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SRT Extras 32 - How to Prepare Your Business for an Exit - Yael Cabilly - Part 1
July 5, 2021
SRT Extras 32 - How to Prepare Your Business for an Exit - Yael Cabilly - Part 1
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 to the seller roundtable e commerce coaching and business strategies with and er, not and amy Wiis. Mm she's amazing and she is going to teach us today how we can prepare to sell our [00:00:19] spk_0: businesses. I [00:00:21] spk_1: don't know how many of you guys exiting your businesses, [00:00:30] spk_0: but [00:00:31] spk_1: I don't know what happened there. That was really weird. [00:00:34] spk_0: Whoa, [00:00:36] spk_1: that was, that was strange. [00:00:37] spk_0: Whoa! [00:00:38] spk_1: It had me join twice. That was really strange. But, but anyway, I don't know how many of you guys have thought about exiting your businesses, but I'm sure eventually you do want to [00:00:50] spk_0: exit [00:00:51] spk_1: and so what have I've learned from, y'all over the years here is that it's really important to know how your business might be valued so that you can prepare ahead of time and it's important to know what things count towards the sale of your business, what things don't count so that you're able to really think ahead of the game now begin with the end in mind and yell is amazing. Her company fortunate has been able to get really great values for people's businesses. Um So yeah, we're so excited to have you, y'all, and thank you so much for being here, and why don't you tell everybody a [00:01:34] spk_0: little bit more about you? Sure. [00:01:37] spk_1: My name is [00:01:38] spk_0: Elka Billy, I'm one of the co founders of Fortunate. Um it's an investment banking firm that helps sellers selling the business. Uh We focus mostly on medium and large amazon businesses, uh mostly F. B. A private labels, but also Softwares agencies, whoever, you know, whoever is in in our business and and and wants to sell. Um We're trying to I'm gonna go through a presentation where I'll try to explain how to prepare for a cell. Um knowing what we know today, I can say as a start that we're in a very good period, the industry is now, you know, everybody knows it's it's hot and it's booming and you know, and there are many new commerce in our industry. Um so so it's a good time and and and by the way it's probably going to remain a good time in the in the next year or two, so don't panic and and throw your business now to the first who's asking? Um our philosophy really is uh you know, it's a lifetime event and if you do it, you want to do it right, you want to maximize the value you want to get as much as you can out of this exit. So uh most of our clients, by the way, are those who are who want to maximize it and not not particularly a very quick sale for for whatever multiple. We're we're working mostly with those who we're looking at the price. [00:03:18] spk_1: Um [00:03:19] spk_0: and by the way, the buyers as well, we work mostly with buyers who are not looking for cheap businesses. Um So um so should I start? [00:03:30] spk_1: Yeah, I will show your presentation on the screen here and I'm going to hide me. [00:03:38] spk_0: Okay. But now I don't hear you. Do you hear me? [00:03:42] spk_1: Yes, I still hear you. Okay. So yeah, and we definitely see your screen and we're on the slide of fortunate part of the amazon sellers community. [00:03:53] spk_0: Okay, cool. [00:03:54] spk_1: Alright. [00:03:55] spk_0: Alright. So so I explain a bit about us, the three founders of the company. There's me how she's the ceo of the company. Um she brings the men a knowledge. She's been dealing with mergers and acquisitions in the last 10 years. She's an attorney for 25 years. Um I'm an attorney as well. Uh in addition to fortunate, I also own a law firm that focuses on amazon. We've been working with sellers over the last five years, uh probably around 5000 sellers. So we've been dealing with with you know with amazon issues and and sellers for many years. Um And the third partner is the next amazon seller. Um He exited and you know sold his business through us and join us. He's also a CPU originally, So the three of us founded the company together were 17. Um And and the rest of the team, these are analysts and financial, you know, and and and lawyers and everything you need uh to kind of make this deal happen. Um So I want to start with with a few questions that we get a lot and then we'll move to the details. Uh One of the questions that I'm often asked is uh should I have a U. S. Company? Is it okay that I have a chinese company? Is it is it okay that I have a Ukraine company? Ukrainian companies? So um the answer is that most buyers are selling your assets, so they're selling they're buying your trademark, they're buying your account, they're buying uh you know the listings and copyrights, everything you have, but they're not buying your company. So basically it doesn't really matter what you have, if it's a Chinese company or French company um they will buy your assets. Um that's true for most of the sales for the larger ones for transaction that we do. Um you know over 20 or over $15 million. Uh sometimes we're talking about the sale of the company. Um if if there's a there are transactions were, you know the virus is interested in the team. So sometimes you would sell the company, but if we're talking about medium, medium small transactions and the average transactions, again, you you sell the assets. Um, so don't worry about the type of company. Um The second question that we, we get a lot is, will I have to stay in the, in the business for for a long time after the sales. So, um, so here too, in most of the transactions, the seller doesn't have to stay for long. Usually there's the training and you know, he is required, he or she is required to stay for about three months. In reality, it's usually about one month of training. And that's it. If you know, if we're talking about a buyer that knows what they're doing on amazon. Uh, Now, if we're talking about the larger transactions in some of the larger transaction that we have, Um again those above $20 million, uh, for those when there's a team of 10 people, 15 people when there is an entire operation, the salaries required to stay more and sometimes the several wants to stay um, to make sure that it gets uh, the urn out. We're going to talk about the structures of the deal. So medium and small. Um, you want to have to say not likely, but for larger businesses. Um, that that's a possibility. And again, not not forever. Um, I want to talk about the types of virus. So, uh, most of us have heard about the aggregators, right? The ratios and there's boosted who spoke here and, and perch and a lot of companies that everybody knows. Um, they they've raised about about $3 million dollars in, in in equity and Uh, and landing, I mean, this is, we know them about 60 companies. Um usually the good thing about them is that the deal is very quick. They usually close within 45 days. Um and uh they're very professional, they know what they're doing uh what you what you want to do. I guess the mistake usually is where a seller gets an approach by one buyer and doesn't check the market. So we're going to talk about it later, but you want to make sure you saw the entire market because if you get one offer or two offers for for those who approach you directly, um you may be missing out and leaving a lot of money on the table. So we're going to talk about the auction process later. But uh if you're going for the aggregators, make sure you tap the entire market and all of them. Um make sure also that you understand the structure. Um It can be misleading. I had, for example, I had a client who told me um I got an offer from one of the aggregators for six X. I said, wow, this is great. And then he said, so it's two X upfront, a multiple of two on the profit upfront and then a multiple of two in two years and then etcetera etcetera. I mean, that's, you know, you just sold your your business for two X. So you have to make sure that you know what you're doing when it comes to the structure and understand what they're suggesting. Um You also want to make sure that it's balanced because the aggregators are doing those, you know, those deals again and again. Um They usually have a team of uh a bunch of lawyers, they have a team of m and a consultant's investment bankers, um so you want to make sure that you know what you're doing and that, you know, that there's a balance between you and uh, and the buyer. Um, Another type of buyer, I'm running fast because there's a lot to say today, but feel free to stop me. Another type of buyer is a strategic buyer. So the strategic one is very relevant when you're selling in a specific niche. Uh, for example, I don't know, you're selling toys for for girls. Um, so, so we may approach a buyer that is in this industry and not necessarily on e commerce. Um, usually they want to take full control of the business because they, you know, they want to own it entirely. Um, and we usually see higher multiples, it's relevant for the larger businesses. Usually, you want to go through that process if it's uh, if it's a small business, but for big businesses, um, it, and if you have time, uh, it may be worth it. Um, Then there are the private equity firms and family offices. These are kind of newcomers in, in our industry, we're seeing them more and more. A lot of the deals go there lately, especially the medium and large ones. Um, so, uh, in the past it was a bit difficult because they were too large, uh, and they weren't really interested in amazon businesses, but now the, those amazon businesses are getting larger. Um, and uh, and there are some of the private equities are kind of boutique private equities, and they have been looking at e commerce for a while. Um, So this becomes interesting. Again, the multiples are higher, they're willing to pay more. Um, but, you know, the deal can take more time than than, for example, the the aggregators. Um, sometimes the deal is interesting. You have to you're selling part of it now and then the rest let's say 80% now and then you you remain with 20% and you stay in the business. Um And then you operate it and then you get kind of the second bite of the apple, which can sometimes be bigger than the first one because you stayed and and its larger now. So you d risk the U. D. Risk first and then you enjoy the profits later. Um the last kind of buyer is uh is an Amazon seller. Uh some of you know, we're seeing them more and more. Uh those who get to 10 million sometimes want to buy another $1 million dollar uh brand. Um So it's becoming uh it's especially true for the for the smaller accounts um sellers are usually not buying the larger account. What they do is sometimes they buy them to uh to kind of flip them to improve them and to sell them. We're seeing some some of them are those who didn't exit. So they're buying and then flipping another business. Um Sometimes they're not so experienced in the in the process of of M. And A. So uh so so they'll need day and you will need a consultant to help in those kinds of transactions as opposed to the the aggregators of private equities who are doing that all the time. Um Let's talk about the value of the business. Okay, so we've discussed the how the transaction looks like it's as as I said earlier, it's a it's a sale of your assets. Uh We talked about the kind of virus, let's talk about your what you're going to get the value of your business. Um So in this industry we're talking about SD SDI is uh is the profit in other industries we usually talk in other industries about Ebitda. Um In this case it's a kind of Ebitda but with bad backs. So I'll explain I'll explain in a second how you calculate the S. D. But the S. D. Is the profit that you have. Okay um So you take the last 12 months uh So the profit in the last 12 months and then you apply a multiple to that. Okay so um the multiples that we see can be anywhere between 3 to 7 X. On the on the on the profit. Um Sometimes a little less 2.5 let's say. Um It can go higher than than seven X. We've done recently, one of I think it was 8.5 on the on the profit. But you know these are the common one that we that we we see the most common one. R 3 to 6 X. I would say. Um So uh so we're taking your profit, we apply multiple. And to that we add the inventory. Okay so the inventory is on top of that. Um There's an example on the bottom. If you have 600 K. Of profit you apply a multiple of 5.5. So the transaction is 3.3. Uh And then the inventory on top of that. [00:15:11] spk_1: Yeah we have a question. Um First I want to say hi to everybody who's on the livestream tim is watching along his drive today on Youtube and her room wants to know please discuss the process of how ownership is transferred. And are you going to talk about that later or did you want to touch on? [00:15:32] spk_0: Uh So I'll explain um So we're talking about transfer of assets. Um, so for the trademark, there's an assignment that we filed with the USPTO. Very simple things about a week and then there's the amazon account uh for that, what we do is we ask for amazon's permission. The buyer actually, the current seller asked for permission. Um, and then amazon gives permission to change the ownership in the account. And then you go ahead from the computer of the seller. Um, you change the ownership to the buyer, you change the legal entity, the bank account, the credit card, phone number, email everything. Um, and you have to do it step by step. I know a lot of virus do it all at the same time. Uh We like to advise buyers to do it step by step. So that amazon doesn't get panicked. But the most important part is to get amazon's permission. Without the permission. It's not it's not allowed to change the the ownership. Um So that's the way it's been, it's been going. And I haven't seen any problems. We've seen over 100 of those uh those migration we call in. Um I've never seen an issue where it was entirely suspended. I saw, I think one issue where they raised something about related account, but the seller actually had a related account and it was solved. Um So that's uh that's the process. Another option is to transfer the listings of the seller to the account of the buyer. So the buyer kind of adds the product from his account like a hijacker basically. And then so the seller sells out his inventory. And when the seller finished the inventory, the seller continued, the buyer continues from the virus account. [00:17:23] spk_1: Uh So they just kind of like realist it and re listed under the buyers inventory. If it can't be transferred and [00:17:31] spk_0: exact [00:17:31] spk_1: buyer just continue selling it from there. [00:17:33] spk_0: Yeah, exactly. That's what we're doing in europe, by the way, in europe. You cannot change the ownership of the account. You can, it's extremely difficult and there are a lot of issues there. So, so that's how we do it in europe. Um you do have to transfer the brand registry if you're doing that. So you're, you know, you're opening a case and and that's what you do. [00:17:54] spk_1: And I just wanted to say hello to Monica and Monica says greetings yell, I [00:18:02] spk_0: want to. Uh [00:18:03] spk_1: All right, So I'll let you get back to [00:18:05] spk_0: it. It's [00:18:06] spk_1: really informative thus far. So yeah, [00:18:09] spk_0: yeah. It's a lot of information. And I'm sorry if I speak fast. I know I speak fast, but I want to get to all of it uh And feel free to stop me. I love questions so uh so feel free to stop me. Um so we were talking about how to calculate as we said. So the value of the account is the last 12 months, the profit in the last 12 months times a certain multiple. Uh we'll talk later how to, you know which multiple you should get. Um And plus the inventory. So um so how do you calculate this profit? So S. D. E. As opposed to Ebitda? Uh What you do is you take your revenue and you retract the cost of goods and shipping. You retract all of amazon's fees of course. Uh All the marketing expenses, you know the PPC obviously and any other marketing that you're doing, some some sellers are doing the rebate or other types of marketing. Um And you retract the software like Helium 10 and other Softwares that you're using or other direct expenses like VHS or or any other expenses directly related to the business and that the buyer will likely have to what you add back. Okay. But you do not include in that in that profit. Um Is the salary of the owner? Okay? You add that back. So it's not, it's not an expense that we calculate their. Okay, so the salary of the owner um and any one time expense, like a trademark, that's not something that the bar will pay because it has already been done. The owners salary, same is not going to have the owner is salary. Um The rent for example, I see a lot of sellers putting the rent and calculating that. It's not, it's not how it's calculated. So so we add everything back to the prophet. Okay. So very important. Um I see, you know At the end the value is based on the profit that you calculated and remember that every dollar can be $5 can be $6. Um so if you include and I'm going to get to that later, but if you include an expense that you shouldn't have um of, let's say 100 K. Of your salary, you just lost 500 K. Okay. Very very important to know how to prepare this uh this piano. Um So that's that's how we calculate the profit and that's the way we, you know, you calculate the value of your account now. How do you know what multiples you should get? Um So there are several factors, you know based on our experience that buyers are looking at. Um And as you said at the beginning, it helps to know what buyers are looking for, especially if you're creating a new brand now. Um And and you know, if if you have the exit uh in your head at the big at the end of the process, then you should definitely know what they want. Um So the first thing they're looking at, and I'm gonna do it fast is um is this account of growing, is it growing year over year, over year? And that's very important because growing businesses get amazing in multiples. Um Flat businesses get okay multiples and declining businesses sometimes get bad multiples. Um And you know, and it comes when we're going to talk about when to sell. Um So on the one hand, you want to sell when the account is growing, right, right? I mean, you wanna you want the buyer to be happy you want the virus to to give you a good multiple. But you but when it's growing you're saying wait if I wait a month or I wait more I'll get more to you. You know you always think about when to sell because when you wait, you know the more you wait, the more you'll get. But then there's a place where sometimes they start you know flattening. So um So just remember that you can't wait so long. You know you can't wait until it goes down okay. Um Because because it will show that will affect the multiple that will affect the transaction. Um So that's about the growth of the account. They're looking at the age of the account. You know how long you've been operating. Um If it's trendy or evergreen, I can say that um selling a trendy product is very difficult because virus, you know, they buy something um And they're thinking about how much time it will get to you know to cover the cost. Um And if the product won't be there in a year um they won't you won't get a multiple of five on that. So so that's the about the you know the type of the products of most of the virus. Talking about an evergreen product. Um Looking at reviews obviously very difficult to sell um an account or listing with you know 3.5 uh reviews or you know three or 44 They want you know they obviously want more than four and hopefully 4.5 or five. Um They look at their looking at competition if you have patents that adds to the to the valuation. So I you know when we start the process early with clients, I always look can we patent something? Is there something we can protect to kind of take up the valuation the value of this account? Um You're looking at the number of skews and that's very interesting because you know, for some buyers, a lot of schools is good because they're buying just one account and they don't want to put all the eggs in the same basket. So so they want a diversity. But for others that they're buying tons of accounts like you know the aggregators, they don't want to complicated, you know, complex accounts where you need a lot of people to manage it because 500 schools that that takes time or 2000. Excuse that takes time. So so the number excuse kind of depends on the type of virus. But generally speaking um if you have less, that's generally good. Um So we've had cases where we uh we had we started the process um and they got very few offers and then we realized that if we, you know, with the clients, if we take down the number of skews, even if the profit will be a little less, the multiple can go up. And that's exactly what we did. We cut the number of excuse by half. Um, and then they get amazing offers. Um, So remember that with the number of excuse when you choose the product, When you choose the category, if you're already there, you're already there, there's a buyer for everybody. It's just simpler with with less queues, I guess. Um, Other, other factors they're looking of course, if you've been suspended, how long do you need to manage this account? That that goes with? The number of rescues by the way, um the the accounts where we saw The best valuations where businesses were, you know, the seller just works three hours a week on this and and doesn't invest much and there's like one or two skews. Um So kind of goes together. Um Is it active in more than one market? I mean, is it only in the U. S. Or other markets? And that by the way, it can go both ways. So a lot of sellers are saying, wait, I'm only in the us, what will I do and you know, it will affect my evaluation. On the contrary, the sellers are the virus are looking for expand. Easy expansion. Um So if you're only in the U. S. That's an easy expansion, just taking it to europe or to Canada or to other markets. So if if you're there great um you know, if you can get their amazing because your your profit will go up, but if you don't don't worry about it, the buyer will do it and it's a plus. Um, so, so that's about that. Um, and then there are other factors around suppliers, how many do you have? Is it all around one supplier or do you have a few options? Um you know, they're thinking about the risk, um, can you sold it, can you sell it in retail? Uh, you probably can, can say much more about that. Um and then um, that by the way, is relevant for some of the virus, some of them are not not looking to go to retail for some who come from that world. It's, it's very much relevant and then they're looking at the ari and profitability. Um, if you have any questions stopping there. Well, [00:27:17] spk_1: I just love what you said about, you know, you don't need 800 Scuse, you don't need, you know, the, your business is going to be worth more if you focus on just a few really great products that are cornering the market, good branding, good differentiation, you know, and are making good sales right versus if you have 500 commodity products that anyone can source and it's not as valuable to a buyer because then they can take those few products that really represent a brand and expand them not only into multiple marketplaces, but but into retail, if they would like, it Looking like a juicier offer to a buyer instead of, you know, 500 different skews that they now have to organize and try and figure out how to make it work. So I love, I love that because that's really what we focus on in the concept to launch program and amazing at home, we focus on building brands with a few really, really great products, getting them selling, controlling our price. Because if you have a really great product that is differentiated and built just for the customer, you can control the price. You don't have to do all these kind of crazy giveaways and stuff. So that is a question that I have for you [00:28:47] spk_0: is if [00:28:49] spk_1: someone is doing the model where they're basically ranking a product [00:28:53] spk_0: and [00:28:55] spk_1: and they ranked basically on kind of giveaways and reviews, um, is that easy for a buyer to kind of see through that? And do they know it's going to be very difficult for them to kind of keep that product in the top position or how do they look at that? [00:29:13] spk_0: So sometimes, you know, once it's done, it's done and the reviews are there. So uh, you know, for in many cases, you know, sellers are doing rebates and they have several techniques for for launching the products and sometimes it's not completely white hat and you know, virus or have heard about everything, they know about everything they will know about what you did because they're doing a due diligence and you'll go through everything. So when it's extreme black hat and you know, something that puts in danger the the, you know, all your reviews, um, that's that's an issue. Uh, but if if these are the regular techniques and this has been done like two years ago or a year ago, okay. And since then there are sales and everything goes well, um, you know, the buyers are not are not that concerned about it, right? [00:30:08] spk_1: It's just if if you basically got, you know, 400 reviews in an hour, your [00:30:16] spk_0: problem. Yeah, [00:30:17] spk_1: exactly. But if you genuinely use regular techniques that most people use in the beginning, when they're launching a product, you got nothing to worry about. It's just if, you know, if you're really fighting to stay in the top position and two years later you're still fighting well in that case your R. O. I. And your profitability isn't going to be great anyway. So I think that that no matter what it will devalue your business. So it's just something to think about when people are choosing their products, they really need to think about. Okay, is this a product that a buyer is going to be interested in buying if I can really corner the market or is it something that is um, you know, so easy for anyone to source and there's gonna be a lot of competition and profitability is going to be hard, [00:31:05] spk_0: right? Yeah. The virus looking at it just like you at the end, I mean they it's they're afraid to put $5 million or $10 million on the, on something that's shady. Uh But they will, if it's something that's been stable and you know, and you launch like everybody else. I think that today amazon is stricter when it comes to uh, you know, to to rebate, for example, um we've seen, we've seen a big wave in the last six months around review manipulation. Um and, and amazon, you know, it's not easy these days, so if you pass the this wave, um and and if you're okay now and you're you're you're not using these techniques anymore. Um you should, you should be fine. Um Today, basically the only way to uh to get reviews uh in in the eyes of amazon is basically PPC I mean, they, the only way to lunch is that today they kind of killed everything in their terms of service. Um, but I don't know many, many sellers who just don't do anything. So it really depends on, you know, on your style and risk tolerance. Um virus are have a risk tolerance until at certain points. So uh, so that kind of answers the question I think. [00:32:32] spk_1: Yeah, I agree. Your product choice matters. Your suppliers matter all of these different things that you're looking into matters. So it's awesome. Thanks for tuning in to part One of this episode, 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 com and amazing at home dot com.