Should you build a brand from scratch? Or buy an existing brand and apply your genius to scale or improve it?
Mike Jackness is one of my favorite eCommerce pros to talk to. He’s a podcast host. He’s built, bought, and sold multiple brands. And he has a heart to teach.He’s currently running a successful eComm brand that I’m an investor in, and it’s in the process of selling.
We wanted to hop on the podcast and talk about the process plus the pros and cons of buying vs. selling.
Here’s a look at what we cover:
- What you’re actually buying when you buy an existing business.
- How Mike looks at brands, he wants to buy or invest in.
- How to approach due diligence as a buyer or a seller.
- Surprises to look for in the due diligence process as a buyer or a seller.
- How getting your business ready to sell now will make your business better regardless of if you sell it or not.
- The good, the bad, and the ugly of M&A.
- Plus more!
Mentioned in This Episode:
Mike Jackness
- eMail: Support@EcomCrew.com
EcomCrew Podcast by Mike Jackness & Dave Bryan
How My Wife Quit Her Job (Podcast with Steve Chou)
Transcript:
Brett:
Well, hello and welcome to another edition of the eCommerce Evolution Podcast. I'm your host, Brett Curry, CEO of OMG Commerce. And today I've got a pro on the podcast, longtime ecom guy, he's a fellow podcaster, we hang out at events all the time. And so really excited to have Mike Jackness on the show today. He's the host of EcomCrew, which we'll hear about in a minute. I believe we met initially through our mutual friends, Steve Chew, shout out to Steve Chew, Seller Summit and also the podcast, How My Wife Quit Her Job, fantastic podcast.
And so Mike is always just one of my favorite people to talk to in the industry. Talking about trends, talking about the economy, talking about buying and selling businesses and all of that. And so we were talking recently and we're like, "Hey, we got to get together and do a podcast." And so today we're diving into the topic of, should I buy? Should I build? And then also tips for selling a brand. Because I think one of those concepts is probably going to fit you right now. With that quick intro, Mike, welcome to the show, man, how you doing?
Mike:
I'm doing good, man. We got to see each other in person again, things are back ... I don't want to say they're back to normal. But at least we're seeing each other again, which is kind of cool. So, yeah.
Brett:
It's feeling more normal, right?
Mike:
Yeah.
Brett:
Airplanes are pretty full, we got events happening. We were in Vegas not too long ago, a prosper show recently, a Steve Chew's event. And so it's feeling good, feeling hopeful-
Mike:
Definitely.
Brett:
Feeling excited about in person events again.
Mike:
Absolutely.
Brett:
Yeah, man. So give us the background, for those that don't know and I know a lot of people listening are like, "Hey, I know Mike Jackness, everybody knows Mike Jackness." But give the quick rundown because you've bought, build, sold brands. Also host the EcomCrew Podcast, but give your 30 second background.
Mike:
Yeah. The 30 second background gets hard and harder to do as you get older, because there's more to cover every year. But in terms of my online entrepreneurial career, I quit my job back in 2004 to get into affiliate and content marketing, eventually ended up in eCommerce kind of in an interesting round about way. We also were into investing in domain names and still are, and one of the domain names we had bought and invested in with hopes of one day turning into an affiliate site, but turned into an eCommerce site eventually was treadmill.com. And that's actually how we got into eCommerce.
Brett:
It's a good domain.
Mike:
It was a good domain name, it was a fun project. But we sold it in 2015 and have since then either bought or started several eCommerce businesses and sold several now. And so yeah, we were just chatting about the whole, should you buy? Should you start from scratch? All that stuff. And so I thought it'd be interesting. Our journey along the way, we document everything we do on EcomCrew. So the podcast is kind of a day in a life of Mike Jackness and his crazy brain and also interviewing other interesting people about eCommerce and topics like this.
Brett:
Yeah, I love it. If you listen to this and you're like, "Man, this is fascinating, interesting. I got to have more Mike in my life." Check out EcomCrew podcast ...
Mike:
Said no one ever.
Brett:
That's awesome. So in fact, we both spoke at Seller Summit recently near Miami and we were at a speaker dinner. I actually talked to a really successful brand owner, he's a client of ours and a friend of yours. And so we were chatting about, why would you buy? Why don't you just build? And I think we're actually talking to an attorney about this, too, he was at the table.
Mike:
Yeah. Right, right.
Brett:
Yeah, yeah, yeah. So I've definitely got some thoughts here, but what are your thoughts? Like buy versus build? What are the pros and cons and what should you be thinking about in that decision?
Mike:
Yeah. I mean there's never a perfect answer to anything. But I'm kind on this side of the fence of, I'd rather buy than start from scratch. We'll talk about the pros and cons of each, but the high level reasoning being that when you buy a business, you're getting something pretty valuable for your money. Unlike in a lot of other things, when you go waste your money in life. If you buy a good business, someone else has already taken a chance, the things that you don't think about, maybe you have a bit of an ego and you think everything you're going to do was going to be successful.
I have been in business for 18 years and I know that's far from the case. And so I have lots of battle scars of things that I've started, maybe didn't stick with them and it failed. Or stuck with it and put my heart and soul into it and it still failed. Which is even more depressing than when that happens, but it certainly happens. And so someone else has already taken that chance. So you're buying a successful business, you're also not buying all the other failures out there. And so I think that's a cool thing to look at.
You're also buying some multiple of revenue and in theory it should be one of the best investments you'll ever make. You invest your money in the stock market and you hope to maybe get 8% per year. If you're buying an eCommerce business or a content site or some other business in today's environment, you're probably paying something a three X or maybe four X multiple of earnings. And so that should give you a return to 25% to 33% per year on your money. As long as the business stays the same.
But the main thing that I like is looking for a particular opportunity in that I'm buying a really successful business. One that really has good systems and people and products or whatever in place. But they haven't necessarily turbocharged the business with my skillset, the things that I think that I'm good at. And that's never to be taken as the old owner is an idiot and doesn't know what they're doing. There are lots of things that people do out there that I am very impressed with or feel overwhelmed with or can't figure out how the heck they did it. And in fact that one of the businesses that we most recently bought, I feel that way all the time, I can't believe like the systems and the processes and the way that the old owner approached it and just did an amazing job. It blows me away every day when I look at the business.
But there was a few aspects that they just weren't good at, just as much as I'm not good at something. And so the things I think that I'm good at, we spent a lot of time sourcing from China over the years, and so we went and did that instead of sourcing from the US. We have a background in SEO, so we applied that. We have a team and processes in place to rapidly launch products, and so we did that. And have been able to quickly see an uplift in the business because it was already a great business and we just kind of sprinkled that pixie dust on it.
Brett:
Yeah, I love that. And I want to unpack just a few things that you mentioned. You talked about how as entrepreneurs and most of us successful entrepreneurs, we've built at least one, maybe two really good businesses. We automatically think the next business I built, that's going to be just as successful, right?
Mike:
Yeah.
Brett:
We got this bias because of our past success. And while it may be true that the next business you build is successful, it might not be. Because success isn't just determined by the skillset of the entrepreneur. Although, that's the biggest factor. It could be the market, it could be the brand, it could just be poor timing, all kinds of factors going into the success of a business. And when you buy, you're buying a brand that already has traction, it already has customers. That's an extremely valuable asset. It already has, hopefully, some systems and things in place.
So just like you mentioned, if you find a brand that's doing pretty well, but they've not applied your genius or your skillset. That's the ideal place to look. I know the brand you're talking about is one we've invested in and you're running right now. And yeah, there was just some amazing systems in place, but they still could use some Mike Jackness and some of the other people that are on the board and stuff. And so it was an ideal fit from that regard.
Mike:
Yeah, you just said something earlier that has taken me a long time to really get a grip with, timing and other factors are just such an important thing. I firmly believe in the whole concept of you create your own luck. You work hard and persevering and just stick with something over long and a period of time, you'll eventually get lucky and have the things kind of click.
But looking back at the things that have been successful, luck has been just a huge component of it. When I was doing online poker affiliate marketing, well, the fact that I found that in 2003, when that industry was just starting and we were there on day one basically or very early, makes such a huge difference. I see the same thing in Amazon, being there in 2015, no wonder we were successful, you could throw up a box of poop and be successful. Because it was that easy, there was nobody else competing against you. Versus now, it's much more difficult. Same thing with the coloring brand that we made. We had a very successful coloring brand, it's pretty well documented publicly. But we just happened to find that niche, a time when it was on the uptick. And it made it seem like we were is more than we were. And it's an easy trap to fall into.
Brett:
I want to use a quick surfing analogy and surfing is something I've been trying to learn for years, I'm pretty terrible at it, but it's still really fun. Take a great surfer and put them out when the ocean's got no waves and nothing is happening or just the surf is terrible. Nothing's going to happen. But you put a good surfer in the perfect conditions and then magic happens. And so we underestimate that, I think. I totally agree with you, you do create your own look over time. But man, why not surf when the surfing is good? Why not maximize your timing and get all the conditions right and then apply your skill set. And I think that's what you can do when you buy a business properly. Yeah, really, really good. What are some of the other pros and cons you had mentioned?
Mike:
One of the cons that jumps into mind, just kind going on the other side of the fence is the pressure when you buy an existing business. When you're starting from scratch, even if you make a business that's the same size, it happens over time. And so one of the things you just lose track of is a human being is just the curve in which you're learning and the time that takes. And so if you build that business up over three or four years, you're kind learning one out of 1500 days at a time or whatever that adds up to.
And versus being handed this business and having to know everything that's happened up to that date in order to just to keep the wheels on the bus, simply keep it from not falling apart. That was certainly an eye opener to me. This was, I think, the largest business that I had ever purchased. It was well into millions of dollars and hundreds and hundreds of SKUs and just a lot of moving parts at warehouse and lots of places to source from. And I mean, it was just a lot to take in. And I remember sitting down on day one and just the owner was helping with transition and everything that they were saying was going over my head. I was like, this is so overwhelming because I just don't-
Brett:
And you get a lot of experience. You're not an eCommerce newbie, you've been doing this for decades.
Mike:
But I mean, I didn't know what part A versus part B versus part C was. And why they used that nomenclature and they were using different systems. And who were the names of the employees and what do they do? I mean, there's just a lot of things and all you're trying to do on day one, even though they're trying to help you on all these different regards. Is like, you got to go get the Amazon account name change, you're trying to get the LLC created, put people on payroll properly, get your insurance moved over, make sure that the lights can turn off, so the electric bill on the right name. There's all these basic building blocks you're just trying to do as if you're being hit by a fire hose. And by the way, we had driven across the country-
Brett:
None of those things are particularly fun.
Mike:
No, they are all the awful things.
Brett:
None of that part is enjoyable.
Mike:
It was awful. It's the stuff that's not fun at all. Especially if you borrow money, which most people do and I encourage people to do it to buy a business to leverage in some capacity. And so you're payment returns are based on today's revenue and if things start to fall off because you've now inherited this and actually done a worse job, it can be pretty intense. And so the first three months or so of my life of owning this business were really, really difficult. Just trying to get over the learning curve and then past that it became significantly easier.
Brett:
Yeah. I think that's something we, again, underestimate is just the learning curve of this brand. This was a sale ... and I got to watch this pretty closely. Sale went smoothly, previous owner, very agreeable, very well documented system. Just like an ideal environment because the previous owner was so wonderful, the seller. But still, it's a big business, there's new stuff to learn, it's overwhelming in the beginning. So even when the conditions are right, that transition period is tricky. So, that's something to keep in mind.
Mike:
Every day while I was there, like I said, we drove across the country to be in person to do the transition because it was just that complex. I was just like, "Man, what if this was the typical seller? Where they just kind of ghost you after a couple of days and they're just like, I got your money. Goodbye." Meaning holy crap. Because I mean, felt like a little two year old kid. I never had more questions in my life. I was like, "Why is this here? And why is that there? Why did you do this? And how come you didn't do that?" It was just over and over and over again.
I mean, I couldn't even find the bathroom the first day in the building. You're just coming into everything brand new and it was definitely interesting. Again, that could be a con, I mean, there's definitely bad sellers. I mean, I've been through it. The ice wraps business that we bought the day after the guy got my money, I literally never heard from him again. No matter how badly I needed his help for something even super small, it's like you had the money and it was like, see you later.
Brett:
Yeah. Good luck buddy.
Mike:
Good luck.
Brett:
It's one of those things where now you're the owner, now you're in charge of the CEO, the president, whatever. And you don't know your way to the bathroom, which is a weird position to be in. Especially coming from likely a successful business where you did know everything and you built everything and you know everything from top to bottom. It's a little bit disorienting and stressful. And then we get the pressure of, I got to pay back this loan and all those things. That's something to be aware of, prepare yourself for that transition. And are you ready to handle the pressure of, "Hey, you're putting your neck out there a little bit, getting this loan and acquiring this business. You got to make it work." Lots of advantages to doing it this way, but pressure and difficulty, as well. Anything else you would add there? Pros and cons, either way.
Mike:
I mean, I think at a high level, in terms of buying a business, those are the ones. We can maybe talk about starting a business.
Brett:
Yeah, let's do that. Yeah, talk about why would you and when would you start a business over buying one?
Mike:
I think that if you're looking at buying a business that is less than two years old, then I think maybe you can make a pretty good argument for starting one. The business we buy, I always like to buy businesses that are much more established, that have multiple years of revenue history and that can really prove that my investment's going to be worthwhile here. And so if you're buying something that's just a couple years old, it could be a fad or a fluke or maybe you're not that far behind and starting from scratch is good. Starting from scratch is also good if you have a lot of other commitments, let's say you are listening, you have a full-time job right now and it isn't feasible to have a large ...of cash and go out and buy something and just quit your job and go do this new thing.
Brett:
You may need to grow as the business grows, right?
Mike:
Yeah.
Brett:
So starting it may be better fit for you.
Mike:
Absolutely. And that's what we did with treadmill.com. Yeah, we owned the domain name, but we got into eCommerce with that site, which was a job shipping site, which is probably easier than having your own inventory, developing your own products. But in that process, we learned how to ... we actually use Big Commerce to build that store at the time. But learn how to get into Big Commerce and learn how to get a payment process or learned how to do basic support and just take transactions online on the internet. All that was completely foreign to us at the time.
And I think back to, would I rather have bought a business or started one in that juncture? I think that starting something was way better because things are happening in real time as you grow, you're learning one more thing. You're learning one more thing. I think at some point then when your skill set is good enough, when you put your 10,000 hours in, the whole Malcolm Gladwell Outliers Effect, then I think it makes sense to start shifting the mindset of, wait a second, I already have all the skills.
One of the things that I've really come to realize is that no matter how big of a business you're running, you're still going to spend the same amount of time in whatever you're doing. If I bought something for $30,000 and it was just me taking it over and working on it, I would probably still be spending 60-70 hours a week on it because it's something new when you're trying to learn it all. Versus buying something for $5 million that has a team and all these things in place, the same thing. I'm still spending the same amount of time. And times like your most valuable commodity, so being able to leverage that as much as you can and not lose sleep, I think is another really good thing in terms of buying a business. But if you aren't there yet, I would encourage you to start a little bit slower, learn the ropes and do one from scratch.
Brett:
Yeah, I love that. So really those two criteria are, if you can't find a business that's ready to sell, one that's established and has that proven track record, ideally longer than two years. Or if you're not ready to buy a business, which is okay if you're not. You need to grow and yet if you don't have those 10,000 hours in, if you don't have mastery of certain things relate to ecom, then maybe makes sense to build and grow with the process, grow into it, so to speak. So really great perspective, Mike, appreciate that.
So this next question, I think as you answer it, this is going to be helpful for two groups of people. One, someone who's looking to buy a business, because I know I've got tons of friends, I know you do too in the ecom space and they're looking to buy, invest, sell, or all three, we're kind of in the all three category or the first two, anyway. What is it that buyers are looking for when they're seeking a brand? Because I think this will help if you're both trying to sell or if you're looking to buy yourself.
Mike:
Yeah. When I'm looking for something, I'm looking for some sort of defensibility. I don't really want something that anybody else could quickly copy. So intellectual property of sort, something that the barrier to entry is quite tough for someone else to replicate. The business that we bought, it wasn't as defensible as I would like, but there was some other circumstances that led us down the path of buying it. But the defensibility thing it did have is it'll be really difficult from someone from scratch finding these products in jungle scale to just go out and buy them because of the MOQs. The MOQs were incredibly high and so you had a pretty big ...
Brett:
Minimum order quantities, for those that don't know. I know most people probably don't know that.
Mike:
Sorry about that, yeah, minimum order quantities. So the minimum order quantity of this stuff is actually done by weight and not even by pieces because you're buying so many of them. We're talking about hundreds of thousands of pieces of each SKU at a time. And having to fill an entire container of something that's like the size of a dime, you're talking about a lot of pieces. That has a facility that already was in place to help package that stuff and do these things.
So while it's a great opportunity for a business, the average person that's like looking at Helium 10 or Jungle Scout and doing research would just get down the path and find out, "Oh, well, while this is a great opportunity, there's no way I can afford to get into it with the MOQs." And the risk is just too high and it's also competitive. And so it would turn a lot of people off.
Another great business I would look at is one that we sold, which is ColorIt, which is I would be attracted to as a buyer because of all the intellectual property. Some artist hand drew every drawing in every coloring book, copyright from that perspective is actually quite strong in the United States, it's actually one of the few areas of law that is pretty saw where you can shut someone down pretty easily for copying. All the other stuff becomes more difficult, if you have a patent you're trying to push back on or other things, it gets expensive and hard to defend. Where copyright stuff is really easy to defend. And so I think the buyers pick the particularly good niche because it had all this intellectual property, had a big email list and a big pixel audience and high lifetime value of a customer and repeatable processes that make more books and more supplies.
And lots of other people have tried the copy of that brand and just fell flat on their face because we had some pretty good secret sauce components there, that made it hard for other people to copy. And so I think that's the type of thing to be looking for versus just there's some random widget like an iPhone case or something that isn't ... that just happens to be a thing on my desk right now. Or pens, just some random pen, it just doesn't make sense to buy a business that doesn't have any defensibility where anybody else can just go grab those products and sell them.
Brett:
And I love that the first example that you talked about, while there's not really a lot of IP there necessarily, the processes are well built out and it's still a high barrier to entry. Someone couldn't enter it, but it'd be difficult. And this business had beautiful systems, the products have tons of reviews, just the head start there was so large. That as long as we could continue to pour fuel on the fire and I say, we, really you. Then success was very, very likely. And then in the terms of ColorIt, you had IP and it was defensible IP and you had a playbook and you had all these things going for it. So I like that. Defensibility because defensibility creates predictability and it means like, "Hey, this is lower risk." If I'm looking to invest my dollars, plus also take a loan out to buy this business. Then I need to limit risk and defensibility limits risk.
Mike:
Exactly.
Brett:
What else do you look for when you're buying?
Mike:
Well then it's the contentious part of, are you trying to pull the wool over my eyes? And that's really important because unfortunately that's exactly what a lot of people try to do. And so it's on you to figure that out. I would not just expect that every person out there is honest, unfortunately. Again, been through this more than once.
Depending on the size of the deal, you want to hire some sort of due diligence company. I've done deals where they were small enough where I did that myself. You don't need to go crazy here, you don't need to overspend and turnover rocks that just don't need overturning. If it's a relatively simple Amazon business, just get the login into the Amazon account and look at the reports and make sure they tie out, look at their tax return, make sure that ties out. Make sure that the advertising spend that they're reporting back to you, ties out. Look at invoices from vendors, make sure that makes sense. There's not a lot of other things that you can really do on a smaller Amazon business to pull the wool over someone's eyes. Maybe there's other black cat things you want to be looking for and making sure that the review profile and other things make sense, as well. Because you don't want to take over the account and two months later get shut down because the old owner was doing something black hat. So those are things I will look at.
Same thing goes when you're buying a content site, you want to look at their backlink profile and make sure that there isn't any trickery going on there. You make sure you fully understand when you're buying a content site, do they have a network of other sites that are ... one of the reasons this thing's successful because they link from a bunch of other places and is there a chance that they're going to remove those links, which could hurt you? So those are some things you want to be looking at.
As the deal gets bigger, then you want to look to hire a professional due diligence company. It's actually funny, the people that did the due diligence on us for ColorIt are friends of ours and they're just good at what they do.
Brett:
So you selected them? It sounded like the buyer probably selected them.
Mike:
The buyer selected them, but we knew of them. They were actually friends of Andrew, a mutual friend of ours. And yeah, I mean, they did a great job. It was interesting having someone that you know looking into your soul. But in the end, I mean they did a really good job. They actually found things that we didn't even realize that we were doing wrong, which is embarrassing. But the buyer makes the decision at that point, is this worth the risk? Do I want to re-trade on the multiple or the valuation? Or is this person doing this on purpose? It was clearly something we were doing by accident, our bookkeeper was just making a really stupid mistake when it came to currency conversion from UK and Canada that I never picked up on.
The thing that was interesting was it kind of balanced out because the UK dollars so much stronger than the US dollar and the Canadian dollars weaker than the US dollar. And so over time it was actually not causing this huge disparity, so that's why I didn't really notice it. Because it kind did balance out. And so luckily it didn't really cost us an arm and a leg. It actually didn't cost us anything because our business was growing as we were going into sale, which is also important. If you've got a business that's falling as you're going in the sale, that can be a lot more contentious.
Brett:
Yeah, that can almost be the kiss of death. If your business is declining as you enter the sale process, I mean most buyers are just out at that point.
Mike:
A hundred percent. Yeah, I mean, it's like they are starting to wonder, why are you selling? Do you know something they don't know? Again, it's always a part of it. And so you got a business that has a rocket ship trajectory over a long period of time. It makes it a lot easier sell. It's like, "Okay, even if they're pulling something over our eyes, we'll make it up in the growth." So it gives you a little bit more confidence as a buyer. And so all those things are important. But yeah, I mean due diligence is super important, just as much as if anyone listening is importing from China right now, I mean doing an inspection on every order before you take delivery is also similar concept. And so why would you ever place an order in China and not do an inspection on it? Why would you ever buy a business and not do due diligence?
Brett:
Yeah, if you're going to inspect one run of a product, how could you not inspect an entire business when you want to buy that?
Mike:
Exactly. Yeah, really important.
And I think you can take it too far. I mean the people that are trying to buy us right now, I think are taking it too far camp, where just like, holy crap, man. You're looking at things that you don't even necessarily need to look at.
Brett:
Right, at the end of the day, do you want to buy the business or not? And you do need to understand, is the person trying to pull the wool over my eyes or not? If there's a little bit of yes, is the asset still worth it? Do you feel like you can still make a go of it? And then, what are the critical factors? And yeah, this is one of those things where you're like, "If I answer this question, is that even going to change anything about this deal?" Why are we digging into this detail? It's not going to change the multiple, guessing it's not going to change your decision to buy it. Why are we doing this?
So yeah, you definitely want to do enough due diligence, but at the end of the day, you could prolong it forever. And what are the critical pieces you need to look at? And go from there. And I think you nailed it where you talked about size and complexity of the deal that really determines how much due diligence and whether you go that alone or likely, you're going to want to bring in a third party or even just someone who's done this before that you can pay for a few hours, if it's kind of a smaller deal, but a little bigger than you'd be comfortable doing diligence on your own. There are people that have done this before that you can pay four, five, six hours worth of their time to look at, as well.
Yeah, awesome. What else are you looking for in a brand that you buy and/or what do you know that other buyers are looking for?
Mike:
When we talk about buying things, the only thing that I always think about is that you're buying time. I don't think I quite mentioned this in the beginning. Any successful business ... or most successful businesses take that first couple of years to just lay the groundwork and the hockey stick growth comes on the tail end of that. It starts to feel so easy all of a sudden. And we often, again, as entrepreneurs, forget about that when you're starting your own business and you kind forget about those hard early days and think more about the more recent thing.
And so that's another thing that I love to evaluate, to be looking at a business that is, let's say, five years old. Even if you could have maybe done it more optimally and done it in four years or three years, you're still buying all that time. You're compressing your ability to do good things with your time. And so that's one of the other things I look at as I'm evaluating a business, is it leveraging my time or am I buying time in a more efficient way versus other businesses? And that's kind of some idiosyncrasies as you're looking at, what were they doing? I mean, is the business, let's say, organic search dependent? Where like most of their traffic is coming from organic search. Again, now you're buying defensibility, but also that's like the ultimate time saver. Because no one can really rush ranking a site from scratch with organic search, it takes a lot of time. And if you build the business around that, it builds a really good moat.
And so just again, looking at more about time resources, how quickly can I make my money back? Am I buying a moat of IP or other things? Or just the general things I'm looking at? And then all the other things that I look at in terms of eCommerce is still applicable. I like buying or looking at brands that have repeat business, that have a passion audience, that has, if you're lucky, has consumability to it. You can write really good content around, maybe there's like a mini course or something you can do. People that would be willing and eager to share user generated content because it's something, again, they're passionate about.
Is there a large pull of influencers in the niche? Or is it just a boring product that no one wants to talk about? And it's hard to do marketing for, where you just constantly feel like you've got a rain cloud over you that follows you around like Charlie Brown. Those are all things I still look at, whether I'm starting something or buying.
Brett:
Yeah. Am I buying time at a discount? Am I able to make the best use of my time? Highest and best. Is this opportunity worthy of the skillset that I bring to the table? And then specifically, what can I leverage? And can I leverage the things that I'm best at? So really awesome.
I want to dig into a few other things. I want to talk about some surprises and some tips in the due diligence process. But first, any thoughts on the LOI process, the letter of intent process? That's kind of the first step. It's the first step if a buyer's getting serious with a seller. Any thoughts or tips around or things to expect with the LOI process?
Mike:
I would say the LOI process is almost always indicative of how the rest of the transaction is going to go.
Brett:
Yeah.
Mike:
So when you find someone that's just needling to live and crap out of you and making life difficult at the LOI stage, it's probably going to ...
Brett:
It's probably just going to get worse.
Mike:
It's going to get worse. It might be a good time to just go try to find another buyer. I know it's tough, especially when you're basically at the altar, you're very close to getting the deal done. But you might be better off trying to find somebody else.
Brett:
Yeah, it's like the couple that's like, "I know we fight a lot as we're dating, but when we get married, it's going to get better."
Mike:
Right, right.
Brett:
And then you're like, "Well, Probably not."
Mike:
Probably not.
Brett:
It's probably going to get worse.
Mike:
Probably not.
Brett:
Yeah.
Mike:
And so what I'm looking for is a buyer that is already in the middle of the road. Whatever side of the transaction, seller or buyer, you can be on either side, doesn't really matter. You're negotiating an LOI from one point or the other. And when the other party ... let's just call them the other party, in this case. When the other party is already in the middle of the road with you, rather than way off in left field or way off in right field. That's a good buyer or seller.
And I've been in this situations where they want to start all the way over in left field, hoping that you'll miss some of the weeds on the way to the middle of the road. Or just get exhausted because there's so many things that you're trying to negotiate just to get to what I would call the middle of the road. What do most transactions look like? Across millions of transactions, what are lawyers from both sides trying to get to in terms of middle of the road and being fair to everybody? Because that's where I like to be. I always like to-
Brett:
Are they starting there? Are they starting way off in left field-
Mike:
Way off in left field.
Brett:
Just trying to take advantage of you. And again, the way they start the process, it's likely the way they're going to finish the process.
Mike:
A hundred percent.
Brett:
And so that LOI is very indicative of what's coming next.
Mike:
And we were discussing this with a friend of mine who was just looking at an LOI that was just so egregious. You know what the rest of the process is going to be when it looks like this. If you asked your lawyer, make this as good for me and as bad for the other party as possible, and hope that they don't catch it, like let's write that document. That's basically what they had written. And in hopes that you would not be sophisticated enough to ... or your lawyer would not be sophisticated enough to find it all.
And typically when you're working with a party in good faith, one of the things you had to think about is, this is the battle that I want to fight. There's a lot of things in the document, you're like, "I would love the red line this or red line that." But let's pick the three or five things that I really want to go to bat over. And again, when the contract's starting so far off in left field, where they're asking for a 10 year non-compete in all of eCommerce or something just ridiculously stupid. Asking you to give them all your assets, but also pay all your liabilities or something stupid like that. Not pay you for inventory or ask you to stay on for 17 years or whatever. It could just be completely ridiculous.
Versus the people who bought ColorIt, I talk about this pretty publicly all the time. The LOI that they put in front of us and eventually they asked the purchase agreement, was written in a way to get the deal done. It's like, "This is the fair thing. We've already negotiated other deals in the past, this is what other lawyers and other parties have asked to get." And so when I had my attorney review that LOI and asset purchase agreement, it was like small grammatical things that they were looking at, not major deal points. And that's the type of buyer or seller that I want to be working with because that's how I am. And it makes the transaction so much easier, it's kind of a breath of fresh air these days to find somebody that thinks that way. Versus again, some of these crazy things. And there's just been a lot of dirty tactics that have been documented, especially in the aggregator space where they try to re-trade in some way at the very last second, when you're back really up against the wall. And it's just really unfortunate.
Brett:
It is. And it's one of those things, and we kind of outline this before. Even when everything is right, even when the buyer seller is in good faith and they're a great person and everything is looking good. It's still difficult. So why go any further with a buyer seller when you look at the documents early on, you're like, "This is going to be a fight. We're going to fight over every little detail." Then why even go further?
Mike:
We're in a position right now, as we record this, I feel the tide turning. But we're in a position right now where it's really a seller's market. So if you're on the sales side-
Brett:
Yes.
Mike:
You probably have more than one option. And the offer that comes in with the biggest price tag is not always the best option. You got to be asking other questions to discern that.
Now, if we go into a period moving forward, which it does feel like we're heading towards where-
Brett:
It does. It feels like we've passed the peak of the highest multiples and we're on the way down. So depending on when you listen to this, that's likely to be true.
Mike:
Yeah. I mean, not the thing I'm rooting for, it just kind of feels that way. We're at the tail end, it feels like of the longest bull market in history, like by far. We've beat this now by many, many years. And so just as a statistics person, it's like, how many times is the roulette wheel going to fall on black before it finally hits red? And it feels like we're pushing our luck a little bit here. And I realize every spin and scenario, it's the same chance each time.
Brett:
Yes, exactly.
Mike:
It does feel like we're at that point. But right now there's lots of options. This is just how life is, if we're at a point where there is only one buyer and it's a really crappy seller's market and you want to sell for whatever reason. Well then maybe you got to deal with some of these things. You always got to think about things in life in terms of timing and those things. But right now, yeah, I mean, I think it's better to go find another buyer or wait than to go through it with a bad person.
Brett:
Totally agree. Yeah, wait or find another buyer. Don't go through something that you just feel and can see is going to be very contentious from the get go.
So let's talk about the due diligence process and like we've established, you've been doing this for a long time. You bought and sold businesses in the past, but you're in the middle of due diligence right now.
Mike:
We are. The hardest one I've ever done.
Brett:
Yeah. Any surprises in due diligence or anything? I know you can't talk about specifics, but anything you would mention to people that are maybe about to go through due diligence for the first time. What do you wish you knew ahead of time getting into this?
Mike:
Yeah, I think every due diligence, literally every single due diligence process kind of has some surprise along the way.
Brett:
Yeah.
Mike:
A lot of times, actually, it's a surprise for the other party, as well. They weren't necessarily trying to be mischievous. When you're running a business with this many moving parts, it's hard to ever have it perfect. I think that-
Brett:
It's the exchange rate thing you had with ColorIt-
Mike:
A hundred percent. It's a great example.
Brett:
No one expected to find that, you didn't expect it was going on, your accountant didn't expect it. They didn't even know there were making mistakes.
Mike:
Yeah. It was so funny because I remember ... I can barely remember what I had for lunch yesterday, my memory's getting bad. But I remember this conversation because it was just so embarrassing. The guy calls me up, introduced himself, like, "I'm so and so with the due diligence company." I was like, "Everything's already in the drive, organized for you. I have all my ducks in a row, ready to go through the due diligence process. This is going to probably be the easiest due diligence process you've ever gone through. Everything is very organized and a hundred percent accurate. And I know the buyer has to go through these steps, but there's nothing to find here."
And then they proceeded to find ... it was actually three things that were all pretty material. That I was just like, "This is so embarrassing." Because this is exactly what somebody that's trying to scam you would say. And I was just like, "Oh my God, I can't believe that." But we've been through five different bookkeeping companies and try to do it ourselves and use different software and stuff. And until you're at a point where you can afford NetSuite, eCommerce accounting is really hard. And there's definitely a part of you lick your finger and stick it up in the air and get it as close as you can. It's just never completely accurate.
And so there'll be things like that they'll find. These guys are way better at this than you are at sniffing this stuff out. And this is why it's so important to have a third party company helping you. Because these are the moments in life ... even though I've been through this multiple times, I still have questions-
Brett:
Sure.
Mike:
Of what would you do? Kind of thing. What are you seeing in the marketplace overall? In this exact scenario, should we just accept this as a risk? Or maybe the deal is slightly different now in terms of our back of the napkin math of how it pencils out by a little bit. But I don't feel comfortable pushing back on the other party for a price adjustment. Or this is so out of line that clearly I should be asking for a price adjustment here. Or is it just like you need to run? Even though you're emotionally invested in this thing right now. Which is really tough, because you might have spent six months getting to this point or maybe a year of looking at different businesses and getting packages and interviewing people and finally finding the thing that you ... it's kind of like dating, we're talking about this earlier. Now you're at the altar, do you run away at the last second? And the answer is yes. I mean that's the hardest thing to do.
Brett:
It almost feels like you can't. You're at the altar, you feel like, okay, everybody's here. In this analogy, like everybody's counting on this. Can I really run? I can't run.
Mike:
Everybody's already bought you gifts.
Brett:
But you can and you should.
Mike:
Yeah, you can and should. Give the gifts back to everybody or whatever. Because here's the thing that I've also learned the hard way. Once you sign the dotted line, it's done, you can't go back.
Brett:
It's done.
Mike:
You can regret it all you want, but it's over. Like your money is gone, your time is gone. You're now having to deal with this messed up asset, if you want to even call it an asset, depends on how bad of a situation it is. And you'll realize the hard way that you would've been better off just throwing away all the time and effort you had to that point and moving on to the right thing. Rather than trying...
Brett:
And I think it really underscores the need to have the right team around you. And you even kind of alluded to this, you've done this now multiple times and you've been in business for several decades. But you may be bringing on a due diligence company or working with an investment banker or working with someone who they've done hundreds of deals or that's all they do is deals. They're doing multiple deals a month. Where when you run into something, you can say, "Hey, what would you do? What am I missing here? What am I not considering as we look at this deal?" And even in a situation where it's a good faith buyer and a good faith seller, can be surprises. So having that right team around you is really important.
Mike:
Absolutely. And I look at the broker and the due diligence company, just as much as a bartender or therapist, is all the other things that I've hire them for. Because it is a very emotional process, again, on both sides. I think on the sell side more so, just because at least in my experience-
Brett:
It's your baby.
Mike:
When I've been looking to sell ... it's your baby. That's definitely a big part of it. There's also, at least for me, been some sort of burnout factor that a company's wanting ... and I'm just like, I'm just done. I'm mentally just ready to be whatever it is. And that's one of the reasons I'm looking to sell. Not that it's a bad business or anything like that. I tend to run fast and towards the sun. And eventually you get a little chard and need to recharge yourself. And when you're right at that last second and the other party is trying to pull some sorcery on you, you're at the weakest possible moment in ...
Brett:
Yeah. Demoralizing.
Mike:
It is. Yeah.
Brett:
For sure. Yeah, I've heard stories of friends who've recently sold all of their business or sold most of the equity, who have gotten to a place where they're like, "I think I just want to quit. I'll quit the whole thing. I don't care anymore." Because they're so emotionally taxed and emotionally drained.
Just other tips or suggestions, let's talk about it from the seller side for just a minute. Tips, suggestions, things to consider if you're a seller right now.
Mike:
Yeah. So I mean, I think number one, you should always have your business arranged in a way that you might want to sell it tomorrow. In my experience, you just never know-
Brett:
It's a better business when you do that anyway.
Mike:
That's exactly the point. It's a better business when you do it this way. If you're organized in a way that you have financials prepared, all the documents are already in a Google Drive and organized, et cetera, et cetera, you have a better business. A lot of people put accounting off and all these other processes until way too late. And so what they end up realizing is that they don't have a business that's worth anything at all because their profit margins of what they thought they were, or just a lot of other things are out of line. And so if you are running your business month in and month out, always preparing to sell. Even something that's brand new, that you just started a couple of months ago. You're going to be in a way better spot, your business is going to be better, you'll thank yourself for it.
Another thing that it's important when you go to sell is just complete transparency. Each time you get caught fibbing or lying about something, it will wreck the confidence of the buyer. And depending on how big of a thing this is, it might be something super small or innocuous or whatever. But if you get caught in some lie, it will really hurt the credibility of the deal. And so don't do that. I mean, I can't believe I have to say this out loud. Anyway, I mean, if you're a human being, you shouldn't do that.
Brett:
Yeah. It should go without saying but maybe it's like-
Mike:
...
Brett:
Yeah. And maybe what some people may be tempted to do is like, "Oh, I don't really need to mention that." Right?
Mike:
Yeah.
Brett:
So it's not a lie, I think most people, hopefully, that are listening will be like, "No, I wouldn't do that." But I think probably what you're saying is, "Hey, even if there's something they're not asking about now. It's going to come out in due diligence, so bring it up now. And talk about it now."
Mike:
I mean, a good example, when we sold our last business, there was a pending lawsuit. We had sued somebody for something and then it was wrapped up or whatever. And so we made sure we disclosed that, that these are things that maybe some good due diligence company would find as they're doing a background search on a company. And so explaining it, why that happened and how that might have affected the business one way or the other upfront is a lot better than going, "Oh, well, I didn't know you needed to know about that." Or whatever you say when they come approach you later, it looks really bad. Because then it's just like, "Well, what else are they trying to hide?"
Brett:
What else do they hiding from me? That's the immediate question. Exactly.
Mike:
Again, in the vein of always treating others like you like to be treated. I always like to think about if I was writing a million dollar check to somebody, how would I feel? Because it's just as uneasy for them. It's a great day for you, like you're looking to sell your business and you're going to go pop the champagne and run into all this life changing amount of money and woo-hoo. Well, the other person is taking an equal bet, making a life changing ...
Brett:
They're on a hook for that-
Mike:
They're on a hook for it.
Brett:
Life changing amount of money.
Mike:
And they're taking a risk just like you have in life, as an entrepreneur. And so just being transparent about that stuff is always the best policy, in my opinion. And in actuality, I've found that by being ultra transparent, it actually helps you get more for your business, helps the deal close quicker. It just actually makes things better, not worse. Unless you're trying to do something really squirrly, then shame on you.
Brett:
Right, exactly. And I think sometimes you're super transparent, you bring up stuff that maybe they'll care about, maybe they won't. But you're bringing up all the dirty laundry, so to speak. Then that gives the buyer confidence and they may say, "Oh yeah, it's not a big deal. I don't care about that. But thank you." It gives them confidence that you're being so transparent.
Mike:
The last thing I'll mention is that the deal should not be done in your mind the day that the wire transfer hits the bank. Again, in the vein of treating others like you like to be treated, be prepared for weeks or months of transition. And go out of your way to help them. Again, just try to remember if you've ever bought a business or if you could put yourself in that mindset of, I just spend a ton of money. And again, the bigger the transaction, the more complicated it is.
And there's going to be little things that the buyer is going to need help with days or weeks or even months, and sometimes years after the fact. I mean the people that bought ColorIt from us every now and then will still email me about something. I mean, obviously it's few and far between, they were amazing buyers, by the way. They asked the least of just about anybody that I've ever done something with. But just make sure that you go out of your way to make sure that every login's turned over, they have all the passwords. That you explain all the vendor relationships that you send emails, transitioning relationships properly. That you're there to answer questions that they might have. Because again, they're coming into it all brand new and they're going to be feeling like they are being hit by the fire hose. And just trying to keep the wheels on the bus to begin with, that they don't know, again, your part number naming conventions or why this product was discontinued or why you sent this particular email out or ran this ad or whatever it might be.
And so they might have questions about that a couple of weeks down the road when they finally get their head and their feet underneath them. And you should just try to be there for them, for those things and not be looking to just run away. Because that's just not fair.
Brett:
Yeah, be prepared on both sides for that transition period. And this process of buying, selling businesses, building them, doing tuck-ins, roll-ins, exiting. It's the way wealth is created. And these are big opportunities and it's a lot of fun. But it's also, these are big deals and it's difficult and you need to be prepared for the difficulties and the surprises that are there. And so, yeah, I think that just understanding ... this has been super, super helpful, Mike. Thank you. Understanding the good, the bad and the ugly about due diligence and about the transition, about even the LOI process. This is all super, super valuable.
So we're kind of up against it, this hour flew by. It's been a ton of fun, Mike. But as people listen and they're like, "Hey, I want to hang out with this guy a little bit more." Obviously check out the EcomCrew Podcast, wherever you like to consume podcasts. But how else can people connect with you? Are you active on the socials? Is there other ways that people can follow you?
Mike:
Yeah, we're getting actually a little bit more active on social. I've always been kind of like an anti-social media guy, because I feel like it's done more harm to the world than good. But we have been, for EcomCrew stuff, more on social media. So it's EcomCrew.com EcomCrew on Twitter, YouTube, all the socials, on podcast. Everywhere you can find anything about technology or whatever, we're there and EcomCrew everywhere. If you want to email its support@EcomCrew.com. That'll get to me eventually, if you're looking to chat with me about something. But yeah, hopefully you'll check it out and appreciate the plug man.
Brett:
Awesome. Mike Jackness, ladies and gentlemen. Mike, this has been an absolute pleasure. Really enjoyed it and I look forward to chatting again.
Mike:
That was like an Ezra Firestone.
Brett:
It was, actually. Yeah, I think that's where I got that. That was-
Mike:
Mike Jackness in the house.
Brett:
Mike Jackness in the house. That's awesome. So-
Mike:
Thanks, Brett.
Brett:
Mike Jackness ... yeah, thanks buddy.
And as always, thank you for tuning in. We'd love to hear what you think about this podcast. Leave us a review on iTunes if you haven't already done that. And with that, until next time, thank you for listening.
.png)
.png)
