#395 – How To Build An Amazon Business Ready For Exit

In this episode, Bradley welcomes Scott Deetz and Danielle Nash of Northbound to talk about Helium 10’s newest content series, Exit Ticket, which aims to educate advanced and scaling Amazon businesses for a potential exit. For our guests, there is a 2-step process that we should execute properly to achieve a premium brand exit. We also cover common questions related to this subject, like why is future forecasting important? When does a potential buyer value an omnichannel business? Examples of premium payouts achieved by Northbound clients. How is your multiple determined? And more! So make sure to listen to the very end.

In episode 395 of the Serious Sellers Podcast, Bradley, Danielle, and Scott discuss:

• 02:20 – Danielle Nash’s Backstory And How She Got Started In The Industry
• 07:30 – The Current State Of Affairs In Amazon Brand Exits
• 09:40 – New Content Series To Guide Your Business For A Potential Exit
• 11:20 – Amazon Exits: The Preparation Phase
• 13:00 – What Is An Accrual Accounting Format?
• 18:00 – Why Is Future Forecasting Important?
• 21:00 – Let’s Talk About Exit Ticket
• 22:20 – When Does A Buyer Value An Omnichannel Business?
• 25:00 – How Much Is The Potential Payout For Premium Brand Exits?
• 27:30 – How Is Your Multiple Determined?
• 30:00 – Target Gross Revenue And The Pillars Of Valuation
• 34:15 – The Modules Inside The Exit Ticket Course
• 37:00 – Danielle And Scott’s 30-Second Tips

Transcript

Bradley Sutton:

Today we’ve got a couple individuals who have helped entrepreneurs out there generate hundreds of millions of dollars from exiting their companies and Amazon brands. How cool is that? Pretty cool I think

Bradley Sutton:

Sellers have lost thousands of dollars by not knowing that they were hijacked, perhaps on their Amazon listing, or maybe somebody changed their main image, or Amazon changed their shipping dimension, so they had to pay extra money for every order. Helium 10 can actually send you a text message or email if any of these things or other critical events happen to your Amazon account. For more information, go to h10.me/alerts. Hello everybody, and welcome to another episode of the serious seller’s podcast by Helium 10. I am your host Bradley Sutton, and this is the show that’s a completely BS free unscripted, and unrehearsed organic conversation about serious strategies for serious sellers of any level in the e-commerce world. We’ve got a couple of people here who have been helping serious sellers for years. Danielle and Scott, how’s it going?

Scott:

Great.

Danielle:

Excellent.

Scott:

How about you?

Bradley Sutton:

Now right off the bat, I gotta say something. You know, people might be looking up my shirt, wondering what’s going on. Now we’re gonna be talking about this new thing that we have called Exit Ticket about how helping sellers you know, take exits perhaps from the brand. You recognize this logo, Scott here.

Scott:

Absolutely. That’s old school. That’s OG.

Bradley Sutton:

The OG Helium 10 logo. I wore in honor of this, you know, Scott’s actually one of the people who helped the founders of Helium 10 have an exit, you know, of sorts. So, so he has a lot of experience with exits and selling brands and things of that nature. So he’s the perfect person to talk to about this. But before we get into what in the world is, is Exit ticket and things like that. Danielle, if I’m not mistaken, this is the first time you’re on the Sellers podcast, right?

Danielle:

Yes, it is honored to be on the very first time.

Bradley Sutton:

Awesome. But Scott was here last year or earlier this year episode 295, guys. So if you wanna go check out some of Scott’s backstory. Make sure to check out episode 295 of the Serious Sellers Podcast. But Danielle, where are you located right now? Actually,

Danielle:

Right now I’m a New Yorker, but recently with Covid. I and my husband work remotely full-time, So now we’re down in Myrtle Beach, so flops all year round, and Texas.

Bradley Sutton:

A lot of people moving to Florida. A lot of people in Florida, and Texas around there from California, New York, and things. I could definitely see the New York or hear the New York accent there a little bit. Did you go to college in New York or where?

Danielle:

Yeah, so SUNY Binghamton

Bradley Sutton:

Oh, I know I’ve heard of that. It’s all capital SUNY and then like. I’ve seen there was actually think had a basketball team if I’m not mistaken. But anyway, what’s the mascot there? I gotta learn a new mascot today.

Danielle:

Do you remember the Bear Cat? The Bear Cat.

Bradley Sutton:

Bear Cats? Okay. There, I learned about a new college mascot there. Now, what was your major?

Danielle:

I majored in finance and also MIS, Management Information Systems. So a little bit of a technology background.

Bradley Sutton:

Okay. Now, what was your journey to kind of like the e-commerce world? Like how did you get here and what do you think of it so far?

Danielle:

Ah, love it. But I have an interesting journey, and a lot of people in the industry probably have heard of my story. It kind of centers around Athena, but I’ve always worked for a large big bang, Goldman Sachs, and Morgan Stanley. So I was always kind of in that financial world, customer service. And literally one day I was on Amazon, I was at my desk and I ordered a headset sorry, a headband. And a week later it came and it was like the wrong color or the wrong size, whatever it was. It was only about $10. So I happened to call, and I went onto Amazon. I was like, I didn’t order this color. Purple’s not my thing. I remember ordering black. So I called, and I didn’t really know at that point, which sounds so silly that Amazon was actually full of sellers.

Danielle:

I thought you called Amazon, they were Amazon employees. So to me, I was like, I called this number that was on the listing, and I heard this woman, she was dropping groceries, her dog was barking, she was talking to children, and I was like, “Who are you?” “Where are you so to speak?” And I was like, “Oh, I must have got the wrong number.” And she was like, “Oh, are you calling about this company?” And I was like, “Yeah.” So we got to talking. Anyway, she refunded me with the headband, but, you know, I was like, “How did you get into this?” So to make a long story short, she synced me up with, I think at that time it was the OPP Operations Physical Products course. And then all of a sudden, a couple of months later, I went on her first or second China Magic trip with her. And that’s why–

Bradley Sutton:

You’re talking about Athena? It was Athena who randomly called.

Danielle:

Right? Athena isn’t that.

Bradley Sutton:

What in the world? That crazy. So guys Athena was just on the podcast a few episodes ago. Athena Severi. That’s crazy.

Danielle:

I know Athena–

Bradley Sutton:

Why is she putting her cell number off on the Amazon, so front there, what’s going on?

Danielle:

That’s the First question I asked her. I’m so skeptical. Why is your personal number on, I guess she had something happen with the supplier where she had the wrong style or colors, and it was like on a massive scale. So to avoid bad ratings or whatnot, she put her phone up there saying, “Oh, contact me if something’s wrong with your order.” So that’s how I got to her. But you know, we instantly clicked. She’s just, you know–

Bradley Sutton:

I have never heard this story. This is great. And so then you started selling on Amazon yourself?

Danielle:

Yeah, so she convinced me she was in the same position where she was inside like a corporate America setting that just didn’t fit for her, but especially with the young kids, you know, having no flexibility. She talked me into this course, which I purchased, and then right when I was launching my first product, I was in China Magic. So she got me on that trip, and that’s exactly where I met, you know, the rest of the crew in the industry as well as Scott. And then I and Scott probably didn’t sync up for about nine months later. Scott had called me and was just like, “Hey, bud, what’s going on? You want a job, so to speak with Northbound.” And yeah, as we joke about this too, I’m like, yeah, definitely. Just meeting Scott and his character and hearing him speak at the China Magic trip, I kind of took a leap of faith and left my career at you know, Morgan Stanley and just did it. So I do have my Amazon business running on the side right now, very small scale, but it does help me with my current clients and just kind of being active in that community. So my main focus is the northbound role for me. So I’m definitely versed in Amazon and understand clients with the seller.

Bradley Sutton:

Super cool. Super cool. I don’t know, Scott, she might have a cooler backstory than yours when we went there. I mean, that’s pretty unique. Oh,

Scott:

Yeah, absolutely. Yeah. And you know, for me it was this I was sitting around and we were trying to expand the company, and I’m like, Okay, I need somebody that’s smart with numbers that really understands high-end clientele, that understands Amazon. And I’m ticking through, and I’m trying to think. And all of a sudden I go, I wonder what the heck Danielle’s up to? And called her out of the blue and said “Hey, good to reconnect with you. You need a job and can you start tomorrow.”

Danielle:

And there were no red flags that I spoke to a lady and met her in China a month later. No red flags.

Scott:

Exactly.

Bradley Sutton:

All right, let’s take it now. Now talking about the industry that, that both of you are in together and, you know, just right at the bat, since the last time we had you on the podcast, I’m trying to look at the date. Oh, wow. It was last year. It was November of last year, Scott, I believe. And so since then, I think, you know, there’s been maybe you know, whether it’s fake news or whether it’s real, but this kind of like, thought in the industry like, Oh man, you know, a lot of aggregator money has dried up and they do not pain as much anymore for people’s Amazon businesses, and some of them are folding up or something. But what’s the real story? What’s the current state of affairs state of the union as far as you know, Amazon businesses are being bought and sold here at the end of 2022.

Scott:

Yeah, absolutely. Yeah. And I think the way I always think about it is on one level you hear a lot of noise and your job as a seller is to then filter through that noise and try and glean what’s actually applicable to you. And so it is true. There are more industry headwinds I’ll call it, in the sense that aggregators, there’s some aggregators that overpaid you know, for things and or growth hasn’t happened because of higher shipping costs, those types of things. So there’s certainly been some struggles at the aggregator level and that’s been compounded by the fact that as interest rates rise it gets more expensive to buy a company and finance it with debt. So you’ve got unique things going on with the aggregators. And then you’ve got also unique things going on with the economic conditions that are out there in the marketplace.

Scott:

And what that means is that it is a more challenging environment now, and that’s had some impact on multiples. The flip side of that is that more than 80% of whether or not you should exit your business isn’t based on the macro conditions. It’s based on what you’re doing and how well you’re doing within your company. And I would say we are getting contacted at northbound more than even last year, from buyers looking for great companies to buy. So if you have weathered that storm, the market is actually quite good because there are other of your compadres out there, other sellers have struggled and that means that you can differentiate yourself better than what you could have a year last November.

Bradley Sutton:

Okay. All right. Excellent. Now, the reason why you were on the podcast late last year is that we had just launched a few courses or a few modules in Freedom Ticket, about how to set up your business for success and for a potential exit. And we’ve had good feedback on those, was probably a good half hour or an hour of information there. But what prompted–, this can be for either of you, but what prompted the thought that we need some more education, maybe some more details on how somebody can really have success with setting their company up for a potential exit?

Scott:

That’s a great question, Bradley. And here’s why we created the content that we did. First of all, the full Exit Ticket program that we built is a much larger program, and we designed it for the serious seller or the advanced seller. And what we have found, because that’s our specialty in the market at northbound, is that there’s actually quite a bit of work that you need to do now to both prepare for an exit and then execute the transaction if you want to get what we refer to as a premium valuation. And so we wanted to put out–, we took the six years that we’ve been doing this on Amazon and 20 years that I’ve been doing transactions, and said, “How can we not design basic level content about multiples and add-backs but really help sellers understand the two-step process of what you need to do if you want to execute on a premium exit.” And so maybe the content got a lot more robust and we’ve actually now got a full workbook that walks people step by step through it. And so Danielle’s an expert in what I’d refer to as the preparation phase. And so maybe Danielle, can you just talk a little bit about what’s in that phase, and then I’ll talk about executing the deal phase?

Danielle:

Sure, definitely. A lot of people who come to us, our clients think they’re prepared to go to market, but once they meet with us and other advisors here, they realize how in-depth the process actually is. And maybe them thinking that they were ready. When they turn around and look at all of the checkboxes, so to speak, that we cover here it’s probably a different story. So to start, we say the core of any good business is the financials. It’s almost like if you’re trying to sell your business, it’s like going for a run without sneakers on you. If you don’t have that court, it’s gonna be painful every single step of the way. So and I’m a runner, so I get that analogy <laugh>, but you know, having the financials from day one is a huge help a lot.

Danielle:

A lot of times clients will come in and they’ll have Excel-based financials or financials they do themselves. We really stress from day one, and obviously, anything that’s good for selling a business is good for running it, meaning. So when you start your business on day one, you always wanna think of that exit in mind. So every step that you take, you should plan for that exit. In interacting with buyers, the first step would be getting an accountant, a bookkeeper who’s an e-commerce specialist almost. We have a lot of clients come to us and say, “Oh, my mom is my accountant, or my dad is,” but you really wanna find somebody. And that’s kind of a hard message to relay. You really wanna find somebody in the industry who has the experience, and they’ll know how to set up your chart of accounts, how a buyer would like to see them. So not only that, you should be in accrual format. That’s also another big hot button with clients. You know, buyers will look at financials and maybe they’ll be in cash format instead of accrual, and you really can’t value a business and, you know, see the monthly–

Bradley Sutton:

Real quick. What’s the difference between the two, just for those who might not understand that?

Danielle:

Yeah. So a lot of smaller businesses, and it’s more simple, use the cash methodology, which means that you record revenue and expenses, when they’re received or dispersed, but are accruals actually recording revenue and expenses when they’re acknowledged? So those transactions when they occur, they’ll be recorded. And also not really when the money changes hands. So it’s kind of revenue recognition. So at a point in time, it will be, it’s not really when cash changes hand, you don’t just record it, and that’s the simplest way to do it. But it doesn’t give you an accurate understanding of your cash flow every month. Operationally, it’s not a good operational way, like running the business. So with that being said, you know, when we get a new client, we like to have their financials cleaned up and we’ll work with them to do so.

Danielle:

But having QuickBooks with an e-commerce specialist in accrual formatting, we’ll definitely be the Kickstarter of it. And again, you wanna make sure that you can do that continuously. When you get set up with a bookkeeper, you wanna make sure there’s a cadence going forward. So every month you’ll review the financials with your accountant, you review your inventory levels and your balance sheet, things like that. So by the time you do get to the buyer, you’re somewhat well-versed in speaking about your financials. You don’t wanna go in blindly, go into due diligence and then have somebody start asking you questions about your financials and not really get a glimpse into your balance sheet, your income statement, your cash flow, and things like that. You don’t have to be an expert, but you should know a basic understanding of it to be able to speak to your numbers.

Danielle:

And you also wanna make sure you’re looking at your accountant’s work to make sure that everything makes sense. Also, once you pass the financial test, so to speak, we go on to forecasting. Now forecasting is really, really important because it’ll allow you, as well as when you go to market the buyer to kind of put, you know, pen a paper and show where those targets are. You’re gonna, gonna wanna forecast for your current products as well as your growth store, their product pipeline because buyers always wanna see that growth as well. So it’s really hard to achieve these forecasting goals when you don’t actually have a goal in place to hit. So you wanna make sure, you know, when you come to Northbound, we would do what call bottoms up forecast. And you literally go into each SKU and forecast how many units per day, what’s the landed cost, how many am I selling this month, and What’s the future gonna look like?

Danielle:

Will it be stockouts? You kind of wanna peak forecast of every possible outcome along with your new product launches, when they’ll start, and what will PPC be like. So this budget in the forecast should actually, you know, have a really good story, a good narrative. A lot of times clients will come and they’ll say, “Okay, I’m going to market and I wanna make my financials look really, really good.” So let’s just say I’m launching, 20 products next month to beef up my valuation. But obviously, when you put that in front of a buyer, you wanna make sure that you could speak to the story, make it realistic. So it’s great to have those targets, but you have to also make sure you could hit them. A buyer can see right through that. If you’re making, you know $500,000 a year, and all of a sudden you’re saying, “Oh, over the next, you know, 12 months or so, I’ll be making 50 million.” It’s gonna raise a lot of red flags.

Danielle:

You wanna have a growth story and make sure it makes sense to you. And then also adding in, you know, like I said, your expenses as well. So the budget side of it, you wanna make sure you have your cogs, your overhead, your paid media, things like that. Obviously most importantly, which a lot of people don’t tick and tie back to are your add-backs. And add-backs are things that will get tacked back on for your valuation. So they would be considered, you know, one-time business expenses that the new buyer would not take over, or, you know, maybe we get like a lot of one-offs where they’ve hired somebody and it didn’t work out, or they’ve hired a photographer one time and that product didn’t go to market. So there’s a lot of leeways you have with that add-backs.

Danielle:

But I will say the one thing is about add-backs is that you have to be strategic about them. You don’t wanna put, too many buyers will start to question the integrity of your historical financials if you put too many add-backs in. So you wanna make sure that they’re realistic, obviously if they’re true add-backs, you know, go, go ahead and add them back. But you don’t wanna be putting in, nickel and dime, so to speak. So not only will the dollar amount matter, but also the lengthy list of those items. And obviously, if it is a true add-backs, you wanna make sure you get credit for it. You know, if you have a 4x multiple on a dollar for every dollar of add-back, you get that 4x back on it, so it does add up pretty quickly.

Danielle:

So yeah, so to get proper valuation buyers, you know, will rely on that forecast, you know, the look at the historical as well as the forecast going forward to really kind of gauge where your business is and where it’s going. And I stress that growth is really important. Obviously, profitability and earnings are key, but that growth story a lot of buyers will not like to see you say, “Okay, I wanna sell my business, I’m done, my hands are washed. I’m done, I’m not launching anymore.” That’s a big no-no, so to speak. Buyers like to see that story. So if you’re not continually launching products, they feel that the business is at a halt, then you’re gonna just not, you know, continue to stay on for the ride and help it grow.

Scott:

Yeah, I really wanna stress this forecasting one cuz what’s happened from a year ago, like if we talk about last November to this November is that the buyers have gotten much more sophisticated in how they analyze businesses. And so part of the reason why we put the whole program together is if you think about it very simply a lot of sellers run their business and then they wake up one day and they wanna sell it and they go, “Okay, I should just go to market.” The real answer is that they’ve heard things like, buyers only buy based on historical financials. So they don’t think about putting together a future projection of what their business is when in reality the future profit of your business is the only thing that a buyer is buying.

Scott:

So we put the Exit Ticket program together to say, before you go to market and try and get the best you can if you take a little bit of time, six months, 12 months and you prepare the company for an exit, as Danielle said, getting all your historical numbers in place, getting your forecast numbers in place, you’ll start to see bottlenecks in the business today. And then we’ve got in the module, I think it’s module four, we talk about how can you remove those bottlenecks, which is how can you raise capital, how can you hire a team and scale a team? How do you improve your capabilities so that you get the trajectory of the business going the right way? And then modules five and six talk about the actual ability to now negotiate better because now you’ve got a more solid financial picture, you’ve got a better story, and you’ve removed some of the bottlenecks rather than selling the company.

Scott:

And then let the buyer sort of double the size of the company by adding capital in. A lot of times what you wanna do is you wanna scale up what’s going well, get that trajectory moving in the right direction, and then go to market for the exit. So back to that central question of why did we do this? It’s cuz the market changed. It’s not as easy to sell a company, but it can still be, and it still is for 90% of sellers, more than half the money you ever take home from your business is gonna come from your exit. So it’s still a necessary part of the equation, but the way you have to do it is more sophisticated. And so we took all of the knowledge of all the deals that we’d done and said, Okay, let’s put everything out there. Let’s work with the Helium 10 community and say, let’s set the bar very high at, you might not understand everything the first time through, but there are all of the things that you need to do if you want to get a seven or an eight-figure type of an exit that’s out there.

Bradley Sutton:

Okay, cool. Now, first of all, this is just great. I feel like Kevin King is on the podcast. When Kevin King comes on, he talks for like so long that I can just like go to the bathroom and eat lunch and dinner, and I don’t have to do anything. But you guys are handling most of the heavy lifting on this episode. I love it. I’ve already had half of my protein shake right here. But anyways, I wish I had more guests like you. I can just kick back here.

Scott:

You taught us, well.

Bradley Sutton:

There we go. I wanna talk more about this you know, exit ticket and maybe some of the, you know the module names so people can have an idea about the level of detail we go into. But just in general, a question I’ve been wondering, since you guys have helped many, sellers exit on average, and I know you don’t have an exact number, but what’s the percentage breakdown of people who are selling brands, They are only Amazon accounts or compared to the omnichannel, like maybe it’s Amazon plus their Walmart account or plus a Shopify account, et cetera. Like, I mean, if I were to estimate, I would say at least 90% are only Amazon or what, what are you guys seeing these days?

Scott:

Yeah, so it’s starting to change where sellers are starting to diversify a little bit. One of the things that we do is we always think about things from the buyer’s valuation lens. So that’s one of the things you’ll notice about the content. And so the percentage of sellers that are now somewhat omnichannel has increased, but the relevant factor that we look at from a buyer’s perspective is, number one, putting up your own website on Shopify and so to speak, taking the business that comes in that’s certainly fine and acceptable to do that, but a buyer will really only value omnichannel if it’s over a certain percentage of your revenue. And so there are a lot of people that try and go omnichannel just for the sake of doing it. And they’ll do things like they’ll spend a lot of money on Facebook ads to drive 5% of their revenue from a Shopify site, and it’s not profitable.

Scott:

And they think that it makes it more valuable because they “have a brand” when in actuality it’s made them less valuable because it’s dropped their overall profit percentage. And it’s actually a distraction if you think about it from the buyer’s perspective, rather than just having to understand Amazon. Now I’ve gotta manage a whole Shopify funnel. So the one thing that we always encourage people is to think through the concept of if you think about your buyer, you know we, we use the mantra, “If you think about your buyer as your ultimate customer and you think with their benefits in mind would they see it as a benefit for you to be omnichannel?” And if it’s just one or two or three or even 4% of your revenue, there’s a lot more work to do to maintain that channel, but it’s not driving a meaningful part of the numbers.

Scott:

And so the right percentage that I would look at would be is that you wanna be north of 10% of your revenue. If you are gonna omnichannel, you better be able to get to 10%, 15% or 20% of your revenue in that particular channel with similar profitability so that a buyer actually sees that, that it is diversified the risk, which makes you more valuable away from Amazon, but it’s meaningful enough that it actually isn’t more work for a lot of extra effort. And I think right now the clients that we work with, you’re right, 90% of them are 80% of ’em anyway are primarily Amazon dominant. And they can have very nice valuations just by being on Amazon and the landscape is starting to change. I know, when we were at the Sell and Scale summit, there was a lot of focus by Walmart and there’s a lot of focus on expanding into other geographical markets. So those are some of the factors that I think a seller has to think through if they decide to omnichannel.

Bradley Sutton:

Cool. Now, Danielle, we don’t give people’s personal information out on here and things like that, but without mentioning names or naming businesses or products, any recent deals over the past year you can say like, Hey, there is a seller who sold their brand for $500,000. There was one who did it for 5 million. Like, any cool story just to kinda like motivate the people. Maybe they’re not ready yet, but kinda like what they can be looking forward to if they do things the right way.

Danielle:

Yeah, for sure. So the current clients we have right now are, you know, running a bit of a premium. I hate to throw multiples out there cause that’s pretty much a hot topic. One of the clients that we just closed on was a premium business evergreen product, you know, and was above that 5x multiple. So, his secret was that he really never lost his vision. He was always continually updating products, you know, keeping his skin in the game and, you know, launching and bringing in team members to support him. I know a lot of the success stories we have are from people who surround themselves with the right team. So a successful exit doesn’t just mean like your product selection or your growth. It also means, being in that right mindset with the right team as well.

Danielle:

So, one of the clients that I recently sold had that team, he was able to continue running his business and focus on keeping his performance up. Cause the last thing you wanna do during due diligence when you’re interacting with a client is spending time on the due diligence process. Because as you’ll see in the modules, that due diligence itself can be a beast of its own. So not just the financials that are gonna play into these success stories for the exit, but it’s really, you know, surrounding yourself with the right team will get you over that line and being prepared financially as well as, you know, having that right mindset when to exit and just kind of sticking to your plan, you know,

Bradley Sutton:

But just figure-wise, like what’s the low end? What’s the high end of stuff that has happened in the last few months would you guys say?

Danielle:

I’d say the last one that I and Scott did together, we got, you know, upwards of a 5x multiple closer to a six, I would think between the five or six. But again, that’s because of the premium brands. You know, we’ve got clients with larger earnings and–

Bradley Sutton:

What does that translate out through to as far as like the payout? Like I think that’s what 5x multiple off of, you know, $5,000 of sales, you know.

Danielle:

Oh, okay. So like on earnings of like 3 million, right? Yeah. So like the TTM earnings, that’s what we go by is you’re trailing 12 months what your earnings were, and then you kind of with that multiple, there’s different pieces to it. There’s an upfront multiple, there could be stabilization payments inventory can get thrown into there. So all that adds up to negotiating a deal. So

Scott:

Think of it as a low eight-figure exit. So if you know, if that motivates people to get out of bed to know that that’s possible. That’s certainly real money. And one of the things that are also out there is that Danielle hit the nail on the head, Your multiple is not determined. A lot of people think that if you have more earnings, you get a higher valuation because that’s one of those, I’ll call it myths that are out there. And part of why we created Exit Ticket was to break down some of those myths. Your multiple is often determined a lot by the buyer’s perception of your growth rate. So if I have $2 million of profit, but I’m not growing and I’ve got another company out there that has $500,000 of profit and I’m growing at 30% to 40% per year, the smaller company just mathematically will generate oftentimes a higher multiple.

Scott:

And the way that I always like to think about it is, if somebody talks about paying five times earnings for you and you’re not growing, then you take the five and you do what’s called the inverse of it, 1 divided by 5 is a 20% return. Cuz if I pay five bucks for something and I get a buck a year for the rest of time, I’m making 20% on that. So one of the key things that’s important to understand is that even if you’re getting larger that growth rate and what Danielle says about keep investing in products and productivity growth is one of the best ways to drive a higher valuation for the business. Because it’s just so critical to recognize that if I buy something for a 5x multiple and it grows at 50% per year, my effective multiple for the buyer, we call it the buyer’s effective multiple, is closer to like a three. And so it’s very important that you, that’s why this forecasting and all these things we talk about are, are so important is that it helps you really have, and I know we laughed about it when we were talking about it earlier, but we call it a eyes wide open exit, of just knowing what your exit is gonna look like before you go through it so that you’re not surprised.

Bradley Sutton:

Okay. Now whether it’s an aggregator, whether it’s a private buyer, et cetera. What’s usually the minimum kind of– I know gross revenue is not the tell-all thing of it. If you’re selling a hundred thousand dollars a year, but losing $140,000 a year, you’re very attractive to any buyer. But, if somebody’s doing the right stuff and has decent profit margins, like, if my gross revenue is only a hundred thousand dollars per year, I would assume that that’s not really attractive to a buyer yet. But like for all the sellers out there who are already crushing it, you know, making millions of dollars, or the other people who are working their way up. Is there a general minimum that I, at least on the gross revenue side, that I need to kind of like target where now I know I might start to be attractive to buyers if the other numbers, you know, all make sense?

Scott:

Yeah. So I think first of all we always quote things in size of profitability, which is either sellers, discretionary earnings, people have heard that term or EBITDA, some people have heard that term. And so the way that we think about. If you said the kind of the pillars of valuation is if your EBITDA or your profitability is a hundred thousand dollars or more in a year, there is a market for your company. And at the lower end of the market, if you have that in just a few products, you might have a lower multiple. So if you’re in that 100,000 to let’s say $250,000 a year profit, you’re probably gonna have a lower multiple than somebody that has reached the next level of scale, which I would call like 250,000 to maybe up to a million and then a million and over.

Scott:

And then there are a couple of other tiers beyond that. But I think the point of it, what makes these businesses beautiful, frankly, is that there is a wide market for lots of different types of businesses If you have profitable and by profit, we mean more than 15% profit percentage. And if you’re growing, meaning that you’re growing at more than 20% per year, that doesn’t mean that if you don’t have those numbers, there’s not a market for you. But if you want to give yourself the best shot at doing it, and then the reason why the low end of the market sometimes is harder to exit is usually the profit is all in one or two products. And that is not as diversified. And so that’s kind of that third key.

Scott:

But you know, there are definitely markets out there. You know you don’t have to feel like you can only exit if you’re doing a million dollars of profit more a year. So to convert it to revenue for you is if someone was saying that they were doing 750,000 of revenue at a 20% margin, that would be $150,000 worth of profit. And that might not be a premium multiple, like Danielle said, of a five, but you know, if it’s a three, and you take 150 times three, that’s $450,000, because of the multiple it’s not a bad idea. Sometimes if you haven’t cashed out to build something up to a certain level, exit it, and then you can always rinse and, you know, repeat if that’s your business choice.

Bradley Sutton:

Cool.Cool.

Danielle:

And just to add to that, I like to tell clients, cause I get that question a lot, like, am I too small to actually sell? And I like to remind them it’s not really what you make, it’s what you keep. So no matter what your top line is, you have to have at least some type of margin that’s attractive to somebody out there. You know, we consider anything below 10% really not sellable. We do sell things in the 15% range, as Scott was saying, obviously close to the 20% you get the more attractive you’ll be. But it really boils down to that margin. I mean, our earning slides, yes, it’d be nice to have, you know, huge earnings, but really the first thing that I look at when I pull financials is what are they making? Because a lot of, even these higher level sellers will come to me and be like, “Oh, okay, I’m making like $5 million a year.”

Danielle:

I’m like, “that’s great, let’s pull your financials.” And they auto automatically think like, “Oh, I’m one of the better sellers. I’ve got that 20, 30% margin.” I show them their financials, like, how am I making 9% margins? So then we’ll get into the add-backs and whatnot. But a lot of people don’t know. And that’s a crucial key to going to market. And that’s one of the leading factors where we get clients in that we actually have to delay the, you know, going to market process. Because at this point, if you do want a premium exit, you know, no one’s gonna really look at your business at 5% margins. And that’s exactly what Scott was saying. That’s where, you know, the future forecasting comes into play. Because at that point, if you have an exit number in mind and a certain multiple or certain valuation, you will with that forecasting, see what month and the future I should actually be thinking about exiting and trying to stick to those targets to hit that goal. So the key is margins, anytime I pull a client in, it’s, it’s that margin number.

Bradley Sutton:

Okay, Excellent. Now, I have one of the outlines of some of the modules, and titles. So let me just give some of these out to everybody out there just so you can understand the detail and the kind of insights you’re gonna get in this Exit Ticket program that, that Scott and Danielle have prepared for us. Here’s one that under the module, Know your numbers to know your value. We’ve got Scenario Analysis Modeling, SAM, I guess is an acronym we can use for that. I’ve never even heard of SAM other than my friend Sam or this topic. So I’m definitely gonna look into that. Accrual accounting, we touched on that a little bit today. Networking capital under your buyer is your ultimate customer. We’re gonna talk about, you know, what drives strategic valuation.

Bradley Sutton:

We’ve got one title here, Taking on a Minority Investor. That’s a question I get from some people asking if that’s, that’s something that should be should be done. How to negotiate a premium transaction glossary of key terms to understand in your track your transaction. Developing your GTM Package. What does GTM mean? You guys will find out if you don’t know what that means in module 5.6. So, guys, we’ve got, is it like, what, like maybe 30 different mod-like videos and training parts here?

Scott:

Yeah, I think, I think it’s north of that now. Yeah, cuz we added a few more in. So I think, yeah, we’re probably 30

Bradley Sutton:

Northbound of 30?

Scott:

Yeah. We’re northbound of 30, probably 35 to 40 videos. You know, and like you said, we want to go in-depth on these topics. So some of ’em are 10 minutes long, some of ’em might be 20 or 25 minutes to really make sure that people have the knowledge to go through the process confidently.

Bradley Sutton:

All right guys, so if you want more information, just an overview of what this is about and if you’re not a Helium 10 member, just go to the page h10.me/exitticket, h10.me/exitticket. And you guys can get some more information on the course there. But if you guys are already Helium 10 members and you’ve got a Diamond account or an Elite account, you should already have access to it probably from your Freedom ticket page. If you don’t see it or you do not know how to get in and you’re already a Diamond or Elite member, just reach out to our 24/7 customer support and say you would like access to Exit Ticket. So maybe if each of you can give us a 30-second tip, it could be something from the course or just something you’ve learned something quick-hitting and actionable on this topic that our listeners can take away. Either of you can start

Danielle:

One tip. That’s good. I like to remind clients a lot when they come on board. Back to that message, you know, whatever is good for selling a business is good for running a business, and vice versa. And, you know, some of the clients that I speak with, a lot of times I tell them one of the key core concepts when you’re going to market interacting with a buyer is transparency, transparency, transparency. B upfront about everything. A lot of questions we get from buyers you know, have you had any Black Hat tactic in the past, you know, months or things like that? And, they’ll obviously say, “No, I haven’t.” But, things like that will come up. I just wanna reiterate that due diligence is a complete upside down of your world that you don’t really understand until you’re going through it, how much scrubbing they do.

Danielle:

So it’s almost one of those things that could kill the deal, so to speak. So I can’t stress enough, you know, being really upfront in due diligence, if there are any problems, bring it to buyers’ attention and let them know, for example, where, “I haven’t done any Black Hat tactics in the industry.” Anybody sophisticated knows at one point you probably did just to get that ranking, and now maybe you’ve gone to a white hat model, but just, you know, reiterate that it’s really important to kind of lay all your ducks out because people like dealing with honest people. So the second a buyer gets any inkling of, you know, you not telling the correct story during due diligence or even prior to that, it’s not gonna go anywhere. So they like to make sure they can put trust in you as a seller.

Bradley Sutton:

Cool. Scott, you got one?

Scott:

Yeah. Yeah. So I’ve got a tip and then a promise the tip is this, understand the power of the multiple. And before you go to market we call it doing a five-for-one scrub, and you literally go through your business from top to bottom and you find any way that you can pick up dollars. And I’ll give it just a couple of examples. You know, you subscribe to a piece of software it’s a $ 40-a-month piece of software. Another one is your suppliers. You’re paying $5 per unit, any dollars that you can save while not also cutting off on growth gives you a multiple. So in an example where I renegotiate with my suppliers and I pick up just even $25,000 a year in cost savings, which for a supplier that’s not that much over the course of a year, you multiply that times the multiple.

Scott:

If you get a 4x on your deal, you just added over a hundred thousand dollars to your valuation. So the power of the 5 for-1 mentalities, it will get you to shut off that keyword at 11 o’clock at night rather than waiting until the next day and saying it’s, Oh, it’s no big deal. I know I’m at 120% ACoS, but maybe it’ll turn around. You know, there’s all these little things that we do that cost us money as we’re growing. So, that’s the tip that I would say is to adopt that mindset in the 12 months before you go to market and you will pull up enough dollars. When I did my first exit that was the first time I came aware of it. This is now 20 years ago.

Scott:

We created over a quarter of a million dollars worth of savings. And our entrance multiple was five and a half, so it was over 1.4 million. I mean, we got down to buying cheaper pens. People don’t use pens as much nowadays, but you know, it was just the thinking of it. So you’re in this fast growth mode and a lot of times that means people are throwing pennies and dollars out and alongside the road cuz they’re driving so fast and the ability to keep that laser-focused before you go to the exit. So, that’s my tip. And it applies to every seller, big or small. And my closing promise to you is, Danielle and our team, were taking hundreds and hundreds of millions of dollars of exits and we’re boiling it down into advanced video content for you.

Scott:

And I will make the promise that if you go through the modules and you follow the workbook, you will know more about exciting than you do now, and you will know how the advanced deals get done. And if that’s relevant to you, I can guarantee you that if you learn it to that level, there’s no question in my mind that whatever your value is today, you will add hundreds of thousands of dollars to the valuation and maybe millions. This stuff makes that big of a difference in your life. And that’s why we’re so passionate about it. And it’s not about using Northbound or anybody else in the industry. It’s about knowing what you need to do before you go to market. And then knowing how to negotiate with that strength in mind is the most leverageable thing that you can do after having good products and, and having a good company. And so that’s the promise I’ll make if you go through the program.

Bradley Sutton:

Awesome. Awesome. It’s kinda like turning, you want to make your exit more profitable as much as turning a 30-second tip into a four-minute tip. That’s the kind of multiple that you can do guys right there.

Scott:

Exactly. Perfect.

Bradley Sutton:

All right. We’re gonna have to change the name of these 30-second tips to a different timeframe here. But anyways, that was very valuable and the Exit Ticket course is very valuable. We thank you guys for all the–, I know what it takes to put courses together and I know that tons and tons of hours of research and filming and everything to that I know it took to get this done. So we appreciate your hard work there. And I want all of you listeners out there to take advantage of this training. Get into your Diamond account and make sure to get into it. And I want to hear your stories at the next Sell and Scale Summit next year or future year, where you come to one of us to Danielle, to Scott to me, and say, “Hey, thanks to the exit ticket, I was able to get this amount of money on my exit and I know I wouldn’t have got it before. That’s the kind of stuff we love to hear. So I want you guys to get in there. Thank you guys so much. And I hope you I hope we’ll be seeing you in person again soon.

Scott:

That sounds great.

Danielle:

Thank you.

Scott:

Thanks a lot, Bradley.

Danielle:

Bye-bye.

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