If you’re considering buying an Amazon FBA business, you need to be aware of the risks involved.
First of all, no matter what kind of business you’re thinking of buying, you need to do your due diligence. This means carefully evaluating the business before making any decisions. There are a lot of scams out there, and if you’re not careful, you could end up losing a lot of money.
Another risk is competition. When you buy an Amazon FBA business, competitors can take market share from you if you don’t know what you’re doing. You need to make sure that the niche you’re in is stable and that there’s room for growth.
Operational risk is also something to consider when buying an Amazon FBA business. Can you run the business as well as its original owner? If not, then you could end up losing money.
We’ll also talk about manufacturer risk and market risks.
Table of Contents:
- The Importance of Due Diligence
- The Threat of Competitors
- Running the Business vs Original Owner
- Manufacturer Going Out of Business
- Market Changes
- Conclusion
The Importance of Due Diligence
When you’re thinking about buying an Amazon business, the most important task is to do proper due diligence.
Due diligence is the process of researching everything about the business, including:
- Financial information, such as sales, revenue, and profit
- The product the business sells, how well it sells, product reviews, margin per sale
- Business operations, such as supplier relationships, inventory on-hand, advertising campaign performance, and software necessary to run the business
- Digital presence outside of Amazon, such as a company website and social media platforms
- Intangible assets, such as trademarks and branding
- Competition on and off Amazon
One of the biggest risks you need to consider when doing due diligence is the possibility that the business is not what it seems. For example, a business may claim to be profitable, but if you don’t examine the financial details of the business, you may not find out until after you buy the business that it’s not profitable.
Another risk to consider when buying a business is the possibility that the business may not be able to sustain itself. This means that the business may not be able to generate enough revenue to cover its expenses.
In particular, Amazon businesses can be heavily reliant on pay-per-click advertising, which can eat up most of the profits. You can easily see if this is the case by reviewing a profit and loss sheet for the business.
Of course, there are other factors to consider when doing due diligence, but these are some of the most important ones to consider. Remember, it’s important to ask questions and to get as much information as possible so you don’t miss anything. This way, you can make an informed decision about whether or not buying the business is a smart move.
Key Takeaway: When buying a business, due diligence is paramount. It’s important to consider the risks involved, including the possibility that the business is not what it seems and that it may not be able to sustain itself.
The Threat of Competitors
As an Amazon seller, it’s important to be aware of the threat that competitors pose to your business. There are a few risks that come with selling on Amazon, and one of the biggest is the risk of being undercut or outperformed by a competitor.
If a competitor is selling the same product as you at a lower price, they’re likely to steal your sales. You can also lose sales to a competitor if their Amazon product page is better than yours. These are just two reasons why it’s important to keep an eye on your competitors and be prepared to adjust your prices and improve your product page accordingly.
Key Takeaway: One of the biggest risks of buying an Amazon business is from being undercut or outperformed by a competitor.
Running the Business vs Original Owner
Another key risk to be aware of when buying an Amazon FBA business is you need to be sure you can run the business as well as its original owner.
There’s no point in buying a business if you can’t operate it effectively. You must have conversations with the business owner prior to buying the business about what is necessary to keep the business running smoothly.
For example, if the product the business sells has a long lead time, and you don’t discover this until after you own the business, you may run out of stock on Amazon.
Another mistake is not finding out if any tasks are outsourced to employees, virtual assistants, or 3rd party service providers. Many Amazon business owners don’t do everything themselves, and it’s important to know if the original owner delegates tasks to other people.
Also, you need to be realistic about what you’re getting yourself into. Running an existing business can have a big learning curve, and you need to be sure you’re prepared for it. Just like it takes time to find the right business, it takes time to learn how to run it as well as the original owner.
Key Takeaway: Ensure you know enough about the business you’re buying to run it as efficiently and effectively as the original owner.
Manufacturer Going Out of Business
Another risk to buying an Amazon business is that your manufacturer may go out of business.
If you’re selling products that are manufactured by a company that fails, you could be left in a difficult situation.
You may not be able to get your hands on more inventory, and you may have to take time to find an alternative supplier. Since one of the major benefits of buying an existing Amazon business is the manufacturing relationship is already settled, losing your manufacturer is a major drawback.
Of course, there are ways to minimize the risks associated with a manufacturer going out of business. For example, you can diversify your product line so that you’re not relying on one manufacturer for all of your products.
You can also stay up-to-date on the financial health of the manufacturer(s) you’re working with. If you see that a manufacturer is in financial trouble, you may want to consider finding a new supplier.
Key Takeaway: When selling on Amazon, there is a risk that a manufacturer may go out of business. This could leave businesses without inventory and having to refund customers.
Market Changes
The ecommerce landscape is constantly changing, and that can be both good and bad news for businesses that rely on selling on Amazon.
On the one hand, there are always new opportunities to capitalize on as consumer trends shift. On the other hand, those same changes can create new challenges and risks that need to be managed.
For businesses that sell on Amazon, there are some specific changes that have taken place recently that sellers need to be aware of. Here are some of the biggest market changes that could impact your FBA business, as well as some tips on how to adapt.
1. Increased Competition from Other Sellers.
One of the most significant changes in the ecommerce landscape, and Amazon in particular, is the increased competition from other sellers.
This is partially due to the continued growth of ecommerce, as more and more businesses are realizing the potential of selling online.
It’s also due to the fact that it’s becoming easier than ever for businesses of all sizes to sell on Amazon. Utilizing Amazon’s FBA service is a big convenience and time saver for both you and your competition.
This increased competition can make it more difficult to stand out on Amazon and can put pressure on margins. The good news is that there are still plenty of opportunities for businesses that are willing to adapt and differentiate themselves.
2. Shifting Consumer Preferences.
Another change that’s always taking place in one form or another is a shift in consumer preferences. This is something that businesses need to be aware of no matter what platform they’re selling on, but it’s especially important for Amazon sellers.
One of the biggest preference shifts happening is a move away from single-use products and towards sustainable, reusable, and eco-friendly products.
This is likely due to a combination of factors, such as an increased awareness of the environmental impact of our consumption habits, as well as a desire for products that will last longer.
This shift in preferences presents both risks and opportunities for Amazon sellers. Shifting to sustainable and reusable products and/or packaging may require an initial investment of time and money. However, there’s opportunity to capitalize on this trend by selling products that match new consumer preferences for eco-friendly and sustainable products.
3. Changes in Amazon’s Policies.
Another change that can impact Amazon sellers is changes in Amazon’s policies. Amazon is constantly tweaking their policies, and even small changes can have a big impact on businesses that rely on selling on their platform.
For example, Amazon recently changed their review policy to crack down on fake reviews. This change could have a big impact on businesses that have been using fake reviews to boost their sales.
Amazon also decided to increase FBA fees for the 4th quarter of 2022. This was surprising for sellers because it’s not something they’ve done before.
The best way to manage these developments is to stay up-to-date on all the latest Amazon news and changes. This way, you can be prepared for anything that might come up and you can make the necessary changes to your business.
4. Amazon’s Growing Dominance.
Finally, one of the biggest changes that’s taking place is Amazon’s continued dominance in the ecommerce landscape. Amazon is already the biggest ecommerce platform in the world, and they’re only getting bigger.
This continued growth gives Amazon even more power and influence, which can be both good and bad for businesses that sell on their platform. For example, Amazon’s size gives you access to a huge audience of potential customers. However, that comes at the cost of Amazon having a massive influence on the success of your business.
The best way to manage this is to diversify your sales channels. If you own your own brand, create a direct-to-consumer website so you’re not completely reliant on Amazon. This makes you less vulnerable to changes in their policies or platform.
Key Takeaway: The ecommerce landscape is constantly changing. For businesses that utilize Amazon’s Fulfilled by Amazon (FBA) service, sellers need to be aware of increased competition, shifting consumer preferences, Amazon policy changes, and Amazon’s influence on their business success.
Conclusion
What are the risks of buying an Amazon FBA business?
The biggest risk when buying an Amazon FBA business is not doing your due diligence. If you don’t know what you’re getting yourself into, you could end up losing a lot of money.
The other big risk is that competitors will take your market share. This is especially true if you’re not prepared to run the business as well as its original owner did.
Also, there’s always the possibility that your manufacturer could go out of business, leaving you high and dry.
Don’t forget that the competitive landscape is always changing, and Amazon has an outsize influence on the success of your FBA business!
Despite all these risks, buying an Amazon FBA business can be a great way to get started in ecommerce, as long as do your homework first. Remember, there is risk to buying or operating any business, so by knowing what the risks are, you can work to mitigate them and minimize the impact they may have on you or your business.
Now that you know what risks to look for, check out the process I’ve used to buy several Amazon FBA businesses here.
Want to see how my FBA business has evolved since I started selling on Amazon in 2015? See this post.