A few weeks ago, we had a chat with Tyler Jefcoat about starting, growing and selling Amazon FBA businesses. Tyler is the co-founder of Seller Accountant – an eCommerce bookkeeping company dedicated to supporting Amazon sellers. Unlike traditional accounting firms, the team at Seller Accountant take a holistic approach towards supporting their clients by advising them from an entrepreneurial standpoint and considering a much wider range of factors than simply financial metrics.
Prior to building Seller Accountant, Tyler was involved in the banking industry, and co-founded a healthcare startup that rapidly expanded to a team of 100 staff within just 4 years. When they sold the business, Tyler discovered his passion for mergers and acquisitions, which has helped him to guide many Amazon FBA business owners towards successful exits.
Getting started on Amazon
When an Amazon business is getting started, what are some of the common mistakes that founders often make?
The number one mistake that new Amazon sellers make is not measuring their numbers. As tempting as it is to delay implementing proper accounting systems and procedures, it is extremely important to get this right early on.
“There’s kind of this ‘I’m in an emergency mode as an entrepreneur and I’m hustling to try to survive and I’ll worry about the numbers later’”
Even if they have some kind of accounting lite system in place, the second mistake that new sellers most often make is failing to really measure their profitability.
“Alot of times, especially if they are wired as a sales guy, they will sell a bunch of stuff and lose money and not even know it. I think those are probably the two biggest challenges.”
What sort cadence should you measure your sales and profitability on when you’re just getting started?
It is really a cost-benefit analysis type situation. But at the very least, you should be looking at your figures monthly. With the combination of cloud accounting software such as Xero or QuickBooks Online, and A2X for revenue recognition, it really doesn’t take that long to keep track of what’s going on in your business from a financial perspective.
“There’s really no excuse not to look at it. You’ve probably gotta look at it every week, and you ought to really dig in for a few hours every month. As you get bigger, you’re probably gonna need to get more help, but that’s good to start off.”
Do you have any tips or guidance for the areas where new Amazon FBA sellers should be looking, and what the most important things are to consider pre-launch?
During the pre-launch phase of any business, research is paramount. However, it’s very easy to get inspired and go off on a tangent, researching things that don’t really matter in the scheme of things.
Every entrepreneur comes with their own unique skill set. Perhaps you might be great at discovering new products or negotiating production deals. But nobody is good at everything. It’s important to understand the bigger picture and know that at some point you will need to hire or acquire new skills.
“And I think just to be honest enough with yourself to know that if you’re not an attorney, then you’re not gonna be the legal expert in your company… Be comfortable spending a little bit of money getting help.”
Before launching your business, it’s also important to think about where you want to be in the next few years, and really getting realistic about the roadmap required to get you there.
“I may only have the resources to place two or three bets, but if I don’t think about the big picture, here’s what happens… you end up placing the easiest bets. You basically do whatever has the path of least resistance today, and you may be foregoing some more important things you may need to be focused on.”
Developing great accounting systems is one of those easily avoidable, but extremely important tasks.
“You get to a certain point where you don’t really understand how much you can afford to spend on advertising or sourcing, because you haven’t really taken the time to understand where the numbers are and where the dollars are going.”
Growing your Amazon business:
Once you’ve launched your Amazon business and gained a bit of market traction, the issue of managing cashflows whilst driving growth will likely arise.
Whilst it is important to pay suppliers on time and keep everything flowing through, how can Amazon sellers stay in the positive? Are any bits of advice or tools like Payability that you would recommend?
“First of all, acknowledge that it is very challenging.”
If you are still in the pre-launch phase, it is a good idea to make sure that you have access to enough cash. Things always cost a little bit more than expected, and having a line of credit or money available from elsewhere can allow you to scale faster. If you don’t have the resources, a service like Payability can be really helpful.
“Instead of you having to have the credibility, Amazon can have that credibility for you, and allow you to get your cash a little bit more quickly.”
Another option is to simply ask your suppliers for better payment terms.
“I mean the worst that can happen is they say no. So don’t be afraid to ask.”
Once an Amazon seller has made it over the first few hurdles, they’re 3-6 months into it, and they are getting the hang of things, what should they look at next?
The next most important things are setting up a proper accounting system (if you haven’t already done so) and locking down your IP by registering trademarks or patents and getting set up with Amazon’s brand registry.
Using a scorecard, which is comprised of 20-50 key metrics that are directly related to business success (such as retention rates, returns and ratings) is a great way to track progress on a regular basis.
“I would just use an excel spreadsheet and make a different column for each week so that you can start tracking your performance and holding your team accountable.”
Financial accounting metrics are lag indicators. They look at what has happened in the past. Scorecards are more of a realtime dashboard that allows you to correct course along the way.
This concept is explained in much more detail here.
At this stage, do you have any tips for how sellers can raise funding to scale up to the next level?
“I’ve heard lots of great stories of sellers that have been able to bootstrap it. They’ve just had a couple thousand dollars, and just bought the smallest run they could of product, and were just slow and steady”
A few other options include:
- Getting a federal-backed loan from the Small Business Administration. Generally, they require at least 12-18 months of financials.
- Bringing on an angel investor. However, they generally want to see a track record first.
- Banks won’t normally lend money without a few solid years of data. However, if you own a house, you might be able to get an equity loan.
Another option, which is quite risky is to work with a credit card broker:
“They will literally apply for 12 different credit cards at the same time, get you approved for these 0% interest deals that in 12 months are gonna expire, and it’s a race against time. Now you know that you have $80-90K like that. But when those things come due a year from now, if you don’t have the cashflow to pay them off, your screwed. So I would just be careful with debt.”
Sales tax nexus
The latest South Dakota vs. Wayfair ruling has really shaken up the industry and permitted States to expand their scope of economic nexus and put more pressure on online sellers.
Where do you see this going for Amazon sellers?
“The Supreme Court kicked the door wide open where States can be more aggressive in forcing compliance for eCommerce sellers in general. But they did that without specifying that marketplaces like Amazon are on the hook for the compliance. And so it’s just become a risk management nightmare for these sellers.”
At the moment, lots of people are wondering if Amazon will step up and own the burden across the board. For smaller sellers, the cost of compliance can really add up. The downside is that once you’ve registered in a State, you need to continue filing returns – even if you have no sales tax to declare.
“The current Supreme Court ruling hasn’t forced Amazon to do anything, and the way the US political system is working right now, it’s unlikely that there’s going to be some new congressional law passed that will solve this.”
To minimize risk, it is important to put a rational strategy in place moving forward.
“We’re starting to look at it State by State, and we’re not doing them all at once. We’re picking the highest volume States and one at a time getting compliant. Just to avoid those big audit headaches down the line.”
“We don’t really know what will happen, and I think that anyone who claims to be enough of an expert to tell you what is definitely going to happen is lying because we don’t know.”
Selling your Amazon FBA business:
What are some of the best practises for preparing your brand and FBA business for sale?
The first thing is to address your accounting right away, and eliminate any co-mingling of brands. Often, merchants want to sell one brand, but they are selling multiple brands though the same Seller Central account.
“Your timeline really matters on this. If you’re thinking ‘I want to sell yesterday, like right now’, then you’re gonna have to try to create a separate financial picture for that one brand that you’re trying to sell, and you may not get as much money as you want for it.”
The next important point is to tighten up the rest of your accounting. You want to put yourself in the investors shoes to understand the level of information they want to see.
“Your tax accountant will often just do your cost of goods sold a few times a year… But if you’re trying to actually get an appraisal for your brand, you need to understand your profitability every single month. And having a tool like A2X where you can, literally just using the cost of goods sold function, match all of your expenses with the appropriate revenue, it’s a game changer.”
Another key thing to consider is how long it takes to operate the business each month. Buyers want to purchase an income stream, not a full time job.
“Automate, outsource, document the systems, make it so that a new buyer when he or she comes in can really easily train a VA to do your job. Invest the time it takes to offload it.”
We discuss this in much more detail in the A2X ‘How to sell your Amazon FBA business’ eBook.
So when you’re working towards a sale, which channel would you go with? Broker? Marketplace? Direct sales?
“If the market is hot and you can for sale by owner and your willing to handle all of the headaches of negotiating the deal and finding the customers, doing the legal due diligence, obviously you can save 10-15% by not having to pay a broker commission. But all of a sudden, you’re not a seller anymore. Now all of a sudden, you’re in the broker business doing it yourself.”
The reality is that quality business brokers have hundreds or thousands of investors looking for deals. They understand what to expect, what not to expect, and how to avoid the red flags and costly pitfalls.
“I was talking with a guy recently… He said ‘I went with a broker, but you know what I got like 30% more for my business. The fact that I had to give them 15% of it, cool. I’m cool with that.”
What are some of the common mistakes that sellers make when working with a broker and do you have any advice for people looking to engage a broker?
Quite often, businesses aren’t ready to work with a broker yet. They need to get their accounts in order first.
“Now the broker will put together your marketing package, but alot of times, especially if you are a smaller deal, the broker is not going to give you the time you need if your books are a mess.”
The other important aspect is simply being honest with the broker and potential buyers.
“It’s an emotional trust-based decision where somebody is looking at you and saying ‘I trust in his brand, I trust in this seller and I trust in these financials’. And nobody is left-brained about this at the end of the day. They’re all right-brained. It’s all like ‘do I believe that this guy is shooting me straight?’”
Even if you’ve had a couple of bad months, it’s better to explain why this was the case, and what you did to improve.
“Just be honest, because you will get more money for your business being honest than trying to paint it.”
To learn more about the ins and outs of selling your Amazon FBA business, check out our free guide. Click here if you would like to get in touch with Tyler Jefcoat to talk about your Amazon FBA business.