When we talk about What We Do at Alpha Rock Capital (buying, optimizing and growing Fulfillment by Amazon businesses), a question sometimes comes to our interlocutor’s brain: Why do we buy FBA business instead of starting them? In the following paragraphs, I will answer that question from ARC’s perspective while also giving an answer that will probably help decide what the best course of action will be for you.
We let other people play some sort of lottery with uncertain expected returns and high volatility. Then, out of all those lottery tickets, we just buy the winning ones, and we do so for a considerably low price (low SDE multiple). – Vedast Sanxis.
Sounds good, doesn’t it? But why would anyone sell a profitable business?
Well, people will sell profitable businesses for several reasons. Some of them may think they can build a new one from scratch, to repeat the “exit” process. Others just don’t have enough liquidity to handle the capital requirements of a business that keeps growing. And others are just happy walking away with a nice payout for what in most cases is a small initial investment.
This is the way we see buying FBA businesses at Alpha Rock Capital, but let’s explore both options now, buying and starting one from the scratch.
Is There a Clear Winner Between Buying and Starting an FBA?
According to Quora, it depends. Yes, I was also surprised to find this topic to be relevant to the point that someone was asking about it in Quora of all places.
Quora’s user question was “What is a better investment, buying an FBA business or starting one from scratch?” and, unsurprisingly, most people were unsure and their answers were on the lines of “it depends”.
But does it really?
I think there is a little truth in the fact that there is no clear winner in all situations, as I will explain later. But also a lot of the reasoning behind that answer in a site like Quora is that leaving an open answer like that makes you, by default, right, which is something very useful for Quora’s users who want to gain authority, but useless to us at Alpha Rock Capital.
Thus, in order to answer this question for our company, readers and potential investors, I am going to take a particular approach. First I will consider what it takes to start a new FBA Business, and explore the situations in which this is the right or only option for you. Then I will discuss the problems that can arise in those situations and I will finally explain why for us, buying is the clear winner.
When Is Starting a FBA Business the Best (or Only) Option?
There are times when what we think is clearly the best option, buying an FBA business, may not be possible or, even less often, recommended. Those situations we identified are quite particular and we, at Alpha Rock Capital, provide the ground for at least one of them not being relevant anymore.
But let’s not get too ahead of ourselves and take a look first at what it takes to start a FBA Business from scratch. And then we will study both options: when you start an FBA because you cannot buy one, and when you start it because buying one would not be right.
What Do You Need to Start an FBA Business?
Starting an FBA Business from scratch means you are going to have to take a lot of things into consideration and work really hard to make sure there are no holes in your business plan.
While the goal of this article is not to guide you in the process of creating a FBA business, I can definitely list here some of the challenges you will have to face before your endeavour is a reality:
- You will need a product, or a series of products, you consider will be appealing to a certain market.
- You will have to find someone that can manufacture that product for you.
- You will have to find someone that can ship that product to the Amazon warehouse that will be holding the delivery of your product once sold.
- You will have to study the market, see if there are competitors, and if you can actually beat them (with quality, price, advertising, etc.)
- You will have to make sure that the product is profitable, at least on paper. Calculate the costs involved, how much you expect each unit to sell for and how many units you expect to sell.
- You will need to have enough money to purchase stock and make a good estimate of how much of it you should move to Amazon’s warehouse to maximize turnover.
This list is definitely not exhaustive, but it can be quite exhausting, considering there is absolutely no guarantee that after doing all this, you will have a winning product, a winning FBA store.
So who, in their right minds, would start a FBA business when they could buy one instead and have someone else already come up with solutions to all these problems, leaving you room just to improve them if necessary?
As I said earlier, there are two main reasons we identified.
You Start an FBA Business Because You Cannot Buy One
Buying a profitable FBA business is, in most cases, going to be more expensive than starting a new one. You are not only buying inventory, processes and hiring the people already involved, if any, but you are also going to pay a multiple of how much that business has been making on average per month (before salaries) that is usually around 28 times for small businesses.
And sometimes, that entry barrier to buy a FBA business is too high. For example, a business that has been making $1,500 a month before salaries and has $10,000 in inventory would cost you already around $52,000. And you will rarely see a business smaller than that for sale.
So, for someone with just a few thousand dollars, starting a new business becomes the only option.
You Start an FBA Business Because Buying One Would Not Be Right
The second scenario we spotted when buying a new business is not the right option is a rarer one, but we wanted to acknowledge it to make sure the article wasn’t incomplete.
When you estimate that you are able to achieve higher returns by launching products.
As we saw before, it is very complicated to find great opportunities. You wouldn’t just need a proven system capable of identifying whether to start selling a specific product, you also need enough capital (and patience) to withstand the higher volatility that this strategy requires.
And that’s about it, at least in our view. You either don’t have enough money to buy a whole FBA business or you are capable of achieving even higher returns by releasing your own products. Other than that, buying is the right way to go.
Even if Starting an FBA Was the Right Thing to Do, This Could Happen
And what tilts things even more towards that affirmation is that even in the two cases where starting an FBA was the right thing to do, a lot of things could still go wrong.
Entry-level competition on FBA business is harder than ever, with established businesses and brands having a clear advantage. Your innovative idea could die swimming on the lower pages of Amazon rankings, where no one sees it.
Why Buying FBA Businesses Is the Right Option for Us
The factor revolving around starting an FBA business that I mentioned in the previous section is definitely something that we had very present when we first decided to buy Fulfillment by Amazon businesses.
And there were many others, like time. Sometimes an FBA business will take months, or even a couple of years, until it becomes clearly profitable, with a margin worth talking about. It could even start by having losses since you may not be aware of the stock you need, demand is unclear, there is no brand awareness, etc.
If you buy an FBA business when it has already proven to be successful, you will have spared those years of uncertainty and struggles.
In most cases a seller will try to sell when the business is performing best, to increase both SDE and selling multiple (there could also be times when a seller predicts a trend downwards and that’s when doing proper due diligence comes into play).
You are getting a clear head start, with even the chance to have a brand that is established and almost sells automatically. You also will possibly have the support of the previous owner, at least in the beginning stage, to make sure everything is understood and continues smoothly.
And all of this is without taking into account the fact that you should, as we do at ARC, try to improve every single section of the business you just acquired.
Thanks to Alpha Rock Capital, You Can Be an FBA Buyer Too
As I mentioned earlier in this article, some people may have to start an FBA Business from zero because buying one is not possible for them. This may also be your situation.
- You have savings but the capital is not enough for an investment that is usually no less than 40-50 thousand dollars.
- Or you may have a bit more money, enough to buy a lower tier FBA business, but that would be putting all your eggs in one basket, increasing dramatically your volatility and risk of ruin.
- You could have started an FBA business but you don’t have a product idea, the contacts, or the skills necessary to be confident of your business success.
Investing in Alpha Rock Capital will get rid of all of those problems. Currently, for as low as $25,000 you could buy company shares in our next capital increase round and be the co-owner of not one, but several profitable FBA businesses in diversified niches and have a team of extremely talented people work towards a common goal: making the most out of your investment.
And you would really not have to do anything yourself, it would be 100% passive for you. You will not have to manage the businesses, keep up with all the constant changes that occur in this environment and worry about whether you are making the right decisions to grow them. That is our job.
When considering why we buy FBA Businesses instead of starting new ones, the answer comes easily and naturally. We consider that buying businesses and improving them delivers the highest expected returns, and it is a more certain investment than launching products. We have set up procedures and operations that allow us to buy, optimize and grow Fulfillment by Amazon businesses that were already lottery winners.
Would you like to get a ticket yourself? Reach out to us on our contact form and forget about the burdens and uncertainties of starting a business on your own!