EA11: How To Prepare Your Amazon Wholesale Business For Sale with Joe Valley

EA11: How To Prepare Your Amazon Wholesale Business For Sale with Joe Valley

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Show Notes

If you’re just starting a business on Amazon, it’s unlikely you’ve thought of selling. But listen up! Preparing to sell your business will help you set your business up right. And whether you’re looking to sell today or in twenty years, understanding and implementing best practices will help you regardless. 

Here to help us understand how to set ourselves up for selling success is Joe Valley, partner at Quiet Light Brokerage. Having sold dozens of successful businesses in his lifetime, Joe is now in the business of helping you sell yours. Stay tuned for his invaluable advice on protecting your most valuable asset – your business.

Outsource Your Accountant

Before we get into the nitty-gritty, it’s important that you’re using QuickBooks, Xero, or are outsourcing an accountant to handle your dollars and signs. The most profitable aspects of your business can be sucked away by poor accounting. Not to mention, the four hours a week you spend on your books could be focused on adding value to your business.

The Four Pillars

So what are buyers looking for? According to Joe, there are four major pillars: risk, growth, transferability, and documentation. Risk factors such as the age of the business, its defensibility, reviews, international expansion, and relationships with suppliers, can all increase or decrease value depending on the strength of each factor. Secondly, your business will have more value when it’s growing than when it’s declining. Thirdly, the assets in your business that produce inventory need to be transferable for the business to sell and lastly, you must have solid documentation.

Documentation goes back to outsourcing your accountant. And equally as important, per EA7 with Dillon Carter, create SOPs or standard operating procedures, for anything you do more than twice. This eases transferability, lowers risk, and instills confidence in your buyer.

Resources & Relationships

With so much misinformation in the entrepreneurial world, it’s important to absorb information from professional brokers and those with experience selling an online business. As a wholesaler, it’s also important to maintain strong relationships with your suppliers to ease future transferability. Pick up the phone, ditch your email, and hop on a plane for an in-person handshake.

How to Sell Your Business at $1,000,000

This all comes down to numbers. Calculating your correct discretionary earnings helps you understand where your business needs to be before it sells at your target price. Discretionary earnings = net income + add-backs. If you’re looking to sell for $1,000,000, your DE should be $400,000 on the low side. Getting this number wrong will affect the trust of potential buyers as your multiples and list price will mean nothing.

Now that you’ve got your number, reverse engineer it and start improving your business today so it’s ready for the big home run.

Overall

Don’t wait until you’re ready to pull the trigger. Start planning for a sale now and set your business up for the ultimate success. If you enjoyed this episode, leave a review on iTunes and check out Joe’s podcast!

Resources From This Episode

Outline of This Episode

[00:18] Todd’s introduction to this episode

[04:13] Joe’s story

[07:04] What is a buyer looking for?

[8:00] Why most people fail at Pillar #4

[25:40] Why it’s important to lean on professionals

[38:10] How to exit at $1,000,000

[54:56] Todd’s closing thoughts

Transcript

Announcer (00:01):
Welcome fellow entrepreneurs to the entrepreneur adventure podcast where we talk about Amazon wholesale and how you can use it to build an eCommerce empire, a side hustle or anything in between. And now your host, Todd Welch.

Todd (00:18):
What’s up everybody, welcome to another episode of entrepreneur adventure. And in this episode we’re going to be talking with Joe Valley and Joe Valley is one of the members, one of the owners over a quiet light brokerage where they help people sell their business. Now you may be thinking yourself, well, I’m just getting started. I’m not really thinking about selling my business. So maybe I should skip this episode. I definitely highly recommend you listen to this episode because it’s really about how to set up your business properly from the start so that eventually if you want to, you can sell your business and get the most amount of money out of it. So it really dives into how you can properly run your business, how you can create documentation, limit your risk, and increase the growth of your business and increase the transferability and things like that that are super important to run an effective business.

Todd (01:23):
So without further ado, let’s go ahead and jump into this episode. Sit back, relax. You’re really gonna like this one and before we jump in I just want to read another five star review over on iTunes. This one is from DK Hutchens and he says, wow, super informational and full of great advice. I’ve been selling on Amazon for a few years. I’ve not really heard a lot about the wholesale side of selling on a podcast before. You can tell Todd is super smart and he’s teaching from his vast experience in eCommerce. I’ve really gotten a lot from the first four episodes and look forward to many more. Check it out. Thank you so much. Decay Hutchens I really appreciate that four star review. If you haven’t left a review for the show yet, I would really appreciate leaving a review over on iTunes. It would really help us keep growing the podcasts, keep creating more episodes for you guys out there and I would just really appreciate it. So without further ado, let’s go ahead and dive in this episode with Joe Valley and if you want any of the information, the links and such that we talk about in this episode, make sure you head over to entrepreneur adventure.com forward slash 11 since this is episode 11 and you can get all the information there as well as transcripts of this episode.

Todd (02:50):
Welcome to another episode of entrepreneur adventure. Today I have serial entrepreneur, Joe Valley with me and we’re going to be talking about selling businesses and specifically Amazon wholesale businesses. Now Joe has been involved in or ran over a dozen businesses and one of his biggest successes was he recently sold a digestive wellness supplements business in 2010 which had been doing over $250,000 a year just in ad spend. So not in sales of products, but just on ads that they were spending, had over a hundred thousand email subscribers as well. So a very successful business that he sold and his recent venture is quiet light brokerage, which is a company that helps people like you and I sell our successful businesses to people who want to keep running them and then we can take that money and do whatever we choose to do with it. And so he’s actually sold over $75 million worth of businesses, so he definitely knows what he’s talking about. So Joe, I really appreciate you coming on the show. Why don’t you tell us a little bit more about yourself and how you got involved in this?

Joe (04:13):
Yeah, good to be here, Tom. Thanks for having me. Yeah, look I’m an old guy. I’ve got some grand the chin, 54 years old. Been self employed since 1997. I’m sure some of the audience members were just, you know, in preschool back then. I’ve first became self-employed launching a radio direct response media buying agency. So it’s just like a, an ad agency these days running in a sponsored ads, PPC. This was 100% radio. It was all direct response. 800 numbers in every ad. And I had a personal financial goal in 1998 to make $50,000, because the job I left, I made 35 when I left and and it making about a half a million dollars in 1998. So I 10 times to my goal, found a niche that I was exceptionally good at. Continue to run that business for a very long time.

Joe (05:09):
During my tenure as an owner of that company, I also started a marketing company where I produced two television and commercials for products that I had done on radio and then took it to TV. And the last one was a business called purists stat. And it was a digestive wellness center. Started out as a simple colon cleansing product and we morphed it into an online digestive wellness center in 2005. Ran it through the best of and the worst of the economy and came out the other end tired emotionally ready to move on. Sold it in 2010 through quiet light brokerage. And then joined the team in early 2012. Mark, the founder of the company and I are now business partners, have been since late 2017. We’ve got a team of 10 advisors. They’re all here to help first and first and share any tidbit of information we had to share to help you guys build a better business and set financial goals and understand the path to those goals with valuations and kind of what buyers are looking for.

Todd (06:13):
Yeah, for sure. And I had the pleasure of meeting you and your team at brand accelerator live, which is Scott Volcker’s conference, a fantastic conference. Everybody out there if you want to check that out. But yeah, just talking to your team, they were very informative and very forthcoming helping me with different things that I could do in my business. You know, what my business was currently valued at and what levels I would have to reach to say exit for $1 million or $2 million and things like that and what investors are looking for. So why don’t we dive right into that and keeping it in like the Amazon wholesale world. What kind of things would a buyer be looking for in a business that is doing Amazon wholesale?

Joe (07:04):
Okay, well there’s, there’s four primary pillars that they’re going to look at. It’s, it’s risk, growth, transferability and documentation. And generally when people bootstrap a business, just like I have many times in that you might have done and the audience may be doing now they bootstrap and don’t separate out the financials from, you know, other bootstrapped businesses. They put it all in one account, bootstrap it, grow it, and eventually they say, well, I know what to do. I’ll get to it. I’ll separate everything out. And the longer they wait to separate everything out, the more entangled it becomes. And the more difficult it is to separate it out. And that’s the case, whether it’s a, you know, a SAS business content business, Amazon wholesale business, or a private label brand business. So once you get to a certain point and you know that this is something that’s a winner, set up your own LLC, set up your own corporation so that you can really master pillar number four, which is documentation.

Joe (08:05):
Most people fail at pillar number four. They figure it’s just QuickBooks. It’s just zero. I can do the accounting myself and they set it up in Excel and they track it themselves. You’re going to lose value. There’s no question about it. When you go to sell the business, so buyers are looking if they’re going to spend 100,000 of their hard earned money or a million or whatever the number is, they want to be confident that the financial documentation is all set up properly, that the business is fully transferable. Pillar number two, growth. That there is growth in place, that you’re launching new products and you have a plan for launching new products in the future that they can take over. That would be a built in path to growth and then risk, right? It’s all about risk. These businesses trade at a multiple because of the excessive risk compared to other more safe investments like real estate.

Joe (08:58):
But the age of the business, the defensibility of the business all of those things, reviews become a risk, builds a moat around the business or diminishes it. All those come into play when a buyer is looking at the potential value of the business, the buyer may not think, Oh, risk growth, transferability documentation, but I guarantee you they’re really honing in on those without even knowing it. But someone asked me the other day, what’s at what point should somebody start thinking about selling their business? And I think really what they ought to do is instead of going with that approach in that question and answer is more or less say, if I were ever going to sell, how much do I want to sell for? Right? So you set a financial target, whether it’s a half a million, a million, 5 million, doesn’t matter whatever your personal financial target is.

Joe (09:50):
And then you, you, you reverse engineer what you have to do in order to sell the business for that amount. And that’s where the education part comes in and in learning what buyers are looking for and what multiples get applied and how to calculate seller’s discretionary earnings. Forget the water cooler talk. It’s all wrong. Forget multiple of six months, forget multiple of your 24 months. It’s all wrong and I hear it every single day and I’ve talked to at least, and this is a conservative number of 5,000 entrepreneurs over the last seven, eight years. Most of the information that’s out there is misinformation and it is wrong and the more you know about it, the more you can be on target for attaining whatever that goal is that you’re trying to achieve.

Todd (10:36):
Yeah, for sure. That all makes perfect sense and having this in your, the back of your mind right from the beginning is really important and something really good to do. You might not be thinking might or you might be thinking, I should say that maybe I don’t ever want to sell. But if you put yourself in the mindset that you will sell at some point and start setting your business up that way, it’s going to align right up with good business practices in the end. So if you think about that and what a buyer is looking for, it’s going to directly correlate to setting your business up well and it be in a good position to have a successful business anyways. So whether or not you’re wanting to sell, it’s something to think about. And you know, one of the things that you touched on was accounting and like you said, a lot of people will start just in like Excel or something like that because they’re either don’t want to pay for QuickBooks or zero or maybe they’re afraid of those softwares. They’re not sure how they work. There’s actually a free one out there called wave accounting.

Joe (11:50):
Don’t do it.

Todd (11:50):
What am I doing?

Joe (11:50):
Stop. Stop right there. Don’t do it now. No, come on man. Look, I talked to somebody yesterday. They was doing 5 million in revenue and they’re doing their own accounting. Why? Right? Look, if you outsource the bookkeeping, whether it’s QuickBooks or zero, and you pay somebody a professional $500 a month to do it right? First and foremost, it’s going to be a cruel accounting which you have to do in a physical products business. Otherwise you’re not gonna be able to properly calculate seller’s discretionary earnings. First and foremost, it’s gotta be accrual accounting. And just for the record, I fell asleep in accounting class in college and talking about accounting for too long makes my eyes bleed. So we’ll make this short, but use professional accounting software and, and the, and the only two choices I see here are zero or QuickBooks online and then outsource it.

Joe (12:42):
There are plenty of e-commerce bookkeepers that can do a better job than you can do yourself. And then you can take that extra four, even if it’s only four or five hours a week, Todd, that you’re, you’re doing in QuickBooks and you see it’s only four or five hours a week or a month, right? A month probably. And take that and focus on negotiating your cost of goods sold down or your shipping rates or paying more attention to your cash back credit cards. Right. Did you know that, that your cash back points are actually, your dollars are actually an owner benefit and should be added back into your profit and loss statement when you go to sell your business? Most people don’t.

Todd (13:22):
Interesting.

Joe (13:23):
Most people don’t. I did this yesterday with this person that’s doing 5 million in revenue, great business but he’s doing his own bookkeeping and he’s doing a lot of hours and pick, pack and ship because their business exploded on Shopify and Amazon.

Joe (13:38):
But their pick, packing and shipping for the Amazon side but there they’re not, they’re not. They’re running out of cashback points. It’s only up to a certain limit and then you lose it. And they’ve got about $20,000 a year right now in cash back. Their business is worth about four times. So that’s adding $80,000 onto the list price of the business. If you don’t slow down and pay attention to these things, it’s going to be much harder to reach that financial goal that you have. If you bury yourself in doing menial work like, and I don’t mean to take away from the bookkeepers who have a great deal of respect for, but data entry with QuickBooks, then you’re not going to be able to pay attention to things that are going to add much more value then then then you spending time in QuickBooks and if you have a bookkeeper in house, odds are they should probably be fired as well. $30,000 for a bookkeeper when you could pay a professional to do an outsource for $6,000, you just made $24,000 a year or $75,000 to the list price of your business. If it’s at a three time multiple of discretionary. It’s all math, all math and logic.

Todd (14:48):
Yeah, for sure. I definitely with that and I,

Todd (14:52):
I do have outsourced mine. I have a bookkeeper through a company called books keep, which I’m going to be interviewing them here in the future and they do a really good job for me and I don’t have to worry about it or touch it or anything. I’ve tried running accounting myself for my past businesses and the beginning of this business as well and it’s just no fun and you always screw stuff up. So definitely as soon as possible get it outsourced. But you definitely want to at least be using something right. Something is better than nothing and outsourcing that as soon as possible for sure.

Joe (15:27):
And don’t wait. Look again, I saw a separate call of somebody else, actually it was email. I met them a couple of years ago at an event and we touch base every year and she does about 3 million a year in revenue. She said, well, I’m really not ready to have you look at it and not ready to list. Probably looking at, you know, listing in Q four of 2020. That’s a mistake because you gotta have somebody that has experience, delve into the P and L to show you what you’re doing right and wrong and help you understand the true value or your true sellers discretionary earnings, not just before you list, but nine 9,18, 24 months before you’re ever going to plan to exit or just do it now. So the yet the education, that way you can set a proper goal and know what you have to do within your business to get to that goal and achieve it.

Todd (16:19):
Yeah, absolutely. And you know, accounting obviously isn’t the most sexy topic, but it really is one of the most important ones because if you’re not doing it right, you don’t know your business is doing, you could get in a lot of trouble with the IRS and tax wise and things like that. So it’s super important. And like you said, when you outsource, make sure you’re outsourcing to someone who can sit down with you or get on the phone with you and go over that profit and loss statement because that really is the, you know, the lifeblood of your business. It tells you exactly how you’re doing. You could be selling $1 million in profit or $1 million in products every year, but be losing money. And if you’re not paying attention to that profit and loss statement, you’re not going to necessarily know that.

Joe (17:07):
Yeah, I’ve actually seen that. I’ve seen that where people were doing several million in revenue and they commingled a consulting business along with a product business. And when I removed the consulting aspect from it, they, they were actually losing about $50,000 a year and it was a bit of a surprise and a completely unsellable business with you know, terrific people. But I had to break the bad news and they’re fixing it, turn it around and keep it another couple of years and hopefully achieve their financial goals. You gotta pay attention to that stuff.

Todd (17:37):
Yeah, for sure. And I got into that issue. Let’s see. The beginning of last year, you know, I thought I was doing really well. It wasn’t paying close enough attention to my numbers and I learned the hard way that I need to pay closer

Todd (17:50):
Attention. So now when I get that profit and loss statement, I looking over it, I’m getting on those calls that are available to me with my bookkeepers and my accountants and stuff like that, making sure that I am profitable. And so since then I’ve significantly turn it around in my business right now is doing about a bottom line profit margin of about 16%. So which is pretty decent for a wholesale business. Is that out what you guys have seen?

Joe (18:21):
Yeah, it sounds about right. That’s pretty solid number.

Todd (18:23):
Very good. So that is a counting. Definitely one of the most critical pieces. Especially when you’re just getting going. It’s really easy to push that to the back burner. But doing that right up front is super important. The next thing that you talked about was documentation. So for documentation, I’m assuming you’re talking about like the processes of the business.

Joe (18:53):
Books. Um but it’s SOP S you know, one of our most popular podcasts ever was on SLPs and this person that had them had like 30 VA’s and he had SLPs on hiring VA’s. He had an SOP on how to make the coffee, cause he had some in house people and he was very particular about his coffee. But what that does is instills confidence in the buyer of your business going, this guy’s running a really great business. I’m more confident in this business. To me it’s less risk because they’ve done a great job building it. And when things are less risky, they’re willing to pay more for it. So you want to, you want to think about building a business that would be an amazing business for a buyer to take over, right? That’s the kind of business that you are going to get maximum value for.

Joe (19:41):
It’s going to benefit you. It’s going to benefit them. And look, you’re going to be a good human for it because they are going to succeed with their investment as well. So think about those things, what you can do to create a great business for somebody else to take over because eventually you are going to part ways with your business. You’re going to grow old and retire. You’re going to close it up because of that. You’re going to get divorced, you’re going to die. Your partnerships that your friend and your best friend that you’re partners with, you guys are going to get a fight. It’s going to happen and you, you, you should prepare for it well in advance instead of just winging it, which is going to cause you to lose tens if not hundreds of thousands of dollars.

Todd (20:21):
Yeah. And for anybody that doesn’t know, SOPs are your standard operating procedures. I’m not sure if you mentioned that, but it’s super important for sure. And I like to, I think it was Dylan Carter who I interviewed on a previous episode who said that anything that you have to do more than twice in your business, you should write out step-by-step procedures on how that’s done. Even if you’re going to continue

Todd (20:48):
Doing it yourself for the time being. Cause eventually you’re going to want to hand that off to another person, a virtual assistant or an employee or something like that. And again, that correlates directly with when you come to sell your business, you know, you don’t want to have to be explaining every little detail to a buyer. You’re a lot better if you can just hand a book of stuff or more likely a Google drive full of all your documents entity. They can just hit the ground running videos as well.

Joe (21:18):
We use loom every day in, in, in our business. What you just said to handing over the business. You know, when a business goes under, letter of intent goes through due diligence and closes. Typically there’s a training and transition period. And typically that’s, this is literally the language that goes into a standard. APA, the very least, it’s the beginning language. It’s up to 40 hours over the first 90 days. I think I’ve only seen one or two people actually use that amount or go over it. And so buyers are looking to get as much as they can, but once they take the business over, it generally takes an awful lot less. Sellers are hoping to do as little as possible after the sale. And that’s sometimes why they choose an experienced buyer over an inexperienced buyer. But the more you have those SOPs in place, the more value you’re gonna get for the business by instilling confidence in the buyer. But the easier it’s going to be for you in that training and transition period as well. So that’s one big advantage to setting up SOPs.

Todd (22:21):
Yeah, definitely. So what other things, so we’re growth, growth, risk, transferability and documentation. So we talked about accounting and SOP. What other

Todd (22:33):
Important things should people be thinking about now to set up a good business in the future?

Joe (22:38):
Well, it has to be transferable, right? Otherwise there’s no point. You’re not going to sell the business. You can’t transfer the assets that are producing the revenue. So distributor relationships that you have, you’ve got to be able to transfer. I had a business last year, I sold for somebody that is a fairly well known in the eCommerce world and he had four different brands. He knew what to do, but he had them all code mingled under one LLC and in one seller account. And he just got to the point where he felt it was too much risk because he had so much tied up in inventory, about a million bucks in inventory between the four brands. And he woke up one day and he said, Joe, I’m ready. I need to move on. Okay, let’s get all four of these sold. Didn’t plan it, didn’t think in advance, didn’t set a target financial exit. And the reality was that when I went through the PLS for each of those,

Joe (23:25):
Two of the four were

Joe (23:27):
You shouldn’t sell because they were negative cause he just launched them. So it was a negative STE one we sold, but the third, he had a wholesale relationship and that relationship was not transferable and that actually was probably the most profitable business because he had some of his own brands. Most were his own, but one particular brand that had a patent on it or skew that had a patent on it. He had permission to resell that product exclusively online. When he approached the distributor said, Hey look, I’m going to sell my business. This particular skew is one of them. I want to get your permission to go ahead and sell. You know what they said? They said no. He said, man, we love you. I don’t know who the buyer is going to be, but we don’t love anybody but you. So at this point we’re going to say, no.

Joe (24:11):
If you’re not going to be the guy that’s selling for us in the future, then we’re not going to continue to allow this, that cut his discretionary earnings on that overall brand by about 40%. Oh, he said, Oh, it’s better to keep it then, then they’d sell it. So the transferability is absolutely critical. You’ve got to be able to transfer all of the assets of the business that generate revenue. Some of those assets are relationships with distributors. Really, really important. Growth is the other pillar. Look, a business, you’re going to get more value while it’s growing than you are when it’s declining. If you run it and it goes well and it goes well and you don’t have a conversation with somebody that can help you with the overall valuation. And then competition comes in and it takes a downturn and you think, Oh, I’m so tired of this, I want to sell.

Joe (24:59):
You’re going to be selling it, but you’re gonna be selling it for less because it has to be valued based upon key financial metrics and year over year growth trends are one of them. So you gotta really focus on selling the business when it’s growing. Risk-Wise you want to wait until it’s at least 24 months old. You don’t want to have a hero skew if you can avoid it. If you’ve got a hero skew that’s doing 80% of the revenue, the value of the business is simply going to be less because it’s more risk. If you’ve got a relationship with one key distributor that’s Rocky, not transferable, or they may be also selling it themselves online on the same platform and competing with you someday, that’s risk. And the higher the risk, the lower the value. So those are the four pillars. The most important thing for I think entrepreneurs to know is that, you know, I’m a broker, right?

Joe (25:52):
I’ve got that label on my business card. It says broker or advisors, something along those lines and unfortunately, whether it’s the real estate world or the residential commercial or the business brokerage world, there’s a bit of a bad wrap because of a few bad players that are only looking out for themselves. Don’t let that stop you from absorbing as much knowledge from people like myself as possible because there are good people out there. We’ve got a team of 10 of them that have all built and bought and sold their own online businesses and collectively, you know, sold a quarter of $1 billion worth of online businesses. We learn a thing or two, gosh, that sounded like a commercial. Didn’t was that insurance commercial, a bump, bump, bump, whatever it is. Somebody figured out, but we learned a thing or two when we have that many transactions in that many relationships and we’re actually very relational, not transactional.

Joe (26:48):
We want to help. So take advantage of whoever it is. That’s been there and done it. Whether it’s somebody advisor at quiet light or any of the resources and tools, webinars, podcasts, or people that have sold their own online business, talk to them directly. Get the details. Don’t talk to a friend of a friend who sold one cause you’re going to get so much misinformation. The businesses that you have and that you’re building are very most likely your most valuable assets and if you don’t pay attention to the value of it, you’re doing yourself a great disservice. More than 50% of all the money you’re ever going to make will come the day that you sell this business because it is cash intensive, right? You’re taking most of the cash that you’ve got from the business and putting it right back into inventory cause it’s hopefully growing pretty rapidly. Right? You’ve got 16% net margins or discretion earning margins. Yup. That’s 160,000 how much do you have in inventory if you’ve got a, if you’ve got $1 million business, you’ve probably got three months worth of inventory. Okay.

Todd (27:56):
Yeah. Right now I’m actually pretty low. It’s about 70,000 in inventory. I have been typically doing a rolling 30 days trying to turn it over rapidly, which I’m extending that out right now to have less downtime and keep those products in stock more. So I’m expanding out for that. So that’s definitely gonna grow quite. Yeah,

Joe (28:19):
That’s a low term. And that’s your business model. That’s fantastic. So you’re going to have lower inventory overall, but even if, and we’re not talking about your numbers specifically, but if somebody is doing a million in revenue and they’ve got 16% discretionary earnings, it’s 160,000 and if they’re able to, in the end they’ve got $70,000 of inventory on hand at any given time. Really they’re only getting about but eighty thousand ninety thousand dollars out of the business cause the rest is tied up in inventory. When you sell that same business, if you’re doing 160 and discretionary and you’re at a simple three time multiple plus inventory, you’re probably making an awful lot more on the sale of the business. And then the key is keeping it right, keeping it. Poor residents of California paying 13% on the state tax side or residents of New York are getting it as well, especially if they live in New York city, they’re getting hit twice and there are there are types of sales that you can set up in advance of going under letter of intent that will minimize your tax burden.

Joe (29:24):
It’s called tax mitigation strategies. One would be an installment sale. You should get everything upfront at once, but instead of getting, Oh, let’s just say that between state and federal, it’s 25 to 30% steady getting 70%. You’re getting more like 93, 94% on a monetized installment sale. But if you don’t plan in advance and you know what you’re going to pay the taxes you could do a charitable remainder trust, which you’re going to get all of it if you’re accept, if you’ll accept getting installments from your own charitable remainder trust over a five year period. But again, if you don’t think about it in advance and you say, I’ve got this, like my 18 year old says, and he doesn’t, he’s just gonna hurt his self financially.

Todd (30:07):
Yeah. It’s super important to talk with professionals like you guys at quiet light and find out what you need to be doing ahead of time and don’t wait until the point where you’re burned out and you don’t want to do this anymore and you just want to sell it cause then you’re not going to get close to what you could get otherwise.

Joe (30:27):
Well, look, or people who have also already sold a wholesale business, you know, I’m not advocating that everybody just speak with quiet light. I had a call with someone last night that the first business that he ever sold was $7,500. Next one was 20,000. Next one was 220,000. The next one was just under 9 million. The next exit he has planned for 2021, he’s got a goal of selling the business for $100 million. And you think, well, that’s incredible, but how can he do that? He must be amazing. He’s just an average guy. And he talks to people each time that had been there and done that. So he has connected with people that have sold their business for 75 to 100 million because he reached out and chatted with them and learned and was pretty surprised to learn that they’re just average people too. So we set that goal of 100 million as an exit and then he reverse engineered and learned what does he have to do within his own business to get to 100 million exit value.

Joe (31:32):
And in his mind, it was something like 35 million in revenue, 25% recurring revenue and well, all the pillars of course. And then, you know, starting to build relationship with potential buyers at that level. It’s a little different than it the sub $20 million level, but you’ve got to do all of that. You’ve got to talk to people that had been there and done it and not, not just me or people that quiet light. We’ll help you. We’ll do, we’ve got the resources. You can find them online as well, but other people that have sold, in this case, wholesale businesses as well.

Todd (32:04):
All right, perfect. So I remembered what I wanted to touch on earlier. And for us in wholesale, I think it’s pretty important to dive into a little bit more. And that was, since we’re, we’re dealing with a lot of distributors and suppliers that were opening up accounts with how can we set those up initially so that they are more transferable?

Joe (32:27):
Well, generally these are asset sales, which means that you’re training, transferring the assets of the business, not the LLC or corporation, and it’s not stock sale. Your agreements, you’re setting up with the distributors, it may be, is it generally their contract or a template contract that you’re creating?

Todd (32:46):
Usually you’re just signing one of their contracts. Sometimes there’s not even any contract. It’s basically just emails saying, yeah, you can sell our stuff and buying their stuff.

Joe (32:55):
Right. So the, the, the most important thing to do is to have a good relationship with them. They see the benefit of working with you because you’re selling their products and they don’t have to do anything for it. Right. So that’s the most important thing to do with most of the businesses don’t have contracts and it’s just the email and yeah, we can sell your stuff. They’ll see the benefit of allowing that relationship to transfer with somebody that’s going to buy your business. Cause if somebody has the wherewithal to stroke a check for a half a million, a million, 2 million to buy your business, they have plans, they have working capital, they intend to grow it even more and you would convey that message to them and introduce them to the new buyer and that buyer at a certain point and due diligence or when you’re signing a conditional asset purchase agreement would confirm that that relationship at the same rates are going to transfer over.

Joe (33:46):
And I don’t think I’ve ever seen once we listed business for sale, those relationships not transfer and in every case except for one that I know of, the relationship transferred along with the same terms and conditions and you know, prices, all that stuff. We did have one nutritional supplement supplier decided to raise the prices on a, a particular client after the sale. And unfortunately for that supplier, that client was able to quickly find a, a better quality product at a lower price and that supplier lost completely. Buyers will worry though that because you don’t have a contract, it’s a risk and you know yeah and uninformed mind always says no as they say. And if your buyers inexperienced or uninformed in these types of relationships or in many cases I see it with people that have their own private label brands, they have manufacturers in China, they were not written contracts with those manufacturers in China for the most part, none of that, 10 of them don’t. But the relationships transfer because it’s good for the vendor. And in this case, it would be good for the distributor to transfer that relationship. If you can work in language into the distributor contract that says, you know, you have the right to transfer the relationship to a new owner of the assets of your business working in. But if they say no, just have a great relationship with them. That’s the most important thing.

Todd (35:14):
Yeah. I’ll have to check my documentation for some of the exclusive agreements that I have to see if it has a transferable clause in there. Is, there’s probably some language that I could add into those agreements that say that in the event of a sale, the business, this contract transfers to the new owner or something like that.

Joe (35:36):
Yeah. I think in the, that I mentioned earlier is Mike’s business where their relationship wouldn’t transfer. I think that’s the exception rather than the rule. Buyers are gonna worry about it nonetheless. But you know, I think it’s good to go in with your eyes wide open and see if you have the ability on those exclusives to transfer that relationship. It’s, it’s always going to be good for the distributor because somebody coming in has an intention to get a positive return on their investment and grow the business further and more than you do. And if you’re selling, you’re selling for a reason is because if you hit your financial goals or your heart’s not in it in anymore and you have a new adventure that you want to move into, so it’s really better for the distributor to allow you to transfer that sale, in my opinion. But they don’t listen to me. Right.

Joe (36:21):
But that’s the truth.

Todd (36:22):
For sure. And one thing that I want to really touch on and really point out is relationships and underline that like 10 times, that’s really what the wholesale world is especially about. But any business really is about relationships. Having relationships with your distributors and the salesperson that you’re working with, with the brands directly. And you can’t really build a relationship over email. So you’ve gotta be picking up the phone at a very minimum. You can at least, you know, start building relationship that way if you can fly to or go meet your bigger distributors in person, shake their hand, go have dinner and talk, that’s even better to build that relationship. And, and just this year I spent almost a thousand dollars just sending cards and gift baskets to a lot of my distributors and suppliers. And so that just helps make me not just a number, you know, I’m someone who has a relationship with them. When you go to sell, you’re going to have that relationship. It’s going to be easier to transfer, you’re going to be able to get more distributors and maybe get opportunities for new products, things like that. So relationships underlying, now, like I said, 10 times, it’s the most important thing.

Joe (37:47):
100% could not agree more. 100%

Todd (37:52):
All right. So I just wanted to kind of go over like a million dollars is a really good number that everybody likes. You know, it’s a nice round, big number. Million dollars ain’t what it used to be, but it’s still a lot of money. So someone in the wholesale business, what kind of sales numbers would they have to get to be able to sell their business for $1 million out the door?

Joe (38:18):
So it’s not sales numbers, it’s actually discretionary earnings. What kind of discretionary earnings do they have to have in order to sell the business? So you know, if you’ve got, let’s go with that 16% margin figure. So you’ve got a target of selling the business for $1 million. Odds are you’re going to be somewhere, and again, it depends upon where you are. Particular business falls in those four pillars, what your margins look like. Look, you’re at 5% versus 16%. There’s plenty of wholesale businesses to buy. The 16% margin one is going to get a higher value because it’s less risk, 5% pretty tight. Something goes wrong. You can lose some money. So if you were at a million, you could be anywhere in that two and a half to three and a half, multiple of seller’s discretionary earnings. Let me define discretion earnings and then we’ll do the full math on it.

Todd (39:13):
Yeah.

Joe (39:13):
So when somebody uses proper accounting software and they run a profit and loss statement for the trailing 12 months, the bottom line is going to say net income. That’s not seller’s discretionary earnings. Let’s say that you run a business and your net income is $100,000 there, but you also pay yourself a salary of $50,000 and you had a one time expense of $5,000 it’s there’s two add backs there. One is $50,000 your personal salary, not 7% taxes that you’re paying on that salary on top of it. And then that $5,000 expense, those are add backs. So right away you’re discretionary earnings does from 200,000 or a hundred thousand what did I do? 100,000 and then 50,000 plus five more. You’re at 155,000 in discretionary earnings. But there are really three different levels of add backs. Some are really obvious like the ones I just mentioned, some are just accounting and onetime expenses like depreciation or if you’ve got an Amazon loan, that’s interest expense.

Joe (40:22):
And then there’s level three, which are much more complicated. And those would be if you renegotiated cost of goods sold part way through the year, you’ve got an add back to do there. If you do cashback and you do sponsored ads, but you’re smart about it and you’re using a cash back credit card, instead of letting Amazon just deduct the money, that is an add back. It’s an owner benefit is the way to look at it. You’re probably also writing off your car, your meals and entertainment, your mobile phone. Everybody has a mobile phone. It’s an add back. So it’s the net income plus those add backs equals seller’s discretionary earnings. That is the toughest number to get to, especially when you don’t have proper accounting software. Okay. Really, really important. Seller’s discretionary earnings spend a lot of time and energy getting that number right, because if you get it wrong, your multiple needs absolutely nothing as does your list price because it’s going to get renegotiated and due diligence after you’re under a letter of intent, it’s going to erode trust, which is going to cause more problems.

Joe (41:27):
So if you’re at a million, you’re going to be a two and a half to three and a half times. All you gotta do is take 1 million bucks and divide it by that two and a half to three and a half times. That’s the reverse engineering. So let’s say it’s going to be on the lower side. You know, you’ve got to have discretionary earnings in the $400,000 range if your multiples only two and a half, if you’re multiples three and a half. If you’re doing the math for me, Todd, everybody listening, you already done it? Yeah, I’m going to do it though. You’re at about 285,000 in discretionary earnings, so now you can set that financial goal of I’m going to exit that 1 million bucks and reverse engineer it just like we did too. Okay? In order to do that, on the low side, I’ve got to have 400,000 in discretionary.

Joe (42:09):
What if I just picked the middle? Okay, 330,000 in discretionary earnings. Remember though, that million dollar figure, if you want to exit at a million, you’ve got to say, okay, is that including or excluding inventory? Cause if your goal is to exit for a million, you also have $70,000 in inventory. So I’m going to buy your business for $1 million plus the landed cost of goods, sellable inventory on hand at the time of closing. So you need to get that million plus the 70,000 so you’d be at 1,000,070 thousand that makes sense.

Todd (42:45):
Yep. Okay. Absolutely. So that’s, yeah, you can see the difference there between a business that’s set up really well, like the way you guys recommend and you’re looking for all the documentation, accounting, transferability or limiting risk. That’s the difference between only having to be selling or not selling. I’m sorry. Discretionary earnings 285,000 versus 400,000 so that’s like what $115,000 difference.

Joe (43:19):
So that’s a lot of money that we’re talking about there. Just if you didn’t take care and run a good business. Yeah. And it’s your ability to exit a lot sooner than, than later if that’s your choice. It’s, it’s, it’s what most people don’t get. And it’s so critical and so damn boring some of the time. Right. But it’s, and as you said, it’s not very fun talking about accounting. Somebody said it’s not very sexy. And then somebody said, but it’s pretty damn sexy when you’ve got $2 million in your bank account and you’re in the beach cause you sold your business. I a client, we sold his business the other day closed. And you know, he had one point $2 million hit his account and he looked it up on his phone, took a screenshot. It’s gonna frame it. That’s pretty damn sexy. So numbers are important and they are what drive value in the business. So the more you can pay attention to them, the better. Yeah, for sure. So one last thing here before we wrap up is the previous episode we talked about taking our wholesale business international and start selling on amazon.ca and amazon.uk and throughout Europe and maybe into places as well.

Todd (44:33):
What does that do for us? For the sale of the business? We have some buyers are looking at it.

Joe (44:40):
Yeah. So as long as it’s done well and done profitably, it’s going to reduce risk, which is going to increase value. It’s also going to increase your seller’s discretionary earnings, which is going to increase value. So it’s a good thing. It’s diversification. It’s diversification of platforms. It’s still Amazon and Amazon only. If you really you know, if I have some, it’s, it’s, it’s not going to change your multiple a whole lot unless you’ve got significant revenue that’s coming from the other countries, right. The, it Canada’s only going to be about 10% of us. Certainly there’s European countries that I see that, you know, when people focus on them with certain products can do extremely well and grow pretty rapidly. But it’s gotta we’ve got to see it growing. You can’t start it in three months later. Be selling your businesses. Well, there’s a big, you know, opportunity here in this. I’ve set this up for you. If it hasn’t driven any revenue, it’s just a, it’s just a concept. It’s not a proof, it’s not actual numbers. So you need to do it well enough in advance so that it’s, it’s working. But it’s a good thing in my opinion overall, as long as it’s profitable and unwell.

Todd (45:53):
Yup. So reduces a little bit of risk. That’s kind of what I was thinking. But again, you gotta be doing it to make a profitable business, not just to try to diversify your risk, even though it does that a little bit. So, yeah.

Joe (46:06):
Was it, was it Kevin Sanderson who was the expert in the podcast?

Todd (46:09):
It was, yes.

Joe (46:10):
Yeah. So Kevin’s a great guy and one of the things that he talks about is, you know, walk before you run. So if you’re going to expand internationally, it’s to Canada, right? It’s a small win. It’s 10%. But if you can win there, you, you sorta figured out some logistics and then try to go to an English speaking country. Yeah. You know walk before your ride. He, he’s, he’s, he’s well versed in it, sees it all the time and I think it’s, I think it’s a great idea to expand internationally. But don’t take your eye off the ball of the biggest revenue producer for you. And if that’s the States, don’t expand internationally at the expense of the States because you don’t want to see that trend down while other things are trending up in a much smaller pace.

Todd (46:53):
Yes, absolutely. And that’s what I’m doing now. I’m starting to go into Canada. I’ve got some really good established business here in the U S so I’m sending some of my most popular products in Canada and maybe eventually UK to start seeing that growth as well there. So I just want to recommend something for people if they head over to your guys’s website, quietlightbrokerage.com and then click on buy and public listings. It’s kind of fun to look at some of the other businesses that are out there selling, maybe compare them to your own and look at what they’re doing. You can’t see all the details, but it’s really cool to see some of the information, how much they’re selling for and that there are other businesses out there really actually selling their businesses for big numbers.

Joe (47:44):
Yeah, you can actually see all the details I recommend to buyers all the time. And, and often people that are selling, you know or plan to in 12 to 24 months, visit every business broker’s website. Click on the listing, fill out the form, sign the nondisclosure agreement and get the full package, see how it’s put together, see what is being asked of the buyer, see what the buyer, the seller is. I’m sorry. Seeing what’s being asked of the seller and seeing what kind of information they put forth and what you would look like. Look at as a buyer what brings value and that will help you build a better business for an eventual exit. You will not learn anything by just looking at the buy page cause it’s just a teaser and we do everything we can to make sure that you can’t figure out what the URL or the brand is from that teaser. So you’re not going to learn much from that. It’s like looking at real estate online and are actually going into the house go into the house, fill out the form, sign the NDA, and go through the process and see what the, the full listing details look like. And you can learn an awful lot that way. And you should, you should take some time to do that once a month, you know, reviewing another listing or two.

Todd (48:53):
That’s great. So you guys, you guys allow people to see the details of the business without a deposit or do you require it?

Joe (49:02):
You have to sign a nondisclosure agreement. I’m pretty, pretty strong binding nondisclosure agreement that you’re not just taking the information, you learn to compete with the, the current seller of the business. The only ones who take a deposit are empire flippers. So the process where you have to send in five, $10,000 into escrow in order to look at the details of a business. I don’t know how it works completely, but we don’t require that we have, you signed a pretty lengthy nondisclosure agreement. And then we’ll help you along the way in terms of discovery of finding the right fit for you.

Todd (49:37):
Perfect. And I see you guys also have a podcast and then videos and guides on your website as well. What do you guys dive into on those?

Joe (49:47):
On the podcast we have experts in the online space. We just had Shannon Stewart online on the podcast and she was talking about those monetized installment sales and charitable remainder trusts that people can and should consider with tax mitigation strategies regardless of how big your business is. We have people that have sold their businesses recently. You know, we had Mike Jackness on the podcast. We’ve had people on that have bought the business and then the next episode is the person who sold the business. So you get to hear both sides of the story. But then experts in this pace. We sold a international a UK business recently with a stock sale. So we had three episodes on it. We had Joseph Harwood, the owner of that business. We had the person who bought the business. And then we had the tax people in the middle of it talking about the, the nuances of a stock sale and how complicated it is, but why a lot of buyers should actually start focusing on buying UK businesses instead of being afraid of it, which most are because there’s a lot of opportunity there.

Joe (50:57):
So all of, all of the above, it’s education, it’s information there to help owners of online businesses and buyers of online businesses learn. I’m all about the space and how to improve their own business and process when the buyer Marcella. Yeah. And I always like to tell people, you know, don’t get too into all these different sources to find information and chasing different squirrels and stuff like that. But I think your guys, his podcasts, your videos and guides would be right up the alley for someone who’s doing an Amazon wholesale business because it’s really, you know, informational about setting your business up, right. And preparing it for a sale, whether you’re going to sell it now or 20 years in the future, setting your business up, right. It’s just going to help you regardless. Yeah, I think what you just said, they’re chasing too many squirrels is really important.

Joe (51:52):
You know, it’s chasing too many rabbits. You’re going to catch none. And I always say, just because you can, doesn’t mean you should, right? We’re all entrepreneurs. We’re go getters, we can, we can create something out of nothing. It’s what we do. But if you’re doing something and you’re doing it really well, stay focused on it, eventually you will get bored of it. So make sure that you understand the value and set of financial goals so that you can sell it and then go onto your next adventure. Don’t start that adventure and get distracted because of shiny object syndrome or chasing too many rabbits or squirrels. And because of just be can, because you can, doesn’t mean you should. It’s a, it’s a, we’re all, you know, egotistical in this entrepreneurial world. We, we think we can do just about anything in most cases. And oftentimes we can, but that doesn’t mean we should.

Joe (52:44):
Right? I could learn everything I can about wholesale business from you and launch a wholesale business and, and, and do that. No, not going to do it. I’m going to stick to what I know. Stick to what I do right now because number one, love it. Number two, I’m really good at it. And number three, Oh, I’m helping a lot of people, which is great, right? I make the, I get to make a great living helping a lot of people I couldn’t ask for more. So I’m going to stay focused and not distracted. And I think that the audience should try to do the same. And then try to eliminate and then we’ll go way off subject, all those tiny little distractions like email everyday on Facebook, everyday, Instagram everyday. Shut them down, shut them down and focus on one thing at a time. You can’t do, you can’t do five things really, really well. At the same time,` it’s not possible. Clinically studied, not possible. So shut everything down. Do one thing really well for a couple of hours and then focus on something else. That’s my two sentence. I’ll stop going on tangents.

Todd (53:44):
No, absolutely. That’s super important to know and understand because he can’t sell a business if you don’t grow your business first. Right. That’s right. So you gotta focus on that stuff and like you said, getting distracted by Facebook and email. I make my list of stuff` that I want to accomplish and before I even open up anything, you accomplish at least one of the biggest ones before you go into anything else because it’s so easy to just get sucked into stuff and it’d be, feels like you’re working and you’re just not really, you’re just kind of spinning your wheels.

Joe (54:17):
Yeah, that’s, that’s called an eat. Eat that frog, but by, Oh, I can’t even think of the good rule once upon a time. But yeah, tackle the hard stuff first. The rest of the stuff was easy after that. Good. Approximately.

Todd (54:29):
All right Joe, I really appreciate you coming on the podcast. Any final

Todd (54:34):
Words of advice or anything when we’ll wrap up?

Joe (54:38):
It’s, don’t be shy. Ask people around you what their experiences. Talk to people that have been in places where you want to be. And absorb as much information as you can about your business cause it is probably your most valuable asset and you should take very good care of it.

Todd (54:53):
I agree 100% thank you

Joe (54:55):
So much Joe. You bet. Glad to be here. I have a good one.

Todd (54:59):
All right. There you go. What a lot of really good information and things that you can do in your business right now to start it on the right track or getting going onto the right track. If you already have an established business, things like doing your books in QuickBooks and zero and outsourcing your accounting as soon as possible to have all that information perfectly documenting your business, having those standard operating procedures. And in fact, in one of the future episodes here, we’re going to be doing an episode all about standard operating procedures. So stay tuned for that in the future. And then that golden number of $1 million, what you need to do to sell your business and how just setting up your business correctly can make it so much easier to reach those goals. So thank you again so much for tuning into this episode. Make sure you check out the show notes@entrepreneuradventure.com forward slash 11 for all the links that we talked about, as well as the show notes and the transcripts you can find there as well. And of course, entrepreneur, adventure.com for all of my resources, other videos, and other podcast episodes and things like that. So once again, I appreciate you showing up and listening. This is Todd Welch with entrepreneur adventure signing off. Happy selling everybody.

Announcer (56:33):
This has been another episode of the entrepreneur adventure podcast. Thanks for listening, fellow entrepreneur and always remember success.

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