Smashing your e-commerce business in 2021 - Amazon Business Tips with Ben Leonard - Part 1
Things we discussed in this session:
A. Part 1
B. Part 2
Things we mention in this session of Seller Round Table:
Episode 104 Transcription:
[00:00:01] spk_0: Welcome to the seller, roundtable e commerce coaching and business strategies with and er, not and amy Wiis. [00:00:08] spk_1: Mm Some people are still trying that today. In fact this week I had at least three or four listing reviews. I do free listing reviews for people and I have at least three or four that people are still launching products like that today. And it's just if you can make money doing it more power to you, but if you're trying to start a business with an exit in mind, you do want to be serving a customer and help them to see value in what you're, what they're buying from you. Right? Because ultimately a buyer isn't necessarily going to be interested in something that's very easy for them to copy themselves. Am I on the right track there? [00:00:48] spk_0: Yeah, absolutely. I mean there's nothing wrong with the approach people took back in, you know, say 2014, why wouldn't you? Right. Yeah, [00:00:55] spk_1: it was very quick money, precisely. [00:00:58] spk_0: But now really we need to be thinking about the longer game, having a bit more patients building something into a valuable asset that a potential buyer is going to look at and say yes, I would like to take that off your hands, please for quite a lot of money. And the way to do that is to create something that has value to a particular group of people and to get in front of them. Um actually, there's a great book on this if anyone's interested. It's called 12 months to $1 million by Ryan Daniel Moran. Um, it's a pretty, you know, it's, I don't like the title that much. It reminds me a little bit of the four hour workweek by tim Ferriss. It makes it sound a lot easier than it is. But you know, sometimes you got to have a snappy title to get something to move. It's a good book and breaks it down to a pretty simple process, create a, you know, a gateway product, build a suite of products around that get in front of your customer, define who your customer is, figure out their pain points their challenges. Make sure that your products are effectively the medicine for their pain, points the solution to their problem, find out where they hang out and get in front of them and create a a group of raving fans. It makes it, you know, I'm making it sound a hell of a lot easier than it is, right? There's a lot of hard work in there, but that's a straightforward process. You know, going to the moon is straightforward, you get in a rocket, you blast off you go to the moon. That's not to say it's not incredibly technical and difficult. You know, I'm sure Elon musk, if you was listening to this would be screaming about how how complex it is. But you get the idea right, It's straightforward, but there's a lot of hard work. [00:02:31] spk_1: Still working on getting Ellen on the podcast, man. Andy I I I say that Amy can do it. Yeah, No. Right or catch him on clubhouse. So I think, you know, the other confusion that's happened in the space between all the different types of buyers, the aggregators, everything else is when you're going to build your brand and you're and you're doing this amazing job. How do you go to sell and get the best multiplier for your business? Like are you should you be looking at aggregators for the best multiplier? Should you just be casting a wide net? Like what is the strategy there when you're looking for buyers to get the best possible multiplier? [00:03:17] spk_0: Okay. So mhm. Before we touch on that, let's talk about what the multiple is because different people will have a different definition of what a multiple is and that can make things a little bit overwhelming when people are researching this stuff. So here's what the definition should be. It should be a multiple of your trailing 12 month sellers, discretionary earnings, which is basically your net income plus add bags. So people listening probably like, well what's in that bag and add back is essentially a cost on your profit and loss sheet, which you can add back because the new owner is not going to have to pay for it. So anything so that includes your your income to the owners taking for instance, but also includes things that have been done once will never need to be do again. So all the photography associated with a particular products, we've done it. New owner is not going to have to do it any consulting you've had done, he's done. New owner is not going to have to do it video um trademarks, all that stuff, are you putting your phone through your business? You and it's not going to have to do it. So that's that's uh That's at backs so the multiple is applied to your trailing 12 month sales discretionary earnings. So I suppose you've got a business is doing Sales discretionary earnings, trailing 12 months is 100 grand and it's two years old. It's reasonably diversified and it's growing probably gonna get about three, a little bit more three x three times now. But if you're doing 500 k cells, discretionary earnings, You've got massive off of Amazon sales, lots of intellectual property, huge growth in the business is five years old. Could be much higher. 45 even slightly higher now. Mhm. Some people in this space, some brokers in particular, they won't be talking about three X. Or four X. Or five X. Because they'll talk about monthly. So when I say three X they'll be saying 36 X. Some makes sense. So you just divide that by 12. You got [00:05:29] spk_1: it. Yeah. So instead of the three acts you're just getting a monthly payment I guess on it it's just they [00:05:37] spk_0: like to so It's three times when I'm saying three X. I'm talking about three times your 12 monthly. Tell us discretionary arms. Whereas what they would be saying is it 36 times the average monthly across the trailing 12 months. That makes it boils down to the same thing. [00:05:59] spk_1: Yeah, you're calculating it annually or monthly. Exactly. So [00:06:05] spk_0: traditionally when we're selling a business multiple, forgetting e commerce for a moment, a multiple might be something like Anywhere between 5, 5 and eight X 6 or seven was about right in e commerce, particularly because of all the risk tied up in businesses selling through a marketplace like amazon where you don't own the customer journey, you can easily be suspended And just because it's so new to people, this concept of buying an e commerce business, the multiples have been kept a lot lower. So until recently, three X was about right about standard, pretty good. But now multiples are going higher and the reason they're going higher as we're seeing so many more people coming into this space. So many aggregators raising all that money is pushing multiples up. [00:06:49] spk_1: Got it. [00:06:50] spk_0: So I've moved away from your original question, which was how do you get a good multiple? Lots of ways. First of all, going back to what we said before, you have to build a brand, you can't just be selling stuff. Nobody's gonna want to buy a business. It's just selling a collection of stuff because there's nothing there for them. Right, Okay. You need to have a growing business which has still got some meat on the bone, which allows the potential buyer to recognize that you're going in the right direction. But there's still some growth there for them to realize an efficient, well automated business. It's going to push your multiple up age of the business is important. Geography, where are you selling? What Mark marketplaces are you selling it? So I'm going to be more attractive than others. How many excuse have you got? How complex is your supply chain? How complex are your products? How risky are your products? All of these things matter? [00:07:51] spk_1: And Katie wants to know should suite of products be all related in some way, [00:07:58] spk_0: ideally? Yes, so, [00:08:01] spk_1: I mean you don't want to be selling dog toys and kitchen faucets, right? [00:08:07] spk_0: You have a business which sells dog toys and kitchen products. That's fine, provided they're two separate brands. And then I will be making the argument in favor of actually those brands being in separate business entities because it gets very, very messy when if you want to sell the business entity, if you want to sell the assets is not quite so bad. But even so, your accounts are going to need to be very clear as to what's the dog stuff and what's the kitchen stuff? I like to keep things neat and tidy and separate businesses. And so will a potential buyer [00:08:39] spk_1: got it. So in terms of getting the best multiplier, you want to make sure that you're building a really awesome suite of products that you're watching, what you're sellers, discretionary earnings are going to be. So if you're advertising is really, really costly, you might want to really take a look at optimizing that and bringing that down because those things are not going to include those, those at bats. Right? So you really want to make sure that your earnings at the end of the day are looking really good and that you're seeing growth over time. I know we were talking about this, we've had a couple of people on recently, as you said, the space is growing. So we've had a lot of guests recently talking about this very subject and I think it's important, you know, and you've brought up a lot of points here that we haven't really touched on. So [00:09:33] spk_0: it's a complex one. And again, I use this word a couple times already. It's one that people can get really overwhelming because there's so much information available on the Internet. Now, there's so many facebook groups, some Youtube channels on the podcast, You can be very difficult to know what to do. Um there's a great book. Another, I love book recommendations. If I may, I get nothing for recommending these. But there's a great book called Built to sell. And I read that book before I sold my business and it helped me to get everything nice and neat and tidy and properly organized. And this built to sell is a great book. It's a little bit like the myth by Michael Gerber in that, um, it follows the fictional story of a mentor and a business owner. So the business owner wished to sell his business and the mentor guided him through it and eventually he went to a broker. And the worst thing you could possibly do is just decided I want to sell my business because you're not gonna be ready to sell it. And that is the mistake that the character in this book made. He went to his mentor and said, I want to sell my business and he said no, no you can't just sell your business, you have to plan to sell your business and so you get me to get your business, even if you're not interested in selling your business now, Probably one day you're gonna be. So what makes a lot of sense is to get your business valued. Now somebody qualified to do that because then you know where you are, you have a reference point. Otherwise you're trekking through the jungle with no map and then you can say, okay great, my business is worth 50 grand, 500 grand, five million. Does't matter and I will be willing to sell it for X from there. You can reverse engineer it where you can work with somebody to reverse engineer it and say what are the things I need to do to get there? You stuck them up like dominoes and you start knocking them down to a make the business an attractive proposition for someone to buy and be make it valuable to reach that target. [00:11:29] spk_1: How do people find someone who can value an e commerce business properly? [00:11:36] spk_0: Well, it needs to be well for starters that second brokers, that's us a little plug there. It needs to be somebody who's qualified on multiple aspects. So they need to have a deep understanding of e commerce. You need to have a deep understanding of accounts and they need to have a deep understanding of uh, e commerce accounts. Do you have a deep understanding of mergers and acquisitions? So those three things put together make somebody highly qualified to do this as an e commerce broker, which is what Alison, my business partner brings to the table. She's got 20 plus years experience in mergers and acquisitions and she's a specialist commerce accountant. So once you get an evaluation, you know where you are, you're not reaching in the dark. [00:12:18] spk_1: Yeah, that's exactly what we're doing right now. We're having our business value so that we can prepare to sell it and um, and it's so important to know what you don't know. I have the pleasure of being able to interview people like you all the time and learn these things, but that doesn't mean that I know what I'm missing or what I need to work on in order to be able to sell my business and there's no better time than now because, you know, everything is really picking up on the higher side, like you said, you know, it's really, really crazy. So I love that exactly how you put it out there, it's like get it valued first. You know, if we were talking to an aggregator right now, they might say, well just send it over to us and we'll let you know, right? But you're coming from that broker side where you're like, OK, you know, your value first or what you can do to prepare for that and then go from there. [00:13:12] spk_0: Yeah, that's the problem with with a lot of these aggregators, you know, good people, I speak to them every day. But ultimately, uh naturally business is business. They're going to want to get your business off your hands for as little as possible. And that probably means we'll sell it to us now. And avoid the biography of avoid the biography is basically them saying, please don't go to a competent broker who is going to properly value your business and ascertain what your real selves, discretionary earnings are and your real add bags, because then we're not going to get it from you for as cheap as we possibly can, [00:13:46] spk_1: right? Yeah, it's great advice. So I think you've kind of answered all my questions, but let's talk about um red flags. So of course there's always going to be bumps and bruises in any business. There's going to be things that every business has that they kind of need to overcome, but or not overcome when they go to sell. But what are the big red flag? So let's say, I've built a brand, everything looks pretty good on the surface. Is there anything when people are going to sell that a buyer will look at and go, oh my gosh, red flag. [00:14:23] spk_0: The answer is it depends. There was certainly when this kicked off a couple years ago, buyers were a lot less agnostic and very, very frightened of certain categories. So supplements was a big no, no. However, some buyers now are finding they actually have the capability to handle that, particularly if the supplements are more in the foodstuffs side. So for instance, turmeric turmeric supplements. Well, really it's just food, it's just ground up turmeric in a capsule. Right? So that's one aspect electronics, right? Many buyers are not too keen on electronics or anything that may become technologically obsolete. So if you are selling something like something like that, I'm not saying you're not gonna be able to sell it, but it's giving me about finding the right buyer and for that using a broker is key other red flags age of the business. So we are seeing again because more money is coming to the space. There's more competition. People buyers are willing to take on a little bit more risk. But generally speaking Businessly that are less than a year older are less sellable. But we are seeing very young businesses 9, 10 months old now being sold. So it's not to say that you can't get it done, but age of a business is important and in any case you're gonna, you're gonna sell your business for more if you've got a little bit more trading history. So those are, those are two straight off the bat. Um, your accounts, your accounts have got to be in order. So if you've got cash accounts and not a cruel get that organized now, apart from anything else, you're not being realized the full value for your business if they're not done appropriately. Um There's nothing a an aggregator likes more than seeing uh cash based accounts rather than a cruel because they know they can almost pull the wool over your eyes if you like. In terms of of uh of the offer, especially if they know you're not working with a competent accountant. [00:16:22] spk_1: Can you explain the difference between a cash based account versus an accrual based account? [00:16:29] spk_0: Yeah. So I suppose you've got a growing business and you're constantly using cash to buy more adventurous. So you've got half a million dollars of inventory on hand. Your profit and loss statement is going to say that that 500 K. Venturi is depressing your net income, But it's on hand, right? So should be outside of the profit and loss sheet. But if your profit and loss sheet, so if you present lost sheet has your 500K. net income really it's a million when you consider the 500 K. Stock on hand, right? So when a buyer Comes to you direct and pitches, you will buy your business in 30 days with no biography and you have cash accounts, you're gonna undervalue your business by a lot. Or when an incompetent broker just refers you to an aggregator, it doesn't actually do any work. The same thing is going to happen Because you haven't thought about the fact that 500 caving venturi was on hand. That makes sense. [00:17:23] spk_1: Yes. Yes, exactly, yep. You got to make sure that your accounts are in order and that you're working with an accountant who understands where your inventory should be placed when it comes to [00:17:36] spk_0: relative to your profit and loss sheet. And I've, I've done, I think I've done a reasonable job of explaining that, but this is precisely why, say Nikon brokers me on the e commerce side, partners with Allison, who is the absolute brain box on the number crunching side. So it's important that you work with somebody, whoever that is, has experience on all sides of the equation. [00:17:58] spk_2: That brings me perfectly into, into my next question. In terms of you're getting a little bit into accounting and things like that. Um, you know, what things should brands have in place before they approach a broker. An aggregator, in terms of like, you know, no past due taxes, um, you know, good books, um, insurance, you know, what are some of the things that you guys are looking [00:18:21] spk_1: at? [00:18:22] spk_2: Um, you know, to make sure that when you package that that up and go to look for a buyer, that there's not gonna be any, you know, anything that's gonna fall through the wayside and maybe blow up the deal? [00:18:32] spk_0: Yeah. So when you sell your business quite rightly, the buyer is going to do some really, really thorough due diligence, right? They're going to part with a lot of money in order to buy your business hopefully. And therefore it only makes complete sense that they're going to look under every nook and cranny of your business. It's important, therefore, that you get a head start on that process to make it as painless as possible for you and as smooth as possible for them so that they don't come back and say, oh, well, actually were undervalued, you're going, we want to discount for this. This doesn't this so things to think about intellectual property. Make sure your trademarks are in order. Do you require patents or registered designs? What about copyright? Have all of these things looked at by a really, really good attorney? I'm all for bootstrapping your business and saving money. But when it comes to intellectual property, get it done by a pro. I mean, ideally get it done by a pro right off the bat when you're starting. But if you didn't do it now, those I mean, those are the main ones that will kill a deal. Is uh you you know, you are infringing on some intellectual property. It's very rare, interesting. Good. [00:19:49] spk_2: No, go ahead. [00:19:50] spk_0: If you're doing anything black hat stop immediately. Don't do it again and keep records. And you really ought to if you were asked about that type of thing during due diligence, you bear all because the guys that are buying these businesses know what they're what this industry is like. They know some of this stuff goes on and with any luck they're gonna be transferring what they buy into their own. Let's we're talking about amazon for a moment, their own accounts anyway. So any history you may have had of anything. If you've done some review manipulation, that type of thing that you shouldn't have been doing even if it was a few years ago, tell the truth about it. Maybe you've got some back and forth correspondence with amazon when you got suspended. Keep records of all of that provide that because if you don't and then they find out then you haven't been honest with them that could kill the deal. Thanks for tuning in to part one of this episode, join us every Tuesday at one PM pacific standard time for live Q. And A. And bonus content after the recording at cellar round table dot com, sponsored by the Ultimate software tool for amazon sales and growth seller s c o dot com, and Amazing at home dot com.