The E-commerce Leader

[00:00:00] They had a high quality product. It had effect of efficacy that they had documented on and on and on. Well, they couldn’t get any, uh, uh, shopping cart payment providers to allow them to sell the product. You know, they’re so early into it. The, you know, the, the, the finance. Uh, people at the, at the, um, merchant services companies would freak out.
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[00:01:20] in our last episode, we talked all about the key performance indicators for buying a business, things you want to look into related to the numbers and financials. And in this podcast, we’re going to talk about the non financial metrics involved. We’ve got. Awesome list of nine things you want to look at when you’re thinking about buying a business that are really going to help you clarify the opportunity and dig deeper into your diligence as you evaluate deals.
[00:01:52] So Michael, are you ready to jump into this fun process? I absolutely love this stuff. Um, this has been very much top of mind for me recently. I’ve been looking for myself. I know you’ve been quietly in the background, you know, acquiring businesses for quite a while now. I’ve been working with clients to assess businesses.
[00:02:07] So this is really much my. Current obsession. The other thing I would just say is the reason this is important is if you’re thinking of buying a business, but then you think, Oh, that’s very risky. It’s like anything in life. If you approach it the wrong way, like driving a car could be deadly, but you need to know what to look for.
[00:02:23] And then you need to train yourself to have a new skillset and then you reduce risk to an acceptable level. I think having criteria like this to assess is a great way to reduce the risk and keep all of that lovely upside that comes from buying a business. Yeah, I totally agree. Okay. So we’ve got a list of nine really important things.
[00:02:39] I would call them key performance indicators. It’s just not financial. You know, I mean, there’s still, there’s still KPIs in a way, but let’s jump into them and, um, really, uh, just go for it here. So the first one on the list is, uh, passion. Do you absolutely love the business that you’re considering acquiring to the point?
[00:03:00] Of it’s keeping you up at night, dreaming about it to the point that you’re obsessed with it, to the point that your friends and family are like, stop talking about that business you want to buy because, uh, we’re tired of hearing about it, but you’ve, you know, do you have a level of super interest in it?
[00:03:15] And I would just parse out one thing. If you say to yourself, yes, I’m super passionate about making a lot of money from this new business. Like if it resolves itself to just the money, like it’s just a business opportunity. I’m not sure that’s enough. I think you’ve got to say to yourself, I like this thing so much.
[00:03:35] I’m going to be proud to own it. I’m going to be excited to run it. I’m not going to be a negligent in my duties. Um, and so that passion piece to me, I think is the first. And most important non financial thing that you can even think about when you’re talking about potentially buying a business. Yeah, I like this is a great corrective for me.
[00:03:55] I have a bad tendency to be too analytical and to enjoy the analytical process itself, which I think is for me in a way that the part that excites me the most, but forget about whether I actually care about the business. I think you’re right. I think it’s really, really important. I think it’s particularly important if, um, there are certain sectors and Amazon selling is one of them that, that invite you to kind of think about the numbers and treat the business itself as an afterthought.
[00:04:18] And I think particularly in that sort of thing, or if the growth metrics are really high, um, they can be really dangerous. And so, yeah, I think just purely financial metrics. You’re right. Yeah. Yeah. And you can fool yourself. If I’m being completely candid. Yes. You know, you, you might hear, Hey, this thing is making 400, 000 a year, net profit, and I can buy it.
[00:04:38] And you say to yourself, I am passionate about that deal because why wouldn’t you be? Right. But, um, but again, I think you’ve got to evaluate it. Just strip it down and be like, if I was starting a business, would I start this business? Am I willing to go for broke on this deal? Is this something that I’m really, really into?
[00:04:57] Um, and those questions I think are vital. Okay. So that’s the first one, not that controversial and super obvious. I think after you point it out, right? Yeah. Agreed. The only other thing I’d say is I think depending on who you’re buying from with small business owners, um, he’s built something from scratch, that’s going to be more important to them than it would be in a bigger, more corporate financial deal making context.
[00:05:16] So your passion for the subjects is even more important as part of the negotiations is all I would say. Yeah. And to that point, then what you’re talking about is are you passionate about what buying that business will do for your current company? You know, like, is there a strategic value that it’s going to bring fill out a certain aspect of what you have or do already?
[00:05:37] And you could be certainly passionate about that. Like, Hey, when we get this thing, we’re going to have a complete and total digital product line to bolt onto our physical product line. Or we’re going to have Yeah. Yeah. You know, a whole new niche that we can get, be into. That’s a parallel to the one we’re in already.
[00:05:53] And that’s super exciting. So, you know, it can be a meta issue that you’re sort of a higher level, 30, 000 foot view passion, but there’s gotta be something there that you’re really, really. Obsessing over, so yeah, I agree. Great. Yeah. Okay. So the 2nd 1 is your, is your topic. You add it to the list. I tweak the wording a little bit.
[00:06:11] You define it as age of business. I said, uh, I would call that durability of of the business. Uh, or the brand and product line and everything associated with it. Why did you say that one was so important for you? Well, again, I start with statistics. Sometimes I’m a rather sort of over analytical guy. I realized when you’re talking about passion, I’m like, Oh yeah.
[00:06:31] I’ve forgotten about passion. That’s really, really critical. But I would say, um, the statistics around business failure give you a good guide. So there are any rough numbers and how. How real are they? We don’t know, but they give you a rough, they roughly parallel experience, right? So after one year, 40% of businesses fail, 90% will survive for five years if they’re over 10 years old.
[00:06:50] So broadly speaking, the older a business is, the more likely you are to be able to say with some kind of statistical certainty. Some kind that it’s going to last for a certain amount of time. No, it’s very rough, but I mean, I do think that it goes with a couple of other more measurable things. One is a longer credit history.
[00:07:06] So certainly people who give credit to businesses tend to perceive longevity as being correlated to, you know, stability and, and, and lendability. And then obviously reputation with suppliers and even in the marketplace. Can also be associated with, with longevity. So it comes with quite a few slightly more concrete reasons to believe it as well.
[00:07:26] And the durability of the brand associated. I mean, if it, if it has a brand that it’s camped on for a longer period of time, longer, the better. Absolutely. Yes. I’m reminded of, uh, Abercrombie and Fitch. Um, that clothing line that was, uh, um. Mail order catalog for ducks hunting supplies, I think in the 1850s or some crazy old thing, uh, such, such a legacy brand.
[00:07:48] And then, you know, the people ultimately, you know, converted it into a fashion brand that’s super trendy, but the age of the business, uh, is really vital. Um, for so, for so many reasons. So I totally agree with this one and it might not be Abercrombie and Fitch, but I think it was that brand that I’m thinking of that was super old and they turned it into a fashion, you know, brand.
[00:08:05] Okay. So, so that’s the second one. Um, the third one I think is really, really super important and that’s the niche strength or niche strength, uh, as you’d call it. Um, and that, and that answers the question, is it in a stable long term high quality. Niche, or is it a fly by night thing that might be much more tenuous to, you know, the space to operate in, um, the, the strength of the niche and the durability of it, I think is really, really important to think through.
[00:08:37] And I’ll just say, so, for example, there are some niches that are created in internet marketing space. That’s a race to zero. You know, it’s, um, there’s tragedy of commons that kicks in. There’s no, um, power law associated with a winner take most or winner take all, you know, it’s a niche that is going to be basically a big hot mess after a couple of years.
[00:08:57] And once you are an online operator for long enough, you see these things and you can just tell, Oh, this niche is going to go to zero. Um, Or, you know, this is, this is gonna be a blood bath, or it’s gonna be shut down by the F T [00:09:10] C or , F D F D A, or you know, it’s gonna be le legislated out of existence. Yeah.
[00:09:16] Or you’re gonna, everybody in there is gonna be sued because people are, you know, ill from the product or, you know, on and on and on. Um, and so that strength of niche I think is really important. Neil, so that I, I agree entirely. Um, first of all, if you are on Amazon specifically, there are certain products that come direct from China.
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[00:10:21] I mean, you could simplify. Amazon third party selling as Amazon’s basically the shop window for the Chinese factories to sell direct to American consumers and cut everybody out. And so if the products that the Chinese will make, um, cheaply and, and it’s driven by price and often, sadly, things are more driven by price than we would like to admit, then that’s something to stay out of because basically it becomes a highly efficient market.
[00:10:43] And that means the profit drops effectively to zero if you’re lucky, or in fact, they sell at a loss because the Chinese kind of don’t care about that. Profit in the way that every other nation does. So, uh, yeah, that’s, that’s a very big problem. The only thing I’d say about legislation, I’ve seen people, for example, somebody of client of mine against my advice, I have to say we’re selling lock picking sets of all things and quite unsurprisingly, Amazon decided to ban them at some point for some legal risk, but it does go the other way.
[00:11:09] So CBD is an interesting place to, to think about particularly buying an existing business. Jumping through FTC or European Union rules could be an enormous pain, but if somebody else has done that, and you’ve really evaluated the legislation, probably with the help of an expert lawyer, that could actually be a moderate risk thing that’s actually going more towards legalization than the other way.
[00:11:32] So it’s always worth thinking about both sides of that equation, but you’re right. I mean, a lot of the time you just need to use your common sense and walk away from a lot of deals, really. Yeah, the CBD thing’s interesting. We had clients we worked with probably four years ago that, um, we’re trying to set up their operation.
[00:11:47] They had a high quality product. It had effect of efficacy that they had documented on and on and on. Well, they couldn’t get any, uh, uh, shopping cart payment providers to allow them to sell the product. You know, they’re so early into it. The, you know, the, the, the finance. Uh, people at the, at the, um, merchant services companies would freak out.
[00:12:08] And so what happened to this company is they would interact with a sales rep from a, you know, merchant service provider, um, that would say, Oh, of course we can do this. Of course we can, we’re all, we, we definitely can support your CBD, you know, product line. Then they’d install that, uh, merchant service provider account, rig it all up.
[00:12:27] And then of course the company would retract. The services, because their legal team reviewed it or whatever, and they were in a cycle where that had happened. So they were just early into a burgeoning niche that was going to emerge. People could tell this was becoming legalized. This is not a pot, you know, uh, this, this is a derivative, uh, and it’s, you know, it does have, you know, medical, uh, efficacy.
[00:12:54] And, um, unfortunately, if you’re too early into any game, that’s contentious, Uh, it’s going to be a lot, lot harder to establish your business. Now you might have first mover advantage if you get it all figured out. But then again, in an industry like that, you might be competing against massive, massive companies.
[00:13:12] So like for that specific example, I don’t think that’s a good niche to go into because you will be competing against a million Goliaths. Uh, in a gladiator ring, but anyway, so those are nuances of the niche strength question, you know, and one thing that’s come out of that is really, I think, um, the relationship between your personal or your company’s strengths and weaknesses and your, your plan.
[00:13:35] And that includes the type of. So, for example, as a guy that I’ve been working with for a couple of years, he’s probably never going to become a client. One of those people, but he happens to have a background in, he’s got a law degree and he produces CBD oil. So he’s very expert. So if I were going to go in and acquire a business, I may yet go back to him and say, look, forget about that deal we were talking about.
[00:13:54] I want you on board as an acquisition partner and you can do the legal due diligence because he’s peculiarly well placed to do that. So again, it comes down to, if you’re going to go into tricky waters, going with an absolute expert guide or stay away, which isn’t quite the same as just stay away. Yeah.
[00:14:09] But you can simplify it to. Stay away from tricky things. Yeah. Don’t sell fireworks online or CBD. All right, cool. Um, so, uh, the, the fourth one leans right into that idea, which is a brand power. Are you buying a brand or just a product sellers business? And this is really with an eye towards the Amazon, uh, you know, uh, businesses that you could potentially buy, um, the opportunity to buy a real brand.
[00:14:39] That has long term power and, um, and by power specifically, I mean, does it resonate with your ideal audience and is there a long term queue of people who have bonded with that brand in association with that product? I mean, is it hitting on the right topic and phrasing and visuals and graphics for the ideal customer?
[00:15:03] Um, and how long has that been occurring? Um, the. The powerful thing to think through there, and this is really where… Um, you know, you, you want to think through is as the brand, um, has power, it’s really technically like, um, in a deal, um, it’s called goodwill. It’s like, it’s like not really actually recorded on the books on the, on the KPIs on the financial side, but, but, you know, when you see it, it’s like, you know, a high quality brand.
[00:15:31] Immediately on face value, usually when you hear the name, when you see the logo, when you see the U. R. L. those things just stand out as strength. Um, and you can see when there are not those things. That it’s an obvious weakness and all things being equal. If you’ve got a business, you could buy, let’s just say you could buy it for 500, 000.
[00:15:52] One has a super powerful brand and the other has just some rando name that they’re selling on and you know, on Amazon, you, you have to think that that brand is worth real, real money for you in the future. Um, so this is a reason why it’s really important to think through and, uh, and to look at deals with that lens, you know, am I buying a high quality brand?
[00:16:13] What are your thoughts on that? So for me, I think it can be really important. Here’s what I would say. You certainly shouldn’t pay, you know, the sort of money you’d pay for a high quality brand for a business that doesn’t have much of a brand. I would say that for me personally, there is value in a business which hasn’t got a great brand as long as, um.
[00:16:32] It’s good enough for you to build on and as long as you pay an appropriate amount of money for that. So if you pay, you know, three times, um, earnings for, uh, say something doing 150, 000 a year on Amazon doesn’t got a great brand, but has the potential sort of platform for that. So it’s got some contacts, it’s got some well made products, it’s got.
[00:16:51] The essence of it, but you can, somebody like yourself could bring a whole bunch of fantastic brand building and customer contact things to bear that could be a very good deal, but if you’re going to pay seven times earnings, then, you know, I’d want to see a Shopify site. I’d want to see some real traction in terms of name recognition.
[00:17:08] I want to see evidence like. Google search volumes using the brand name or Amazon search volume using the brand name and so forth. You know, so I think for me, I’m a little bit more flexible on the question of brands, but I don’t want to overpay for something that doesn’t have brand is the way I would put it.
[00:17:24] Yeah. And I think what you’re describing leads right into our number six opportunities. Let me just reorder our list real quick and just top jump into that topic. We’ll, we’ll reorder the list a little bit here. So what you’re talking about is you’re seeing it an opportunity. And so, so let’s just put that as the next topic here is that we’ll call it number five.
[00:17:43] Is there an opportunity for you with this business you’re buying? And I would say, can you see five easy ways to improve it? The metaphor I would like to use is, are you buying a cut diamond from the jewelry store or are you buying an uncut diamond? And if you’ve got five angles that you can cut into a business, like to your point, if you see a really well selling.
[00:18:06] Um, you know, unique product on Amazon and the people want to sell that and they really have not created a brand around it, then that’s 1 of your angles, you know, and that’s fantastic. Um, and on and on and on. I mean, you know, what, what other ways can you [00:18:20] add, uh, you know, real value to the business and they have to be in your mind.
[00:18:24] Very, very clear. Uh, they, you know, people might propose the seller might propose you, you could do this with this, you know, opportunity and you could do that with this opportunity. Those aren’t your visions of the future. Those aren’t your ways to add value. Those are being sold to you as a part of the package.
[00:18:43] It’s not nearly as helpful or meaningful as if you personally, as you’re obsessing over the business can say, oh, my goodness. They don’t do email marketing. Well, you know, or that kind of thing. Um, and I would be, I would be, um, careful. In the selling and buying process in the, in the deal making to not disclose these 5 things because, um, 1st of all, they’ll be perceived as judgment.
[00:19:09] You know, if you say, if you say in the deal structure, man, I, I just can’t believe you guys don’t do, um, social media at all. I, I can’t wait to get that started. They’ll perceive it as a judgment. You know, they’ll, they’ll perceive it as an insult. And so you just want to keep those five easy things that you can do to improve it to yourself.
[00:19:27] Have it on the clarity in your mind, have a battle plan for how to implement those prioritize them. Which one would you do first on and on and on? You know, if they don’t have a Shopify site, that’s obviously going to be on the list. To your point, if they don’t have a good clear brand, those assets are really important to build and that can be done.
[00:19:44] The email marketing, social media, uh, affiliate deals on and on. You know, you, you, the opportunity ideas can start flowing once you see the specifics of the business, but, um, you really need to have those fully cooked because day one you hit the ground. Um, you know, you’ve got to figure out what you’re doing.
[00:20:00] Are you just status quo in this deal or are you adding exponential value? I like that a lot. I got a ticking off from there. Rather blunt, um, very experienced m and a specialist accountant the other day, because I didn’t have exactly that, a very clear plan for how am I gonna grow the businesses I acquire.
[00:20:17] And so, yeah, I’ve, I’ve been accused of that before, like, like a vision. Even when I was conducting choirs, I’m like, well, let’s just get the next concert really good. And they were like, yeah, but what are we doing for the next five years? I’m like, oh my goodness. I don’t actually think that way. So, you know, this isn’t a gift that we all have, I guess.
[00:20:31] Yeah. So for that reason, I try to keep it simple. What are your favorite sort of five ways that you would look for in a business that you would need to expand? And you mentioned a few theoretical possibilities. Uh, what are your sort of top favorite ways that if you see a business that doesn’t have it, you think I can really go to town on this for you personally?
[00:20:49] Yeah. Um, that’s a good question. I. Oddly enough, I had lunch this week with a local business owner and, um, for a nonprofit related thing we’re doing in town and, um, just ask him about his business. I went to his store and, um, you know, we had lunch and, you know, as you do, you just ask kind of who you are, what you do type things and.
[00:21:10] My mind always goes to internet marketing. So, you know, ask, do you have a website? No, never did a website. We just always sold local. And do you ever do email marketing or capture emails in the process of, you know, purchasing? No, we’ve never done email marketing. So, um, you know, my mind runs to the, the big waves of, I guess, internet success.
[00:21:30] The first wave was. Can you have a website for your business? Yes, you can. You know, that was 25 years ago, but a lot of people miss that boat. And you know, a lot of Amazon sellers of scale that have missed that boat too. So can you have a website? First question, uh, can you do effective email marketing? And that’s the first and best traffic strategy.
[00:21:47] Um, And so those are the top, uh, social media follows on after that, um, a lot and then a brand related things follow on in my mind quickly after that. For example, a lot of the businesses that we’ve acquired, um, have had a brand that I would say was not professionally. Put together, but had the makings of the opportunity to put together the professionalism to support the brand, you know, the business.
[00:22:14] And so, you know, you’ve got maybe if they got a brand, that’s just under presented or or not clearly presented, you know, you can immediately start to see opportunities there. Um, and then you go, of course, the products, you know, product line opportunities. Um, and that whole spectrum from digital goods to, um, physical items to, um, even affiliate opportunities or co partner, you know, co marketing opportunities with other companies, um, on and on.
[00:22:41] So there’s a, there’s a lot to sort through as it relates to opportunity. It all depends on what the specifics of the situation is with that individual business, you know. Nice. But that’s, that’s a good sort of hit list for you personally, based on your skill set. I mean, that’s, for me personally, I’m looking for things like, uh, geographical expansion within Amazon.
[00:23:00] So that doesn’t scare me. And I’ve got the contacts to do that. Um, which brings me really to the other thing is I’ve got the required network to help advise on operate and sell businesses in the Amazon type space. Now, I don’t think that’s superior to Shopify type, um, business. On the contrary, they have obvious concentration risk.
[00:23:15] But at least I know how to handle that. And, and over time I might, you know, use in my network. Like yeah, I get a hold of you and, and get you in as a consultant and say, right, I want to put a Shopify store on top of this. What’s the overall strategy here? And, and, you know, get work with you on that. So that would be another reason to do that.
[00:23:30] If I didn’t happen to know you or experts in Shopify, I wouldn’t do that. That’s, um, that’s a sales channel view, right? Sales channel. Yeah. I guess are they on Amazon? Are they on Shopify? Are they on Walmart? Are they on eBay? Are they on Etsy? Uh, you know, on and on. Umhmm. That sales channel question is a great question.
[00:23:47] Yeah. The other two things are one is familiar to every e commerce operator ever, which is add on more products. Now you’ve got to go in knowing the working capital requirements of that. So you cannot go in paying 500, 000 for a business and then ignore the fact that you need 250, 000 to expand it. If you’re going to expand the product lines, if you’re importing from China with hard goods, right?
[00:24:09] So it depends on the model, but you know. All things being equal, if you’re well funded, that’s the obvious thing. The other less obvious thing that is in way my preferred way, because I don’t want to get into the micromanagement of, of creating products, because that doesn’t give me joy, but it does give others joy is for me to bolt on whole other businesses.
[00:24:26] So buy a dog supplement brand and then bought on a toys. A dog toys brand for me, that’s a bigger, more exciting way of doing it. Um, you can do both obviously, but I do think it’s good to have your favorite ways and ways that you’re versed in. And again, to your first point that give you some joy, if it’s something you feel you should do, you don’t enjoy it.
[00:24:47] That’s gonna be a big tension, isn’t it? Yeah, totally. Okay. So that’s, uh, that’s, um, uh, we’ll call it five.
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