Acquisitions Anonymous - #1 for business buying, selling and operating - A branded highly-rated Amazon FBA pet consumables brand / Yet another Saas for web scraping - Acquisitions Anonymous e10

Episode Date: November 24, 2020

New episode published!We analyze two companies for sale/sold:- A branded highly-rated Amazon FBA pet consumables brand - Yet another tiny Saas for web scrapingEnjoy!-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on twitter @acquanon Learnings about small business acquisitions and operations.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#62 Two Landscaping Businesses for Sale - Mike Loftus CEO of Connor's Landscaping#66 Analyzing Software Businesses for Sale with Steve Divitkos, experienced industry CEO#42 $900k Moving and Storage Company / $500k Rural Mini-Storage#61 Two Manufacturing Businesses for Sale - Brent Beshore - Founder and CEO at Permanent Equity#24 $5mm pool services and lifeguard staffing co / $2mm septic services business -  featuring baller @WilsonCompanies as a special guest!#45 $800k/yr cleaning business in Midland, TX / a $565k/yr window cleaning business in San Antonio, TX #48 Two Landscaping Businesses for Sale - Mike Botkin of Benchmark Group--- Support this podcast: https://anchor.fm/dealtalk/supportSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

All right, everybody. Welcome to Acquisitions Anonymous. I am Michael Girdley. I'm here with Mills and Bill. And we are back this week with two more deals, one decidedly tech and one decidedly non-tech. So we're going to start with the non-tech one. And Bill, you have that one.

So let's go. All right. Let's get it rolling. So this is a brand that we looked at in 2018. It is a brand of pet products. They sell 98%. So effectively, entirely on Amazon. At the time they were for sale, they had about eight or nine skews,

you know, kind of pet shampoos, stand removers, things like that. And they were about two years old at the time. This was in kind of early 2018 and they were founded in 2016. One thing that immediately jumped out at me is they, in less than two years, had jumped to a trailing 12 months revenue of $1.5 million and about $400,000 of sales of EBITDA, rather, $400,000 of EBITDA. And they are asking $2.1 million. So about five times trailing 12 for this business. But I had to hand it to the broker the way they positioned it. They did not position it as five times trailing 12 months. What they did is they took trailing and projected six months. So I guess they took the trailing six plus what they thought was going to happen.

over the next six and multiplied that by four times to get to $2.1 million. So they said that number would have been $520,000 of SDE instead of the $400,000 of SDE they had done trailing 12. And they said, well, a four X multiple on that number is reasonable. So $2.1 million is going to be the asking price. I think one of the reasons they did that is this was for sale around summertime, or springtime rather. And Q4 is always big for them based on kind of their historical monthly. they included with the package. So that made me think they kind of were trying to capture credit for the upcoming holiday instead of just the past holiday, which they expect to be much bigger.

Fairly aggressive pricing tactic by the broker, which you occasionally see, but I thought it was a little bit bold. So things they make generally, as I said, like shampoos, supplements, chews. This was in 2018 before Pet got super hot. If this was for sale today, this would be one of the hottest listings on the market place. Amazon FBA seller, pet industry, really, really sexy industry right now. And these guys were a couple years ahead of the curve. So they have, they claim they work about 10 hours a week on the business, pretty much exclusively sourcing new products. They're really riding the FBA

wave. Their manufacturers ship it straight into Amazon for them. They also sell a little bit on Chewy, although it seems like most of their sales are on Amazon. They turn their inventory five times a year. They don't have any payment terms, so they pay 100% on shipment from their vendors. And as I mentioned, entirely seller central Amazon. And really, the only marketing they do is Amazon ads. So, you know, profitable business, about 33% EBITDA margins, making about half a million a year. They want to sell it for $2.1 million. What did you guys think? You know, it does, it does my immediate red flag and it maybe it's just an emotional thing. Like, I just feel so abused when I don't own the customer relationship, right? And the Amazon thing really scares me.

So they do talk here about this idea of getting away from Amazon, FBA, as their only channel, you know, Chewy and some of these other platforms that are selling to the consumer. Do you think that's real? Like, is that a real opportunity here? Or those other ones just too small to matter? I will tell you every FBI business that I see for sale, that's 100% FBA, every single one of them puts this in their growth opportunities. Expand to Shopify, diversify our sales, and take it to different marketplaces. And I ask the same question that we often ask, which is if this is such a good idea and so easy, why haven't you done it? So the move to Shopify every FBA brand in the world will say, oh, the buyers should take

this to Shopify and diversify their sales channels. Well, I believe that the jump from FBA to Shopify is one of the hardest things to do in e-commerce. And there's a reason most of them are talking about how you should do it and not explaining how they've done it. Yeah. The other thing that's happened since this business was for sale and sold is the rise of the thracios of the world that are consolidating these FBA things. Yes. This seems like one that they would pay list price for, like in a heartbeat. So I do wonder if this is one of those ones that you look at it as an independent seller and be like, oh, there's an independent buyer and look at and think there's a bunch of dumb money going to be chasing

this thing. Should I even spend much time on it? So yes, although I will tell you the thrasios of the world are rather price disciplined. And they have to be because of the way their capital is structured. They have certain IRR hurdles that they have to hit just based on the way they are financed with debt and equity. so they can't pay huge numbers for everything. I happen to know and have heard in the marketplace, they are rather priced disciplined than drop out of processes all the time.

So while this would be a perfect fit for their business model, I don't think you can always count on them dropping huge coin on something like this. Right. And then so what is the multiple of trailing 12 months EBITA? You said that's actually... It's about five. Yeah, it's about five.

Their trailing 12 is 400,000, and they want 2.1 million. Yeah. And then the last question I have, and then I will stop talking all over Mills. How do we feel about this brand? I kind of like, and I forgot if we're allowed to say the name of it or not, but I kind of like it. We should not say the name of it.

Yeah. I kind of like it. It's kind of hippie, you know, and kind of, I think it's pretty cool. So I do think that's a big asset. Yeah, they've done a good job with it. Bill, I'm curious about how the owner of this business or this type of business gets started. I mean, do you think it's, hey, I have pets, I like pets, and I want to kind of, you know, start my own entrepreneurial foray. Most of it to me, then the hurdle, right, is figuring

out vendor sourcing. It seems like that's the X factor, right? In a lot of these is can you actually consistently get, you know, because that's the whole business, right? It's just getting the stuff to Amazon and making sure that you keep the trains running on time, so to speak. Yep. The vendor sourcing is, I'll go back, who starts this business? In this case, this was started by somebody that was already familiar with Amazon FBA, and this was a new brand for him. He had a separate business, and then I think this one actually outgrew the other one. He, of course, had started a pet business on FBA in 2017, 2018. It was really in the right place at the right time, and this thing really took off. But a lot of times, yeah, Mills, the archetype

you described is exactly who starts these businesses, somebody who, they kind of start it part-time, while they've got a job, maybe they're into dogs or they're into whatever niche they're into. The vendor sourcing is not always that hard. A lot of these products, you can contract manufacturer. Many of these contract manufacturers have sort of a menu of formulas you can kind of pick off of. And a lot of what makes these successful is the branding, the positioning, the Amazon optimization, and advertising. And kind of the digital marketing product launch side of it. more of the demand gen than the creation of the products, which these days in the age of contract manufacturing

in consumer products is typically not the long pole. And we talked about this, I think, on the last episode, it gives me reservations thinking about, you know, okay, if it's not a differentiated product, right, then what's going to keep somebody, especially if there's low barriers to entry, right? You could call my contract manufacturer, so to speak, and you could come in and basically start selling the same thing. And if you have more money, right, you could theoretically have better branding.

And then you could outcompete me on, you know, pay per click or whatever your customer acquisition strategy is. So that makes me a little bit scared. But they mentioned, I think we've talked about this before, they mentioned that they've hired an agency. And I know you personally have some experience with this, but you've probably also seen it flop or really work well. I'm curious, what is somebody in this position asking an agency to do, to drive traffic to their Amazon page? Pretty much to run their Amazon ads. So they would be asking the agency to continually iterate on what keywords are we bidding on, what are our bids, you know, because these are all essentially auction markets that fluctuate all the time. So, you know, you've got to stay on top of it, check it every couple days, adjust your bids, figure out if those keywords are still profitable, try to add new keywords, those types of things.

So that, in this specific case, that's what they're discussing. And most of the time, I've seen that work terribly. People try to outsource it because the agency, you know, they set a calendar reminder and they look at it every four days for 30 minutes and then, you know, they come back to it four days later. They're just not really in it typically. Well, and the issue, right, is if the agency were the best in the world, right, or top desal, right, at managing these types of campaigns, they would just do it for themselves

to make a lot more money. Right, or they do it for much bigger clients than you who has, you know, $2 million of revenue or $1.5 million of revenue, right? Yeah, yeah. The parallel to that in the B2B world, like the direct sales world, is outsourcing your sales. It never works. Like, I've seen it try it over and over again.

It's the total same thing. Like, you got to own that stuff in the house because nobody's committed like you are. Yep, exactly. No one knows your product like you do. So, I mean, I've seen, typically when I see business, FBI sellers with, or even any e-commerce sellers with outsourced agency work, it is outsourced to either one or two of the best e-com agencies that there are, and they're paying a handsome price for it, or they're kind of succeeding despite the fact that the agency is doing it. You know, it's like a very good product or is in a very hot niche, or they got very lucky. but one of the things when we buy a brand, we almost always do is fire the agency

and run it internally and typically get much better performance. So when I see a brand that's using an agency and doing well, I actually love that because I see that as a big opportunity. They also mentioned in here the idea of kind of turning on or trying to make you subscribe and save within Amazon. It didn't even strike me as that's something that you could opt in or opt out of as an FBA seller. What's your experience with that?

Yeah, you do have to opt into it. It's not that hard to opt into it. So them admitting that they're not doing it is just basically pure laziness, which is fine. That's, I think a lot of value is created in these smaller business acquisitions by buying a business and just being less lazy. So, yeah, I mean, so we see on some of our brands, I mean, we can see 10 to 20% of our sales on subscribe and save. It's hard to, you know, we've been subscribe and save for so long.

I can't recall, you know, if you get a boost, when you go to subscribe and save, but I'm sure you do. And getting that kind of recurring revenue is absolutely worth doing. Yeah, interesting. Okay. Well, I think I like this deal.

This is cool. If I was in the FBI business and had some established assets there and stuff, I think this is one that's pretty exciting. So, Bill, when you looked at it, though, I mean, your M.O. At Elements Brands is not to remain on subscribe. I mean, not to remain, you know,

with that dependence on FBA. So even despite that, right, you were thinking there's probably an angle here and we can maybe help them make that jump or at least you thought that at the time. Yep. So I'll reveal to the listeners here that we did pass on this deal and I still regret it. We should have bought this one. And even though, so this was 2018 and at the time I was very, very convicted that we did not want the level of Amazon concentration that this brand has, 98%. we have kind of relaxed that thesis a little bit in recent years, although we still like to see kind of at least 25% from the dot com. We ended up buying a different pet business this same year and have crushed it with that business.

And we actually should have bought both. And this business, I happen to have stayed in touch with the guy who bought it and know that it's more than doubled over the past two years since it was sold. So this business sold. I'm not sure what it went for. know they had several bids. So I imagine they got close to that kind of made up 4x trailing six plus forward six number. But I also know the guy that paid it has done very well, even despite paying what would be perceived as a rich price. They've launched a couple more skews and they've just kind of ridden the Amazon ecosystem and the pet market has been a

bonkers tailwind. So for me, kind of the big lesson I took out of this one is no deal is perfect but there's a lot to be said for being in the right industry and having tailwinds at the right time. So if you see a business that is in the right place at the right time and has tailwinds, buy it and put up a sale. Yeah, growth solves a lot of challenges. Yep. I think we talked about that before in a previous episode, like every deal underwrites if it's going to grow 50% per year for the next five years.

That's exactly right. And I think a lot of people don't really internalize that. Right? You know, they think, oh, like they get so hung up on, oh, I'm paying 5x. Like, am I a sucker? Well, you won't feel like a sucker if it doubles under the first 12 months of your ownership. You know, if you know what you can do and you think you can grow this business, almost any price is worth it. Yeah. Which is a good segue. Yeah, for sure, for sure. Well, and then there's the Munger quote, right, where he talks about paying up for, you'd rather pay up for a quality business than get a crappy business at a discount. A lot of that comes up to growth, I think. Yep. Cool. Well, I have the second one, so we'll go from something decidedly non-tech,

except for the fact it's sold on Amazon to something pretty techy. So this is one that we looked at a couple years ago. It's a pure play SaaS business, and it's focused on developers. So a small little business, it is basically a set of APIs. So if somebody's building a system that wants to go grab and basically scrape is what it's called, take the information off of another website and programmatically access that. So like you build a system that would go grab that stuff. So say like you want to go pull eBay listings off each day and build an automated pricing thing, you would build your application

and would use this system to go get that data for you. And the reason you need it is because a lot of these big sites are pretty good about protecting themselves from scrapers. So they have CAPTCHAs and all that kind of stuff that keep that from happening. And so this particular company has built a system that basically distributes and anonymizes those requests and allows you to go grab that data. So you can just outsource getting other websites information to this thing when you're building your own app. So that was me trying to take a technical thing and make it non-technical.

Does that make sense as to what it is and what this thing does? Yeah. So it helps you, it's basically a B2B tech company where it's a developer, tool. Yep. Right. Yep. So developers are the ones that decide on using this and then their code has stuff that calls this system that goes and does stuff on their behalf. I am going to be honest. I had to Google around and see what exactly is scraping, right? And what is it used for? Like, what are the, I guess it's not a business case as much as, you know, it's a dev tool. So what types of in cases are developers building this for? And most of it is over my head.

from a tech perspective, but it is really intriguing and interesting when you think about taking a manual function, right, and putting it into an API and basically taking something off of the developer's workload, which is virtually what AWS is, right? So one of my questions is, does AWS have a competitor to this or if they don't, why not? Pretty sure they do. Let me see, scraping API AWS. So let me check the, they do. They do, they have a thing called the custom extraction API. And I do think this ties into the, this does tie into kind of one of the qualitative aspects of this

and one of the benefits of being being in your lane, so to speak, which is, you know, I think seeing deals all the time. So, Bill, you're seeing deals in the FBI space all time. Well, in the tech space, you would realize that, oh, one of the reasons we could talk about this one is there's a bazillion of these things and they're all out for sale in the past year and a half. So it does tie back into one of the qualitative things I can tell you about this business is this is one of hundreds of these particular services. So to answer your specific question, yeah, it doesn't surprise me that it looks like somebody has built one of these exactly on top of the AWS marketplace already.

But AWS doesn't offer this. And typically it's because this type of service also lives in kind of a gray area. So big companies don't do it because a lot of these sites like eBay, or even a big company website, they will have terms of service that say you're not allowed to scrape what we're doing. So if they did do, if AWS or somebody along those lines offered something like this, it's very likely they would get a letter from the law firm representing that website. So that's the other sketchy thing about this is it's a cat and mouse game where the websites really don't want you to be scraping.

So you have to be putting together a solution to keep doing it and work around there. They're things they're doing to fight back against you. Michael, I think we kind of interrupted you, but you want to talk about revenue and SDE on this? Yeah, so they are selling for approximately $6 million or we're selling. It's a pretty young company just a few years ago. As I said before, there's just a bazillion of these things. They're serving in terms of scraping requests. Most of these type systems are going to do billions of requests per month.

and their monthly recurring revenue is about 175,000. And if you kind of do their average spend, it's in the lower kind of $5 to $700 a month per customer. Pretty sticky. They turn about 5% of revenue a month, and they've been growing really quickly, looking at where they are in the past two years. They've gone from basically quadrupled their revenue.

And like a lot of these kind of businesses, when you look at who's selling it, it's somebody that's not a business person. It's a moonlighter who's product focused, technologist. So basically did some things with the business that were interesting and also some that were unappealing, if that makes sense. So channels of how they get customers, just kind of go through my notes here. About half of it comes through just web search. So they are spending money on SEO. They have not been able to be very successful in terms of getting other folks to provide channels with them. So direct sales, referrals, all that kind of stuff, has not worked pretty good.

So they have presented all of the earnings in a seller discretionary, so an SDE format. So there's adbacks there that they're doing. And they claim to be running about 55, 60 percent profitably. So NOI is, from an SDE standpoint, it's about 60 percent or so of trailing 12 months revenue. So about $800,000 roughly? Yep. So so far numbers wise, we have have six million sales price, revenue is about one and a half over the trailing 12 months, and then 800K and SDE.

So kind of doing the math there. It's four times revenue and a little less than eight times SDE. So pretty pricing. Team, team wise, already assembled. Owner claims to be part time spending a quarter

to half time on the business. And the team is what you see in a lot of these little SaaS businesses already overseed, offshoreed, and everybody's working as a freelancer. There's no W-2 equivalent, kind of the highest-played employee as a salesperson. Given the way the business has been going, I don't know what the salesperson does. It's built on a pretty modern tech, and it's, you know, digging into the technology, as I said before, they have to do a lot to work around the websites fighting against your existence. So they've been pretty good about doing that kind of

thing to keep themselves from getting blocked. But it's a continual kind of arms race with those folks to go there. Interesting data point. If you ask them why they're special and who their big competitors are, as I said before, there's hundreds of these type little things. They say they mostly win because they are cheaper. I hate saying that. That's brutal.

Yeah. That was for you, Bill. I know you'd hate it. I hate that. I do think their pricing strategy is interesting in that they'll give you a certain an allotment free, right? You can do X number of these for free at first. So it's like, come in, taste the Kool-Aid, get hooked, right? And you don't even have to give them a credit card it looked like to basically start. So I like that kind of strategy. If you're going to, you know,

take that competitive route, which is we're just going to undercut folks, this has zero barriers for somebody to come in and a dev, right? And all the sum costs, you know, as a factor of that, if a dev starts working this into their toolbox, switching costs, then at that point, you're going to be really difficult. For sure. I do think there is some danger, especially with API tools like this,

that usually it's just a few lines of code that they put in. And switching to a new service is not that crazy in terms of what that happens, right? I think there's the reason you see this being very much a red ocean in what this does is the two things I talked about. So one is the, the sketchiness with the arms race, right? This is kind of a gray area business. And then the second thing is, like, it's just, it's just pretty easy to switch from one to another if you really

want to. That's just a few lines of code to go there. So anyway, I'll pause there. So, Michael, I got a question for you on this industry because it's funny, you know, I present the branded products last time, and Mills goes, there's nothing that differentiates it. And I'm thinking, as a consumer investor, right? But there's a brand here, right? Like, and also, So this is a huge industry, the pet industry, right? So there can be lots of players. And so I'm less scared by what looks like a red ocean in consumer brands. So I wonder for you as a technology investor, is that same dynamic there? Like, do you see this and go, yeah, there's lots of competitors, but clearly they have a great business. They've carved out part of the market. It's

growing. You know, this market is big enough to support lots of players. And so I'm not scared by that. or do you say, is technology different and that tech tends to converge to win or take all? And so it scares you, there's lots of competitors. How do you think about that in tech? And is it different than the way I would think about it in consumer? Yeah, well, I think it's interesting because in tech, not every market shapes up to a winner take all. So this is one that is not that way. And it's just the nature of how commoditized and easily interchangeable the things are.

and also that there are actually, unlike most tech things, there are few to none economies of scale here. There are actually dis-economies of scale, right? Because since you're dealing with the websites fighting an arms race with you and trying to shut you down from scraping their site, the bigger you get, the more of a target you become, and the worse your service gets. So this is one where, you know, the more loud you get,

the more out there you get, the more you have to worry about the websites on the other side that you're scraping, shutting you down, or making your service worse. So, I mean, I think to bring back to your point of the domain, of the brand here, what's actually interesting is their SEO placement, right? At their price point, it's pretty much impossible to do direct sales. And you can see that in the information memorandum, like their sales rep is not very successful,

is not adding a bunch. As long as you're up there in that first page of Google results, this will continue to be a good business. If that slips, they're going to have real problems. Okay, so this is basically a SEO business. It seems like. For the most part. Okay.

And so you're more scared of this business, not necessarily because there's a lot of competitors, but more for these specific fragilities in this specific business, the dis-economies of scale, the whack-a-mole level of the sites trying to block you, and the fact that you're probably very dependent on your Google rank. Yeah. Well, yeah, totally, totally right. And I think they're asking for somebody to pay up here at a multiple that you're going to assume that this is going to continue on for a long time and keep growing. It's hard to be pretty certain of that.

And I don't blame them for asking for it, but that risk doesn't appear to be priced in when you're at, you know, four times revenue. Did you bid on this at all, Michael, or did you just let it go? Let it pass. Let it pass. Yep. You think someone bought it? I do know. I haven't followed up.

it's interesting to me that in traditional kind of you know brick and mortar blue collar B2B and B2C in kind of a non-tech sense if somebody's playing in the gray it's pretty obvious right they're doing something blatantly kind of immoral right or something that you would go you know I don't not really comfortable getting into payday lending or whatever it may be but you know I don't look at this Michael and my first thought is wow this is kind of not not playing in the gray, right, they're not doing anything, you know, blatantly, I guess, illegal, right? They're just trying to find loopholes. And as long as the loopholes exist, they're going to continue to try and go through them. But as an outsider, I would look at this and go, oh, man, you know, somebody's pitching

me payday lending, right? Or the equivalent of it online. That's something that would have otherwise probably been lost on me. Yeah. Well, I don't think it's as bad as payday lending, but I do think you have a situation where you're potentially going to get harassed. that's why I put it in the gray area. Payday lending is definitely in the, like, I'm not really interested in being in that business business. This is one of those like, well, you know, somebody else is making some rules and you're not following them. So it's kind of the equivalent of jailbreaking an iPhone, if that makes sense. So, yeah, yeah, that's just something to be mindful of before you get into something like this. And I don't know, was it for me,

wasn't for us. Well, two very different businesses, and I'm sure some people got excited about them. I mean, I know the pet one sold at full price, and I bet someone got excited about this, it was, you know, the thing I will say is it was rich, but the growth curve here, I mean, is very steep. They have, they doubled in the last six months. So, you know, kind of back to our point about growth again, yeah, you may be paying here eight times EBITDA, which I agree is definitely too high. But even if you did, and it doubled in six months, you've paid four times EBITDA. And if it doubles in another six months, you've paid two times EBITDA. Of course, it depends on whether that growth continues and whether you, the buyer, think you can maintain it.

And I think, you know, Michael, as you kind of pointed out, somewhere there is a ceiling for this business, a dis-economy of scale. But currently, they're at, you know, 200 grand of MRR. Is the ceiling at 400? Is it at a million? Even if it is at a million, you've probably still done pretty nicely on this investment. So to answer your question, I did just do some Googling. They were sold, and they sold to some guys out of Las Vegas. So. Who probably still own it today. Yeah.

All right. Good one. All right. Well, that'll be great. And I think we'll just go ahead and wrap up this episode and go from there. All right. Thanks, guys. All right.

Good job, everybody.