Inside Thousands of FBA Deals: What Separates the Ones That Sold Well

Key takeaways

• If you plan to sell in the next 12 to 24 months, Greg's first step is a 30-minute call with a broker who has sold businesses like yours, not a conversation with buyers.
• Greg said FBA businesses typically sell at 2.5x to 4x annual SDE. Above 4x is rare, so ask whether a friend's 6x was measured on SDE or EBITDA.
• The most common mistake is overvaluing the business. His example: a seller earning $15,000 a month, with plans to double it, wanted $20 million.
• Declining revenue is the biggest negative for a valuation. Age helps (a business that is 15 years old tends to last), while stockouts and depending on one product raise risk.
• Start new marketing channels about 14 months before an exit. Most valuations look at a 12-month window, so keep experiments out of it.

Welcome and introductions

All right, what's happening? We are live this week's webinar session. Pretty cool one that we're going to jump into that we haven't talked about in a long while and slightly different format today where it's going to be more of a fireside conversation with one of the true experts in our space which I'm looking forward to. Yeah, August middle of August. Welcome everyone jumping in. Let me know where you're from. And any questions that you have. By the way, we have a poll that'll be live inside of streamyard today. So if you can take a second and click on the poll that'll be really helpful to us.

But let us know where you're coming in from and get ready to have your questions ready because I think you know this is a critical topic for everyone who has a brand, a product that is selling on Amazon or beyond. This is something that you really need to think about carefully and I've got a lot of opinions on it. So looking forward to it but before I ramble on for a whole while, let's start with Greg. Why don't you introduce yourself? I know you some of the audience here will know you but introduce yourself and the idea of Empire Flippers and we'll take it from there.

Yeah, John. Well, thanks for having me, man. It's good to be back on and hopefully can provide some value for your audience. I'm Greg Elfrink, head of marketing over at Empire Flippers and we're the largest curated marketplace and M&A firm when it comes to digitally native businesses. So I basically always joke I help an entrepreneur get rid of the business that they own so they can become very wealthy with a very big exit. So, we're a sell side and M&A intermediary, done over 25 M&A transactions, and we have a buyer network. I think it's at 12 billion in investable liquidity now.

It's It might be a little bit higher. But, a big buyer network and I think I think this is news since last time I was on, but we're at about 98 millionaires created at the moment of exit. So, just two more to go the hit the 100 mark.

Yeah, let's hopefully some of some of our listeners yeah will become the next two in that picture.

That'd be great.

Well, you know, usually it's you know, at least 24 months out, 12 to 24 months. So maybe not the people listening today. But,

If you're in the process, all good. But, yeah, you know, yeah, I always talk about it and it's very relatable, right? Obviously, you know, having a brand and selling it and looking for an exit and you know, an entrepreneur like myself creating SaaS technology and building that and at some point, you know, you know, exits are always things to think about, right? And you know, there's hundreds of stories out there of you know, people who've done it for the first time and you ask them, "Hey, oh, you why have you sold?" And they're like, "Oh, I had a chance to sell like 2 years ago and I never did it and I regret it." Or I sold and it was like the worst mistake I made.

Or hey, I sold and you know, they just killed the brand and you know, or I sold and you know, I look at the success I've had since, right? So, there's all these different stories and you know, many pathways that are available and timing is obviously clearly a critical thing and you thinking about that as the owner of a business and preparation for what you need to do and certainly help that you need along that way to make sure that exit is you know, is optimized, right? Is critical. So, we're going to jump into questions around that and certainly also talk about the impact of AI on business today and valuations and you know, the type of questions buyers are talking about that has this new input from the AI side and what they're looking for, right?

About ZonGuru and Helix

So, I think we're we'll cover a lot of that today. You know, if you don't know ZonGuru is really built for Amazon's AI moments that is happening right now with Alexa for Shopping and COSMO and if you're you know, looking to optimize your content for Amazon's AI you know, ZonGuru is certainly a place you can come to where you're going to get massive help. We have a product called Helix which helps you with content optimization for the algorithm using first-party primary data, right? So, structured listing engineering and how we you know, help you create that content and maximize your discoverability with some amazing results.

So, you know, but today's not about me diving into a whole bunch on ZonGuru and Helix. But you know, if there is interest from everyone here, you know, go and check out the links that we've posted at the top here that will help you get your head around it and get the results that we're seeing from our customers, right? Which is you know, creating this architectural base that will maximize your discoverability and allow you to do you know, all the good marketing layers on top and that's critical. So, a couple of links there just for you to look at my LinkedIn.

There's always some really you know, up-to-date content that we're posting on that around what's happening in the industry. Our newsletter, there's a link there as well. So, you know, sign up to the newsletter, you're going to get all the current hot takes on what's happening within the Amazon world and the AI world. And you also get information on upcoming webinars and then some two links there. One to our free you know, AI optimization report to understand how well your current Amazon listings are optimized for AI on the COSMO and Alexa for Shopping side and then a link there to our Helix product as well, which is where you can start to actually help reach two goals, which is help to improve human connection and conversion with your customers and around positioning and how to how to you know, sort out your positioning with your with your Amazon product.

And the second one is AI readability and discoverability. So, making sure you're sending the right signals to Amazon's AI so that you get discovered on Alexa for Shopping and everything else. So, those links are there for you to explore. You know, that's as much as I'm going to talk about our product today. We're going to jump in and really focus on you know, your path to potential exit and the things that you need to explore on that side and the mistakes you need to avoid. For sure, we're going to talk more about that. I have a couple of news pieces I want to talk about up front and Greg, you can you can totally comment on these, you know, as you know, cuz you know, you know the space well, but I think the first thing I want to say there is this is more of a note from our side.

We had Evgeni, who's on our team, who is really involved in structured listing engineering AI prompting side as well as our Amazon GEO and SEO side. He was on a podcast or a webinar yesterday with Kevin King and you know, a few other experts in the Amazon GEO space. Andrew Bowles on there as well. And I think you know, I asked Evgeni today what is the high level, you know, take from this the session, the cliff notes. And I think what he was saying there is that you know, this idea of first party structured listing engineering and ensuring that, you know, you use your engineering your listings to maximize your AI signaling is really you know, and something that needs to be handled first whether you explore that with, Claude beyond that or ChatGPT or anything along those lines.

The results are coming where you structure, your listing based on first-party data from Amazon, which is obviously one of the things that we that we do on our side, which is another thing that came up that, that is worth, talking about is, let's see, so, one hot news piece is that Amazon is actually starting to franchise out Alexa for Shopping to other retail websites. Kate Spade is one of the first ones that is actually taking it on. So, if you think about the whole, conversational search AI experience you're having on Amazon with Alexa for Shopping, that structure, that intelligence, they're now franchising that, to other websites, right?

So, you can have that experience on those websites. And what does that really mean if you read between the lines is like, how you structure your content is the most critical thing, right? And so, if you're structuring your content which is really readable and understood by Alexa for Shopping, that's going to now expand you beyond, Amazon, right? Which is really and I think the last point I wanted to say here is the Q there's there's a whole post on this, on our blog as well as, LinkedIn as well, but, the Q2 earnings came out from Jesse, you know, a couple of days ago or last week at least.

And I think the interesting thing there that the stat I wanted to pull out is that, you know, basically the sponsored prompts, right, are converting at 48% higher than typical, sponsored ads, right? And so, what that means is like though, you know, internally on Alexa for Shopping, you've got the sponsored prompts that are appearing, right? And if customers are clicking on that, their conversion rate is obviously way higher than other ones, right? So, that idea of having a trusted recommendation coming out of Alexa for Shopping and that conversation continuing to where it's really talking about your decision-making criteria before you even get to the PDP and then obviously seeing a link on there and clicking on it, you're way more down the funnel and ready to convert than you are on a typical search results page, right?

So, you know, the interesting part of that is that is that, you know, of those sponsored prompts all those prompts that appear, you know, I think there's only a few percent that is actually, you know, typically the sponsored. The rest are organic or Alexa for Shopping's understanding of your listing, right? So, what that means is that really you need to make sure that your content is structured and sending the right signals to Alexa for Shopping so that you do get the visibility and then the conversion and it's not a pay-for-play. Like sponsored prompts are you have sponsored ads, Alexa for Shopping decides whether you're going to show up in the conversation.

You can't actually bid on that, right? And so, you know, it's taking the relevancy factor and the signaling from your listing and everything else to then decide to show that sponsored ad or not, right? You can't actually bid on that as you typically do. So, you really have to make sure your content is structured. So, look at that poll, answer that for us, but this is the idea of making sure that you have structured content. And that's that's really the high-level update from my side around some of the news that's happening. If you have any questions on that, please you know, put that in here and let us know you know, if you have any questions on that specifically, let me know, but good to see people in here from and not many people put actually their countries here, so good to see some familiar faces in Deborah and Ian.

Empire Flippers: how FBA exits work

And yeah, keep the questions coming in. This is our chance to ask Greg the right kind of questions you know potential acquisition selling your business and let's jump into that Greg. So I guess the first question I have for you is Let's see you know you had a comment to me and in our conversations that sometimes the buyer is going to be making a lot more money than the actual you know that's a little bit of a hot take or an unpopular opinion and you know dive into that a little bit with me in terms of your thoughts around hey sometimes the buyer is going to make more money than the seller.

What's what's your hot take on that or your thought process there?

So yeah I mean this is a great question. I say it because people are like wait that doesn't make sense you know it's a kind of a pattern break right? But it's just something I have seen over 2500 transactions. So I've been in this game the M&A game for a little bit over 10 years with digital businesses. A lot of FBA is part of those transactions And the reason why I say it is when you build a business from scratch you're looking at a timeline between two to five years to build something that can exit. You may never exit because you just didn't build it right?

Like that's also a possibility. So you're looking at that two to five year timeline and the reason why you need that timeline is because a buyer isn't going to spend a million dollars on say a three month old business. Like can it happen? Sure. Is it likely? Extremely not right? But if you're a business buyer what are you buying? You're buying that two to five years timeline or sometimes even longer like I've sold a business that was 15 years old right? They get a jump ahead of that timeline curve dramatically with a business that's already working already has proven market fit and now when they do something like tweak the chain like tweaking pricing or reducing their cost or whatever they can see much quicker gains than someone starting from scratch who if you tweak a price and you're not selling anything, well, it's not going to do anything, most likely, anyways, right?

Maybe you'll start selling something, but you're not doing any big changes. So, what I mean by that comment is my buyers often sell more than my sellers, because they don't have to wait those two to five years. So, if you're a prolific business buyer, let's say you buy a business, let's say you sell a business, now you have the money to buy businesses, you go, and which is a very common thing that happens with my clients, you go and buy two smaller businesses that are similar, they're different, but similar business model, maybe similar niche as what you were building in before, you would already know the road map of how to get to the next stage, cuz you just sold that the thing that was the next stage, right?

And then, over a period of a few years, you keep doing this, you can get to a point where you're selling two to four to eight businesses a year, which is significantly faster than someone who's building from scratch. So, my comment is a little bit tongue-in-cheek, like obviously, the seller's going to make more money than the buyer like up front, but over the long period, the buyer actually is in a position to sell way more than the seller, because they just have more businesses. They like to them, their business is not their FBA business, their business is the selling business, and each FBA brand they own is just a product on their shelf waiting to be sold.

Buying a business versus starting one

Yeah. Yeah, 100%. And you know, we from speaking to people who've sold a business and bought other ones, you know, it's it's imagine all that focus that you've put onto your current business, and all the learnings and mistakes you've made along the way, and now you've pulled out of that, cuz you sold, you've got some liquid cash, and you invest that in a few businesses, and then you're looking at those businesses through your expertise and what you've learned along the way, and you'll know the mistakes that are in there, or the things that can be optimized and fixed, and you can fix it, grow it, and then and then exit that, right?

So, yeah, I you know, that's it totally makes sense, and I think to interrupt you. Just to like highlight that example. So I don't recommend anyone to do this by the way. This is a very dumb strategy, but it's something I have seen and it was very funny and it kind of like shows my point. We had a business years ago. It was a very small business, like 100 grand, something like that. This guy, he bought it and then he asked us, "Was there anyone else interested in this?" And we're like, "Actually, there was a lot of people interested in this business for whatever reason, right?

Like it is a pretty competitive thing." And so it goes to our migration process where we actually like transfer the business over to the buyer, right? And he tells us like, "Hey, could you would you reach out to any of those other prospective buyers? I'll sell it to them for 115k." We're like, it's not normal for us to do that, but sure, why not? I mean we already have the money, the seller's going to get paid. So we say, "Sure." And we do. And sure enough, someone bought that business for 115k. Like I think that guy owned the business for a grand total of like an hour, right?

You can never do that with a business you start from scratch, which isn't just the buying a business just gives you a lot more different avenues to monetize in unique ways that starting from scratch can't can't give you.

Yeah, and I think the other the other piece on that and we see that a lot. There's a big trend right now, right? Around these you know, established businesses, not just digital businesses, but certainly you know, you know, even blue collar style

Yeah.

That you know, that are established 10, 15, 30 years where the owner is simply aging out. And you know, doesn't actually have a family or a CEO or someone who's going to continue to take it on and they just want to exit and sell. And there's opportunities on that for younger generation, smart, savvy marketers, AI forward you know, thinkers who you know, who are more digital savvy, who can go into these businesses, buy them on an SBA loan or whatever it is, and then look at the efficiency plays, especially around you know, more modern style marketing and AR practices, bringing that to the business and helping that scale.

And that becomes your growth path. And I've I've got friends who've done that and are incredibly happy. And you know, that whole crazy world of entrepreneurship, which is, you know, that first 1 to 10 years of trying to build something, you know, Seth Godin has the book The Dip, you know, all of these things where it's like, you know, how long do you keep struggling on a business to get some footing in the blood, sweat, and tears. Like that's, you know, you've you've you've quantum leaped that and you're getting something established and you're looking at building in and frankly, yeah, your digital savviness and then your people skills become your most important assets in kind of scaling that business, right?

So, different world.

There was a study I saw. So, the common saying is like 97% of entrepreneurs sell, which is not true, by the way. It's far less than 97%, but that's kind of like the guru hype number. The real number is something like 50% or 60%, something like that over a 10-year but if you look at like businesses that you acquire, the failure rate on that is extremely lower. It's like about 20% over the same time period, somewhere around there. So, like you put the odds so dramatically in your favor as long as you buy right. And buying a business, strangely, is a lot more forgiving than like buying real estate because like you can overpay on a business as long as the fundamentals of the business are good, that actually doesn't matter that much cuz you can outgrow it.

Like I We had a guy, he bought a business from us for $180,000, an Amazon FBA business. And you know, we don't overprice by any means. Though if you're a private buyer, brokers always overcharge in their in their view, right? But well, that's not true in my view, but that's the way a lot of buyers look at it. Buyer bought a 180K business from us. 22 months later, he's selling it with us again for over a million dollars. So, even if he grossly overpaid, right? Like what he care? Probably not. We're about to make him a millionaire, right?

So, that that's one of the nice things about buying a business. As long as you buy a fundamentally good business, it's a lot more forgiving than a lot of people think.

Yeah, and you know, obviously there's a USA audience here. You know, it's international as well, but from a from a USA perspective, like you know, if you're sitting here going like, "Hey, well, I don't have the capital to look at buying a business, right?" you're actually wrong. Like you probably do, especially through the SBA program. You know, I have a friend who you know, actually you know, in this kind of world it's slightly different business, but it's a business doing 20 in annual revenue, and I think it was like two or three million EBITDA business.

And you know, he bought it for 10 million bucks, let's just say like as a as a number, but you know, he got 7 million on a loan out of SBA, right? And that's not based on you know, he has to personally guarantee that, or the business has to guarantee it, but that SBA loan is based on the numbers of the business he's buying, not on his own personal assets or anything like that, right? So, you can get like the kind of funding that you need based on the numbers of the business you're trying to acquire, and I think that's an important like unlock for people to understand, right?

Yeah, I agree. And you know, even for it's important even for sellers as if we're talking about like selling your business, right? It's important, in my view, for sellers to also understand the different paths a buyer has to buy, because if you understand how business buying works, especially the more creative, the weird side of it, the more tools you have to also get to the buyer to pay you more money, right? Cuz like at the end of the day, a buyer wants the guru dream of the zero down payment kind of business, which those do exist, by the way, or the $1 businesses.

Those aren't fake, but they're extremely rare and like very advanced. I wouldn't recommend that for a newbie buyer. But the more tools you understand as a seller that the buyer has available to buy from you, the more you can say like, "Actually, we don't need to do that 30% seller financing because this SBA covers it all. We could just do 5% seller financing." And now you get 95% of your money up front rather than 70% up front, right? And then on the you mentioned something two things very important. So you your buddy's business that he buys is like a you know over 10 mil.

Debt, equity and raising money

Once you get above a certain phase, ironically it gets easier not harder to get the money. Like the bigger the business that it is weirdly easier it is to buy with less of your own capital is a quirk of M&A. Because people will take bigger risk on it because the business itself is less risky cuz it's so much more well established, right? Very few businesses ever get above the $10 million phase in terms of their valuation. So it's a very rare duck. In terms of the SBA stuff, like you may also mention like well your buddy is not tied to his personal stuff.

Now if someone does an SBA, that is tied to your personal stuff. And that freaks people out, but I always ask them to think about their own house. Cuz a lot of my friends that they own their own real estate, right? Like well that's all a personal All that is a personal guarantee loan. Like if you stop paying that, do you think they're not coming after your other stuff? Of course, they're going to going to try to get their money, right? So mortgages don't freak people out, but SBA that does. And I think it's just because they don't realize they're very like obviously they're not the exact same thing, but they are very similar to things.

And I think it's very funny and now I'm going on a tangent, but I think it's important cuz a lot of my entrepreneur friends fall into this trap, too. Like I have a lot of entrepreneur friends, they'll start a business or they'll raise capital to go acquire a business and they're like over the moon once they get like you know $200,000 in committed investable capital. But if you they go to a bank and they get a $200,000 loan, let's say it's at an atrocious interest rate of 20%, right? They're like, "Oh my god, this is like highway robbery. This is crazy." It's like, "Guys, that bank wants $50,000 on their 200k from you over a period of time.

Those investors want a lot more from you than 50k. Let me Let me promise you that, right? Like I have old friends who have sold their business where they're so diluted from the investors they had to go get a job afterwards cuz they got basically nothing at the end of the deal. Like we just saw Airtable sold, right? Like Airtable got a valuation. I think their valuation was like 11 bill or something like that. And then they ended up selling for like 1.2 bill and all those employees that had stock options, the great payout they got is zero because they got those stock options at 11 billion, right?

So I think a lot of people have a like a not very well aware concept of how white debt is actually way better than equity a lot of the cases. So that's that's my personal soapbox on with my entrepreneurial friends.

Yeah, no, that's good. I mean I think Yeah, sitting here whether you give away equity or you take on loan, I think Yeah, this is this is part of like especially if you're taking on equity, you know, what are the part is bringing on besides cash, right?

I think that's Absolutely, man. That's That's the thing. They always think that the investors are going to bring some like golden goose knowledge. It's very rarely the case. Like they like there's nothing that a lot of them have that you don't already have as an entrepreneur. In a lot of ways you are built better than a lot of these investors who are spreadsheet jockeys, right? So like I have sold tons to the FBA aggregators when they were all spreadsheet jockeys and most of them went bankrupt. And they bought good businesses, like good fundamental businesses.

So yeah, I always get a little bit you should be careful if you're going to raise equity versus I'm very pro debt cuz like if you believe in what you're doing, it's like some of the cheapest money you can get. Even if the interest rate is atrocious.

100% yeah. Good. Okay, so anybody listening questions, please you know, if you have specific questions around this, put them in the in the chat.

My great soapbox on debt versus equity.

The biggest mistakes sellers make before an exit

Well let's let's let's talk about like, you know, okay, so everyone here should be thinking about selling their business, right? Whether you do or don't, it's things that you have to prepare for and understand. You know, the timeline is like whatever like if in preparation and thinking about it 12 to 24 months, let's just say, like what is the number one, number two mistakes that people make in looking to sell their business over time that really impacts you know, the valuation of

Yeah, the absolutely number one mistake entrepreneurs make, especially if you've never sold a business, less so if you have sold a business cuz you kind of know how it works, but the number one mistake is your valuation. So, my entrepreneurial friends before they talk to me, they think that their business is worth way more than it really is. And I so I always joke, you know, I'm trying to wake you up from your dream so you can actually become rich cuz no one's going to give you the dream price. Like as an example of how crazy this could be, I'd say the people who can get most delusional about their valuation is probably my SaaS buddies so building software.

No knock against you, John versus I'm Guru, but like I had a friend, he came to me like, "Hey, Greg, we want to sell this business for 15 I think it was like $20 million, he said, I'm pretty sure. We want to sell for $20 million next year." Like, "Great, man. Tell me a little bit about the business. Like what's your you know, your monthly or yearly profit?" He's like, "We just hit $15,000 per month, but we're planning on doubling next year." I was like, "Man, you're going to have to do a lot more than doubling to get to that valuation." Like obviously this is an extreme example, but I have so many friends who think their business is worth way more than it really is.

So, I talk to people all the time. Like I literally sent this email five times today to show you how common this conversation is, where people tell me, "I'm looking to sell in like two years. Reach out to me then." And I'll reply back, "Well, actually, if you're looking to sell in two years, now is the best time to talk to me because we still have time to do things to get you closer to what your dream valuation is cuz I bet you your dream valuation is not going to be your real valuation at least as the business currently stands. So, there's a lot you can do during that 2-year period to get a lot closer to your dream valuation.

So, number one mistake is misunderstanding how valuations work and overvaluing yourself and not talking to a professional not a buyer. Don't talk to a buyer cuz they always want to get you for lower, right? But talk to a professional intermediary even if you don't plan on using them. Most of us are free to talk to. But just get a real look at what you're valued at before you get to sell. So, that's number one mistake. Number two mistake is related to that. It's part of why it happens and it's called emotional equity. At least that's what I call it. So, the reason why entrepreneurs overvalue their business isn't because they're crazy.

It's because their business has done amazing things for them, right? Like maybe it allowed you to quit your job, like travel the world, like able to live your dream, right? It gave you so much stuff. So, you have a very strong emotional attachment to your business. So, when a buyer comes in and they give you an offer, it could feel like a knife in your gut like a lowball offer, but it's really a realistic offer, but you have the cognitive dissonance cuz you haven't yet talked to a professional who's you know has sold thousands of these who can give you a more impartial answer that wants to also sell you for the highest possible price, right?

That's why I say don't talk to buyers, talk to a broker cuz a broker wants to sell you for the highest possible price, right? That's how they get how we get our commission. Those are the two big mistakes and they're pretty much they're they're like within the same mistake category, I'd

Yeah. Yeah, for sure. I think that emotional aspect is critical and I think leads to a lot of mistakes, right? And you know, just from my conversations, I think you know, seeing your first exit as a as the next step on your journey, right? And where that takes you is critical, right? So, you've got to think about the journey beyond that and what you want to do, but you know, hopefully most see it as just a step in your in your career and your business journey, right? And it's not just like, "Oh, I'm just going to exit and put my feet up." And trust me, anybody who wants to exit and just put their feet up most people get bored after a week.

Yeah. The way The way I have to describe it is kind of like post part of depression, you know? Like the business is your baby. We often say that about our own business metaphorically, right? So, it's like watching your kid go off to college. Like, life isn't over. Life is just different, right? I often tell my entrepreneurial friends, this is why it's very important to have goals beyond your exit because if I give you five, six, eight million dollars, you're going to be happy for like five minutes. And you're going to be like, "Greg, that's crazy. I'm going to be over the moon for longer than five minutes." Like, not if you don't have any other goals.

Like, we're I firmly believe we're creatures of tomorrow. So, if tomorrow ever becomes today, we're like, "Whoa, what do I do with myself now, right?" So, it's important to have like you don't have a need a hard plan, but you should have a vague idea what you want to do next. And I often tell people, "Look at your brand is not your business, but the business model is your business, right?" Especially if you want to do what I said earlier about buying businesses similar to yourself. So, your business is not your FBA brand. Your business is you are an FBA entrepreneur, right?

Which repositions it all in your own head.

The free audit and self-auditing your numbers

Yeah, absolutely. Okay, so let's go back to the something that you brought up there, which is like the mistakes you make around valuation. You know, high level, what is the you know, how do you look at the estimate valuation of an FBA business, you know, based on EBITDA, whatever it is? Is it 1x, 3x, 2x, 6x? What do you Like, how do you kind of reset it? Just so people have a you know, that they number one have like a resetting of the of the expectation. And then number two, maybe talk about your audit process of you know, what they can get from taking the free audit and setting themselves up in that in that way.

Sure. So, the free audit thing, I'll cover that first cuz it is actually a very simple exercise when I was telling you about it. So, something that's very common is we get what I call churn or MRR bloat in our business. We sign up for a million different things, we get to cancel, free trial comes in, we get charged. Or, you know, we're especially now in the age of AI, like we're actually not even using the tool anymore cuz another tool replaced it and we forgot to cancel something. So, the self-audit is an extremely simple thing you can do. Just every month You don't have to do this every month.

Maybe for the first couple months when you first start doing it, you should. Maybe for 3 months cuz some people charge 90 days. Look at all of your expenses, tally them up, and ask yourself, "Am I really using this?" And this can have like this sounds so simple, but this can have a very significant effect on your business depending on what you're doing. To give you an example, I have a buddy, he had a smaller agency. I was looking through his P&L and I saw that like a huge percentage of his monthly like software spend was on this one outdated software that he could just replace with a new software that was like 1/20th of the price.

Like, I think he was paying like two grand a month, two 22 grand or 2500 grand a month. And if he just replaced it with this other thing, it'd be more like 100 bucks a month. Now, that sounds like small pickings, but for every dollar you're saving, that's like a extra, you know, three to eight dollars on your valuation, right? So, to put it into another example, you should look into all sorts of different ways you can shave off little costs in here and there without suffering any quality issues. And the easiest one is just looking at your software expenses, but another one I've seen people do that, you know, impacted to hundreds of thousands of dollars in terms of their was just looking at their own packaging, for example.

Like, Amazon charges you based on weight, size, dimension, all that kind of stuff, right? Like, well, can we create a new packaging that still gives the same brand quality we want to give to our customers, but caught just cost us less in terms of storage fees, right? And I've seen that shave off tons of expenses that boosted evaluation. In fact, the one that I saw is a buyer who bought that business and then he did that and that was a major reason why he was able to sell the business for like 8 12 months later for much more money because they were so scaled up.

It was a significant expense that he was able to save. So self-auditing is just looking at your P&L like, "Hey, what dumb financial mistakes am I making and overlooking here, right?" And they'll be pretty obvious when you go into it. And that's free to do. You don't need to hire a bookkeeper or anything like that. Just look at your own numbers. And I advise people to do that once every couple months. You'll be surprised at how much money you save. The other thing you asked about the like what is a realistic multiple? It's a very good question because most businesses are going to be traded at a range.

Valuation multiples: SDE, EBITDA and typical ranges

A range of SDE or EBITDA. We can go into the difference, but most businesses that I sell are SDE. I've sold a few EBITDA, but most of them are going to be valued on SDE, which stands for seller's discretionary earnings. So if you make $500,000 a year, your expenses are 200 grand, you have an SDE of $300,000. That includes like money for growth, but also money to pay yourself, so that your multiple is always going to be a times of that. For FBA businesses, you're looking at between a 2 and 1/2 to 4x multiple of your annual SDE. That where I would say is a pretty decent range.

Most of them are going to be sold between that 2.5 to 3.1 phase because you also got to leave room for the buyers too who are also thinking about the upper end of that range, too. So that will probably be the range. Every business is different and you can obviously maximize sort of the higher end of that range. And one of the ways you do that is like doing the self-audit, for example, cuz every expense you get rid of is another dollar another few dollars to your SDE valuation, right? But that's the basic range. I would say about 2.5 to 3.1 and maybe 3.2 is where the average FBA will sell.

In terms of your total range you're looking to play with, 2.5 to 4x. You can go above 4x, but most won't get there. And I'll preface that like a lot of your audience probably has friends that say, "Well, my friend sold for 6x." Like, okay, well, like we got to ask like what was their SDE or what was their EBITDA? If it's much higher, that makes sense cuz as a business grows in terms of its annual profits, so too does the actual multiple range that they could command. So, that's a another common mistake people have.

What lifts or lowers a valuation

So, let's So, let's take those two scenarios. Like, what are the top three things that you see that help business to sell at 4x and what are the top three things that you see that make businesses sell at 2x, right? What are you know, what are the What are the two top things? Like, what are the fundamental things that really help with im- improving valuations that buyers are looking for and what really negatively impacts

Sure. Stockouts can be a very negative impact. Declining is probably the biggest factor. Just declining profit. Age can be a big one. If you're trying to hot potato it too quick, that can really affect you deeply. If you're a one product only business, that can affect you. I wouldn't say it's like the biggest knock, but that can affect you because that can be viewed as pretty risky from a buyer perspective that everything is leaning on a single SKU really like keeping up. And this is especially true if you're doing anything in like apparel or anything with fast trends.

That could really screw you if you're a one product only business. So, that's something to be careful about. In terms of the opposite side of things, it's, you know, are you growing? And there is a there's an interesting take on this cuz you if you grow like this where you're just growing super fast, that can also be looked down on by a buyer because that trend is so hypergrowth. Like, where is this even going to end, right? Like what happens when we hit our first plateau? Is it just a decline from there? Cuz it's just growing too quickly. So a lot of times it's better to actually have either a steady revenue year over year with good growth, but not crazy growth versus the actual crazy growth to get the investor to buy in.

A good way A good way to look at valuations is a buyer is willing to pay you the maximum premium for the least amount of risk. So the less risk you have, the more premium your business becomes. So you have multiple SKUs, you have good steady year over year profit, you don't have stock outs, you got your logistics figured out, you got multiple different marketing channels coming in. So face you know, maybe it's Facebook ads, Amazon ads, Amazon organic, you know, the AI with Alexa, all that kind of stuff. You have a omni-channel strategy, no one product is making up the vast majority of your business, and then age.

So there's a thing when it comes to M&A, it's called Lindy's Law. It's not really a law, but it's more of a guide. And Lindy's Law states that something that's been around for a certain amount of time is likely to be around for the same amount of time. So for example, if a business is 2 years old, Lindy's Law states, well, it will most likely be around for at least 2 more years. If a business is 15 years old, it will most likely be around for 15 more years. This is why I call it a guideline, but the reason why people say that is because a business that's been around for 2 years is much more fragile most likely than a business that's been around 15 years that's seen all kinds of storms, craziness, crises, layoffs, hiring sprees, all sorts of stuff in the saga of that business, and it still survived and thrived, right?

So age plays a big factor into it, too. And there's not much you can do from that from a seller perspective other than hurry up and wait, which again is one of the reasons why buyers can make crazy more money than sellers at scale because they buy stuff, then they skip the timeline thing altogether, right? They just focus on the growth part.

Audience questions: brand, risk and projected profits

Got it. Okay, so let's jump in here. This is a question from Greg. Hopefully Greg you

Great name, Greg. Fantastic name.

Greg hopping in his own question to

In valuations, what consideration is given to brand? EG, if the brand is a long-established best seller in a category, even if the profit margins are tight, EBITDA is tighter, you know, does that sway some of the valuation? And is there considerations for projected profits?

Yeah, good Both really good questions. So, brand is a very tough one. It's probably the squishiest part of any business valuation. So, I unfortunately have to say it depends. I it like it depends a lot on the buyer more so than any like hard and fast rule when it comes to valuation, cuz there's multiple different types of buyers. There's people who are cash flow buyers, and these would be other entrepreneurs typically like you. Private equity people tend to be cash flow buyers, and they may not like the entrepreneur might like the brand, but may not pay a premium for it.

The private equity guy may not even really care as much about that unless they have another exit plan that goes to the third type of buyer who probably would care about that. And that's what I call the strategic acquirer, the strategic buyer. So, a good example of this we sold a $13 million business last year. I believe it was a DDC Amazon hybrid. And the person that wasn't a private equity, it was an international electronics retailer. So, they were a strategic acquirer. In that case, 2 + 2 for that buyer often equals 10 or 15 because of all the synergies.

So, in that case, buying the brand might be extremely important to them. And then yes, it would help you. So, it depends on who your buyer is on that front. What was the second part of the question outside the brand?

Projected profits.

Projected profits. Got you. So, a lot of you know, a lot more adult M&A, I should say, where like, you know, the people in the suits around the table, they'll have a pro forma with projections. Like, yes, you should have those. It can it can hurt your valuation more than help you sometimes though, because again, entrepreneurs tend to be very optimistic about their projections. So, if you put in what the buyer considers crazy number, they might just think you're not very serious. So really, the projections don't help you with the valuation side. It really helps the buyer understand your own belief in the business.

So, and again, so it's almost like a risk analysis of the business. Like, if this buyer is telling me, oh, I'm projecting like, oh, we're going to have 200% growth, like, okay, this seller is like out to lunch, and he's just trying to pull a fast one on me, type of thing. And they might just stop talking to you, right? Whereas, if you have a more conservative numbers on there, like, okay, well, this seems realistic to me. So, usually what I would recommend is you kind of have like four projections you're doing. You have like absolute best case, you have very good case, you have what I think is normal, then conservative, and absolute worst case, right?

Like, some like a range like that you're giving a plethora of what could happen to the buyer. So, remember what the buyer is trying to do. They're trying to evaluate the risk. So, if you give them all different kinds of reasons and cases where it might go, you can put percentages, like, I think this is most likely because of XYZ. And now when they give you the deal stack, you can use those projections as well to like help them like find the right number and coming together with them to like de-risk the business for them, right? So, it can put you in a stronger negotiation place if you do it right, but it can also really hurt you if you go wild on the projections.

Yeah, 100%. Good. I have a question there. Like, so maybe in some of your FBA businesses that you're selling right now, you know, I think there's a there's a big focus, you know, generally from FBA business owners to start to focus on omnichannel or, you know, they've got their strong sales coming from Amazon, but they are exploring TikTok and, you know, looking at TikTok Shop or whatever it is. You know, what's your sense from that? Is that like a again, like, you know, the theory is like, "Hey, if you're driving sales omnichannel, you're you're derisking your business, right?" in some ways.

But, you know, the reality might be worse. It might actually be like, "Hey, you've you've you've widened your focus and you're not as precise anymore and there's additional costs that are coming in there and it's not as efficient or whatever." So, like, you know, talk a little bit about that. Like, if you're looking to sell in 12 to 24 months, you know, is that definitely something that needs to be explored beyond Amazon? Is that helping with valuations not causing more challenges or like what's the take on that?

Omnichannel, TikTok Shop and marketing before a sale

Great question. First a little bit of hard promo. We just sold our first TikTok Shop and successfully migrated it. That was actually quite a big challenge for us cuz

Like we literally we never had done it before. So we now know how to do this for any of my TikTok Shop entrepreneurs, come on over. We can help you out.

Use John's affiliate link, please. But, to answer your question, again, it depends on what you're trying to do. Cuz you are 100% correct, this can lead to a distraction that actually hurts your growth and then hurts your valuation, right? So, it is better to have it if you can have it because it does derisk the business, but it's all a balance of what you can and can't so to put it in perspective, I always tell entrepreneurs omnichannel will increase your valuation. That's true, but in reality, out of the 2,500 businesses I've helped sell, almost all of them are mono-channel.

They have one channel, right? So, like do you need it? No, absolutely not. Does it help? Absolutely, if you do it right. But, how do you do it right then? Well, the way I would do it is say you get really good you know, Amazon ads and AIGO, all that kind of good stuff, right? You got that all locked sync synced in, right? What I would do is either use the AI agent or hire someone, train them on your method to take it over for you to help you do that to free up your time to go fail and lose money on TikTok Shop. So, you can like learn it all cuz I the way I view marketing is through a profit curve and I'll say this as a marketer, I've had to tell a lot of people like you should not do this campaign.

Like as a marketer, like you just have these silver eyes. It's not going to work the way you think it is. The way I view marketing is you have a period of testing where you're definitely going to lose money and that's okay. As long as you lose enough money to get enough data, that's the important part of the phase. Then you move into break even phase where you tweak things up, you iterate and the only goal there is to be at zero. You're not still not looking to make money. If you can get at zero, then you can move into phase three to iterate and find a profit and that can scale up.

And usually in terms of marketing, that's like six months to a 12-month timeline we're looking at. Maybe longer depending on the channel. Like if you're doing a slow marketing channel like SEO, it could be longer, right? So, that's what I would say like before you if you're going to start a new marketing channel, you should do it like 14 months before your exit timeline. Cuz that gives you enough time to experiment, to fail, to iterate and hopefully grow. And if you can't make it work, you can then just stop and let your SDE come back up. And then when it comes to the actual selling, you can tell the buyer you and the buyer can negotiate on that expense.

Like hey, that was a one-time like marketing experiment. Like maybe you can discount it. They probably won't, but it's always worth asking to get your SDE back up. And this goes to a very good point. Most businesses are valued over a 12-month window. So, as long as your main 12-month window it doesn't have any of that experimentation in it, you're probably going to be all right in terms of your evaluation. But, I would play it on the safer side to do like a 14-month window where there's no

Yeah, I would align everything you said there. You know, I think you know, exploring Omni-channel is timing of the business and how it's grown and how it what your baseline of your business is, right? I equate it with the same thing of like, "Hey, I sell on Amazon USA and I have one product. What's my next iteration of growth? Is it going multi-markets or is it going multi-product, right? Or is it going Omni-channel or something else?" And like you've got to really look at all of those and see what is the next best iteration for you, right? And so, you know, I can look at those.

How AI changes valuations and who is buying

So, maybe switching gears slightly, but by the way, Greg came back which is you talking to yourself.

This is really helpful.

Thank you, me, for the compliment.

He said he said he said thanks, very helpful. The question I have there is like it's it's related to AI, right? I mean, obviously AI is a massive you know, input that's changing all of our businesses across multi-facets, right? You know, are you starting to see the conversation of AI coming into seller-buyer agreements, conversations, you know, namely from you know, obviously if you're an Amazon FBA business, you know, understanding how well you're optimized for Alexa for Shopping, does that come up in conversations or you know, even on a on a different scale, you know, what you know, what SOPs or structures or architecture from a an AI perspective are you bringing into your business?

Are you looking at EBITDA in a different way because like maybe EBITDA before was like, "Hey, yeah, all right." Or a gross margin percentage was running at like, "Oh, you're running at 50%? Great." Or 30%? Good, you know, on this business, but now you should be higher on that because you now have the ability to use AI. So, like if are there any conversations happening on AI and what are the focal points there so that people who are starting to prep for or looking at selling in 12 to 14 months, what are the things that they should be looking at?

Yeah, so this is a I was a huge topic, and it's kind of a tale of two cities in the sense that AI is either destroying valuations or increasing them dramatically depending on who you are. Like my friends in the media space, we sold tons of media or we used to sell tons of media businesses. Those are mostly wrecked by AI. Like that doesn't help them in a lot of ways. Semi-SaaS friends, they're they're in a uncomfortable position where is it helping? Is it not? Like it's hard to say yet. I think the winners of the AI race as far as business models go is actually everyone on this call, like e-commerce people, like e-commerce FBA, right?

And anyone doing a service business, I think you're in a very good place where AI is going to help you because it's going to do one what you just said, right? It's going to lower your costs and again, back to the audit thing, every dollar you save is like $4 to $8 to your valuation, right? That's massive. So, a lot of you know, traditionally high-cost businesses, say like a marketing agency where you have very high payroll and unfortunately for the jobs, they might not be there, but the payroll expenses are gone, right? Like or they're greatly reduced.

So, now the profit is dramatically higher and agencies for the first time in a long time are getting like hyped up as an acquisition target because of AI. Now, when it comes to e-commerce, the thing that I think is very interesting here is very nascent. So, it's like very early days. Everyone's talking about AI in terms of growth in my e-commerce and FBA circles. When it comes to the actual acquisition stuff, I wouldn't say it's a massive part of the conversation yet, which gives you as the seller who's embracing AI a massive advantage because put it into perspective is I have a friend, he has a SEO agency, and I was asking him like, "Hey man, how's the SEO world going with AI?" He's like, "Oh, it's going great, man." Like, "Oh, that's not what most of my SEO friends are saying right now." He's like, "Nah, dude, it's I'm still selling SEO retainers.

I just call them AIO retainer and now I get to charge an extra thousand dollars a month cuz it's the same work, right?" So, you can use the fact that you are really optimized with Alexa, all the different AI options that Amazon's come on, and it shows in your P&L of your reduced cost. So, you have the hard multiple to your valuation increase from there, but you also have the cool increase to your multiple here with AI cuz it's still so nascent. Especially if you're relatively like mid-size or bigger FBA brand, like let's say you're making between 50,000 to 150,000 dollars a month in net profit over averaged out over like 12 months.

If you're in that range and you're optimizing with AI, it's very likely that your business buyer is going to be private equity or a strategic buyer, and they're going to be thrilled with you that you're using AI. They're going to want to get in, and they'll probably want to pay you extra to keep you on for a little bit to teach them what to do, right? Cuz a lot of these PE people, they're like old school dinosaurs in a lot of in a lot of ways with this stuff, and they need good operators. So, it can be a very powerful thing for you both in terms of like the hard advantages you get as a e-commerce store owner using AI, but also the cool factor that gets all these investors jumping in competing against each other for you.

Yeah, I mean yeah, the other the angle on that is like it helps with the de-risking of the business as well, right? Because ultimately the buyer is buying the team that's running it, right? Whether it's one person, two people, three people, or outside of the owner, right? You know, whoever that is, but if that team is more AI forward and is like that culture is not built in, you know, that's a de-risk to the business because as we go more into the AI world, you know, they're going to have to evolve and if they haven't evolved yet, that's a risk. All right, yeah, it's going to help you.

So just on a point on that, so I don't know if this is going to happen. It may happen. I haven't seen it, but there's a chance it could happen. It is on risk like I have a bunch of friends building AI startups right now and I tell them like look man, you got two paths. You either need to raise an obscene amount of money to remain competitive, way more than you think, or you need to build so crazy quick you could exit to the people with the obscene money to stay relevant. But the cool thing with FBA and e-commerce entrepreneurs, like if you're using AI, it doesn't matter if the AI you use becomes obsolete, you just grab the next one off the shelf and plug it in.

Like you always can stay relevant versus my friends who if their SaaS is all AI, like you got to be at the cutting edge constantly or you're going to become obsolete, right? It's a much harder grind. So e-commerce entrepreneurs are in such a good place to where they can just like take whatever the best AI is and just replace the keys usually. Like yes, it's a pain in the butt, it's tedious, but it's way easier than if your entire business was that one AI that got obsoleted by some new tool, right? So what might happen is a lot of buyers seeking de-risk, like seeking cash flow, they're going to come in back to buy e-commerce stores and FBA brands and service businesses that are AI empowered, but they're also not weakened in the sense of the AI fragility that some of these SaaS companies might be it might find themselves in, right?

So I think there will be a interesting blend of brand new buyers coming in to buying e-commerce stores over the next 2-3 years.

Oh, I 100% agree and I you know, it's exactly that, right? Like technology is changing so fast that, you know, what you're building today might be obsolete in blah time,

Products are, you know, at the end of the day, AI is helping bring everyone back to the point that you're as good as what your product is, right? There's obviously there's Amazon, there's all these channels, everything, but if you have a if you don't have a good product, you know, you're going to always struggle, but if you have an amazing product, you know, everything else is just leveraged to help you improve the discoverability of your product, right? And so, you know, there are I agree with you, there's going to be buyers out there who are like, "Geez, I want to de-risk my portfolio." Or whatever it is, like, let me go back and just buy products cuz products are what people buy, right?

There's a reason why there's so many like SaaS Silicon Valley style people buying plumbing and HVAC companies right now, right?

Like there's a like that trend started before AI, obviously, but they're like there's a reason why people are going to those kind of businesses and I think there will be a similar thing with e-commerce stores cuz it's a physical product, right? It's like in your hands and it doesn't have like a physical product doesn't have to be just an online business, right? Like we've sold businesses that do massive wholesaling to Walmart, to like thousands of retail locations all across America or Canada or whatever, right? So, like is like your FBA brand is so much more flexible versus a SaaS business in a lot of ways and I think you we will see new buyers who start competing for that very reason for it.

Closing and how to reach Greg

Which will should lift up multiples. Yeah, no, 100% agree. Good. We are at our time now. We've got to we've got to jump in a second, but maybe just to wrap it up like, you know, if someone is looking to sell over the next 12 to 24 months, like what's the number one thing they need to do? Not even focus on, but what should they do? And then you know, if there's links or ways that people get hold of Empire Flippers, let us know so that we can get people over

Yeah, sure. You can shoot me an email just greg@empireflippers.com or just go to empireflippers.com and this is going to sound super self-promotional, but you don't have to use us. The number one thing outside of anything if you want to sell in the next 12 to 24 months, schedule a 30-minute call with a business broker that has sold business models like yours. It doesn't have to be Empire Flippers, can be anyone. The reason why I do is they'll give you the impartial objective truth of what most likely is true for your business without the emotional side, which you're going to get with the buyers anyways, so it's better to hear it from the guy who wants you to sell for the most.

And that period gives you enough time to actually make the changes to really like up your valuation. So, I think that'd be the best move if I was going to do one thing, just talk to a professional about your valuation.

You know, and I and I 100% agree as well. It's it's interesting like you know, as much as you think the buyer process is so straightforward, buyer seller process, it's not. And the emotion that's actually involved in a sale outside of the numbers is also there, you know, or you think it's emotional and it's actually the numbers and you know, everything's good, but the one number is off, right? So, like getting that getting that reflection on your process and the way you need to build for exit is critical. I would 100% agree with that.

And I don't I wanted to say one more thing and then and then I promise to stop rambling and we'll get ended, but you just reminded me of one more very important mindset thing for any seller, whether you use me or go private or whatever, is always remember you as the profitable business, you're the darling at the ball, right? Like you might overvalue your business and a lot of buyers, they want you to play to their flute, but you're the actual one with something important. The buyer, all they have, the only tool they have is money. Like that's it. They're commodity.

You're the actual product that they want, right? So M&A works in reverse where as long as you understand it well enough, the seller of the business is not the salesman. The buyer is the salesman. Like that's their goal. They need to sell you on it. So always keep that in mind and don't get stuck with only one buyer, whether you go private or with a broker, always have multiple buyers competing for you.

Good stuff, man. Always good to catch up. Appreciate it and you know, hopefully this was super valuable to everyone. You know, get in contact with Greg you know, there is a replay going out. There'll be contact details there and certainly connect with us at ZonGuru. You know, it's more important now than ever that the baseline architecture of your content is optimized for the It's going to help your business overall across everything. So you know, check us out and check out Helix as well from the links that we gave you guys. Join our newsletter. We have some new partners coming in a couple weeks for a pretty cool webinar that we're doing and we'll just roll from there.

So stay in contact with us and thank you, Greg. Always good to connect.

Always a pleasure to catch up, man. Hopefully your audience enjoyed my ADHD

That's all.

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