E103: Buying a Business vs. Starting One From Scratch with Bill d’Alessandro of Elements BrandsDecember 7, 2017 in Ecom-Crew-Podcast
“If you’re never been an entrepreneur before, I would suggest starting a business. If you have done it once, I would strongly advice buying a business. It’s just a lot easier.” – Bill D’Alessandro of Elements Brands
If you’ve been listening to the podcast for a while now you might have noticed that when I talk about my speaking engagements, I always give credit to someone who told me–back when I was unwilling to speak in front of a large crowd and would rather get a root canal–that I needed to do something that makes me uncomfortable to further my career and life. That someone is my guest in today’s episode.
Bill D’Alessandro is the founder of Elements Brands, a company that acquires and scales consumer products brands. He has been buying businesses for 7 years now and currently owns 9 brands with over 130 products. We invited him to be one of the special guests of our 100th episode and if you haven’t listened to that, absolutely do so–you will find nuggets of advice you won’t get anywhere.
In this episode we discuss why he prefers buying businesses over starting one from scratch and when you can do the same.
Here’s an overview of what we discussed:
- How Bill and I met and how he helped push me to become a speaker
- Why he prefers buying existing businesses
- When it is right to start a business or invest in an existing one
- Bill’s buying criteria and the attributes of a business that is a good buy
- Turning ugly into an opportunity
- What businesses to avoid buying
- The time when a third party tried to sue him for buying one of his businesses
- What he does after buying a business
- Why not all debt is bad, especially if you bought a business you want to grow (unless you have rich parents)
We have a new segment on the show! Starting next year, we will be featuring a segment called Under the Hood, where selected listeners get an hour (up to 1.5 hrs) of FREE coaching with Mike and Dave. In exchange, the coaching session will be recorded and turned into a podcast episode.
If you want to ask Mike and Dave for ANY advice about your business absolutely for FREE and want to help put out good content for the podcast as well, we need you. Sign up at ecomcrew.com/UnderTheHood if you’re interested.
Thanks as always for listening, and until next week, happy selling!
Full Audio Transcript
Mike: This is Mike, and welcome to episode number 103 of the EcomCrew Podcast. You can go to EcomCrew.com/103 for the show notes for this episode. Today I have a special guest: Bill DAlessandro. I don’t know how I made it through the first 103 episodes without getting this guy on the podcast. He was nice enough to do a segment on the 100th episode. If you haven’t listened to that, go back and check that out.
But Bill is one of the most influential people that I’ve met in e-commerce. He’s become one of my great friends in e-commerce, just a super nice guy, obviously has a great business going on over in Charlotte with Elements Brands. He kind of dubs himself as the Procter and Gamble of Charlotte, and he’s definitely building a business that is like that unquestionably.
I met Bill for the first time I think in person at an ECF Live event back in maybe 2015 or so. And that’s where he actually had asked me to come speak at an event there or at that event on a panel on buying and selling e-commerce businesses. It’s kind of ironic because it’s actually one of the big topics we’re talking about today. But that aside, he said, “Jackness please come and be on this panel. It’ll be me and you, and a couple other people talking to a crowd about buying and selling e-commerce businesses.”
And just flat out told him like “look Bill, I’m not interested, I appreciate the offer, I am really flattered. But this is not my thing; public speaking is not my thing.” I think a lot of you out there probably can relate. It’s been equated to people would rather pay taxes or get a root canal than public speaking. And I was just like; I don’t want to do it. But we went back and forth, and he said a couple of things.
First of all he’s like, “you have to do something sometimes that make you uncomfortable, that’ll make you a better person,” and he said a bunch of other things that are not anywhere near appropriate for the podcast, and eventually shamed me into doing it. And I’m really glad that I did, because really it was the beginning of my speaking career in e-commerce. And since then, I’ve gotten a lot of reward out of that both personally and in my business, going to speak at these different events, including keynotes that I’ve done, things like ECF Live and Ecommerce All Stars.
So Bill is like the guy that started all that. And because of that, I went to Toastmasters and really worked on this just like everything else in my life. And now I’m at a point where I don’t lose sleep the night before. I certainly–I wouldn’t say that I quite look forward to it yet although it’s close. I do feel like I get a lot of excitement and enjoyment out of it. And it is a high when you get done doing this, but not quite the point where I look forward to it yet, but getting there. And my goal was to be at the point where I look forward to going to do this and just crushing it, and I want to thank Bill for that.
But that’s just one small thing that Bill has helped with. He has also helped with getting my head around financing in this business. You absolutely have to have financing if you’re going to be in an e-commerce business. You have to be able to take on debt for assets, one to one relationship, or maybe a one to point eight relationship, whatever you feel comfortable with. But basically think of it as the old US reserve gold standard, where you have debt to your inventory at a one to one relationship.
It’s absolutely necessary if you’re going to continue to grow especially if you’re in a pace like we are, two to 300%. It’s just simply impossible to grow 100% organically with your own cash unless you have rich parents, which I don’t, to be able to finance that with. So that was another thing that Bill helped with. But just all kinds of other things from how he runs his business to how he runs his life to just the kind of person he is. I just really enjoy being around him. He is just a super awesome guy, and I’m really excited to have him on the podcast today.
And the main topic for the podcast today is, “is it better to start your own e-commerce business from scratch or go out and find one that already exists and invest in it”. And I’ve done both, and you’ll hear my opinions of both of those things throughout the podcast. But Bill is definitely sided with the buying existing businesses, and I think that there is a lot to be said for that. I think that the next one that we do will be that.
I just think that there’s too many valuable pieces of information that you get from buying a business versus starting it from the ground up. And you’ll hear all that in this podcast. It’s absolutely fascinating the way that Bill goes about doing this. So I hope you guys enjoy this interview, and we’ll see you on the other side.
Bill: If you’ve never been an entrepreneur before, I would suggest starting a business. If you have done it once, I would strongly advise buying a business. It’s just a lot easier.
Mike: Hey Bill, welcome to the show my friend.
Bill: Hey yeah, good to be here.
Mike: I finally got you on a full length episode of the EcomCrew Podcast. It took over 100 episodes, but I’ve finally caught you here.
Bill: I know, I’m not in the top 100 guests, but I’m I think 103 or something I think.
Mike: And you’re number one in my heart.
Bill: That’s nice.
Mike: Cool. I’ve been wanting to get you on for so long because as I’ve as you know like you’ve been an inspiration for me in e-commerce. You’ve definitely helped with a lot of things for me. Number one, getting me off of the risk averse, credit averse I should say bandwagon I used to be, like I’m not ever going to take a loan. I’m like I’m past that point in my life, I don’t have credit cards, I’m not in debt, I don’t want any debt. And you were just like that’s really, really dumb what you’re thinking. So you really helped with that, so I really appreciate that.
Bill: Take more risk.
Mike: Yeah take more risk. You’re younger than me, so maybe I should stop listening, because I don’t know, I think when you’re younger you have less at risk, right? I mean I’ve already gone through that before, and certainly don’t want to have to start over from ground zero again. But obviously if you’re running an inventory based business, having a line of credit against that inventory is pretty essential. So it’s been a huge help for us doing that, and definitely appreciate you helping me see the light there.
Bill: Yeah, I have borrowed a fair amount of money myself over the course of these last kind of six or seven years in e-commerce. And frankly, I don’t think I would be here if I hadn’t. I mean we’ve borrowed money, not just for inventory, but I’ve also borrowed money to buy other businesses, which has really enabled my business to explode and grow in big chunks rather than trying to just generally grinding up into the right. Without the debt, I wouldn’t be able to have done the deals, and would be in a very different place.
Mike: Yeah and that’s like the perfect segue into the main topic for today, which is, is it better to buy a business or start one from scratch is kind of the headline of this podcast. And I think we’ve both been on both sides of the fence, because I think that both of us have started from scratch and have purchased other businesses, which we’re going to talk about extensively here today.
And I can speak from personal experience that I have fallen on both sides of the fence as far as how I feel about this. Some days I wake up, I’m like, oh man, why would I buy that business? I can start it from scratch and do it myself. And in other days, it seems so clear to me that you would–why would you start yourself, you already can buy these other assets. So I can’t wait to do a deep dive into this topic with you and see kind of where we fall at the end.
Bill: Yeah, I have started one. My first brand that I did, I started, but since I have done five acquisitions over the last four years. And the goal is, we were raising capital last year as I think we talked about offline, and the goal is to try to do four per year for the next kind of foreseeable future. So I have come down firmly on the buy side of it, but I do think there are a lot of merits starting out as well. So it will be a good conversation.
Mike: So let’s start with the first one that you started. Before there was Elements Brands, I guess it was Element Brand to start with.
Bill: That’s right.
Mike: So I think that was the lip balm. Is that the first thing you did or was there something before that?
Bill: It was KP Elements actually, the keratosis pilaris cream.
Mike: Okay and so you started that with that one product. And how long were you doing that for because I knew you were kind of like The Four Hour Work Week guy and had a completely different lifestyle and goal at that point? But was it just like a one SKU product?
Bill: Yeah, it was one SKU and then after a year we introduced a second SKU. And we still have those two SKUs today in that brand. But yeah, I was very Four Hour Work Week at the time. I was kind of outsourcing everything; I was traveling around with my laptop, pure Tim Ferriss style. And I did that for two years or two and a half years before I realized that that wasn’t going to be very fulfilling long-term.
And that was when I expanded our strategy to say, I’ve built a lot of systems and process that allow us to do e-commerce very well on a very highly scalable way. And that was when I expanded the strategy to let’s go out and buy some other brands that have kind of I don’t want to say hit a glass ceiling, but the entrepreneur has kind of taken it as far as they want to take it, and they’re ready to go do something else. We love businesses that have kind of flat lined. If they’ve been flat for five years, I love businesses that have been around in a long operating history, and kind of just don’t know how to get any bigger.
Mike: Yeah, I think that’s definitely the big keys, and that was one of the things that when I bought IceWraps, I was looking for that same thing that had been around for like eight years. We already had, you have all the data, right? You know like what’s selling, what isn’t, what the margins are, and what the customer base is et cetera.
And we were buying a business that already had kind of plateaued and hit some limits, and now we’ve — we bought it for 50K, and it’s worth well under seven figures today. So I mean it’s definitely a viable approach of buying businesses in that condition.
Bill: Yup, yeah I agree. I lost my train of thought but I agree. Especially if you’re — and this is kind of where I think the line comes down for me. If you have never done it before, if you’ve never been an entrepreneur, I would advise starting a business, because you’re going to learn so much. You’re going to do a lot of stuff wrong. And you’d rather do those things wrong on a business that is really not worth anything, that is new, and you can kind of fix with time with sweat equity rather than like the surgeon operates on a cadaver first.
You don’t just like walk into the live patient on the table and just start learning on the fly. Because if you buy a business, there is going to be substantial risk of capital, and the price of screwing up is going to be a lot higher. So my kind of distinction is if you’ve never been an entrepreneur before, or even specifically kind of like a physical product or e-commerce entrepreneur before, I would suggest starting a business. If you have done it once, I would strongly advise buying a business. It is just a lot easier.
Mike: Yeah and I mean just to kind of back up your point there, I completely agree. I mean, when I got in e-commerce, I’d already been in a business myself for well over ten years. I had another business that had hit eight figures, but still had just so much to learn in e-commerce. So I mean the first thing that we did was Treadmill.com. Obviously we paid a lot of money for the domain name, but it was an existing business.
We started from scratch and learned just so much along the way, like how to even launch a Shopify store. At the time it was BigCommerce, how to like do a BigCommerce store, how to design a template, how to take payments, how to do customer service, how to do drop shipping, how to process orders, how to deal with returns, how to get on Amazon, how to create a product listing, how to shoot product photos. And the list goes on and on and on, there was so much to learn.
So, I wholeheartedly agree even if you have a ton of business experience, that isn’t necessarily going to cross over into e-commerce. You’re going to have a lot to get into. And I think that having those basic building blocks of knowledge is essential before trying to buy another business. And walking right in the door on day one and having a fire hose kind of pointed at you and having to learn all those other basic building blocks along with how their business works at the same time could be just overwhelming.
Bill: Yeah and especially too because if you buy a business you’re probably going to use some debt which we can talk more about later if you want, but by using debt which means you have debt payments, which means if you screw up, you’re going to be under the gun to fix it to make your debt payments. Versus if you had started it and there’s no debt on the business, you can kind of — if you screw up, as long as you don’t fatally screw up, you can take a little while to fix your mistake.
There are very — many of your mistakes are fatal when you don’t have debt.
Bill: Or when you don’t have skills.
Mike: So I think we’re both in the same page here, but like if we’re for talking to our audience here, let’s lay out a couple things that we would both agree on as far as some criteria that you would want to have before you feel you’re comfortable going out to buy an e-commerce business. I don’t know if there’s a way we can quantify it in transactions per month or revenue, but I would say again, I just rattled off a bunch of things. I mean I would have some basic understanding of Shopify or a hosted platform, how to sell on Amazon, so basic like PPC and Facebook ad experience. What are some other things you can think of Bill that are essential before taking that leap and buying a business?
Bill: I mean I think all those things are true. I think if you were to paint with a broad brush, I think you should be able to look in the mirror and say, I am capable of launching a product and a brand from scratch and scaling it to six figures in revenue. And that is a huge skill set. I mean that includes sourcing, that includes Shopify, that includes Amazon, that includes PPC, probably includes Facebook.
I mean you’ve got to be confident that you can take a product and get it from zero to a 100K based on the skills that you have. And at that point you’re dangerous enough to go buy a business. And if you are that dangerous, it’s probably a pretty low risk proposition for you to go buy a business.
Mike: Yeah, I completely agree and I think you said something earlier, I forget the exact way you said it. But basically when you’re running that first brand that you started, you realize that you’re kind of going in the right direction, and that you can apply that same skill set to an existing business and add value to them. I think that’s the other criteria is if you look at a business that’s doing e-commerce, where can you add value.
And if you haven’t figured out all the basic building blocks yet, it’s going to be very difficult for you to add value there and correct the things that the previous owner wasn’t doing.
Bill: Right, right yeah you have to be able come in and say that they’re doing that wrong, they’re not doing that, and could start doing that cetera. Dana Jaunzemis who is a mutual friend of ours, I know you’ve had on the podcast said a phrase to me during one of the very first times I met her, and it just stuck so in my head, and I’ve said it to other people, and have I steal it often, because it’s so good.
She said to me, Bill have you ever seen those billboards on the highway that say, I buy ugly houses? And I’m sure we all have, and she says, I buy ugly websites. And I just thought it was so good, because she saw ugly as an opportunity rather than ugly as structurally broken. The same way you buy a house and go, oh yeah I can redo the kitchen and a few bathrooms and make the house more valuable. That was what she was talking about with businesses.
And so, if you are out there to buy a business, I would think you shouldn’t be looking for something that is perfect, because all babies are ugly. There’s going to be something wrong with everything. You should be looking for something that is wrong in the ways that you know how to fix. And you’re not going to have that context I don’t think to know what you’re able to fix unless you’ve kind of done it before.
Mike: Yeah, I couldn’t agree more. And so for me, I would be looking at businesses to buy that are exactly like what Dana was saying. The website is ugly, that was definitely the case with icewraps.com, that’s the criteria that I definitely want to see. I also didn’t want to be buying at the peak. I wanted it just like what you were saying. I looked for a business that would be stagnant or struggling. So you’re almost getting it at an asset purchase agreement price, versus buying it on a multiple of revenue.
And if you aren’t buying a multiple of revenue, you’re not buying a bunch of like future revenue built into because typically businesses that are doing quite well will sell at a higher multiple. And that’s something that I don’t want to be involved in.
Bill: Yeah, you’re going to get a better price because if a business is perfect, you’re going to pay a lot more for it. And then you’re going to own it and you’re going to go, what do I do now? And then hopefully it started doing well, but it might be you might be looking around for levers to pull.
Mike: So what are some other criteria? I can think of a few things off the top of my head. I mean I would not want a business that doesn’t have a long track record. I think that that’s one thing; I mean I would want something that’s at least three to five years old. What do you look for in that regard?
Bill: So that is like the totally key point. And this has become so much more of a key point in the last two years with the proliferation of the kind of Amazon only businesses, and all of these courses out there, sell on Amazon. I have seen so many businesses out there that are exactly two years old; they clearly list them for sale on the second anniversary of the business. They all started — right now they all started in 2015. And soon you’ll start seeing the ones that were started in 2016.
And they’re selling faddy products, selling things like vitamin C serum or they’re selling certain fitness things or whatever it might be kind of the supplements like crazy. Oh man the faddy supplements of the day like crazy. And they’re branded products, but they’re not really a brand. I mean they’re not — what they’re really doing is exploiting an eddy or quirk in the Amazon algorithm. They’ve basically launched on Amazon, they’ve driven a bunch of reviews, and they’ve exploited a quirk in the Amazon algorithm. They found a low competition niche or whatever, all the things that they tell you to look for.
And that usually is pretty good in the short term, but eventually the algorithm changes or the competitors come in, and those businesses kind of they’re like a pop and then they try to sell them at the top of the pop. And they’re not a brand because what really is, take the vitamin C serum for example. I used to see a lot of those. Those were hot kind of last year, and I haven’t seen a lot of them lately. But they would rank very well for vitamin C serum and the algorithm changes and boom you’re done.
And then you’re kind of left holding the bag as the buyer. And they might be ranking second for vitamin C serum, right? And they go, look at all these people who are buying our vitamin C serum, they love it. Well, they’re buying the thing that ranks number two for vitamin C serum.
Mike: Exactly, they type in Vitamin C serum and that’s like the most the customer is thinking about.
Bill: Right, and as soon as you’re not the number two slot, if you’re out of stock or the algorithm changes or whatever, they’re just going to very happily buy something different, because there is not really a brand loyalty there. Which is why I look for kind of minimum five years of operating history, and not Amazon concentration. So, I look for brands that have a healthy dot com channel, or a healthy wholesale channel, which tells me that they’re not just exploiting you know optimized one channel that’s very optimized.
Mike: Yeah, I mean if you’re buying a pure Amazon business, in my mind you’re buying all of the downside. It’s like all the upsides already baked into it. They rank number two or like are number one, where else are they going to go? And then the prospectus always says, well like oh the opportunity is that you can build an off Amazon business, or you can expand into international channels etcetera.
But like you’re buying like what perhaps is like the easiest part, but the most risky part is just like launching a product and getting it to rank on Amazon. Not exactly a whole lot of extrinsic value there and a lot of a lot of risk.
Bill: Right and they say, oh the opportunity is to go off Amazon and to go to wholesale and stuff. That’s the brutally difficult part.
Mike: Exactly yeah.
Bill: And is not even possible in some cases.
Mike: Yeah, so I mean the real business to look for is the one that’s like on the flip side where they don’t have an Amazon business yet, or it’s not a large part of what they do. They’ve already developed the wholesale channels; they’ve already got a good offline Amazon business. They own a Shopify store or even better something like Instacart or Yahoo stores platform that you can like redesign to make it look a lot better and sell more. And they haven’t really exploited Amazon yet. And those I think are the diamonds in the rough.
Bill: Exactly and that’s what you look for.
Mike: And I mean you found a couple of just ridiculously amazing opportunities as of late that we can talk a little bit about. But basically they fit like all these criteria, but the biggest thing is like one of these brands you just bought, there was like 40 years old or something crazy, it’s been around forever.
Bill: It’s been around since 1978.
Mike: It’s just absolutely insane.
Bill: One hell of a track record.
Mike: It is and then you got a bunch of loyal customers that come along with it that you can obviously resurrect from the dead in some cases. I mean a lot of them were customers that the old owners just didn’t do a good job of. But let’s talk about the things that the old owner like just wasn’t doing a good job with. I think there might have been like a death in the family, or the owner or something at some point along the way. Was that right or was that a different person?
Bill: There was, yeah the owner passed away in 2013 and left it to his wife who was not an entrepreneur or even a business person. So she’s kind of an absentee owner, and the business was not – nobody is really watching it. So there was — I mean you can imagine all the inefficiencies that came with that. But just overall, it was a business, they just kind of missed dot com to some degree. I mean they had a website, they were doing five figures a month on the website, which was good, but it was just not optimized at all.
They weren’t doing hardly any email, they would send like one email a week with just like a 30% discount on it. And like there was — and it was bashing blast to everybody. And they were due in – they were spending a lot of money on social media, but they weren’t selling it on social media. They were just losing their ass in wholesale and all these retailers that they never really kind of walked the impact of it all the way down the income statement to see if they’re actually making money.
Their call center wasn’t adequately staffed; they didn’t have enough people to answer all the phones because people were calling to order, because this company has been around for so long. They have a lot of elderly customers who would call on the telephone to place an order, and they weren’t getting all the calls. I mean just so many things.
And their Amazon, they had kind of outsourced their Amazon presence. They were selling wholesale to kind of an Amazon middleman who was turning around and flipping it on Amazon, and making the spread. Which is a classic way when you buy a business, many businesses don’t know how to sell an Amazon, so they do that. They basically sell wholesale to someone else, because they know how to sell pallets, and then that person makes the spread basically selling on Amazon. So to cut those people out, that’s a pretty easy win.
Mike: Yeah, I bet that was a bad day for that guy when he got that phone call from you.
Bill: He tried to sue me.
Mike: Oh is that right? Oh my god.
Bill: It was a bad day for him, yes.
Mike: That’s always a good way to try to work with somebody. I’m going to sue you so I can keep buying your products.
Bill: Which is a real shame because his company was doing great work. They were doing of all the Amazon resellers I’ve seen, they were doing great work. And I would have recommended him to people too. But anyway, he threatened to sue me, and he couldn’t, he didn’t have grounds. But anyway yeah he was pissed.
Mike: Yeah, I can imagine up in — we have a couple of relationships like that as well. I mean we try to work as hard as we can to provide as much value as we can, but I also understand like our position there because like we would do the same thing if the situation were reversed. I mean we don’t want that middleman. I mean, it depends on if you are — I guess what your position is as a manufacturer. And you’ve got to be careful about trying to escape both of those lines, because you can end up in a position where you’re selling directly against the people that you’re also trying to get to buy from you, which could be an interesting position to be in.
Bill: Yeah we cut them all out. So we basically we have a wholesale agreement. So in order to get wholesale prices, you agree not to sell on any market places. We check you out; you’ve got to have a bricks and mortar store, all that stuff. And if you start mysteriously pumping like huge volume through your single bricks and mortar store front, and all of a sudden that seller shows up on our ASINs. We start marking your jars, we do a test buy, we get you.
Mike: Got you, it makes a lot of sense. So I mean what are some other things? I mean one of the other things I can think of right off the top of my head with this type of opportunity is also just to refresh in packaging. A lot of these companies — now imagine a company has been around since the 70’s, probably have packaging that look like it came from the 70’s, is that accurate? And if you did a redesign, like how much you think that helped?
Bill: Very common. Yeah, we’ve done redesigns on almost all the brands we’ve bought. And it’s not purely packaging although packaging is part of it, it’s kind of brand overall. We’ve kind of tweaked the logo sometimes; we redo the website every time with a focus on conversion rate. The packaging helps. I mean I think when you have crappy packaging; it kind of indicates a lower end product. It indicates a not professional product; it indicates a small business essentially.
So, to put a little bit of effort into packaging, I think you can convey a more upscale image, a customer can feel comfortable purchasing on your website. And if you have any retail presence also it kind of goes without saying that packaging is paramount if you’re on the shelf. Because it is the only thing you have to make the sale.
Mike: Yup, so we’ve gone over a lot of things here, but let’s kind of bring this back into the whole like, would you rather buy a business or start one from scratch? This conversation, I mean I don’t think it can be more clear since you started one from scratch and then you’re now on the string of purchasing. But why not — you have these skills sets. I mean you can — why not start your own facial cream brand, or laundry detergent brand or all these different things that you’ve done, versus paying three, four, or five X future earnings for a business, and then trying to make that money back in a short amount of time? I mean I guess you can make the argument that you could start from scratch and save that money. What’s the appeal to you of buying an existing business?
Bill: It’s just a hell of a lot faster frankly. I looked at — we bought a business the first one I bought in 2013. I looked at kind of the historical growth of the business. This slide was in my talk when I spoke at EcommerceFuel the very first time, was, they kind of got it from zero to X in six years. The business has been around six years. And in the first year after I owned it, we were at two X.
So I basically did what took them six years in one year, because starting a brand is brutally difficult, it takes a long time. And if you’re able to do it while not being an expert, it means that there really is some customer loyalty there.
Mike: Yeah without a doubt. And I would say that – and I don’t know that I would call myself an expert at this, but this is one of the things that we focus on in our business. It’s like the basic building block at the bottom of the pyramid is brand building. But we’re going through it right now where we have one existing brand that’s doing very, very well. And you don’t really think about or remember all the pain that you went through to get you to where you’re at.
But when you’re starting another brand like we are right now, it’s tough. I mean it’s expensive; it’s a lonely place to be, because you’re basically writing and talking to yourself, and don’t have that core group of fans or customers yet that are going to advocate for you, and be liking everything that you put on social media or just blindly buying any new product that you launch. It’s definitely a tougher position at the end.
Bill: Yeah and so I think it’s easier to buy. But I understand why sellers sell. It’s hard when you’re small to keep your finger on the pulse of everything that’s going on in e-commerce, to be good at Facebook ads, to be good at Google, to be good at conversion rate optimization, to be good at the product to make it good, to be good at package design, all these things. I mean at Elements Brands, we have 20 people, and it’s hard when you have two.
And so I can see like sellers, you know all the sellers that I’ve worked with, they’ve been fighting the good fight for a while, and they want to get paid and they want to go do something different which is fine too. So I get why people sell. I think it’s kind of usually a win for both parties.
Mike: Yeah, and I mean you have 20 people, but I think the key is that your focus is on something completely different than probably these old owners. I mean most of them are starting with like a personal passion in mind for the product. They’re developing this product and their business is that. They are thinking of like how can I make a unique product, or how am I going to sell to a particular group of people, or whatever it might be. But if you’re like me, like your approach to it is completely different.
You’re an e-commerce guy, like to start with the product, it doesn’t make a damn bit of difference. At the end the day I mean it has to be a good product, but that isn’t your thing. You’re probably not necessarily married to that product; your 20 people are thinking e-commerce the moment they walk in. Like what’s my store going to look like, what my email campaign is going to look like, what’s my free plus shipping offer going to look like, what’s my Facebook ad going to look like, my social media presence? All that stuff more than the product itself.
Bill: Right yeah, have you ever kind of heard the old adage that it’s so much easier to solve someone else’s problems than your own?
Mike: I haven’t heard it, but that makes a lot of sense, right?
Bill: And this is essentially the same thing, because when we buy a business, like they kind of don’t feel like our problem. So it’s easier to make the hard decisions, it’s easier to look at it; it is easier to look at dispassionately. It’s easier to kind of take a 30,000 foot view. And incidentally that’s also why when we buy a business, we buy the whole thing.
We don’t let the owner kind of keep 10 or 20% or anything, because we’re about to change a lot of stuff. And that makes people uncomfortable when they’ve been owning a business for five or ten years understandably. So we really need to look at those problems as new problems with fresh eyes. And it makes it hard when there’s old eyes in the room.
Mike: Yeah it definitely makes a lot of sense. Cool, so we’re getting close to our 30 minutes. At the end here, do you have any other like thoughts or tips about the subject before we sign off?
Bill: I wish to talk about debt really quick.
Bill: That’s how you fund all this stuff.
Mike: Good point, I forgot about that. Let’s hit that really quickly.
Bill: Yeah, so I’d be interested to hear your take on this too. My experience has been, typically if you are buying a business, some that are already for sale will be — they’ll say SBA pre-approved. So if you’re going to buy a business, you probably want to borrow some money for two reasons. A, you’ll get to buy a business a lot sooner than if you have to save up 100% of the equity just like with a house. B, interest rates are at historic lows. And C, because of that the cash flow, the payments to service the debt are often very low compared to the cash flow from the business you can buy with that amount of debt.
And what I mean is that because interest rates are low, and because the prices, the market bearing prices for these businesses that are for sale are relatively low. Typically the debt payments — if you get a ten year SBA loan at 4 or 5%, the debt payments are going to be kind of 30% of the monthly cash flow of the business. I mean that’s like a huge drag. But that gives you a lot of room even if the business gets — it goes down 30%, you’ll probably still be able to make your payments. The environment is such that it’s very favorable to use debt right now.
Mike: I agree, and it’s — I guess you could use the same like thought process you would use for like buying a rental property, and making a cash flow positive rental property. But that’s almost impossible in today’s market because real estate prices have gone up so much, and rent prices really haven’t followed. You can still do that with a lot of businesses, where I mean you’re buying businesses that are immediately cash flow positive. If it only takes 30% of the cash flow to service the debt, you have a nice boom and cash flow from that transaction.
Bill: Exactly. I love the house analogy because for some reason the house thing is a lot of people understand, but the business thing seems so far beyond most people. So I think relating back to buying a house is great, and the economics actually can be quite similar. You typically with an SBA loan have to put down about 20% just like when you buy a house. And you’ll probably get a ten year term loan or a seven year term loan if you go through the SBA.
So you can kind of do the math. You can figure out if I buy a business for half a million dollars, I got to put down a hundred grand. So I’m going to borrow $400,000, interest rate is 5%, ten year term. Plug it into a mortgage calculator, and you’ll get an amortization table, and you kind of figure out what the monthly payment is going to be.
And then look at the monthly cash flow from the business, and you’ll see that — I know because of the way prices are and interest rates are, it’ll be pretty doable. And it’s kind of the equivalent of buying a house where the mortgage is 1,000 a month and you can rent it for $4,000 a month.
Mike: Yeah, but you’ve got to make sure that you are in a position to actually take the business over, and not be more detrimental than the old owner was. I mean I think I see this happen a lot, I don’t know what it is. I mean as a for instance, the people that bought Treadmill.com from us, like they just didn’t know what they were getting themselves into. I almost feel bad in some ways even though I was very open and honest with the person that bought the website.
I even pissed off my broker that was doing the deal, because I’m like, look man, I want to let him know the real reasons I’m looking to sell this website, and make sure he understands like the amount of work that he’s getting himself into because he wasn’t a seasoned e-commerce person. He was just looking to buy a business and thought it was going to be easy. And even though it wasn’t my place to tell him that this is going to be harder than you think, and even though I told him and he still did it anyway, once they got the business I think they realized what they got themselves into, and they did a much worse job with it than we have.
And I think it was probably a bad investment for that reason for them. So you just gotta make sure that you fully understand what you’re getting yourself into when you’re buying a business. Make sure that you understand, you have a good plan for what you’re going to actually improve and that you actually have the staff and the ability to actually do that, and not let whatever existing business you have like go to crap while you’re going through that transition as well.
Bill: Right and that’s a big difference between this and real estate is the kind of once you buy a house and you have a renter in it, you go on a cruise. A business has to be run.
Mike: Yeah exactly. That’s exactly what I was trying to get at, because I mean buy a house, I mean the most you have do is do some renovations and get it ready to pop someone in there. It’s truly a passive income versus this is not. That that is not at all what you’re getting into here, it’s not a passive income situation.
Bill: And everyone who is trying to sell you a business will tell you it’s a passive income situation. The business runs itself…
Mike: And only eight hours a week or eight hours a month [overlapping 00:36:27]. I think that’s when you actually run the other way; you realize that it’s not a good investment realistically. I mean if that’s what they’re telling you, or if you’re buying it for those reasons, you’re being fooled. You’re definitely being fooled.
Bill: Yeah I agree. So I think if you buy a business, it can make a ton of sense, but plan on being CEO of the business that you buy. And if you’ve got an existing business, you’ve got to feel really comfortable that your existing employees or management structure is capable of you taking your hands off the wheel for the most part, and focusing on this new thing.
Mike: Yeah and I think it’s really good advice. I think the debt portion of it makes a lot of sense. I mean people are looking to instead of real estate let’s say it is businesses, or if you’re in e-commerce it makes a lot of sense to be putting cash there. And I personally think it’s a safer investment, I think that real estate prices are way too high right now. And I think that e-commerce businesses in general if you’re buying the right ones are still undervalued. It’s an exciting place to be for sure. And if you have the skill sets to then take it to the next level, it’s a really great opportunity.
Just the things I would caution against is that the whole, like if you chase two rabbits, both will get away. I mean you and I, were talking about a really great opportunity before we got on the call today. I mean you have to be also able to say no. You can’t just always be thinking about the opportunity. You have to actually have a plan in place and you certainly do within your business. You’ve done an amazing job of executing this time over time after time, but it’s not easy either. I mean I know how much work you put into it.
Bill: Right, I mean yeah you got to go into it eyes wide open essentially.
Mike: Cool Bill. Well I think that’s it for today. How can people find you if they’re looking to get ahold of you? I know that you’re kind of on this war path of buying businesses. So people who have a personal care business and they might be interested in selling, they can obviously reach out to you. But for anything else, what’s the best way to get ahold of you?
Bill: Yeah, I’m glad you mentioned it. We are always looking to buy brands. We focus on household goods and personal care, and any branded product if it’s been around a while. If you want to explore selling your business, you hit me up. You can always get me on Twitter is @BillDA, or shoot me an email, [email protected], Elements Brands both plural.
Mike: Elements Brands.
Bill: Yeah that’s right.
Mike: I was listening to either Andrew was telling me this on my podcast, or I was listening on his podcast where he is making fun of your Elements Brands. He’s like we should start calling it Element Brand from now and just to drive you crazy.
Bill: It’s brutal, everyone does it. That’s why I should have never — I feel I need to rename the company, like who knows how many emails I miss.
Mike: Or buy the other URL and redirect it to you so at least you get the emails.
Bill: I already own like — because there’s four variants, right? Elements Brands. Yeah so I already own two of them.
Mike: I want to go buy one of the other two just to mess with you.
Bill: Oh I’ve tried. The other ones are like other companies too. So you’re also free to submit if you want to tweet me new names for my business.
Mike: Awesome. I appreciate you coming on the show today and hopefully we’ll chat again before we hit episode 200.
Bill: Yeah man, sure thing, great to talk with you.
Mike: Thanks man.
And that’s a wrap. I hope you guys enjoyed the one hundred and third edition of the EcomCrew Podcast. Just as a reminder, you can go to EcomCrew.com/103 to get to the show notes, ask any questions you might have of Bill or myself. And one other reminder, we hit on the top of the show about the Under the Hood segment. I’m really excited to start this in 2018.
The basic concept is, go to EcomCrew.com/underthehood, give us your name and your e-mail, and what you want to talk about. Abby who helps put the podcast together for us, she does an instrumental job will contact you, get some more information, will evaluate you for the show. And if we select you for the show, you’ll get one to one and a half hours of free coaching. There’s nothing to pay. Dave and I will talk to you; we’ll use it as a podcast episode.
So in exchange for talking to us, we do get to use the conversation as a part of a podcast. But I think that this will make amazing content. One of the things I’ve been looking forward to doing in 2018 is really taking the EcomCrew Podcast to the next level. And I think this Under the Hood segment can do just that. We’re at a point where we’ve started collectively over ten e-commerce businesses, well into eight figures of revenue.
And I think that the experience that we have and being able to talk to people on the fly in situations like this, will be just completely invaluable for the Ecommerce Crew community. I really think that this will just be an amazing segment, something that we hopefully do well in 2018, but it’s early to tell. But you guys out there in the audience we need you. We need you to go to EcomCrew.com/underthehood.
Again you’ll get a free hour of coaching from Dave and I. You can ask us any questions you want. We won’t hold back on anything just like we don’t hold back on things in this podcast. And hopefully the information that you get from that hour coaching can add 20%, 25, 30, maybe even 100% to your business depending on what we talk about. And it’ll also pay it forward for everyone else out there in the audience.
So, once again EcomCrew.com/underthehood. I hope you guys enjoy this podcast episode. We will be back with episode 104 next week, and until then guys happy selling.