One of the most exciting things to do for an entrepreneur is to start a brand new business and get it off the ground. It’s got a lot of potential and it’s so exciting – until we hit that dip and that low.
Statistics show that 90 to 95% of new businesses fail in the first five years, and no matter what every Instagram guru or influencer tells you, entrepreneurship is fraught with failure. However, there is a different way to do it. As entrepreneurs, we do not have to build our cashflow from the ground floor.
Greg Elfrink from Empire Flippers is going to show us how to create cashflow and make a living by improving something that's already there. Empire Flippers help buyers and sellers of primarily web-based businesses meet and create profitable win-win deals for their clients, both buyers and sellers.
In this episode, Brad Costanzo interviews Greg to shed some confusion and talk about what's working now, what Greg has seen in the market, and what are some of the mistakes that people are making and the big red flags they should pay attention to.
Gregory joined Empire Flippers in April 2016 as the Content Manager. He manages the flow of content surrounding our brand – blog posts, guides, podcasts etc. – from producing the content to promoting it.
His goal is to grow the reach of the company and introduce us to new audiences. Gregory was born in Anchorage, Alaska where he worked in the oil fields and now travels around Southeast Asia. He loves fiction, science and in his free time, he moonlights as a novelist.
I've got a great guest on about a topic that I've discussed many times. It is one of the most popular topics that we have here on the show, which is the concept of buying, acquiring businesses, doing deals and looped frogging your way up the ladder as opposed to just building a business.
There are a lot of entrepreneurs who read this and a lot of very experienced ones, a lot of brand-new ones. One of the things a lot of us entrepreneurs are known for is building a business and getting it off the ground. It's actually one of the most exciting things to do is to start a brand-new business.
It's got tons and tons of potential that we see and it's exciting until we get it up off the ground and we hit that dip and that low and that, “Oh crap,” moment like, “I actually got to grow this and there are a lot of variables that I didn't know.” It can be daunting as we all know.
One of the statistics out there is that 90% or 95% of the new businesses fail in the first five years. The chances of failure in this business, regardless of whatever your Instagram guru and an influencer tell you, entrepreneurship is fraught with failure.
However, there is a different way to do it. This is something I've got some experience with them, always trying to grow my knowledge in this area, which is acquiring an existing business and bringing my assets, skill set, resources to improving something that's already there.
For instance, when I want a shelter for a house, I don't go to Home Depot and buy bricks and boards, hammers and nails and then watch YouTube videos about how to buy an info product about how to build a house. I go find somebody who's built a house that I want to live in. I arrange financing that is monthly payments or less than my income and I move into the house and I've got my shelter.
I think business is very similar to that because we're in business to make money, to create cashflow and living, make an impact and everything else. As entrepreneurs, we do not have to build our cashflow from the ground floor. That is one of the reasons that I invited Greg Elfrink from EmpireFlippers.com.
Empire Flippers, if you guys might be familiar with them, I'm a fan of their show. I pay attention to what they do. They help buyers and sellers primarily web-based businesses meet and create profitable win-win deals for their clients, both buyers and sellers. If this is an area that you're probably interested in as well, but you're not 100% sure how to do it and it seems super confusing.
Our goal here is to shed some of that confusion and talk about what's working, what Greg has seen in the market, what are some of the mistakes that people are making. I also want to let you know that we're not going to go into those most basic reasons of why you should potentially look at buying a business or sell a business.
We'll touch on that, but I've got a lot of questions and I'm going to pick Greg's brain as much as possible. I invite you to read as we go deep on a topic that's near and dear to my heart. Greg, welcome to the show.
Thank you. I appreciate being here and I'm looking forward to hopefully adding value to you with your questions and to your audience out there.
Question number one, how do we get rich quick and easy with no effort whatsoever? That's what we want to know.
It's so easy. You just buy the next info product you see advertised on Facebook.
It all works every time.
If it didn't work for you, you're just not trying hard enough.
Greg, tell my audience a little bit more about Empire Flippers. I gave them a little bitty taste, but tell me what is it you do? What are you focused on? What is the biggest value you bring to the market? I want to dive deep into some of the nitty-gritty stuff.If you’re not seeing the results you want, you're not trying hard enough. Click To Tweet
We've been around for a while since 2011, but we exploded over the last few years. We've been an Inc. 5000 company. We've become the largest curated marketplace in the world when it comes to online businesses. One of the things that we do when it comes to helping people buy and sell online businesses is that we have segmented like a traditional brokerage.
You'd have a broker that does every single aspect from vetting your business to selling it to migrating it, the marketing of it. What we've done is we've taken that and broken down that one roll into several different departments and made a well-oiled machine. Some people love that, some people don't. They prefer more high touch stuff.
My personal bias is far more efficient. I think it's actually better for buyers and sellers. That's some of what we do. We've sold over $80 million of online businesses and the trend keeps going up. We're excited to be leading that charge not just selling and helping people buy these businesses, but also educating the market like, “Over here, this is something cool you can do that you probably didn't think about.”
$80 million in sales, that's great. Do you know the biggest exit somebody had was with you? You don’t have to say who.
I won't say who, but I can tell you the actual sales price. That's another thing that we do a little bit different. We're very big on transparency and I'm sure you know this, but if your audience is new to this industry, it can sometimes be hard to get clear answers. We actually have a whole page dedicated to this.
People can go to EmpireFlippers.com/scoreboard. It has a lot of our different metrics. If you go to our marketplace, you can see our biggest listings sold, which is $2 million Amazon FBA business. We do have a business that might beat that one at $4.4 million that's in pending sold.
What's the nature of that bigger business? The other one was an Amazon FBA?
This one is also Amazon FBA. I think they are in possibly similar niches here as well. The $4.4 million one is in sports and at home. The $2 million one is in health and fitness, which has some crossover. They're both very popular niches.
Do you focus on online businesses?
A lot of businesses are an online business in general.
The definition of that has blurred significantly with the explosion of eCommerce. If you have an offline component like a retail store, typically if you want to use us, you have to separate those two entities out and sell the online portion with us.
I think maybe one of the better ways for me to break down some of these questions is I'll put myself in two perspectives because I've been in both, but also my audience is either in one or the other, which is potential buyers. People who are interested in getting into a business or potential sellers.
Let me go from the buy-side questions first. For all you out there who actually have a business, it's an online asset. Maybe you are considering selling but not 100% sure what to do first or you haven't thought about it, but you might be open to it for the right price and you're like, “I just don't know where to go and how I would do this because I'm busy running my business.”
We're going to get to you guys with some of my questions. Greg, I want to ask some questions from the buy-side.
Some of these will cross over. You mentioned a couple of the bigger ones being Amazon FBA businesses. I've heard a lot about those being very marketable, resellable businesses but at the same time, if it's a pure Amazon FBA play, that personally makes me more nervous.
Amazon has screwed a lot of people with some of the changes and some of the things that go on there. To me, it makes it feel a little bit riskier. That being said, I also love how you just tap into something that is relatively low tech on your side as long as you're playing on the Amazon side.
I bring that up, but are you seeing a lot of the sales? Is there a good portion of the sales of your businesses that are Amazon FBA? A lot of people out there trying to buy those, is there a lot of demand for those businesses?
There is and part of it is because of what you just said. There are two different fronts on that depending on your skill level, whether you're just starting out or very much a veteran in the eCommerce space that FBA gives you. On the newbie side, if you're just starting out, it's like eComm on training wheels where you don't need to focus on the marketing as much. I still do.
Obviously, you still have to do some of the marketing, but Amazon takes a lot of that heavy lifting out for you and also helps you on the backside of the logistics chain supply once you get your products in their warehouse. They're taking care of you in a lot of different ways. That's nice if you're just starting out.
On the other side, if you're the veteran, the thing that's awesome about it is that you can scale up because you can focus on a few different metrics and you can scale that with the economies. We see a lot of these buyers who are doing that side.
They will usually focus on one monetization, create a fund or they're raising a bunch of money, acquiring these FBA businesses and then they can get locked in their suppliers at these awesome deals because they can order at scale. You also see them mitigating that risk by creating their own eComm brands and stores outside of Amazon eventually.
Amazon is almost like a laboratory to see if it worked. Of course, you get through other reviews, all the social proof. Those are some of the attractive stuff. What you brought up is very important. That is a critical point of failure in FBA businesses. At this point of strength, it's supported by Amazon but that is also one of its big weaknesses.
Are there some things that a buyer should typically be aware of if I'm looking at an Amazon FBA business for sale? Obviously, length of time in the market or whatever, but what are some of the bigger due diligence questions that somebody should pay attention to?
That's a very nuanced question in the sense that someone's due diligence could be wildly different from someone else's. Maybe they want to see that they got hit by something where they fell out of the top position and another buyer doesn't want to see that. Because they have different skill sets, so their due diligence criteria are different.
Some of the questions that we do see are stuff like, “How many SKU does this business have? How many products are you selling?” Because if I'm buying $1 million business and you're selling one product, that increased my risk quite significantly.
What if this product is a fad? What if a competitor comes in and tanks me? All that kind of questions going around your brain. You might start off with how many SKUs are there and what amount of revenue to each of those SKUs makeup.
If one of those is making up 90% of them, then you still more or less have the same problem as if you're just selling one product and now you're probably dealing with four SKUs, I might have a lot of dead inventory too, which is inventory not being able to move very quickly with.
That might be some stuff to ask about. As a buyer, if you're looking at a business like that, let’s say a five-SKU business and three of the five products are dead inventory. You as the buyer might be able to use that to your advantage to get those two profitable products and buy those two products.
That way, while the seller doesn't get exactly what they want, you get the profitable products and they get to recover a little bit from their mistakes, so ordering that product.
What about on Amazon businesses of the ones that you have worked with? What kind of range on the multiple are you typically seeing on that? Is that multiple based on revenue? Is it based on earnings, EBITDA or is it typically a one to three times range? Do you see higher or lower?
We're a bit unique. We price everything on a monthly multiple instead of an annual EBITDA but more or less, it's the same concept. It’s the net profit average over twelve months and we give a monthly multiple. I actually know that data because we did our State of the Industry report.
It’s the first one where I analyzed 500 businesses that we sold and FBA was a big sector. We were able to get some pretty good data there. That resells multiple for FBA businesses in 2017 was 21.25X and that's monthly not annual. 2018 went up slightly to 22.77X. That sounds like a slight increase, but that is still a 7% increase in the average sales multiple within a year.
Break that down to the audience. Let's just use a 22 multiple. How would you explain that for somebody? You're doing $10,000 a month in earnings.
If you're making $10,000 net profit for a month, you can times that by the average sells multiple, which is more or less 23X for FBA businesses. That would give you a rough valuation. That is an extremely rough valuation.
If you want a little bit closer, you can use our valuation tool, which uses all of our sales data and that's fairly automated. If you want to sell, our vetting agents will give you a real valuation.The definition of online business has blurred significantly in the few three years with the explosion of eCommerce. Click To Tweet
If it's like 23 months, that's basically just short of two years. It’s basic math, I know some of this stuff if they're not used to dealing with this.
No worries. I'm creative. Math is my worst enemy.
Oftentimes the size of the business, you're going to have a higher multiple. If you've got a business that's just doing $100,000 a year, you may have a lower multiple than if you've got a company who's doing a $1 million a year.
That's one of the things that can affect that multiple, but you can get a higher than normal multiple, even on the lower end. In my report, since we do all the businesses at once, there's a bit of SKU-ing there because of multiple different businesses at different prices and also different quality.
I put a full disclaimer of businesses that beat that average. For example, one of those businesses was an FBA business that was $54,000 as the actual sales price and that was 29X multiple. The same concept as before, but much higher than the average sells multiple. It’s because I was a higher quality business by the very nature of what it was.
There are a lot of different ways to increase the valuation, especially if you're the seller. The nice part about evaluation and this entire thing is a business isn't worth anything. A business is worth what somebody will pay for it.
If you can make the argument that it's worth 29 or 49 to enter the right buyer, it can be worth a lot more. Because if it's a strategic acquisition and it's a brand expansion or something else they got, they've needed, they're like, “We know we'll make a lot more money on this because we've already got the resources in place.”
People that are making a strategic acquisition, they'll often spend much higher amount because they're not buying the business in a vacuum. They're using the business to leverage other properties that they own and that synergy makes it worth it to them to spend more. Strategic buyers are often the best type of buyers a seller can run into.
This flips over to the seller side if you are looking for somebody to buy your business. If you can find somebody who's got a real reason for buying that, you can oftentimes get a lot more money out of them as opposed to selling it to somebody who just wants the cashflow.
They're trying to get the most return for their current money. If I put in $100,000, I'm trying to get as much of a return on that money as possible. I hope maybe I can grow this business. I bought a business for a financial play for some passive income, but I didn't have any big desire to be in that business per se any more than any other business.
Therefore, I spent a lot less money than I would have if I had already had a business in that space and wanted to pay more for it.
I think what you said there brings up an important point that I think sellers and even buyers, they forget about when they go to sell their business. I'm sure you familiar and your audience is familiar with it, but we started with a business, thinking about copywriting.
How to get into your customer's heads or wants, desires, needs, all that stuff. We all know as marketers, people buy things based off the emotion and then they back it up with logic. You need to have that reason why, but when someone goes to sell their business, they often forget their copywriter hat and they forget about the buyer's wants, desires and needs.
If they just put that copywriter hat back on, they can often sell it for much higher if they dig down into why does the buyer want this outside of the financials.
Still on the buy-side, the thing that is probably the most important aspect of this entire process after you find a deal or whatever is due diligence. That's where the money's made or lost. If you miss something critical, you can lose a lot of money.
If you do the right due diligence, especially from the buy-side, you can uncover a lot of opportunities to suppress valuation and get it to where you want it. I think it's arguably the single-most important aspect of the entire process.
Because of that, it can be daunting if somebody doesn't have a whole lot of experience. I know when I started off and I bought my first business, I do come from a finance background and I've owned businesses and I’ve sold.
I've been through the wringer and I've got some experience there, so I knew what to look for, but I didn't have any formal training in that. From the buy-side, do you provide any specific resources for people besides just the seller deck or do you suggest that they do certain things for due diligence to help alleviate the concern that they're going to screw that up?
I know I've looked at some bigger deals and I've thought, “I am over my head. I don't know what I'm doing. I'm going to screw this up.” It kept me a little bit more trigger shy from the bigger deals because it was more complex. What do you recommend for people who are a little intimidated by the due diligence process?
If that's you and the audience and you think like, “This sounds cool but it sounds so complicated.” I'd highly recommend you to avoid a private deal because that's where you'll probably be screwed just because you don't know what you're doing.
When you say a private deal, do you mean a deal that's not listed with a broker?
Yes and that sounds self-serving. The reason why I say that is because if you come to us and you have no experience but you want to get into the game. What we do is we set you up on what's called criteria call. What that is, is you meet with one of our business analysts.
Usually, it's not terribly long, 20 minutes to 40 minutes depending on how the conversation goes. We talk to you about your goals, your skill sets, your background, all that stuff. We help you create first what you want to accomplish and what does that look like? We will help you create your due diligence framework that once you have that, you can go anywhere.
You can go private, broke but that will allow you to eliminate a lot of the businesses that you feel uncomfortable with very quickly and it'll let you drill down deeper on the ones that look promising. That gives you a little bit of skill set in the game.
Have you charged money for the criteria call?
No, that's totally free.
I was going to say that sounds like it's worth it.
We have that a lot of people, they do them and then they do buy a deal outside of our marketplace. They have full intentions of coming back, hopefully and buy a from us too. They always say it's worth it. I think it's a good way to create your foundation as the buyer to get your feet a little bit wet in the terminologies of the industry.
Another thing I would suggest for a buyer is to read our Definitive Guide to Deal Structuring that I wrote. I recommend a new buyer to check that out. That's a great resource to understand how creative financing works in our industry and that's a powerful advantage that the buyer has when it comes to acquiring deals.
The last resource I would give for someone is our Web Equity podcast. We do seasons of that. Every season covers a different theme about buying and selling. Season two covers everything from start to finish that a new buyer should know about.
It walks you through the entire process from finding the deal, due diligence, negotiations, what does migration look like, all that terminology. If you do all that, you should have a pretty good base to start with.
I love that show. It's good. I've followed a lot of the episodes. Ace is on that one a lot, right?
Yes, Ace is a good friend of ours.Someone's due diligence could be different from someone else's because of different skill sets due diligence criteria. Click To Tweet
Same here. I love Ace. He's been on the show as well and we talked a lot about this. This was one of those honest but damaging admissions. What percentage of the sites list on Empire Flippers that don't sell? It's not Empire Flippers thing. Let's be realistic. Just because you have a site to sell doesn't mean you're probably going to sell it. Are you able to give any statistics to say a third of them and just don't move?
I don't know the statistics. That’s the only reason why I can't give it. I don't know what off the top of my head for the ones that don't move once they get onto our marketplace. What I can say though is we're very controlling on who we allow onto the marketplace. You have to go through a fairly rigorous vetting process before we allow you on.
For that, I do know the statistic that two out of three businesses around 66% or so businesses that come to us, we just simply reject. A lot of them we reject within five minutes because the quality doesn't match the standards that we're looking for.
Can you give us an overview of at least the minimum level of quality you are looking for?
Our minimum qualifications are actually pretty easy to meet that will help you get past that five-minute check. The minimum for a business, it has to be making a minimum of $1,000 average net per month and you have over a twelve-month period ideally. Sometimes we will do six months, which I don't recommend for sellers by the way, because we take a pretty big hit on the multiple if you do that.
The other thing that we need to see unless it's like an FBA business or even a KTP business, which we have sold a few of those. We like to see at least three months of traffic analytics as well, either through Google Analytics or Clicky is another reputable one. Those are some basic stuff and that's all fairly easy to hit for most of these people.
We can start doing the actual process and things that will get you hit are things like a bad P&L, which is quite common for eCommerce entrepreneurs. We'll help you build that P&L. Just because we say, “We can't list this yet because of your P&L,” it doesn't mean you're dead in the water just yet. Those are some examples that could happen.
For the audience' sake, the way you guys make money, do you guys ever make money on the buy-side or are you just taking a percentage of the price of the listing when it sells?
Our fiduciary responsibilities to the sellers. We don't get paid until we sell that business as a success fee. That works in various tiers. Anything underneath $1 million, it's a flat 15%. $1 million to $2 million, we do 12%, $2 million to $5 million we do 10%. $5 million and up we do 8%.
The buyer never has to pay us at all. It comes out of the seller proceeds. We don't believe this is a zero-sum game. We don't believe that there has to be a winner and a loser. We think everyone should win. We want the buyer to walk away thinking like, “That was a great deal I just got.” We want the seller to walk away, “That's the perfect X that I wanted.” That's what we're always shooting for.
Have you seen any favorite deals? You don't have to mention the names of any of them. I love stories about fun deals and big successes and whatnot. Is there anything that stands out to you as, “That was a fun one?”
There are a few of them in various levels of success. One of the craziest ones I saw was definitely fun for the buyer of this business. He was able to negotiate the deal down and he bought the business. I think it was below six figures. He literally asked us during the migrations, that's the period when we have an entire department that handles transferring the asset over to the new owner to make sure everything is transferred correctly.
It was during that process and he asked one of our sales guys like, “Would any of the other interested depositors' want this? I would sell it for an extra $20,000.” We’re like, “We can ask,” and so we did.
Did you gather who wanted a piece of this?
In order for someone to look at our business, they make a deposit. We got to have multiple buyers looking at a deal at the same time. Whoever gets the business first is the person that gets their bank wire first. I often accepted the offer of course. He asked us if one of the other buyers doing due diligence want this.
We asked, and he literally sold that six-figure business for an extra $20,000 an hour before and even moved away from the sellers’ original account. The seller got paid, the buyer got paid. There’s another buyer within a matter of an hour. One of the weirdest things I've seen that was by far not normal.
How does the deposit work?
It's one of the other unique things that we do. A lot of other companies, what they'll do is they’ll have you sign what is called a Letter of Intent or LOI. Often what that means is you more or less have exclusive due diligence to various levels depending on how it's written. That's good for the buyer.
It's not necessarily good for the seller because that slows down the seller because now there's only one person looking. What we do is to weed out tire kickers and potential copycat marketers. We require a buyer to put down a deposit on the business or at least call our business analysts to show proof of funds and have a conversation first before we allow them to see the more intimate details of a business.
We will give you some of the best metrics on the actual marketplace but we won't reveal the URL, the actual products, the true niche because usually we do big parent niches like what you see on the marketplace. A lot of the intimate details are hidden away until you make that deposit or until you get on a call with one of our business analysts and they approve you to let you see it.
The deposit, is that a fixed fee or is that a percentage of the potential sale price?
It used to be 5% of the sales price, but we started getting much bigger deals that became a big ask. That was created back when we were selling $5,000 size. We have one in pending sold for $4 million. It was unreasonable to have someone put down that. It's always been 100% refundable.
Even if you do buy the business, we actually still refund you that money. That's how you get into the business. The reason why that's good for the seller is this allows to create a pool of buyers all looking at the business at the same time.
That creates a bit of that scarcity, a little bit of heated competition, makes the seller able to bounce offers off of each other, which helps move the deal faster. It’s very much an advantage to the seller, not as much to the buyer unfortunately.
Let's say I'm looking at a business and I put down the deposit. Is that refundable within a certain time period? I've got a fourteen-day right to inspect or something of that nature. Is it time-based?
For the deposit, it's no time. You can refund it whenever you want.
I can look at it after three days and go, “I'm not interested.” I get my money back or I might be looking at this thing for 30 days because we're maybe in negotiation and all this other stuff. At the end of that or maybe even 60 days, who knows how long it goes, if for one reason it doesn't close, I get the money back?
That's correct. We refund the deposit even if you do buy the business. Most people will pay it with their credit card. The only thing we ask when you get your deposit refunded is the reason why that wasn't the right business for you. That's useful feedback for us because maybe it’s just truly the wrong business or maybe it's a process thing of ours that we can improve. That's the only requirement to get it back.
You mentioned proof of funds. You don't want to be dealing with a bunch of broke people. When I was a financial advisor and we had a saying in the office because it was very easy to cold calling a lot of times to a little old lady and she's nice to you on the phone.
I think she had $50,000 to invest and I told my branch managers like, “This is great. She's got $50,000.” In the brokerage world, in the fee-based advisory that's broke. We love broke people just not during business hours.
It’s funny you used the old lady. I used to work at La-Z-Boy when I was younger. I was in a commission-based. The best customers were the little old ladies because they didn't care how the La-Z-Boy looked. They just wanted comfortability. We always knew that they were a high chance of buying.A little bit of heated competition makes the seller able to bounce offers off of each other which helps move the deal faster. Click To Tweet
She was an easy sell for me. She was great. She wanted company, but I wasn't going to make any money off of $50,000. That being said, that goes along with this. The real question is proof of funds.
This dovetails into another question perfectly, which is the financing of businesses. Some people are sitting on a lot of cash, $1 million offer, $500,000 offer and they can write a check and do an all-cash deal. Some people are going to need to go arrange financing of one sort or the other.
I've got a few questions along these lines. Off the deals that you guys do, how many of them are apparently like, “We'll write the check, cash deal. Here you go,” versus them arranging financing one way or another on their own?
I don't have a hard percentage for you on that. That's actually something we want to do for the next State of the Industry report is to break that down further. Unfortunately, we didn't have the time to do it. What I can tell you is if a deal's underneath $200,000, it's almost always going to be all cash or close to it.
When earnouts or seller financing or other forms of financing start to come into play where the seller might get a large upfront amount and then they have to wait a certain period of time to get the rest of the money, that usually begins in earnest $500,000 and above. It can happen even at the sub $100,000 level, which is far less common.
If you're a buyer looking in the sub $100,000 level, I'd be very careful with trying to do a seller finance deal because at least if you're doing it with a broker like us or we're doing a private deal, then it could be a very advantageous thing for you to do.
If you do it with us, then there's a good chance that the seller will just hold out until he gets that all-cash offer because we sell $700,000 so quickly. If you're looking at our marketplace, that can actually put you at a disadvantage by doing the finance deal and sub $100,000, but a huge advantage at the higher levels.
The web-based businesses can be notoriously hard to find financing for because oftentimes there are no hard assets, and it's a more volatile business than a brick and mortar or something of that nature.
Are there any resources, tips or tricks for buyers to find financing outside of friends and family? Are there companies out there who are arranging this for people? Have you seen anything creative being done besides creative financing and owner carrybacks?
A lot of creative financing is with seller financing. It's an interesting industry. Our multiples are somewhat lower than a traditional offline business, like your local laundromat. The big reason I think is because of the lack of financing. If you go to Wells Fargo and say, “I want to buy a $200,000 Amazon affiliate site about dog food.”
They're going to be like, “What are you talking about? Get out of my office.” If you go to that same bank and like, “I want to buy a media company all about dogs and their food that's worth $20 million.” It's more or less the same business model, they're like, “Let's do it.” Once you get above the $10 million range in digital assets, financing does start actually becoming available.
Most of us aren't playing at that level. What we see is obviously seller financing is a huge one. A buyer should always ask for that borrowing my previous advice if you're at the sub $100,000 level. Otherwise, you should always ask it, even if you have the full liquid. Because the vast majority of the time, the seller's going to give you some earn-out and they're going to give you a 0% interest.
It's more or less a 0% interest-free loan. There are other things you can do in that earn-out too to help you get successful, which isn't necessarily financing, but there are things like milestones that we've talked about and different things.
Raising funds outside of friends and family, there are a couple of other things out there. One thing that's come on the scene is small business administration loans or SBA loans for your American audience. If you're buying an American business and you're American, then there's a good chance you can apply to an SBA and get it.
SBA financing is pretty reasonable and they cover a lot of it, but they typically want collateral, often the house that you own. Sometimes they will forego that in very rare circumstances, but usually they need some collateral. That's another way, even though that is somewhat still a rarity in our industry. Another thing you can do is if you do own your own house. I would never tell you to do this if you're trying to save your life or if this cuts into your emergency fund.
Another smart investment strategy that I've seen people who are in a financially healthy position do is they will take out a HELOC or their Home Equity Line of Credit. That more or less works as revolving credit, similar to a credit card.
That does use your house as collateral as well, but it allows you to buy the business and often get great ROI that you can pay that off that loan within a year, year-and-a-half often in the last depending on how much of the loan you use because you don't need to use 100% of it. I would never advise doing that either. If you want your audience wants more inspiration for creative financing.
This something I'm interested in as well because I find it fascinating how people raise capital. If you look at any of the real estate gurus or anyone who's done any real estate deal and they are starting to get above that fourth property where they can't get that traditional mortgage anymore. There are a lot of crazy creative financing strategies and real estate and a lot of those actually can apply pretty well to what we do.
I have a real estate background and then I was the chief marketing strategist for two of the biggest real estate gurus out there. I do advisory work with RealEstateInvestor.com and the owner of that company is a guy named Gary Boomershine, one of the absolute masters of creative financing strategies I've ever seen. It is next-level blow you away awesome.
In fact, one of the pieces of advice I've given Gary was like, “We need to come out with this,” which is a real course on truly creative financing. There's some basic stuff out there, but not the level of stuff that he's teaching.
Yes, some of it is specific to real estate, hard assets but its buyer psychology and understanding the difference between price and terms. You get to pick one. It's your price in my terms or my price and your terms.
That's the most powerful thing in any negotiation understanding that I'll give you $1 billion for your business. It's going to be $1 billion a year for 99 years and $999 million in the last year. You can say you sold your business for $1 billion. That's my terms.
We say that to sellers a bit. Sometimes sellers are like, “I want the full list price.” Let’s say it's like $1.3 million deal. “It depends. Do you want the full list price and a longer earnout to get that money or do you want more upfront money cash in your pocket right now for a little bit less than that list price?” They'll have a flexible range there if there’s a reasonable seller.
What are some of the biggest reasons from a seller position that you see the seller wanting to cash out and sell their business? I know there's a plethora of reasons why somebody might sell their business from burnout to, “I just want to cash out or I want to go spend time on other stuff.”
Oftentimes, there are differing levels of distress. I know when I've sold a business before, I was just like, “I am burned out not spending any time on this thing.” I wasn't desperate because I was making money elsewhere.
I didn't need to sell it, but my other option was letting it continuously go down into the dirt and shutting it down as opposed to getting a year's worth of earnings. There are other people who were just like, “I'm desperate. I’ve got to get out of this.”
On that range, what would you say is some of the biggest reasons you see sellers decide to finally go, “I'm out?”
On the personal side, it’s definitely the burnout thing. It could be a subtle thing. I know people with business making. Not crazy amount of money but a decent amount of money working on something that they will only have to work on every other month, maybe four or five hours during that month.
The weird thing about is it takes up so much room in their brain. They're like, “I just want to stop worrying about it.” It's making money but next month it doesn't, and then I screwed myself because I could've sold it. Those weird doubts coming in through their mind and think like, “I just want to get rid of it. I have plenty of other stuff I'm doing.” The more professional or business reasons, there could be a myriad of reasons.
One of the things I say and this is one of the best reasons I see sellers sell them in my opinion, and I say this to almost everyone that's starting an affiliate site or FBA business, “You haven't started your career in this business model until you sell your first one.”
The reason why I say that is if you're an SEO person and you create an Amazon affiliate site, you sell that affiliate site with us for $128,000 or $150,000. That is probably your biggest windfall of cash you've ever had in your life. I'd be surprised if it wasn't.
That amount of cash sitting in your pocket, plus all the earnings that you had saved up from the time it was making money. You can turbocharge your system. We have sellers that sold around $800,000 worth of Amazon affiliate sites with us over a two-and-a-half-year period, maybe a little bit less than that.
Every time they would launch twenty new websites with their SOPs or whole processes like this factory belt just pumping them out. Then they would sell off about eight or ten of them throughout the year and keep two or three of them and then use that capital to redeploy into making new ones.
They were able to level themselves up so much that they experimented with doing a SaaS product. They also ended up creating a very successful productized service. That's an example of what a seller can do.
One of the reasons why they do sell is to go off and do bigger things, bigger projects or get that war chest to enter into a much more lucrative but more competitive space that they would never have been able to compete with unless they sold that site or sold that eCommerce store.
That's one of the things that helped me too. It blows me away when people are like, “I don't understand. You've got a business, why would you ever sell it?” Because things change on a dime. You may not have a built-in moat around your business where you're totally protected.
This is not buying a government bond. I look at it like I'm not selling this for money. I'm selling this for time. If I sell it for two times year’s earnings, especially if it's an all-cash deal, somebody just handed me two years of my life.
Now I'm going to go run out. I've got a two-year headstart because it would've taken me a couple of years to make that money and my profit and the time value of money. Money now is more valuable than money later.
I look at it like that when I'm ready to sell something. You can't buy time but yet you can. This is one of the ways you buy time.
What you said there reminded me of something I think about often. I go to a lot of conferences. A lot of them are buyer-centric or seller-centric.
They don't always tend to mix. I do get people more on the sales side like, “Why would I ever sell this?” You get the sellers who are like, “What kind of buyers are these people? They must be naive buying my business for a couple of years that I built while I’m living in Chiang Mai,” or something like that.
On the other hand, buyers like “Who are these sellers? They’re so naïve. They have no idea what they have. I'm going to put out to 10X this thing.”
It's a crazy market out there. People don't quite get it. Once you get it, it's like, “Now I see it.” For instance, there are some sites where it’s an info-based business. You've got an eBook and this and that and the other and you're making $100,000 a year.
Granted I might not pay you $200,000 or $300,000 for that business. Especially cash, realistically I could go out and duplicate assuming that it's relatively general business. It's not necessarily based on a specific personality, but it’s like the Keto diet system.
For a couple of hundred thousand dollars, I could easily go hire the best writers in the world, spend a lot of money on ads and funnels and all these other things.
I could rebuild it for a lot less, but there are some things if I want to skip to the head of the line, especially if I can arrange financing or I know that there's something I can do with that business that these guys don't even have any upsells.
These guys don't have any higher-end products. I'm just going to buy this thing for a couple of hundred thousand, add a little bit of value and then watch it skyrocket because I know how to pull the profit levers.
It's a paradigm shift for both sellers and buyers. Why would I ever sell this or why would somebody ever buy this? Why would I buy it when I can build it? Because you can buy it instead of building it.
Even if you're brand new, if you’re the newbie in the audience learning about this for the first time, I would say as long as you're in a financially good position, you don't need to bootstrap. You have money that you're okay if you lose it because it is a volatile industry.
Things happen just out of our hands that we can't control. I would be more of a buyer than a seller. The reason why is because even if you buy on the low end say $50,000, which is still reasonable purchase, you are already getting so much time just from that $50,000 purchase because you don't have to explore different niches, different keywords. If it's an associate site, you already know it's making money and it already has traffic.
When you buy that site, you can instantly do something like conversion rate optimization where you make the number of visitors worth more. You couldn't do that if you were starting out because you have no visitors. You have nothing to play with.
It's just all operating in a vacuum until you start getting that machine going, which you can take several months before you even see your first check. Often, it's a depressing one. It's like a $50 check from Amazon. I'm like, “What did I just spend a year on doing?” Because the real money does come in eighteen, twenty months in when you start ranking in Google.
It's an amazing paradigm shift when you start getting it. We see a lot of sellers once they get that windfall of capital instead of supercharging themselves into that factory mindset like that other seller that we’re talking about. They actually become buyers because they understand how it works.
Another one because I had given this advice to other people who are trying to get started in the stuff and they’re maybe entry-level entrepreneurs, they've dabbled, they've played around. This sounds great, but they probably read this part and says, “I don't have a couple hundred thousand dollars to buy something.
I'm not stacked with cash. I don't know where I'd go find that.” A great way to do that from a beginner's level is going to find somebody who does have some capital and offered a run it for them with sweat equity. Say, “Give me 15%, 20% of the business. Let me even invest in. Let me actually have ownership of it. If you can buy this, here's my plan to run it.”
I know for me, I'm not sitting on millions of dollars to go deploy like crazy, but I've got capital to invest. The one thing I don't have is the right resources of hustlers and operators who would love the opportunity to go own something and run with it and have that pride of ownership.
That's a great way to buy a minority interest using other people's capital just tell them you’re going to run it. I think that's overlooked because there are a lot of young, hustle, full of energy-smart people that are not sitting on a fat stack of cash.
It doesn't mean you can't buy a business. In fact, one of my other podcast episodes, which was fun, was with my former business partner named Dale Hensel.Make sure you value your own time and what you're bringing to the table. Click To Tweet
Dale said he switched up after he had sold a business and had some good success from business coaching. He goes, “I was coaching all these entrepreneurs.” Usually, when an entrepreneur seeks business coaching 80% of the time it's because something's broken and they're trying desperately to fix it.
He said, “I came across as a lot of recently failed entrepreneurs who've come off of failure. They started it up, they screwed some things up. The business didn't do what they wanted.” Because that's the nature of business as we know, 90%, 95% of them fail. It doesn't mean they're not smart. That doesn't mean they're not driven.
What he started to do because he had a lot of ideas is he would partner with them and say, “I'll fund this. Let's either go buy this business or start this business or something else. I'm not going to pay you a lot of money.
You're going to be the CEO, you're going to be back in here, but you've got my resources. You're going to operate it and you're going to get 20% equity in this, but it's going to vest over three years. If you bust your butt, I'm not only going to coach you, I'm going to fund you, we're going to run this thing and then eventually we're going to sell it together and you're going to make money.”
I love showing people that there are more opportunities out there than you realize. You don't have to have the money if you can access it. If you can access the money, how do you influence somebody to work with you like that? Tell them, “I'll run the whole thing. I'll operate it. I'll get skin in the game.”
One thing I like to add on that is on the other side, the guy who's looking for this person with all the finances that they can tap into. I think a lot of us and me included, and I'm sure you've felt this as well. We have that imposter syndrome like, “I built an Amazon affiliate site that makes $1,000 a month. I'm nowhere near skilled enough for this guy to give me $1 million to buy it as other a content site.”
Here's the thing that I tell people. Internet marketing, if you're brand new to it, it sounds complex but it's not rocket science. Honestly, it's less complex than things like commercial real estate in my opinion, which I know a fair bit about. I was raised by a real estate agent who owns his own real estate company.
If you learned how to build something making $2,000 or $3,000 a month, those same skill sets apply to a much bigger business could make that business go wild with the amount of money that you can make. It's just that you are now looking for a financer that will allow you to open up those gates to scale.
That's the way you should look at it. As this person looking for the financing, make sure you value your own time and what you're bringing to the table. Because while you don't have the money to buy the business, you do have the skill sets to give the financer the ROI that he's seeking.
It is a powerful play and you're right, that is a fantastic way to get your hands onto a business if you don't necessarily have the money, but you have at least some of the skill sets.
I've also noticed that a lot of times people like myself, I don't have experience running a $25 million, $50 million top-line company as a CEO and doing all that, but I've run much smaller companies.
I think when you're running a smaller company, oftentimes you have to be nimbler and ninja and figure stuff out because that's one of the things I've noticed because I consult much bigger companies.
It's the stuff that I learned down in the trenches because I had to do it to make it happen because I couldn't just throw money at agencies and just throw money around. I became a lot smarter and the stuff that worked pretty well at the low end can move the needle big-time at the high end.
It goes back to what I said about buying that $50,000 site. You have much more to play with than you would before. That's why it operates so well and scale.
I bought a business. It was a small business. It was a great deal, but it's so small that it doesn't turn off enough revenue to move the needle in to put back into the business. Sometimes buying a bigger business can be a lot easier. There are ways to do it. You could have no experience in this.
You could buy a $5 million business if you find the right seller, the right situation, it matches up with the right resources. Maybe you have another person behind you who loves the deal and loves your hustle.
For instance, for my audience out there, but if you know anybody too Greg, I am looking for a smart, hungry eComm operator who can take a project, run with it for payment plus equity and wants to own something but doesn't mind putting in some sweat equity and operate it.
I've got a couple of projects I'm working on that I just don't have the bandwidth personally to do. I could hire agencies, but I'm always looking for people like this.
For you readers, you can always email me at AskBrad@BaconWrappedBusiness.com and let me know if you read this piece of the segment and you're interested. That's the other thing, there are so many people that are like, “I want to be an entrepreneur or I want to be my own boss.”
It's overrated. I'm not a CEO, I've done it and I suck at it. It's a whole different set of skill sets that come as a CEO versus an owner or an investor. I've been trying to take much more of an investor mindset in every single thing I do.
I know that when it comes down to the general business administration stuff and running the business, that's a manager's responsibility. I'm not a manager. I'm an opportuneur. I'm a hunter.
If we're talking to the guy in your audience who is looking for the financing. If that reader is good at delegation and understands how to make that work, that is literally the most valuable skill. You don't even need to know that much about it.
It’s my number one thing that I need to be better at. I'm pretty good at partnering, but delegation is a whole other thing. We've talked a little bit about eComm and FBA businesses, and I know you guys sell some SaaS, eComm.
There's eComm on Amazon, Shopify and then a combination. Are there any other business types on here that do incredibly well that people should be looking at, whether it's because you can get a good valuation for it or because there are a lot of opportunities there, there are a lot of sellers? SaaS is obviously one of them. Do you guys make a lot of SaaS sales?
SaaS is still relatively new to us. We do SaaS and we're actively seeking it out. The big reason why we haven't done that many SaaS businesses in the past are simply because we weren't focused on it. Now that we have such a good market with the eComm space, whether it's dropshipping, FBA or a hybrid, and also on the content side, we're starting to focus a lot more on SaaS as well.
It’s mainly that they just didn't know about us and I think that's going to change significantly probably the latter half of 2020. It's when you’ll probably see that more on a marketplace.
As far as other business models that are out there for your audience to explore, I actually wrote a thirteen blog post series about the most popular online business models. This is a great place if you’re a reader out there just getting their feet wet into internet marketing.
I basically describe how the model works, what are the advantages and the disadvantages of each and what a buyer should look out for when you're looking at it? What a seller should consider when they want to sell one of these businesses. They can get that either by going to Empire Flippers Blog and find our online business model or you can download it on the Kindle, but unfortunately I have to charge you if you do it on the Kindle.
I saw that. This is good. This is something I started to do and I hadn't finished it out. It looks like you've done a lot of good work on this. I listed out all the various entrepreneurial business models I can think of very similar to some of these.
You've got some that I don't have on it. Everything from consulting, publishing, offering services, agency work, affiliate and blogging. I built a mind map and it was like, “These are the pros. These are the cons. These are the skills needed. This is the SWOT analysis of each one.” The main reason I started to build that out was for myself.
I was trying to take an inventory of what I wanted to do next as I was reinventing it because I've got some experience and about 90% of the business models I've either consulted or run myself. I was trying to narrow it down, the process of elimination to go, “This is the direction I want to take.”
Ultimately, the direction I take as much more of a deal maker and somebody who consult and puts together strategic deals and potentially acquisitions because it plays the best to my personal strengths, but I think that's important that you know what your strengths are before you try to go out and buy a business.
It can be tough to focus on one. It sounds like you might be a little bit similar to me where there's so much opportunity out there. People always say whenever there's a Google algorithm update or Amazon changes a policy like, “It’s dead or dropshipping is dead.”
We just sold multiple millions of dollars’ worth of dropshipping businesses in 2018. Dropshipping definitely isn't dead. While there is more competition now than there has ever been, and there'll be more, I think the opportunity is even better than it used to be because the barrier to entry is so much lower.
People like you, there's so much information out there, whether it's our blog or someone else's blog. The barrier to getting started has never been better.
I heard about this company and I'd never heard about them, but I think they're pretty big. They're based here in San Diego. Have you heard of a company called CAPTARGET.com?
I don’t think so. It's not ringing a bell.
What they supposedly do is helping middle market, private equity, source acquisition opportunities, and they do it for flat fees. I know for a fact that one of my friends, he's got a nice eComm business, which I'm happy to introduce you. He's exploring the potential valuation for it. He found them and I think he just paid them a flat fee.
I don't exactly remember what it was, but I know it was less than $10,000 to do a full-blown valuation of his firm but even helping him source buyers. They're doing this for a flat fee. Supposedly they're trying to reinvent the market. They’re somebody to pay close attention to.
It says, “CAPTARGET helps private equity and similar buyer’s source both on and off-market acquisition opportunities for a low monthly cost, eliminating the need for the buyers to pay finder's fees.” I think they work with a lot of private equity companies. I literally just got introduced.
If you want me to follow up, I'd be interested to know how their model works out. I've seen some interesting models. I've tried to do something similar like that and I didn't end up too well. It starts off good and then it becomes an issue later on typically. Who knows? Maybe they'll be able to do something cool.
If you go to their pricing pages, it’s the first I've seen that. If you want a pitchbook, it’s $5,000, deal marketing, $750 and up and I think it's designed for more mid-market PE firms.While you don't have the money to buy the business, you can have the skill sets to give the financer the kind of the ROI that he's seeking. Click To Tweet
It’s probably above the $10 million range.
Do you ever have any buyers who are doing any types of roll-ups in your business or no?
By roll-ups, could you give me an example?
I'm actually an advisor and I have equity in a company and you might even have somebody on your listing who does this. We're rolling up brands in the CBD supplement space. What we're doing is we've acquired some of the details are that it’s a sizable minority interest in various successful CBD supplement brands.
Let's say we acquire 40% of your business, but we have the option where if you hit certain benchmarks at the end of the year, that will acquire the rest of it and for both cash and then a little bit of stock in the holding company that we have.
We've acquired one. We’re in the final stages of due diligence to acquire our second and our goal is to acquire the controlling interest in at least ten of them where the owners of the company still get cash, but they're also getting stock in our parent company because the goal is then to sell to a private equity company.
If we have ten companies, each doing $2 million or $3 million top-line, we've got $30 million conglomerate and it's a lot easier to sell that from much higher multiple to much bigger pocketed buyers down the road. Thus, the rolling up similar businesses in a fragmented market.
This is something we do see. It's not very common yet at our level, the sub $10 million levels. I say our level but I'm pretty sure a $30 million business came to our marketplace, we have the resources to sell that versus a few years ago, we definitely didn't. What we're seeing is something like that.
We see a lot of these PE firms that normally would never dip underneath the $10 million level. They're starting to dip underneath that and acquire these brands and doing a similar thing as what you're discussing. We're also sitting on the flip side, people who are raising funds and capital. They are rolling these brands, these assets together and creating synergy.
That's the second one is the one I'm talking about even more because that's one of the opportunities. It's hard to get the attention of the PE firms unless you're doing $10 million.
They've all roll out of bed for anything less.
I read a great article from a guy named Jeremy Harbour. He teaches a lot of creative deal structuring. He wrote an article about how to build a $10 million company in six weeks with no capital at a high level.
Find five businesses in a similar industry, maybe it's fragmented and maybe each one of them is doing $2 million a year in sales and maybe each one of them is doing $200,000 in net. $2 million with a 10% profit margin.
If they go to sell, they're probably going to get on average about just short of two years earnings, but if they were doing $10 million, they might be able to get 4X or 5X multiple. The multiple will be a lot higher if they're bigger.
What he was suggesting because he said he had done this, he created a special purpose vehicle, let's just say it's called Brad Costanzo LLC and I go talk to you, “Greg, are you interested in selling your business?” You're like, “Yes.”
The market value for your business let's say it's $400,000 because you're doing $200,000 net. “If I'm able to buy this thing for $600,000, would you sell it for a $600,000 net in the next six months or a year?” That's 50% over your current valuation.
There's a good chance you'd be like, “Yes.” It's like taking an option on it. What he does is he creates a full-blown purchase and sale agreement with a twelve-month option period. Then his company Brad Costanzo LLC owns the rights to purchase that and he'll go find five other people.
Each one of these people in return will receive not quite 20% but let's just say 14% ownership of the LLC that I just put together. That LLC doesn't own anything. I haven't executed. All I've done is gotten into contracts with these five companies to buy for a substantial premium over what they could sell.
I create the consolidated balance sheets and P&Ls for all of these companies. In essence, Brad Costanzo LCC has five companies each doing $10 million a year with a $1 million bottom line. I have a much more likely to take that out to a private equity company. He's like, “Would you like to gobble up five big players in this industry?” He’s like, “Yes, I want five or six times EBITDA.”
That reminds me of a bit of an old real estate strategy. The same concept, get the deal and the contract, and then you're able to sell it for much higher to someone else.
I’ve done that a lot. That’s just the wholesaling. I'm going to sell the paper but in this case, along the real estate lines, it's like, “I'm going to get five houses under an option.” That was one of the keys. You're letting the sellers participate.
What you're doing is you're giving them a smaller piece of a bigger pie. I've always loved that. I'm sure it's a lot more complicated than that, but the concept is alive and it's cool.
We're starting to see those concepts entering in our space. It levels at PE firms usually don't come into, so it's even happening on the smaller levels and I think that will continue to happen. It’s super exciting times, especially if you understand all of the more esoteric ways of financing business. You can make a very significant amount of money. Of course, there's a significant amount of risk, but come the risk comes reward. It's a very powerful strategy.
The nice part with a strategy like that, the risk is literally just the time, energy and money spent putting together consolidated P&Ls, like go in and do due diligence on them and get a good audit. Because then if you're going to take that conglomeration to a much bigger PE company, they're going to want to go deep and make sure you're not selling. It shows you what's possible.
We were talking about content marketing, one of the things that could make business powerful is when you have a mixed monetization. We have an Amazon FBA business that’s also powered by an Amazon affiliate site as an example.
You get a double-dip on that affiliate money and your actual product margin. The same concept, you combine those two businesses together as a much more attractive business that they would've gotten by themselves. The sums of their parts are actually greater than their parts in some aspects. Some of the biggest companies in the world have done this.
They go and buy a media publication. They just went and bought all of these websites all about soldering boards. Who knew that there is such a passionate hobby? Each of those sites, they're all self-sustainable as businesses in their own right.
That soldering company, at any moment, they can have this addressable audience that beats out Super Bowl ads because they can just tap into all these different publications that they've known as part of their strategic acquisition.
Especially on those sites that I told you that I bought. In that niche, it's a lot of passion bloggers and people who own a lot of the traffic, but they're very passionate about it and they didn't necessarily get into it for the financials.
They just got into it because they love doing it. One of the strategies that I haven't deployed yet but I probably will, is starting to create some relationships with them and just see if they'd be willing off-market to sell their business.
Whether it's an option on their business or to actually sell it. I'm like, “I've got a substantial but a small player in this little market and I can piddle fart around with it or I can try to go big. Let’s gobble up all of the eyeballs in that market one way or another.”
It’s a powerful strategy, and it works well in almost every market. If you can capture the audience, that's what it comes down to is having that addressable audience in a lot of ways.
The distribution is everything. Let me ask you this question. Either you personally or Empire Flippers, what's a nut you are trying to crack with the exception of the easy one, which is just getting more buyers and sellers to come to our platform?
Are you looking to raise money, meet a specific type of person or learn a skill? Whatever that nut is to where if it was cracked, things would be rocking and rolling. What would that be? This is our chance to give back to you.
I guess it would be buyer marketing. Sellers are somewhat fairly easy to find because a lot of times the monetization model that the seller is in is usually like a guru or there's a bunch of passionate bloggers talking about that business model. It is often very easy for me to target sellers even have a specific monetization to get them across the board. I think we do well with that.
While we have a very good buyer pool, buyers in general are much more difficult to market too mainly because they're much more varied. There's no one common gathering source of them like there is to say the Amazon affiliate gurus or the FBA gurus.
A lot of times the buyer is just someone in their 9 to 5 cubicles who walked into Barnes & Noble. Maybe they picked up Rich Dad Poor Dad and they're investing and they start investing or Googling a bunch of different keywords. Maybe they come up onto me, but it's unlikely because they're probably looking at other stuff because our industry is not very well-known.
One thing that we're working on and we have some ideas on how we're going to do it, is taking this whole concept of buying and selling online businesses much more mainstream. What I've been saying is my true competition as the Director of Marketing for EF isn't the other brokers in the space.
They are truly my competitors as well. The way I look at my real competitors is the idea of investing in real estate and the stock market. I want the idea of investing in digital assets to become just as much part of that nomenclature as those other forms of investing.
It's challenging, especially because you’ve got to shift some paradigms and then get over those beliefs that are impossible. In the intro I said something, I used a metaphor. I realized when I said his name, but I got it from Ace Chapman, which was the house building episode.
They rang Ace all over it. He said something very similar on our podcasts.
I just remember it because I was already in the space, but that solidified it with me. If you can get that metaphor out there that grows like a weed in somebody's head and they can't stop thinking about it.
I remember Ace gave the full-blown metaphor was like, “We're in the business to have cashflow. That's why we are in business.” Because if we’re not making money, you're going to be out of business.
He goes, “You want shelter or home? What do you do? You arrange to finance and you buy it. Do you want transportation? You're not going to go buying that and build your own car. If you can't pay cash for it, maybe you go to the bank and you arrange to financing. Why is it as entrepreneurs we think we have to build our cashflow from scratch when you can decide what you want, arrange financing for it that makes sense for what you're trying to accomplish and then figure out a way to execute the deal? You just bought your cashflow.”
I love that. It was one of those things that every time I think about building a new company, Ace’s always rung in my ears.
On the Web Equity Podcast, every episode and I think you're familiar with it, we'll always do a cool quote that either Justin or Ace said. I remember having a beer with Justin and he's like, “Ace always beats the quote. He’s so much better at it.”
I never finished doing this exercise but I sat down, it started to get complicated. However, if this is something that helps you guys with your marketing, this might be an interesting content piece. You could do it as a hypothetical case study. I started thinking. Maybe my ideal criteria is I want to buy a business that makes X amount of money and I don't want to be on the org chart.
I want to own the business but I don't want to run the thing. Let's say I started with that criteria and let's just say to keep numbers I want $10,000 a month coming into my account. That's the cashflow I want.
I started to think about this and map it out in a journal going, “What criteria would that business have to have such that it could churn out $10,000 a month realistically to me?” You just start to back it in. Let's say the company's got a 10% profit margin. Ideally, you’ve got a little higher but 10% is standard.
That means it's probably got to be doing $100,000 a month in sales in order to pay for other expenses and cost of goods sold and maybe even salary. It was a $100,000 a month so that makes it about $1.2 million a year in sales.
I was like, “If it's doing that, what might the companies sell for?” Let's just say it ended up selling for $500,000 company or $1 million company. I started just to try to reverse engineer and then if I didn't want to spend cash on it and if I wanted to finance it, what kind of debt service would I have to have?
I wanted to make it much more real to go, “All I have to do is find a company doing $3 million in revenue a year with a 10% or 15% profit margin that has this many people in place. Somebody to manage it who are making $10,000 a month and I can afford to pay this for it and I've got financing over here.”
I think if I saw that number, that would be an interesting hypothetical to start to go target certain companies based upon what is the bottom-line profit that I want to make? In real estate, people do that and it's called the cap rate, “I need a 10% cap rate or I need a 6% cap rate on my money invested. What kind of building do I have to buy that’s going to deliver that?”
This is one of the things that is not as in detail, at least not always, it depends on the person that we're talking to, but when we get on the phone and do these criteria calls, these are the conversations we are having. We try to drill down to what is it that you want in your cap rate or whatever you want to call it, and then we work backward from there. This is a lot easier to work backward once you know what you're aiming for.
I will absolutely sign up for one of those criteria calls. I'd love to have somebody help me pick some of the criteria more clearly out of my brain. Where would I and maybe other people go to sign up for one of those?
You can go to EmpireFlippers.com/contact or just go to our main site. You can see our number there and you can schedule an appointment.
I think that's super smart because ultimately, you’ve got to have a vision for where you want to be. Sometimes coming up with those criteria can be confusing if you don't have clarity on this stuff and you don't know what questions to ask. I'm sure that your team has better questions. They can ask somebody about that.
The other thing too, even if you are a prolific buyer, you probably have bought maybe ten businesses over a period of years perhaps. Maybe more if you’re crazy or diving deep. One of the cool benefits of having this call with us, even if you have bought several businesses, is that we do this every day. Even a prolific buyer maybe does it once every year. We're happy to do it for free.
You have a free resource that you said on the little pre-survey and you mentioned. You said you have a State of the Industry report.
That is the thing I've been referencing throughout the show. It’s a big data analysis we did over a couple of years of data. I wrote 84 pages of logs. It was definitely a burden of love. The coolest thing for me about this is it's the first report of its kind, at least as far as I'm aware of in our industry that doesn't take scraped data but actually gives you the real sales data and the actual average days on the market.
Other people tried to do these reports where they would scrape these listings from various broker websites, but they don't take into account that a broker might be enticing a seller with a very high multiple to get them signed on or something along those lines.
That inflates the average listing a lot of these reports are talking about and they never actually tell you how long they're on the market because how could they, they don't own all the data. They're just scraping versus our report. We own all the data end-to-end. It's all businesses that we've sold on our marketplace and the analysis that we've done on it. It's the first time that those metrics are revealed and it's pretty exciting.
This has been a lot of fun and I love it when I can get on with people and literally forget that I have an audience here and ask the questions I want to ask and learn things for myself that are useful, tactical and eye-opening.
Readers, if you enjoy this and you're not subscribed, please do so subscribe, send me an email at AskBrad@BaconWrappedBusiness.com. Let me know what you thought. Let me know if you have any questions.
Let me know if you need any help, maybe you need help growing your business. Maybe you want to sell it, but you're not 100% sure how or you've hit a plateau and you'd like a second opinion on some of this stuff. I am happy to give it.
This is what I do and I enjoy helping entrepreneurs because the road is hard. The odds are stacked against you as we discussed it. I know how that feels and I am here to help. Until the next episode, Greg, thank you and I will see you on the flip side.
Gregory joined Empire Flippers in April 2016 as the Content Manager. He manages the flow of content surrounding our brand – blog posts, guides, podcasts etc. – from producing the content to promoting it.
His goal is to grow the reach of the company and introduce us to new audiences. Gregory was born in Anchorage, Alaska where he worked in the oil fields and now travels around Southeast Asia. He loves fiction, science and in his free time, he moonlights as a novelist.