Case study part 3 – As of February 23rd we’ve had this business for roughly a month and already increased net profits to $5,050 (from an AVG of $2,700 ish previously). There’s 2 core reasons for this. One is related to marketing which we’ll discuss in a later case study post but the other I want to touch about now, it’s more a due diligence & acquisition point than anything else.
I’m only going to touch on this briefly because the point is so simple and obvious that many will think it’s common sense.
Acquire a business that’s GROWING…
But honestly, it’s something that’s overlooked by a lot of acquisition models. They look at year over year growth or how the market itself is moving. Don’t get me wrong these are important for larger businesses, but if you’re purchasing anything under half a million, I’d say they actually don’t matter.
The reason why we purchased this business is threefold;
- It had great branding.
- A strong base which our 10X Amazon marketing process can scale from.
- Finally, it was growing from month to month.
The final point is incredibly important because it actually makes the valuation of the business seem LOWER.
If you find a business that’s growing 5% a month, but it’s valued on its 12-month AVG business net profit. Assuming you pay slightly under this price, you have an incredible opportunity to expand very quickly, simply because you (during the due diligence process) have assessed the business, products etc. But as soon as you acquire this you are already in a profit…
Let me explain a bit further with an example if you purchase a business that’s doing $2.5k/month net profit on a AVG 12-month breakdown. Let’s say you buy the business for 24X monthly net profit = $60k. In “theory” you’d think you need 24 months to get your money back (assuming no active marketing for growth and no decrease in sales).
But, the issue is if the business is already growing your actually looking at acquiring a business that’s doing closer to $3.75k/month. Assuming no active growth or decrease again, you get a great deal in that your $60k is returned in just 16 months. Not a bad deal in my book if you are paying 16 months net profit for a business.
Of course, this is oversimplified and making a lot of assumptions around growth and lack of risk. But this means if you can DOUBLE net profit in a 3 month period (investing heavily, launching new products – which we’ll cover in the next post, investing into influencer marketing, investing into ranking and other paid advertising mediums). Suddenly you have the potential to get your initial investment back within 10 months…..
Anyway, you can see I’m passionate about this subject, but let’s cover some other important points in finding a good deal;
- Quick wins – Ensure you can see some quick wins in the products. Whether this is images, reviews, competitors (sucking), PPC etc. Doesn’t matter what it is, but you need a list of tasks you or your team can cover in the first month to increase profits with a high degree of confidence.
- Tools – Leverage tools and software from day 1. Analyse absolutely everything, we have the leading post on Amazon seller tools so anything your unsure of just head over there.
- Low Organic Competition – When purchasing (or launching any product for that matter) – Have a look at the top ranking competitors, if you are launching a brand new product and the top ranking competitor have 2,000+ reviews at an average of 4.5 stars you should probably build out a definitive strategy and angle. Notice how I’m not saying don’t do it, but instead, you need to ensure that the angle is in place. This is more about branding than anything else (which we suck at for the record).
- Reviews are the limiting factor – Amazon businesses can grow exponentially fast – but the single most difficult part to scale is going to be the reviews coming in. As a result always weight strong, real, good reviews very highly when looking into an Amazon business to acquire.
- Look for opportunities but realise it’s never “too good to be true”. Taking action on a good opportunity is better than analysis-paralysis – Self-explanatory.
Hope this helps, stay tuned for episode 4 in a month or so.