Joshua Chin 5:27
in, in a scenario where I’m running a business in an ecommerce business, that’s, that’s fair, relatively well, but still kind of not ready to sell. I’m considering what an exit might look like, when the cycle kind of comes back into a more favorable one for sellers. What should I do in the next 12 To 18 to 24 months? In order to best prepare for an option to you like that?
Ben Leonard 6:03
It The answer is it depends. There’s lots of things you you could and should do. And it depends on where are you businesses now and what your goals are. So we can take a few different angles with this. So let’s let’s begin with, with the first one that I’d like to look at, which is thinking about when I get to the point that the deal is done, what is it that’s gonna get the deal over the line, because it’s over, a lot of people make the mistake of asking themselves, or focusing on themselves. So thinking about, I’m going to sell my business, and this is how much I’m going to sell it for. But of course, you selling your business is contingent on somebody else buying it, right. So we have to think about, well, what’s gonna get it over the line. In other words, what matters to a potential buyer. And, in our view, there are five key things that we need to make sure we focus on, as we’re preparing to exit that put us in the shoes of a buyer. And I like to imagine these in the form of a pyramid. And it’s actually like a Mayan pyramid, not an Egyptian pyramid. So imagine you’ve got a Mayan pyramid with five layers, you’ve got branded the bottom, then growth and profitability, then risk, then transferability, and then documentation. And these five things represent the five most important factors to a potential buyer. And the lower down the pyramid they are, the more important they are. So if you remove lower layers, things going to come tumbling down. Now you don’t have to have all of these layers to be able to sell your business, but you’re gonna need at least three. And the most important ones are brand at the bottom, and then growth and profitability. And the reason for that is that brand really matters, right? With no brand identity. There’s no hook, no excitement, no following repeat customers and word of mouth, no pride in your business from a legion of fans or vile stuff. Because remember, buyers want a sustainable business that’s going to last, they want a business that has growth potential. They want intellectual property, and they want repeat customers. So a brand is a very easy way for us to think about getting all of that. And if you are just you just have an online business that really either literally has no brand identity and just selling stuff, then you don’t have that. Or if you have a weak brand identity, you know, some sort of pseudo brand. You just slapdash. Put a logo on something. You know, that’s not a brand.
Joshua Chin 8:40
How do you measure that then? And hold on? Let’s let’s see the backtrack a little bit. What’s amazing. What’s a Mayan pyramid? How’s it different from an encryption pyramid?
Ben Leonard 8:49
And Egyptian pyramid? Do you imagine you climb to the top of an Egyptian pyramid and sat down? You slide all the way to the bottom? Right? It’s smooth. Yeah. A Mayan pyramid is is like stepped up stairs. Okay. Yeah. So it’s an easy way to like represent the layers, right? You just have these five distinct layers, whereas with Egyptian pyramid, there’s nothing really distinct about it. Yeah. Makes sense. So distinct lists. Yeah. So brands, there’s lots of different definitions of brand, right? And really many of them are are all right, but the one that I really like is a brand is a group of products that solve problems for a particular group of people. So if you are selling products, to arts and crafts enthusiasts, and perhaps we’re gonna get reused, getting more niche, perhaps emitting enthusiasts, right? Right. And that’s the brand and it’s defined by the the people that you’re serving, right? And branding is how you make people feel about your brand. And the way you make If people feel about your brand, you achieve that whatever you’re trying to make them feel through your marketing, in my opinion. This is why it’s so important right to consider, you know, a lot of people are like, what were this guy supposed to be talking about mergers and acquisitions? Why are we talking about brand marketing? Because it matters, right? It’s not just about taking. You know, there are people in this space, who are mergers and acquisitions, experts in bricks and mortar, mortar businesses and haven’t tried to get into ecommerce, but they don’t understand ecommerce, they don’t understand branding and marketing and digital marketing. And so all they’re doing is taking a trailing 12 month profit and multiplying it by three and saying that for your business is worth without really understanding, what are all the ins and outs of this business and deeply understanding everything about it from the operations through to the marketing, and thinking about how can we set this up so that it is as attractive as possible to a buyer?
Joshua Chin 10:58
Now, I want to unpack that a little bit. How do you think about the inputs to building a brand? And, and this is coming from someone who is I’d say, from a branding point of view, I am nowhere near Nex expert, I would, I’d say I tend to associate closer to the direct response crowd, if you will, I tend to think about marketing investments as for every dollar that I spend, I need an ROI that’s measurable, within a certain time period. And if I don’t see that I, I feel uneasy, and I feel terrible. So I’m pretty sure I’m pretty sure that I have some kind of a blind spot to the topic, in terms of what exactly branding is and how it relates to marketing and how you measure that? And what are the inputs that come into picture? And, and what what builds branding, and brands?
Ben Leonard 12:09
So yeah, and then I’ll try and answer this. And I’ll try and keep it relevant to selling your business and preparing for sale. So ultimately, it comes back to the definition of a brand, which as I said before, is a group of products that solve problems for a particular group of people. So does that therefore mean that I can pick a niche? And then grab a group of products and slap a logo on it? Or does it? And doesn’t mean that that I don’t even I don’t have a brand? If you’re listening to this and you don’t have a strong brand identity? Can you just slap a logo on something? Yeah, no, the answer is no. The first step, the first input to come back to your question, in my opinion, is quality products. You know, Seth Godin, who’s like The Godfather of all of these things, teaching us that quality products are marketing, right, you can market a crap product. And you can build a brand based on a suite of crap products. So the first step is to have great products, right? And they will, they will, in some ways don’t market themselves. Yeah, then it’s to develop a brand identity. Well, how do you do that? Well, that’s opening a huge can of worms, really, it’s asking who your audience is deeply understanding them and going through a bunch of exercises to probably build a customer avatar, and then build a brand avatar to reflect those customers. That’s, that’s what we’re talking about when we’re talking about building a brand. And so then to bring this back into to selling your business, when you have all that you have this longevity, this sustainability that repeat customers, the legions of fans who will buy new products, you have these routes to growth, because you have you have the constraints will buy your new products, you already have a basis on which to grow your business into new markets, new channels, etc. Whereas without a brand, you’re really just stuff selling stuff on the internet. And that isn’t going to take the boxes that are that a buyer wants, right. And these layers in this pyramid that I described, they’re all interrelated. So having a brand, right a strong brand at the bottom of the pyramid, not only is that layer in and of itself very important, but that will then strengthen the other layers. So a strong brand will allow your business to have more growth potential and be more profitable, a strong brand D risks your business. A strong brand is transferable because a buyer wants to pick up your brand and drop it into their existing system. So I think to come back to your I think it was like your, your very first question. What should you be thinking about it? It seems to me this is putting yourself in the buyers shoes, right? Yeah, that’s that’s where we are. But then there’s other things to think about. So for instance, somebody might say, Well, should I focus on top line revenue? Or should I focus on profitability? Well, the answer is, it depends. And it depends on a couple of things. One, it depends on where you are, how far out you are, you know, if you’re looking to sell in the next 1218 months, then you want to maximize profitability. But you don’t want to dramatically impede your top line. revenue growth, but you are looking to maximize profitability, because ultimately, that is the metric on which we’re gonna devalue the business. However, if you’re further out in growing top line makes more sense. And then you pivot to a strategy that focuses on profitability later. Right. It’s also fair to say that this is like invisible levels in ecommerce, in which different types of buyers will become interested. So for example, a private equity buyer, a big private equity buyer, we’re not talking about aggregators. Here, we’re talking about a level above them private equity, where you actually funds the aggregators themselves, they’re probably not going to become interested until you’re doing sort of 10 $15 million of EBIT done, right? So if you are on the cusp of one of these sort of levels, if you like, then you’re going to be focusing on profitability, to get your profits up into that kind of bracket, if that makes sense.
Joshua Chin 16:40
Makes sense. Interesting. At the end of the day, valuation, I presume for most ecommerce businesses are based off Ebro, am I right to say that?
Ben Leonard 16:57
Yes, but the multiple will change based off a variety of factors. So for example, we might have two businesses, both doing a million dollars in EBIT da, both in the same kind of niche, one is growing much faster than the other. So the multiple applied to the high growth, one’s gonna be higher, one might have have a stronger brand identity than the other. So the multiple for the strong brand will be higher. So although we will use the EBIT da, or SD, as the basis for the valuation, the multiple will change, depending on all sorts of factors. Makes sense?
Joshua Chin 17:45
Makes sense. What are some of the coolest transactions that you have seen in in recent times? Or have been a part of that you
Ben Leonard 17:56
could share about? Yeah, absolutely. There was one, which was super cool. This was a passion project. Husband and wife couple with really humble roots from from Eastern Europe. They had created a brand in the beauty space based off of their own experiences, and solving their own problems, which is a classic way that a lot of entrepreneurs start they’re scratching their own itch, husband ran the technical side wife was the face of the brand. And through all their determination and hard work, they got to the business to do more than 10 million in revenue more than a couple of million profit. And we ended up selling that for them for life changing amounts of money, right? It doesn’t take a mathematician mathematics expert to work out if they’re doing just over 2 million in profit, right. And we sold it for something in the region of North of six acts. Not only did it change their lives, but the lives of their entire extended families where they’re from. Yeah, I’m not going to get into too much detail for obvious reasons. So that illustrates the the life changing impact of ecommerce which I find fantastic what I love about ecommerce and why I love working in it every day is it’s a completely it is now a level playing field. People with no business experience can get into ecommerce based on the variety of free tools, cheap tools, free and cheap education available to us, which not that long ago, we couldn’t get into. But that doesn’t mean that I’m only excited about the big big projects. Right. So you know, one awesome project we worked on business we sold was doing only about 125,000 profit. And despite it being the smallest one of the favorites because the guy owner, his name is John. He’d been on holiday in Bali and discover this factory making brass fittings for bathrooms and kitchens and this factory Have no commercial sense that artistic talent but no commercial ability. He started taking suitcases of this stuff back home and selling it on eBay. He quickly realized that the products were not only were they cheaper than than the Chinese stuff, but also like five times the quality way better. Yeah. So he put together an exclusive deal with this factory. No other factory in Indonesia is doing this kind of stuff. He completely cornered the market and absolutely crushed him. Excellent. So then we sold his business for about 5x interest, and he bought a yacht and he’s sailing around the world somewhere where there’s dock.
Right, five exit at a net profit of Yeah, wow. Okay,
because right outcome, this is what matters, right? People will say, Ben, what are multiples like at the moment? And I will say, Well, it depends. Because, sure, you could you can say right now that generally speaking, ecommerce multiples are between three and four. Yeah, generally. But every business is different. We did another deal a short time ago, about 190 grand Ste for just over 5x. And people would like to ask a very high multiple Well, yes, but there were very specific details about that business made it very attractive to the buyer. And that buyer very particularly wanted to buy that business. Interesting. On the other hand, we might sell a business doing significantly more, say, you know, I don’t know 700,000. Ste, for a lower multiple. Because there are factors that mean that that is what it was worth to the buyer. Remember, it’s a deal about getting it over the line is give and take on each side. You know, you can have you can have everything you want. Oftentimes, you can have the numbers you want, but you won’t necessarily therefore get the the terms of the deal that you want, in terms of the deal structure, for instance. Next and and vice versa.
Joshua Chin 22:00
For the for the business, that’s making multiple millions in Ebro. And you sold it for 6x. What did the process look like? Were were you looking out for multiple buyers and going to when you when you went to market? Or were you going in like a linear fashion? What was the strategy and what what made it work.
Ben Leonard 22:28
Our job is to put the business into its best possible state for an exit, and then market it to the right buyers. So that’s really important. So you want to bring as many of the right buyers to the table as possible. It can vary from business to business, depending on the complexities and individual nature of that business, and also the business owners and what they want. Right. So this particular deal we ended up with, we went through the process of having we had five indications of interest, which are not quite the same as a letter of interest or letter of intent. A letter of intent is the next stage. Oftentimes, the indication of interest stage doesn’t happen. But we chose to do this because it was we wanted to get this absolutely right. But this particular deal, an indication of interest is you know, you’ve you’ve presented the business under NDA to a potential buyer. And they have expressed in a completely non binding way, at a relatively high level, this is the type of deal we would be prepared to offer. Soft negotiation takes place. And then a letter of intent will be submitted by the potential buyer, which is a letter non binding letter that says we’d like to buy your business. Please agree to grant us X days, typically, these days about 45 to 90 even to conduct our due diligence, and you agree please not to sell your business during that time. So at that point, you can only go under loi with one party at a time. So you’re whittling down your indications of interest to your letter of intent. Stop negotiation and then agreeing broadly on some terms, the deals of the letter of intent, it’s fine and you go into the due diligence period, then the buyer conducts their due diligence on turning every stone and looking at every nook and cranny of your business. And then they’re going to put in their formal offer to buy the business in the form of either an asset purchase agreement or a share purchase agreement depending on whether you’re selling the actual legal entity of the business, or you’re just selling the brand. Makes sense. Now,
Joshua Chin 24:53
when when you’re at that final stage looking For Buyers and marketing, marketing the business do you always go for multiple buyers in the table? Or has there been instances where it’s just one buyer? It’s perfect. Let’s let’s make this happen.
Ben Leonard 25:18
Yeah, 100% There are times when you, you know, from your your existing network, exactly who would be a great buyer. You present it to them at the same time, you’re quite likely to present it to other parties, of course, because you are, in order to do your best job for the seller, you’re representing the seller at the end of the day, you need to to cast as wide as possible. Yeah. However, there’s also a lot of factors to balance, like, how quickly does the seller want to get the deal done, right. And also, who’s going to be the best buyer for the business, because remember, depending on the deal structure can be that a significant portion of the money that the seller is going to eventually get is based on how well the business performs in the hands of a new owner. So you want to make sure that the new owner actually has the operational capability to run the thing. But there have been times that we have presented a business to a buyer that we are highly certain is the right buyer for that business. We’ve also shown it to some others. But in the end, that buyer has immediately come back and said yes, very quickly submitted an LOI and the seller has accepted that loi without even looking at other offers, that does happen. Interesting, but we’ll only let that happen. If we believe that that is in the best interest of the seller, we’re not going to cut off opportunities to look at other offers. That would be negligent.
Joshua Chin 26:36
Make sense? This is interesting, because typically, the oh, what I’ve learned and salary from just people who do deals is that you typically not want to take an offer, when the only offer on the table is the one that you have.
Ben Leonard 27:02
That’s not necessarily true. And for some people remember that the market has changed. So for some people, they don’t really have a choice. Well, they always have a choice, they can either not they could not sell it isn’t fair enough. Sometimes you only get one offer. That’s not the ideal world. But that is that is that is the reality. And I think it’s important to to let people know that that that can be the case. But that doesn’t mean that the you know, first of all, you don’t want the buyer to know that. But also it doesn’t mean that the buyer is going to submit a poor offer, because they know that you could just turn it down. Yeah. You know, and there can be very good reasons why there’s only one offer, right? It could be that you do have a good business. But it’s not a right fit for other buyers at this time, for a variety of reasons. Or there’s one buyer in particular who really wants to buy your business, because it is a perfect bolt on to what they’re already doing. Or they actually need to deploy a certain amount of capital before the end of the financial year, for instance. Lots of reasons.
Joshua Chin 28:04
Fair enough. Now, quick segue. Sure. What are you doing on a personal basis? Are you taking on investments? Are you investing in DTC brands yourself? I know that you’re in, you’re also in an operator’s seat. But what’s that, like, since you’re looking at so many deals and what’s happening on the market, and you have so untouched over
Ben Leonard 28:35
folks like me, so I can, I can own a sports brand. The situation there was my co founder pitched me that he was my competitor. He paid me for some consulting, we became friends, he pitched me on investing in new business. And he runs the day to day ops, and I mentor him. So that’s one thing. I’m developing another brand in the background, which is not launching yet. And we’ll do a Kickstarter later in the year that’s in the parent and baby space. And then I have minority equity stakes and a couple of other brands in exchange for mentoring. Acquisition wise, it’s not something that I’ve done lately. There’s actually a deal that I’m looking at. And yet, those are the things that I’m that I’m up to at the minute.
Joshua Chin 29:27
How do you structure and mentorship equity type arrangement?
Ben Leonard 29:33
Sure. It’s pretty straightforward. So it could be cash out equity, so they might pay a retainer. But also, you take x percent in the business, let’s just call it 20%. Or it could be purely equity. So you you put together a pretty straightforward contract with the the expectations on either party and you’re gonna provide mentoring. So that could be based on a number a set number of hours. Or it could be a bit looser than that, depending on your relationship with this person in exchange for equity, so one way that you do it is actually you don’t, you don’t actually take on, you know, in the very beginning, you might take a very, very, very small share, like nothing or 1%. And then they effectively the business effectively owes you for the mentoring. And then you, you, so that’s a depth of the business. So let’s do and then you convert that to equity later. So he’s saying, right, instead of instead of me billing you for this mentoring, we’re converting it to equity, and you’d have an agreement in place that says that that’s what’s going to happen.
Joshua Chin 30:46
I see. And the valuation and obviously, it would be agreed upon prior.
Ben Leonard 30:52
Very often, no, very often the valuation, there isn’t really a form of valuation. It’s like, if I’m going to mentor you, you know, here’s what I want.
Joshua Chin 31:01
Okay, how would you? How would you price the, the Feasel and the equivalent equity percentage and that scenario, or
Ben Leonard 31:10
don’t really do like, you don’t do like a conversion? You don’t do? Like, okay, so my hourly rate is, you know, 500 bucks, and I build you this many hours. And based on the EBIT, da, that means that I’m owed X percent of the business doesn’t work like that, it’s the agreement is, the agreement up front would be, I’m going to mentor you, in exchange for 20% of the business or whatever it might be. I see.
Joshua Chin 31:34
Interesting, that’s really interesting.
Ben Leonard 31:37
There’s a good way to do it as well, which is a really nice get out for everybody is that you. You drip feed the equity. So maybe that you get X percent or 2% a month, can you say 24 months, or 12 months, whatever. And anyone can get out at any time, or end the agreement. So you might the, you know, the main shareholder might might might end it. When you have to 10% You’re not going to own 10%, you no longer committed to any more monitoring. That is interesting. That’s really interesting. I’ve toyed around the idea of an affine pitch this as well as an agency, but it just never really took
Joshua Chin 32:25
the deal. And I’ve toyed around with the idea of offering our services in exchange for equity, but in a slightly more creative fashion. So for instance, if the market value of our services, call it 200 grand over the course of six months, we would have that, and which would be 100k. And we’ll take payment in the form of equity instead of 20k in cash. And we basically do work for free for six months. And it does two things in my least in my mind. One, it keeps us incentivized as a shareholder, with aligned interests in the purest of its definition. And at the same time, it allows for cash flow in the business, and you’re not worried about marketing, you basically have a full blown Marketing Marketing team without worrying about hiring for six full months, or 12 months or whatever the timeframe might be for the business and at the end of it. I like it. Everyone’s happy, if the outcome is great. And yeah, scale happens. No, I
Ben Leonard 33:52
like that. I think that that could be that can be certainly could really work. I think you need to get it right in terms of who the client is. But there’s no reason that you can’t make it work. And there’s no you know, what I think the way to do it, is to test it in a way in which it’s easy for all parties to extract themselves from it. And then maybe when you when you reach a critical threshold, you can tighten that you can tighten it up, so that if you’re happy, you don’t find that the rug is pulled from under you. And they’ve ended things and you’ve invested all this effort for for very little make sense. Make sense?
Joshua Chin 34:32
What would that look like? Would you say a termination clause with a certain period?
Ben Leonard 34:39
Yeah, something like that. So you know, I’m not a lawyer. Something like that. I would want
Joshua Chin 34:44
hypothetically not legal advice. Yeah, absolutely.
Ben Leonard 34:49
Hypothetically, yes. You can you can you know what I’m a big fan of is I like to when I’m dealing with these types of things. I I put what I want in laypersons language I give it to my lawyer, turn this into a thing, right? And they’ll say, man, you can’t do that, or what we can do that, but we could do like this. Or they say, yes, you can do this. And actually, we can make it even better for you by doing this and this and this. And that’s why I’m a huge fan of working with with with experts, right? You know, I’m, I’m all about bootstrapping. But for certain things, particularly legal issues, I’m always about paying experts. And this is why I’m encouraging people to pay experts to plan their exit strategy, right? You know, your business is your most valuable asset. Why on earth? Would you try to cut corners with that? And like, you know, flip it on some crappy flipping website? With legal stuff? Why on earth? Would you try and just download some template and do it yourself? I agree. Yeah. Talk to a lawyer because actually cheapest expensive and expensive is cheap. Yep. Yep. Let’s think and think that’s true for a minute, cheap is expensive, expensive, is cheaper, write it down and think about why that’s true. I love that so much.
Joshua Chin 35:57
We’ve learned that the hard way as a, as a as a customer as well, because we hire agencies, and we hire contractors. And often, when we try to cheap on certain stuff and cut corners a little bit, we end up in a situation where we spent way more money fixing the mistake. And way more time, and most importantly, mindspace to rectify the issues, when we could have spent maybe twice as much of Yeah, twice as much twice as much surely initially. Yeah. And save, like 80% of the the overall cost. Yeah,
Ben Leonard 36:41
completely. So
Joshua Chin 36:44
or, and in your case, it would be pay a little bit more upfront, but ended up with an outcome. That’s way more way more exciting way more life changing? Yeah.
Ben Leonard 36:58
I mean, in our case, actually, it’s, it’s like this, you know, it’s, we, we have a commission structure. So the more we sell your business for, the more we get paid. Makes sense, which, but it’s, it’s a smaller percentage. So if we sell your business for, you know, 10 million bucks, we’re going to take one every quarter percent, you sell for 100,000, we’re gonna take 12%. Right. So you’re not getting you it gets better, right for for the seller. Yeah. But also, they know that we have an incentive to sell the business for as much as we can. So they know that our goals are aligned. And actually, it’s an ROI, like, our job is for our fees to have more than paid for themselves. For all the work that we do, in maximizing the value of the business, planning the asset and then running the whole deal so that you get the right deal. The right deal structure with the right buyer. Exactly. And that’s relative to trying to go it alone or cheap out on some services going to devalue your business and reduce it to nothing more than a commodity on some listing website is night and day. Love that.
Joshua Chin 38:16
final advice for people listening to best prepare for the opportunity that is coming.
Ben Leonard 38:26
In the next 1218 months. Yeah, treat your business with the respect it deserves. It is not a side hustle. It is not a game on the internet. Yes, we play this on our laptops, right. And it feels sometimes it’s very tempting, because it’s so easy. For so many of us to get access to becoming an ecommerce business owner, it can feel almost gamified. But we’re talking about real businesses and large amounts of money. So treat your business with the respect it deserves and take it through a mature process and start playing that process. Now. It could be two years out from your exit, but when you plan now, you can line everything up so that it is in the most sellable state possible and you can get the deal user and change your life. Love that. Then what’s the
Joshua Chin 39:17
best way for people connect with you and get to know about what you do?
Ben Leonard 39:20
Absolutely. You can email me Ben@ecombrokers.co.uk. It’s a UK domain, but we operate internationally. Our website is ecombrokers.co.uk, and I’m on all social media channels @benleonardpro.
Joshua Chin 39:36
Love it. Ben, thank you once again, insightful as always, and looking forward to having you the fourth time sometime in a row.
Ben Leonard 39:43
Thanks for having me. Good to see ya.
Outro 39:50
Thanks for listening to the eCommerce Profits Podcast. We’ll see you again next time and be sure to click Subscribe to get notified of future episodes.
