I’d like to talk to you today about what to do if your FBA business is unsellable.
Unfortunately, there are cases when an FBA business just simply cannot be sold. So, what makes an FBA business unsellable? I’ll go through the high points and then we’ll discuss them in more detail and give you some practical advice of what to do.
Here are the points that will be discussed.
- High profit, low SKU count.
- Low margin, high SKU count.
- High inventory, where we class high inventory as over a 100% of your annual net profit.
- Declining trend. If you’re in a steep decline, it’s not a good time to sell.
1) High profit, low SKU count
What does that mean? Well, we’ve seen a number of businesses that have a couple of products and one product just really hits it out of the park. They’re making a lot of net profit, a lot of revenue off of this one product.
Now, if that product is not proprietary, patented in any way, it’s a private label or a me-too product, this can be really hard to sell for a decent multiple. I’ve seen up to a million dollars net profit off of one product. So, this is going to be a tough one to sell. There’s no product diversification here, so the obvious thing to do is take some of that profit and build out your product line to help support that one product and then you can sell for a higher multiple.
2) Low margin, high SKU count
The average net margin of businesses that have sold … no that have listed, but that have sold over the past 12 months that we’ve been tracking, have an average net margin of 29%. So, if you’re coming in with a net margin of 10, 15, 16%, you’re actually low compared to businesses that have sold.
This can tell me a couple of things about a business if you have low net margin:
* You could have high price competition. There might be a lot of competition and they’re competing on price, so it’s driving the price down.
* You could still be in growth phase. You could still be building this business and that’s not ideally the time to sell. You’re reinvesting in new products, launching new products, etc.
If you also have low margin and a high SKU count this can tell me that maybe a lot of the products aren’t selling. Or maybe, some of the product lines aren’t profitable and they’re dragging down the whole net margin. So, if you actually look across the product line, break it down item by item, SKU by SKU, you may find that there’s 10% or 20% of the product line you could actually cut. So, just liquidate that stuff, move on, if you’re wanting to prepare for a sale.
3) High inventory
We often see businesses come through with a lot of inventory and this relates to low margin again. On average, if your inventory at cost is greater, for instance more than 100% of your annual net profit of the trailing 12 months, that means there could be a problem. Obviously, going into Q4 you may have more inventory than normal, but at other times of the year it may highlight a problem. Maybe there’s some SKU’s that aren’t selling through. Maybe they’re profitable but they’re not selling through fast enough. What can you do to trim down that product line, making it highly profitable to go for sale? So there’s some work to be done.
4) Declining trend
If your business is in steep decline it’s going to be very tough to sell this business. The only offer you will see, if you get offers at all, are going to be really aggressive low multiple offers, because an investor needs to take a gamble. Even if you say, “Here’s the reason why and here’s how it would turn around,” it’s unproven. The investor, the buyer, is taking a gamble on whether they can turn this business around. So, in order to mitigate that risk, their offer will be very low. So, that may not be a great time to sell. In fact, it’s rarely a great time to sell if you’re in decline. I’ve seen businesses that show a decline of 50-100% year over……. that’s scary for an investor.
Fixing an Unsellable Business
So what else can you do if your business is unsellable?
Well, one thing I would do if it was me, I would do a stock take of my own skills and my own goals. A lot of times the FBA business isn’t the main source of income, especially if it’s not really going that well. Maybe you have a day job, maybe you have another business that you’re focusing on. Get clear on what skill set you have, what skill set your team has, and what your goals are.
Next, you could actually let the business go. What I mean by this is that if things are in decline, you’re making some money off it, you’ve got some inventory, just let it sell through. Take the cash you’re going to make from selling through that inventory. You may not even want to reduce the price, just let it sell and take those profits and focus on something else that will give you a higher return from your effort.
Meet Your Target Market
Another idea is to go and hang out with your target market. A lot of people in the online world will only be looking at their laptop, they never look outside. If you have a really passionate niche market you should meet with your target market. Figure out exactly what they’re excited about, what their fears are, what their products are. By doing this you can actually find some products that relate to them and build out the product line just for them.
I often hear people that I talk to say “Well, how do I do that? I can’t put that in Jungle Scout first.” Well, you need to think outside the box if you want to get a brand, an actual physical product brand that you can sell profitably.
Diversifying your Sales Channels
Also, you might want to look at diversifying your sales channels. Maybe, even if the business is in decline and you want to keep going, you’ve got the skill set and you are determined to invest the time and energy to make your business grow, maybe look outside of Amazon. If the competition is fierce on Amazon, what else can you do outside? That relates to going and hanging out with your target market.
Acquire Other Brands
Something else to consider, and this may come left field, is to actually go and acquire other brands. Right now there is a ton of listings on the market. At the time of this recording, there were about 240 brands for sale worldwide.
Now, you won’t want to buy all of them, because some of them will be unsellable. Their sell-through rate worldwide is 30%. So 70% of these businesses, these brands, will never sell, which is why I’m shooting this video for you. Think about your skill set, your goals. Can you partner up with someone to get some capital? Do you have extra capital you can put in? Instead of launching new products you can go and acquire another brand, absorb it into your business, your account, and start growing that. Look for leverage here. That’s going to be different for everyone, whether it’s niche knowledge, supply chain, whatever it is, make sure you’ve got a strategy coming in when you’re going to acquire another brand.
Build out the Brand
The last thing you can do, as an idea, is actually focus on building out the brand. Oftentimes … I’m not sure who started this trend……, but we often see businesses or FBA businesses with multiple brands and just a couple of products in each brand, or even just one product. That’s not a brand, right? Pick one of them that’s highly profitable, that you’re actually interested in, and really hone in on that target market and that demographic. Start figuring out how to solve problems for that specific demographic.
The reason you want to focus on a demographic is it gives you more leverage. So, even if you stay just 100% Amazon focused, if you’re building out around a demographic, a buyer can come in and say, “Hey, you’re reaching out to mums. I sell products to mums, so I can cross-promote your products to my existing audience.” Same goes if it’s sports enthusiasts or hobbyists. Whatever that demographic is, that’s who you want to focus on.
Go with the demographic first. Pick your brand and the demographic to match with each other. Then, go deep in that. If you can pick out five, ten, products that are highly profitable, that are really solving a need for that demographic, you may be able to build a seven, eight, figure business in a relatively short amount of time.
To recap. Not all FBA businesses are sellable right now, unfortunately. That’s just the harsh reality, that’s the truth. However, if you put in some work and you actually want to build out more of a real business then you can turn things around and go make your business sellable. It’s really about whether you want to take the cash flow that you’re already getting? If you want to sell, then you need to change something if things are unsellable.