Joe Valley is an Advisor and Partner at Quiet Light, a business advisory firm that helps online entrepreneurs achieve amazing exits. Joe joined the firm after selling his own e-commerce business through Quiet Light in 2010. Over the past nine years, he has mentored countless entrepreneurs with the goal of helping them achieve their own profitable exits.
In addition to being a frequent speaker and podcast guest himself, Joe is also the co-host of the Quiet Light Podcast. Recently, he published his first book, The EXITpreneur’s Playbook, to help entrepreneurs successfully sell their online businesses.
Here’s a glimpse of what you’ll learn:
- Joe Valley shares the purpose behind his book, The EXITpreneur’s Playbook
- When should entrepreneurs start planning for an exit?
- Joe’s advice for e-commerce store owners looking to sell a business
- How Joe’s book helps entrepreneurs create an exit game plan, evaluate their businesses, and more
- The impact of recurring versus non-recurring income on the value of a business
- How accurate are third-party evaluation companies?
- A cautionary tale about selling businesses unprepared
- Joe talks about making the most out of tax laws to maximize your profit when exiting
- What to keep in mind when selling an FBA business
- Where to buy Joe’s book — and access three free chapters today
In this episode of the Ecommerce Wizards Podcast
Some e-commerce entrepreneurs find meaning in growing a single business to its fullest potential. Others, however, are looking for the freedom and profit of selling their businesses. For these business owners, the key to success is knowing when and how to exit. With stakes so high, it’s crucial to get it right the first time. So, what is the secret to making a successful exit?
As a former e-commerce business owner and a current business advisor, Joe Valley knows the ins and outs of successfully selling a business. He has perfected the art of preparing a business for a profitable exit, from identifying add-backs to structuring a deal. Now, he’s here to share his expert recommendations and advice to help you create an exit game plan today.
In this episode of the Ecommerce Wizards Podcast, Guillaume Le Tual interviews Joe Valley, Advisor and Partner at Quiet Light, to discuss how to successfully exit an e-commerce business. Joe shares his strategies for properly evaluating your business, making the most out of tax laws, and preparing your financials for a profitable exit. He also reveals key takeaways from his recent book, The EXITpreneur’s Playbook. Stay tuned for more.
Resources Mentioned in this episode
- Guillaume Le Tual on LinkedIn
- Joe Valley on LinkedIn
- Quiet Light
- Buy the Book:The EXITpreneur’s Playbook by Joe Valley
- Free Chapters:The EXITpreneur’s Playbook Intro
- Chapter 3 – Valuation Overview
- Chapter 11 – Identify All Your Add-Backs
- Chapter 15 – Structuring the Deal
- Quiet Light Podcast
- John Corcoran on LinkedIn
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Guillaume: Hello everyone, Guillaume Le Tual here, host of the E-commerce Wizards Podcast where I feature top leaders in business and e-commerce. Today’s guest is quite exciting. It’s Joe Valley, he’s a serial entrepreneur, we call him the EXITpreneur. He’s an advisor and partner at Quiet Light brokerage, and leading online focus MMA firm, he has built, bought and sold over half a dozen companies of his own. And he has helped thousands of online entrepreneurs to achieve their goal. Joe has a book coming out pretty soon, The EXITpreneur which we’ll be talking about today, and we’ll also be talking about preparing a business to be sold, maximizing the value of the online business. And of course, all this would have to focus on e-commerce businesses, even though we’ll cover business at large.
So, if you’re selling products online in an e-commerce store that is totally something that you can sell, you can sell that business if you want to. And it’s quite wise to maximize the value before you sell. And we’ll be talking about this in a moment. A quick shout out to John Corcoran of Rise25 media for introducing us, making this possible.
And just before we start, we have a sponsorship message. This episode is brought to you by MageMontreal. If a business wants a powerful e-commerce online store that will increase their sales or move piled up dormant inventory to free up cash reserves, or to automate business processes to gain efficiency and reduce human processing errors, our company MageMontreal can do that. We’ve been helping e-commerce stores for over a decade. Here’s the catch, we are specialized and only work on the Adobe Magento commerce platform, we’re among only a handful of certified Adobe Magento companies in Canada. And we do everything Magento, development, maintenance support, anything they need, we got their back. Contact our team [email protected]montreal.com or go to magemontreal.com.
Alright, Joe, I’m quite excited about our podcast today.
Joe: Good to be here.
Guillaume: Yeah, every entrepreneur is always interested in knowing how to first of all maximize the value of their business, regardless if they will sell it or not. And who knows maybe if they maximize enough, put it in order enough, maybe they’ll enjoy it so much, maybe they won’t sell. But let’s see, what do you have in mind on this topic?
Joe: Yeah, what you just said is absolutely true. I’ve done this a lot. I’ve been at this for over a decade, our team’s been around for 14 years, we’ve got 15 advisors and close to 100 million in transaction. I have literally over 8000 one on one calls with entrepreneurs about the value of their business. And the reason I wrote the book, The EXITpreneur’s Playbook is because I can’t keep that up. It’s a lot of phone calls, it’s a lot of one on one things that involve a lot of detail. And it’s delicate and creative. And it’s for the owner of the business, it’s a bit like drinking through a firehose, and that’s not the right way to do it, because the business that they own is likely their most valuable asset. And in order to sell it for maximum value and get the real value for it, they’ve got to train for that exit.
I don’t like the term exit planning. It’s nauseating, makes your eyes bleed, I don’t like it at all. So everything around the details of the book are sort of sports oriented. But it’s training for the exit simply because it’s necessary. And what happens and I’ve seen this happen personally, is that when we go through the process with an individual entrepreneur that owns their business, and they start to understand the real value, they set an exit goal originally, then we reverse engineer a path to that goal. And they realize this is exciting now. Those rough days are easier to get over or through and the hurdles are easier to get over. I’m gonna go ahead and move that goalpost. I’m not gonna sell for a million, I will sell for two, and I’m gonna move that another year or two down the road. And that’s, to me, really fun and exciting, because not only do they now truly understand the value of what they have, but it’s more exciting to run because they’ve got more of a purpose than they had before.
Personally, I’ve been self-employed since 1997. I always knew I wanted to be self employed, because I just simply didn’t want to work for anyone else. What I didn’t understand was that most of the money that I would make would be on the exit. And when I sold my first business wasn’t really well prepared for it. And I think that if I had timed it better and prepared longer, I would have had a larger exit. But the other thing I might have done was keep it a little longer. Because I would have been charting a path to a larger exit. And I might have enjoyed it a little bit more because I was bored. As an entrepreneur, we get bored after a while. But if I had a real purpose and objective, the business would change my mindset.
Guillaume: Right, most entrepreneurs need to plan that exit. How long ahead of time would they typically start to do that planning?
Joe: Yeah, everybody has heard the phrase, you should start planning the day you start your business, you should be thinking about your accident. And it’s just not reality. Because all we’re thinking about is surviving and bootstrapping, and where we’re going to get the money for the inventory, and how are we going to improve our SEO? And am I doing the right stuff in PPC, it’s all consuming, and then trying to grow, exit planning, better planning your exit now take that to thinking about eventually selling is too much. So the time that’s right is, when you’re ready, bottom line. My advice is, the sooner you start, the easier it’s going to be. Taking clients that reach out and say, I’m ready now. They say okay let’s do it. As long as the value’s there that you’re trying to achieve, you can move forward now. But the reality is that if they had called me or a member of our team a year in advance, or read the book, which they couldn’t until this week, they would have realized a few things that they could have done to shift the value of the business in a better direction, or simply have a better transition during the exit period, so that they’re not tied to the seller or the new owner of the business for too long of a period of time. Because when we sell we want to generally sell and move on. Right? We don’t want to continue to operate the business for the new owner of the business.
Guillaume: Do you see a drop in motivation after they sold? Do they do their full term let’s say if they have those earn out kind of plan, or what’s your view on that?
Joe: Earnout, that’s a text part of the book, there’s two chapters really on things like earnouts. And it’s part of the deal structure, structuring the deal is the chapter we’re giving that actually away for free in the show the link’s here. And then the second part chapter two follow up, that is negotiating the deal points. There’s not a requirement, you’re selling your business and you’re moving on, that’s the objective, you’re not selling it to go work for the new owner. So there’s normally just a short training and transition period after a sale. And these words are in the letter of intent, and in the asset purchase agreement, it’s normally up to 40 hours over the first 90 days after closing. The words up to are important, because you’re not locked into 40 hours, you’re locked into up to 40 hours.
99% of the time I see buyers, fearful of having that enough time from the seller. And so that up to 40 is important to them, because they think they’re going to need that 40 some think they’re going to need a lot more. The reality is I don’t think I’ve ever seen anyone use even a total of 40. If you’re prepared to sell your business well and you’ve got SLPs in place, it’s just gonna make it that much easier. So, up to 40 hours over the first 90 days after closing. And you are answering their questions and helping them understand all the aspects of your business, you’re not operating it for them.
Guillaume: Yeah, that’s a key point. You don’t want to be sucked back in the business, that’s for sure you want to move on, then prepare for your next adventure and so on. Okay, if we’re talking here about an e-commerce business because I’m pretty sure you regardless not even just e-commerce business, I’m sure you had people reach out to you and they had a certain valuation in mind. And then they were probably sorely disappointed when you gave them an evaluation of their business or that they did not have the right metrics to measure or to know properly how to measure the business, what would you give as an advice to any ecommerce store owner thinking about selling his ecommerce store?
Joe: There’s so much. The first thing you’ve got to do is have proper financials, clear financials, I didn’t say clean. Clean, people think that I can’t write my mobile phone off through the business because that’s a personal expense. You might use it for business but it is a personal expense. It is clear financial, so you got to use QuickBooks, you got to use zero, none of these Excel spreadsheets on your own doing your own math, because it has to be done in accrual accounting, not cash. Now we can convert cash to accrual if you’ve got beginning in an inventory data, but it needs to be done properly, clear financials.
Now, people say well I have my CPA, I do my bookkeeping. CPAs within the states, their job is tax mitigation and preparing your taxes. They need to be filed at the end of each year. Bookkeepers, on the other hand, are there to enter all of your data into QuickBooks or Zero properly, so that you can run a proper profit and loss statements on an accrual basis at the end of every month, or have it presented to you, and they publicize your business.
The first piece of advice, if they haven’t done it, is they’ve got to hire a good solid ecommerce bookkeeper, that will understand accrual accounting and help that client work through doing the numbers so it’s on an accrual basis. It’s tough, but it’s critical. There are these aggregators that everybody knows of, and they don’t want to look at any p and l unless it’s done on an accrual basis. And here’s the thing, if your business is growing like crazy, and you’ve got a physical product business, your cash flow is going right back in inventory, because you’re just trying to keep up so you don’t run out.
If you just run a profit loss statement, using cash, accounting, that inventory is captured in there, and your net income is going to be dramatically lower. Accrual, it only captures the inventory that you actually sold, not that other $300,000 that you have on hand, that should be on the balance sheet. And I know this is starting to make people’s eyes bleed, and I totally get it. And I try to convey it in a way that’s simple, clear math and logic in the book. And, sometimes I say grab your bottle of wine or your whiskey or whatever you need to get through this portion of it, because it’s critical. But you got to get through it. People are trying to absorb it on a phone call or podcast or stuff then go back and refer back to it, make notes and ask questions and things of that nature.
Guillaume: So, the whole inventory is moved to the balance sheet, so you don’t have it in your profit and loss statement. And so it’s not even showing up as any kind of liability or whatever, just on the balance sheet?
Joe: It’s on the balance sheet. Let’s say you’ve got $300,000 in inventory. If it’s cash, that’s going to take $300,000 off your discretionary earnings. And if your multiple is a four time multiple, that’s going to take 1.2 million off the value of your business. Now people are going “Oh, okay what’s accrual accounting?” And they are starting to pay attention to it. This is why it’s so critical, because it’s all that, it’s all driving towards making sure you’re getting the proper value for your business.
Guillaume: Yeah, and this is pretty fundamental for entrepreneurship. But just in case anybody doesn’t know, well, accrual would be really like the total maths for your business including, especially like a service business, anything that you’ve invoiced, regardless if it was paid or not by your customers. And any invoices you receive that are due that you must pay any of your bills. Regardless if you paid it or not, it’s going to do all the plus and the minus, it’s going to give you the total like on paper, this is how much we’re supposed to be making, while cash accounting will of course, be based on cash flow, have you paid on the invoice or not? Till it’s paid doesn’t exist.
Joe: And I’d say over the years, at a minimum 50% of that 8000 people that I’ve talked to, did not use accrual accounting. And that’s why I’m trying to get the message out there on how important it is, we can flip it again, it’s livable, but if you’re off by 1%, you’re either undervaluing or overvaluing your business, and that could make the deal fall apart. If you’re overvaluing your business.
Guillaume: And operations, there’s a reason why both systems exist is because they’re both useful. On paper, everything may look right, but you’re gonna die from a cash flow problem on accrual but that’s why you have cash based accounting, and then you can compare both. I know we use both to run the company at all time, because it gives you a more complete picture to look at both ways.
Joe: Again, the book is called The EXITpreneur’s Playbook. So I’m trying to get some sports analogy in there. We’ve got part one, which is called game plan exit well, and it’s talking about what needs to be done in order to prepare the business. Part two is the valuation scoreboard, I go through a valuation overview so you understand how values are developed and defined. And what buyers want, what they fear, four or five different pillars that we focus on, that you need to understand as an owner of a business that you need to firm up and make sure they’re strong, including the fifth pillar that isn’t which is you, that mortar that holds the business together.
Going through all of those things that go into the overall valuation of the business or the valuation scoreboard. Third part, running the place we talk about tracking financial metrics, really critical chapter is chapter 11, which is identifying all of your add backs. And we get into a little detail here, the value of your business is a multiple of sellers, discretionary earnings. That’s not your net income. Your seller’s discretionary earnings is calculated by taking your net income less your add backs, that equals seller’s discretionary earnings.
An example of an add back would be your cash back money, or your reward points converted to cash, at least on paper. Most people miss that, it’s in the third level of add backs that we talked about. And I’ve seen people that are spending a lot of money on advertising, using a credit card to purchase inventory, pay invoices, things of that nature. I’ve seen that addition, which is legitimate black and white math, and should be an add back because it’s an owner benefit. It changed the value of the business by $150,000 to $100,000. The really critical chapter there.
And then yes, I do go into valuation multiples for physical product businesses, for content businesses, for SaaS, businesses, service businesses, all of it. And it’s all with a caveat. There are exceptions to every rule and valuation multiples change. Right now we see FBA businesses growing in value, because of FBA, roll up firms or aggregators, as they’re called, we touch on that a little bit in chapter 13. And then chapter 4, or the fourth section is big when it’s teaming up the sale, whether you want to use an advisor or not, if you’re going to go on out on your own, talks about structuring the deal. And that is detail, there’s cash plus a seller, there’s an equity roll, there’s like six or seven different possible types of deal structures, and some of them have all of it in there.
We’ll talk about how to negotiate those details as well, talks about due diligence, attorneys and advisors, and then what happens at the end. So it’s really the entire sort of journey that you would have in preparing and selling your business to the point where it’s actually sold, pretty detailed. Hopefully, it’s easily read and easily readable because I’m trying to do it in a way that is just as if you’re having a conversation with me, if that makes sense.
Guillaume: Okay, obviously, we will not cover the whole content of a book in a short podcast. Let’s see if we keep it high level on a few points, like a business based on recurring income versus not recurring income, because even with e-commerce or regardless, if you’re talking about services. With e-commerce, you do have some businesses who are subscription based. So you will have your new reorder delivered to you on the first of each month or whatever frequency you chose, what kind of difference in the valuation of the business will that make?
Joe: If there’s 35% recurring income, buyers love that because it reduces the risk of the business, and a lower risk increases the value, so you’re going to get a higher multiple with that type of business than if you would, if it’s just a one off sale, after a one off sale after a one off sale, the recurring revenue drives more value. You might see a 10% to 25% bump, depending upon the type of business. We saw the subscription business in the pet space recently. And if it had not been a subscription business, we probably would have seen a difference of almost a full point in value. So let’s say the business was doing a million dollars in discretionary earnings. If it was a one off sale, it might have gotten a three and a half multiple. Instead, it got four and a half, multiple in multiple offers. So it’s a pretty substantial difference.
Guillaume: Okay, that’s quite huge. And of course, the more recurring the better, because then there’s even lower risk and the next buyer will feel even more secure and all that. But is there any kind of guideline, like you drop the number like 35% recurring income? Goals are thresholds roughly that of course, the more the better.
Joe: I wish it was that easy. There’s just so many different variations to businesses and no two are alike.It’s not a clear, simple answer, where I say, Okay, if you hit 50%, recurring revenue, the value of your business is going to go on to x. If I told you that I would be stretching the truth. Every business is different and they all come with their own strengths and weaknesses. And we’ve got to drill down into all of those before we could really tell you what the value is.
Guillaume: Now, we can talk in generalities and of course, other factors like additional risk, another area could drive down the multiple evaluation.
Joe: An example of that would be an electronics company that I sold last year. They had one skew that represented 70% of their total revenue, that’s a hero skew, that’s a risk to buyers. Because once you generate so much revenue and competition comes in and eats away at the profit margins of that, or it gets more reviews, that’s going to be a challenge for that owner. And the other part is because it’s in the electronic space that goes into the risk factor, as well, because of the fear of obsolescence. So, you can have hero screws in that direction, with physical products.
You could also have a hero skew in, let’s say a SaaS business. If you’ve got 1000 subscribers, 500 of them are within one company, that one company is paying for 500 subscribers, that’s a hero client, or a hero skew. And that is increasing the risk, that decreases the value as well, a lot of nuances like that.
Guillaume: Yeah, very good point, in that. Let’s talk about some more risks like the buyer, let’s say, having the maturity level of the business, that the owner has fully replaced themselves in the business or not, what kind of impact both for service business and/or for product businesses?
Joe: Yeah, in most cases, let’s call this in the sub $25 million dollar range, the owner operator is going to be replaced by the buyer of the business. Some buyers may come in and say, Look, I’m gonna hire somebody to be in this role. So I need to adjust the valuation for that. You say, whatever, but we can’t count for all buyers, this is the way it’s being operated, we’re going to replace this owner operator. And so whatever they get paid is an add back goes back to discretionary earnings. The challenge there though, is if that owner operator has a special type of expertise that’s not transferable to a generalist that would be buying their business.
Or if you have two owners that are working 80 hours a week combined, you cannot add back both owners salaries of that business, you can only add one back. Because 99 out of 100 times you’re getting one buyer buying your business, and their goal is not to work 80 hours a week, they’re going to be an owner operator working roughly 40. They may work more initially, but only one of their salaries can add back. And if you’ve got expertise, it’s not transferable, this is where training for your exit is important because in advance of an exit, you would reduce your expertise and bring somebody else in, that could do some of that work at a cost that you determine.
If I’m coming in as your buyer, I’m gonna say, look, I only hire Canadian based experts, and the average wage is going to be $42 an hour. Whereas the reality is, you might outsource it to somebody in Venezuela, where you might be able to get the same quality of expert for $7 an hour. So if you do that in advance and replace that expertise that you have, that’s not transferable, you’re going to be able to sell your business for more, and you’re going to have a better transition of the business as well.
Guillaume: You can control how much, otherwise they will try to tax you. We’ll need a guy at 300k for a year to replace that guy.
Joe: Exactly. And if I sell your business for $3 million, they’re gonna say, look, it’s gonna cost $300,000 to replace you and your business is listed as a four time multiple. That’s 1.2 million, though I see your business is only worth 1.8. And they may have a point. If it’s legitimately $300,000 profit. Just an example.
Guillaume: Yeah, exactly. On the market, there are various accountants, in Canada we call them Triple E for evaluator whatever, it’s a certification there. How realistic is it? Let’s say those evaluations that may get from a professional if your business owner says hey, I want to get my business evaluated for its value, versus what you might actually truly get on the market?
Joe: Third party valuation companies that are not 100% familiar with the online space, are simply going to get it wrong. They’re generally going to look at your profit loss statements and tax returns and do evaluation, mostly off tax returns. And they probably won’t do a full add back schedule. And that’s where most people lose or gain money in the add back schedule. In my experience, it’s okay, but it’s not going to be fully accurate. I think odds are your business is going to be worth more than what they’re going to tell you the value of your company is. It’s like asking an SBA lender, they do what they have to do, a small business administration here in the States, they are going to do a valuation in the process, because it’s a bank that’s loaning the money.
They’re generally on target because we’re telling them what the business is listed for under contract. But we don’t go to them first to determine what the value is you need somebody that’s in the space and somebody that understands what’s happening lately. Because valuation is going to be going up or down based upon certain things in the market and what buyers are asking for. I would say, “Okay, they got it close but I wouldn’t rely on it too much if a third party valuation company is not in the space.
Guillaume: Very good point in specialized parties or not. And in the end, it’s worth what the buyers are willing to pay for and that you’re willing to let it go at. But of course, if by doing all the metrics and preparing then you can maximize the valuation, and you can justify why a higher price tag also is fair to some degree because you’ve prepared all your metrics like that. So, do you have any kind of cautionary tales to tell about selling a business unprepared?
Joe: Unprepared? Yeah, sure. Good question. You know, I made up a name in the book, because this particular individual would not like me telling the story, let’s call him Jason. Someone came to me at one point and said, “Look, I almost signed an engagement letter with XYZ competitor of yours, I’m ready to sell, this is the value that gave me you want to move forward? You want to do it?” And I made the mistake of saying yes. He said, “Send me an engagement letter”. I sent him an engagement letter, and he signed it back to me. And that was before I had a chance to look at the profit and loss statements. So his goal was to exit the business for about $10 million.
I said, we’re not gonna move forward until I get the p and l, we gotta dig into the p and l. And I’ve got them in front of me, and I put them in a normalized format, because we always want to do that. And we have a call, I’m doing a screen share. And we’re going through some of the monthly numbers, and I’m asking questions, and I get to say them all out and he says “Oh, hold up, hold up, hold up. What’s that number there in July? I didn’t do $300,000 in revenue in July”. They are stunned into silence and I am like, well, this is your profit loss statement. This is what you gave me. What do you mean, you didn’t do $300,000? That’s not right, it can’t be right, there’s no way.
Long story short, you can’t get your business sold if your finances are wrong. After we got the full financials correctly, in my inbox, and analyzed the business might have been worth about three and a half million dollars, not 10 million. It’s still a lot of dough, but it’s not what he was expecting or shooting for in terms of an exit. So he was totally unprepared. He hired a just out of college accounting major to be his bookkeeper, that bookkeeper did whatever his CPA or tax advisor said to do, and it was just all wrong. It wasn’t an accrual, it wasn’t done correctly. Bottom line, he should have just hired an ecommerce bookkeeper for a couple of 100 bucks a month and the data would have been right. That’s what he did wrong.
So, he was worn out, tired, exhausted, ready to move on. The sad thing is, he can’t move on. He could get three and a half a million for the business after the financials were cleaned up, which is still a big number, but his goal was 10. He’s done, he’s stuck. He’s got to get out of bed the next morning, think about what a grim reaper Joe Valley is and get beyond that. I need to get the energy together to stick this out for another few years in order to achieve my goals. And that’s why I think it’s important to sort of set your goal, figure out where you are today and how close or how far you are from it. Other people that have done that, have done it very well.
Jeremy, that’s his legitimate real name, did it right. He started an e-commerce business. He and his wife. He was working in the corporate world getting paid six figures. And his wife’s a schoolteacher. So he’s making $100,000. And she’s making $25,000 which wasn’t a big disparity. But he was miserable and unhappy. They just had a baby. She was able to stay home for the summer, ball comes, what are they going to do? He started a sort of side hustle ecommerce business. And they made the decision to have him quit his job and focus on that business entirely. He called 24 months in, he’d already hired an e-commerce bookkeeper. And we reversed engineer that to a million dollar actually, which is what he was shooting for in 24 months. And 24 months in, he sold the business for 24 months for a million dollars plus inventory.
During that 24 month period because it was growing so quickly, he never took a nickel out of the business. He bought a camera for the company and it cost $600 for photos. And he kept that but that was the only thing, never took any money out. This sounds like a miserable experience. They lived off his wife’s teacher’s salary for two years. But doing the math, he traded a full time 60 hour a week job for $100,000 for kind of a part time gig, taking care of his son and running a business, coming and going as he pleases, being around as much as he wanted to, selling the business for a million, making a half million dollars a year in a lower tax bracket than personal income.
His personal income tax bracket might have been 35% at that time. Capital gains taxes when the business is sold is very different. In his case the state that he lived in, combined with federal was about 25%. They made a whole lot more money because he had a plan, he focused on it. And he knew that most of the money was going to be made on the exit. And now he’s sitting on an awful lot of zeros. Happy, content, got a ton of experience to do whatever he wants to do in that space or something else for his next adventure.
Guillaume: And you’re saying he was never taking any money out of the business. So I guess he was really reinvesting 100%. And all the cash had to go just to buy more inventory, sort of scale up that million dollar of volume from nothing in 24 months.
Joe: Yeah, it was growing so rapidly, he didn’t have any choice but to put everything back in the inventory in order to keep up with demand. And his discretionary earnings at the time of that sale were around $300,000 cash flow, because all that money’s going back in the inventory. He might have had $300,000 on hand and inventory sitting there, that got sold with the business as well. So at the end of the day, he really got 1.3 million, because you buy the business for a million plus the inventory for another three. So he got that money back, that he invested in inventory. But it had to be an inventory in order to keep up with demand and the value of the business.
Guillaume: So you’re saying a discretionary earning was around 300,000. So in selling for like a million plus the inventory of 300k. It was roughly a times three multiple here we’re talking?
Joe: Yeah, his case is about 3.3 plus inventory. There’s two different ways to measure that. Most brokerage firms list businesses for sale as a multiple of discretionary earnings, plus the landed Cost of Goods sellable inventory. There’s one exception to that, it’s website closers. They include inventory value in the list price of the business. So sellers look at that and go, “Oh wow, the multiples higher, I’m going to work with them”. Buyers look at that and go “Oh wow, the multiples higher, I’m not gonna work with them”. The reality is, it’s all exactly the same.
Guillaume: Yeah, it’s taxing or plus tax, it’s the same.
Joe: It’s all the same.
Guillaume: European tax in America, Canadian plus tax, it’s the same thing. Another thing a lot of people don’t know. In Canada, Some states have that kind of law, there’s a really amazing tax credit here in Canada that the first $850,000 when you sell a business is just tax free. So you sell the business for a million, you don’t pay any taxes whatsoever for the first $850,000, and this is a lifetime. So you can sell two businesses, let’s say one for 400, then another one later, for 600. And it’s a total lifetime, $850,000 Canadian, and not taxable.
Joe: It doesn’t matter how much you sell your business for. It’s how much you keep. So, as a Canadian, you want a share sale, not an asset sale. I had a conversation with somebody 20 years old, and his business is tracking towards a million dollar valuation and that’s it. Don’t sell it, don’t think I need to sell it for a million. Take a look as a Canadian, at that rule, that benefit exactly as you’re talking about, you can earn up to 850,000 tax free. Now, the majority of buyers are Americans. 95% of these types of transactions are asset sales, not stock or what you call share sales. Therefore, you’re going to list the business as a share sale, because the brokers advisors in this space are not licensed stock brokers. They need to be licensed in all 50 states and beyond.
It’s a new world that we live in, because the buyer could be in Venezuela, the seller could be in Canada, you can’t get licensed in both places. If it flips to a stock at Bushehr sale, there’s clauses for that engagement, I know I’m getting into the weeds here. Bottom line is when you do your research and prepare you come up with something like that, which is as a Canadian, I’m not gonna pay taxes in the first 850,000. It’s a share sale if it’s an asset sale, you’re up truly want to focus on trying to get a share sale.
Guillaume: Yeah, and you can go further with that, then you can add a trust to the whole thing and you can have your wife in this and then you both get that $850,000 tax free. You just doubled to $1.7 million tax free for your couple in Canada. I don’t know about the state stuff.
Joe: Unfortunately it’s not in the states, our capital gains taxes are probably going up because of administration.
Guillaume: Yeah, and then you can add your children also in Canada in this, but the Children’s Law is a little bit different. With your children, you you get half and they get the other half. And it’s all true legislation. So the other half will be really truly untouchable and they get it when they’re major here. So it’s sort of a fair deal. You as a parent, you get like 425 or so of cash from using your children and your children get the other half. But you cannot touch it, it’s all restricted.
Joe: And this is all why you have to have a game plan starting a business. Because there’s nuances like that, depending upon where you live and the type of business you have, that can make a tremendous difference in how much you keep at the end of the day. If you just wake up and decide to sell your business and don’t plan it out, don’t give it some thought. You might be losing hundreds of thousands of dollars.
Guillaume: If not millions, which is exactly what I’m talking about right now. Because there are also other laws about those trusts in Canada, and I only know Canadian law, but you have to set it up two years in advance before you move on. And that’s a huge difference for your whole family. You can be talking like 3 million bucks difference or something?
Joe: Yeah, the difference in the states is a simple thing, like you just said move, right? I’ve seen clients move from the state of California, where the income tax is 13% to the state of Texas, where it’s zero. I know one person sold his business for $100 million save $13 million savings. Because he said, You know what, I’m gonna move out of this very expensive location and avoid those taxes because he could even with the kids, it’s okay to do that. But everybody in the e-commerce world is moving to Austin, Texas. So you want to come to the States, folks and get out of the cold. Go to Austin, all your friends will be there.
Guillaume: Yeah, keep Austin weird. And it’s a fun place to visit. I liked it there. So, Texas has no taxes like this whether on personal income from a business sale or from?
Joe: Both actually, there’s no state income taxes and then apply to capital gains taxes and it’s more than just Texas, it’s South Carolina and New Hampshire, a bunch of other states as well.
Guillaume: See, that’s an important detail I didn’t know worth many millions in this specific case here. The value of preparation is hundreds of thousands of dollars or million this is just a scality just accounting detail and tax saving and tax credits, and you can go further by actually maximizing the value of the business when you prepare by having better multiples, knowing which multiple to prepare and what not.
Joe: Have you ever heard the term, choose your pain?
Guillaume: Not really but I guess I know what’s coming, go for it.
Joe: You know what’s coming, right? The people listening are like I hate accounting, I hate math, I hate understanding taxes and all this stuff. Okay, choose your pain, there’s the pain of learning that and understanding that and getting a feel for it, or at the very least connecting with a really good tax advisor or sell your business and lose that $850,000 tax free credit, if you’re a Canadian. Choose your pain. One is a whole lot of smart. The other is, you just gonna be sad and miserable and have to keep working or bootstrap the next investment because you didn’t sell it for a value that you get to keep as much of it as you could have because you chose the wrong pain.
Guillaume: Yeah, I totally agree with that. You talked earlier about FBA fulfilled by Amazon. So basically Amazon businesses, Amazon stores, and right now there’s that big move from FBA aggregators, so that the big players, they’re just trying to buy all the small players. In a way it kind of reminds me of some anecdotes from the John D Rockefeller book there that John D was just like buying all the other oil rigs around where he’s at. So then people sort of caught up in that, that’s what he was doing. And then they would just like, throw up new companies all the time just to get purchased by him. Is that the kind of game here that’s going on with the aggregators?
Joe: Well, I think what’s happening is that the FBA business owners fulfilled by Amazon business owners are really starting to really understand that they’ve got something of value. Because really smart, well financed, private equity firms are forming companies specifically designed to buy them. And the way it works is that they’ll buy your FBA business at call it a two to three time multiple and these multiples are going up, let’s call it three because they’re actually going up. But when it’s pulled into their portfolio of 50 FBA brands there’s a lot of diversification, there’s a lot more growth, there’s a lot more valued discretion, earnings are much higher. All of that leads to a higher multiple, lower risk, higher multiple cetera.
So they may buy it at three times. But once it’s part of their portfolio, it instantly becomes worth 10 times. So they’re making 300% of their money on day two. And it just makes a whole lot of sense. The problem is the way that they’re going about buying the businesses from you. If anybody in the audience is an FBA business owner, you’ve gotten an email, or emails already, “Hey, we want to buy your business, we pay cash, we’ll close in 30 days, avoid the broker fee”. if you don’t understand what we’ve talked about so far here in the call, accrual accounting, add backs, all of these different things, you are going to give them what’s called an ignorance discount. Because you’re ignorant to these things, and you’re going to give them even more instant equity than they’re already going to get when they put it in your portfolio.
You may be selling your business for a million dollars instead of 1.3, or 1.2. On top of that, there’s all the different structures, and they roll so many of them up into one purchase. They’re amazing, they’re good people. They’re very smart, well, finance people and good people for the most part that I’ve had dinner and drinks with. But they’re better at marketing than anybody I know, because they’ve taken this concept of a nano, right, which is that you get paid a percentage of the revenue of your business because they want to give you all cash. And they’ve flipped the script and they somehow managed to call it a profit sharing program, and people believe it.
The reality is it’s just a nano, they say “Avoid the broker fee”. What they don’t tell you is that they’re also gonna look for a working capital peg, which is equivalent to two to three months worth of inventory. And they’ll buy your business, they’ll pay you for the business, but they don’t want to buy all your inventory, they want you to give them two or three months with a view inventory for free. They told you to avoid the broker fee, they didn’t tell you they’re gonna look for inventory at no cost. It’s tricky.
Guillaume: That’s even worse, inventory at no cost.
Joe: A lot of nuances to it. It’s exciting, it’s flattering for somebody to reach out to you and say hey man you are doing amazing things. Let me give you a million dollars for your business, I’ll close in 30 days. Of course, you’re gonna pay attention to that. But if it feels too good to be true, it probably is. Somebody said once, it’s the equivalent of walking into Shark Tank. Everybody knows Shark Tank, you get one aggregator that reaches out to you and you deal with that one. It’s like going into the Shark Tank to present your business for sale. And you present your business to the sharks but all of them call in sick except for Mr. Wonderful. So you’ve only got one guy there, negotiating, you know you’re gonna end up with a royalty deal with him or something like that. It’s not gonna work out very well. And you need to learn from them. Get all the nuances that you can and get trained, if you will. But make sure you’re not just talking to one buyer, you want to talk to 50 aggregators now that actually are really, really well funded. We’re talking billions of dollars in money to buy up these FBA businesses.
The end result is multiples are going up, they’re going up significantly. There was a time when we would not present an FBA business at a 2.75 mill would do 2.74 because it rounded down to 2.7 online. Buyers were very resistant to buy an FBA business because of the risk factor. Well Amazon can change their mind, Amazon can take over my brand or compete against me and all these different things. A lot of really smart people have proven that not to be the case, they’re not afraid of that. And now they’re all competing for that same business which is great because the values keep going up because they keep over bidding each other which is great. You just got to make sure you’re getting the right discretionary earnings presented first and then you want to make sure that you’re getting the best deal structure that you can.
Guillaume: So of course it will all come back to the fundamentals for the multiples and all that like you have the right finances but then do you see any kind of market vertical or niche market that seems to be particularly hot right now in those FBA acquisitions?
Joe: Yeah, pets and kids is all. Anytime there’s a pet listing there’s like Chuck had one not even a big one. It was like 200,000 in discretionary earnings. It sold like a seven time multiple there were like 14 offers on it. It is crazy. Don’t expect that multiple people don’t expect that. But the pets, kids things with recurring revenue. There’s a long time when people say no, I don’t wanna be in that supplement space. I don’t want there to be low barriers to entry in the supplement space. When margins are incredible, and there’s a recurring revenue to it, I think I do want to be in that space. And now there’s aggregators that are specific, they focus on buying businesses with supplements, because there’s a recurring revenue aspect to it.
The one thing that’s kind of neat, that would be good for you and your audience that’s mostly off Amazon is that these aggregators are having trouble competing against each other and not able to allocate their money to buy these businesses that they wanted to. So they’re going, where else can I look around and go, “Oh, okay, I can buy just something off of Amazon. I think I’m gonna build a portfolio of Magento site”.
Guillaume: Whichever, there are lots of great platforms out there. So they are a niche for different markets. It’s more of the mid market, midsize enterprise.
Joe: Yeah, people use Shopify as if it covers everything. They’re buying a portfolio of different types of businesses and they’re focused on those, which is great, because now we’ve got buyers focus competing against each other, well funded on Amazon. Now they’re taking a look at Magento and Shopify. Soon it’s going to be a lot of content sets those margins are right up, we’re gonna allocate this money just to buy content. I don’t feel the future at all in this industry. I think we’re at the tip of the iceberg.
Guillaume: Of course, there’s just more value creation going on. And more population, more people coming online worldwide. It’s not just generosity, guys, like Mark Zuckerberg just connecting the old internet, it’s just logical, it’s gonna also drive the whole ecosystem online and all that. And by the way, just going back to the first topic, it’s very logical that they will probably at one space, try to have more diversity in their portfolio. So they’re buying FBA businesses that might stick to their core, but eventually, they might just diversify and also by regular ecommerce stores, those large aggregators, and they could have even strategic approaches that are very old techniques, like you’re trying to dominate the first page of Google and you’re the owner of all the listings there, you own all those sites, or a big portion of them.
Like Quebec, Canada, there were two main electronic sites, there was a future shop and there was Best Buy, but guess what, it’s the same owner, it doesn’t matter where you buy from. So that kind of approach but for the listing on Google.
Joe: Yeah, very smart. Going back to the, choose your pain to wrap it up with, I think it’s important that you choose the right pain. I didn’t write the book to make money off the book, I’m not gonna make any money off the book, I’m here to help. I’ve always been here to help. That’s been my primary objective. And it’s a funny thing, when you get a little older, and you get some experience under your belt, you realize the best business model is when your focus is on helping others. And that’s the purpose of the book is to give you everything you need to know to understand the path to selling your business from A to Z. So that you first understand this is my most valuable asset, I’m pretty damn close to it. And then you can do a reverse engineer path to your big exit, really important.
And, lastly, look, it’s not all about you, the seller of the business that when you age and you realize the more people you help, the better your business is going to be. It’s the same, the better business you build, not with just you in mind, but with a buyer in mind, a future buyer, the better deal you’re going to get. If you get trained right, the lower the risk, the higher the value, you diversify all these transferability issues, the documentation, all of it, you do that you focus with the buyer in mind, and they’re gonna pay you more for the business because it’s a better business. So it’s not all about you. But you will achieve your objectives when you focus on the buyer of the business. And that is about you at the end of the day.
Guillaume: All right. Well, those were great tips. And I learned a few things here, Joe. So where can people find the book?
Joe: Just search for it on Amazon. It’s The EXITpreneur’s Playbook. I suppose if you searched in Google, you’ll find it there as well. But we’ve got the Kindle version, paperback and hardcover version. We don’t have the audio version yet because COVID and the backlog in the studios, but exitpreneur.io is the website where you can do a search for EXITpreneur on Amazon and it will come up as well. Let me just add to that, we’re giving up three chapters of the book, so that you can digest and experience some of those portions of it. In the show links here I’m just going to offer them to you, it’s the EXITpreneur’s Playbook Intro, goes through the foreword by Sam Parr who owns the hustle and then goes into the details of the business and what you need to think about. And then we’re doing chapter 3, Chapter 11 and chapter 15. And those are the valuation overview, how to identify all of your add backs and structuring the deal. All three critical components to somebody that’s going to be selling their business. Those are all available for free. You can share them with anybody you want. There’ll be links. Post a link, give it away to anybody you want, the more people we can help, the better.
Guillaume: Thanks for sharing, Joe.
Joe: Bye now.