50% Of Shopify Businesses Are Worth $0 (With Fan Bi) transcript

In the last year, my friend Fan by has looked at over 300 businesses to possibly buy or advise or buy positions in or something. He's seen a lot of e-commerce P&Ls, a lot more than I have, a lot more than you have, a lot more than anybody I know has. And he has a position on what is happening in e-commerce right now. And Fan is just feeling rosy about everything. He thinks everything is great all the time. Just kidding.

And so, it's a great time to have him on. after I released an episode this week telling you why I still think e-commerce is a great business. Fan is going to tell you why he has real concerns about the space. I won't put any more words in his mouth about that. He is one of my favorite people in e-commerce become a good friend and one of the sharpest minds in our space thinking about businesses at the level of the P&L at the level of what makes it a good business and and think about the value the equity value of a business the enterprise value of a business not just tactics about how to make it better.

Let's get into it with Fan B from the Hedgehog Company. Andrew, great to be on the show. Thanks for having me. Yeah. Yeah. Yeah, man. Good to good to see you as always. That this was like a quick turnaround. I said we should do a podcast and it was like boom, we got it scheduled, which I appreciated because I I wanted to do it. Um uh so, okay, let's let's just tell people about Hedgehog real fast. Like what is what is it that you do?

I mean, just tell people why you've looked at three over 300 business in the last year or I don't know 100 this year or however you want to say it. Just so they understand where you're coming from. people are looking for expertise on or an opinion rather on what their businesses are worth. Um so there aren't very many voices um in e-commerce trying to beat the drum of hey it's probably worth checking what your business is worth before committing the next 5 to 10 years of your life building something.

Um, so brands reach out to us either through our network or through our content marketing saying, "Hey, I'm building a 5, 10, $20 million business, profitably, unprofitably, growing quickly, not growing quickly. What is it worth? How do I sell? Um, there's a ton of content um, historically in e-commerce about marketing. There's growing content around finance. I know um you've been talking a lot more about supply chain um but there still isn't very much about the M&A landscape um and so we try to be a voice.

We try to share an opinion um so people reach out to us about that. Yeah, I think that's totally right. And like I feel like it's like your beat whenever you've come on my show and it's really helpful because like you're one of the only people I know who is spending the vast majority of their time just like analyzing e-commerce businesses and so u you know I did the intro talking about how you're more pessimistic than I am and I think partly like that's probably because I have too much selection bias towards clients that I'm working with and people are talking to me and something like that.

Um whereas you are actually seeing a much wider swath of the market than I am. Um, so you've looked at uh like I said uh you know 300 brands last year, 100 brands this year. What's like the big impression that you have of e-commerce right now? Like what do you what do you what are your sort of largecale observations um about the space? Because I I literally just recorded an episode. You haven't heard it yet, but uh about why I'm still bullish on the space and and that's just a very me kind of thing to be super optimistic about it.

But like uh you know what are you seeing? It's a good reflection that you know you're seeing highquality businesses and more specifically you're spending a lot more of your time with clients that are doing well. Um and that's kind of self-fulfilling. We see maybe a broader reflection of the median kind of Shopify business mostly in that kind of call it 5 to$20 million revenue range or maybe even 3 to 30 just to broaden it a little bit.

Um, and I think the median Shopify business is challenged. Um, and that's probably what's driving a lot of our pessimism that it's conf it's two things. One which is the operating environment is challenged which is reflected in their P&L and their the enterprise value is challenged caused by the market's impression of what DTOC businesses are worth. Um, and so the combination of those two make it really hard to be a median e-commerce seller today.

When you say they're challenged, what do you mean? So, if I looked at the, you know, 300 businesses that we've seen in the last year, I probably break them down into three buckets. I'd say half of them are I don't want to say bad businesses, let's say challenge businesses. So that their specifically their P&L is very very hard to win. Uh very hard to get profitable, very hard to be a going concern. Um their gross margin is sub 50%, sub 40% after shipping and fulfillment.

Um their marketing spend is 30 to 40%, and so from a post marketing contribution margin, they're either flat or negative. Uh their retention cohorts aren't strong. And so what is the asset that you're building? So that's half the businesses. Yeah. And you think you think half of e-commerce businesses right now have sub 50% landed margin to the customer? Yes. That's Yeah, that's that's really fascinating. Um Okay. I have a lot of questions and thoughts about this, but I'm going to I want I want you to finish your thought like what are the other things that you see?

Yeah. Um, and I think a lot of them I think the the vintage is also important. I think if you were to look at businesses that started in the last four years, they're probably financially healthier than the businesses that started in the 5 to 10 years prior, right? I think that there has been a lot more financial education and a lot less equity capital. um both of which have driven a need to be more financially disciplined or just an awareness that you need to have better gross margins.

I think that there was this perception that you could start with directionally 50 to 60% product margins and like there was this misunderstanding of what product margin and fully landed gross margins was, right? Like you'd talk to four different e-commerce operators and they'd have four different definitions of what gross margin was. Um, and so you had a lot of operators starting in 2016, 2018 that said, "Okay, I'm going to have 60% product margins.

That sounds pretty good." And then because the category they were in or because they had high returns or whatever, they ended up with fully landed gross margins of 35%. And they just thought that it was fine because they were like, "Oh, I'm anchoring to 60% margins." That was just kind of uh the rubric they were using. But it's just really hard when you actually landed margins that are 35%. There just isn't very much room to operate.

Um, so I think that's that's 50% of businesses. Um, I think there's another 25% of businesses that we see that are have good attributes but that are trapped inside some bad balance sheets um or trapped inside some wrong expectations in terms of growth, right? they have kind of good margin profiles, but they're running the business too aggressively and not efficiently enough or and or they've taken on debt which has kind of made the servicing and cash flow and working capital thing a massive mess.

So that's probably 25% of businesses. So when you say that the balance sheet is bad, that's what you're thinking of is like bad debt basically. That's right. So they've got some old MCAs that are killing them. MCAs, um, accounts payable that they've like, you know, stretched the vendors on, um, uh, potentially a meta balance. Um, and and all of these were kind of band-aids at one certain point, but, um, it's it's hard to generate enough free cash flow from operating to be able to service these band-aids over time.

Yeah, that's terrible. Um, yeah, that's that's really interesting. Okay. Um, okay. What about the other 25%. Yeah. And then the final 25% are good businesses, right? Like I'd say probably indexing more to like businesses that have started in the last four years as you know, let's say DTOC has been around Shopify ecosystems been around for 15 15 years. In this last third, so the last 5 years, people are just much more aware. they're probably on to maybe their second or third e-commerce business or they're like they came from agency land and now they're starting a brand.

So, they're just um much richer in data, much richer in experience, understand where margin profile needs to be, you better understand market trends. Um and and they're building good businesses. Um so, yeah, I'd say that that's that's the third bucket and and kudos to that group. Yeah. Okay, great. This is a really good thing. So I think people who are listening to this, watching this can start to think about how their business fits into these different uh profiles.

Okay. So let's let's go back to the first 50%. Okay. The the group of businesses that are um that are that are in real trouble. So let's say I told you you had to buy one of those businesses, okay? You just you had to. It was for whatever reason it was like you had to do it. Okay. Um yeah. Anyway, uh if you did that, um do you think how many of them of that percentage do you think you could by looking at the P&L the right way and thinking strategically about how to um approach things like supply chain, ad spend, opex, right?

Like how many of them do you think you could turn around? And what I'm really asking is like are these businesses uh were they dead on arrival or or is this that like they that operators in some of those cases just haven't quite figured out how to be good enough? I wouldn't say this to many people um because we're good friends. Um we've failed at turning around these businesses. And so I would say that if you asked me four years ago, I would say a much higher percentage could be turned around than what I think today.

And so to answer your question, um we just we wouldn't we wouldn't take a run at it. We think it's really hard to take a business that doesn't have the gross margin. So what do you So let's just take the kind of components of the business. So the what do you need to believe to get the gross margin of? So you need a resource which is really hard to do and we um have uh our mutual friends um at move and more staffing um that do a great job but it's still hard because there's definitely risk to it. this working capital needs to it.

Um, and it's it's going to be bumpy. Um, you have to underwrite some kind of price increase. Um, and then you're questioning the elasticity of the customer, which is probably pretty low in most industries cuz products are so commoditized and competitive. Um, you probably need to believe that you can drive increased marketing efficiency, which you're better at than we are, but um, it's just hard for us to believe that they were doing it so badly that we can get such a material lift.

Um, and so there just has to be a lot of work done to get to what an end state of maybe 5 to 10 points of EBIT, maybe. Um, and so risk adjusted, it's just not a place that we spend time. [Music] When Rich Panel first reached out to me to talk about sponsoring my podcast, I told them the same thing I tell everybody uh who reaches out to me whose products and services I don't actually use. I told them no. And then I realized something which is that multiple of my clients actually were using Rich Panel and were really liking Rich Panel.

One of them actually wanted to switch to Rich Panel and uh needed to clear some little hurdles but was was actually already planning on moving that way. And so I began a little bit more of a conversation and had one of my favorite calls with a software provider I've ever had with uh Amit from Rich Panel, the CEO of that company. The mentality at Rich Panel is really really refreshing uh because they are trying to build a tool that is AI first from the ground up to be your help desk software.

They do some really basic stuff, right? Where where uh it just makes sense to take a call with them. Like if you're on Gorgeous or Zenesk, they guarantee you they can save you 30% uh relative to those two platforms and reduce your ticket load by 30%. They also can um switch add you to Rich Panel, like make the transfer from your old help desk software to rich panel in less than two weeks. They really value your time.

All those things are no-brainers about what makes Rich Panel um a good option for your help desk software. You should go to richpanel.com, get on a call, see if it'll work for you, take a tour of the software in general. But the thing I wanted to tell you about what I was so impressed by was how um unwilling Amit was at the same time to overpromise. Um how much they showed restraint on rolling out AI tools before they were ready. uh he told me at one point we don't do fully automated AI things um in these two areas of the software you know that uh because they get it right 90% of the time and that's not good enough you for it to work you need to get to 99.9% of the time and then we can do a fully automated AI solution and so they build and build and build to get that right I've taken countless AI focused calls in the last uh few weeks few months whatever it is and man that is such the opposite attitude of what um so many people are saying where you have this moment where you think AI is going to take over everything and it's awesome except you start actually using the tool and what happens it only works 60% of the time or something like that.

Um so go check out Rich Panel today. Really really cool software going to save you money going to make your um reduce your tickets which is going to please your customers. Um AI is built in at every step of the way. It is AI first but without overpromising really awesome stuff. Richpanel.com go check it out. Yeah that's I mean that's it makes sense that you wouldn't spend time there but I think the question and and it's probably not where I would spend the time either if I was in your shoes when you say that you guys failed to do it.

Um, why do you think you failed? Like what did you believe that turned out to not be true? Because we thought we could do all these things. We thought we're like, "Oh, great." Which ones did you think? All of it. All of them. Yeah. We thought that like great, we'll um we'll move the supply chain and um get, you know, 10 to 15% gross margin lift. Easy. But you have to kind of sell through product that's at modest velocity.

Um, and pair that perfectly in a jigsaw puddle puzzle with new product that's coming in that's that the customer is not going to super notice or the work of kind of the sampling process. And it's to move a supply chains. It's a 9 to 18month process. So you're not realizing the um you're not realizing the benefits for a while. And so you kind of need to survive through all these changes. Um the pricey elasticity like if you know we most brands the median Shopify brand has now trained the customer on a promo calendar and especially in a in challenge situations and increasing promo calendar.

And so now we're kind of trying to increase gross margin selling more at full price on a customer that's trained on um discount and trying to increase prices. So that's really hard to do and something we've kind of struggled with. We've tried to pair like brands and over list overlap customer files which just hasn't hasn't worked at all. Um and have talked to a number of platform and aggregators in the space that have shared similar feedback.

Um and yeah, I think we have taken huge bites of humble pie around increasing marketing efficiency and being like, "Oh, we're going to do um better structuring, better testing, more creative." Um and it's all some combination of expensive and works less good than you think it will. Yeah. Yeah. I I mean, I think that's I think that's a sane approach. I you know it's just interesting because I think the part of the reason I've talked about being so bullish on e-commerce is like I look at these different elements of the P&L and go like there's just so much more resource now to do these things well than there used to be and maybe where that's really coming out is not at the level of actual optimization of an existing business but what basically what you alluded to before which is that it's businesses that came up in the last four years in the environment where you know as I always call it the intellectual capital and DDC collective balance sheet um those brands that came up with all that intellectual capital like you said maybe they came out of an agency like CTC you know, I had Isaac Merins on from Flux Footwear in the last couple weeks.

He was at CTC went and started a business and look at that mid 8 figures pushing 20% margin like you know with great TAM opportunity all you know all that kind of stuff. So um it's like it yeah it suggests that maybe the actual answer here is that it's about opportunity selection more than it is about the ability to turn around an existing business that isn't that good. Um, and that it might just be hubris to think that like, you know, you can you can turn around a better business.

Like because I I'm sort of listening to you going like it's just so hard for me to imagine some of those. But then I think back to my own experience with this and go like okay when I was at 4x400 I always give the example of this like brand that we had that was like I don't know maybe pushed to 10 million not even quite was like six or seven million probably in revenue barely spun a profit and it was all the things that you just said low LTV margin was like 45% landed to the customer no matter what we did about it we actually did a pretty good job on marketing on it I think and did some cool stuff and I sort of think getting that business to six or seven million bucks or whatever it was um was like my greatest accomplishment ever, you know, because it was like the deck was so stacked against me, you know, um that it was like, well, we actually did a great job.

In fact, what we should have done with that business is is not approach it as a DTOC business. Like it was the wrong channel fit for what the product was because it was expensive to ship to individual customers. And really, we needed to think differently all the way around and think it's a wholesale business is what it is. And you got to think about it like that. And and that kind of shift is really about opportunity selection.

You know, it's not about going and optimizing within a certain DTOC framework. It's about rethinking exactly what will create value in the business. It's like uh and that's that's just like a much harder bit bigger thing. You know, you mentioned you mentioned move supply chain more staffing. Like I'm such a believer in those people. I think there's a lot of opportunity. I think a lot of supply chains are underoptimized.

But you're right. 9 to 18 months is probably a good timeline to think about winning on supply chains and they are really really good talented people. They are not magicians though. You know, you can't find 20 points of margin on a lot of businesses. I don't know maybe maybe Laura would disagree with that but like you know it would be really hard to do I think. um especially in the current environment. So yeah, I think uh I think it's a it's a good point and I think that just to spend a minute on the $6 million, let's call it break even business or even like let's even be a little bit more generous, the $6 million doing 300k in EBIT, so 5%.

Yeah. And I think it's quite an interesting debate, not one that we necessarily need to get into today of like is that a good asset to own or is that a good asset to have? Is that something that people should feel proud? Because I think that the median Shopify seller I think like the median Shopify plus seller is like a3 to5 million business and so like this is marginally more than that and then be like if I could just get to 6 million and 500k in EBIT like that would be so great.

I'm sure there are a lot of listeners today that are like, "Oh, if I can get my business to 6 million and 300k in EBIT, that'd be really great." I I actually just disagree with that, and it sounds like you do as well of like, yeah, that's still a really tough business. You're just still massively pushing a boulder up a hill. You've got working capital problems every day even though you're quote unquote profitable. Um, that's why we think e-commerce is really hard. that business is that's a that's a great I think I think that's a a really good example because in that business I mean we literally had this conversation at 4x400 right we had multiple brands in our portfolio and we're spending a bunch of time on that brand and the ultimate decision at the end was it required the exact same amount of output of of uh mental and temporal and financial force to get that business to there as it did to get Bamboo Earth which is the one business they kept you know to a much better spot at the level of profit and cash and all those kinds of things and and so the the problem with the $6 million business putting off 300k, first of all, like you said, it has no cash.

So like the 300k you don't ever get to put in your pocket ever. Um and then secondly, um the problem is that uh the the problem is that you could apply inevitably you've done a decent job running that business if you got to 6 million at 300k. So like you have you know you've done a decent job. If that's the case, then you could probably apply that same level of force to a much better opportunity and end up in a much better spot.

And that is that is the fundamental problem with that business. Um, so you have to think about like like I said like is there I I think the question that I would ask if I if I ran that business, the question I would ask is is there any way to get this business to double and to get the profit to triple as a raw number, right? If there is, it becomes a much more interesting opportunity. And as long as that's not a fiveyear path to doing that or something like that, you know, then like then it becomes Yeah.

Unless it's a passion project, which if it is, more power to you, you know, but like um as far as thinking about it, you know, on just raw terms, like you and that's why I go back in the example I'm thinking of in my head. It's why I go back to the idea of like, oh, I think actually if we had put rejiggered all of our efforts into like wholesale relationships, we could have really changed the margin profile of the business and potentially u just done some really different things in a way that maybe would have produced a meaningfully better business or at least a much more profitable business at the same level.

Um, but we we sort of we were sort of dead on arrival from a DDC perspective for a bunch of reasons. So yeah, I think I think that's that's the thought is like essentially how much effort can you put towards it and is there a way without tripling the effort to triple the value, you know? Um, and I don't know cuz that business $6 million business that grew 25% last year, let's call it, and is at 300k in EBIT. I mean, what would you pay for that business right now, Fan?

I mean, you probably wouldn't buy it, but like let's say let's say I was forcing you to buy it. Like what would you I think our general rule of thumb is at this range in the like sub2 to $3 million EBIT things trade at between a two and a half times to maybe four times EBIT. Um yeah, I was thinking 3x SD somewhere around a million bucks is the value of the business. Yeah, I think that like and just to push a little bit on the like you know you said it in kind of passing of oh we could go wholesale like you know that's been a very invogue thing to talk about and I think that's just also another way to die right not to be the perma bear here um and you know we've got you know um Andrew with a big smile me frowning but like we've just also seen a lot of businesses Australian man you're supposed to be like the happy people or everything's going great I think we've just seen too um the the5 to6 million business saying, "Hey, we've flattened out.

We can't find efficiency anymore. Um growth has slowed. Everyone keeps talking about going into retail wholesale." And we've just seen that being a really big cause of death of introducing operational complexity. um you got working capital challenges um of instead of getting paid today by your DTOC customer getting paid 90 to 120 days later by um a buyer uh you've got you have to stop that up. It's it's a completely different go to mock in motion.

Well, I don't think that's wrong at all. And in fact, I'm thinking not about that as a strategy generally. I'm thinking about it really specifically in the case that I was in where it had a real niche community that like shop at some really specific places that you could potentially have gotten into and it would have been better. And then I'm also thinking in that business again it was it was um businesses I don't think it's not a problem for me to say it's slick products um slick was uh wash products for off-road vehicles, right?

Dirt bike, ATV, that kind of thing. So um heavy bottles of liquid are just extremely expensive to ship individually to a customer, but they're not that expensive to ship on a pallet. And so um and and the actual the goop itself in the packaging was not particularly expensive. You know the margin all of the margin got eaten up in shipping it to the customer. Um and so so yeah anyway so you know we had looked at that and said like maybe now that might not have worked either but what I think about retail in that case it definitely would be a way to die for sure.

You could kill the business that way for sure for all the reasons that you said. Um it's just that it's was going to be very hard to ever get the business to 20 million in revenue apart from that kind of thing. And so it's while it is a way to die, it's also probably the only way that I could see in retrospect to have also made it really valuable. Um, uh, you know, so it was just a riskreward thing like way probably more risk but also much more reward because you would end up potentially having more margin as well.

I wouldn't have stopped selling DTOC. just would have considered it a secondary channel and and try to grow it more in some other channels, you know, and we had for the record, we definitely had people at the time suggesting that um you know, saying like this just you just have the wrong delivery mechanism for this and something that's underrated. You know, I had I had Kelsey Laric on here a while back just debating this stupid question of like is DDC a business model or is it um a channel?

And one of the reasons I say it's a business model is because shipping the product to the customer logistically is like very core to the thing. And if you can't do that in a uh cost-effective way, the business breaks. It doesn't work. And so like um and and so yeah, so that's like one of the things. And I think a lot of brands, I don't know if this is something you see when you're talking about the 50% of brands, like I think a lot of brands end up not realizing how much like the cost of shipping to the customer ends up crushing their margin.

And it's because it's like a value to weight ratio problem, right? like, you know, you can't if you have a if you have something that costs the customer $40 and it's kind of big, like you're just you're just dead. Like it's just it's really hard to like make it because if it cost you eight bucks to ship it or something like that, like that's 20% of the of the money you collected, like just even if you charge for shipping, like it just Yeah.

And people do that math wrong all the time. So yeah, I I don't know how much of a problem you see consistently on that, but I think that is something people underrate as they're doing this calculation. Yeah. Um, does D TOC work for anything else other than supplements and beauty? I think that's a question that like, you know, we ask more internally now. Um, and I wish that it wasn't that way, but like in the same way that I tell my kids like there are only a couple of or only a few types of jobs that you can do if you want to earn a lot of money.

You can't just do every job like and that's the way the world is. Like I think DTOC and categories is the same. that there are just a lot of categories that don't work on DTOC even if the end customer really likes the product. If you are trying to build a profitable e-commerce business, there is a tool unlike any other that is thinking the same way as you for doing that and that is Intelliggeems. When I talk to my friends at Intelligjs about what I'm supposed to say to you as a sponsor of my podcast, they say the same thing over and over, which is all we care about is people operating excellently.

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Because this is something I think when I debate this question with people. Well, I think sometimes I have a different idea and it's partly because I've said this before, but I'm just not that ambitious. So, like how big does a business have to get and how much eBay does it have to drive or does have to drive uh for it to work quote unquote? To your exact point, I think it's different for everyone based on their personal ambition, right?

But I think going in there is some loose calculus of what do I need to get paid and then on top of that my equity as a bonus. like what is my bonus worth? Um, and you want to be building both of those over time and they should match your ambition. Um, what certainly doesn't work is if you're expecting your equity to be a part of your base. I like, hey, I'm actually not very happy with the salary that I'm making. Um, but you know, I'm going to make it all back on the equity.

And you've tremendously mispriced the equity and it's actually not worth anything. And that's a that's a bad setup. I mean, yeah, that's that's a real Yeah, that's that's a rough day to wake up and realize that that's the case. And I'm sure you see that a lot. Yeah. I think that's the median Shopify business where they're like there's not they're not earning as much salary as they want to. Um, but they're making a bet that the equity will be worth something that will advertise over the 5 to 10 years that they run the business and that doesn't end up being the case.

Yeah, that's a rough situation. Um, yeah. So, I mean, are you just uh getting out of e-commerce? Is that what you're telling me? That's what the announcement is for today on the pod. Um, that um I will be going into real estate and leaving e-commerce. Um, no, I think like vending machines. Yeah. Yeah. Um, vending machines, dry cleaners. Um, yeah. I think um Wait, can I tell you a story about this really fast before you say this?

I had a funny conversation with a friend of mine who was uh who had been in DTOC for a while and he switched completely industries like just got a job in an operational role um at like an industrial electricity industrial electrician B2B company um and he said he was in a meeting in like his first couple weeks and you know they're talking about how like they had quoted they had priced uh whatever they had priced the the job out this this business is like less doing less than 10 million in revenue.

Um they'd priced a job at whatever they had priced it at. They did the job and their costs came on under under what they had expected their cost to be by a couple hundred,000. And so they just had 200 $250,000 more on the job in profit than they had expected basically contribution margin, right? Um and he's like they're sitting in this meeting and somebody like announces that and they're like, "Oh, that's great." Like everybody says, "Oh, it's fantastic." you know, and I just and and he and I both were talking about how like in D TOC if suddenly just someone came up with $250,000 on like a $10 million business or something like that of just like extra profit that nobody saw coming, you know, it you would everybody would have stopped and immediately gone and had a party, you know, cuz it's just like you're just like clawing for every dollar like that, you know?

He's like they just like found it under a rug and it was like and and and clear what he learned, right, is that that like happens reasonably often in that business. And so just ran at this monster margin doing this thing and had been doing that for 50 years. Somebody had started it, you know, and it did it was one of those things that made me think like and maybe just to put the question back on you like why are we in e-commerce?

What what is there a different world? Is the is other business actually easier or is it just the grass always greeners? Like I don't know fan are you quitting e-commerce is that is this is I I suspect that the grass is greener which is why I'm here but maybe that's just a story that I tell myself. To answer your question more directly as to why 15 years in I'm still in e-commerce, I think I have certainly a um skepticism and I don't think that there's any free lunch.

But the reason that I'm here is I like the industry. I I like thinking about why consumers want to buy products, how you price them, how you position them. Um, I'm inspired by the 25% of good businesses, new cohorts coming through, um, running e-commerce businesses really well. Um, we also love kind of doing deals, right? The advising brands through these situations, um, and trying to get it turned around kind of that we find really energizing.

So, um, but yeah, there's definitely kind of a big dose of reality versus when we started this practice kind of four to five years ago or when I got into e-commerce 15 years ago. Wait, I have another question. I was thinking I as I was thinking about your examples of a business with 40% landed costs, uh, 40% landed margin and 30% in ad spend. Why doesn't that brand just spend 20% on ads? Yeah, because it doesn't have a strong enough retention cohorts and um and and so you know it's very onetoone to topline um and then you just get to lower kind of contribution margin and absolute dollars.

Um that's that's the down that's one version. Another version is most founders and operators just aren't willing to go down in revenue, right? Like that's kind of it's it's blasphemy to say we're going to project down but try to be more efficient. Um even though that might be the healthier thing to do like and we tell brands we talk to all the time like it's better being you know for your 25 plan it's better to be 15 and positive one and a half than it is to be you know 21 and negative -2.

Um, and but what they index so much on is like we so want to grow to 22. Like if we can just get that a little bit because if we can get to 22, then maybe we can get to 28 the next year, then we can get to 35 and now our, you know, our business is going to be worth a lot more. Um, and I just don't think that that's true. Um, we have seen probably a handful of deals in the last year where they've gotten to true scale. you know, looked, we worked, we were an adviser um on a kind of approximately $40 million fashion business um that sold for kind of mid-se figures.

Um and um and yeah, it's, you know, you would think from the outside like, okay, you've reached the promised land, you should have operating leverage. Um, but they're there just aren't very many buyers for break even businesses. Um, and if you are a break even business, I think the other thing we realize is there just so many ways to die. Um, there's so many ways to experience very acute pain. Even if we think about again the last five years like let's start from the beginning like you so you get co where for half the industry you get massive demand for the other half the industry you get no demand the year after that you get kind of supply chain whiplash everything's trying to get onto a boat things ramp up they get delayed you're missing inventory plans um you have you know sticking on the supply chain you have your factory go bankrupt um because they can't stand the supply chain whiplash.

Um, you've got a 3PL move, but it's been bungled. You can't sell product. You got stockouts, you got angry customers. Um, you have iOS 14 uh wreaking havoc on your CAC. um you've got 145% tariffs or 46% tariffs or um and you know I think you talked with Taylor a little bit about like building the anti-fragile business. I think it's really hard to do in e-commerce. Really hard to do. Yeah. I um I just want to say if somebody has a break even business, a break even $40 million business that they want to sell me for a few million dollars, I'm interested.

Um I like I just it is impossible for me to hear that that's the case and to think that there's just not something else going on there that is just being operated in a way that is sort of silly. Um I I just can't imagine if you if you are able to break even on 40 million. I mean it's not it's not the grocery store and it's not an airline. Like it just it can't be the case that you can't find a way to shrink that business and make it way more profitable.

And I I that just seems Yeah. I mean, maybe maybe it is, but it's maybe it's just Yeah, but I I mean Yeah. Go ahead. What you say? Yeah. Um so just to add a couple more attributes, right? Like um because it's a fashion business, there's a ton of NPD, which causes two headaches. One, you've got heads. What's NPD? Um new product development. Yeah. Um you need to have the heads doing the MPD. Um because that's just what the customer expects.

They they need the newness. That's what drives LTB. Um but it has two very tangible costs. One which is the actual heads to be doing the product designing, the sampling, the sourcing. And the second is the working capital, right? You just have like skew proliferation. And I think I actually um um had on the pod uh your good friend, my new friend um Dave Vook um and he was like the thing that no one does is cut bad SKs.

Like it's it's kind of like the um That's right. Everyone just wants more revenue. everyone just wants more SKs because they think that those two things are directly correlated and they are sometimes but yeah so you just have skew proliferation in NPD businesses um um which is really hard for working capital so that's that's one attribute I think the second is um there is this natural there's this thing that happens when you get to some scale that you get more people not doing the work.

Um because you're thinking, you know, you you've been growing and you're like, "Okay, we're only 2 years away from $75 million. So, we need to start building an organization with systems and processes and one-on- ons and team meetings to organize to look like a $75 million business." Um, but when you end up being flat for a year and a half, but you've got the the kind of OPEX starting to bake in and the culture starting to bake in of a $75 million business, that can cause a lot of problems.

Um, and then when you start to have some of these problems, when you end up being flat, but you projected up, your balance sheet starts to crack. You start saying to your vendors, "Hey, um, can we push out payments?" You start adding some more debt. You start adding some more mezz debt. Um, and again speaks to the fragility, not the anti-fragility, of some of the businesses in our industry. But like to come back to the point you made earlier, people just want to get to that next revenue level and they won't accept the advice that uh that a $15 million business is doing a 10% profit is better than a $22 million business at break even or a loss or whatever.

Um I mean that's not an e-commerce problem, right? That what you described is a human problem. What you described is is is uh the power of uh of lust for wealth, uh the power of lust for status, the power of envy. Uh sometimes it's a calculation, which is one way to frame it, right? Sort of a positive spin on this is just like somebody miscalculating that the business will be somehow have more operating leverage at 22 million and so they just need to get there.

Um, but I I think I think a lot of times it's it's actually not like it's like the problem that they have is that they it's a joy problem. You know, it's a problem of contentedness in life. And and and now I recognize other people have different aspirations for themselves than I do. But maybe maybe what part of I'm saying is like, are you sure those are good? Like, are you sure because you want that? Are aren't aren't some of your desires for yourself and aren't some of your aspirations bad and and hurt and harming you?

Like I think that's sort of everybody knows that's true, right? This is like anybody who's eaten too many donuts understands that sometimes your desires are leading you astray in terms of what's actually best for you. And this is like what I when I hear you tell that story like it's like oh I can clean I can get 10% of margin back. You just spend less on ads and grow slower. Um, now again, I'm not saying you have to be locked into that opportunity otherwise you are reflecting your envy and lack of contentedness.

Like it it's possibly the case that you should shut down that business and go put your efforts elsewhere to try to pursue a better opportunity. Like that that might be wise. But the more I'm thinking I'm just reflecting on what you're saying as you're saying it. And I'm thinking like so many of the things you're describing strike me not as business problems. They strike me as uh as like desire problems. I don't know if I know what you think about that.

I only half agree with you to answer your question of is this an e-commerce problem or a human problem. I think that there is an e-commerce problem um because of where e-commerce started and still the tail that it is wrapped around. So e-commerce started 15 years ago as a tech business. I think some people might today call it a tech enabled business. Um, and there are still sources of capital that value it as a minimally tech- enabled business more akin to a tech business.

And um I think if you were build, you know, if you had a $15 million uh brick laying business or dry cleaning business, I don't think that there is a single um uh operator in a mainstream business that's like, oh, I'm going to create more enterprise value going from 15 um and one and a half to 22 and break even or negative because someone's going to put a revenue multiple price on it. But there are still a lot of people that believe that in e-commerce.

And to be fair, at the true true scale, you know, the the 300500 billion plus, I mean, there are still some transactions um that reflect that, but that is so abnormal. Um and um and it probably backs into some like just really high even multiple, you know, in the you know, high teens, low 20s because of the scale. Um but a lot of people don't see that. And so I think that there is an e-commerce problem of this either misunderstanding or incomplete understanding of the value of their business that a lot of people do believe, hey, I just need to get to that next revenue milestone, then the next one, then the next one, the next one, and then some strategic's going to pay me a price or I can get to some operating leverage.

Um, and I think that that's probably from almost everyone not the right way to approach it. Um, yeah, I think uh I I think that's a really good point which is that essentially what you're saying it feels like what you're saying is it's not actually like it's almost like somebody sold them a bill of goods about what an e-commerce business is and what it can do and it's not really their fault for believing that when it was sort of true for a little while, you know.

Um, and yeah, that's yeah, I think I think that's that's a a fair point. I I mean, what happens though when you actually tell one of those brands, "Hey, maybe slow down your revenue and take more profit." the people you said like just resist that knowledge. Do do you think they're resisting that because they uh they're resisting that because uh they don't believe you or because like it's just too hard of a pill to swallow.

Like it's just it's too much of a dream shattering to suggest that that's what their business is. I I honestly don't know which one of the two it is, but most people don't believe me. Yeah. Yeah. That's they they just go take the next call with somebody like you and assume somebody else will tell them a different multiple. I mean that sort of makes sense. I actually did I yeah I had somebody recently tell me like they said something about a business and it was it was negative and not grow.

It was you know I mean it you know it didn't have any book value. And I and they were like well it's it has book value. Come on. You know like it has some. And I was like uh I'm not sure it does. Now there's an interesting thing there which is like it probably it has as much value as somebody will pay for it. So like maybe it has some value but um because maybe somebody else would buy it even if if uh if I wouldn't but um and so yeah again that's sort of rational in that respect but yeah um Andrew I need to hop in two minutes but um just yeah on the like dissonance on pricing like even just this week we talked to two brands um one was doing 15 flat vers you know projecting 15 flat us last year probably lost last year predicting break even this year and you know something better next year.

Um had a um and it was a kind of apparel and accessories business. We had a different business in the supplement space four and break even last year projecting eight and break evenish this year. Uh, so one 15 in break even, another bit flat, another four in break even but growing. And they both just it was just a coincidence. I was like, "What do you think those businesses are worth?" They both said like $10 million.

And I just like kind of sat with that for a little bit of like um Yeah. Yeah. How, you know, it just that just wouldn't happen in most businesses that you get two such different things coming to the same price. Um, and why is that? Um, and I and I asked them, I was like, you know, how did you arrive that price? And they're like, and the answer is really just a feeling. Vibes. Yeah. Yeah. Uh, it's it's it's it's vibes market cap.

Um, and um, but I think it was just very reflective of a lot of things that we've been talking about of like Yeah. Yeah. just checking whether the enterprise value that you're working hard on is priced correctly. Yeah. Well, one of the things I wondered about is if the kind of person who would say those kinds of things is actually listening to my podcast and listening to this interview because like presumably that that person is hearing certainly everything I put out is saying like here's how to drive profit and while you grow, you know, that's like the thing that's all that's all I talk about, you know, and uh and like it assumes that that's the way you generate enterprise value because that's actually the thing I care about.

The reason I the reason I care about driving profit is because I care about driving enterprise value. And so um so yeah, that the two are the same thing for me. And so that that person maybe doesn't see that. All right, Fan, thanks so much for your time. Um, good conversation about the state of things. Like I said, you see a lot of businesses. I don't. You should follow Fan on X at Life of Buy. You should follow him on LinkedIn at Fan Buy.

Both of those links are in the show notes. Go follow up with him. Reach out to him. Sell him your very, very good e-commerce business. Restore his faith in e-commerce. You can do it with one business. Just put it right in front of his desk and show him. It's not supplements, but it's still making money. Um, and uh, yeah. Thanks, man. Great, Andrew. Thanks so much. Look forward to next time. Yep. Thanks so much for watching or for listening.

You should reach out to me at podcastjfgrowth.com if you do want to, you know, sell me your uh business that's $40 million and not making any money. Uh I probably can't buy it, but you know, reach out to me. Maybe I can find you someone who find you someone who can. Um you can subscribe to this podcast wherever you're watching or listening. Get more content like this if you want to grow a business profitably. That is pretty much all I talk about. uh various ways to do that down at the level of detailed tactics and sometimes at a higher level of what's happening in the market like this with Fan and everything in between.

Do follow up with Fan. He's a great guy, great follow. All kinds of good information on his channels about uh what he's seeing in the marketplace. Um breakdowns of different businesses, that kind of thing. Uh really good. I love Fan. He's awesome guy in the space and just generally super helpful person to be talking to and thinking alongside of. Uh you can also reach out to me, Andrea Ferris on X. You can also follow me on LinkedIn. and I'm trying to post there a little bit more often.

And sign up for my newsletter on my website at afgrowth.com. Uh I think that's it. I've got a bunch of great interviews coming up lined up really well. I've got Bear Hanland coming soon from born primitive and my profit monsters series. That's going to be a great episode. Um don't forget also to follow up with my sponsors, Intelligjams and Rich Panel. Intelligjs.io. Use the code uh Ferris 20 for 20% off your first three months to operate with a profit first mentality.

Drive profit through your business with Intelligjs Enrich Panel. Uh will save you 30%. on your uh help desk software. If you are on gorgeous or zenesk right now, switch over. You guaranteed savings 30% two weeks to switch. They're great people. Richpanel.com. Thanks so much for watching, listening. I'll talk to you next time. [Music]