Acquisitions Anonymous - #1 for business buying, selling and operating - Mommy blogger turns toy seller with guest Kelcey Lehrich - Acquisitions Anonymous 213

Episode Date: July 25, 2023

Michael  (@girdley), Heather  (@EndresenHeather), Bill (@billDA), and special guest Kelcey (@kelceylehrich) dive into a blogger turned toy seller deal that makes for a fun conversation. Check it out here: https://mailchi.mp/websiteclosers/very-profitable-growing-ecommerce-brand-kids-toys-vertical-42-net-margins-65-aov-28-repeat-orders-strong-social-signals?e=42dc999128-----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, the internet's number one podcast about buying and investing in small businesses and thinking about small businesses along the way. So the four of us, me, Heather, Bill, and our special guest dug into a business that's pretty cool. It was actually a product used by the royal family of England and has been part of their core marketing and gross strategy as a business. So with no further ado, we dig into it with our guests and we'll now.

That's who that is in just a second, and then go from there. And it turns into a super interesting discussion about the dynamics of these types of businesses and how you should think about them if you're looking at doing one of these types of deals. 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,

2020, 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-N-F dot com,

and get more details there and sign up to join us. See you soon. All right, another episode of Acquisition anonymous and this is a good one because there's four hosts four for the price of one today. It is me, Michael, Heather, and our guest host from 365 Holdings and Holcoe comp Kelsey Lerick. Woo! Woo!

Crowd grows wild. Yay! Hey! Kelsey, glad you're here, man. Thanks for having me, guys. Appreciate it. So Kelsey and I have been friends for a long time. And Kelsey and I are kind of two of the original, I would think, Ecom, Holcoe guys.

So Kelsey has become a good friend. and he is so obsessed with Holco's that he now puts on a Holdco conference, which is extremely creatively titled, Holdco Conf. So, Kelsey, can you tell people what Holdco Comp is? Holdco Comp is a annual event. This is our second one. It's in Cleveland, Ohio this fall in September, where we'll have Holdco founders, owners, operators, executives, investors,

gathering for two and a half days of holding company talks. So our kind of target is those of us running seven and eight take our businesses and multiple of them. And so of topics like shared services and managing cash between your businesses and cross-collateralizing loans and you've got to do more M&A because you've got to grow your portfolio are things that you find yourself thinking about. And you might find yourself at home at Holdicoke conf where the topic is nonstop and small business holding companies. That sounds very exciting. And this is, you said this is the second annual one and it's in the beautiful city. of Cleveland, Ohio. Correct.

Second annual in Cleveland, Ohio, September 18th to 20th. And none other than our favorites, Michael Gurdley will be there this year, which we're excited about. Yep. You guys are like two of the most

credible Whole Co people I know, so it should be a good show. I'm super stoked. I'm flying myself to Cleveland. So that says something about how stoked I am for the show, and it's up my wheelhouse. So I'm really excited to either.

We also baited you with like all you could eat, Chili's buffet. But yeah, it's good to have you. What I say. When I say we, my, my co-host is John Wilson of the Wilson companies. You might have been on this time at some point.

He's well-known around the Internet for his home services roll up of some mega and H-day businesses, which is all the range of these days. Totally is. All right. So if you are a whole-co person or aspiring whole-co person, check it out. If you Google Whole-CoConf, you will find it. All right. We've got a e-commerce deals.

We've got Kelsey. We're doing e-com. Who's reading this one? It is me. I am the victim du jour. All right. All right. So this one is from website closers. It is a new business listing, a very profitable growing e-commerce brand in the Kid Toys

Vertical with 42% net margins, $65 average order value, A-O-V, 28% repeat orders, and strong social signals. The asking price is $1.3 million. And before I read more, they have like the cutest little picture of the little brother and Is this they're like putting foreheads together? It's adorable. I mean when my kids were that age, then they turned into teenagers.

Evans very quickly. All right. Asking price, $1.3 million. Sales are $950,000, earnings of $405,000. So asking price, $1.3 million, sales, $950,000, earnings $405,000. So website closers presents an e-commerce company

operating in the evergreen and booming field of kids' toys and travel products and accessories, with award-winning products that parents are eager to buy for their children. Parents can be very discriminating buyers in this vertical, and the brand has gone a step further, winning their loyalty through their entertainment packs, which have proven to be ideal for keeping little ones active during long travels, weddings, and other special occasions. That's given the brand fast-rising sales, thanks to their appeal to parents who are strapped for time and want fun ways to keep their children engaged. Their products were created to offer solutions

to parents traveling with children, and their products have drawn strong reviews from satisfied customers for helping to reduce the stress of staying on schedule while keeping their kids happy. Strong SEO program built to run keywords related to traveling with kids and blog read by thousands of interested parents. The company quickly became a trusted authority on family travel issues. Their already large customer base keeps expanding. They have six years of experience building up their customer base and the company now enjoys 42% net margins and around 70% gross margins across the store. Partly from social media marketing campaigns that have delivered 100,000 engaged followers. This not only helps drive organic traffic to their website, but also gives them a

rising 28% repeat purchase rate. And then they go on here to talk a bit more. The toys market is big. The company does well attracting B2B contracts and has solid relationships with several large corporations. And they have a smart story to tell about how they built up this company. The average order value is $65, $160 for keeping kids entertained on the plane through that kit there, and they have grown to have 100 items that can be put into their pack. For their D to C customers, the company appeals to a diverse customer base with orders coming from parents, grandparents, and other relatives such as aunts and uncles and even friends of the family. Women between the age of 25 to 60 make up their top demographic.

They have a slowdown in January. 90% of their sales are D to C, but they have been rising host sale lately. They have opportunities to expand their B2B sales in numerous ways, and then a listing that goes on and on for about three more pages. You missed the most scintillating part. In addition to the popular products, the company has a narrative to share about how the royal family and celebrity customers use their products, most notably when the company supplied packs for the royal wedding in 2018, the royal family has been a faithful customer ever since.

So that has, I think, gone from selling point to liability with Megan and Harry lately, has it not? You met the as seen on badges, as seen on New York Times. It's like as seen on the royal wedding. Yes. I put that on the homepage. I would totally put that on the homepage. The royal children play with this pack.

Is this a good business? I mean, it's got almost, again, 45% net margins. It's got 70% gross margins. It's got 100,000 followers. It's growing, you know, decent AOV. It's almost entirely dot com. 90% of their sales are D to C. And they have, so they haven't even touched the Amazon marketplace at all yet.

I mean, Kelsey, is it a good business? I think my biggest criticism is this is probably a very owner-dependent business. You just look at the revenue run rate and the amount of margin. There's not a lot of room for staff. I'll bet you there's a couple of contractors, maybe some software in there. I think there's probably some structural things that are really good around SEO, engaged audience. Apparently, they have some great products.

I'll just bet you it's very owner-operated. I don't think it's a scaled-up business with a team. I think it's a business that the owners have to show up every day to make the widgets. Yeah, I mean, that's sort of a criticism of all smaller businesses, right? Like, you buy this business. It's got 400K of SDE and you want to hire a COO. Well, there goes $150,000 plus, right? And then you had a marketing and pretty quickly, you've considered,

assumed the whole last year left. There's no money left. It's for an owner-operated business, we'd probably a lot of strengths with the resources this brand has. I think it's this easy to mistake. So as a business, to your point, it's 400K of earning to say, oh, we're going to hire somebody to run it. Given the revenue size, I'm guessing, it might be a hard business to make into a five, eight, ten, $20 million company. It does, they do have a paragraph here that I didn't get to you that says the inventory for their items is sourced within the UK through eight main suppliers. Products are shipped from the 3PL with 50 shipments being made daily. It does, I do suspect this is not a North America business. Given that in the royal family,

Ty, would not surprise me if this is in Surrey or some random place in London somewhere. So what's interesting about this business, so there's a lot to like about it, right? It's doing a million sales. The margins are great. They've got a good following. They got some cloud from the royal wedding. It's entirely D2C, so they haven't touched the Amazon platform. So there's probably room there, et cetera. Here's the thing about this business, though. This strikes me as what I'm calling a kit business.

And you'll see this. These got really big in kids' birthday parties, like probably five years ago in e-com, where like if you're a parent and you're throwing a kid's birthday party and you want it to be Thomas the train themed or whatever, you can like buy a pack and it has the plates and the cups and the birthday hats and the streamers and the decorations, right? You spend like 80 bucks and you got like a Thomas the train birthday party in a box. Those got really big.

The problem is they have no moat, like zero moat. So these guys, this kind of strikes me as the same thing, right? This is a kit of things to keep a consumable kit of things to keep kids entertained while traveling, like toys, candies, things to fiddle around with, I'm sure, et cetera, which is great, but you are going to get knocked off immediately from China because all of the stuff in your kit is all the stuff that China is just awesome at making for no money. And that I think, if this is a kit business, which I think it is a kit business, that makes Amazon really tough. There are a number of these kind of birthday party kit businesses that popped on by Amazon

initially did very well and they got absolutely annihilated because the barrier to entry is. is zero. I noticed if the average order value is $65, that means about 14,600 orders per year. How does that strike you, Bill? That's a thousand orders a month, is 30 orders a day, right? Like, that's not that crazy. So, I mean, that seems normal. I mean, they've got an average order value, you know, as you said, $65.

bucks. Kind of like middle of the road for e-com. Mm-hmm. So somewhere in the middle, it says the company was launched six years ago, and then the title it says 28% repeat orders. And if you're an e-com nerd, you know that that means that's the metric from Shopify, which is percentage of orders from customers who placed an order previously. And it only grows over time because it's years compound.

You have many, many customers that eventually come back. What it really doesn't do is it doesn't tell us about the lifetime value and how much, if you get a customer today, where they spend the next 30 or 60 or 90 days. It might take them a year or two to repeat. So I wonder if this is a business where you really have to be first order profitable to turn a profit every month. And even though there's that slow compound in the repeat orders, it may be a low frequency business because if it's bills correct, you might only do a birthday once or twice a year, depending on how many kids you have and if they have the thing you want. If Thomas, the train was

hot last year, you can repeat Thomas. You need fire trucks or first moving vehicles. You need something new every year. So it's probably some product development and life cycle challenges to keep those customers interested in coming back. That that 28% repeat number looks like a strong number until you put it in a spreadsheet and learn how it works. A lot of six-year-old businesses are 28%. Not a knock on this business. It's just not a headline number that gets me excited because most businesses at six years old have people coming back. All right, taking a quick pause here, I have something to tell you. This is Michael. I hate bookkeeping. I hate bookkeeping. I hate doing HR, I hate doing all that kind of stuff. But for bookkeeping, I have found a solution. It is my friend

Charlie's business called cloudbookkeeping.com. So that's cloudbookkeeping.com. They are your perfect partner if you want to get bookkeeping out of your hair and focus on making your company, your customers happier and more successful. So please give them a call, call Charlie, cloudbookkeeping. com. Tell them we sent you. They're a great way. If you're a business buyer, if you're a business owner, you're tired of hassling with getting your bookkeeping done. He's got a whole fleet of people that are well trained and work for him. He's located here in St. Antonio, so I can tell you because of that, he's awesome. And they're a great partner for you to potentially call to help with all your bookkeeping needs so you can do the important stuff in your business rather than worry about

getting your books right. So give Charlie a call, cloudbookkeeping.com, and now back to the episode. it's probably seasonal too is i'm guessing because it's children traveling is sort of their theme so children are going to travel the most in the summer when they're out of school would you would you think so yeah i would think so yeah so that's always got some challenges anytime i look at a business that's seasonal i think about the strain of you know the the high season uh as far as you know getting out the orders and managing uh and having enough staff for all that and then i think about the slow season, you know, how do you manage your cash flow during that period? But I would guess there's some seasonality here. Probably so. So this is either a really diverse business

or they did a great job bracing the profile because we've got text messages, emails, organic traffic through SEO, Facebook and Instagram. It's hard to know what the spread there is. But this could be actually a really well-diversified business depending on the details of how those things actually play out. I would just like to see it ultimately comes down to how are these guys different. Do they have anything in their packs that's proprietary? Do they have some sort of really catchy name? Do they have Megan Markle continually using the kit and being photographed doing it over and over and over by the paparazzi? You've got to have something. And these kit businesses is just brutal. I mean, but if you're just packaging like little sets of things to keep kids busy on planes.

Basically, they're a middleman, right? They're buying this stuff from China or I think they're saying they're buying it from the UK, but they're buying it from other suppliers, kidding it and charging a premium. What you're doing is parents are outsourcing the kidding to this company and thus paying for it. I just caught this. The plane kit has an average order value of 160 bucks. We buy stuff for our kids when we travel. We don't spend $160.

So God bless these people for the amount of margin they can expect. and their customers on entertaining a kid on a four to eight hour plane ride. That's a lot of revenue for them. Kelsey, have you ever taken an international plane ride with a three-year-old? I have not gone to international. That is inexpensive. I would pay multiples of that. We've done two hours with an iPad. You took a three-year-old to Italy? No, I'm not insane. I did not have death wish. But I was on a plane with the lady back from Italy who did have three children and she was not having a good time. Not having a good time.

So we, I remember when we were young parents and we were like, look, we're going to be good parents. We're not going to do any of those things. Our kids aren't going to get devices. We're not going to do anything. And so we decided we're going to do that and be those kind of parents that were just like, yeah, we have our principals. We're not crossing the line.

And one of the other moms who had like slightly. No juice either, right? Oh, yeah. No sugar, like here it would be perfect. One of the other moms was like, hey, let me tell you secret about these travels with infants and in young, in toddlers. And we're like, okay, what's the secret? And she goes, Benadryl. I almost said that.

So we were like, no, we would never give over the counter, over the counter sleeping pills to our kid. Because Benadryl makes you sleepy. And, yeah, I'll leave it to the reader to think about what eventually happened. Eventually, eventually. It's so hard. Anyway, go ahead. Maybe they should sell bags of Benadryl. That would totally work.

Yeah, generic Benadryl, way cheaper. Oh, man. That's always the funny thing when I'm on social media or whatever, and I see these, like, you know, your wife is five months pregnant and this type A, you know, entrepreneur, husband is like, I'm going to be different with my children. I'm not going to do this. We're not going to have any screen time or whatever. I'm like, okay, yeah, just call me in three years.

Let me know how that goes after you don't sleep for a full night for several years. See if you still have the same resolve you have now because that second trimester is pretty easy, much different than when the kid comes out. All right, so anyway, I got to subtract. Do we like this deal? I haven't pooped on it yet, so it's good. On the face of it, I like it. If it's a kit business, I don't like it.

Heather, what do you think about three point one times SDE and financing? Any Hamers business that sells kits? I would have a tough time with this because I would, it said fast growing. It's been around only six years. You know, a lender would look back three, four years ago and see where it was then. And it would probably show that, you know, what this earnings are, these earnings today might easily disappear or shrink. And it would be pretty tough to put much leverage on that.

I think it would, and I think it's also probably not a U.S. company. to Michael's point, that's really tough to do. Even if you were back to onshore it, back to the U.S., really tough for a lender to try to underwrite to non-U.S. tax returns or non-U.S. financial statements. I think this one, there are some lenders who would do it. I do think it would be a limited number of lenders that would do this. I don't know if we say the C word out loud on this podcast,

but travel was interesting there for a couple of years. Certainly kids weren't on airplanes for a period of time, and so there might have been a real dip. and then a real rocket back up, um, and international travel or just making travel with kids on planes. It was probably pretty small before COVID, I would guess.

Yeah. And, and maybe it's grown with the rebound of travel since then. But yeah, it would be pretty tough to put a 10 year SBA loan as an example on a six year old business. We really have, that's probably got some volatility,

uh, in those six years. Yep. I mean, at its core, this business and the supplement business that we did in the last episode, like, it's the same thing, right? You build an audience through these platforms, and that's exactly what this person did, right? They started to write a travel with kids blog, and they started

to cross-post their content to social media. They would do a new blog and a new email each week. They get out to 50,000 viewers. And then once you have that audience, you figure out a way to monetize it. And in this case, they sell the people, you know, bags of crap that they import from China and putting plastic bags and have pretty good, pretty good stuff. But kind of the power of like, if you can figure out how to build an audience one way or another, there's just so many different ways you can go to monetize it. So I guess I've just totally described what's happening on Twitter the past six months. So sorry, but like it's just the pattern is here, right?

You get an audience and then you monetize it. That's right. And this whole industry, right? Kids, toys. The mommy bloggers is apparently now a pejorative. They don't like to be called mommy bloggers anymore. What do you call them now? I don't know, but my wife follows a ton of them.

Maybe they're mommy Instagrammers, but like everything we buy from our kids comes from people that I would call mommy bloggers. They're exceedingly influential in our household. So I don't consider it a slight at all because they're driving tons of transaction volume at least to our mailbox. But like these kids, toys and stuff, right? That's how you go to market. Yeah.

Well, Bill, I don't know if you're aware, but we also are accepting paid advertisers for our podcast here. Oh, really? I have heard that. Yeah, it's very certain. We've built an audience and now we're monetizing it. That's right. It's kind of the podcast, the cuttle flanks. Well, our audience is highly sophisticated, whole co-owners and business owners and operators and acquires, right?

I think the test is really. I think it's great. Well, that's like cloudbookkeeping.com and folks like that have been with us. Like, it's because you're exactly right. Like, it's that audience that we've got going on here with our 65,000 a month downloads, which is very exciting. Here, let me give you the pro case for somebody that should buy this. I think this is actually a really good business for somebody that is a stay-at-home mom,

but wants to be entrepreneurial, right? Like, my wife did a similar venture like that when our kids were younger and she got to work her own schedule and she was selling wedding sparklers online. And, you know, it just went really well. Like it basically has funded all of our kids' colleges because of what she was doing. So, you know, I think that's a good potential buyer than this. Are you going to have an opportunity really to grow much bigger? I don't think so.

But like for somebody who wants to stay in the game, but be stay at home and live this mommy kind of, well, we're not not calling them mommy followers, but like mommypreneur, like I think it's really good. Any of these niches that even though they have demand creation from content and influencers and Instagram, they still get search volume on Amazon and I just caught that they're doing zero revenue on Amazon. They have 10% they call B2B. I don't know how is the model that is.

But nothing on Amazon, nothing on Walmart. I got to imagine there is search volume to be captured there. Don't know how competitive it is. But that seems like a really good opportunity for the buyerless business. Yes, unless it's a kit business, in which case, Amazon is probably completely saturated already. 100%. Okay. Any idea how you would structure doing a deal like this?

Seems like one that's ripe for some seller financing. Yeah, I mean, I don't know that this is much going to get much differently structured than any other econ business. I mean, it's going to be under the SBA threshold, right? Right. I think given that it is under the SBA threshold, somebody is going to come along and use an SBA loan to pay 100% cash and close if I had to guess. 801010. Most likely. You could still do a small seller note with an SBA.

I think most banks like to see that. But again, I'd be worried if this does not have U.S. tax returns. That would be a pretty tough one if it doesn't to go SBA. So if SBA is out, this would be seller financing and cash. The broker did not mention SBA qualification and the deal the size they usually would, I would think, check that box. And so Heather might be sitting that out. Yeah. Yeah, probably no U.S. tax returns. We really take for granted how incredible the SBA program is. I mean, I would not be here without it. I would not be on this podcast. I would not have a business like we wouldn't know each other. I would not be an entrepreneur without that program.

The liquidity that the SBA program provides for businesses to trade is is the glue. It's it's it's the whole market. And I've been fortunate enough to kind of watch it grow over the last 12 years from really hardly any banks participating in these types of loans to all of them, you know, doing it. And it's just amazing the change that it's brought about. 100%. Yeah. It's awesome. on this July 6th it is another great thing about being American is our SBA program. Thanks to America. Amen.

Cool. All right, Bill, I think we're running up on a hard stop. So do you want to wrap us up and let's take us out. So that's it for another episode of Actualinonymous. Thank you to Kelsey Lerick for being here. If you are a Holco person or a aspiring whole co person, what is the URL, Kelsey? hold co-cons c-l-s dot com. Holdcocoms.com.

And I appreciate the time to be here today, guys. It was fun breaking down a couple of deals with you. If you're a deal junkie, you probably enjoy HoldcoCounce. I'd love to see you this fall. All right. Thanks a lot. See you guys next time.