Someone is selling their FBA business and I analyze the numbers

What you’ll learn

  • How to analyze an FBA business
  • What the numbers say about this business
  • Whether it’s a buy or not

Once in a while, I browse through a marketplace like Flippa to see if there are FBA businesses, products or listings potentially worth buying.

The interesting thing with Flippa is that the seller uploads financials for anyone to see.

No account sign up, no deposit required.

In today’s post, I’ll share the FBA business that I found, the financials and what I think after breaking down the numbers.

But first, a story of why I do this and how it helps.

Before and after

During my twenties, I went to the gym regularly to try and bulk up my skinny frame.

There were signs of life during that year where I went to the gym religiously and ate as much as I could.

But what helped the most was keeping track of progress. I’m sure you’ve seen those nerds at the gym with a pen and paper and writing things down.

That was me.

It was good while it lasted. I didn’t bulk up a lot, but I got enough meat on my bones to upgrade from pushover anchovy status to normal skinny guy on the street status.

Being a numbers and stats person, I like to keep track and count of what I’m doing, and where I stand. Not for the purpose of comparing, but to make sure I’m not falling behind.

It goes the same for business.

I’ve been going through my numbers and I share my thoughts on margins and what levels we are trying to shoot for. In the post about how to price products properly, I showed how we try to model ourselves after Proctor and Gamble on the financials.

This is the equivalent to having a before photo of my skinny bod and an after photo of a lean and strong “after” photo shot.

Our current state is the before, and P&G’s is the after.

By keeping track of our financials like this, it helps us keep a healthy balance sheet and forces us to focus on making decisions that will make positive impacts to our financials.

FBA business on sale for $265k

Back to the Flippa listing.

The FBA business being sold is BluePeak USA.

Asking price is $265,000.

From the listing description:

Here’s a look at their products from their storefront. Using my tips on analyzing FBA storefronts, their #1 seller at the moment are double wall stainless steel tumblers, followed by protein shake bottles at #2 and #3. #4 is a Nespresso capsule holder.

See it for yourself while the listing is up.

BluePeak USA storefront top 3 products
BluePeak USA storefront top 3 products

They claim the business generated $1.12M in the last year with a net profit margin of 12.9%.

The pros I see:

  • Sales have been increasing.
  • There are only 6 13 sku’s. Some are high performing. Room to grow quickly.

The cons I see immediately:

  • I don’t trust the numbers. It looks very overstated.
  • The company is young so there isn’t much history to work with.
  • Very competitive product and niche.
  • Products reviews are going down on best selling items.

I want to say that if the numbers were 100% accurate and not massaged in any way, then this looks to be a no brainer deal.

$265k for a business that can churn a $140k of annual profit is literally a 1.9x multiple.

But that sounds too good to be true.

Let’s see if it is.

Let’s dig into the numbers

The seller uploaded financials going back from June 2017 to May 2019.

The excel file has serious errors with the total value where the seller is adding up 20 months rather than the last 12 months. They could have just left it empty which would have been better.

There are other issues where the number of columns being added are inconsistent with each other and line items are assigned in the wrong place.

Allocating a COG as an expense will only make the gross profit look much better than it really is.

Warning flag: if a seller can’t organize and upload accurate financial statements when selling their business, what else could they be hiding or missing hiding?

After cleaning up the financial statement and rearranging the line items properly, here’s a better representation.

Bluepeak financials corrected TTM
Bluepeak financials after correction TTM

None of these numbers are audited and my calculations are just based off what the spreadsheet says. I’m sure if I really wanted to buy this business and dug into the reports and transactions, I will discover a lot of discrepancies judging by the initial financials.

Original VS Corrected

  • $1.5M revenue vs $1.13M revenue (overstated by 25%)
  • $605K gross profit vs $245K gross profit (overstated by 60%)
  • $119K net profit vs $144K net profit (understated by 22%)

If you look at the numbers as a percentage, the original statements make it look like the business is operating at:

  • Gross margin of 40%
  • COGS of 19%
  • Amazon expenses of 59%
  • Net margin of 7.9%

After correction, the numbers really reflect:

  • Gross margin of 21.8%
  • COGS of 78%
  • Expenses of 17%
  • Net income Operating income of 13% (net income is after tax)

The before and after paints a drastically different picture.

Originally, what looked like a high profit margin product turns out to be a low profit margin product in a competitive niche, with bad reviews.

If the gross margins of the business is 21.8%, it’s on thin ice. Things could go downhill quickly because as you grow, operating expenses add up quickly.

The financials only include Amazon related expenses and Amazon PPC in the expenses line. There is nothing for payroll, social security tax, overhead, insurance, auto, R&D, customer support, fees and other expenses that come up with running a real business.

By the time all these expenses are subtracted from the gross profit of 21.8%, you have negative operating profit and negative net profit.

Deal or no deal?

If you have extremely lean operations and can operate with 21.8% margins, this isn’t a bad deal if you just take it at face value.

Most likely you cannot have any employees, operate out of your garage, and you definitely cannot pay yourself anything.

Long way of saying – NO DEAL.

But I can see the motivation for wanting to sell.

  • Reviews continue to trend down.
  • Some products are close to dead.
  • Seller wanting to get something out of a tough FBA product.

As I mentioned at the beginning, if I hold this company next to my requirements and benchmarks, it fails most of my boxes.

I’m aiming for 40% gross margins because I know my operating expenses will be around 20-25% and after any interest payments and taxes, my goal is to stay above 10% net profit.

You can try to analyze the business yourself. I’ve uploaded the original and corrected.

It also brings up the important point that there is going to be a reason for why the seller is selling. It’s up to the buyer to uncover the truth because the seller is always going to sugarcoat it or leave out the details.

However, considering that I already have suppliers that make capsule holders, there’s no reason for me to pay $265k + inventory for something that we could get done for $10k.

Summary

You can learn a lot by analyzing somebody else’s financials.

From this company alone, I can tell that the owner doesn’t know their numbers, costs are high, products are dying, margins are thin and the niche is competitive.

The business generated $1.12M in the past 12 months, but the owner is willing to sell for $265K. Not a horrible deal, but only if that person is brand new and doesn’t have the time to learn and do it from scratch.

How to price products for profit and growth (case study)

Before getting started, note that there are many strategies on how to price products based on your Amazon selling strategy.

  • Fast turnover, low profit
  • Slow turnover, high profit
  • Loss leaders
  • Promotions
  • Distribution pricing

But the focus of this article is to look at product pricing for fast to mid turnover items while maximizing profit.

One tool that has helped our business growth tremendously is knowing how to price products properly based on the channel. Now, our focus is to always prioritize profitability AND cash flow without sacrificing (too much on) turnover.

I see a lot of articles and videos talking about margins and “net profit”, but note that profit is not cash flow.

Actually, from an accounting standpoint, calling your Amazon profit “net profit” is very wrong and will give a false reality of your bottom line. The “net profitability” definition on Amazon’s calculator is really gross profitability.

Very dangerous to confuse the two.

So when people say they get a profit of 40%, they really mean gross profit and after operating expenses, it could range from 0% to 25% net profit depending on how much they are spending on advertising like PPC, tradeshows, Facebook, giveaways, R&D and so on.

These are all operating expenses. Not cost of goods sold.

How to price products for Amazon

To successfully price your products on Amazon, these are rules of thumb you can apply.

Our goal is to aim for 40% gross margin products as a starting point and rule of thumb.

This kind of margin gives us plenty of breathing space to compensate for failed products (which happen regularly) and also provides us with enough cushion to continue product development, spend on PPC and other businesses expenses as mentioned above.

But why does it have to be 40%?

While all businesses are different, here’s a better breakdown of what you have to pay for to keep running your business and generate sales.

  • product cost – COGS
  • freight cost – COGS
  • shipping to amazon cost – COGS
  • labor cost – operating expense
  • advertising cost – operating expense
  • payroll – operating expense
  • utilities – operating expense
  • rent/lease – operating expense
  • legal – operating expense
  • other fees and interest – operating expense
  • marketing – operating expense
  • taxes – other expenses
  • travel – other expenses
  • (there’s more I didn’t mention)

E.g. wholesale sellers that operate with 10-20% gross margins walk a tight rope. One wrong move and they fall in the red.

Looking for products that can achieve 40% margins gives you breathing room.

Take a look at the financials for Proctor and Gamble. Click to enlarge.

Proctor & Gamble Financial Statements 2013 to TTM
Proctor & Gamble Financial Statements 2013 to TTM

They work with 50% gross margins which should be the baseline for any wholesale business. When we sell to our wholesale customers, we make sure that our margins are also at 50%.

As you go down the financials, note that operating margins comes in at 20%. This means that 30% of the revenue go into operating the business.

This is close to what we have going on and it’s the max level for an Amazon business. We range from 25% to 30%.

If operating expenses exceed 30% of revenue, then there is too much fat and waste in the business.

Keep going down and taxes are real. They should be included in your calculation. Finally you get to net profit where PG shows 16.4% TTM.

Very strong and healthy business.

If you sell outside the US, where taxes are included into the price, you have to factor that in to your pricing as well.

If you don’t include business expenses like the above points into your calculation, you could end up cash flow negative, despite having a profitable product.

Introducing the Gorilla ROI Amazon pricing calculator

Here’s an example of BBQ gloves you see all over Amazon.

bbq gloves

This one is priced at $16.95.

Reverse engineer the product pricing

In our pricing calculator included in the PRO Spreadsheet Package, I’ve entered the

  • selling price as $16.95
  • target margin of 40%
  • 25% overhead expenses (my rule of thumb)

Example of our PRO Spreadsheets

I don’t know the exact cost breakdown of what is included in the product, but based on experience, I’ve jotted down what I would potentially pay.

It’s also easy to go on Alibaba and get prices of each. Doesn’t have to be accurate.

Don’t forget the other COGS.

Once that is done, you see the product cost is not $3.42.

It’s really $4.17 once it reaches the Amazon warehouse. This is the “landed Amazon price“.

What’s should I price it at?

Now the important question is what price you should sell this product.

  • One way is to enter different prices and calculate the margin each time.
  • The other is to work backwards for the margin you want and find out the price.

The quickest way to do both is to use a sensitivity matrix.

Sensitivity matrix

The above table is a simplified P&L statement with varying price points.

At $16.95, the gross margin ends up being 32.3%. I am confident this is close to what the seller is actually getting. Probably between 30-35%.

Question is, is this price profitable and is it a good price?

Let’s see.

GROI calculation details

If my goal is to achieve 40% gross margins, I’d have to sell it at $20.

$16.95 is a 32% gross margin product, and although I would make $5.48, the TRUE cost to replenish inventory to Amazon’s warehouse will be $4.17. This means I’m left with $1.31 in my pocket.

This is money I can use to pay taxes, develop new products, increase spend on marketing etc.

Now compare that to the $20 recommended price to get 40% margins.
For each sale, I’d gross $8.36.

$4.17 will go towards inventory which leaves $4.19 per unit in my pocket.
The rest can be used for your marketing and other operating expenses.

The real difference is in the operating margins.

Both prices are profitable and will be cash flow positive. But the $20 price point gives you 16% operating margins while the $16.95 price point leaves you at 7.3% operating margins.

If you go back to the top and look at Proctor and Gamble’s financials, you can confirm their operating margins at 20%. So you want to make sure your operating margins will come to at least 15% as a minimum.

Because Amazon takes such a big cut of your sales price, our goal is for at least 10% to 15% operating margins based on the product. Overall, we are looking for 15% at the end of the year.

Anything less, and it leaves less room for error. Also, if a certain product demand spikes, the extra percentage points helps to have a strong cash balance ready to double down on inventory and expand when necessary.

With 7% operating margins, investing in double the inventory quantity will strain your business – especially if another product requires 2x inventory.

Never join the race to the bottom

As a last example, if I was to price this item at $15, you can see what a difference it will make.

Price for cash flow & not just profits

It may look profitable at $15 with a 25.5% margin, but after business overhead, you are left with 0.5%.

Razor thin margins.

After taxes, your net margin is negative. You lose money for every unit sold.

Don’t just price products for profits, price it for cash flow too, and find that balance.

Alternative FBA Calculators

Another alternative you can use are online calculators that go beyond what Amazon provides.

Here’s one example of an Amazon FBA calculator you should check out.

amazon fba calculator
amazon fba calculator

Love the clean and easy to follow presentation.

If you follow my screenshot, you can take it form steps 1-4.

Enter the ASIN of interest, the costs associated with the product like I did in my spreadsheet calculator, and the potential profit is calculated for you.

The difference in figuring out how to price products with my spreadsheet vs other online tools is that it’s easier to break down the details via spreadsheet. The spreadsheet is also focused on determining your best selling price based on your margin requirements.

Online tools are great for scouting and quick analysis as you can see above.

If you need a better handle of your pricing, check out the pricing calculator in the PRO business package along with other operational docs that will help you get a better handle on your business.

How we source winning products using Amazon Storefronts

What you’ll learn:

  • What I define as winners for our business
  • How to find winning products via storefronts
  • How to find competitor’s bestsellers

Winning Product Probability

A while back, my mentor said that on a good day, 1 out of 10 products will be winners.

A mere 10% hit rate.

This is coming from a person whose family founded a multibillion-dollar retail company across the country. He knows what he is talking about.

When I look at our product portfolio and stats to date, he’s spot on.

However, with the software and data analysis, you can perform nowadays, this stat should be trending up.

When we started sourcing without the help of any data analysis, I shared the story of our first product and how it flopped – a microwavable silicone cutting board.

cut marks on silicone cutting board
cut marks on silicone cutting board

The second one also flopped – an expensive DIY Greentech product that makes natural household cleaners with just water and salt.

one_spray_disinfectant

Two in the fail column straight out of the gate.

We were so close to classifying our 3rd and 4th product a failure and throwing in the towel. But as luck would have it, it found the right channel.

#3 and #4 have both turned into our best sellers and have been going strong ever since.

Here’s the tricky part.

Some of our best selling products do over 6 figures in wholesale business.

However, it doesn’t sell well on Amazon.

When the products are sold in stores or direct to consumer at shows, it flies out.

On the flipside, some of our best selling items on Amazon does not sell on the wholesale side or in a direct to consumer setting.

Our retail buyers are just not interested.

So depending on the product, what you may deem a failure, could really be a huge success via a different channel.

But since we are talking about Amazon here, allow me narrow down to what I look for when sourcing Amazon products that I define as winners.

Winning Product Requirements

Keep in mind that our numbers are totally different to yours. There are different strategies to sell on Amazon. You have to pick your path.

You and I sell in different categories, have different strategies, different visions, and different everything.

Our items are mostly under $20.

If you are selling furniture that sell for hundreds to thousands of dollars, you’re not looking for volume.

If you sell generic items, turnover is most likely your KPI as you have a lot of competition.

These are rough numbers of what makes sense for us in order to label a product a winner.

  • $20,000+ in monthly revenue
  • 2,000 units sold per month
  • Average review rating >= 4.3
  • Conversion rate > 20%
  • PPC ACoS <= 30%
  • Gross margins of 40%

A product rarely hits all 6 points.

Our best seller meets 5 out of 6.

Our number two seller ticks 2 out 6.

Goes to show that there are outliers, but for the most part, our products hit 3-4 out of the 6.

With so much competition, in just about every category nowadays, it’s getting harder and harder to find a product that scores well.

But there’s a quick and easy way to see what’s working for others that you may be ignoring.

That is, looking up best sellers of your competitors.

Analyzing Competitor Storefronts

This is an old tactic, but it’s one of the easiest, most reliable and overlooked.

You can use scouting software, but it’s not 100% and everyone else finds the same thing.

I like to run through my intuition first and then follow it up with software where needed.

To see what I mean, open up “meat claws” or “grill brush”, and sourcing software will say it’s a good opportunity product. But if you look at the listings and the countless number of identical products, you know it’s not worth pursuing.

Here’s what I do.

Let’s say I want to get into the stainless steel water bottle business.

I enter “stainless steel bottle” and I want to reverse analyze this seller “Simple Modern”.

1. Click on the “sold by xxxx” to go to their profile page.

amazon storefront 1

 

2.  click on the link to their storefrontamazon storefront 2

3. This will bring up the storefront and Amazon displays the products in order of best sellers (units sold) to least number of units sold.

amazon storefront 3In this example, what jumps out is that if I was new to this category, instead of diving straight into stainless steel water bottles, which requires a lot of capital and huge competition, it’s a better idea to make some variation of a unique lids that can fit all types of bottles. Make it compatible with all brands.

Rather than investing in stainless steel bottles, going for the lids will be will be cheaper to make, cheaper investment upfront, wider market, and higher demand based on what the storefront is showing.

The stainless steel bottles can still work of course. If you have deep pockets and can afford to reinvest, test the product by hitting PPC hard and doing tons of giveaways.

But an easier backdoor entry point with higher demand seems to be the lids based on this single example.

Caveats

Amazon has made it difficult ever since they combined BSR across variants.

In this example, the #3 listing of the water bottles has 42 variant SKU’s. Instead of ranking each variant separately, all child variants have the best BSR attached to it, even though it isn’t selling at this rate.

This gives a false picture and a trap for new sellers.

If only 2 out of the 42 SKU’s make over $20,000 and the others sell 10 a month, there is no way to find out which version is the best selling one.

Scouting software will tell you that this particular item makes over 6 figures a month, and if you trust it blindly without verifying, a big mistake is waiting to happen.

That’s where more due diligence, intuition and experience comes in.

Nevertheless, the storefronts are fast shortcuts to what each seller’s best selling items are. A great way to track what competitors are doing, and to leverage the work they have already done.

Bonus Tip

You can assign this task to an assistant or a junior employee to track and provide a weekly or monthly report.

A good way to keep your product and idea pipeline fresh and in sync with best selling products.

3 reasons trade shows aren’t dead

What you’ll learn:

  • why we go to trade shows
  • what we get out of trade shows
  • how it can help your Amazon sales

Yes.

I still go to trade shows.

I’m afraid to look at my calendar because 2019 is packed. My wife and I definitely feel overwhelmed already from all the upcoming schedules and events.

But I do look forward to seeing how everything pans out when I review 2019 a few years later.

Trade shows? Eww…

First, when it comes to trade shows, people tend to think:

  • trade shows are useless
  • they are behind trends
  • waste of time and money

I attend shows for 3 main reasons which I’ll go into deeper detail.

#1 To sell our product

When we get to sell it physically, we find out which products work, what people respond to, and getting rid of excess or dead inventory.

#2 Scouting

I’ve mentioned this before but I don’t rely on scouting software for new product ideas. With so many armchair Amazon sellers, finding product ideas outside of the usual research software has been an advantage that continues to work for us.

#3 Networking

Most business owners at the show all go through the same thing. It’s a great way to pick up knowledge bombs from others and share feedback and marketing ideas.

Helping a new entrepreneur is also rewarding.

1. Selling our product

A lot of good things come from selling at shows.

It’s an opportunity to:

  • get in front of a real audience
  • identify who your true target audience is
  • gather live feedback from buyers
  • craft your pitch
  • test what works and what doesn’t

You can do all this from the comfort of your office or home, but there’s a lot of value in doing it in person.

It’s also faster and cheaper.

You could spend weeks, and hundreds of dollars doing online surveys, using custom software, sending out emails, split testing pages and headlines, and paying for ads to drive leads before you have a big enough sample size to lock down a solid result or conclusion.

But trade shows provide the opportunity to do all of the above in one setting. And within a day, you usually get the answer.

I’m not referring to big trade shows like the annual Chicago homeware show.

A couple of years back, we did a local Christmas event. Our friend was begging us to sell our stuff at her event. It was only $30 to get a table. The show/bazaar was held at her school on a Saturday from 10am-3pm.

At this little event, we figured we would work on our pitch and see what works. Didn’t expect any sales at all. Just doing it to help a friend.

But we sold over $600 in that lazy afternoon.

But the point is once I got my pitch going and was able to convert browsers into buyers, I applied the catch phrases and keywords that triggered a reaction – into my Amazon listings.

These are keywords that do not show up on google search volume, Amazon search or any SEO software.

After we updated our listing with these phrases, it started to have a big effect. We uncovered the exact pain point keyword by listening in person to what the customer was looking for and asking questions about.

Real time feedback.

Trade shows are also good places to get rid of excess or dead inventory AND do some local marketing and get the product in front of people.

With our dud products, we offer it as a freebie to incentive people to buy. We were going to throw it out anyways. Might as well use it as a promotion to increase conversion.

With each sale, we also mention our website and where they can find us. An effort to drive people to our site for future repeat purchases. Last year we started to see good results and diversifying away from Amazon is always a good idea.

2. Scouting for products

At our worst show ever, we sold $12 all day.

  • 10 hours
  • 2 people working
  • $12 total sales

Not going to lie, it was draining and demoralizing, but we found our best selling product.

Here’s how it happened.

The guy next to our booth was crushing it.

He easily made $15-20k during this show. But thanks to him, and our non-existent sales, I got to watch his pitch, his presentation, his craft and pick his brain.

The way he presents his products, the problem he makes you visualize, the dream he lays out and the solution to the problem.

We now try to create out listings, website, videos and marketing material in this way.

Don’t sell the steak. Sell the sizzle.

His presentation was so good that my wife fell for it and couldn’t contain her excitement at spending $2k to buy his stuff.

As he is packing up the goods for us, he throws in a small sample of a product to keep his products in top condition.

Again, that show was our worst ever.

But that little free sample – it worked so good when we tried it that we were literally blown away. Forget the expensive $2,000 item. We were ecstatic about that cheap little freebie.

We had to find a way to sell it.

After digging around and making numerous calls, we found the manufacturer was able to open a wholesale account.

To this day, it is still our #1 seller and getting stronger year over year, turning over thousands every month with little competition.

During the show, it was draining and annoying not getting any sales. But in hindsight, it was our biggest success ever.

This is an example of scouting luck, but hey, luck comes to those who try.

Our other products were also found in person. If we see a booth that is getting huge amounts of traffic, we analyze what the product is and why. If the product is good and fits within our scope, we improve on it and make our custom version.

Seeing as how all the low-class Amazon sellers are short-term motivated and copycats, they lag the market significantly.

While these sellers may get to market quickly with the exact same product, it’s not worth playing the same game.

There are so many shows and fairs throughout the year. Check out your local calendars to see what’s around your area, or if you have the time and budget, make an international trip. International scouting has been one of our biggest winners throughout the years.

3. Networking

Trade shows are some of the best ways to network with like-minded people.

We all go through, or have been through similar experiences and people are more open to answering questions when you talk to them in person.

If you’ve ever been to a networking event, it’s miserable. People aren’t there to network. They are there to sell.

With shows however, people are there with the same objective and are open to sharing ideas, their stories about business and life.

We found one of our best distributors from a show. He noticed that we were coming year after year, yet didn’t see us outside of our main city. He wanted to take on the product for his portfolio.

Most people at the shows also don’t know how to sell on Amazon or how to do it properly. So if you are a consultant or agency, it’s easy to pick up new business.

Many different ways to approach it. It’s the mentality that counts.

If you believe trade shows are for suckers or it’s old school and there’s nothing to gain from it, that’s the result you’ll get.

Downside to trade shows?

The biggest downside is:

  • time
  • energy

Shows are not easy if you exhibit.

I have so much respect for people who do it all year around.

But each time we’ve put in the effort, it has paid off.

You can start easily and just visit shows and fairs around you that are easy to get to. If you are a new seller, it’s a good way to be different and build up experience without a big investment.

Summary

Trade shows don’t suck.

Visit one, or sell at a local one yourself and it will make you are a better seller on Amazon.

You’ll get what you put into it.

Don’t just be an armchair Amazon seller.

Be different.