Ep. #995 - Preparing to Sell Your eCommerce Brand

Andrew Morgans 00:01
What’s up, Hustlers? Welcome back. This is Andrew Morgans, founder of Marknology, here as today’s host of Startup Hustle. We’re going to be talking about preparing to sell your e-commerce brand. But before I introduce today’s guests, today’s episode of Startup Hustle is sponsored by Equip Bids Auctions – – your Midwest Online Auction Marketplace to buy and sell stuff. Equip-Bid provides dedicated support to affiliates in Kansas, Missouri, Nebraska, and Iowa. Join the team and sell everything from heavy machinery to home goods, vehicles and boats to restaurant and kitchen equipment, and tractors to patio furniture. Go to equip-bid.me/startup for details. Or just click the link saved down in the show notes! Today’s guest is Thomas Smale from FE International. Welcome to the show.

Thomas Smale 00:50
Andrew, thanks so much for inviting me on.

Andrew Morgans 00:52
Yeah, it was a pleasure. This topic is something that is very relevant to my audience and very, very relevant to my personal journey right now. Marknology is a full-service agency, but as an entrepreneur and an investor myself, I’m trying to acquire and build brands from my own team. Use as a Marknology team building the brands, not just Andrew. So what does that look like? How do we get our brands ready? We get hired to help brands get ready to sell their e-commerce business or their Amazon business. Maybe that’s getting their website ready or built up past what it is. Maybe it’s getting their Amazon built up. There are all different things you can do to really get an e-commerce business ready. But before we jump into that, as always, I love to get to know you. And you know what has gotten you to the point where you’re an expert to be on the show to talk about this, talk about the company you’ve built. We all have our stories. And I would love to know yours. Like, where does your entrepreneurial story get started? You know, did you always want to be a business owner? Did you always want to be in finance and M&A? Tell me about your early days.

Thomas Smale 02:00
Yeah, so started EF International in 2010. I graduated from university or college in 2010. At the time, for those of you who remember, that was a bit of a recession or coming out the back of a recession. So getting a job was actually quite difficult. I did a business degree. And almost everyone in my peer group went on to work for an investment bank, and they went to work for a large consulting firm and accounting firm, large companies. I did not, so I didn’t really want to run a business as such. But I also didn’t really want to get a job. I fell into starting a business by accident. I definitely don’t have that. Oh, I was an entrepreneur since I was five years old, selling cookies and lemonade and stuff like that. I don’t really have that background. I’m obviously technical because I’ve run an investment bank, essentially. But I wouldn’t say I’m an extremely technical finance person. I don’t have an MBA in corporate finance and do not know that much about my team. Do I have a very? I guess I’m fortunate I’ve built a team of people who are much smarter and more qualified than me at this stage. But starting out 2010, you are actually just talking about your sponsor, which has absolutely no link to me whatsoever. But back then, I was essentially buying and selling anything I could to make money online. In 2010 I was mostly selling things online. Such things as domain names, which back then you had to sell on eBay. That was really the only option. And then covered. I never really understood domains because, to me, a domain didn’t really have any value. It was very subjective. So what is this domain worth? To most people, it is worth nothing. Someone, it’s worth $100 never made sense. Then I discovered websites or online businesses. And that was a bit of a business background that made sense to me. It’s like, well, if this is making $10 a month, it has value to someone because that cash flow is worth something. So I started with tiny, tiny websites making literally $10 a month, $50 a month, $100 a month. I buy them for $500 and then sell them at the end of the month. That $1,000 did that during college.

Andrew Morgans 04:18
Were you selling the website like at that time just because we started around the same time, so our path is going to be pretty similar? I could play eBay games at the same time.

Thomas Smale 04:28
Yeah, they and then forums, I think, digital point back then. I don’t know if he exists now. But Digital Point was the form that everyone would buy websites on back then. Yeah, exactly. They had that section. There were a few other forms as well.

Andrew Morgans 04:44
I honestly don’t remember all the names, but essentially it was Craigslist in the game or not back then.

Thomas Smale 04:47
Not ready for the web. Craigslist was around, but not really for selling websites or domains. Maybe there was, but it was never anything I figured out. It’s definitely not as mature as it is today. If you want to sell your own website today, there are 100 Different marketplaces you can go to and lots of different m&a firms, and then more as you go. I graduated from university in 2010. At the time, I was just buying and selling websites for myself. And I realized if I was going to pay rent, I wouldn’t come from a family with money. If I was going to pay rent and be able to survive, I couldn’t just live off $500 a month where I was living at the time in London. So I launched a course or a book about how to buy and sell websites for profit, basically teaching people how to do it. That was in 2010. I had no idea how to launch a course or a book. I’d say I got lucky, or it did quite well. Lots of word of mouth, people liked the book. There was no real demand for it. At the time, I didn’t think there was any demand because no one was talking about buying and selling websites. But once I was launching the book, there were a bunch of demands. So that took off in 2010, that essentially paid enough for my rent-free year to open a small office, hire the first couple of team members, and kind of create a bit of a financial backstop. Wow, that’s incredible. And then what I realized is off the back of the book, I thought, I’m gonna then make all my money, like what you read now, like passive income on a beach type thing, just selling courses. That wasn’t the reality. What actually happened is people who owned legitimate businesses, like yourself, for example, would come to me and be like, hey, Thomas, I read your book. It’s really helpful. But I actually don’t want to sell my business myself. I want someone to do it for me. So back then, even though I had a business degree, I should say I knew, but like, I didn’t really know what m&a was, or I didn’t know what an investment bank was. I just thought, sure, I can help you. You sell it. So I fell into m&a or investment banking by accident and started selling businesses to people. Long story short, I did that for two years, buying, selling a bit myself, selling for people selling courses, and a little bit of everything in 2012. My current business partner, sml, joined the business, and we’d gone to college together, but he had gone and worked in investment banking. And I think he called me one day, I called him one day saying, Hey, I just saw a website for $10,000. Isn’t that cool? And he called me saying, Hey, I just worked on this IPO, which was, like, I think at the time, the biggest in history, multi-billion dollars. And then we figured, why don’t we like to combine work together, apply what he’s learned on multibillion-dollar deals, what I’ve learned on $10,000 deals. And that’s essentially what we’ve tried to do even today when I’m talking to my team, if you want to provide the level of experience to a business owner, that if you call Goldman Sachs and you have a billion dollar business to sell, we want to provide exactly the same experience, you get bought for a $10 million business, or a $50 million business or a $1 million business. So from 2012 onwards, he also looked at my numbers. He was like, Thomas, you make all of your money from selling businesses with people, but you only spend 10% of your time on it. So 2012 Onward. FE International has just been m&a 100% of our time, and the focus has been selling businesses for people. In more recent years, we’ve ramped up a little bit of our own buying and selling, which we’ve always done since day one. At the moment, we buy one or two businesses a year. I’ve always thought at the start about what makes someone an expert. I’ve always thought you can’t really be a true expert unless you’ve actually done it yourself. So the trade-off between, I guess, competing with your clients and being the one who’s also buying and selling, but also understanding how the process works. So our m&a business today, we’ve closed over a billion dollars in deals by total valuation, over 1200 businesses in total, and we sell about 100 businesses a year. And then our perspective is we’re buying one or two. So a very small percentage of that overall, our m&a business is around 50 People at the moment, to total business with everything we do is over 150. The majority of our m&a team is in either our New York office, Miami office, San Francisco, where I am, or London. So we have four main offices and four main teams, but the majority are in New York at the moment. And then I think, like many companies, we also have some remote people as well, particularly over the last few years. So that’s where we are today. We started out super small, doing really small deals applied to industry knowledge. We knew a lot about online businesses and applied what we learned from doing billion-dollar deals, and I think that resonated very well. There’s a big, and I say the growing movement of bootstrapped or self-funded or even like the small amount of funding business owners who realized that but you can do very well for yourself financially if you build a business that makes $10 million a year, without, without outside investors, and then you sell it for 20 million, or whatever it might be.

Andrew Morgans 10:15
So that’s very much like at the center of it’s so interesting to me, you know, as someone that’s been helping people sell their businesses, I have yet to go through and exit myself. I’ve just been kind of holding every business I’ve built or acquired. I’m holding them all. But I watch. I’m definitely a watcher, and I learned the most by just observing and being a part of things. I felt like my first 10 years, any common Amazon has been in business has been my, my second, third and fourth degree, so to speak, you know, I, similar to you, I was actually touring playing music, through college, and I, I didn’t want to get a business degree. Because I was afraid that this was my business, the degree was my backup plan for music. And if I wanted to make sure my backup plan would, for sure, get me a job. So I went into it, just because everyone I knew, and it was like getting jobs, they were all getting placed. And my friends getting business degrees would sometimes be like, I don’t know, where do I go? Do I run a business and my business owner, do I go into finance, like, you know, it was broader. And so I went into it, even though now I’m in business, it’s interesting. You know, and it was like, what I’m doing now has nothing to do with the computer science or networking degree that I got no-till, you know, it may be taught me how to reverse engineer some problems and taught me how to not be intimidated by technology, and some things like that, but definitely nothing to do with what I’m doing today. But you know, what I do know is that for every person I know of that sold a business or been part of an exit. You know, it’s, it’s a very high percentage, I would say like if I was gonna guess like 75, or 80% of those didn’t have a great experience, right, they didn’t have a great experience, or they feel like they left money on the table, or that they could do it again, they do it differently, or, you know, something along those, that was a very stressful process. And that’s something that I’ve just been able to observe. And, you know, for me, whenever I go through that process, it’s always been like, I don’t want to make the same mistakes or go down the same path that I’ve seen almost every other person go down. And I think it’s because you work so hard, and in a business like this, and then you get to the end. And is this a completely different arena than what you’ve been doing before? You know, from the negotiations? Who are you selling to? Who’s the buyer? Like, you know, what does due diligence look like? Do you get to continue to stay on and work on the business for the next couple of years? Or do you just hand it right off? And then they have to handle it? You know, we saw this in aggregators, and some of them did it right. Some of them didn’t, where the business owner is no longer attached to it, and the person running is not there. Someone else has to pick it up. So I think, you know, I started the Amazon industry. I was very early in the Amazon industry, and there wasn’t demand, I promise you that there wasn’t demand as needing to do demand generation for Amazon services, instead of just capturing the demand. And now both of us are capturing the demand type of businesses instead of generating them. But I can relate to, you know, being like no one was really looking for this, no one was really doing this, that part and then being where we are now where there’s lots of people doing what we’re doing. And you’re saying, Hey, why would you choose us? Why would you work with us? And like we mentioned before, we’re the we’re the small Kansas City firm, you know, 40 of us are so trying to work with the biggest the biggest brands in the world in some regard and trying to do that same thing, where were the small team working, you know, with with the big guy. So just relating a little bit around that. And I know that like some of our fields, at least in e-commerce. I know, I know, m&a. And acquisitions have existed for a very long time. But we’re talking about e-commerce today. And that is relatively new, meaning you were there at the beginning of websites and now you’re in the process of building them and selling them and preparing them for exit and advising them. And all of that has happened in the span of, you know, 1012 years or so. You know, let’s talk about e-commerce content agencies, service based agencies websites, you know, I assume you guys are selling like, you know, DTC brands and Amazon brands as well. Is that okay? Okay, so that assumption being true that’s that’s really where, you know, my world has exploded over the last two years since the pandemic really interest to was the very first kind of coming out now they fired their CEO laid all these people off, you know, just craziness really around the space. What are you seeing things slow down? Are you seeing things like you know, for me, it was like, Guys, don’t listen to the noise Steady as she goes. If you’re the best, if you’re doing great work. If you’re, you know, running your business the right way. We’re going to be just fine. You know, Steady as she goes, don’t listen to the hype. That’s one person’s perspective from you on the m&a side how have you seen things, you know, progressed over the last couple of years.

Thomas Smale 15:04
Yeah, it’s been interesting to observe it since 2010. When I started the business to your point, e-commerce was obviously a thing. Amazon existed for all of that. But if anyone was building an e-commerce business back then they were using ug Volusion. I don’t know if you remember Volusion. It was like an old e-commerce platform, or Magento, which is still around today.

Andrew Morgans 15:24
Since growing Magento screw Magento I’ll speak to that basically, no one uses it nowadays.

Thomas Smale 15:27
Basically, everyone uses Shopify. We do a lot of business in the Shopify space like apps, themes, Shopify stores. If you’re building a DTC brand today, you probably use Amazon to sell to third parties and use Shopify to build your own store 10 years ago, wasn’t really a thing. About 10 years ago, we started actually selling Amazon FBA businesses. It was cool. No one even knew it was really a thing. People were building Amazon brands, but there was no big demand for selling them. You mentioned Twilio, I actually met Carlos, who was the one of the founders came to our office, which was then in Boston, I don’t remember when but before three, zero, even launched, and he told me about his idea, because at the time, we were one of the market leading firms. We still are today. Yeah. So it’s funny to think that we’ve kind of pre liked, for many years, predated the aggregator world. And now also, we’re still fine, we’re still growing. But a lot of the aggregators have disappeared or imploded. So to your point, the aggregator world has really helped us because it’s generated a bunch of awareness around an industry, already operating in the demand has always been there from buyers and sellers. But others didn’t really know, you could sell because there wasn’t a huge amount of press around it. And one of the challenges with m&a and marketing. So as CEO of EF International, a lot of deals are private, and the terms are never disclosed. So we can’t do it. Sometimes you can do a press release. But we can’t usually do something like a story, a case study, like a TV ad or anything like that showing what you’re doing, which makes it challenging. What threads do and while all the aggregators did was they did a good job like storytelling, interviewing people and selling what they’re doing.

Andrew Morgans 17:17
Right. Yeah. So I think a lot of sellers like, wow, this is cool.

Thomas Smale 17:21
I want to be, I want to be one of those sellers. I want to say that I sold my business. So it built a lot of awareness in the industry. Ultimately, my view since day one, when I said that I identified the websites had value because they made cashflow. There’s still exactly the same with e-commerce brands today, I think what really happened is some of the aggregators came along. And were overpaying versus what was rational from a valuation perspective. And all that’s really done since then is valuations have just normalized. So if you look at a chart of e-commerce multiples since 2010, they’ve probably gone. I’m not sure if you see my pen going like this. And then like, jumped up over the last couple of years. And now they’re kind of like back to where they were before, to what I needed.

Andrew Morgans 18:05
People needed somewhere to put their money during the pandemic, when there weren’t a lot of places to put it. And you know, a lot of those businesses were making, they were profitable and new and exciting, and people were overpaying to get in the game. But I think a lot like when I think about the aggregators, that’s what I’ve been trying to do. So I’m not a hater on the aggregator model, like as a bootstrap guy, I wanted to build brands and like, acquire them and cash flow them. And this is what I’ve been doing for 10 years. For other people. I saw the model, I knew it would work. And I saw THRASS to do it.

Thomas Smale 18:37
And I got excited because they were actually an Amazon agency first, I believe, and then woke up and called us like a PPC agency before he started it.

Andrew Morgans 18:41
Yeah. Like he knew the game, you know, versus like some of the aggregators that just popped up to go buy the businesses, like he at least knew, knew the Amazon industry. And so for me, it was a validating thing. Oh, my God, okay, if this is big news, and they think it’s a great idea to the point of raising this much money, I must think that I had to do this kind of as a bootstrap guy was a good idea, because no one had done it. I was just kind of like, fly by night, you know, with my own plans. So for me, it was as validating as anything else. But I would compare it to like when I’m looking at brands now to work with, okay, so we have, you know, 50 or so brands that we work with, you know, across our teams, we do a lot and it’s full service. So you can imagine we’re like that white glove boutique agency where we’re doing a lot, a lot of proactive strategy, just hands and everything influencer based brands like Kevin Hart and Nikita dragon and doing some fun stuff. But for me, as an agency owner, I learned early on that the projects that were the hardest for us were investor based brands. So brands that were not really led by the founder or the person that built it or like, you know, a short retail store trying to go online or, or bigger manufacturer or something like that, if they were an investor brand. There were just so many more demands and such. Amazon is already a hard game in a lot of ways. They get margin and things like that. And so you had these investors that were pushing versus brand building over time, if we had time will always be successful. If we had to hit marks in a certain amount of time, you just can’t control all those things. And so, you know, if you run 300 400 brands over the course of 10 years, you start to learn a little pattern to the ones that are successful, and the ones that are and just like knowing ahead of time that these investor base brands were some of the hardest, especially if they weren’t doing all the things they should be doing, like on the DTC side and all those kinds of things. And they’re just like, jumping their mind, Amazon. And when seeing the aggregator model, do that coming with a lot of money and try to throw money behind the brands and push to hit these goals, I just, you know, made me feel very like this is going to be a very hard thing to accomplish. But I’m telling you, we’re still launching brands every day on Amazon, we’re still getting successful all the time, it’s still very much possible. You know, so it’s been interesting to just be like, Steady as she goes, keep doing quality work. And the best firms, the best operators, the best teams will continue to be here. Like when, when everything shakes out, I mean, the thing you’re saying about not being able to like let’s say run press on some of your deals or off market deals or things like that. I operate in the Airbnb and real estate world as well as diversify, you know, from my agency and into real estate, and very much so like operating here in Kansas City, it’s an up and coming city, you can get a lot of property pretty cheap. A lot of the deals you never even see you’re never even like you know promoting or they don’t get listed for sale, you’re doing everything behind closed doors are like trying to get them off-market and wholesale. So I can imagine, you’re not getting to tell those stories, you’re not really wanting to, you’re not able to get that appraisal that you wanted off the last one. And when I was in the early days of Amazon, I know I’m taking a second. But when I was in the early days of Amazon, it felt like I knew how much money these guys were making and how successful we were building brands and from, you know, 2011 to 2017, like the happy years, so to speak. And it was just like I had all this knowledge, but like, no one cared about it. And you know, no one was like selling the brands, I think people were building them. But like, the news wasn’t out and like how well and how much money these brands were making. So I poured myself into Amazon. Because I was just like, oh my god, this is working. This is working. This is working. This is working. And had to build myself to the point of being able to go and make some acquisitions ourselves like you. But I think there’s more benefit in you know, you have to be the operator that’s done it the operator in the business, I think having done it yourself, really sets you up for a lot of different ways. And then you’re one of the first first m&a teams I’ve talked to where I’m actually talking to one of the founders, I talked to a lot of sales guys, I talked to a lot of you know, but there’s this part of it, that’s like, you’re not even asking me the right questions about my business, or my team or my agency or what we’re working on, to even know what my company is worth. You know, talk to me about, you know, kind of some of those plays, like, I’d love to spend the last half of this just talking about like, you know what a good business looks like a good e-commerce business looks like to find a good, a good sell or a good transition.

Thomas Smale 23:13
Cool. Yeah, so I say good is very subjective. Because then when you’re building a business, you’re much information out there, like good can be. And I was talking to someone about this earlier. So hands on but top of mind, good can be a business as good for you like a good business to run. Like it is profitable. You work 10 hours a week, and you can go on vacation whenever you want. Good to someone else is a business that makes as much money as possible. But the owner works 80 hours a week. So I always say to be when you’re talking about building a business or thinking about what good is, is established, like what personally is your goal? Are you trying to build and what and when it comes to thinking about selling? What valuation would you like to achieve? If you’re trying to build a $100 million business? But your peer is trying to build a $5 million business? And you asked me that question, I was a good business. What’s a good business in the context of trying to build a $100 million business is completely different to good in the context of trying to build a $5 million business.

Andrew Morgans 24:20
So if you don’t know I’m gonna get more specific with you because you’re exactly right. And that sounds like something I would say 100% If someone was asking me about strategy on Amazon, I would say well, what are our goals? What are we trying to do? Are we trying to hit top line sales? Are we trying to be profitable? Are we trying to retire your mom? Are we, you know, like, are we taking care of other people when you exit? Is it just you there’s so many things that go into that? Before I do I have to hit today’s episode sponsor is equip-bid auctions and online marketplace dedicated to growing small auction businesses are solving problems and providing a fun, read commerce or liquidation shopping experience to value bidders go check out their incredible offerings and sign up at equip dash bid.me back slash startup. Okay, back to you, Thomas, I’m gonna get more specific because you’re exactly right. I want to tailor this for my audience specifically that I talk to regularly because I can and I’m gonna, you know, advocate for them. You know, we’re talking about a business that’s, let’s say it’s 750,000 on Amazon, maybe 100,000 on their DTC, or let’s say it’s five, five, and let’s say they’re doing a million in sales, they’re 500 on Amazon 500 on their website, that’d be kind of healthy if they were diversified like that. Is a business doing a million dollars sellable? Do they need to be at a certain revenue number? Can you sell it any revenue number, like, what should they be thinking about? As far as I like, I want to get my business ready. I’m not ready right now to work. I want to work on these things to prepare my business for exit. And to me, these are not these businesses that are kind of ready to exit even at a million not trying to get 100 million not trying to get 50 million. They’re saying, Do I need to be at 5 million to sell? Do I need to be at 2 million to sell what gets me to that point where someone’s like, Yeah, I’ll take a business.

Thomas Smale 26:06
So generally speaking, I’d say almost any business assuming it makes money is sellable. Okay, whether or not it’s sellable for a good amount of money or a good valuation is a separate question. But almost anything is sellable. More specifically, I’d say generally, once you get to a million, so the number you’re talking a million in sales, it starts to get into the interesting category where there’s a slightly wider pool of buyers at that level. And this is generalizing because there are lots of questions around margins, costs, all of that comes off. At that level, you’re probably beginning to be worth about a million dollars valuation. So I’m very simple. Assuming you make 25% net margins on your million, she makes about 250k a year, and a four times multiple, again, oversimplified could be higher, you’re worth about a million. At that level, there’s a reasonable number of buyers, and there’s quite a lot of buyers in that one to 20 million valuation range anywhere from one to 5 million. Sales is generally quite an interesting level, lots of buyer demand. And then beyond that, there’s also a lot of never-ending demand. Any level you can get your business to revenue wise, there’s by demand out there, there’s not a level where demand starts to fall off. But a good rule of thumb is once you get to a million dollars, your business is sellable. Once you get to 5 million, you start to become more interesting to a wider range of buyers, and multiple start to go up. As the buyer pool widens at that level, you’re more likely to be interesting to strategic buyers, who might sometimes pay more or private equity firms who might pay more, there are very few, particularly today maybe in the aggregator days from a couple of years ago, there were some aggregators doing million dollar deals. But there are very few private equity firms buying businesses for a million dollars. And there are very few strategic firms doing deals for a million dollars as well, you probably need to be in that 5 million plus value range, which probably means you’re doing about 5 million revenue. Again, making lots of assumptions around your margins. But of course, I’ve looked at a lot of businesses, usually around that 5 million revenue level, you start to hit around that 5 million valuation level. Although I should be clear, just in case that I misunderstand. That does not mean e-commerce businesses are worth a multiple of your revenue. I’m making some mathematical assumptions on the back end. Yeah, so a million dollars is a good number. Once you get to that level, your business is sellable. Below that. You’re also sellable. So at 800,000. Yes, it’s close enough, which isn’t as exciting.

Andrew Morgans 29:06
Yeah, there’s a much smaller pool of less sophisticated buyers at 200,000 revenue, probably not sellable unless you get lucky, your friend or something or just don’t have enough traction at that scale.

Thomas Smale 29:09
And over the years as well. I’d say that Amazon has continuously, for most businesses, squeezed margins. So a business doing a million a year today on Amazon is worth less than a business doing a millionaire five years ago, because your net margins and gross margins are probably not much worse but definitely worse than they were back then you have to you are not a seller on Amazon, we pretty much have to pay for traffic on Amazon these days. That’s unavoidable. Generally, platform selling fees have gone up, hidden fees, fulfillment fees, all of those kinds of things have gone up for everyone. There’s no real way around that. Let’s say that the level you’re talking about starts to get interesting from my perspective, that doesn’t mean there’s no way to sell your business below that level. But you can start to plan it. Access all that kind of stuff when she hits a million, like a true expert, there’s no black and white, there’s a lot of gray. And it’s, you know, 100 options for Sunday.

Andrew Morgans 30:02
You know, when people start asking consulting questions like that, and that’s what my technology does. I’m not, I’m not here to pitch us either. But it’s really how I’ve set up my agency and why I got excited as things get harder, because Amazon still has the same amount of customers growing every year. I mean, it’s growing, growing, growing. So how do you get more volume to offset those margins? How do you continue to get margins, everything gets trickier, you got to care about supply chain more, you got to care about bundling. And you know, he’s not just listing products anymore, you have to be very strategic and intentional in the way that you’re doing your e-commerce, from your DTC to your Amazon. You know, it can’t just be like it used to be like, you could almost be Amazon agnostic. And that was okay, because PPC was doable and things like that. Now, even if you’re an Amazon business, a lot of them are looking to tick tock and Facebook and Instagram, some of these other channels for advertising to kind of, you know, keep their growth strategies and stuff going, which has just made it fun. I absolutely love the space, I’m not in it for money. So for me, the professional Curiosity continues to, you know, as it gets harder, it gets more fun. Let’s talk about Okay, so we’re thinking in the world of e-commerce, we’re thinking about a business that’s around a million. You know, they’ve got their numbers, let’s say their books are in order. You know, what are some of the other things you can do to prepare your businesses? So we’ve talked about what maybe size they need to be at or what like, you know, gross margins they’re getting, but what are some of the other things that like, a good buyer is going to say, see this in a selling business and be like, Wow, they’ve got this covered, they’ve got this covered, they’ve got this covered. This looks like an attractive offer to me.

Thomas Smale 31:46
Yeah. So firstly, at least, the art of good m&a is reaching a broad range of buyers. So there should almost never be a list of things, you absolutely must have to make your business sellable. Because one buyer loves another buyer will not. But you mentioned the first one, the most important one, which is books in order. And I would say part of the reason why the smaller the businesses, the harder it is to sell is often the financials are the most messy for smaller businesses. So I would love it, if every million dollar business came to us with perfect books, the reality is, I wouldn’t quite say it’s 0%. But it’s closer to 0% than 100% that have books that are not in order. So books and order is a prerequisite for selling any business. If your numbers are not accurate, then no buyer is going to pay you any sort of reasonable multiple, because they are guessing and no sophisticated buyers. Guess when it comes to acquisitions, particularly dealing with someone a strategic buyer with like, if they’re a public company, or whatever, they’re never gonna give you $1 Unless your numbers are believable, exactly. Same with private equity. They’re not either an individual like your ally, maybe yes, we would take upon, but we would be making a massive kind of reduction on what we’d be willing to pay, because we’re kind of using our expert and expert guess I would call it. So numbers have to be in order. In almost all businesses, this kind of goes without saying, but you need to have the ability to actually sell your business and the products you’re selling. So for example, we saw a business recently, which on paper was a great book, which was great, but didn’t actually own the rights. They had a product, they had a license to sell the product, but they didn’t actually own the manufacturing relationship, the designs or the name. And while they had known the licensor for years, that doesn’t necessarily help with the buyer who might be like, Well, how do we know that relationship is going to continue. So that kind of goes without saying you need to have the actual rights to sell your business and then transfer that to someone else. Lots of businesses around the level you’re talking around that million dollar revenue level, have a founder who is probably very involved in the business, and they’re probably either self fulfilling, so maybe they have a warehouse or garage or a small office where they’re maybe doing packing and shipping themselves maybe have a couple of people helping out but it’s unlikely they are completely out of the business. At that level with the team once you get to say 10 million 20 million 50 million revenue, you can start to build a management team. You might have a warehouse or three PL or whatever, you might not be involved in logistics at all. But at that million dollar level, you almost definitely are almost all sellers we work with, even if they’re not physically in a warehouse and working with a three PL. So that’s unavoidable. That’s just the nature of selling businesses at that level. So having your processes well documented, having everything you do well documented, things like your supply chain, SOPs or All of that kind of stuff like knowing your lead time from suppliers, having backup suppliers, having a good process for creating new products and new skews, if that’s something that’s an important part of your business. Because at that level, a buyer is essentially buying your job as part of your business. So making that as easy as possible for someone to take over is a good thing. Why don’t you think you need to do it? If you asked me this question 10 years ago, I would have given you a more textbook answer, the more textbook answer is you should try and replace yourself and reduce your hours down to zero. The reality I found in 12 years working with business owners is if you tell them to do that, they won’t, or they can’t. So it’s kind of pointless advice to give, theoretically, the less time you spend on your business, the more it is worth or the easier it is to sell. The reality is if you have a business making $200,000 a year in profit, and you’re paying yourself 100,000, you’re probably not going to take that 100,000. You pay yourself to pay a manager and then only make 100,000 yourself on a theoretical textbook paper. Yes, it makes sense. Because your business is more sellable. But the reality is, no one actually does that. So if you can reduce your time, great. The reality is you should just make it simple for someone to take over. As your business grows, things will change. So if we’re talking about a $10 million revenue business, I would definitely advise you not to be the one in the warehouse every day, kind of packing shipping orders yourself. Or you’re not, it definitely starts to get challenged around that level. Because you probably have. For me, I know we were talking about this just before we started recording. To me. The hardest point of my business was just before we hit eight figures in revenue, and we were at about 20 people, think 20 people, and that’s probably where you’re gonna be with the $10 million e-commerce business. That’s the hard level where you’re probably doing a little bit of everything, you’re probably managing 19 people directly. As you grow, you then start to build a management team, you have, hopefully less direct reports. And things can not entirely run without you. But some things can run without you. So that’s how things change. Once you get to 10 million revenue is unavoidable, you’re going to be in the day to day. So I’m not going to tell people to get themselves out but at least document it. Beyond that, there’s not really anything that I’d say is an absolute prerequisite, I could give you a bunch of metrics, which some buyers will care about like reorder rate, average order value, return on ad spend metrics like that, some buyers will say to you, oh, you have to have a return on ad spend of one to four or your businesses on sellable realities, buyers just won’t care, some some will. But someone will give you a ratio of one to five, some will say one to 10, one to two does.

Andrew Morgans 37:54
Everyone has an opinion, everyone has an opinion. To learn, I would say always be aware that any buyer is very good at doing this to your point around the sales guys who are sales women who are kind of doing m&a or buying businesses.

Thomas Smale 37:58
There are lots of people who are very convincing if they’re trying to buy your business, the metrics they are looking at are what everyone was looking at. So Oh, everyone cares about return on ad spend everyone cares about, like how many SKUs you have on Amazon. Everyone cares about what apps you’re using on Shopify, everyone cares, you have your own, like you’re selling a Walmart as well, the reality is, it doesn’t really matter. Some people will see it as an opportunity. If you do not have your own store, or you don’t have a Shopify store, some people are like, well, that’s great because I can buy this business and launch one. Other buyers who might also be credible might say, I don’t own a Shopify store, I’m not buying this business if you don’t have it. So you’ve got 100 buyers, 50 will say deal killer 50 will say this is an opportunity. So one thing I’ve learned of m&a is to reach as many buyers as possible, then you could ignore all of the people who say this is an essential criterion. But it isn’t a central criteria that your books are in order. And it isn’t a central criteria, that is your role. If you want to get out of the business and sell it can be replaced. And you have the physical, legal and otherwise rights to sell the products you’re selling. And transfer that business to someone else. Yeah, I can give you a list of 500 like nice to haves, but they’re not not essential. And if anyone tells you they are, then they’re lying.

Andrew Morgans 39:36
I love that answer. Thomas. I think we got to make that into a clip. Because that’s just a beautiful answer. And you’re right, like you know, we talked about black and white notes in the gray. And you know, same thing for me as an agency, where I have a fulfillment center and a warehouse. I have a branding and content team that can do full service from packaging to you know, a plus and And PDP images on Amazon the full stack, you know, to PPC team to, I’m going to look at a project or a brand that’s lacking some of those things and see it as an opportunity. Oh, I can bring the brand story to life here we can launch a DTC site, they have no social media presence or they’re not doing Amazon Well, this is the opportunity here, they’re doing DTC Well, I’m looking at those, those things missing and seeing opportunity, oh, we could launch internationally. You know, that hasn’t been touched. You know, there, ao V could be way up there not doing a great job of cross selling, see all these things as opportunities, whereas someone else might be looking for something more turnkey, where everything is running smoothly. And you know, their main plug is sourcing in China, and they’re going to reduce the cost of goods, and they just want everything else already running, you know, amazingly. So you’re absolutely right. Marknology usually steps in when it’s like, you know, a lot of times it’s that business trying to get to that next mark of sales, or is that smaller business that’s trying to hit that first mark. And it’s like, look, I went to a seller, I went to an aggregator I went in there, like we, you know, we would love for you to have these things in place before you sell. And, you know, they come to us and we help them accomplish that. Whether that’s, you know, a lot of a lot of times that’s brand story in, in the Amazon world, if it’s a DTC site is someone’s doing well, on DTC site, they typically have brand story like pretty, pretty locked in and it’s just a matter of not having Amazon knowledge. If it’s an Amazon seller, a lot of times they have ops, down, they have their data, they have their like, SOPs and process in place. But they don’t understand branding and storytelling. And people like to buy, you know, a package brand package, like, you know, what are we buying? What’s your story? What’s your value differentiation? You know, how are you guys different from the market? And so, you know, bringing those things, and it was curious for me, just as just to hear you speak around that I think you’re absolutely right. You know, as a b2b business, I have different things to do than I have as a b2c business. And I’ve seen, you know, so many different buyers. In this space, let’s talk about just as we wrap up, we’re coming up on our time to talk about FE International. And what is something you guys are working on as a team, I know you have a diverse team, you’re in at least four or five locations, you guys have been doing this 12 plus years, you’ve been at events you’ve been, you know, you’re doing all types of things, what’s something that you guys are doing as a team, maybe it’s a new market, maybe it’s like your focus is coming here, you just run with it. But as a team, something you guys are excited that you guys are moving into.

Thomas Smale 42:36
So one of the things we’re working on at the moment, which says the secret but if I tell you it’s no longer a secret, we’ve always had demand for this. And we’ve always offered it privately, but we’re going to begin to offer it publicly. And actually, this part of the aggregate, the rise of aggregators has actually increased the need for the service. At the moment, we only really do sell side services for business owners. So if you want to sell 100% Your business, we will sell 100% of your business. If you want to buy a business elsewhere, you need to hire in almost all cases a third party due diligence firm to do the due diligence. One of the things our team is really good at is due diligence. We’re known for doing a huge amount of upfront audit work, hence why I say almost no one has accurate financials, because I have 18 accountants, and they go through the numbers. And they will always find discrepancies in basically any business, particularly e-commerce businesses, and particularly small ones. There are always discrepancies in basically 100% of deals. So we’re going to start offering that to buyers and people searching to buy businesses. And I guess the reason that’s relevant with the aggregator world is a lot of aggregators, where they went wrong, is they didn’t do a very good job doing due diligence. They were like, yeah, we’ll buy your business. And they would kind of just buy it and then realize that the business was not making what they said. And suddenly they have a business that’s worth half what they paid, because they are missing in due diligence. So we’re going to start using our team for the processes, SOPs that we’re talking about, we have those we built those, we’re going to start offering that to buyers. So people buying a business for the first time, or maybe think of a small aggregator who doesn’t necessarily have the resources or expertise to build that internally. And to your point, you and I have been around for 12 years. There are lots of things you learn online in 12 years, that even with a billion dollars, or remember how much to raise, but something like that. You can’t necessarily buy all of the talent to figure that out. Even with a billion dollars, it just takes no replacement for time. So we’ve just learned, I guess a lot of tricks of the trade, a lot of things sellers do and they hide them and we’ve picked up on these common patterns that will do exactly the same if you’re buying a business elsewhere. And this is I guess, not supposed to be a sales pitch for FE International. But Hello, I asked what we do really well on the sell side is we sell businesses which are legitimate and do not have discrepancies in Financials, why we can’t guarantee that we have an audit team. That is their job. If you buy elsewhere, the vast majority of m&a firms or business brokers or investment banks, whatever they want to call themselves, don’t really do any due diligence upfront, even if they say they do. So, a business that says it is making a million dollars a year, in almost all cases, revenue is correct. Almost no one, I think people get confused with this. Almost no one lies about their revenue. Because revenue is very easy to prove or disprove. People lie about their costs. And they lie about how much time they spend on things. So we do a very good job of that, we’re going to roll that out. And hopefully it will help make to your point about the industry growing one thing, I think it’s important if you’re a kind of an anchor firm, which I just gave us in the industry, is making sure that industry stays legitimate and does not get a bad reputation, which means you have to do a good job. And people have to better buy businesses and not get ripped off. And to your point around sellers, seller friends you have or colleagues or peers who have sold their businesses, you need people who have sold their business to have the best experience possible. And yes, to your point, selling our business is always stressful. We hope to remove some of that. But I’d be lying if I said, every seller we work with is not stressed at the end of the process. It’s unavoidable. It is emotional, it’s life changing, or hopefully life-changing. But walking away knowing that you’ve got the best possible deal you could have got from a legitimate buyer who will do a good job of your business, hopefully, then you walk away without any kind of selling regrets.

Andrew Morgans 46:42
Yeah, and I think I think a great starting point for anyone that’s looking to sell their business is, is maybe it’s not a buyer looking at your business, that’s paying for the due diligence, but you as a business that’s saying, hey, in the next 234 years, I want to prepare myself, you know, using a service like a due diligence service to say, hey, I want you to evaluate my business as if you were picking it apart for a buyer. And really come back to me because it’s not, I think a lot of times as an owner, it’s not that I’m outright lying. It’s that I don’t know that this should be like this, that this should be like this. And this should be like this. And you know, I can assume a lot of other people are like that, to where? Oh, yeah, I didn’t know to add this and to speak, to call it this. And you know, to move it here and to be in this column, and yada yada, yada and speak about it that way. And so a lot of times by having my CPAs look at my stuff, my bookkeepers look at my stuff, having my mentors look at my business. That is when I figured out what I should focus on. That becomes my drivers for the next couple of years and saying, Okay, this is something I want to accomplish. Okay, there’s a big gap here. It’s like getting your house appraised. Right? For you know, before you sell it, it’s like, and you are entirely correct, there is a very big difference between sellers who intentionally misrepresent something, in which case we would never advise buying, we’d never represent them.

Thomas Smale 47:51
And people who did not know or made a genuine mistake, part of the, I guess, art, to m&a outside of science is establishing if you think someone was lying intentionally, or they were lying, because they didn’t know, or they made an error, I’d say the majority people are usually acting in good faith. They didn’t know their accountant did it wrong. Their bookkeeper did it wrong. They entered it in the wrong column, or they forgot to put the invoice in every bit. I’d be lying if I said as a business owner, I’ve never made an accounting error. Like everyone’s done it. It’s not that you don’t end up in jail for making a mistake, regardless of what people think about the IRS or whatever. That’s not the reality. So yes, that’s a big part of it. Are they acting in good faith? Yes, if so, buying their business is fine. And representing them, if you’re us, is also fine. But you probably just then expect some sort of renegotiation or adjustment to the deal. If you discover it in due diligence, hence why we do work upfront, to make sure there’s not a renegotiation based on financial discrepancies, right.

Andrew Morgans 49:02
rAnd then your expectations are going to be so much more in line when you go through that process. If you’ve done that, to know how you’re not caught by surprise, like, Oh, my business is worth a third less than I thought. Because after due diligence, you found all this and then you’re in the process of Well, I was planning on selling it. I’ve made that decision mentally. Now it’s a third less what do I do and you know, it just becomes Uber stressful versus you know, really taking the time to prepare your business for exit I think is just super, super important. Instead of just like, Oh, my God, multiples are at an all time high. I’m gonna sell and jumping into that fray without really knowing, you know, where you’re going, you spent you birth, most of us at birth these businesses, you know, out of our bellies, and it’s like, you know, it’s something it’s it’s a very stressful process to go through. I have Marknology. As an agency owner, I’m super excited about that offering and what you guys are going to do. I’ve paired that together with an m&a guy I know that does an amazing job with his business of, you know, just Data Analysis and tracking everything. And he’s the best I’ve ever seen. And so every every once in a while, I’ll pair up with him as a combo team to kind of do a due diligence on a business where I’m doing all the front and back end of an Amazon, so to speak, because that’s my world, you know, plugging in profitability software, seeing their cost of goods, are they actually what they say they are looking at PPC is there, you know, is there room for growth, they’re looking at return rates, those kinds of things that an Amazon expert would know. But there’s so much on the supply chain side, looking at manufacturer’s invoices, like, you know, the cost of goods and shipping and auditing all that kind of stuff to see if it’s accurate. And this, you know, there isn’t, there hasn’t been, in my opinion of formal, anyone that’s standing out as doing this formally for people in the best way. So I’m super excited to hear about that. For our own partnership, division, and, you know, we have a lot of brains. Tom does look for these kinds of things, looking for help looking for the finance side. And I’m always just like, I work with some of the biggest companies in the world, some of the biggest brands 10 million, 20 million, 30 million, and they have no idea, their e-commerce, their e-commerce, the e-commerce side of their businesses a lot of times or they just don’t really know what’s even going on, you know, are they on vendor Central? Are they on Seller Central? Does actual leadership or ownership know the differences and those things? It’s just surprising what you’d see, you know, you just see the revenue numbers, and you assume, but this industry is really so so new, that not every accounting firm, not every bookkeeping firm, not every, you know, m&a professional, and not every tax professional understands e-commerce and the nuance, so to speak, the nuance that goes into a million line transactions versus 10, big POS for the year, you know, it’s not the same businesses to evaluate and whatnot. So thank you for sharing that. I know you said it’s a secret, not a sales pitch. But I think it’s very much a problem that needs to be solved. And I think that what better to do and affirm has been, you know, doing it a long, long time.

Thomas Smale 51:57
That was awful as well. So glad to hear you like it.

Andrew Morgans 52:01
Yeah, it’s like, it’s I know that it’s a need, like, I mean, it’s a need, you know, and I know that for a fact. And so a lot of times I feel even unqualified to really tell someone, yes, you should buy this business or not buy this business because I could only evaluate so much as an expert on my side, you know, so kind of coming in blind for all the other part of that and being able to plug them into a partner or be you know, if you’re buying a business worth a million dollars, what is 10 grand, you know, or, you know, whatever that price tag looks like to get due diligence done and get a real evaluation and feel great about the business that you’re buying. I think it’s priceless. So, you know, that’s absolutely incredible. We’ll have to follow up maybe, you know, six months or a year from now. Let’s see how that you know that see how that new division that new offering is going because I think it’s something super needed. Hope this has been absolutely great. Thomas. You are in New York. I’m in San Francisco, but often in San Francisco. Okay, I don’t meet as many e-commerce Guys in San Francisco as I do in New York or Miami. So always awesome talking with you. It’s been a pleasure getting to know you more. I’ve known of FE International for quite a long time just seeing you guys in the industry as someone else has been, you know, around in you kind of see the m&a guys as you know, what do they want from me, you know, you know, kind of like, you know, in some ways, it’s they’re buying your business and you lose them as a client and other ways. It’s like, you know, it’s a great source of income and other ways. It’s a great ally. You know, there’s all these different kinds of ways that agencies and the m&a guys have no, but I feel like we’re gonna be friends and colleagues for a while. So I really appreciate getting to know you, and I hope it’s not the last time. Shout out again to our sponsor. This episode of Startup Hustle is sponsored by friends over equip-bid auctions, join, sell, earn. It’s that easy with equip-bid auctions, become an affiliate and start or grow your independent business by visiting equip-bid.me/startup today even easier had to start up dot XYZ, click on Next, click on our partner’s page, you’ll see a quick bids founder, Andy has set up everything you need to go make money today, go build your business within a business. I have this great idea for a website called things we find in houses for all the real estate stuff we do. We just find the craziest stuff in there sometimes, you know, vintage cards, pianos, record players, just like some crazy guns and walls sometimes. And you know, these auction sites, you know, I started the same way, just selling stuff on eBay. Back in the day, you could buy anything and everything on eBay or Craigslist. I think back in the day and a lot of the people that have been doing this for 10 years. We kind of all ended up in the same spot through some of the same methods. So it’s great to meet somebody else that’s been in the industry a long time, Thomas. Thanks again for your time.

Thomas Smale 54:49
Yeah, thanks so much for inviting me on. Appreciate it.

Andrew Morgans 54:51
You’re welcome, and thank you, Hustlers, for tuning in. Hope we brought you guys some value today about thinking about, you know, your business or your future. Maybe the one you’re about To build, the one you’ve been building, please Thomas’s notes and connections will all be in the footnotes. You’ll be able to contact him there, FE International. We’ll see you next time, guys.