Acquisitions Anonymous - #1 for business buying, selling and operating - How to spot red flags in eCommerce listings? - Acquisitions Anonymous episode 161

Episode Date: January 25, 2023

Bill D’Alessandro (@BillDA) and Mills Snell (@thegeneralmills) discuss two eCommerce deals today. These two listings have something in common: They appear to be sketchy!We dig into how to spot hidden traps from eCommerce listings, and Bill throws some gems around operations that lead us to suspect that the motives for the sales go beyond what is stated in the listings.-----Thanks to our sponsors!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.-----Show Notes:(00:00) - Introduction(02:00) - Deal 1: 5-Year-Old Fly Swatter Brand Selling For Inventory Value Only(03:40) - Do we think this is a good deal right off the bat?(07:05) - Where is the inventory, and why does it matter?(08:53) - Why would we buy this business? (10:22) - What would we ask the seller if we had an interest?(14:15) - Why do we think this is a falling knife?(16:10) - Deal 2: Currency Counting Machines | $1.2M Revenue and $382K SDE(18:20) - What do we like about this one?(19:15) - Which moats should you look for in a defensible brand?(23:48) - What would we consider a great product and a defensible brand?(25:00) - What type of functions does their 3PL perform? Why is it important to understand this listing?(26:45) - Why do we think this is a side hustle for the seller?(31:05) - How should you think about buying inventory for an eCommerce business?(33:00) - Why is this valuation crap? How should you reframe it?(36:10) - Why is this not SBA eligible? Why are they selling this Business Unit?----Additional episodes you might enjoy:#160 - Should we buy this drag strip... for the land?#159 - Make Millions Moving Dirt in Michigan #158 - $1.2mm revenue Court Maintenance Company for Sale!#157 - Make a $1mm/yr with a Language School#156 - 60% Profit Margin Amazon Online Community for Sale#155 - A $3mm profit-a-year water delivery business!#154 - A Truck Driver School for sale in Texas#152 - Should we buy this Ambulance company?#150 - Let’s buy a medical staffing business#148 - Growth Marketing explained: Shopify Superfood GrSubscribe 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]

Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-host, joined today by Bill D. Alessandro. Gerdley's out, so we decide to just have fun and see where the show takes us. There's no accountability while what's the saying, while the cats away the mice will play. So Bill and I talk about two e-commerce deals, which we used to talk about two deals in episode, and we kind of set that to the side. These are two e-commerce deals. They're for sale on Quiet Light.

Some of them, you know, have more details or less, but these were ones that we were able to pair together. And we talk a lot about two unique. situations. One of them is a situation where we think that the business is just tanked and is kind of on a downward downward spiral and is being sold for just the value of the inventory, which got my attention and Bill, you know, schooled me on why that's not a very good thing. And then the second one is one, it's a dollar bill counting machines. And it's probably a corporate divestiture or, you know, a carve out of another brand. So there's some really interesting and fun details on both of these. If you're, if you've ever considered an FBA business, if you've ever considered e-commerce, Bill

dropped some really good nuggets. So I hope you enjoy the episode. And a big thanks to our sponsor this week. Welcome back, everybody. Another episode of Acquisitions Anonymous. We have a really fun one today. We're going to dive deep into e-commerce. It's just me and Bill.

So we just were like, you know what? We can do whatever we want. Gertley's not here. And we're just going to swing for the fences and then let him talk shit to us later. So Bill, how you doing, man? Mills and I, we are unsupervised today. So this should be a good one. Mills,

if you are not watching us on YouTube, you got to go on YouTube and look at Mills's fresh beard. If you've been following the show, Mills has had a very impressive mountain man beer going, and he has really trimmed it up, and he looks fantastic like he's about to take his wife out to dinner tonight. It's looking very good. Go on YouTube.

We did go on a date last night, and I didn't look like a homeless person, you know, trying to abscond with her. So you wait until after the date to, fix the beard? No, no, no, no. I got the haircut before the day. Don't worry. Okay, good. Good. Looking fresh. It's, it's about time. We got two e-commerce deals, which is Bill's specialty, and I'm going to read them. This one, I immediately, as soon as I saw, I sent it to Bill, and I was like,

Bill, this sounds juicy. So this is on quiet light. It's a five-year-old, which is kind of a positive sign, five-year-old fly swatter brand selling for inventory value only. I mean, that just grabbed my attention for so many reasons. Revenue is $251,000, no income and no multiple is what it says, NA. So, I mean, it just gets better. Asking price, a dollar plus inventory. Launched in 2017, this brand focuses on selling a variety of electric fly swatters. The owner has run the business profitably in prior years, but in 2022, the company was unprofitable. The owner started work at another company that took up a large portion of his time. So he stopped paying a close attention to the brand and the business suffered for it. They're looking to sell the business

because he doesn't have the time to run it anymore and because the employment at his company requires him to divest this. The business is best suited to an experienced e-commerce operator looking to turn it around. They want all cash, quick close, sell the business for all the inventory value, which is roughly $200,000. There's not a lot of info here. So we're going to talk about two e-commerce deals, but this one has, I feel like there are so many things, Bill, that you know from e-commerce that kind of happen underneath the radar. And this has all of the right undertones to it. It's easy to get into e-commerce. It's easy to sell FBA. And sometimes this is where we end up, right? Yep. Yep. So this is an interesting one. So Mills, you emailed this to me and you're like,

ooh, interesting. And I email back, eh, I'm not so sure. So, So the reason we decided to do this is I want to kind of help teach people how to read between the lines in this listing. I don't know anything beyond what Mills has just read. So I have not signed an NDI in this, but I have a sense. So this business has been around since 2017. I initially say, okay, this is this is pretty good. Five years. The key sense for me here is the owner has run the business profitably in prior years, but in 2022 was unprofitable.

And now they want to sell for inventory value. I'm going to make an assumption here that this is an Amazon FBI brand because this is a, an electric fly swatter business. It just feels to me like this is a guy who took a course on how to make an FBI side hustle, figured out that there was search volume for electric fly swatters, imported a bunch from China via Alibaba, and has been selling them online. I have a sense also probably, because Amazon is hard and volatile at times, you know, the business has probably fallen apart over the last couple years or year, really.

It's unprofitable now. and he's going, I got a day job. I'm burned out in this thing. I'm not sure I can fix it. I need someone to bail me out of the inventory of $200,000 of electric fly swatter inventory. Mills, does that smell relatively correct to you? Yeah, I think so. I mean, what I was going to ask is, Bill, how quickly can things change if you're selling maybe one or two or three skews on Amazon?

on overnight, which is the scary part about Amazon. So, you know, like, for example, your account can get suspended or a competitor, especially selling something like electric fly swatters, which is going to be heavily populated by Asian sellers who have very few scruples when it comes to competing on Amazon. You could get review bombed by like 20 negative reviews that all get upvoted. And so you've got like all one-star reviews overnight. And it's very difficult to prove manipulation and Amazon almost never does anything. There's all kinds of things that could cause your listing to tank overnight.

You could also have his manufacturer could have come in and started selling the exact same thing he has at half the price, right? Like the exact same model or a similar manufacturer, right? There's a lot of things when you're selling a commodity item like electric fly swatters on Amazon that is probably sourced in Asia where they can come in. if the factories are getting wise in Asia, like overnight and not to go on a chat GPT, tie rate here, but chat GPT allows non-native English speakers to speak like English speakers. It's quite impressive. So the level of Asian competition is ratching up. So I have a sense this guy's business is falling off.

Things have changed for him kind of overnight on Amazon, and he's got $200,000 of electric fly swatters that he doesn't want anymore. So, Bill, let's assume it is FBI. And he's not holding this inventory. It's not in his possession. It's in Amazon distribution facilities, right? I mean, have you seen this happen before? How does the asset actually change hands from an ownership perspective when there's no, like nobody's the custodian of it?

Amazon's holding it. So this is really interesting. I'm glad you brought it up, Mills. So this inventory, on one hand, it's like what we'll call it's at the edge. It's distributed throughout Amazon's FBI network. It's close to customers. in some ways, that's the best place that it can be to sell through, right? Unless your Amazon listing is tanked and not getting any volume and not selling,

in which case it's the worst place it can be because you don't really have any options to get it back to liquidate this inventory, right? If I had $200,000 of fly swatters in a warehouse somewhere, you know, I could try to move this to a liquidator or something or cover some cash. but on Amazon, it's probably dispersed throughout 50 plus warehouses, right? So I can get it back from Amazon. You can issue what's called a removal order from Amazon. And they will send it back to you, but there are a lot of fees associated with that,

just both FBI fees and shipping fees and all that stuff. And the other thing that you don't expect is it comes back absolutely destroyed. I don't know what Amazon does, but like when you ask for something to be removed, it's like they hit it with a few baseball bats on the way out the door just to spite you. So it's going to come back in 50 different shipments, all beat to hell, and you're going to have like a major work product to reassemble, recondition, et cetera, and get it ready for liquidation. So that's what likely true about this inventory. So in like in this scenario, if you do nothing, right, and you just hope that, you know, maybe through some like blood, sweat and tears and magic that the listing improves and just organically or maybe. through like sponsored post or whatever, you try and call your way back up.

It's going to be expensive in the meantime, too, because your Amazon's charging you for the shelf space in their fulfillment center. It's not like the carrying cost is zero here. No wonder the business is barely trading water. Correct. It says NA for cash flow on this listing, but NA does not mean zero. And a is likely negative zero or negative negative numbers below zero. And what's interesting here is, okay, so this seller is losing money.

Their Amazon listing as is is not profitable, right? And they want to sell you all of their inventory at cost, right? Why would I do that? If I really wanted to be in the electric fly swatter business, I would just go to Asia, source the same $200,000 electric fly swatters, start a new listing, right? Because in an Amazon business, the only thing valuable is the listing and the review modes and everything that allow you to sell Asian inventory, you know, at a premium. If you don't have that, you just have a bunch of Asian inventory you can't sell and is also stuck to a listing that can't move product.

So, like, why would I buy it? Like, this is pure, this seller wants a bailout, right? And you got to smell that here. So is there a scenario, Bill, where you would say, like, I know you've done some creative things in the past with like, you know, taking things on consignment or something like that. If the product is not unique, there's not actually anything proprietary about it. And their distribution model is not unique. It's unless, unless you found something out like, oh, wow, you have a million Instagram followers or something for these floss waters, then then that's a different story.

But they would have mentioned that in the listing. I mean, is, I guess the first question, is there a scenario where you could imagine somebody being able to extract some value out of this situation? And then two, what questions would you be asking the seller like reports from Amazon and like sell through rates? What kind of pieces of data would you need and inputs would you need to actually understand if there's something there? Yeah. So what I would go sniffing for if I were to learn more about this deal is if it's, there's two things I'd want to know. One, do the union economics work? And this business is just losing money on overhead. And then also is there some sort of

creative deal structure here where I can share some profit with the seller? I mean, on no planet, am I just buying this guy's inventory for $200,000 and letting him walk away, right, in assuming all this risk here? So first, I would want to say, you know, work through the reports and go, okay, what's this thing sell for? What's the cogs? What are the Amazon fees? What's the inbound freight? What's outbound freight? And what kind of advertising as a percent of sales is required to kind of keep this thing rolling as is?

And is that a positive number? You know, like, is there, is it a decently, you don't want that to be 4% positive, right? Like, you want this to be easily 20 to 30% positive and go, okay, the unit economics of this business work. If the unit economics is a business, yeah. Well, I would call it contribution margin. Okay, yep. Yeah, I would want to make sure that this business was contribution margin positive. And if it's not, that would be the end, right?

So I would walk away. If it was contribution margin positive and it was losing a bunch of money and I thought that I had the overhead to take this on and cut all that out, I would consider proposing this guy an offer, you know, almost like a Mr. Wonderful royalty type thing. You know, I will pay you 50% of your cogs as it sells or something. So basically, you're going to share, you're going to basically be buying his inventory as it sells, no cash up front for half off. So he's going to take, if it all sells through, he'll get half his money back, which is better than the zero I think he's probably going to get. And you don't take any upfront risk. That's the type of deal I would be looking for on something like this.

It's an unprofitable business. And really, I mean, from an overhead standpoint, it doesn't, I can't imagine this business having that much overhead, right? I mean, it's one or two skews. It's, we're assuming it's Amazon FBA. So it almost has to be a really upside down contribution margin and or something just happened where whatever competitive advantage they had got competed away. That's exactly what I expect to find here.

The way it usually goes on Amazon is something happens to affect your organic rank, be it bad reviews or sellers at a much lower price from Asia or whatever. Something happens that you're not ranking as highly for electric flieswater. So your sales start to fall. So then you go, oh, crap, and you start running ads, right? And you start running more and more and more ads and your revenue stays there, but your profitability gets destroyed because you've traded all this organic revenue, which is free for paid revenue.

But now if you turn off the ads, ads, your sales are going to tank, right, by a ton. And then you get where you end up where I assume this guy is, which is totally stuck. You have revenue, but it's unprofitable because of the ads. And if you turn off the ads, the revenue gets cut in half or worse and he's stuck. And I have a sense, that's probably where it is. Do you think, Bill, I mean, just a quick Google, it looks like these things are anywhere between like $10 and $30 and some of them have branding and some of them don't. One of them is called the executioner, which is, I think, better than the others. I'm guessing this $200,000, that would have to be, that's not cost, right? $200,000, if these things cost like,

I don't know, maybe six or seven bucks a piece, just in cogs and maybe freight, I mean, that would, that seems like way too big of like a minimum order, right? How did he end up with $200,000 of these things? That's a good point, Mills. He's got $250,000 of sales and claims to have $200,000 worth of inventory. And even if he's got 50% gross margins, which would be a disaster, and I would hope it's higher than that, this is at minimum two years of inventory based on current sales. And that is another tell that his sales are falling off. Right. I bet he had too much inventory, sales are dropping. And what was once four months of inventory is now two years. Dude, that is so good. And I feel like that's so insightful because I never would have come to those

conclusions on my own. But just if you're looking at this and you've seen enough things go poorly, you immediately deduce, here's the situation, here's what's happening. And, you know, this is a falling knife, you know, at best. Well, that's the funny thing about small business acquisitions, right? Is there are so many falling knives in the world, right? Like that people are trying to hand you the bag, right? Like, they are in, in over their head. And they're like, I need someone. bail me out. Let's sell this business on what appears to be a screaming deal. But if a business is going to zero, any price other than zero is not a screaming deal. Right. And you've got to, I feel like so much of small business acquisition diligence is trying to figure out if someone is

trying to hand you the bag. Yes. Or not if, but how? And is it a bag, is it a bag that you're willing to take? Right. Because in some cases, it's like, you know what? I can live with this. it's not, you know, a bag of poop on fire. It's just, you know, a bag of inconvenience or something like that. Exactly. Exactly. And all small businesses have big bags of inconvenience, right? Yeah. You want to make sure you know exactly where they are. If you're buying a business that does not have a big bag of inconvenience, your diligence process is terrible. Yes. All right, anything else on this one, Bill, or do you want to talk about our second e-com deal? Let's talk about our second one. Will you read it? I'll put it up on the screen. So this is a two-year-old. The other was five.

this is a two-year-old Amazon FBA brand, currency counting machines, 1.2 million in revenue and 382,000 in SDE. It says it's currently under offer. So if we don't like it, you know, we're going to make fun of the person that has it under contract. And if we do like it, we're going to, you know, talk crap about them. They're asking $957,000 plus inventory, which is two and a half times multiple, but that doesn't include. that's just the asking price. That doesn't include. That doesn't factor for the inventory. Launched in August of 2020, this Amazon FBA business sells premium money counter cash machine. So, this is not a coin counting machine. This is a cash counting machine. Even during a pandemic where cash

was not as widely accepted and used this business still flourished with the trailing 12 months of revenue at $1.2 million in SD at $382. Not the typical electronics business that requires constant product updates. Products are stable and don't require regular updating. Net margins are at a high 31%. These are good details with nine total skews and the top two accounting for 73% of revenue. Bill, I can't wait for you to tell me if that's good or bad. 91% of revenue is on the U.S.

Amazon marketplace. Expansion opportunities. I love it. Even I know that this is a total just red airing. Expansion opportunities include Walmart, Shopify, and Amazon International. markets. The business has exclusive contracts with its manufacturers and their main products. Can't wait to talk about that. Machines can count over 100 plus currencies effectively and accurately, including all the major currencies while detecting counterfeit bills. Owners have built efficient

standard operating procedures around inventory management, customer service, and product repairs to minimize owner involvement. They have a knowledgeable customer support person and 3PLs that handle all their returns and repairs so the two owners can work remotely. Inventory is not touched by the owners. Neither owner is a programmer or has a background in developing money counting machines. They work a combined 20 hours a week. This is not SBA eligible. I am, what a listing. There are so many. What a listing here. This is awesome. I love this listing. Props, hats off to quiet light here for a really good listing with lots of nuggets. Oh boy, Mills, where should we start? Should we start with what's cool about it? Yeah, that's good. That's good.

We've been told that it helps if we like the deal first and then don't like it second. So we're going to go in with the positives. I'm not actually sure I totally hate this. There are some things I hate about it, but I'm not sure I totally hate this. So stay tuned and I'll tell you that in a minute. Okay. So here's what I like about it. It's on a growth trajectory. It's done well during a pandemic. The margins are amazingly good. It has 31% net margins. I also like that it only has nine total skews. You know, some of these Amazon businesses can have 50 to 100 skews and it's just a logistical and working capital nightmare. It's got nine skews and the top two are 73% of revenue. I don't hate that. It's a little bit of concentration. But the way

Amazon works is that you tend to have hero products. Any company does, you know, that that ranks really well and build a review mode and, you know, those tend to be actually sometimes what's valuable is the hero product, you know, that's hard to supplant. So that's interesting. Mills, you called out that they're doing 91% of revenue on Amazon and think they can expand. I'm sure you can expand. Taking an Amazon brand and taking it off Amazon is one of the hardest things to do in e-commerce, period. I would think, just based on the size of this business, I would think there's probably room to double it on Amazon way before you could double it outside of Amazon. So yes, but I would want to be really convicted that there's some low-hanging growth on Amazon and not rely on trying to do the triple axle of moving an Amazon brand off of Amazon.

All right. What about this exclusive contract with its manufacturer? Is that, that sounds good. But can that, I feel like it's too good to be true. It does sound good. I mean, because one of the things initially concerned me about this business was that, you know, how differentiated can a cash counting machine be, right? If, if this manufacturer is like the best cash counting machine in the world,

really what you need it to be is a brand of cash counting machine. machine that people know. But I have a sense that's probably not true because this listing is sort of positioned as their brand of cash machines made by a manufacturer. So yes, this gives you a little bit of protection that your Asian manufacturer, I'm assuming Asian here, given the product category, is not going to sell it to anybody else. Assuming that is you trust them and the enforceability of American contracts in mainland China, which is, you know, not very high. That being said, though, there's probably 25 other cash counting machine manufacturers, right, that can sell basically the same cash counting machine.

So without knowing the nuances here, this doesn't give me the warm fuzzies that they wanted to give me. To me, like, if the cash counting machine, the manufacturer, if it was truly one of a kind and absolutely differentiated, there's no way that they're giving up. Let's just say it's, let's say it's not all the exclusive rights to this company. but it's just the maybe the rights to sell on Amazon or online or e-commerce or something. If the branding in the machine is that good, then why would I grant exclusivity to somebody? I would just do it myself, you know, as the manufacturer, I would just sell direct.

So I just would have a lot of questions about that. And even if you do have exclusivity, what's the term on it? It's not going to be in perpetuity. It might be a five-year term or something where, hey, yeah, you can go sell on Amazon until your heart's content or your own e-commerce. But after that, we're going to, you know, we're going to do it ourselves or put it out to bid or fund somebody else who wants to do it too. Yep, the very insightful mills. So like on one hand, if this is a brand of cash canning machine that I have exclusive rights to sell, on one hand, that's great, right?

Like, I have, this is a license to print money. But that contract has an expiration date. And eventually this brand is going to figure out they need to cut you out. That this business model is what I would call Amazon arbitrage, right? And you mills, you say like, well, why would a company ever. grant you that exclusive right. Frankly, it's because many, many companies out there are stupid and not tech forward and don't realize the opportunity that is on Amazon, don't want to figure it out, don't want to deal with all listings, don't want to deal with FBI, don't want to do all that stuff.

And so, yeah, they're configured to sell wholesale. They are configured to sell to retailers. They know how to sell wholesale. They, so if you can approach them and go, I just want to open a wholesale account and I make Amazon look like wholesale to you, a lot of people have made millions of dollars doing that. The jig always, always, always comes up. And eventually, manufacturer goes, holy crap, you're our largest wholesale account, right? Where are all these units going? Oh, they're going to Amazon. Oh, I think we can do that. You know, and they hire some, you know, whip smart, 25 year old and then you don't get your contract renewed and your enterprise value goes to zero. Yeah. Yeah, there's just some risks there. It, you know, if it almost makes me think it's a little bit better

if it's a somewhat commoditized product and it's not this super unique. There's, there's pros and cons for each, but you would really want to figure out what, what's so special about this thing? It does command higher, like higher than average, you know, product margins. So what, what's going on there? What do you think about, you know, I guess I don't know enough to know whether or not this is special that it can count different currencies and it can detect counterfeits? But I would think if you have a cash counting machine, that's, it needs to be able to do those things. So maybe it's special. Maybe it's not. Yeah, I don't know. I mean, I think like the ultimate, if you, if I were conceive of the perfect, right, product business.

Like what you want to have is some sort of innovation where your product is different. You want that innovation to have some intellectual property protection, right? So maybe your car canty machine has an extra long, you know, tray or something or arm that makes it way better to use. And that's patented. And no one else can do that. Even if you don't have a patent, the second best kind of protection is something that's hard to manufacture. That's very difficult to find something that, you know, requires unique process and then you need a manufacturer you can actually trust is not going

to divulge your process for doing it. And it's hard to figure out from the outside. And you have your own brand. And you can drive revenue from outside of Amazon or somewhere else. Like you can, you can do really effective direct response TV advertising or you can do really effective Instagram advertising. That's what makes, you know, a really defensible brand here. I'm not sure this category in cash counter machines lends itself to that type of innovation in patent protection. I like too that they've already kind of addressed some of the operational concerns, which is, okay, this is a remote business and they don't touch the product. But you can say that. That's easy to say. But if you're selling products, things go wrong. You have customer service needs. You have returns.

So they've, you know, they're acknowledging, hey, this isn't, this isn't a perfect, you know, zero refund kind of business. But we've, you know, developed a way to handle that. I have to admit, like the 3PL receiving the refunds is something that I hadn't really thought about. Because they're not using third-party logistics outside of Amazon to sell the product and distribute it to customers, but they are using it on the reverse to get product back. Is that something that's common? So they're probably using for a little more than that. So very often when you manufacture something in Asia, it's not quite ready. It comes off the boat from Asia and not quite ready to go to Amazon, right? It needs to be reboxed or it needs to be stickered or something like that.

that. So there's this whole category of 3PLs that are basically FBA prep, right? So they receive your stuff from Asia. So there's this FBA prep. So even if you're a pure Amazon seller, a lot of times you'll still have a 3PL and that three, you can do the following things. Prep is one of them. Returns, as you mentioned, is another one because if you have returns sent back to Amazon, they almost always restock broken stuff and then resell it and then you get terrible reviews and then you spend your seller account for being a terrible seller and you're like, this is bananas. I'm taking crazy pills. You guys put the stuff back in inventory. But that aside, the other thing here is they do 9% of their revenue, not on Amazon, it seems.

So you need a 3PL to ship those orders. I would also, by the way, I will bet you a lot of money. This is not these guys' only business. So there's a couple tells on this. Tell one is it's two years old and they're selling it. Right. So it's two years old and they're selling it. And yet, so that's a young business by any measure, right?

And yet five paragraphs down, it says the owners have built efficient SOPs around inventory management, customer service, product repairs. The business has knowledgeable customer support person and 3PLs. They handle everything. Inventory is, so like this looks, this is a dialed in business, right? After less than two years with all these SOPs, no. I mean, yes, it probably is. But there's no way some guy took a course and is like crushing it.

Right. Right. And that also tells me, too, the fact that only 9% of their revenue is coming from off Amazon and they have a 3PL that seems comprehensive. It also tells me, like, that account is not big enough. You know, 9% of a million bucks of revenue, you know, $100,000 of your revenue is not big enough to get like a really tight 3PL, like really interested and good, right? So they've probably got all their other businesses with their 3PL, and this is like one

of them, if I had to guess. These things aren't necessarily bad, but this reeks of guy who spins up businesses, identifies niches in the Amazon algorithm, has a really, really tight, is a great entrepreneur, has really, really tight SOPs, right, gets them just barely two years old and then sells them with Quietly every time. This just reeks of that to me. Is there a way to buy a business like this and it work? I mean, or is it, because the way you portray it, right, is I would never want to be on the other side of that trade. Well, yes, there are plenty of times you don't want to be the other side of that trade.

sure. But, I mean, this is what you're trying to figure out. So there are guys who are great zero to one type guys, right? And they figured out that they make a million dollars plus inventory every two years by spinning up new Amazon businesses and selling them, right? Not a bad gig. And they just, that's what they do. They don't want to think about long term, you know, any of that. I actually have made a ton of money being the one to end guy, right? You buy something from the zero to one person who doesn't know how to take it beyond one and you take it to N, you know, take it to two, three, four, five, six, et cetera. But the whole key is you have to buy something that has the legs to go beyond one, right? I mean, they take it from zero to one to, you know, what is it?

Two million, or one point two million in revenue. Like, you've got to really believe that this can get to five to ten million in revenue, you know, to buy this business. there are plenty of businesses, especially on Amazon, where you can identify a niche and there's about a million bucks of revenue opportunity in that niche on those SERPs, you know, with, you know, the number of units sold and the average selling price per unit. And it is relatively, I'm putting easy in quotes, but relatively easy to get to kind of saturate the initial niche, right? And that's what these guys do. They find the niche. They saturate it. They got a business. The business shows great growth over the first year or two of its life because it's scaling from zero to the maximum

penetration of the niche. And then they want to sell it. And in order for you, they might have, you know, they got nine skews total and two heroes. In order for you to take this to five million, you might realize that you've got to have like six heroes and 40 more skews because you got to go into three more niches. Right. That's much harder. And it's also unlikely that the, whatever brand they've got going of cash machines translates into, I don't know, money bags or some other, you know, adjacent niche. Like, yeah, like, it's got to work. Like, you can't, you got your brand of cash machines and you take it into electric fly swatters,

right? Like, it's not going to translate. You know, that's just a whole new business. So you got to make sure that there's headroom in these brands if you buy them. Yeah. What do you think about the, you know, asking price being a 2.5 times multiple and they want to sell the inventory plus inventory? Do you want, you want my soapbox on plus?

inventory. I think we have the same soapbox, but I feel like sometimes in e-commerce, like anything goes. So make your point, depend your case. Nell's, you and I definitely have the same sandbox on inventory, or same soapbox, rather. So that being said, like, and by the way, the brief version of the soapbox is you would not sell the business without the inventory and you would not sell the inventory without the business. It is kind of crazy to ask for a normal, to not allow a normalized level of inventory to be included in the asking price. That is how, you know, legitimate private equity style deals are done all across the industry with a working capital peg. And if the business is, in fact, over inventory compared to normal, the buyer will pay a little bit of a premium.

If the business is under inventory compared to normal, the seller will reimburse by a bit of a premium with a working capital peg. That's how it's usually done. That being said, Mills, I have fought this fight. I have talked to Quiet Light. I have talked to every single broker in the online space and I have lost. E-commerce businesses are sold as a multiple plus inventory at cost. It's stupid, but that's the way this world works. Is there, I mean, do you find that you're able to typically get like some kind of true up on the inventory and gives you time to, I mean, if it's FBA, you can't go inspect

the inventory, you know, like you would in like a typical wholesale and distribution business. So are you buying 100% of the inventory or are you able to kind of, by, you know, a factor of it. Maybe, you know, you're paying 80% of the inventory value or something because you know there's going to be spoilage or obsolete inventory or something like that. So it's a negotiation, right? Like anything else. The key things I look for are like, this is plus inventory.

That's all the inventory. That's every single thing, including the stuff metaphorically in the back gathering dust that hasn't sold in five years, right? And so the seller is like, boy, it's really nice just to wash my hands this whole pile inventory, you know, most of which is. good, but a lot of which is we're mistakes. Please buy all this stuff. You figure out how to liquidate it, right? So when we look at buying an e-commerce business with a plus inventory price, you know, we're going to go through on a skew-by-skew basis, and we're going to basically say, how many months of inventory do you

have on a skew by-skew basis? And we're usually not buying more than three to four months of inventory. So if you've got, you know, three months of inventory on skew number one, great, I'm buying all of it. If you've got two years of inventory on skew number two, I'm buying, you know, one eighth of it, right? And the rest I'm not paying for it. But in that case, is it kind of like, I'll take it, but I'm only going to pay you for a normalized amount? Because what are they going to do with it, especially if it's sitting, it's not sitting in their warehouse. Yeah, but yeah. Yeah, I'm going to take it, but I'm just not going to pay for it. Or I might negotiate to, I'll take it and I'll pay you for it as it's sold.

you know, like every quarter, I'll see what I sold and I'll pay you, you know, what was actually sold until it's gone. Something like that, up to a maximum of X, which is, you know, the amount that you gave me. But I'm not buying two years of inventory up front. No, thank you. Yeah. Just because you, you know, placed a big buy and you miscalculated your sell through rates or something.

Right. The other thing is really important. And this seems stupid, but it's worth saying, this business is priced at $950,000 plus inventory. It does $382,000 of cash flow. It is very easy to go, oh, I'm buying this business at a 2.5x multiple, right? You are not. Let's say there's another million dollars of inventory. You're buying this business at a 5x multiple, right?

And when you are comparing your entry price to kind of your mental anchors and all the other deals you've heard about in the marketplace and the rate of return you think you're getting and all that stuff, you need to lump the inventory amount into the match you're buying. You are going to stroke a check for the full. amount, and that is your basis for your IRA calculation. That is the amount of money that you're investing in this deal that your net income is the yield on. The multiple on this deal, if there's a million bucks of inventory, is 5x, not two and a half. Not to mention, it's going to determine your total purchase price, your total equity that you need to bring to close, and the total amount of

money that you're going to borrow that you're going to be calculating your debt service obligations based off of. So exactly. But buyer is going to pat himself on the back and tell all friends, I bought this business for two and a half times. I'm a freaking genius, right? No, you didn't. Which is why, by the way, a baseline of level of inventory should be included in the asking price. But that's also why it never is because the brokers then would have to list this business at a 5x multiple, not a two and a half X multiple and no one would be interested. So there's this like weird prisoner's dilemma thing, right? Where as soon as one broker starts breaking out inventory, all the multiples on their deals seem lower and a ton of buyers flock to it.

And then everybody starts doing it that way. It's also very seller friendly because of the aged inventory thing. Like it allows a seller just to hand the buyer a huge pot of inventory and get all their capital out. I just don't like e-commerce, Bill. I don't know how you make it work. It's hard, man. You've got to look at a lot. There's a lot of really bad e-com businesses out there.

The other thing worth noting on this thing is it's not SBA eligible. And Mills, help me remember, does it have to be. three years old to be SBA eligible? I don't remember. I know that, you know, there's a lot of kind of taboo categories. And I feel like maybe, you know, obviously like banks and like there's also like strip clubs and vice businesses and things like that that aren't allowed firearm related is not. But I'm wondering if because maybe does it, do you think it has something to do with the actual

product type and the fact that it has to do with currency and it could. I mean, I've seen stranger stuff from government agency. I know SBA hates like, you know, money lending, you know, anything that are financial services businesses and it's possible this got cut up in a net. I actually think it's because it's too young is the kind of the Occam's razor explanation here. It's, it's barely two years old, which I think means it's got to be three years old. The other reason, oh, by the way, actually, this might be it. This lends credence to the fact that I think these guys have multiple businesses. The other thing that makes a business not FBI eligible is if it doesn't have its own tax return.

So I would be willing to bet these guys own multiple businesses, as I suggested earlier, probably use the same 3PL, and they've pro formaed out the P&L and everything for this business. And they're just trying to sell off this product line and keep everything else. And that's what makes it not SBA eligible. It's a carve out. I would almost assure you because that's one more check in the probably, these guys probably on multiple businesses along with everything else I said earlier. Interesting, man. That's problematic. I mean, it's not impossible to do, but then all of a sudden you go, okay, what are the shared services? You know, what kind of, you know, efficiencies and buying

power do they have that guess what? I'm not going to have or I won't have in the same way that they do. That's, that's really interesting. Mm-hmm. Mm-hmm. And then, of course, if Michael were here, he would say, what about all the other ones? Why am I the lucky? Why do I get to buy the cash counting machines, but you're not selling me the other three like the good businesses, right? Why do you think this one is the crappy one, right? That's what I'd be trying to figure out. Yeah. Yeah, exactly. I mean, that's, that's the nature of it, right, is that, you know, they're rebalancing their portfolio for a reason and they're divesting something. And you go, what, you know, what don't you like about this and

what do you like about the others that make it make them worth keeping? Yep. Yep, exactly. Anything else on this one, Bill? I think that's all I got. I mean, I love to see the growth. It's just, you'd have to learn a lot more and there's a lot of gotches here. Well, these were fun, man. Always learn something whenever we talk about it. And I'm always thankful when we get to hit record on these conversations because I also just love talking to you about it. So thanks, everybody. And a big thank, big thank you to our sponsors. And tune in next week. We'll be here.