Acquisitions Anonymous - #1 for business buying, selling and operating - An Ecommerce Business that Bill Actually Likes with $1.6M of EBITDA - Acquisitions Anonymous 233

Episode Date: October 3, 2023

In episode 233 of Acquisitions Anonymous, Bill and Heather discuss an intriguing e-commerce opportunity. The business is a 19-year-old company that specializes in therapeutic massage supplies and equipment. It boasts a diverse product range, with an impressive average order value of $939. The business primarily relies on dropshipping, 3PL, and in-house branding for its products. Bill and Heather delve into various aspects of the business, including its margins, potential valuation, and the challenges of securing an SBA loan for an e-commerce venture. Despite some banks' reluctance to finance e-commerce businesses, they believe this opportunity has significant potential and could fetch a price of around $5 million. Today's deal comes from Axial.  Axial is a trusted deal-sourcing platform serving professional acquirers in the American lower middle market.___________________Thanks to our sponsors!Acquisition Lab. Acquisition Lab and their team have been longtime supporters of the pod.Created by Walker Diebel, author of Buy Then Build: How to Outsmart the Startup Game, is an accelerator with a highly vetted cohort-based educational and support community for people serious about buying a business.Many of our listeners tune in each week to our deal reviews and want to get in on buying a business but don’t know where to start.Acquisition Lab exists to help people buy a business, navigate all the complexities of the process, and provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director, Chelsea Wood, at [e-mail] 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 another episode of Acquisitions Anonymous. I am Bill Dallisandro, one of your hosts. And today, Heather Anderson and I do a right over home plate ecom deal from Axi Market. It's got $1.6 million of EBITDA and it sells massage tables and massage supplies. It's a really cool mix of drop ship and owned brand. I really am impressed by the seller of this one. I think they kind of recognize the strengths and weaknesses in their own business and have gone out of their way to mitigate them. So this was a cool one. I really enjoyed it as the ecom nerd. If you're an ecom nerd, I think you will too. I hope you like this episode of Acquisitions Anonymous. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab and their team. They've been longtime supporters of the

pod and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Diable, who's become a friend, the author of Buy, Then Build, How to outsmart the startup game. So Acquisition Labs an accelerator with a highly vetted cohort-based educational and support community for people who are serious about buying a business. So a lot of our listeners like you, you turn in every week to our deal reviews. You want to get in on buying a business. You know, you're on this podcast because you're trying to learn how to buy a business. But if you're not quite sure where to start, Acquisition Lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you

hear us talking about on the show. They provide a proven framework, tools and resources that support you all the way from search to close. They do it. There's a whole bunch of education material and support. So if you're serious about buying a business, check out Acquisitionlab.com, or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com. Heather, we are back. I feel like it's just you and me, like semi-frequently lately. I know. The other guys just don't want to show up. I don't know what, what did we say to them? Did we do something? I think I must have done something, you know, that or you're just way more reliable. You're reliable, but like every time I'm here, the other guys are not here. It's only

you that wants to hang out with me, I guess. It's you. It's you. I think it is me. But I'm a, this is our second one today, and I'm much more in the Acquisitions Anonymous mindset now we got rolling on our previous episode. And I'm psyched because this is a good one. Yeah. This is a good one. Let's dive in. So I guess before we dive in, I should say that this is another one from Axial Market. So we've started doing more from Axial because they tend to have bigger and like a little bit more professional deals. You know, a couple million dollars of EBITDA.

And they're usually represented by an intermediary, which means you get a little bit more of a professional sell side process. You probably get clean financials. You know, you have a sane voice in the room telling seller what reasonable valuation expectations are, et cetera. So we started looking more and more on axial for deals. So this is another one we grabbed from there. And I think, Heather, you've got it for the read. I got it. All right.

And it starts out with SBA pre-qualified. We'll talk about that. We'll talk about that. Therapeutic massage supplies and equipment e-commerce store. So it is a 19-year-old well-established company offering therapeutic massage tools and equipment. 36% of sales come from. from the owner's brand. That sounds nice. Over a 1300 plus different products with an average order value of approximately $9.39. 60% of orders were drop shift, shipped, and 36% 3PL.

And 4% stocks, 76% of sales via website, 24% via marketplaces. The business is highly efficient from purchasing, marketing, and order fulfillment, good standing relationships with 35 plus suppliers. Owners work full-time managing and operating the business. The company has two employees who handle customer service, order processing, and bookkeeping. Strong growth opportunities include expansion of the owner's brand, adding additional products offered by manufacturers, international expansion, hiring outside sales team, additional expansion into Amazon, and other online CPA comparison shopping engines and networks. The business provides new owners with a complete turnkey business. Business can be operated from anywhere in the world. The seller will provide strong

transitional support based on the needs of the buyer. Owner is looking to retire. 2022 revenue, $6 million. Does not say what the year over year growth was. EBITDA 1.6, so hence it's in the SBA ballpark. And 27% EBITDA margin. Change of control. I think that's kind of it. Yeah, I I think the rest we covered already in the top there. So what do you think, Bill? So I think I just have to, first of all, I would love to be friends with this entrepreneur. I bet this is a really good entrepreneur. There's a lot of things in here that I just have to give props to the person who started this business for doing well.

There are also some things that scare me. But like, this is a very cool business to own. So a couple of things that jumped out for me. So therapeutic massage supplies, I can guarantee you this is big, heavy stuff. So like this is if you are a massage therapist, if you're building out like your own studio or maybe you're a like a mobile massage therapist that goes to people's houses or a place of business, you are probably the customer for this website. And I know that because I can see an average order value of $939.

Like that's massage tables and things like that. I also know that because they've got 60% of orders being drop shipped. It is a dynamic in e-com that basically the bigger and heavier a thing is be more likely it is to be drop-shipped. And the reason for that is it costs money to move big heavy things around. So it doesn't make sense for the manufacturer to bring all the materials in, build a table, ship it to me where I warehouse it, you know, where it's taking up space and we already burn freight. and then I've got to ship it to you, the customer. It makes way more sense to cut my warehouse out of it entirely, leave it warehouse to the manufacturer,

and drop ship is straight to the customer. So generally bigger, heavier things are more likely to be drop shipped. So this guy has 60% of his orders drop shipped. He's got 36% of his orders in a 3PL and 4% stocked. I think it might be no coincidence that also 36% of sales are from the owner's own brand, the private brand, and also from the 3PL. And I think what he's probably got going here is 60% of this business drop shipped, 36% of this business, his own brand in his 3PL, and then 4% stocked. I don't know why that wouldn't be at the 3PL. Is this like might be in

his backyard, like in his garage or something. I don't know how stocked. Why would he be stocking this at his location, not at the 3PL? I think you could easily take that 4% stocked and push it to the 3BL. It also makes sense. This business has 76% of its sales via the website and 24% via marketplaces. If I had to guess, I think you would see the branded stuff skew significantly more towards the marketplace and the drop ship stuff beyond the website. The reason for that is that it's very hard when drop shipping to compete in like a perfectly price competitive market like a marketplace because you've got 10 people drop shipping exactly the same thing and the next guy, because he doesn't touch it anyway, is willing to sell it for a dollar less,

and you end up with this kind of race to the bottom on margin, on marketplaces for dropship things. Versus like if you own massage tables.com, you're going to rank really well for massage tables. You can provide a lot of education, build a lot of trust, and somebody's going to buy a massage table from you without necessarily shopping it around a bunch of different places. You might be able to get $10 or $20 or $30 more than it's the market clearing price. because you provide a good customer experience. So that's kind of some of things that jump out at me, kind of the split right away.

What else about you, Heather? Well, that was interesting about the why bigger things are dropship. That makes a lot of sense. When you drop ship something, do you, the business owner, take ownership of that inventory at any point in that chain? You never actually own it, right? I think you technically own it, like once it leaves, the dock. So what happens is the drop shipper, the manufacturer of the massage tables in this case,

when you sell one on massage tables.com or whatever, your system will transmit in an automated way, probably, to the manufacturer, basically a purchase order for one. And it's like, hey, I want to buy one at wholesale price. You know, I want to buy one for, I sold it for $1,000, but the manufacturer doesn't even know that. You just transmit an order for one at $500 with the shipping address of the customer's house. And then the manufacturer, they know their drop shipping. They know what they sign out for. And they'll print a packing list or whatever with your logo on it and mail it.

And then you, the drop shipper, will be responsible. Like, if it gets all banged up in shipping or whatever, it's probably on you, the drop shipper, right? Like, that's customer service is on you, typically. Now, that doesn't mean that you can't, like, then try to push it back later to the manufacturer if they're not packaging it right or whatever and you're eating all these. refunds. But like you are going to deal with the customer. Like that's the value you're providing. You're bringing the customer and you're dealing with them. Yeah. I ran into this recently.

It was an SBA loan for an e-commerce company manufacturing a product. And it was actually really difficult for the bank to understand how to put their UCC on inventory. You know, what was, when does it become? There's none. Right. And they were like, where's the warehouse? And we want to go, you know, do a site visit and we were trying to explain to them. So to our point earlier, our discussion earlier about, you know, banks and their and their taste and some of them don't like e-commerce. I think a lot of it comes down to these little nuances in e-commerce where they just don't understand it.

They don't understand this, you know, the drop ship and who owns the inventory at what point. Well, in theory, you have no inventory, right? Like, you hope you have essentially like one day's worth of inventory on the balance sheet. It's incredible business model. Yeah, it is. Not great for lending. Right. Well, actually, I think it's great for lending.

My argument to the bank was why that lowers your risk, right? A traditional manufacturer actually carries a lot more risk in having to carry the inventory. It's a lot more costly to do that. So I personally think it's lower risk, but again, it's just non-traditional. So it takes, you know, banks a while to kind of understand those differences. I feel like this mix, though, is, you know, between drop shipping and 3PL and their own. website versus marketplaces, seems pretty good to me. What do you think, Bill?

Yeah, I have seen plenty of businesses that are 100% dropship and they scare me. I generally think, I think as a rule, drop ship is a race to the bottom on margins because that same manufacturer is dropshipping for you, is drop shipping for 10 other people, and it's just who can spend more on ads and cut price low enough. Drop shipping is not a great business model. the places, the exceptions to that rule are products that cannot be stopped and are structurally drop shipped like heavy things, right? If you are able to have some sort of exclusivity, or if you are able to use the base of the

drop ship stuff, which everybody has, the commodity stuff, to then build your own brand around it, which is what this guy is trying to do, right? He's got 36% of revenue wrapped around the drop show stuff that is branded, which is smart. And like that is to me the indicator, this is a good entrepreneur. Like they understand that 100% drop ship business is not defensible. And they have probably spent years building up this house brand of stuff. Like it's because it's not that easy. Right.

When you have a drop ship business, you are like hanging out in your mom's basement, clicking on buttons and like the money comes in. It's pretty wild. Now you want to start your own brand of stuff. You need a manufacturer. You need to deal with labels. You got to hold inventory on your balance sheet. You need a 3PL.

It goes from this digital money machine business to real business as soon as you cross out of the 100% pure drop shipping. And it's going to be a very scary thing. And it ups the level of difficulty and all that. But I think if you don't do it, you create very little enterprise value. All right. Taking a quick pause here. I have something to tell you. This is Michael.

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rather than worry about getting your books right. So give Charlie a call, cloudbookkeeping.com, and now back to the episode. Right. So the percentage of your own brand that you're selling, and the 3PL is sort of a hint that that's what it is, is sort of a sign of maturity in an e-commerce company, would you say? Yes, 100%.

I mean, it's a sign of it being a real business rather than like a straight-up hustle. Like if you are ranking for, let's say you own massagetables.com or something, which, and by the way, I know many people who have made tens of millions of dollars doing exactly what I'm describing, which is to own something like massage tables.com, rank really well in Google because they have the exact match domain, right, and just move a bunch of the same massage table everybody else has because they come up number one, right? They're not buying a massage table because the customer wants their massage table.

They just happen to rank number one, right? It's not defensible at all because what happens is Google changes the algorithm. If you've been in ecom for a long time, you know that exact match domains used to be it. Like if you had massage tables.com, you were ranking number one for massage tables, no matter what, it was like a cheat code. And I know tons of people that made tons of money on exact match domains. But that changed. Exact match domains don't matter nearly as much anymore.

And so your business, Google changed the algorithm, and you can just lose your business overnight because someone else will rank number one for massage tables and the customer's not looking for you, they're looking for massage tables, right? And generally, the margins are lower and all that stuff on dropshed. So like if you have your own brand, people are like, oh, and probably what this is, right, is dropship tables

and then everything else around it, the towels, the sheets, the lotions and potions, the oils, all that stuff, private brand, if I had to guess. Yeah. And that makes sense. And I think that's another thing that lenders don't necessarily understand is that they might look at every e-commerce as being in that first bucket where you, like, as you call it, straight hustle, you know, they might see them all that way.

And the reality is you have to have to know how to ask these questions and what to look for to see the ones that are more mature and have built up a brand, you know, from that place, maybe from that starting point to your point. I think this one looks pretty good. I mean, the margin of 27%. That looks great to me. Is that a healthy, normal margin for something like this? So it gets solid.

It's especially solid for drop shipping because what I will tell you is dropshippers usually have much lower margins because let's be honest, you're not doing that much, right? You're not what you're just, you're just basically ranking your website. So like drop shipping businesses are very often sub 10% margins and which this probably is too because it's like big, heavy hard goods. I bet it's got 10% margins. So they may make, you know, on a $9.39 average order value, they may make $100, which is still like a really good profit per conversion, but it's a 10% that margin,

right? So what this tells me also, and this reinforces my guess, that most of the branded stuff is the lotions and potions and the tout, like the high margin stuff, I bet they've got a 50% margin on the branded stuff. So I bet 36% of their business has a really good margin. and the other 64% of the business has a very low margin, but like high dollar value. And that's how they're mixing to a 27% net, which is pretty good. Interesting. So if you were going to value this business, at least that's where my head went when you said that, is I'm almost like valuing it in two parts and then sort of bringing those together like on a weighted average.

At least that's the way my brain thinks about it. I don't want to pay very much for that drop ship business that's kind of commoditized. and I might be willing to pay a lot more for that branded business. Is that how you would think about it? That is a fair way to think about it. I don't think if you think about it that way, you will win the auction. Yeah, I think that's a very fair way to think about it. It's like two businesses in one here. If I were the seller, I would say, yeah, but without the low margin drop ship business,

we could never sell the towels and the oils. Like people come for the tables and then, We sell the towels and the oils, and that's the stuff that has the LTV. That is something I would definitely ask right away, show me the LTV by product. And of course, you buy one massage table. But if you can show people coming back month after month for the branded oil and they like the scent and all that stuff, okay, now I'm more interested. Interesting. So you can't really value it as two parts.

It really, they have to be together to your point for this all to work. And you're right. You only buy one massage table unless you're in the business. business and you're expanding and you need more tables, I guess. Right. And I would want to know that also. I would definitely want to look at repeats. But as far as valuation, I think this thing will sell for four times.

I really do. I mean, it's big enough. It's 1.6 in EBITDA. I mean, I think this is probably a $5 million exit, which, you know, top end of the SBA range. Yeah. Yeah. That's what I was going to say.

So SBA-wise, you know, this is what's, interesting. Yeah, the numbers all fit an SBA loan. You could come in. If you paid that multiple, you could come in and put 10% down. You could get a seller note of maybe another 10% and 80% SBA financing and the cash flow would work. The only challenge with this is that a bank is probably going to be picky about who buys it. Is this somebody with experience in e-commerce? And number two is a kind of a topic we were talking about on the last episode, banks don't like e-commerce on the whole. Let's just say we took 100 SBA banks. And we pulled them and said, who wants to lend on e-commerce?

That 100 is going to shrink probably to 10 or 15. And even out of that 10 or 15, they might like smaller risks. They might like to make small loans in e-commerce to kind of feel safer. But once you get to $4 million SBA loan on e-commerce, it's not going to be that many banks that will understand how to underwrite this, what kinds of questions to ask and will just, you know, not throw up on it just because it's e-commerce, which is a problem. Does it really, because I've experienced this too, a lot of banks are just uncomfortable with e-commerce.

Does it really, and this sounds so dumb, but I think this is true. Tell me if I'm not off base. I think it really comes down to a bunch of people still who don't understand these businesses. Even in 2023, they don't understand like they couldn't ever, even after a month. or two of research, come to the analysis that I did early in this podcast of like how this business actually works. Is that true? And so they go, I don't get it. I'm scared. I can't lose money. I'm out. Okay. I'm going to tell you what it, yes, it's that, but it comes from laziness. That's what it is. There's a lot of laziness in banks. There's a lot of people who chose that career path because

it was supposed to be kind of easy and safe. And they learned what they learned at some point in their career and they're older and more senior now, and they're the ones making the decisions. And they've gotten lazy. And they don't want to learn the new stuff. And they don't want to hear you tell them or sell them on it or anything else. They just dig in their heels and say no.

And it's astounding how little they actually know about some of the stuff that they're making decisions on. Sometimes the yes decisions aren't really that smart either. So I think it's just something of the industry needs to, the industry has also done away with training programs and any kind of education spend. So you got some dinosaurs who are just not willing to crack open, not even a book anymore, crack open the internet, you know, and just explore and ask some questions. And a lot of people just, a lot of folks in banks just won't do it.

Yeah, that's, I sense, I sense it too. Like, it's just not worth the, because if they kind of come with the curve on it and they miss on one in 10 that vaporizes the profits on the whole portfolio. So they just stay in their wheelhouse forever. Right. And their wheelhouse may not be safe. You know, that's the thing that I noticed in banking, you stay in your wheelhouse, but your wheelhouse is dying. So, you know, you really do have to evolve. But it's all about, you know, the aging workforce, if you ask me, and it's like, look at the average age of people making credit decisions and the fact that they're just not learning anything new. And I think that's where some of the problem is.

Yeah, I think that's true. Yeah. All right. So, I mean, I like this one. I think it will sell. I mean, probably, you know, $5 million max SBA loan and a little bit of equity on top of it. I like it. I would be really, if any of our listeners pursue this one through Axial Market, which you just go to axiol.

net and request more information. They'll introduce you the broker, the whole thing. If you guys pursue this, we would love to hear more about it on Twitter. I think this is pretty cool business. Yeah, I think it is too. I like it. All right. Cool.

Well, that wraps it up for the day. Thanks for tuning in to this episode of Acquisitions Anonymous, and we will see you guys next time.