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Damon Pistulka, Andrew Cross
Do we don’t care?
Damon Pistulka 00:07
All right. Thanks for stopping by once again, at the exit yourway faces of business.
Andrew Cross 00:16
First time I’ve seen the intro, and it was pretty good. I like it.
Damon Pistulka 00:19
I can I don’t have the overlay done yet, but we’ll get that one done. But the intro, yeah, yeah, we made that list last week and got that going. But thanks everyone for stopping by. We’re getting ready here to talk a little bit about selling an e commerce business. Something that we we do an awful lot is, you know, working in the e commerce industry like we are it’s people ordered people wonder what’s going on. They wonder, you know, what it’s like to sell an e commerce business, how it’s different from selling another business, a lot of different things. When we when we talk to people.
So what we’re gonna do is Andrew and I are going to run through some of the some of the things that that we run into when we’re talking about an e commerce business, what is an e commerce business, first of all on our eyes, and then down through the different things that that we’ve dealt with when we when we try to sell them? So Andrew Krause are you doing today?
Andrew Cross 01:16
Well, I’m well, good. Yeah. 2021. Here we go.
Damon Pistulka 01:23
No doubt. Yeah. Seems like it’s hitting the ground running. That’s for sure.
Andrew Cross 01:29
Interesting times. Yeah.
Damon Pistulka 01:31
Yeah. That’s for sure.
Andrew Cross 01:33
But witness goes on businesses get built gets sold. So that’s not going away. Some great opportunities. Yeah. I noticed in the new relief package, and the SBA there. There’s new incentives for lending to buy a business if you’re not aware of that and been thinking about getting into or buying a business. Yeah, there’s some great incentives picking up your first six months payments.
You know, I don’t know how, if you’re if you’re going to have a successful transition, or transaction in a business, if you get through the first, the first six months are critical. So that kind of help. Yeah, is really something and, and a reduction in the fees. So yeah, yeah. Talk to your local bank about that. If you’re, if you’re an individual, and you think you can buy a business are looking to do that SBA lending, that’s, yeah, it can, it can, it can be quite a difference. But
Damon Pistulka 02:34
yeah, that’s for sure. And I saw that too. And we talked about it. But if people that are on there, listen about buying, thinking about buying business, go ahead and drop your comments into LinkedIn, or on Facebook, or wherever you’re listening to this or just reach out to us directly, and we can get them answered for you. But yeah, the lot of buyers don’t know when we’re not going to go down buying a business too far. But a lot of buyers don’t understand that the SBA lends to buy a business.
And, and that’s, it seems like we were helping people a lot with that, but they’ll lend up to $5 million to buy a business. And what what’s the buyer of a business has to put how much down in that in that situation? 10%
Andrew Cross 03:17
a well qualified buyer and, and you know, as little as 10%. Okay, you know, so I mean, that’s something to really think about, because, you know, if you have, you know, $100,000 to buy a business, you could buy a business for $100,000. Or you could buy a business for a million dollars. And yeah, you get a lot more for your money on that leverage, and then let the business pay back the debt.
Make it make it for you over time. So anyways, great resource, use your banks, if you can do it. These are desperate for small deals, they’re really lined up to help. on smaller deals, they’re really geared up to really, you succeed. Yeah. Governments, it’s, it’s good for everybody. That’s where jobs come from. That’s where innovation comes from the Small Business engine. And there’s a lot of people coming up now that have to transition out of their companies. But anyways, we’re here to talk about e commerce today.
Damon Pistulka 04:19
Yeah, well, we’re talking about selling an e commerce business. And really, I mean, this is all relevant in it to is you need to understand your buyers and we’re going to talk a little bit about the buyers later and what they’re looking for. And then throughout because honestly, when you’re getting ready to sell a business, I think when what we see is people aren’t ready, they just aren’t they haven’t thought about who is going to buy their business. And and really, that that’s critical in in the sale of the business or if you’re going to be able to sell the business.
So when when we look at businesses, Andrew, and we talk about the owner now what’s your That owner be doing it first in the business? And in how much should they be? What should their role be in that business, you know, in the year before they sell or when they’re getting ready to sell? When should they have this, I’m trying to, you know, what I’m trying to say about how much owner involvement is in the business. There you go, right.
Andrew Cross 05:21
I mean, if you look at it, from a value perspective, and the value of companies, valuations are done to the end, and you know, the buyers, that’s what they’re doing, you know, and they all have different ways of valuing business. And then there’s professional people who evaluate businesses, you know, but the people who are running the business is a key component, a key factor your management team, and typically, in these smaller deals, the owner is generally an operator, the business is in his inner circle, and critical to the success of the business.
So, you know, there’s the conundrum, you’re gonna sell a business, but it relies on you and has done for the last, you know, 1015 years, you started it, you handle all the sales accounts, everything critical decisions made by you, you hire and fire, you know, and all rests on it, you know, the buck stops here, as it does at the leadership’s desk, but what value is there to a buyer, if you’re not there, to run the company anymore, and then it also presents a huge risk to a buyer.
So yeah, they got to look at it, um, you know, like, you know, you want to think about your business in a different way. And it create a business that, that, that creates value for you, with professional management, you know, with delegation, without, you know, if you, if you can’t leave your business for, you know, and go on a two week vacation without having to check in every day, you’re gonna have problems on your company. Yeah, you know, it’s watermark test, you know,
so, create a business
Andrew Cross 07:03
that you can do that, you know, have the right people there that you can rely on, that are running the business, so that you can go and if you can actually literally disappear on an island for two weeks, and not have to check in and you don’t worry about it. Because, you know, it’s in good hands. And people are doing, you know, executing the plan, they have the right people in the right seats, and you come home. You know, that’s the kind of business that’s value, that’s what value, you know, that’s a what’s gonna get a business soul and be, you know, what’s gonna get you, you know, hundreds of 1000s, maybe millions more than what you’re currently looking at.
Damon Pistulka 07:43
Yeah. And that’s, that’s this was trying to let let people understand that, you know, when you’re in that business, and you’re building that business, and it’s, you know, might be three, four or five or more million dollar business, and if you’re still integral to that business, that buyers looking at, like, what am I gonna, what, how, how incentivized or how much can we really count on that to be able to transfer forward with the business if I just paid that owner a bunch of money, and, and they’re either walking away to part time, or they’re gonna even stay and work with the business?
Andrew Cross 08:20
Well, it’s, um, it’s a, it’s a jump and a leap to take a business that provides you with an income to a business that you treat as an investment that is increasing in value. Every day, and, you know, you know, this is why you look at publicly traded companies, you buy stock in a company, they’re, you know, they’re compelled by law, you know, if the, if the CEO is fired, or leaves, they have to disclose that to you as an investor. And why is that because that’s critical, you know, you lose the head. And, you know, we can see examples of that all over the map. Or the founders outlet, you know, Apple went through all those transitions, it’s no different at your as well.
Damon Pistulka 09:10
Yeah, yeah, exactly. And that’s, that’s where when we’re when we’re working with clients and advise them on selling their business, we’re sometimes it takes us six months or more for them to get themselves out of the business enough. So like you said, they can go on a two week, two week vacation and maybe get a report here or there if they need to just see how the business is running. But if they can’t do that, and can’t, you know, check in every few days or or maybe even add best every week, that would really be the best. They’re probably it’s probably gonna degrade their value of it.
Andrew Cross 09:44
Yeah, for sure. And that’s part of what exit urine is all about two is,
Andrew Cross 09:51
you’re you’re putting you’re, you’re building a company, and if you’re there, you’re there. If you’re not, we’ll you know, we actually, you know, we’ll go in and help you get there. But you’ve got to be able to let go. Like all the fun, when it’s a if you can’t, you can’t because something, it’s human nature and you built a company and some people have to have control.
It doesn’t mean you can’t sell your company from that, but you’re very limited, you’re going to need the buyers NDC kind of understand from their perspective, they’re going to be very, very comfortable, you’re coming in and you exit, and they can take over and drive ethics. So that means you’re limited to buyers that are in your industry, or really know their stuff.
You know, whereas if you, if you have a company that runs itself, like an investment, that has a good strong management team in place, everybody understands what’s going on, the buyers can come in and see that and feel you you open your world to many, many more buyers, because there are buyers who buyers investors, they don’t necessarily get into, because they’ve been in manufacturing, you know, or have any experience at all, you know, they might have a finance background or technology or something else. That doesn’t mean you can’t own and operate a business or head up a company that way. So
Damon Pistulka 11:09
I’m not sure that’s right. If if they have
Andrew Cross 11:12
it’s really called marketability. Yeah, this is more marketable when it’s set up that way, as it is, if you’re really tied to the business.
Damon Pistulka 11:21
Yeah. And if you’re really tied to it on this, be honest, you’re not going to sell it. Yeah, I
Andrew Cross 11:27
mean, it’s, it’s really difficult, or, you know, you get down to just really closing down or selling off assets, right? So a really good example is professional firms, medical practices, dental practices are great.
It’s all goodwill,
Andrew Cross 11:45
all the sales come from your, you know, I go to you, you’re my dentist, I’m uncomfortable with you looking in my mouth, I don’t know who this new guy is, you know, you may have a very successful practice. But, you know, when you transition in a new dentist shows up, you’re going to lose that, you know, a good portion, the question is how much right? So
Damon Pistulka 12:10
yeah, yeah, but
Andrew Cross 12:12
there are ways, you know, techniques to use in those kind of, to transfer those companies and mitigate that, but it takes time, those are just harder deals to accomplish. Yeah, you know, usually you get paid, because, you know, the owner, then the data, you know, has to stay on after for a much longer time, and typically would be required to transition to do
Damon Pistulka 12:36
that. That’s the other thing too, is if you’re if you’re, a lot of times in a in deals, the owners are expected to stay for a little while. But if you’re really part of the business, and you are lucky enough to get it sold, you may have to stay for a year or more in a in a position of some sort if you don’t have a setup, right. And if that’s your, your goal, that’s that’s something to do. But a lot of people they want to be rid of that to be able to move on to something else.
Andrew Cross 13:06
Yeah. And understand, too, that there are buyers who are buying that, you know, you may not miss it. And we’re talking to sort of talking about folks who are exiting this material, you know, we’re assuming they’re at the end of the road, you know, it’s time to retire, they’re in their 60s, they’ve done what they’re going to do, they want to go live the rest of their lives.
That’s, you know, that’s a good number of sales are like, that’s why people are selling right now. That’s reality, that’s gonna slow down eventually, I mean, but the time being it’s an aging population, baby boomers are heading to the exits. And, but they’re still you know, there are investors or buyers who want to buy companies, you can be in your mid 30s. And you can bring in a buyer who invest in the company, but they’re investing in you too. They don’t, you don’t intend for you to exit they just want to help capitalize you in the growth of your business so but it’s still a transaction it doesn’t sound like a sale, but you made it you take other people’s money, it is a sale.
Damon Pistulka 14:03
Yeah, if it’s in it’s definitely in in in either situation, you’re going to be working with the with the buyer of the business for a period of time after the sale, there’s very few times when you’re, you’re done and boom, it’s it’s all over and you walk away and in most cases, there’s at least some seller financing that’s included in that in the sale of a business. So you’re going to at least you know be getting financial reports and hopefully getting money from them to get paid that paid back.
Andrew Cross 14:34
Well yeah, in some cases, they’re gonna want you to be contractually bound to stay with that company. Again, you know, they’re relying on you, but that that’s a you know, a difficult path for seller. And there’s a lot of roadkill fitness scenario you lot. I mean, I think every owner is heard of so and so did that and it can be a really bad deal, you know, because you’re it again And it’s a big risk because you are used to being a boss. And
Damon Pistulka 15:05
Andrew Cross 15:05
you know, when you turn over, you know, a good equity in your company to investors. You’re not the boss anymore. Yeah, some people cannot adjust to that.
Damon Pistulka 15:14
Yeah, it’s true, because there are different demands when you do that.
Andrew Cross 15:19
Absolutely. demands that kind of thing. Proceed with caution.
Damon Pistulka 15:25
Andrew Cross 15:26
we’re capitalizing, you’re going you’re a partnership in that scenario, and, you know, evaluate that carefully. They may be financial partners, and there’s, there’s plenty of good stories about that, too. And it works. Oh, yeah.
Damon Pistulka 15:40
Yeah, yeah, there’s several I know of currently that are doing it, you know, some, some good private equity backed expansion plays where somebody’s got a good business, they’re at the right point in their career, if they can acquire a couple of companies to increase quickly, that’s a great way the equity people will love that type of investment. And, and, you know, buy some in the existing company, and then buy two or three or four or five or 10. More, yeah, and, and build it up, because they get an increase in value when they do that.
And, and when you come back to the e commerce, I think that happens an awful lot in there, because people start to buy up similar products, like you could be in a you could be selling specialty pet products, like we’ve dealt with that before. And and, you know, you find someone that’s making leashes that’s now making dog bowls, it’s now making, you know, whatever, dog sweaters, you know, custom dog sweaters, it’s just and you put these together, because it’s really, most of the time, it’s not that hard.
Unless you’ve got big manufacturing operations that are tied behind them or something. But a lot of people are doing that just to be able to aggregate revenue, and selling power, you know, through a website or multiple websites. And, and you know, because if I’m selling pet products, and I’m selling leashes on one website, and I can add now I can add dog bowls and dog sweaters on that same one, you know, you’re gonna sell them on there, and vice versa on the other websites, and there’s there’s some good synergies there for people looking to acquire revenue, rather than grow revenue.
Andrew Cross 17:17
Yeah, absolutely. acquisition strategy. You know, obviously, big companies do that. And there’s no reason smaller companies can either but yeah, ecommerce is is interesting. You know, we’ve been working in And now for the past, you know, five years. You know, it’s some of it’s a mystery, because, you know, here’s the thing, you know, I went to, you know, some of the clients that were ready to exit their, their ecommerce companies, and I went to, you know, do a deal, it’s a deal a deal, how do you sell an e commerce company?
It’s no different than selling in any other kind of company. So I went there to look at, you know, you know, I dug in to find out, you know, where are you? What’s the market, like for e commerce companies? I found out there really, there is no e commerce industry, right. So we, I can look up a machine shop, I can look up a retail location, I can look up restaurants, and it’ll they’re all identified.
They’ve got, you know, they’ve got identifiers NAICS codes, there is no NAICS code for, for e commerce, you can look it up. If you’re just looking to have a, you know, a government category for a type of hazard, that the closest one you can come to is catalog. merchandisers. Yeah, that’s what makes code they throw on e commerce in a way. I mean, it’s a catalog. Yeah. It’s very, you know, it’s online. But that’s the nature of the business. But, but I find that it’s interesting, because everybody’s talking to e commerce is hot right now. And it was really interesting, because you couldn’t really know, you know, how do we value that?
The e commerce companies aren’t really, you know, what is the market? You’re right, you know, you’ve got mom and pop, they’re selling a product, you’ve got big manufacturers with you using e commerce. You know, but you know, that e commerce, you know, a guy selling aircraft parts is a completely different business than than the mom and pop who are who invented a product out of the garage and are selling it? Yeah, you know, directly, right. Obviously, the big players in e commerce and, you know, Amazon has written the book on how to do that. And they are an e commerce company. If you peel that back, amongst other things,
Damon Pistulka 19:23
yeah, yeah, their platform, they saw a lot of different things. But when you’re looking at a company like we will be working with, you make a great point. Because if I’m a reseller of products, say I’m selling this, this mouse on my desk here, and I’m reselling that thing, well, what do I really have as a company I have inventory maybe if I’m drop shipping, then it’s then it’s not even I don’t even have inventory. At that point. I have a sales channel that’s generating revenue. That’s what I have.
Andrew Cross 19:54
You can you can be an e commerce and have no inventory Exactly. whatsoever. So it’s it, I love the business, it’s interesting because e commerce is, it was really interesting, the full companies we work with to go look at who’s out there, you know, who did e commerce, and, you know, there’s a big, you know, if we look at it, you know, only there 2% of all the revenue in e commerce worldwide is, is in like, 3% of the businesses, that in size companies, there are hardly any harmony, there’s an everything else is under a million in revenue.
So the mom and pops selling solopreneurs, you know, doing stuff through e commerce. And I don’t think sales, you know, some people manage to scale it up. And if they do, if they’re getting over 30 40 million in revenue, they’re getting scooped up by the big companies. So that to me, you know, just I just see a lot of opportunity there. Yeah. Because in e commerce is, is a way to, you know, it’s really, you know, what, you know, at the heart of it, it’s a way to go direct for to your customer,
Damon Pistulka 21:09
yeah, you’re selling
Andrew Cross 21:10
the service, even if you’re selling services, or products or anything else, you’re cutting out the middleman, you have expanded your sales channels all over the world, you know, so the art of e commerce is really just, it’s, it’s really understanding those channels and managing them, right, and it takes a lot of work, it takes a lot of work, because there’s a lot of noise in there. And it’s hard to get attention. And also, you know, as we discover to, you know, the fastest, I mean, you can just you can go to Amazon, and they’ll give you a playbook on how to open a shop.
Damon Pistulka 21:44
Yes. And you can even put the right products in there. And if you can put enough of them in there, and you can sell a few of them all, you’re gonna, you’re gonna be just fine. If you know, depending on what your inventory situation or how you’re doing that some people use dropship vendors where you have no inventory, some people have inventory, they’ll sell on an FBA type platform where Amazon’s you know, handling the shipping and all that or they’ll do it themselves out of their home Intel
Andrew Cross 22:10
made great businesses are built in Amazon is the path of least resistance, you’re going to get sales if you work with them. Together, and you don’t have to be a tech guru to do this. Oh, you know, I mean, one of our clients that we work with, and he built up to a company that, you know, was 20 $30 million company.
Damon Pistulka 22:30
Yeah. And he was
Andrew Cross 22:32
a salesman. I mean, he sold products. And he loved doing it. He loved bartering. He loved going out there, he loved the whole process of selling, he didn’t know anything about techie computers. But he just bought a book out how to sell how to start an e commerce business. And it’s one of those Some people think, wow, that’s kind of, you know, you see him advertised on TV, you know, it’s kind of like, you know, one of those kind of things.
That’s corny, I’d never do that, you know, you’re not gonna learn this. And he just did it. And he followed it and a disciplined approach, and he built a $30 million company. Yeah, I mean, well, you’re not going to learn this. I don’t, you know, I suppose you can maybe some schools and go do your MBA in marketing and stuff like that, but I don’t, you know, you know, if they’re gonna teach you how to sell, but like I said, it’s, you don’t have to be, you know, you don’t have to have computer science or engineering degree.
Damon Pistulka 23:23
Yeah, it’s really anymore, you brought this up earlier. And when you look at ecommerce, as an industry, it’s really not an industry, it’s really a way to sell.
And when you and so when you go in, if you like, if I’m looking to find ecommerce companies, you can’t just go I want to look at e commerce companies, because their shoe companies, their clothing companies, their, you know, office supply companies, their outdoor products, companies, or whatever they are, they’re not, they’re not going to say I’m an e commerce company, like you said, when you come back to the valuation, you look at it, and you go, the, the valuation of these companies is valued more like the underlying industry rather than the than its e commerce or a technology because they aren’t valued like a technology company is?
Andrew Cross 24:09
No, no, definitely not. Um, yeah, they are valued more like traditional companies. But you know, one of the things I was gonna say, though, but if you want to get started and and be an e commerce E, then you can be in any kind of business to do it. Yeah. You know, Amazon’s a great, you know, people’s, almost everybody starts it.
I mean, you can’t almost not be in business, especially if you’re dealing in products or manufacturing, and not do something with Amazon, you know, and you can grow fast, you know, but what we found is the companies that are jumping from the mom and pop into starting to become a substantial business, you know, and I’m talking north of 30 million in revenue.
In order to break that ceiling out of that you have to develop your own channels direct the customer, and that was the constant fight. That was what was cool about it and things change really, really fast in this business. But you know, when we, when we go to market with e commerce companies for sale to a lot of the buyers are don’t know what they’re looking at, you know, and that effectively too, there’s a lot of fear there too, because there’s a lot of unknown, this hasn’t been going on that long. And things are changing very fast. And you can make tons and tons of they’re attracted to
Andrew Cross 25:17
you can make tons and tons of money if you can jump on the, you know, the opportunity app, and work those channels and learn how to do it. But, you know, but a lot of these guys are, you know, especially for investor buyers or investment bankers, you can put yourself in their seat, see what they’re looking at.
Okay, yeah, making, you know, if you do direct to customer and build your own, you can make, you know, 50% margin, you know, it’s way more than a retailer, and, you know, Amazon’s expensive to use them. Get out of it. You know, so, you know, our our strategies, you know, with the clients was to it, you know, you don’t want to reduce your Amazon, your sales to me, you know, through Amazon, you want you must want to increase your direct ones. But it’s hard to keep up because the Amazon stuff is done. Yeah,
Damon Pistulka 26:01
yeah. And you do, that’s a great
Andrew Cross 26:04
guy in value, the margin, you know, the profit.
Damon Pistulka 26:09
Right. So again, we come back to another key issue when you’re when you’re selling any business. And just like any business, selling an e commerce business is no different. It’s customer diversity. If you can, if someone looks to buy your business, and 100% of your revenue comes through Amazon, that is going to be valued less than a multi channel company that say I’m selling on my own website, I’m selling on Amazon and selling on Walmart, and maybe I’m selling someplace on wayfair.
And I’ve got kinda even even if it’s close, you got it’s kind of distributed evenly among four or five, that’s worth a lot more, because you don’t, because, honestly, as a reseller on Amazon, or any of those platforms other than your website, a change tomorrow can put you out of business.
Andrew Cross 26:55
Yeah, absolutely. Well, you know, customer diversification just like anything else, if you’re all tied into one, Amazon, you know, in some cases, kind of and that’s it’s another kind of strange oddity about the whole thing. They’re really a customer, they’re really a partner. Yeah. They are a customer. At the end of the day, you can’t live with them or can’t live without them.
Damon Pistulka 27:16
Yeah, well, they have the traffic. And that’s and that’s where a lot of people are attracted to it early in their in their ecommerce journey, because they have, I can put my website up, and I can try to get as much traffic as I can to that website and spend a lot of money on Pay Per Click and work my butt off on SEO and SEO takes you a year more to really start seeing results. Or I can list the same products on Amazon, I probably have traffic tomorrow.
Andrew Cross 27:41
Yeah, for sure. But you know, value is affected by customer diversification. Go talk to the banks. You know, if if you’re 80 or 90% of your businesses, you know, through Amazon, they’re probably not going to lend you money. They’re gonna be worried about it again, it’s just if something happens. So you know, the strategy get is diversify, diversify. From day one.
Yeah, take the Amazon ride the train. Yeah, same time, invest significant resources in developing your own channels, a diversifying yourself and be you’re going to have higher margins, because just the company look at the bottom line, you got two companies doing 2 million revenue, one does it all through Amazon, and they look at the bottom line, and they’re at an 8%, you know, mid income margin, you look at the other company that’s doing it direct the customer built their own yet takes time, you know, easier said than done. But is that a 25 30% margin and margin, which company is worth more?
Damon Pistulka 28:40
Exactly, A, B, and B is worth more. And as you’re talking about this, from the buyers perspective, it’s less risky reducing risk in your own business. And for anybody that comes into the business by being diverse in your customer base. And when we boil all this down, whether the bank will loan you money or not or viral by your company not its risk it’s it’s the lower you can get the risk to come into that business, the better off you’re going to
Andrew Cross 29:08
be you risk and think about it size as well. Like I said, what’s really exciting is in e commerce You know, there is a you know, there’s a gulf of there’s no middle, they’re small, they’re small businesses, there’s mega businesses, but there’s no medium, you know very Yeah, it’s hard to survive. Yeah, a medium sized company up you kind of have to you know, make the leap and take investor money and build it up so that you can ride it out. It takes a long time to build it up.
And the thing about e commerce is you constantly have to resell yourself on your you know, every you know you you’re looking at sales per month sales per quarter and you’re having to you’d start from zero and have to do it all over again the next quarter. So it’s it’s not a recurring revenue model, necessarily that way it’s it’s pretty whimsical in it. You know, buyers are interesting, you know, the way they shop know, and the way they look at things with reviews. You know, and that’s where diversification helps you as you go, you’ll be up in some areas and
Damon Pistulka 30:12
down and others. Yeah, vacation of product. Because you’ve got one or two products and you’re selling a million dollars worth that one or two products if, if that goes out of favor for some reason, your your business is worth nothing again, or more significantly reduced. You know, it again, it comes back to that risk, like you said, it’s all around product mix and customer mix in the end, and those are honestly the same things, you look at any business?
Andrew Cross 30:39
Yeah, um, you know, and I think there’s some, you know, that I think people too, especially if they are have the financial wherewithal and got enough momentum going in their companies, they have to really think about acquisitions in that space, not as a, as a matter of growth, but as a matter of survival, it’ll add value to your company, but it’ll help you survive also, because what does it accomplish for you right?
There, these little, little mom and pop companies can be bought, you know, they don’t have a lot of value on their own merits, you know, if I looked at them, just like they were any other business, it’s a one product company, you know, maybe they selling two or three products are something that, you know, a person invented, but, you know, you know, then you look at their margins and what they’re making, they’re barely making enough to pay themselves, maybe less than a million or 100,000 a year in sales.
And if they’re doing a 10% margin, which would be great. You know, that’s $80,000. And if they paid themselves $60,000, you know, yeah, at the end of the day, that’s a living, you could go get a job for that, you know, 10 times as hard run, you know, you’re probably through however, so those, those companies don’t value very well, you know, no one wants to come in and buy, you know, what are you going to spend to buy something that just clears the $80,000 a year?
You know, and you don’t have to do that you can go get a job somewhere, right. So you got to get above that threshold. But you know, there’s opportunities to buy those kind of companies. Because, you know, if you’re a $15 million $20 million dollar company, and they’ve got a they got a million revenue, yeah, it’s only $80,000 on its own, but tucked into your company, you’re adding another product, another customer line base, you know, a little bit more diversification might be worth spending a little bit more money.
And you think, you know, things to consider. And again, it’s all about how these are how the professional buyer, evaluate companies, you know, so it’s a little more art than science, but if there’s synergistic or strategic reasons, but usually, you know, it’s rare to see a small business owner, or am I talking to medium sized business owners doing 20 $25 million a year think like that, they’re not thinking about going to acquire the company.
You know, they’re just thinking about getting more sales and grinding out and organically growing their company like they happen. But if they can, you know, think about that, it can be done. Yeah, it’s an untapped market, because most of those companies are completely overlooked. No one, no one buys them.
Yeah, it either they fold out, they don’t, you know, again, the value of a company, there’s a huge value on size, you know, you get a premium, the bigger the company, the more valuable it is. There is a you know, it’s not that, you know, a size premium, it has to do with you know, there’s, there’s less risk, you know, if you’re $100 million company, you’ve been around for 10 or 15 years, that’s going to be worth more than a $3 million company that’s only been around a couple years, you know, staying power, it’s got equity, you know, you know, size premium, and, you know, they get higher multiples for their businesses, for sure.
Damon Pistulka 33:49
That for sure. So, when when, so back to back to a couple things, and we’ll move on, because I think we’re gonna cover a couple things about about some diligence and, and COVID and some other things. But yeah, so when we look at value on these companies, and and correct me if I’m wrong, these aren’t going to be an e commerce company, just because it’s selling e commerce is not going to have usually some crazy high multiple, like you would hear in a tech startup or something like that.
It’s more traditional, because it’s got revenue, and it’s generating profits and those kind of things. Correct? Correct. Okay, just one people understand that because I, you know, we do get approached by people that have an e commerce business say, Oh, my growth potential is so huge, and I should get, you know, four times revenue or something like that, which is just simply not going to be the case. And
Andrew Cross 34:44
it’s no different than any other business but you know, you know, nobody goes into business without thinking they, you know, they’re gonna kill it. Right. And that’s, you know, this puppet and everybody thinks they have potential in some and some do they actually do. Yeah. It just like any other business, e commerce is no different people buy businesses because of potential, but they don’t pay for it.
Damon Pistulka 35:10
They always say, Well, I tell people they will buy because of it, but they won’t pay anything for it because it doesn’t create any more value today.
Andrew Cross 35:18
Yeah, but potential is a funny thing. And you know, the more believable it is, the more value you can generate from it, too. So talking about potential is great, but really starting down the road and demonstrating that you that your potential is starting to get realized. is, you know, canon, and buyers will pay for that. But they happen to believe it. So, yeah,
Damon Pistulka 35:48
yeah, Canada says all about the money, honey,
Andrew Cross 35:51
Damon Pistulka 35:54
I mean, at the end of the day, and this is another thing for anyone selling a business, you got to remember is that the buyer of your business needs to be able to pay the investment back and make a return on it. And that’s that’s the long and the short of it, the time that they you know, the time that they’re going to take the pay their investment back off, that’s that’s their choosing the return that’s good for that they desire on that investment is their choosing.
So if you come in and you you have a million dollars in sales, and you have $100,000 in profit, you want somebody to pay you, you know, $4 million for this thing, that’s gonna take you 40 years to pay it back with no interest. Right? And so it’s just you got to think about these things to be realistic on the value. I mean, that’s, that’s, that’s, it’s math.
Andrew Cross 36:45
Yeah, it is math, it there’s a there’s a common sense approach to it, you know, because these are businesses, and these aren’t startup companies, these aren’t tech. No, they are, they’re no, and people may come in and pay, you know, put money into those companies. But it’s not quite what you think you’re not really cashing out. Like, before you get to an IPO.
And cash out at that level, a lot of other levels of finance happen in between. and in by the time you do and even you know, these these guys, even the ones that do very, very few that actually do get to an IPO or cash out big become billionaires overnight. They’ve already sold off a lot of that company before they got, you know, so when I say angel investors, the venture capital companies, and there’s a cost of that capital all the way,
Damon Pistulka 37:34
all the way through. Yup.
Andrew Cross 37:36
And it’s no dip is that it’s no different the cost of capital for the business owner who’s doing under a million in revenue. You know, you can you can find out your borrowing. Where do you get your money from to grow your business to start your business friends and family? There’s a cost there’s a cost of capital to
Damon Pistulka 37:51
Yeah. The other thing is,
Andrew Cross 37:53
Damon Pistulka 37:56
Yeah, it is very expensive. startup capital, the venture capital, any of that money. It’s very expensive. And as as you’re a business owner, and you’re, you’re going okay, how do I do this, that that cost of capital is significant? Yeah,
Andrew Cross 38:09
it’s something that, you know, the, again, for selling your company understand that,
Damon Pistulka 38:13
Andrew Cross 38:16
Just, you know, get in and learn that most business owners really understand their craft and their trade, like that financial IQ and the cost of capital. You know, they come around, eventually, the CRO comes to roost, because, you know, you got you’re in business for 10 or 15 years, and then you go back and I pay a lot to get here, you know, yeah, it’s, it’s, it’s expensive, and it also can put you out of business really
Damon Pistulka 38:45
fast. That’s for sure. Yeah. One of the things that that someone saw on an e commerce business might get surprised by when you start to go through it is if you and I are in an e commerce business, and we decide a we’re going to start it we’re going to get into it we’re going to sell these products and say we’re selling pet products. And say we’re selling a special a specific pet product. We’re only sell dog leashes, right? The the buyers may
Andrew Cross 39:13
sell a company that’s sold on leashes.
Damon Pistulka 39:15
Yeah. It’s easy. But you know that a buyer is going to ask what is the market for dog leashes that you sell do? and How big?
Andrew Cross 39:27
Yeah, there you go. And that’s, you know, understanding your market and your industry. The, you know, that’s not e commerce, that’s pet industry.
Damon Pistulka 39:36
Andrew Cross 39:38
free, you know, in that particular instance, that was a great space to be in. It’s, it is it’s one of the it’s one of the most in all of e commerce. It’s one of the most active industries.
Damon Pistulka 39:50
Yeah. automotive parts, I
Andrew Cross 39:53
think is number one, you know, in pet products, I don’t know might be two or three of all industries. You’re really strong now. People are buying dogs they spend, you know, the spend per capita on pet owners is is just continually going up, we don’t know where the ceiling is on that. There’s great opportunities, you know, people have jumped in, and e commerce is a great way to be a business. Again, what you want to do to sell it. Okay? Well, if you think about it that way, I don’t think people you know, they didn’t get into selling dog leashes.
They just had a, you know, they had a dog, they kept chewing and destroying their, their dog, their leash, you know, their puppy, and then he go into his garage, and he built one that he couldn’t chew through. And then he said, Everybody started asking him for him. Then he made some more for some of his friends. And then he started selling them out of his garage. And next thing, you know, he’s three, 4 million a year in revenue on leashes. He’s not thinking about, Hey, I’m selling this business. It did come it finally you kind of accidentally got there and was like, Yeah, I got something here that somebody might really want.
But yeah, no, but if you get out the gate, you know, look at the buyers, you know, people who do buy companies up like that, too, right? You know, who the strategic buyers are the best buyers? You know, can you get in a position where it’s complimentary to that right? Again? What does it do for that? Understanding your avatar, okay, I’m going to sell this to a medium sized company, I want this because it’s going to add, you know, 3 million to their top line revenue and add another club, you know, 100, and maybe two or 300 more clients, and, you know, diverse, like what to do to their value? by acquiring, right.
Damon Pistulka 41:36
Yeah. And that’s, you know, there’s there are different acronyms that people hear when they do that, that if you start an e commerce, you may not lose somebody on the long term value of the customer, how much are they going to spend over the life of your, of their relationship with you how the customer acquisition costs, how much they cost to get that customer in, because there’s more than likely there’s advertising spend that has to come to get that customer in, and those are some things that you may not be familiar with, because you did, like you said,
You literally invented a product built a business around it, and you’re, you’re that business, you’re not an e commerce business, you’re that business owner that that built a business?
Andrew Cross 42:18
Yeah, you know, here’s another area too. Let’s think about it in kind of, like territory development, you know, a lot of big of the bigger medium companies, you know, they kind of own you know, three or four states in the West, right. But if you, if you can come in and, you know, kind of get control of your market and your state that’s territory expansion for them, they can be they can add, you know, a state to their, their, their, their, their business model overnight, right.
Whereas, okay, I want to get into Idaho, for example, when we did have a company that did this, it got sold to a player who was looking to expand in Idaho, and they had a four year plan to expand in Idaho hiring employees, putting out Knox’s you know, advertising, and we came across our little deal of like, Oh, well, you guys have already been here for five or 10 years, boom, business’s sole, right? to solving You know, it, what would you pay for that? You know, what’s the cost of explorer?
For five years? So what’s the value of the company? Who cares? Yeah, they’re profitable, they’re making money, they own the territory. Yeah, that those those kind of acquisitions are, you know, and you can build your company to be attractive to player like that if you pay attention to your market and your competitors and everything else?
Damon Pistulka 43:44
Yeah, that’s one of the things I think that if someone’s considering the sale of any business, they really need to think about that buyer. I mean, you hear it every day now and sales and marketing, you got to know your buyer, know your buyer know your buyer. And that’s no different.
When you’re going to sell your company, you got to know who’s buying it, because it’s as simple as the difference between, if my company is is going to be sold to an individual, it has to look a certain way that an individual will like to buy it or, or if my company is going to be sold to say a search fund that has, you know, a stable of a few CEOs that they’re going to back and put into companies, that’s a little different, because I don’t necessarily have to have a CEO. Or if I’m going to sell it to a private equity company that has that that wants to use it as a platform to add other companies into that better have a CEO executive team that can do a five year plan and execute it. Yeah, well,
Andrew Cross 44:38
let’s let’s talk about that a little bit too, because that’s extremely important, too is is that the problem is you kind of built a lot of people build their companies up on their own style. And they they’ve got their own way of running it their own way of checking in with things and stuff like that, which is there’s nothing wrong with that. No, but it is a standard basic. Fundamental block and tackle management structures techniques in positions and it’s recognizable, I guess it’s like accounting to, you know, and the financials of it, you do your books a certain way, if you’re a small business, you don’t have to do them that way.
But when if you should set them up that way, because if you do it different difference, okay, but if they walk in the door and don’t recognize it, you know, I, you know, if it doesn’t fit with, you know, a lot of the reasons they the bigger companies don’t buy the smaller companies as their cultures are different, it doesn’t fit within our management structure, but they’re running a company where, you know, it’s okay, it’s, it’s much more standard, we have our operations, we have our finance team, you know, we have our leadership groups, we have a hierarchy, you know, people report to people, you know, all those things are there for a reason.
Because it’s recognizable, and you don’t, but if the, if your company isn’t set up, that way, they can’t plug that in, then there’s no deal to be made there, or they’ve got to spend time converting you. And a lot of times, they just will walk away, because, you know, that could kill your company, you’ve built a culture on that. And, you know, if there’s no real hierarchy structure, people don’t know where, you know, you know, what they’re working towards, and understanding, you know, basic, fundamental, recognizable business practices. You know, if they don’t see that they’re that you know, that it’s, you know, we don’t know what to do with you, because you
Damon Pistulka 46:28
make a great point, because you can run in a couple of million dollar ecommerce company through a checkbook, really, because all the stuff that’s handled by Amazon and all the stuff that’s handled if you were just doing a third party platform like that, but when you tried to sell that you wouldn’t get it done, because there’s no way to really do you know, put a financial statement together and really understand that and, and that, that could be fine for the for the business or today. But you can’t turn that into value tomorrow.
Andrew Cross 46:55
Well, it’s true, too. And then you’re basing your value on your own. Yeah, we can call that bootstrapping, right? You know, you you’re you’ve got high margins, because you do run your you run a bootstrap company, you’re doing a lot of the work yourself, you’re not paying yourself, you’re running out of your checkbook, you don’t you’re not using payables people, you’re not using all the kind of familiar things that companies have in place.
So you know, smart buyers, and those kind of companies come and go, I understand that, you know, it’s great, we’re in the same business as you, you’re making 40 50% margin. Because you can’t, we can’t do that we can’t, not your your style of managing and operating the business, we have to convert you to yours, then if you do that your your margins are going to go down because you were raising your expenses, they know that right away, they just say it’s not a fit.
I think it’s what though, the word they will call it as the app sorry, will pass this is just another Yeah, you know, and I get why it’s not fit. Right. But, you know, they go in there, and they see, yeah, you’ve got a number two in the company, you’ve got leadership teams, you’ve got, you know, you got people on the sales, we have people on the sales and marketing team and a leadership team led by somebody there.
And you’ve got Operations Group, you know, again, read but you know, got leadership teams that you meet with them on a regular basis, they all know what to report out to. They’ve showed, you know, consistent growth, they know what projections are. They do earnings meetings and stuff like that. That’s what big, you know, bigger companies recognize That’s what I’m talking about. When I say professional management, you know, deal,
Damon Pistulka 48:29
it doesn’t have to be a huge team. I mean, you just have to have a handful a handful of people that are covering the right basis, and they’re they have goals, they’re there, you’re measuring, you’re talking about their goals, and and so that somebody coming in can say that, listen, we said we’re going to sell $500,000 last month or 1000 million, whatever the number is, and, and we did this and we do good or bad? And did how did these people do that? I mean, that’s, that’s it’s as simple as it has to be.
And then the financials to back it up, because they’re, they’re gonna want to and their diligence process, they’re gonna want to follow a trail of $1 to somebody bought the product, to there’s the cost of the product to theirs, where it went into the bank, because they you know, in bigger deals, they’re going to do the quality of earnings. Yeah, the quality of earnings, where they’re going to do that pretty, pretty significant dive into that to make sure that they can substantiate the fact that you did sell $20 million worth of stuff, and we can see where the money came in through the channels and went to the bank account or to pay for things.
Andrew Cross 49:32
Yeah, and then in e commerce, if you’re a you know, if you’re a significant player in e commerce, we’re talking about inventory, and good inventory, bad inventory, tracking control of it, all. All of that adds value to your business if you’re if you have systems and processes in place. You know what your inventory is and where it is. Yeah, yeah, it’s hard work. It is but you know what, you’re not alone.
You Like I said, If see very, very successful people, they didn’t have a background in technology. Neither do they do and operations or inventory control or management, you get the right people. There’s a lot of talent out there. But you gotta you got to, you know, you got to spend the money on that. And, you know, and make sure it gets done, because your your investment is significantly weakened. If you don’t have those processes to implement systems.
Damon Pistulka 50:27
Yeah. Yeah. And you know, what, one of the things as we sit here and talk about this, and I thought about before, Matt, like we are talking about it now is that these are really, ecommerce is just a sales channel. It’s a way that you’re selling, these are more like the, you know, when you look at a lot, a lot of these are import import businesses or their manufacturing businesses, and they could just as easily sell, sell this mouth by people walking around and selling it door to door or selling it through radio, you know, or commerce is channels. Yeah.
Andrew Cross 51:04
Right. What are channels, sales channels, it’s a function of the sales. Yeah, it’s just, it’s just multiple, you know, actually, then successful e commerce companies to we’re seeing companies that manage are really good at managing channels. And that’s, that’s, that’s the real, that’s the real key to being successful there is, it’s it also, and that’s a lot of reasons that people stay in the mom and pop realm is it’s not, you can do it.
But you have to work those channels constantly, it’s not easy, it’s hard, hard ass work. And then you know, your channels dry up, and you got your back to square one, or you got to shift over, you know, and you’re constantly hammering away, you got to find out where that product moves.
Damon Pistulka 51:49
Andrew Cross 51:50
good. Companies, the valuable ones are the ones who built a, a team of people and an organization that really is nimble and can work channels, and understands them, you know, switch, if needed, get new ones, you know, those kind of things again, but all that adds value to the company to selling your company is, you know, it’s, that’s the people factor, right.
So these are people clearly again, not there, some of them may have a variety of different beverages, he really different successful people eat, like I said, you don’t have to be a computer engineer necessarily do it, you just Yeah, you got to be creative, and you got to be able to adapt. But that’s just basic fundamental skills of good people.
Damon Pistulka 52:32
And it’s right, you have the right key metrics in place each one of those channels, you should be measuring them to the gross margin line, after fees, NAFTA returns and all that kind of stuff. And when you do that, you begin to go, you know, like, because we’ve had clients that have had 1214 different channels are selling through. And when you do that, you really need to understand these channels, because one channel may be charging fees, one way one started, I they are not they could be they are they all charge fees differently, they all have different rates, they all have different strengths and weaknesses.
So you, you know, you might be wanting to sell, if your product is great for one kind of product might be good at a Home Depot channel might be good on Amazon, but another one might be really good on wayfair and good on rapidash or something that, you know, there’s so different, there’s so many differences in these channels, that you know, it’s it is like you said it’s that team, they’re nimble, and they understand how to manage those channels, because within a channel, they change to this, the the platform can it can significantly change your your upside potential and your profitability.
Just because it might highlight your product better or favor your your method of shipping better, or it just there’s so much stuff. Yeah, you know,
Andrew Cross 53:53
I think we were good to touch a little bit on COVID. You know, and the fact that, you know, an e commerce and I think there’s safe to say I don’t have anything to back this up. But you know, a lot of e commerce companies are prospering during COVID you know, everything’s being done digitally, more ordering more logistics, all those businesses are up big time. That’s a great time to sell. You know, and the old adage is, you know, sell when you’re doing well. Now, that’s a hard thing to do.
For a business owner, in especially the ones who are heading towards retirement age, they usually want to sell when they want to sell when I’ve done you know, not when I’m doing well, if you want to get value for your company. And often that’s that’s a sad story, because they’re pretty disappointed when they get there and finding all this worth, they’re not going to get near as much as they thought they were, you know, have an idea where you want to you want to go and get out but build it.
You know, you know, things get sold when all ships are rising. It’s pretty obvious, but the real question is, you know, where is the top right? Well, you know, and no one no one I goes right, you know, you don’t have to make that decision. You know, just like when you’re selling your stock, you know, sell high, you want to buy low and sell high, you know, if I, if I double it, you know, I’m gonna get, I’m gonna unload it, you got to have that kind of mercenary kind of, you know, you know, you know? No, that’s, that’s a hard thing to because you put a lot of blood sweat and tears in your business. So,
yeah, you’re not
Andrew Cross 55:24
like that is more of an emotional factor involved in it too. But, you know, ecommerce is it’s a perfect space to do that, because things go out really fast. Yeah. But COVID has helped me, you know, has helped a lot of these businesses, they’ve exploded, is that made them more valuable than not necessarily, you know, me and you again, put yourself in the buyers position you’re walking in, you know, yeah, you, you you guys have grown? should I pay top dollar for that isn’t going to last, you know, COVID not going to be around forever?
What’s it going to be like, go back to normal, you know, again, create the value in a company, just like anything else, you have to have, you know, a, you have to have a really clearly identified strategy, and you have to have a track record, if you want to get potential, you got to start showing it, but you got to address the risk. And the risk is COVID is not going to be here forever. And then, you know, and then what are you doing, you know, to, if you jump from 5 billion in a year in sales to 20 million in the last year? You know, what are you going to do to maintain that, you know,
Damon Pistulka 56:31
I grew up because honestly, if it’s gonna fall back to 10 million the year, it’s too risky for somebody to buy. It’s it. Yeah, isn’t gonna happen that way. So you really better if the COVID bumped you up to three times, you better be figuring out how NEC in 2021 and 2022, you’re gonna grow beyond that.
Andrew Cross 56:52
Yep. And conversely, we’ve had businesses have been affected by COVID. negatively to that, you know, again, again, this is where we’re different, rather than just working on the deal, we work on the company, because, you know, you know, if they’ve been a good company, you know, again, hope is that this is a temporary Blip. How does that affect your valuation?
Well, you know, yeah, right, today, your, your, your, your low, but, you know, there’s absolutely no reason, you know, people will be going back, you customers will rebound, you’ll be, you know, it’s a matter when, and, you know, so as far as valuation goes, not that much effect of it. So, you know, you could probably sell your company still, even if you, even if you have a down year because of COVID, because the buyer is gonna come in again, and go Yeah, yeah, that’s fine. I’m, you know, you’ve already been through the worst of it, and I can pick up your color here,
Damon Pistulka 57:41
there is a definite trough. That’s the thing that we’ve seen in somewhere, there’s a definite trough it hits, then, and then sales have come back, and some have come back then near normal. And that’s
Andrew Cross 57:54
actually your ways to start showing, you know, that potential, right. So if it’s coming back, it’s just a matter of making the buyers feel comfortable with the risk, the a strategy is accounted for it, you have enough cash, you know, you’re you’re not cutting bone, and you’re hiring the right people, because the future, you know, pick it up, and then when you start to see the actual results rolling in, it doesn’t take long, you know, and, you know, it’s it’s momentum, you know, and was when the buyers start to see a company that has built a company that understands how to keep momentum going. That’s,
Damon Pistulka 58:32
that’s, that’s what they want. Yeah. Well, it’s been good. Andrew, I think we covered the, you know, the things that I was thinking about, then, you know, basically talk about value, that’s the biggest thing that people are concerned with, when they’re selling them, and then the how to get them sold. And you know, it’s really the risk management, making sure you don’t have all your eggs in one basket, whether it’s products, whether it’s platforms, and and making sure that you you got your back end your house in order, so you can show them that it’s actually a viable business, and you can prove it out. Yeah,
Andrew Cross 59:03
yeah. proofs in the pudding
Damon Pistulka 59:05
as well. Thanks a lot, everyone for joining us today. Thanks, Andrew. You know, again, talking about selling an e commerce business. anybody has any questions, they can reach out to me directly on LinkedIn or Andrew on LinkedIn, or email us directly, just get on our exit your way.us website. And we’ll, we’ll get back to you with your questions. But it was wonderful talking with you today. And we will be back again next week with some other great guests.
Andrew Cross 59:34
Right. Thank you.