Explaining FBA: FBA is a service provided by Amazon to help businesses grow. FBA stands for Fulfilment by Amazon. Businesses send their products to Amazon’s fulfilment centers, then when a purchase is made by an online customer, Amazon takes care of the rest – this includes receiving, packing, shipping, returns, and customer service. Your job is to handle the sales and ensure Amazon is always stocked with your products.
Selling physical products online utilizing Amazon’s storage and fulfilment centers is an approach that’s been in operation for almost 16-years, and in recent years we’ve seen this service accelerated by Amazon. As an incentive for using FBA, Amazon is now allowing its marketplace sellers access to Amazon Prime.
Many FBA businesses are now starting to mature, which has led to a huge amount of interest by investors looking for potential investment opportunities. In this post, we’ll look at how an FBA business can be an exciting and tenable investment opportunity for investors. We’ll also look at some factors investors should be aware of when considering purchasing an Amazon FBA business.
Traditional investors understand that investing in E-commerce brands built and grown on platforms like eBay and Amazon can be financially rewarding and that successful Amazon FBA businesses are very much in demand. We’ll also explore why FBA businesses are in high demand, if this is impacting the market (and how), and what’s in store for the future.
How Difficult is it to Buy an Amazon FBA Business or Seller Account
More and more investors are discovering that Amazon FBA businesses can be bought and sold, and recently we’ve seen Amazon approving a lot more sells of seller accounts. The transfer process is actually very simple. When an Amazon account has been sold, to complete the transfer of ownership, certain information on the seller central account must be changed. The buyer simply updates the new information. Alternatively, the buyer may prefer that the seller enters the new data for them. Either way, the seller will provide the buyer with login information and the account can be updated accordingly.
Important Factors to Consider when Evaluating an Amazon FBA Business for Sale
There are several factors to consider before finalizing the purchase of an Amazon storefront.
No. 1: Where do their Products come from?
The type of business can influence the value of an Amazon FBA business, so it’s important to note there are three main types.
Private Label: This is typically the most valuable business type. It’s where you own your brand, but shoppers can also purchase the same product elsewhere.
Reseller or Amazon Retail Arbitrage: With this type of Amazon business, a reseller purchases wholesale products and receives a margin for selling the products on Amazon.
Proprietary Products: This means only the seller can sell a particular item or group of items, this business is unique to the seller, so it always stands out and stays lucrative to the buyer.
No. 2: Age of the Business and Sales History
Whether selling or purchasing, the age of the business will determine the ultimate value of the business. For example, a business that’s been running for less than a year will receive lower offers than a business that’s been running for (say) more than three years.
Profits and Losses: Examining profits and losses should be your first criteria. Check the financial overview, look for inconsistencies, and examine the net profits of the business. This should give you a good indication of growth, seasonal opportunities, and sales trends.
Account Health: Does this business have good standing in the marketplace? Amazon sellers are expected to meet very specific criteria, and failure to comply will result in account suspension.
No. 3: Look for the Following Metrics:
Pre-Fulfilment Cancelation Rate: 2.5%
Order Defect Rate: below > 1%
Valid Tracking Rate: <95%
Invoice Defect Rate: > 5%
Late Shipment Rate: > 4%
Inventory Performance Index: > 350
Also note service-related metrics, which include contact response time, customer service dissatisfaction, and seller feedback. Customer reviews are a good sign of an account’s health. Positive reviews are extremely valuable – they mean that this business has earned the trust of its customers.
And finally, check the Conversion Rate. It’s helpful to know how many views a certain product listing has attracted and/or is still attracting.
No. 4: Suppliers
Perhaps the most critical aspect of any Amazon business is the suppliers, who play a major role in the success of a business. What agreements does the seller have with their suppliers? Is this an exclusive relationship? Check the terms and any unforeseen costs.
The following criteria should be included in every agreement –
Lead times
Quality price breaks
Material costs
Manufacturing costs
Manufacturing standards
We already know that entrepreneurs prefer purchasing established Amazon businesses rather than starting their own business from scratch. They appreciate the value of the groundwork that’s already been laid down for them by someone else.
Let's explore some legal aspects of buying an FBA business in the next chapter.