When buying an Amazon FBA commercial enterprise, performing due diligence is prime. I share my 6 step framework that I’ve used throughout a couple of acquisitions to understand strengths, weaknesses and red flags.Buying and promoting Amazon FBA agencies has exploded in recognition Amazon FBA due diligence over the last 2-three years as aggregators which includes Thrasio have made headlines as a number of the quickest-developing businesses inside the US.

If you’re interested in buying an Amazon FBA business although, you have to be performing giant due diligence.Due diligence is the method of know-how and verifying every element of a employer’s operations. Due diligence covers all factors of the enterprise – from P&L verification, and deliver chain, to even figuring out capacity increase possibilities or threats to a commercial enterprise.

What does a Good Amazon FBA Business Look Like?

Throughout this text, we’ll go through and describe precisely what you must be looking for in due diligence. However, allow’s begin by describing what a exceptional Amazon FBA business looks like.

A appropriate FBA business to accumulate has the subsequent traits:

Strong role in a developing area of interest market

Growing sales and earnings yr over 12 months

High unit margins

Low operational complexity (<10 SKUs)

Strong moat against the competition (reviews, IP, etc)

Many paths to expansion

At its core, a good Amazon FBA business spits off cash and grows quickly with a low time commitment. Using Amazon for fulfillment allows sellers to rapidly scale up without additional logistical complexity as their business continues to grow.However, it’s unlikely that a business like the one described above will be put on the market or available for sale at a reasonable multiple. That’s the purpose of due diligence – to uncover the strengths, weaknesses, and potential deal breakers of any proposed acquisition.

6-Step Amazon FBA Due Diligence Framework

Data Prerequisites

Before going through the full due diligence process, make sure you have access to the required data.If going through a broker, they should have a lot of this documentation prepared for you in the business listing or confidential information memorandum (CIM). Be sure to request:

View-only access to the Amazon Seller Central account

Full P&L for the last 3 years

Documentation on the supply chain describing the process and terms

Any SOPS used in the business

This information will give you enough to get started and then you can always request more information/access as you uncover more and have questions.

Niche Due Diligence

An Amazon FBA business lives and dies by the category/niche it is in. As most operators know, it is much easier to operate a business in a stable or growing market than in a declining one. You can be a great operator but if the demand for your products is declining, it will be difficult to grow.When evaluating a niche, we look at three core factors: market size, trends, and competitors.

Market Size

Market size is important because it determines the potential ceiling for your business. Using tools such as Helium10 and Jungle Scout, lets you estimate the potential revenue in a niche. Looking at the overall market size also allows you to judge the potential for product expansion in the category.

Trends

While the market size is important, the trend of a market is equally important. Consider using tools such as Google Trends to evaluate whether a niche is declining, stable, or growing. A declining market indicates that there is less growth potential for a business and is a potential red flag for any acquisition.

Competitors

One of the core factors when evaluating a market is determining the quality of competition. Amazon FBA businesses can be very vulnerable to competitors undercutting their prices and taking away market share. Whenever you’re evaluating an acquisition, look through the top 3 – 5 competitors.Are they actively adding new products and performing optimizations? Or do their businesses look stale and outdated?

Note: Are you competing against Amazon’s products? Competing against Amazon Basics products can be hard and in most cases, would be a deal breaker. Amazon prices aggressively and gives these products priority placements that regular sellers can’t win.Answering all of these questions is essential to evaluating the overall market and determining whether or not you should go through with the acquisition.

Financial Due Diligence

Financial due diligence is the process of verifying the numbers stated on the profit and loss statement. Because businesses are often listed as a multiple of the seller’s discretionary earnings (SDE), every line item, expense, and add-back directly affects the potential acquisition price.

Source of Revenue

At a high level, understand where the business makes the majority of its revenue. Most Amazon FBA businesses have 80-90% of their revenue from Amazon. The remaining revenue is typically made up of Shopify and/or wholesale orders.

Trends

When looking at the P&L, always ask how is revenue trending? How is net profit trending over the last 3, 6, and 12 months? If revenue stays the same but net profit is decreasing, understand why that is. Is it because of increased advertising spending? Lower pricing?

Margins

At the end of the day, your gross and net margins are the lifeblood of the business. Higher-margin businesses allow for more mistakes and are typically easier to operate than low-margin businesses.According to a study by Jungle Scout, a typical Amazon FBA business runs on a 16% to 20% net margin. Benchmark a prospective acquisition against these numbers. Is the net margin higher or lower?  It’s important to look at the gross and net margins over time as well. If revenue stays the same but margins start declining, that indicates increased competition and could be a threat to the longevity of the business.

 Amazon Due Diligence

For every potential deal, you should get full-view access to the Amazon Seller Central account.

Account Health

Account health is the first thing to check before proceeding with any due diligence. In an Amazon FBA business, you will be taking over control of the Amazon account. If the Amazon account gets suspended or canceled, your business could be irreparably ruined.