When it comes to buying Amazon FBA businesses, we at Alpha Rock Capital are selective and follow a strict due diligence process. This process, however, starts, amongst other key points, with a simple premise: is the business price within our desired price target? Let us tell you why we choose the $100K to $1M price range for FBA business.
Why Do We Choose the $100K to $1M Range of FBAs
This is something that investors often ask us, why this acquisitions scope, that seems to be avoided by other buyers, despite being the range that incorporates the highest percentage of Amazon FBA business?
When we decided to acquire business that roughly ranged between those price tags, our decision was based on four reasons:
- They usually cost less in terms of SDE multiple.
- They tend to be more improvable than bigger business.
- It allows us to build a more diversified portfolio.
- We can buy those businesses quicker.
We will now dig deeper into each one of those reasons, to understand what we mean with each of them.
Business in the $100K to $1M Range are Cheaper
Of course when we say this, we are not talking about the obvious fact that an Amazon FBA Business worth $100,000 will be cheaper than one worth $10,000,000. We talk about affordability in terms of the SDE multiple that we will have to pay to purchase the business.
What does SDE stand for
SDE, Seller’s Discretionary Earnings, are, as we explained in What We Do, profits before salaries, interest, depreciation, amortization and taxes.
Even if SDE is measured annually, when it comes to SDE multiple to value an FBA business, we usually refer to the average monthly SDE (annual divided by twelve). Then, if a business has a multiple of 36, it means that its selling price will be 36 times the average monthly SDE (or three times the annual).
What is the common SDE multiple range
In general, with very few exceptions, that happen mostly in Amazon FBA businesses with price tags of several million dollars, the monthly SDE multiple for most FBAs being sold range between 24 and 36. Essentially two to three years of profits.
There are several factors that determine, for a given FBA business, whether its multiple will be closer to 24 or 36.
Things like strength of the product and label, opportunities of growth, variety of SKUs, all come into consideration, but also the actual size of the business is a factor, as you will see in the next section.
What are the average SDE multiples of FBA business based on price
The best way to get an idea of the average SDE multiples of FBA businesses based on price is to read the 2019 year in review article on The FBA Broker website.
There, we can see that in 2019, businesses in the $100K to $500 had an average yearly SDE multiple of 2.1 (25 monthly SDE), businesses in the $500K to $1M range had a multiple of 3.1 (37 monthly SDE), businesses between $1M and $5M were at 3.8 (46 monthly SDE) and finally businesses valued over $5M had a multiple of 4.9 (59 monthly SDE).
We can confirm this trend, even if with different multiples in each range, with a quick look at Empire Flippers, one of the most popular marketplaces for online businesses (including Amazon FBA).
As of the time of writing this article (late August 2020) businesses over $1,000,000 in selling price average an SDE multiple of 32, while those in the $100,000 to $1,000,000 range average 29 SDE of asking price.
This is not as big of a difference as the one stated on The FBA Broker report, but it is still considerable.
Even more so if we keep in mind the fact that a smaller multiple tends to make a business less appealing to bigger investing companies. This way we don’t face competition when acquiring more assets.
At the end of the day, paying a lower multiple for our FBA business means we are getting more SDE with the same money.
Business in the $100K to $1M Range are More Improvable
A surprising amount of Amazon FBA businesses start as solopreneur ventures. Someone has an idea of a product, finds a way to produce it and starts selling it with the help of Fulfillment by Amazon on the side.
Suddenly that business grows and the owner starts working on it full time. Eventually it reaches a point where they decide is time to exit the business and move to some other endeavour.
The decision can be personal or professional, that’s irrelevant to us now. The point is, those businesses have had very little tweaking and improvement of the operations, since no matter how competent a person is, it’s only one person after all.
When a business has become so big it is worth several million dollars, chances are much higher that there are employees and processes behind them, when a business is within the $100K to $1M range, we are still in the early stages of development.
That gives these types of businesses’ an extreme potential of improvement.
At Alpha Rock Capital we have worked to develop processes for our operations team that make the most out of every aspect of Amazon FBA businesses and we are ready to implement those improvements in every new business we acquire.
Because the potential to improve those newly acquired businesses is actually this high, we can say that we are paying an even smaller SDE multiple for the businesses than what the actual price tag may suggest.
Again, we are getting more SDE with the same money.
Buying Business in the $100K to $1M Range Lets Us Diversify More
The third reason we choose Amazon FBA business in the $100K to $1M price range is that this allows us to diversify our portfolio of businesses, with the consequent lower volatility and risk of ruin.
This point is very easy to understand. Imagine that we wanted to start from scratch at Alpha Rock Capital. That we had already all the structure, operations and processes we have right now but owned no Amazon FBA businesses.
If we had an initial capital of $10,000,000, what would make our portfolio more diverse and robust, to acquire two businesses with a price tag of $5M each in two independent niches or to acquire twenty businesses with an average price of $500K, all of which sell different kinds of products?
Of course there are many factors that we would have to take into consideration to make a final decision, but it’s not hard to see that the chances of your investment failing when you have twenty different businesses are much lower than when you rely on the success of just two of them.
Since we are always focused in the long term at Alpha Rock Capital, making sure we are diversified and thus robust is an essential part of the way we operate. Acquiring businesses in the $100K to $1M range is, at the moment, the best way to achieve those long term goals.
We Can Buy Businesses in the $100K to $1M Range Quicker
Our last reason to buy businesses in the $100K to $1M is a matter of using our money efficiently.
Whether we have money due to a new investment round or thanks to our current businesses’ earnings, it is obvious to see it will always be quicker to buy a cheaper business than a more expensive one.
If we found ourselves with $500K in our bank account, and we were only looking at $1M+ businesses, we would have that money waiting, not being used, and that is the least efficient thing we can do with money: nothing.
Focusing on cheaper businesses means our money more often than not is being spent and thus more growth is on the way.
We hope we have made clear to you why we choose the $100K – $1M range of Amazon FBA businesses when it comes to acquiring new assets at Alpha Rock Capital.
Does this sound appealing to you? Would you like this type of resilient investment in your portfolio? Make sure to reach out to us via our Contact Us form and we will keep you posted on our next capital raise.
And if you happen to own an Amazon FBA business within the $100K to $1M price range and are looking for potential buyers, please reach out to us via “sell your business”.
Let’s welcome the new era of digital investments together!