Acquisitions Anonymous - #1 for business buying, selling and operating - An eCom business at 2x profits?! - Acquisitions Anonymous Episode 121

Episode Date: September 7, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley) and Bill D’Alessandro (@BillDA) talk about an eCommerce business in Africa. This is an extremely cool deal as this focuses on women and mothers in Africa, not only that we also get to unpack how this is different from similar businesses in the US and what it’s at stake here. -----“Thanks to our sponsor!Live Oak Bank - Whether you’re looking to build, buy or expand your business, let the team at Live Oak Bank be your financial guide. With Live Oak, you get a partner who believes in your success and is willing to take the journey alongside you. We provide small business loans tailored to your goals.Fuel the growth of small businesses across the country; bank with Live Oak Bank.You can contact Heather Endresen, Director & Founder at [e-mail]. Mention this podcast in the subject line and ask her about office hours to get in touch.*Live Oak Bank is the #1 SBA 7(A) Lender. The data supplied by the SBA reflects 7(a) highest dollar volume during FY 2021.”-----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.-----Show Notes:(00:00) - Introduction(00:24) - Deal & financials: African eCommerce site(00:55) - What does the seller need? What are they looking for?(03:45) - What are our initial reactions, and what do we enjoy most?(05:00) - What do we think about these margins?(05:44) - First red flag: What is it?(06:46) - What are the foreseeable challenges for running this business?(07:39) - There’s no UPS in Africa… What are the alternatives?(09:18) - What are the risks of investing abroad in an unknown environment?(11:30) - Financial considerations if you want to acquire this business(14:13) - Our Sponsor is Live Oak Bank(15:36) - What is so interesting about the product-market fit?(18:40) - What are technological and societal challenges?(23:20) - Specifically, how should an international transaction be arranged for maximum efficiency?(24:12) - Final considerations about the market and its maturity-----Additional episodes you might enjoy: #108 A fireworks store and a ski rental business foSubscribe 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]

Hey, everyone. Welcome back to Acquisitions Anonymous. This is Bill D'Alessandro. I am one of your hosts. And today we are going global. We are going to Africa in an industry I know well, an e-commerce business focused on women and mothers in Africa from our sponsor, Micro Choir. So extremely cool business, fit totally different than even the same business in the United States. So Michael and I will unpack it together on this episode of Acquisitions Anonymous. All right, Michael, we've got an interesting and unique e-commerce business today, which I'm excited to talk about. out. We do e-com, but we don't do international African e-com very often, and that's what we've got today. So, all right, let's jump right into it. So this, the title of this one is a platform aggregating products to empower African pregnant women and mothers to make informed decisions for the health and well-being of their families. They are doing, they're doing 757,000 in TTM, And they're asking $1.5 million for the business, so 2x revenue. It says they have a strong brand and has a leading baby products commerce platform in this region, the customers trust us.

We believe this business will do better with an acquirer who has access to working capital and or inventory. They say they've got between 10,000 and 100,000 customers. It's been around since May 2017. And their team size is 35 people based in Nigeria. Interesting. They don't list a profit. They just say $757,000 of revenue and they say they got a 5% annual growth rate. So I'll tell you a little bit more about it. It says they do e-commerce and retail of products and services. They have over 3,000 skews of baby products across 10 categories, diapering, baby gear, car seats, nursery, clothing, and shoes, feeding, bathing, back to school, et cetera. So much potential for growth with adequate inventory. And then they also do service.

services, we sell maternity services prenatal delivery and postnatal care, whoa, in partnership with hospitals to improve access to care. It's they talk a little bit about their tech stack. It's basically e-com on WooCommerce, and then they've got some custom stuff, I think, that's running on DigitalOcean. Their growth opportunity is that they've grown sales from their e-commerce and online platforms from 25% of their revenue, pre-COVID to 40% post-COVID. There's an opportunity to grow this even further.

It says they're not able to meet demand for the products that they sell. So having access to funding for products or inventory is an immediate growth opportunity. We're only able to fulfill between 30 and 40% of the orders that we generate. We are always sold out. Interesting. We have an email list of 38,000 people with an average of 34,000 new visitors to our e-commerce site every month. The market is open to private label products that are good quality and price cheaper than their well-known brands.

I would imagine Africa, pretty price-sensitive market. market. The apparel and clothing and shoes do really well. Folks on expanding this category will be great because margins are 60% in that category. So they could also expand by offering products for older kids. And then they sell only to five and a half percent of the people in their community and they could increase penetration into their customer set. It says they're selling a business because we're unable to raise working capital to grow and scale. There's a huge gap in this market and not many competitors in this niche. So we get a lot of orders that we we can't meet because we don't have inventory or working capital.

It's a great fit if you have access to working capital. Financing, we took a total of $480,000 of an investment in 2017 and 2018, but have bootstrapped since then. So, Michael, what do you think about this one? Man, you know, I feel like I'm somewhat ignorant about North American e-commerce. The more we talk about this, I have so many questions that are just like, So what does the delivery infrastructure look like in Africa? Like, how do you deal with customs? Like, do you have, you know, what does the supply chain look like secondarily?

Like, all of this is just, you know, how are you taking payments? Like, I just don't know any of these questions about how this thing works. And maybe this is the nicest and most verbose way. Gurdly said, I have no clue. But like, like, the first thing that strikes me as I read this is I'm like, man, these guys are really early. because these are all problems that felt like 1996 in North American e-commerce. And they're like going through them right now, which is like, you know, like we have more demand

than we can't sell things, you know, directly. We don't know. You know, it's just like so tough. So I don't know. That's my initial reaction totally. Yeah. I mean, if this business were based in the United States, I would think, oh, wow, this is very interesting.

You know, they can only fulfill 35% of the orders that they're generating and all they need is the working cap. Now, on one hand, like, that's pretty, that would be pretty exciting. My other question would be why, you know, you say you've got 60% margins in some categories, why are you not generating the working cap to buy more inventory? Or, you know, have you not seeked out debt or, you know, other types of financing and you're just at kind of sell the business? Now, I will say sometimes these are the best deals where you've got a seller who's financially unsophisticated and doesn't know that he just needs a line of credit and just kind of throws up his hands and say, I need to sell a business. I can't do it. Sometimes those are great, great businesses

or great deals, I should say. But I just wonder, like they've raised $480,000 and they just can't get out from under this working capital thing that is usually a symptom of low margin. Yes, and also likely a bad sign that somebody who's a pretty smart seat investor who knows Africa really well gave them money and then nobody has given them any more money since then, which is like, oof, like a bunch of really, you know, it's a red flag to me or a little tiny red flag that a bunch of really smart people have passed and are uninterested in this, which is like, whoa. Yeah, well, I also, the thing that's weird, and again, this is Africa, so I don't know how much

people make, but their team size is 35 people and they've got $750,000 of revenue. So like, I'm practically wondering if they're doing their own delivery. here. You know, I have no, I mean, I just don't know what the econ infrastructure in Africa is like, as you mentioned on the payment side, but like on the shipping side, you know, how do you even do that? Are people, they mentioned that they're serving 5% of the people in their community, which almost implies that it's geographically bound in some way. And maybe people are coming to pick it up. I mean, maybe the orders being placed online and then they're coming to pick it up and they don't have the inventory. There's, I have so many questions. And, you know, I,

am, I'm an e-commerce guy. I've done a lot of e-commerce for a decade. I would not mess with this because it is just too different. You know, like this is the thing, everything about this is going to be different from payments to delivery, to working capital, you know, to, I mean, to import, export. I mean, who knows, maybe you got to, I don't know what customs is like in Nigeria. Maybe you got to bribe your way through and you got to know all the right people. And as soon as you own it, you know, the bribes just just doubled. I mean, there's so much that you just, you know, I don't know the local warlord or who knows. I don't mean to, you know, who knows what it's like over there. You know, it's just so, so many unknowns. Like, this is ultra hard mode. Yeah. Well,

and then you're, you're not only dealing with like, okay, you're in Nigeria and this is how Nigeria works. Then you're dealing with like, okay, well, Kenya, I believe is next door. Like, how are you doing in Kenya? And then there's all these different things. Then there's like, you're in Lagos and Nigeria, and then there's all the rest of Nigeria. Just like, how do you deal with all that? I did Google a little bit of kind of e-commerce challenges.

It does look like there in Africa is one big business called Jumia, which is like the biggest e-com success and the most funding. The picture I see of them is they are totally vertically integrated. They have gone the Amazon path. They have their own drivers, scooters, all that kind of stuff. Because my suspicion is there is no UPS. in Africa that's going to work well. And if you're interested, YouTube has some really fascinating documentaries about all the

different parts of Africa. I mean, I think being in North America, we're pretty ignorant to how big and diverse it is. Everything from South Africa to Zimbabwe and all the stuff in the kind of the West, Coat Ivory and all that kind of stuff like there is just a bunch of diversity on the African content and, man, it's scary. It's like, we just don't know. We don't know. And, you know, my Twitter friend, I don't know if you're Twitter friends or not,

but Levi Bankert, you know, up in Austin, he was in Africa as an entrepreneur. And he said it was just crazy, though. Like, it's just total, total weird stuff. Go to the prime minister's house to try to get permits, like all this just like crazy stuff that just doesn't happen in America. Like, you don't go to the president to ask to get like a local building permit. But that's the way it happened there. You know, just like oddball stuff.

Right. I mean, there's just like a base terrain of business environment in every country that's different. I'm sure they would think ours is insane too. And I have found that it is, right? I mean, it is. Right. Ours is insane too. But it's so different that it is really, really adds a ton of risk to try to operate in a business environment that you're not familiar with, especially a small business like this one, where you don't have a ton of cushion to hire local management, you know, grease, whoever you've got.

got a grease, screw up a bunch of times, all that stuff. So without harping on that too, like, throw that out. Let's assume that you are Nigerian and understand how everything works over there and aren't intimidated by that. Is this an interesting business? I would say, probably yes. Yeah, I mean, the good news is it looks like they're really early. And if you're going to be really early or really late, I would rather be really early because at least then you could just wait it out, like the path to be on top. is the right thing. I do think that this could make sense for, you know,

if you go and were to get a partnership with somebody there, or somebody knew that you trust, or he came from a Nigerian family, like, and you have infrastructure and an unfair advantage buying a business like this, like, yeah, like I think there's something there. But yeah, that's the only answer I have for you. Like, well, get your ass on a plane.

See you in Lagos. Let me know what you figure out. And I think as a Westerner, that is an option. as an African? Yeah. Like I, I, you know, good, good, good sign. The bad sign is, though, it's pretty obvious that the right buyer for this is somebody from Nigeria, from Africa, maybe lives in Lagos. Like, you know, it's pretty obvious that that's the right buyer, but this is marketed

in a Western, a Western business marketplace, which is like, well, okay, why are we the lucky people to get to look at this one? Really, the right buyer is somebody, they ain't looking on microcoir. Or maybe Nigerians are looking on microquire, which is a good thing for microquire. But anyway, I'm rambling. Yeah, I mean, I don't know. Maybe there's no African version of Microquire. And so they came here.

You know, the thing that jumps off the page here is the fact that, if true, they are only servicing 30 to 40% of their orders due to lack of inventory. If that is true, that is exciting. then now keep in mind they're asking one and a half million bucks here that probably means you've got to put another half million bucks or something into it in working capital so you know whenever you buy a business you got to especially a business with a working capital thesis like this one you know you've got to make sure that you're you're allocating extra equity for that or you have a rock solid debt financing facility that you can put in place to take care of working capital upon taking over the business But I mean, I like that, right?

I mean, that implies that revenue would double overnight if you could just have inventory. Now, I question whether the reason they don't have inventory is purely financial. Is it that you can't, like you have trouble getting a bunch of this stuff through the distributors? You got to buy it from and import it into Nigeria and get it through customs and, you know, half of it disappears along the way or the distributors can't get it because there's COVID shortages. And I mean, I know there have been diaper and baby wipe shortages lately. You know, if there's a shortage in America, I'm pretty sure there's a shortage in Africa significantly, right? So it's possible that it's not just financial is the reason that they can't get inventory.

So I want to understand that. I did just Google their competitors or one of their competitors. So they list their competitors as Jumea, which is evidently the Amazon of Nigeria. By the way, this is definitely one of those episodes where somebody's going to go on Twitter, and be like, you guys are idiots, you don't know X, Y, Z. It's like, this is partially why we're doing this deal we want to learn. But then you Google Peekaboo, which is another competitor, doesn't even have a website. I don't know if that's still in the business.

Kasha came up, which is the third one, K-A-S-H-A, and that recently got more money. It's interesting. They seem to be, they just raised another million bucks in April 2020, and I don't know since then, but they've raised two rounds, and they've raised two rounds, and they're there's something going on that these guys seem to be doing that this particular e-com is not doing. Interestingly enough, when I look at the two founders of Kasha, they are decidedly Western. They're Anglos, for sure, which is pretty interesting that they're out doing that in and launching a Rwanda e-commerce startup. Like, cool.

Like, that's definitely some interesting, interesting approach to everything. This episode is sponsored by Live Oak Bank, the number one SBA lender in the country by dollar amount. But they're more than the top SBA lender. They also provide USDA and conventional financing, tailoring each loan to their customer's unique needs. Whether you're looking to buy or expand a business, let Live Oak be your financial guide. With Live Oak, you get a partner who believes in your success and is willing to take the journey alongside side of you. Live Oaks M&A financing experts lend across many industries nationwide. They also have over 30 industry-specific teams whose lenders are experts in industry-specific small business loans. Some of these

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You got to hand it to them to hard mode. I mean, the thing that I will say that is cool about this, and at least based on their description, is that they are bringing products to mothers in Africa that can't get them. I mean, it's like, it is very possible here. What they have is like the very best kind of product market fit where they, where people are clamoring for a thing and you are bringing it to them. I wonder, I feel like it should be bigger, you know, if that were the case, unless it was decidedly geography bound or something.

But, I mean, it feels like if, I mean, if you're like places that are, have e-commerce growth, I mean, Africa is going to have probably more than United States. is just so early over there. It's very possible, I mean, like, you're legitimately helping these women to take care of their children with, you know, Western products or even maybe not Western products, but just, you know, more modern products than they would otherwise have access to. And that is pretty cool. You know, if you can do that and make money and grow a business, you know, that's the way and way.

So here, look at the story of this caution. This is really cool. I just pulled this up on Geekwire. In July, Joanna Bischel, who's one of the founders of this, other competitor of the company in question, Kasha. And she and her husband left Seattle, moved to Rwanda with her husband and two children. And she was chasing, it says here the article, she was chasing a calling to help women in Africa access critical heritage products, a calling shared by Amanda Arch, her co-founder.

They were working together from Microsoft, and they reconnected and decided to launch Kasha together. And it's, Kasha describes itself as an e-commerce startup that sells and delivers women health care products like contraceptives and tampons. Like, you got me at the hook there. Like, this is a pretty noble cause when you think about what you're doing. And like going all in when you're like, hey, I'm moving to Rwanda. It's like, no, you are? Like, that's, that's definitely a serious level of commitment.

That's as all in as it gets. I mean, there's, there's financial risk and then there's move to Rwanda. I mean, wow. here look at this as well um so this is an 18 month old article it says here in the developing world short codes are open to the public if a kasha customer has a basic cell phone without internet she can call a short code and will access kasha's menus so she can place an order so that's like star five five right like the short code um this goal is to make it possible for any woman to purchase products from kasha um and so here the quote from arch something that's so ingrained in the fabric of our lives in Seattle and seattle and seattle and seattle and seattle and seattle when you get your Amazon package on your doorstep, it could be a book or it could be a health related product. There's anonymity in that people just expect to see these packages. Man, and she's describing here, well, that's like a new concept. Like people just don't do that yet in Africa.

Like, these people are like some serious pioneers. It's very cool. I mean, the opportunity to bring kind of Western developed e-com, which makes all of our lives amazingly better here in the States, right? You know, anything on demand from your phone in a couple days is pretty wild. To bring that to an entirely new continent, I mean, you could make a ton of money and make anton of people's lives a lot better. Well, it's a parallel that to how accustomed we've become to all of this excellence. I, you know, here in America, if I'm in my building and I'm getting on a phone call, I'm like, oh, I can go for a walk and I can walk and talk through this one-on-one

or through this chat. I tried to do that in Canada. And the second I got like 10 feet away from the building, like the phone exploded, like everything dropped. Like it was just a huge mess. And like literally for the next week, I was like, ah, the telecommunications infrastructure here in Canada, it's like a third world.

Like it's just such a jaded, like, perspective of stuff. Because like these folks are building a business in a country where like, I mean, they're dealing. I mean, we've just talked about. the technological challenges. This article also talks about they're having to deal with societal challenges where like there's a stigma that they're having to get past where like girls often stay home. Like here it says girls often stay home from school when they are menstruating and women can be deterred from visiting clinics for contraceptives fearing public derision. Like there's

a massive amount of headwinds working on this business for these ladies. And the two of them, You imagine, though, the business prop here, deliver these things anonymously in a box to your doorstep to enable, like, for you to live your life? I mean, that's, geez, like, you know, take my money, right? Yeah. Oh, and this is great. Like, the lady who founded it, she, she's dedicating the project to her daughter, like, who's named Kasha.

Like, how cool is that? Yeah, like, super, super great. And so they've gotten people backing them. Like, it's great. The Bill and Melanie Gates Foundation, Microsoft Gammers, Starbucks, folks like that, all of folks who've had experience at those places. So really pretty cool. One thing that's interesting about Africa.

So I know Stripe just bought one of the largest payment players in Africa. And it's really interesting because they're, so much of their country is completely unbanked, right? You know, they don't have checking accounts. They don't have the financial infrastructure that we have. And I read this article that basically described how Africa has basically skipped a generation. Like here in the United States, like we're trying to bolt things like PayPal and cash app and Venmo on top of our existing banking infrastructure. Right. But they never built that. So they're just going like straight to this modern digital money.

And people, it's totally different. Like stored value on your cell phone, you know, which starts to sound a lot more. like crypto. It's just all the payments are handled completely differently, like text to pay, your checking account is your, some of the largest banks are the phone companies. I mean, it's just totally different. So payment processing, like getting paid to do e-commerce is trivial in America and probably a massive competitive advantage if you can figure out how to get paid in a streamlined way over there and totally different than any of the rules here. Yeah, something like this, you're not only building, I mean, it's like, it's like, hey,

this is back, it's back, it's back to the days like in the early 2000s when if you wanted to like build an e-commerce business, you had to not only buy the servers, find an office to put them in, build the e-commerce infrastructure, like WordPress didn't exist then, you might have gotten some Magento, you're managing servers, you're building a payment platform. Like, you're having to do everything. delivery like it is just it is just a testament to how easy things have gotten when you can just go click three buttons and have a shopify store up in 45 minutes like just unreal what kind of challenge somebody like like running a business like this was going through just man kudos to

them kudos to them as somebody who's never been to africa it seems really really hard yeah well what you left out from the article is that uh the kasha woman uh is previously from the bill Melinda Gates Foundation and Microsoft. So I think she probably has some financial backing here. If I'm back to our microquire deal, if I'm talking about spending one and a half million bucks to compete with Kasha, right, who does not need to make money because it's a Bill Melinda Gates philanthropic thing, right, which is great. It's going to change a bunch of people's lives.

I don't want to be, you know, $2 million into this and trying to get $2 million out plus a rate return while my competitors are nonprofits. Pretty tough. We just talked about what would be the optimal setup if you wanted to go make something like this happen, pick up and move to Nigeria or in their case, Rwanda, have somebody who's another partner who's experienced with all this foundational nonprofit world

who spends her time in San Francisco near all the money centers. You're competing with some folks that are doing it the way we just talked about doing it. You know, it's just pretty tough, pretty tough. Smart folks who don't have to make money, that's scary. Driven by a mission versus profit. Yeah. So it's pretty straightforward.

You're going to get hammered. Well, kudos to them. I mean, I think for sure this needs to exist. Like Africa, I mean, it's obvious Africa needs this. The world needs this. And so more power to them. Hopefully they find some exit that's going to be good to keep it going. Yeah, I just wonder, I don't know, but I wonder if the local market is at a place where this can be a business or where it still has to be a philanthropy.

And eventually it will transition, right? Like all of the developing world stuff, it starts as a philanthropy and then the market gets developed enough and then it can support businesses and then things really explode. Right. But I don't know where the market is that this business is operating in. And I wonder if it's on the tipping point because you've got, you know, philanthropy back. businesses here in Kasha. And then you've got this business, which seems to be operating, but probably not generating a bunch of cash. It feels like it's right there, but maybe not quite there yet. Yeah. Well, and also, I think a testament, if you were looking for a business to build

in Nigeria or Rwanda or these places, like it's pretty straightforward. You're 20 years behind the West. You should be working on building out, you know, payment startups, delivery startups, order tracking, the Shopify for the Shopify for Africa. Clearly there are tons of people like this who are dying for you to build that so they can build actually profitable businesses. Because right now, I just don't see how this is going to work. You're not going to start making instantly start making money on this. At some point, it will take off.

You just like, and maybe being there for two years so you're entrenched when the inflection point happens, maybe that's the play. But this feels more venture. more venture philanthropy and less value buyer small business to me. Yeah. Well, kudos to them. And happy to feature a deal from our sponsor, Biker, sponsor of the day. Fantastic.

So pretty cool. Yep. Thank you, Micro Require. Well, this wraps up another episode of Acquisitions Anonymous, the internet's number one podcast for buying and selling small businesses all over the world, not just the United States. We will see you guys next episode.