The E-commerce Leader

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[00:00:00] JM: you never know what kind of amazing deal. Might potentially fall into your lap and you want to have the arsenal of tools ready to go
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[00:01:08] JM: So Michael, I’ve heard you’ve been trying to borrow as much money as you possibly can, acting like a drunken riverboat gambler or something like that, going around the world, asking people how to get as much business capital as possible for your various shenanigans. So. What’s going on, man? That’s funny.
[00:01:26] MV: That’s not quite the intro I was expecting from a discussion, but that’s quite funny. I have been going around asking people as they, they can lend me lots of money. I have not hopefully been doing so in a drunken manner. Well, I definitely haven’t been drunk while I’ve been doing it. So that’s an amazingly, um, entertaining tee up for the conversation today.
[00:01:43] So yeah, I want to talk about acquisition finance. So I’ve been talking to a lot of lenders and finance brokers as part of my mission to put together deals. And we’re just really starting to pay off. I haven’t got my first acquisition done yet, but I have already got a client who I’m working with to help him with his first acquisition.
[00:01:59] And he was slightly depressed at the end of our last call, because I think the business he was excited about doesn’t look quite as shiny as it did, but he did say, look, I’m feeling like you’ve taken the rose tinted spectacles off. And, um, so. That’s why I hired you for. And so I’m happy with that. So that’s going well.
[00:02:13] And a big part of that, of course, is looking at the numbers and lending is an interesting exercise because I would say is a prelude to a couple of people. It’s really important to say that even if you’re not looking for lending, it can be very educational talking to lenders because of the way they look at the business.
[00:02:30] JM: Yeah, this is really, really interesting. I love it. Um, very cool topic. Uh, obviously we’re in a. Climate in which many, many businesses are going under transition from owner operators that are, you know, baby boomers that are looking to retire. Then you’ve got the whole segment of e commerce operators that have started e commerce businesses that want to sell them to move on to, you know, greener pastures or whatever.
[00:02:56] And it creates a climate in which there’s a lot of opportunity for deal making. So I’m excited about this topic because one of the tools in your toolbox should absolutely be how to do an acquisition via a loan product. Um, you know, cinnamon and I have done acquisitions, uh, via, uh, term payments by, you know, the, the, the, the, the seller has financed the deals basically for us, we’ve paid cash for, uh, businesses we’ve acquired.
[00:03:24] We’ve never done a big loan product for an acquisition. I tried. And I got turned down by Chase Bank. Um, and so that’s interesting. Uh, so I’m really keen to hear what you’ve got on this list of notes. You’ve been talking to these lenders and really learning a lot in the process. And I think it’s a great, great skill set for anybody who is in growth through acquisition mode or wants to be in the future as a way to scale up their e commerce.
[00:03:53] And I know a lot of our, you know, community here that follow me or, you know, Dave Ramsey fans, and they’re really averse to borrowing. Uh, you know, a lot of, uh, a lot of folks who are more conservative. Uh, we’ll say they don’t want to borrow, but I think it behooves all of us to understand the mechanics of this.
[00:04:13] And I’ve always, it’s always funny. Cause I hear people say, I don’t want to, I don’t want to borrow money. I don’t want to be in debt. I’m like, how’d you get your house? Well, we have a mortgage, so it’s kind of like, you’ll do it if you want to. And so you might as well learn how this works for business acquisition.
[00:04:28] Cause you never know what kind of amazing deal. Might potentially fall into your lap and you want to have the arsenal of tools ready to go. So anyway, with that little pretext on my side, um, should we jump into the topic, Michael?
[00:04:42] MV: Yes, I think you’ve raised a couple of really, really important points. So let me just reference those.
[00:04:46] The first one is. Uh, let me just address people here like that. It’s on the hard side of like, never borrow. It’s, it’s ethically wrong or something. And I have some sympathy with that viewpoint. I don’t share it. Otherwise it would be a bit stupid for me to talk to lenders, but, you know, very strong Christians and Muslims.
[00:05:02] I can understand that. And, but I would say is you don’t have to borrow a penny ever. To learn insights from finances. In fact, I would argue, you know, it’s know your enemy. Isn’t it? The people that are the most obsessed with the God question, the atheists and theists, like I’m a bit agnostic is I don’t really care that much.
[00:05:17] And I would say, you know, if you care that much about debt, then, you know, even learning it about it is going to give you insights. And the other thing I would say is this, so owner operators who aren’t planning yet to acquire a business. There’s a really amazing reality check you get from lenders. If your business isn’t lendable.
[00:05:33] While you may not want to loan, if nobody will lend you money, that should be a big red flag for you to check your finances because, you know, there’s a reasonable, there’s a very rational cold hard basis for that. So with that prelude, I think those, those groups of people should still consider it. So whether you’re wanting to acquire or an operator, then I think there’s a lot to be, to be learned from this.
[00:05:53] So yeah, let’s plunge in. I’ve got 11 points, which is a really stupid number, but that’s how it came out.
[00:05:57] JM: That’s super cool. I’m going to be the. The one who kind of tease them up for you. So what’s point number one?
[00:06:02] MV: So the point number one is, um, to someone like yourself, Jason, who’s a profit oriented or profit driven entrepreneur, you’ve got a phrase you use for that.
[00:06:09] But, um, this is kind of one on one and very obvious, but a business is valued as a multiple of profits, not revenue. And I think it’s so important to say that because people kind of go, yeah, yeah, yeah. And then they go, yeah, but look, I’m growing my business. And they said that to me all the time in the master.
[00:06:22] Mind or one to one clients. And I said, when, when you say growing your business, what do you mean? And they go, well, I’m growing the revenue. I’m like, okay, so listen to the words you’ve just used. You’re growing the revenue that is not growing the value of a business as a sellable entity. And that becomes very, very real.
[00:06:37] When you look at the numbers either on the acquiring or the selling side, because you realize, okay, well, if you’ve got a declining profits. Is a percentage of the revenue. So if your revenue goes up, but your profits are the same for me, that’s a big red flag. That’s literally what I’ve been just seeing on somebody’s financials.
[00:06:54] I was going through with this client that hired me to go through this. And so it is not a virtue to drive revenue per se. And I think it’s just important to reiterate that.
[00:07:04] JM: It’s interesting, isn’t it? Because if you don’t have a big enough top line, nobody will be interested in buying your business generally.
[00:07:11] So you got to get to some. You know, a critical mass on the top line sales. And usually people would say that’s something like, you know, two to 3 million makes your business sellable. Now, you know, it’s debatable. We bought businesses at all different levels. So it’s really unique for every situation, but, but you’d have to get to top line growth.
[00:07:31] But the problem is if you’re working on strategies for top line growth, by spending all of your net profit on. New ventures, which Amazon’s been doing for 25 years. But if in any of those cycles, Jeff Bezos said, I think I’m going to sell Amazon. People would be like, this is a flaming turd. I don’t want to buy this business because there’s no profit, you know?
[00:07:55] Um, or they’d see the wisdom and what he was doing and of course buy it. But you get my point. Um, if you’re in the cycle where you’re trying to grow and you don’t have much profit, it’s a really bad time to try to sell your business. You almost want to be. Super long, long thinking and say, okay, I’m in growth mode.
[00:08:12] I don’t have much profit to show right now, but in another year or two, this thing’s going to be a cash cow on the books and then I’m going to sell it. You know,
[00:08:21] MV: well, you bring out some fascinating points. So let’s delve into these. I mean, first of all, Amazon, I mean, run by a former wall street guy who I think is the strategic genius of our times.
[00:08:29] I mean, just incredible business per owner. And I’m sure Andy just is good as well, but like pretty incredible, but, um. Everything was mindful and done for a reason at Amazon. And one of the reasons they didn’t want to make profits because you get taxed on profit. But one of the reasons that worked is number one, it’s a PLC.
[00:08:43] It’s a wall street listed, not wall street, but you know, yeah, whatever it’s lost in the New York stock exchange. So they could borrow at 1% and invest things that make a 2% return. And that’s still works financially. That won’t work now, but it did back in the day. Um, also it was a growth stock. So the future cashflow promise is what it was sold on.
[00:09:01] Now you’re right. If I love the flaming turd image, that’s a very strong image kind of thing. I would say I’ve been influencing you Jason here with my British ways, but, um, the, uh, you’re [00:09:10] right. If at some point it has to be profitable now, now, if you’ve got a small business, you can’t pretend it’s the next Amazon.
[00:09:15] The first one I would say. And the second thing is interesting that you differentiate between reinvesting all the money and very low profits versus high profits. Now, another interesting, well known business that that would be a counter case to that would be Southwest Airlines, which in an industry that’s infamous for losing money, the Warren Buffett quote, I think it’s the best way to become a millionaire is invest a billion in an airline.
[00:09:36] So, uh, in that context, they, they got very, very consistent profits every year for like 30 straight years. I would say. That’s probably a more sustainable, wiser course for quite a lot of people. There’s a path between that and reinvestment. Um, but it’s interesting, isn’t it? I mean, the other thing I would say to that point, two, 3 million.
[00:09:54] I mean, I see a lot of businesses that sell that, that are only doing, you know, sub a million dollars in revenue for sure.
[00:10:00] JM: Yeah, there, there’s a, there’s certainly marketplaces that allow you to try to sell any size business at all. So, yeah. The, the rule that nobody will be interested, unless it’s two to 3 million in sales, is sort of stupid.
[00:10:11] It’s like maybe big companies would only be interested in buying a company, but there’s marketplaces that allow for sale of any size. So that would be one thing. I I just, one other, you know, quick point on this one is, um, you, you want to, um, you, you, you wanna think through plateaus and growth spurts, and I’ll just point out the obvious.
[00:10:36] If you’re selling your business under duress. Or stress or burnout and not when you’re in a plateau or growth spurt phase that you’ve thought through logically where you optimize for profit, you know, you’re going to get a huge discount to your sale price, you know, under stress, you will, you’re going to be doing a fire sale and you just need to own it like, look, I’m done.
[00:11:00] I can’t keep doing this. I’m not going to get my cake and eat it too. I’m not going to get, you know, a super awesome valuation when I haven’t set up the perfect, uh, you know, conclusion, uh, you know, on the balance sheet and, and P and L. Um, so there you go. Yeah.
[00:11:16] MV: It’s true. I mean, gosh, there’s such a big topic.
[00:11:16] I suppose really, I’ve realized that we’re ending up discussing some of the bigger picture issues that come up just really acquisition generally, which we should dive into, but to come back to the lending things rather a narrow lens to look through. But nevertheless, yeah, I think it’s going on your
[00:11:16] JM: points though.
[00:11:16] Yeah, sorry. Cool. Okay. What’s point number
[00:11:17] MV: two? Point number two is cashflow is king for lenders. Now, the old phrase is absolutely true. Profits, vanity, um, profit, and sorry, it’s never try again. Revenue, uh, vanity, profit is sanity and cash is king. I would say cash is reality and actually lenders are very, very, Sober people in most cases, all the way they evaluate businesses.
[00:11:37] So if there isn’t cashflow coming out of all the profits, nevermind all the revenue, they’re not sitting in a bar with you impressed with the fact that you were, you know, seven figure business owner, always a power seller or whatever names we kid ourselves with. And it’s important to us to, to keep our spirits up from day to day.
[00:11:53] But the truth is. If it doesn’t show up in cashflow, you aren’t going to get the loan. And this is one of those reality checks. I think it’s really important for owner operators to think about because if you can’t get a loan because your cashflow is rubbish, you should be concerned. Not about the loan or not, but that your business is not in good shape.
[00:12:10] So I think this is another sort of reality chat that is very healthy, even though it’s not much fun.
[00:12:15] JM: I think the thing that pops out to me on this one is the underlying business models that generate different types of cash flows. You know, if you’re, uh, selling, um, you just reselling items that you’re buying wholesale and you get, you know, keystone pricing, you buy it for 10 and you sell it for 20 or maybe you buy it for 1000, sell it for 2000.
[00:12:36] That’s not the business model that’s going to generate outsized cash flows, uh, and profits compared to other business models where you have your own bespoke product that you have 8 times markup on or, you know, something like that. So, when you’ve got a business, it’s got a model that. dictates profitability, then you’ve really got to think through, well, you know, if I want to sell this for a multiple that’s meaningful, I have to have it be 4 million instead of, you know, 1 million or something like that.
[00:13:06] So, so the underlying cashflow or profitability pieces, it’s really interesting to me in terms of, you know, how the business could be. Perceived by other people and how valuable it could be in the sales process.
[00:13:20] MV: Yeah, I think so that you were talking about the, the owning the reality. If you’re trying to do a fire sale, cause you just have to get out for some reason.
[00:13:27] Like I know some people that it wasn’t a fire, so they sold a really valuable business for decent money. But the reason they chose to sell as opposed to just grow it themselves is because they’re about to have children and they need to buy a house. It was simple and they got a decent price, but no, they didn’t.
[00:13:40] kind of ride the wave of the business growing. Similarly, with the business model, I think you make an excellent point. A lot of types of business model have a pretty narrow range of profit that they will produce and cashflow. And you have to just accept that. And, and in Amazon private level businesses with bespoke products, I mean, I don’t think I’ve seen many with an eight time markup.
[00:13:58] It’s possible, certainly highly desirable for sure, but Again, the reality is a lot of them that going to spend 25% of the revenue on, on the products in China plus shipping, and then give maybe 40 to 50% away to Amazon. So the profit levels are quite thin and you have to be real about the value of that business and also the risks that come with that as well.
[00:14:20] JM: Yeah, maybe terminology differences, private label business. I wouldn’t what I meant by it is a uniquely created and manufactured product that you know,
[00:14:28] MV: I’m talking about uniquely created manufactured products. Oh, I
[00:14:31] JM: know them. Yeah. I know people that have. Oh, I know. I know. I know 15 X. I know, I know, I know 20 X businesses, um, uh, on product at the product level, you know?
[00:14:41] And so, um, yeah, yeah, yeah. So, you know, there’s all birds of different feathers all over the world, you know?
[00:14:47] MV: So I’m not saying it doesn’t exist, but I guess what I’m saying is that, you know, you should fight to get that for sure. But if you don’t have it, don’t be. Surprised that people don’t really go mad for your business or lend you money.
[00:14:59] JM: So, uh, yeah, what’s point number three?
[00:15:02] MV: So point number three, uh, balance sheets matter more than you think. So a lot of business owners. If they’re really kind of naive financially are just obsessed with revenue growth, um, the ones that have got the idea that profit and loss matters are absolutely correct, but it’s not enough.
[00:15:16] And one of the reasons that cash flow is something that people don’t look at so much is because it doesn’t really appear in the profit and loss account. If you’re selling physical products, digital products, they’re much more similar. But, uh, the other, uh, completely neglected entire financial. And again, lenders are obsessed with cash flow and assets, basically, that’s the things.
[00:15:36] If you buy a house, the mortgage, you basically they’ll, they’ll look at your, if it’s your person, if you’re doing a buy to let, for example, a rental property, they’ll look at how much can you make for rent, and then they’ll look at the value of the property, if they have to repossess it and sell it. And that’s similar for a lot of lenders as well.
[00:15:52] That’s one of the things that people are very ignorant about in their own businesses. And I think that’s just something you have to begin to educate yourself about and get to grips with. Go buy yourself a good finance book, a financial intelligence for entrepreneurs is my go to. It’s quite friendly by Joe Knight and Karen Berman, but any books like that go and educate yourself because ignorance is not okay when it comes to the balance sheet, I
[00:16:13] JM: think.
[00:16:14] Yeah, and let’s just clarify for people who might not be familiar with the basic financial, uh, you know, instruments that the P and L or income statement is where you document your income and expenses. That’s where you kind of display your profitability. That’s the side of the business. We were talking about a few moments ago.
[00:16:30] The balance sheet is the side of the business where you have. Assets and liabilities that you document. So if you own a building or if you own big machinery, or if you have, you know, a lot of, uh, a lot of assets that the business would say, Hey, we have. You know, we have assets we’ve accumulated, they would show up on the balance sheet and that’s what the lenders would be looking at, uh, in this situation, which is very interesting.
[00:16:54] And the reason they would be doing that, of course, is because if the loan defaults and they have to take ownership of that business, they’re going to sell it for parts. And if one of the parts is a G wagon, that’s a pretty good part. Let’s sell the G wagon, at least get a hundred grand out of this thing.
[00:17:12] If one of the parts is a building, they’ll be like, let’s sell the building and, you know, get whatever, uh, you know, uh, equities in it. So that’s why balance sheet, I guess, is important and kind of interesting thing. I, I hadn’t really thought about that before when I thought about what lenders would care about, but it makes a lot of sense.
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[00:18:15] JM: So what’s yeah, support
[00:18:17] MV: number four is really related to that. So, um, you [00:18:20] talked about assets and the asset quality, um, Examples you were given where I would call fixed assets or long term assets. So buildings, vehicles, things that will last for more than one financial year. Um, of course, uh, there is a lot of, uh, uh, a lot of businesses that have current assets, i.
[00:18:33] e. stuff they expect to be out of the business within a year, i. e. for e commerce businesses, inventory or stock. And so what’s interesting is, and this might really interest you as somebody who’s done a lot of acquisitions, I know Jason, but not. done it with finance yet with lending, there are lots of different types of assets and actually putting together sort of stack of assets and then going to specialist lenders who can lend against that type of asset is one way to really crack that nut.
[00:18:59] And I think that what’s interesting is some assets are way more value than others. So loan to value is something that most people who’ve done some kind of property investing or even just. What their in house will be familiar with. So if a property is worth a million dollars and you can borrow 800, 000, then, um, you know, 80%.
[00:19:16] So my wife and I just right now buying a house for, it’s about three quarters of a million dollars, which is a frightening number. And yet very standard in the Southeast of England and we’ll be getting half a million pounds worth of debt against us at 80%. So it turns out that for physical property or retail, you know, um, what do you call it?
[00:19:30] Um, real estate, as you call it in the States. Um, You can get up to 80% lend of value. Now, if what you have in your business is a lot of inventory, then you can lend against that as well. But turns out lenders have a rather dimmer view of inventory, so, mm-hmm , 20 to 30% might be on the high side, and that might be for quite an established business.
[00:19:47] So you might find the reality is your book value, not what you’re gonna sell it for on Amazon. So say $50, not where you bought it from in China say $10, but what they’ll actually lend against it. Is maybe 3 per unit or something like that, or even a bit less. So that doesn’t mean you can’t use it. And if you have a lot of inventory, as a lot of e commerce businesses do physical inventory, you can lend against that as well.
[00:20:09] You can technically lend against non physical inventory, like patents and things like that. But that’s pretty complex. It’s not something I’ve looked into because I’m not intending to use that. So this is an interesting area, this whole one.
[00:20:21] JM: Yeah. In our case, it would be long term royalty, uh, revenues.
[00:20:24] That’s interesting. Yeah. Okay. So what’s point number five? Point
[00:20:29] MV: number five, talking of what you can lend again. So I was talking to a lender today or a finance broker who says that actually for e commerce sites and not relevant for the Amazon business that I’ll be targeting initially, but actually they can do things like take your average 12 months of credit card payments.
[00:20:45] And then lend you that much to be a hundred percent of that over the next 12 months to be paid by future payments. Yeah. Your future payments, which blew my mind. So there’s all sorts of products available out there. I mean, it just depends who you speak to. It’s just amazing what forms of loans are available.
[00:21:00] And bear in mind, this is in Britain in late June of 2023, the interest rate keeps going out. The bank of England keeps raising it. Uh, we’re not in favorable lending times, and yet the lenders are waking up to e commerce as an asset class is what emerged from a conversation today, which is actually really good news for people who own a direct to consumer site.
[00:21:19] And particularly I’m thinking of someone like you, Jason, if you buy in digital based businesses, like digital products, they may not have much physical inventory, they probably don’t have building, they don’t have a plant and equipment, but they may have an awful lot of credit card payment history. So very interesting.
[00:21:34] Yeah, that is
[00:21:35] JM: one example. That’s a surpriser. Yeah, that’s very interesting. I love that one. Um, and I just as a commentary about your, the climate in which loans are occurring or not occurring right now, I just say this, that, you know, bank, bank, uh, executives who are trying to, you know, be loan, the loan officers, I guess is what I’m trying to say.
[00:21:55] They have a job to do. Even if interest rates are really high and maybe for 20 years, their job was very easy because interest rates were so low. All they had to do was look to see if there was a pulse at the, you know, by the, by the borrower and the business, and they would like do the paperwork, but now they still have to move loans.
[00:22:15] You know, they still have a portfolio that have to grow. So it, you might end up in an odd way, having more flexibility and. Openness on lender side, even though the interest rate is higher, and they know that they know that’s going to be a barrier. And so it’s really an interesting climate context issue.
[00:22:34] Where if the interest rates are unfavorable, those people might be rolling out the red carpet a little bit more to get people in the door, um, and be creative in terms of how they look at businesses to see if there is a viable path for a loan product, you know?
[00:22:50] MV: Absolutely. I mean, yes, you make an extremely good point.
[00:22:52] I mean, really, we’ve got to remind ourselves that our product as physical. Business, um, product sellers, or in your case, digital products is the physical product, their product is money. They, they lend money out, which is why I can understand why there are moral objections to, because it does seem quite weird, but that’s how fiat currency works.
[00:23:08] You create money and then you lend it out. It’s fractional lending as well. So the bank will have 5, 000 in the bank and they’ll lend you a hundred thousand, which is why when I’ve run on the bank happens, it all happens really horrendously badly. But that’s how it works. The Italians created it in what the 15th century.
[00:23:21] This is not a new and terrible innovation. And yeah, the point of that is if they’re not lending money, they don’t get income from interest. So they have to lend money to somebody. So you’re absolutely right. It’s, it’s a comforting thought. The other couple of nuances I would say is this. The second thought on that is if you have a really good quality business that has strong cash flows to the point you’re making, if you can get an eight X, a 10 X, 25 times markup on your cost price, then you’ll have a desirable business to lend to.
[00:23:48] And you might actually be in a better position than you were in 12 months ago. Um, yeah. And the other one is that the, the rate to watch is the legal rate, which is the London interbank lending rate, I think, which is actually not necessarily directly linked to the feds rate or the bank of England. So the one that everyone panics about, if you’ve got a mortgage for a property, then as I know right now, we try to get a mortgage property.
[00:24:09] Yes, you need to worry about that. But if you’re trying to get a lending for a business, it turns out it’s not directly linked. So it’s actually a nice comforting. Oh,
[00:24:16] JM: interesting. Yeah. Okay. What’s point number six.
[00:24:19] MV: So your personal credit matters, but not in the way you think. Um, so when you’re first starting out doing this and depending where you’re at, I’m going to say you, so Jason, you would be in a position that’s different for me.
[00:24:29] Then if you’re looking at lenders initially, they’ll look at your fit to the business model, whether you’re the right kind of person, you can grow business and also the business. But before you start buying the business and you’ve got something concrete on the table. Um, they’re going to look at your personal credit history and credit worthiness, but that’s just kind of like the starter motor for a car.
[00:24:48] Really the credit worthiness of the business is what you got to think about. So if you don’t have great personal credit, it will be a barrier to starting, but it’s actually not as important as you would think it is. Uh, which again is a comforting thought, I think.
[00:24:59] JM: But why, why is it you said it probably not the reason why you think what what is the reason why?
[00:25:07] Yeah, I suppose
[00:25:08] MV: I’m, I’m assuming that people think that you’ve got to have great personal credit. Otherwise you can’t buy a business to get the loan. Oh, yeah. Okay. And I would say that it’s going to make it harder to start. But once you’ve actually Got a business that you, you can show the numbers of that.
[00:25:22] It’s really, really clean and good cashflow in business and that you’re competent kind of person to run it. Then it’s more about the business itself, which is my seventh point.
[00:25:32] JM: Okay. So it’s really, it’s really just a. Are they willing to entertain the conversation with you based on your personal credit worthiness?
[00:25:39] And if so, then it’s an evaluation of the business
[00:25:41] MV: details. Yeah. I mean, it depends who you speak to. When I was Steven Spear, he’s one of the people that I, I spoken to on the podcast. He’s an American based guy who actually I’ll put in touch with you, Jason, if you’re interested, but he’s, he, he says you basically need to pre vet the buyer.
[00:25:55] So that would be in this case, and then, then the business, so you kind of need to evaluate both, which makes sense. So some people think, think of it more on both sides of the equation, and obviously the more money you’re looking at, the more everything gets put under scrutiny. But broadly speaking, I think that, um, from the lenses that I’ve spoken to in Britain, they might have slightly different flavor.
[00:26:13] But I think on both sides of the pond, broadly speaking, the thing that matters most is the business. And I think that there’s a lot of people have more similar, more familiarity with real estate. So if you’re buying a business, you’re buying a house or a flat to rent out while they want to know that if something goes wrong, you can probably dip deep into your own pocket.
[00:26:30] Broadly speaking, they want to know what’s the rental value of the property. And does that cover the mortgage payments comfortably? And what’s the value of the business if we need to repossess it? So hence why you can get loans quite straightforwardly on that kind of asset. And it turns out that with businesses, it works in a broadly similar way, which is actually again, quite good news in my opinion.
[00:26:48] Yeah.
[00:26:49] JM: So number seven is related. What’s that one?
[00:26:51] MV: Yeah. So number seven is you can get a loan against the business. It’s about the business, not you really. So the point I was just making, um, so let me just do that one again. So number seven is if you can get a loan against the business, it turns out that it’s, it’s about the business, not you.
[00:26:56] So again, like buying a rental property, uh, it’s about the cashflow and the asset value of the business. Rather than you personally, which is really great news, which means you can kind of reach above what you can punch above your weight as it were, rather than just thinking, Oh, I’ve only got 20, 000 in the bank.
[00:27:14] I can only go and buy a business for, you know, 50, 000. It turns out.
[00:27:19] JM: Wow, that’s interesting. Yeah, you’re right. Because like, who know, like, who knows, but maybe you’ll get it like an amazing business drop in your lap. You know, like, this is a big business, man. [00:27:30] This is this is, you know, I’m way out of my league, but I know I could run this thing.
[00:27:35] And, uh, if you can find a lender to agree with you or arrange the financing, then it’s just, just a set of negotiations, you know, Okay. What’s
[00:27:45] MV: negotiations exactly? Well put.
[00:27:46] JM: Yeah. What’s number eight.
[00:27:50] MV: So you’re on London talking about negotiations and different possibilities. Your lender may say you have to quote unquote, give a personal guarantee, but that doesn’t mean it’s always true.
[00:27:58] I mean, most lenders and will want you to have a personal guarantee. So just to clarify what that is. If you go and borrow more than 100, 000, 50, 000, maybe in dollar terms, in my experience, a lot of my clients do that. And above a certain amount, the lender will say, we want your house as a collateral, which means if your business isn’t doing very well and it all goes to pot, then they will come and take your house and sell it and your family will have to find somewhere else to.
[00:28:23] So live, which is not good, of course. And it turns out that not good understatement of the century. It turns out that that’s not necessarily true. If you simply say, no, I’m not going to do that deal. It’ll come down to your desirability as a lendable person to. You know, who’s good at running a business or managing it once you’ve taken it over and or the quality of the business most importantly.
[00:28:47] And so if you found an amazing business and you say, I will get a loan, but I refuse to take a personal guarantee. Then some lenders will simply say no. And some will still consider it. And that’s, so then a balance you’ve got to decide for yourself, whether you’re going to go down that route
[00:29:00] JM: or not. Which sort of opens up a, a 30, 000 foot view topic, which is obviously with, um, getting alone.
[00:29:08] It’s like anything else that you’re shopping for. The more options you have, the more power you have. Like if you have 10 people who are willing to entertain the conversation about giving you alone and they all come back with different terms, then you’re you’re in the driver’s seat. You know, and so that’s the thing that’s interesting in this process is the world is really, honestly, a wash in money.
[00:29:32] Like, you know, how many it’s ridiculous how much money is out there that people are trying to figure out a return for? Well, we got to get a return here, get a return there. And and so. A lot of people who have money have put it into a loan type portfolio, a lending type scenario. And so, you know, the limitation on our side.
[00:29:58] For this opportunity is just the networking, the identification of people to talk to and our appetite for going through their, you know, meat grinder process.
[00:30:09] MV: Quite your willingness to suffer. Yeah. Well, that brings me neatly to the next point, which was going to be point 11, but this is. Yeah, absolutely. A hundred percent.
[00:30:19] Right. Just as you work on lead flow and your e commerce business, you’ve got a ton of traffic you can optimize for conversions. If you can optimize for conversions, then you can optimize for long term customer value and, and, you know, average order value, all the rest of the good stuff, the same kind of basic idea applies to not only deal flow, which is having multiple options of different businesses to buy such that you can find that the sellers who are more motivated to.
[00:30:40] To do a deal than others, but it’s applies to finances. Exactly what I’m doing. I’ve got a team beavering away on LinkedIn and all they’re doing at the moment is they’re reaching out to potential finance brokers or people who know lenders like accountants and they’re setting up conversations. So I am absolutely not going to be beholden to one finance broker saying no to me because, um, that, that means I’m putting my entire future business of this project, which I’m very excited about.
[00:31:04] I’m really excited about. In one person’s hands is going to say no, because lenders are good at saying no. That’s what they, their whole apparatus is set up to kind of filter out people. You should say no to, but if you have 10 lenders and you can say to the 10th lender, by the way, I’m talking to lenders one to nine, and I’ve got one and two.
[00:31:22] It puts you in a different position. It’s no different to any other negotiation. So you’re absolutely right. And there’s proven to be the case.
[00:31:28] JM: So a concise reading of number nine would be cultivate lenders like you would other leads for your business. Yeah. I would,
[00:31:37] MV: I would go. Yeah. Don’t just cultivate, but, but work really hard to have a flow of potential people and be in conversation with them and cultivate the relationship and deepen the relationship.
[00:31:47] All of the above treat it very, very seriously, because if you get the lenders on side, even if you’ve got some kind of agreement in principle, you can then approach the sellers of the businesses as a legitimately set up to actually buy the business, but using loans rather than having to have a half a million pounds in the business, in your bank account or whatever it is, which is severely limiting factor for most of us.
[00:32:08] And. Then you can also, you know, actually get alone to make sense and everything is made possible by the people with the money and to your point, to your point. Um, just think about all the headline news that people think. People always assume that big money flows into investments, equity investments, in other words.
[00:32:27] So 150 million, um, dollars here, a billion dollars here is going into AI startups, right? Unproven businesses. But there are some people like Mr. Wonderful, Kevin, what’s his name from? That’s the one, Kevin O’Leary, who loves debt. So a lot of people will use debt as an investment type vehicle instead of equity investment.
[00:32:46] And like you said, they’ve got to put that money somewhere. They’ve given it to a bank, to a lender, and there’s no reason why if you bring them an amazing deal that it won’t be you that gets lent it. So you’re absolutely right. It’s really important to bear that in mind. I’m so glad you put that out because they need us to a degree as much as we need them as well.
[00:33:03] JM: Yeah. And the powerful part of this, just a vamp on that idea for a moment. The powerful part of this whole conversation in this whole line of thinking is that if you have a business that you’re trying to acquire, that’s had a track record of success for 10, 15, 20 years. And you say, look, I, These guys are retiring.
[00:33:22] These guys, you know, they, this business is proven. The customer base is there. The product strategy is there. Um, I’m a competent operator. How high a gamble is that? Like it’s, you know, that’s way different than saying, I want to build an AI tool. That’s going to change the world. Can I have a million dollars?
[00:33:41] You know, that’s a very, very different proposition, you know? And
[00:33:47] MV: also it’s a very different proposition from saying, I’ve got a business that I’ve been growing from scratch that hasn’t made a profit yet, which is so common for so many Amazon businesses when you get to look at their books more closely, if you’re looking at acquisition head on and like, you know, sometimes go five years without making a profit on year six.
[00:34:02] Oh, we need to invest another half a million over the next two years. Can I have a loan? Versus here’s a highly profitable business. I want to buy it and operate it. I have 10 years experience in this industry. Will you give us a loan? I mean, yes, exactly. I mean, when you think about the things that as e commerce operators, we’re not afraid to go and beg for money to run a business that is struggling to get off the ground, but why are we so afraid of asking for money for something?
[00:34:24] That’s a proven success. Exactly. A lot of this is. Head trash. We have to get out of the way. It’s, it’s a negotiation, as you said, you’re willing to negotiate and jump through the painful hoops, which are quite painful for the lenders. The amount of bank statements I’m sending around the world is crazy.
[00:34:39] Mm-hmm. . But yeah, the money’s there and you just have to be willing to bring the deals and jump through the hoops.
[00:34:45] JM: Yeah, totally. Right. Um, okay. What’s the, what’s the next point? I think we’re on a number 10.
[00:34:49] MV: We are. So now this one’s really interesting. I spoke to somebody a week ago who who’s been in the business of finance breaking for ages.
[00:34:57] And he said to me, no money man doesn’t exist. There’s no such thing as no money down deal. I’m like, ah, okay. I’m taking notes. I mean, you know, I’m learning from the experts today. I spoke to another lender and I said, you said, I said, so what percentage of equity would I need to bring to do? I said, well, what sort of size deals are we looking at?
[00:35:12] It’s a British based guy as well. And I said, uh, geographically very close to the other guys. It happens some Northern guy. And, um, In north of England, and I said, well, about sort of turning 50, 000 to 600, 000, you know, enterprise value that is you multiply the EBITDA by the multiple that you put on it. And that’s how much you’re going to pay for the business.
[00:35:28] He said, well, yeah, it depends on the business. You might get up to a hundred percent in a very relaxed way. He wasn’t stressed about this idea. It didn’t seem crazy to him. It’s just what he does every day. And so I thought. How interesting is that? I’m sure the guy I spoke to a week ago, sincerely believed it to be true and acts that way, and maybe has for 20 years and maybe it is true for him.
[00:35:47] Um, but it turns out there’s not true for everyone. So the idea that money down, no money down doesn’t exist. It depends. And that was fascinating to me.
[00:35:56] JM: That’s a function in my mind of the vast, uh, you know, scope of the marketplace that we’re operating in the, by the marketplace, I mean, the lending. Market, because it’s fractured, it’s a million people offering a million different deal structures and a million different, you know, uh, requirements.
[00:36:13] And it’s not like chase bank is the only bank that will lend a business loan, you know, and so that’s a function of visibility into the marketplace. And where one guy might say it never happens, well, maybe he only ever goes through bank number, you know, X, Y, or Z. Whereas the other guy has 50 different types of lenders.
[00:36:37] Yeah. By the way,
[00:36:37] MV: he said he has 120 lenders on his book. So maybe [00:36:40] this guy’s done what we were just talking about with deal. You know, relationship creation and really, really, really gone thorough job on it. And the other guys like certain people that his mates he’s comfortable with and they go, no, no, no, we can’t possibly do that.
[00:36:51] So yeah, just again, this brings us back to the other point, which is worth reiterating, which is by making the effort to contact lots and lots of people, you will end up uncovering the diamonds. And I was so glad that I thought I’m so glad I’m paying these guys to works hard on LinkedIn, to reach out to people, to set these conversations up, because this is entirely changing my view of what.
[00:37:11] Is out there and it chimes in with what I’ve been taught by other people who’ve done this before, which is it is possible to do with no money down, not saying it’s always desirable, not saying it’s always necessary, but that changes the conversation because that means in theory, I don’t have to have any money in the bank to do deals, which means that I can approach the whole thing in a different way.
[00:37:29] I mean, it doesn’t mean it’s how it will work, but even the possibility being. A realistic possibility.
[00:37:35] JM: Yeah, absolutely. Totally right. I mean, it’s no different than real estate. If you have an awesome real estate deal and it’s no money down, you’re like, hello, that’s amazing. Um, and so I agree now I thought where you were going to take number 10 was and the delusions of the sellers.
[00:37:52] Just because someone sincerely thinks something, yeah, just because someone thinks something sincerely doesn’t mean it’s true. I thought you were going to talk about valuations there, but to your point, you know, the lenders have their own delusions or realities, uh, but sellers can also, you know, they can think they’re, uh, you know, their business that has a hundred thousand dollars in sales and no profit is worth a hundred thousand dollars, you know?
[00:38:17] So, um, To use a small example, um, and so this is true and it’s true in multiple angles. Your own mind can screw things up. The seller’s mind can screw things up. The lender’s mind can screw things up. If you’re doing a lender, um, I’ll tell you one quick example on this about how everybody’s reality kind of, you know, can screw it all up.
[00:38:41] Um, I applied for the loan. I mentioned at the top of the show from Chase Bank to buy a business and Um, the bankers I knew I was my bank. I mean, I kind of, sort of knew the people, the branch people, you know, and they were nice enough to me and like the process was simple and then they just said, yeah, we just need the guys, uh, like prior three years, uh, financials.
[00:39:03] Uh, P and L and, and, and that was where it got sticky. He’s like, well, I, this is sole proprietorship. I run it all through my, uh, in the U S I run it all as a sole proprietorship with schedule C on my personal tax return. Well, the bank needs to see that. Well, I’m not going to show them. And I was like, dude, I, I just need to see just page 14 is all you need to see, you know, it’s like, nope.
[00:39:26] I was like, it’s not like a big deal. He’s like, nope. So the whole thing fell apart because he wasn’t willing to disclose information to the banker and the banker had their checklist and, and, and I was just like, come on, man, I want to do this deal. And I don’t think the bank would have said no, because the business is profitable.
[00:39:45] I was fine on my side. It was a fair enough deal. Okay. But he didn’t want to disclose a couple, you know, personal details, his tax return stuff. And so, um, anyway, that’s just how reality works in these deals is like, it’s really a whole set of just negotiations where people have their. Their guide rails, the checklists, their mental models, their yeses and noes pre cooked.
[00:40:08] Oh, yeah. And,
[00:40:09] MV: uh, yeah, it’s so fascinating, isn’t it? How people would just, you know, snatch defeat from the jaws of victory, as we say, you know, the British have a habit of celebrating defeats. Like Scott of the Antarctic, you know, died 11 miles away from his last base. Even, even the British might find it hard to celebrate somebody that stupid.
[00:40:28] I mean, in my opinion, there you go. For him, it might be an incredibly personal value. And this is where psychology comes
[00:40:35] JM: in, isn’t it? Well, the reality was he had a really good asset. His business was a really good asset. He sold it to somebody else out from under me in like three days. You just, he had other people who are willing to, you know, uh, pay all cash and go, go immediately.
[00:40:51] And he, so he had control, he had options and he didn’t want to mess with me. And that’s just how it goes, you know? So, okay, let’s go on. What’s number 11?
[00:41:00] MV: Before we talk about number 11, you just said the phrase, I think is the absolutely critical phrase. He had options. So I haven’t even talked about deal origination here because I’m just trying to narrowly focusing on financing because I think it’s the most opaque.
[00:41:12] It’s the least talked about topic I’ve heard in this space. And therefore I wanted to bring some learnings from the front line, but yeah, um, deal origination is really, really important. So he had options in that case and he sold somebody else. I think the key to, to winning in negotiation, apart from the skill at that, which I’m learning a ton from Chris Voss and his incredible book, never split the difference.
[00:41:30] I have had it on my bookshelf for a couple of years and I’ve started reading it and rereading it. Um, my. Goodness. It’s good. We got to talk about that. We have to talk about that, but apart from the great in the actual negotiations themselves, you need to set this situation up. So if you have, you know, five potential deals you’re looking at and the guy sending to use only got you or nobody, you’re an incredibly strong position.
[00:41:50] And yeah. That’s the ones trying to engineer, of course, you know,
[00:41:53] JM: it, it is about who has, uh, you know, one of the definitions of wealth or poverty was, um, I’ve heard a long time ago was, um, poverty is a lack of options and, um, if you’re, if you’re the buyer and you’ve got five great businesses. To work with, to acquire that you’d be happy with.
[00:42:12] And, and, and those sellers don’t have any ready buyers. You’ve got power and they don’t, or you’ve got more power than they do. And if the opposite is true, if the seller has a whole bunch of suitors knocking at the door, like, please sell us your business. And they’ve got all the power or a lot of power and you don’t you has
[00:42:32] MV: options has power and I would say another thing and it’s an important point.
[00:42:35] You were talking about the valuation piece. You were saying you need to grow top line revenue to 3 to 5 million or whatever US dollars. Um, in order to. Be able to sell your business. Well, that’s kind of true in a way. And it’s kind of not true. If you want to be, you know, have lots of suitors, then the absolute size of a business is the EBITDA.
[00:42:54] So the earnings before tax, really that don’t matter or cashflow. There’s lots of acronyms you can throw around all day, but EBITDA, whatever you prefer, um, If that gets above a certain size, then you have a lot of private equity tends to get more involved. Uh, the aggregators came into the Amazon space, uh, on an unusually low valuation of businesses.
[00:43:12] Guess what? They’re now leaving because they didn’t know what they were doing. So it’s kind of reverting to tight. So private equity tends to be interesting deals worth a few million because I have to put so much expensive manpower or woman power in, uh, trade buyers tend to buy bigger businesses. They tend not to be aware of the smaller businesses.
[00:43:28] So once you get one of those entities in the game, And especially if they’re competing with each other, that’s when as the seller, you get the greats, um, price for your business. And that’s what you want to engineer. If you’re buying a business, my strong suggestion is you stay the heck out of that and you go for smaller value businesses where it’s much less likely you’re competing with lots of people and you may end up in the competition.
[00:43:48] But it’s just less common. So that relates to that whole thing as well. So he has the options as power, but also if you fish in a place where you tend to find desirable entities that are big enough to get on the radar of the big people, you’re in a fight and you’re going to get a less good price.
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