I've been running an ecommerce business for 3 years now and get good sales from Amazon, but have been investing every penny I've earned back into more inventory. I feel it might be the time to cash out soon and use the funds to start a new business and do it bigger. But I don't know where to even start with finding out how much my business is potentially worth. And I don't want to listen to business brokers give me a sales pitch disguised as a "free valuation", at least not until I've made up my mind.
A good starting point for determining valuation is 3x your annual profits. That said, you may find a 1 - 2X variance up or down depending on the type of product(s), the category or categories you sell in, your total number of SKUs, etc.
If you're after just an overall idea, then most FBA businesses sell at around 2.5x - 3.5x SDE, with SDE standing for Seller's Discretionary Earnings or your Net Income + any discretionary or one-off expenses.
There's much more to it, though, and a lot of metrics will end up impacting the actual valuation. Is it mostly a single-product business? Expect the valuation to take a hit. Have you been steadily growing both your top and bottom line each year? Expect it to increase.
You may want to give https://thefbaguys.com/amazon-valuation-tool/ a go. Valuation tools are notoriously incorrect but this is a good exception in this regard ... as it's limited narrowly to just FBA businesses and can, therefore, take into account the metrics that apply to FBA businesses specifically.
Also - when you talk to a GOOD broker, they won't deliver you a sales spiel or convince you to sell earlier than you should. Many (most) of them will, but there are still a few decent people left in the industry who are happy to suggest you what's in your actual best interest, not what makes them a quick commission.
I won't repeat the same info as the previous experts already provided. I will add to it that in order to even get accepted in their marketplaces, your business must have at least 12 consequtive months of sales and show either a steady income for those months or a growing income. The more categories you have ungated will add more trust and more value to your business. The more successful ASINs, the better for your valuation.
Also remember that the business you sell must allow the new owner a way to continue sourcing the products as you do now and the buyer will most likely have you sign a non competition agreement baring you from selling in the same niche or selling on Amazon all together for a number of years.
The price you get is for the business only and does not include inventory. So you need to sell them the inventory separately if they want it.
If you would like some comments from a business broker I would share the following with you.
1. If you are looking to sell your business and are motivated to sell, look at things from a buyers perspective. If you are only willing to sell to meet a set of criteria that works for you it will be hard to find a buyer and ultimately close the sale of your business.
2. Your opening paragraph says you have been running your ecommerce business for 3 years and getting good sales from Amazon but you've been investing every penny back into the business. If your plan is to sell the business and then start a new business and do it bigger wouldn't it be best to keep your current business and make it bigger and better seeing you know it so well and have learned so much?
3. There are different metrics to value a business. A critical metric is how much the owner keeps after all his expenses or what is called Sellers Discretionary Earnings. This is one of the most important metrics as a business with lots of gross revenue doesn't mean its worth anything. For example, if you have a business with $1 million in gross revenue and expenses of $1.2 million to run that business its not too attractive unless the buyer is taking out a competitor. If you have a business with $1 million in gross revenue and expenses of $500,000 that's worth a lot more.
4. Most buyers need to get a loan to buy a business. A lender will not loan to a buyer if the business isn't making money as it can't service any debt the buyer takes on.
5. A good business broker will always charge for their business valuation. If a seller doesn't want to pay for my business valuation then they don't see any value in the information and skills it takes to be a successful business broker. Plus a good business valuation necessitates asking lots of questions which takes time and knowledge to handle correctly.