Acquisitions Anonymous - #1 for business buying, selling and operating - Shopify App for Mexican E-commerce, $600k! - Acquisitions Anonymous 289

Episode Date: April 16, 2024

In this episode of Acquisitions Anonymous, Michael, Bill, Heather, and Mills dig into a startup from Mexico that's all about Shopify apps. They chat about what the app does, how it's doing financially, and if it's got what it takes to grow. They also discuss the ups and downs of running a business in Mexico, the wild world of e-commerce on TikTok, and what might be in store for Shopify. Should you buy this? Check out the listing here: https://app.acquire.com/startup/PPZlvLMJqJbD45atKWIWbrbYLUA3/82GQlSJqU3M1FltWXOxlAcquire.com is the online marketplace to buy and sell startups.Join 200k+ entrepreneurs closing life-changing deals. Buy and sell startups in as little as 30 days, supported by the best advisors and tech.Thanks to this week's sponsor:Have you ever wished your business’s software was a better fit for your needs?IvyWorks can help. They specialize in building custom solutions for SMB’s complex processes.You forge the vision, and they handle everything else: discovery, design, engineering, creation, and training. They’ve built everything from semi-autonomous, AI-powered roof scanning drones to mobile apps for managing hundreds of maintenance staff across thousands of properties.They only take a few client partners each year. You’ll be handled personally by founders Callan and Sam, with complete transparency and an open invitation to all development calls.Book a free discovery session, and we’ll make you an actionable project scope document that any software firm can execute. No strings attached.Visit Ivy.Works to learn more.Connect with us:https://www.acquanon.com/Twitter: https://twitter.com/acquanonFor inquiries or suggestions, email us at [e-mail] to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome back, everybody, to another episode of Acquisitions Anonymous. We had all four co-hosts today. Epic. That hasn't happened in a long time, and we brought a really juicy deal for having all four of us. It was a SaaS business on Acquire.com, and this business, we think it's SaaS, but it's maybe not monthly recurring revenue. We talk about splitting hairs between those, but it's a company that connects into Shopify, it's a Shopify app, and connects Mexican e-commerce businesses to FedEx. DHS, DHS, shippers.

And we talk about a lot of the nuances, what it's like to work in that market. Could this deal actually get done? Heather drops a huge bomb and says this is not financable by the SBA. But we talk about the underlying dynamics of Shopify in the market as a whole. And overall, it's a super fun episode.

So I hope you enjoy. Today's episode is brought to you by IvyWorks, a Boston-based software engineering firm dedicated to crafting tailored solutions for SMBs. Are you tired of off-the-shelf software that doesn't quite fit your needs, IvyWorks understands. Specializing in operations and client-facing software, they guide you from discovery to design, engineering, and beyond.

With the track record including projects like AI power drones for roof scanning and mobile apps for managing large-scale operations, IvyWorks is not your average firm. Led by founders Callan and Sam, they prioritize transparency and personal attention, involving you in every step of the process. Act now and receive a free discovery session, with systems, architecture, design, and feasibility study.

And even if you don't choose IvyWorks, you'll walk away with a comprehensive project scope. Don't settle for generic software solutions. Visit IvyWorks today and mention Acquisitions Anonymous for your free project discovery walkthrough. Let's build the software your business truly deserves. All right, happy April Fool's Day, guys. Anybody got really burned on anything today

besides my hilarious Olive Garden joke. You're welcome. I thought it was real. I was sure you had switched allegiances from show. I always saw it in Ardhawn. I was sure. I saw that spy photo of you at Olive Garden the other week, too. So, you know, putting two and two together, I was pretty sure it was legit.

I see these people that are like so like, they're like, oh, I'm not going to participate in April Fools. I just can't stoop to that level of like that level of just fun. I don't like it. I'm like, oh, just relax, man. It's not that hard. Just like got there to enjoy your life. My favorite one, and I got one of our employees a couple years ago, was she takes like most of the inbound calls.

And so I wrote down a number for her to call back. And I said, hey, Ellie Fant called from this number about a leak. Will you call them back? Ellie Fant. And it was the number to our local zoo. And so she kept calling being like, is Ellie Fant there? And it went on for like hours. She kept calling them back and couldn't get them and was just.

going back and forth. That's funny. I don't think this deal is Agrafouls. I think it's a legit deal. Man, one thing I'll say about a quarter, they keep getting better at their listings. Like, you know, I used to look at some of listings and I'd be like, oh, these are not very well written. We can't do them.

But these are like, every single one we seem to look at these days, it's like really well written. So let me read this one and you see what you guys think. It turns out it involves a country that is adjacent to my home state called Mexico. So I am an expert. So from Acquire.com, it is a Shopify app startup located in Mexico, and it is an e-commerce shipping solution designed to streamline logistics and reduced delivery costs.

Oh, you had me at hello. Asking price is $600,000. Multiple is $3.9 times profit or less than one times revenue. Then there's an asking price reasoning. I will just skip to that. Trailing 12 months' revenue is $1 million. Trailing 12 months' profit is $154,000. and last month's revenue was $65,000.

So one of the things we like to do is multiply last month's revenue by the trailing 12 months revenue, and it can tell you roughly if the last month was below or above the average revenue per month of the last trailing 12 months. And it looks like their trailing 12 months revenue was a million dollars. Their last month's revenue is $65,000. If you multiply $65,000 by $12, that is less than a million. So last month was quiet.

or quieter than their average 12 months. Let me attempt to defend them here, which is that I bet they do a ton of business on Black Friday because it's the commerce. So that might not be a bad sign like it seems. Yeah. Yeah, so seasonality is definitely a possibility. It's kind of like how every business suddenly

is like pictured as recurring sticky revenue, mission critical recurring sticky revenue, even though it's not. You're just like, oh, yeah, don't you know everything's SaaS now? everything from Chick-fil-A down to Salesforce.com. SAS. That's how this works. Company overview. Our SaaS Shopify app.

They have a SaaS Shopify app. It is a regionally specialized solution tailored for e-commerce businesses in Mexico. It offers a streamlined and cost-effective approach to shipping logistics perfectly aligning with the unique needs of the Mexican e-commerce market. Designed for seamless integration with online stores, our app simplifies the shipping process

by connecting businesses with leading local courier services. This ensures fast, reliable delivery catering specifically to the Mexican market. Key features include automated shipping label generation, real-time tracking, and an intuitive interface. The app is scalable, adapted at handling the varying volumes of both its small and large businesses. Our users benefit from reduced shipping rates with up to 70% savings made possible through our negotiated deals with Topps' career services. This boosts not only profitability, but also it enables competitive shipping prices for our

customers. Please note, the P&L numbers are in US dollars with the total sales section in the analytics 2020, blah, blah, blah, blah. Okay, then there's some stuff in Mexican pesos, which basically meets just divided by 18 or 19. Founded in 2019, team size is two to 20. They make money on a transaction-based model where we generate revenue from each shipping label purchase through our app. The straightforward approach ensures a consistent profit stream while offering competitive pricing to our customers. We maintain a uniform pricing structure offering the same rates to all of our customers regardless of their size.

This simplicity makes our app attractive to a broad range of e-commerce stores from small startups to medium-sized businesses and enterprise clients. TechStack is pretty standard Java, MVC-type stuff here, running the cloud, and they compete with Skydrop X and Invia, and they list some growth opportunities here. Key assets are a brand, website, domain, customers, code base, and IP. The growth opportunities are what you imagined. Shocker, social media marketing. Expanded new markets, increased digital marketing and increased pricing.

The potential for growth in our app is significant. A new owner could expand the business by investing in targeted marketing campaigns reaching a wider audience and boosting user acquisition. Cool. And reason for selling, the decision to sell is to focus towards a new app that has recently seen substantial growth and attracted funding.

The shift requires us to reallocate our resources and efforts to maximize the potential of our new ventures. Between 100, and a thousand customers, 1.3 million in recurring revenue, they say, and they grew 30% year over year. Cool. So do we understand what this actually does? Bill, maybe you'd be a great way to explain it. Yeah, so here's what this does. So if you are in Mexico and you are on a Shopify store and you're shipping to Mexican customers, or maybe not exclusively Mexican customers,

but someone buys something in your store, you need to mail it to them. So you need a shipping label. So instead of going to FedEx and, you know, whatever the Mexican equivalent of the U.S. Postal Service is, the Mexican Postal Service, or whatever carriers there happen to be, you want to figure out who is cheapest and then you want to buy the label. So what this is is software that integrates with Shopify so you can see, oh, it'll cost $7.27 using this carrier. It will cost $9.99 using this carrier, and it lets you the merchant choose which shipping method you want. buy the label and then print the lid so that you may then affix it to the box. So their business model, this is kind of a, I'm not saying I don't like this business,

but it illustrates where everybody misuses the term MRR. So the way this business makes money is they negotiate like a bulk volume rate with FedEx, say, and maybe it costs them six bucks, and then they charge you $6 and $60 for the label and they keep a 60 set spread every time a label is generic, which is why I am now more certain than ever that you're going to see a really big Black Friday or Q4 for this business, because they're making money every time a label is printed.

They're going to make a spread. So what this really is, and I mean, maybe there's a SaaS fee, $20, $50 a month, but if I had to bet, the lion's share of the revenue profit of this is spread on shipping labels. It's a toll, right?

Yeah, I mean, you pay, Because you, the merchant, you don't have enough volume with FedEx to command rates that good. So what they do is they basically aggregate volume, get access to FedEx volume rates, which is good for you, the shop owner. And then they basically share the savings with you is another way of framing. Right. Like, it's not so much that they're taking half of your taking half. It's they are aggressively negotiating. And as they get bigger, they get even better rates.

And it's kind of like a 3PL would. Like you aggregate, 3PL aggregates all the volume, negotiates a bulk rate. and then passes some but not all of the savings through to their clients. This is like that, but SaaS, if you don't have a 3PL, if you're just shipping it out of your storage unit or basement or warehouse or whatever. But without a subscription model, can you really call it SaaS? I mean, I guess there's no rules here, but it doesn't seem like it's actually software as a service. Well, I could call it SaaS, but I definitely can't call it MRR.

Okay. It is software as a service, but I definitely can't call it monthly recurring revenue. I can call it reoccurring revenue. And I bet it is semi-sticky, you know, because it's a little bit of a pain of butt to install a different Shopify app, but not like a devastating pain in the butt. So, yeah, I will call this reoccurring revenue, but not recurring revenue MRR in the true software sense of the word. And you're somewhat at the mercy of the shippers, right, or the couriers, as they describe it there, in terms of being able to negotiate reasonable rates. I mean, and I'm sure that's based on how much volume is running through your app. Does that sound right?

Yeah, and that's honestly, that's like a pretty well understood volume scale. You know, like as someone who has run a warehouse for a decade and negotiated endlessly with all of our American carriers, you know, just you ship more, you get better pricing. You shit more, you get better pricing. You know, there's certainly a skill of knowing how to ask, you know, knowing how to negotiate, concentrating your negotiation energy in the class of service where you have the most volume. So, for example, for us, we did a ton of volume with FedEx in what was called SmartPost, which is basically cheap and slow. And I didn't care what my two-day rates were because I never used that. So I would always dangle, yeah, we're thinking about doing a lot more two-day, but like I really care about the pricing on the Smart Post. And so they're like, oh, we'll make it up on the two-day volume.

And we just didn't ship any two-day. Right. So, you know, you got to know how to negotiate these carrier contracts and better negotiate. in the case of this business will lead to better margins. We invested in a company that did small business lending and stuff in Mexico. And some of the stuff they told me about the way, like, the Mexican e-commerce and specifically even the business market in Mexico was just like, it highlighted so many things that we take for granted in the United States and in North America.

Like the network of shippers is crazy. But then like even more fundamental stuff, like you can't, for example, do a, it we do in just like cold call business owners and sell them stuff you know we do that like just it's just like a tuesday like everybody does that to grow um because if you cold call people in uh in mexico they'll be like how'd you get this number because they're scared they don't want people to know that like you know they think the cartel they don't want it widely known who has money right because they don't want the card dollars somebody to come getting out of them so there's that kind of stuff as well that's like super weird and even going further i've watched a couple pitches where

people were like trying to do e-commerce in Africa. And Bill, I think you and I did a deal, we did a deal on the podcast like super early. Remember that? The e-commerce Africa one where it's just like, the people were just like, okay, well, you can't just hand it to FedEx and have it magically show up another place. It highlights just how much we take for granted, some of the privileges in business and infrastructure we have here in the U.S. And so like I think a system like this is essential in Mexico because they, you know,

they don't have the same kind of breadth of services and infrastructure that we do for sure. So what are the challenges of a U.S. buyer trying to buy something like this? Mexican culture, Mexican language. They speak Spanish. Mexican-Spanish? Mexican entity. I mean, I bet having a Mexican entity down there to do business with FedEx, Mexico, and with whatever local carriers there may be, you know, I think you've got to show that you're credibly Mexican. Yeah, that's what I would think, too. You've got to be local for this one. Even just, yeah, like you said, to have sort of the presence down there, you certainly can't finance it, that is what that means, right? It can't be, there's no SBA loans for this one.

So if you do something like this, it needs to be cash or cash in seller note. You know, one thing that's also worth mentioning is that what's interesting is that this is Mexican, but these are a dime, a dozen in the United States. So, I mean, there are infinity of these on the Shopify app store because it's all of the carriers have well-documented public APIs. and in fact, there are even well-documented public aggregator APIs. So you don't even have to call FedEx and UPS and Postal Service. You can call one aggregator API and it returns all the rates. So, like, these are relatively trivial to build technically.

All of the power or all of the secret sauce, if you will, is it going to be a distribution in the lock-in and in negotiating your rates? And I think what you'll find is negotiating rates, will only just help you win the race to the bottom. Right? Like, it's a race to get scale here, because if you can get the more shippers, you can get better rates with FedEx, so you can offer the merchants better rates,

which is basically how you compete, right? You say, we have the best FedEx rates, and we take the smallest margin, so merchant you get the best shipping rates. Well, and I don't know if it's, you know, if this kind of race has it come to Mexico, and these guys are the first movers in Mexico, and they might be able to hoover up a bunch of market

share and thus good rates in Mexico. But from a technological differentiation point of view, I don't think there's a lot here. What's interesting, they've started a new application. The decision to sell. This is terrible. It's focused towards a new app that has seen substantial growth more than this one and attracted funding. And the shift to requires us to reallocate our resource.

So to some extent, both the investors in their new venture and the people behind this I have kind of, well, I don't know, just send a very clear message they don't see that there's a lot of future in this bill. That's the way I read that. Yeah. So like, I don't think this is a bad business. I think you can't pay a growth multiple for this business. But, you know, you could pay, again, depending on the local dynamics, if these guys are the only ones doing it, you've got to assume competition is coming because the competition is already here in the states. I'd be thinking of how do I use my install base here to launch other stickier services to Shopify

store owners, you know, while, you know, because eventually this is going to, this is going to get harder. The competition's coming. And maybe, yeah, you have enough scale and you can negotiate really hard with the carriers and be the market leader, the low price leader. But being the low price leader is not always a great business model. But they're also just not big enough, right, to, like, to command that. So the inverse of that is there is somebody who's probably bigger or could be bigger if they wanted to and had maybe slightly deeper pockets for a little while. So to me, I'm like, man, you could get crushed really easily if somebody just came in and said, we're just going to do a land grab. We're just going to grab as much market share as possible, bleed everybody out,

and then we can kind of reset the pricing dynamics once we're, you know, one of fewer. or somebody that comes in that has all this American volume and they say, hey, FedEx, give us the same Mexico rates. Let's go. Are we long or short, Shopify? That's a complicated question, Michael. Well, it turns out you're an e-commerce expert. That is a complicated question. So, all right, brief like three minutes on the long and short case for Shopify. So on one hand, is Shopify the best software to use to start an e-commerce store, hell yes, and it's not close. You would be insane to start an e-commerce store using anything but Shopify now. They have the best software. They have the best developer network. They have great payments integrated. There is no reason to use anything but Shopify.

Shopify owns this market, owns it. And I think Will for a while for the foreseeable future. So the question is, like, from that point of view, it's a great market. They're doing a lot of of things to expand their margins. They're pushing into payments even deeper. They just did a price increase on their Shopify Plus product, which sucks as a merchant, but it's great if you own the stock. The stock has performed pretty well as of late.

Shopify is kind of the de facto. If you don't want to sell on a platform, you're going to sell on Shopify, period. But therein lies the rub, which is, do you want to sell on Shopify or do you want to sell on a platform? And this kind of comes to, I think, the existential questions about the future of e-commerce as a whole, which is, in 10 years, will more

volume go through platforms or will more volume go through independent stores, direct consumer? And what I see is the demand, the consumer demand aggregating to the platforms. I mean, Amazon continues to crush it, right? More and more and more people have Amazon accounts and prefer to shop on Amazon. They've built an unparalleled logistics infrastructure. And so then you've So you've got Amazon there. I think they'll continue to take share. Then, like, on the far other end, look at TikTok. So TikTok is what they know they have is all of these eyeballs, but they don't have

a transaction infrastructure. Amazon has a transaction in fulfillment infrastructure and no eyeballs, although they're trying, right? They're kind of much more bottom of the funnel, whereas TikTok has ton of eyeballs and nothing down the funnel. TikTok is launching TikTok shops, which is they're building basically Shopify functionality into TikTok, into their eyeballs, plus. platform. Facebook has repeatedly stuffed their toe on Instagram shops and all this stuff, but they will

eventually get it right. So the platforms, the eyeballs platforms are building Amazon type functionality, and Amazon is trying to move up into the kind of the eyeball part of the value chain. So it scares me as an independent merchant, but also as a Shopify shareholder, you know, how does Shopify fit into that ecosystem 10 years from now? I don't know the answer to that. But it's, very interesting. So Bill is literally long Shopify, but understands both sides of the trade. Yeah, I mean, I own a whole bunch of Shopify stock. I do. It's done quite well. And then in my business, you know, we run Shopify's our site, but I also run Amazon and I just got a phone call with TikTok. Like, we're growing hard on TikTok shops. So like, we're trying to platform diversify in our business.

But I mean, I don't think Shopify is going away, but I have real questions. I wonder. if Amazon buys them. I wonder if TikTok buys them. I wonder if meta buys them. I wonder if any of those would be approved by the need to trust people. I don't know where Shopify goes, but it's going to look notably different in a decade, I think. It's interesting. They're like one of the ones you just kind of listed, they're like one of the few ones without an audience or a broader platform, right? TikTok meta. That's the problem. They're kind of caught in the middle, right? They don't create a whole bunch of eyeballs and they don't have all of this delivery infrastructure that Amazon has. $100 billion market cap.

So that would be 5% of a Microsoft or a meta. Yeah. But Bill, what do you think? I mean, do you think that the data that Shopify has is arguably more valuable than the data that TikTok has? Shopify, I don't know what data both of them have, but Shopify would have your payment info, right? If I bought anything from a Shopify store, they got my name, my email address, my phone number. and my credit card info. TikTok may have a lot of impressions, right?

I mean, I'm not on TikTok, but if I'm a user, they have tons of data about what I like and don't like and how long I stay on a post versus scroll past it. But at this point, they don't have deep data, right? Things that are maybe a little bit more actionable. In my experience, I think of, I'm not saying shoprides going away, but I think in general, as has been proven across many different business models,

value aggregates to whoever controls the customer relationship, I think generally. And the customer, if it's TikTok and they control those eyeballs, not right away, but eventually they have a lot of power there. And Shopify does not control, like they might have a credit card number, but like if you're on TikTok,

it's not that hard to enter a credit card number into TikTok. Yeah, you may not even make it to the e-commerce store because it's all native. So it's already that way. So that's what it is. On TikTok shops right now, we're integrated. So the customer transacts entirely on TikTok. And then TikTok on the back end actually pushes the order into our Shopify store.

And Shopify acts much more like order management and, you know, it interface with our 3PL and all that stuff. Because that TikTok knows all the brands already have that infrastructure. Like if you can get an order into my Shopify, I am capable of shipping it. So TikTok has built out just sort of the cart, if you will, the transaction. an execution and then pushes the Shopify to handle all the backend. And I don't know the shop fight is going away, but maybe it ends up looking more like a net suite or like an ERP or, you know, operations platform. So in a few minutes, a few minutes we have left, A, do we like to steal and B, who should buy it if they do?

It depends on Christ. What do they want? What are they asking? 3.9 times profit. I mean, it's not crazy. It's a little rich. I mean, what I would want to understand is growth. I want to understand growth of Shopify in Mexico. I want to understand growth of the Mexican e-commerce market generally. I want to understand if this is shrinking, if the air is going out of this market or if the years coming into this market. If the errors coming into this market, you know, maybe some sort of earn out type situation.

Like I think it's tough to pay four years forward because there's a lot of disruptions going to happen in the next four years. So you're going to need to, in order to pay four X, you're going to need to be seeing some growth. I mean, there's platform risk here also. This is Shopify only. You know, we potentially have a situation where Shopify decides to build this functionality in. This seems very core to me, right?

Everybody else is vertically integrated. Like Amazon has their shipping. So what's interesting is this, Michael, this is already built into Shopify. So I want to understand how this is different than the functionality that is already built in Shopify. We definitely have to understand Mexico and Mexican business. and have some money and not try to borrow it. I think that's what we're determined.

I'm also just trying to figure out what would the bull case for this be. I mean, maybe you have some deep end roads in another country, right? It's not just Mexico. Maybe it's Central America, like, on the whole or South America as well. I don't know what, like, little kind of silver bullet somebody would have to have to make this like a slam dunk. Yeah. And also, it's a different dynamic down there, right? instead of eBay and some of these other platforms,

you have Mercado Libre as another one. Like that's their version of that for Latin America. Like you just got to make sure if you're getting into this, it seems like you really want to be somebody who understands the dynamics of the tech market and where it's all going, you know, down there. And I don't think any of us do, which is probably why we're not in the category.

It's why we're all scratching our heads. Yeah. If this was just a U.S. only, like it gets easier for a U.S. buyer. but, you know, I think if you're, you know, somebody in Mexico with the pockets to deal with this and understands this stuff, like, it's not the worst, but as Bill said, a little rich. I just want to share risk with the seller in some way. And so I want to find a way to share risk with the seller. And I also want to make sure I had a really strong growth thesis.

Because I think you're going to have some dynamics over the coming years that are going to put pressure on you. You know, more competition, maybe shop five. builds it in, I would want to have a real thesis on how I could make, I could grow this, either getting off Shopify, offering different features and services, et cetera, that I need a more complicated, or more complicated growth thesis than simply just sit here and wait for the Shopify market to get bigger because you could get hit by a meteor. Yeah. All right. This is a good one. Heather, did we mansplain you enough in this one? I have nothing to contribute to this one,

but I did learn a lot from Bill, as I always do. And I'm kind of fascinated about. about the whole shift in e-commerce maybe to the TikTok-type channels. I think that's really, really cool to know. Yeah, super cool. All right. Any last words? Cool. See all next week.

Bye. Tell your friends about the podcast. We'll appreciate it. Bye.