The Pitfalls of Selling your Amazon Business.


Scott Deetz on Selling your Amazon Business

  • How to get a premium valuation on your company when you sell
  • In your own mind understanding the concept of lifetime business value
  • Having run your business for a 3-4 years, what % of the money that you put in your pocket is comes from the entire time that you ran teh business and how much of that comes from when you sell the business
  • More than 50% of the money you put in your pocket comes from when you sell the business
  • That’s because you are continually re-investing in the business when you’re running the business
  • If more than half the money comes when you sell, how many hours are you committing to the sale of the business
  • Usually next to no time is spent on the selling side to sell the business

In Numbers this means

  • I’m an Amazon seller and I’m doing £100k in revenue per month and making 20%, $20k / month
  • Circa $250k a year
  • Not taking out that full $250k, probably $5k / month giving $100k per annum
  • Take out $100k / year for 4 years = $400k
  • That $250k business on multiples would get 2-4 times earnings.
  • Say 3 times x $250k per year gives $750k in total valuation for sale
  • So you get out $400k but your sale gave you $750k – a lot more

Timing selling your Amazon business

  • Once you understand what a buyer values you can time your exit correctly
  • Big three metrics
    • Profit % must be 20% min ideally 25-30%
    • Growth %, this varies and 20% growth is pretty flat growth in the eyes of a buyer
    • Size of earnings, higher multiple on your valuation the higher your earnings are

Time to Sell

  • Plan on 6-9 months for the sale to happen
  • Your growth rate needs to be continually increasing throughout that time period
  • Once the growth rate starts to slow then the multiples go down
  • You want to sell on the way to the top as the buyer wants to see the future profits
  • Not when you’re on the top as it’s too late and future profits will not be as high
  • You want authentic growth too – buyers are smart
  • Hollow calories – using ad spend to drive a bunch of revenue but not adding anything to the bottom line

Suspensions

  • A huge issue as it’s something you can’t control and it affects selling your Amazon business
  • If it hasn’t happened to you:
    • Think about selling when well because there can be outside factors that come in and make things not go well
    • Client with $4m in revenue making $800k per year
    • Valued at $3-5m depending
    • Got hit with account suspension and patent issue
    • This business is now down in value and will take time to build up again
  • When you get to a number that would be good to cash in – don’t be too optimistic and wait too long
  • If it’s your first time selling your business, think hard about getting that first one under your belt
  • It’s a big risk factor in these kind of businesses
  • Don’t think suspension makes your business not saleable, but needs to be explainable

Black or Grey Hat

  • If you’re doing things that are black or grey hat then a buyer is going to grade you on the business practices
  • Might be making more money today, but costing yourself money down the road
  • You might get suspended for many reasons that are explainable (unknown patent issue, competitor bad practice)
  • You will have dip in profitability and growth, so take the time to resolve and grow again
  • Get 6-12 months out from any issue to have recovered your financials
  • As long as you document what you did and have recovered from it then you should be okay
  • The pitfalls are that they don’t disclose to the buyer , when they find out they walk away
  • Or they try to recover too quickly

The 5 for 1 Mentality

  • If I can save a $1, I put it in my pocket and it’s worth a $1
  • Your value based on your previous 12 months earnings (Seller Discretionary Earnings) basically your profit and add back owner expenses
  • Have $100k making, valued at 3 x Seller Discretionary Earnings valued at $300k
  • If I saved $10k in the year before I sell, the $10k I put in my pocket but I increased the valuation by 3-4 and that $10k turns into $40k in the sale
  • In the year before Scott looks at how you can make that saving to maximise the profit without sacrificing growth
  • This makes a big difference to your sales price when selling your Amazon business

Multiples when selling your Amazon Business

  • When going to the Buyer table, you must understand the rules of the game in selling your Amazon business
  • Buyers are sophisticated and will use all means to beat down your price
  • We don’t buy based on future earnings, we only buy on historical earnings
  • It creates a mentality in the seller that it’s true and it’s not
  • Buyers only really care about future earnings as that’s the only profit they are going to get
  • Example is:
    • Trailing earnings is $500k and doing well
    • Buyer says they value at 3 x Historical earnings and value at $1.5m
    • But if you’re growing rapidly, then calculate the ‘buyers effective multiple’ the amount they paid divided by the earnings that they make in the year after they sell
  • Unless you show them what the potential of the business is, then the buyers just say they’ll pay on the historical rather than the future earnings and growth
  • Understand what your future profitability is, divide your future earnings by the price your asking and bring that to the table in the negotiations

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