Acquisitions Anonymous - #1 for business buying, selling and operating - Going deep into a supplements business with guest Kelcey Lehrich- Acquisitions Anonymous 209

Episode Date: July 11, 2023

Michael  (@girdley), Heather  (@EndresenHeather), Bill (@billDA), and special guest Kelcey (@kelceylehrich) dive into a supplements business and share some exciting news about the hold co conference. Check it out here: https://quietlight.com/listings/11245953/-----Thanks to our sponsors!HoldCoConference, the conference exclusively focused on HoldCo Entrepreneurs and Executives. This conference is where Holding Companies meet, learn, scale and grow. From tech to Home Services, Holdco Entrepreneurs from around the globe will be meeting in Cleveland this September 18-20th in Cleveland Ohio.Check out holdcoconf.com for more details.-----------------CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.________________________Subscribe 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, Michael here. Welcome to Acquisitions Anonymous. You got a special episode coming up here. There were four of us here, including a special guest, who we will introduce here momentarily. And we did a very interesting business for sale around the supplement space. And normally, before you freak out, normally we poop on supplements, but we really dug in some stuff here to think about this business and why it may not be as bad as some of the other ones. So here's the episode, and I hope you enjoy it. This episode is sponsored by the Holdco conference. This is a conference exclusively focused on holding company entrepreneurs and their executives.

It is where holding companies meet, learn, and scale, and grow. From Tech to Home Services, Holdco entrepreneurs from around the globe will be meeting in Cleveland this September 18th to the 20th, 2023, and it will be there in Cleveland, Ohio, which has me super excited, also because I will be one of the speakers and attendees of the conference as well. So I encourage you to check out their website and consider joining us there. The website is holdcocomf.com. That's h-o-l-d-c-o-c-n-f.com and get more details there and sign up to join us. See you soon. All right. Look, it's going to be a great episode and there's three reasons why. Would you guys like to hear them? Please. Number one, there's four of us, including Heather,

who always brings the heat. Number two, I brought you. I brought brought a supplements deal, and those always turn out to be good radio. And number three, we have a badass guest. So, Kelsey, we're so glad you're here, man. I'm glad to be here. Who is the badass guest? Is there another person on the line? Oh, it's me. Thank you for having me, guys. I'd like to be here. And so I'm excited because you're here. You have something to promote. So let's promote it, and I want to talk the heck out of it, and then we're going to do a deal. And it's going to be super fun because it's a supplement deal. So tell us what you're hearing, what's going on. This podcast might be the public announcement of you as a speaker for hold co-conf this fall in

Cleveland, Ohio, which we're excited about. So we'll talk about hold co-conf momentarily, but we're also about the time this episode drops. We're releasing holdco survey, which is the first like survey study of small business holding companies on a whole wide range of topics. So if you're interested in that topic, check out holdcoasturvey.com. And if you're interested in the conference, you can meet gurdily in person. He's incredibly tall, September 18th to the 20th in Cleveland. Come meet Michael, myself, and some other holds for people. Yeah, super cool.

Well, I'm excited to go to Cleveland. By the way, for the first time anyone's ever said that in history. But, no, it should be cool. So tell us a little bit about the conference. What's happening and what are we going to be doing? For sure. So the target is entrepreneurs, founders, and executives of holding companies. So if you identify as a multi-business entrepreneur, you've got two or more companies

or you have one, they'd like to have two or more. And you think that it's aspirational or inspirational to build a portfolio of small businesses, kind of a mini Berkshire halfway model, something Bill, I think, knows a lot about from his journeys over the years. This is a conference all about that. So we'll have speakers and ranging on topics from M&A to financing to hiring and more and all really around that topic of being a holding company and having a portfolio of businesses. I think it's very credible.

There's a lot of people who put on conferences that don't know what the hell they're talking about. But Kelsey knows exactly what the hell he's talking about, having built an actual Holco in the e-commerce space. And then Gurdley, obviously, if your regular podcaster knows, he has his own holding company as well. So the two very credible dudes at the Holco Conf. I heard some really good feedback from folks that have been over the past several years because a lot of times doing this can feel pretty lonely. It's fun to run into people who are doing the same thing and having the same type of problems. If I'm going to travel for work, I try to have fun too, so we have no shortage of fun things to do for the conference. So it's not the typical, like, hotel ballroom, all day kind of thing.

Lots of fun activities, food, hotels included with the stay. And I would try to show off the best the city has to offer because it's not often, but somebody's excited to come to Cleveland. So we want to at least show them a good time if they're going to be here to visit. And if me and Gurley aren't enough, my co-host, John Wilson, is always a good time. I know his name. He'll be there as well. Yeah, right on.

And how many, you know, is it a bigger conference? Is it more intimate? and kind of how are you guys thinking about the experience for people? Last year was just over 100 attendees. I'm expecting we'll have more this year. So our stretch school is 200, but even if we have 125, 150, it'll be a lot of fun. Our venue is actually a comedy club,

kind of in the heart of downtown, and that's a great place to spend the day. And it's a good side. You can meet everybody. It's not too crazy, and it'll be a lot of fun. Yeah, awesome. Well, how do people find out more about it? There's a website, is that right?

Correct. Hold, Coke. Comps.com. There's a price increase coming at the end of this month, so in August, ticket prices go up. But hold co-C-O-N-F.com for the conference. Dude, kudos to you guys. I've looked at like the prospect of putting on events and being a promoter of stuff and trying to do what you're doing, like craft everything top to bottom. It's definitely entrepreneurship on hard mode. So could, kudos to you guys for A, like becoming one of the few shows that actually makes it to like

the second year. Like I invested in a, I don't know if you, I don't think I I've ever told you guys this. I invested in a Coachella light here in San Antonio. We didn't even make it to the second year. We blew through all the money. So, yeah, it was fun, though. I got to go to some fun meetings. But, yeah, sometimes you invest in stuff and you're just like,

I'm going to lose all my money, but it's going to be awesome. Like, they're going to have good food. This is a perfect example of how, what a blind San Antonio booster, Michael Gurdley is. He wrote a check into a Coachella hosted in San Antonio, Texas. Oh, they made, well, okay, so they pitched me on investing in this thing that was going to be like at a cool like Zilker Park, like they have an Austin, whatever. And then like I look up towards the end and like the the acts they had promised, we didn't get those. And then the only place that. Is this the fire festival of San Antonio?

Yes. Were there cheese sandwiches? It got pretty close. And then we go out to go and the, they had it at Fiesta, Texas, which is six flies. here in San Antonio. I'm like, no, no, you're trying to have something cool. You don't have it next to the Batman roller coaster, FBS of Texas. So anyway, we lost all of our money.

It was good times. All right. Well, cool. So it's at holdcocomf.com. Right? H. Holdco, C-O-N-F.com and sign up today. And thanks for being here. So we're going to talk about a deal.

I'm teeing this up. This is like throwing a softball down the middle of the plate for Bill to go on one of his supplements rants, which now that you're back from your vacation, Bill. I'm sorry. Your Evacione in Italia, you can do it. Okay. All right. So who wants to read the deal?

All right. Why someone else read it? Because I have a feeling I might be running my mouth. Okay. Heather, please. Okay. 20 plus year old supplement business, 2.9 plus million SDE, 100% Amazon rating, revenue, 5 or 4,353,000, income,

2,779, multiple 3.6x. Asking price, 10 million plus inventory. Online since 1999, this supplement business is well established in a market that continues to grow. In the trailing 12 months, revenue exceeded 4.6 million with over 3.1 million in SDE. Approximately 75% of sales come from the direct website, with 23% coming from Amazon, from eBay and 1% from wholesale customers. The current owner has a background in endocrinology, pharmaceuticals, nutraceuticals, and nutrition, giving him firsthand knowledge of the negative side effects. Knowing that many consumers prefer to avoid these side effects, he began developing his own line of products with natural ingredients. There are total of 13 skews.

Investing in advertising is a clear path to higher revenue, as the current spend is negligible. With nearly 2 million YouTube subscribers and over 125,000 customers on an email list, it's clear that the interest in these products is strong. Creating additional supplements for different health categories would provide a major boost in sales. These can bring in new types of customers who can also serve as new audience for cross-promoting the current product list, thus leading to instant revenue with little to no advertising. Additionally, there are two areas the owner wants to or wanted to. focus on for massive and exponential growth, topicals, skin hair, et cetera, and pet supplements.

Well, there you go, Bill. Both would be complementary to the current products and thus excellent cross-selling options for the existing customer base. The current owner spends minimal time operating the business, mainly focusing on writing the website content. All inventory is currently at a 3PL and Amazon FBA, where it can remain or be shipped to a new wearer. house. The owner is committed to a smooth transition and will happily offer training and support. Well, this business has a 63% net margin. Kelsey, I don't know about your e-commerce businesses, but that would top the list for me. Tell me you're a contact creator without telling me you're a contact creator with your 2 million of YouTube strivers and that kind of

margin profile. I can't imagine there's any sorts of traffic for this business other than And the endocrinologist, pharmaceutical, nutraceutical expert producing mountains of content and saying, go to my website. Because with just cogs and Shopify, even with the margin on supplements, this is an incredibly high SDE margin. It's got to be due to like some subject matter expertise and some ability to drive traffic from YouTube would be my great reader. Yeah. I mean, they're doing 75% of revenue on the website, right, through Shopify, which is incredible. so it's not a free discovery on Amazon. They're not like ranking really highly.

But it just must be this guy is talking head on YouTube. He's got two million YouTube subscribers. For sure. He has started a supplements brand. And now he's going to sell it to you and immediately stop creating content. But he said there'd be a smooth transition. He did say that. That's true.

Why don't they mention the time this guy spends creating content anywhere in here? And why do they say he's not spending any time? Is it, is he going to, And it's also, I guess, telling that we're all assuming it's a he. Because I guess women are smart enough not to do this business. But anyway, like, nothing against women, but women are not smart enough. Men and women do this equally. This could very easily be a woman.

Okay. This could be a man or a woman, either way. Okay. Thank you for bailing me out again for getting myself canceled. Yes, I'm doing great. Are you reading this that they're going to sell the supplement business, but they're going to keep the thing that makes it work, which is the YouTube channel.

Which is the guy's face. No, I'm sure he'll give you the YouTube channel and all the back content and everything. But the thing to me that would worry me is that it's his face. So this reminds me, do you guys remember, is going to belie my fact that I'm just not into pop culture? It was either, it's Kylie Jenner, right? Yeah, Kylie Jenner sold half of Kylie Cosmetics to Cody for like an absurd amount of money, like two or three years ago. And then like, obviously, like, Cody was holding the bag.

Because if Kylie Jenner is not posting about Kylie cosmetics every 10 seconds, it's not going to do very well. And she does no longer owns the business. So what did you really buy? Right. And it kind of exposes the difficulty of these celebrity led brands is it's just so hard to transact them. They're incredible to own, right? Because you have this awesome free traffic source. You don't have to deal with Facebook ads or any of that.

And you just post or tweet and then free money. shows up. So basically what you do is you pick a high margin category like supplements and you just start pushing it. But the problem is it's so hard to transact because it's probably called Michael Gerly Nutraceuticals or something. You know, Michael Gerly hair growth compound. And if you don't have Michael Gurdley talking about the hair growth compound, it's not going to work. You know, the marketing's not going to work. Oh, my God. You come back from Italy and it's like you're Swiggin. Okay.

Reading some of the keywords here, Bill, tell me if this tracks for you. I feel like this is probably one of those businesses where like the main ingredient is the name of the skew and there are certain trends that happen like years ago, it's like cook them in different like active ingredients. And you get these incredibly high margins. It's a simple formula to compound. And if you're an expert in things like endocrinology and nutraceuticals, you can go deep making all this great content about the benefits of aschpaganda or vitamin C or whatever this

ingredient is. And you just make a skew that has that thing in it, which is really, really cheap cons. And if you can keep your YouTube presence up, you probably drive a lot of traffic to these like single ingredient skews. It's like my guess without having signed an NDA here of probably what this product line looks like. Yeah, this is a classic seller-dependent business. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and I can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner.

So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your QuickBooks online set up in the right way, and a number of things around payroll as well.

So definitely know them and recommend them. If you want to find out more about Cloud Bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast,

it would help us and help Charlie know that we're supporting him as well. So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode. So Heather, do people get SBA loans to buy businesses like this or no? this would be really tough. The way a bank would look at this is exactly what you're saying. They would pick up very quickly that this is a seller-dependent business and maybe not transitionable. And so the transition risk would be huge here. It's also, if really the earnings are 2.7, if that's really the cash flow, it's probably a little too big for an SBA loan.

You know, it's unless someone was bringing a lot of equity. asking 10 million plus inventory. Right. Heather, with the new regs, would you look at a 5 million SBA notes, some seller role and some deferred, you know, seller note on full standby is a potential way to get there? If you had $2 million in cash, $3 million in seller equity rule or $2 million in a note, is that a feasible way to get there on this? How's that playing out? That might, but the problem with the seller roll over equity is you want to keep your seller below 20 percent. of the post-close entity,

because obviously they're not going to give a personal guarantee on your loan. If they go above 20%, the SBA would require that. So you can't really put a lot of seller rollover equity into this. You could put a big seller note, and that might tie them, the rollover would kind of maybe,

if this seller wants to keep making the content, sure, that would work. I question why the seller is selling at all. Are they just tired of creating the content, of being the face of the brand, because making $2.7 million a year doing that doesn't sound like a bad gig at all. That is an interesting point, Heather. I mean, if this person is famous and is presumably going to continue being famous,

and I'm using famous in the quotes, the YouTube sense of famous, but if they're going to continue being YouTube famous, why not just keep clipping to almost $3 million a year and sell this thing? They've been doing it since 1999, which is another thing I find really interesting and initially good, right? it's not often you see an aged business like this. So there's been a lot of pooping on this business. But here are the things that are freaking awesome about this business. One, it's been around since 1999.

It's been around for 25 years. You just don't find that in e-commerce businesses. I mean, that's old enough that I wonder if they have retail business or used to. I mean, 25 years old in e-commerce is ancient, which is good and seasoned. They've got 75% of revenue coming directly from their website. They're not dependent on Amazon. I mean, they're doing 25% from Amazon, but still, that's usually it's flipped. A lot of times in supplements, you see 80% Amazon because the supplements business is so Amazon heavy.

The market is just there on Amazon. And of course, the aforementioned 63% net margins, which is bananas. And basically the reason that Kelsey and I are immediately saying this is an influencer business is you cannot have 63% net margins without spending $0 on advertising. You know, most e-commerce businesses are spending 20 to 30, 3,000. 30% of revenue on advertising, which then knocks that net margin down in the 20s, if you're doing really well. So that's why I can tell they've got free traffic from somewhere. It's really interesting in terms of comparing this to other listings.

Every other kind of teaser we always look at talks about why the seller wants out. And this one just kind of says nothing about it, which is very curious, very curious. To Bill's point on not just critiquing the deal, I think a big opportunity here, is if my hypothesis is correct, they only have 13 skews, as over 20 years old, as Bill said, they're probably these niche use cases. And I'll bet you that to be around this long and have this kind of revenue, there's probably some repeat, probably some customer lifetime value,

you have 120,000 emails. I would guess the business is under monetized on the back end. If you go to a broader use case like fish oil or multi-valued, and there are some more common use cases, and you have these customers that trust you for a very niche, very detailed thing, you can probably push into larger markets and probably get better follow-on revenues from your customers by expanding past those 13 skews.

I don't know, Bill, if you thought on going to skin or pet supplements, I would go probably more mainstream of like multivitamins and fish oil and things that are more common. That would be my kind of hypothesis? What do you take your thoughts on topicles and pet supplements? Completely agree. I mean, topicles and pet supplements great markets, but 13 skews. Different business. Ratching. Yeah, it's a different business also.

Like, it's that, do that in three years. I mean, spend the next three years launching new skews in supplements that are synergistic with the skews they already sell. 13 skews is hardly any. I mean, this guy, the seller here, what he should do is sell like, you know, 30% of it or something, stay on, or at least roll a substantial portion, stay on, launch 20 more skews, get this thing to $8 million in EBITDA and sell it to private equity in three to five years. Is that who's buying this type of stuff? Is PE buying this stuff? Yeah, Pee, I know of a supplement's

business, almost entirely Amazon, got 80 million in sales. And they just sold to private equity for I wouldn't say a big number, but a solid number, 10 plus times EBITDA. They were not celebrity centric, though. What do you think of the multiple they're asking here, 3.6? The function of the dependence on the seller, I think you said it best is it's a seller-centric business. You know, need to find a right buyer for it, probably given the risk profile, probably the right multiple. If this was an ad-supported business, then maybe had a lot more revenue, but similar than I didn't tell me, Bill and I would both say that multiple is probably light, and it's probably more like

four to five, even in today's environment of compressed pricing. You'd probably be higher if it was built on paid ads. Yeah, they're acknowledging the issue right there in the multiple. Yep. Kudos to Guilla, like, I think they've had a good reputation. I think a lot of their stuff is probably priced well. I bet you they get some thought to this, and it's probably the right. number. Yeah, and Quietlight is generally a very high quality broker and really knows what they're

doing in the e-com business. So I would say this is probably priced correctly, given the dependence on the celebrity. I wanted to go back to something you said, Bill, about the ad spend and kind of picking up on you, they're obviously, you know, not spending on ads. I think that comes up in a lot of other businesses as well, that people sort of miss it, that a business might have been started by a founder and because of their reputation and their network and their word of mouth, they've been able to grow without any ad spend. And I look for that as a lender. I look for, well, what is the ad spend going to need to be when you take over this company? You're going to have to compress your margin, not in this case, but in a lot of other cases, that's exactly what happens is someone

takes over a business like that and they have to start spending on ads and the margin is completely different. But you're going to pay a multiple as though you weren't spending on ads. So you're going to get absolutely an aisle. You're going to suddenly lose 30% of revenue to ads if this guy's, I mean, or worse. I mean, it might not even be possible. Yeah. So if you were to buy, let's say if you were to buy this business, you know, table stakes, this guy has to stay on and create content.

So like table stakes, there's just no way to buy this business, assuming it's a influencer driven business. There's zero way to buy this without him rolling a substantial amount of equity. And I don't mean a seller note. because Sellingot gets paid off and it has no upside and he has only incentive to make sure you don't go bankrupt. I mean rolling equity like a substantial bit, like 49%, you know, 30%, I'd want to see a big role, which would get your purchase price down too. And you need a contract where he keeps creating that content or has substantial financial penalties. Bill, here's a wild idea.

We have two million subscribers and we're all making the assumption that the face is very important, currently created in the content. What if you take your equity role idea, and part of the mission is to go find two, three, four, five people that are now paid and diversify the face of the channel and try to evolve the business. Does that sound viable to you?

Like, I would spend some time thinking about that, but I've never seen it work. Do you have any opinion on that? It's so hard because it's probably called Michael Gurdley Hairgrove Supplements. You know, the name's probably on the bottle, right? So, you know, if you've got If you've got someone else pushing it, they're going to look like an affiliate.

You know, like people want to buy it from the guy's name who's on the bottle, I think. I mean, yes, Kelsey, like that's separately a marketing thing that, you know, affiliate marketing, you know, they could definitely do. I don't think you could ever do it to successfully enough that you remove the dependence on the original founder. What a fascinating business. And this guy really started, if he started in 1989, it would have been pre-Y YouTube. So they were in business for almost 10 years

before YouTube was a thing, right? YouTube's 2004, 2005. Yeah. So fascinating who this person is and how they developed this brand. Also, the closing paragraph says owner spends minimal time operating the business, mainly focusing on writing website content.

It does not say focused on YouTube, just website content. So I wonder if it was a blogger back in the day when blogging was pretty big and search kind of dominated building this type of business. Yeah. Could be. Fascinating.

But there's a level of dependency here on Google algorithms and Google algorithms at YouTube, right? Because Google owns YouTube. You know, if those change. The other thing I want to, let's just talk about other risks in celebrity linked brands, you also have the cancellation risk, right? Like, this guy beats his wife or this girl kicks her dog or whatever. ever, right, and gets canceled, you're toast. Even if they're no longer involved, right?

You're still dependent on all that back catalog and reputation, which based on their actions in the future, which is risky. The, I don't know, the celebrity brands just have always scared me. They're great to own. They're so hard to buy. Just based on the fact that the business is 24 years old and assuming the individual is more than 25 when they started it, they may be getting older. and that's a risk too, right?

I mean, none of us are going to live forever. And I just say the key man risk alone, like even if he rolled the equity or he or she, I'm going to say she, she rolled the equity. It's a woman I've decided. You know, what if she's getting older and she has a health problem or, you know, then what did you buy, you know, if they're unable to continue to produce the content

or be the face of the brand? So I think that their age was, I hate to say that as a person that's getting older themselves. But I think their age might be a factor as well. Yeah, I wonder, it's interesting, too, that it's been around for so long that it's not that much bigger. I mean, it's still only $4 million in sales. I would also be curious, you know, is this person, do they have other brands?

Because a lot of celebrities will have a supplement brand and then they'll launch an athletic wear brand and then they'll launch a dentures brand or whatever, however old this person is. Right. So like if they have other stuff and they're just selling you this one, then, you know, Girdley's favorite thing, why am I so lucky that I get to buy this one? You know, why don't I get to buy the dentures business that's crushing it? You know, why don't have to buy the supplements business that you clearly don't want to own anymore? You know, you just have to, when you buy from a person, you have to diligence the entire person, not just the business asset. 100%. Pure cool. All right. I think this is a really interesting one. I mean, it's just fascinating to see these businesses pop up like this and how these people got to where they are. And then a lot of times you just see the weirdness in the listing,

which is this is definitely one of those. And quiet light, it knows what they're doing. So it'd be, and if anybody digs into this one, definitely let us know because I think we're, I'd be right curious. It's worth mentioning that this is what e-commerce businesses used to look like. Like back in the day before Facebook and Amazon figured out how to extract all the value. in advertising. You know, this was, you guys remember when D to C like became a hot thing, you know,

cut out in the middle, man, sell directly consumers. And like Facebook ads were new and young and worked really well before all this privacy stuff before there were a ton of people bidding on the auction. There were a lot of businesses like this with 50% net margins. You know, this is why D2C got so hot. And then what happened over the last decade is Facebook figured out that they had severely underpriced their traffic. and they just kept increasing, increasing, increasing the prices of traffic.

And that's why I'm saying most businesses like this have a 30% chunk out of the PNL going to Facebook and to Amazon, you know, or even more. But it didn't used to be that way. And when this person started, it wasn't that way. And it's sort of rare to see one that still isn't. It just shows what a great business e-commerce can be if you have free traffic. All right. Well, we'll end this one there.

Again, Kelsey, thanks for being here for this episode. Hopefully you're coming back for the second episode, which we're going to start recording in about three minutes. But y'all check out HoldcoConf at holdcocomf.comf.com. And thanks for being here, Kelsey. We'll appreciate it. Thanks for having me. Three minutes.

So, bye, everybody.