How to Maximize the Valuation of a Private Label Amazon Brand Before an Exit
February 16, 2021
Here’s a glimpse of what you’ll learn:
- Scott Deetz talks about the factors that have contributed to the increased interest in FBA private label businesses
- The future of the Amazon marketplace as the number of FBA aggregators continues to grow
- Why Scott decided to bring private label sellers together to create larger multiples for successful exits
- The trade-offs brand owners have to make in order to quickly transition and exit their businesses
- How owners can protect themselves after being acquired by aggregators with limited to no operational talent
- Scott’s thoughts on buying and selling through brokers
- The importance of seeking expert advice before preparing for a sale
- Scott’s advice to private label brand owners who are thinking about selling their businesses
- Some unexpected forms of waste that Scott sees among FBA private label brands
- The pros and cons of the different lanes of investors
- What Scott loves about e-commerce and Amazon entrepreneurs
In this episode…
As the Founder and CEO of Northbound Group, Scott Deetz is an expert at helping FBA private label sellers get the right valuation for their businesses. He was inspired to follow this path after his educational experience selling his business. When Scott first tried to make a sale, his initial deal fell through. However, he saw this as an opportunity to improve his company’s value—and, with the help of a mentor, he ended up selling his business for more than three times the amount of the original offer.
So, what are Scott’s strategies for improving your valuation in order to make a greater exit? As he says, there are four main things buyers look for when valuing a business: a good profit percentage, a solid growth rate, risk diversification, and more earning sizes. These will determine how valuable a business is and whether or not the seller will get a good price when exiting.
In this episode of the Buy Box Experts podcast, James Thomson interviews Scott Deetz, the Founder and CEO of Northbound Group, about how to maximize the valuation of an FBA private label brand before an exit. Scott shares his advice to brand owners on how to prepare for a sale, the ins and outs of the different lanes of investors, and why you should always meet with an advisor before selling. Stay tuned.
Resources Mentioned in this episode
- Buy Box Experts
- Controlling Your Brand in The Age of Amazon: The Brand Executive’s Playbook For Winning Online by James Thomson and Whitney Gibson
- Northbound Group
- Scott Deetz on LinkedIn
- Disruptive Advertising
Sponsor for this episode…
Buy Box Experts applies decades of e-commerce experience to successfully manage their clients’ marketplace accounts. The Buy Box account managers specialize in combining an understanding of their clients’ business fundamentals and their in-depth expertise in the Amazon Marketplace.
The team works with marketplace technicians using a system of processes, proprietary software, and extensive channel experience to ensure your Amazon presence captures the opportunity in the marketplace–not only producing greater revenue and profits but also reducing or eliminating your business’ workload.
Buy Box Experts prides itself on being one of the few agencies with an SMB (small to medium-sized business) division and an Enterprise division. Buy Box does not commingle clients among divisions as each has unique needs and requirements for proper account management.
Learn more about Buy Box Experts at BuyBoxExperts.com.
Podcast Episode Transcripts:
Disclaimer: Transcripts were generated automatically and may contain inaccuracies and errors.
Welcome to the Buy Box Experts Podcast where we bring to light the unique opportunities brands face in today’s e-commerce world.
James Thomson 0:18
Hi, this is James Thomson from the Buy Box Experts Podcast. Today’s episode is part of a special series of interviews that we’ve done to dive deeper into the recent phenomenon of private equity companies and FBA aggregators investing in private label brands that are leveraging the Amazon sales channel. As part of this series, we interview a wide range of investors, brokers, consultants, and entrepreneurs that have recently sold their private label brands. We peel back the layers on what’s happening in this new investment space and look at how private label brands are finding financial success through the building and eventual sale of their online businesses. For three weeks from mid February through early March, we will release a new episode every weekday on this topic. Sit back and enjoy today’s episode.
Hi, I’m James Thomson, one of the hosts of the Buy Box Experts Podcast. I’m a partner with Buy Box Experts and the former business head of the selling on Amazon team at Amazon as well as the first account manager for the Fulfillment by Amazon program. I’m the co-author of a couple of books on Amazon including the recent book, Controlling Your Brand in the Age of Amazon. Today’s episode is brought to you by Buy Box Experts. Buy Box Experts takes ambitious brands and makes them unbeatable. When you hire Buy Box Experts, you receive the strategy optimization and marketing performance to succeed on Amazon. Go to buyboxexperts.com to learn more. Before I introduce our guests today, I want to send a big shout out to the team at Disruptive Advertising. For off Amazon advertising, Disruptive Advertising offers the highest level of service in the digital marketing industry, focusing on driving traffic, converting traffic and enterprise analytics. Disruptive helps their clients increase their bottom line month after month. Check out disruptiveadvertising.com to learn more. Today, our guest is Scott Deetz, Founder and CEO of Northbound Group, a leading strategic finance corporate development and sell-side M&A advisory firm focused on Amazon and e-commerce, physical goods and SaaS businesses. Scott advises on strategic transactions such as improving cash flow through partners supplier negotiations, debt financing, or minority equity investments. After selling his first business for 8 figures, it has been Scott’s passion to help other entrepreneurs get the right valuation for their company. Scott, welcome to the Buy Box Experts Podcast today.
Scott Deetz 2:42
Thanks a lot, James, good to be talking with you.
James Thomson 2:44
So you’ve been very busy in the last 16 plus months as FBA aggregators and investors have become very interested in buying private label brands that use Amazon as a primary sales channel. FBA private label businesses are a hot commodity these days, in your view, what has happened to generate this recent interest that businesses that have been around now for 20 plus years are getting all this investor attention.
Scott Deetz 3:08
Sure, I think there’s a couple of factors, maybe a few factors, and then a real big accelerator. So the first factor is that the businesses themselves I got started on Amazon actually being my own Amazon business in 2013. And, you know, the easiest way to put it, it was pretty simple back then, there wasn’t a lot of competition. You know, you run some Facebook ads, the rules are different, you could, you know, put up a product, slap a white label on it, and a way you roll, but you really didn’t have I call it. Now when I look back on it, I had a product, I didn’t really have a business. So I think what you’ve seen over the last three years is a number of those people that have now been at Amazon businesses for three or four or five, or sometimes even longer. They’ve widened the product set, they’ve diversified the portfolio, and they’ve actually turned what was just a product or a product line or brand. And they’ve turned it into a full fledged business. And so I think the capital markets are starting to see this. And when you then combine that with the fact that e-commerce even pre COVID was a double digit growth industry. Even though it’s a trillion dollar plus industry, there just aren’t very many of them out there that are that big that are growing that fast. So I think that really drove the capital markets to say, hey, wow, these are great businesses to buy. And frankly, a few years back, the multiples were very low, some might argue they’re still low. So the ROI for investors also made it attractive when you look at their annual rate of return that you could achieve. So and then probably the last factor again, factoring out COVID, which is a separate topic is the fact that even though a lot of these businesses were good businesses, there’s very much opportunity for what buyers would refer to as post acquisition lift when Which means what can I do after I a business to drive more margin. And for most of these businesses, a lot of it is relatively straightforward path to increase margin, it’s insert more cash, it’s be more efficient operationally with shipping and logistics and some very tactical things that you can do to take something that might be making 500,000 a year and turn it into something that’s making a million dollars a year or more. So the seeds were all there, even pre COVID for these being great businesses to buy. And that’s only accelerated, you know, since then,
James Thomson 5:35
Many of these new investors coming in are not inherently Amazon, knowledgeable. They’re, they’re learning about space. They’re learning about the marketplace, how this works. What do you see happening over the next couple of years as the number of FBA aggregators continues to grow, and more and more companies are fighting for private label brand investments?
Scott Deetz 5:56
Yeah, I think there’s a couple of things. One of them is that there’s going to be more aggregators that are more sophisticated. And so the, the, there’s going to be some things that if I’m thinking from a seller’s perspective, if I’m thinking about selling my Amazon business, there’s some positive things that might happen in the future. But there also might be some negative things to valuation as well. So on the positive side, right, now, you’ve got a lot of capital that’s out there in the market, you’ve got a lot of new money that is looking for people that have historical knowledge. You know, when I think about historical knowledge, anybody who has ever been through a holiday season three, four or five times you have a base of knowledge that frankly, I don’t care what kind of capital that you have, until you’ve been through it, you just don’t really understand, you know, the rules of the game. And so there’s a lot of advantage there, of why a lot of these businesses are looking for great companies to buy two or three years from now, what you might find is that more of them have their platforms established, and are doing more bolt on acquisitions, which might not be as favorable to the multiples as sellers, or frankly, there might continue to be, you know, more and more aggregators out there, because the e-commerce space just continues to explode. But I think it’s a pretty unique time now that you have, as you’ve said, You know, I can count at least a dozen or two dozen aggregators that are within the last couple years, still building out that core platform. And that’s really an advantage for sellers.
James Thomson 7:28
So Scott, your firm has recently been in the news for helping large private label sellers join forces together to create, what ultimately ends up is large, larger multiples for exit, to tell us more about how you think about this form of opportunity where you’re bringing private label sellers together before they go before they go and sell their businesses.
Scott Deetz 7:51
Yeah, so I think you know, anybody who does what I do goes back a little bit to their own first transaction as to kind of why did you even get into doing what you do. And my short version of the story was, I tried to sell my business by myself, thought I knew what I was doing had a seven figure exit, it was a technology business, the deal fell through, and I got depressed, because I thought that it was going to go through and I met my mentor. And what we ended up doing was what I refer to now as just good old fashioned corporate development, which is get the company to be more valuable before you exit, and we went back out to market 18 months later, same company, we acquired a competitor of ours, and we ended up getting more than three times the price of my original offer. And that was really the first time that I ever had the thought that I think that most entrepreneurs don’t realize the amount of chips that they might be leaving on the table, if they don’t understand the exit process in quite a bit of detail. And that was kind of my first passion was to say, wow, you know, if more than half the money you ever get from your business comes when you actually exit and you don’t do the last step right, you’re literally living 50 cents on the table. So if you now track that forward to the Amazon opportunity, and if you think about what buyers are looking for, buyers are looking for, you know, kind of for big things when they value companies, they want to have a good profit percentage, they want to have solid growth rate, they want to have a risk diversification job. So they want to have things spread across multiple skews. And then they want more size of earnings. And so if you think about if, for example, you haven’t achieved all of those types of things, those are kind of the output metrics, the input metrics that drive that are things like having a great team, a balanced team, having scale enough so that you as the owners can work on innovation, having access to capital so that you can fuel ever increasing growth. And so I think the concept of whether you call them roll ins, roll ups, partnerships, mergers, you know, buying before selling all of these different types of terms, what you’re really doing is you’re acquiring both capabilities and output metrics that prove those capabilities before you go for your ultimate exit. And I think that’s the step that a lot of people think that if they don’t have it inside their own company, they think that they maybe can only do that through organically growing the company and hiring the team. And what we’ve kind of seen is that they’re, you know, we want to introduce that there’s another way to do that, which is through different types of partnerships and strategic transactions that can build those Lego blocks. For you first before you then go find your own larger exit, or you’re a strategic partner that takes that growth to the next level.
James Thomson 10:39
So I’m a small private label seller, I might do two $3 million a year in sales. You know, I’ve got 30% gross margin, maybe I clear a million dollars a year, I have a catalogue of 510 products. You’re You’re now talking to me about, oh, maybe I should go acquire somebody in order to create a bigger entity. How big do you have to be before it starts to make sense to be doing some of this, this pre sales work to potentially buy somebody? A lot of these companies that are being bought by smaller aggregators today, they don’t have a lot of cash to begin with. And one of the reasons they haven’t grown anymore is they’re so cash strapped. They can’t possibly be doing an acquisition, or at least not a cash based acquisition. How, what kind of advice do you give to some of these smaller brands that are right now hot commodities, but may not be in a position to grow the way that you’re suggesting?
Scott Deetz 11:36
Yeah. So I think the first thing that I always start with is, don’t just think on the terms that bigger is better. Think of it on the terms that better is better. And what I mean by that is you need to look inside yourself and look at the capabilities of what your company is. And think less about the fact that I’m I’ll call it buying another company, and that I might be partnering with another company, I might be doing a merger transaction where I’m bringing on and doing a stock swap where I don’t need to come up with cash, okay, what I’m really looking to do is I’m looking to build capabilities that I don’t have. And so I’ll give you an example. You’re a really great marketer, you really understand sourcing and innovating on products, but you absolutely hate supply chain, okay. There are a few people in the Amazon industry that would classify themselves as such, you happen to be at masterminds or on podcasts, or you’re out there in the industry, and you realize there’s another great company that’s out there, that happens to have somebody that really, really excels in supply chain. But frankly, I haven’t figured out the secret sauce to picking great products. So there lies the ingredients, what I would call it is better is better, because of the fact that I can take this half a million of earnings over here, take your million dollars of earnings, they’re both of us individually might be worth a three x multiple. But if we have the ability to bring that capability together, we’ve got the ability to achieve not only a higher amount of earnings, but an actual premium on the business results. And so I think first in terms of capabilities, and culture, and then I back into Of course, we should be able to prove that we have more earnings. So I think that’s the first point. And then the second point is to have everybody educate themselves about what capital is really available, if you do want to do a traditional acquisition. And between the combination of financing that’s out there seller financing with the person that you might be acquiring. Generally, if there’s an interest in getting a deal done, there’s a potential that a corporate development person like myself or a finance person can help you probably structure a deal if there’s enough synergy. And my last comment on this is that, to me, the synergy threshold has to be big. So if you don’t believe that the value of the two parts after they come together is 30 to 50%, or more than what they are individually, don’t bother, it’s too much of a distraction. So you have to really think that you got to model out what that potential future is, and really believe that there’s that much synergy in the deal. In other words, just don’t, you know, I like to sometimes use the expression that you can’t, you can’t take an apple, a banana, a slab of meat and some ice cream and call it a fruit basket. Okay, you got to have everything that really fits together in order to make these types of things and it takes planning and it takes work. But for successful companies that want to reach that next level, it’s a great option for you.
James Thomson 14:47
So let’s go back to the types of firms that were heard in the press getting sold today. Lots of companies that have even half a million to $2 million a year. We get packs of stuff that gets sold to the owners. We’ll walk away fairly quickly. But there’s also a class of very large private label sellers. And they might be doing 10 to 20 million EBIT a year. Those are big dollars. And for them to get the kind of multiples that they would like to see, your typical PE firm would look at them and say, Sure, we can buy you, but you’re going to stick around for two years and help run this business, we’re going to make sure that there’s a long term transition period, that is not something that the smaller brand today is necessarily having to participate in. What are the trade-offs that owners of some of these larger brands, what are the trade offs some of these owners are having to make in order to be able to transition out quickly from the firms that they’ve built and now want to sell? How do you think about the loss and multiples that an owner would likely go through in a situation where they do want to exit quickly?
Scott Deetz 15:51
Yeah, so there’s a couple aspects to this. First and foremost, I think that you need to step back and decide what you really want as an owner, and what your true objectives are. And here’s what I mean, most of the time when we work with and we work with, you know, some of the, you know, the largest Amazon sellers in the space. But it’s not uncommon for somebody to say to me, I want to sell and I want to walk away. And a lot of the reason that they think that is because they think if they sell out to you know what, sometimes people would call the man that now I’ve got to go work, and I’ve got to be an employee. And what I encourage the larger sellers is let’s just use your example, I’m doing $10 million of EBITDA. And let’s just say for example, I achieve, and we’re not part of the multiple inflation hype crew at Northbound, so I’ll just use a number like four, because it’s still a big number, it’s 40 million bucks. Okay, so somebody is going to pay you $40 million. And let’s just say that they’d like you to stay on through one more holiday, next year, maybe 12 to 18 months. And because they want to really make sure that they maximize it, get all of the processes in place. Your job after the transition is not going to be what you think of as a job because of the fact that somebody just let’s say they paid you 75% in cash and 25% in equity, rolled equity. Yep. So they just gave you $30 million. They know that if they treat you like an employee, you’re going to do what you’re gonna say, Sorry, I’m out, right? They’re really looking at you as transitioning into a strategic advisor to get the knowledge over the wall that you have historically embedded within their platform company and get to the next level. So the first thing that I always say to people that want to know, when we go into any buy sell situation, the first thing I always say to the client is that I will eventually get around to asking the buyer to meet your needs. But I will never lead with that. What we need to do is have a conversation with multiple types of buyers about what they need out of your company in order for it to be successful going forward. And think just like you do, when you put up a new listing, you don’t think about the benefits that you have in making money about it, you think about it, the benefits from your client. And so we always say your ultimate buyer is your ultimate customer. Think of them the same way. Once you understand what buyers would value in your business, we can then design what’s the right way for you to stay on or exit. And the reality is, if you want to leave on day two, you will be giving up a significant multiple, simply because of the fact that you’re not giving them what they need in order to succeed. But that being said, we’ve done deals where we’ve rolled 20% equity in the future of a company and our owners have only had to stay on full time for less than six months. So you don’t need to feel like you have to stay on for three years to find the right buyer and get an upside that might pay you down the road. And so I think that’s probably the you know, the first thing is I think the premise of how people think about it, frankly, in the larger deals is off because they hear so much about how it happens in the smaller deals, that they’re not recognizing that the need set of the buyer is different. And if you focus on finding the right buyer and then in meeting their needs, if they know that you only have a year horizon, they’ve got a line of people that they can put in there, but they need your knowledge over that time period. So I think if you take that model, we found that there’s almost always a buyer I call it lanes. If you have four or five different buyer type lanes and aggregator 60 day transition is lane five and five years go work with a growth equity firm is lane one for successful companies now particularly right now one of the most exciting thing that we get to do every day as we get the lineup people in lanes 1234 and five and then show our clients and say hey, let’s talk through what each one of these lanes looks like for you economically and then also lifestyle wise Usually the answers sort themselves out.
James Thomson 20:04
Extremely insightful. Thank you, Scott. So let’s shift gears here, I want to talk about what happens when these companies do get acquired. Some of the aggregators that we’ve seen so far don’t have fully developed operating expertise, they may not even have a fully developed operating team in place. So I’m a private label operator, private label owner, I’m selling my business as part of my earn out, based on the operations of my business in the first year or two years of the new owners takeover. How do I protect myself against the lack of operational talents? Or were with all that the new owner now may have? Got it?
Scott Deetz 20:44
Yeah. So this if you had to, so we started Northbound Group out of the Amazon business close to five years ago, now about four years ago. And if I had to go back now and say, the one thing that if I could tell every seller that with that you absolutely don’t do today that you need to start doing its forecasting. And I don’t mean forecasting what’s going to happen next month? I mean, if I go into a room of 100, sellers, even successful sellers, and I asked how many of them have a credible two to three year forecast for their business? probably less than 10. hands go up. Okay. And the way that I think about it is there is no planning your exit without forecasting. And here’s what I mean by your question is, let’s just say I’m a seller, I’ll give you another example. I’m in a niche that has a number of variations amongst a parent SKU. So I’ve got 10 parent SKUs. But I haven’t had the capital to expand out all of the different variations, you know, the two pack, the four pack, the eight pack, the blue, the red, all of those types of things, my scaling plan, and my forecast really requires less about operational talent, it requires more about raw capital and inventory management. So if I’m exiting to folks that and we know you and I both know aggregators that come from companies that have demonstrated a lot of operational supply chain expertise, it might not be Amazon. But if all my strategy is of my forecast that’s been really hampering My company, then I have a very clear path, so that I could build that forecast and feel reasonably confident that a buyer could achieve it. I’ll use another example. I’m in highly seasonal luxury goods that are brands that require creativity, and I have 35% of my revenue right now coming from off Amazon, Facebook optimization, okay, I put that exact same company same earnings into that exact same aggregator and my risk profile of whether or not I think this turnout is going to get hit go shot through the roof, because I’m now the person that understands all of the brand. And unless I can hand that off to them, and they understand both on Amazon and off Amazon, then Amazon is going to die away. And no matter how good I do on Amazon, I’m not going to hit my growth. So I think the key thing for anybody thinking about exiting is before you stock in generalities about whether or not your buyer has a core competency to hit your earnout or your rolled equity, you need to have the numbers that you believe that could be hit with and what are the resources that are required talent team, you know, dollars, what are the assumptions that will drive that performance? And then that drives the risk profile of whatever your particular buyer is. And most people don’t do the first step. So they wander around thinking that the aggregator is really, really risky when they may be or they may not. And I think it’s that that’s kind of what is the missing piece.
James Thomson 23:59
So let me ask you, Scott, all these new buyers showing up, they’ve raised all this capital, they need to put the capital to work. A lot of these companies are going to brokers, and they’re sifting through the deals that are available through brokers. At some point, there’s not going to be enough brokers to go around to feed all of these investors. How do you think about the world of going and finding deals where it’s not just a broker driven model?
Scott Deetz 24:28
So I think from a buy side perspective, I think most of the aggregators that are out there recognize here’s the analogy I’ll make to it. I’ll go back to when I started Amazon 2013. Find a product in China white label, slap a name on it, no differentiation, no image building needed. This is gorgeous. What uh, I can’t believe this is so simple. Okay. Now you have to innovate products. You have to you know, different nga, you’ve got to optimize, you got to do a whole bunch more things, I think it’s going to be the same thing for the aggregators, the original aggregators that were out there it was put your name out there, get out there, or there’s going to be a whole bunch of people that want to exit to you, because they’re ready to go, you’re the only game in town, everybody’s going to want to exit to you go out onto the broker listings, and you’ve got a steady pipeline. I think as things mature, what you’re going to find from the aggregators is they’re not only going to be good at transactionally, executing acquisitions, but they’re going to start building their name out there as a company to try and attract people to be aware of them and control their own pipeline, not just by going out to the the brokers that are out in the space, and part of why I think that’s going to happen is because sometimes, as we all know, in life, the the best buyer isn’t always the buyer that comes to you. And sometimes what we know is the best companies to buy aren’t the ones that are thinking that they’re considering selling. And so I think you’re going to find more outreach in that area from the aggregators as they, you know, move forward to build their own pipelines of acquisitions.
James Thomson 26:10
I’ve talked to some larger Amazon sellers, who have said to me, they’ve already been approached five or six times by various investors, people that they’ve never met. But just as private label products are easy to find. And for somebody to go and decide I’m going to go build my own version of this widget, information about some of these sellers is becoming easier and easier for investors to go find. So the good businesses are being approached. And yes, you may not realize you’re ready to sell your business, but somebody’s ready to have that conversation with you.
Scott Deetz 26:42
Yeah, and I think, to that point, one of the things we always encourage people is I have yet and you know, I don’t know how many hundreds of mergers and acquisitions conversations I’ve been in over my life. I don’t know how many of them that I could count that I would say weren’t useful in some fashion. So one of the things that I would always encourage sellers, whether you talk with advisors, like myself, or talk with brokers, or you talk with buyers directly, don’t allow it to distract you. But having other people weigh in about what they see in your business is a critical feedback loop and actually designing your business. It’s the age old if I want to go to, you know, get across, you know, back in the Midwest here, if I want to get across the cornfield, I don’t look down in front of me, I look at a tree across the field, and I go, that’s where I want to go. And it keeps you on that and having buyers give you input. You know, I really liked this company. But you know, what you think seasonality is great. I think seasonality sucks, yeah, because it’s harder to inventory plan or hear these types of things. So I would say that, you know, people that are out there contemplating it, your sale for most sellers doesn’t end on the day that you exit. So get out of this before and after event view, it’s more of a tour or three year, you know, there might be a pre process, a transactional process, and then a post acquisition, where you’re trying to maximize a deal. And start those conversations early. Just as like when you go out to masterminds, and you educate yourself on other Amazon topics, start educating yourself on this topic, and any buyer or a conversation that you have, as long as you don’t jump, you know, jump into something, all of them will be useful in how they describe your business to you. So that I think that’s a, I think it’s a good area to put investment in if you think of yourself as a CEO of your company.
James Thomson 28:34
So on that let’s talk about now that you’ve seen so many sellers, you’ve had so many conversations, what advice would you give to private label brands that are starting to think about potentially selling their business? What should they be doing now? Six months out? 12 months out 18 months out? How do they start to prepare themselves so that in fact, they are attractive to potential buyers?
Scott Deetz 28:56
Yeah, so um, first of all, I would say there’s blocking and tackling basics, or what you know, to use the card analogy, there’s table stakes. If you don’t have the ability to generate every month, I’ll call it impeccable accrual based financials, you are going to be at a disadvantage. So the first thing that I would say to people is you need to have a great historical based accrual based financial package. And then my second thing was you need to start working on your forecasting, you need to start really looking at what are the drivers of your future success. And then you need to look at the big four that I mentioned, your profit percentage, your growth, percentage, your diversification, and then your size of earnings. So all of that I think is sort of table stakes. Then I think where you get more into the advanced side of things is what I would refer to as really doing a gap analysis on each one of those particular drivers. What do I need to do? To drive more value into my company, and the most common one that we see is the ability for people to accelerate the two key factors, the number of successful products that they can bring, and the ability for each one of those successful products to be a hit ratio. So most people, when you start out, you release four products, you know, one of them becomes a winner, the other three fail. As you get better and better at those types of metrics, that becomes more valuable that you are and the ability to sort of prove that out to a buyer. Well, in advance of when you begin to exit, then you have, most people think that when you’re, when you’re thinking about exit, you slow down product launches, it’s exactly the opposite. You know, you want that ability to show the buyer. This is how much more growth is in the pipeline, after you acquire me. And I think that, you know, those are the things that you need to do now that there is a concept that we call the 541 concept, which is every dollar that you’re wasting, it doesn’t cost you $1, it costs you $5. And my argument for that is if I’m making a million dollars a year, but I’m shipping by air, a percentage of the time because I don’t do good inventory planning, and that’s costing me an extra $50,000 a year, that’s costing me at a four, multiple 250,000. Because of the fact it’s costing me the multiple on the 50, which is 200 grand plus the 50 itself. So when you’re thinking about exiting, you have to be able to get rid of those things that are unproductive. But for the most part, those shouldn’t be growth oriented things, those should be more wasteful types of things. So I think that’s probably the biggest thing. And then the last one that I’ll mention, which is I lead kind of a whole session on this particular topic, most people don’t understand the concept of net working capital, and how it impacts the valuation of your company. And so I’ll usually say to somebody, if I have two companies that are making a million dollars a year, and one of them needs $500,000 of inventory that they have to pre buy, in order to make that million dollars a year, and the other one could magically get their supplier to finance the whole bit of it. Most people think well, one of them is better than the other. But they don’t know that actual $500,000 gets added on top of your purchase price because you’re efficient with your working capital. And so it’s a too complex topic maybe to go in right here. But for more advanced sellers, I would say tracking your working capital and improving it through supplier negotiations is a critical standpoint, in terms of your ability to maximize the valuation of your company. And that’s one of the things we spend a lot of time with our clients focusing on. Because most people don’t realize it actually not only affects your ability to grow the company, it literally affects the purchase price directly. I want
James Thomson 32:58
to spend another moment and talk about some of these unexpected forms of waste that companies may in fact have in place. certainly understand issues around how you choose to ship your products, other types of common areas of waste that you find within FBA private label brands.
Scott Deetz 33:16
Sure. So the biggest source of waste that I find is between the ears of the entrepreneur in how they think about their business, okay. And what they think about is that as long as I’m growing, this just becomes a part of the deal, okay. And it’s that sort of mindset. And I’ll give you an example of that. One of the things that when I’m leading a webinar or a class, I’ll ask anybody, how many people out here have gotten excited about two different software tools that do the same thing, and they’re subscribing to both? Okay, everybody’s hand goes up. And they’re like, you know, it’s only 4999 a month, it’s only 50 bucks a month, and 50 bucks a month times 12 $600 a month times for multiple five for one principle $3,000. You just throw away $3,000 if you told that person that when they bought that second tool that does the same thing as the first tool that it was a $3,000 tool, they’d never pay it, but it’s the accumulation of those different types of things. It’s the cost campaign that is sitting at, you know, 210% But yeah, maybe it’ll turn around, or I needed to drive rank so I don’t kill it. It’s the mentality of not maximizing profitability, while also not sacrificing growth. And so if you just go down and you look at your p&l of what you can change, then it becomes pretty apparent. Are you going to change the 15% that Amazon charges you for the platform fee, no. FBA fees, can you get to a smaller size and you haven’t really thought when you did your product, you put it in the package that just went right over, you know, you know, regular standard and went into the next size up, you know, that’s costing you huge every time. So if you look at your p&l, and you think about it, the biggest part of my p&l other than my Amazon is my product costs, my advertising costs and my fulfillment costs. And then what I would say my third one is my overhead of just kind of, you know, inefficiently running my company, we just do what’s called an audit of the financials. And we’ll literally go back and look at the whole last year. And let’s look at each one of those four areas and see where we wasted money that we didn’t need to, and how do we design that in, you know, in a in a fixed way going forward, but it starts from the mentality part of the the aphrodisiac of growth is that you think that you can be wasteful with your spending, and the best sellers actually have figured out a way. Now, that doesn’t mean that you’re not gonna make mistakes. And those, you know, you absolutely have to recognize that you’re going to launch products that are going to fail. I’m not talking about that. But having a, you know, 13 ounce product, rather than an 11 ounce product, when it could have been an 11 ounce product is just a massive amount of costs, that you could have done better and every one is worth five bucks.
James Thomson 36:09
fascinating stuff. Scott, I want to shift gears here a little bit and ask you about the class of investor that is this FBA aggregator. There are still private equity companies, traditional private equity companies out there that some of them will buy the odd brand here or there. What do you think about an FBA aggregator? a one off investor, a family office, and then your traditional private equity investor, all of whom are now starting to sniff around and ask about these private label businesses? What do you think about where there might be an opportunity to talk about these different lanes of investors? But how do you think about the different types of companies by way of what they know how to do and know how to do well?
Scott Deetz 36:53
Yeah, so I think about it in the lens of the less that a buyer has, is potentially for a bigger seller that has more capabilities, more that you can bring them and transition from being just what’s often referred to as a bolt on acquisition compared to a platform acquisition. Okay, so if I’m thinking about the concept of lanes, and if I think about, I’ll start with the aggregator lane, if I’m in the aggregator lane, and you are a bolt on acquisition, because they already have their platform in place, let’s call that a mature aggregator, okay, if I’m a mature aggregator by definition, that doesn’t make them a good or a bad exit for you, they might have the ability post acquisition to put you on an earnout program, so that you can achieve a higher effective multiple than what you get on on the egg on the entrance. So if I move over a lane, and I go to the person, the aggregator that has raised the capital, but is looking for their first platform to build the rest of the bolt ons around, I might be able to achieve a higher entrance, you know, multiple, and then I might be able to have the opportunity for role to equity because I’m meaningfully participating in it. And so when you put all of those things together, here’s the what I think we’ve spent the most time and we actually have models that we build that we show our clients is that most people look at the value of their company based on what I think is a very archaic and simplistic way of valuation. It is based on the trailing 12 months historical multiple, upon the initial exit. And I often like to kind of you know, shock some of our clients, I’ll say, There’s never been one buyer in this industry that has ever bought a company based on trailing 12 months historical multiple,
James Thomson 38:51
they’ve got to see the future growth.
Scott Deetz 38:53
Well, even more whether there’s growth or not, the concept is that how much of that historical profit do they get to experience, not a dime you’ve already you’ve you’ve That was last year’s trip to the Bahamas or wherever it is, all they care about is the future. So what you need to focus on is not the entrance, the multiple you get here, but what we refer to as the lifetime effect of multiple. And the lifetime effect of multiple is if you take all of the payment streams that you will ever receive upon exit upon seller financing upon earnout. Upon rolled equity, you discount them for the risk that they are achieving. And then you divide that by the historical multiple. The only way to get a true balance between all of these lanes is to look at that because we have five major lanes that we work with. One of them is aggregators, which does not have rolled equity aggregators that might give her old equity, we’ve got growth, equity, preferred equity, and we’ve got traditional private equity and strategics until you create a baseline of what your lifetime effective multiple is across all of those Things you have no way to compare. So you have no way to know what the right buyer is. So my answer would be back to sellers that are thinking about that is that the definition needs to be standardized in order for you to be able to compare across lanes. And once you do that, it again usually comes pretty clear that you might say, for my business, I should really only sell 30% of it. Now, we call that a might, you know, minority equity transaction, I do a 3070, where I sell 30% of it now to get the cash off the table that I want and get the growth capital in. And then I have a plan to exit in two or three years for the rest of the 70%. Or I do it the other way around, if I want to get more exit out and sell majority control now. So the common thread is being able to understand how lifetime affected multiple changes over each one of those deals. And that that’d be the key advice that I’d give to everybody is not to look at, look at the end of the multiple, but only look at the multiple in context of the deal structure across all the payment streams.
James Thomson 41:01
I want to finish our conversation today by asking you a question about the types of entrepreneurs that are in this space. When I look at FBA sellers, people that have built businesses out of nothing, often bootstrapping it from limited life savings. There’s enthusiasm, and there’s a way of doing things that quite frankly, I have never encountered. Prior to my being involved with Amazon. When you look at the experiences you’ve had and the types of people you’ve met. Tell me what surprises you the most about the entrepreneur base that we’re seeing here on Amazon today.
Scott Deetz 41:39
I think what I not only surprises the milk, but what I enjoy the most is, you know, at Northbound we talk about our mission is to help create life changing events for e-commerce entrepreneurs. So we don’t work for companies, we work for owners that have companies. And frankly, I’ve never been around such a hard working yet fun loving set of entrepreneurs in any industry I’ve ever been in. Now that I’ve been in some great industries and tacking and insurance and you know, other types of things. But there’s just something fun about this culture, that it was maybe five to seven years ago, really wild west, maybe even to wild west for buyers, right. But right now, we’re in that perfect part of the curve, that you’ve got people that are really, really passionate about creating a life changing event for themselves and their families and their co-workers and those types of things. And then there’s enough business acumen that’s starting to develop because the industry has matured, that they’ve got some real capabilities, you know, I kind of look at it. And I think I can say this, because I came in in 2013, we’ve all kind of grown up together. And I would kind of if I was to use the analogy, it’s almost like the industry right now is just heading off to college. You know, there’s that next level and the aggregators and everything is coming in. But it’s really at that fun part of the curve, that it’s a youthful enough industry, there’s so much whitespace out there that the entrepreneurs that you meet, kind of wake up every day focused on what they can do to take it. And unfortunately, the biggest drawback to that that I see is it’s all of the frustrating things that get in the way of what their vision is that they want to be doing. It might be having to, you know, handle cases with Amazon or handling supply chain and logistics. And so one of my advice to the entrepreneurs out there is to literally do that self inventory of what do you love and build that team around you? Because they have that passion. And if you don’t get rid of those other things, because the business model requires you to know a lot. That’s when the burnout sets in. And the worst time to sell a business is when you’re tired. You know, it’s just a bad decision making. So so that’s for me, you know, I’ll end with that it to me. It’s just such an incredibly fun industry to be a part about and It surprises me the dedication and that kind of combination of aggressive energy with fun loving that that’s out here. So yeah, I feel pretty blessed to be serving this industry.
James Thomson 44:08
Scott, I want to thank you for joining us today on the Buy Box Experts Podcast. For those of you interested in learning more about the Northbound Group, please visit northboundgroup.com.
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