Selling your Amazon business
with Chris and Jason of Providium Chris Shipferling & Jason Somerville of Global Wired Advisors/Providium
Why sell your Amazon business?
Is this really the main option for most people long-term?
Selling your Amazon online business is always something you need to consider. Of course, tt’s an option to hang onto your business. Sadly, the data says you’re very unlikely to pass this to your kids.
For nearly every person who owns business could make more money by selling it. So you need to have an exit in mind.
Most people hit a point where they need more capital to grow the business.
Most entrepreneurs like solving the puzzle – then they get bored! That could be the time to sell your Amazon business
Click below to estimate the value of your business
What matters when selling your Amazon business?
There is no downside to building a business as an attractive asset. If you are preparing to sell your Amazon business, it will benefit you as an owner.
Owner operator or small business…
There is a natural creative /destructive cycle. It’s very difficult to innovate and grow and be at front of the market for years.
If you hold on too long, the business may well plateau or even take a step back.That’s a good reason to sell your business before that happens.
Background of our guests in buying and selling businesses
Sold a lot of buggies – worked for a Japanese company
Ran sales and marketing.
Then worked in sales and did some product development
Then ran subset of Barcelona company for 4 years.
One focus was direct to consumer – own own website
What are the best activities – playground to learn great
Got $500K product stuck in warehouse – no retailer wanted it.
Brother- in-law was seller central wizard.
Spent months- webinars, white papers and learned SC inside out.
They ran out of cash so that hurt!
Started own consulting firm.
Lots of contacts in baby space; also amazon and vendor central.
Chris has helped people move from Seller Central to Vendor Central. He speaks the “vernacular” of Amazon.
Chris’s Role in Global Wired Advisors
- Biz dev. – this online world is new to his partners.
- Conveyor belt on selling digitally native and amazon businesses
- He goes under the hood. Love to “King Kong”
- Massive disparity – what you big up vs. Seller central
- What’s going on?
- His background in sales and marketing – what would a potential business buyer look for?
- He goes under the hood. Love to “King Kong”
6 million dollar business – only on amazon, no email marketing, no social, no other marketers
To potential buyer in OM: look at what he’s achieved just by great product.
Based on forecast can take $6m and double in one year by focussing on other things.
- Go international on amazon – uk, Japan, china
Partners build the financial model.
In Investment banking 20 years
Worked for bank of America capital markets group
Hedge fund in Miami – wide variety of things
A few years pure entrepreneur – started and and purchased businesses and exited those
Background of Global Wired Advisors (from Chris)
Wall Street guys
One ran trading desk at Wells Fargo
One went out and acquired businesses
60,000 contacts in Private Equity, investment banking
Then met 2 other partners – similar backgrounds –
Felt smaller business world was missing high quality expertise and help in selling companies
Could fill void in the market.
Owner operated and family owned businesses
Started providium group 2 years ago
GWA – Global Wired Advisors – started within the last year as a subsidiary of Providium.
Focused on online businesses, aka “Digitally Native Businesses”.
Focussed on amazon particularly.
Different forms of capital raising for Amazon businesses
There are Mergers and acquisitions if the whole business is involved.
Acquisition is if one company buys another entirely.
Mergers – are when two companies come together.
Debt markets are for lending money to your Amazon business; Equity capital is about selling a part of your company (shares) in exchange for funding.
When you’re trying to sell your Amazon business, you need to be aware of what the buyers look for
There are some general business things and there are things specific to Amazon businesses.
Different buyers look for different things. But generally Private label brands are more attractive than reseller business (Retail arbitrage).
You need a few other characteristics:
- Good product roadmap
- Producing cash
If you’re selling your Amazon business, who might be buying it?
Smallest of business to largest – people change who buy them change as biz get larger
Small business – sold for <$2m value
one segment- individual buyers- often want to be owner and operator themselves.
They buy a cash flowing business that will also be their job.
Selling your Amazon business worth $5 Million plus
There are more buyer types for this kind of business.
– individuals who pool their money – informally.
Wealthy family has generational wealth – instead of outside investment co, create internal office
Selling your ecommerce business worth $10m+
Tends to dominate market
There’s over 4000 PE firms in USA
What is Private Equity?
PE just means investing in privately held companies not PLCs
A fund who has raised funds from wealthy accredited inv.
Pool funds structured a nd pro
Specialisms /focus – sometimes specialisms
From 10,000 to billions
Myths about selling your Amazon business
“I thought revenue was most important metric”
No, it’s always cashflow!
In the OM (offering memorandum), show positive growth.
The health metric is The bottom line.
IP is important but cashflow is
What’s the different between cashflow and Profit?
Cashflow is another word for profit/EBITDA
Profit for most people is net income after all expenses including tax strategy – trying to increase expenses as much as possible to pay fewer taxes.
Profit in small business context has a different outcome to true cashflow.
In a small business when an owner operates it and gets benefits, all those are effectively included in the cashflow of business
Seller’s discretionary earnigns
Seller’s discretionary cashflow
All mean the same thing
Gross profit minus any other expenses to run the business
Numbers in $1000s per month
$50 costs for product inc shipping
$50 gross profit
$30 op profit
$5 home office
Benefit owner receiving is the $50K because salary is owner related and home office.
So cashflow is $50K
Is EBITDA the right metric to start valuation of your Amazon Business?
For owner operated businesses is NOT usually used for that. Because it doesn’t account for owner benefits/seller discretionary Earnings.
That is more for a business that is NOT an owner-operated business.
“I just need to wait to do x, then I can sell”
No, if you have good cashflow and products, you can sell at any time.
YOU CAN leave something on the table for a buyer – which is often a great incentive to have when selling your Amazon business.
How do we value an Amazon or e-commerce business?
They can get close to a number.
They use formulas daily to provide an approximation.
It’s an art but it’s also a science
Most companies that are operating are valued on a multiple of cashflow.
If it’s a private buyer for a small company worth $1M, that might not be strictly true.
But if it’s a $50M business – rely on multiples
What is Venture Capital and angel investors?
These invest at a very early stage especially in tech world, when it’s just an idea or no revenue yet or no cashflow yet
Valuation there is not a multiple of cashflow!
How do Amazon businesses compare to those more speculative businesses?
They are basically retail stores B2C so they are valued as such.
This market for buying and selling Amazon businesses has never gone through a stage where VCs or Angel investors got involved.
What do you need to do as a seller to make your business sellable if it’s under $2m value?
Growth is very big. Over a period of time is good.
The longer the period of consistent growth, the better.
Growth potential /future growth
A buyer isn’t buying your business based on past.
They only benefit once they buy it ie in future
They buy track record – and a believe it will continue to go well
And they think they can bring in special sauce/resources to help it grow even more
They want to feel there is a lot of growth left
Recognition – even if just on amazon. Maybe off amazon
This is a strong theme in the market recently. Starting to be a top bullet point
Make sense of what the performance really is.
In due diligence period – quickly verify what been told.
To read/listen to more from Chris and Jason, click here for the other podcast interview
Click below to estimate the value of your business
Michael Veazey 0:04
Welcome to the 10 k collective podcast. Listen, if you want hacks, my friend, I’m afraid you’re in the wrong place. Our philosophy has grown out of the 10 k collective London mastermind members, by the way, make between half a million and several million dollars a year in e commerce based on how many have doubled revenue in the last 12 to 18 months. If you’re that kind of person, this podcast is made view. We’re not puritanical, we use hacks, we just don’t think you should focus on them. If you’re building a real business, instead, we focus on what’s been proven to work in the real brand building, clear strategic objectives, courageous long term goals and long range thinking, if you like that focus, keep listening. Welcome, a collective.
Ladies and gentlemen, welcome to 10 k collective podcast, very happy to be here with a brand new podcast. And this is aimed at you the advanced amazon seller, or at least somebody who’s got some revenue, and is basically a serious person wanting to scale up big. And today we’ve got a couple of guests who are going to help the really ambitious people who want to build an asset to sell. And that is two people from Wall Street and no less. So we’re honored to have on Chris ship filling and Jason Somerville of global wired, advisors and premium. So guys, welcome to the show. Hey, Michael. Good to see you both. I like the simultaneously Hi, that’s great.
Unknown Speaker 1:33
Michael Veazey 1:34
it’s great. I love it. It’s all part of the theater. So guys, can you give us a bit of background about each of you personally first, because it’s always good to know who’s the person giving the advice before we go any further?
Unknown Speaker 1:43
Yeah, no problem. My background is I’ve traditionally been in a lot of different marketing roles I’ve worked, I cut my teeth in, in sales to start worked on the manufacturing side. So worked for various different companies and also worked with new product development, Product Marketing, trade, marketing, and eventually slowly rolled into focusing on digital marketing and also, specifically Amazon. I’ve been working with Amazon vendor central for almost 14 years. But recently, about four years ago, started diving in very deeply into Seller Central and really understanding the mechanics of what it means to be a seller, a brand selling through Seller Central. And so I’ve done some Amazon consulting over the past few years with some with some larger brands brands that helped go from vendor central to Seller Central brands that didn’t have any clue what they were doing with Seller Central. I met these guys at pavilion over a year ago. And we just started chit chatting about Amazon and about digitally native businesses. And here we are, now we’re helping people exit their business for maximum value,
Michael Veazey 2:56
excellence exit business for maximum value, that’s a very, very clear that you achieve people. That’s fantastic. So Jason, tell us a little bit more about you.
Unknown Speaker 3:05
Sure. Thanks, Michael. Um, I, I’ve been investing banking and capital markets, my entire career going on 20 years now, I am actually started with Bank of America, work for them for a number of years in their capital markets group, and then moved on to a hedge fund in Miami, where we did a large variety of things as most hedge funds tend to do. Work for those guys are doing lots of different types of trades, lots of mergers and acquisitions, lots of debt and equity, capital markets transactions, and then actually moved on for a few years became purely entrepreneurial myself, started and purchased a number of businesses grew those and exited those over the course of about, I’d say, five years. And then a couple of years ago, I actually met two other gentlemen who are not on this podcast with us. But there are two other partners who also come from similar backgrounds to mine, different trading and investment banking roles in very large bulge bracket companies. And we sat down and felt like that the smaller business world was really missing high quality expertise and high quality health, if you will, when it comes to selling their companies. So we felt like we could fill a void in the market, we could get a give those you know, many owner operator and family owned businesses, some really, you know, high quality help, you know, allow them to achieve outcomes that were much better than what they had been able to achieve before. So we did that we started about two years ago with premium group and that’s the company that Chris referred to before. And then recently, in the last year, we actually started global wired advisors, which is really a subsidiary of video. That’s when Chris shuffling came. And we really wanted to focus global wired advisors on online businesses, primarily Amazon based businesses. And I’ve been doing that now for several months. And I’ve really enjoyed it. You know, I’ve met a lot of great clients and helped a lot of great clients along the way.
Michael Veazey 5:17
Wow, that’s quite a lot to take in. So thank you very much, guys, for your backgrounds. I mean, obviously, you both had the entrepreneurial bug, which is very important. So you’ve been out there yourself trying to create businesses, obviously, Chris, you’ve also got the background of of helping Amazon sellers, you understand that the platform very, very well. Which I guess is important, because you’re aware of, you know, how the precariousness of life on Amazon, I guess, which is kind of part of the picture, isn’t it? And then Jason, just a couple of things I wanted to just dig into straight away, because I think these are the more obviously, you know, seller, Central and vendor central these words, were very familiar with this Amazon sellers. But just to dig a little bit more into the background of this stuff. Because it’s partly, I guess, one world understanding another right as part of what this is all about, I guess you guys, the people bring the two sides together, the people who are the money and the people, the businesses. So I’m going to bit a bit more about some of these buzzwords, you were you were throwing around capital markets, mergers and acquisitions debt and equity capital markets. I mean, obviously, these words that in a way sound very familiar, but I want to just dig without spending too long there. But just dig a little bit more into what it means, first of all, and and I suspect it may be relevant background for Amazon sellers, as well.
Unknown Speaker 6:26
Sure. You know, at a very basic level, really, when I say capital markets, it’s going out and accessing really funding through other parties. And that can be done through debt instruments. You know, hence, debt capital markets that can be done through selling of equity in the company, that’s equity capital markets. And then there are if you’re talking about transactions that involve the majority or the entire business, then you get into mergers and acquisitions, where if one companies buying another company, entirely, it’s an acquisition. And if the two companies are merging together, and there’s some technical nuances that I won’t bore you with at the moment, but that would be effectively, you know, kind of what a merger is. So those are kind of how the few those four are as far as high level. But, you know, in terms of the basic gist is accessing funding from outside parties through various means, essentially,
Michael Veazey 7:30
a crate. So that makes an awful lot of sense. In other words, basically, you give up something part of your company, either you owe them a debt or equity, or the whole thing is moved in one go, and then they give you money for it. So I guess it’s a kind of obvious thing I just always worth digging into. Because people always throw in these big words around and dig deeper, know what it means I just wanted to look clever. And like I live in London. So there’s plenty people wandering around talking about mergers and acquisitions and that sort of thing. But in a while not on the team, nobody talks on the tube, but yeah. Same on the subway him in New York as well. So guys, let’s get into them. Thank you very much in the background, very interesting, already quite a different conversation than the standard thing of how to get my products to rank this month. But tell me a bit, first of all about the the entire proposition of selling an Amazon business, is it really the main option for these people long term? Why not just build an asset and just hang on to it for your whole lifetime? And then pass it on to your grandchildren?
Unknown Speaker 8:25
Yeah, I can answer some of that. And I’ll let Jason take some of that as well. I mean, the short answer is yes, you can, you know, you can, you can do whatever you want with your Amazon business. So you know, if you want to build your Amazon business, and you want to hold on to it as an asset that produces cash, that’s obviously an option. Most people and most personalities that we come in contact with. And what we always give advice for with with anyone who owns a business is when you start a business, you should always be thinking about selling that business. Because typically, when you sell the business you can, you can come out at the end making more, then what you could potentially make even with it being just a cash asset, there’s a lot of nuances and headaches to that go along with owning your own business and growing your business. You know, you can grow a business, and then you may have a very healthy business, but you hit a point where you need more capital, you need more money in the business to be able to grow the business further. So there’s there’s hurdles that can get in the way with that as well. So I would say a direct answer to your question is yes, you can hold on to it. But you know, I think with most entrepreneurs and personalities that we run into, they like solving the puzzle. And then when the puzzles been solved for them, they want to go solve something else. And so we would love to give you a payout to go solve a harder puzzle is how we like to put it. I don’t know if Jay said color to that.
Michael Veazey 9:48
Yeah, I like that. Thank you first for just to reflect on that. And the official love to have some input from you, Jason. So yeah, I mean, one of the things, I understand that the data says that the likelihood of your business being around for you to sell to your kids at all pass on is kind of quite low. I guess it’s one thing, isn’t it, but also the question of making more money by selling it, then you could run it, which is obviously important. Most entrepreneurs are pretty motivated by money. It would be strange if they weren’t. But as you said the other thing, the real key. And I like the fact you understand the entrepreneurial mindset, yeah, we get bored or we get it creating systems, but we’re terrible at running them. I’m like, I’m forever breaking amazing FBA, for example, because I set up some system with my you know, my little team, and then I’ll be the first one to break it. And they need to say, Mike, don’t give us tasks on Skype, do it on Trello, or whatever it is. So yeah, you’re quite right. Entrepreneurs don’t make great people for just keeping a steady ship, they like to be aggressively growing or do something else. So very, very valid points, indeed. So Jason, give us a bit of input on that. So is selling really the main option for people who own a business? I mean, why bother selling is another way of putting it?
Unknown Speaker 10:48
Well, I’ll just echo a couple things that Chris said, One is, you know, if you own a business, we can we always advise to always think about the exit because there’s really no down, there’s no question downside to be thinking about the exit, is, it’s something that if you build your business in a way that it would be an attractive asset for someone to buy, even if you ended up not selling it, the things that you’re going to do to make it attractive to an outside party are only going to be things that are going to benefit you as the owner, ultimately. So that’s one thing I would say it’s just a good mindset to have as a business owner, number one. Number two, again, a little bit of what Chris alluded to, you know, it’s very difficult for ownership of a business, especially an owner operator business, or a smaller family owned type of business, for that ownership to be able to continue to innovate, and grow and, and really be kind of at the front of the market for years and years and years and years. It’s difficult. And if you kind of hold on too long, a lot of times the business will plateau, or start to you know, take a step back. Because just you know, the natural, creative, destructive cycle. It’s very, very difficult to be really great for 10, 1520 years at the same thing.
Michael Veazey 12:11
That absolutely makes sense. I mean, you look at the businesses that survive. I mean, I guess everyone because the big brands make such a disproportionate impact on our brains that we think that things are around for a lot longer. Intuitively, we feel things around for a lot longer than actually are something like Coca Cola is is so the exception to the rule. And I think like, of all the companies that were in the footsie 100 or s&p 500 of the Dow Jones 30, whatever it was, way back 100 years ago, there’s probably like, one left, I mean, Coca Cola is the example was springs to mind started in the 1890s. But even then that mutated very massively from it. So originally was supposed to be a medicine, it had cocaine in it. I mean, this couldn’t be more different now. Right? So it’s one of those realities that we have to get our heads around, even make a massive corporations that feel like they’re around forever. They’re not they just feel like it. So that’s a very good point. And we’re going to dig a bit deeper into that, that whole question of what the alternatives are to a straight up sale, but a lot of people are interested in straight up sale, they’re not necessarily wanting to hang on to business forever. So next question is then basic, simple question. If you’re wanting to sell something, what are the buyers or businesses looking for? And and the other question, I guess that implies is who buys businesses?
Unknown Speaker 13:20
Yeah, I’ll, you know, I can I can, I can start with that. I mean, you know, specific to Amazon businesses, you know, buyers, different buyers look for different things, right, I would say, when you’re looking at Amazon, specifically, a private label brand is going to be much more attractive than a reseller. You know, when you have your own brand, and you’ve done things to really build that brand, and make it strong and shine when you’ve got, you know, a diversified or a good product roadmap. And and obviously, healthy margins. You know, when you’re in the in the business is producing cash, that’s also something I think very, very important to notate. You know, there’s a lot of, and I’m sure we’ll get into this a little bit. There’s a lot of myths around selling your business. But one of the most important health metrics is that it’s producing cash. And that’s got a lot of good protection around the business as well. So
Michael Veazey 14:10
So these I suppose the those are the things that people are looking for that let’s stick a little bit more into the question of who buys businesses, because I’ve spoken to people before on the show about sort of private buyers, sort of wealthy individuals, maybe they’re retired CEOs, what have you tied doctors, in some cases, particularly in states, I can get pretty wealthy, I guess. And so yeah, so those that’s one type of buyer, tell us a bit more, you guys obviously deal with quite a variety of buyers more and the questions around what the hell is private equity? What is venture capital? What is angel investing? I don’t really know the difference tonight. So first of all, are those the kinds of people that buy the businesses? And if so, can you explain the differences?
Unknown Speaker 14:50
Sure. So I’ll hopefully not drone on too much. But I think it’s good to sort of segment the market a little bit, I think it might be helpful for your listeners. So if you start with the smallest of businesses, and then go all the way to the largest of businesses, then you kind of can follow that path a little bit. And the kinds of people who buy those businesses, they tend to change as the businesses become larger. So when you you know, the smallest of small businesses, let’s say transactions, that the businesses being sold for, you know, less than $2 million, us, let’s say, that’s kind of one segment of the market. And that tends to be mostly individual buyers, individual buyers that quite often and most often are actually wanting to be the owner and the operator of the business themselves. So they’re looking to buy a cash flowing business, that will also become their job, essentially. So that’s the most common in the smaller segment, when you go from $2 million to let’s say, five or 6 million dollars, you start to sprinkle in some additional types where there would be groups we call buyer groups, which are just really individuals that have decided to pull their money together. Again, still fairly informal, but but you start to get more into the investor groups as well as family offices start to participate. And what I mean by a family offices, a wealthy family that has generational wealth, that has a lot of money that they can invest on their own, instead of taking those funds to an outside investment company to invest for them. They’ll often establish their own office, internally, that works for the family, and invests on their behalf. So you’ll get those guys in there in that smaller kind of two to $5 million segment. And then as you get over 5 million and really into the 10 to, you know, $10 million plus area, that’s where private equity firms tend to come in and dominate the market. And, you know, in the US alone, there are over 4000 private equity firms. And that number has grown quite substantially in the last 10 years. What a private equity firm really is mostly, I mean, there are different structures, but it’s usually a fund that has gone out and raised money from usually wealthy accredited investors, they pull the money into a formal structure. So everything is very formalized, and very professional. And then those funds tend to have investment criteria, areas that they focus on. Sometimes they’re specialists, sometimes they’re generalist, and then they’re going out and the words private equity simply mean, investing in the equity of private companies, instead of publicly traded or publicly held company, that it’s really that simple, from the standpoint of what is that phrase me? So they’re going out, and private equity goes usually from 10,000,005 to 10 million all the way up to, you know, billions of dollars for certain private equity funds that they can invest. So that size range becomes very wide for those guys. So I’ll pause there, Michael, and Thomas.
Michael Veazey 18:21
Yes, perfect time, because I’m just making some notes here. Because I mean, my poor show notes, editors have to deal with a hell of a lot of input on different subjects. But I’m just thinking, this might just be beginning to blow their minds up, but it gets some notes made. So just to reflect I mean, first of all, the question, what is private equity? Maybe that’s a private obsession of mine like to work out what that is. That was an extremely clear explanation. It just means investing privately held companies, not PLC us. But broadly speaking, it sounds just to reflect back and make sure that I’ve absorbed this properly, so that listeners can as well, small businesses, that’s under $2 million. And that’s $2 million value, not annual revenue. I’m presuming that’s the metric. Good, which is a distinction that we got to make sure that everyone obsesses about revenues and seller, but now we’re going to suddenly obsessed with a different metric, which is, what’s the value of my business, as opposed to the revenue? And we’ll we’ll obviously be asking about that. But to come back, small businesses under $2 million value, basically, individual buyers, and they want to be the owner and operator themselves. So that’s a very distinct segment. And we’ve talked about that before with with some people we’ve had on the show. And then the the interesting thing now is that it starts being more about groups of people, either by groups that are sort of informally organized or investor groups, or family offices, either which way there’s either an informal or with a family office semi formal and, and I would guess, and with private equity formal, but either which way it’s pulling up the capital of individual people. And then they’re just basically looking for places to park their money that isn’t a private company, not under public listed company. Is that a fair summary of? That’s exactly right. Yeah. But of course, I have the advantage of writing everything down.
Unknown Speaker 19:54
What do you say? It’s like? I did. So.
Michael Veazey 19:58
That’s very sweet. But you’ve explained that I’ve had a good teacher, you know. So yeah, I think it’s very important to get this stuff clear in one’s head. Because I think one of the classic dictums right for anyone selling a product number one or one on Amazon, and for anyone who’s been around block for a while this will be hopefully meat and drink, which is, you know, first of all, you’ve got to understand your customer. And know them, I know what they want before you even start developing a product. That’s kind of obvious. But I think when it comes to selling a business, I don’t see why it’s any different, somebody needs to buy it, and you’re selling it. But there’s sometimes business owners get very wrapped up in the product and their business to customer relationship. And they forget that there’s a whole new packaging of stuff for the person buying their entire business. And yeah, so that’s why I think you got to understand who you’re selling to. So thank you very much as x and explanation. Any other thoughts on the buyer types before we plunge into what we need to do about that?
Unknown Speaker 20:51
No, because I think, I think later on, we’re going to get into, you know, maybe some of the specific things that these buyer types look for? What’s attractive, so we can handle that then. So I think we can move on.
Michael Veazey 21:03
Great. Okay, well, so it sounds like the next question I was going to ask was, what do you need to do as a seller to sell your business? But the first, you mentioned myths, Chris, let’s deal with that. First, give us some myths about selling a business that you think comes up? And then what is the reality? In your experience?
Unknown Speaker 21:18
Yeah, I’ll mention a few. And in Jason’s experience, he’s probably heard of a lot more. But, you know, one is, we already talked, I already talked about it before, but revenue being the most important metric, it’s not revenue is not it’s about your cash flow, you know, is your business producing real cash in cash flow, which is also something we can give color to as well. Because there’s also some nuances around you know, cash flow versus profit, which I know we’ll get into a little bit later, or even DOD cetera, etc. Another one is, I need to wait until I do this, and then I can sell my business. Sometimes that is true. But for the most part, you know, if you’re, if you’re a business that’s producing cash, it’s actually not a bad thing to leave a great opportunity for a prospective buyer versus just saying, well, I need to do all of these things first. Sometimes trying to create the perfect business for a buyer actually isn’t the best thing. And I’m Jason can definitely give a lot more color to that as well.
Michael Veazey 22:18
Great. So the first question I was going to ask is, you touched on the difference between cash flow and profit? So I don’t think we can just let that one slide, let’s go more into the How was the difference there?
Unknown Speaker 22:28
Well, I think that most people, when they think of profit, they think of the net income after you know, all expenses are paid, including, a lot of times, we’ll call it a tax strategy, where you’re trying to increase your expenses as much as possible, so that you pay the least amount of taxes possible. So profit in the small business world, in particular, and in the private company world, in general, usually has has a, you know, quite a different outcome, then true cash flow. And usually that’s on purpose. A lot of times again, it’s for tax purposes in particular. But primarily, when an owner especially on a small business, when an owner in kind of operates it, and is really getting benefits from that ownership, all of those benefits are effectively included in the cash flow of the business. So there’s, there’s a couple of terms that I’ll give you that are somewhat interchangeable that you may have heard before. There are sellers, discretionary earnings, their sellers, discretionary cash flow, and there’s owner benefit, those are three terms that frankly, mean the same thing. And for an owner operator business, which I’m sure you know, most the vast majority of Amazon businesses are. That’s the actual number that represents your cash flow. So what it really is going to be, is going to be your gross profit, which I think most of your listeners probably probably are familiar with gross profit. And if they’re not, we can if you don’t think there are we can get into that a little more. But it’s really gross profit minus any other expenses to run the business that are not owner related expenses, if that makes sense.
Michael Veazey 24:18
Yeah, I think I’ve got it but can you give us a doesn’t say when it comes to numbers like this, a quick example is maybe a hard thing to get. But okay, let me ask the question. Can you give us a quick example, if you got Fred Bloggs, as we call it? Or Joe? Joe, somebody, what do you call it? Joe, somebody in love Joe Blow. Last one column, you have blogs, he’s got his business and it’s worth $2 million. And give us a bit of a blow by blow account of how that might look.
Unknown Speaker 24:44
Okay, so here’s here’s an example. Let’s say Fred Bloggs, he has total sales of will make it easy $100 and the cost and he’s selling product. So he has a cost of goods sold, which is what it what he pays for that product, let’s say that’s $50. And let’s say that includes the shipping to get that product to his warehouse or to the Amazon warehouse. So Cost of Goods entirely is $50. Well, that leaves him with a gross profit of $50. So let’s say he takes the salary from the business that’s $20. So $50 minus $20. Now he has you know, $30, let’s say that he’s able to deduct $5 for his home office for tax purposes. So now he’s down to $25. So yes, I said salary. If you want to go you want to go back on that, Michael, so I can remember my own math.
Michael Veazey 25:47
So you got this gigantic business doing 100 hundred dollars in revenue, I guess you could say 100,000 revenue a month or whatever it is 50,000 a month costs for for products, including shipping 50,000, therefore gross profit, right, then that he takes his 20,000 salary. And so suppose he has an operating profit if that’s the right term of 30,000. And I’m not expecting us to be counted. But obviously there is an interaction between knowing the numbers and valuation of businesses and stuff, right, the science, the painful questions, and then it’s spending $5,000 on his home office. So yeah, I make that 25,000. At that point, what do you call that number, then that we’ve got left over at this point?
Unknown Speaker 26:23
Well, what what most people would call is, they would call that profit, that would be the profit that most people would refer to. So my business has $25,000 of profit. So when in fact, so that’s fine, that can be your profit, that’s your profit for your you know, your profit and loss statement. It’s your profit for tax purposes. But the cash flow that an owner is actually kind of receiving or the benefit that the owner rusty is receiving is, is the 50 is $50,000 because of the salary being owner related, because the fact that you know, he’s really just deducting an expense for his home office, that’s also owner related. So in that case, the cash flow of the business is actually 50,000, even though the profit is 25.
Michael Veazey 27:14
Boo, interesting. All right. And so is there much to answer, which metric then do we use for the valuation?
Unknown Speaker 27:21
It would be cash flow, cash flow is usually what’s used for values. Okay, so
Michael Veazey 27:25
I’m glad I asked this question, because that’s quite a profound difference. So take so we’re, we’re going to value this business says 50,000 a month or if my math is right, six $600,000 a year in cash flow. And that’s the metric that we use to base the valuation on not the 25,000 a month. So profits, is that correct?
Unknown Speaker 27:43
Michael Veazey 27:44
Wow. Okay, that’s profound difference. Wow. Okay. So just going to let that sink in for a second because that we basically doubled the best as so that’s so interesting. So EBIT da than the earnings before interest, taxes, depreciation, amortization, that famous one sounds again, so like, you really know what you’re talking about, because it’s got an abbreviation that nobody understands. But actually, that’s a bit of a red herring, then when it comes to building a business, is that right?
Unknown Speaker 28:08
Well, Eva, when it comes to an owner operated business is tends to not be the metric that’s used. And the reason why is because you don’t get an owner that’s actually running a business themselves. So even dies, the more appropriate metric for a business that is a non owner operated business. And at that point, you can really focus in on what he does, because if you think about it, if you if you own a business as an investment, then really the free cash flow is most accurately calculated by the EBITDA. But if you actually own and operate the business, there’s all these benefits that you’re taking as the owner, that has to be effectively added back into the profit in order to get the cash flow. So that’s really the distinction between owner operator and non owner operator were in the owner operator example that we just had, it’s really more of an owner benefit sellers, discretionary earnings metric issues. And for a non owner operator business more of an EBIT, da.
Michael Veazey 29:15
Okay. So you know what that is that this podcast, if anyone listening who actually has any ambition, whatever, to build a serious business that that little nugget, I think is worth a lot, because I’ve never really had anyone articulate that clearly. But you guys do this every day. So it’s just got to be right. So fantastically clear. Thank you. So I’m glad to see that digging, and all those numbers worth it. People hate numbers. They’re horrible on podcast, because it nice to have things in front of you. But hey, it was worth the sweat. So let’s come back to that was one hell of an answer that we dug into, really, from those things that completely derailed my thoughts here now as well. But so we’re talking about revenue and and then what’s the difference in cash flow and profit, which I thought was a small difference? And it is profoundly important. Thank goodness, we found that. So let’s go back to the question of, what do you need to do is to sell it and we talked a bit about the different buyers. So I guess that implies that we really got quite different things that we need to do. But let’s say first of all, if we split it up, then according to the those different things that you were talking about Jason with the businesses for under $2 million value. Let’s start with that. First of all, I guess we ought to talk about how we value the businesses, I’m assuming that it’s a multiple then of the cash flow. How does that work?
Unknown Speaker 30:25
Yes, I think, you know, valuation. It’s mostly science, but it’s also a little bit of art, let me kind of first say that, you know, it’s not, there’s not a hard and fast rule for any company to say, Okay, this is exactly what the value is going to be, before you actually go out and effectively market that business, and you get these specific value. Now, that doesn’t mean we can’t approximate it, that doesn’t mean we can’t get pretty close to what you know, a very accurate number is, but that kind of want to make that point first. So you know, there are a lot of formulas, we even use formulas, you know, daily to provide an approximation, but it is part science and part art. And the reason why that they both come in is most companies that are operating, that have some history, and are producing cash, most of them not all are valued on a on a cash flow basis, there are multiple of the cash flow. And that goes for small businesses all the way up to much larger businesses. So if it’s a private buyer, individual buyer for a small company worth a million dollars, then it’s really a trades on a cash flow multiple, if it’s a $50 million business is also going to, you know, heavily violent valuation. So one of the differences that you sort of mentioned venture capital firms and angel investors before, and I don’t want to go down a total rabbit trail, but very early stage companies in let’s say, the technology world, and then in some other industries, angel investors and venture capital investors, they’re investing in those companies, while they’re still either just an idea, or they don’t have any revenue yet, or they don’t have any cash flow yet. And there are reasons why that those firms like to invest in companies at those stages. But valuation, in those really early stages, is not a multiple of cash flow. And we can do a whole probably other podcast on on that at some other time. But the difference is, when you have a company, that’s a real operating business that’s got some history and is producing real cash, then as soon as you have that valuation tends to really shift towards multiple cash flow
Michael Veazey 32:50
makes a lot of sense. And the first thing I’d like to just reflect back is that I’ve heard that after all the speculation and and worry about venture capital and angel investors trying to invest in things that have absolutely no revenue, that alone profit, like the absolute extremely, that was probably the.com, boom in the late 90s. Right. But have you got any any take on how Amazon businesses compared with things like that for in for the more serious investments?
Unknown Speaker 33:15
Well, because at their core, what Amazon businesses are, is they’re effectively just retail stores, really, that’s what they are there, they’re buying products, they’re selling product, even though there is some business to business activity. So I’m kind of carving that off for the moment, the vast majority is is consumer retail transactions, purchasing physical products. And in that regard, they’re sort of valued as much so that, you know, we will we really did not see, as this market for selling Amazon stores developed, it never went through a phase where venture capitalists and angel investors really got heavily involved. Because from from their perspective, it would be the same in a way as going down to the, you know, Main Street store and investing in a small mom and pop retail store that just opened up. And that’s really not what they do. So Amazon storefronts and Amazon and seller businesses, they never really had a phase where angel investors or venture capital investors were heavily involved.
Michael Veazey 34:25
Makes a lot of sense. Yeah. And so in other words, they just go after it’s a very, again, a useful distinction. So venture capitalists, as as the name implies, I guess they they’re into ventures into things which are high risk, mostly going to go pop with no money, but occasionally going to blow up. Whereas this is for private equity investors, they’re investing in existing businesses that have something very tangible, it they’re operating, they have not just revenue, but they have cash flow as well. So that’s a useful distinction. Actually, I suppose things like Dragon’s Den or Shark Tank, tend to blur the boundaries, because sometimes they invest in your wacky stuff. And sometimes they invest in just mom and pop Little things like an ice cream store that’s opening several different branches or something. So that’s interesting that maybe that’s blurred Mike perception too much teli was bad for your brain, isn’t it? So let’s go back to the What do we need to do is to celebrate that, so we looked quite in detail, which I think is always an excellent starting point, you’re gonna sell something you understand he’s going to buy it be buying it on the other side of the equation here. Having said that, though, let’s think about then. So if you’re a seller, of a business, or you own a business, and you want to sell it, and it’s under $2 million value, so according to what you were saying, then, Jason, you’re going to be looking at individual investors, what are the main things that you need to get done with your business to make it an attractive proposition to sell to those guys?
Unknown Speaker 35:40
Well, I’ll start on this, and Chris can add, but there are some really core things that I think it’s important for everyone to understand that the market really likes to see. So I’d say first and foremost, growth is a very, very big one. So showing growth, not only kind of, kind of recently, but you know, over a period of time, the longer the period of time where you’re consistently showing high growth, the better. And then kind of the other big one, which a lot of a lot of business owners don’t kind of fully understand is, they also want to know that when they buy the company, there’s a great deal of growth to come, there’s a great deal of future growth. Because if you think about it, it sounds simple, but sometimes it’s good to kind of, you know, break things down simply, a buyer isn’t buying your business, they don’t get any benefit from your past success, they only get benefit from what happens once they buy. So what they’re looking for, in a very simple way is a track record that shows this business is growing, it’s growing well, and then a belief that after they buy it, it will continue to grow well, and maybe even they think they can bring in some special, you know, sauce, or x extra resources or some you know, other thing that will help grow it even more, that’s probably if I had to say what’s the biggest thing that a buyer wants, they want, they want to feel like there’s a lot of growth that they can go access once they buy the business. Now, that’s kind of what I’d say, first and foremost, I think that, you know, as you start to go down the list, what they like to see in this market, as Chris alluded to, building of a brand is more attractive, certainly if that brand is protected, and trademark. And then you know, that brand has got a little bit of recognition, whether it’s just on Amazon, or even maybe a little recognition off Amazon brand is something that we’re seeing is, is a very strong theme in the market, certainly recently and has been for a bit, but it’s really starting to become one of the top one of the top bullet points for what buyers want, they want a strong brand us even if it’s just the name, Amazon brand, they want a strong, they want to see a strong brand. So growth, a strong brand is something that is very valuable. Something that again, I you don’t take for granted, but having fairly organized financials is something that is important. So they can make sense of what the performance really is. And when during the due diligence period where they’re, you know, poking and prodding, they’re able to quickly verify what they’ve been told also, you know, very important, I think that we’re seeing differentiation in category now as well. categories, like let’s say pet products, which are very, very popular. Those are, you know, buyers would like to see categories that are kind of on the upswing more than categories that maybe aren’t trending so so well, in general, I think from a from an Amazon, kind of structural standpoint, Chris? Yeah. Maybe you can jump in there. Yeah, I mean, I think, you know, when you when you are looking under the hood of a, of a seller central account, you know, going back to that growth point that Jason made, there tends to be a trend that I’ve seen with sellers, where they like to brag about fast growth and quick growth, that’s awesome. And great. But from a buyer’s perspective, you know, they want a little bit of a longer history than just say, you know, three months of incredible hockey stick growth, even more, so more than six months, I mean, unless they’ve got some type of amazing IP, amazing patented product, for the most part, going back to Jason’s point and adding some more color to that they want to see long, longer term growth. And you know, the brand is number one, I know I mentioned reseller earlier and just to just to harp on that for just a moment, if you’ve got some exclusive arrangements with with brands, or exclusive arrangements with certain skews, and you’re a reseller, that’s obviously more more attractive. But if you’re just a pure reseller, the issue there is is the risk, you know, you risk all of your revenue going away, just because for a myriad of reasons, you might be competing with 10, other resellers or a brand decides that they want to just bring everything in house, you know, you just you just raise your risk. And so at that point, you know, trying to sell your business to a prospective buyer, they’re they’re going to look at that as more of a suppressed much more of a suppressed model. So
Michael Veazey 40:28
great. Wow, that’s quite a lot to take on board. So basically, this is all for the sort of $2 million valuation, although I guess, and therefore, for individual buyers finds Donald our guests that we can certainly dig, I’d imagine these will apply at all levels. So growth is important, really glad that Jason, you picked up on the potential future growth, because in a way, again, we get a bit obsessed with what’s already happening. And as you just said, um, it’s kind of obvious once you think about it, but we mostly don’t as business owners, right? It’s not about your track record. That’s only a value insofar as it gives them belief, or the actual a buyer stops exactly the point. It starts at the point where it stops for us, we hand over the keys to the business as it were and then at that point, that future grows, what they’re in business for. So that’s really important. And I think it’s a very important mindset to guide us in terms of creating a sellable business. brand, obviously important. The fact is getting stronger is an important selling point makes a lot of sense to me, because that happens at this product base level as well. You get a you know, a better price premium is more defensible, organized financials. We’re all pretty guilty unless certainly I’ve got some Indian guy right now, digging through my amazing FBA financials, I’ve had my British accounts and trying to deal with prime music hitting it and various other things I’ve run as an Amazon businesses, I hear you on that one. And then differentiation in categories, again, pretty obvious, but it makes sense to go into something that’s going to be good business anyway. One interesting thing, also to reflect on this before we come back to you is the fact that if something’s going to be hard to sell, because it’s not a very defensible business, means you probably should be transitioning out of that model as quickly as possible, right. And I think, as you said, right at the beginning, Jason is not necessarily about selling your business overnight. But whether or not you sell it, the discipline of preparing something to sell, is a very important discipline. And that that’s like the most major hit in the world is guys, if you’re reselling stuff, please start transitioning over as soon as you can, because it’s hyper risky. So let’s come back to a few of the questions that come out of that. For me, one of them is okay, we keep talking about the length of stuff we got for the business, let’s have data like the time it’s been alive, indeed, how long does the business have to be to sell at this kind of level? Does that is this a minimum age?
Unknown Speaker 42:36
Well, I would say the minimum age is going to be six months, but there will be a, let’s say you have a business that has six months of really strong performance, and it’s only six months old. And then you have a business that is three years old, and it has that same same level of performance in the last six months, the six month old business does the one that’s three years old is likely to sell for a much higher price. When we talk about minimums it’s really in the context of valuation, a six month old Amazon business, depending on certain factors could absolutely sell, it’s just likely to sell for a lower price for really the main reason being that, you know, just the track record isn’t long enough. And therefore the feeling is that the risk profile is worse for that business. Because there’s not as much data to to really look at and get comfortable with.
Michael Veazey 43:36
And when I sex that nice. My next question was going to be does that affect the multiple but you clearly answer that in is kind of obvious that it would right? And so that the other extreme, then is it possible to wait too long if you’re wanting to sell a business, and he’d been working on it for for a number of years, is there a kind of sweet spot, because we talked about the implication of the data says that you’re not going to pass this on to your kids, in most cases, the implication is, at some point, the business is going to stop falling off and become less valuable or in fact, is not survive. As we all know, this statistics, nine out of 10 fail in first three years, 910 fail in the next you know, 15 blah, blah, blah. So where is that kind of sweet spot? And it’s kind of a How long’s a piece of student question, but I’m going to ask it anyway, because it seems important.
Unknown Speaker 44:16
Well, I don’t know that there’s a specific time period that you can say is too long. But that’s the time it’s kind of in relation to the performance of the business. So what I would say is, if you if you have maximize the business, everything you can do your abilities, your resources, and then your business starts to plateau, then the answer is you’ve waited too long. And at that point, and this is something again, we’ve talked about it a little bit earlier, but they multiple the reason why oftentimes, the reason why a multiple for business will be higher is because of the stronger growth opportunity. So if you have business a and business be business that they have the exact same levels of revenue and profit. But the market believes that business a has much stronger growth prospects than business be than business a will sell for a much higher price than business be. And so while maybe you have increased your cash flow by holding on to it and growing it as far as you possibly could, but you still actually get less for the business. Because the there The feeling is there’s not a lot of growth opportunity that has a big effect. So even though now you have a higher cash flow, you actually sell your business for a lower amount of money, because the growth story isn’t very good. Okay, so in other words,
Michael Veazey 45:45
the implication of it started to plateau, you waited too long. So I guess hindsight is 2020 vision. But I suppose one of the implications of that is if you are now you know, to certain point and you’re doing say $500,000 a month revenue at a certain profit level, with your own enhanced resources and your own cash flow. If you can look ahead, and you’re realistic enough to go, Well, you know, what, if we want to scale to a million, we ain’t gonna be able to do that within the house funds and expertise, I guess, then you starting to look at either selling it before it plateaus, or getting out and raising capital, which brings me really to the different topic of raising capital. And there’s a few related things as well. And I think we’re going to split that up into different episode because we going for quite a while now. So I’d love people to absorb this properly, and then be able to absorb that property as well. So we’ll come and revisit that fixed. So thank you very much for the input on that side. And we’ll revisit the raising capital thing in the next episode.
Unknown Speaker 46:36
Michael Veazey 46:41
Thanks for listening to the 10 k collected podcast. I really hope you found this show helpful. I mentioned the London based masterminds we’ve been running since September 2017. Members of the 10 k collective mastermind making about 480,000 pounds a year, whatever 600 thousands of dollars. To find out more about that mine gets you amazing fba.com forward slash 10 k si k for killer. See for Charlie, million pound mastermind members make a minimum 4.2 million pounds a year that’s about 1.5 million US dollars for years. To find out more about that mastermind. Go to amazing sba.com forward slash MP em from other people
Transcribed by https://otter.ai
Watch Selling Your Amazon Business With Chris And Jason Of Providium Part 1
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Watch Selling Your Amazon Business With Chris And Jason Of Providium Part 2
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