A PE Buyer's Playbook for Shopify Businesses
"You would probably prefer to take money from Tony Soprano."
Jeremy Horowitz has spent a decade in the Shopify ecosystem, scaled brands at Gorgias, and now runs a PE fund that's reviewed nearly 500 deals. He acquired a WhatsApp marketing app called Coco AI and he's still hunting for his next Shopify brand in the $10-100M range. We get into what actually makes a business sellable (and what kills a deal instantly), how earnouts and seller notes really work, why DTC as we knew it is dead, and his scorching take on why Shopify Capital loans are worse than credit card debt at 40% effective interest.
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The Unofficial Shopify Podcast is hosted by Kurt Elster and explores the stories behind successful Shopify stores. Get actionable insights, practical strategies, and proven tactics from entrepreneurs who've built thriving ecommerce businesses.
00:00
On today's episode of the Unofficial Shopify podcast, we're talking acquisitions and scaling
00:06
and well, the big money stuff that is really fascinating. Jeremy Horowitz is joining us and
00:13
he's got the experience. He spent a decade scaling Shopify plus brands and apps, including
00:18
gorgeous, some others you may recognize, and then launched his own PE fund. All right,
00:23
that's where the big money stuff comes in as soon as I hear private equity.
00:28
And he is attempting to acquire Shopify apps, but what's so fascinating is he has been building in
00:33
public, talking about it via a newsletter in LinkedIn and has finally picked one in a space
00:38
and has, well, all kinds of contrarian hot take ideas that of course were catnap to a podcast
00:44
host like me. I want to hear it. I want to learn from his experience on growing these apps and,
00:50
well, spending quite a lot of money on them. So, Mr. Horowitz, Jeremy Horowitz, what...
00:56
Well, welcome to the show. Thanks, Jeremy. I'm really excited to be back. I think it's been
01:01
five years since the last time we did a podcast together. So, really excited to dive in. A lot
01:06
has changed since I think 2021, 2022. Yeah, wow. That's a while ago. So, you acquired an app.
01:16
Let's name that upfront. What is this new acquisition? Yeah. So, a little over a year
01:23
ago, we acquired a Shopify app called Cocoa AI, which is WhatsApp marketing, all your campaigns,
01:30
automations, and then an AI sales agent on the backend. Yeah, we acquired it from a team out of
01:35
Paris and have been taking over and scaling it under our fund because Ventures, where the quick
01:40
model is we either acquire 10 to $100 million Shopify brands and scale them up or one to 10
01:46
million ARSAS businesses and scale them up as well. Essentially, everything is related to an
01:51
e-commerce business, which at this point basically means a Shopify business.
01:54
Your career, your adult experience, it's all e-com, isn't it?
01:59
99%. I started an HR company and software out of college and then started building magento
02:09
connections. And then from there, basically, how I got into Shopify was migrating sites off of
02:14
WordPress and magento onto Shopify. That was over a decade ago. And then, yeah,
02:18
I haven't really looked back since then. One of your early successes was a magento
02:23
store, I believe. Ew.
02:25
But it was aftermarket automotive. That's my specialty.
02:28
Yeah. I feel like everyone in e-commerce, if you do this for long enough, you have to touch it.
02:34
Essentially, my partner who I started the fund with had done this before. He acquired an automotive
02:39
aftermarket business. We scaled it up and then almost 15, 20 years ago, two SaaS companies spun
02:46
out of that model. So essentially, what were the problems that the what's called the platform
02:51
business or the main business has? What's some software that we can solve those problems with?
02:55
And then essentially, we figured out other customers had it. The late 2018, 2019, all three
03:00
of those businesses exited. And then we started the current fund because ventures to essentially
03:06
replicate that model. So what's a really big brand that we can grow and we can scale. And then what
03:11
are software businesses that other e-commerce brands will have similar problems we can
03:17
sell into similar models. And we essentially just reverse it this time when we bought the
03:22
software business first.
03:23
So how long you were at Gorgias leading Ecosystem Marketing?
03:29
About a year, two years ago now, I love Gorgias where I ran a lot of their big marketing programs,
03:35
especially on the partnerships and events social side. And then we started the fund again,
03:40
where then yeah, about a year of searching, we ended up acquiring the cocoa as our first acquisition.
03:44
That I found fascinating. You started writing about it online and you're saying, "Hey,
03:49
I'm looking for an acquisition." And you had a very clear picture in your head. It seemed
03:55
of like, "Well, this is what makes a good acquisition for us." You didn't just stumble
03:59
into it. It sounded like it took you a lot of time and didn't you look at hundreds of these things?
04:05
Yeah, it probably started in 2022. We were doing some early stage checks like Angel,
04:11
VC style checks. And then we were like, "We don't really want to do this. This isn't a great fit for
04:15
us." So we wanted to get back in. We started doing some sourcing and diligence for other
04:19
prior equity firms. We were like the E-com guys where a big prior equity firm would be looking
04:24
at a deal. They'd call us in to look at it. We got that taste again of like, "We want to do this
04:29
again." And so yeah, between my LinkedIn, which has been just a great... And the newsletter,
04:35
which has been a great source of deals, I probably looked through about... Now I'm probably close to
04:39
500. We probably looked through about four, 450 before we bought cocoa. It's been an insane five
04:45
years of looking at like, from the 2020 just surge for the collapse to now the, we'll call it the
04:52
Bumby ride from here. Yeah, we looked at a ton, mostly on the brand side. We looked at a lot of
04:57
brands, especially in that like 10 to 100 mil range. And then, yeah, actually it all came together
05:02
through LinkedIn. The founders of cocoa reached out to me. They're like, "Hey, we see that you're
05:07
looking to buy software businesses." We talked and then about three, four months later, we decided to
05:12
acquire it. It was on the deal. And out of 500 deals, what's the thing that makes
05:18
cocoa this WhatsApp, a WhatsApp app for Shopify merchants? What made that one stand out above the
05:25
other 499? Okay, where cocoa fit was, it was a very contrarian bet that I was very bullish on.
05:32
So if anybody's been listening to podcasts long enough, the last time I was on the podcast,
05:35
I was giving a playbook for how SMS marketing is working at the time. And very early in the SMS
05:41
evolution, now everybody has as a channel in the States, it's a very popular channel.
05:46
I noticed from our research that it's the exact same thing in Europe and honestly the rest of the
05:52
world other than North America and some Asian countries like China that have their own version
05:56
of WhatsApp. Basically everyone else in the world uses WhatsApp. And so the big insight there was,
06:01
one, the app was just growing incredibly quickly. I'd very rarely seen zero to, I can't publicly
06:08
disclose it, but zero to X scale of revenue. You can probably intimate based on our criteria
06:15
in such a short period of time. The other piece was that contrarian bet of the rest of the world
06:21
isn't really doing, there's no equivalent to SMS, WhatsApp is that channel. And we thought cocoa was
06:27
a great bet in that market. And then the third piece was, can only brands are just really hard
06:34
to acquire right now. We can get into why, but with tariffs with all of the other uncertainty.
06:42
Well, it sounds like excitement around AI and uncertainty around tariffs meant
06:49
SaaS was the way to go. It was just an easier bet, an easier sell at the time. And then
06:56
within that, just from my experience, WhatsApp is such an untapped opportunity in the US where all
07:06
of Europe, this is the default, Latin America, this is the default. The rest of the world
07:11
is using WhatsApp and the US is catching up to it. And so I absolutely agree with you on your thesis
07:19
that like, "Oh, there's a big opportunity with this here." And then you've just coupled the
07:24
excitement of AI to it to make investment a little bit easier, it sounds like.
07:28
Yeah, exactly. And the business doubled last year, we're on pace to double again this year. So
07:35
our space is so hard because you have to have the perfect timing of when you acquire it to when it's
07:44
going to grow to when you also exit it. The big difference of how private equity works and most
07:49
people who are not VC style investors is VCs are like, "Okay, we're going to put a ton of money in,
07:54
we just want you to go on a rocket ship and that rocket ship can take 10, 15 years, sometimes
07:59
longer." But we just wanted to see the single vertical versus the way our model works is two
08:05
parts. One, we don't make 10 bets hoping one will work, we make two bets hoping and need
08:10
two to work. The other part of that is we have a very defined timeline, like our investors expect
08:14
their capital back in the next three to five years. So it also has to be a market where the
08:19
thing is growing, it doesn't need to be like an X and go vertical year over year. But we do have
08:24
to hit certain targets in the next, from a year ago, three to five, now it's really kind of three
08:29
to four years, where we have to get it to a certain place, we have to get it to also a place
08:33
where it is sellable again, and we can return our capital to our market.
08:38
And part of it is what the current market is. There are the appetite, the demand for
08:47
business acquisitions changes over time. And often, I suspect it really is tied to what the
08:52
current interest rate is. And when we had 0% interest rate over the pandemic,
08:56
suddenly there were a lot more businesses being purchased, I bet.
08:59
Yeah, exactly. And we can get in, if you want to get in, we can get in some of the
09:04
crazy financial engineering and politely magic that some companies were doing, where, yeah,
09:12
our returns are determined by how much equity is put into a business. So let's just say that
09:18
a business is going to sell for $10 million. If we have to come $2 million in equity,
09:23
like actual cash out of someone's pocket that we have to go raise from versus $5 million,
09:28
the business sells for 50 at the end of the day, a return on $2 million versus 50
09:33
is much better than a return on $5 versus 50. Like a profit of 25x return versus a 5x return.
09:40
So our investor in one scenario is making 25 times their money or five times their money.
09:46
And it's a very big difference for them. And then also our entire financials and mechanics
09:51
are built on their return. So the way that we think about it is, and then the other portion
09:57
of that we can get into deal structures, but most of the time the balance level will come from
10:00
debt for some other type of vehicle. And yeah, when your interest rate is zero, so your costs
10:04
to get that $5 million or $8 million is zero, you can greatly change the mechanics. I know some deals
10:10
where some brands were bought for zero equity and a hundred percent debt because interest rates were
10:15
so cheap. And the type of the, I'll say the risk appetite surprisingly is actually much higher,
10:21
where I'm willing to give you a much higher valuation and buy a lot more deals where my
10:26
interest rates are cheap because it's less risk for my business as the acquirer. I know that sounds
10:33
crazy, but it's very counterintuitive to how you think about a business, but it's a lot less risk
10:38
because I need to go raise less equity, which is the risk for my business as a prior equity
10:44
investor. And so yeah, when interest rates spike, the other component is also when you have a
10:50
physical goods business, you have to buy inventory, which then is another layer of debt, right? That
10:55
$10 million enterprise value of a business. Most business owners also probably want a million or
11:00
$2 million for the value of their inventory that's sitting, that they sell to make the business worth
11:05
that. Now I've got to go raise even more debt to go buy the inventory to make sure that all sells.
11:10
And all of those mechanics greatly change the math and the calculus that we need to do of,
11:14
is this a good investment? Is this a good investment for right now? And how are we actually
11:19
going to generate a return on buying this thing with all this inventory today, grow it, scale it,
11:25
and exit it. So I want to dive into your acquisition criteria because you made it public,
11:33
but walk us through it. You're evaluating a Shopify store. What are we looking at first?
11:39
Yeah. So we specifically are looking for profitable and businesses that have what are
11:44
called Hebita. You will also hear this referred to as net income or SDE, seller discretionary
11:50
earnings in English, just the actual profit at the end of the day that the business generates
11:54
where you take all the sales and take out all the costs. And what we are looking for
12:00
is a business that does about one to 10 million in that profit number, which usually correlates
12:06
for the average e-commerce brand to about 10 to a hundred million dollars in top line sales,
12:11
assuming that the average e-commerce brand usually does about 10 to 15% in net profit
12:17
for their top line. The other piece that we specifically look for, which is not
12:21
standard, but something that's important to us is that it's 50% direct to the consumer.
12:27
So this is essentially the majority of their sales come from Shopify.
12:30
Why that's important to us is we've just been burned so many times by Amazon and retail
12:36
businesses in our careers that we like to have the majority come from channels that we know and we
12:42
can control. That's also our specialty. There are tons of acquirers that are looking for Amazon
12:47
specific businesses, retail specific businesses. The really important thing that if you are looking
12:52
to sell your business to always think through is why is this a good fit for them? We look at a lot
12:58
of those 400X deals where a lot of 55% Amazon businesses or majority retail businesses, great
13:05
businesses, probably a good buyer for someone else. It wasn't a good fit for us. The second piece is
13:11
be weird businesses. So we don't want to get into the thousandth yoga pant business or the 500
13:17
clean beauty brand, things like that. I'm sure as everyone who's watching this podcast knows,
13:25
every ad platform is getting more and more competitive. Our entire model is quickly
13:29
and profitably growing something from point A to point B, unless there's something incredibly
13:35
even if there is honestly something incredibly unique about a yoga pants business or something
13:38
like that. I've just seen too many of them. It's too competitive of a space. Whereas we like weird
13:44
businesses and we like businesses that have some unique angle to them that if we do need to go and
13:50
spend a bunch of money on advertising, we can have something that really stands out. Preferably,
13:55
though, it has some other like paid media is basically a foregone conclusion that it needs
14:00
to have. But preferably we like to see some other element that we can push in some other marketing
14:05
channel. That could be influencer affiliate, SEO, things like that. It could also be B2B sales
14:10
channels or local retail arms like veterinarians or doctor's offices or local gyms. That is a
14:19
different and diversified revenue stream that we can go grow it as well because every channel
14:25
eventually gets too expensive to continue scaling in. So we're looking for that unique
14:29
angle in our product that we wouldn't go to for the fitness and apparel brand. We can't just go to
14:36
any local gym and say, "Hey, we have yoga pants." It's not going to be a compelling new product for
14:40
them that makes their business more valuable and wants them to buy our product.
14:44
Do you care why the seller is selling?
14:48
Absolutely. That's going to be one of the most important reasons. And honestly,
14:53
I have done this hundreds of times now is usually the worst answered question in the entire process.
15:00
And it is probably one of the top three most important answers to have prepared.
15:06
The reason why is I can't tell you how you are selling your baby. I stepped in and I am CEO and
15:15
operating Coco, our first acquisition. I started a whole bunch of companies. So I understand the
15:20
process. But I can't tell you how many of these things fall through because someone's either like
15:25
they want to sell, but actually they don't want to sell. Or they have these clauses and components
15:29
where they say one thing in the beginning of the process and it's really something else that's
15:32
important to them at the end. And it is a game of poker. You do need to decide when you want to
15:38
reveal certain information. But yeah, I can't say how many deals we've also passed on because I asked
15:44
why are you selling right now? What's the ideal transaction look like for you? What do you want
15:48
to do after this? And they just don't have a clear answer. And it's just like, it's one of those
15:55
things that as you do it, it's really, really hard. But the deals that actually move very,
15:59
very well, the founder has a very, very clear reason of like, "Hey, I'm looking to sell this.
16:03
I'm looking to sell it by X event or X date. And we're ready to move on to the next thing."
16:10
Those deals I've always found are more successful because the other piece that's really important
16:17
if you've never gone through this experience before is expectation setting. It's a little bit of a
16:22
lot of these scenarios of the world is your oyster. I'm looking to sell my business. I'm hoping to
16:27
get as much money for it as possible. I'm hoping to get everything I want out of it.
16:30
That's the seller's experience, the person who owns the business, really. The buyer's experience
16:36
is like, "I need to fit very, very, very specific criteria for this to work for me." That's also why
16:41
we put our criteria out publicly is I just want to be very transparent and also candidly for me,
16:46
myself, which is just saves a ton of time. I can't tell you how many people they see my LinkedIn
16:51
buy. I want to get pitches to start a gym or a restaurant or stuff that I have no business
16:56
investing money in. Really being clear of these are the important things to me because the other
17:03
piece also is this also just becomes an enormous negotiation of every point and every little thing
17:08
needs to be negotiated. Setting the expectations of this is what I'm looking for. This is what's
17:14
important to me early on is really, really important because the other side from our perspective,
17:18
we're looking through every single thing you do and you say. From our downside protection,
17:24
we just need to make sure you're not lying to us. If you say something is important to you over here
17:28
and then when we actually get three weeks in or three months, well, God, I hope it's never three
17:32
months into diligence, but some of those deals are more complicated, three months into diligence.
17:37
And you said something three weeks ago that was this and now it's actually this over here.
17:42
That's an enormous red flag for us because these aren't public companies. This isn't gap-validated
17:47
legal repercussions of how you're representing your information. We essentially have to do this
17:52
all based on what's said, what's in the data that were presented. And so we're also looking through
17:57
the through points of, "Okay, the reason why they're selling is important to them. Does that match up
18:03
to what they actually say and what they actually do?" Because I can't tell you how many businesses
18:08
I've looked at where someone basically ran the business as far as they could run it. They're
18:12
discounting it into the ground and they're just looking to dump it. And oh, there's so much growth
18:17
potential to this thing and I don't feel like I'm the right person. I can't tell you how many times
18:21
I've heard that. Anyway, when we look at it, it's like, "Okay, that's clearly not the truth." And so
18:26
it's one of those things from our side where we have to assume the best and the worst in every
18:31
people and every deal of they're telling us the truth until they tell us so much that we stop
18:36
believing them. And so having that answer really, really dialed in also explains why one of my
18:42
LPs loves the "All Your Daughters" question. This business is so great. Why are they selling?
18:46
And so you need to be prepared for all of those different types of scenarios and questions and
18:53
all those types of things. I'm going to try to freak anybody out of like, "Don't overthink it,"
18:56
but really have a clear like, "I started this business because I had this amazing idea.
19:02
It grew to this place and now I'm ready to part with it because of X, Y, and Z and truly mean it."
19:08
The other thing that I just say a word of advice as someone who's just been in this process a
19:11
couple of times is, "You have an amazing business, probably don't sell it." It's one of those classic
19:18
things and I'll start my rant here. But the businesses that everyone wants to invest in
19:24
and put their money in are probably the businesses that don't need any money and don't want to sell.
19:27
I have this buddy who we have this conversation every 18 months and he's growing the business
19:32
to a really meaningful size and he's very successful. And he's like, "Yeah, I'm thinking
19:35
about selling it." I'm like, "Do you want to sell or do you want to just fix that one part of the
19:39
business that isn't exactly how you want it to operate and usually hire somebody and fixes it?"
19:43
He's doubled or tripled his business while we've had these conversations and is doing very,
19:47
very well. And so that's the other piece of like, if you have such a golden goose and this thing is
19:53
so successful, really think through why you want to sell before you part with it. Because listen,
19:57
once we wire you that money and once we sign this final documents, the thing transfers
20:01
ownership and you do have to walk away or transition out over time. And I know so many founders who
20:06
just have remorse over signing their business because it's like, "Yeah, I took a paycheck."
20:10
But the thing ended up being super successful or I didn't find the next thing that I was really
20:13
passionate about. So also from you as the owner of the business, the thing I always love to say here
20:19
is you're the greatest investor in this business up until this point. You put your blood, sweat,
20:23
tears, times, you've grown this thing. So really think through, "Am I ready to part with this?
20:28
And what do I need for that to make the most sense to me?"
20:31
I'm glad you brought it up. I've had a lot of friends who have sold businesses and acquired
20:37
businesses and the people acquired them. They have a theory on how they're going to grow it
20:44
based on their experience and how it was represented. And most of the time, through good due
20:52
diligence, everything was represented correctly. But when it's misrepresented, that could be bad.
20:59
On the buyer side, that's where I see the regret way more often. The seller is the one who has the
21:07
opportunity and is parting with the money. I think they just inherently do more due diligence.
21:13
They think through it more versus the seller. There's just emotionally so much wrapped up in
21:20
a business when you're the one who built it over however many years versus acquiring it.
21:24
I often find people where they regret selling it either because after the fact,
21:30
the deal didn't go the way they wanted or they don't know what to do. Six to 12 months later,
21:35
they're like, "I don't know what to do with myself. What's next?" Or often, they see,
21:41
to your point, how successful the business now is. They're like, "Well, I could have done that.
21:46
Okay. I'd say it's 2020." But even like George Lucas, how much did he get for Star Wars selling
21:52
it to Disney? And even he said, once he saw what they did with it, suddenly he's like,
21:57
"Well, I wish I could have done it." The paycheck, I know the paycheck is what grabs the headline.
22:05
It is one of... I mean, I think when we look through deals, we have 167 points that we look
22:10
through and we usually negotiate. Maybe it's even more than at this point. The headline is the number
22:15
that you get is only one part of the deal. And there's so many other parts of how you built and
22:19
run your business that are really crucial. That yeah, the Star Wars is probably one of the most
22:25
successful examples in deal making history for both sides. He got one of the biggest paydays ever,
22:30
and I'm sure Disney has monetized that thing into the absolute hilt and made way, great returns on
22:35
that investment. But yeah, if he could go get a time machine, maybe he wouldn't have sold. And I
22:41
think that's really important to think through. What is important for you before you kick off
22:45
that process? Because the other thing to just prepare you is usually when you're ready to sell
22:49
your business, it's about a year long process from when you actually make the decision that,
22:54
"Hey, I want to..." Depending on the size of it, but on average, it's usually about six to 12 months
22:59
from like, "Hey, I want to sell this business," to the deal just closing. That's not even talking
23:04
about post-deal transition of if you have to stay for a year or two or there's a training period or
23:09
anything like that. And so it is a very long... This isn't a, "I want to sell this thing and it
23:14
happened. What money is in my bank account tomorrow?" So spending that time before you
23:18
really kick off that process of like, "I have that next thing in mind. That thing is way better than
23:23
what I'm doing right now and I'm ready to move on," is a major, major component of how you really
23:29
determine. At least what I would recommend is it makes everything in the process way better.
23:34
And I can't give too much experience on when I've sold these businesses, but I'll come back in a
23:39
couple of years when I do. But it just makes it a much better process for you overall and it really
23:44
reduces the remorse. For you, what's the instant deal killer? We got misrepresentation, of course,
23:52
a seller having the potentially wrong reason, and then of course, bad fit.
23:58
What else? Were you looking at it and you're just like, "Nope, out."
24:03
Yeah. So we have some specific criteria on things like financials. So we're looking for businesses
24:09
that at least about 50% to 60% gross margin. That's just because in our playbook, that's what we need
24:15
from just a business fundamentals to make things work. Really, a lot of key dependencies. So 80,
24:23
90% of the traffic comes from Meta. One person really runs the whole business, which is usually
24:29
the person trying to sell it. And nothing is documented in the business. I can't tell you how
24:33
many times I've looked through a business. I'm like, "How do you guys structure and run ads?"
24:37
And I know that sounds like a very basic question, but there's actually a lot of moving components
24:42
and usually multiple people, different types of resources, tools that you actually have to have a
24:46
deep, intimate understanding of that business and how that business works. My favorite line is,
24:50
"We're all essentially selling hamburgers, but everybody's recipe and process to make a hamburger
24:55
is what makes our business special. If I'm going to buy your business, I want to know exactly how
24:59
your hamburger is made." So those are the two or three key big ones. I would say the other really,
25:04
really big one is when their financials just don't match the story that they tell. So for anybody who
25:10
hasn't gone through this process before, usually the way that this process works is you create a
25:14
little teaser of some key metrics. It usually has some fun name like Project Shadow or Project,
25:20
I don't know, whatever clever idea, Project Fury, things like that. And then it'll be like the
25:24
teaser and the overline of, "Hey, here's the key information." And then we essentially decide,
25:28
"Hey, we want to learn more." You'll send over what's called a SIM. It's essentially a presentation or
25:33
if you ever raised before, it's basically just a deck. Here's the business, here's the key
25:37
information, here's the story. If we're interested from there, we'll jump on a call. Basically,
25:41
it's a ton of an interview. We'll just go through, we have a ton of questions that we want to know
25:45
about. We'll learn more about your business. From there, if we're interested, usually we'll ask for
25:51
what's called the data room. The data room is your key information. If you've ever raised money,
25:57
you've probably gone through this process. Your financials, so your P&L, your balance sheet,
26:01
cashflow statements, maybe some key other information that's crucial. You're a very IP
26:06
heavy business. We'll want to look at patents. If you're a very heavy ads business, we'll look
26:11
at some documentation around your ads process. A data room, it's meant to be a secure way to
26:16
share the files. Exactly. It'll usually be in some sort of like, we have to get specific access. We
26:23
usually send an NDA beforehand, we can't go run and do anything with your business or your information
26:28
after that. To answer your question, the other thing is if you've told me stuff here and your
26:33
financials don't match, or there's stuff that we've looked through your financials and there's
26:39
something sniffy or wrong, I'll usually give person the grace of over one email, a couple
26:45
questions and maybe another call. But if you're talking to an 80% gross margin business and I
26:50
cannot find a single year in your past three year financials of 80% gross margins, that's the exact
26:55
type of thing where it's always good to know your own numbers. Some of these metrics are very,
27:02
very specific and most people who build these successful businesses did not get an MBA in
27:08
e-commerce financials and all those other data points. But if you're telling me you have an 80%
27:13
gross margin business and I'm looking at 40% in your P&L, I haven't seen anything that drastic yet.
27:18
But those types of things where it's a broad, broad miss, because then also when we look at your math,
27:23
like if the math isn't interesting to us, we can't make all the other parts of the business
27:28
and the other scaffolding work. How often do you encounter a business where it's like, "Wow,
27:33
this would be really successful and attractive if it weren't for the fact that to get there,
27:38
they ended up saddled with debt?" You're actually pretty surprised. So there's two camps. We do look
27:45
at what are called distressed deals as well and it's essentially the loans that have mounted so far.
27:50
A lot of really successful D2C brands, especially the ones that have hit the market the last 12
27:56
months, don't have that much debt on them. They're actually like they've just maybe a good amount of
28:02
credit card debt and usually the founders don't pay themselves very much until the thing hits
28:06
pretty meaningful scale. But I would say that there's... Okay, so there's definitely two camps.
28:12
Then there's the bad debt businesses. You don't want to be in that category because we're buying
28:15
it for next to nothing. Usually when it's something that's called distressed, public brands go through
28:22
bankruptcy or what's called Chapter 11. Those types of businesses were usually just buying it for
28:27
very low amounts of money to take it out. Yeah, you do not want to have an incredible amount of debt
28:34
under business. Most of these sub... We'll call it usually businesses that are around less than 5
28:42
million in net profit that are sold are sold as asset sales anyway. In English, what that means
28:47
is let's just say that I'm buying a business from Kurt. Kurt has a cool T-shirt business,
28:52
fashion apparel business doing very well. I'm going to buy his assets, but he keeps his legal
28:56
entity. So Kurt's T-shirts LLC stays under Kurt. I'll buy all of the things related to Kurt's
29:03
T-shirt businesses as assets from it. So all the debt stays in Kurt's LLC. I'm just giving Kurt
29:10
money for everything else. Then you'd have to go settle the debt. Larger businesses will be...
29:14
I'm left with the shell company that has the debt and then the things of value you take out,
29:20
we transfer out, and then you pay me. And then ideally I use that to... I take care of the debt
29:25
or whatever I'm going to do with it. Yes, hopefully you would use the proceeds from the sale to pay
29:31
off your debt first. But yes, you essentially would be legally and financially responsible for
29:38
all the pieces that happened while you owned the assets in the business. And yo, your Shopify site,
29:43
your newsletter, your subscribers, your inventory, your social handles, your ad accounts, all those
29:49
can IP, all those things. We would essentially purchase from you. And equity sale, which is
29:53
probably what people see more in headlines, is I'm going to buy Kurt LLC. And Jeremy LLC now owns
30:00
Kurt LLC and all the assets and everything underneath it. In that deal, which is very,
30:06
very rare for these smaller deals, yes, then the debt on your books greatly matters because
30:12
it's essentially a subtraction item from everything that we're buying for the value.
30:17
If you have a $10 million business, your business is worth 10 million, but you've got 2 million in
30:21
debt. Well, we're only actually going to buy it for 8 million because now we have to assume your
30:25
2 million... It's not always that neat, but we're going to assume your 2 million of debt as part
30:29
of our acquisition. Very, very, very rare though. Most of these deals will just be an asset sale,
30:34
where the owner will deal with the debt after the transaction closes.
30:39
The other way I see people get burned, my grandfather-in-law is a JD, CPA in Silicon
30:47
Valley. And so we've seen a lot of these deals. And being a lawyer, he's seen often like, "Well,
30:53
where do they go wrong? Where do they go bad after the fact?" And it's on earn out deals,
30:58
especially where the owner stays on. Like, "Hey, we're going to give you 80% of the equity or
31:05
whatever. You're going to get a lump sum and you're going to stay on with a salary for X number of
31:09
years. And then when we sell it, you're going to get a big payout." But when that time comes and
31:14
the PE firm starts getting ready to sell it, magically, something always went wrong and the
31:18
person gets forced out because they want them off the cap table and capture more value for the
31:25
PE firm. And I've seen it enough times now where I'm like, "Oh, that's a thing to watch out for."
31:31
For the person selling their business, should they always be trying to get that payout up front?
31:38
Or can you make these milestone payments where you get equity later after whatever? Can those
31:46
be made to work? Or is it just asking for a dispute? Yeah. So I think at the moment of transaction,
31:54
essentially the balance is the investors want to put as little down at the moment as possible to
32:00
de-risk their investment. And the seller wants to capture as much money as possible to essentially
32:05
de-risk their future. These transactions have this incredibly beautiful timeline math to them,
32:11
where the investors worry that this thing goes to zero afterwards. And the founders worry that
32:18
they're not going to get the future payouts. Everybody's worried the thing goes to zero.
32:21
It's just how you do the math around that. What I'll say is the delta between the enterprise value
32:28
of the deal, like $10 million, we'll just use Kurt's Black Tea Company as an example again,
32:33
or the $10 million value of that, the delta between the $10 million that the business is worth
32:39
and the amount of money that if Kurt's the seller here would walk away on day one,
32:43
is essentially the confidence that what you say and your projections of the future are accurate.
32:48
So these deals where you see big components of earnouts is because essentially what the buyer
32:54
is saying is, "That's great. I would love to see it, but I don't have the confidence based on what
32:59
I'm seeing in today's business. That's a guaranteed payment." And just for clarification,
33:07
it's very, very rare that any of these deals get done in all cash up close.
33:13
I did an SMB report for Quiet Light two years ago where we looked through hundreds of their deals.
33:19
I've looked through a lot of M&A for public companies.
33:22
Quiet Light is the business program.
33:24
Yeah, Quiet Light is probably like if you're looking to sell your business, they're definitely
33:29
one of the more best and reputable places that will essentially run the process for you. They
33:35
are the person that you go to, they collect everything, they go find the buyers, they go
33:40
set all this up and they control the sales process. And look through a bunch of this information.
33:47
There will be some component of cash at close plus there's a whole bunch of other things that
33:52
you can negotiate in value. And that's also why I said earlier, really clearly know what you want
33:56
and what's important to you. I've heard deals where sometimes people get a Rolex instead of cash.
34:01
I've also heard some deals where the founder takes less money, but they don't change the name of the
34:06
business. There's a huge spectrum to what the value of the deal is. But essentially,
34:10
answer your question on earnouts. You also hear things like seller notes, which is essentially
34:14
where the seller loans the acquirers X value of the business and then they get paid out on a loan.
34:22
Oh yeah, seller finance deals. Those are crazy.
34:24
Yeah. I'd say those two are fair or I think also we were a little bit described as what's called
34:30
an equity rollover. So we buy the assets out of CURT LLC for $10 million. We pay CURT $8 million
34:38
and we roll 20% or $2 million. So now CURT owns 20% of new fashion company. And that's part of the
34:47
value that you get for $10 million worth of your business. All of those mechanics are essentially
34:53
as a seller, you need to prove to me essentially that these milestones are going to hit and that
35:00
you're really, really confident. And yes, hire a good lawyer. Make sure you read and review the
35:07
terms because it's the same thing as venture capital. The stories of the founder raised a
35:12
bunch of money and then they sold for a big number of it. The founder got nothing because
35:15
they didn't read the terms and how they got the money. And yeah, the terms, honestly, most of the
35:21
terms are more important than the enterprise value number because it's how you get paid and you
35:25
should be protecting yourself. But also you need to be reasonable of if you want to go chase a
35:30
really big number and you don't have some genre defining business with a ton of IP and seeing
35:36
growth incredibly profitable. The acquirer will need some protections on their side as well.
35:42
And so you really just need to think about what are your trade-offs? What are you comfortable with
35:46
taking as part of that? And really understanding like, okay, if I'm taking it or not, the last
35:52
piece is really just be very, very clear with the acquire. I think a lot of those issues and horror
35:58
stories are because the seller does not really go through what are the actual terms of the earn-out,
36:03
what is very, very clearly stated, and do we have good communication and expectation planning? Do we
36:08
have very clear milestones, goals, pieces? Because a seller note is essentially a loan, right? You're
36:14
going to get monthly payments or quarterly or annual payments back with interest. And earn-out
36:18
is essentially bonuses. Earn-out is essentially like, if you get a $2 million earn-out, when you
36:23
hit these targets, we're going to essentially give you bonuses for that $2 million. And then
36:28
equity rollover is you own a part of the business. And in that, the next part of the business,
36:34
the acquirer needs to sell it for more than what you bought it for or for anybody to make anymore.
36:38
Right. And like, so many of there's so many points in terms to dispute. If any of that's in a gray
36:47
area, years later, now suddenly, you're like, "Oh, well, we didn't think through that." And now that
36:53
becomes a thing to negotiate on, argue about. So having your ducks in a row and making sure you've
37:00
got a good lawyer seems like a requirement here. Accountants, lawyers, and brokers on the smaller
37:08
side, bankers on the larger side, all incredibly expensive. But if you have a deal that's worth it
37:12
and you structure the right terms, they pay for themselves a hundred times over.
37:17
I believe it. All right. So I want to talk to you about your experience
37:23
with... Because you have such a great view into so many businesses, but all within
37:27
e-com space, within direct to consumer. And you gave a talk called "D2C is Dead."
37:34
And I believe the... D2C is dead, long live the direct to algorithm brand. Okay.
37:41
Riff on this. Tell me about it. Yeah. So the 15 minute talk in two minutes is the concept of
37:48
go find two parts in China, throw it up on social or search, run a bunch of ads, sell a bunch of
37:53
units and scale. It doesn't really work anymore. Essentially, the... And really where I... I think
38:00
the Shopify journey and Shopify as a business would be really successful under the D2C umbrella
38:05
of e-com 1.0 was essentially like eBay. E-com 2.0 was essentially Amazon SEO based businesses and
38:12
Magento, those early, "How do we get traffic off the internet, buy our product, ship something
38:16
reasonably not too expensive?" And then Shopify really... Shopify on the back of Meta really blew
38:21
up is, "I can go find really cheap product, slap some branding on it, run a bunch of ads,
38:25
make a lot of money." The part where that kind of imploded was, D2C was supposed to be amazing
38:31
because you cut out the middle man and you had great margins and there's going to be these huge
38:34
profitable businesses that operated like software. As everybody has seen over the past 10 years,
38:39
all that money went to Meta. And so everybody now is rediscovering 10, 15 years ago the phrase
38:46
is Omni Channel, now it's called Omni Brand. I think though the major difference if you look
38:50
at the truly breakout brands, like the very, very successful ones, the comforts, the groans, the
38:56
true classics, Jones Road Beauty's Liquid Deaths, it's not just that they're spending a lot of money
39:02
on Meta. It's that they're figuring out how to go viral across all social channels at once,
39:07
then layering on a ton of paid media on top of that to then scale. And they're not a shot...
39:14
The classic question we've looked at for acquiring all these brands the last five years is,
39:17
is it a Shopify business or an Amazon business? That was going to determine your valuation and
39:22
your business and your mechanics and your models. I think it doesn't matter anymore.
39:25
These brands today are in Shopify, Amazon, retail, other marketplaces at speeds that we've just never
39:32
have really seen before. The classic advice five, 10 years ago was go scale up on Shopify to X
39:37
number of million before you even consider another sales channel. Now it's like, "Okay,
39:41
how do you go viral on TikTok shops or Instagram reels or YouTube? File as much traffic into your
39:46
site as possible, but you convert 3%." You probably know this better than I do. "How are
39:52
you on Amazon? How are you in other places already that you're capturing all that demand and just
39:57
aggressively scaling?" And I think that it's really hard. It's not an easy thing to do,
40:04
but really leveraging things like TikTok shop, like YouTube influencers. If you notice most of
40:10
the $100 million, billion dollar brands have really grown very quickly over the last five years,
40:15
they're leveraging Instagram reels, TikTok shops, or YouTube influencers very, very well. And then
40:21
essentially also using it as a massive outsourced content creation farm, where then they take what's
40:27
working, plug it all into ads, and then run it in as many channels as possible. And it's this very
40:34
weird all blitz, all channel model, which don't get me wrong, it takes a good amount of willpower
40:41
to scale that quickly. You have to be really, really diligent with cash. But the brands that are
40:48
absolutely blowing things out of the water have really mastered that. And I feel like five years
40:53
ago, it was the Dr. Squatch and they're like, "We're going to go pay a creative agency."
40:58
They're not picking on them. Poopery, there's a ton of these types of business. We don't pay a
41:02
creative agency to come up with this. The Harmon Brothers, that was the...
41:05
The Harmon Brothers, Raindrop.
41:06
The Harmon Brothers ad, right? Everybody had a Harmon Brothers ad, the funny direct,
41:10
you pay that, pay $500,000, then go spend $2 million on media on this very highly produced
41:16
social asset. I think that doesn't really work anymore. For anyone who hasn't looked at comfort,
41:23
they did half a billion last year, they're on pace to do a billion, no outside funding.
41:29
Really one of the most impressive brands in the world. Their founder, Hudson, also has very
41:33
forward shares, a lot of what they do. But essentially, they just build this affiliate
41:38
army on TikTok shops that constantly is promoting the heck out of their products.
41:42
And then they just aggressively put paid media behind the content that's working.
41:47
And so you have this very bottom up approach to what sells. The brand isn't deciding how to sell
41:53
their product. Essentially, all these influencers are. They coach them, they do all these other
41:57
things. They coach them, they make them better at it once they figure out who's working.
42:01
And then they pay them an incredible amount of money to scale their ads.
42:05
Now again, going back to the financial credits here before, good margin product,
42:08
something that is highly scalable in multiple channels. But this new brand is emerging where
42:15
it's not the, "We're going to go run meta ads." Those businesses don't really make enough money
42:20
anymore. It's this, "How do we be in all channels on social and retail?" They are as many as retail
42:25
as possible. And then just really have aggressive momentum as a brand.
42:28
You know, I've seen a few of these work that way. And once you're on, you get on TikTok shop,
42:36
and you get lucky with an influencer where suddenly they take off. And what's so interesting
42:42
about that is like, "Okay, now you have UGC, you have content you can reuse. You can post that on
42:47
the Shopify site. You can use that in ads, post it on social, take that to other channels,
42:52
and use it as inspiration." You're like, "Hey, this worked really well." And share that with
42:56
your other influencers. What I always find so fascinating is you get copycats. You get people
43:01
that you didn't recruit who are not getting any affiliate cut, but they want to ride the wave too.
43:05
They want to create successful content, whatever that hashtag is. And they go, "Create something
43:10
similar." And they're like, "Okay, well, they did it for free, but hey, let's recruit them too."
43:14
And so you can quickly... It becomes a flywheel where you... What's so smart is you've outsourced
43:19
that core content ideation and figuring out what works. Hmm. I've never... Okay.
43:26
I've been thinking about this. I saw it in action, especially with the golf brand. We work with pins
43:33
and aces where they experience this approach. But hearing you lay it out as like, "All right,
43:39
this is the very concerted way to do it." Interesting. Okay.
43:44
Yeah. The more important piece that I think everybody misses is that it's not a... So a big
43:51
piece is that you're outsourcing the ideas, but you're letting the data and the market validation
43:56
of what works actually protect your media budget. Because a lot of the classic model is you pay...
44:04
If you spend 10 grand in ads, you spend about 700 dollars creating the creative to then go
44:11
spend in the ads. But you have to get... The Harmon Brothers model was you paid and you
44:16
guessed what worked, then spent the data on it. This is to your point, people who... And the really
44:22
interesting model today is none of them are influencers anymore. It's people with a thousand
44:26
followers or even less. So you don't have to pay them any... How a lot of them are doing is you're
44:31
only getting commissions. You're giving them commissions. So they have to prove that they can
44:35
sell your product. And then you're layering on the paid media is essentially just the...
44:40
Whatever works, throw more fuel on the fire. And that's the real value is that you're not...
44:45
It's not like five years ago where you torched $10,000 in meta spend to figure out your two out
44:50
of 20 ads that work. It's you already know what's working and how can I just scale that until it
44:55
stops working? Yeah. No, it's helpful to hear it. And I think this approach...
45:02
It really depends on what your cost of goods sold is for product seeding to work. But if it's low
45:08
enough and it's practical enough, 100% is the approach I would be taking now if it wasn't
45:13
something I was already trying. Exactly. Restoration hardware can't do this tactic.
45:17
But for the normal e-com brand, it's not too expensive of a product or it's not too expensive
45:22
to ship. That's why you see a lot of fashion apparel, health wellness, beauty, skincare brands
45:27
do this, which I probably are most people in the space in general. BI wouldn't do this with
45:32
furniture cars, stuff that... Electronics.
45:35
Probably if they go to more of an old school content creation model where you're bringing
45:38
them to an experience, they create the stuff and figure it out. But yeah, the internet economics
45:43
need to be pretty cheap to ship out. At this point, I think I'm for working with something like 500,000
45:49
of these affiliates and micro creators. And yeah, I assume that their products are not super
45:56
expensive to ship a hoodie to half a million people. Yeah. And there's no break edge, you
46:01
ship it, you don't worry about it breaking in transit. It definitely... Like that is kind of
46:06
the cornerstone of it is that product seating has to be practical for you.
46:09
To wrap this up, I want to discuss one of your hot takes. And before we jump into this,
46:17
I suspect you're a Shopify ride or die, but you've got this great piece called...
46:23
You share your opinions on Shopify capital loans.
46:29
Tell me about what are your feelings on Shopify capital loans?
46:33
Yeah. So I want to preface this with I give... My entire career is built around the Shopify
46:38
ecosystem. How I make my money is investing in Shopify apps. I have also personally just been
46:43
invested in the Shopify stock for a very long time. I think I bought back in 2016, 2015 timeframe.
46:49
So I'm an enormous believer in Shopify. The reason I do this is because I want to call out the one
46:54
thing that I think is a glaringly obvious bad decision that they're making that I hope that
46:57
they correct. Sort of the way that a loving family member would. But so now that I preface all that,
47:03
yeah, Shopify payday loans or Shopify or payday loans, like the capital that they call it are
47:07
worse than mafia loans. You would probably prefer to take money from Tony Soprano. I don't want to
47:13
get too deep into the math because it's pretty boring, but you're way, way better to go deep
47:19
into credit card debt than to take one of these off. Credit card interest rates like 20% to 25%.
47:26
Most are 30% now and it's still a better annualized interest rate on it. So like, okay,
47:34
to really, really quickly just talk about it. You put money on a normal Visa Master card,
47:40
your credit card, you get 30 days to pay that money back. And then after that period,
47:45
they're going to charge you 20, 30% on an annualized basis. You'd have to carry $100,000 in a loan
47:53
over a year to pay 30%, there's like 30 grand, $30,000. Well, the other pieces is that the Visa
47:59
Mastercard or whatever your credit card provider isn't taking money out of your bank account
48:03
every single time that you get cash in to pay back their loan. When you actually do the math
48:08
on most of these, what are called MCAs or merchant cash advances, it actually comes out to 40%
48:14
annualized interest rate. And the way that that works is that the fees that they're saying that
48:19
they're charging you are being taken out of your essentially your daily sales before it even hits
48:25
your bank account. It's almost like sharecropper model where we're going to give you a resource
48:30
and then take things out before the cash actually hits your bank. And so your two reasons why this
48:35
is so dangerous and the reason I'm going to call it out is I'm fine if other companies want to try
48:42
this and there were funds that tried this in like 2020, 2022, all of them essentially went bankrupt
48:47
or left this space. I'm fine if other companies want to do it. I feel like it's really the wrong
48:52
thing for Shopify to do when they just embed it in the product, they market it everywhere and they
48:55
make it seem super safe because these things are not. And over the years they have taken out the
49:01
personal guarantees, which are essentially like if you take $100,000 out in these loans
49:05
and don't pay it back, like Kurt as a human being is responsible for the $100,000 payback, not Kurt's
49:12
LLC. And there's a whole bunch of bankruptcy laws and other things that they're circumventing that
49:16
are like really dangerous there. But the other part is that they're taking it before it hits
49:20
your bank account. So if you think about our modern commerce business, you spend a bunch of money on
49:26
inventory, three to six months before you sell it. They need to spend a bunch of money on ads to sell
49:31
it. And then you eventually somewhere in six months after you started to get cash in, you then
49:36
immediately have to go back and do that process all over again to buy more inventory, get more
49:41
spend more money on ads. Now a normal loan will give you payback terms because they understand
49:45
you need to put cash into your business, you need to put cash back out of your business to get to
49:48
you growing your business to have enough money to pay it back. You shop like capital loans,
49:52
just take the money out before the cash comes out and pay for more to move. And so you get in
49:59
this death spiral of I take cash, I take these merchant advance loans out to pay for my inventory
50:05
and maybe to pay for ads. I make my sales, but then there are 7% a day or whatever the
50:10
number that they're saying it is comes out of the $100,000 that I made in sales at whatever margin,
50:16
you know, we'll say the $100,000, but then I need to put $50,000 divided to 50% gross margin back
50:21
into more inventory to scale. But now I'm losing 7%. So where is the money coming from? Mostly,
50:28
almost all the time is my profits, which is killing your cashflow as you grow. And they're
50:33
very much positioning this as like a growth tool and something that's amazing for your business.
50:37
Four or five years ago, it helped a lot of brands essentially work through these
50:41
where they actually started stalling out and either declining or going out of business
50:46
because they essentially had to start discarding their product to sell the product fast enough to
50:50
pay back the loan, then buy more inventory. And it's just a death loop of really, really bad and
50:54
negative behavior. If an individual wants to take these loans out because they think it's right for
50:59
their business, we live in America is their God given right to do that. But there's not enough
51:05
customer education for someone to actually understand what they're signing up for when
51:10
they do it. And I at least would like to think that the onus is on Shopify to take that education on,
51:16
especially with how aggressively they market these things. Because it really is,
51:21
like I actually do believe it is a better thing for you and your business to take on the credit card.
51:25
When you're in, you log into your dashboard, and it's like it's right there as a card on the
51:30
homepage. Hey, you've got X tens of thousands of dollars available to you, instant payout.
51:36
And they make it easy. It's a Shopify product, so of course, it's very easy to use.
51:42
Right. And it's just it's so dangerous. And it's really the...
51:49
It's not misrepresenting because I'm sure they have all the fine print and the legalese.
51:54
But you really... I worked with Ibeam two years ago, and they built a calculator to show you what
52:01
the loans of all these things actually equal. And every time you do the math of, okay, yes,
52:06
I'm only paying 7% a day, 5% a day, where the numbers is seeing super small,
52:10
the cost of that money is actually so far greater than that small number. And if anything happens in
52:18
your business, if your meta ad stop cranking, if this product doesn't sell as well, if you have to
52:21
discount another product, you now have this massive cascade of a cash issue. Because it's not like a
52:27
normal business where the cash is in my bank account and I can decide, do I pay the loan back
52:31
to avoid interest or do I pay for more inventory? You don't have that option in this other model.
52:36
They've already taken X% over 30 days that just never even got to you that you have the ability
52:42
to go and figure out what you want to do. And it's also one of those things that I want to just
52:47
make a lot of noise about it because it's only a problem when it's too late to fix it.
52:52
Like it's not something that, we mess up the website, ads crash, whatever, those are highly
52:58
fixable products, even like a bad inventory PO, your business can survive that. But once you're
53:03
is stuck in one of these loans, it's 30, 45 days or whatever later you're paying for it.
53:08
And then you have the issue over here. The other thing is just from our side,
53:13
no other lender will really give you more money. These are the junk bonds of the entire debt space.
53:19
And so usually when I've seen these deals, it's like these distressed deals that come
53:25
from these types of loans. The business has one or two of these, no higher quality level debt on it
53:32
and credit card debt. And so it's just a really dangerous cocktail mix of just things that just
53:40
really... Interesting from my perspective is people put so much time and effort into us giving them
53:47
equity and maybe raising some debt at 10 to 15% interest rates, but will accept a Shopify
53:53
Capital loan at 40% like that. And you wouldn't go to the SBA and be like, "Hey, I'm happy to take
54:02
a 20, 30% loan." There's actually in some states there's laws against interest rates that high,
54:09
but everybody's just so okay taking a Shopify because I think it's really not properly
54:13
communicated of how expensive it actually is. Yeah. And with how it collects it, you could
54:21
figure out the terms. You could sit down and calculate like, "Well, okay, this is the actual
54:26
interest expense on this." And then there's a little bit... It sounds like opportunity cost
54:31
because you're not getting the full payout. So what is the alternative to an MCA, a merchant
54:38
cash advance loan? Yeah. So with Meta getting rid of credit cards, that makes the ad part of this
54:45
dicey. The one place that... Also when we acquire some of these earlier businesses, once you get
54:51
to about 20, $30 million, other debt facilities open up for you that are at a higher quality that
54:57
you can get out of this space. The other part I really hate about it is really preying on the
55:02
smaller earlier brands. The most important thing that I think every small brand misses
55:07
is their vendors are their biggest creditor. And I'll just... I'll position it this way.
55:12
I'm going to go back. We're going to go back to... I'm going to buy... Let's say that your T-shirt
55:16
brand is doing a million dollar valuation, doing about two to three million in EBITDA, around like
55:22
15 million in sales. The first thing I'm going to do when I buy cards business is I'm going to go
55:26
to every single one of his vendors and negotiate terms. And I'd be like, "Hey, if we pay you net 30,
55:31
we're not going to pay you net 60. We paid you whatever these terms are. We're going to extend
55:35
it all out because then I just got a 30-day loan from Hertz T-shirt manufacturer. I just got a 30-day
55:43
loan from the ad agency or the dev agency or the whoever that I need to pay these big buckets of
55:49
money. And if I can turn that inventory in less time than when I need to pay those people back,
55:55
I just made money." And so for anyone who ever referred to his cash conversion cycle,
56:01
I know it's a very, very boring financial term, but it's really important for you to understand
56:05
in your business of every major milestone, "Hey, we just did a million in sales. We just did two
56:09
million in sales. We just did five million in sales." I call them Moyza Lee Special because
56:16
his favorite thing was you go to all your vendors and be like, "Hey, we hit this amazing milestone
56:19
together. What can you do for me? How can you make this cheaper? How can we get better payment
56:23
terms?" And I think smaller brands just assume they have zero leverage, but you actually do.
56:29
And the bigger you become at that company, the more important you are to that vendor.
56:35
And so as you look through your biggest line items, it's always either payment amounts or terms with
56:40
your product sourcing vendors, your fulfillment vendors, and usually your advertising vendors as
56:45
well, like your agencies and all those other things. And if you think about it, if you're
56:49
starting to scale up very quickly, you're probably paying them five, 10, 20 grand a month.
56:54
That's a $100,000 client for their business. You become very important to their business.
57:01
And so working around payment terms, finding ways to be more flexible is the easiest way.
57:06
Because the perfect world is I get inventory today, I sell it in under 60 days. All of my
57:13
payments are 60 days. It never works this way, but I've essentially made free money.
57:18
And this is what all your retailers do. So if you've ever seen Acquire does this amazing coverage
57:23
of Costco where they will pay you out on their sales in net 30 terms, they sell your items in
57:31
28 days. So you ship them your product, they sell your product, they collect all the cash for the
57:38
full value of the customer, and then they pay you. No cash actually left Costco's bank account when
57:43
you're selling Costco. And so if you can start running that similar model with your vendors of,
57:49
I'll keep this to manufacturing to be the simplest, assuming most of them are in China,
57:53
they get debt way cheaper than we do. They have a lot of terms they want to keep your
57:58
business and keep your business growing. If you can get your product 60 days out,
58:03
you sell your product and you have 60 day payment terms, as long as you sell your product for less
58:07
than 60 days, you have the cash now to grow faster. It will never work out perfectly with
58:12
all your vendors, but you want to do this in as many places as possible of essentially limiting
58:17
as much as possible the cash out of your business before the cash comes into your business.
58:22
And all these incredibly fast growing brands that probably most of the people in this space
58:26
are looking to and idolizing, they've actually mastered this piece way more than they raised a
58:31
bunch of money or they took on a bunch of debt. The other piece also in the same component is
58:37
a lot of times, depending on if your business is growing very well, your manufacturer or your
58:41
3PL will also either loan you money or invest in your business. I can't tell you how many successful
58:50
brands were just like, "Yeah, we needed a $100,000 line of credit and we asked our manufacturer and
58:55
our manufacturer extended us $100,000 line of credit on top of our current image."
58:59
Don't be a vulture and take advantage of everybody, but create mutually beneficial
59:07
relationships with all of your vendors. You could essentially fund your business another cycle by
59:13
just getting better payment terms on other pricing or on... There's also, for that example,
59:20
you could pay your vendor more, but have better payment terms. This would be really high gross
59:25
margin businesses. I have 80% gross margin and I need another 30, 60 days. I may pay them and
59:31
my gross margin comes down to 75%, so they get paid 5% more, but now I've just bought myself two months.
59:37
That's really good advice.
59:39
It's really understanding. You can do this in any business. We do this at Coco, depending on the
59:44
vendor, we'll pay different payment terms. Sometimes we pay a little more, sometimes we pay a
59:48
less, it's all in the negotiation. Ideally, you pay the same amount, you just have better payment
59:52
terms. You essentially buy yourself a ton of time and a ton of growth. Every successful business
59:59
has figured this metric out. It's always super boring. Everybody's eyes are always over,
01:00:03
but it's the most important thing if you want to grow and grow quickly without taking on a ton of
01:00:07
capital in it. Well, I'm glad I asked and I'm glad you brought it up because it's good advice.
01:00:14
But it's the kind of thing... It's not exciting. It's not sexy. It's not AI. It doesn't get talked
01:00:20
about, not in these shows and in these spaces because it's just not going to sell as well
01:00:24
and get as many eyeballs. But that's the real meat of a business is that cashflow.
01:00:29
True. I need to build a cloud code or some AI agent that does this for brands and everybody
01:00:34
will find it really... Anybody could. You could just put in whatever your preferred LLM is.
01:00:39
Hey, here's my latest invoice. How can I negotiate better payment terms?
01:00:44
And probably actually we'll spit out something pretty good. So there's your AI
01:00:46
spin for everybody. It's a sexy part of the body. It doesn't even have to be hard. We can get an AI
01:00:51
to do half the work for us. So okay, going back to your acquisitions, are you still looking for
01:00:59
your next perfect acquisition? You got Coco, you like it. What else are we on the hunt for?
01:01:04
Yeah. So we're still looking for that $10 to $100 million brand. I actually have a two or three
01:01:08
deals to look through this week. So we're still looking for that. And then we're also looking for
01:01:16
other acquisitions that would make sense to pair with Coco. So a very, very common playbook that
01:01:21
you'll see in this space is we buy one business, what's another business that makes one plus one
01:01:26
equals three. Very, very hard to do. Most people don't do it very well. But if we can keep buying
01:01:31
more other software businesses that make sense and we can scale up, that's also something that
01:01:35
we're very interested in as well. Yeah. I think that's the play a lot of people make. And then
01:01:40
it's just, it's harder than anyone expects to be able to merge two businesses and get the synergy
01:01:45
out of it that way. Yeah. Especially in this space where at least on the consumer side,
01:01:50
so many brands are so unique that it's almost impossible to have synergy with another company.
01:01:55
They're very successful because they've done something incredibly unique and different.
01:01:59
On the software side, it's a little bit different because we can offer multiple services to the same
01:02:04
client base. But yeah, it's a very interesting challenge. And hopefully, I don't have to look
01:02:10
through another 500 before we acquire our next one. But yeah, we're always on the hunt looking
01:02:16
for our next deal. So you've got this great newsletter. Where could people sign up for it?
01:02:20
Yeah. So the best place to get all everything all Jeremy, if you're still listening, this far into
01:02:26
the podcast, and it's still interesting. My LinkedIn is the best place. So Jeremy Horowitz,
01:02:31
H-O-R-O-W-I-T-Z. The link to my newsletter, I post content daily about something econ related
01:02:37
and in this space, as well as Cocoa and everything else that I'm working on.
01:02:40
All right. Jeremy Horowitz, follow him on LinkedIn. Jeremy, thank you so much.
01:02:47
Thanks for having me on.