Selling an Ecommerce Business: Valuation, Deal Structure, and Legal Pitfalls To Avoid

Google Podcast

Paul Rafelson

Paul Rafelson is a Partner at Rafelson Law Firm, which focuses exclusively on ecommerce business concerns. With over 15 years of experience, he has in-depth knowledge of tax, litigation, and M&A legal matters and is regularly cited by the press when it comes to Amazon and ecommerce. The House Antitrust Committee used him as a primary resource in its report on Amazon’s business practices.

Before his private practice, Paul worked as an in-house attorney at Microsoft, Walmart, and General Electric. He is also a professor at Pace University School of Law in New York, where he teaches constitutional law on state taxation.

Here’s a glimpse of what you’ll learn:

  • What to know about selling to Amazon aggregators
  • Considering economies of scale when buying businesses
  • The best way to navigate offers when buying or selling companies
  • Diversification and how the Amazon market has changed
  • The importance of legal counsel when closing deals
  • What return to expect when selling your business
  • Buying assets versus buying shares
  • The complex issue of taxes when purchasing a company

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In this episode of the Ecommerce Wizards Podcast

Most of the advice available for ecommerce businesses centers around building and growing the company. However, questions for entrepreneurs interested in selling and exiting remain, including what’s a fair price and what issues deserve special attention.

As an experienced ecommerce attorney, Paul Rafelson has extensive knowledge in the complex world of mergers and acquisitions. With many moving parts, the process of selling your business and having a successful exit needs special attention. Paul knows that having someone to help you navigate these matters is essential, especially for Amazon sellers. Having legal counsel at your side will help prevent a deal from going sideways and ensure you get the best return possible.

In this episode of the Ecommerce Wizards Podcast, Guillaume Le Tual sits down with Paul Rafelson, Partner at Rafelson Law, to talk about selling an ecommerce or Amazon seller business. They go through the entire process, including appropriate expectations, how much you should receive upfront, considering economies of scale, and the legalities involved in selling your business.

Resources Mentioned in this episode

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Episode Transcript

Guillaume: Hello everyone. Guillaume Le Tual here, host of the Ecommerce Wizards Podcast where I feature leaders in e-commerce and business. So our guest today, Paul Rafelson, is an attorney and he says that he has completed over a quarter billion dollar of Amazon acquisitions with aggregators. So if you’re an Amazon seller looking to sell your business either now or considering to do this perhaps later, this is the episode for you, check this out. We have a great legal expert who is going to talk about it, earning multiples for your exits, legal risks and things to avoid, traps to avoid. Towards the end of the episode we get really geeky about all the Canadian and US taxes and things to be careful about and transfer of liabilities, even after the sale and so on. So if you’re looking to sell through an Amazon aggregator this is an episode that you don’t want to miss out.

Today’s guest is Paul Rafelson. He’s one of the founding attorneys of Rafelson Law Firm. He also has another company called Seller Basics. Today we’re going to talk about Amazon aggregators, so acquisition multiples when you sell your business, mistakes to avoid and mistakes that other people have done and a little bit about the Amazon aggregator bubble and sort of the faulty or you could even call it delusion that’s been going on with the Amazon aggregator. So Paul, thanks for being here today.

Paul: You’re most welcome and thank you so much for bringing me on. This is a subject that’s near and dear to my heart so I’m always happy to give you my feedback.

Guillaume: So as an attorney, I mean, you’re very qualified to discuss all the legal aspects. You’ve seen many of those acquisitions, mergers and that kind of thing so let’s jump right into it. So what have you seen happening recently with Amazon aggregators that people should maybe be careful of before selling to one of those aggregators?

Paul: I think it’s a couple of things. Just to give you a little bit of my background, we did about a quarter billion in what I would call the restart of a bubble in 2021. Like real bubbling where we saw multiple earnings. So if you make $100, your business might be worth a multiple that. It might be worth $250 or it might be worth $300. When you hear people talking about multiples, 3x, 4x, that’s what was going on. So that you’re getting paid in multiples of your earnings, pretty common. And maybe back in 2019 that might be 2.753, depending on how much money you make. The more you make, the more of a multiple to be entitled to. But those same people that might have been sort of, if I get at the 2.753 to 3.25 range, in 2021 they were getting offered a lot of money. They were getting offered like five to six at closing which is a substantial jump from where the market used to be. So it was a really bubbly time to sell because that had a lot to do with the fact that you had just so much competition. Aggregators were being funded left and right in 2021, I mean, every day it seemed like a new aggregator took the stage and announced some funding. So that was the market then, it was hyper competitive.

You can have an Amazon brand and put it up for listing and you could get 20 offers on it, so that explains it. Now we’re in a place where 2022 is definitely slower, 2023 we’re not sure yet where it stands compared to 2021 because we’re actually kind of busy again, but the market has substantially changed since 2021. The numbers have come back down to earth and the model is kind of coming under question, does it work? What are the Amazon aggregators trying to do and did it actually work? A lot of the aggregators that started out early are not doing well, at least it appears from that perspective on the outside. They’ve stopped acquiring, maybe they’re firing a ton of people, they’re getting sued. There’s all these sorts of situations going on. And the conclusion is that the premise has slowed at least at the outset in 2021 and 2020 and before. Now, some of the premise may have changed but that’s kind of where we’re at now. So up to there I’m gonna give you a chance to ask some questions.

Guillaume: Yeah, let’s maybe explore a little bit on that premise just to be sure everybody listening to this episode is on the same level. Correct me about this, this is basically an arbitrage play. So when they see a smaller business that has like 100k, 200k, or 300k of bottom line revenue per year is going to trade at maybe three times more earnings, if it’s a $900,000 acquisition or something like that. And as a larger company they trade at a much larger multiple maybe 10x or something like that, so it’s purely an arbitrage play. So let’s buy as many brands as we can because the moment they transition to our portfolio as a much larger aggregator, maybe it’s even a publicly traded company or a special acquisition company, we try to hire multiple that it just makes sense to just buy and it’s pure arbitrage. Now there’s possibly some issues going on with this such that you just start buying and buying, you have to consolidate all that stuff correctly together. And I believe that’s where stuff starts falling apart and where we may see that the model doesn’t even work.

Paul: Yeah, I think that’s right. I think that we did sort of the business school concept you’re talking about. It’s sort of like, nobody thought about the concept of synergy or economies of scale. It’s sort of assumed that there would be economies of scale or maybe Synergies Amazon, but it didn’t work out the way they wanted it to work. So you’re right, there were some folks that were purely for the arbitrage play. We buy 10 companies that are making $300,000 in profit and we paid them a 3x multiple, this might be the underlying theory. Now we have a $3 million company that we can sell at a 4x or 5x multiple, or 6x multiple or 7x multiple, you know, whatever it is, but there’s an arbitrage play. When you accumulate those companies together and now you have $3 million of earnings and you package it as one company making $3 million rather than 10 companies making $300,000 each and you try to arbitrage that. But I think it didn’t work because some of the presumptions I think that were made was, one, they could do this as good or better than the owner. So they needed to show some sort of economy of scale or something so that typically meant that their own internal team was better than the salary and I think they’ve learned over the years that that’s not true.

There’s something to be said about the magic that the owner has when they run this business and the way these guys are running this business. It was terrible. I mean, they weren’t pursuing new product launches, they didn’t know how to successfully launch a product because they could only buy listings with pre-proven success. There was a prioritization, they were understaffed, I think they undervalued what their staffing needs were, or underassessed that. So they’d have prioritization situations where they’d say we’re going to prioritize 10 or 20 brands, or whatever that number is. So anyone who’s done that brand may turn the PPC off and just watch the listings go to garbage. As your brand that you sold to them that’s a terrible thing to witness. I was on track to do this than the other, especially if you thought you were getting more money out of this deal, which is something we teach our clients generally not to expect those funds because we just think that they’re very speculative that we call them earnouts.

But those are real stories that really happened. And one of the ways that we know it’s a little different now is because the new model that we’re seeing more common with aggregators at the marketplace today is that there is more of an expectation that you don’t exit. It’s a common treasure when you say a business you’re exiting, they don’t really want you to go anywhere, they want you to stay around and keep running the business. It’s almost like a six pack of soda where each can is separate, as opposed to a two liter bottle, it’s like every can in the holder is like its own thing and it’s all sort of siloed. But they want those owners to run their businesses as if they were still running it for themselves. Which in my opinion also sort of makes the valuation seem off because if you’re spending the entire year running your business, you could argue one year of your multiple you’ve basically earned yourself, because you’re not getting the walk away from it. Maybe there’s some risk sharing argument because you’re getting paid upfront.

Guillaume: You have peace of mind for sure and it must be part of that negotiation when you have a few hundreds of 1000s of dollars of inventory stock overseas and then wait for it to be shipped, it’s going to take a few months to arrive and then your stock starts to be depleted again and then you need to place another order overseas to get the stuff shipped. It can get nerve wracking especially if they put their house in guarantee or something. So there can be a peace of mind leverage if the big guy is going to take some of the risk away.

Paul: Yeah, that’s the appeal. I think that’s true. That was the most common reason with so many different Amazon sellers especially, it was like a weight off of their shoulder, it was taking chips off the table. It was de-risking themselves. They’ve had this business, they’ve made X amount of money over the last few years and here’s an opportunity to take three, four or five X to basically lock in the next three to four to five years of profit depending on what multiple is and that’s an appealing offer. Because you don’t know when you’re an Amazon seller especially, like the next day could be your last. That’s commonly what we would hear. I think sellers do need to value that though that before when you typically exit the business maybe there’s a transition period where you spend maybe a couple of hours a month, there may be some transitioning but in these cases they really want you to work for them. They want you to have a JOB for like the year after, at least one year, maybe sometimes two. And if they like you they may want you for another brand. Do other things and tricks on other brands. So when you really have to work that whole sort of following year, I’m just saying you got to put that valuation in perspective when you consider an offer for selling a brand. If they expect you to spend a whole year working with them and it’s a lot of work then what is that compensation worth? What is your time worth at that point and that should be baked into your analysis of whether you’re getting a deal that works for you.

Guillaume: And those aggregators that keep the founder on board do they give some kind of shares or percentage in the new siloed system or the new entity?

Paul: So they’ll sometimes do like maybe this will be part of a 10% rollover play depending on what the rollover equity is. So it means you’re getting a piece of equity in the new company. But having a minority interest in the company you’re along for a ride but again there’s no guarantee. Sometimes there may be some nominal amount of salary, I’ve seen 50, 70, it depends. But if you’re used to spending your hours in a day running a business that you’re making seven or $800,000 every year and now you’re basically being told you still have to run your entire business but you’ll only make $100,000. I mean, it adds to that factor into the value that you’re not exiting right away.

Guillaume: Become a selling person. I think some people will be interested as long as they have enough cash upfront. Let’s say you sell it and let’s say that person has a 100k salary offer, one of the top ones that you’re mentioning, can that person get a six-figure salary elsewhere on the market? Like that’s their core expertise, the business they built and they know it. So there’s that aspect that may be interesting depending on their trade, I mean, maybe they’re not a lawyer or a doctor or some high powered executive with a six-figure salary and they don’t see how else to earn that other than running a successful Amazon store. So it might be interesting for them to just keep having some income after selling it and cashing out.

Paul: Yeah. I think oftentimes it is usually a combination of like salary and then some sort of rollover equity which is typically 10%. I think in that scenario, maybe you were making $500,000, $600,000, or $800,000, is that valued? I don’t know. Just as food for thought, people might disagree with me on this one, I just think it’s a new trend because remember the peak at the market was sort of the opposite. The peak at the market was, you were probably being paid close to double, or maybe an extra 50% to 75% more than you’d be getting today. And the expectation is probably you’re out of there within a month, like they’d usually have a transition services agreement 2020-2021 and 2019, typically it was like 40 or 50 hours over the course of the following six months. So think about that, it’s not a lot of time.

Guillaume: No, it’s an awesome deal for the founder who wants out to say, ‘Okay, I’m done’.

Paul: Exactly. So they can obviously turnout and other things and they wouldn’t get hit and that’s when they get upset if those things don’t get hit, which unfortunately, they don’t. That’s why we always want our clients to be mindful of that. Because when you’re promised money in a deal, I remember people used to go on Facebook and they brag about, ‘My friend’s getting like a 10x now so you don’t know what you’re talking about’. Then you look at the deal and it’s like 4x to closing hash, and then like 2x of a stability payment, which is like a year from now up to 4x or whatever, over the course of the next two years which is very, very speculative. Or three years and it’s like if you do the math your business pretty much has to 10x, which is hard to do. But they speak to you like it’s a certainty and that’s always the part that always irks me when you’re talking to clients. The clients are given the impression by their buyers like it’s almost a certainty they’re going to get maximum earnout and we’re just looking at it like, no, that’s not true. That’s not going to happen. It may happen but it’s highly, highly unlikely. You have to be prepared for reality.

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Guillaume: Most entrepreneurs I speak with have the mindset that you have to be happy with the amount that you’re walking away with and not count the earnout. The earnout is a pure bonus. Like if you get zero in the earnout are you still happy that you sold, and if he has that is that a high enough price then for you?

Paul: That’s exactly my teachings, it’s that simple. If you’re not making this earnout it’s going to put you in a deep spiral depression. Don’t do the deal, that’s what I would say. You have to be able to close in cash.

Guillaume: So you said the early aggregators sort of are not doing too great. The latter want to join the party, they seem to be keeping the founders on board and seem to be doing way better. So I think one of the problems here, we’ve talked about this a little bit before, is it was a delusion from the aggregators with this arrogance that, we’re gonna run this shop way better than you. That might be true with a few rock stars in your aggregator team, but how many rock stars do you have? If you have hundreds of millions of dollars to burn and acquire stuff, how many rock stars can you deploy? It was just not a scalable model. At one point you will have average employees running it that are not more qualified than the guy who spent several years building this Amazon store, who really knows the full supply chain or the deal, he tried and failed at many products and so on. That was one thing, a little bit of arrogance that we’re just going to always run it better than the founders.

The next thing is a lack of synergy as you mentioned, that they’re just like buying and buying and this is an arbitrage play but what about the manufacturing process? Like, can you buy all from the same buyer and increase your purchasing power or you’re just buying a little bit of everything that is getting issued or whatever it is. So that’s the second one that you have. And the third one that’s a major fundamental mistake is that they believe they’re buying Amazon businesses, which they’re not. Amazon as a sales channel is one among many, you could be selling on Etsy, on Walmart marketplace, you could sell on your own, dotcom website, Shopify or Magento, or something else, you can have a brick and mortar store. So selling on Amazon is just one marketing channel or one sales channel among many. So they made the mistake of saying that because this store generates at least 60% of their revenue on Amazon then they’re an Amazon business. That’s not the case. That’s just a business with an exaggerated dependence on a single sales channel. So it doesn’t mean you know how to run that business. How do you source the product? How do you deal? What’s the industry like? What’s the mindset in that industry? You know nothing of that industry just because they’re selling on Amazon? You could even stop selling on Amazon with that Amazon business and use other channels as well.

Paul: Yeah. We’re an e-commerce focused law firm. We even have Seller Basics which is like suspension, we have free lawyers, we’re entrepreneurs who pay $100 a month. But the one benefit that Amazon sellers that have got Seller Basics that’s above and beyond what the typical entrepreneur typically is helped. But it’s very common with Amazon that whole account suspension is a suspension issue that we deal with all the time. And we’ve actually built sort of an insurance style, it’s not an actual insurance model to help sellers. Amazon businesses are unique and I know you just kind of don’t like the term but it is an Amazon dependent business. And the funny thing about the aggregators is that they didn’t actually, you’re right, I think 60% might even have been too low, they didn’t even know what to do with these businesses if they were too multi-channel. They thought their whole formula was kind of around the Amazon marketplace, and that’s where the synergy was.

Guillaume: Yeah. And that’s their day one deviation. That from day one you go the wrong path. It’s a fundamental assumption error, that just because they’re selling on Amazon and overly dependent on Amazon, they’re an Amazon business. That’s not the case. It is a business and it could sell through other channels and not be overly dependent on a single channel. So if you’re a new CEO who comes in and assesses that business, your first order of business should be the diversification of the sales channel, because you’re overly dependent on Amazon.

Paul: But the question you raised is whether that’s actually a possibility. We had this conversation and we discussed launch strategies, whether it’s better to build your own website channel first and have Amazon around. But Amazon sort of like easy money, you can bump up PPC. You used to do all these strategies, I’m not so sure you can do that anymore. I know the industry is kind of looking for new ideas to do launch strategies but there were ways you could quickly get your product ranking and selling pretty fast on Amazon, it’s maybe not so much anymore. But people are not building brands, they’re building products. I guess what I’d say is I’d agree with you in some respects. I think I know what you mean, I think I’m saying it differently, like, I find Amazon businesses to be somewhat anemic. In terms of when I think of a complete business, I think of Amazon a lot of times as my clients are just selling products. They’re arbitragers in their own right. They’re using helium 10 data and they’re looking and they’re pure data scientists. If they can make a decent looking avocado peeler they can make this much money on Amazon. But a lot of times they lack the skill set like my web channel clients who envision more of a brand building exercise or a customer relationship exercise.

Guillaume: Yeah. You build your own customer list that you own but you can’t on Amazon, so that’s part of it too. But Amazon is great, you can start there or you can start elsewhere but at one point you need to have a diversification and to own your customer list and to build a real business if that’s what you’re interested to do. Because you never know when the next product arbitrage play will just not pan out anymore.

Paul: I agree. I’ve noticed some people are trying to open up to new channels. I mean, some people use Amazon fulfillment on their Shopify sites now so the market is changing and I think it is more expensive. I think that’s true, get your own list, get your own customers and it’s great. Amazon’s a very appealing way to get traction quickly. But you lose that.

Guillaume: Anyway, we’re sidetracking a little bit. There are these fundamentals and so on which is part of what didn’t make the Amazon aggregator work early on, or not work too well. So you said be careful about your earnouts. So things to be careful about when you get into a deal with an aggregator, you must be okay to walk away with no earnouts and that is still enough money. Anything else that people should be careful about?

Paul: Well, I just want people to understand what we do. We’re the lawyers, like, why are you hiring us? People don’t really understand what we do. People say to me, like, that’s a boilerplate document, why am I paying you to look at it? And I don’t really understand it. So it’s sort of like walking into the cockpit of a Boeing 747 and saying that’s a boilerplate cockpit. I don’t know how to fly but I can also learn how to fly the plane now. And what I mean by that is, it’s your standard purchase agreement. I use the cockpit analogy because we know there are cockpits with a million switches and dials on it, like, what does any of this stuff do? I’m thinking like at the end of the last Top Gun will be when it’s in the F-14, and the young kids like roosters are like, ‘I don’t know what these buttons do’. What a purchase agreement does and people kind of don’t understand this is like, you’ve negotiated a price, maybe you’re working with a broker, maybe you’re working on your own, maybe you were approached, but sometimes people come to us after they’ve been given that sort of offer and they say, ‘Okay, I just want you to look over this document’. And it’s like, ‘Well, that’s not really what we’re here to do’. What we’re here to do is to negotiate your risk profile, because you haven’t done that yet. What you did do is you went through a pre-negotiation of price through the letter of intent.

You went through some further due diligence and now we’re negotiating a document that will determine who takes what risk. What do I mean by risk? Well, obviously if there’s earnouts, or future payments or stability payments, those obviously are a risk. The document does affect your probability of data statements obviously do improve the better the document is written, although that is still not that great because the cost, of course, is way too expensive in most cases. But obviously you want those terms negotiated. But we’re also talking about the risk of them coming back at you because when you sign a purchase agreement you make these really strong promises about the status of your business. Like really everybody’s promises become actuality. And I like to call them these little promise bundles that you make about various things. Like you complied with all laws, you complied with all of Amazon’s terms of service, you followed all the environmental rules you follow, you own all of your IP address, those are much harder questions than you realize. And if you’re wrong about any of them you’re opening yourself up to a major lawsuit especially since in most deals it’s not your LLC that’s signing, you’re just the LLC I should say but you’re also personally signing. It’s a huge deal because you’re opening yourself up to unlimited liability. You’re actually removing the LLC from your protection elements or from similar corporate protections if you use a different entity to remove those protections from your life. You’re also opening yourself up as a person, which means that depending on where you live, like, you might be okay in Florida if that’s your primary residence but in other states they can go after your house.

So they design these documents so that they have the right to go after you and recover funds and they often have a very long period of time to do it. And you wouldn’t even know it if you didn’t have a lawyer because that’s written in statutory language. It doesn’t say 20 years, it says the maximum time authorized by Delaware law, which is 20 years if you don’t know. You can have these things extend out in terms of breach claims for reps and warranties. So that’s why it’s really important to have a lawyer and understand that we’re looking out for you. We want to make sure that you get the closing cash and that we do the best job ever of helping you mitigate your risk and understanding what risk you are taking and making sure that you’ve agreed upon the amount of risk that you’re okay with. And there’s ways we can do that by negotiating caps, by diluting the language of the reps, things like ‘to your knowledge’ and making sure that knowledge means your actual knowledge and not knowledge that you could have acquired by hiring a million experts, we call that [inaudible-27:42] a bad thing. Because now you’re on the hook for things that you may not even know are wrong.

So that’s the lawyer’s job. When you’re going through this it’s really to help you risk-manage but we also have insight, and that’s the only way to provide insight. We see so many deals, we see a market in our own way. And we kind of see where multiples are and where trends are going and can give you feedback, and we’re the only people who are not incentivized to basically make you close a deal. Because we’re paid hourly, we’re not paid on a contingency basis. I’ll tell you the whole idea is a terrible deal, I’ll tell you it’s a bad deal, I’ll give you honest feedback. Whereas, a broker may not be as inclined to tell you to walk away because obviously their commission is dependent on you not walking away. And they also don’t really care about this legal stuff and will tend to poopoo it because again, it doesn’t affect them. They just want you to sign and they want to get their permission.

Guillaume: And then you have a 20 year period of liability.

Paul: Yeah, you’re looking over your shoulder for 20 years and wondering if they are going to take your house. Then people say, ‘Oh, but they would never do that, so and so is such a famous aggregator’. If it’s a private equity backers, it’s the bankruptcy trustee, it could be anybody, you have no idea. You have all these contracts out there, I mean, you’re toast if you’re not negotiating it right. So the whole idea is to make those contracts strong. I mean, the aggregator business model is, I guess we’re waiting to see how it does work. I think there’s also an arrogance that they think that you’re going to make an impression on the customer.

I told this to the Business Insider, like, not this past Christmas season the season before that. I did an interview with them and we were talking about the aggregators failing man, and I said some of them had some real arrogance. They were saying things like we want to be the next Procter and Gamble, we want to be the Procter and Gamble of the 21st century or something like that. And I’m just like, you’re actually arrogant to think you as an Amazon dependent business can accomplish that because Amazon won’t let you do that. Which goes back to your point, why you need to really have diverse channels. Because if you want to make an impression, if you really want to control the customer and get to your customer, you really need to make sure you’re controlling the experience from A to Z the way Amazon does, because that’s what tends to wow people. It’s their Amazon experience that keeps them rolling back to Amazon, which is why it’s such an easy platform to start on and why people love it. Because we know there’s going to be eyeballs on that website. Your starting point is, I know there’s going to be a lot of people looking at these websites question, how do I get them to look at my stuff? That’s the trick. I don’t even see my stuff out of everybody else’s, but there’s no shortage of people wanting to look at Amazon’s website. Whereas when you’re starting your own website the problem is, how do I get people to look at my website?

Guillaume: Yeah, that’s always the number one challenge at first. You need to buy your own traffic and so on. Anyway, that’s a side discussion.

Paul: I learned a bit about that at Affiliate World in Barcelona, so that’s a whole different world.

Guillaume: Exactly. So any last thoughts to sort of wrap up this discussion about aggregators?

Paul: Yeah. If you have an e-commerce business Amazon aggregators are out there if you do a lot of Amazon. If you don’t, you still have a very valuable business. There are also Shopify aggregators like open store, or website to website aggregators like open store. But don’t assume that they’re everything. I tell people there’s still places to go to get better multiples. If you have a good business and you’ve built something awesome, there are buyers out there, you just need good business brokers. And there are good business brokers out there or bankers to tie in your size. But my concern is that a lot of brokers kind of popped up during the Amazon aggregator bubble. And all these brokers were like, ‘Hey, I sold my business last week so now I’m an expert, I can help you sell yours’. But it’s like, well, you’re just pitching it to aggregators. So working with a business broker is really important. For anyone with strong network connections well beyond the aggregators you might do a lot of deals. Now we see a lot of deals with these SBA, Small Business Administration loans, just regular people who want to quit their job, or change their job to do something different and they want to buy your e-commerce business. I mean, that’s still a thing and the multiples are actually a little bit better with the aggregator. So the terms are usually easier to negotiate.

Guillaume: What kind of multiples do you see for e-commerce stores versus let’s say Amazon right now in 2023?

Paul: They’re still floating around the three, four range, for sort of like million dollar business and less.

Guillaume: Of top line or bottom line profit?

Paul: Bottom line profit. So a lot of times it depends on people’s profit margin. I always say it’s just sort of finally money works its way. It almost becomes like your top line is your purchase price because people’s net profit is 20% or 25%. If it’s much lower than that then the aggregator doesn’t want it. Maybe that’s why we typically see like 20% to 25%. So by the time you apply the multiple it almost gets back to where you’re almost becomes your top line earnings as your buyout price, it just kind of works out that way. So yeah, we’re seeing three to four and not much more than that. Well, it’s like that would probably be a part of that ’20, but it’s a different world when the ’21 was just a bubble. And before 2021 that’s kind of how it worked and now we’re kind of going back to that level. So when I see offers and like the twos and somebody’s doing a million dollars a year, I’m just kind of like, maybe just keep it. He would make the money, it’s not a great offer.

Guillaume: Run it for two years and you got that money anyway. Sure, you’ve got the stress, the risk, the time, but that’s okay.

Paul: Yeah. But you’re not losing in the risk anyway, at the time we sell we’re just going to sign these papers. So actually we’re gonna get that negotiated anyway.

Guillaume: So you need a great agreement that waives the risk for you. And for the e-commerce store, do you see anything above three or four that you see on the Amazon aggregator?

Paul: Not as not as much now. It’s still floating around three or four, I have to go back and see. I was just looking at one the other day but I can’t remember if it cracked five, it was a big number. But I think it was like a $2 million store so I think it might have cracked five. It’s $2 million net not gross, sorry.

Guillaume: Yeah, for sure because it gives them safety. For the audience, say, if you buy a business and there’s only like $100,000 left in cash and at the end of the year you have a few unexpected things, the next year and well now you have more cash left. So then you have a business that generates more cash and becomes more appealing to a buyer because it’s a safer purchase. Okay, if there’s a bump on the road we have cash to cover that and to fix the problems, so that’s important. Maybe another technical question for you, are those like asset sales or share sales? The shares in the business or this ESS?

Paul: Mostly they’re asset sales. Once in a blue moon we do get involved in stock sales because, for example, I believe in Canada there’s a tax benefit though your share sale.

Guillaume: Yes, that’s why I’m asking.

Paul: Yeah, they have similar things in the UK and I think in Ireland they have a similar sort of these one time realization event deductions. So you can save up to like a million dollars in taxes or something equivalent to a million euros, depending on where you are. So yeah, we’re fully aware of that. The issue with stocks is that a lot of the buyers don’t want to buy American businesses in shareholder agreements. We’ve done a few, especially with the European aggregators. We’re doing it in European law though, they’re a little more open to it. But I think people are just paranoid about the risk of the American legal system. And when I say American business, I mean you could be a business in Germany owning an American trademark and if your predominant market is America, like 90 odd percent of our business is coming from the United States, I think that that scares people a little bit. People just kind of fear that there’s liability out there. There’s always liability lurking so people tend to think the asset sales mitigate some of your, what you call success or liability risk, although not with respect to taxes and sometimes even when with personal injury. You might see it as fundamentally unfair and they may let it carry over. So it’s not even a guarantee that that works but it’s certainly an argument to say that that’s what you did. So that’s why they do it.

Guillaume: Yeah. Because again, for our audience, if it’s an asset purchase or an asset sale or business, you’re just buying the stuff of the company, the inventory, the intellectual property, the logo, the brand name, and so on. So people cannot sue you for any kind of skeletons in the closet, as we call it here, that that brand might have because you didn’t buy a company, you just bought their stuff. Their past history if they get sued is none of your concern. But if you bought the shares or you bought the entire company then you’ve also bought all the history of that business and possibly the skeletons that could come after you later. If that business had done whatever malpractice in the past it might just come back to haunt you later because you bought the shares. That’s why buying assets tends to be popular because of that protection reason. But yes, in Canada, there’s the capital gain exemption for almost a million dollars and they keep indexing it with inflation each year. When you sell the shares of your business up to almost a million dollars for one individual you don’t pay tax. That’s 1 million dollars in your pocket and this is over your lifetime. So you could sell the business of $400,000, and later another one of $600,000 over your lifetime. You could also put in place a family trust to extend that benefit to the rest of your family. So that’s something quite popular here in Canada. But of course, it goes back to, can you get a deal for selling the shares and the business?

Paul: It can be done. It’s patience and it may not be your typical aggregator but I absolutely believe it. It typically can be done. It’s more work by far but it can be done. Again, it goes back to finding a good broker or a good banker who can help you pitch that to the right business who’s willing to sort of assume some of that risk, but it’s certainly worth trying. Especially if that’s such a huge benefit. You don’t have to pay taxes in Canada.

Guillaume: There is a lot of tax there. It’ll be like 50% tax. If you have a million earnings, in just one year you’ll pay 53% tax on that. So you’re happy to be zeros if you can deal in the US.

Paul: In the US it’s typical that when you’re doing an e-commerce business the number one asset by a longshot is you’re selling your inventory to the cost, there’s no profit based on the inventory. So what you have is the trademark and the goodwill associated with the trademark. That’s the primary asset and that actually can be taxed as capital gains. So for US citizens it’s like 20% tax on the predominant amount of their profit when you’re selling an e-commerce business, typically. That’s what we’ve seen.

Guillaume: This is if you take it personally. Now there’s all kinds of ways you could always sell it to another company because companies have different tax rates, or whatever. So you need to talk with a tax specialist about structuring your deal in the most efficient way for your personal situation. But it’s very important to know the difference there. There are asset sales and share sales. Now a similar question, is there an acquiring company who wants to buy the shares like this, could they have some kind of shell company in between that’s doing the transaction which somehow cannot be traced back to them when closing the company? Is that something that might actually work along those lines?

Paul: I think that’s a stretch because while you can do things and we can certainly create companies like in the US that are not publicly known, so certainly not in the public view. I could certainly get a court order and find them through Discovery. It’s only that it will take a little bit more work. But if I really want to find out I’m going to find out who’s behind this company.

Guillaume: Not in the sense of hiding, but maybe like who’s buying who and then maybe you have a shell company buying the shell for that one. And then you have the main acquirer just buying the assets of that one and then you sort of close the shell company in between, Just like the one selling the company can get the maximum cash and tax deduction and the one buying doesn’t have the risk of skeletons that that company might have. I don’t know if it’s doable?

Paul: You can definitely do it. It’s very case by case. Like I said, taxes almost certainly won’t work, like sales taxes, income taxes, usually sales taxes is the biggest concern whether it will be onshore.

Guillaume: That would not be to dodge taxes, you pay all your taxes for sure. It would be to dodge risk.

Paul: No, I know, I’m just saying. That’s the one liability that I think freaks a lot of people out because doing taxes on Shopify sites or websites is more complicated than on Amazon. So when you have a larger e-commerce store presence, then you do Amazon and you’re making a lot of money but you haven’t registered for taxes that freaks people out because you didn’t collect it. So that liability carries over. I’ll give you an example, if you fail to collect like $100,000 of sales tax in California and you close your business they don’t go after you personally for that tax. This is for sales and use tax, just transaction tax. But if you sell your business that tax will carry over, that liability will continue. But if you close, as long as you didn’t collect it and pocket it, in California that will end the tax liability. Those kinds of liabilities are commonly what people are scared of. But that can happen in an asset sale too, and like I said, there’s always court cases where they could try to bring a successor liability argument to say that there is something fundamentally unfair about how this brand was sold and the liability just being left out to dry if somebody was hurt. But yeah, you can always do those things to help build liability moats and then you can use it to try to defend yourself in the event that that happens, along with hopefully, good insurance and make some sort of asset protection arguments around that as a buyer.

Guillaume: In your California example, the government is not going after sales tax when the business is closed because that business made no money. Is it because it closed as a bankruptcy kind of deal or?

Paul: No, it’s just not the policy to go after them. California law just says you’re not personally liable for sales taxes not collected. Your company can be liable but they’re not going to extend it to the owners. It’s not going to pierce the corporate veil.

Guillaume: Here it does.

Paul: In most states it does if you continue the business. If you continue the business, if the brand is substantially continued on in another vehicle in California, theoretically, it has an argument to say those are our taxes. And you still have to pay because you’re still benefiting or there’s some sort of benefit from that. I see that issue a lot with website deals because most e-commerce sellers who sell on web stores do not register in all states, which I don’t honestly recommend. I think that can be a trap in itself. That should be very strategic. I know we could do a whole call on that on its own.

Guillaume: Yeah, exactly. We can go deep into tax stuff. Here in Canada if a businessman unfortunately goes under, the first creditor is your sales tax to both governments, federal and provincial. They will go after you personally because that money was never yours. You were sort of the trustee of that money to collect on behalf of the government.

Paul: And that’s the same in California if you collect the money, but what if whatever you sell you don’t do it at all?

Guillaume: If you didn’t collect they’ll still go after you. You’re fully liable, you don’t mess with sales tax. But if the business goes on and there’s, let’s say, income tax at the corporate level that’s not paid, as far as I know, that will just be part of the bankruptcy closure of the company. They’ll not go after you but with sales tax you have to make sure that it’s paid first before everything else or before you run out of money. You can let income tax and everything else just die with the bankruptcy. Knowing that kind of terrible scenario I don’t wish it to happen to anyone, but that’s as far as I know about that liability.

Paul: Awesome. Thank you so much. This has really been a lot of fun. I love talking about this stuff and hopefully people understand that there’s a lot of options out there. My last word of advice, especially if somebody approaches you to buy your business, you should question what you’re doing. This is something that always gets under my skin when I see a buyer, aggregator, whomever, cold-calling someone and they know that the person doesn’t have the wherewithal to think maybe I should actually put my business out to the market and get competitive offers. I see that mistake getting made a lot sometimes. By the time my clients sometimes find me in that situation I don’t want to be involved, I might say it softly. But they just say I’m happy. Just remember there are buyers out there. Even if it’s not Amazon aggregators, there’s a lot of buyers out there. The market for selling your business is still strong, you just need help. I just do think you need help finding a buyer, I think that’s important and who helps you I think it’s important. So be mindful and definitely take advantage of the fact that there is a market out there. It’s not just one person. A lot of people probably want to buy your business if it’s doing well.

Guillaume: Good advice Paul. So thanks for being here today. Paul, if people want to get in touch with you, what’s the best way?

Paul: Sure, if you are interested in our law firm, it’s [email protected]. If you are interested in our legal plan that’s separate from my law firm that we participate in with other lawyers it’s You can check that out on our website and see how you can work with our law firm or other law firms and it’s a very affordable way to get legal help for your business, as well as e-commerce stuff and other e-commerce benefits. But check us out either way, I’d love to hear from you. Thank you so much. I appreciate it and it was nice meeting everyone virtually or over this call.

Guillaume: Thank you Paul.

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