Hudi and Claus from amazonienii, the leading FBA course in Romania, had Coran on their LevelUp podcast and it was such a great episode we decided to share it as well. Below is the video and transcription.
My name is Coran Woodmass. I’m the founder and managing partner at TheFBABroker. We are the first business brokerage worldwide, to focus exclusively on selling brands that sell through Amazon as a sales channel. We started this business two years ago and it has been going very well.
We have realised there has been a decent shift in the last 6 to 12 months. What we’re seeing currently is that they are 240 listings available, worldwide. Alarmingly, over the last 12 months, only 30% actually sold through. While businesses are being listed by brokers and various marketplaces will take on these businesses to sell we have seen that an alarming amount of business do not sell through. The data has highlighted that this of the 240 listing we have been following only 30% of these have actually sold through. While businesses are being listed by brokers and marketplaces only 30% of them actually selling through in the end.
We started to dig deeper into our own listings to see what was selling and what was not. We came up with 5 points that make a business more sellable.
Five points that make a business more sellable:
1. Brand
2. Margin
3. Products
4. Size
5. Growth
1. Brand
The first one is brand. One of the biggest factors that will make a business sellable is having a brand. When we say brand, it’s not just slapping a label on XYZ products. It’s having a brand story. You want people to understand your brand. What you do and why you do it?
You also need brand awareness or brand synergy amongst the products. It’s not good enough to say ACME Products and then have a thousand different products that are unrelated. You really want a tight brand synergy around that name brand and essentially serving one target market. That’s something that is becoming more and more interesting for a buyer. Basically, with brand 2.0 (this is becoming a brand registry 2.0) it demonstrates that trademarks and this idea of a brand story are becoming crucial for selling a business.
If you’re afraid to talk about your brand publicly, that may be an indicator that maybe your brand isn’t a sellable asset in the future. I believe in the next 12 -24 months that if you continue to grow a brand with trademarks and brand synergy it will pay off in dividends for you. I think in the next 12 to 24 months, this will really pay off.
This is where we believe the market is heading, you want to be proud about what you’re selling and your market. This is a way to grow the brand bigger than just Amazon. There’s the thousand true fans rule, that you may have heard of from Kevin Calloway. This type of thing, where you have that core audience that really loves your products. There’s a ton of niches that this works in.
For example say, the health and fitness space. One type of fitness, or sports, that people really love and they share your products with their friends. They brag about your products. They’re asking you to make more products. They’re the type of brands that are really becoming more valuable and more sought-after from buyers.
Direct access to your customers is another big thing. If you can reach out to your customers via an email list or have Facebook fan pages, private groups where you can reach out to your customers, engage with them. This demonstrates that you have a strong brand and you really understand your customer.
2. Margin
The second key factor is net margin. The first piece of this is really knowing your numbers. It’s a boring topic accounting is. Well for most people. It’s the thing we hate to do. We all like to talk about I did a million in revenue last month. Everything is great but knowing your actual numbers, knowing how profitable you are, having a finger on the pulse of your financials, is really the thing that matters.
In the last 12 months of the businesses that have sold, the average net margin is almost 30% or in most cases just under 30%. In the e-commerce world and in physical products you’re aiming for about a 20% net margin. A lot of people talk about this as a benchmark. But as far as selling goes, being able to sell your business, you really need to get higher net profit around that 30% mark for it to really matter. This is coming direct, from deals we’ve done in the last month or two. One great example of this was a deal that was on the market for just one week. It was listed at $1.1 million had a 43% net margin and had a great brand. It sold in a week. We closed that deal in two months.
From the time we listed, until the time the seller got paid up and us (we get paid at the same time as the seller) was two months. We had two buy calls. Two different buyers. The second buyer took it almost at list price. The clear majority of that was cash at close. You really need to understand the key metrics in your business. A good bookkeeper can help with this. If you need a referral, we have an amazing bookkeeper that we work with we would be more than happy to pass on these details. You need a bookkeeper for taxes and a bookkeeper for performance reporting. These are two different things.
I mentioned the benchmark. You really want to look at your operating expenses. Typically, someone will reach out to us when they want to sell their business. They’ll say, “Hey, Coran. I want to sell my business. Let’s go. I saw you on Hoolie’s webinar. Let’s do it.” That’s not generally the time that you can sell your business. You need to really plan for this exit. Operating expense is one of these things that we look at the trailing 12 months of your business history to value your business. Your net profit over the last 12 months. Your top line revenue. We’ll look at all that, over the trailing 12 months.
If you’ve been overspending on marketing opportunities or an excessive amount of staff it can really cause your net profit to get dragged down under that 30% benchmark. Typically, when I’m talking to people with exit plans 6 to 24 months ahead of time, to be able to sell their business for the top dollar. Right now, to even be able to sell the business you need to plan the exit in advance.
One of the biggest killers of that margin we’re seeing, right at this minute about the last nine months or/ is PPC costs. There’s more competition coming in for Amazon PPC. We’re seeing a lot of competition come into the space. Prices for pay-per-click advertising is going up.
Amazon are getting more nuanced in the type of targeting they can do. A friend of mine was explaining this. He deals with 8, 9, 10 figure brands selling through Amazon. He manages their PPC campaigns. He’s based in Colorado. He was telling me that with what he’s looking at, they had a huge history in Google AdWords. In the early days of Google AdWords, it was a very simple advertising. Now it’s getting very technical. Five or six years ago, when I worked for a large travel company, I was a digital marketing consultant there. Digital marketing executive, whatever the title was. We had 100,000 a month we were spending on AdWords. We had two guys, in-house that did this and an agency that ran it. They were, basically, mathematicians just running spreadsheets. I think Amazon is aiming to go to that level where you get more granular detail.
One thing that we’re seeing is a lot of businesses from the financial sector. We’re seeing a steady downward trend in net profit. Even though their revenues could be increasing, the net profits coming down mostly because of PPC. There are obviously, other Amazon expenses that are going up. If you don’t have the patience or the interest in PPC maybe it’s a great idea to get a solid agency to help you with that. Put them to the test and really watch your expenses. Watch the return on investment. Not all agencies are created equal, make sure you get someone that’s really good. We have several contacts I can share with you after the call that are really good and keeping goals for clients.
Another thing that you might want to do if you have a large range of SKUs. This is often, if you have a high amount of inventory compared to the net profit over the last 12 months say you’ve made 500,000 in net profits, over the last 12 months but you have 600,000 at cost, of inventory. Now, you may be planning for a big Q4 or prime day that just happened that’s out of the ordinary. But if on average, your inventory at cost is above the net profit you made over the last 12 months chances are that could be a problem there. That could say that you have dead SKUs. Sometimes, one product may have a lot of accessory products. There are a few schools of thought whether it’s great to have 30 variations on a product. That’s another topic. What I’m talking about right now is specifically for sale. You may find that of those 30 variations 10 of them don’t really sell that well but you need to keep it in stock. That’s dragging your net profit down and is also increasing the amount of inventory because you need backup inventory for all these SKUs. That’s something we see. In the exit planning stage 6, 12 months out you may want to just cut through with a machete on your product line to really get to the core products that are making the bulk of the money.
None of this stuff is fast. I wish I could help people in six weeks get ready but realistically it’s just not the case. There are too many moving parts. Often, we’ll see clients with too much inventory that they need to clear out. The reason you want to do this on the flip side if you’re trying to sell it without.
A great example. A good friend of mine wanted to sell his business. We had it listed knowing there was a lot of inventory. We thought, “Okay. We’re going to have to negotiate this.” Well, what happened when the offers started coming in from buyers one of the common threads were buyers were either wanting a massive discount. I’m talking like 50% off his cost. They’re taking money out of his pocket at this point or the last offer we got from that business was about half the list price. They offered half the list price plus they wanted the seller to fund the inventory. They wanted to pay the owner back, per item as they sold it because he had so much inventory. We ended up taking the business off the market. He went and did exactly this. He went through with a machete on his product line cleared out all the dead SKUs. He’s back to a position where his business is more profitable and more fun. He’s still a little bit out from being able to sell the business, unfortunately. We can’t create miracles. We can bring people together. This is something that people need to understand before they go to sell.
A lot of people I talk to and I say, “Oh, do you know your numbers? Do you have a P&L, a profit and loss statement, income statement, this type of stuff?” People say, “Oh, I’m using this Software.” Well, software is okay but the software is only as good as what you put in. If you’re using an online tool, that’s pulling data from Amazon it doesn’t factor in all your other expenses. If you’re using a bookkeeper, the bookkeeper only inputs into the software what you tell them. It’s important to make sure that someone is helping you put the whole picture of the business together to really understand. That’s point number two, is the net margin which is a big one.
3. Products
Number three is products. Products come into play. Ideally, you don’t want more than one product being more than 20% of the revenue. This is a really good metric 20% to 30% max for one product. If you’re doing $1,000,000, you don’t really want more than 200,000 to 300,000 over that last 12 months to be from one product. You want diversification. More is even better. Right now, we’re seeing a big trend of one product being the hero product and a couple other products are doing okay. Out of that 240 listings we have available right now, worldwide. Not we, the worldwide market. Under half a million dollars, $100,00 to $500,000 rage is about 60% of the market. There are hundreds of listings available, right now. If you’re looking at 20 different products that say you’ve got $300,000 to spend and you have 20 businesses to choose from. You have one business, that has one product that’s doing all the revenue and a couple of other products. Versus another product, that has 10 products that are fairly equally spread. You have less risk on the business with 10 products. Does that make sense? That 20%, 30% rule replays. Then with the products themselves how defensible are they? Are the products themselves unique, defensible in any way and do they solve a real problem for your target market? That’s important as well. This is a big trend in the marketplace.
Something we’re seeing come to light, in the last few months is a preference towards higher price products. Now, higher price retail products, price products such as $50, $100, $200, in that rage is higher-priced. One thing is, a lot of the courses don’t talk about doing high price products there’s potentially less Amazon savvy competition. Also your margin will be higher because there’s a barrier to entry there. Someone can’t go and order 10,000 units of $100 product necessarily off the bat. That’s something that’s becoming more interesting for buyers.
Buyers love repeat purchase. Anytime you can prove that buyers come back and buy your products again and again, that will make your business stand out against other businesses in the marketplace. That business I was talking about the 1.1 million list price, 25% of their customers came back and ordered again and again, 25% repeat purchase of that business. It was a gift product. It’s not a consumable, it was just a cool gift product. People came back, again and again because it got a great reaction when they gave it as a gift. Things like that can help. Yeah, no dead SKUs.
Occasionally, we’ll get a deal where a buyer goes through and they’ll look at the product catalogue and they’ll say, “Hey, this whole section over here this isn’t selling. We’re not going to buy it. We don’t care what you do with it but we don’t want it.” That has happened.
The buyers of FBA brands and businesses are getting a lot savvier. There are a lot more consultants in this space helping buyers to be savvier, they’re picking up on black hat techniques a lot more than they used to. That’s something that if you are doing anything edgy on the T’s and C’s the best thing to do when your selling is to be upfront about how you’re doing what you’re doing because chances are very high that will be found out.
Something that we’ve seen recently again is reviews being removed. This is, I’m sure your audience and even you guys have probably seen this yourselves. Reviews being taken down is pretty tough. Whatever you can do to make sure those reviews are legitimate and you’re building a business that’s sustainable longer-term will come into play.
In a year two years’ time there may be me significant changes, that will make a business that’s doing somewhat grey hat stuff may be unsellable in the future. If you’re building to sell, build something that’s more sustainable. The days of pumping up products to sell and moving on are pretty much gone. There may be a few that still get done but it’s very much on the way out.
Another thing buyers love is when it comes to products is new ideas. Do you have any new ideas for product expansion preferably for your target market? This goes over really well with buyers, especially if you’ve gone to the effort of actually testing me products supplies. You’ve got supply lined up, you’ve got that new product, you’ve got the name it’s just ready to go. Even better. We had one case where the new product was shipping to Amazon during diligence as we’re doing the deal the products were coming over. The buyer was almost racing to buy the business before that new stock landed. It was a high-priced product good margins and they saw a good opportunity there. They were excited to take over this and see what that new product could do. Unfortunately, we weren’t really getting paid more for that business because the valuations we do are on the trailing 12 months as I mentioned before. It’s a multiple of that last 12 months. That’s something that will help your business stand out.
Another big bonus is being retail-ready. I had a call yesterday with the guy who had his products selling on Amazon about 30% of his income was outside of Amazon and in retail. He had products in retail in New Zealand, Australia and Singapore, I think from memory. Yeah, that’s quite interesting. His product’s already in retail and most of the buyers are in the US. If they can take that product and put it into retail that’s awesome.
On the product, while we’re talking products, something that is interesting to think about. When you started your brand, or as you’re expanding products you’re looking at the competition on page one, right? You’re looking at all the other competition. When you go to sell your business, that’s what we’re doing. We’re trying to look at, “Okay, what price point are you at? What’s your positioning, as far as the other 100 odd businesses that are available for sale in your price point? How do we stack up against those businesses?”. It’s important now, like it is on Amazon, to be different and unique in me way with your product offering. When you go to sell your business we have to really highlight what’s unique. What’s different about your business to convince a buyer to buy yours as opposed to someone else’s. That’s what we spend a lot of time doing. That’s why the exit planning is 6 to 12 months along because we need to figure out how to do what’s best for you to get you ready for sale.
4. Size
Four is size. Everything else being equal bigger is better. There’s more buyers at the high-end 10 million-plus budget. There’s more of those buyers than there is with $100,000. It may seem strange but that’s the truth. There are a lot more buyers at the top end.
On average, buyers are really wanting a million in revenue as a minimum. At that 30% net margin that’s 300,000 in net profit. That’s really the baseline for serious buyers that are potentially looking to buy multiple brands. We really want to attract those buyers because they’re a better type of buyer than someone that’s just buying one.
If you’re in the smaller size business or listing and you’re appealing to buyers that only want to buy one brand you better believe that standing out from the crowd is 100 times more important because they only have one bullet to shoot. Right? They only have one bit of cash they’re putting in. They’re freaking out, because that’s all the money they have in the world. “$100,000. This is all I have. This better payoff.” You don’t really want to be dealing with a buyer like that. You want someone that has experience, they have a strategic advantage and they’re buying multiple brands because they’re set up for success. They’ll pick up your brand and know what to do with it next. That’s who we’re trying to attract.
Another thing is buyers with bigger budgets they have more cash than they have time. This is something to consider when you’re positioning yourself for sale is how does the business itself run and does it run without you. Anytime that you could figure out, “Okay, if I have another $100,000, another $1,000,000 to put into this brand here’s what I would do with it”. When you go to market to sell your business that’s something that you want to explain to people is how you would deploy that capital because these buyers are coming in with more cash. They have more cash than time, that’s really important.
Then with the size, as your scaling up we typically see inventory creeping up as well. I mentioned that 100% rule. On average, throughout the year, if your net profit is 500,000 and your inventory is 500,000, at cost throughout the year, not just at Q4, that could mean there’s an issue. Now, we’ve seen me of the fastest deals to close have the lowest inventory requirement. A good friend of mine sold a seven year old supplement company. He had a lot of repeat purchase. His Amazon component was only about 40% of his revenue. He was making that half a million net profit in SDE, which is how we determine net profit. But his inventory amount was only $30,000 to half a million in net profit. This business sold in three days, well above list price. They had multiple competing offers. His repeat orders were about 30% and seven year history. It was really high margin, low inventory requirement, sustainable, long-term business and a lot sales outside of Amazon. That type of business, these are the types of businesses that are out there. It’s worth keeping an eye on.
5. Growth
Five is growth trends. Definitely want to see forward momentum in the business. I’ve dealt with businesses recently that have had a huge highs because they’ve got on some trend and then you know the markets and saying, well it’s still making good money but I want to sell this. People aren’t going to buy it because they look at the year over year trend, not just month over month, year over year is what they’re really looking at, which is why you need a business that’s at least two years old, two years of history to be able to show year over year growth. How can you actually hack this? Say you’re in a position to sell, Alex says one product and making all the money and you’re $500,000, a 500,000, 50,000 or $100,000 in net profit.
Podcast Question & Answers Segment
Inventory vs Net Profit Ratio
My question, regarding inventory because my maths doesn’t add up or I have an unsellable business or I have to figure this out. Because when you sell via water, via sea, you need like 40 to 50 days to ship the products right?
Lately in China, for bigger orders we got 50 to 60 days of production. They are going crazy with the production time. This is almost 100 days in order only to have the inventory in the US. If you have bigger inventory then you need another two weeks of sorting LTL shipments and stuff. Then, you need like one month to one month and a half, maybe two months, to sell that inventory. You know, 45%, 40 to 45% margin, this means that you will always have more inventory than revenue more inventory than your profit margin, at least in our case. Because we need to fulfil even for the all the year, basically, we need to fulfil to have enough inventory to cover all these five to six months. If you’re switching from July to Q4, where you’ll need to have like double the inventory. You will most of the time, have more inventory than your profit margin does this makes my business unsellable? Or I need to figure out something like, “Okay, I don’t need to sell you all this inventory. Just give me a good price on the deal and then we’ll see what.” Maybe we can postpone the inventory payment in such a way or something like that?
The numbers I’m talking about are averages across all the deals were seeing that are selling and the deals where we’re brokering ourselves. There’s always going to be outliers for different reason. If you have me of these other points really locked down but you need a lot of inventory at costs. If all those other factors are in play, then that’s still potentially sellable.
I would still look at your inventory line-up and see what you can do. If you’re in growth mode you’ll need to put a lot of inventory, seed, aggressively expand to grow the business. That’s when you’re in growth mode. If you’re going to sell, you want to optimize for the sale. Again, six months of planning ahead. You would look at the product line up and say, “Which is profitable? Are these lines actually needed?” Because in that 100%, 150% of your net profit there could be five new lines you’re trying. There could be stuff that by the time it gets in is kind of not selling as well because you’re planning far ahead, right? There is a bit of give and take. But, when you’re planning for the sale, you’d want to really look at each individual product for net margin, sell-through and future potential.
I get asked many times, “How do I build a business?” Or “Can I build a business in six months and sell it?” In my opinion no. You shouldn’t do that. If you’re the entrepreneur because that’s not how you get the most out of the time you put into it. I’m seeing consistently a three to four-year mark as being the ultimate timeline to start to sell. What you often see in that first year is you’re trying to figure out what products works. The product that solves a problem. You’re also figuring out who your target market is that’s the first year. Just figuring out what works and what sells. Then the second year, you can start building out that product line around that customer. Really, what else can we do to expand this? You’ve maybe got one product that’s doing all the work revenue-wise. Then you can expand, for that next year, you could have maybe 5 to 10 products that are really doing a decent percentage of the revenue. Year three and year four is really where you either double down and you put everything back into really scale this thing up or you optimize for sale. I think there’s an either-either there. A lot of times, that’s a pretty personal question whether you optimize for sale or whether you optimize to continue growing the business.
It comes down to capital available, your risk tolerance and what other options you have. If you really love this business, you’re a product guy, you love solving problems, you love the customers that you have, you’re in that niche, you’re in that sport or that group, whatever it is you just live and breathe it. That’s awesome keep doing that. There usually comes a point where a lot of your net worth is tied up in one brand. That’s when people generally start thinking about selling. If you’re on the flip side. A couple years back and we still see this now we turn most of these away, we can’t really help them. If they find something that works, it’s like a hot potato. They’re like, “Oh, it’s working. Quick, sell it.” Then, go into the next thing. Buyers are getting a little bit smarter than that. Maybe that’s a good deal, but you’re never going to get a decent multiple for that.
The time and effort you put in to the risks you’re taking, the capital you’re putting at risk to get that product that’s working, to really get the maximum leverage from that or maximum return, to keep going and grow that business. Then, if it does come to a point where you’re wanting to sell maybe you could look at getting a partner on board to take me of the risk off the table. Someone with more cash or you go and look to sell the business. I think the longer-term you think about this business the better. Especially moving forward. Two years ago, it didn’t matter much but now there’s a big change happening. The leaders in this space and you guys are talking about this as well you need a brand now. You need to do more to continue selling on Amazon. To be able to sell your business, you really need to think more about growing a brand than a business, that’s sustainable longer-term. That you ideally, wouldn’t want to sell if you didn’t have something else to do. You just keep doing this. If you didn’t need the cash off the table, right? That’s really the point we’re at.
Products Count vs Multiple
Can you tell us a little bit more about the multipliers, Coran? Most of our guys in the group only have one, maybe two products out. They’ve just began, maybe last year, maybe this year. What is the earliest you think it’s a good idea to go for the sale? When is the earliest to come and talk to you? Maybe see how they need to prepare for the sale? What about the multipliers for just Amazon?
The single product stuff is still sellable but it depends. It depends how big the business is. Typically, we see single product businesses in the 100,000 to 500,000 list price range. Multiples under a half a million dollars because of there being many listings available it’s turned to a buyer’s market the multiples are going down.
If you’re doing say 30,000 net profit, 30,000, 50,000 net profit and you have one single product that’s doing most of the work but you have a good brand. You’re solving a real problem. Maybe you’ve got some accessory products that are serving that audience. It may still be sellable but the multiple at that point would probably be around 1.5 to 2 times that profit. It’s not a massive return.
If it’s 50,000, it would be what? 75,000 to 100,000. That’s not a massive exit. It may still be worth it for you but at the same time there is only a 30% sell-through rate. Think the days of being able to flip a single product or immersive revenue are all but gone unless the product is really, really defensible or unique. If it’s patented or you’ve gone over and above with the designs that no one can really do what you do or it’s a really strong brand then that potentially is sellable.
I think the options, with a business like that is to either continue growing or just keep the cash flow. You’ve got one hero product just take the cash flow out. Enjoy what you’re doing. If the business model suits you and you want to grow this continue growing. Can you expand into more products, for that target market? If you could get from one to five hero products, they’re all doing about 20% to 30% of the revenue each that’s a very sellable business as long as it’s dealing with the same target market. I think you’re at an advantage if you have one hero product today and you’ve been in it a year. You can look at building 3 to 5 to 10 products for that target market and look to sell in the next year or two. What you’re giving yourself is more defensibility for your business, moving forward that’s the second option.
In the next 6 to 12 months it may not even be worthwhile putting those businesses on the market. Because it’s a buyer’s market the offers that we’re seeing come in, we just took one off the market last month, it was in this case it had one hero product. He tried other products and it didn’t really work. The business model wasn’t for him. He wasn’t a product guy. He had one product that was somewhat defensible, really good margin. About 40% margin but these other products just did nothing. The buyers that were looking at this and had low ball offers and very low interest. It was a European based business there wasn’t any US income which is another thing. At that lower level 1.5 to 2 times multiple net profit is probably where you’re at plus inventory at cost, if the inventory isn’t out of control. Again to Q4, everyone needs more into inventory, for the most part. That’s why I said on average.
Multiples in businesses
What about other multiples? Like, for let’s say “normal businesses” like that? Appropriate business, with not more than 25% umbrella. Let’s say have a stable business, but not that big. Like, maybe same revenues, but five different products.
That’s putting in the category of more sellable. That could be anywhere from 1.8 to 2.5x net profit. If it was the level 50,000 to 100,000 range in net profit, you’d be looking at about that multiple. If you got up to half a million in say 300,000, 200,000, 300,000 plus, the multiple may inch up a little bit, once you get to half a million, or a million in net profit it really boosts up. If you’re doing half a million and you have 5 to 10 products that are doing all the work there is no one main product. Then It’s a good brand and very synergistic. The margin’s good, you’re doing about 30 percent net margin. This business could sell anywhere from three to four times net profit because it’s harder to pull that off. Whatever it is harder to do will typically be paid off when you go to sell. Very interesting like 1 million in profits and net profits. And we just tabled business with not focused on one product or two enough brand awareness and everything. It can go up from three-plus maybe four.
If you have something outside of Amazon you have awareness but you’re also making sales outside of that through your own online store, other platforms, people are seeking out your products that’s really where you start to leverage at multiple up.
We wanted to ask you this because we had this conversation the people looking for businesses. I’m not focusing much on the what you do outside Amazon for us it’s a bit unclear now. What you’re saying is like it’s not that important. Like I don’t know what Facebook does have or stuff like that. But it’s important if you’re managing to do sales like the practical stuff or because maybe I have like an Instagram that I say like in five years we’ll sell $2,000,000 per month. I don’t know but I’m not sending extra. Now I’m building it. Is this worth anything or it’s better to have like 50 sales outside Amazon every month and this is the most you can do it.
I don’t think there’s one clear answer. As of today buyers are buying businesses with Amazon only income 100 percent. In the future I believe it will be more important to have sales outside of Amazon but it depends on your skillset of your team. Often if you’re really great at finding products that solve a problem and your great at ranking on Amazon editing the whole ecosystem working and focus on that. Maybe partner with someone that does the outside Amazon stuff, just focus on that lane but it also depends on your own risk tolerance, an own plans for the future is the other thing to consider. What you want to do longer term is what should be a really important and you know, selling is kind of like the flavour, the flavour of the month and this in the Amazon world right now, which is great for business.
I’m not complaining for us but for all of us really. But you know, there is the cash flow aspect of this, these businesses as well, you’re making good cash flow. We have an Amazon brand or a supplement business that sells only through Amazon. We have outside channels and things driving traffic. But yeah we don’t do a lot with this business and I ran the numbers on selling the business versus holding it. We’re making, it was a little bit more previously (there’s more competition now) but we’re making about 35 percent net cash in our pocket from this from inventory after all expenses. And I don’t have anywhere else to put that cash right now. If I did, I’d sell it and then go put my cash somewhere else. But they’re little cash machines if you get it right don’t forget the the power of what you’re building. In future there are potentially other options available to you. You have got work out what do you want to put it into the business to get out of it.
Growing a Sellable Business
What can you do at this point to grow the business to a sellable position?
What many people are doing is they’re acquiring other brands. These larger bodies that are buying multiple brands for large businesses and outside Amazon in the real world, let’s call it, they grow by acquisition all the time. You’re hearing about this in the news. Facebook bought Instagram. That is a famous example of growing by acquisition. Of course, they were taking out the competition in that case as well. However, you could look at buying other brands, you can get more defensible by buying another brand that’s more defensible products. Alternatively they may have one hero product and now you’ve got two hero products. If it was a line somehow, that’s a good thing to do.
Other sellers are partnering with people with capital to take me risk off the table. They may sell 30, 50 percent of the business today at today’s value and then get a capital partner involved tin order to grow the business, continue growing the business and slash or fly acquisition. Grow the product line through acquiring other brands and that’s what we’re really seeing is the key right now or that’s the options were seeing and the growth trends.
If you’re in decline, one guy I spoke to is doing about half a million a month but year over year he was about 50 percent down from the year before. A buyer would look at this trend and say well you’re doing half a million a month now. He used to do a million. What’s going on here? What’s the chance that next year it will go to zero and they’ll start to chart out whatever the trend they see. If we have a nice growing trend that we’ll look at that and say okay this will keep growing. Well yes, I want to buy this because of what I’m getting out of it. If it’s the other way, if it’s going down the thinking, how I don’t want to pay for this at this price because it’s going to go down. That’s really important year over year growth, two years of sales out of that can also help if your business is seasonal somewhat, adding a winter product or a seasonal Christmas holiday products that can help. Also you’re best seller rank by the time is something that a buyer will look at as well as what’s that trend been? Has that been drastically impacted when it comes to competition, which kind of leads into growth and how is the last 12 months been for you? Have you seen new competitors come in that have stayed in that top in those top positions over the last year? Staying consistent, a few people coming in but then one or two of them are sticking on the first page over time that will eat away at your market share. You really need to get proactive on that. These are the things. This is how a buyer will look at. Does that cover the two couple of techniques that Alex, the buying other brands to grow or getting a capital partner to expand the product line?
Selling the Account vs Company
Do you sell the accounts or do you sell the company?
This really depends. Typically a buyer will want to buy the assets of the business, not the entity itself. If a buyer takes over the entity and then they’ll assume the risk of the past. If you had any other things that were running through that entity that will now assume liability moving forward, even if your contract says your liable before the state, they’re liable after, they’ll still have the liability. Often with these smaller deals, the entity would be a part of the deal. Sometimes a buyer will prefer the entity that’s generally at the larger range. If you’re at the $5-10M plus list price valuation range plus an entity may need to be a part of available as part of the transaction, but even $5,000,000 that’s generally an asset.
That’s something that entity versus assets when it comes to the seller account and whether that needs to be included with the sale or not this also depend on the size of the business the country that you’re selling in as well comes into play. If you’re in the US, I know most guys are selling into the US, right? in the US it’s very easy to transfer an account, typically a buyer will want to take over the account. There’s a lot of history with an account that has PBC history, for instance, it is great to just have it seamlessly transferred. We typically like to have the seller account available for transfer as part of the deal. That’s what we like to see. Especially in the US, whether the buyer wants to take it over or not is a, is up to them.
They may have a larger account that they’re saying the sports health and fitness that’s buying your sports brand, rolling it into that bigger account, then they’ll take them to the brand. We transfer, it’s all very easy. The seller account transfer is the fastest way to transfer a business as well, which means you get paid faster. Everything else being equal. If we get the deal done, we had one of these two weeks ago, we had a call for about one hour to transfer all the assets and the buyers then called the lawyer to release the cash from escrow. And we got paid the next morning. It was super-fast. It took time to get to that point but the actual handover was very quick.
We have a deal in Germany. The majority of the sales are in Germany. The German Amazon system is a little bit different and they are a lot stricter. They’ve actually said in this case, they won’t transfer the accounts. What we’re doing is the buyers have a new account. We’re transferring the brand ownership across this account. They’re taking listing control. We’ve been working on the physical transfer for two weeks already and we’re still not done because they have inventory limits with Amazon. We’re trying to get these limits removed so they can take over and it’s just a longer process. I’m sure we’re very close to being done on this deal but it depends on how long that will take time in the US as well. It doesn’t mean that’s faster. They weren’t actually. Amazon won’t move inventory between accounts at their warehouse because I don’t want to assume liability. You can ask. I’ve heard of me deals being done where they will do this in the US. In Germany and the UK they definitely will not do this.
Other countries vs the USA
Is it good to continue having a company in Romania or do we need to move to a company to the US because that’s better to sell?
From what you’re saying, it’s better to keep it in Romania because when you’ll sell, just sell the asset and not the company.
I would hesitate unless I spoke to someone one on one and it really was to their advantage to switch to the US. I don’t think blanket advice like I would say it tax planning and exit planning too. They go hand in hand but I wouldn’t change. If you’re listening to this call, I wouldn’t go out and change to a US entity if you’ve just started, you know, you’re six months in, Oh let’s change for US entity so we could sell. The business isn’t even ready to sell yet I’m definitely going to reach out and do me research. If you’re thinking of switching entity. As a broad statement, it shouldn’t matter nine out of 10 times. Just to give you an example of one way. The taxes you’ll save by being in a country such as Romania will make it worthwhile anyway. I say just keep doing that.
Timelines
What’s the shortest time track record that you need before being able to start searching for a buyer?
Again, it depends. I mean there was nothing stopping you from searching for a buyer yourself, if you want to sell with a broker, most brokers will want at least 12 months history and there’s other marketplaces that might require less if you’re doing it individually. You can start whenever you like. But like I mentioned before that year over year growth is one of the key components that drive value of the business. If you don’t have a full 12 months, year over year, two years of history the buyer taking more risk. Because there’s no proven track record and I mean two years isn’t even really a long-proven track record either but it gives you something to compare. Whereas if you’ve just started out, you say six months old, you potentially could sell this business but you’re not going to sell it for the greatest multiple ever because it’s just new. It’s unknown. The buyers really gambling at that point.
Fees
What is the broker’s fee?
Yeah. brokers charge all different fees. We have a sliding scale basically. Our fees start at 15 percent and scale down as the business gets larger. It could be paying 15, it could be paying 10, you could be paying five. It depends on the size of the business. But we’ve got a deal right now and we get paid out of the deal when the deal closes, we’re paid out of escrow, most brokers will be paid out of escrow that’s before, before taxes. We’ve got a deal we’re prepping right now. It will probably be for about $10,000,000 they’re obviously not paying 15 percent. That would be at one point 5 million. That would be a nice commission but they’re not going to pay that.
Amazon categories
Which Amazon businesses sell?
We did a whole article on this on our website for 2017. We did a rap of all the deals that we had found that the highest, the most sales were in the kitchen niche. That’s a very popular product. The second is home health and beauty. The category you’re in can impact the multiple as well. Say you were in the supplements business. This is a great example, it’s almost split down the middle with buyers they either want supplements or they won’t want supplements. No one’s on the fence with supplements. Whereas home and kitchen it’s everyday items. A buyer may want something more proprietary but they’re open to everyday products that people use over and over again.
Buyers
Who is buying? What is the customer Avatar for the Amazon business buyer?
It is dependent on the price point and list price. If you’re up to that half a million mark, 100,000 to $500,000 list price for your business you’re typically dealing with the individual investor. They’re investing their own cash they have a huge fear of loss, right? They’re investing their own capital in the business. Typically, they’ll be US based. Most of our buyers are US based which is why we’re now developing those relationships.
Generally, they’re a high paid executive they’re working 60, 70, 80 hours a week and they’re looking for a better return on capital than cash in the bank. And like I said before you know, cash on cash return on inventory is pretty tough bet in an inventory based business. That’s why they’re looking to buy these. Typically, they’re new to Amazon as well and they don’t have that much of a track record. They don’t have much experience. They’ll lean on the seller, lean on you guys to help them to get up to speed to run the business. In that half a million to 1 million range list price right now it’s a little bit of a black hole. There’s less individual buyers that will have half a million or more to spend in one deal and it’s not big enough for the larger guys to get interested. It’s a really awkward price point right now we’re seeing businesses take a lot longer to sell.
They need to be extra. You know, these five things we talked about before. You need to be hitting all of those to be able to sell in that half million to 1 million range now. In the $1 to $5 million range list price. Last year in October I gave a talk about this, these price ranges and advertise back then 1 to 5 million was the black hole. Now this is the hottest market. It’s a seller’s market. If you hit those five points that we mentioned before it’s a seller’s market all the way. Like I said before that one deals recently sold in a week. Another one is 1.5 million in the same month. We had a 1.5M and a $1.1M deal. The $1.1M sold in a week and the $1.5 million sold in 3 weeks.
It was just fast and there is a lot of buyers. Those buyers are generally more strategic buyers that have raised capital. They have a team in place that have Amazon ecommerce experience. They have a big growth plan, they’re looking to buy multiple brands. Right now they’re not really looking too much below the million below list price range because it doesn’t make sense. What they’ve done is they’ve raised the first round of capital, they may have raised say $50,000,000 that it works then the rest comes out in tranches. The first piece may only be $10,000,000 and they need to show success on that 10 million to get the rest. A lot of them are working on a first tranche it doesn’t make sense to buy $100,000 businesses. At that point. They want a couple of businesses to prove the model and to then go get more capital. That’s why the one to five million price point range is a hot market.
Above half a million above that $5 million plus range is almost exclusively strategic venture private equity groups. At that point, we’re also seeing family offices come in. A family office is pretty cool. You may or may not know what this term is. Basically, if you have a massive exit. Say you guys sold your company you’d get a decent amount for that. Then you’d put if you have say a $50- 100M plus exit on new business you now have enough capital to actually hire wealth managers yourself. They call this a family office. Instead of going outside to get capital management, you have it inside and these people that work for you adjust managing your capital and getting a better return on that capital. There’s a number of family offices that are looking at Amazon brands or consumer brands in general to buy and they’re actually pushing the multiples much higher as you go through those price points because you know at 10M to $20M list price range that you’re dealing with actually need to deploy capital.
They have a massive amount of capital or committed capital behind them that is his or her sole job to invest that capital and get a return for there partners as opposed to those in the 500,000 range. This guy has $200,000 but that’s all he’s got. And it took him 10 years to save this up. Putting all that capital in into one sole investment is scary. I’m not saying it’s just comparing. Right.
Keeping a portion of your company
Is there any chance of selling like 95 percent, 90 percent of the company? Like still, I’m thinking like selling 90 percent in the way that they invest a lot of money and then your 10 percent maybe words like what you do now and I don’t know this kind of agreement.
We often see deals where a component of the business stays current owner. And we don’t always advise to take this type of deal. There’s a couple of things to think about when thinking about this. The concept of selling 90 and keeping 10, if they do something great with the business after or you’re on a growth trend that seems like a good idea. And typically it might be but what we tend to do as we look at who’s making the offer. If the buyer is brand new to amazon never sold on Amazon for $1,000,000, I don’t know what to do with them. At that price point look at the buyer type. If the you know just because I’m buyers have a lot of capital doesn’t mean that the right partner to do this with either you want to ask them what the plans are and also what their experiences. We’ve got about 30 different buyer groups right now that have raised significant capital. They’re looking at $1 to $5 million plus range to buy. And a lot of these guys,almost all of them will make an offer like this where they keep you keep a percentage moving forward but only maybe five to 10 of them I would actually say is a strong yes because the rest of brand new to this that bringing capital and that haven’t done it before. You really want to make sure that the guys who partnering with or girls have done this before.
If they’ve built an exit an ecommerce or brands before then they’ve got more track record and there’s a higher chance of that 10 percent you’ll keeping will be worth more and you may actually find there’s a couple of these guys right now that are looking to partner with an Amazon operator because they don’t have an Amazon operator. And their sole purpose is to buy multiple brands and they may be able to help you, may be able to stay as part of the business to you and your team to help them acquire these other brands, integrate them, build it up to a much larger deal. And typically these guys are looking three to five years for an exit. You may not want to sell 90 percent if that’s the plan. You may sell 50 percent of the valuation today and then in three to five years you sell the other 50 percent for maybe 10 times more than your original 50. it depends. That is a good strategy, especially if you believe in your product and your niche.
But is this safe because I know as on as you don’t have the, uh, what to say, Alex, majority, majority of, there are legal ways that you can, like from 10 percent become like we saw all. Everybody’s facebook, you know, like basically the view now it’s still safe now or it’s like a bat or basically you, you, you are happy with what you’re getting now. And we have the possibility to get more in the future, how you see that, how you approach that.
Even if someone has a proven track record you’re still taking a gamble because there is no guarantee even if you have rock solid agreements, you’re a shareholder in the entity. Something could change they could buy a brand that tanks the whole thing. It is the type of thing that depends on the deal structure too. Recently a seller was offered a deal where they would take the percentage of profit each quarter. Every time the investors took out money, everyone got a distribution each quarter. But what we were asking the buyer in that case was, what’s your growth strategy? And then we’re saying, oh, we don’t take distributions. We put it all back in. You’ve got to look at the whole deal structure as a way about yourself. There are legal ways to make it safe to make sure you get your 10 percent if they sell again. There is no guarantee business is business at the end of the day. Especially if you’re not operating the business, you’re handing over the keys to someone else and that can open to risk. You must be careful with who partnering with and what the deal is. And the rule of thumb is to be happy with your first payout in case there is not another one.
Top 3 lessons
What are the top three lessons learned after many business exists that you’ve been involved in?
Top three. Wow, that’s a great question. I haven’t actually been asked that before. I think this is one of them actually like classes for instance the type of buyer you’re dealing with that can dictate a lot of the deal. Partnering with someone in the process that I’ve actually been through deals before is really important. I’ve learned different lessons on each deal, I’m not saying I’m perfect but we learn on every single deal we do. There’s no one way to get a deal done. I think one of the biggest takeaways as a seller because I’ve been on both sides prior to becoming a broker. I was buying and selling online assets myself with my own cash and we bought my own assets. We Made me money and we lost me money. We built an ecommerce business, sold it from scratch. I’ve been on both sides. What I realized is that, especially on the sell side, because we’re talking mostly sell side here is when it’s your asset you’re selling, you’ll never really find you could sell at the peak because the buyer always wants an upside. They’ll only buy on a growth trend and they’ll only buy if they think they’re going to get back that money soner than what they’re paying. If they’re paying a two times multiple they look at the trend and they’ll say hey I got my money back in a year and a half instead of two years. I’ll pay two years back quicker. People say win, win deals are the only thing that works you really want to work with a buyer and set them up for success. The deals that we’ve had the best deal terms, the most cash upfront the easiest transition is where we work with the seller to prepare for helping the buyer succeed after the sale.
Having product ideas, getting them up to speed if they’re brand new to amazon. We had one seller who offered to fly to Florida to help the buyer get set up, she’d never sold on amazon before. She said oh, I don’t need that. We can do it all virtually. But he offered to fly over like that. Go above and beyond for the buyer and position your thinking, your business for the buyer when you’re in the deal as the seller. That’s important. One of the biggest lessons even when you’re even a professional buyer is that they have capital behind them but there is still a fear of loss involved. And on the sell side there’s a fear a different fear, I built this from scratch. Why is this person asking so many questions about my business? There are a lot of emotions that comes up around selling a business, buying a business and you find out a lot about yourself.
Selling must-haves to Increase Multiple
What do you think are the must haves when a buyer looks at a company?
Yeah, sure. those, those five things are really where it’s at you’ve got the brand net margin, products size and the trend. The brand being key having that recognizable brand but also brand synergy in the products be.
Do you think these are the must-haves or desire good to have for a better multiple?
I guess you’re asking what would I pick out of the five if I was to go sell a business? I think uh, as of today, I think today moving forward, I think brand is going to be one of the biggest factors. Making sure you have a strong brand. I think that’s the thing to start focusing on. There’s a lot of businesses that are doing great net profit that only have like three products in completely unrelated categories. Our three brands where I just have three different labels. it’s not a brand and a brand with one product isn’t necessarily a brand if it’s generic. I think brands really plays a big part. That would be probably my biggest pick followed by net margin is the two biggest and then diversification on the product line and then trend. That’s the priority order.
Higher vs Lower Margins
What happens if the margin isn’t that high? Is the business unsellable or is the business sellable but with time and a lower multiple?
It depends on the business. As a business grows larger, they will have a smaller net margin. I was talking to a friend of mine that works for a private equity firm. He was saying you know, they look at a three percent net margin but they’re looking at billion dollar companies. So this is a completely different.
I think 20 percent is the absolute minimum. We’ve got a businesses right now that are in that 18 to 20 percent range had a couple million in revenue that are still very sellable because the brand is strong. That’s why I put brand first. We’ve seen businesses recently with ten or eight percent margin listed for sale elsewhere and you know these, these business, everything else being equal, if they’re only making half a million a million and your net margin after adding things back is under 10 percent why would you buy that? A very little margin for doesn’t leave much room for error or margin to compete with competition. If someone comes in with heavy competition on your net margin and you’re at 10% you’ve got nowhere to go. If you’ve got 30 you’ve got a lot of flexibility that to weather out the other competitors coming in. Say you were actually at seven percent net margin with seller discretionary earnings adding back company taxes, owner’s draw any conferences you go to, things that aren’t related to run the business called this operating expense that’s not operating expense, we can add it back. The bottom line, if you’re still at 7 percent I’d say really look at the product line up and cut, cut out what’s not profitable and look at turning that around before selling.
Yeah, I’m thinking about at the strategy, I’m thinking like growing the business as much as you can with it. I don’t care about the margin and then trying to optimize it to get that too optimal reach that everybody wants to see because Alex you paid 100,050 or 150,000 last year in events or stuff like that. How’s that to your margin? You know, like, but it doesn’t necessarily base to do this, you know, like yeah, that wouldn’t be on your bottom line. , we wouldn’t include expenses.
But yeah, I get what you’re saying but you’re it sounds to me at least what we’re talking about now a few classes at a point where you’re in a growth mode and you wouldn’t. The only you’ve got to change. You can keep growing, you could just stop or you can just let it go like it’s going. You can keep growing. Well, you can get on a partner to help you. A capital partner, basically you wouldn’t want to sell right now if you didn’t have to right. If you ever have to sell the chances of you selling in a timeframe that matters are really slim.
Years ago when I worked for another brokerage there was a business based on the west coast of the US the seller was moving to New York and he had this business been running for a few years. He had inventory. He didn’t reorder inventory because his thinking was I’ll put this up for sale and if it sells great. If it doesn’t I’ll just leave it moves to New York. We were literally negotiating a deal and he ran out of inventory and an inventory based business doesn’t make any money if there’s no inventory. And I said, I called this guy off. I’m like, what the hell are you doing? Why don’t you have any inventory? Well, no, that’s not how to do it. Right? If you need to sell and can’t afford inventory just let it run out. Don’t try and sell it. This is beyond the distressed asset because especially if you’re selling on amazon you run out of inventory for any significant period. You guys know it’s tough to get those rankings back. In any cases not selling is actually the better option especially if you need to sell like whenever anything is rushed or urgent it’s a buyer will either run away from that because that scared all of the offers that will come in, will be rock bottom and you may not want to do that deal anyway
We’ve got me clients that their whole business model and amazon businesses are like this, off-amazon brand like this to where they need to constantly release new products to keep growing and we need to factor that cost in. Then that margin will go down. But there’s two problems with that in a selling scenario. They not only need to keep that, not only need to show that expense forward they now need to train the buyer to do this. We need to find a buyer and train that buyer, if they don’t already know how to actually continue that growth going forward that will reduce the buyer pool. Whenever you want to go sell something you want the broadest buyer pool possible to get the most offers the most interest and that’ll drive the price up. Whatever, these five points we’re talking about. Sure you don’t need all five to go sell, but if you have all five, you will have the biggest chance of selling at a decent multiple or above market rate. And that’s what it’s all about. Your positioning that for success.
