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Selling to an FBA Roll-Up Company? Do This and Earn More Money
David Newell is an M&A Advisor at Quiet Light, a business advisory firm that helps online entrepreneurs achieve amazing exits. His main areas of expertise include e-commerce/Amazon FBA, SaaS, and content companies that range in size from $1 million to $25 million.
David is also the Founder and CEO of Inner Truth Media, a digital platform for podcasts, video courses, and articles about spirituality and personal development. Before joining Quiet Light, he was an investment banker and spent three years in internet brokering, where he personally advised on the sale of 75 businesses.
Here’s a glimpse of what you’ll learn:
- What is an “aggregator” in the e-commerce industry?
- David Newell talks about the business model behind Amazon FBA roll-ups
- The kinds of multiples David sees from roll-up companies
- The problem with the “save the broker fee” mentality that many holding companies advertise
- How Quiet Light helps clients navigate stability payments and earnouts
- Joe and David discuss the issue with multiples and ask the critical question: “Multiple of what?”
- Why the seller’s discretionary earnings (SDE) is the most important thing to get right when selling your business
- How long does the due diligence process take with aggregators vs. with Quiet Light?
- Joe’s advice to business owners who choose to sell to an aggregator
In this episode…
Let’s cut to the chase: you want to sell your business quickly and turn a large profit. But, with so many different paths for successfully transferring your company, how do you know which strategy will be best for you?
Aggregators have recently become one of the most popular sources of transferability, especially in the Amazon FBA world. In short, these companies want to purchase and scale your business—ensuring not only a profitable exit for you, but also continued revenue down the road as they grow your business. However, transferring your business to an aggregator isn’t necessarily as simple as it sounds. Today, Joe Valley and David Newell explain why and offer an alternative strategy that will boost your business’ value in no time.
In this episode of the Quiet Light Podcast, Joe Valley sits down with David Newell, a lead M&A Advisor at Quiet Light, to discuss everything you need to know before transferring your business to an FBA roll-up company. Listen in as Joe and David discuss what an aggregator is, why multiples aren’t all they’re cracked up to be, and the unmatched value of working with a brokerage during the exit process. Stay tuned to discover how to achieve a more profitable transfer this year!
Resources Mentioned in this episode
- David Newell
- David Newell on LinkedIn
- David’s email address: [email protected]
- Quiet Light
- Inner Truth Media
- Joe Valley
- Mark Daoust
- Quiet Light Podcast email: [email protected]
- Pat Yates
Sponsor for this episode…
This episode is brought to you by Quiet Light, a brokerage firm that wants to help you successfully sell your online business.
There is no wrong reason for selling your business. However, there is a right time and a right way. The team of leading entrepreneurs at Quiet Light wants to help you discover the right time and strategy for selling your business. By providing trustworthy advice, effective strategies, and honest valuations, your Quiet Light advisor isn’t your every-day broker—they’re your partner and friend through every phase of the exit planning process.
If you’re new to the prospect of buying and selling, Quiet Light is here to support you. Their plethora of top-notch resources will provide everything you need to know about when and how to buy or sell an online business. Quiet Light offers high-quality videos, articles, podcasts, and guides to help you make the best decision for your online business.
Not sure what your business is really worth? No worries. Quiet Light offers a free valuation and marketplace-ready assessment on their website. That’s right—this quick, easy, and free valuation has no strings attached. Knowing the true value of your business has never been easier!
What are you waiting for? Quiet Light is offering the best experience, strategies, and advice to make your exit successful. To learn more, go to quietlight.com, email [email protected], or call 800.746.5034 today.
Hi, folks, it’s the Quiet Light Podcast where we share relentlessly honest insights, actionable tips, and entrepreneurial stories that will help founders identify and reach their goals.
Joe Valley 0:29
Hey folks, welcome to the Quiet Light Podcast. My name is Joe Valley. I’m a partner here at Quiet Light Brokerage and today we have a very special guests and we’re talking about a very special subject. subject. There I go, I start I started stuttering already, David. I told you what I stutter my way through some of these things. All right, that that smiling man on the other side of the screen here, folks is David Newell. If you don’t know him, he is a lead advisor here at Quiet Light David, former investment banker, former head of brokerage services for a competing firm, British, charming, handsome all of these things an expert in the SaaS space. But today, we’re gonna talk about aggregators. Right, David? Yep. What is an aggregator? give me give me a couple of other names for an aggregator
David Newell 1:18
Whoo. Well, those stems from this big strategy that’s been rolling through Amazon for last 24 months, which is this roll up strategy that everybody’s hearing and seeing so much about the most prominent of which is Thras.io and then they’ve been followed by some other big names like Perch and Boosted and SellerX, and so forth. And it’s a very, very, very interesting time at the moment, because what’s happened is, many older listeners will know you know, during the 1970s, and 80s, there was this big kind of private equity rush into buying like mom and pop stores and all of the strip malls various like High Street places in America, and indeed in Europe. And they would buy up these small chains, small franchises, and so forth, stick them together, and then basically sell them on to larger private equity companies or higher multiples became very famously known as the roll up strategy. Fast forward 30-40 years to where we are now, especially accelerated by the pandemic. And retail is moving increasingly online increasingly into e-commerce. And so now the opportunity has come to basically acquire parts of the digital High Street this time round, stick them all together, do it at scale, and roll them up. And so in the last, you know, 12 to 18 months, there’s just been this explosion of buyers come into the space. And you know, they can either call themselves aggregators, FBA brand operators, roll-up buyers, funds, all these different names, basically all attempting the same strategy of owning and operating many of these brands to then sell on after a few years.
Joe Valley 2:56
Yeah, those are all the names for them. And it’s an interesting strategy. I think it’s brilliant in many ways. But it’s not for everyone, right? I know, my own level of incompetence, and managing lots and lots of people is definitely one of them. So, you know, these folks take that lifestyle entrepreneur, that business that’s owned by just a few people and operated by just a few people, and they bring it into their portfolio and put their team on it. And the beauty is that it instantly, it’s instant, instant equity for them for us, because as you said, you know, they might buy it at a to two and a half, multiple, three, multiple, whatever the number is, and we’ll get into some of that, folks. But once it’s in their portfolio, it instantly becomes worth 10 times. So there’s a lot of upside for them. And 10 times plus or minus, right. But we’re going to talk about whether or not this is good for FBA business owners, we’re going to talk about some of the deal structures, what the multiples are, how to avoid the ignorance discount, if you want to try to sell to them on your own. And all of these different things I’m going to try to, you know, tighten it up and keep it in this short window of time on a podcast here without talking for hours about it, because we could, we’re gonna try not to go first, I want to create an image for you. Because we have a lot of folks out there that that say, Well, I’m just going to go straight to the to Thras.io And by the way, they’re very good people, we do enjoy working with him. They’re just all of these people that are, you know, creating these roll up companies, they’re, you know, for the most part, well educated, honest, sincere, intelligent people. And we do enjoy working with them. And it’s a good idea, you know, if the deal was right to sell to them, but there’s a right way to do it and a wrong way to do it. The first thing image I wanted to just describe for you is the Shark Tank. Right? It’s a tank, meaning there’s more than one shark in it. If it was just Mr. Wonderful. You wouldn’t get a very good deal. Yeah, I think it’d be a royalty deal, right? Everything he does you want some royalty on or something like that. But he’s gonna he’s gonna give you some money and then you’re gonna pay him back for And then he wants a royalty on everything that you sell. And it would not be a very good deal. And we’ve, we’ve worked with lots of Shark Tank folks, including Pat Yates on our team, now he owns by Happy Feet, and he’s got to deal with Robert, he was on the tank A few years ago, still owns the company. And he thinks, you know, laughable in many ways, he got cornered by Mr. Wonderful at one point, who apparently is wonderful, he’s just kind of hard on the show. But you know, it’s that one on one is not a good idea, you’re not going to get the best value for your business that you’ve worked incredibly hard for. If you just say, I’m going to save the broker fee. And I’m going to direct to Xyz FBA roll-up company. There are how many sharks in the tank before normally, sometimes five. But they’re limited on that show for you know, entertainment purposes, if you had 24 sharks in the tank, it would just be mayhem. But you’ve got to have more than one shark in the tank, it is a tank. So the first piece of visual advices, think about that. Don’t go to just one, if you’re going to sell on your own, you want to go to all of them, not four of them, all of them. And there are dozens at this point, the other image would be an auction, we’ve all at the very least seen one, right? If you see them in movies, where people are raising their paddles, bidding up bidding up and bidding up. If it was just David Newell, in the auction room, David would be laughing and he get a hell of a deal. But you put David and me against each other. And then 510 20 or 100 other people or everybody on the Quiet Light buyer list, you’re talking about 1000s of people that are going to be raising paddles, getting information on the business and competing against each other, that gets you a better sale price, a better deal structure, better terms and all of this. Now, some of the drawbacks, if you will, to the FBA roll up companies is that they have investors, David right. And those investors require them to invest in certain structures. And it limits their ability to just, you know, stroke a check for five times multiple, right? have you dealt with any that, you know, say, Well, our, our our buying practice or principles are stuck this way? How can we make that work? Have you had that at all? You had a recent roll up with me?
David Newell 7:19
Yeah, a great deal. I’ve had a lot of experience in this recently. I mean, I think I want to echo what you said at the start, which is that the introduction of all these buys into this space actually is a massive net positive for everyone, because they are very professional buyers, they close very well. We have great relationships with many of them. And my experience with them has been exemplary almost through and through. But as you said, just dealing with one direct is a major problem as it relates to AI value and terms and actually going through the process successfully. And you know, one of the the reasons I think the impetus for doing this podcast is that because these guys, they have a fiduciary duty, right, they need to acquire brands for as cheaply as possible, they’re running their business, and they want to then flip them on for as high as possible. And that’s perfectly reasonable. That’s their model. And so with that, and then they also have a large amount of capital, they need to invest and they need to vest that relatively quickly. And so the the the modality has been with that is to start making direct approaches to sellers. And so it’s interesting, because we’ve started seeing increasingly more sellers, I know, you’ve seen this Joe, come to us saying, Well, I was thinking about selling I’ve been doing I’ve been directly approached by one or two of these people. And we’re starting to see some of the offers, because they’re showing us like what they’ve even seen. And, frankly, it’s it’s pretty stark contrast in in many respects between kind of what they’ve been offered, you know, directly versus what we could realistically achieve for them, you know, given the conditions and their dynamics you’re speaking to, and it makes sense. I think like, you know, if they have the opportunity to go for that lower multiple lower cash upfront, then they’re going to attempt to try and do that, or at least start the conversation there. And the problem is, of course, without that, like competitive impetus, it’s hard really to kind of push the conversation up. And so, you know, I’ve seen multiple scenarios now of offers from, you know, funds that I know, on assets, and then you know, a week later sort of seeing the same funds bidding very different offer structures in competitive scenarios. So that was your question, Joe. I don’t think that they have I think that maybe they have certain ceilings about where they can go and certain things I have been communicated a few days, but the ceilings are much, much, much higher than what they are currently looking to do kind of indirect. And just to close that point. I mean, some of the differences in value a quite eyewatering especially when we’re talking about like seven figure valuations on businesses. Like, you know, my sense at least is like 20 to 30% differential, just on the multiple alone, and that’s before we get into the finer points, which I’m sure we’ll get onto this,
Joe Valley 10:07
I think they’ll I think they’ll tell a seller directly that they’re, you know, what they can pay is one thing, but then when they’re working with us or through us, and they know they’re competing against others, that that something has to go up because they know others are looking at it. What kind of, what kind of multiples Are you seeing, David? What kind of multiples in terms are you seeing from these roll-up companies? Yeah,
David Newell 10:29
say it’s a fantastic question. I know, you might have a really good conversation about multiples and why it’s kind of like not the most important thing. And it’s, it’s for us, it’s funny. For years, it’s always been this very, like, nebulous topic that’s not really talked about very intelligently. Because lots of people say, Well, I sell for seven x, and it’s like, well, how much should you get up front versus what you get on a note, that’s what you can earn out. And this is happening more and more and more, and I had a client that we got an insanely good result for a couple of weeks, go reach out and just say, I’ve just had someone who told me that they got this, someone else got five x. And I was like, Okay, let’s just dig in a little bit. And say, let’s put too fine a point on this, basically, because the two most important things to think about is like, what’s the sort of cash multiple for the business? That’s what did you get at closing in cash? And what’s that reflected as like the multiple for the business there, and then what’s the implied multiple that you get if the earnout that you’ve taken, which is always which is often the case for these deals come through. So I’ll give you an example, because of a very classic structure that aggregators are offering is an 80/20 type deal. So let’s say the business is listed for say 3.6 times plus inventory, and they offer asking price, they’ll pay 80% of that in cash, asking price at close plus the value of inventory. And then they’ll take the 20%, which essentially held back and carry that forward for usually one or two years as a revenue base earned now. And that’s usually one or two things either you get as the seller, you get to share in a percentage of the upside of the revenue. So if you’re doing say, one or 2 million in revenue, and that goes up to say, two and a half or 3 million over that period, you might take a percentage of that upside, or it might be like a particular performance target, or it might be the same percentage that it went up is what increases the initial value that you held back. And so you end up in a scenario where the multiple you got to closing was 3.6. But if the outcomes due in one or two years time, when your business is, you know, most of these brands that were selling are doing anywhere between 50 to 100%, you know, year over year growth, sometimes even more, it’s quite a substantial amount of value is going to come in that 20%. That’s been held back. And so by the time that gets paid out, you probably are looking at 4.55 5.5. And in the business that I was dealing with just a couple of weeks ago, six and a half x on the on the on the earnout.
Joe Valley 12:56
I think amazing is probably the exception rather than the rule. Because you had a an exceptional business with a lot of competition between direct buyers and the aggregators, all competing for the business, how many how many offers overall? Did you get on that particular one?
David Newell 13:14
We got we got 12 offers on that. And I yeah, we sort of had to kind of kept the cop to demand because at some point you’re like, Well, yeah, I mean, is the 13th offer that useful after a while?
Joe Valley 13:26
Yeah, Brad’s got an interesting approach on that. He’s like, I’m not gonna, I’m not gonna even get to 10 offers he’s i cap it at five, I let them know all No, it’s competitive. And there’s a lot of people backing up behind them. So you know, step up and get us a great offer. That you know, when you with that scenario, I want to make sure people understand that getting to that kind of multiple is the exception rather than the rule for the most part, how how big was that business, by
David Newell 13:51
By the way it was about six things, wrote an SD, a 600 sd, but it was it was growing like 100 and 110%, year over year had double has doubled every single year for last three years, and is forecast to double again this year. So it’s pretty phenomenal.
Joe Valley 14:05
So you know, folks, when you’ve got and this is, this is why Mark and I hate multiples, I think you hate multiples, because people always focus on the first but if you’re, if you’ve got a business listed at a four time multiple, and it’s growing, if it grows 25%, year over year, you’re going to earn your money back in 2.7 years or so. So it’s really not a four time multiple. Anyway, very, very frustrating. And we’re gonna get into multiple of what in a second here, but some of the things that I see that are drawbacks to selling to the holding companies are that first one of the things they’re going to pitch you on, if you go direct, or if they find you and pitch them buying your businesses, they’re going to say save the broker fee, right? Which is, you know, true, you’d save the broker fee, but you would get so many things wrong along the way. And what they don’t tell you for the most part is the majority of them. Some of them are now in the raising that third fourth round of capital are able to avoid this. But when they come from David’s previous world with it, which is investment banking, they want something called a working capital peg. And it’s defined as they want to define it. And most of the time, what they’re looking for is at least two months worth of inventory. So if you’re moving through $100,000 of inventory a month, they’re going to look for $200,000. And gifted to them as that working capital tag. So they’ll say, avoid the broker fee, but then they’re going to look for two months worth of inventory. And when you’re have dozens of people 12 offers like David had, you can sell your inventory, we’re asking price as it should be sold with a business of this size. And that’s only when they’re competing against each other when we first started selling to some of these folks, when they first started in 2018. Even before that, right 101 Commerce started, RJ started a few years before that the working capital peg was something that they demanded, because there was no competition necessarily. And they had to buy more hero SKU risky businesses, because the general public wasn’t excited about buying those. And so they were the last buyer that would buy it, and they could get what they wanted. And now today, with all of them competing against each other, if you do it right, and competing against the general marketplace, you’re going to get a better deal structure and get more of that money. And if you got $200,000 of inventory that you’ve given away, that’s $200,001 bills that you’re not going to get, you’ve already spent the money of your business. And if you have a lot of people competing against each other, you’ll be able to get that money. But the first thing, David, well, actually, we’re gonna get to, we’re gonna get to multiple of what in a second, but I want to throw out one more thing in terms of, they’re going to look for working capital in the form of inventory, if you go direct, or if you just don’t have a lot of people competing against each other. And if your businesses got a hero SKU in the electronic space, it’s gonna be much harder to sell. And it’s gonna be a lot of risk. But they also look for what’s called a stability payment in many ways. So stability payment is something that they’ve come up with, to avert risk of your business falling off the revenue falling off a cliff, after closing, and so they’ll say, look, if revenue for 12 months after closing is within 90%, of where it was prior to closing 12 months prior will pay out the full stability payment, and maybe they’ll hold back 10%. So if it’s a two and a half million dollar deal, they’re going to hold back a quarter of a million dollars. And that stability, payment will be released in all the deals I’ve done. And that I think we’ve done that stability, payment has been released. But it still can cause some sleepless nights, and some stress. But each each one I’ve done, I can speak personally that they’ve all been paid out. But it is another thing.
David Newell 18:00
I want to jump in on that as well. Because you know, with so much of the value getting turned over towards performance consideration towards and as towards stabilization payments, it begs the question, well, who’s going to run the business best? Because, you know, you, as the seller have done an excellent job of running for several years, it’s getting increasingly challenging, as everybody knows, to run businesses successfully on Amazon, particularly inventory and so forth for the last 12 months or so, actually, like having a firm understanding of like, each of these spans, and actually who has the best operational expertise, because it’s one thing sort of buying them, it’s another thing running them for success. And I know, in the last couple of deals I’ve done, that’s been a massive focal point for the sellers, which is like asking me as the advisor, you know, what’s your experience, you’ve sold other brands to them? How are they running other brands? Like how successful have they been with them? Like what is the past service done? And that kind of like, knowledge is incredibly important when we’re talking about holding back quarter of a million or more in value over the next 24 months?
Joe Valley 19:06
Yeah, you don’t want somebody that was really good in a different world, convince people to give them you know, $10 million to roll up FBA businesses, and they’ve never operated one. And then then they’re asking for that stability payment. A couple of things on the stability payment, I want to talk about that and then turn out in terms of structures and things people can do and that we help you do in this process. Anytime I have a aggregator looking for a stability payment. The first thing that they’re going to offer is if we’re within 90%, you’ll get that quarter of a million. The problem with that is that if you’re at 89.999%, you lose a quarter of a million. So you want to have a staggered payout on that so if it’s 85 to 90 80%, you get 200,000. If it’s 80 to 85, you’re gonna get 150, and so on and so forth. So definitely do that structure, if you’re going to do this on your own work that structure it on the earnouts. I am not a fan of earnouts, I will say it loud and clear every time. The exception to the rule is that I, I don’t like earnouts on profit or gross profit. What I want to see is if it’s a disaster, I’ve got a client, I sold the business several years ago. And you know, the earnout was on profit, or net income, we sold it for much more than he thought he was going to get to begin with and you know, literally 40% higher than the original list price. So we were like, cool, we are now to gift. But we didn’t work the structure and properly the buyer was fantastic. And his business has struggled a little bit. Now we’re struggling to get that earnout detail and get them fully paid out. So I say never do an earnout on net income or gross profit, just do it on total revenue, and make it a much smaller percentage, right. So if they’re offering 15% on net income, you could do the math, to make that equal to 2% of gross revenue, and much easier math, you can continue to have access to the seller account on Amazon view only. And you can have peace of mind all along the way as you can pop in and take a look at the reports and see how it’s doing. That makes sense.
David Newell 21:31
Yeah, super valid point. I mean, and I have literally just recently seen. I mean, we never I don’t think we ever sign or sadly, I don’t ever recommend signing any clients up to kind of non revenue based earnouts. But I have just recently seen a fund that I know does revenue base that announced fire us with a direct deal having an SDN out in the other way. And is obviously I don’t know the seller, personally, and rssi, or that’s a that’s a territory you just don’t want to get into. So yeah, please just stick the top line,
Joe Valley 22:05
if you can avoid it, right? stick to it stand firm, it’s your business, you’ve risked everything to get where you are today. And you don’t want those sleepless nights and stress afterwards. Because it’s not just about the cash or getting it closing. It’s everything else as well as if though, if you’ve listed your business and you get crickets for months, and then you get one offer, you may not be able to do that still ask for it push it at the last minute. And when they say absolutely not, they put the firm foot down, okay, maybe you bend a little bit, because you’re obviously buyers are telling you your business is not worth what you think it is and that there’s a risk and that risk associated with it needs to be paid out. Alright, so we’ve covered stability, payment structure or not structure. Let’s talk about, you know, my one of my I have so many frustrated favorite topic. It’s It’s It’s seller’s discretionary earnings, right, people will say, Oh, yeah, I got I got I got a four multiple, I got three multiple, get a five multiple. I’ve had, I had a guest on the podcast that sold his business through one of our competitors. And I was like, why would I have him on the podcast, but I had him on because he’d started a consulting business. And it seemed to make sense. And we got into, you know, his multiple, after we hit, you know, stop recording. And he couldn’t really figure out what his multiple was because like you said earlier, he said, Oh, I got this multiple. I’m like, Okay, well, let’s drill down into that. What was the lowest price? What was the earnings? Okay, what did you get? And really his four time multiple? When you do the comparison in the math, right? It was really about a two and a half and even that’s fuzzy because he couldn’t answer the questions. But multiple of what let’s start with that first event multiple of what I that’s what I want to have any idea of what
David Newell 23:58
it’s it’s so funny, because I think SD sellers question is like the least sexy topic ever, but it’s actually you do need to kind of borrow into it because it’s insane amount of value that I mean, we’re talking about three, four or five x multiples whatever it is you want to cash out, but if you just take 500,000 in SD and figure out that there are additional outbacks it just that 100,000 or even 50,000 more to that and multiply that up. That’s a crazy amount of additional value there the leverage that comes from figuring out what the right SD is like as a quantum leap in value between a business that’s 400 nestie or 500 nestie once it’s been appropriately looked at and the thing that I honestly have seen some eyewatering eyewatering like losses in value for people that I know on this point and I think you you’ve accident excellently dubbed this the ignorance discount because that’s what it is. Because people just don’t know and why would they know to kind I’ve looked at certain things around St. Louis. And it’s very, it’s very easy to kind of hop on and sort of like, Okay, well, it’s just my compensation. And it’s just maybe like my personal expenses or my auto and my health insurance and like a trademark here and there. And I kind of look that up on a blog. And that makes about sense that makes rough sense. I mean, it’s kind of a sort of, like fast, fast paced approach to it. But there are some other huge and unknown backs that are perfectly valid. And I know you’ve had a couple recently, I just had a client of mine is looking at listing in q2, this year, amazing business. And he’s in kind of like headwear and Chaparral type stuff. And he’s just had a cost reduction on his entire product catalog. Basically, it’s all same thing with different variations of that’s very material, like almost a 20% reduction in production cost for the product by changing suppliers and it’s done that for two months successfully No, no qualms. That is an add back that can be applied completely retroactively, which we did do and his business sells enormous amounts of that. We added something like it was crazy out of like 600,000 of value just on that our back. And he had no idea that that was like valid.
Joe Valley 26:22
And and man oh man, wouldn’t the aggregators love to buy that directly from him? Because they just gained $600,000 in equity, I gave him a shitty deal structure. Okay, now, now the podcast is going to get the explicit rating because I just swore sorry, folks. It actually does get an explicit rating on Spotify. If you use foul language, I need to I need to clean up my language. So yeah, the sellers, discretionary earnings is the absolute most important thing to get right, you’ve worked your tail off to build your business take all sorts of risk, and then casually sell it off of inaccurate numbers is really truly the ignorance discounts that we’re trying to help everyone avoid. For clarity, sellers, discretionary earnings is net income plus add backs, that equals sellers discretionary earnings. inventory is a separate piece all together with everyone except for website closers. They include inventory, in the list price, for various reasons, none of them nefarious, but what it does is actually increases what what the multiple looks like, at the end of the day, it’s the same same cash in the bank, but it appears to increase the multiple, it’s really not, it’s the same. So net income plus add backs equals sellers discretionary earnings. And if you do not dig deep and get creative focus, use math and logic, you’re gonna lose a lot of money in your most valuable asset when you sell it, which is your business. David just gave an example that, you know, boosted the discretionary earnings by $600,000. And that’s, you know, they renegotiated cost of goods sold, dropped it by 20%. And you take essentially, that dollar value of that 20% for the 10 months prior, and you apply it to the total number of units sold. And that is math and logic, and it’s put in the add back schedule. Now, would a buyer argue against that? No, when you apply the math and logic, because if your cost of goods sold went up by 20%, I can assure you, they’re going to do the math, and because they hold on hold on last two months, cost of goods sold up, we need to apply that to the prior 10 months, and now your business is only worth x $600,000 less, they’re definitely going to do that. So the reverse applies, as well, as one of the other more, you know, misunderstood and not applied add backs is when you have a price increase, your cost of goods sold remained the same. I had this recently on a business that ended up with six offers on it. And so it they raised the price on their top selling skew by $4. They did it six months, you know into the in the last six months with the trailing 12 it did not change the conversion rate did not change return rates did not change anything except for the profit. And so we had, we took the total number of units sold by month for the first six months where it wasn’t applied and did the math. It added about $150,000 to the list price of the business, math and logic we had six offers for them from aggregators, not a single one had an issue with it. So getting the sellers discretionary earnings, right is absolutely critical. You can talk about your multiples all day long. And you know you can you can talk about how big it was or you have your friend what you probably want to say when someone says they got a multiple of four for their business, just say multiple of what See what they get, and then dig down into some of these things that Dave and I are talking about. There are so many add backs that get missed. That it’s, it’s, it’s, I feel, honestly, bad for the owners that sell their businesses without really, really digging into it. And I do enjoy talking about the subject painful to see, I really I do enjoy I’m passionate about the subject, but I fully understand that it makes people’s eyes bleed, right? It’s it’s, it’s math, it’s accounting, and I fell asleep in accounting class in college. And it just because I hated it. Now, I know what a difference it makes in people’s lives when they’re trying to sell their most valuable asset. So definitely dig deep there. You know, we talk about three levels of add backs at Quiet Light, we’ve developed a process there are six levels to each, and it gets more and more complicated with each level. And honestly, there’s not just 18 different types of add backs, there’s probably a you know, a couple dozen more. It depends upon your business. And they’re all different. They’re all complex in their own way. So that that’s that’s the getting SDE. Right and multiple of what frustration that I have, I want you guys to really focus and dig deep on that. Let’s talk David about something else we focused on recently, which is a pro forma p&l and moving forward a little bit, you know, talk about that just for a second. And I’ll tell my own story. Yeah.
David Newell 31:22
Yeah, I mean, I think, you know, if we look at the average growth rates of businesses that we’re listing now, I mean, I can’t remember the last time I listed something that wasn’t doing 3040 50%, year over year, it feels like that’s just the momentum of these businesses. And when you think about that, if you go out into a sale process that might last probably like 60 days to think find the Find a winning buyer, as particularly if you’re doing this yourself even longer, to kind of negotiate and get through that process without like a lot of facilitation and you’re running out of business, your business is growing, like at quite a nice click during that time period. And so if you take if you choose to value the business, or the buyer choose the value of the business, on a static, trailing trailing 12 months, let’s say 2020. Right now, we’re already gliding through the first month of 2021. And then it goes into the second. By the time let’s say you look to close the transaction sale, say at the end of February, you know, the business theoretically the trailing 12 months should have? Well, it certainly has, it’s already actualized a significant increase for those months. And so the business value should be higher. But what happens is it’s not it tends to get pegged to that static, trailing 12 months, or 2020. And so what we’re doing now is basically pricing and forward looking earnings for these for this period in time. So that basically, by the time the business gets to closing, it is valued appropriately for it, actually exactly the amount of money that earning and you know, the buyers get that they understand that they appreciate that they’re respected, why wouldn’t you is logic, it’s fair, it’s what the business has actually done. And the seller shouldn’t be penalized for a slow process. Because remember, like the slowness can actually come a lot more from the buyer and the seller. Yeah. And so that’s something that is again, getting missed out in direct sales. And so if you have a fast growing FBA business, you’re getting really hot in the delay on processor.
Joe Valley 33:25
Yeah, but by way of example, I’ve got one that is officially going to list net next week, which is in the past, by the time this airs. But, you know, in 20 of the seller’s discretionary earnings was about a million dollars, but it’s growing by literally like 140% year over year and more in the second half of the year. So going with your logic and math example, in 2020, on average, I think the from from list to closing, on average, a Quiet Light listing, it took 125 days, right, so about four months. So what we’re doing in this pro forma situation is where we’re going out 90 days, 90 days, we’re going to project out the total revenue and total discretionary earnings, we’re going to under promise and over deliver is really, really critical. You don’t just blow up those numbers and then fall short of them, you’ve got to under promise and over deliver. And you the business owner is going to, you know help with those projections and where you think you’re going to be. And so in this scenario with this particular listing that I’m launching next week, we’re actually gaining about $400,000 in discretionary earnings. So 2020 was a million when we go from April 1 of 2020 through March 31 of 2021. It’s adding $400,000 meaning the first quarter of the year is going to be way over last last year’s first quarter so that you take $400,000 times the multiples of this particular business, which is going to be well north of four times, let’s just call it four for simple math. Four times four is 16. That’s $1.6 million added to the list price of the business. using math and logic that buyers get, they understand they appreciate, because by the time we close, you know, they’re buying the business on that trailing 12. And the trailing 12 is truly historical at that point, because odds are, it’s not going to close until April. Anyway. So more math and logic getting the SD right and working on pro forma numbers. exceptions to the rule would be, if business is flat, not really a big point, in doing a pro forma b p&l, if business is flat, if business is down, you’re going to you’re going to list it on the trailing 12. And you’re going to adjust the multiple down because of it because it’s it’s buyers are going to do their own math on that you’re going to pull that multiple down a little bit. And what it does, in some ways is allows you to list the business at a fair and reasonable multiple for the buyers, because the first thing they look is that the multiple but still get the dollars are probably more dollars than you had hoped for, for your business. And really, you’re getting what you deserve for the business because by the time it closes, those 12 months will be in the in the review window. All right, we talked a little bit about deal structure already dated, but let’s, you know, let’s dig into a little bit further in terms of timetables, let’s let’s let’s jump the timetable. So, you know, I just said that from from list listing to closing on average in 2024, Quiet Light, it was 125 days, average deals was maybe 1.7 million, and that’s including the $25 million, one that Brad closed and the 22 or $23 million that walk and Brian close and going as low as any current lowest was around $16,000. It takes them all in there. What what’s your experience in terms of once we’re under yelloweye? What How long does it take for due diligence with these aggregators? What are some of the hurdles that we have to get around? What do they look at? And how quickly do they close?
David Newell 37:22
Well, yeah, I mean, I think that just given the current level of competition in this space at the moment and the interest in it. Certainly with respect to FBA brands, my experience even out in market and finding winning offers has been literally a process of weeks now. It’s like, I used to feel I used to feel sort of, you know, quote, 30 days and feel can be on the safe side. But you know, the last five listings have had in this space been under offer within 14. So I don’t want to kind of stamp that as the sort of the new global standard of Quiet Light, but it’s
Joe Valley 37:56
kind of price. What kind of list price range for those in those four? Yeah,
David Newell 38:00
all between, I would say between 700,002 and a half million. Yeah. Say yeah, what
Joe Valley 38:07
I what I typically say is that, you know, the goal is to get three to five conference calls with qualified buyers in the first 30 to 45 days. Because sometimes it does take that long for some certain listings if we pushed the multiple or it’s a little complex and just outside the comfort zone box. But if you’re looking at a pure FBA business, we’re gonna have a competition like crazy if it’s priced right, that’s the key if it’s priced right if it’s defensible if the books are clear, and multiple offers, look, the last two I listed had the same I had nine offers on one and six on the other. Chuck’s got one now that’s in the pet niche. That’s FBA and he’s struggling to keep it below 15 offers.
David Newell 38:52
Yeah, I think I’ve just been spoiled. I’ve had a bit of a run of great business recently, which is nice.
Joe Valley 39:00
But do you panic if you don’t have offers within the first two or three weeks now? Right? what’s what’s wrong?
David Newell 39:08
Yeah, no, all right. The new the new normal the new normal size for now I see it see me get the the offer in in a sensible time period, as you said based on size and business type and demand and pricing and so forth. The typical times have been as 30 days almost, I would say 30 days pretty much consistently up to five maybe $7 million in value. I think perhaps north of that they might start to push to 45 or 60 but certainly for you know, six figure and lower to mid seven figure businesses 30 day closings absolutely fine and one of the great things about these businesses is that due diligence has proven to be pretty clear cut and dry because there’s so much data in Seller Central there’s so much verification and validity to be had there and so Day one due diligence, providing guest access to that account has really smoothed out. I mean, I mean, you and me now, we’ve probably done like 80, ACC deals each piece. And I’m sure we can both remember times of sort of, you know, you can’t do that volume of deals without seeing certain things, you know, go a bit oriented diligence when things get uncovered or things have to be clarified. But you know, just the level of disclosure and transparency that’s possible with Seller Central now, with the tools available over the top on Amazon has made you diligence. Great. So the standard template is 30 days, I’m regularly seeing buyers, you know, be able to beat that. The deal I have at the moment is looking to close, it’s probably going to shave a week off that which is pretty phenomenal. When you think that say two and a half plus million listings sold in just over three, three weeks. It’s like
Joe Valley 40:53
the last one I listed was similar, it was listed at 2.9 million plus inventory, and about 400,000 in inventory for 50. And that’s the one where we got six offers, we listed it just before Thanksgiving, we closed literally mean before Christmas. So not only do we listed got six offers, we closed before Christmas, so that the buyers who was an aggregator one of the newer ones, really super nice guys like, like I loved I loved their approach. They’re smiling, they’re happy, they’re looking at the best interest of the seller. And they they stuck to it, they did exactly what they said they were going to do. And and they pushed on the cash upfront. The the the timetables can vary, though, depending upon the size of the deal, as mentioned in one of the questions I often get David from people that are selling is how much renegotiation is there. In due diligence, were under Li x, do we close at x? And what would cause us to go from x to y to z in that due diligence period.
David Newell 42:05
So I’ve experienced extremely little to virtually no renegotiation. And in the last 18 months of deals, I would say, I think there’s an acceptable window of tolerance of between, like in my experience, like two to 3% of earnings. So like, you know, whatever that comes out, shakes out however, that comes out whether it’s kind of miscalculation, if you use a tool to kind of pull a p&l through from Seller Central, or if it’s just like smaller backs or small adjustments here or there that get argued, if you’re within that window of tolerance, that’s not a cause for renegotiation. Like there’s enough good faith that nobody’s going to even bother with its currency. And to be honest with you, that tolerance could be slightly higher, if the business is absolutely going like you know storming along, I think everything always gets looked at in the context of the wider picture. You know, the renegotiations that I’ve seen have been situations that were just like abundantly clear and fair, that everyone would circle around on them. And often case, it’s not like, you know, negligence or deliberate omission from the seller or anything, it’s often something that may have arisen during the time what we’re actually doing the deal, like a supplier issue or something. And actually, often it isn’t necessarily a change in price. It’s a change in structure. And it’s just to give the buyer more security. So I had a situation while ago, where there was a supplier slow down with the supplier, and they were under pressure, the supplier was in there creating a new facility to produce more goods in and it was causing, like stoppage and slowdown and so forth. And it’s something which the seller was getting slightly worried about could happen. And that kind of situation accelerated during the, during the timetable. And we just agreed that it would be sensible to hold back 10% of the deal for three months just to see what was going to happen there. And it could be offset, you know, to help bear out maybe, and in the end, the supply came through. And the buyer actually released the funds like way before even the three month mark on that. So yeah, I haven’t seen a substantial price discount on the deal for quite considerable time period. Now.
Joe Valley 44:16
Yeah, I haven’t either. And when I do see it, like you said, it’s a it’s an oversight, unintentional omission or something from, you know, the seller in a situation where the sellers bookkeeper wasn’t doing, they sold internationally, it wasn’t doing proper currency conversion. And, you know, we ended up being discretionary earnings might have been $5,000 less. So in that scenario, I think that listing was under 3.3. So we could have just used the math and logic are 3.3 times 5000. That’s how much comes off. You know, the agreed to purchase price of the business. But we didn’t do that. Because the business grew so much more than we thought it was going To be growing that and and seller was just a good human right he was doing everything he could. He had some he had some completely unsellable inventory. So he created an inventory aging report because this is selling like hotcakes, this has taken a little longer this, I can’t, everything I do, I can’t sell it. So don’t buy it, I’ll donate to charity, or you can have it and do whatever, you know, whatever. So he’s just been a good person. And that led to the buyer going, don’t worry about that, you know, currency conversion mistake, not a big deal, we’re good at the price we’re at. So being a good person kind of helps tremendously in this process, believe it or not be a good human and think good things happen to you and everybody around you. strange concept. And speaking of concepts, I wanted to touch on one thing I wrote a note down when we were talking about inventory, and or really the stability payments, we talked about different, you know, tiered structures with the stability payment, you don’t want to go from 90% to zero, you go you know, step it down a little bit, the the clause that I’ve put in the last couple of agreements, is around inventory outages. So you know, if the buyer of your business, whether it’s a aggregator or an individual, if you’ve got some sort of stability payment or earn out or something along those lines. And the last one I put in was if they run out of inventory for more than a one week period on any particular SKU. That is, you know, their fault, not because Amazon couldn’t whatever, you know, the world exploded, then the stability payment paid out immediately. They just screwed up, and you should not be on the hook for that the burnout goes away, you just get the whole thing. If they if they screw up, and I had a situation like that it was a, the client was going to get paid, you know, six months out, you know, at the end of q2, or the end of q4, you know if certain revenue levels were hit. And in q2, they were 90% of the way there. And then they ran out of inventory for three weeks. And, and my seller and I were going okay, did they do that on purpose? Did they do that on purpose? So they wouldn’t have to pay $300,000? Let’s do the math. We’re 90. We did the math and like, wow. Yeah, that would have been tricky if they did that on purpose. But they’re good humans, this particular buyer good people sold two since then know them all. And it was just a underlings oversight if you if I can say it that way. And and then they crushed it in q4, way beyond I mean, they got paid more than they thought they were gonna get paid, you know, because the growth was so substantial. So something to consider there.
David Newell 47:55
I think this point is, is hugely important to emphasize, because we’re not going to name names, but those certainly one of the well established and kind of well known people and you would think that, you know, basic inventory management would be like the, you know, it’s oxygen, right of the e commerce business, what’s going to grind a business, a multimillion dollar business to come to a whole, you know, because of that issue. And so, and it’s not this, this term, this conversation is not featuring, in, as far as I can see, like 90% of transactions. Yeah, and I think it’s a massive oversight. So I think it’s a really important thing to look at,
Joe Valley 48:30
just because, you know, you’re selling to an aggregator, and they’ve raised 10, or 20, or we just had one added to our list that’s got 450 million in committed capital, just that’s pretty impressive. But they’re still human. And if they’re rolling up, if they’re trying to buy two or three FBA businesses at a time, they’re gonna bring on new people, and those new people are human, they’re kids, they’re gonna screw up. And so you definitely want to work that into the deal structure. And this is one of the reasons it’s so important to require that you have view only access to the seller account during your stability period, or earnout. Period, because it’s your business, it’s your money, you can log in on a monthly basis to go based upon their growth, I know that they need to order more inventory. And this is what my client was doing, kept kept saying order, you’re gonna run out order more, you’re gonna run out based upon projections, this is, and they still didn’t do it. And it was just a kid that screwed up because they’re human. And so we try to, you know, with including that in the clause, you just kind of eliminate the human mistake factor, and make sure that you’re not getting, you know, screwed out of a quarter of a million dollars or whatever the number might be. Without a doubt, we want to make sure that if you’re going to sell directly, make sure that you hire a good quality attorney. We’ve got some that we’ve worked with over the years, we can refer them out to you just shoot David, Ryan, email or anybody in email inquiries, add an email, whatever works for you, anybody on the team can gave you the name of an attorney, if you hope if you decide to go ahead and sell to one of the aggregators on your own, hopefully we’re revealing and sharing so much information here that you’re going to be, and I’m not going to try to save the broker fee and lose $600,000 in value, like on David’s deal, if that person had gone direct, they would have had one off or not 12, they would not have done that ad back properly, they would have lost at least $600,000 in, in value in their business. So yes, we do earn a living doing what we do. But our approach is to help first help second help Third, the more we help you the better value you’re going to get for your business. And that just is going to put more money in your bank account. You don’t get a multiple deposited to your bank account, by the way, it’s actual cash in dollars. So the more we can help you, the better off your business is going to be and the better off truly, everybody’s going to be in the whole process. And yes, that includes the buyers because we make their job easier. They don’t have to do as much work because of the work that we put in and trying to answer all of their questions in advance that they get access to after Of course, they sign a nondisclosure agreement. All right, David, I think we got through most of our points, is there anything that we’re missing? Any any other thoughts that you want to talk about?
David Newell 51:12
No, I mean, I think in aggregate, we’ve spoken to a lot of points here, where I see the big shortfalls I’m seeing is in Yeah, difference in upfront cash, versus what’s kind of standard in the marketplace, the difference in the overall cash multiple the difference in the kind of earn out terms, the the SDP i think is where the biggest value losses are coming in terms of add backs in terms of pro forma it’s pretty, it’s it’s pretty significant. Anything, I did have a kind of a back of the envelope on a couple of deals have recently listed. And yeah, the value differential from when the client came in to what they ended up with negative our fee afterwards was up 30%. And I kind of said, I say stole clients, because you know, we’re all entrepreneurs here are quite light, right? We got it, you know, many, many of the team have sold through here and then become become, you know, advisors within the business. So we get it right, like, ultimately, you know, we’re not here to kind of gouge people of their money, like we kind of want to celebrate and help them at the end of their journey and, you know, go on and help raise their families and their kids with the money and so forth. And so my general approach, and what I always say to clients is like, oh, man, it’s like decimate our fee with the amount of value that we’re going to add to the business. And like, that’s what’s happening consistently. It’s just that no other time in history, I think, in our industry has it become more apparent that there is such a value gap, because there’s so much more direct buying activity going on, it used to not be the case as much. And so now, it’s just really saying, Wow, that business should not have gone for that value should not have gone for those terms. And so, yeah, I like really encourage people to kind of look deeper at some of the details here because it might be a bit boring, like you said, but you know, good money in your bank accounts never boring at the end of the day. Yeah, yeah, I’ve
Joe Valley 53:07
tried to find a way to make to convert this from making your eyes bleed boring stuff to be because you get a whole bunch of money in the bank, but I struggle with it nonetheless. Alright, folks, we’re gonna wrap it up here. Hopefully, we’ve helped you educated you and shared some insights that will help you get more value for your business and perhaps those buyers that are in the audience that are listening as well. You’ll realize when you look at a particular listing that there’s probably more equity in it then it’s being sold for if it’s being sold for sold by someone else or sold directly by the seller. And you can go ahead and take advantage of that ignorance discount hopefully you will not get that at all with any of the advisors in the Quiet Light team. So one of the things I’ve been doing lately David is I end the podcast and then I come back and I say to people Thank you for listening please give us a review and rating we want to get as many reviews as possible but I’m gonna do that without hitting pause so people if you think David is charming and handsome please like our podcast give us a rating give us a review so know if our ratings and review don’t come up at all
David Newell 54:17
Yeah, I’m gonna couch if not based on me then do Joe’s wonderful hack because at the ripe age of 55 I think he has truly splendid right?
Joe Valley 54:32
Yeah, give me a rating and a review just for my hair. If anybody mentions the hair in the review. I’m gonna I’m gonna get you a pair of Happy Feet slippers has that Pat gives us a discount. We get some nice Happy Feet slippers. I’ll pay for them out of my pocket if I need to just help us out. Look, some of our friends and colleagues. David’s got his own podcast. Mike Jackness, EComCrew. Y’all know who I mentioned, Steve Chu. They do a great job. Seeking ratings reviews because it It raises the rank of their podcasts and helps more people. And that’s what we’re about. So if you want to help us, help more people, help your friends in the e commerce will give us a review. Much appreciated David. Thanks for joining me here. It’s been a blast. Appreciate it.
Today’s podcast was produced by Rise25 and the Quiet Light content team. If you have a suggestion for a future podcast subject or guest, email us at [email protected] Be sure to follow us on YouTube, Facebook, LinkedIn, Twitter and Instagram and subscribe to the show wherever you get your podcasts. Thanks for listening. We’ll see you next week.