[Case Study] Valuing a $2,124,893 Amazon FBA
May 7, 2020
The bigger you get, the higher the stakes.
No statement is truer than for a $2,124,893 business.
The bigger a business gets, the finer the margins for error. The owner has more and more skin in the game. They’ve also likely put up a lot more capital to build the business and worked more hours to grow it.
When you’ve worked hard and invested so much to become one of the biggest players in your niche, you want to know that when you sell, you’ll get the best possible reward.
When valuing a multi-million dollar business, the differences in price valuations aren’t $10K, $20K, or even $50K. The differences can be as high as $100K, $200K, $500K, or even more.
This is where having a broker value your business really makes a huge difference. They act as an impartial party who can help you get the payout you deserve without scaring off buyers with a ludicrous valuation.
This scenario is exactly what we’re going to cover today. We’re going to talk about how this business was valued and then revalued four more times to get to the final sale price. And how the seller ended up with $500,000 more than they initially expected.
First, let’s learn a bit about the business so we can get an understanding of the overall deal.
Give a Stoic Five Years and He’ll Build a 7-Figure Business
The seller had been in the eCommerce game since 2002. When they launched their business in 2014, they’d had 12 years’ experience. They used that experience to slowly climb to the top division of the niche.
They attributed their previous success to their stoic approach to business. In natural stoic fashion, the product they sold in the outdoors niche allowed customers to sit back and reflect on days gone by.
Some key facts about the business that were considered in the valuation process:
- The business had six products with 19 SKU’s color/size variants). The main SKU had 1,588 reviews at an average of 4.5-stars. The seller had developed a high-quality product, which went hand-in-hand with building a long-term business.
- All products were sold through FBA. The majority of the inventory was stored in Amazon warehouses. Some inventory was kept at a 3PL warehouse, which had better monthly storage prices than Amazon.
- They also had a supporting Shopify store that made a small number of sales.
- The business was mostly automated, so they only worked five hours per week on it.
- The work to maintain the business was carried out by a PPC manager and a customer service VA. They used Vendor Express to run Amazon paid ads.
Despite having a solid business with high-quality popular products, the business didn’t quite dominate the niche. Sometimes buyers look for businesses in this position as it gives them leverage to take it to the top and make a hearty return.
With all of this in mind, let’s break down the first valuation of the business.
How the Business was Valued
Before starting the valuation, we carried out the initial vetting process to investigate the following areas and see if the business was a good fit for our marketplace:
- Revenue
- Expenses
- Traffic sources
- Customer base demographics
- The legitimacy of both the seller and the business
Once we’d verified that all the figures and accounts were legitimate, we started the valuation process. We dug deeper into the logistics of the business, researching everything related to shipping and storing inventory; data management, including external platforms used; the Amazon Seller Central account; assets to be included in the sale; and information about the product.
We wanted to understand the business inside-out, so we could make sure the seller’s reward reflected the business’s actual worth and that the buyer paid a fair price – all valuation factors considered.
Of course, each valuation process is unique, so let’s get into how the process looked for this business.
Choosing ‘Add-Backs’
When creating P&L reports, we have a data category we call ‘add-backs’.
These are non-operating expenses, so the buyer won’t have to pay them – unless they want to. Examples of these expenses could include when a seller takes a salary, or hires a writer or photographer for a one-off piece of content. This allows the buyer to see the actual expenses associated with the operations of the business and to make judgment calls about necessary expenses.
Classifying expenses as add-backs isn’t always cut-and-dry. It takes some assessment from our vetting team. For this business, there were a couple expenses our vetting team deliberated over with the client.
The seller had a contracted worker handling Amazon ads – a PPC manager. Although the advertising was an integral part of maintaining the business, the PPC manager wasn’t part of the sale. As in, they may or may not have continued working with the business after the sale. The buyer could choose whether to negotiate to keep them on, or they could use their own PPC management staff or software.
The PPC manager was declared an add-back, along with a Mailchimp account, a domain, the product quality inspection expenses, and a US virtual address.
How Past Shipping Costs Affected What COGS We Used
We initially suggested taking the most recent invoices for the COGS calculation. However, the seller wanted to use a weighted average calculation for the past few years. We felt this wouldn’t be an accurate estimate, as the previous year’s (2017) COGS were significantly lower than those of 2018. The seller explained that in 2018 their freight forwarder company had increased its prices. They felt it wouldn’t be a fair reflection of the actual shipping costs to only use the average for 2018.
Since we knew we’d see proof that their shipping costs would drop back to normal levels in 2019, as they had renegotiated the prices with the freight forwarder, we agreed to adjust the COGS formula for the seller. We believed this would give the most accurate reflection of the state of the business.
Interpreting Amazon Sales Reports
The reports available in the seller’s Amazon Seller Central account seemed to contain some discrepancies. This was because the data pulled for each report was slightly different based on the type of report that was generated.
Comparison to payment reports are examples of where business reports can seem different as they don’t take into account cancelled orders, and business reports do. Settlement reports include Amazon fees, whereas business reports don’t.
This is why it’s important to have a good understanding of how to use the reports to extract figures for the most accurate evaluation of the business income and expenditure.
After extensive examination into the various reports Amazon provides, our Migrations Supervisor George Sanderson determined that the payment reports would show the most accurate reflection of the state of this business.
Determining the Initial Multiples
When the seller first submitted their business for listing, they requested we set a multiple of 38x.
We looked at our marketplace data and found that for the previous quarter, the average multiple for businesses of the same size was 34x. The average multiple for businesses the same size on the marketplace at that moment was 35.5x.
We decided to set the multiple at 39x based on the expectation that the business would experience its highest ever sales. Which evidently came true.
After getting all of the correct data and making sure it was interpreted accurately, we came to the first valuation figure of $1,679,820.40.
Valuation Explosion
Then things changed.
The spring months were always the business’ best season, but the sales had never been so high.
This meant the P&L’s needed to be updated along with the valuation figure.
Because the business experienced its healthiest March ever, we revalued it to $1,764,937.74.
But it didn’t stop there.
The valuation process is iterative, especially for a business this size. We were repeatedly reviewing financial data to ensure we had categorized all the data correctly so it was as accurate as possible. For example, in the P&L’s, we initially used the term “Manufacturing weighted average” for the manufacturing costs. The seller requested we change this term to “Manufacturing costs” because the costs to manufacture the products hadn’t changed since the business was created. An ‘average’ would give the impression there was a fluctuation in the data that needed to be averaged out.
These are the important distinctions that need to be made clear for the buyer, so they can fully understand the logistics of the business and not uncover something later that they weren’t aware of before the purchase.
After another clarifying round of updating the figures, the sales for April came in.
Again, another record month.
This boosted the valuation up to $1,997,943.87.
New Inventory Orders Added to the P&L
With new inventory orders, there was a change in the landing costs. Thus, the P&L documents had to be updated to reflect these new figures.
This change to the P&L was also significant, which affects the valuation figure. Improving the accuracy of the company’s financial statements gives the buyer an accurate picture of the business.
After the P&L was updated according to the addition of the May sales figures, which were continuing to rise, the value of the business shot up again to $2,408,259.42.
This was the final listing price for the business and what prospective buyers saw on our marketplace.
Onto the Sale Price
Within the first few days, there was an active potential buyer unlocking the listing and taking interest in the business.
While they were likely conducting their due diligence and looking further into the business, sales for June were climbing to the highest ever for that month. The business was exploding in growth. When July rolled around, the figures were in; the P&L was updated and so was the price: $2,688,166.43.
Before the price update, the number of active potential buyers was three. After the update, the number went up to six. A business improving in performance is often a desirable asset.
Negotiations continued between the prospective buyers and the seller. After four months of being on our marketplace, the business was sold at $2,124,893.00.
Next, the business had to be migrated over to the buyer and the money to the seller. No other online business broker has an entire team dedicated to this process. We have standardized the process, and our team has dealt with every issue you could imagine. We seek to protect both sellers and buyers and want everyone to win on every deal. Both parties definitely won here.
After a long, intricate, and thorough process, the business was successfully sold.
Takeaway & Conclusion
Selling a 7-figure business is an intricate process. If figures are incorrect or a stone is left unturned, then it can cause valuations to go too high or too low, along with a lot of other logistical issues.
With such high stakes, it’s best to have a broker act as an intermediary to prevent things from going awry. Through the whole process, the seller had a team working with them to get the most accurate valuation possible, arrange and oversee negotiations, and fulfill the sale. We were with the seller at every stage of the process.
If you want to find out how this process could look for your business, speak to one of our team members today on a free exit planning call.
