Joshua Chin 4:41
What makes a business sellable? What are some of the aspects that you consider?
Ben Leonard 4:46
Yeah, so it’s not just about making your business sellable, but it needs to be valuable. And the two things go hand in hand right your business. If it’s not valuable, it’s not sellable. And if it’s not sellable, it’s not valid. And there are several things. Timing, it’s the first one, your business, you know, the time of your exit needs to be when your business is, is growing, it’s on an upward trajectory, which will make it attractive to a potential buyer, but not maxed out, you’ve maxed out all the growth, and there’s no meat on the bone, no carrot on a stick to entice a potential buyer, the buyer wants to buy your business so they can enjoy some more growth to if you’ve already, you know plateaued, there’s nowhere else for them to take it. So that’s why you want to reverse engineer your exit and think about when you want to sell it, what are the steps you need to take between now and them to to get there? second aspect that makes a business sellable and valuable is stability. So is it risky? Are you selling products or services in a risky niche? Have you ever used gray area or black hat strategies? I hope these are things to consider about whether your business is sellable. Different buyers will have a different attitude to that risk. What about your growth history? I mentioned growth before but how has the business done in the past? That’s really important. And where are you now? are you growing? Or are you plateaued or declining? You’re plateaued or declining, then your business might still be sellable. But it won’t necessarily be as valuable as you might have hoped? And how transferable is it? Can you hand over the keys tomorrow, or if you fall down the stairs, break your leg and end up in hospital can can nobody else run your business? Well, if nobody else can run your business, when you’re in the hospital, then presumably, a new owner can’t take the business off your hands and run it either. So it needs to be very transferable. And then the last part, I suppose of stability is documentation, which is everything from your accounts, being neat and tidy all the way to intellectual property and having all your trademarks and patents in place. And having systems and processes which again comes back to transferability. So that’s stability. Of course, if your business is profitable, that’s going to be a real help. Not so you know, not all businesses actually need to be profitable when they’re sold, especially exciting startups. But for the most part, for the for the people that are listening to this, you potentially own an ecommerce business or thinking of selling it. That applies and you know, it goes without saying your business needs to be profitable. And hand in hand with that is defensibility. Are you selling just a mishmash of stuff, which can easily be replicated? Or have you got a defensible brand, have you got a real suite of products which solves problems for a particular group of people, then your product has an identity, which is protected with intellectual property, right? Those those things are all really important. I can go on about more, if you want Josh, lots of things that make a business sellable.
Joshua Chin 7:51
I want to unpack the transferability piece a little bit more. That that’s that that’s one aspect of econ businesses that that brands should always think about as they scale and grow, regardless of whether they choose to exit anon eventually. Because it creates just so much freedom and so much. reduces stress so much, when you’re able to take a step away from a business and have, you know, a week-long two weeks vacation without having anything, crash and burn. I think that’s the outcome that we’re trying to get to. But what are some of the the pillars or components to creating a transferable, stable business? If I were running a brand today, what should I start looking at
Ben Leonard 8:41
Several things. First of all, I mentioned before systems and processes, right? If you haven’t, if everything is in your head, or stored in your employees or freelancers heads or haphazardly stored in, you know, Google Sheets here and Evernote notes there, then that is not transferable, that is not sustainable. And also, it’s not sellable. When somebody comes to do the due diligence on your business, and they see this mess, that’s just gonna be a red flag and they’re not going to want to buy your business or they’re going to buy it for a significant discount. On the other hand, if you have really neat and tidy systems and processes that form part of a wider operations manual, that can be handed over, then you know, that’s a big green tick, and people are going to be more impressed with that. And we’ll be happier to pay more for a business like that. link to that is automation. Automation will not only Lower, lower the costs of your business and therefore make it more valuable. But it will make the business more transferable. If you have automation in terms of social media. Pay Per Click, how you’re getting your traffic through paid ads, inventory management, chatbots email flows, which of course you know, you know whole about sending out your receipts and these things all make the business more transferable. The state of your accounts, if your accounts are neat and tidy and being handled by proper chartered accountant, then that can be handed over to the accounting department of the the organization that buys your business much more smoothly and painlessly than if they’re not. So those are, those are the big ones, I would say for transferability Oh, and finally, actually relationships, particularly with suppliers. So if you’re selling physical products, for instance, really important, you have a fantastic relationship with your supplier. And if there’s going to be any kind of transfer, you know, transfer period during which time you might be still involved with the business, then you can ensure that the transfer of that relationship goes very smoothly between you, the supplier and the new owner of the business.
Joshua Chin 10:46
What are so we’ll talk about the relationships and the transfer period a little bit more. But what are some things that we could do to improve the defensibility of a brand, and potentially improving that, that eventually multiple will be getting, if See, I don’t have a if I don’t have an IP of any kind and I’m selling generic product or other any other ways of creating defensibility.
Ben Leonard 11:17
So first of all, if you know, the obvious one there is well get some IP get some get your get your trademarks done not only in the territories, and you’re selling in, but also in wherever you’re manufacturing the products. And if you have any of your own designs, they need to you need to have them registered or patented. And I love scaling businesses and bootstrapping them and it’s spread fun. But one one place where I always say to spend the money, either intellectual property, it’s always worth it to spend the money with really good IP attorneys who can help you get that right. Aside from that, there’s several things that you can do. And I’m a big fan of diversification in four ways, sales channels, so where are you selling your stuff? Are you only selling it on your own website? Or are you also on a variety of marketplaces, which could be Amazon could be Walmart could be ball could be any any other one. Could be Etsy markets in terms of international markets. Are you purely selling in the US? Or are you also in Latin America, Europe, the Middle East, Australia? What about products? Are you relying on one or two products? Marty skews? Well, what happens if your factory has a problem? Or there’s an issue during shipping? What What if your stock is on a ship? And suddenly it gets stuck? Because an enormous ship has got stuck in the Suez Canal, right? Oh yeah, you’re reliant on Okay, that’s a once-in-a-lifetime example. But you get the idea. If you’re relying on just one or two products. That’s that can be okay. Provided you have backup plans, you have a backup factory, right? Do you have a backup way to get your stock into the country? Those those kinds of things are important to consider? Or can you diversify and offer a wider range of products to solve problems for the same person, right, so maybe you’ve proven the concept with your first one or two products. And now you need to create more products to sell to the same people. So if you have a brand of knitting accessories, you’re selling your fantastic knitting needles, and you now sell them special bags to store their knitting accessories and right. And finally, traffic, you need to diversify your traffic sources, are you relying purely on one Facebook ads account? Well, if your Facebook ads account gets banned, or goes down for some reason, then you’re in a pickle. But if you’re getting traffic from a variety of sources, then if any one source goes down, either permanently or temporarily, then you’ve got a safety net there whilst you get everything up and running again. And so an individual or an organization doing their due diligence on your business is going to look at diversification. And if they see that you’re heavily reliant on one channel, one market, one product, one source of traffic, that they may still buy your business, but it’s going to be much less valuable to them, and they’re taking on more risk. So they’re not going to be as willing to pay as much for it. Makes sense? And
Joshua Chin 14:18
now, when it comes to valuing a, an ecommerce business, I’ve seen ranges that that that vary still wildly from from people looking at revenue and having a point, point five acts of revenue to four times of EBITDA, is there a range that you typically kind of expect when you grow broker a deal or sell a business or it doesn’t matter from industry to industry.
Ben Leonard 14:54
It does matter industry to industry. And somewhat, it really depends on the business, the category, the buyer, all sorts of things. But if I was to give you a fairly broad range for considering and for the purpose of this conversation, let’s assume we’re talking about a physical products brand, selling online, whether it’s on, you know, a Shopify site or, or marketplace or MCs, anywhere between one and a half and six times EBIT da or SD E, we could talk about this term, those two terms if you want. But more or less net net income plus add-backs and adjustments. Now, having said that, we can have much higher multiples, particularly if the buyer is a strategic buyer, rather than your typical buyer, for instance, like an ecommerce aggregator, or a competitor or other private equity. So yeah, there’s somewhat of a range. So if,
Joshua Chin 16:02
if I find a strategic strategic buyer, who would be would benefit greatly from from acquiring my business, I would probably get a much higher multiple than
Ben Leonard 16:11
Yeah, yeah, then we’re talking, you know, 678 Plus, you know, up into the teams that can that that that is the advantage of selling to a strategic buyer.
Joshua Chin 16:22
Yeah. And I suppose that ranges from like, at different scales of the business below one mil and up to two,
Ben Leonard 16:29
yeah, definitely. I mean, typically EBITDA is used for businesses, doing more than sort of one and a half million dollars in earnings. And STDs, typically for businesses less than a million dollars in earnings. But that’s, you know, those things are fluid and movable. So yeah, I don’t know how much your listeners know about what EBITDA and so he is, yeah, shine some light on that, though. So EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Basically, it’s your net income, plus interest expense, depreciation expense, immortalization expense and taxes, which is a, you know, it’s, it’s a classic way to, to measure the value of a business. It allows potential buyers to compare against other businesses in the same industry by removing expenses that would like sort of skew that comparison, whereas SDE is a bit more simple. That stands for sellers discretionary earnings. And it’s the most common one that we use in ecommerce, it’s basically the entire financial benefit your business would provide to one full time owner operator. Now we know the business isn’t necessarily going to be bought by one full time owner operator. But it’s just a very simple way of thinking about what is the value that this business will add to the portfolio of businesses this buyer already owns. And it’s simply calculated by taking your business’s net profit, and adding back certain discretionary expenses. So typically, that’s the the income of the owner, and any personal expenses they’re putting through the business, travel, etc. But then there’s all sorts of other add backs and adjustments that a good broker will make when they’re valuing your business. So for instance, any one time expenses that a new owner is not gonna have to do so once your trademarks have been done, they’re done. So you add them back, right, that comes off the last part of your p&l sheet and goes back to the profit part. Photography has been done, added back video has been done, added back, the consultant consultant you paid has been done added back. All sorts of these, and depending on how good your broker is, depends on how detailed they’ll get. And then there are more, you know, interesting adjustments that a good broker will make. So suppose you’re selling a product. And two months ago, you negotiated a lower price with your supplier? Well, typically, we value a business based on the trailing 12 months’ performance wouldn’t really be fair if the new owner was able to take advantage of having the new lower-cost from your supplier. But you’re only getting that benefit contributing to two months worth of the trailing 12 months’ performance. Yeah, so it’s reasonable and legitimate adjustment to say, well, we will extrapolate back as if every unit you bought was at the lower cost for the full 12 months. Similarly, let’s say six months ago, you put the price of your product up. And when you did that you didn’t see a drop in sales, sales stayed the same or went up. I don’t know maybe because customers now see your product as being more premium. Yeah. Well, it’s only fair that we extrapolate as if you’ve always been selling at that higher price because the new owner is going to get the benefit of selling at the higher price. So it’s only fair that the value of the business reflects that. Does that make sense? And those are just two examples. There are a lot of adjustments that a good broker who has the accountancy experience, and the m&a experience will do so that’s really important when you look Selling your business that you’re working with someone who understands ecommerce, understands accounts, and understands mergers and acquisitions fully so that they can maximize the value of your business without you actually necessarily doing anything in your business. That’s different.
Joshua Chin 20:14
I just want to point this out as well, when you’re looking at like a six times eight or nine times EBITDA or SDE, any 1000. Any dollar that you save from these potential add-backs, or they’re basically multiplied by six or eight. Yeah,
Ben Leonard 20:32
they’re compounding right up. So that’s why the right you know, with a typical, like, for instance, let’s say you’re selling 50 units a day of a product three months ago, you increase the price by $2. So for 365 days, that’s 36 and a half grand, extra profit, right? No, yes, that’s 36 and a half grand extra profit per year, if you’re selling at a 4x, multiple, that’s 150 grand extra added to the value of the business purely for taking the time to think about how that affects the real value of the business to the new owner. And when you’re dealing directly with an owner, let’s say they cold approach you Sorry, a potential buyer and they cold approach you it’s very difficult to, to, to push these things through. Or if you’re dealing with like, you know, if you’re flipping your business with like flipping services, it’s very difficult to have that done. And so an expert will be doing lots of those adjustments and others, which could add high six, even seven figures, or more to the value of your business, if you do it correctly. That’s incredible. Pretty much.
Joshua Chin 21:45
But um, the the period from which you sold, after you’ve sold the business, the deals done, you sign the agreement, what happens then typically, do you stay on the business for a period of time, or do you typically hand things off,
Ben Leonard 22:07
it depends on what the seller wants to do, and what the buyer wants to do. But more importantly, what the seller wants to do, a lot of people fall under the false impression that the power lies in the hands of the buyer, and the buyers want you to believe that right? They want you to believe that they hold the cards and that and then you take their pretty poor offer that they give you. Whereas what you should be pushing for a really great deal, because you’re the one that has a fantastic business that they want to buy. So if you want to retain equity, then you and your broker and your your your mergers and acquisitions attorney and a good broker will will will find you one will negotiate that you will retain some equity. If you don’t want to retain equity, but you want to stay on as a consultant to help develop products and take a profit share of those products, then you negotiate that, if you want to walk away into the sunset and have nothing to do with it, then you negotiate that right, it’s really important that sellers understand that they will depart because it’s their fantastic business that somebody wants to buy. So there’s lots of things you can do. For instance, when I first sold the first brand I owned, I negotiate a deal where I continued to develop products for the brand, which was great, because I enjoyed it in exchange for a commission on the profits of that product for the first year after it was launched. And that was fantastic because I was having my cake and eating it because I also negotiated the earnout targets. But because I knew the products that I was going to launch, were going to be great, I was very confident we would hit the ernaar targets. And indeed we’ve hit all the targets so I’ve got the full amount from that deal. So um, you know that there’s ways to have your cake and eat it and to really structure it exactly how it works for you. We work with we’ve worked with some people who have decided to keep some equity in the business. So they’ve like sold like 70%, say and retained 30. And what’s really exciting is that the moment you sell, let’s say you sell 70%, a three and a half x The moment you sell it, the new owner is rolled into their portfolio, right? So it’s worth way more than three and a half x, right, double, triple even. And at the same time the 30% you still own which is attached to the company obviously it’s also worth much more than the 3.5x right so a couple years down the line when the new owner comes to sell it on as part of their wider portfolio and your 30% have sold along with it. You might be getting eight 910 even more X on that 30% which is really interesting because now you’re having two paydays and your second payday could be even bigger, even though it’s a proportionally smaller percentage. And what’s really, really exciting about that is you actually had to do no work, you sold the business then you owner is running the business. You’re doing whatever you’re doing now, happily knowing that you still own 30% of you’re going to get another payday in a few years. So there’s lots of ways to do it. A lot of people like to do what I do, which is sell have some involvement to guide and advise the new owner During the earn-out period, it doesn’t have to be very particularly labor-intensive at all, I’m talking about, you know, a call once a month or something and then rinse and repeat and use their skills to build more brands, because that’s what they discovered they love doing. That’s incredible.
Joshua Chin 25:18
What are some of the configurations or structures they’ve seen? done really well, as far as vehicles are, are there typical permutations that you’ve seen
Ben Leonard 25:31
in ecommerce 30. Most aggregators and buyers in ecommerce just want to buy 100%. And what they want to do is deal with you on your own without a broker or representative and pay you a pretty poor amount up front, you know, 70%, or something less even, and then hold back the rest on earnouts. Which, with with, with targets, which are gonna be pretty difficult to hit. But a good deal might look something more like this, somewhere between 80 and 100%, upfront, right? Often it’s not, it’s not often it’s not 100% upfront. Although caveat there, if you can see the real, if you are very confident in the growth of the business, you might want to have less upfront and have a really aggressive earner, because you know, you’re going to hit these fantastic targets, right. So that’s just as a side note there. But a good deal will be, you know, significant proportion upfront. And then earnouts, which are a realistic, and be protected, such that, if you miss an urn out by $1, you’re not going to get nothing, right. So then the deal needs to be structured such that there is a, a fair sliding scale or a ladder, if you like, of our target. Right, right. And the deal also needs to be structured such that if for some reason, the business doesn’t hit an earnout target, because of mistakes by the new owner, you know, they went out of stock on a product, they failed to order products in time, they didn’t, you know, various, various reasons, the deal needs to be structured such that, you know, the legal agreement, such that you will still get your own target, if it can be demonstrated that the target was missed, because of poor management by the new owners, for example. Another good example of something good to put in the deal is that you still get access, read-only access to things like the backend of the website, or any marketplace that you’re on, so that you can get in there early, and help the new owners and say, Look, I’ve noticed this, I’m helping you in due time so that this mistake doesn’t occur. You know, that, that those are all important things. And it’s difficult to negotiate those into the contract when you’re dealing, you know, with like a flipping company, or if you’re just Yeah, you’ve been called approach. And I guess the other thing to add to that is that when you are selling your business, it’s really, really great if you have a competitive environment of several good potential buyers at the table, who all want to buy your business, because then you have a bit of an auction going on. Right? That makes sense. Maybe a rookie question here, but
Joshua Chin 28:21
it do you talk about the potential buyers that you have with each buyer? Do you bring that up on in conversation at all?
Ben Leonard 28:31
Yes, but not like not at the very first stage. So what we tend to do is that when after we’ve done all the work to maximize the value of the business fully understand that get the potential, the owner started on the due diligence process, so that we hand over to the potential buyers, a really impressive, neat and tidy business with a ribbon on top. So that when they do their due diligence, they don’t discover anything they don’t like they’re very impressed. I’m not trying to push for a discount. We present that to a pool, not an enormous pool. It’s always enough to have a competitive environment. But always it’s got to be the right buyers, right people who actually have the capability to run this brand. Through selling products, we wouldn’t market your business to an organization who specializes in windsurfing, right? Yeah, for example. So after we have interested buyers, then we introduce them to our owners, right, the sellers, we don’t tend to get the seller too excited about who may or may not buy the business until we actually have something to show them. Right? Because that’s just not the right way to do it.
Joshua Chin 29:38
What is the last question, what is the process look like if say, I if I own an ecommerce brand and I I’ve done my own work and I have a great business, and I decided that I want to sell this business. What are the routes that I could take between working with an advisor like yourself versus going about Looking for a buyer myself?
Ben Leonard 30:01
Yep. So you could, you could sell it directly to a potential buyer. Yeah, the way that usually happens is that they will actually often approach you. And initially, that seems wonderful Oh, fantastic, I put all my heart and soul into this business. And that’s all he wants to give me quite a lot of money for it. And they’ll dangle a carrot in front of you, that is quite a lot of money, your business isn’t worth a carrot, your business is worth a whole stack of carrots. And typically, you will get a lower price and terms and structure which suits the buyer rather than you. And it’s a lot of hard work because you’re trying to run your business, let alone sell it, you know, when I went through the due diligence process for selling my first business, it was so intense, I thought they were going to come around to my house and scan my retinas. You know, they want to know everything about the business, and rightly so they’re giving you a lot of money for it, they will find you because they have big lists, they tend to scrape the internet to find ecommerce business owners. Yeah, and you know, don’t get me wrong, these buyers are great people, I deal with them every day. But Business is business and they want to take your business off your hands for as little as possible. And pray that you don’t bring anyone else to the table for a bidding war. And pray that you haven’t had a competent broker, calculate and maximize the value of your business. By doing all the Add backs and adjustments we spoke about before. The other way to do it, or the other the there’s a couple of others, you can flip it on a flipping service, which is not a good good thing to do, particularly because they are working at a very big scale, they don’t particularly tend to do the work to actually maximize your business in the market did they just kind of slap it on their website, but they listed on the website or the eBay business. So then the other way to do it is to use a qualified broker. And there are there are good, obviously we’re one of them. And there’s other good ones out there. Um, ideally, they need to be experts with lived experience on all sides of being a business owner, being m&a experts and being accountants and that’s really important. And they need to this is important, right? They if they’re, if they want, if they’re trying to encourage you to just sell your business now now now that’s a red flag, it might be that your business is ready to go now and that’s great. But they need to be working with you until you are ready to sell your business and not the other way around. Right? And to be taking you through that process to understand your business and understand when is the right time to sell it? And how much do you want to get for it? And what’s realistic to get for it? Right? If you say I want to get 10 million for it, and they know that if they’re telling you it’s worth 10 million, but but it’s it’s blatantly isn’t, you know, then that’s a red flag. Yeah. So they need to do the work to get your business, you know, ready to go. And then mark actively marketed to potential buyers, they need to be adding value to your business, such that whatever that you’re paying them has to pay for itself multiple times over in how much more you get for your business, right? And then they need to position the business properly and help you structure the deal to suit you. So those are what that’s what to look for when you’re when you’re selling your business.
Joshua Chin 33:19
Is there anything else that I should be asking you that I haven’t yet? Two conversations we had?
Ben Leonard 33:27
I would say the last one I would say is if you’re it’s not really a question, it’s more just a statement, I think which is this? Sure. There’ll be people listening to this who are saying, my business I don’t I don’t ever want to sell my business, that’s fine. But just hypothetically, step back from it, you know, put the kettle on, have a cup of coffee, sit down, take a step back and say, Well, where do I want to be in five years? And the answer might be still running my business, that’s okay 10 years 1520 and there’s gonna come a day when you’re retired and the landscape will have completely changed and the technology will probably completely change. And it might be that you see that you’re gonna have this business down to your kids or whatever and that’s that’s absolutely fine. But the situation may completely change and that may not be doable, and there’s going to have to be some kind of an end game. And it would be a real shame for that end game to just be winding up your business. So start thinking now about how you can make your business sellable and valuable even if you don’t want to sell it anywhere, anytime now or in the next few years. So the when the time does come, your business is in really great shape to get the ball rolling on on getting that process underway, and also so that if somebody does come out of the blue and say hey, we want to buy your business then and actually that the numbers are dangling in front of you are big enough to tempt you, then it’s in great shape for you to get the ball rolling that as well.
Joshua Chin 35:06
And what’s the best way for people to get in touch with you have this conversation started?
Ben Leonard 35:10
Sure. Head over to EcomBrokers.co.UK, we have a button you can press there that says value your business and you can put some data in there and then we’ll get the ball rolling. That allows us to do a very broad indicative valuation and then we will really dig in and understand your business. Later when we get in touch. You can email me [email protected], and I’m also on LinkedIn, just search for Ben Leonard.
Joshua Chin 35:37
Awesome, Ben, I’ve learned to 10 I’ve taken a bunch of notes as I can. As usual, I always learn a ton from the interview. Thank you so much for being on the show.
Ben Leonard 35:47
Thanks for having me. Great fun to talk with you.
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