15 Mar How to select the right metrics for your Amazon FBA Business
If you are thinking about selling or obtaining financing for your business, you must know that a great number of factors are taken into account by investors to evaluate an Amazon FBA business, as well as Boopos specific approach to them. To calculate how much you can obtain from us, we apply a multiple of up to 2x to a certain profit metric, to yield the maximum cash out amount.
In this post we are going to focus on that profit metric, how it is calculated and adjusted to your Amazon FBA and what’s the rationale behind it.
Going down your Amazon FBA Business Profit & Loss Statement
Just like traded companies are usually measured on net income or EBITDA, the most commonly used metric for assessing Amazon FBA businesses is Seller’s Discretionary Earnings.
Imagine your FBA business sells 1,000 units of your only SKU/ASIN every month. Each of them sells for a $100 unit price (let’s forget about sales tax for the sake of simplicity here). Here’s a first financial metric we can build: your monthly revenue is $100 x 1,000 = $100,000.
Now let’s think costs. Every time you ship a unit, you pay Amazon a 15% selling fee and around $10 for fulfillment. That means that you direct cost of selling on Amazon is $15 + $10 = $25; times 1,000 units that would make $25,000/month. In addition to that, your “cost of goods sold” (i.e. the comprehensive price you pay for every item sold) is $25.
That means you are spending $25,000 per month in products. Then your gross profit for the month would be as follows:
Gross Profit = Revenue – Direct Cost = $100,000 – $25,000 – $25,000 = $50,000
In real life, there may be additional complexities that will also be taken into account when analyzing your Amazon FBA Business:
· There will be a cost associated with refunds
· You may have your own warehouse and shipping costs besides what Amazon charges you
· You may have inventory shrinkage losses
· Amazon may charge you for stalled inventory
· You may have extra packaging costs
Now, below Gross Profit you will probably have a breadth of expenses related to the business. PPC marketing will most likely be a big item, but then you have assistants and contractors, accountants and tax advisors, tools and software, etc. All these have to be subtracted to get to an Operating Profit (this is similar to what the bigger companies report as EBIT). Say you spend $20,000/month in all of the above. Then your Operating Profit would add to:
Operating Profit = Gross Profit – Overhead Costs = $50,000 – $20,000 = $30,000
Then come the add backs. While managing your Amazon FBA business, you may charge costs that are not strictly needed. Imagine that, out of the $20,000 overhead costs, you charged a $5,000 management fee related to your own financial needs.
If that is the case, then you would expect acquirers to add back the amount to get to the valuation metric. Investors typically don’t like this happening and will push back on it, because it is hard to tell “needed” from “not needed” from an outside perspective, and will usually favor “clean” businesses with no add backs or a minimum amount of them. So, this will bring us to the final Sellers’ Discretionary Earnings metric:
SDE = Operating Profit + Add Backs = $30,000 + $5,000 = $35,000
Please note that this common metric is actually a little bit incomplete. Say you are spending 20 hours per week in managing this business. If an investor acquires it, then he would need to allocate a manager spending 50% of his monthly time, therefore incurring in salary costs.
So, the real profit should subtract half the monthly salary of a manager. This kind of math is taken into account in more complex businesses that require extensive management, although you as an Amazon FBA seller could argue that was already factored in the multiple applied.
How to choose the right period of time of your Amazon FBA Business
The $35,000 SDE monthly metric before is a photograph of your trading for a very short period of time. Given that Amazon FBA businesses are usually seasonal, assessing under such a small window will almost always be unfair or misleading.
The standard is to use trailing twelve months (TTM) to account for all seasonal changes throughout the year. If your Amazon FBA business has been growing faster very recently, you may feel that what happened, say, nine months ago, does not reflect the current reality (same reasoning would apply in the opposite direction to businesses recently trading down).
If you have decided you want to obtain funding from/for your Amazon FBA business and you want to do your own math about what you can expect, knowing all of this information to select the right metrics for your Amazon FBA Business is the first step.
At Boopos we have designed our own models to quantify all these factors and accurately predict what the maximum amount we can provide is, reflecting both the potential of the Amazon FBA business and the amount we can pay to receive a reasonable risk-adjusted cost of capital going forward. Contact us for more information.