Coloring Book Biz Sold for Millions 🎨
The opportunities out there are endless...
Quick Context 🎨
What is ColorIt: E-comm business that sells coloring books and supplies…But for adults.
Founder: Mike Jackness
ColorIt’s customers: Adults
When was it founded: 2015
Business hours Spent per Week by the Founder: ~ 6 Hours
Team Size Including Founder: ~5
Quick Facts 💨
Purchase Price: Final amount is undisclosed but based on my back of the napkin math it comes out to be ~ 3.1M
ColorIt’s Growth Rate: 32% year over year growth on top line revenue and 45% on the bottom line of discretionary earnings
Monthly Revenue: ~ 400 - 600k
Multiple it sold at: 3.1x EBITDA(Earnings Before Tax, Interest, Depreciation and Amortization)
My Main Takeaways:
a. Go deep on 1 or 2 businesses rather than delving into 4 + businesses
b. As entrepreneurs, we should seek to become conscious of our limits and respect them. Otherwise, burnout could be the quickest alternative.
c. Mike did a great job growing his businesses by hiring people overseas. Three trends to look out for: 1) Labour costs increasing in the U.S. relative to emerging markets, 2) Skill and talent growing exponentially in emerging markets with information being more accessible and 3) More and more people hiring overseas
Three Reasons Mike Sold ColorIt:
a. Running 4 businesses spread him thin which caused a build up of stress & anxiety
b. Fear of unrepairable damage if a “worst case scenario” occurred to ColorIt
c. Ability to focus on his other businesses that were in earlier growth stages
Buyers: Nirav Bhagat(Co-Founder of Profound Commerce) & Matt(Last name unknown) 🤫
Payment Structure: All Cash
Mike…How does it feel to have sold ColorIt: “My stress levels have dropped significantly which was one of the reasons why I wanted to sell ColorIt. We paid off all our debt and are in a position where we can survive any event…Literally anything could happen at this point, even if our Amazon account were shut down for six months"
Tell me About the Founder 📖
Mike Jackness is a serial entrepreneur who owns a company called Terran. Terran is the umbrella company for four separate brands. Before ColorIt was sold, it was part of this umbrella along with Ice Wraps, WildBaby and Tac9er. He is also one of the co-founders of EcomCrew, so you may have heard of him through his podcast or community.
Mike acknowledged that it was difficult to run all four of his business with the same level of intensity, passion, and detail. This wore Mike out because whenever problems came up, he couldn’t dedicate his full attention to handling them. Selling one of his four brands would give him back time to refocus.
Burnout Alert Ahead ⚠️
Mike tells us that “the last few years have been tough. It’s been really, really tough on me personally. It’s been tough on my family and personal life”.
In December of 2019, Mike was beginning to burn out after having to manage 4 E-Commerce brands under Terran. Mike tells us that “when you start to get burned out, sometimes you’re way past the point of no return and that’s really dangerous for your business, your personal health and well-being.”
I find his self awareness that burnout was approaching to be admirable. The worst thing one can do in situations like this is ignore the exhaustion one is feeling. In many ways society encourages this bravado mindset of persistence at all costs. I look up to Mike’s self awareness because coming to this realization is not easy…since one is essentially agreeing that one is reaching one’s limit.
The business was growing at an incredible rate. Mike tell us, “We were growing very fast: Mathematically you cannot grow at 100% per year, and have cash. On paper we were doing really, really well. My accountant would say, man, congratulations on another great year, we were posting great financials and net profits. We were taking every single penny of ColorIt and investing it back. So it was just a continuous cycle that became very stressful.”
Every entrepreneur has a certain growth scale where their comfort zone is tested and at the time of listing, Mike’s comfort zone was being tested. "The stakes were getting higher and higher and the numbers were getting bigger and bigger. It was becoming a situation where if a doomsday scenario happened, I felt like there was no way out. I always like to have a backup plan where if something goes wrong in life or in business, I can deal with it. And when ColorIt had reached the mid hundreds of thousands a month, we felt like we were in a situation where a backup plan was unattainable.”
I too am quite risk averse. However, my approach to ensuring that a risk averse mindset doesn’t limit me is by setting up buffers that mitigate and reduce the risk. In this case, the risk in some ways can be seen as a good one…ColorIt was scaling too fast. Of all the problems out there, this problem isn’t a bad one to have. It’s also good to realize that scale has a different meaning to everyone, and to Mike it was this point where things became "imbalanced and stressful". Another reason this is good self awareness is because the same entrepreneur that is good at growing a business from 100k to 5M won’t necessarily be successful at scaling from 5M to 30M. Both require different skillsets. Being aware of these nuances can mean the difference between selling a business at it’s peak or hanging on to it until things go sideways. ⏳ 👀
Selling Through a Broker 🕴️
Mike chose to work with a brokerage called Quietlight to sell ColorIt. You might remember QuietLight as they also helped with the sale of “Anchored” for $867,000. One of the reasons Mike chose to sell through QuietLight was because he knew Joe Valley, one of the team members at QuietLight on a personal level. Mike tells us that he “can’t imagine going through this process with anyone else.”
Relationships, relationships and relationships. Enough said.
Of all 4 Brands, why Sell ColorIt? 🤔
Funny enough, Mike was originally intending on selling Terran entirely because of burnout. But after speaking with the broker, he says he was “talked off the ledge”. He realized this would have “been a bad business and personal decision” and decided to sell just one brand for now.
The first challenge was determining which of all four brands to sell.
#1 - Brands are at Different Growth Stages 📉
Two of the brands under Terran are startups and they’re operating at a loss. Mike is building them up and putting a lot of advertising dollars into them.
One of these businesses was operating at about a $25,000 annual loss. If we bundle this business into the same bucket as the others and then apply a 3x multiple, the $25k loss becomes a $75k hit against the value of the business. So, if all four brands are sold at once, the overall return is substantially less.
#2 - Unhealthy Competition 🤼
Unhealthy competition on Amazon was starting to weigh on him. He tells us that “negative things are happening on the platform like negative reviews, negative up voting and fake IP complaints”.
#3 - Amazon Doomsday 😳
“I started hearing the stories of people’s accounts getting shut down for seemingly no reason. We’ve had lots of individual listings shut down over the last couple of years but never our entire account. Either way it was really stressful and upsetting that Amazon could take a ‘seemingly I can care less position; you’re just a bug on our windshield in our quest for world domination’. Seeing Amazon launch their own products against us was not a nice feeling ”
💡 Great reminder that diversification is an excellent approach to de-risking ones situation. This concern also came up during the analysis of Anchored…Could this be a trend? Could this be the #1 reason people will veer away from Amazon in the future?
#4 - 1.3m in Inventory
“We got to a point where we had $1.2M to $1.3M in inventory. That is a massive number in my world. That is a life changing amount of money and having that much money in inventory with a debt of about $650k that’s personally guaranteed is really stressful.”
💡 Selling ColorIt would allow Mike to payoff his loan and be in a situation where even if things hit the fan, he would be fine. This is a great reminder that everyones situation is different. As a potential buyer, you never know, the business founder might have 400k in student loans that they still need to pay off…That debt might be weighing down on them and causing them to want to sell a perfectly operating business. The key is to find these hidden gems of information during the diligence process. The better of a relationship you can create with the seller, the more likely you’ll find these diamonds in the rough.
#5 - Long Hours 😫
Mike was working long hours since he lives in the U.S and part of his team is in the Philippines…he was working 16 to 18 hour days to accommodate both timezones.
Jeez no wonder our friend Mike was approaching burnout. It’s not as if he’s single either, he has a family too.
#6 - Employees Quitting 😞
“Three marketing people quit over three years. The effort that went into training these people and then having them leave was soul crushing for me, definitely really difficult to swallow.”
💡 This is an element of being a leader that often gets overlooked and is rarely talked about. It’s also one of my reasons for finding ways to automate my own business and operate with as little people as possible. I am fascinated by businesses that generate 1M, 2M, 5M per year and function perfectly as an army of 1 with perhaps outsourcing standardized work to a few virtual assistants(VA’s).
A good thought experiment is to put yourself in Mike’s shoes and ask yourself how you would respond to each one of the challenges above. 🤔
Preparing for the Sale 💰
Mike and the team spent the next few months after deciding to sell ColorIt getting their house in order and generating as much profit as possible. This would allow them to sell the business at a higher multiple. A good rule of thumb is that the higher the the profit, the higher the multiple.
Strategies to Increase Profit
Launched new products
Became diligent on reducing Pay-Per-Click (PPC)
Reduced Facebook ad costs by being more intentional on ads
Spent money conservatively
Cut all SaaS costs for things that weren’t being used
Minimized business trips
When selling a business, the seller should always have a goal in mind...Duh. However, not only a dollar amount, but also desired terms. The terms of the sale can often be more important than the actual dollar amount. In this case, Mike wanted an all-cash deal. Mike told us that “I wanted something that was as close to an all cash deal as possible because I don’t like being in a position where people are paying me with my money”
In other words, he didn’t want the buyer to use seller based financing for this acquisition. Mike’s rational was, “If I was to sell my business for a 3x multiple and got paid over the course of a year for the business, I feel like I’m really only getting 2x because they’re using one year of the earnings to pay me back or they get an extra year to pay me back, certainly not something that I felt comfortable with. I wanted the money in the bank to be able to pay off the loan and become debt free.”
💡 Do you agree with Mikes rational? I see where he is coming from but I tend to disagree. The 1st year after an acquisition is usually the year with the highest risk of the business underperforming because of transitions, on-boarding etc. The buyer will also be the one to put in the work with perhaps a few hours of support from the seller every now and then. So…Does the business really sell at closer to a 2x multiple in the short run? Maybe. But is the seller actually working for that additional 1x multiple? No, the buyer is. Hence, the risk is shared…rightfully so.
I can also see seller based financing as a great way to increase the multiple that the business is sold at. However, in this case, Mike wanted/needed the cash to pay off the loan. I wonder if he would have been open to a higher multiple and seller based financing had he not needed the cash for the loan.
Initial Broker Steps to Selling the Business 📜
Seller Interview - Seller does a written and recorded interview through Zoom.
💡 As a seller, this step is important because it begins establishing trust with potential buyers. Important information can be shared that might not come up on the surface level of a P & L. For example, repeat customers, the club money, inventory and cost of goods sold savings. This is also a great point where the seller may share further growth potential for the business. For example, ColorIt sells thousands of gel pens yearly. ColorIt’s sourcing agent found a similar good quality gel pen manufacturer at a cost savings of $1.60 per pen. If ColorIt sells 1,000 pens per month, this produces $1,600 in savings. So what they did was look back at the last 24 months and applied a monthly savings of $1,600. This alone in the trailing 24 months added up to $38,400 as an add back. This is a great example of why capturing good data is so important. Without this data, they would have missed out on 3x of $38,400 which is about $115,200. The reason this is a legitimate add back is because this expense is going to carry forward for the new owners.
Conference Calls - The goal is to have three to five conference calls with potential buyers within the first 30 to 45 days. Once these are complete, they should lead to at least one acceptable offer under a Letter of Intent(LOI) to buy the business. If it’s a cash buyer, it’s going to take about another 30 to 45 days to close and if it’s a buyer getting a loan from the Small Business Administration(SBA), it’s going to take another 60 to 90 days to close.
Listing the Business for Sale 🎉
Mike knew that they were going to have a really good December which would make the business more attractive. Against recommendation, Mike put the business up for sale in mid-December to gather the level of interest for his business…but in the end there was none. The December sales hadn’t posted yet and the listing date was right before the Christmas holidays, which is when people are occupied with other things.
💡 Timing matters when listing your business. Since the outsized December sales hadn’t posted yet, Mike had to make up for these sales by increasing the multiple of the business. This outsized multiple wasn’t well received by potential buyers.
December sales were expected to be particularly high because many people buy coloring books around the Christmas holidays as gifts. In fact, 40 to 60% of ColorIt’s yearly revenue came from December sales. Jeez…We can see why not including these revenues significantly reduced the trailing 12 months revenues. As mentioned before… they didn’t include December, so they had to make up for the sales by increasing the multiple of the business listing.
💡 Buyers typically look at the multiple first and then decide to read the teaser of the business. If the teaser is interesting enough and they’re okay with the multiple, they dig in further. The combination of these factors led to fewer interested buyers and so they resorted to taking the listing down.
Re-listing the Business 🙏
The business ended up being re-listed in January and this time it was listed at a 3.2x multiple, instead of a 4x multiple since now they could rightfully account for the December sales. Great news…Potential buyers showed up and ColorIt was under LOI with a company on February 5th 2019. Matt tells us that “the next two months were spent doing due diligence, which was incredibly stressful.”
I believe the word that I heard the most in Mike’s 5 interviews when speaking about his businesses is “Stressful”. I’m sure he didn’t intend on this being the case but nonetheless, an intriguing observation.
Matt decided to hire a company called Centurica for the process of due diligence. Centurica does in depth website assessments and provides due diligence services to avoid scams, fraud and unreliable information. Mike tells us that the “due diligence process proved to be very stressful not because we were worried that they were going to find something hidden but because they were finding stuff that I didn’t even know was wrong with our business…We also didn’t know how much more time this was going to take.
It’s stressful when someone keeps on asking for more and more and more information. It definitely was not an easy few weeks. We also then negotiated the asset purchase agreement. Once we had everything under wraps and agreed upon, one of the things that was still outstanding was to sell our Amazon sellers account, which led to another whole series of stress. “
Mistakes Uncovered During Due Diligence 😮
Understated Cost of goods sold(COGS) - “ColorIt’s COGS were being understated by errors done by our bookkeeper, which means that we were showing a higher net profit than we thought we were making. On any individual month, this wasn’t a big number… It might have been $1,000. But over time, this added up to a lot.”
$1,000 x 12 months x 3 years = $36,000 and 36,000 at a 3.2x valuation is $115.2k. Definitely not peanuts.
Unadjusted International currencies - The bookkeeper wasn’t converting the currencies from UK and Canadian seller accounts into US Dollars. She would just take the UK amount and write it down as US dollars without accounting for the currency conversion.
Woops.
Unattributed Refunds - Refunds were not being attributed properly. ‘So if we had a return, let’s say we gave someone a $100 refund, that’s obviously $100 less in income that we should have been reporting. I realized this because the inventory asset account was starting to balloon since the COGS weren’t being properly accounted for. I went through and looked at our balance sheet line by line and saw this relatively large clearing accounting number that should always be close to zero
This was an error Mike found and chose to tell Centurica. Actions like these set the foundation for trust early on in relationships…Mike could have easily looked the other way.
All 4 Brands under 1 Amazon Seller Account - Since Mike owned multiple businesses under the Terran umbrella they had to make three separate LLCs and create three separate Amazon seller accounts.
As an entrepreneur and potential business seller, you want to look at your business from the standpoint of the ultimate buyer. For example, in an E-Commerce sale, the buyer might just buy the assets from the seller and leave behind everything else. This is what happened with the sale of ‘Anchored’ for 867k. The buyer didn’t want the liabilities that the sellers LLC had incurred, like taxes, but they did want the actual assets, like domain names, customer lists, inventory etc. In the sale of Colorit, things were slightly different. The buyer wanted the Amazon seller account that the brand was in because they didn’t want to risk moving the account or creating a new one only to have the organic rankings drop.
Meeting the Buyers In Person 🤝
“I went out to Austin, which is where these guys are based. I happened to be out there for a mastermind so I extended my trip and spent two full days with the buyers. I got incredibly lucky as these are two amazing individuals. We really hit it off. Matt and his partner Nirav have been awesome to work with. I’m excited to have a good group of people own the business. They have gone out of their way to make my life as easy as possible and I think this is one reason I went out of my way to do the same for them. I did everything I possibly could in good conscious to make sure that this business handover was as smooth as possible.”
This is a sneak-peek of how the seller felt about the buyers. I've said this in all my other deep dives, but it's worth repeating...Rapport between the seller and potential buyer is a MAJOR and often unconsidered advantage. It is said that most deals are 90% emotional, 10% financial...let that sink in. 👀
Matt had and still has a full time job(This is probably why they didn’t want to disclose his last name) and works at least 60 hours a week doing it. So he dealt with each issue as it came. He wanted ColorIt’s employees to be taken care of and worked to instill confidence in them by ensuring they knew that their lives wouldn’t change.
This is a sign of two emotionally intelligent business buyers. Someone who isn’t emotionally intelligent wouldn’t go through these steps and would therefore suffer greatly when half his team quits months later.
Admirable Seller’s Frame of Mind 🧠
Mike’s frame of mind on how to treat the buyer is one that every aspiring seller should adopt. He tells us, "I was sitting down thinking about what Matt and Nirav would say about me when talking to their friends in a private conversation. Their perspective of me and how I treated them mattered to me. Were they deceived in any way? Were they treated in the right way? I wanted them to say nothing but glowing things about me because I want to treat others how I like to be treated. That was my goal and my standard.”
What I love about this frame of mind is that if one follows it to a tee and makes every decision with this mindset, it almost guarantees a collaborative outcome. A collaborative outcome is vital because the world is getting smaller and positive/negative word gets out with ease.
ColorIt’s 2x-3x Growth Opportunity 📈
Mike tells us that “selling the business was a bad business decision from the standpoint that the business was continuing to grow. I think that the people who bought the business are going to double or triple it over the next couple of years and can resell it for significantly more than what they paid for it. From that perspective, it was a bad business decision, but it was a good personal decision since not selling it would have come at the peril of my health”.
We observed this exact same scenario in the SaaS sale of Baremetrics and E-Commerce sale of the Anchor business. Both businesses where doing beautifully well, but the founder had personal reasons to sell. Contrary to popular belief, the fact that a business is for sale, is not an automatic indicator that something is wrong with it. The best buyers discover nuances like this.
Mike’s Takeaways 📓
“Go deep vs wide with your businesses. Having multiple revenue streams is good because of diversification but it also takes away focus. I was chasing too many rabbits and catching none. No matter how good your virtual assistants are, no matter how good your employees are, they’re not going to do as well as an owner operator will and they’re not going to care as much.”
This can be seen in the trailing 12 months P & L statement. Mike had handed over the advertising budget to one of his employees and they ended up spending too much money carelessly. Advertising spending had gone up but profit had not. Mike decided to step back in and advertising expenses came back down but profit increased this time. Prime example that intentionality pays off. This was probably another ~35k that was wasted advertising dollars in the trailing 12 months. At a 3.2x multiple, this becomes is 112k
Create separate LLC’s and Amazon accounts from the very beginning
Even if you sell on amazon, seek metrics that show that your customers are repeat customers. Potential business buyers love knowing the percentage of revenue that is recurring. Recurring revenue makes a big difference because it add’s security to the deal.
Say hi on LinkedIn & Twitter (@JaygerMcGough), together we’ll become smarter about buying and selling businesses.
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Mike’s Interviews of ColorIt: Why I sold ColorIt, Preparing for the Sale of ColorIt - Pt 1, Part 2, How Our Filipino Team Reacted to the Sale