Crucial Advice & Strategies for Selling an Eight-Figure Business With Nathan Hirsch of EcomBalance

Guillaume: Hello everyone. Guillaume Le Tual here, host of the Ecommerce Wizards Podcast where I feature leaders in e-commerce and business. Today’s guest is Nathan Hirsch, CEO and founder of EcomBalance. This is our second episode together and today we’ll be talking about Selling an Eight-Figure Business, so he can share some of his personal experience and wisdom. If you ever sell your business, what to pay attention to on this topic.

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So Nate?

Nathan: Yeah, thanks for having me. Good to be back.

Guillaume: Thanks for being here.

Nathan: Cool. I mean, so to start and I mentioned this in the last episode and I’ll repeat again, the best decision we ever made was hiring a bookkeeper from day one of FreeUp, our business. But with our Amazon business before it, that’s not what we did. We tried to do the bookkeeping ourselves, it was a mess. We tried dumping it on our account at the end of the year, but this was not ideal. We never got to the point where we were getting good monthly reports, so we learned from that. When we started FreeUp we hired a bookkeeper from day one. The month would end, we’d get an income statement, balance sheet cash flow by the 10th or 15th, and we would make good decisions based on those numbers.

Four years later when we sold the business, that’s what helped us pass due diligence. We were acquired by a company called The HOTH, Marc Hardgrove and David Martin, two great entrepreneurs that I look up to a lot, and they have been super nice to us. They reached out and their message was, we buy businesses, we don’t start them. We want to buy a freelance platform and we like FreeUp and we use FreeUp. We’d like to see if you guys would be interested in selling it to us. We heard them out and they asked us a lot of questions on that initial call. Most of those questions were finance-based. And because we’d had a monthly finance meeting every single month where we reviewed our monthly reports from every single month for four years, we knew our numbers inside and out. We answered all those questions.

Down the line when they got to due diligence, everything that we told them on the phone matched exactly what was in our books. That built a lot of trust early on in the process. So bookkeeping and strong bookkeeping is a big key. And if you talk to any broker or any M&A, they will tell you the same thing, you want to have clean books before you start to sell your business. The whole selling process is stressful enough even with clean books but it’s even more chaotic without.

Guillaume: Pretty sure there. What was the key factor to maximize, lower or increase the value of the company?

Nathan: Sure. Having clean books was obviously helpful, cashflow positive business was very helpful, recurring revenue and clients that stick around was an incredible and important piece of it. Another thing is the marketing assets of the company at the time, we had a podcast, we had good SEO ratings, we had tons of backlinks all over the web, we had lots of partners, we had a whole marketing department that was firing on all cylinders. Those were big parts of it. I think where a lot of people got it wrong and I remember talking to people about it is, I was kind of the face of FreeUp. I would go on the podcast and stuff like that but that part of it’s very replaceable. The actual business ran without me, the processes, the matching freelancers, the customer service, the billing, and all the business systems. Like, you can always take a business and grow it with a different marketing strategy, removing me and putting in other marketing people. That’s fairly easy but the actual business depended on me to talk to the customers and match the freelancers. That’s where you run into issues and that’s where it makes things unsellable. What allowed us to sell was that the business processes were very good, even though the new people would take on a new marketing strategy.

Guillaume: So the business owner is totally separated from the delivery aspect and just focuses on marketing the face of the company, big relations, the general direction of the company, and so on. Were there any mistakes in hindsight, and hindsight is always perfect 2020, that you see and say if we had done this before we would have gotten a better valuation?

Nathan: Well, a big part of our business was the software that held the market place together. And we started that with a very crummy software that did very little and built it up over time. That helped us, no one else had that software, we didn’t lease it to anyone and we weren’t using other people’s software for billing or matching. I think one thing that we learned from that is, that was a very valuable piece and we probably could have doubled down on it even more. So for us with EcomBalance, we have a client portal we’re building and we have even more confidence in investing in it because we know it’s going to help the company long term. There were a lot of features that the new owners use that are built into the software that we had been talking about for years. In hindsight, we should have just invested the money and built it. So I think that the proprietary software component is something we learned a lot about.

Guillaume: Okay. And when your potential acquirer comes to see you they always have a game plan in mind. They would say, we’re going to buy this foundation because it’s faster than building it ourselves and we’re going to bring it to the next level. Do you know what their gameplay was? Was it just adding more resources and money, or was there something else going on here?

Nathan: I mean, they had bought a lot of different businesses and had a lot of experience in building marketing systems and making things more automated. There were things that they implemented right away that we learned from, like, they took the business off Skype and moved it to Slack and now we use Slack for every company that we start going forward. So there are small things like this that help automate the processes. I think from the marketing side, they own marketing agencies so they’re able to just use their own resources to push marketing even harder, and also bring it into other industries. Like, I’m pretty well known in the e-commerce space but I’m not very well known in the marketing space. They’re very well known in the marketing space. So things like that, they were able to bring the same business model to two different niches, which was a big proponent of it too.

Guillaume: Yeah. It can be very interesting to have those conversations regardless of if you end up selling or not. Because you have to come to agreement with terms and so on. I can share on my side as well, there was a company who wanted to acquire us and we had a chat with them. Their game plan was to add us for key critical persons. They said we’re going to give you money to go and hire those four key critical persons. I was like, that’s an interesting game plan, I kind of agree with that game plan. You don’t have to sell but of course we were a small company back then. So it can be an interesting thing to have a chat with these guys sometimes. If it’s really a fit you can sell if you are serious about selling but at the same time you can learn a lot just by talking to more experienced larger companies for this process.

Nathan: Yeah. And one of the biggest keys and this was the best advice that I got was, do due diligence on who you’re selling it to, just like they’re going to do it on you. So when they were sending over questions, we were sending questions back. We wanted to know everything about them, their plans for FreeUp, their past purchases, their success, their failures, how they treat people, what their internal processes were like. We wanted to know every little thing about them because we wanted to sell the business to someone who was going to take good care of our clients, take good care of our team, honor their word, obviously pay us every penny, we didn’t want to end up in a lawsuit with someone down the line over things.

We wanted to sell it to really good people that had the same business values as us, and Marc Hardgrove and David Martin are two great entrepreneurs that we look up to now. But through the process you’re still kind of crossing your fingers because you don’t really know until you sign and see what they do. But they ended up honoring their word. They helped us promote new companies that we launched to their audience, just to be nice. They honored their word from a contract perspective and they treat our team well. Our team is still there two years later and we still talk to them and have a great relationship with them. So across the board it ended up being a win-win.

Guillaume: Okay. Do you have any insights and opinions about high level financial structure, for example, on earn-outs? And other kinds of deals that may happen there like being paid over a few years versus upfront and so on, having shares perhaps in the modern company that is buying you out, or do you even keep a few shares in the older company that you’re selling? Like, what’s the high level view on the financial structure?

Nathan: So my overall view is, if we were going to sell the business we’re going to be done with it. We weren’t going to stick around, we weren’t going to be employees for a year, we weren’t going to keep shares, we were going to sell it and move on to the next thing. Our mentality was, we were going to make the best decision possible based on the information we had and move on with no regrets. We didn’t want to be a part of a business that we weren’t leading and making decisions on.

Obviously, the best case scenario is all cash upfront. But most deals are not that way, there’s some kind of earn-out or something like that. You’ve got to be careful, you’ve got to treat earn-out money as an extra, like something that might not happen. And especially one thing that you don’t want is the earn-out being tied to specific performance things that are very hard to hit, because a lot of times you never see that money. So for us, we structured the earn-out in a fair way that allowed us to make it all and we got every penny of the earn-out. I won’t necessarily go into details but we got most of the money upfront. The earn-out was dependent on the business staying the same or growing over time. There weren’t unrealistic KPIs, like, if the business doubles you’ll get this or whatever. I think that’s where a lot of people went wrong. We also had certain measures in place to protect us. We knew as we were going in that this is the minimum we’ll get and this is the maximum we’ll get, and we’ve got to be okay with the minimum because we know the maximum is not guaranteed.

Guillaume: Right. So you went into the deal or the negotiation with a number in mind already, like, I’m not selling below that, and if I get this amount, yes, I will sell?

Nathan: Yeah, and those were our initial conversations. I mean, there was that and then there was the LOI, the letter of intent. And when we agreed to that, then it was six months of stress and lawyers got involved. It wasn’t their fault and it wasn’t our fault. Their lawyers were doing their job, our lawyers were protecting us and their lawyers were protecting them. They were trying to dot every I and cross every T’s. For us, it was the biggest moment of our life, to the lawyers it was another Tuesday because they had other stuff going on. So there were a lot of factors there. The biggest thing that we did and another good piece of advice was, we stayed focused on growing the business. We said this deal can fall through at any second and so it’s not guaranteed, if it does fall through we want to have a good business back to. November 2019 was the best month that we had of all four years of FreeUp because we stayed focused. That was tough because every day of the six months we were like, is it going to be over? But my business partner and I kept each other focused on growing the business even while going through that process.

Guillaume: Were there any other things that you learned that impact the valuation and were sort of a surprise to you? I’ve heard of many cases, maybe you were already familiar with this, that business owners don’t know about add-backs. They just take their balance sheet, their profit and loss statement as is and they make X amount of dollars and think that’s it after multiplying that, depending on business model recurrence. They often don’t know there’s a lot of stuff you can add-back there. This was a special expense and you can remove it from there and amortise it over 5-10 years or whatever is relevant, which will increase your real P&L, profit and loss result. There are other things like cash back from credit card expenses like the 1.5%, you can put it back in there and that can increase all kinds of little things. They add up because then you can multiply it by whatever is your sales multiplier.

Nathan: Yeah. I mean, we were told about the add-backs. We weren’t lean frugal businesses that don’t spend a lot of money on things that aren’t relevant to the business. I would say the one thing that was an add-back is just the conferences. I went to a lot of conferences during the four years of FreeUp and that was the big add-back. Was it very significant? Not really compared to what other people might have. That was definitely a factor but I wouldn’t say that was a deciding factor or anything like that.

Guillaume: Because you are investing in yourself as the entrepreneur because the business is paying for all those business trips to go and learn in all those conferences. But if you had clean bookkeeping, as you said, and you have all that in a neat line, you could just scratch out the line and add that back to profit and multiply by whatever. It’s an interesting additional free money.

Nathan: Exactly.

Guillaume: So what else should people know? I really liked what you said, that the deal can fall through at any time and so make sure you keep running a clean business in the meantime. So anything else that people should know about selling their company?

Nathan: Yeah. We made sure our team was taken care of, that was a big part of it. We made sure our clients are taken care of and we followed up with them as we stayed in touch with the owners. They came to us with different questions and advice and ran stuff by us before they made changes, they didn’t have to do that. I mean, we wanted FreeUp to succeed, we wanted our team to be treated well, we wanted our clients to be happy. We obviously wanted the new owners to be happy with the deal. For us, it was about relationships, like, they were taking a risk and we were taking a risk. It was life changing for us. It’s probably one of the best things that’s ever happened to me but at the time it was a lot of anxiety and stress because you never really know how it’s going to go down. So having that relationship and honesty and communication component is very important.

Guillaume: Awesome. And once the deal went through and you got paid, what’s next? Had you already started working on your next project or did you go chill on the beach for three months, what happened there?

Nathan: We didn’t have a next project. We were very focused on FreeUp for four years and we didn’t know if the deal was actually going to go through. I mean, it was incredible at the time with the life changing money and all that but the sad part was, we had to tell our team and that was very emotional. We let them know that and we gave them a lot of money from the sale as well. Shortly after that the pandemic hit, which was kind of crazy. The original plan was to take a lot of time off. I didn’t think I would see my business partner, Connor for a year or whatever. But when the pandemic hit we were stuck inside and we started brainstorming on our next business ideas. I mean, we are entrepreneurs and we love building businesses. My life is a lot chiller than it was through the four years of FreeUp when I was hustling a lot and working weekends and working 80 hours a week. But I still love building businesses and applying the lessons that I’ve learned to hopefully do better in the future.

Guillaume: And what’s the more normal business week for you now if it’s not 80 hours anymore?

Nathan: I work pretty close to 40 hours a week now that there are certain things that I might work on here and there outside of normal hours. I try to work 40 hours a week and I always work remotely because we don’t have offices. Like right after this I’m going to go and work out for an hour in the middle of the day, it’s 11am for me. So my business runs without me having to just be glued to my computer all the time. We still like working hard. There’s also time to work hard like when we started the EcomBalance earlier this year and for the first few months it was a lot of work. Now that we’re set up and we have a big team your role changes a little bit. So we’ve learned all kinds of lessons.

Guillaume: Alright. So to wrap this up, a last opportunity, anything else you’d like to share with us?

Nathan: No. Feel free to connect with me on social media. I love meeting other entrepreneurs, it’s Nathan Hirsch on any channel. If you’re interested in monthly bookkeeping, check out EcomBalance, and if you’re interested in all my hiring processes, check out Outsource School.

Guillaume: Awesome. Thank you for being here today Nate.

Nathan: Thanks for having me.