Scott Deetz - 250M In Ecomm Companies Sold - Exiting Your Amazon Business With Premium Valuations
Should you exit your Amazon Business? When? Why?
Get your answers from Scott Deetz and take action base on expert advice
Scott Deetz is a seasoned entrepreneur who has represented sales of companies in the 100’s of millions and represents people who are building businesses to get the most value out of their work. What valuation could you sell at? This largely depends on how much work you want to do post-acquisition, as well as your current revenue, margins, etc. We are currently interested in acquiring Amazon Private Label companies. Contact us for a no-obligation valuation, (Companies with revenues of 500k to 5m yearly): aaron@bigbrandproducts.com You can also reach Scott directly at Northboundgroup.com
TRANSCRIPT
Aaron Cordovez:
All right, everybody. Welcome to the Ecomm Leaders podcast, I have with me an absolutely fantastic special guest today, Mr. Scott Dietz from northbound group who has sold hundreds of millions, right in hundreds of millions. I mean, I think one deal is under million plus, or at least in that range of Amazon FBA businesses and other types of businesses representing sellers to get the highest multiple highest valuation. And not only that, but working with you to actually make the company more valuable, not just fiddle around with papers. But my understanding, Scott, you are an absolute pro and getting sellers to actually use their company and make it just even more amazing and juicer for them. So welcome to the show.
Scott Deetz:
Thank you very much. Yes. So and, yeah, I would say our passion, let me call it that way is that, you know, we believe that the, for most sellers, the bulk of the money comes when they exit. So the but maybe they’re too busy in the day to day that they don’t spend enough time focusing on it. So if more than half your money is going to come in to your exit, but you’re only spending 1% of your time thinking about it. That might not be the right way to allocate your time. And so we like to just educate and help people along through the process and think about what does a buyer value and why? And then and then if you know that that’s where you need to end up, then what can you do before you exit to make your company as valuable and as attractive as possible? So so I think you hit the nail on the head, we like to do two steps, make yourself valuable. And then exit? is kind of our two part focus.
Aaron Cordovez:
Yes, and I think that’s brilliant. I and as you know, we have been looking to acquire some companies, we’re in touch with several, and I’m looking at as a buyer, right. And there’s, you know, more than one that we’ve talked to that are they’ve kind of taken their brakes, I mean, sorry, their gas off the pedal, they are no longer growing. And they’re like, okay, we’re ready to sell. And like, it’s very unattractive, especially like you start talking. And then 30 days later, it’s crashed a certain amount 10% 20%, half, I mean, some of these, like, when you’re not working in your business, and you’re just like, in toxic sell, and you’re not actively growing it. That’s a really, I mean, it’s just seems such a bad practice. And but I understand some people they may have given up, they’re they’re selling because they’re giving up on the business, right? Or on that model. So I guess, how do you see a lot of people selling because they’re, they’re kind of done with it, or they’re just selling and they’re just continuing in the game? After selling?
Scott Deetz:
Sure. Yeah. And we’re a little bit I’ll talk in general in the industry, and then we at northbound we’re a little bit skewed. Because our client base and our market segment is what we refer to as premium valuations for premium companies. So so we tend to represent the top five or 10% of e commerce sellers. So you know, we have a little bit of a different profile. But if I if I back up a half a step, and I think about, you know, why do people sell there is certainly a significant part of the market of, and I’m sure anybody who’s out there, if you are an entrepreneur, e commerce or Amazon or otherwise, one of the days that you think about selling is the day that this thing shuts down on you, and you realize how risky it is to run it. Or it’s the day that the shipment doesn’t get there, and you miss the holidays, and you just say I just got to get out of this thing, right? You know, obviously, that’s generally not the best time to get the best valuation. And and so we always like people to think about their exit strategically, in most of the time, what you’re describing with this plateau is I always like to think of it as like, the old bell curve is if I’ve got something that goes up and up and up, and then it starts to level off. Typically, most buyers are going to like yourself are going to think, well if it went up, and now it’s level, what’s the next step? It’s going to go down. And so you want to exit your business before that that trend starts to change that way, if you’re doing it strategically, and sometimes what happens is, frankly, people run it a little bit too long, they get bored. Maybe it was their first products, you know, they they pick something small and light because the course told them to, but it’s absolutely boring, and it’s driving them crazy. And they wait too long, and then they decide to exit and so that’s why you do find in the general marketplace, that there are a number of things out there, you know, that don’t look as attractive, because they’ve kind of hit that level off period and from you as a buyer, you know, you’re obviously only caring about what the future of the thing is. So when you see that you’ve got to be you know, you’ve got extra concerns. So, you know, we try and encourage sellers if you’re planning your exit correctly, you’re doing it while you’re still on the upswing as opposed to waiting until it’s plateaued.
Aaron Cordovez:
Yeah, brilliant. Brilliant. And so we met I believe, at the seller Conference potentially.
Scott Deetz:
Yep, seller conference. Yep, down in Florida.
Aaron Cordovez:
Yeah, yeah. Was Yeah, exactly. And I’ll tell you what’s really interesting. I think, anyway, a mutual friend obviously introduced us. And what’s what I find just amazing about you, let me just say something is, when you come and first talk to, you know, it seems like you’re very just humble. And you’re just like having fun, you’re just chatting into your very, seems like, not business, you know, you’re just like, just talking. And then when you actually get down to it, the amount of spreadsheets and knowledge and the crazy crunching that you and your team do is like mind boggling. And I honestly, it’s the top of the top that I’ve seen, and honestly, there was one person who I actually recommended to you, I don’t know if you remember, I recommend it or not. But they were working with another team. And another person said, Why don’t you just give Scott a try? And they went over to and they just exited for over 50 mil. It’s a public thing anyway. And I was like, just talk to Scott, I’m like, he’ll do something with you. And he’s like, I don’t know. It seems to cost a lot what these people sometimes big business guys are sending like 10s and 10s of billions ago, like I’m afraid to pay, like 10 grand, I’m like, Oh my gosh, anyway, so it’s it’s a little interesting, sometimes business people anyway, but just a comment is that when you get down into your passion, it is like it’s something incredible. And you you don’t get that just from looking at you, you know what I mean? It’s like, once you talk, you get to another level. And so I don’t know, I just find that interesting.
Scott Deetz:
Thanks, I appreciate that a lot. Yeah. So, you know, I think for me, where we’re all of that starts, is when somebody is your mentor and helps you. So my first exit, how I got into this was close to 20 years ago, and I did it myself. And I got a buyer to the table, we shook hands on the deal. So that to me, because I was young and foolish at the time, I meant that I thought we actually had a deal done. The deal fell through, of course, and it was a seven figure deal. And so I met I got depressed. And then I met my mentor, who has done I think north of 10 billion in deals.
Aaron Cordovez:
Is that mentor public?
Scott Deetz:
Well, not officially public. So but but I just call me He’s my buddy Terry. And he’s an advisor now at northbound and, and so what we do, what he showed me was, what I was thinking I was supposed to be focused on as an owner was actually what I thought was strategy was just tactics. And what real strategy is, is positioning yourself in the marketplace that makes you compelling to a potential buyer. And, and so my story was we took the exact same company, took 18 months worth of planning, really looked at what was going to make the company valuable. And then we went back out to market and we got more than three times the price that I was going to get on my own. And so it was that day when that wire comes through. And for those of you that maybe sell on Amazon, think of it as like Black Friday, Cyber Monday Prime Day, and, you know, and all of that combined, and all of a sudden, it just hits into your account. And that was the first, you know, thought that I had was that if I hadn’t met my mentors, there was a sort of a group of them, I would have not ever really thought about all of these things, which meant I would have left two thirds of all of the hard work that I ever put out on the table. And that was the day that I thought, jeez, I’ve got to help a bunch of other people do this. So I think maybe part of the reason that I come across that way is, you know, I created a value within northbound when I started it, and it says we do work for businesses, we work for owners that have businesses. And so our whole mindset is that, you know, we think of people as people first that are going to have multiple business ventures, most of our clients do, they’re either buying companies or then they’re looking to buy and then sell start over partner with a private equity. And so if you keep the focus on the human aspect of it, that’s what wakes us up, you know, we got a little over 20 full time people and we create, you know, our mission is let’s create life changing events, for entrepreneurs in e commerce entrepreneurs specifically. But when you keep your focus on that, then you get into the fun of what this is not just into the math. And then you realize that in order to do this properly, and get the highest valuation, you got to have a whole ton of math behind you got to have a ton of negotiating skills. You got to have a ton of legal skills, tax planning, all those things. But when it stems always back from you know, we don’t represent for example, we’re not what’s called the buy side firm. So we don’t, we will represent clients that are entrepreneurs that might want to buy companies, but we typically don’t work for you know, a large private equity firm and the reason is that we don’t value what they do. We have close relationships with them. But we value the excitement of having an owner move from not having financial freedom to having financial freedom, and then they get to go pick what they want to go do with their life after that. So, so maybe that’s what comes across is just that intense passion around that. And that’s what happened to me. And you know, it’s a way to give back.
Aaron Cordovez:
That’s awesome. That’s awesome. I love the purpose. It’s entrepreneurs, I mean, great people on winning health, I mean, all the time, you know, unguided, just like, wild activity. So, appreciate that. And then could you you know, just for a, if you’ve calculated this, what’s the cumulative cumulative amount of deals that northbound or you are combined, have transacted in terms of selling companies?
Scott Deetz:
Yeah. So I would say, I don’t have it off the top of my head, but I would say definitely north of a quarter billion. Yes. So I’d say, you know, somewhere in, you know, like I said, don’t have it exactly there. And that’s probably what I’d say, is just sort of in the e commerce space. I’ve been doing this, you know, for little longer and other types of transactions. But that’s kind of what our focus, you know, is I think that’d be relevant transactions for the audience. So, yeah, we’ve been through it, you know, dozens of times, and, you know, have seen kind of, a lot of, you know, different types of things. And, you know, when I think about the why of why people exits, there’s a lot of different reasons why that was there.
Aaron Cordovez:
Why? Why do sellers sell right? Of course, there’s of course, if they’re afraid, right, that’s one, let’s put that into one bucket. Hey, your Amazon account might get suspended? competitors might come in, the Chinese might come in at a low price. Okay. You scared? I will put that into a fearful or cautious. Okay, that’s one bucket. Um, but what are the benefits? Right? Let’s see if they sell Regardless of the reason why does a person so what do they get from selling a company that they’ve worked so hard to build?
Scott Deetz:
Yeah. So first of all, before I get to why do they all start with why should they? And and the reason I say why should they it’s quite simple. four things can happen to you, when you become an entrepreneur with your company. You can either die, you can literally meaning die die, you can die, you’re gone, you can fail, you can work in this business for the rest of your life, or you can exit. So when I put those four options out there, for most ecommerce entrepreneurs, it’s pretty easy to understand that, you know, first options, really bad failures, you know, sometimes can feel like dying, staying in this business for the rest of my life doesn’t sound that exciting. And so I pretty much can narrow the funnel down to you that at some point in your life, you should be planning an exit. And then I go to if you’re not going to exit, some people say, Well, I just want to continue running it. And then my answer to them is is then in my opinion, you should be implementing a strategy that we refer to as you should be exiting to yourself. And so if you are going to be in a long term hold position, the most common problem and there’s entrepreneurs littering the globe that have done it, they constantly re up their money back into their own business, not getting money out of their business, and diversifying their company, or diversifying their asset base. So in essence, the way that I think about them is the people that go to Vegas and play blackjack, and they say, I’m gonna bet $100. And then if I win that, I’m gonna bet 200. And then I’m gonna take the 400 800. And that’s how I’m gonna get wealthy. And eventually, what happens is that that math, Vegas, let’s just put it that way they love when people like that show. Right? Exactly. And so the way that we think about it is that you should, if you’re not exiting to a third party, you are exiting to yourself, which by by that means is that you got to get capital into grow the company, which allows you to take dividends and distributions out so that you diversify your asset base, no more different than if I gave you $10 million to put in the market, you probably wouldn’t put it all in one stock, you know, you get it into a diversified portfolio. So that’s why I think people should exit and then you go, why do you now that I know that I’m going to now it should be less about why should I exit? And it should be what type of an exit Should I consider? And so, to me, that’s a it’s an important it’s a subtle but important mindset shift, because a lot of people are trying to wonder why they should exit. And I say, No, no, no, you’re absolutely should, is it going to be to yourself or to somebody else. And then if it’s to somebody else, then here are the types of criteria.
Aaron Cordovez:
You might want to know me clarify a little bit exits, right? So you prepare to exit meeting you. In this case, you’re going to do the same number crunching the same forecast the same kind of magic that you do and plan out your company, right as if someone would buy it and you tell them this is the trajectory. So you do all that work. which is again, what you guys do is magical? And then how do you sell it to yourself? So then basically, is there any physical transaction? Or is this more of a mental sell?
Scott Deetz:
So what you do then, is you look at what the valuation of your company is. And let’s say you built up a company that’s making a half a million dollars of profit a year, okay? And it’s on a growth rate, you’re still growing the company. So it’s growing at 25 to 40% a year, what most people will do is they’ll take the profit from the company, and then what they’ll do is they’ll reinvest it back into buying more inventory, staffing up more thing. So even though they’re profitable each year, they haven’t actually pulled the capital out of the company and put it into what I refer to as the me account. So when I talk about executing a transaction with yourself, what you literally are doing on not just on paper, but you’re dedicating a certain percentage of your cash flow, you’re getting an outside capital source, generally debt financing, that’s not personally guaranteed. If I’m personally guaranteeing the debt financing, then it’s not like I really took the money out of the company. Okay. So what I’m doing is I’m diversifying my risk by taking on reasonable corporate debt, that allows me when I make 500,000, to take roughly 20 to 25% of the cash flow of the company, and move that into my own personal accounts, which diversifies it, which is the same if you think about it, is if I if I can take 30% of my cash each year, for eight years, or 10 years, that’s the equivalent of selling for two and a half to a four multiple, okay? Now, most the time when people actually realize the economics of selling to themselves, they go, you mean, it’s gonna take me eight years to get to a four multiple or I can sell today, which then gets to my, my next point is when you decide whether or not this was the eye opener, when I sold my first company is I was feeling like I wasn’t getting enough value for my company, every entrepreneur, anybody on this podcast, no matter what multiple that Scott, or northbound we get you, we always are going to have the combination of Should we ask our conversation, should we ask for a little bit more, right. And I’ll never forget, I’m sitting in the conference room, it’s late at night. And I’m looking to exit my first company with the group that we’d hired. And, and I’m with the financial guy, crunching the numbers. And I’m feeling like I’m not getting enough for my company. And he finally looks at me, and he shows me the spreadsheet. And he says, You do realize that after tax with the capital gains that you’ve got, you’re in a software and technology business that you need to keep or maintain your profits for 12 more years. Or you can get 12 more years of that by taking this offer. And that was the point at which he said show that to me again. And basically what it was was that when you take the purchase price of what we were exiting the company plus the earnout, that we thought that we were going to achieve, and you take a capital gains tax rate against how much money we’re actually able to take out of the company, the math that made it equal was that I’d have to work and be successful at the current level with no downturns for 12, straight years.
Aaron Cordovez:
Is that taking all the earnings?
Scott Deetz:
What it was taking the it was taking the bulk of it, oh, it was taking the bulk of it, it was taking you know, it was it was more than 10%. You know, it was like taking, you know, a half to three quarters of it, you know, and so all of a sudden, you just kind of get this worldview that you’re like, I don’t want to do that, you know, you know, at the time I was, you know, 30 or 31. I was like, Oh my god, that’d be like when I was 43. Right? You know, you know, so that’s when it hit me that it was the right answer to exit to somebody else. Because now we’ll get to Why do people sell is when you exit and you exit to a third party that has capital, it allows you to accelerate the asset that you have built and get a payment stream in a much more rapid fashion.
Aaron Cordovez:
Is this depending on what what method you’re selling now you’re describing selling a portion or you’re describing selling fully or half or what?
Scott Deetz:
Well, yeah. And so now, you know, what I would say is almost all exits to a third party accelerate the amount of money that you get, compared to a sell to yourself. Yeah, right. Yeah, by definition. If you get more than one times multiple, you know, you’re getting more than what you would you’ll be able to take out a cash flow, right. So, so so I kind of start there. And then here’s kind of the other mindset when we talk about people why they exit, what we try to do is we try to with all of the you know, modeling and the spreadsheets we put together is open up the dialogue, dialogue, dialogue of what does an exit really mean and most people People start with thinking that it’s I build it, I built it, I build it, I build it, you know, I sell it, I get a one time payment 100% cash upfront, and then I go live on an island, you know, I go do something else in life, right. And the reality is, is almost every exit is far more nuanced than that. So most of the time, people are valuing their business on what’s called a trailing 12 months multiple. So you’ve probably heard that term, you take your trailing 12 months on earnings, and then you multiply it times three. So if I’m making half a million a year, multiply times three, it’s a $1.5 million transaction, what we focus on is what is what we call the lifetime affective multiple, because that’s the only multiple that ultimately matters in terms of what you achieve from this business. And I’ll give you the same company. And I will say to you, One option is that you sold for a three multiple, and you get $1.5 million upfront. And the other one is you sell for a five multiple. So which one is better? And most people will say it was the five multiple, and I’ll say to you, oh, yeah, by the way, the five multiple only contains 15% down, it contains 50%, based on an earnout that you have to double the profit of the business. And it contains the remaining 35% on a rolled equity hoping that the company that you bought got bought by does better than what you are doing today, when all of a sudden they and all of a sudden now the the answer flips. So it’s like, whoa, wait a minute, why don’t want to do that? Oh, my God, I thought I was going on the island. Exactly. What happened to the island is is it sounds like I gotta roll my own boat to get to the island. What do I need the buyer for? Right? So the answer to how you should be evaluating when and how you should sell is based on when you exit. When all is said and done, what is the cumulative amount of compensation you received from that exit over the lifetime of the transaction. Okay. And that, to me is the aligning multiple that allows you to look at two different offers. And one of them might be a cash offer, and one might be an urn out. And what you do is unless you have an accurate forecast of what you think the business is, and then you discount it back for risk, because obviously, money you don’t get today has some risks to it. But it allows you to create the right framework for what’s the right type of an exit. And that’s the economic half. The second part of it is what do you want to go do in life. So I’ll give you two different people that are exiting, one of them is absolutely does not want to work for I’ll call it they always used to say when I was growing up, don’t go work for the man, right? Don’t go be an employee with somebody. But somebody else will say that’s not going if I go sell to a private equity company, I’m not going to work to have a job, I’m getting to level up and get to interact with a whole bunch of really, really bright people that are going to put a whole bunch of cash into my business. Because if I’m, if I’m buying a company, I’m buying it to grow it. So for other entrepreneurs, what they’ll do is they’ll say, you know what, I’d like to grow the company for a couple years, build it up to a level of success, then what I’d like to do is bring in a capital partner, that helps me get some money off the table, but then puts you know, a lot of money into the business. And then let’s go take it to the next level. And then I’ll exit the second portion of it three years down the road, same exact business could have multiple exits, and there really is no right or wrong answer until you align what we call the owner objectives with the business capabilities, and then the transaction structure. And you have to kind of lay all three of them down together. And that’s why, you know, done right? You’re you’re thinking about these topics right from when you start your company. Because you know, your answers will change over time. And hopefully what we want to be a resources is if you ask a more detailed, arguably more thoughtful and intelligent set of questions around exiting, you’ll come up with better answers.
Aaron Cordovez:
And when you say this lifetime equity lifetime, effective multiple, multiple, by lifetime, do you mean that the time from the exit to when you’re done? So like you have to work for another two years? And not that two years? Can you explain better?
Scott Deetz:
I’ll give you an example. I’ll use a million dollars of earnings just because it’s easier to do the math. I get an AI in 2020. I made a million dollars worth of profit, okay. The buyer was willing to pay me a five x multiple on the business. So $5 million. Yep. But I only took half of it in cash. So I got $2.5 million in cash. Okay, the other 2.5 million I took in equity or stock which is called rolled equity. In the new company, that was the buyer.
Aaron Cordovez:
Did you directly sell it right away?
Scott Deetz:
So let’s assume it’s a private buyer. So I get new equity in the new company, they grow that company for a typical private equity will hold it for three to five years. And at the end of year three, they triple the business and they quadrupled the value. So the value of my other 2.5 million went up by a factor of four. So 2.5 times four is $10 million. Plus, I got my original 2.5, at cash at closing. Right? So I ended up with 12 and a half million dollars, and I was making a million dollars of earnings. Right when I sold it, right, that’s a 12.5 lifetime, effective multiple, what I did five years to get it, but it took me five years to get it. So the answer to how you you know, you answer these questions is you have to look at the total lifetime effective multiple over the time period against the risk to decide what type of transaction is best for you. And I can take the one seller a that’ll say, give me the Give me the $5 million today, right? And I can take another seller, that’ll say absolutely no way. Because if I take my $5 million today, and I pay taxes on it, let’s just say I have to pay 20% taxes, and I got $4 million left. What are the odds that you can take $4 million, put it out into the market and in three years invested in a stock that gets you 12 and a half million?
Aaron Cordovez:
If you had put it in Bitcoin a long time ago, you could have done it, but…
Scott Deetz:
Yes, you could. And it might be, you might lose all of it. And it might be bearing as much risk as keeping it in the business. So some people if you’ve got a broker that can do that in a diversified way, please let me know. Right. So it’s all risk versus reward. And what the job of audit advisory does like us is that we help you first if you don’t think about lifetime, effective multiple is the right goalpost, well, then you’re kind of lost, because you get excited about, oh, this one’s a four and a half multiple, this one’s a three multiple. So the way we break down then lifetime effective multiple is into what percentage of your lifetime effective multiple is guaranteed versus contingent. And then what part of the guaranteed is 100%? guaranteed? Because you got it closing. Right, right. So everything has different risks. And when you do the analysis on that, usually what happens. And then the important one you said is how much do I have to work afterward to achieve that. And the reality is, is that that is sometimes independent, there are companies that we roll equity when we do a transaction, but the seller only has to work. We did one, they worked full time for 90 days, four hours a week for nine months, and then they were done. But they still roll 20% equity. So don’t think that you have to roll, you have to work there to roll equity. Some buyers require it but others don’t. But the most important point is to think about, if you if you break down what a transaction really is, over the lifetime of it, you’ll come up with a whole bunch of more understanding of whether you should do a transaction or not.
Aaron Cordovez:
Okay, good. Um, and here’s, here’s a one thing that I learned that a seminar here locally, actually, a couple years ago, was the the relationship between the multiple, and then the return on investment for the buyer. Okay. And the way that that worked, and again, you probably are familiar with this, which is right, if I’m buying a company at a, you know, 3.2 or 3.3, multiple, whatever the inverse of that is the return I’m expecting. So that would be a 33% return. Because if I put in a million dollars, and you know, the purchase price is a million bucks, the earnings was 333,000, or whatever, then I’m paying three x multiple, which means a million, I’m expecting a 33%. back. So similarly, if I buy a company at a 10 times multiple, you know, in an ideal world, that company doesn’t go down, that company will return a 10% return on that, right. So that relationship to me when I learned about that I’m like, Okay, that makes sense. And then the ratio of like, how risky it is, normally will go. And that will depend on your multiple, right? If it’s fully guaranteed 100% of like, No way it’s going to go down. A lot of people pay a higher multiple. And that’s I think, why software companies when people are like ended and they’re not going to ever churn or whatnot, you can get a crazy multiple because it’s almost guaranteed that that’s gonna stay. And so, um, do people think about it that way? Is that a right thing that I learned about?
Scott Deetz:
Yeah, you did. And here’s one of the you know, one of the biggest education’s a for you know, in I’m assuming this, you know, the audience for this is more the sellers and the buyers. The one thing that the phrase that we always To talk with our clients is, you have to understand that it’s not what the seller is selling, it’s what the buyer is buying, or the way I describe it is your ultimate buyer of your company. Think of them as like your ultimate customer. Okay? And so when you think about what you do when you put up a listing on Amazon, do you list all the reasons why you think it’s cool? Or do you list all the benefits of why your customers might think it’s cool.
Aaron Cordovez:
For sure the customer, right?
Scott Deetz:
So everybody that when people, when people say to me, Well, I don’t know anything about selling my business? I say, yeah, absolutely you do, because you put up listings every day, describing things from the lens of your customer, if you think about your buyer, as just another type of a customer, start describing your entire business from the lens of that buyer don’t describe what you want out of the transaction, described, what they’ll get out of the transaction. And the first thing that you talk about is what we would refer to as the hurdle rate on the investment or the internal rate of return. So the internal rate of return is your 33%. And each investor will have a hurdle rate of what they expect that their investments to achieve. And if the market in the stock markets at 12%. And you want a hurdle rate of three times the stock market, because you’re more risky, you’ve got a 36% hurdle rate. And so the way that I would add on to your calculation is that what you’re doing is assuming a steady state, which is a perfect, easy way to describe it. What a buyer will then do is that they will put together a forecast of what they’re going to do with what’s called post acquisition lift. And then they will build that into the calculations of what the internal rate of return is. So I’m buying a company million dollars of earnings, I’m paying 3 million for it, they would never do it just for a 33% return.
Aaron Cordovez:
Is that because the transaction and the due diligence and everything is so high, is that it?
Scott Deetz:
Correct? It’s more because of this, it’s because I know that if I buy five companies that all stay steady and get a 33% return, that’s never going to happen, one of them is going to blow up. Okay. And so I have to have my winners pay for my losers and all my transaction costs. So I only want to buy things that I believe that I can add lift, after the the acquisition and I would submit to any seller that a buyer of their company that doesn’t believe in their mind that they can double the size of the company is probably not gonna want to buy your company. Now, you might say, Well, wait a minute, but I’m not on the trajectory of doubling the size of my company. And now we’ll get back to it’s not what the seller is selling. It’s what the buyer is buying. There’s probably three reasons that you’re not able to double the size of your company, you don’t have provability and repeatability, which basically means to me, you haven’t figured out the model, or you have provability and repeatability. But you don’t have scalability, because you don’t have the cash to be able to scale, or you’ve got provability, repeatability and scalability, but you don’t have the team in place. So you don’t have the infrastructure in order to make that happen. So when I’m looking at it, as a buyer, I’ll look at this great business and go wow, I see 10 products here, nice little brand, they’ve got two variations per product. And the reason they only have two variations per product is because they don’t have the cash to offer eight different variations per product. And that’s why they’re ranking five, rather than ranking in the top three, I come in, I’m going to bring in three times as much capital, I’m going to expand I already got the supplier, I add yellow, green and blue to black and red, I add extra small and extra large to medium or whatever the variations are. They’ve got a theory or a thesis and investment thesis in their mind that’s going to double the size of the business. And now I’m going to go to the opposite question, which is the opposite of a lifetime effective multiple is a buyers effective multiple. So one way to think about your buyer, your return is this 33% if you want to convert it to a multiple if I buy something at a four times earnings, that I double the profitability, what’s my buyers effective multiple.
Aaron Cordovez:
So it is 50%. Two multiple of 50%.
Scott Deetz:
So it’s 50% of the four multiple. So what you’re looking to do is find a scenario where you can have a good lifetime effective multiple for you but there’s enough growth in the business that it creates an acceptable buyers, effective multiple for them. That’s the definition to me of a win win transaction. And it’s usually you’ve gotten it to a certain level, okay. And then there are still capabilities, you’re still investing and have new products. But there’s the next level that a buyer can bring synergy that you either don’t want to do can’t do don’t have the capabilities to do. Or it’s easy for one of the buyers that’s out there in the space to say, I’ll throw $10 million at this to scale it to the next level, it’s another thing to go talk to your spouse in life and say, you know, what, I’m thinking that we should put $10 million back into this, right. And that’s the difference between a lifestyle business and in a scaled institutional business. So that’s the dynamic, and you’re exactly right, when you’re analyzing it as a buyer, start with the baseline analogy, you know, but the the odds that your company is going to stay exactly at that level, as I like to say I’m a big football fan is the same as having 16 ties in a row, right? Things are either going up or they’re going down. And so your job is a seller is to sell them on the concept of why all you need to do is insert more gas in the car, and it’s going to go farther. And you need to be able to prove that story to them to create a compelling value proposition for the company, which then creates the multiple. And then if it’s true, this is why the truth is so important, is if it’s true, and it actually happens, you can get a higher lifetime effective multiple by structuring the deal to get rewarded for when that future growth happens.
Aaron Cordovez:
Okay, I’m a buyer, okay, and I want to buy and I know that’s gonna double or whatnot. What is that you said, a win win scenario be like, Hey, I’ll get that. And then you get a percentage of, you know, the left or something like that. And even if they have to do nothing, because if you’re confident that you’re going to grow it, and if you do, let’s say, double the earnings, then who cares if let’s say the seller will go up from a three multiple and go to a four multiple, or even four and a half or five or something like that over the lifetime, but it’s only when it grew. Now, do sellers go for that? is that exciting for them?
Scott Deetz:
Yeah, so if I flip it around, and I’m on the buy side, there’s a couple of different things that are out there. One of them is am I just buying assets, I’ll call it buying skews, and the seller is going to go away. So if the seller is going to go away, then it becomes a little bit more of if I can get a seller to offload this business to me for a lower price, then I might as well do that because they’re going to be gone and I get more lift. If I’m doing a transaction where we’re going to work together afterward, I call that I’m not only selling skews, but skills, because I want the person to come with it, the entire mentality of the deal starts to take on a different tone, because nobody likes to sit around in a deal six months or a year later. And I always call it you know, to me, the easiest test of fairness is that we’re at the closing table, and then we’re at a year later, we’re having that same dinner. Are we both happy? Or is one of us made so much money off the other that it feels awkward, right?
Aaron Cordovez:
Hey, stay on for a 50k salary and grow the business and I get all of it. That obviously would be terrible, right.
Scott Deetz:
But if you’re but if the seller is going to leave, and they’re, you know, this is where, you know, my job is to represent sellers, but as a buyer, there are people out there. Why do you think that all buyers value businesses on trailing 12 months earnings? Okay, I can I can tell you this. There’s not one buyer that actually values a business based on trailing 12 months earnings. And when I say that people like what are you talking about? Scott? Everybody does? I said no, no, no, no, they don’t at all, because how much of the trailing 12 months earnings do they get to keep? That’s all gone. You know, that was last year’s trip to seller con or wherever it got spent. They don’t get a dime of that. They’re calculating it based on trailing 12 months earnings, but they’re valuing it based on their projection of future 12 months, 24 months and 36 months earnings. So the whole notion that buyers value businesses based on TTM is absolutely a farce. And so when you start adopting that mindset, you’ll start looking at what are they going to get now the other reason why if a business is growing and it’s doubling, right, is it better to value it based on trailing or future if I’m a buyer. So you start to use this negotiating language we don’t ever pay for future earnings. We only buy on historical earnings. Anybody here has just tried to sell a company has probably heard those words. When nobody knows what the future can bring Amazon’s too risky, you know, a whole litany of reasons.
Aaron Cordovez:
But you’re gonna start blaming the fire there.
Scott Deetz:
Yeah! Well, and, and the reality is, is that it’s just an open conversation because we all understand that those things are risky. And if I, if I represent a seller, and they say, I’m going to double the earnings, and the buyer says, prove it, well, then you better be willing to, you know, only take a third of your money down and put two thirds at risk, because you just told them that this thing’s gonna double. So the conversation isn’t about being on opposite sides of the table. You know, the best way that I think about it is that in any good negotiation that starts out with people on opposite sides of the table, eventually, what you want, as the deal matures and is about to closed, is that we turn around on the same side of the table, and we look at a common future. And the common future is, where are we at today? What are the risks today? What is the growth opportunities, and when we start to see, you know, when we’re both looking at the same sunset, you know, we both know when’s the right time, you know, what’s the best way to structure a deal. And if we’re always, you know, and it’s natural, that there’s some tug and pull looking back and forth at each other, from opposite sides of the table. But in the proper deals, deals that get done that are aligned after the deal, you eventually have to open up the dialogue to get on the same side of the table. Now, that happens less if it’s just I’m going to buy you and you know, and right, days later, you’re gonna be gone.
Aaron Cordovez:
If they’re the sellers I mean, the seller is just gone, then typically the multiple is going to be much less because there is no shared future, right, the dinner table later, it’s like good luck, whether whether you doubled it or whether it crashed is kind of like the seller doesn’t even care.
Scott Deetz:
The buyer is there for all the risk. So, yeah, so it’s less so that way. So again, we serve the premium market with premium sellers, where you generally, I would almost argue that no deals, you know, that we deal with, we haven’t done 100% cash deal in a long time.
Aaron Cordovez:
Right, because you’re going for the premium multiple, when you have multiple, the people they have to stay on because again, you’re they are gonna do that shared future. And again, if you guys are listening to it on the audio, if you go to the YouTube, Scott did something, with his hand that is so beautiful, it’s like basically German facing out, and like a guy’s walking away, Sunset on the deal.
Scott Deetz:
And you said one thing, though, that I do want to mention is that it’s not only that you have to go work together, but back to the point is, you’re allowing the buyer to cash flow, the purchase, with the future profit of the business. So here’s an important point about that, even if you’re not gonna work with them at all. The reason why we don’t do any cash deals is if somebody’s going to come out of pocket for 100% of a three x multiple, okay. Do you think that they have had to price in a lower multiple in order to come up with that much cash? And the answer is, yes.
Aaron Cordovez:
Can you clarify that?
Scott Deetz:
Yeah, well, the way we think about it is, by definition, 100% cash buyer has to pay less than somebody that will be willing to pay you 50% cash today and seller finance the second 50% over a year, because the second buyer has the ability to use the profit to finance the business. So if somebody is only going to, I’ve got two buyers, one of them says I’m 100% cash buyer, I’m going to give you $3 million for this million dollar company, I can almost guarantee you that there’s a buyer out there willing to pay 3.5 million, and they’ll pay you 2.8 million today or 2.5 million today, and in 12 months, they’ll give you a million dollars. And they’ll put it on alone, because they get to finance the cash flow of the business. So almost by definition, when we do seller financing, or when we do earnouts. And rolled equity is if you don’t do those things, if it’s like taking away from the meal, you do those as the dessert on top of what you weren’t going to get anyway. And that’s the mindset is if you’re doing too risky a deal, you know, which we don’t advise people to do. But if you are, it’s because you’re taking too much risk. But if you’re only going to find a buyer that’s going to be willing to pay you $3 million in cash, why not find a buyer that will pay you 2.8 million in cash with a million of upside, enrolled equity.
Aaron Cordovez:
I mean, if it grows, or if
Scott Deetz:
It grows, because you’re only given up 200,000 or 300,000 in the exchange to get something more so generally doing again, thinking about it from the buyers perspective, what you want to do is you want to create a deal that gets you enough cash at closing might be 75 or 80%. But the more you can be flexible to work within their structure, the more that you can typically maximize the lifetime effective multiple of a deal. Now, if you don’t believe in your own business, or you really believe that Amazon, you know, everything is going tomorrow, you know that then you can look at it a different lens and we don’t ever pick the lens for our clients. We do the math that allows them to see it clearly. So that they can pick the lens and what typically happens is when you do the math on it, you typically realize that it’s better to give a little bit of seller financing and then if you want to get more risky You put more out on an urn out, if you want to roll equity, you know, those types of structures tend to naturally happen. Because you’re trying to align getting the right multiple evaluation with the right friendliness to the buyer.
Aaron Cordovez:
That’s great. And I guess that’s gonna really depend like, if you want to stick you know what you’re gonna do with the money, sorry, like, yeah, if I want to take out the money, and I pay, I feel like I want to put all my money in stock, or you have this apartment building I want to buy, and that’s going to do some x with the money, you might want all that money now, but realistically, you know, if you have $5 million exit, even $2 million, you may not spend it all in one go. Because that’s kind of risky, right? Yes. double double or nothing at the blackjack table? Yeah. Yeah, you just cashed out, you probably want to take it a little slow. So the earnout probably not such a bad deal for the seller. Really? Yes.
Scott Deetz:
And one of the things I’m glad you mentioned this, because one of the things I didn’t realize until I did my first exit, what I didn’t realize was a couple of really important facts. One of them is once you’ve exited your first business, do you think that there are a whole bunch of people that line up to want to then help you finance your next businesses? So most people don’t realize it. But now all of a sudden, they the the expression they always used to use was they’d say, you know, I don’t bet on the horses. I bet on the jockeys, right, and you’ve now proven, I can start a business scale a business grow business, and that business created an exit. So when I exited my first business, what happened was a whole bunch of other people come out of the woodwork that then now want to, I’ll call it bet with you or bet on you. And so what I always encourage people is most people think that they want to sell their first company for $2 million, take the money from that, and put it back into their next venture. And you want to put maybe some of it if you want, but what I always try and say is no, the goal of exiting is to get this me account built up and diversify in stocks, and maybe put 50,000 of your own money in and go find an investment partner that was willing to put another 50,000 of equity in, and then maybe you give up a small percentage of the company, we recently did a transaction where we were able to get a company funded for a startup didn’t exist, except on paper. And but we had the bio of some successful sellers. And they gave up 15% of the company. And they were able to get $1.5 million to start the company 300,000 of equity, and 1.2 million on a line of credit. So what they were able to do was dramatically increase the capability. So if I asked you the question, would you rather start a company and own 100% of it and have your own money on a percent? Or would you rather have $1.5 million and own 85% of it, and people can choose whatever they want. But there’s a lot of people that would say wait is an option there, there is an option. So once you’ve exited your business, this is why I think it’s important to think about exits, maybe even sooner than what you think is that is that once you exit once and you’ve proven yourself, there will be people that want to partner with you to then grow. So you don’t you put your money that you get from your exit as much as possible into a diversified portfolio and maybe a little bit back in, but then leverage up the other capital that’s out there not personally guaranteed again, but leverage up other capital that’s out there to grow your next venture maybe larger and have diversified your risk. So that I mean, I think that’s just a fundamental thing that until you exit, you don’t realize that that happens. And that was what happened to me to help grow my next businesses is that it was like, it was like, Oh, no way, wow, there’s this whole market out there for people that want to invest in entrepreneurs that have been successful.
Aaron Cordovez:
And that’s brilliant. And actually, that’s a really big benefit of selling. Because once you sell, I mean when I know that the person was selling, they’re like, hey, they can go on like a Click Funnels and be like, I sold the company for $10 million. And like, that’s some credibility. But you’ve done it and you’re gonna have some attention and you can repeat it. And if I look at people like Elon Musk, I don’t know he sold PayPal or whatever he did and into the next thing they sell and then move on to the next sell move on to the next it’s not one big long deal. Because I guess it’s just get some momentum, right? You’ve made that big score you’ve taken like you said 12 years of your earnings, put it into one goal. Now you to start your next venture with a bunch of money and I think that’s a big benefit to selling. Just because now you get you have so much cash you can do whatever you want to do. And you probably are so much smarter after growing and selling a business.
Aaron Cordovez:
Yeah. And hey, when you have a couple million bucks, you know, may might get some attention, I guess, you know,
Scott Deetz:
Yeah. And then you can also you can take your Take your time off to not jump into the first thing too quickly.
Aaron Cordovez:
Yes. And I think that’s a lot of people got whatever they got success in is almost like happened by luck. It wasn’t always like, Hey, this is what I’m gonna make money. I tried so many different things. And then Amazon was one thing that actually worked, you know, so it wasn’t that it was just by choice. And I love all this. I mean, I do actually love selling on Amazon. I think it’s I think it’s Yeah, but not everybody does, even if they’re successful. So I think that’s a great option. So to recap, benefits of selling from Scott, the man himself, Okay, first of all, you get a bunch of money off the table could be 12 years or more of your earnings that you actually would get otherwise when you pay yourself to you have a bunch of capital then to do whatever the hell you want. Any business you want. Any niche you want. Any market you want. I mean, you are ready to go. Um, another one is you can find then take all the money off the table, you can have investors, you can do another thing where you don’t have all your personal money tied up in there. For I guess it’s fun.
Scotts Deetz:
I mean, here’s the one that we didn’t mention that it’s probably the one that we can sort of end on or summarizes, when you double the size of your company and you’re running it.
Aaron Cordovez:
Did you get less busy or more busy?
Scotts Deetz:
More busy more problems, more products. So that generally takes more time. When you exit a business, and you get more capital, what do you also get more than just financial capital? You get your time back. And it gives you this great opportunity to refocus on what you want to do. And I’ll end with kind of where I started is, that’s why we always say we work for owners that have businesses, I just was talking with a successful entrepreneur today, got a 15 year old, the 10 year old, hey, there’s only so many years left that you’re going to have, you know, 15, you know, you know, put yourself back when you were 15. Were you out the door at 15? No, but was I mentally starting to check out? You know, maybe, right. So what I, when you exit your business, you get more capital, you know, and it might not be 12 years for you, it might be four years, or three years or eight years, whatever it is, that’s the math part of it. But I can guarantee you that you get your time back to refocus on what you might want to reprioritize in your life. And so that’s the fundamental aspect beyond the economics. You know, I call it, you know, sometimes you have to sell your business to be able to see yourself, you know, in a new way. And so that’d be the last one I would add to that list.
Aaron Cordovez:
Brilliant. Love that time. That’s the most important one, actually. Yep. Okay, good. So quick to wrap this up. I just do want to mention again, I myself, Aaron Cordovez, I am looking to buy companies. So after all this, you’re like, Hey, I would love to sell guys reach out to me, Aaron at big brand, products.com, I’ll put it in the link. I’m looking to buy any company, Amazon based $5 million, purchase price and less. So if you have any company that please message me. And then Scott, if somebody wants to get, you know, premium multiple. And of course, as you said, this is not really all cash upfront that you haven’t dealt with those in a while, someone who wants to either continue building, they want to get a premium multiple by doing these premium. Again, I’ve seen some of the deals we’ve done, and it’s like, hey, these people are gonna sell a percentage of the company, keep growing it have all this count, like these crazy deals that are really exciting for business people to continue. But if they want to premium multiple and let me see about your premium valuation for premium accounts. Okay. If you want to go that route, how do they find you and your team? Sure, yeah. So
Scotts Deetz:
If you want to reach me, it’s just Scott, my first name Scott at northbound group.com. or go to www dot northbound group.com. And, you know, happy to take any questions that come on in and, you know, we exist in this industry to be a resource for entrepreneurs, to think about exits in a smarter way. So if you’re, you know, we’re happy to field questions. You know, those types of things. You don’t have to have a client relationship, we have a passion around this. And we know that eventually, as people become more successful, you know, some of them will want to work with us more directly. But if you have any questions, just go to Scott at northtown comm with an email or hit the website.
Aaron Cordovez:
Awesome. Scott, thank you so much for all that and I just again, I’m gonna just double up on the recommendation. I know people will work to do multiple, and if you want to put in the time to get the highest valuation, you’re not just going to go I want to brokerage something be gone in a month, if you want to put that time in the business to make it absolutely more valuable and potentially get 10 times more than you were expecting. But you do want to do the work. Absolutely going with Scott will be part of the best decision you will do financially in your life. So that’s good for you, Scott.
Scotts Deetz:
Thanks so much thanks a lot Aaron. Great talking man!