How To Sell Your Business For Maximum Value (With Fan Bi) transcript

[Music] fan by sees hundreds maybe over a thousand businesses a year as the CEO of the Hedgehog company an aggregator that has four brands in its portfolio right now including baboon to the Moon probably the best known brand in the portfolio and fan as the CEO of an aggregator that has raised capital A lot of his job comes down to buying and considering selling different ones of his portfolio of Brands and so fan and I were hanging out a couple weeks ago he's a brilliant e-commerce thinker and a guy who I just love talking to about the state of e-commerce in the world and we we were hanging out a couple weeks ago when he was in California and just got talking about sort of like what's going on in e-commerce land right now what's going on in the m&a market because he sees so many Brands come across his desk understands exactly where they're being valued in the market how are you seeing what's happening and I said well why don't you come on my podcast and let's do an episode about this for all the founders out there who are thinking about selling their business at some point they should know what they are trying to aim at how do people right now in the world value their businesses what should they be building for how should should they care about revenue or profit or what and fan has clear and uh experienced perspective on all of that and so I have on the show today fan by a great e-commerce thinker as I said A friend of mine and somebody you're going to love hearing from on the inter feris podcast this week so let's dive into my interview with fan by fan thanks so much man for for coming I when we hung out a couple weeks ago it was just a delight and it was like just so fun I know you know both of us I think got pretty quickly into uh what are your observations about e-commerce right now what's kind of floating the top of your head that sort of that sort of mode so it's perfect podcast F so thanks thanks for joining me man how you doing I'm good Andrew it was really great to see you in person although I thought it was this podcast was going to be a continuation of our last conversation which was a long 2hour Meandering Journey on the meaning of life I didn't know that we're going to be talking R comos today yeah yeah we could do that man I mean I did another interview actually just today with a founder of about exactly that so I touched on a lot of conversations you and I hit I look everything here is about the meaning of life in some way right because what is really the point of going and getting an exit of your brand well it better tie into what you sense the meaning of life is because you're spending a lot of time on it I kid but yeah excited to talk all thing to com us and and I'm sure we'll get to the meeting of Life another time yeah all right maybe that'll be the followup piece so okay you said something really fascinating that we should use as a jumping off point here to me which is again I let's actually play this game for a second how many brands do you think you have looked at in m&a conversations right so just just say hedgehog company is an aggregator the best known company brand in your portfolio probably is baboon to the Moon is that would you say that's fair yeah great and so you guys own four Brands so you and I got talking probably originally because we were both in aggregator land when I was at 4x400 we even we even looked at selling you one of our brands at one point all those kinds of things as we were leaving aggregator land I should say um and anyway in in that process for you as a CEO of that brand m&a is a big part of your job and so you are thinking about what brands you might want to bring into your portfolio with capital you guys have raised all those kinds of things so in light of that how many Brands let's just play the game how many brands do you think you've looked at in the last let's just say year obviously you're not going to get the number right on the head but let's just ballark it yeah I think in the last like year or two we've I'm probably close to a thousand yeah that's a lot of businesses to look at and how of those thousand how many do you think you're looking at their financials like like are you actually getting to the point where you actually get their p&l or or something like that we've actually opened an Excel file on probably a thought of those okay great that's a lot still that's a lot and and there's just such value I think in having that perspective and so from that perspective you told me when we were hanging out that you have a a theory about e-commerce with which is that everybody right now maybe not everybody but a lot of people have been affected by a one particular Brand's outcome and and maybe this brand is just emblematic of a total era so tell me the theory I think you know what I'm talking about so I said something that I think might be controversial to others although is very clear in my head and how we think about the world of Hedgehog which is but obis and Andy D particular did such an incredible job inspired and set sale a thousand chips probably a you know a million chips of Founders that wanted to build e-commerce businesses I think the potential trap is that it also set the idea that the default Financial metric around valuation was a revenue multiple that they had raised including from tier one investor at Revenue multiples and to their credit exited at a revenue multiple you know for some what $350 million plus or minus at around three times revenue on an unprofitable business and so throughout that Journey continue to get validated and ultimately got the validation that you could exit at a substantial Revenue multiple and so of the Thousand e-commerce entrepreneurs that I've talked to in the last couple of years so many of them are still coming into to a conversation with us being like yeah like I think my three five $16 million Revenue business that's also unprofitable is worth three TI revenue and I think that's really dangerous I mean it's it's insane at this point right I haven't heard of a single at this point it reflects such a lack of awareness of the present state of the m&a market and you know my reaction to that then is coming bubbling back up in my heart right now I can feel myself reacting to it which is like people are still saying that because like it seems so obvious to me that you know the valuation of your business is going to be basically a multiple of your IA you know obviously there's there's some things that are some extenda circumstances in terms of what makes the multiple bigger and smaller but that's going to be the foundation of the valuation for the vast majority of Brands these days that seems so clear to me that's not obvious to lots of people even still you like the bonobos problem you know what I'm calling it's it's not really their problem but the bonomo's problem that you're talking about is still a problem for people I think absolutely I think it's the I think it's the default now I think more people are aware that the small market and low midmarket trades on an ebar multiple more people are aware of that fact than maybe ever before definitely you know was three years ago or five years ago but I think that the default is still everyone operates on a revenue multiple for I think a couple of reasons one which is like that's still how early stage Equity funding largely BC or family office or what have you I think Equity funding happens because like if andreid vanan started a like coffee cup company that was really Innovative and we we had a million dollar run rate but didn't have an EA out like and someone was going we wanted to raise money at a valuation it wouldn't be valued on any basis we were six months into it and and so there there's some implied Revenue multiple and so I think because of the way the funding ecosystem works and of the Thousand Brands a lot of those would have raised money and they would say like my loss valuation that the investors gave me was a revenue multiple probably was a 2 to 3x Revenue multiple and I think the biggest difference is there's a huge gap between what a fund round valuation is with the implied structure of the investors having liquidation preference we they get their money before Founders get their money and also just the mechanics of that's a set of Securities that you're going know valuing it off that has different preferences both like hey this is actually an exit and what the investor is making a bet on is like hey I can own a quarter of this business and if it's a runaway success then great but at minimum I have one maybe two maybe three times preference that I'm going to get paid three times my money before anyone else gets paid and and those two things are very different although most people view them as the same that's super interesting I didn't think about the impact that preference was having on the Capital Market on the front end of these things just for people who don't know can you explain preference for investors in in that so people understand what you're talking about there yeah so sticking on the same example Andrew and fance start a coffee company coffee cup company gets to a million dollar run rate we say hey we think there's an opportunity here to build a $50 million Revenue business we go to Alfred Taylor and say hey will you give us a million dollars for terrible idea I know Taylor too well Taylor I'm assuming you're talking about Taylor holiday he is he'll never invest in an e-commerce company we got to go to somebody else okay yeah so inless parallel universe Taylor gives us a million doar and we say okay we want the valuation be $3 million and he's like well you have no okay so there's an implied Revenue multiple but I'm going to say I want to let's say if he wants to be aggressive he's like I don't I like you guys I don't know about the cing cup idea but I really like you guys I'll put in a million dollars I want three times liquidation preference meaning that I'll get three times my million dollars at minimum before Andrew ofan get a dollar so if we sell for $4 million he gets a $3 million and then all three of us share in the remaining million doll but that just means the three million valuation isn't kind of a true valuation because he's got his preference makes perfect sense okay so that's interesting I mean because that is the truth right that actually in any early stage investment cannot be an investment based on based on IA to Value the business like by definition with the whole idea of raising stage you're you know I mean it's it's even a punchline to look at sort of like the charts that people show in those meetings to just talk about what their revenue and their EV is going to be it's just all made up up it's all an idea and exactly what you said is actually why people are going to invest right I I maybe like the the coffee company idea sounds like we just started simple modern by the way which would have been a good business to start but they really like us you know and so they're like okay I want to give you guys money I have dry powder and I need to get into the into the market and so and so they do that but they're not going to do that based off of valuation but see what I I think that the dots that I'm putting together in this conversation that I actually didn't even a couple weeks ago are that Founders are not realizing that that early St AG valuation for raising money at that stage of things is fundamentally different than the kind of valuation that you're going to get at an actual exit I think I didn't again I don't maybe that seems obvious to me because I think probably just because of my experience at 4x400 they went through that they raised a million bucks at a$1 million valuation early on and the valuation was nonsense like it was nonsense you know it was made up number about like where this might get and then in the long longer even before I joined that that's the valuation was but you know in my conversations with our investors includ which included very seasoned investors and you know PE guy and all those kinds of things you know they they were Crystal Clear every meeting I ever had with them was about an Eva multiple and what we needed to get that number to and and all those kinds of things so so maybe it's just because I had good investors who who understood that really clearly and were were drilling that into my head but to me that that distinction seems obvious you're it sounds like you're saying many Founders don't realize that it's going to work very differently on the back end of the the sell transaction than it was on the raise transaction yeah I I think that that I think those connect that's it's exactly also how we read it which is it's just much easier Founders are dreamers right and it's much easier to dream in Revenue multiples than it is in E on multiples e on multiples are like a real person's work so okay we raised a million from Taylor at a $3 million valuation now we're like okay so we like it's easy to infer okay like we're worth $3 million even though that's really the wrong lesson to take away from it and then because naturally it's like well we've got a million dollars it should spend it we're going to grow Revenue run rate and now we're went from a million dollar run rate to $4 million run rate and but because of the natural a product based business we're just gobbling cash gobbling ad spend we need to raise more money again again no ebit on multiple so we go and raise another you'll raise $3 million $5 million and again easy to infer that after a couple of rounds the whole time the whole world has been telling you that Revenue multiple Benchmark but you stop growing and things get a little bit harder and you're like shoot okay I I can't raise the next round now what happens now you have to make the impossible Traverse near impossible Traverse from a revenue multiple world to an even a multiple world and and that's the pain that everyone's been going through the last two years like I said it's an almost impossible Traverse because now you're looking at for the first time ever really seriously everything below the N Revenue line which almost no one looks at including investors like for most of the last 10 years everyone is just like I only care about net revenue growth I don't care what's below the the other 40 line items and maybe I care a little bit about what the bur rate is at the bottom but every like I think the really great donors in the space are incredibly meticulous about every point along those 40 lines between the top and the bottom line and they're fighting for every single point and cuz on each 50 basis points or 150 basis points on those 40 lines they all start to add up and then you either have a 15% e out business or a negative 15% even up business yeah you know I once had a conversation with a Founder who I was pitching to work with and I said like because I knew that this founder was attempting to sell at some point and I said hey look you had like a let's say it was a 1.5 row ass in their out account at some point and I said I think you can get that to 1.6 and you can pay me to do it and that might look really really small small but at your scale that extra point you know was actually going to be worth I mean I don't remember let's call it a million bucks or something like that I don't even I don't even remember what the actual number was and that million dollars the Gap there actually was going just by eliminating waste and their spend and some some things with the media right and then just from there I was saying like on that million dollars let's say let's even let's just call it 500,000 so it's not as big of a number right but still if they were going to have at some point an exit and they're going to be valued on their iata well that money I just got back in that one little 0.1 point of row ass is actually going to trickle straight to the bottom line because we're not doing you you well I mean you're GNA pay me a little bit to get there so not quite straight to the bottom but close and when that's going to happen that money is not actually worth $500,000 to you what it's actually worth to you is let's even make it smaller let's make it a $100,000 if you're getting 8X on on your exit and this company was probably at a size where they could get at least that right what that's actually worth to you is $800,000 and so to your point about meticulous this is why I talk all the time about like starting from the end here like anybody who listen to my show for a little while knows like this is why I care about bidc caps I actually don't care about bid caps at all like really what I care about is profit because profit is actually what I care about is the valuation that's what I care about Enterprise value of your business and the grounds for the valuation is your profit and there are a bunch of little things you can do to get more profit you know two of the ones I talked about all the time is being smarter about wasting your ad spend and you know using tools effectively to manage your ad spend like Caps or whatever and then another one I talk about all the time is keeping a super lean Opex and I'm jumping the gun to another conversation here but it's precisely for the reason that you just said which is that good operators I've been around them too they are meticulous about that they care about it so much because ultimately if the grounds of your valuation is that EPA number at the end or or whatever net income however you want to say it right at the end operating income if that's the number that's the case then every dollar you save is getting multipli in the valuation back to you if you let's say you own 100% of the business and even if you own 50% of the business or whatever then you know you're you're going to get 50% of every aex dollar you save or whatever it is so it is a huge amount of money at the end of the day by doing those things really really well and by downgrading your clavio account when you should and you know all those kinds of things you know they all really matter and they get there go ahead sorry I'm Gonna Leave You a space there I want to ask you another question a second about evit based valuations but but say what you're gonna say yeah I'll just like to reemphasize the point I think again in the Eos the half of the ecosystem that I play in which is largely capitalized VC back or PE backed with like the bootstrap people are learning that they were playing checkers and they're now playing chess that for much of the last five to seven years the game was just Facebook ad performance and net revenue growth and now it's everything below the line it is turning off the clayo account it is pushing for terms with your vendoring it's all these things are in the 40 line items between top and bottom line and that's just a very different muscle which is why it's making it so hard to go from a revenue based multiple mindset to an E based multiple mindset yeah so let's go there for a second because I we're just implying a bunch of things that we actually haven't talked that much about yet which is the actual basis for evaluation right now when I relaunched my podcast as the ineris podcast and got away from hosting the e-commerce Playbook podcast when I was with CTC and for 100 and those kinds of things which is still a podcast you should go listen to because now it's hosted by the aform Taylor holiday and it's great but when I did that the very first episode I did was with could do from Supply and Patrick had just sold his business and so we talked through he didn't give the exact number that he got but we he talked through the basis of the valuation of his business so if you are interested in this conversation you should go back and listen to that because my sense of things right now this is about a year and a half ago when I when I did that my sense of things that they're actually very similar in the marketplace the the valuation might be slightly lower now but the Baseline idea of how the business is valued is pretty similar now to what it was when I did that interview with Patrick so go check that out it's in the show notes so let's let's talk about that what is the actual like what are the prices for Brands right now how are they being valued in the marketplace as you see it yeah I think that um kind of from what we've seen and we get a lot of we have a lot of conversations with our friends at Quiet Light I think that you know they're probably a thought later year in terms of small market pricing we sold at least one business with them at 400 they're great yeah and yeah you should just cut out this clip and they should be sponsoring so yeah I think that like in the like sub million dollar evid or SD range it's like probably two and a half to three and a half times plus inventory and then like in the like one to three then you're probably talking more four to five maybe got a six out a push and that's really the space that we play so like in know like let's call it half a million $2 million e range which really implies you're probably a five to $50 million Revenue business and yeah so you're really dealing with anything from Two and a Half to maybe six at the very high end if you're growing quickly and then yeah the more locket you go if you're two and a half to $5 million AB or five to 10 then you kind of get a couple more turns four to six 6 to 8 8 to 10 Etc but again in the small Market half a million to $2 million it's going to be up between three three to five is generally what we see now the very important Nuance is like there's a difference between headline price and actually what you're seeing on day one and what's guaranteed and I think what is happening today is it's just more structure what is back-ended what is performance you mean yeah right you mean like there's an earnout that is really significant yeah yeah I think that's probably changed a lot this year though last year where a year ago where it hadn't softened completely you're maybe still getting 3x but you were getting 80% of the cash up front today maybe you're only getting 50 % the cash up front and you know 50% paid over overtime maybe with performance SC I think like between one to two years yeah okay that's what I would have expected that's super interesting I mean because I actually that was my first reaction to when you were citing those valuations is that like they're pretty similar to what I heard even when I was at 4400 which you know I left at the end of 2021 yeah that's right at the end of 2021 is when I left 4400 and you know even then it was I was looking like it's going to be based on IA and we were like okay if we get to 10 million and we were not close to that but if we could get to you know 10 million then then you're talking about really getting up into numbers that get you know much bigger where the where the multiples are maybe 10x or you know plus you might be able to get 15 if it's cash flowing a lot something like that and those you know those details were all the things that again my really experienced PE board member was able to talk through and look at and say like yeah here's here's where you start let's call it 10x on 10 million or something well okay what happens from there how do you get more than that okay it depends on all kinds of things things right drisking the business for example if you have good Channel diversity if you have good sales traffic diversity versus let's say business with two million in operating income all of your revenue is coming from Facebook ads you have relatively low LTV somebody might look at that and say like uh you're still G to get solid money for that you know like you said what what do you think two million like 4X on that maybe five yeah right something like that right but if you doing those things then maybe that for floats to a three and a half Etc what I didn't know is that they were the the structure of the deal is changing so much towards the sort of performance-based incentives and some of that stuff that's uh that's really different do you think that's just is that just because the market is softened and so so buyers are doing that because they can or is there like some sort of logic to it that's distinct yeah I think it's more a reflection of the market and it's also like yeah it's just a way for buyers to hedge like okay especially if a brand had some volatility in Revenue right like if you had a flat year boast loss year but you had a really strong year the year before and they're like shoot over a twoyear basis you're like negative kery does that mean the next two years might be down as well I don't want to be buying a business that's like 10% negative ker over four years so I want to head you a little bit so I think it's just a reflection a little bit on the market what wi can get away with performance of underlying brands that are selling but I think the other so like structure is definitely one Nuance the other big Nuance is like what numbering that chart of accounts in that p&l is the multiple Bas stuff so in like the top of the market in early 21 people were paying multiples of contribution Maring which is crazy measured net of AD spend net of ad okay right and so they were saying like we can just absolve your GNA right we'll pay you 5x because we can just absolve your GNA let's just assume that your GNA is zero because we already have the infrastructure the team the whatever and that's bar very very different to crazy you know 5x on net income incredibly different and then SD is kind of this Middle Ground where it implies that you kind of take out the owner and but the owner still everyone like every Quiet Light any listing ever has always said the owner only works five five hours a week I've never seen a listing that says the owner does Works more than five hours I want to actually meet some of these mythical owners yeah that sounds great yeah yeah so they always back out like the owners like distributions but in reality like you still need someone actually running the business and for e-commerce businesses today more than ever they're more complex and require and a not inexpensive executive to run so this SD is this so where are you taking the multiple off is kind of really important as well yeah that's super interesting I had one business valued on SD when we sold it was FC goods and it was because it was just because the e a number was was small and so you know there was like sort of sub 500,000 that kind of idea was like that's going to get you an SD multiple do you think that's still true just that SD gets used if it's if it's a really small is much smaller business yeah I think that's a like great mechanism that bro which by the way you should just you should just explain SD to people too just so people know what what that is yeah so SD stands for seller discretionary ownings basically allows to add back the owner's pay so like let's say in an Andrew F coffee cup business we end up deciding to sell at at million of Revenue it's doing $300,000 in net income but we're each paying ourselves $200,000 and so depending on the broker you might either be able to add both vals back or at least add at minimum one of vals back so now you're selling at either 500 or 700k multi you know kind of put a multiple on that ver to 300K I think it's a great mechanism for Brokers to kind of keep prices a little bit higher because remember Brokers get paid as a you know percentage of exit transaction but as a buyer you're like well I didn't know that I should be adding Andrew and fan salary back because they they're actually working pretty hard on the business and if they if they're not getting paid then I have to pay someone else and so why do I want to be paying a multiple and 700k because I this there still real cffs yeah I think the logic on the smaller business that makes sense the logic on the smaller business was that like essentially the kind of acquirer would be paying themselves that kind of money they weren't buying it to buy it as part of a portfolio and then hire out the position but the idea is like just like let's say I owned a business and sold it let's just call it I don't know FC Goods like in that case right like the if I'm the CEO I'm it's not a big enough business for me to like go hire out a whole big team or whatever and really have much money left over like instead it's like okay you're gonna work on it yourself and you're gonna and you're gonna do that and so then the valuation was based on the fact that you'd probably sell it to somebody do the same thing and so it has real monetary value to them as well because they're going to salary themselves off the business basically so I mean at least at the time that was kind of the the things that we're looking at okay so with all of this what do e-commerce operators need to be thinking about now what are they like if if you you know I mean you you have an aggregator obviously but like if you're building businesses now what are you doing to build them towards an exit and I don't mean this from an operator perspective I mean sort of like the way I always think about this is like p&l design like what are you trying to what are you trying to accomplish maybe another way of asking same question is like what are the lies that are being told to operators that people are telling themselves or that are being told from external sources that are keeping them from thinking about this the way they should be I think first of all like you have to assume the base case which is that your business exits on an e on multiple and I think the reality is that like most people aren't willing to think about it that way because there's no way that their business can exit on an e multiple meaning that we looked at so many businesses where it does not work without continued external money and often that is like true gross margin is like less than 30 points that the cap to LTB is you know upside down less than 30 points of margin landed yeah and and I think that again like during the HP cycle there was just less scrutiny below the net revenue of hey like we're really good performance Market is we're on a really trendy like we're we want something really trendy pickle keto pior like fad you know influ influencer backed it's just their revenue growth and we're worry about the like modin expansion stuff later but yeah I think there are a lot of businesses that just cannot work like it's too low gross margin it doesn't convert it's not a simple enough message and that's a really tough spot to be in today and I think that there are a lot of Founders that are in that spot and yeah that's that's impossibly tough of where you're like I've got something it's maybe you know doing a few million dollars in Revenue but there's no way I'm going to be able to eek out kind of any eving this business because it's low birth modin it's complex enough that I still need enough heads to run it and we're just kind of in this Lane duck situ ation I that that really sucks fan and I are talking in this episode about what makes a good e-commerce business and look what makes a good e-commerce business is profit at the end of the day that's ultimately where this conversation is uh centering on and to build a great and highly profitable e-commerce business you need to do a couple of things the first is you need to operate the business effectively and secondly you need to do that while having enough money left over to generate profit and therefore high value of your business and that means operating effectively while staying relatively lean it is one of my core beliefs about e-commerce that you can run a very lean operate opx in your business and have a great business one of the ways to do that is to add incredible talent to your team from the Philippines people with deep experience in e-commerce pay them a very competitive salary for the Philippines but a lower salary than you would pay the same person with equal experience in the US is a win-win and you can find that talent in the Philippines by going to my friends at more Staffing and I want to specifically tell you about their service more fractional supply chain uh fan and I in this episode are talking a whole bunch about all of the different efficiencies you can get in your business by doing a great job on your supply chain things like negotiating terms with your manufacturers managing inventory well buying not too much or too little inventory all of the things that go into a great cash consideration cycle in your business the ability to test new products do all those things more fractional supply chain can help they have deep experience in e Comm Merce Supply chains that's actually the Genesis of their business and they can help you do that if you are considering adding supply chain talent to your business go do it with more fractional supply chain as part of more Staffing you can go to more now.co and use the code AJF 20 to get 20% off your first three months it's AJF 20 to get 20% off your first three months at more now.co talk to them about their whole business talk to them specifically about more fractional supply chain to get fractional supply chain support from your business from real experts in the Philippines right now is the lie that they're telling themselves in that case just that they have a good business you know what I mean like I think that that that is the lie that they're telling themselves I think it's a lie like I'm super empathetic to that and yeah I was a you know I started as a DDC founder that was like in kind of a lame duck situation operated the business for several years didn't get the scale even on neutral yeah like there's a ton of loss ADV virsion of like I've spent all this time when he just makees something of it but it's yeah really tough yeah I mean in that case it sounds like that the move is for the business to just be done and I understand that too there's businesses that are just Dead on Arrival and you don't realize that I mean it's certainly one of the things that's happened for me over time and this is partly the result of a lot of mistakes is just realizing what a good and bad e-commerce business actually even is at this point and you know less than 40 points of gross margin is Mo is usually a bad e-commerce business there's a couple of exceptions to where that can work but it's really specific and yeah that would just be one of those things I would look at and say don't even start I mean there's just if that was the product that was given to me I just wouldn't even it wouldn't even be a starting point conversation for me you know there's just no no world which you do it I mean do you have a sense right now and you think about is there a is there a profile of a business that you think this is what makes a good e-commerce business besides just you know has bottom line income yeah I mean I think like you know if I think if I start from the top Revenue quality is definitely like there's a reason that software businesses historically have been valued at a revenue multiple at 10x Revenue multiple plus or minus and that's all due to the revenue quality like that that revenue of a software business the really really great ones is like an an investment grade Bond right like it is it is going to pay consumer discretionary e-commerce that is not an investment grade Bond and so Revenue quality really matters subscript can help but even subscription like I mean we see so many subscription businesses that have really high churn Revenue quality is really important gross margin but then like including Transit like actually like Neto returns Neto credit card processing you really want something that's not to 45 ideally 50 points which is really hard because it means that your landed fob probably needs to be close to 70 points and which you get is just quite hard yeah 70 land Ed is is Pretty Tough it's hard I mean and you're saying net of returns net of credit card processing fees so that's essentially 3% for processing fees most what's that sorry just to clar so 70 70 points of product margin and 50 points of true gross margin right including like transport returns credit card processing yeah I always think of that as uh I like the way that like people have said this for for pnls and e-commerce as cost of delivery as the thing that is like the total bucket and what that includes is the product of course including Freight to your Warehouse which is part of your product costs the packaging all those things that make up your product cost but then from there it's also like Freight to the customer and then it's credit card processing fees things that are variable costs associated with every single order that a customer places and then returns while that's sort of not true cost of delivery the same way it is a bankable number for most businesses you can just sort of say ah three% or it's 5% or if you're in app perel Business it might be 20% like it's like it can be really really big and yeah so those margin considerations are just really tough and you know I mean it's interesting that you say 50 is hard to get to I I would look at it and say like in a d Toc business for a really good business I want that number net of all those things to be over 65 if I can get there you're you it sounds like you see very few of those almost impossible to get to that you in what we see I think like you see it some in like Beauty and supplements which is why those categories are so hot because you have like 90% landed product margins and then that's how you can get the 60% net of of delivery because there also those businesses who like don't really have a returns problem like you know you're not you're not really going to return like $8 supplement thing but then delivery can also eat into like a you know low aov product and so yeah if we if we can get not to 50% less cost of delivery we're we're pretty happy but I think the what's more common is people have targeted a 50% landed and then end up with a 25 or 30% less you know cost of delivery and that makes it really really tough yeah I mean you just can't compete at with any scale with any advertising dollars unless you have Monster LTV and most brands in that category I mean all the monster LTV brands are like supplement Brands and stuff you know it's really it's really rare that you have like truly truly really high LTV otherwise if you have to live your life at a three to one on Facebook or a four to one on Facebook to make money then you're in trouble it's going to be really hard to do that on any real real scale I think the second kind of Beyond gross margin Beyond Revenue quality where looking at Cash conversion and kind of work with capital and then relationships with vendors like is there any float available because otherwise like again you're just always in this a really tight cash bind especially in the early years you're not enough scale to be actually have any real retained cash it's always going into next season's inventory so that becomes really really challenging which is like why heom is also really tough where you can have brands that have being even without profitable for years and then have one bad year cash uhuh never had cash I've never had cash for six years even out profitable paying taxes for six years and then bam one bad year and they're like like I never retained cash in building a healthy business in six to seven years and I just had like I overbought this year and just got totally squeezed and that just really sucks yeah that's super interesting that's very tough so high gross margin even you'll take over 50% that's still surprises to me and let's say cost of delivery onto that right high cost delivery percentage low cost delivery high high percentage margin there well just good cash conversion is that's number two pillar number two anything else that you see as like really core to being what makes it a good business yeah so we just yeah 50 points and then if you can have produce Revenue quality with 25% at spend to net revenue and run a somewhat so then you got 25 coins of contribution margin right and then like this is where the complexity of the business really matters so we see we're talking about lies that be com us today like another lie is like multich again pretty controversial thing to say because it's like the It Word of consumer brand in 2023 and probably 2022 as well and it probably will be for 2024 what we see is a lot of subscale Brands sub five million sub 10 million even that are in four channels they're in they're on Doom they're on Amazon they're in other marketplaces they're in retail they're in international and that is a freaking complex business and you know what complexity means heads yeah that's right it's impossible to say lean yeah and it just drives so much DNA and all of those channels need support like not even just in headcount and also in ad dollars yeah that's super interesting I mean it's funny because you and I have not talked much about this but we are meaning of life Andrew you and I we're just you and I just meaning of life it's all meaning of life no I mean but that that point to me like this is something I've been coming back to a lot recently is that people really need to internalize the idea that both first of all Focus has compounding value there's probably a lot lot more you can get out of your DTC than you think I mean you can build a pretty big business d2c with a bunch of profit and if you can just focus there you can make your sales funnel better you can make your email capture better you can send better and more emails you can make your ads better you can generate a better creative team you can probably get some Google ads going you know there's like a lot of different things that you can do to create a pretty good dtoc business and the beauty of them is to do that very well with that one channel you can actually do all of that quite lean um and and it scales beautifully the example I always give is it takes the same amount of money to design one email whether you send that email to a thousand people to or to a million people and so therefore your GNA against that email design is quite a bit you know is is massively lower as a percentage as your business scales and so because the business can scale so well D Toc without having a big team low Opex is a percentage of Revenue where Opex is really def I just mean sgna basically if low sgna as a percentage of Revenue fixed costs low fixed cost as a percentage of Revenue is one of the fundamental advantages of D Toc as a business model and the moment you go Omni Channel you risk forfeiting that advantage of the model if there's enough scale there in your Omni Channel Outreach or or expansion it can be totally worth it don't get me wrong there are plenty of businesses where it's completely the right decision to do but a lot of people also just don't think enough about the fact that focusing in that one area both keeps you lean and actually creates a whole bunch more compounding value over the long term and then when you go later on another Channel once you're at 2030 $40 million in D Toc revenue or whatever that channel is actually more set up to succeed because because you've now probably invested a whole bunch of money in ads to get there and you know reach customers in a way that is is going to make more sense and now you're going to have more visibility or more awareness when you get on the shelf and all those kinds of things and so so to me that's that's one of the huge things it is it is part of why my sponsor for my show is a staffing agency in the Philippines it's they are great people but it's another way to take that same model and say like wait a minute this is another advant AG from all these work from home business work from home businesses which is that you can not only find great people but you can also find them in places where you don't have to pay them as much as you know for most these businesses that are us-based a US salary and now you can make that GNA even smaller while getting incredibly talented people that's a huge win if you're trying to build your business for IA and it's you know I so yeah so to me it's it's a huge thing the example I always think of here is Butcher box because I heard an interview with their CEO where it was like it was like 160 employees at 500 million plus in Revenue it was a few million dollars ahead basically yeah I mean I mean the host of the show was interviewing him who was not always dealing in D Toc businesses couldn't believe it he was like what in the world you're doing that much revenue per head in your company and it's because they're basically peer play DTC still at that kind of scale they might be literally that I don't know if they do any other distribution channels I have no idea but but you're able to build a very big business there's plenty of people on the internet to buy your products there's plenty of them you don't need to do Channel expansion to necessarily to capture all that demand it can again can be helpful but you don't necessarily have to do it either and in a world where you where you stay D Toc man you can do a lot of Revenue per head and that trickles straight to the bottom line of that p&l and straight to the valuation of your business like you're talking about so this is a hobby horse for me right now because I think it's so important for people to to really get this right is to understand that the combination of that with pretty good landed margin is very very very powerful for building a really valuable business yeah and like I said before it's um there's more focus on all the items kind of blown net revenue now and and I think that's you know productive for the industry yeah anything else that's on that list again I'm thinking of that that uh listener who's building an e-commerce business which is definitely a lot of my listeners or serving people building an e-commerce business which is another bunch of my listeners thinking about structuring their business for Success at sale you're just one person but you have this a very good view into the system so margin cash conversion cycle lean GNA anything else that you'd put onto that list that you think of as really important in building a really good business yeah in terms of like if I was starting a new e-commerce business today like I almost certainly start I I want to look for I'd give up cap table space like ownership space to try to buy some unfaired Advantage now a very played one is not of influencer whether that's direct or through an agency but like if you can get into some kind of audience that's not even just kind of like Hollywood influencer that could be like buying into a community someone that has an online audience someone that has a Blog hey like would love to partner with you you I'll be 30% 10% 30% whatever and yeah if you can reduce your paid spend from 25% to 15% because you're getting 50,000 monthly uniques from a free source amazing another onare Advantage might be on the manufacturing side sell the dream give you cap table space if you give us terms discount priority product development budget Etc and short yeah priority for shorter time delivery basically right cut down cut down the time between ordering and receiving your product that's a huge deal in DC it just allows you to be so much more flexible on your inventory buying yeah I'd look for an unfair advantage on and maybe both and then the third one is just like I think the bar is today much much higher on actual product differentiation I think great point five years ago much easier to put a skin on something from Asia and then be really good at Performance Marketing and positioning and today to have anything that endures Beyond like a 12 or 18 month sad needs to because anything that hits is going to have 10 copy caps the next year so having something that has something that is differentiated which is why something like solo still is still going so strong 10 years in I don't know like Andrew and Van aren't starting solo stove tomorrow we're starting a coffee cup cup company but we're not starting solo stove tomorrow yeah that makes a lot of I think that buried entry point is totally right I mean just truth be told I've thought about this all the time like what should I try and go back and run a brand or something like that and you have repeatedly told me not to by the way but one of the things I think about is like I just don't know if I could I'm just not a product guy and it makes me not want to do it because it's just like you need something probably better than what you would have needed a number of years ago to go make this happen and you know the sort of drop shipper me mentality is is probably those days are probably behind us mostly on top of the fact that I want to sleep well at night and not just sell people crap so I can make money okay anything people should be doing to prepare themselves for an exit uh let's say you are getting towards that point you got a couple million bucks in EB you're thinking about selling any last any last kind of pieces of advice for people who are moving towards that phase besides selling the business to you yeah I think that um that should definitely talk to a broker or a banker depending on the size they are and just to get a kind of third party View their space I think like a lot of folks are looking for Ev do consistency and so like if you can have four 6 8 quarters uh where it's you know people get a little bit scared where like if it's a highly seasonal business or like your performance is just really volatile like profitable one quarter unprofitable the next profitable one quarter unprofitable the next I think that's tricky so just kind of preparing for that but yeah if you're an e a healthy business you're in a good spot like I think it's a tough time be selling so if you can wait it out even some of our good Banker friends are like they're telling their clients like hey weit to 24 see how things shake out like this is not a good time to go to market super interesting yeah just just maybe just just see if you can get a better valuation by waiting for longer and keep keep playing wacka with that p&l in that in that world right just go figure out how to change your delivery time from six weeks to five with your with your uh manufacturer figure out how to get you know terms I mean even if you go from you know 30 down 70 on receipt to 30 down 30 on receipt 40 you know like whatever every little bit helps you know 40 to 30 you know like there's like all kinds of little things you could do to just try to push those things out make your business a little bit better think about getting a little bit leaner being a little bit smarter yeah makes sense all right people should follow you on Twitter you're a great follow on Twitter want you your beat on Twitter is is the analysis of Brands earnings and sales and so if you are ort of interested in this conversation and want to see how markets are being valued fan is is like an absolute ideal follow I think it's what at life of BU is that right that's right yeah okay I just remembered that but of course the link will be in the show notes there so you can go follow fan on Twitter and if you are interested in selling fan your business you can go to the Hedgehog company.com and go check out what they're doing over there and reach out to him should people just DM you on Twitter is that is that or should they email you what's the best way to do it totally fan of the Hedgehog company.com Twitter yeah easy to find me all right man well meaning of life next time any final words for anybody here or or do we about cover it yeah it's if you've got a good business I think like Kudos it's it's a tough market like e-commerce operator friends we should try not to beat ourselves up it is a tough environment so I think the default is it's hard so I try to tell everyone that I talk to that like don't like you know be too sad if you're having a you know soft year but yeah like we you know we try to improve our business every day and that's all we can do I think that's really good advice all right man thanks so much for taking the time I appreciate [Music] it there's my conversation with fan I loved this conversation I actually love talking to Fan anytime I get a chance to I you could probably hear that in the conversation I just love thinking through what makes a good e-commerce business and what doesn't if you liked this episode do go back and listen to my interview with Patrick kadu from a year and a half ago you might also like my episode with Dan McCormick from a few weeks back who is the founder of create Wellness creatin gummy brand because Dan and I talked a whole about how he has structured his business in the earlier stages and he's shared this very publicly for the kind of success that fan and I talk about today building a business for both scale and profit in D Toc Dan's got real clarity about that and so if you want to hear sort of some more outworking of this from an operator who really understands this point really well go listen to that episode it is also linked in the show notes don't forget of course to go reach out to my friends at more Staffing and more fractional supply chain to get help for your e-commerce business from the Philippines as they say virtual assistants are helpful vir ual professionals can be transformative go to more now.co use the code hf2 to get 20% off if you use more fractional supply chain to add supply chain tent to your business you know where to find me but just in case you need a reminder email me at podcast aaf.com find everything I'm doing at AJF growth.com in fact you go see get on my weight list if you want to work with me all those kinds of things and of course follow me on Twitter at andrewj feris where you should also go follow fan as I said at the end of the episode he has really a great follow and you will like it as always I would love it if you would rate and review And subscribe hope you are having a great Christmas break if you are somewhere where that is part of what you're getting right now maybe a little slowdown between the holidays and January hopefully in your business if you're not in the wellness space that's certainly what I'm getting in in my getting a little bit of slowdown here at this time the time this podcast is going to be released thanks so much for listening to me again this year it's been a year of growth and a year really appreciated a bunch of really good feedback on the show I would always love to hear from you if this show has been helpful to you or if you think could be better please do reach out to me otherwise merry Christmas happy New Year all those things I'll see you next [Music] time