Season 1, Episode 74

 

 

Poor Decisions Now Will Cost You Money Later

When it comes to selling your business, the earlier you start doing your due-diligence the better. In this episode Chris & Leah spoke with Jamie Davidson of Northbound Group about the importance of running your business with an exit strategy in mind and keeping your business clean to appeal to potential buyers.

Show Notes

Transcript

[00:00:07] Leah: Hi, Amazon sellers, I am Leah McHugh from ecommerceChris and I am here as always with the eCommerce Chris, Chris McCabe. And today we have, Jamie Davidson joining us from Northbound Group. And we are going to talk about pretty much what Chris and I talk about. a lot of the times on the podcast, but from the, the point of view of selling your business, Jamie, thank you so much for joining us today. 

[00:00:38] Jamie: Yeah, thanks leah. Thanks Chris. Excited to be here. 

[00:00:40] Leah: First of all, why don’t you tell our listeners a little bit more about what it is that Northbound Group does. 

[00:00:45] Jamie: Yeah. Sure. So Northbound Group, we focus primarily specifically on the Amazon industry, helping sellers and also service providers, SAS and tech enabled, service enabled companies, focused on the space to achieve a premium exit.

 And then I’m sure we’ll get into a little bit what that means. In terms of selling their business and really representing them on this side of things we’ve done, the Helium 10, when they had their first transaction, we represented them. A lot of you guys may know GETIDA. That was just in the news as well, too.

So A lot of the deals from complex to some of the, I guess, more straightforward ones were very active in really helping sellers sell their business. 

[00:01:25] Chris: This is a great topic for us because we deal with some companies that are looking to acquire, right? Pre-acquisition due diligence, but more and more lately with the changes in account health, being very hot among sellers. The business owners before they sell, want to know how they can clean things up. Tidy things up, resolve their account health so that they will be a more attractive, acquisition. So we, we hear a lot from both sides. 

[00:01:50] Jamie: Yeah, super smart. Yeah. Real really important. I’m sure we’ll get into that. A lot of people, I’m sure you guys see this too.

Get into the process too late or start thinking about it a little bit too late. When really I’m sure a lot of the stuff you help people with, you really wanna be planning well in advance for such a big transaction. 

[00:02:05] Leah: Yeah. And I, that’s what I’ve really enjoyed about talking to you guys. It’s less about, well, how much can I get as evaluation right now?

And more about if this is your exit strategy, you need to be planning for that in advance. What’s the first thing that you guys look at when you start working with an Amazon seller?

[00:02:22] Jamie: Yeah, so we have a conversation we love along the lines, you know, similar to the way you help with people. We love to engage with people earlier in the process than later. The reality is a lot of people don’t do that. And so we’re working with them, but you know, the first step is, is really trying to understand, really validate what the business really is, where it’s at.

A lot of people maybe think their margins, their profitabilities at a certain level. We’ve got a 40 person team. Really experienced financial advisors. So we run a lot of data. We create what’s called a data room to really make sure we can get a good firm grasp on what the business, where it’s actually at.

Again, sometimes there is a mismatch for someone maybe thinks they have their business is at 20% margin and it could be a lot lower than that. So ideally people wanna find that out sooner than later, because you can fix some things and get along those lines. So that’s really. Really the first step.

And even before that is also just understanding the goals of what a seller is trying to achieve. Myself. I’ve been a long time operator and seller in the space, but it’s kind of, you don’t know what you don’t know as a seller. So these transactions, there’s a lot of different ways you can do it, whether you wanna take a , a full on exit or maybe you wanna what’s called rolled equity take, you wanna sell part of it.

You wanna continue on kind of have another bite at the apple. Or you may just want like a minority stake, like GETIDA announced, Hey, they wanted a capital partner to help them to grow faster. So, there’s a lot more options than maybe the typical Amazon seller realizes are out there.

So we, we first kind of wanna understand what’s what’s the seller’s objective and then get a good clean look of where the business actually is right now. 

[00:03:55] Chris: Do you ever find yourself hearing from them first? Hey, there’s a couple things I wanna bring up before we get in or do they just wait to see, talk about the valuation, wait to see if you bring up hey, are there any issues with your account help? Any policy warnings, any recent listing takedowns? Is it always on one side or do you kind of share some of that in the initial discussion? 

[00:04:17] Jamie: Yeah, that’s good, Chris. I mean, obviously the more you can identify up front because we’re on their side, we’re trying to help them.

We have relationships with hundreds and hundreds of potential buyers, whether it’s aggregators or private equity or, or strategic, but it’s like anything else, the earlier you can identify it than the better, especially as you’re representing them. But occasionally as people do bring things up, like, Hey, there’s a lot of nuances.

Like, Hey, I have to switch to another Amazon account every periodically and sell on this other account. And it’s like, okay, we need to understand that. Because at the end of the day, we say, it’s not what you’re selling. It’s what the buyer is buying. And if it sounds too complex or it sounds if it’s not gonna make a lot of sense, then that’s gonna impact your valuation in a way. So, obviously you want things to be as clean as possible and the story of what the potential is and what the business is right now needs to be, as straightforward and honest as possible because if there’s a sense of distrust in the buying process, that can certainly derail a deal by itself.

[00:05:13] Leah: Yeah, you bring up a good point as well about it, not just being aggregators. I think the last few years, everybody got a little tunnel vision in terms of aggregators being the one selling businesses. But you know, Hero cosmetics, for example, they just sold to Church & Dwight who definitely aren’t an aggregator, but you know, that was the fourth largest direct to consumer acquisition, I believe in history ever. So yeah. Opening those blinders a little bit, I think will not just change the selling process, but also the operations process, it’s not necessarily all Amazon. 

[00:05:45] Jamie: Oh, totally. Yeah. And I think it’s hard as a seller, you know, somebody who’s running the brand to really understand. I mean, as Amazon sellers, like that’s not their focus, their focus is to run a really good business and take care of their customers with their products. But so often you ask, who ended up buying the company? It was like, oh, is this guy out of India just was interesting to jumping in and they bought it for a few million. It’s hard to kind of understand the full possibilities because the range of reasons why someone may buy your business is much more diverse than to your point than just purely aggregators, even though, obviously there’s a lot of them involved, but there’s more to it than that. 

[00:06:18] Leah: Right. How early do you recommend people reach out to you before, let’s say before they intend to sell?

[00:06:25] Jamie: Yeah. I love that question. Honestly, the sooner, the better. We’ve talked to people that have a conversation like, Hey, three years out.

So we’ve got, for example, whether it’s an Amazon seller, let’s say it’s an agency or a service provider, they may talk to us and say, yeah, actually we don’t have any plans to sell right now. And through the conversation, they’ll learn some things through the conversation. Like I said, Amazon sellers, kinda one set of metrics, but if you’re, let’s say you’re an agency or you’re someone who has a software, there’s certain metrics that we can talk about a lot of times, almost always in those conversations, whether they work with us or handle things otherwise, they’re usually go, Ooh, that’s eyeopening. I didn’t realize that’s really that important because you know, it’s kind of the old beginning with the end in mind. So the earlier you can kind of have that mindset, even if you’re not necessarily planning to exit, but ideally I would say, certainly at least a year out, but, certainly have the conversation with two years out because you’re sure to, to learn some things and how to operate your business better.

[00:07:21] Chris: That’s great to hear. 

[00:07:22] Leah: That’s a conversation we’ve had actually with a few people, not on the podcast, but we’ve had it at our at our conference, running your business with your exit strategy in mind will make it that much easier when it does come time to exit. Obviously things change over time, but just having that in the back of your head, when you’re figuring out how your business actually runs, can make such a huge difference.

[00:07:44] Chris: Two years out is great to hear because we’re hearing from people who are two weeks out who present a problem to us that has to be fixed and we’ll say, oh, okay. And then they mention in the conversation well we’re in the process of selling by.

And in more conversation, we realize that they’re contacting us incredibly last minute because either they themselves identified problems that were never addressed or potential suitors are saying, Hey, what about this? They’re flagging it in their due diligence. And then they want to hire a consultant to help them out. And it’s like so late in the game, I mean, two weeks, you know, unless it’s resolved right away and there’s a lot of pressure, right? They’ve got pressure on themselves. Maybe they’re getting pressure from the potential buyer to wrap this up quickly and to fix it up quickly.

And we’re always amazed that they haven’t put the process in place, got in the wheels turning in the right direction months earlier, if not years earlier. 

[00:08:39] Jamie: Yeah. And I think some people are scared. They think that if they’re gonna engage someone , like a Northbound Group or something that, Hey, it’s gonna be really expensive.

So I wanna wait till the last moment the reality is when I say, Hey, two years doesn’t necessarily mean you’re gonna hire someone to help you at that point, but you need to educate yourself and be, understand the process and understand the timeline. And like I said there’s things you guys do to help them out to understand like, Hey, these are the things I need to run a really clean business. And we always say, Hey, what’s good for selling a business is also good for running a business. They’re not mutually exclusive in any ways. I have a close friend of mine who sold five of these brands, him and his wife they’ve they started these brands and sold them all within two years. 

 So they just literally launched the brands with the intent to sell them. From the day they launched it they knew the plan. They had sold a couple brands before, so they kept learning the process, but most people don’t have that experience.

And like I said these are massive life changing transactions. The biggest payday you’re gonna have with your Amazon business is typically the day that you exit. But you need to just really educate yourself on the process and the opportunity. And like I said, it aligns with making your business more profitable. And that mindset is really when you think in terms of exiting your business, you think in terms of multiples, but in terms of running your business, that means like every dollar you save or every extra dollar you earn, you can think of it as Hey, that’s actually worth three, four, five you know, maybe six times impact on the actual asset value. 

[00:10:04] Leah: Right. And just giving yourself that breathing space also gives you the ability to adjust to market changes instead of having to push for the sale while everything is still working and nothing’s broken to okay, well, you know, we’re going into the recession right now.

Maybe people aren’t paying as much for these businesses. Maybe I’m better off waiting until after the election or whatever the case may be to get a better price.

[00:10:26] Jamie: Totally. Yeah. And actually along those points, depending when people are hearing the information that could be, the market could be tougher, it could be more favorable in terms of as a buyer or a seller, but yeah, to that point that just something I’ve heard a lot from buyers a lot just because we talk to so many of them is a lot of sellers get scared.

They think, oh, my margins are tighter right now and they think it’s not a good, they’d be surprised. There’s always an opportunity to have that conversation because a lot of the buyers, for example, right now understand that when logistics costs went up and there’s been some downward pressure, they understand on margins. They understand that across the board. So sometimes sellers don’t realize, that there is an opportunity. They don’t need to be scared about potentially selling because the buyers, if it’s a good business, it’s a good brand. There’s a good opportunity. There’s always a good opportunity to exit that. You don’t have to kind of wait till the perfect time. 

[00:11:17] Chris: Speaking of being scared, are you ever concerned that you’re spending time on a business where they’re building up high risk, high reward, but it’s risk that you don’t want to take on. So you ultimately think, well, this is a house of cards.

This is going to collapse because they built it on non-compliant behavior or little gimmicks and tricks that won’t stay the test of time and then you’ve spent some time getting to know the brand and the product itself might be great, but their valuation and their standing in the marketplace is not what it appears to be at first glance or is that just run of the mill part of the daily work that you do, you expect a certain percentage of brands you encounter might be worth less than they appear at first glance?\

[00:12:03] Jamie: Yeah. I mean, I think it’s probably human nature that most people think it’s like, if your house you’re probably gonna think it’s worth more, in some cases maybe, but, at face value now, Interesting ways to structure deals and stuff that can be worth a lot more than . Yeah. I mean, the people that are buying these brands, they’re buying them for multiple because and a lot of them especially aggregators and private equity, they have a lot of accountability towards that money, they need to de-risk that A much as possible and so they have very low tolerance for any of that. So, we try to identify it as much upfront, but, but yeah, by all means this is like pro professional capital that’s in the space, four years ago that capital didn’t really exist too much. So kind of anything went, but yeah, it’s all the more reason why you wanna really just run a good clean business with a really scalable brand. That’s really where the value is. 

[00:12:51] Leah: Yeah. And even on our end, we’ve seen in terms of risk tolerance of buyers last year, there was a lot more tolerance to things that had maybe gone on in the account in the past compared to this year where they don’t even wanna look at it if that’s the case. 

[00:13:05] Jamie: Yeah. To both of your points. One thing we’ve seen more too is, initially when the aggregators came in, it was kind of like the gold rush there was a little bit, I would say the due diligence was probably, it still happened and it was thorough to some extent, but now it’s much more, they look at it with a much closer kind of magnifying glass in the business.

 They’re gonna be pickier. We haven’t had any deals ever killed on our end that we’ve representing, but, but I do think as guys, you know, jump into this maybe a year or two ago where they could. Hey, I’m gonna call up a few aggregators and kind of get a deal done. I think the deals absolutely are still happening.

Buyers are buying, but you’ve gotta have your ducks in a row and you’ve gotta understand what going through the process the right way and being able to navigate it with some help typically. I think some of the aggregators learned the hard way that they bought an asset that was high risk and they considered it low risk. The old adage, like, well, everybody’s doing it. So this brand isn’t doing it more or less, maybe a rule bending, rule break than any other brand that we’ve heard about that’s in their space or in their category. That is definitely a high tolerance for risk. The last 12 months have shown that I think some of those assets purchased didn’t have the right value just because they didn’t have any staying power and they, they might not even be selling today because of things they had done pre-acquisition. 

[00:14:21] Leah: Yep. And then last question, is there anything that you wish that sellers knew that we haven’t already covered? 

[00:14:27] Chris: Yeah, I think in a short time we covered some of the big ones. I’ll just recap that, I’d say there’s always an opportunity for a good brand, a good business. Even if the margins, like I said, are a little bit compressed or not optimal, you don’t need the perfect time, to exit. But that being the case I’d really focus again on trying to run a really good clean business. The more you can probably work with guys like yourselves, you run, get things, get your ducks in a row the earlier the better.

And, I think it’s just a great opportunity because with Amazon, the beauty it is when you do exit your brand, you’re gonna typically gonna have a non-compete for that category or subcategory, but the primary skill of building brands, there’s so many other categories and opportunities that unlike other businesses and other industries, when you sell it, you may kind of be out of the game. You have so much opportunity. So if there’s an opportunity, like, Hey, you’re great at building the business from, let’s say zero to 5 million or whatever that number is, then, Hey, you have that opportunity to potentially do it again and let someone else scale it. So that’s my biggest advice.

And just like I said, think about it, as early in the process as you can, to be ready to exit. Yeah. 

[00:15:28] Leah: And if our listeners wanna get in touch with you, what’s the best way to reach you and Northbound Group. 

[00:15:33] Jamie: Yeah. So I guess I’ll give two things. One is just our website, which is, northbound group.com.

 Other one, this is obviously a really big topic. Feel free. I’ll give you my direct cell number. Anyone feel free to text is the easiest way. 

[00:15:46] Chris: Are you sure? 

[00:15:46] Jamie: Yeah. Yeah. I tested this out on a podcast for, but this is a big deal in all seriousness. If you want to connect my number is 404-275-8643 and our team, a lot of them are former Goldman Sachs guys, like big players in the industry. If nothing else we can get like just an initial look at you or have a conversation to see what your goals are and see if there’s a way we can help. 

[00:16:07] Leah: Awesome. Thank you. I think you are officially the first person to give their cell phone number for our podcast.

[00:16:12] Chris: You win that prize, very bold and daring stuff. So you’re willing to put your phone number behind your words and your reputation, which is great. 

[00:16:20] Jamie: Absolutely. 

[00:16:21] Chris: Thanks for joining us today. We appreciate it.

[00:16:23] Jamie: Thank you, Leah. Thank you, Chris. Appreciate it. 

Hosts & Guests

Chris McCabe

Leah McHugh

Jamie Davidson

 Resources

 Northbound Group

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