things make purchasing an Amazon FBA business an extremely attractive idea.

If you are an Amazon FBA owner and you’ve been growing your business for the last few years, then now is a great time to make an exit.

This was the first million+ listing we have ever sold on our marketplace, but it is certainly not our last. We had another million dollar Amazon FBA business recently go live on our marketplace after all, and more are in the pipeline.

Are you ready to make your big exit and follow in the steps of this seller?

The next step is to click here to submit your business to our vetting process and get your listing live so we can start marketing your business to our lists. They are filled with thousands of buyers, many looking exactly for what you have.

We’ll meet you on the other side.

Photo credit: AndrewDemenyuk