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SRT Extras 32 - How to Prepare Your Business for an Exit - Yael Cabilly - Part 2
July 6, 2021
SRT Extras 32 - How to Prepare Your Business for an Exit - Yael Cabilly - Part 2
Session Videos:

A. Part 1 with Yael Cabilly

B. Part 2 with Yael Cabilly

Things we mention in this session of Seller Round Table:

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Transcription for this episode:
[00:00:01] spk_1: Welcome [00:00:02] spk_2: to the seller roundtable e commerce coaching [00:00:04] spk_1: and business strategies with and er not and amy Wiis, mm. All right, keep it coming. All right. [00:00:13] spk_0: Um so I started talking about the P. N. L. And the importance of the P. And L. And you know, we had fortunate we always say that the P. N. L. Is the is the first step of uh of the negotiation. Um You know the at the end this SD that we're referring to your profit on which there will be a multiple is the net okay? The net profit the net income before tax. But then you with the ad backs. Okay. And what are these affects? What can we add back? Um So that the the S. D. Will be higher. Um So we spoke earlier about the owners salary. Right? I mean if you included you lose a lot of money. Um and then there are personal expenses like the rent or you just bought a car that's something that you will add back to your profit. Um and then there is uh, intellectual property, like trademarks and patents and copyrights. Uh, these are things that, you know, you do once, that I won't have them. Okay, So we're gonna argue that that's not part of the expenses there. Um, and then there are website designs, everything, although, you know, one time things that are not relevant to the barn, um, should not be, uh, be an expense that is counted in european. Okay. It should be added back. Um, mastermind's events, um, reduce costs of goods. So sometimes, for example, our clients have, uh, have, uh, let's say they, their supplier charged them $2 and then in the middle of the year they negotiated, and it's 1.5, okay, uh, for the buyer, the next year they will pay 1.5. Okay? So sometimes we fight to have this 1.5 calculated for the entire year, instead of like half a year or two and then half a year. 1.5. Okay? Um and then there are the reduction in tariffs. Sometimes, you know, you pay a certain percentage and then it goes down at the, you know, in the middle of the year. Same thing here, the buyer won't have that expense will fight for that. Um So again, every dollar can be $57. We have tons of examples around that, you know, people um using uh here and here is an example. People you're using air freight, okay? Our client use air for the entire year. And we calculated that if if the client did not use air afraid, um and you see for it then um the expense would be probably around 101 100 let's say 100 K. Per year. Okay. Um Now if you have a multiple of let's say five on that it's 500 K. That you're negotiating here. It's a lot of money. Um So we're always thinking about this P. N. L. Uh We're always thinking about adjustments. What can we adjust? How can we negotiate if you were out of stock for 33 weeks? You know because you didn't have the fun. That's not something that will happen to your bar. So let's let's adjust that. Let's let's try, let's negotiate that. Um If you had a suspension, let's try. So there are a lot of things to think about when when you're creating this piano. And you know sometimes as as a lawyer I help sellers with sometimes I always also help on the on the legal side. And I get the case when when the deal is done. And I and I see that the seller has has left 700 K. On the table. Um So so I think that you know, think twice before you you just let the buyer prepare the P. And L. For you. Um And and it's very important to negotiate every part of it. Um And if you're not sure how to do it and then obviously take a consultant that will help you with that because they've been doing that, you know for for for a long time and they know exactly where to negotiate. Um So that's about the P. N. L. Which is the first step of the negotiation. Now another part that's very important um in our opinion that fortunate is the auction. Um So when you negotiate with one person or even to buyers, even three buyers, you can get to a certain point right between the three, but when you need, when you show your business to all the markets to hundreds of buyers, uh The aggregators, the private equity is the VCS, the sellers, all the relevant virus for your specific business. What you're gonna get is a lot of bits, And then usually what we see is that all the bids are kind of similar, and then there's one or two for which the business is worth much more and you want to get to that buyer, the one that for which the business is worth more. And sometimes the difference is just crazy. We had, you know, we had transactions where the difference was $2 million $3 million. Um So, so, so, so there's it's very important to make sure you speak, you know, everybody's is the business not just one, not just two. Um, so that you get to the maximum price. Um Now, I'm going to talk about other ways to create value and and kind of maximize your deal. Um, Sometimes we're, you know, we're trying to think of creative ways to take up the values. Um, and I'll give I'll give a few examples um, when you have, uh, when you have a growing business, and let's say you're selling in the toys category, okay. At the end of the year, something very interesting will happen. Uh, it's cure for um, your, you know, your cells are going up, um, the profit is going up and you're gonna finish the year, sometimes twice or three times what, you know, your profit is now. Um, So what we can do is to kind of form a projection um, uh, you know, based on the numbers now and what we foresee from, for the end of the year and then sell your business not based on the prophet now but based on that projection. Um Of course it requires a very detailed one and very convincing one. And sometimes it requires you to stay in the business for for you know, for sometimes sometimes not sometimes there's an adjustment if it doesn't happen. Uh But if you do it right in some of the businesses, especially the larger one. Um That that is possible especially lately with you know with with the industry right now. Um So that's 11 type of of way to uh to increase the value. Another ways to uh you know to reduce the number of schools as we said earlier. You know, you may have a lot of excuse but if you and and the the S. D. Is higher but less virus are interested in those. So what we do sometimes is we take down the number of skewed. We'll lose a little from the SD. But then the multiples go up and at the end the value is higher. That's another way of you know thinking creatively about the value of the business. Um And another way is to integrate brands. Um We've done that several times and it was interesting. There was there was an amazing feedback from from the virus of the industry. What we did is we took several businesses together from the same category. Um And we sold them together. Um And since we know that larger businesses get higher multiples um uh buyers loved it. The businesses they sometimes they even compete with each other. So the usa Barak it get more uh more uh real estate on on the first page you can say. Um And so and so you integrated it extracts more buyers. Um And as I said, the multiples is higher, but you need to find the right partners. It's not always easy to get to people together to owners of of amazon businesses together. Um So what we do is we set really clear rules. Um And uh and we can we can already say which, you know which sellers are are fit for that and which are not and that's fine. They can, you know, we can sell the business separately. Um So that's something we've been we've been doing in the last year um And and has a very good feedback and takes up the multiple instead of your business. You and another together. Higher sc higher higher multiple. Um So let's talk about the deal structure for a second. Um We have, you know, you know that cash is king. Of course, I mean you want to have as much cash as you can. Uh But sometimes especially larger businesses um you know they're willing to stay in the business or to kind of Um you know to kind of bet on the on the success of their business in the future and get some upside from from what's going to happen in their business. Um so in most of the cases what you know, diary suggests is a certain percentage of cash, let's say 80% cash for example. Um And then the rest can be can be divided Um can be for example, I'll give a few example, it can be deferred payments but guaranteed for example 10% of of the payments will be paid in uh in a year from now um and uh with interest. Okay let's say let's say a year from now with interest. Um Sometimes it's every quarter you get you know some of the payments. Um And sometimes this uh this component will be an er note which is subject to stabilisation. Um meaning that if your uh let's say um the buyer will say I'll give you know 10 additional percent if The business doesn't you know, doesn't go down, doesn't start falling or doesn't fall more than 10% from what it is now. Uh so that they kind of that that's something to protect the risk of the buyer of course. Um so that's based on stabilisation and sometimes there's uh there's a profit share. Um so we sometimes see for example You'll get a multiple of 4.5 uh now and then you'll get 50% of uh of any profit above the current SD so let's say Your SD the your current profit in the last 12 months was one million. Um If next year it's two million, then 500 K. Go to the Baron and 500 K. Go to the to the seller. Okay? Um So that's something also that we see like a certain percentage is a 4.5 5 X. Now plus um you know this this kind of profit share the split of the growth. Um So so there are several uh transat deal structures and as I said, it's very important to understand what they're offering you and how to protect yourself. Um You know how to make sure that you actually received the money. What happens if they, you know, you have this guaranteed payments um in a year? What happens if the barrier doesn't pay it? Um So there are legal ways to kind of, you know, protect you so that it will happen. Uh let's say if it doesn't happen, the trademark goes back to you or something like that. Um So make sure you're protected and that you understand the tractor and that it's the best tractor for you for us. I think that the destructor is is probably one of the best part of the of the it's the fun part of the transaction. Thinking how to build it in the best way for clients. Um The client has two products that have just been launched and we want to have profits from those because they weren't counted in the in the valuation. So we're thinking about how to structure it so that we will include the those. Um So that's that's uh in a natural about the deal structure. Um So maximizing the value. We spoke earlier about a few things that can maximize the value. Uh you know the smart P. N. L. We call it Smart Penelope. Nl that you know with all the ad backs and and think about adjustments. Um We also um tell the story of your business. We we present the business in the business presentation um That you know shows all the advantages of the business that that that that also adds value. Um The auction that we spoke earlier as obviously adds value to the exit and takes you to the to the highest multiples basically. Um And then there you know there's what you do now before you sell the business. So while you're in the process or in the year before you exit, you know done a lot of clients ask us what should I do? Should I you know should I start um should I start selling in retail? Should I start um should I start Shopify account? I'm gonna sell it in in in five months. Should I start Shopify? Should there's this and that I would say, I mean don't don't just change your entire moral just to get a higher multiple. Ok, so you heard that virus like to have several channels? That's true generally. But if you have five months it's gonna be hard for for you to, you know, to to dive into the retail and and or to dive into uh Shopify [00:15:04] spk_1: if you don't [00:15:05] spk_0: know what you're doing, if you have time, that's that's something else. But but be very fucking if you have a short period of time just be very focused on what you're doing and do what you do best. So, you know, if you're very good at launching new products and you do that all the time, then do that. If you're good at conquering new markets, you know, getting to europe, getting to Canada, then do that, or just launching variations basically do what you do best if you have a short period of time, just be very concentrated on what you do and don't be distracted by by other things at the end the buyer wants healthy growing account. Um so, you know, if you're going to neglect what you've been doing now and start a new adventure, um the the account will start going down and we've seen that unfortunately. Um, so so focus on your account and uh, and don't take crazy risks. Um, you know, like falling false complaints against competitors or things like that, Not a good idea when you're selling the business. Uh, so just stay out of that, don't take crazy risks. Just take the regular risk that, you know, you've been taking so far. Um, so that's about, you know, the maximizing your value. So how should you prepare for the exit? What should you do? So you know, I think that we've spoke about all the things that viral want and and what you do once you're in the process. Um I think that you know if you're starting the process in a year um it's a good time to start talking about it. Um So we, you know when we speak with our clients, uh there are several things that we do together to make sure that they are prepared and they don't lose money for example, um We had a case. Now we're um you know we went with our client to their accountant to their tax consultants, we spoke about their taxes uh and the tax consultant was about to you know to change the entire structure and they didn't know that that the client was going to sell the business and we we kind of stopped a kind of catastrophe there on the tax part. Um So very important to be in touch with your accountant. We had a case where um the seller um you know I had a company in this country and uh and they had a partner in another country, but the company itself, I mean they won lived here, another lived there and the company was in the third country, so we advise a client to go to one of the top four um You know accounting uh firms you know, E Y. And ERnst and Young and all these PWC and all these companies Um and then they built the structure and eventually they they had to change the country, they actually moved for further sale. Um and and they they gained probably about $1 million so taxes are very important. Important to start early. You'll need a good lawyer. Uh So most consultants can can can refer you to uh two good good attorneys in in the e commerce space. It needs to be someone with experience in that space. Um Make sure that your I. Ps. In order. Um So that's also one of the first steps we do is make sure that you're protected for all your products. But also see if we can, you know, if you can squeeze a pattern there or a design patent, or if you can register copyrights to pick up the evaluation of of your business. Um And then as I said earlier, make sure you tell the story of your business. Um You show, you know, you show the buyers the all the strength of of your business uh and where you are compared to the competition and that you tap uh the entire market. Um And I guess the last slide uh to finish, um And of course feel free to to ask me if you have any questions. Um When's the best time to sell the business? That I think that that's probably one of the most common questions we get. Um And we, you know, we spoke earlier about the growth part and how important it is. So you cannot wait until it stops growing. Um It's just less attractive. It's still sellable but less attractive. Um So you want to sell it when, when it's growing. And then you should ask yourself a few questions to understand, you know, when is the right time? Like um do you want to grow to a larger team and to scale? So for example when you get to Sometimes six million, sometimes 10 million, you kind of need to scale. You need more people. You can't, you can't handle it anymore. We speak with a lot of sellers, they sometimes they sell just because they don't want to deal with, you know, with a large team come come in the morning and have 10 people to speak with. They prefer staying at home. Um, to answer yourself where you are, if you're willing to stay, how do you feel with the risks of amazon? You know, some sellers, they just, you know, they sell the business because they feel that it's amazon and you can be suspended. So, uh, they're saying, I know how to build a brand. I will sell it, I will cash out and then I will do it again. And it's interesting actually interesting to see because the second time it's so much faster you have the funds, you have the knowledge. So you're doing it just like that um In most cases, so we're seeing, you know, we're seeing sellers after a year and a half getting to what they did in in four or five years. Um So that's about the risk of amazon. How do you feel about it if you're okay with it? So you can continue or you know, if you don't sleep at night at all? Um maybe it's a good thing to to sell it to cash out and then, you know, build the next business, the next brand with, you know, with a different approach, you will sleep better. Um So, well, you start a new business, you know, a few questions that you can ask yourself. What's the projection, is it, is it, you know, is it growing like crazy? So maybe you should wait a little or sell based on projection like we said earlier, um, or it's not, it's not growing that much. Uh, so, so it doesn't really matter if you wait or you don't, this [00:21:38] spk_1: is one of the hardest decisions I think to make is, you know, you're torn between, how much more can I grow my business on my own? Right, and how much do I want to stay in it? I think that's another question like you were saying, I mean, something that we're struggling with right now is we've recently started selling in retail [00:22:02] spk_0: and [00:22:02] spk_1: um, and we're thinking, okay, you know, in order to really grow in retail, we're going to have to change some things around logistically [00:22:12] spk_0: and that [00:22:13] spk_1: is going to be a lot of work and it may just lead to more [00:22:18] spk_0: growth [00:22:19] spk_1: that we don't know if we want to manage. So that's why we're working with you right now. It's just understand where we're at, where we could go um and really get a better idea of um to make an informed decision because there's nothing wrong with putting the feelers out there when you guys are starting to think about selling your business, like even if you're a year out for me, I was a year out, I was like okay, I'm going to sell my business in 2022 but as I started going into some of these growth factors on like man, maybe it wouldn't be so bad too sell it now, you know? Um So I think it's, it's all about what you want out of it and if you've built something that is, I think what boosted said on our seller roundtable the other day was there is never, it's like having, having Children, right? There's never a perfect time. There's never going to be a perfect time to sell your business, there's never going to be a perfect time to, you know it's never going to be perfect and what he said was buyers expect there to be some stuff that needs to be worked through, so don't wait until you have everything all buttoned up and tied up and perfect. Would you say that? [00:23:37] spk_0: Yeah, I agree. I'm thinking about myself like I was with the first case I was waiting to be ready for the kid, like I was waiting for waiting and this didn't come so I just decided okay let's have kids and the second time I knew I don't have to wait because it doesn't come, so I'll just you know do the second one. Um but but I I agree 100%. I think that uh you know you do need to think about your growth and and again if you're growing like crazy unless you know you get a value that takes into account your growth um then sometimes you may want to wait a few months. Um But but [00:24:18] spk_1: that's what's great about working with a company like fortunate that can kind of break things down for you and you know the story that you told me about somebody that came to you and you were able to help him clean up a few things because his PPC spend was pretty high, but you guys were able to help him clean up a few things and understand where those factors were, that might prevent him from getting the most value out of his business. [00:24:44] spk_0: And uh [00:24:45] spk_1: you know that was like the highlight of your year being able to help him sell his business as a young kid for multiple millions of dollars. So I think that it's really cool if we're thinking about selling our businesses, number one, all of us can take this information today and put it in our brains and go, all right, we need to be thinking about these things as we're running our businesses and how easy it's going to be for us to hand it off to someone else. Number one and number two, there's nothing wrong if you're even getting close to where you're even thinking about selling your business. Nothing wrong with reaching out to someone that understands that so that you can get an understanding of where am I at and where do I need to be? And what are some factors, some levers that I can pull to have the most impact on my evaluation? Right? [00:25:33] spk_0: Yeah. I think that, I mean that's why we always uh you know, we we started realizing very quickly. It's fortunate that we need to come in very early because the first step is the strategy. And I think that a lot of sellers don't know because they don't know the numbers. They don't understand completely where the profit is. If it's good or not, if something can be improved. So what we do is we start with the P. N. L. We start with understanding the numbers. Um and then we decide when is the good time. So the example you gave is you know, the one where we started with the P. N. L. Um and and we sold the business actually a year later. But when we did that P. N. L. And we started we saw that you know the seller was spending a lot on the PPC and something didn't make sense there. And you know, we see we're not geniuses but we see that you know, something it was wrong there compared to other businesses. Um So he eventually set with my partner for like three days. They changed the PPC strategy and the profit went up from 18% to 26%. Um A year later he sold that business for over $20 million and you know, just calculate how much does 8% means. So sometimes just like, you know, looking at your business, nothing more, just looking at your business things come out. Um And you know, and as I said earlier with the taxes sometimes we started with a regular steps right? The P. N. L. The taxes, the I. P. The compliance, all those things, you know to kind of prepare and and crazy things happen like the taxes where we save a million just like that. So I think you don't, there's not much to lose by starting early. [00:27:18] spk_1: Yeah definitely because then if you can identify those things you can really get after them. I know you know I do have a bookkeeper but my bookkeeper does not, she's not in the business of selling businesses. She's in the business of keeping books for amazon sellers right. Which she does a great job at that. But I need to be able to look at my P. N. L. From a perspective of selling it. So that's where companies like fortunate come in. So speaking of that before we sign off today what who should come to you like [00:27:51] spk_0: who is [00:27:52] spk_1: the ideal customer for fortunate And how did they do that? [00:27:58] spk_0: Um So any seller with the revenue usually above a million dollar. Um That is considering selling the business in a year or you know or or more or now, but anywhere in the coming year um the sooner the better, even a year and a half start talking, start talking now. Um and the way the way it's just you know by email, facebook or you know whatever is easier through our website is fortunate dot net were very available and and always happy to talk even if it's not relevant now. [00:28:37] spk_1: Cool. Yes, I completely agree. You guys are very responsive, you're awesome. It's so great for people to have this knowledge. I know me as a consultant, I'm looking forward to working with you because I want to learn more how I can help my client to prepare their businesses for sale and now I'm going through this process myself and so it's so good to learn what do we need to do and how do we prepare? Because we always want to begin with the end in mind. And so if we are wanting, even if we're not wanting to sell at the end, it's still good to know our numbers and know what makes a profitable, awesome business. So thank you so much for your time today and for helping us understand this and thanks everyone for being here. We appreciate you so much. I know a lot of our listeners are going to be catching the replay because you are guys on this Australia side, they are just waking up probably in about an hour here. Um, but yeah, I know everyone is going to really enjoy the replay today and thank you all for being here. Thanks yell any, any final words before we sign [00:29:43] spk_0: off. Thank you. Thanks for having me always a pleasure and I'll see you soon in person. Very excited about [00:29:53] spk_1: it. Me too. Me too. All right, bye everybody. We'll see you soon. Thanks for tuning in, join us every Tuesday at one PM pacific standard time for live Q and A. And bonus content after the recording at cellar round Table dot com, sponsored by the ultimate software tool for amazon sales and growth seller S c o dot [00:30:17] spk_2: com and [00:30:17] spk_1: amazing at home dot com.