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If you are considering the acquisition of an e-commerce store, you better grow comfortable selling through Amazon. The reality is, Amazon’s FBA program is growing exponentially (65% in 2014). E-commerce owners can’t ignore the massive $88 billion marketplace that is Amazon. But the metrics and operations of an Amazon FBA store are different than a traditional e-commerce shop.
So how do you evaluate an Amazon store? What common mistakes do buyers make pre and post sale?
I asked James Thomson, president of PROSPER Show (a show for Amazon Sellers, a conference focused on developing training and best-practice materials for online sellers) and the first Amazon FBA account manager, to review some of the biggest mistakes buyers make when acquiring Amazon seller accounts.
Every week, Amazon Seller companies change hands, with excited new owners anticipating big things from their newly acquired businesses. With more than 160 million active customers, 2 million sellers, and $100 billion in worldwide sales happening yearly on Amazon marketplaces worldwide, there definitely plenty of opportunity for upgrading a newly acquired Amazon seller business into a bigger company.
We have seen far too many ecommerce businesses for sale stumble very quickly under the new ownership. In this discussion, we examine mistakes made by acquiring sellers, splitting the issues into those made before the sale, and those after the sale.
1. Not Understanding The Amazon Marketplace Concept
Selling on Amazon is unlike other channels where a company will sell its products. Amazon created the third-party marketplace to complement its own Amazon Retail business, where it sources products directly from brands.
The Marketplace Allows Amazon to Collate Data. Lots Of Data
Through the millions of sellers doing millions of transactions each year, Amazon Retail can get deep and broad data on customer preferences, using that data itself to develop its sourcing strategy for future years.
As it does not share this data with third-party sellers, Amazon Retail has a massive advantage being able to “cherry-pick” brands and specific SKUs that it can see are already popular among Amazon customers. By acting on this data, Amazon can regularly take over the sales of top-selling items, previously sold only by Amazon third-party sellers.
Since the marketplace organizes products so all the sellers of the same item show up on the same product listing page, it is easier for consumers to compare offers of the same item, selecting what they believe is best for them (regarding availability, pricing, delivery time, etc).
The Importance Of The Buybox Algorithm
Layered onto this single-SKU framework is Amazon’s “Buybox Algorithm”, the algorithm that decides which seller will have its products added to the customer’s cart when the customer clicks the “Add to Cart” button.
In fact, this “Buybox Algorithm” is so important that it’s quite silly for anyone to consider buying an Amazon seller business without a rudimentary understanding of how the algorithm works. Without this understanding, a seller may find themselves with lots of inventory that it will never sell because other sellers dominate the buybox on those items.
You shouldn’t consider buying an Amazon Seller business without understanding the buy box.Click to tweet
FBA Sellers Get a Buybox Algorithm Boost
Amazon wants to create a fluid, consistent, high-quality experience for customers, each and every time the customer shops on Amazon. While the Buybox algorithm evaluates each seller’s past performance with regards to criteria such as on-time delivery, propensity to cancel orders, and feedback rating, the algorithm also rewards the seller that choses to use Amazon’s Fulfillment by Amazon (FBA) program.
The FBA program enables sellers to ship product in bulk to Amazon’s fulfillment centers, thereby making their products eligible for PRIME Shipping and Super-Saver Shipping – two accelerated shipping programs that enable Amazon to promise customers consistently fast delivery of their orders.
But with inclusion into the FBA program also comes the requirement that sellers accept Amazon’s very lenient refund policy – a policy at times so liberal that new sellers will be shocked by how easy some customers get away with blatant customer fraud. However, this higher cost of returns is typically offset with superior customer conversion resulting from products being in the FBA program.
New sellers on Amazon should understand that the marketplace is a fast-evolving market where competitors aren’t always rational, where the number of competitors on specific listings can increase significantly overnight (resulting in collapsing sales and margins), and where Amazon Retail has the permanent advantage over all other sellers.
Furthermore, what a seller offers today in its catalog is likely going to evolve over time as the competition on specific items changes. We have seen sellers be particularly successful by getting exclusive sourcing deals on strong products, or developing very tuned operational skills that allow them to get in and out of products without too many issues around stale inventory, high return rates and disappearing margins.
2. They Don’t Secure Key Brands In Writing
When a seller account is made available for sale, it’s critical for the buyer to understand which products currently carried are sourced through exclusive or semi-exclusive relationships with the brand.
Those products that do come with certain sourcing agreements in place (versus a model of anyone can source the items from the brand or distributor), it is critical that the buyer obtains written confirmation that it will be able to continue sourcing these brands. Otherwise, it’s entirely possible that new owners will find themselves cut off by the brands shortly after they complete the account transfer.
3. Not Understand Which Products Are Key Drivers Of Profit & Loss
Equally important to securing sourcing relationships is understanding the SKU-level profitability of the business being purchased. We have seen companies buy seller accounts without a clear understanding of which parts of the catalog are making money, and which aren’t.
Many sellers of Amazon accounts “pretty up” the account before the sale by growing top-line revenues quickly (at the expense of the bottom line). So it is critical that the account buyer understands at a very granular level which SKUs generate profits and losses today.
4. Inadequately Accounting For Liabilities From Uncollected/Remitted State Tax & Customs Duties
Not all Amazon sellers have their act together regarding state taxes. With the nexus tax implications of Amazon’s FBA program not well understood, a lot of sellers aren’t properly collecting and remitting sales tax in all states where they have generated tax nexus. It is best to get a tax attorney to evaluate a target seller business before the sale so as to avoid a costly future bill for back taxes.
Likewise, if the current Amazon seller imports products from overseas, it is highly advisable to review the import duties paid in the past two years on the account. We have seen situations where products were misclassified in the past when imported, resulting in tax fines when US Customs identified the mistakes.
1. Significant Changes To Operations & Fulfillment That Lead To Degradation Of Performance Metrics
I mentioned earlier that running an Amazon seller account requires an understanding of and adherence to all seller performance metrics that Amazon tracks. The key issue for recent buyers of Amazon accounts is to understand exactly what behaviors are needed to ensure these performance metrics remain strong.
Realistically, the best course of action is to require that the seller of the Amazon account provide at least one week of hands-on training, explaining the business specifics that impact these Amazon performance metrics. As with a brand new seller accounts, Amazon doesn’t provide a new seller with any “runway” to practice and get used to the high standards, so it is ideal to include some hand-holding during the handoff to ensure a smooth transition.
I also would advise new buyers to prepare for a lot more minutiae managing the day-to-day operations that what they have experienced with other sorts of businesses.
2. Not Understand Where Growth Opportunities/Improvements Lie
Finally, while an Amazon seller account may provide a new buyer with decent future cash flows, it is critical for this buyer to understand exactly where the opportunities are to improve and grow the business.
Due to increased competition each year, an Amazon seller can expect to have to work harder to keep the same margins. So without a clear game plan of where to find growth, too many new buyers of Amazon sellers accounts will become quickly frustrated by how much work they are putting into the business, only to see expected margins slipping away month by month.
3. Not Adjusting For a Changing Tax Nexus Position
A seller account had a nexus tax position before, but with the transfer to another owner, the tax nexus situation may well change, leaving the new owner exposed to uncollected and unremitted sales taxes. It is critical that any updates to sales tax nexus be made immediately upon transfer of ownership to avoid accrued tax liabilities while the new owners figure out what’s going on.
Running an Amazon seller business must be treated as a daily activity. While prospective buyers may view the purchase of an existing Amazon account as a clever way to get into e-commerce, or as a way to generate some decent cash flow each month, much Amazon-specific due diligence is required beforehand. A method for developing quick subject matter expertise on the Amazon marketplace is necessary to ensure that there aren’t costly mistakes early into the new ownership.
In fact, this high bar for performance metrics is a primary factor for Amazon’s policy restricting the sale of Amazon seller accounts. Of course, any seller is certainly free to offer for sale its know-how, existing inventory and sourcing relationships to another organization (though Amazon requires that a new seller account be setup by the new buyer).
Addendum – February 2016:
Until late 2015, Amazon’s Terms of Services indicated that an Amazon seller account was not allowed to be transferred to a new owner (as Amazon did not want one seller’s sales history, feedback and product reviews to be transferred to a new owner that may not operate at the same performance level as the previous owner). However, at some point in late 2015, Amazon changed its Terms of Service, and now seller accounts are allowed to be openly sold/transferred across owners. Amazon now provides specific directions on how to make the following necessary changes to ensure the new owner’s credentials apply to the seller account (use the “Settings” tab on the right-hand side of the main page of Seller Central):
- Deposit Method
- Charge Method
- Charge Method for Advertising
- Business Information (including the email addresses)
- Business Address
- Legal Entity (including if applicable, the DBA name)
- Merchant Token (provided by Amazon)
- Language for the feed processing report (most likely English)
- Shipping and Returns information
- Tax Information (including state tax setup)
- New email and password for the Seller account.
If the account is already tied to the Brand Registry for particular brands, a discussion with Amazon’s legal team is strongly suggested.
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