The Quiet Light Podcast Incredible Exits – Mike Jackness – Selling ColorIt
In the second installment of our Incredible Exits series, we welcome Mike Jackness back to the podcast. Mike, one of our favorite guests, is here discussing the recent sale of his online business, ColorIt. Mike is a lifelong entrepreneur and hosts a podcast with a 30k listener following. On his show, he talks all things about e-commerce, email marketing, and Amazon. Mike’s decision to sell this particular business was based not on struggling to grow it, but simply on the the need to offload something from his plate. He was well aware of what he’d done to grow it, and the potential for its future growth, he simply knew it was time to hand over the reins.
We wanted to have Mike on to tell us firsthand how that process went, the challenges he faced, and how he eventually reached multiple offers. He shares some of the key things he did to get the business sold at 96% of the list price. We discuss how some acquisitions don’t go as smoothly as others, even for someone who seems to have a great grip on how to grow and eventually sell an online business. Ths episode chronicles the sale and buying process: what Mike has done right and what he would change if he could.
Episode Highlights:- We hear about Mike’s journey as an entrepreneur and what led him to start the Ecomcrew podcast.
- The factors that led him to sell one of his e-commerce businesses.
- Mike talks us through the 10 risk factors to take into account for e-commerce success.
- How Amazon can be the judge and jury when it comes to keeping your e-commerce business alive.
- The one thing he would go back and do differently in the transaction.
- The importance of planning in advance for an easier buyer transition.
- Why some entrepreneurs get caught up in the squirrel syndrome and often find that as they take on too much they run into trouble.
- Mike takes us through the launch process and how we got to the multiple with the right buyer.
- The importance of instilling confidence in the buyer.
- The inventory issue specific to this brand and how that affected the sale. Why one can’t plan the perfect inventory in e-commerce business.
- How to find middle ground on the inventory excess in the sale and acquiescing when necessary.
- Why the seller makes all the difference in the sellability of the business. The way a seller should act under any circumstances.
Transcription:
Mark: Joe you got to have one of our favorite podcast guests on; Mike Jackness. And Mike actually retained you or hired you to help sell one of his properties. And we get to do another episode … is this part of our Amazing Acquisitions? I don’t know … our Amazing Exits I’m sorry.
Joe: Incredible Exits, come on Mark get it right.
Mark: My goodness, I made it up. It’s a good—
Joe: I don’t even know what it’s called. Somebody’s going to tell me there’s a certain term for things that flow off the tongue very well … incredible.
Mark: It’s almost as if I’m not paying attention to what you’re doing at all. You got to have him on the podcast about selling his business.
Joe: Indeed.
Mark: I’d like to know about it.
Joe: You know he’s just an awesome human being and that made selling his business and the person buying it that more excited about it. Look, Mike is an influencer. He has a podcast where he’s got 30,000 people listening to him every month and he talks about e-commerce and email marketing and Amazon. We had challenges because people are like well if Mike Jackness isn’t killing it with this I don’t know if I can do any better. But the reality was Mike was just simply chasing too many rabbits as he says. He had four brands inside of one seller account. He has the podcast and he has other projects going on. So he wasn’t giving his full attention to this. So really the reason I wanted to have him on was to have people hear from him some of his … well-known and an influencer much larger audience in his podcast than we have what he was doing wrong. If he could go back and do it all over again how he would have changed things so that it would have been an easier process for him and we would have had … we had multiple offers but would have had a much easier process in reaching those multiple offers. And some of the key differences that he did to seal the deal. He didn’t do it to seal the deal, he was just doing it anyway and it is what sealed the deal and got us under LOI at 96% of the list price.
Mark: Yeah you know one of the most popular articles that I wrote on our blog back when I was doing all the blogging on Quiet Light Brokerage was the story of my own process of buying a business and in my own estimation failing at it. And frankly, as the founder of Quiet Light, it’s kind of humbling to go out there and say yup I made an acquisition I completely failed but here is why. And I got so much good feedback from that saying this is great thank you for sharing these details because it really helps. So hearing from someone like Mike Jackness and his episode that you did with him is probably my favorite episode that we have that I’ve listened to. I don’t listen to my own episodes which is why they aren’t like [inaudible 00:03:51.2]. That episode from Mike Jackness in all seriousness he talks about email marketing and how he does email marketing. That’s fantastic so if you haven’t listened to it, go back and listen to it. It would be interesting to hear what he had as far as his own self-assessment when it comes to selling his business and some of the struggles that he had as well. And I think it might be encouraging for those of us that are out there like how are these guys doing all of it because we only hear about the successes, right?
Joe: Yeah. There are challenges in here and I was … my initial plan was to do a two part series but we managed to get it all in. It’s a little long folks. It’s about 45 minutes or so and then the plan is to do a follow up episode about due diligence, closing, transition, and training. We may even have the buyer on and have all three of us on the podcast.
Mark: It’s 45 minutes?
Joe: Yes.
Mark: Well, I should shut up. We should get to it.
Joe: Let’s go to it.
Joe: Hey, folks Joe Valley here from Quiet Light Brokerage and today I’ve got somebody that’s been on before; Michael Jackness from EcomCrew. Welcome to the Quiet Light Podcast.
Mike: Welcome back.
Joe: Welcome back is right. You actually inspired this type of episode as I said before we recorded. Folks Mike has … when he was on before he shared his expertise on email marketing and the use of Klaviyo. Today he’s actually going to be our first exit entrepreneur or Incredible Exits guest. Mike decided to list his business for sale last December. We talked about it. We got it listed. And now we’re under Letter Of Intent. We’re recording this on February 12th and we wanted to share Mike’s direct experience so that you hear it … hear about the process, and what you should do right, what you’ve done right and what you do wrong, and hear from somebody other than me. Mike has been through it. He’s got an audience of 30,000 that listens on a monthly basis at EcomCrew. If you’re not listening to EcomCrew … I know I’m promoting another podcast but it’s one of the absolute best out there. Go to EcomCrew.com they’re always helping entrepreneurs in the e-commerce space. So Michael Jackness, 30 seconds just tell some folks who you are again for those that didn’t listen to the first episode that we did together.
Mike: I’m basically a serial entrepreneur. I started my first business when I was a kid. I did have a stint for seven years in corporate life. One of my clients did hire me but for the last 15 years, I’ve been doing my own thing either in affiliate marketing or e-commerce lest the 5 plus years. And when I got on e-commerce I realized that we were coming at things a little bit differently. We kind of got at it as a tech company rather than a product company. And we realized we had a lot to share. So the entire process pretty much; as you mentioned EcomCrew, even blogging, and podcasting, and telling the world about what we’ve been doing. But one of the things that make us unique is we also talk about all the negatives not just the positive sunshine blue smoke up your ass crap. In fact we go out of our way to talk about some of the hardships of running a business and specifically e-commerce. So yeah that’s a 10,000 foot view.
Joe: And in just about 30 seconds; so thanks. Yeah, I get it, I can’t emphasize enough. If you are a current e-commerce owner you should listen EcomCrew as well especially the Under the Hood series that I enjoy so much and inspired the Incredible Exit series here at Quiet Light. All right Mike at one point, you came to me. You reached out I think probably around Thanksgiving or so and said you wanted to exit. Did you plan that well in advance or did you just find yourself tired and ready to move on?
Mike: Yeah, there were a ton of factors that went into that initial conversation. We had a different plan. I can tell you what. We’ll talk a little bit about that but the plan was to do this a little bit longer. But I actually just did a podcast about risk factors in e-commerce and we don’t have 30 minutes to go over the entire episode but there were 10 risk factors that I called out. Which basically were like the amount of inventory that you have, tariffs, taxes … just kind of like a risk to reward type of thing, competition, Amazon getting involved in brands, Amazon shutting your account down, getting unbalanced to be more Amazon than not off Amazon things of this nature. And for me what I realized … I started waking up one day realizing that for us this stuff they’ve kind of gone a little bit out of balance. We’re at a point right now as we’re doing this podcast because I haven’t quite done the exit yet where we have $1.3 million in inventory total company wide as we’ve been growing. As you know in e-commerce it’s hard to get any money out of your business because we are growing it 100% per year and it’s a situation where money just keeps on piling back in the business. You have a tax bill every year and without the money to even pay for that because you’re plowing everything back in the inventory for growth. And we have been running at that speed for almost four years. And because of some of those other risk factors, the kind of leverage is changing a little bit. I felt like it was time that we needed to take some chips off the table. And combining that with just honestly being a little burned out; running at that speed is definitely exhausting. I found myself either dreaming about Amazon shutting my account down or waking up every morning first thing and checking my inbox and seeing if they had been shut down. Not because we do anything black hat at all but because I see things that happen out there because of EcomCrew and also [inaudible 00:09:05.1]. You hear stories of people that legitimately didn’t do anything wrong but it doesn’t matter because Amazon can be the judge and jury and executioner all in one. And factoring all these different things in it just … it felt like it was time. And we didn’t know it when I had that initial conversation with you. I didn’t know exactly what that was going to look like. At one time we had talked about selling everything. I was kind of like just in a bit of bad mood that day and then we kind of start walking through some more realistic and better options to kind of end up [inaudible 00:09:35.9].
Joe: Yeah, let’s talk about that the realistic option of selling everything I have things or setup because I really want people to learn from this process and what your goals were and the challenges that we’ve had and some of the amazing things that you have done throughout the process as well. So the first thing we looked at was selling all four of the brands that you have. You have it under one LLC and two of the brands are doing very, very well. And two of the brands are start up brands where they’re really working at a loss because you have a tendency to just focus on organic traffic and brand recognition for a series of months to a year and don’t mind operating at a lost. First and foremost Mark had a podcast with somebody from a PE firm that painted this picture. He said the thing about private equity investors is … well, think about it when you were a kid. And he says you get a bag of marbles from and you try to negotiate a deal with your buddy for the bag of marbles. The first thing you want to do is reach into that bag of marbles and take out all the chipped ones. You don’t want to buy the chipped marbles. And then you want to focus on the best marbles. And so when looking at your four brands, two of them were really operating at a loss so my advice right away was let’s take those out of the picture. Because when you’re selling a business let’s say at a three time multiple and you have two brands in the bag and they’re both operating at let’s say negative $10,000 in discretionary earnings; that’s $20,000 times three that’s $60,000 off the list price of your business if you go with the multiple of discretionary earnings valuation model which is what we do in marketplace valuations. So we had to pull those two out. And then we looked at what at the time was one of the larger brands of the two. We’ve got ColorIt that we’ve talked about. We’ve talked about it openly and you’ve done presentations all over the world on your email marketing campaigns with Klaviyo and ColorIt. But the other one, different space, and we had a challenge. See one of the things that we talk about all the time are the 4 pillars of sellable businesses; age, documentation, growth, transferability. And the big thing that we had a problem there was the transferability of that particular brand. Two of the SKUs that you had which were not the largest used by any stretch, you were reselling those, right? And you reached out to your vendor to confirm that you could transfer those and what did they say?
Mike: They said no.
Joe: Simple as that. So that takes away one of the pillars. It makes it more complicated. But again as you said you were in a bad mood that day that we talked. A lot of emotions in selling your business and as you say in the introduction that we did for ColorIt, you’ve been chasing too many rabbits. When you’re doing that you’re getting tired, exhausted, and pulled into many different directions and often going nowhere. So we ended up setting that one aside as well and focused only on ColorIt and went with that to launch. Before we get into the initial launch multiple and things that we found that were really amazing about it we found one more challenge or maybe two. You have one LLC with all four brands under one LLC and all four brands in one seller account. What have you done since our initial conversations back in late November early December to rectify that?
Mike: Let me kind of set the stage just real quick of why we got there as well because it’s interesting in business. There’s two phenomena that is existing, first of all, I’ve been in business for 15 years so I kind of knew some of the hiccups and roadblocks we might get into down the road. But I had run multiple businesses in the past. So whenever you do something and you don’t like it you tend to correct for that in another way in a future endeavor whether it’s a business or in personal life. And the thought of like having … we actually have more than four things going through this LLC, there are other non e-commerce stuff and some other things as well. And the thought of having six or seven different tax returns and credit cards for each business and trying to figure out how we’re going to separate employees or like the lease or back in software like Skubana or you know a UPS count; all these different things like having to have them all segmented out just was not appealing to me in any way shape or form. And I was more concerned about today than tomorrow as far as operating the business. And I also had this thought process of when I’m ready to get out of e-commerce I’m going to get rid of all of it once. I’m a pretty binary kind of guy like I’m either all in or not doing it. And I thought the day that … when it came that we would get out of e-commerce we would just sell that conglomerate. But life happens and business happens and like I said some of these risk factors changed and the reality was that we wanted to pivot and change our philosophy and our business plan pretty quickly. I equate this also to like when you want to pay taxes you want to have your business show the lowest amount of money. You’re trying to figure out any expense you can have. That’s really good for a tax but when you go to apply for a loan it better be showing lots of income. So it’s like … it’s a similar kind of phenomenon where like in one part it makes sense to do one thing but in another … on the other side, it makes sense to do another. So we were kind of at that spot where it was obvious that this was going to be a problem because the things that came up in the calls over and over again were really two things. Number one shared resources of employees or other resources which I understand the challenge there. And also the fact that everything’s in this one Amazon account. And let me tell you man if there was anything I can go back and do differently it would be having multiple Amazon accounts at a much earlier stage. The challenge is Amazon doesn’t make this easy. They won’t allow you to just create multiple accounts first of all without getting permission. And in order to get permission, you have to have a separate company. You have to have a separate … either separate ownership structure, separate EIN, separate checking account, separate credit card. All this stuff has to be 100% separated out in order for them to grant you permission to create another Amazon account. So we are going through that now and I mean what a disaster. Like we’re having to … we’re trying to close within about six weeks of recording this. And to hand over the account at closing we have to have just Brand A which is going to be ColorIt and the Amazon account and Brand C or B, C, D have to be out of the Amazon account and in a new account and it has to happen as seamlessly as possible which is impossible because we’re … we only have inventory in Amazon. All of our inventory is on Amazon. So we’re having to recall some of it and relabel it, get it into the other account. And we keep a relatively [inaudible 00:16:34.1] amount of stuff in Amazon so it’s not … looking on a SKU by SKU basis it isn’t that big of a deal but because we’re a high seven figure seller total we’re recalling truckloads with the goods from Amazon. It’s not going to be cheap and when you recall stuff it gets damaged a lot of times. The stuff shows up and looks used by the time that … you’re shipping it in and it’s getting … someone’s handling it and putting it on the shelf and they got to go take it off the shelf put it in another box and crate and when you recall stuff it doesn’t come back in the best of shape. So yeah I mean it’s kind of a disaster all around but this is what we’ve had to do to get to where we are. And moving forward they all are all going to be in separate companies. So at any point when the time comes to put Business B up for sale, we’ll have it all in one clear concise company; one account and we’ll just pull the trigger and be done.
Joe: You know I think you had said at one point you knew what to do and you had one plan and it was to sell the entity and all the brands within it at one time. And then we found three stumbling blocks. Two of them were operating at a loss because you are focused on organic traffic and brand building. And one where two of the vendors said: “yeah no, we like you, Mike, we don’t know anybody else we’re not going to do this deal with anyone else”. So you ran into challenges there. And you also said if you have to make those changes someday you’ll do that. And all of a sudden you woke up and someday was here and we had an action that we wanted to take right away whereas the idea of I always say don’t decide to sell which is eventually you do decide to sell but plan to sell. So my little slogan there doesn’t actually work all that well. But seriously though I think the thing to do is to plan it out in advance as much as possible to make it strangely enough as easy and seamless as possible for the buyer. For that person that is going to put a million dollars of their life savings on the line or two or three or 100,000. The amount doesn’t matter. It’s a lot of money for the person that stroking the check or sending the wire. So that’s the key thing.
Mike: Can I just … I want to mention one other thing if you don’t mind? [inaudible 00:18:48.4] this thing.
Joe: Yeah.
Mike: You’re asking just kind of like some of the other things that kind went wrong and we could’ve done better. This is stuff that’s often not talked about again in entrepreneurship but the reality is is that it would have been better just to have one brand and focus on it or maybe two rather than trying to do too many things at once which is a trap that a lot of entrepreneurs get caught in. Something I tell myself all the time, I even had it in writing on a blog post like eight years ago like I won’t do that again; get into too many things. Entrepreneurs are different … there are different classes of entrepreneurs but the kind of entrepreneur that I am it’s the squirrel syndrome. It’s always exciting to do something new rather than what you’re working on. I get bored really easily. To me, the business aspects are way less about the money than the personal enjoyment and excitement part of it. And oftentimes you end up with this … you chase rabbits both will get away saying that I use all the time. But I give that advice and don’t follow it as well as I should. So that’s another thing that you could really take away from this if your … the existing business you have is probably the best one that you have, the same type of thing with a car like the cheapest car that you’ll ever have is the one that you own right now. You are then going on and buying a new one. Or any of these types of things can be applied to other aspects of your life as well. But if you are focused on one company like you typically have all your T’s crossed and I’s dotted and that’s how I like to run my companies because I am a bit of a perfectionist. But as you spread your resources across multiple businesses things like to fall through the cracks that make things less attractive to a buyer. And the reality is is it’s not as easy as it should be to just cookie cutter your business into another one. We had a really great podcast about this a year and a half ago. It was actually something we recorded live at E-commerce Fuel Live last year back in Gohana. So I just want to throw those things out as well as just other things that to be thinking about. As you’re planning your exit you should be a lot of times it’s … well, I want to get in this other thing or as you’re growing it’s really exciting and it’s infectious and you want to keep on that path because it’s fun to tell everybody how fast you’re growing. And everyone pats you in the back and society makes things even worse because they’re always like yeah man good job and everybody is like oh good job you only grew by 5% last year because that’s just how we’re all wired. Which the reality is that as Dave my partner always says is that revenues are vanity and profits are sanity.
Joe: Yeah. Now I love that again this is … I want people to hear from you more than me. I say his stuff all the time and you’re someone that’s going through it right now and coaches thousands of people on a regular basis to improve their businesses and Dave as well. The other thing that is separating out the brands and separating out the LLC does for you the seller and the potential buyer is it casts a broader net of potential buyers. And the broader the net the more interest level there is going to be in the business. And the more interest level the more likely you’re going to get an offer at or close to list price. And in this case we did not say SBA prequalified, technically you can take a business like yours and go through the process and have your accountant separate all those things out and certify it. It’s not a full audit and you could try to go through the process and make it SBA prequalified. But in the time frame that you and I were trying to do this, you wanted to be under Letter Of Intent by January 31st. It didn’t happen. We came close but we couldn’t have gone through that process because that process would have taken six to eight weeks for your attorney to do it. And given the time of year, it might have taken longer because he’s in full on tax preparation now. So that’s the other thing that separating out your LLC’s by brand will do for you is that when you wake up one day and you want to exit it’s clean, it’s simple and you can do that with a lot less work. And that work Mike we … it was a lot of work in preparing the listing for sale. In the Profit & Loss statements and then in that client interview everybody’s heard about it … I told my wife when I sold my business I felt like I was working harder preparing the business for sale and going through the process of getting it sold than I was actually running it. And when I was running my own I was working about 20 hours a week running the business so that tells you what that workload is like. In terms of what we did, I want to talk a little bit about the launch process and talk about the multiples and some of the things we did but you did it just absolutely right spot on. We did go out a little early the right? We talked in late November early, early December and you had a goal and I wanted to help you achieve that goal. I’m human and I think that what I probably should have done in hindsight is said no, this is probably not the best approach. We went out in I think around the 10th of December, listed the business at a pretty strong multiple. It was at a four time multiple. And went out and said Look December is going to be great. Trust us these numbers will drop to a 3.5 once the December numbers are read. And the ultimate answer we got was cool, I think I’ll just wait to see if that’s true. So we’ve got a … I think we had a phone call, maybe we had one buyer seller conference call in the month of December and then you’re a man of your word and you like to under promise and over deliver. And when December numbers came in they were up 80% year over year.
Mike: Yeah.
Joe: I’ve used this analogy with a lot of folks before and they’ve heard me say this again you can list something at a four time multiple and if it’s growing 25% year over year consistently the buyer earns their money back in 2.7 years. I did not do the math on 80% and I won’t but that really got people off the fence a little bit. We updated the P&L’s, got the December P&L’s and then we’re relaunching I think on January 8th, 9th, or 10th, in and around there. And we actually dropped the price by $75,000 too. So the multiple didn’t drop to just a 3.5 it dropped to a 3.2 multiple and we relaunched. And I think we had three or four phone calls out of the gate. The goal is to have three to five in the first 30 to 45 days and one acceptable offer. We did have just two offers in this case and one was just not there. We had two or three phone calls with them. One was interesting, right? I was traveling to Dallas so I’m on a conference call with Mike and the buyer and I’m actually going through TSA security on the conference call. And thankfully Mike can talk folks. So he was talking as I put my headset down and went through security. I picked it up on the other end and you were still talking. And you had a terrible cold.
Mike: Yeah, that was a pretty embarrassing call.
Joe: It was great though and the thing that you do so incredibly well is you instill confidence in the buyers. You’re honest. People trust you. And it made them … anybody that had the opportunity to talk with you I think wanted to make an offer if they could pull it together. But we couldn’t do an SBA buyer because of that commingling issue so we were focused primarily on cash buyers. Keep in mind though that not all SBA buyers don’t have the cash. Many of them do they just prefer to make their money go further with an SBA loan. So I think we were both at ECF, that’s E-commerce Fuel, at the event down in New Orleans and I drove you nuts a few times saying I think I may have an offer right? Did I—?
Mike: It was so funny, you texted me at the opening party I think I have an offer and then you went to bed. I think like you didn’t actually have the offer yet I just think I read the text a little long but … so I was like walking around the entire thing looking like anybody know where Joe Valley is? Like I want to know where Joe Valley is.
Joe: Yeah, I think I heard somebody say Joe likes to go to bed early. He doesn’t stay up late at these events. He’s probably in bed. And that … I felt a little embarrassed there. I’m like okay I’m getting a reputation for going bed by nine. But we ended up not going under LOI—
Mike: [inaudible 00:27:07.7] morning than I did.
Joe: I think I probably did. I was really hopeful that we could go under LOI while at E-commerce Fuel because that would be a great feather in your cap and mine. We would be able to have a drink there and celebrate. But it didn’t quite work. It took an extra … probably four or five days. But we had some challenges with the business. We ended up getting fairly close and I’ll do the math as you answer this next question in terms of that asking price; that 3.2 multiple. But we had some challenges and the big challenge was something you talked about earlier. One of these big issues that you’ve got is you’re taking all the profits from the business and putting it back into inventory. And when you have a business that’s growing at the rate that yours was that’s a lot of inventory. Can you talk about that a little bit in terms of the challenges that we had there?
Mike: With inventory specifically in terms with ColorIt?
Joe: Yes.
Mike: Yeah. And this is something that we have worked really hard on in our business and we’re very [inaudible 00:28:06.7] which is that you basically want as little inventory as humanly possible at all times. I mean you don’t … there’s a lot of reasons for this. If you have too much inventory when something goes wrong like you’re stuck with a hot potato. That always sucks but probably more importantly especially when you’re in this growth phase is cash flow is the most important thing. There’s this saying that’s been around forever which is cash is king and there’s a reason for this; for every dollar that you have an excess inventory that’s a dollar that you don’t have in some new product … some new product launch or some other thing that can make you more money. And every inventory business is going to go through this. There is no inventory business I think on earth that … especially when it’s newer and growing at this speed that can plan inventory perfectly all the time. Either you’re going to err on the side of caution of not having too much inventory and be willing to run out of SKUs because of that. Or you’re going to err on the side of caution of having too much inventory and err on the side of caution of never running out of a SKU. And for me, we went with the latter because in the early days of selling on Amazon we realize that when you run out of stuff it can be really detrimental. We had one SKU that we still are trying to recover from. It’s a part of this issue here with this business sale we’re now we have too much inventory because we could never get it to recover back to the point where it was before. So we try to in our inventory business turn our inventory three to four times a year which means that you should have no more than three to four months of inventory at any one time. And with ColorIt that was definitely not the case. So it was not the case. I mean there’s a bunch of different exceptions that put things way further out than that but there was an old legacy book manufacturer that we work with that had very high MOQ’s. So if we wanted to even sell the item we had to order a year worth of it at one time. And that was a decision that we made in Q2. We had a newer product that we just started selling and it was selling really well so we’ve ordered more of it and again at their MOQ so we have more than 4 months of inventory there. And so the bottom line was that of the 300 … actually it was $400,000 in total inventory that we have for ColorIt both from stuff that’s in stock and things that we had already placed orders for that haven’t shown up yet. There was about 100 … I don’t have the numbers in front of me but $100,000-ish I think of inventory that that would take longer than 12 months to sell. And so for me because I’ve been on both sides of the fence as both a buyer and seller of businesses and I really believe living life like don’t ask others or don’t do what you want to do yourself, I realize that before we even start talking to the buyer that we probably have to make some sort of concession on the inventory. It just would be unrealistic to just be like no you’re going to the inventory and too bad because I wouldn’t feel comfortable doing that myself. The other thing that I don’t like doing is like having someone pay me with my money. So that one thing I was steadfast about was that we’re not going to take financing or delay the purchase price. I want an all cash offer for the for the purchase price but the inventory component I thought the right thing to do was to pretty quickly acquiesce and come into a middle ground with a buyer. So what we had agreed to do was, first of all, there was one SKU that I admit that just doesn’t sell well. It was a bad buy on us. We just rid it off 100%. It’s about $8,000 dollars. They can either … they were in a trash can if they want to transfer or they can keep it and do whatever they want with. There were a couple of SKUs that I kind of conceded to that were slower movers that I felt like was going to be kind of detrimental to their business to buy at with 24 months with the inventory at face value. So what we agreed to was we’ll sell you anything that we think is going take longer than 12 months within that inventory at a 50% haircut. We’ll just write off half of it and you can buy it for 50% off. So now you … yes, you carrying more inventory but you’re buying it at a price that makes sense to carry it. And then the third group of SKUs were things that were basically like in this 12 to 18 month window, they weren’t really that low for stock, and the biggest culprit of that was this new item that we’re trending higher on. So I think ultimately and I convinced the buyer ultimately especially once the Christmas season comes they aren’t going to have … they aren’t going to actually have more than 12 months with the inventory. So we agreed that even though our forecast shows it’s going to take more than 12 months to sell it’s because we were using like a January sales number for that we weren’t including sales growth in that forecast and we also weren’t including what I believe that was going to happen in December which is December is about 3X any other month in our business. So ultimately we wrote off $40,000 with the inventory and agree to give them 12 months financing on the inventory at 5% interest which basically I think helps normalize that situation for them. And it’s also something that I can tolerate as well.
Joe: Yeah, and it happened and then we succeeded with it A. because of you; the likability and trust factor. But you have something that I preach again and that’s when you’ve got an inventory based business you should have inventory aging reports. Sophisticated buyers are going to ask for them and they’re going to want to see the inventory by SKU when you bought the inventory and how old it is, how many months you’ve got. As Mike said you want to turn your inventory every three to four months if you can but in his situation, it was 9, 12, 18 months in some rare instances. And so on that inventory report one of the key things that your buyer Matt said that made a difference for him in sealing the steel and getting it done was the inventory aging report and the notes that you put by each SKU and right there in one of them you said this is all inventory and it’s not going to sell so we’ll write this off. You just acquiesced on that 8,000. He didn’t ask for it. You just put it in there because you knew it was the right thing to do. And then you went line by line on every other SKU and justified the 100% value or where you needed to discount. And let me just say for everybody listening, it is rare to need to take a note on inventory. It’s rare to have to discount it. But when you’ve got that much you’ve got to do the right thing. What I don’t want to happen here is for buyers to go “oh well hey Jackness took a note, I’m always going to ask for a note” because that’s really, really the exception rather—
Mike: Like I wouldn’t do that with IceWraps for instance because there’s … if we were to sell that we have four months with inventory. It’s really clean and smooth. It’s a more established business with fewer SKUs. It doesn’t have a lot of the other things that cause us to have extra inventory. And like you said I mean just doing the right thing and being realistic of both sides. I mean this is what happens … like a lot of people when they’re sellers they want to be way up here when they’re buyers they want to be way now here and they’re just like … they have this gap in which I think that just makes them not the best of human beings right? I mean you’ve got to be like more in the middle and realize the person that’s buying and what they’re thinking and what their [inaudible 00:35:24.6] is. And conversely when you’re in the sell side be thinking about as well. It’s not always just about you. There is another side of the coin. And I wish our politicians are covering this a little bit as well but it’s just good business it’s being a good human being. It’s what makes deals get done. It’s just doing the right thing and being fair about it; being equitable about it. I could … I just … I would feel like a dirty shyster if I have that guy by that one SKU that I know … like he doesn’t know the business as well as I do. I know that one SKU [inaudible 00:36:00.9] it’s been around here for two years. No matter how hard we try to sell it, we threw it at a 50% off sale or we even did a 75% off sale around Christmas to try to get rid of some of them. People just don’t like that title. It was the one title that we made out of 25, it’s a pretty good track record but one title out of 25 that was just this complete failure. I’m like how could you have someone take that? That’s just basically like I’m stealing from them or trying to pull the rug over their head. And you know when they discover that later which they probably will in due diligence they’re not going to trust you.
Joe: Yeah, exactly I was just going to say that. They are going to discover in due diligence. And I’ll tell you what for folks listening, we’re going to run a little bit long on this episode. I’m going to lock this all up in one episode instead of doing two series here. The due diligence process would reveal anything like that so you need to get ahead of it. You have to be a good human being. This is a transaction that has to end with two satisfied individuals or entities at the closing table; that’s the buyer and the seller. It’s not winner takes all because the buyer is putting their life savings on the line again and they can walk away at any time. If you fake it, lie, cheat, or steal, it is going to be discovered in due diligence. More and more folks are hiring Centurica, your buyer is. That’s Chris Yates’ team. Chris owns the company called Centurica. C-E-N-T-U-R-I-C-A, they do due diligence for buyers. And honestly, as a broker, I love it when they join the team because they’re working for the buyer. And I have yet to see a deal go sideways on any of the listings that we’ve put out. What they do more than anything else is they reinstill confidence that the numbers are right, that the seller presented information, and they create a roadmap to growth. They can point out certain things where there are flaws and sometimes it’s a little scary but the buyer goes oh okay that’s a flaw, I can fix that. I can make this better. And it’s a path growth that we aren’t able to do on the client interview which is great. One other thing I just want to say that we won’t get into in great detail but without a question when you plan to sell instead of decide to sell, one of the things that you should always do, your partner Dave did it, is to take a look at your cost of goods sold. And if there’s a possibility that you can renegotiate your cost of goods sold 12 months out in advance and reduce that cost of goods sold, for every $10,000.00 you save you’re going to wind up with at least 2 ½ to 3 ½ times that depending upon your business and the trends and whatnot. Mike, you did it but you were able to renegotiate the cost of goods sold on just one of your SKU’s and you placed an order for it so was locked in and loaded and the future sales would all be locked in at that lower cost of goods sold. And you sold through all of the other stuff at a higher price. So we were able to increase your seller’s discretionary earnings by a total of $43,000 on that overall. And it was just because of that one SKU where you were able to renegotiate the cost of goods sold. In hindsight Mike do you wish you had done it on all of the other SKUs as well?
Mike: Yeah I mean I don’t think this is necessarily a selling your business thing more than this is just good business at that time.
Joe: Yeah.
Mike: What I’ve realized again after four plus years of importing stuff from China is that I wasn’t as good of a negotiator as I thought I was. And I’ve always thought of myself as a really good negotiator in all aspects of anything that I do in business. And we had negotiated down from the original price they gave us but it still wasn’t like the Chinese price. And when you get like a really good sourcing agent or you have someone that’s more in tune with the local business and customs there they’ll probably get a better price. And that’s what happened for us. We met somebody … and these contacts are hard to find in business. We were out there doing it all ourselves like going to the Canton Fair, walking the floor finding manufacturers, and we did that because we’re never really able to really find a good sourcing agent and didn’t really know any other way to go about it. But because … mostly because of EcomCrew which is one of these things where the more you get back in life a lot of times the more you get rewarded. A lot of things we do in EcomCrew we don’t get anything direct for our time for what we do. Like most of the stuff is just giving people free information and giving back to the community but what I found that happens in these types of situations is that makes relationships with people and the people you meet they know people that makes relationships with other people and eventually that path led to us finding this amazing sourcing agent that not only is he helping with ColorIt but everything else that we’re doing now. And he was in our office here one day and we were actually sourcing something else for our tactical brand. I wasn’t even looking to resource price I was looking to source new stuff. We were just chit chatting and we have this display up on our wall of all of our products and he is like what if I try to go source this for you? What do you pay for it if I can do better when you buy it from me? And I was like well man I’m also like not just about money. I’m really about relationships. I really like the factory I work with. We’ve been working with them for a while. It had to be like one hell of a cost savings for me. Like if it was I’m going to save you know a couple $1,000 here and there it’s not worth it for me to blow that up. But he came back and was able to reduce the price of that particular thing from … well, he reduced it by 16% is what it was; which is massive. It’s like this ridiculous cost savings. And at the same time the other factory as much as I … it’s so funny like I’m really big on relationships and I was really concerned about them they actually copied our product during this process and even used our [inaudible 00:41:30.2] that we had paid for and everything and released our product to someone else. Sold our product to someone else. Which we then have to go spend money on a lawsuit to fight them which we got them to stop but … so between those two things we switched. Now the switch engine is going out and repricing our stuff and that’s going to end up benefiting the buyer way more than it is for us on ColorIt which is fine. But I guess the end result is you should always be looking at price. Even when you think you have the best price you probably don’t. There was a great … a presentation at ECF about this as well when it came to shipping rates. I don’t know if you saw Craig Gentry’s presentation on FedEx and UPS when he was just like if you think you have great rates you don’t. Like there’s … you can still do better because there’s still another … they make you feel like you’re getting the best deal ever because they’re really good at negotiating. And it was similar with our products and we realize that we could be saving quite a bit. I mean 16% percent is a huge difference on COGS … I mean it ends up in your net profit. It’s way more than 16% percent increase rate because it’s going to be SKUed. It makes you … you could just throw money around the bottom line. So yeah I mean it was massive and the timing was great because we did get some benefit. But yes I wish that we had time to go through and renegotiate all those SKUs for sure.
Joe: Yeah and I think you said it best. It’s just good business. It makes smart business sense. Not necessarily sorry for the exit planning and the eventual exit and sale of your business. Can you say one more time what Dave always says it’s not profit it’s—?
Mike: Yes. Revenues are vanity and profits are sanity.
Joe: Perfect.
Mike: I’m sorry I’m going to go off on a tangent; another tangent. [Inaudible 00:43:05.7] I got you and just like people are like counting their chest. Like I’m a seven figure seller and well I’m an eight figure seller and I sold this stuff … no one ever goes around saying well I sold 10 million dollars of stuff last year but I actually lost money. I mean there are plenty of businesses out there that are like that. It’s very easy to get in that trap because it’s actually pretty easy to sell stuff online. You can just spend way too much money on advertising and you can sell stuff but the profit is what really actually matters.
Joe: Absolutely and that’s where these marketplace valuations are. It’s on the profits so discretionary earnings. All right so look I want to read one more thing and I’m going to wrap it up. I’ve said that you the seller, in this case, you Mike makes a huge difference in the saleability if that’s a word, of your business. How you act prior to selling the business, how you manage your business, and how you represent yourself all throughout makes an enormous difference. And the way that you handled yourself on the client interview, on the recorded interview that we did as part of the package, on the conference calls with buyers, in the inventory challenges that we had, in writing those notes there, and just acquiescing on that $8,000 of inventory that you knew was no good; it all made the difference and it’s why we’re under Letter Of Intent. I did the math. We’re actually under Letter Of Intent at 96% of the list price of the business. Again the inventory we’re doing on a note which we don’t love but sometimes you have to do that. I want to just read an e-mail that you sent to Matt, your buyer within a couple of hours of when we were under Letter Of Intent to just reemphasize what’s important and the way that a buyer should treat their sellers … or seller should treat their buyer. So here we go. I feel like I’m in second grade standing up and reading this—
Mike: I was not planning on this being read but it’s okay read it. Go on.
Joe: It says, Matt … his first name is Matt we’re not going to say what his last name is. I just received the signed LOI from you and wanted to take a minute to thank you for putting your faith in me and my love child ColorIt. It’s been one heck of a ride but I’m ready to pass off the baton and experience a year or two of not having too much on my plate. Of course, I realize there is still a lot to accomplish to get to the finish line but I wanted to say cheers. With the growth rate of ColorIt along with some of the other fundamentals, I’m convinced this will be your best purchase to date. My goal is to make sure that it becomes a reality for you as we progress through the transition. I look forward to working with you in that regard over the next few months. Mike. Guys, that is the way to transact business. It’s just the right thing to do and it feels good. And I can tell you [inaudible 00:45:45.4] 80% year over year growth in December and didn’t even mention it 74% year over year growth in January. It made a huge difference and Matt making an offer at 96% of the list price. But this kind of thing, the way Mike handled himself as a professional, as a good human being in this entire process sealed the deal ultimately. So Mike, thank you. I appreciate the way that it’s gone so far. I think what we’ll do is have a follow up episode to talk about due diligence and the training and transition and how the transaction wound up at the end of the process with this closing that we’ve got if you wanted to come back on.
Mike: Yeah. Can I say one thing about the letter that I wrote?
Joe: Of course.
Mike: Since you took the time to read it I just … I got to preach because I’ve been on both sides of these deals. There have been times where I’ve been the buyer and at that moment that you sign the LOI there’s always this anxiety, right? Where you like man I’m about to jump into this thing and you don’t necessarily know what you’re getting … everything that you’re getting yourself into. And I just wanted to let the guy know that first of all I appreciate him again like it was sincere like I appreciate him … this was like now the sales person parts over like I’m not trying to sell him anything. It’s always awkward when you’re saying stuff in the call part of it. It almost sounds manufactured even though I don’t do that but I’m sure to them it comes off as like this guy is probably just saying this to get me to write a check. But it’s done. The finish line is there from that perspective I just … and I do want it to be a success story. I want the guy to buy it and look back at these years later and feel like he made the right decision. And yeah that was really all; just kind of being sincere about it. And I think all too often again people are more way about themselves they’d be all high fiving everybody and saying that we got an LOI and celebrating their success more than thinking about what this guy’s about to endeavor in. And I think that’s important.
Joe: I appreciate that and the last thing I’ll say is what I said to everyone which is we’re under Letter Of Intent. There’s no guarantee.
Mike: You’re right; the money is not in the bank yet for sure.
Joe: It’s not on the bank yet. So let’s have another killer month in February. We’ll get through all of this. Due diligence is very detailed but again they’ve got Centurica doing it for them. We’ve got to do a lot of work but we know it would be done right. And that emotion will be left out of it as much as possible and it’d be math and logic and we’ll get through it. And then we’ll have you back on the podcast to maybe high five. And maybe we’ll get the buyer Matt on it as well.
Mike: Yeah, I think it’ll be cool to have him and come join us and talk about both sides.
Joe: Alright, I’m looking forward to it Mike. You’re a good man I’m glad to do business with you. I look forward to hearing you back on the podcast.
Mike: Thanks, Joe.
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