Boat Anchor E-Com Business Sold for $867K
The million $ question...Could it have sold for more?
Quick Context ⚓
Company name has been requested to remain private to respect the new owners of the company, but for the sake of this deep dive, let's call it "Anchored".
How does Anchored make money: Sells boat anchors online through Amazon and other online channels.
Founder: Dave Bryant
Who are Anchored's customers: Boat owners
When was it founded: 2008
Team Size Including Founder: 3
Quick Facts 💨
Purchase Price: $867,000
My Main Takeaways:
a. During business transactions, consistently question your assumptions. Not doing so can cost you millions.
b. Truly learn the process of selling or buying a business and avoid reliance on a broker that will take 10% + of your business in commission.
c. Determine your true risk tolerance and establish processes to mitigate your risk, this will prevent caving into fears once adversity hits…And it will hit.
Multiple it sold at: ~2.65x (Seller's Discretionary Earnings)
Buyer: Ex-CEO of a Public Corporation
Payment Structure:
$600k purchase price
$100k seller financing for 2 years at 6% interest
Inventory paid for over 8 months in equal monthly payments
How are E-Comm businesses valued? Tip: SDE ✅
First, let's define SDE: Take your business profit and add up all discretionary expenses e.g. the range rover you bought for the business, your IPhone 12, meals etc. These expenses vary by business owner since they’re discretionary.
In the E-commerce world, most of the time, sellers discretionary earnings(SDE) will be the biggest influencing factor in your business valuation. Growth rate will have an impact as well but it ultimately comes down to SDE.
In summary, E-commerce businesses typically sell for 2.5x-3x SDE of the last 12 months.
Other elements that impact the multiple at which an E-Comm business can be sold at can be seen below. Over all, you’ll notice that every metric relates directly to risk-mitigation.
Age: How old is your business? If you business has shown consistent upward growth, fantastic! This is what a buyer wants to see. Buyers don't want to see volatility. Generally, e-commerce businesses that have been operating for less than a year will be offered significantly lower multiples because the business doesn't have a reliable history of performance. Many buyers will want to see over three years of operation.
Time: How long does it take you or your employees to actually run the business?
Trends: Buyers want to feel confident that the general product trend is increasing in demand. As in, they don't want to buy a business that won't have a strong addressable market in 2 years. I mean who would? 😂
Inventory carrying costs: How much inventory does your business carry.
Platform Concentration: Are all your sales coming from just one channel or are well diversified?
It’s Storytime…The Founding of ‘Anchored’ 📖
In 2008, while in Grad School at Simon Fraser University, Dave started an e-commerce side-gig in quite a niche...Boat Anchors. Yes, the 100lb steel weight that goes to the bottom of the ocean to keep the boat in place.
In the first few years, it was just a side gig. In fact, Dave would get calls from customers during class and he’d dash outside, put on his 'corporate deep macho sounding voice', and answer like he was in a prominent corporate office. He would also use these same strategies when he'd meet with suppliers in China. Dave could only afford to stay at Hostels, but when suppliers would come to pick him up, he'd ask them to meet him in the lobby of the closest Hilton Hotel…Sneaky Dave.
Why Sell his Business? 🤔
"I wanted the accomplishment of ‘selling a company’ – deep down inside I wouldn’t feel like a real entrepreneur until I had"
💡 I hope this compels all of us to question our assumptions and the stories we tell ourselves. This couldn't be a bigger fallacy and I sense that the root of this mindset is the pursuit of status. Let’s never forget though, status stands for still too arrogant to understand success. I’m being harsh because in this case, understanding our internal stories could mean the difference between selling a business for under $1M and selling a business for over $5M.
"I was deadly afraid of my business failing and wanted to take some money off the table for security. Fear was a very important contributing factor. I was scared of my business failing and not being able to support my family"
💡 I love the honesty. This is a prime example of a business performing swimmingly well but the risk averse founder still feels a compelling reason to sell. There is no right or wrong assessment of this, other than to questions one's risk tolerance and seek to become aware of the root of the risk. If you know the root of your risk, it allows you to find ways to mitigate it. Overall, I respect Dave's risk-averse approach to ensure that his family is taken care of.
💡 As a buyer, it is key to seek to uncover scenarios like this during the due diligence process rather than jumping to the conclusion that a business is up for sale because something might be wrong with it. In this case, we can clearly see that the seller has a motivation to sell due to a founded or potentially unfounded fear.
Dave was concerned that Amazon had become the source of over 50% of Anchored's revenues. Amazon’s percentage of Anchored's sales moved from 30% of sales in 2013 to 67% of sales in 2016.
💡 Completely fair concern and goes to show the importance of diversification...Btw just imagine what percentage of Anchored's sales would be reliant on Amazon today? I'd be willing to bet around 95% based on the rate of Amazon sale growth from the table below 👀
🧠 Risk-Tolerance Question Time: If 95% of your company were reliant on Amazon, how would you feel? Part of me would take into consideration the lack of diversification but the other part of me would also have comfort in that Amazon as a business is not going anywhere anytime soon. Lack of diversification isn’t ALWAYS bad.
We should qualify concerns like these because they can drive significant decisions, like maybe selling too early. Being aware of our risk tolerance not only applies to entrepreneurship, but life as whole. Many people perceive the world of entrepreneurship as an immensely risky journey, but just like everything else in life, there are ways to de-risk or at least mitigate the risk. The best entrepreneurs and investors are the ones that have awareness of the risk's they face and build processes to mitigate these risks. Daniel Wagner, put it beautifully and said, "Some risks that are thought to be unknown, are not unknown. With some foresight and critical thought, some risks that at first glance may seem unforeseen, can in fact be foreseen. Armed with the right set of tools, procedures, knowledge and insight, light can be shed on variables that lead to risk, allowing us to manage them.”
The exchange rate in Canada had plummeted and Dave got about a 35% bonus by selling his company in U.S. dollars.
😮 Many of us are very lucky to live in the U.S. and the fact that the dollar is the current global world currency gives us a tremendous amount of leverage...Look at the figure below and notice the value of the Canadian Dollar over time and the Argentinian peso on the right...Wow.
This gives U.S. buyers are monumental amount of leverage when doing international acquisitions.
2014..."Time to sell" 🤔
2014 was a rough year for Dave. As he puts it, "We were in cash flow hell, I had rushed into a couple of decisions that significantly added to our overhead, and we lost a lot of money. The company overall was negative $60,000 on the balance sheet. You might ask how a company that had Seller’s Discretionary earnings of $88,000 is negative on the balance sheet. The answer is easy: by the naive owner paying himself too much."
Adding on to this, he was expecting his first child in October of that year. Anxiety had reached a peak during this time and the only thing that stopped him from being able to sell was that his sellers discretionary earnings(SDE) was only $88,000. Which means that had he sold at a 2.65x multiple of SDE, he would have only earned $233,200 before taxes and fees. Ouch. No way Jose.
Instead, he dedicated 2015 to maximizing profits.
His steps to maximizing profits and increasing SDE
Sold his office and had his two employees work remotely.
Took a 40% cut in his salary which allowed Anchored to buy more products. This was one of the hardest decisions he made since the reduction of his salary wouldn't have an impact on his companies ultimate valuation price. It did however allow him to buy more products and create more revenue.
Got ultra specific on the actual costs of products e.g. shipping costs, return rates, sea freight and cut out anything that wasn’t necessary.
Dave negotiated on everything from credit card processing fees, internet bills and supplier costs.
💡 This is a good lesson...he who does not ask, does not get. You would be surprised at the amount of things that we believe have a fixed cost yet are completely negotiable…Question your assumptions as often as possible.
On Selling Through a Broker 🕴️
Dave chose to sell his business through a broker for three main reasons:
He had never sold a business before so he saw this as a potentially valuable learning experience.
A broker would have a rolodex of potential buyers.
The broker could provide document templates(Letters of intent, asset purchase agreements etc).
Three counter reasons I have for selling through brokers
Broker fees are typically 10% of the total sale price, if not more. As in, if you sell a 1M business, the broker keeps a whopping 100k 😮. Jeeze...It pays handsomely to learn the strategy of buying and selling a business to avoid reliance on brokerages.
Some brokers may not have the sellers best interest in mind…or the buyers for that matter. The don’t have skin in the game…so we can’t exactly blame them for this. For example, a sub-optimal broker may advise you to sell when in reality, had you waited 6-12 months and adjusted a few things in the business, you could have sold it for a higher multiple. Now why would a broker perhaps advise against waiting those 6-12 months? Because time is the biggest killer of deals. Which therefore means that time also decreases the likelihood of the broker getting his commission.
Similar to how no one will care for your money more than you do, no broker will be more caring of your business than yourself. I mean how could they? They haven't put in the blood, sweat, tears and sometimes even a home on the line.
💡 Are there good brokers out there? Absolutely. Are there scenarios where brokers are necessary? Yes. Do I believe most deals need a broker? No. And that my friend is one of the many reasons I’m writing this weekly analysis.
Time to List Anchored for Sale 🕺
Dave and his broker listed the business for sale at $597,000. His broker put together a marketing package for his company which consisted of financials and an extensive Q&A about the business. The reason the business ended up selling for $867,000 instead of $597,000 is because Dave had about $267k in inventory at the time of the eventual sale.
💡In e-commerce business deals, inventory is an important variable towards the final sale of the business. Given that the quantity of inventory held by an e-commerce business will fluctuate, the final cost of the inventory isn't calculated until a few days prior to the business sale. This allows the buyer and the seller to go through a diligent inventory count.
Dave's broker advised that the typical selling process is:
"The listing goes live – it gets posted to their website, emailed to their list, posted to several brokerage websites, emailed to other brokers, etc.
Within a few weeks they expect to get 2-3 serious potential buyers.
With those 2-3 interested buyers you do 1-4 conference calls between yourself and the buyer. The buyer gets to ask anything they want and may request brief documentation.
If they like what they see, you negotiate a Letter of Intent (LOI) – essentially a price.
Once the LOI is signed by both parties the buyer gets to start due diligence where they will basically try to recreate everything you’ve reported in your Profit and Loss Statement. This takes about 3-4 weeks.
If the buyer is happy with what they see, you sign an Asset Purchase Agreement (APA) and within 2-4 weeks, the deal closes." - Dave
Ultimately, Dave was told to expect about 2-3 months from the time the business got listed to the time it closed.
Dave shared that in "March we had a lot of inquiries come in about the business but no serious buyers. By May, we had two conference calls with potential buyers but nothing materialized. Finally, 2 weeks before I was about to pull our listing and take it off sale, the ex-CEO of a public company wanted to have a conference call to discuss my company."
The Negotiation 🤝
Dave spoke with the ex-CEO on June 13th and by June 30, the ex-CEO had submitted an offer to purchase.
"After some extremely long back and forth (there were some family dynamics at play in the deal which complicated things) we agreed to the following:
$600,000 purchase price (so plus $3,000)
$100,000 seller financing for 2 years @ 6% interested
Inventory to be paid for over 8 months in equal monthly payments”
Due Diligence & Final Contracts 📝
"On July 13 we signed the Letter of Intent. This basically gave the buyer access to EVERYTHING about the business. They could ask for any report, any receipts, any tax filings, etc.. As I mentioned, they needed to confirm that everything I reported was 100% accurate.
This is one area that makes having an entirely online business a very good thing. Immediately I setup user accounts for our buyer with PayPal, Amazon, our Magento backend, Google Analytics, and Linnworks (our order management software). This took me about 15 minutes to do and the buyer never asked for a single other thing (often due diligence documentations requests can take hours upon hours). After the buyer submitted their Asset Purchase Agreement, my lawyer had to review it and make revisions"
A couple of important things that were included in the final contract:
A non-compete clause not to sell boating products online for 3 years
A promise to help the company transition for 40 hours over 3 months
Dave says to "expect to pay $5000-7000 in legal fees for nearly any business sale which is one of the rare times I’ve used a lawyer and felt like my money was well used."
Cha-Ching…The Business is Sold! 💰
"Dave and his two former employees spent all day transferring the assets of the company, things like Amazon accounts, domains, web hosting packages, and SaaS products. This is an important note to make: when someone buys your company they are almost always buying the assets in the company NOT the actual company. The buyer doesn’t want the liabilities your LLC or corporation has incurred (such as taxes) but it does want the good stuff like domain names and customer lists. So when I say that I sold my company this is actually not true. My company still exists (including bank accounts and almost everything else financially related to it) but it has no assets with which to speak."
Dave’s Takeaways ✍️
Build and manage your company like it will be sold tomorrow
There is a market for your e-commerce business
In e-commerce, revenues are vanity, profits are sanity, especially when selling your company
Aim to sell your company for under $100,000 or over $1,000,000 (Avoid in between like I did). When Dave sold his company he fell into a bit of a no man’s land. As in, his company was too big and expensive for an average joe, but too small for larger buyers
During the entire sales process, assume until the very last day that the deal will fall through
My hopes is that you learned as much as I did during this analysis.
Say hi on LinkedIn & Twitter (@JaygerMcGough), collectively we’ll become smarter about buying and selling businesses.
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My lawyers told me to include this:
This newsletter is presented for informational purposes and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor. No guarantee is given regarding the accuracy of information on this letter. The newsletter is composed of opinions and is not intended to give investment advice.
Link to Original Story: https://bit.ly/36LtgnC