The E-commerce Leader

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[00:00:00] MV: We don’t think that’s stress proof enough in the current environment, but if you can raise the amount of money that’s coming in. Then we’ll lend more against it. And that’s exactly how they would look at a business
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[00:00:32] JM: okay.
[00:00:33] Before we finish this, uh, whole session, the podcast, we haven’t talked about, I think probably one of the most, uh, delicious. Aspects of this whole topic. And that is the question about valuation. So I think people who are listening to this conversation are probably waiting for us to hear what the lenders points of view or perspective are on e commerce business valuations.
[00:00:56] So in your. Conversations with all these guys. Did you get any new insights? I mean, we have rules of thumb and kind of generalities that we could talk through, and I’m happy to kind of use those as a starting point, for example. Frequently, if you look industry wide, you can say that. Uh, you know, valuation of an e commerce business is going to be some multiple of now you used EBITDA, which is a more technical term, but I think what people like Roland Frazier, other acquisition experts talk about is seller discretionary earnings, where you have basically, well, yeah, so, so let me just do the multiple thing and then we can unpack it.
[00:01:34] So, so if you have seller discretionary earnings out of your business, that means all of the. All the money you can take out of it as the owner. Let’s say that’s 100 grand. Um, and then, then you’ve got the 100 grand is the starting point upon which a multiple would be applied. And that multiple, depending on the, uh, you know, type of business might be somewhere between.
[00:01:56] Just, you know, back of the envelope three and five times or something like that. Three and seven times. It depends. But in that range is what’s a plausible, realistic, uh, you know, kind of valuation method. Now, another valuation method that I know people have used is if there are businesses that are good businesses that are growing, that are exciting, but they’re not focused on profit.
[00:02:22] Then another multiple I’ve heard is one time annual sales. You know, so if it makes a million bucks in top line, is it worth a million bucks now that maybe is totally wrong. I don’t know, but any insights or thoughts on. Well, this from the lenders point of view, Michael, wow.
[00:02:39] MV: So much to say, um, let me simplify this as much to your recommendation.
[00:02:42] Very, very interesting. Um, is
[00:02:48] differentiates between the businesses. Value based on the SDE versus EBITDA. And the difference is really simple without falling down rabbit holes about how you define this stuff. Seller discretionary earnings is relevant for an owner operated business. And the reason that’s absolutely critical is very simply this.
[00:03:04] I don’t want to buy businesses where I operate them. I want to have, I don’t want my personal money and I don’t want my personal time over involved in these deals. I want to be good at the specific acquisition. Strategic growth, bolting on selling. I don’t want to get involved in that. So many buyers will feel the same.
[00:03:20] Many buyers will be happy to operate it, but the, therefore the market for a business where you have to. Um, operate it yourself is smaller than the market for a bigger one, or if somebody is going to buy it For one that that is got management in place They’re going to have to pay for the management which really reduces the the bottom line, right?
[00:03:38] Because you’ve got to pay for the manager’s salary So the sde kind of blends together the idea you’re operating itself ebitda traditionally used for businesses where you’re paying for somebody to manage it Hence why there’s a difference so that’s a bit squishy because it pens is buying it, but I would say there is a lower value If you’re multiplying the SDE than if you’re multiplying EBITDA with it, with the manager in place.
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[00:03:59] JM: it makes sense because if you’re looking at a business, the first question is who’s going to do all the work, you know, well, am I buying a job or am I buying a company? And if you’re buying, you know, it’s always somewhere in between, you’re going to be responsible as a senior manager, but are you going to be, you know, basically replacing the operator?
[00:04:18] Now, if you buy a business that’s built on a technical operator and you are assuming that person’s. Position in the, in the business, you just have to realize that you’ve got to pay yourself a living reasonable wage. Like let’s say that’s 120, 000 a year position. Well, uh, that person’s value of that business, they really, with respect to their own logic and their own profit and loss statement should have a slot in their W 2 line for their, their, um, you know, uh, salaries.
[00:04:53] That says fair salary for the CEO, 120, 000. That’s an expense in the business.
[00:05:00] MV: You know, you’d be quite generous for a lot of the smaller business. So it depends what the going rate is, but that’s the point is you need to look up what a going rate is. Now you could argue that that’s not necessary. And, and you know, the truth is, for example, I’m working with the client right now, he’s acquiring a business.
[00:05:15] He’s going to own and operate it himself, but I’m pointing out to him that. That’s fine, but there is an opportunity cost to you doing that because you’re not doing something over here. And therefore that has to be accounted for in the valuation. So you can go down rabbit holes and say, that’s not SDE.
[00:05:30] That’s not EBITDA. Well, okay, let’s call it adjusted earnings. What are we adjusted for? Somebody has to manage the business. That is a financial value, either a high cost. Cause you’re paying somebody. If I buy an Amazon business, I ain’t going to get stuck talking to sell a central ID because I hate that.
[00:05:44] I know what it’s like. I’m competent enough to do it because I’m experienced enough to know that it’s horrible when it goes wrong. So I will hire people to do that. And I know roughly what the cost of that would be. I’ll get an agency in or people that I know. And I need to account for that. I wouldn’t personally buy the business.
[00:05:58] Now, this guy that I’m talking to would buy the business, which is why he’s brought me into help advising my, how to structure it. But the market for that business is smaller because I wouldn’t buy it. Therefore the value is a bit lower. And so we have to look at that. Now, this is all just like, this is a very important sidebar.
[00:06:14] When you’re coming back to the lenders and how they look at valuation, what’s good about it, good and bad. Is that it gives you a much more narrow window for playing with it. So this guy, for example, is, is I’m talking to is thinking of, um, buying a certain business for a certain multiple. I won’t talk thinking, I think, I think he listens to my podcast.
[00:06:33] I’m going to avoid talking about that, but let’s say I wanted to buy a business for four times. Right. And it’s an Amazon business and it’s making 10% a year. If the lenders look at that and the interest rate is whatever it is, 7% on the deal, 10%, whatever the interest rate is, and the repayment schedule is X, then it comes down to a payment cover question.
[00:06:51] So in other words, if you buy a, again, a buy to let property, more familiar situation, a rental property or real estate, if you have a flat, for example, I’ve got a flat here. We’re probably rented out for about 3, 000 a month. And then the mortgage on that is going to be about 500 a month because I managed to fix it before the interest rates went up.
[00:07:10] There is no lender in the world who’s going to really worry about that number. Screaming deal. Amazing. Yeah. Screaming deal. Whereas if I could rent something else, I’ve had another property that I’ve rented out for a while where I’m the interest rate cover it, the interest rate is about 300 a month for the interest payment.
[00:07:25] It’s a cashflow questions. The interest rate technically isn’t relevant. Whatever the repayment per month is what it is. And then the cashflow from the, from the tenants was only about 1, 000 a month, 1 terms would be about 1200 and 300 respectively. That wasn’t actually enough. When I went back to the lenders to get an extra loan, it happens to be a real estate idea, but it’s the same idea they said.
[00:07:45] We don’t think that’s stress proof enough in the current environment, but if you can raise the amount of money that’s coming in. Then we’ll lend more against it. And that’s exactly how they would look at a business. So if you’re trying to pay an excessive multiple multiple for a business and you’re getting a loan to do that, the lenders would just say no, which I think is actually doing you a favor because they’re stopping you from doing something that wasn’t very financially valuable in the first place.
[00:08:08] Now, caveat, if you have to cover the costs of finance, obviously that’s going to push the multiple down compared to if you’re going to buy it for cash. You could theoretically afford to pay more, but I would argue, you know, if it’s like the, the, um, this is named Benjamin Graham principle, you know, Warren Buffett’s mentor.
[00:08:27] He says that you should buy with a margin of safety. So when you buy into by under market value, and so if you overpay for an asset, it’s very hard to make a profit trying to sell it at the other end. Yeah. So I would argue that you see in the right direction. There you go. Yeah.
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[00:09:29] JM: so, okay. I’m still going to press you on the specific.
[00:09:32] Of multiple. Is there any insight on e commerce business multiples? Did you hear common numbers mentioned in terms of always
[00:09:41] MV: see what you mean? No, not really. But I think that’s also a way of evaluating business. That’s a bit fluffy because what you’re trying to do is, is value something based on the market for an asset.
[00:09:51] This incredibly illiquid. If there’s one person, you maybe that wants to buy somebody’s business and there’s nobody else who’s willing to buy it. And that’s often the case with small business. There is no liquid valid market against which you can really benchmark in a meaningful way. And so I would evaluate each deal separately and I would just look at the, run the numbers.
[00:10:11] I’ve got a spreadsheet that I use. I would run the numbers that say the inventory and the fixed assets and the real estate or property that it owns. And then, uh, I would look at. Then you go to the lenders, get some indicative financing numbers and come back and look at what I can afford to pay. And you can roughly guesstimate some of this stuff yourself.
[00:10:28] So many receivables, you can get 80% loan on inventory up to 30%, about 50% of fixed assets, 75, 80% on property. So you can start to roughly work out what is an actual affordable amount that you can get a loan for and not crash the business. In other words, you need normally to put a it’s a
[00:10:50] debt cover. So you need a two to one or two X debt cover. So if you’re going to be paying 50, 000 a year to in repayments of loans and interest, you need to be making at least a hundred thousand in free cashflow for that to be a viable proposition for the lenders to say yes to. So that pushes you to a pretty nice number, but it’s not a neat, it’s two times, it’s three times on average.
[00:11:12] Yeah, sure. So it’s a different way of looking at things, which doesn’t say that one shouldn’t go when look at averages and so forth, but it’s a lot more concrete. It pushes you into much more, it’s, it’s more disciplined, I think.
[00:11:25] JM: No, I, I, I love this man. This is so great. It’s very, very interesting. Um, I’m going to make a unique call to action to end the podcast.
[00:11:33] And that is if you’d like to be put in touch with the lenders that Michael has, um, ferreted out and sourced via LinkedIn. I’m just making this up as we go, Michael free for, feel free to correct me. But I would imagine that if people would reach out to you directly, uh, on, uh, amazingfba. com website contact form, uh, you could share with them the details of who you’ve talked to.
[00:11:56] I actually have a client that we work with who told me about an amazing lender. That did working capital for him. And it was a beautiful process, a great deal, easy and all that. And I remember he gave me the person’s name, but I didn’t, you know, I don’t need working capital, but, um, but I, you know, the, this conversation reminded me of that person.
[00:12:15] And I thought, Oh, I should be cultivating my. My lender, uh, you know, options here, and I should remember that person’s name and get it. And so, um, if that’s a fair deal, Michael, um, and tune it up if you want, but I think if you, um, are willing to share these kinds of lender leads with, uh, people who are listeners, um, that seems like a really awesome thing to do.
[00:12:35] MV: Yeah, I guess there’s no particular reason why not. There’s no big downside for me unless we go after the same deal, but the chances are astronomically small of that. I think, yes, just email me is the easiest way. Michael, M I C H a E L at amazing FBA. com. If you want to get linked to that. What I would also say has been interesting to me is working with this client is acquiring a business.
[00:12:53] Now he’s sold his own business before in content space. And so he’s a savvy operator. Um, but what’s been interesting to me is how much, a lot of what we’ve been talking about. Has been a double revelation to him. I think first of all, the acquisition process, even though he’s gone through it before, there’s a lot to think through.
[00:13:10] And obviously I’m learning very, very fast from a lot of good people here. So getting things to share now. And then also if you’re not, if you’re new to a space and in this case, obviously I’m specialized in Amazon, private label and custom product businesses, there’s a lot to learn there as well. So I would suggest if you reach out to me.
[00:13:27] Let me just deal with this camera. I would suggest if you’re going to reach out to me, tell me a bit more about the deal in case I can give you some advice that might save you from a horrible mistake as well.
[00:13:36] JM: Yeah. Well, this is a wonderful conversation. I’m so glad that you are on this journey for your own strategies related to e commerce and that you’re sharing it with our listening community.
[00:13:46] Uh, it really is fun to learn together and to learn from each other. So appreciate you breaking it down for us. What a great, uh, A set of, you know, ideas and inspirations and thoughts based on these conversations you’ve had. So with that, let’s wrap it up. Any final commentary?
[00:14:02] MV: Yeah. I was going to say, should I just do a quick summary if we’ve got a minute?
[00:14:06] Okay. So here’s, here are the points. Number one, business is valued as a multiple of profits, not revenue. Number two, cashflow is king for lenders. Number three, balance sheets matter more than you think. Number four, some assets are more valuable than others. Think inventory versus real estate. Number five, your future credit card payments in your e comm store can be an asset.
[00:14:23] Thinking of you there, Jason. When I wrote that number six, your personal credit matters, but probably not why you think, uh, number seven, if you get a loan against the business, it’s about the business, not you, which should be reassuring to you. You don’t have millions in the bank. Number eight, your lender may say you have to give a personal guarantee, but that doesn’t mean it’s always true.
[00:14:39] Number nine, just as you work on lead flow and your econ business, you should work on financial flow to your point, Jason cultivate the finances. Number 10, just because somebody sincerely thinks something’s true does not mean that it is. It’s really important then sidebar on the valuation. Um, yes, valuation is quite squishy.
[00:14:54] A lot of it’s down to negotiation. That’s not really what the point we’re making, but, um, the other point I didn’t get to is this, which kind of a following from what I was saying about the financial is different, isn’t it? You don’t always have to put any personal money into a deal at all. I’m not saying that’s easy to find, but I’ll just say that there is such a thing as no money down deals as far as I know.
[00:15:13] JM: Amazing. Well, thank you so much. Thanks everybody for tuning in with us. We appreciate your support for the podcast. We love your, uh, subscription on whatever platform you’re listening on and your review, if that’s possible, like on Apple podcasts, it’s possible to do reviews there and feel free to leave comments there as well with your.
[00:15:34] Awesome 5 star reviews, of course, and we really, really appreciate your support for the program. So with that, we’ll end it. Thanks, Michael. Thanks, Jason.
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