Ep. 104 - Questions to Ask Yourself Before Selling Your Business with Chris Shipferling

Ep. 104 - Questions to Ask Yourself Before Selling Your Business with Chris Shipferling

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Ecommerce is continuing to mature; And as it continues to mature like anything in capital markets, the need for exports goes higher. It goes higher and higher and higher. Welcome to Honest Ecommerce, where we're dedicated to cutting through the BS and finding actionable advice for online store owners. I'm your host, Chase Clymer. And I believe running an online business does not have to be complicated or a guessing game. If you're struggling with scaling your sales, Electric Eye is here to help. To apply to work with us visit electriceye.io/connect to learn more. Now let's get on with the show.

Alright, everybody, welcome back to another episode of Honest Ecommerce, this episode is gonna be a good one. For people that have experienced the ebb and flow of Ecommerce during this last year. It's been a pretty wild year. And you know what? I bet some people out there like, "I think it's time. I want to sell my business." So today on the show, I'm welcoming Chris Shipferling. Chris is an expert when it comes to selling your business. Chris, welcome to the show.

Thank you so much, Chase. I appreciate it, man. Thank you for having me on. Now to specify, are you mostly talking about like Ecommerce businesses with your expertise or are you all over the place? Yeah, great question. So I'll give you a little bit of context in terms of who we are and our backgrounds, and that will probably give you a much better answer to that question.

So my background, I came from consumer products. I worked for close to about 14 years and a small business ranging from 22 million all the way up to half a billion dollar companies working in various sales and marketing executive positions, but specifically in CPG. Working with big box retailers working with Amazon, when it was way back in the day --back in 2003-2004 vendor central days-- and have worked, of course, with various --I call it "in-store retailers"-- and then also E-tailers as well. My partner's background, they all came from large institutional investment banks, working for Citibank, for Deutsche Bank, for Wells Fargo, Bank of America... For hedge funds,

various credit hedge funds, private equity, etc... So I say all that to say, yes. We're digitally focused at Global Wired, but because of our backgrounds, we're fairly agnostic. And so really, what our firm has turned into is a marrying of both anyone that's got any level of maybe some traditional and also digital, we can handle it all within the consumer product goods space. So I hope, I hope that answered your question with a little bit of context. Yeah, I know, it answers the questions a lot. And I guess CPG is an easy term for me to really be like, "Oh yeah. They've got some Ecommerce element to it." Especially now. And if they don't, they're leaving money on the table.

(laughs) Lots of money. Yeah. That's right. Yeah. Consumer packaged goods. So that's anything from like some toothpaste all the way up to

like headphones in like some cool box. It runs the gamut. It does. That's exactly right. Anything that's effectively consumer facing is gonna be consumer packaged goods. That's right. A really terrible thing to think about would honestly be like, "Could you buy it at Walmart? It's probably considered a consumer packaged good." Or "Could a thing exist and be bought at Walmart?" I guess I don't know. That's right. Walmart. And we'll use something... Well soften the blow a little bit there anything

that can be purchased at "Tarjay"? Or Target? Yeah. This you nailed it, though. That's exactly correct. Awesome.

And now Amazon, right. That's the new vernacular. (laughs) Anything you can purchase at Amazon, effectively. Outside, of course, watching movies, and... Yeah. ...doing any cloud-based services. Amazon does it all. So... They do it all.

So alright, let's get into the nitty gritty of the podcast here today. So let's say... Sure. My name is Joe and I've been running my business now for a couple years. We've got some really good track records selling these widgets. [We've got a] small SKU count product line and I'm starting to play around with the idea of "This has gotten too big for me." Or "I just don't have time for this anymore. There's

a new passion in my life. I'm thinking about selling it." That's just like... Coming to that realization is one thing, but then what's the next step? Are people... Yeah. ...knocking down doors trying to buy businesses? How does this work? Great question. I'll try and keep it 30,000 feet, and then feel free to bring me down into the minutia, or anything lower.

When you're at that place, and you're looking at potentially selling your business, the first thing you need to do is get in touch with a really good M&A advisor or some type of advisory firm. Alright. what does that stand for? Yeah. So mergers and acquisitions is what it stands for. Now, there's not a whole lot of merging that occurs in this part of the capital markets. It's more acquisition. Just outright selling your company. And that takes on a lot of different structures, which we can get into a lot later. So Joe,

you have a great company. Congratulations on your success. It has gotten to a point where you just know you can't take that next click and you can't take it to the next level. So you get in touch with someone like us. I'm going to ask you a series of questions about your business, because you now express that you're ready to potentially go to what we market. First and foremost, I'm going to ask you about the health of your business. Those are going to be some specific metrics. Now, it's not all financial metrics, it's going to be both

financial and digital. I'm assuming you, Joe, have a digital business. Is that correct? So you would have an all-digital company, only Ecommerce. Is that correct? Sure. Let's go with that. That's most brands that exist on Shopify would still be considered digital, even though you're selling a product.

That's right. So you're digitally focused is what we really say. Digitally-minded. And you're looking to sell direct-to-consumer or something of... Some type of derivative. So I'm going to ask you, though about the health of your business. Let's start with financials. Do you have organized financials? It's a very basic question. But

my goodness, a lot of people in their... The spectrum of answers that we receive is all over the place. So do you have healthy financials? Now what does that mean? Do you have P&L? Do you have profit and loss statements by month for the past at least 2 years? Are you on an accrual basis or are you on a cash basis for your accounting? Is it done through generally accepted accounting principles? So the gap method. Do you have a good CPA? We're gonna go through this whole yellow brick road and I'm going to ask you a lot of questions around your financials. Do you have a balance sheet? Is it up to date? What are the debt

and liabilities and assets currently running through the business? That's really what the balance sheet does. So we're going to walk through that. And then I'm going to rotate over towards, now, the actual mechanics of the company. Walk me through your vertical? How did you get into this vertical? Where's your revenue concentration? Are you mostly Shopify? Are you mostly Amazon? Because that's going to inform me how much data do you actually have on your consumer. If it's on Amazon, and mostly through Amazon? Well, it's gonna dilute the amount of data you have. You got to go through other methods.

Sometimes they're gray, sometimes they're black-hat methods. That doesn't necessarily make a potential acquirer feel good. But if you're running most of your revenue concentration through Shopify, well then I know you've got a lot of data on that particular consumer. And as you know, Chase, that data begets more data. Mm-hmm.

...which means more sales, right? Yep. This is what you do for a living (laughs). So I'm going to ask now. I'm going to get into some.... I'm going to get into the minutia. I'm going to say, "Okay, walk me through understanding your vertical.

You are mostly repeat purchase. Okay, great. Let's talk about your CAC." I'm okay now if I hear that your CAC is almost that you're not profitable to get that first-first sale? What does your LTV look like? How long do you typically keep it? What's the consumer lifecycle for the particular widget that you're selling? How many of the variants of that widget do you have? So we're gonna really talk through a lot of financial health and a lot of... just digital marketing health right? Yeah. It's just pure sales and marketing health...

Yeah. ...in your business. If anyone's been listening to this podcast for over a month... I don't know, it comes up in almost every podcast. It's like, you need to know... Every number you just rifled off.... You need to know your numbers.

Ecommerce is numbers at the end of the day. And you can't just go by your gut. You need to understand how much this stuff costs. A, not only for a potential sale down the line. That's --[for] some people--- not their goal. But for the more important thing is you actually have to know how much money you're making.

Or you might just be running at a loss over a very long time. You nailed it, too. And look, we talk to folks all the time and we try and be very educational. Sometimes it's actually translated as just being benevolent or altruistic, because in some cases, it really is. There are folks we speak to that don't want to sell their company, but we talk to them anyways. Because they just want to understand the process, kind of like how we're having

this conversation. And look, it's always healthy to set your business up for sale, no matter where you are in the process, because of exactly what you just said, Chase, the fact that someone is running this operation. And they're at a point now where they're like, hey, maybe this is actually getting a little overwhelming. "It's getting too big for me." If you don't know your numbers, just from both on the consumer product from sales and marketing all the way to financial numbers, I don't know where you're actually steering the ship. I don't even know how you're surviving up to this point. Because it's all so important.

That startup phase is a lot of flying by the seat of your pants, figuring out what works really fast, and you really don't have time to get into the weeds there. But that zero to 1 million is like the startup phase that I've been going with. So... Yeah. ...from one to 10 is probably "scaling". And in that phase, that's when the numbers matter. That's when you... That's when you're either gonna go bankrupt or you're gonna win. Yeah, you nailed it. That's exactly right. Nobody likes insurance, but everyone should have it. Mistakes do happen. Our partner Rewind

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Best of all, respond to any of their welcome emails and mention Honest Ecommerce (this podcast) to get your first month absolutely free.. That's the fill or kill phase. It's go or no go. I would agree with that. But you kno, too and I think you might agree with me when I say this out loud. To some degree, even in the startup phase, the amount of data: Data processing, data applications, apps through Shopify, folks like yourself that are out there... Experts when it comes to digital marketing and all things Shopify, all things Amazon, you start to run up a little bit now I say in 2021... Or 2020 going into 2021.

Even in the startup phase, if you don't know your numbers, it's like "Hmm. I don't know if any excuse now is going to be relevant." Right? Yeah... There's just so much information out there. I think it's... What's the name of this one

Shopify app, Live Timely (Lifetimely), or something like that? I think it is. It's some app. I know some of our clients have used it before. And of course, coming up with a little bit of a brain fog at the moment. But it shows you all of the LTV and repeat purchase data. And it's a fantastic app, it shows your AOV,

it shows you all of the metrics you need just pulling in all your Shopify data. It just proves my point, right? Mm-hmm. Even in the startup, to that 1 to 10 million days, there's just so much out there, in terms of data reading, and dashboarding. It's almost like, "Hey man, you can know your numbers

pretty early on." And it really is. It does inform your business plan. And that's the other thing that we also talk a lot to Joe, a guy like Joe. "What's your 3 year business plan?" If they just scratched their head, not a problem. We help work through that. We help discuss that. We help weed through all of their information. And that's part of our process, which I can

get into a little bit later. But most importantly, you're a consumer products company. I worked... In the middle market company that I worked at, we had... I can't even begin to tell you how many product managers we had. And as well as just... We actually pulled in a lot of folks from both Kimberly Clark and Procter & Gamble. We were always talking in terms of 3 years down the road. NPD or new product development

was constantly the conversation. And it was also... We're talking about channel diversification and real channel strategy. Which product is going to go into Kroger, but then which product is going to go into Nordstrom? Basically, we've run the gamut with a lot of different product lines. So that's also an important piece. You're definitely getting to Joe's level and it may be overwhelming.

But it's like, "Hey, man, what exactly do you currently have now that would pass a sniff test down the road to a potential acquire that could be built to take this company then to the next click?" That's another important piece. It's almost like if you're Joe and you're coming to us, and you're about that place, Chase, it's almost like "Let's now talk through every single function of your business. And if there's some holes, let's talk through what that looks like to fill those holes.

And if some of those holes in terms of functions..." And I'm talking about basic functions of any business, sales, operations, marketing, finance, etc, logistics, manufacturing, etc, etc. "[If] there any... If some of those feel anemic, let's go ahead and try and fill those in as well." And so that's that's what I would recommend

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That's right. So you're not going to be happy with the outcome you can get out from under it... That's right. ...but you're not going to have, you're not gonna have a profitable thing going on there. You're not gonna like that time. But on the other side of it. I do want to go back to something you said earlier.

Those startup phases, especially now moving into 2021, a lot of people were like relying on "We're just gonna throw money at Facebook. We're gonna scale this bad boy, because it was affordable." And good luck. Facebook is not affordable anymore. It is absolutely expensive. It is actually... We

are pulling budget out of Facebook and putting it in other places for all of our clients. Yeah. Facebook is not cheap anymore. And that cannot be... if you go to any investor that knows anything about Ecommerce, and your business plan right now is like, "I need to get some more money and I'm spending all that money on Facebook" They're gonna say "No. That's not a good plan." Yeah. No, you're right. And I think what it does is it continues to validate... Just by

you saying what you said it continues to validate the need and the... Let me back it up. Ecommerce is continuing to mature. And as it continues to mature --like anything in capital markets--The need for experts goes higher. It goes higher and higher and higher. So folks like yourself become so much more valuable, in our opinion, because you are on the forefront of being able to determine which way the shift needs to go. And that ship is digital marketing, right?

Yeah. And you're telling me right now Facebook, and I agree with you, we are seeing those same types of numbers where the cost to acquire a customer through Facebook is starting to go higher and higher. The cost to acquire a customer through Instagram, of course, which is owned by Facebook, it's going higher and higher and higher. So what other methods are out there? Well, I do know

that Tiktok, I think, just opened up their advertising, what, about a year ago? Yeah. The beta program started right around when COVID hit, especially with Ecommerce. They had a specific Ecommerce element to it for like almost dynamic retargeting, which was wild. Right, exactly. Well, what does it look like to maybe put... That's a much younger demographic. Although, just like any other social media platform, the old people are typically the last to get on. But they will eventually get on. But you know, what does that actually look like? I know that there... So there are other methods. There's other places to go and advertise.

Folks like yourself, when it comes to digital marketing, you guys are the Jungle Scouts or the Sherpas, helping your client really find the places that they need to go to accomplish what a digital marketing firm should do for a CPG company: Sell more widgets. And also (laughs)at a place where it's profitable. Yeah. So, I agree with you.

Yeah, it's one of those things where... Agencies exist for brands that want it done the right way the first time and they understand like that they have the capacity to do it. There are a lot of good freelancers out there. And I sometimes see them having issues with capacity. And then that makes their work product, unfortunately, not as good. That's right.

On the flip side, man, there's terrible agencies out there too. I don't know. There are. Just... (laughs) Yeah there are. No, there are and you have to... You have to weed through them, for sure. And you got to be much better in terms of your interviewing process as a brand. Asking

for references or... Genuinely, referrals tend to always be that. I'm sure you'd agree with me, they always are the best type of client or potential agency, because someone, a friend, said, "Hey, I did this and look at all the success they had with me, etc." So yeah. Back to Joe. So that's what we would do with Joe. We would really vet. And our firm in particular, we're

very... What's the word? I don't want to use the term picky but we have a criteria. And so we're not taking on every single client because we're not a business broker. We are a lower middle market investment bank.

We're true M&A advisors, and we're a partner led firm. I'm not a guy on a desk with a name slapped to me as a license, trying to get as many deals up on a listing site as I possibly can. We're very selective on who we take on. So to your point about Joe, we're gonna spend a lot of time with him. We're gonna vet. We're gonna dig in. We're gonna understand his business. And we're going to play business coach... Mm-hmm. ...with him in terms of "Are you really ready for an exit?" Because we know the acquirers very well. We came from that world. We know the world of investing.

And we know that in the world of investment banking. And so we know what acquirers are looking for, what makes businesses more attractive and drive better value than just taking the business and throwing it up on a listing site. Yeah. Since 2004, Avalara's vision has been to harness the power of cloud technology to help simplify sales tax for businesses of all sizes. Avalara solutions are designed to affordably scale with businesses as they grow over time. Tax Compliance is not a revenue generating activity. So Avalara's technology is designed

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So I got a question. So you're going through this process with Joe and Joe is just overwhelmed with the business. It's gotten bigger than he ever thought it would. And there's probably other circumstances like he had a kid or something. Sure.

He just doesn't have the time to invest in this business anymore so he can't answer that 3 year question. He's like, "I can't even think till next week." He's like, "But I know we have a good product. We have good customers. Sales are there." Do you help them come up with that 3 year plan and those projections? Because I feel like that is like where people... All of it. Yeah. All of it. Yep. Absolutely. And so we utilize both our strong financial engineering background,

because, that's basically all we did. My one partner, Chris, he actually worked on the buy side for a couple of different firms. And just to... I'm maybe using language that before you even ask the question, so there's sell-side and there's buy-side. Buy-side are private equity firms, their hedge funds. They're out there looking for deals, right.

So they're the ones vetting the deals that come across their desk. And then of course, sell-side is what we focus on right now as Global Wired Advisors. And that's helping someone go and sell their company. And so having that experience both on the sell and buy side, we understand what it looks like to model out, you know, projections for widget A through Z. The fancy Latin term for that is called a Pro forma, which you may have heard of before. And so yes, we're gonna dig in with Joe. I, myself, run a business, develop marketing.

And then when it comes to our sim creation process, or --Offering Memorandum is what we call it-- or investment book. So the book, the marketing book that we're creating to go and market the company without potential acquirers and potential investment partners, I actually run that part of the business, which is data analytics, as well as really building out that opportunity for the next 3 years. So I, myself and my team, we would be working very closely, as well as with one of my partners, who would be the deal runner, we're going to work on a 3 year plan. Coming from the

background that I came from, I sold to lots of different types of entities or different sales channels. I've done international distribution. I've done Amazon. I've done selling direct-to-consumer...And I've also sold to specialty, and then also selling to even mid-tier, call it, retailers, and then also some of the top tier. I've sold

to Walmart, sold to Target, sold to Bed, Bath and Beyond, etc. So it really gives us a good view and perspective on being able to take Joe's business and say, instead of just writing things like "Yeah, I could go to Walmart. I could go to Walmart, Canada." We're going to dig in with Joe, we're actually going to create a nice 3 year plan that probably won't go all of it into our investment books, per se. But we're going to have that ready

for the potential acquirer to really listen or see for themselves. This is where the business could go. And this is what it's going to look like. And that is just not something that... It's not something that someone can just come along and one day say, "Yeah, I really think... Oh I can do that, too." It takes a lot of experience. And in particular, with the four of us, you're talking about over 20 years of true investment banking plus real operating experience on a larger scale. So yes, we're going to help

Joe do all of that. Gotcha. We're gonna do it for him. So you and Joe have been doing this... I'm assuming this process takes months? No, it doesn't. So, you know, Joe wants to sell his business. For us to put together an offering memorandum and get him to market and all the information we need to put in front of an acquirer to optimize the value of the company and optimize his particular outcome.

We usually take about 3 and a half weeks, sometimes 4 weeks to get all of this, the whole entire investment book ready to go and also us, our firm, the deal runner, and myself to really understand the company so we can go out there and market it effectively. So no, it won't take months. I think that goes back to... You're making sure that it's the right fit for the process.

It's process-driven... That's right. ...on your side, as well as, I'm assuming, you're really looking for process-driven businesses on the other side as well. Because if they are... Yup.

If they've got all that stuff in place, it's gonna be a lot easier to sell. That's exactly right. If they got this stuff in place, and then of course, during our vetting process before they become a client, we're gonna do that Skype that's [like] a business coaching. Now, for us, that's...

We're not charging for any of the vetting. We're not charging for any of the business coaching that we're giving them. And really what I mean by that, it goes back to what I said earlier. We're going to walk

Joe through all of his functions. And if we know there's something that's missing, we're going to show him where it's missing, and then also how to fill that gap in a short term way, but then could be filled from a long term perspective by a potential acquire. Uh huh. Yeah. So for instance... I'll be specific, because I promised you before I go on this podcast,

I would be specific. Let's just say his financials are just in disarray, It's all over the place. Well, we're going to provide resources for him, both internally and also externally, that's going to help him get his books cleaned up. Now, in some cases, what that's called in say, the middle market, investment banking world, and the institutional investment banking world, it's what they call a QofE or quality of earnings. And so we're going to make sure that his financials and earnings are vetted and stamped by a firm that when we go out there to seek a good potential investment partner or acquirer for his business, they look at those stamped financials by some firm, or even us, because we've got a good reputation. They're gonna say, "Okay, these are good financials. They're clean." If he... If we've noticed

that, for instance... Like you said, let's just say we're like, "Hey, man, your CAC is just not... It's not good. You're indexing way higher than your peers. So I'm going to introduce you to someone who I know could become a longer term partner, but may be able to start cleaning you up sooner than later, in the form of a digital marketing firm." The list could go on.

We can go through each function, which I won't now, but we could go... We'll go through each function, we'll find out where he's... Where Joe is missing. Those particular puzzle pieces. Gotcha.

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If you want to give Gorgias a try, visit gorgias.grsm.io/honest to get your second month free. And now let's say you ran this whole thing with Joe. And let's say for the easiest sort of math out here, coach me through these numbers and the math part of it. But let's just say it's a $5 million a year business. And what that means is their top line is $5 million. That doesn't mean the profit is $5 million for everyone listening. Let's just say that's the number.

And you cleaned up the numbers of his books, because he was doing Excel spreadsheets back and forth with his vendors overseas, and it wasn't digital at all. All that's working. This is all verified now. Yep. What should you be expecting from the market for like a sales price? Great question. So you know, we always talk in terms of structure and range, right? When we speak to our potential clients. So Joe, at that point should be running about a 20%

EBITDA level. That's healthy, right? We like to find and take on clients that are ranging for about 15% to 25%. EBITDA, are you familiar with that term? Earnings before net taxes or something? Basically, yes. For the long and short, it's just earnings before interest, taxes, depreciation, amortization. That's all it is. It's the financial metric that pretty much all major investment folks use to measure a business and also then apply a multiple. Now, it's either EBITDA or cash flow, which I can get into in a little bit. But it's pretty

much about the same. Sometimes you have what's called adjusted EBITDA, because what you're doing is you're modeling the business under a new acquirer, which means that you need to potentially add a CEO, you might need to add a vice president of sales or vice president of marketing. So you have to model that in and adjust the EBITDA because if a private equity firm is purchasing this, Joe's gone, potentially. Mm-hmm. And so they've got to bring an operator, and they might have to bring two operators. So there's some nuances there.

I do have a question. Yeah, go ahead. How often do you see... This might be the secret sauce of the buyer, though. But like, do those estimates change in the sense that like, "Okay. Well, this buyer, it's a roll up strategy. They have all these warehouses and connections and product manufacturers, and they can do bulk. And they can do the economy of scale."

Does that ever factor in? Yes. And does the seller ever see that information? Yes. So that's what we would typically call a strategic purchase. And that's somebody who's got all of the tools basically, and really what they want is they want your brand name, they want your widgets, and they want your market share of whatever channel that you're selling mostly through. We just closed the deal last week where it was exactly that. And on a business that normally, if you ran it through a typical business broker process, listing it, and gone through a non-strategic, --maybe just a personal buyer-- it would have probably yielded maybe like a 3 multiple, maybe.

But because we found the right fit for this for this particular client, then it really was the right fit. They sold a product that was a perfect fit for a $90 million company and this company was only $3 million. And so you know, they were actually less than where our criteria is today. I'll get into that in a moment. But we really... We found them the perfect acquire, and the ultimate multiple on that was 5.5. Because they are looking...They're just modeling things differently.

And you nailed it Chase, they're just looking at the world a lot differently. Now, when you take it over to say private equity, and someone who needs to put a portfolio manager in place, they need to put an operating team in place, they're going to model it differently. And also, they're not going to pay as much .Because the strategic can take the widget

day one. And they can... It's almost like a Midas touch, right? It turns to gold immediately. Because the ramp to higher revenue, higher profitability, that ramp is --in that curve-- is much, much faster than say a private equity firm or even a personal capital buyer buying the business. So let's get back to Joe's company, right? So we're going to establish, and let's just say he has a million dollars. Now, at this point, I'm going to have a long conversation with Joe and say, "Look, here's what it looks like to sell your business today." And I'm going to walk them through what we really consider: The different tiers of folks who would be interested in buying his company. He's going to struggle to find a strategic because lots of strategics that a million dollars in cash flow or a million dollars in EBITDA, they're just not that interested.

They just it's really difficult for them to get excited about a million dollars in cash flow or EBITDA. Now what he might get is maybe what we would consider more of that tier 2, mid-tier private equity or smaller private equity firms, maybe some family offices... It also depends at this point. Where's most of his revenue concentration? And it's mostly through Amazon, there is risk downside, unfortunately, still out there.

There are investors who go, "Hmm. Man, that Amazon risk doesn't make you feel good." Now, they're reading all of the boogeyman articles. They're reading the CNBC articles that talk about suspensions, and people getting shut down and all the counterfeit, Bezos acting crazy... The reality is the valuation for Amazon continues to stay strong and goes up. The stock price continues to go up.Traffic and all the metrics for Amazon continue to get healthier, healthier. And so we're starting...At least our firm, we're starting to talk guys out of that whole

risk conversation. But the multiple continues to suppress because you don't own the data. back to what I said earlier. Yeah. So if most of Joe's revenue concentration is through Shopify, he owns data to make some more attractive.

So as far as valuation range goes, we could probably find him a good fit. He's got not a lot of history in the business, probably maybe at this point 2 or 3 years, maybe 3 or 4 years at the most. We probably would find him evaluation range, a total multiple, maybe around call it 4 and a half, 5. And that includes working capital, which translated some level of inventory, right? Mm-hmm. It would also include, potentially, an earnout structure, which means I'm going to give you 80% cash at close. So you literally get money transferred on that day to your bank account and whatever wiring instructions, you've given the bank or the escrow agent. And then maybe

20% of it is in rolled equity. It might be in the form of, “Hey, we want you to stay on private equity loves this, we want you to stay on. So we're willing to give you 20% or 10% of the new company, and roll equity with us and we want you to stay in place. We're going to give you an employee agreement, and it's going to be very lucrative, etc.” Or Joe might say, "Look, I wasn't kidding, I'm burned out. So I'm done after 6 months.

I'll give you 6 months. But that's it." "Okay, no problem, we'll give you 6 months, but we'll still give you the 20% because we want to hedge our risk." They want to hedge their risk in the form of equity versus just any other form of structure. Finally, there might be actual no rolled that equity and some type of earnout. Earnouts come in all types of forms. This is where you have to be very careful because structure and deal structure, it's our expertise. It's our forte. There are a lot of folks selling businesses like ours,

it's not their forte. And they get lost very, very quickly. Because there's a lot of ways to structure earnouts and then at the end of the day, it needs to benefit the seller, period. And that's where we really come in and we play just a tremendous quarterback for the seller, making sure that earnout looks really good. And...

So for Joe at 1 million, that's what it's gonna look like. And I'm assuming... Oh. Go ahead, Chase. I'm sorry.

I'm assuming when we're discussing earnout here and earnout with no rolled equity. You know, it's this concept of the golden handcuffs. And I guess you could explain why this wouldn't be very appealing to someone that wants to sell their company. Traditionally, it's been unappealing. But some of the structures that we've created for our clients have taken the business from a 5 multiple all in, say, if it were just a normalized earn-out or whatever. And we've been able to negotiate that at the end of their earnout, the end of their term, close to a 7 multiple in the business and upwards, even 8 multiple in the business.

So there's ways to structure it where it's very advantageous. Actually, for our firm, we got just on Friday, another earnout check where one of our clients got full earnout for year 1. Now they've got one more year to go. It's a nice annuity, honestly. So if you can turn it into something that's very advantageous for the seller. Again, this is where... I feel like I'm stumping for politics back in the late 1700s, but representation matters. It just does.

And so having the right team and the right deal team, to help you structure --the correct deal structure for you-- this is where it really starts to matter. It matters in finding the right acquire, because that's a huge process. And if you're passive with that process, the outcome will be suboptimal. So you want someone who's highly invested like our firm. And then also when it comes to the actual negotiating of the structure. So earnouts, to your point, somewhat have a little bit of a stigma on them. If you have

the right deal team, it can become very, very advantageous and very far away from being a stickler. Yeah. If you can play the game and make it worthwhile then it's just another piece of negotiation. Yeah. Another for instance, you know, we have a client right now going under LLI, and he's

going to get a multiple of his current Trailing 12 cash flow. And then we negotiated that in because Q4... I'm speaking your language here, man. Q4, for most CPG, it's the quarter.? It's the Super Bowl of quarters. Some folks are, are more flat throughout the year, they're not as seasonal.

But based on our client base, we found that, I'd say, over 50%, for sure, maybe touching 60%-70%. Q4 is like, again, it's the Super Bowl of quarters, right? Yeah. And so they're going to buy the business on November 1, but then in January, first, they're gonna look at the two months of that cash flow, and apply an even bigger multiple to those 2 months as a quote unquote, "First Level Earnout." So if you see how... Your brains, your gears are probably moving right now. If you're thinking about Joe's business, and you know that he's had a good trailing 12 at a million, and we are projecting a really good, future growth for him, but that he's a seasonal product. And he's going to get now 2 months times and multiple of that cash flow, and another pop of earnout, on top of another earnout that we're negotiating for him for the next 2 or 3 years. It's really advantageous man starts to make the deal really attractive.

And also in this particular deal that I just mentioned, Joe doesn't have to stay on. He literally gives up on business day 1. It's just all contractual turn out from there on out. So... That's awesome. Yeah. There are a million ways to structure your business. There's a million ways to structure these deals.

And it's definitely worthwhile to not go into it blind. And do you have time or money, you can learn some of these things, or you can just invest in the right partner and get it done faster. And obviously, the faster you can get things done, quicker you can make moves, the faster you can pivot, and essentially, the better off your business should be in reality. Obviously, they either are scam artists out there and people that you shouldn't work with. That's right.

You should be pretty wary about them. But I mean, using trusted partners for some of these things. I think going from zero to one like I talked about, probably in the last episode was that startup phase, you can realistically get away with all that yourself and do it yourself.

And just like getting some good coaching here and there. But going from one to 10 or whatever, that next step should definitely get dedicated partners for specific parts of the business to help make a well-oiled machine. You nailed it. So yeah, you absolutely nailed it. And I'll just say one more thing. And

I know that we might be bumping up against time. The other thing we're going to talk Joe through is "I know you're burnout, but we just walked through a lot of your business and a lot of the functions of your business." Sometimes it renews energy with the business owner just to actually have a conversation with someone who can speak their language (laughs) and really speak their language from a strategic perspective. And even in some cases, which we've noticed, actually bring real strategy into the company where that gas, that strategy gas, has been just vacant for the past 2 years because Joe is just buried. Tough for him to get out of the weeds and really think strategically. So sometimes we'll actually see the fog lift. And that's where we really start to pivot the conversation

and say, "Look, Joe, you don't have to go to market right now. If you've got renewed energy, we really encourage you to try and get that even up". And the closer he can get to $3 million, there is an absolute cut line out there in the investment world. When you hit $3 million, you start to wake up a lot of different folks. And then we can really take your business to a lot more potential acquirers and a lot more strategic acquirers. And ultimately get Joe a lot more cash for his business. You're talking at 1$ million. I gave you what about a range of... Let's just call it 4 and a half, maybe 5. Or four

to five. So it's easy math, $4 to $5 million, $3 million in EBITDA. We're looking at more. He's all Shopify? maybe like a 6, 6 and a half, maybe 7, you're talking $18 to $21 million. That's

a huge difference. Huge. And so that's where we really like to take our time with clients and just make sure they fully understand what the landscape looks like out there. Yeah, that's awesome. Hey, so if someone's listening to this podcast, and they're like, "A lot of these things, register with me. And you know what, I want to reach out and

I want to talk to you. What do I do?" Great question. So they are going to contact... They go to our website, globalwiredadvisors.com. They're going to... We have a valuation tool on our website to where they can fill out the valuation tool and see.... We put real market data in that valuation tool. We asked a lot of questions, too so it's not just some quick and easy type of valuation. However, it's still, gosh, 50,000 feet. [The] devil is always in the details.

So they fill that out, it's a good place to start. And then of course, I'll follow up right away and see if they want to have a conversation about their business. Secondly, they can go to our consultation form. That goes directly to me, and I ask some questions about their company so I can really understand where they stand. We do have a criteria in our firm. You nailed it in our example.

We're really looking to take on businesses that are, I'd say, upper 6 figures in cash flow up to that 7 to low, --very low-- 8 figures in cash flow. That's really where we were our firm plays and that's where our process works the best. So that's how they get in touch with us, man. And you know, any listener that's listening today, just know that if you're not there yet, that's not a problem. Still reach out to us. We're happy to have the conversations today, even if you're 2 years out. Awesome. Thank you so much for coming on the podcast today.

Awesome. Thank you, Chase. I cannot thank our guests enough for coming on the show and sharing their journey and knowledge with us today. We've got a lot to think about and potentially add to our businesses. Links and more information will be available in the show notes as well. If anything in this podcast resonated with you and your business, feel free to reach out and learn more at electriceye.io/connect. Also, make sure you subscribe and leave an

amazing review. Thank you!

2021-01-23 10:58

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