Just over 3 years ago, Coran and his wife left Australia and their corporate jobs and began traveling. They had online businesses at the time and soon began buying and selling websites to fund their traveling. He liked the process of building a company to sell it rather than building to for the income. He struggled to keep his attention on one thing.
For this interview Coran create a package of tools for Amazing FBA listeners at http://thefbabroker.com/amazing. So do check that out.
About a year ago he got into the brokerage side of things after people began asking him to review and vet websites that were for sale and help negotiate the sales. As of about a month ago he has been dealing exclusively with FBA businesses.
Most people do this backwards. They build up a business and it’s making money and then they decide they want to sell it. Maybe they want to focus on something else, maybe they want to cash out and pay off the investment. That’s a terrible time to sell. Odds are, you won’t be structured in a way that is attractive to sellers. The first thing you need to think about is who you are going to sell to and what they are looking for.
Let’s say you have a private label business that’s been operation for an year and half to two years. So you have a bit of history and you beginning to think about exiting. Reasons that Coran decided to sell his companies were that he might need the cash flow for something else or he was getting bored with the business.
Coran breaks Amazon businesses down into three types, retail arbitrage/wholesaling, private label, and unique or proprietary.
For retail arbitrage/wholesaling, unless you have exclusive rights to selling on Amazon, the chances of your income being taken away is very high. What an investor is looking for is a return on investment. They will pay a certain multiple for a business with the intention of getting that money back first. So with wholesaling, for almost all cases, your only asset is your inventory, so if you lose your means of selling it, you’re just stuck with a load of stock.
Private label is the most popular way to sell on Amazon. There is a barrier of entry so your products have a shelf life of 6-12 months. That means that if you have one product that you haven’t differentiated, you just stuck your label on a product and built the brand, it’s not super defensible. So it will sell at a lower multiple. You can definitely sell these companies, you just have to put a little work into it.
Unique or proprietary products are much more defensible. You may have taken negative comments on your products and tweaked them. So you might have a unique mold or something that makes your product unique, that will sell at a higher multiple. The more you can make a private label product better or unique, the better it will be when it comes time to sell.
For example, Greg Mercer at Jungle Scout ran a case study where he made his chop sticks a little longer. While not super defensible, it is unique, and if you build your brand around that it sets you up in a better position.
There is a debate among brokers as to what the minimum amount of time is. For Coran, a year is still young. You certainly want 12 months of history. There are a few reasons for this. One, you want to see if there is any seasonality involved. An investor wants to work out their return on the longest history possible. There is also something to be said for a product that takes time to gain traction. Seems a bit counter-intuitive but an investor will look at a product and think, “What’s to stop me from doing this myself?”, so a product that takes time to get established show the investor that this company is worth buying because it will take that much more time to get it going if he/she wanted to start from scratch.
Most importantly, when it come to age of a company, you want the company to be established. For online companies, that typically means 3 years. Compared to offline, like brick and mortar businesses, 10 years is a long time.
Even if you’re not thinking of selling your company soon, now is the time to start preparing for it. A year, year and a half out, you want to make sure your products are defensible and that you have products that will add value to your company when it comes time to sell.
Coran is working on two businesses, trying to get them ready to be listed. One business is completely private labeled, very little in the way of differentiation. It’s just brand. He has 20 products. That business is attractive because of the wide range of products. Out of the 20 products, most of the income comes from three products. It is all on Amazon and bringing in a million in sales a year.
The other company has only one product that is unique. It’s is their own formulation and their own brand. 70% of their income is coming from Amazon. They also sell on Amazon US and Amazon UK. 30% of their income is coming from their Shopify store. So they have several layers of defensibility.
The gold standard, according to Coran, is a third company he is working with. They have 10+ uniquely formulated products. Multiple sales channel. 70% through their e-commerce channel, 30% on Amazon.
The less reliant you are on one thing, the better. Multiple products, multiple sales channels, multiple traffic sources. So if you have a private label and don’t want to focus on unique products, focus on finding sales channels outside Amazon. That way, if one thing takes a hit you have hedged your bets.
You need to look at it from an investors perspective, they are looking for a return on investment (ROI). Their in for $1,000,000 and their making $200,000 a year on it, that’s the ROI. They way we value Amazon businesses is net profit. The best way to look at this is: what is your annual net profit. If your business has been around a year and making decent profit, that’s not as attractive to these kinds of buyers. The important thing to consider I: what is your profit right now? When working with clients, Coran finds that most people over-estimate their profits. Oftentimes it’s as much as half of what they thought it was once they put in their numbers. If you want to find out what your business is worth, use Coran’s tool for that.
The longer your business has been around, the better
The more profit you’re bringing in, the more attractive your business will be
Diversified traffic sources
The strong the competition, the more wary investors will be
Profit and Loss Template – Use this spreadsheet to help determine how much money your are actually making.
It starts with your total sales and revenue. From there it takes out the cost of sales. This is your Amazon fees, packaging, shipping, etc. All the costs associated with selling that item. Then it takes your operational costs out. The is refunds, ads, web hosting, salaries and other drawings, etc. All the costs that are associated with running your business. In the end you’re left with your net revenue.
In regards to salaries and other drawing from your business, when it comes to selling the business you can add that back into your profits. The reason is that your investor might not want to draw anything from the business. So you want to present them with the profits including what you are drawing from it. Then they can decide what they want from it. If they are looking for an income, they can look at the net revenue and determine how much they can draw. If they are looking for growth, they might want to leave everything in and use that to grow the company.
If you don’t add back your salary, it makes it much more difficult for them to find it. You want to make it as easy as possible for your buyer.