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.
Swym - Wishlists, Back in Stock alerts, & more
getswym.com/kurt
Ecommerce Alley - Is It Your Ads Or Is Meta Having A Bad Day? Check it at
ecommercealley.com/bad
Zipify - Build high-converting sales funnels
zipify.com/KURT
Apply for Shopify Help
ethercycle.com/apply
See Our Results
ethercycle.com/work
Free Newsletter
kurtelster.com
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.
Kurt
This episode is brought to you in part by Swym. Here's the thing about wishlist apps. Most of them just sit there. A customer saves a product, and then nothing happens. Swym actually activates that data. When someone wish lists a product, you could trigger price drop or back-in-stock alerts and feed that intent directly into Klaviyo or your CRM. You're not guessing what people want because they've told you. Plus, customers can share wish lists for gifts and your team can view them to offer personalized service online or in store. And unlike card abandonment, wishlist data is permission-based. These are people raising their hands saying, hey, I want this. Just not right now. Swym's been around for over a decade. It powers 45,000 stores and installs in about five minutes. You can try it for free today at getswim. com slash Kurt. That's G-E-T-S-W-Y-M. com slash Kurt On today's episode of the unofficial Shopify Podcast, we're talking acquisitions and scaling and well the big money stuff that is really fascinating. Jeremy Horowitz is joining us and he's got the experience. He spent a decade scaling Shopify Plus brands and apps, including Gorgeous, and you know, some others you may recognize. and then launched his own PE fund. All right, that's where the the big money stuff comes in as soon as I hear private equity. And he is attempting to acquire Shopify apps. But what's so fascinating is he has been building in public. talking about it via a newsletter and LinkedIn, and has finally picked one in a space and has, well, all kinds of contrarian hot take ideas that of course were catnip to a podcast host like me. I want to hear it. I want to learn from his experience on growing these apps and well spending quite a lot of money on them. So, Mr. Horowitz, Jeremy Horowitz, what uh well, welcome to the show.
Jeremy
Thanks for having me on curve. Really excited to be back. I think it's been five years since the last time we uh did a podcast together. So really excited to dive in. A lot has changed since Uh I think twenty twenty one, twenty twenty two.
Kurt
Yeah, wow. That's a while ago. So uh you did you acquired acquired an app. What's let's let's name that upfront. What is this new acquisition?
Jeremy
Yeah, so about a little over a year ago we acquired a Shopify app called Coco AI, which is WhatsApp marketing all your campaigns, automations, and then an AI sales engine on the back end. Yeah, we acquired it from a team out of Paris and then have been taking over and scaling it. under our fund because ventures, where the quick model is we either acquire $10 to $100 million Shopify brands and scale them up four one to ten million ARR SaaS businesses and scale them up as well. Essentially everything is related to an e-commerce business, which at this point basically means a Shopify business.
Kurt
And that's like for your career, your adult experience, it it's all e-comm, isn't it?
Jeremy
Uh 99%. I started an uh s an HR company in software out of college uh and then started building magento connections. And then from there basically moved in like my how I got into Shopify was migrating sites off of WordPress and Magento onto Shopify. That was over a decade ago. And then yeah, I haven't really looked back since then.
Kurt
One of your early successes was a a Magento store, I believe. Ew And it but it was aftermarket automotive. That was that's my specialty
Jeremy
Yeah, uh I feel like everyone in e-commerce, if you do this for long enough, you have to touch it. Uh yeah, so essentially my partner who I started the fund with had uh done this before. So he acquired an automotive after markets business. Uh we scaled it up and then almost fifteen, twenty years ago, two SaaS companies spun out of that model. So essentially what were the problems that the what's called the platform business or the main business has? or some software that we can solve those problems with and then essentially we figured out other customers had it. Uh the late 2018, 2019, all three of those businesses exited And then we started the current fund because Ventures to essentially replicate that model. So you know what's a really big brand that we can grow and we can scale? And then what are software businesses that other e-commerce brands We'll um you know have similar problems we can sell into the similar models and we essentially just reverse it this time where we bought the software business first.
Kurt
So uh how long you were at Gorgeous leading uh ecosystem marketing, yeah.
Jeremy
About a year, two years ago now. I left Gorgeous where I ran a lot of their big marketing programs. Uh, especially on the partnerships and events social side. And then we started the fund again where then, yeah, about a year of searching we uh ended up acquiring a cocoa as our first acquisition.
Kurt
That I found fascinating. Like when you You know, you started writing about it online and you're saying, hey, you know, I'm I'm looking for an acquisition. And you had a very clear picture in your head, it seemed, of like, well, this This is what makes a good acquisition for us. You didn't just stumble into it. It sounded like it took you a lot of time and didn't geez, you look at hundreds of these things.
Jeremy
Yeah, uh it probably started in 2022. We were looking at we were doing some early stage checks like Angel VC style checks, and then we were like, we don't really want to do this, this isn't a great fit for us. So we wanted to get back in. We started doing some sourcing and diligencing for other private equity firms. So, you know, we were like the e-com guys where a big private equity firm would be looking at a deal. They'd call us in to look at it. We were we kind of you know we kinda got that taste again of like we want to do this again. Um and so yeah, between uh my LinkedIn which has been just a great and the newsletter which has been a great source of deals, I probably looked through about Now I'm probably close to 500. We probably looked through about four or four hundred and fifty before we bought Coco. Um it's been an insane five years of looking at like, you know, from the 2020 just surge to the collapse to now So we'll call it the bumpy ride from here. Um yeah, we looked at a ton, mostly on the brand side. Uh we looked at a lot of brands, especially in that like ten to hundred mil range. And then um yeah, actually it all kind of came together through LinkedIn. The founders of Coco reached out to me. Being like, hey, we s we see that you're looking to buy uh software businesses, we talked and then about three, four months later we decided to acquire it, close on the deal.
Kurt
And what was the out of 500 deals, what's the thing that makes Coco, this WhatsApp, a WhatsApp app for Shopify merchants? What made that one stand out, you know, above the other 499?
Jeremy
Okay, where Coco Fit was it was a very contrarian bet that I was very bullish on. So if anybody's been listening to the podcast long enough, the last time I was on the podcast, I was kind of giving the playbook for how SMS marketing is working. at the time and like very early in the SMS um evolution. You know, now everybody has as a channel in the States, it's a very popular channel I kind of noticed from our research that it's the exact same thing in Europe and kind of honestly the rest of the world, other than North America and some you know Asian countries like China that have their own version of WhatsApp. Basically everyone else in the world uses WhatsApp. And so the big insight there was one, the app was just growing incredibly quickly. Like I'd very rarely seen kind of zero to, I can't publicly disclose it, but zero to X scale of revenue. um you can probably intimate based on our criteria uh in such a short period of time. The other piece was was that centrarium bet of no the rest of the world isn't really doing there's no equivalent to SMS. WhatsApp is that channel. And uh we thought Cocoa was a great bet in that market. And then the third piece was um candley brands are just really hard to acquire right now. We can get into why. Um But with tariffs with all the other uncertainty Well, it sounds like excitement around AI and uncertainty around tariffs meant
Kurt
SAS was the way to go. And it was was just a an easier bet, an easier sell at the time. And then within that, you know, f just from my experience, WhatsApp Is such an untapped opportunity in the US, where like all of Europe, this is the default, you know, Latin America, this is the default. The rest of the world is using WhatsApp. And the US is catching up to it. And so I absolutely agree with you on your your thesis that like, oh, you know, there there's a big opportunity with this here. Um, and then you've just coupled the excitement of AI to it to make investment, you know, a little bit easier, it sounds like
Jeremy
Yeah, exactly. And um, you know, the business doubled last year, we're on pace to double again this year. So um it was just like a You know, our space is so hard because you have to have the perfect timing of when you acquire it to when it's gonna grow to when you also exit it. The big difference of how private equity works and most people who are not VC style investors. Is VCs are like, okay, we're gonna put a ton of money in. We just want you to go on a rocket ship, and that rocket ship can take 10, 15 years, sometimes longer. But we just wanted to see this thing go vertical versus the way our model works is Two parts. One, we we don't make ten beds hoping one will work. We make two beds hoping and need two to work. The other part of that is we have a very defined timeline. Like our investors expect their capital back in the next three to five years. So it also has to be a market where, you know, the thing is growing. It doesn't need to be like 10x and go vertical year over year, but we do have to hit certain targets in the next You know, from a year ago three to five, now it's really kind of three to four years where we have to get it to a certain place, we have to get it to also a place where it is, you know, sellable again, and we can return our capital to our investment.
Kurt
And is it, you know, part of it is, you know, what the current what the current market is. There are the the appetite, the demand for Yeah, business acquisitions changes over time. And often, you know, I suspect it really is tied to what the current interest rate is. And when we had zero percent interest rate over the pandemic, suddenly there were a lot more businesses being purchased, I bet
Jeremy
Yeah, exactly. And we can get in if you want to go we can get into some of the crazy financial engineering and um politely uh magic that some companies were doing where you know yeah our returns are determined by how much equity is put into a business. So let's just say that a business is gonna sell for ten million dollars. If we have to come two million dollars in equity, like actual cash out of someone's pocket that we have to go raise from, versus five million If the business sells for 50 at the end of the day, a return on 2 million versus 50 is much better than return on five versus 50.
Kurt
Right.
Jeremy
Like a profit of 25x return versus a 5x return, right? So our investor in one scenario is making 25 times their money or five times their money, right? And it's a very big difference for them. Um and then also our our entire financials and mechanics are built on their return. So the way that we think about it is Right, and then the other portion of that we can get into deal structures, but most of the time the balance that will come from debt or some other type of vehicle. And yeah, when your interest rate's zero, so your cost to get that five million dollars or eight million dollars is zero. We can greatly change the mechanics where I know some deals where some brands were bought for zero equity and a hundred percent debt because interest rates were so cheap. And the type of the, I'll say the risk appetite surprisingly is actually much higher where I'm willing to give you a much higher valuation and buy a lot more deals where my interest rates are cheap because it's Less risk for my business as the acquirer. I know that sounds crazy, but uh it's like very counterintuitive to how you think about a business, but it's very a lot less risk because I need to go raise less equity. which is our risk like which is the risk for my business as a private equity investor. And so yeah, when interest rates spike, the other component is also uh when you have a physical goods business is you have to buy inventory which then is another layer of debt, right? That ten million dollar enterprise value of a business Most business owners also probably want a million or two million dollars for the value of their inventory that's sitting that they sell to make the business worth that Now I've got to go raise even more debt to go buy the inventory to make sure that all sells. And all those mechanics greatly change the math and the calculus that we need to do of is this a good investment? Is this a good investment for right now and how are we actually gonna go generate a return on buying this thing with all this inventory today grow it scale it and exit it
Kurt
So I want to dive into your acquisition criteria. Because you've made it public, but you're walk us through it. You're evaluating a Shopify store. What are we looking at first?
Jeremy
Yeah, so we specifically are looking for profitable and businesses that have what are called Ibada. You will also hear this referred to as net income. or STE, seller discretionary earnings. In English, just the actual profit at the end of the day that the business generates where you take all the sales and take out all the costs. And what we are looking for is a business that does about one to ten million in that profit number, which usually correlates for the average e-commerce brand to about ten to a hundred million dollars. in top line sales, assuming that the average e com brand usually does about 10 to 15% in net profit for their top line. The other piece that we specifically look for, which is pretty is not Standard, but something that's important to us is that it's 50% direct to consumer. So most this is essentially the majority of their sales come from Shopify. Why that's important to us is uh we've just been burned so many times by Amazon and retail businesses in our ex in our careers that we like to have the majority come from channels that we we know and we can Control. That's also kind of our specialty. There are tons of acquirers that are looking for Amazon-specific businesses, retail-specific businesses. The really important thing that if you are looking to sell your business to always think through is why is this a good fit for them? Right. Like we look a ton, a lot of those, you know, 400x deals were a lot of Amazon, well, 55% Amazon businesses or majority retail businesses. Great businesses, probably a good buyer for someone else. Uh just it wasn't a good fit for us. The second piece is be like weird businesses. So we don't want to get into, you know, the thousandth yoga pamp business or the five hundred uh clean beauty brand. Things like that. Um I'm sure as everyone who's l watching this podcast knows like every ad platform is getting more and more competitive. our entire model is quickly and profitably growing something from you know point A to point B unless there's something incredibly even if there is honestly something incredibly unique about a yoga pants business or something like that, like I've just seen too many of them. It's too competitive of a space. Whereas we like weird businesses. Um, and we like businesses that have some unique angle to them that if we do need to go and spend a bunch of money on advertising, we can have something that really stands out. Preferably though it has some other like paid media is basically a foregone conclusion that it needs to have, but preferably we like to see some other element that we can push in some other marketing channel. That could be influencer, affiliate, SEO, things like that. Could also be B2B sales channels or um you know local retail arms like veterinarians or doctor's offices or local gyms. that is a different and diversified revenue stream that we can go grow it grow it as well because, you know, every channel eventually gets too expensive to continue scaling in. So we're looking for that unique angle in a product that, you know, we wouldn't go to, you know, for the Fitness and apparel brand, like yo, we can't just go to any gym local gym and say, hey, we have yoga pants. It's not gonna be a compelling new product for them that makes their business more valuable and wants them to buy our product.
Kurt
Do you care why the seller is selling?
Jeremy
Absolutely. Uh that's gonna be one of the most important reasons and honestly I have you know done this hundreds of times now, is usually the worst answered question in the entire process. And it is probably the most one of the you know top three most important answers to have prepared. The reason why is I can't tell you how like you are selling your baby and like I have been I am like I stepped in and I am CEO and operating Coco, like our first acquisition. So like And I've started a whole bunch of companies, so I understand the process, but I can't tell you how many of these things fall through because someone's either like they want to sell but actually they don't want to sell, or they have these like clauses and components where you know They say one thing in the beginning of the process and it's really something else that's important to them at the end. And you know, ever it is a game of poker, like you do need to decide when you want to reveal certain information. But yeah, I can't say how many deals we've also passed on because I asked like, you know, why are you selling right now? What's the ideal transaction look like for you? What do you want to do after this? And they just don't have a clear answer. Um, and it's just like It's one of those things that like as you do it, it's really, really hard. But the deals that actually move very, very well, the founder has a very, very clear reason of like, hey, I'm looking to sell this. I'm looking to sell it by X event or X date. and we like to like we're ready to move on to the next thing. Those deals I've always found are m are more successful because the other piece that's really important if you've never gone through this experience before is expectation setting. Yeah. It's a little bit of a lot of these scenarios are good bit of the world is your oyster. You know, I'm looking to sell my business. I'm hoping to get as much money for it as possible. I'm hoping to get everything I want out of it. You know, that's the the seller's experience, the person who owns the business virtually. The buyer's experience is like I need to fit very, very, very specific criteria for this to work for me. That's also why we put our criteria out publicly, is I just want to be very like transparent and also candidly for me self-like my self-experiment is it just saves a ton of time. I can't tell you how many people like they see my LinkedIn bio and I get pitches to start a gym or a restaurant or like you know, stuff that I have no business investing money in. Um and Like really being clear of like these are the important things to me because the other piece also is like this also just becomes an enormous negotiation of every point and every little thing needs to be negotiated. And so like setting the expectations of this is what I'm looking for, this is like what's important to me early on is really, really important because the other side from our perspective, we're looking through every single thing you do and you say. And from our you know downside protection, we just make sure you're not lying to us. So you know if you say something is important to you over here and then when we actually get like three weeks in or three months, Well God, I hope it's never three months into diligence, but some of those deals are more complicated. Three months into diligence diligence. Anyway, you said something three weeks ago that was this, and now it's actually this over here. You know, that's an enormous red flag for us because These aren't public companies. This isn't like gap-validated, you know, legal repercussions of how you're representing your information. We essentially have to do this all based on what's said, what's in the data that were presented. And so we're also looking through the through the through point of, okay, this answer, this, you know, the reason why they're selling is important to them, does that match up to what they actually say and what they actually do because you know I can't tell you how many businesses I've looked at where someone basically ran the business as far as they could run it. They're kind of discounting it into the ground and they're just looking to dump it. And oh, you know, there's so much growth potential to this thing, and you know, I don't feel like I'm the right person. I can't tell you how many times I've heard that. Uh and you know, and we look at it and it's like, okay, that's clearly not the truth. And so It's one of those things from our side where we kind of have to assume the best and the worst in every deal the you know in the people in every deal of like they're telling us the truth until you know they tell us so much that we stop believing them. And so having that answer really, really dialed in also explains why the one of my LPs loves Ali Asking's question, this business is so great, why are they selling? Right. And so you need to be prepared for like all of those different types of scenarios and questions and all those types of things. I'm not trying to freak anybody out of like don't overthink it, but really have a clear, like, you know. I started this business because I had this amazing idea. It grew to this place. And now I'm ready to part with it because of X, Y, and Z and truly like mean it. The other thing that I just a word of advice as someone who's just been through this process a couple times is If you have an amazing business, probably don't sell it. Right? Like, you know, it's one of those classic uh things, and I'll start my rant here. But uh, you know, the the The businesses that everyone wants to invest in and put their money in are probably the businesses that don't need any money and don't want to sell. And I have this buddy who we have this conversation every 18 months and he's grown the business to a really meaningful size and he's very successful. And he's like, yeah, like I'm thinking about selling. And I'm like, do you want to sell or do you want to just fit fix that one part of the business that isn't you know exactly how you want it to operate? And he usually hires somebody and fixes it. And yeah, he's doubled or tripled his business while we've had these conversations and is doing very, very well And so that's the other piece of like, you know, if you have such a golden goose and like, you know, this thing is so successful, really think through why you want to sell before you part with it. Because listen, once we wire you that money and once we sign those final documents, like the thing transfers ownerships and you do have to w walk away or transition out over time. And I know so many founders who just have like remorse over selling their business because it's like, yeah, I took a paycheck. But the thing ended up being super successful where I didn't find the next thing that I was really passionate about. So also like from you as the owner of the business, the thing I was also love to say here is you're the greatest investor in this business up until this point. Like you've put your blood, sweat, tears, times, like you've grown this thing. And so really think through, am I ready to part with this? And what do I need for that to make the most sense to me?
Paul
Have you ever watched your meta-ad's acquisition costs double or triple overnight, and then just sat there staring at it, like it personally insulted you? You check your ad account metrics, you check Google Analytics, you check Shopify, you ask your agency if anything changed. You wonder, maybe just for a second, whether Mercury is in retrograde, but you find nothing. Because there's nothing to find. Meta just had a bad day. And this happens more than you'd think. The meta bad day detector by Breezeway and e-commerce alley was built for exactly this. It pulls live data across over 50 DTC brands and tells you whether everyone got hit or whether it's actually you. It's a tool that hundreds of e-commerce brands look at every morning before looking at their ads or their numbers. And it's completely free Visit ecommercealley. com slash bad to see if it's you or if meta just had a bad day.
Kurt
I've had a lot of friends who have sold businesses and acquired businesses and the people who acquired them, you know, like they have a th a theory on what how they're gonna grow it. And, you know, it's based on their experience and how it was represented. And most of the time, you know, through good due diligence, everything was represented correctly. You know, but when it's misrepresented, you know, that that could be bad. On the buyer side, that's where I see the regret way more often. You know, the seller is the one who's you know, who has the opportunity and is parting with the money. I think they they just inherently do more due diligence. They think through it more versus the seller, you know, there's just emotionally so much wrapped up in a business when you're the one who built it over however many years versus acquiring it And said I often, you know, find people where they regret selling it either because like after the fact the deal didn't go the way they wanted, you know, or they don't know what to do at like six to twelve months later. They're like, I don't know what to do with myself. You know, what's next? Or like or it often, you know, they see, to your point, how successful the business now is. And they're like, well, I could have done that. Okay. Hindsight's 2020. Um, but even like George Lucas, how much did he get for Star Wars selling it to Disney? And even he said he like once he saw what they did with it, well, suddenly he's like, Well, I wish I could have done it.
Jeremy
Right. And you know, the the paycheck, I know the paycheck is what grabs the headline. It is one of, I mean, I think when we look through deals, we have like 167 points that we look through and we usually negotiate. So maybe it's even more than that at this point. Like the headline is the number that you get is only one part of the deal, and there's so many other parts of how you built and run your business that are really crucial That yeah, I mean right like that the Star Wars is probably one of the most successful examples in deal making history for both sides, right? Like he got one of the biggest paydays ever. And I'm sure Disney has monetized that thing to the absolute hilt and made way you know great returns on that investment. But yeah, you know, if yeah he could go get a time machine, maybe he wouldn't have sold. And I think that's really important to think through like what is important for you. before you kick off that process. Because the other thing to just prepare you is usually on the when you're ready to sell your business, it's about a year long process from when you actually make the decision that like, hey, I want to sell you know, depending on the size of the business. But on average, it's usually about six to twelve months. From like, hey, I want to sell this business to the deal at the deal just closing. That's not even talking about like post-deal transition of if you have to stay for a year or two or there's a training period or anything like that. And so it it is a very long, you know, this isn't a I wanna sell this thing and it happened, you know, what money is in my bank account tomorrow. And so spending that time before you really kick off that process of like, You know, I have that next thing in mind. That thing is way better than what I'm doing right now, and I'm ready to move on is a major, major component of how you really determine at least what I would recommend. is it makes everything in the process way better. And I was, you know, I can't give too much experience on when I've sold these businesses, but I'll come back in a couple years when I do. But yeah, it just makes it a much better process for you overall. And it really reduces the remorse.
Kurt
For you, what's the instant deal killer? It's like, all right, we got misrepresentation, of course. Um the A seller having the potentially wrong reason, and then of course bad fit. What uh what else were you looking at it and you're just like, nope, out.
Jeremy
Yeah, so I mean we have some specific criteria on things like financials. So we were looking for businesses that have at least about 50 to 60% gross margin. That's just because in our playbook. That's what we need from a just a business fundamentals to make things work. Um really like uh a lot of key dependencies. So 80-90% of the traffic comes from Meta. One person really runs the whole business, which is usually the person trying to sell it. And you know, nothing is documented in the business. I can't tell you how many times I've looked through a business and be like, how do you guys structure and run ads? And I know that sounds like a very basic question, but there's actually a lot of moving components and usually multiple people, different types of resources, tools, that like you actually have to have a deep, intimate understanding of that business and how that business works. My favorite line is, you know We're all essentially selling hamburgers, but everybody's recipe and process to make a hamburger is what makes their business special. You know, if I'm gonna buy your business, I want to know exactly how your hamburger is made. Um so those are the two or three key big ones. I would say the other really, really big one is um when their financials just don't match the story that they tell. So for anybody who hasn't gone through this process before, usually the way that this process works. is you create a little teaser of some key metrics. It usually has some fun name like you know Project Shadow or Project, I don't know, whatever clever idea, Project Fury, things like that. And then it'll be like the teaser and the overline of, hey, here's the key information. And then we essentially decide, hey, we want to learn more. You'll send over what's called a sim. It's essentially a presentation or if you ever invest, if you ever raise before, it's basically just a deck. Here's the business. Here's the key information. Here's the story. If we're interested from there, we'll jump on a call. Basically, it's a ton of an interview. Like we'll just go through. We have a ton of questions that we want to know about. We'll get more and more about your business. From there, if we're interested, usually we'll ask for what's called the data room. The data room in key is your key business, your key information. If you've ever raised money, you've probably gone through this process. uh your financial, so your PL, your balance sheet, cash flow statements, maybe some key other information that's crucial. If you're a very like uh IP heavy business, we'll want to look at patents.
Kurt
You're very busy if you're a very like heavy ads business will look at some like documentation around your ads.
Jeremy
Exactly. Like it'll be in a usually a locked, it'll usually be in some sort of like we have to get specific access. We usually sign an NDA beforehand, so you know we can't like go run and do anything with your business or your information after that. What to answer your question? The other thing is like if you've told me stuff here and your financials don't match, or there's stuff that I've looked through like we've looked through your financials and it just there's something sniffy or wrong. You know, I'll usually give person the grace of like a couple of e you know, over one email, a couple questions and maybe another call. But like if you're telling me you have an 80% gross margin business and I cannot find a single year in your past three year financials of 80% gross margins That's the exact type of thing where like uh you know I was it's always good to know your own numbers. I w some of these m metrics are very, very specific and you know Most people who build these successful businesses did not get an MBA in e-commerce, financials, and all those other data points. But, you know. If you're telling me you're you have an 80% gross margin business and I'm looking at 40% in your PL, I haven't seen anything that drastic yet. But you know, those types of things where it's like a broad, broad mist Because then also like when we look at your math, like if that if the math isn't interesting to us, we can't make all the other parts of the business and the other scaffolding work.
Kurt
How often do you encounter a business where it's like, wow, this would be really successful and attractive if it weren't for the fact that to get there, they ended up saddled with debt?
Jeremy
Um you actually would be pretty surprised. So there's two camps. We do look at what are called distress deals as well. And it's essentially the you know the loans that have mounted so far. You a lot of uh really successful D to C brands, especially the ones that hit the market the last, I'll say 12 months, don't have that much debt on them. They're actually like they've just uh you know, maybe like a good amount of credit card debt. And you know, usually the founders don't pay themselves very much until the thing hits pretty meaningful scale. But um I would say that like there's there's okay, so there's definitely two camps. Then there's the bad debt businesses. You don't want to be in that category because we're buying it for next to nothing. Um, you know, usually when it's called something that's called distressed public brands go through bankruptcy or what's called chapter 11. Uh, you know, those types of businesses were usually just buying it for Yeah, very low amounts of money to take it out. Uh yeah, you do not want to have an incredible amount of debt on your business Most of those these uh like sub we'll call it like usually businesses that are around less than five million in net profit that are sold are sold as asset sales anyway. And in English what that means is let's just say that I'm buying a business from Kurt. Kurt has a cool uh t-shirt business, you know, fashion apparel business doing very well. I'm gonna buy his assets, but he keeps his legal entity. So, you know, Kurt's t-shirts LLC stays under Kurt. I'll buy all of the things related to Kurt's t-shirt businesses as assets from it. So all the debt stays in Kurtz LLC. I'm just giving Kurt money for everything else and you'd have to go settle the debt. Larger businesses.
Kurt
I keep I'm left with the shell company that has the debt. And then you the things of value you take out, we transfer out, and then you pay me, and then, you know, ideally I I use that to I take care of the debt or, you know, whatever I'm gonna do with it.
Jeremy
Ex yes, hopefully you would use the proceeds from the sale to uh buy pay off your debt first and then you but yes, you essentially would be like legally responsible for Uh legally and financially responsible for all the pieces that happened. Well, you owned the assets in the business, and yo, your Shopify site, your newsletter subscribers, your inventory, your social handles, your ad accounts, all those can IP, all those things. We were just essentially purchased from you. An equity sale, which is probably what people see more in headlines. is I'm gonna buy Kurt LLC and you know, Jeremy LLC now owns Kurt LLC and all the assets and everything underneath it. In that deal, which is very, very rare for these smaller deals, uh, yes, then like the debt on your books greatly matters because You know, it's essentially a a a subtraction item from everything that we're buying for the value. You know, if you have a ten million dollar business, your business is worth ten million, but you've got two million in debt. Well, we're only actually going to buy it for $8 million because now we have to assume your two million you know, it's not always that neat, but like we're gonna assume you're two million of debt as part of our acquisition. Very, very, very rare though. Most of these deals will just be an asset sale where the owner will deal with the debt after the sit the transaction closes.
Kurt
The uh the other way I see people get burned, you know, um my grandfather-in-law is a a JDCPA in Silicon Valley, and so we've seen a lot of these D deals. And, you know, being a lawyer is uh seen often like, well, where where they go wrong, where they go bad after the fact. And it's on, you know, earnout deals, especially where the owner stays on. Like, hey, you know, we're gonna we're gonna give you eighty percent of the equity or whatever. Like you're gonna get a lump sum and you're gonna stay on with a salary for X number of years. And then when we sell it, you're gonna get a big payout. But when that time comes and the PE firm starts getting ready to sell it, magically something always went wrong and that person gets forced out because they want them, you know, off the cap table. And it capture more value for the the PE firm. Is this I've and I've seen it enough times now where I'm like, oh, you know, that's a thing to watch out for. For you know for the person selling their business, uh do you should they always be trying to get that payout up front or you can you make these uh these milestone payments? in a where you get equity later, you know, after like, you know, whatever. Can those be made to work? Or is it just asking for a dispute?
Jeremy
Yeah, so I think at the moment of transaction, essentially the the balance is the investors want to put as little down at the moment as possible to de-risk their investment and the seller wants to capture as much money as possible. to essentially de-risk their future. These transactions have this incredibly beautiful like timeline math to them where you know the investors worried that this thing goes to zero afterwards. And the founders worried that like, you know, they're not gonna get the future payouts if the thing everybody's worried that the thing goes to zero. It's just how you do the math around that. What I'll say is The delta between the enterprise value of the deal, like $10 million, we'll just use Kurtz Black T company as an example again. The $10 million value of that. The delta between the $10 million that the business is worth and the amount of money that if Kurtz, the seller here, would walk away on day one, is essentially the confidence that what you say and your projections of the future are accurate. So these deals where you see like big components of earnouts is because essentially what the what the buyer is saying is that's great. I would love to see it, but I don't have the confidence based on what I'm seeing in today's business. that I'm c like that's a guarantee payment. And so what you'll see, and and just for clarification, it's very, very rare that any of these deals get done in all cash applied. Like I I looked through I did like an SMB report for QuietLight two years ago where we looked through hundreds of their deals. Um I've looked through a lot of like MA for public companies. Yeah, Quiet Light is probably like if you're a if you're looking to sell your business, they're definitely one of the more like best and reputable places that will essentially run the process for you. Like they are the person that you go to They collect everything, they go find the buyers, they go set up all set all this up and they kind of control the sales process. Um And look through a bunch of this information. And essentially, like there will be some component of cash of close, plus there's a whole bunch of other things that you can negotiate in value. And that's also why like Said earlier, like really clearly know what you want and what's important to you. Uh I've heard deals where sometimes people get a Rolex instead of cash. I've also heard some deals where you know the founder takes less money but they don't change the name of the business. Like there's a huge spectrum to what the value of the deal is. But essentially answer your your question on earnouts, you also hear things like seller notes, which is essentially where the seller loans the the acquirer's X value of the business and then they get paid out on a loan.
Kurt
Oh yeah, seller finance deals. Those are crazy.
Jeremy
Yeah, uh like those are I'd say those two are fair or you also hear as an equ I think also we were a little bit described as what's called an equity rollover. So we buy, you know, we buy the assets out of Kurt LLC for $10 million. We pay Kurt $8 million and we roll 20% or $2 million. So now Kurt owns 20% of new fashion company. But and you get the you know and that's part of the value that you get for ten mil the ten million dollars worth of your business. All of those mechanics are essentially You you you as a seller you need to prove to me essentially that these milestones are gonna hit and that you're really really confident And yes, like hire a good lawyer, make sure that like you know you read and review the terms because there's uh you know it's the same thing as like venture capital the stories of like the founder raised a bunch of money and then they sold for a big number but the founder got nothing because they didn't read the terms and like how they got the money. And yeah like the terms Honestly, most of the time the terms are more important than the enterprise value number because it's how you get paid. And you should be protecting yourself, but also you need to be reasonable of if you want to go chase a really big number. And you don't have some genre-defining business with a ton of IP, insane growth, incredibly profitable, like the investor will the acquirer will need some protections on their side as well. And so you really just need to think about like what are your trade-offs, what are you comfortable with taking as part of that? And really understanding like, okay, if I'm taking an earnout, The other the last piece is j really just be very, very clear with the acquirer. I think a lot of those like issues and horror stories are because the seller does not really go through like what are the actual terms of the earnout. What is very very clearly stated and do we have like good communication and expectation setting? Do we have very clear milestones, goals, pieces? Because A seller note is essentially a loan, right? You're going to get like monthly payments or quarterly or annual payments back with interest. An earn note is essentially bonuses. An earnout is essentially like, you know, if you get a $2 million earnout, when you hit these targets, we're going to essentially give you bonuses for that $2 million. And then equity rollover is you own a part of the business. And in that, you know, in the next part of the business, the acquirer needs to sell it for more than what you bought it for for anybody to make any money.
Kurt
Right. The and like so any of there's so many points in terms to dispute, you know, if any of that's in a gray area. And then, you know, years later, now suddenly you're like, oh, well, we didn't think through that, and now that becomes a thing to, you know, negotiate on, argue about. And so having your your ducks in a row and, you know, making sure you've the a good lawyer seems like a requirement here
Jeremy
Accountants, lawyers, and brokers on the smaller side, bankers on the larger side, all incredibly expensive. But if you have a deal that's worth it and you structure the right terms, they pay for themselves a hundred times over.
Kurt
Hey, today's episode is sponsored in part by Zippify Plus because you've got enough to do as a business owner and marketer. The last thing you need to be worried about is optimizing your upsells. But if they're not optimized, you're leaving up to 20% of your revenue on the table every single month. So be honest, did you start a new batch of split tests on your upsells this week? Of course not. Real optimization requires constant attention, running tests, launching offers, reading reports, adjusting for sales. Your team's too busy for all that. Zippify Plus takes over your upsells completely. You get a dedicated team that builds, manages, and optimizes your upsells for you. They work with over a hundred Shopify Plus stores. Their average client sees two hundred thirty-three thousand a year in extra revenue without lifting a finger. If you can't remember the last time you updated your upsells, go to zipify. com slash USP to book a free strategy call today. Their team will audit your store and show you exactly where you're leaving money on the table. No commitment required. That's zipify. com slash usp. Because you've got enough to do without worrying about upsells too. All right, so I want to I want to talk to you about your experience. with because you have such a great view into so many businesses, but all within the e-comm space, within direct to consumer. And you give a talk called D2C is dead And I believe the uh yeah, D D C is Dead, long live the direct to algorithm brand. Okay, riff on this. Tell me about it
Jeremy
Yeah, so the 15-minute talk in two minutes is the concept of go find cheap products in China, throw it up on social or search, run a bunch of ads, sell a bunch of units, and scale. doesn't really work anymore. Essentially the and really where I, you know, I think the Shopify journey and like Shopify as a business has been really successful under the D to C umbrella of Ecom 1. 0 was essentially like eBay. E-com 2. 0 was essentially Amazon SEO-based businesses and like Magento, those like early how do we get traffic off the internet, buy our product, ship something reasonably not too expensive. And then Shopify really, you know, Shopify on the back of Meta really blew up is I can go find really cheap product, slap some branding on it, run a bunch of ads, make a lot of money. The part where that kind of imploded was D2C was supposed to be amazing because you cut out the middleman and you had great margins and there's gonna be these huge profitable businesses that operated like software. As everybody has seen over the past 10 years, all that money went to Meta. And so everybody now is kind of rediscovering, you know, 10, 15 years ago the phrase was omnichannel. Now it's called Omnibrand. I think though the major difference if you look at the truly breakout brands, like the very, very successful ones, the Comforts, the Groons, the True Classics, Jones Red Beauty's Liquid Deaths. It's not just that they're spending a lot of money on meta. It's that they're figuring out how to go viral across all social channels at once, then layering on a ton of paid media on top of that to then scale. And they're not a shop, you know, the classic question we've looked at for acquiring all these brands the last five years is is it a Shopify business or an Amazon business? That was, you know, that was going to determine your valuation and your business and your mechanics and your models. I think that doesn't matter anymore. These brands today are in Shopify, Amazon, retail, other marketplaces at speeds that we just never have really seen before. You know, the classic advice five, ten years ago was go scale up on Shopify to X number of million before you even consider another sales channel. Now it's like, okay, how do you go viral on TikTok shops or Instagram reels or YouTube? Out as much traffic into your site as possible, but you know, you convert 3%. You probably know this better than I do. How are you on Amazon? How are you in other places already that you're capturing all that demand and just aggressively scaling And I think that it's really hard. It's not like an easy thing to do, but really leveraging things like TikTok shop, like YouTube influencers. If you notice most of like the hundred million dollar, billion dollar brands that have really grown very quickly over the last five years, they're leveraging Instagram reels, TikTok shop sport, YouTube influencers very, very well. And then essentially also using that as a massive outsourced content creation farm where then they take what's working, plug it all into ads, and then run it in as many channels as possible. And it's this yeah, it's this very weird like all blitz, all channel model, which don't get me wrong, it takes a yeah, it takes a good amount of uh willpower to scale that quickly. Um you have to be really, really diligent with cash. But the brands that are absolutely blowing things out of the water have really mastered that. And you know, I feel like five years ago it was the Dr. Squatch and like we're gonna go pay a creative agency. I'm not picking on them. Pooh Pooperie. Uh there's a ton of these types of business. Like we're gonna go pay a creative agency to come up with this. The Harman Brothers.
Kurt
That was the Harman Brothers raindrop Harman Brothers ad, right?
Jeremy
Everybody had a Harman Brothers ad of like the funny direct like right, you pay that up like pay five hundred grand, then go spend two million on media on this like very highly produced social asset. I think that's doesn't really work anymore. It's, you know, for anyone who hasn't looked at comfort, they did like half a billion last year, they're on pace to do a billion, no outside funding. Um, like really one of the most impressive brands in the world. Their founder, Hudson, also is like very forward, shares a lot of like what they do. But essentially they just build this affiliate army on TikTok shops. that constantly is promoting the heck out of their products and then may just aggressively put paid media behind the content that's working And so you have this very like bottom-up approach to what sells. Like, you know, the brand isn't deciding how to sell their product, essentially all these influencers are. They coach them, they do all these other things. You know, they coach them, they make them better at it once they figure out who's working. And then they pay them an incredible amount of money to scale their ads. Now again, going back to like the financial criteria before, good margin product. you know, something that is highly scalable in multiple channels. But this new kind of brand is emerging where it's not the we're gonna go run meta ads, you know. though those businesses don't really make enough money anymore. It's this how do we be in all channels on social and retail, as many as retail as possible, and then just really have aggressive momentum as a brand.
Kurt
You know, I've seen I've seen a few of these work that way. And you know, once you're on you get on TikTok shop and you know you get lucky with an influencer where suddenly like they take off. And what's so interesting about that is like, okay, A, now you have you got UGC. You have content you can reuse. You can post that on the Shopify site. You can use that in ads, post it on social. you know, take that to other channels and use it as inspiration. You're like, hey, this worked really well. And share that with your other influencers. What I always find so fascinating is you get copycats. You get people that you didn't recruit who are not getting any affiliate cut, but like they want to ride the wave too. They want to create successful content, you know, whatever that hashtag is. And they go create something similar. And they're like, okay, well, they did it for free, but hey, let's recruit them too. And so you can quickly it becomes a flywheel where you What's so smart is you've outsourced that like that core content ideation, right? And figuring out what works. Hmm. I've never okay. Like I'd I'd been thinking about this I saw it in action, you know, especially with um uh golf brand we work with Pins and Aces, where they experience this approach. And but hearing you lay it out as like, all right, this is the you know the very concerted way to do it. Interesting.
Jeremy
Okay. Yeah. The the more important piece that I think everybody misses is that it's not that it's a a big piece is that you're outsourcing the ideas. But you're you're letting the data and the market validation of what works actually protect your media budget. Because right, like You know, a lot of the the classic model is you pay, you know, if you spend 10 grand in ads, you spend about seven grand, or no, sorry, seven hundred dollars creating the creative to then go spend in the ads. But you have to get you like you know the Harman Brothers model was you paid and you guessed what worked, then spent the data on it. This is to your point people who and the really interesting model today is like they're all none of them are influencers anymore. It's like people with like a thousand followers. followers or even less. So you don't have to pay them any, you know, what how a lot of them are doing is you're only getting commissions. You're giving them commissions. So they have to prove that they can sell your product. And then your layering on the paid media is essentially just like the, you know, whatever works, throw more fuel on the fire. And that's the real value is that you're not You know, it's not like five years ago where you torch $10,000 in meta spend to figure out, you know, your two out of 20 ads that work. It's you already know what's working and how can I just scale that until it stops working.
Kurt
The Yeah, no, it it's helpful to hear it. And I think i this approach as it really depends on like what your cost of goods sold is for product seeding to work. But if it's low enough and it's practical enough, this a hundred percent is the approach I would be taking now if it wasn't something I was already trying
Jeremy
Exact. Restoration hardware can't do this tactic. But for the normal ecom brand that you know it's not too expensive of a product or it's not too expensive to ship Uh, you know, that's why you see a lot of fashion apparel, health, wellness, beauty, skincare brands do this, which I probably are most people in the space in general. Um but yeah I wouldn't do this with like furniture cars like you know stuff that you probably have to like you know go to more of an old school content creation model where you're bringing them to an experience they create the stuff and figure it out. Um, but yeah, the the United Economics need to be pretty cheap to ship out. You know, at this point I think Comfort's working with something like half a like five hundred thousand. of these affiliates and like microcreators. And yeah, like, you know, I assume that their products are not super expensive to ship a hoodie to half a million people.
Kurt
Yeah. And it like it there's no breakage. You just chip it. You don't worry about it breaking in transit. Um it definitely like that is kind of a the cornerstone of it is you know the product seating has to be practical for you. I it to wrap this up, I want to discuss one of your hot takes. And before we jump into this, I I suspect you're you're a Shopify ride or die, but you've got this great piece. Called uh in which you you flat out uh you share your opinions on Shopify Capital Loans. I tell me about how what are your feelings on on Shopify Capital Loans?
Jeremy
Yeah. So I want to preface this with uh I give like my entire career is built around the Shopify ecosystem. Like how I make my money is investing in Shopify apps. I've also personally just been invested in the Shopify stock for a very long time. Like I think I bought back in like 2016, 2015 time frame. So like I'm an enormous believer in Shopify. The reason I do this is because I want to call out the one thing that I think is a glaringly obvious bad decision that they're making that I hope that they correct. Sort of the way that a loving family member would. But so now that I preface all that, yeah, Shopify pay loans are Shopify or payday loans, like the capital that they call it, are worse than mafia loans that like you know You would probably prefer to take money from Tony Soprano. I don't want to get too deep into the math because it's pretty boring, but you're way, way better to go deep into credit card debt than to take one of these off.
Kurt
Credit card interest rates like it twenty to twenty-five percent.
Jeremy
Most are thirty percent now and it's still a better a it's still a better annualized interest rate. on it. So like, okay, to really, really quickly just talk about it. Right. You put a you put money on a normal Visa Master card, your credit card, you get 30 days to pay that money back. And then after that period, they're going to charge you 20, 30% on an annualized basis. So right, you'd have to carry a hundred thousand dollars in a loan over a year to pay thirty percent. What is it like thirty grand thirty thousand dollars? Well the other piece is is that you know uh the Visa or MasterCard or whoever your credit card provider isn't taking money out of your bank account every single time that you get cash in to pay back their loan. When you actually do the math on most of these what are called MCAs or merchant cash advances, it actually comes out to 40% annualized interest. And the way that that works is that the fees that they're saying that they're charging you are being taken out out of your cap out of your essentially your daily sales before it even hits your bank account. Right, like it's almost like sharecropper model where we're gonna give you a resource and then take things out before you the cash actually hits your banking. And so your two reasons why this is so dangerous. And I like the reason I want to call it out is I'm fine if other companies want to try this, and there were tons that tried this in like 2020, 2022. All of them essentially went bankrupt or left the space. I'm fine if other companies don't do it. I feel like it's really the wrong thing for Shopify to do when they just embed it in the product. They market it everywhere and they make it seem super safe. Because these things are not. And Over the years they have taken out the personal guarantees, which are essentially like if you take a hundred thousand dollars out on these loans and don't pay it back, like Uh Kurt as a human being is responsible for the hundred thousand dollar payback, not Kurt's LLC. There's a whole bunch of bankruptcy laws and other things that they're circumventing that are like really dangerous there. But the other part is Is that they're taking it before it hits your bank account. So if you think about our modern commerce business, you spend a bunch of money on inventory three to six months before you sell it. Then you have to spend a bunch of money on ads to sell it. And then you eventually, somewhere in you know, six months after you started, get cash in. You then immediately have to go back and do that process all over again and buy more inventory, get more, spend more money on ads. Now, a normal loan will give you payback terms because they understand you need to put cash into your business, you need to put cash back out of your business to continue growing your business to have enough money to pay it back. These shop by capital loans just take the money out before you before you the cash comes out then pay for Morgan Moon. And so you get in this death spiral of I take cash, I take these merchant advanced. loans out to pay for my inventory and maybe to pay for ads. I make my sales, but then their seven percent a day or whatever the number that they're saying it is comes out of the hundred thousand dollars that I made in sales at whatever margin, you know We'll say it's $100,000, but then I need to put $50,000 if I have the 50% gross margin back into more inventory to scale. But now I'm losing 7%. So where is the money coming from? Mostly, almost all the time, is my profits. But it's killing your cash flow as you grow. And they're very much positioning this as like a growth tool and something that's amazing for your business Four or five years ago I helped a lot of brands essentially work through these where they actually started stalling out and either declining or going out of business. Because they essentially had to start discounting their product to sell the product fast enough to pay back the loan to then buy more inventory and it's just a death loop of really, really bad and negative behavior. If an individual wants to take these loans out because they think it's right for their business We live in America is their God-given right to do that. But there's not enough customer education for someone to actually understand. what they're signing up for when they do it. And I at least would like to think that the onus is on Shopify to take that education on especially with how aggressively they market these things because it really is like I actually do believe it is a better thing for you and your business to take on the credit card debt.
Kurt
When you're in, yeah, you log into the your dashboard and it's like it's right there as a card on the homepage. Hey, you've got, you know, X tens of thousands of dollars available to you, you know, instant payout. Hmm. And they make it easy. You know, it's a Shopify product, so of course it's very easy to use.
Jeremy
Right. And it's just it's it's so dangerous. Um and it's really the It's not misrepresenting because I'm sure they have all the fine like the fine print and the legal ease, but you really I worked with um High Beam two years ago and they built a calculator to show you like what the loans of all these things actually equal. And every time you do the math of okay, yes, I'm only paying 7% a day, 5% a day, where the numbers that seem super small, the cost of that money is actually so far greater than that small number. And If anything happens to your business, if your meta ads stop cranking, if this product doesn't sell as well, if you have to discount another product, you now have this massive cascade of a cash issue. Because right, it's not like a normal business where the cash is in my bank account and I can decide do I pay the loan back to avoid interest or do I pay for more inventory. You don't have that option in this other model. They've already taken X percent over 30 days that just never even got to you, that you have the ability to go and figure out what you want to do. And it's one of it's also one of those things if I I want to just make a lot of noise about it because It's only a problem when it's too late to fix it. Like it's not something like you know, we mess up the website, ads crash, whatever. Like those are highly fixable products. Even like a bad inventory PO, like your business can survive that. But once you're is stuck in one of these loans, it's 30, 45 days or whatever later you're paying for it, and then you have the issue over here. The other thing is just like from our side, no other lender will really give you more money. Like these are kind of like the junk bonds of the entire debt space. And so usually like when I seen these deals, it's like you know, these distress deals that come from these types of loans. It's like the the business has one or two of these, no higher quality level debt on it, and credit card debt. And so it's just a really dangerous cocktail mix of just things that like just really like it You know, the interesting thing from my perspective is people f like put so much time and effort into us giving them equity and maybe raising some debt at like ten to fifteen percent interest rates, but we'll accept a Shopify capital loan at forty percent like that. And um, you know, you would never think you you you wouldn't go to the SBA and be like, hey, like, you know, I'm happy to take a 20, 30% loan. There's actually in some law, there's some states, there's laws against interest rates that high. But like everybody's just so okay taking with Shopify because I think it's really not properly communicated of how expensive it actually is.
Kurt
With the Yeah. And you know, with the how it collects it and you could figure out the terms. You could sit down and and calculate like, well, okay, this is the actual interest expense on this. And then there's a little bit, it sounds like opportunity cost, because you you know, they're you're not getting the full payout. Um so what is the alternative to an MCA, a merchant cash advance loan?
Jeremy
Yeah, so with meta getting rid of credit cards, that makes the ad part of this dicey. The one place that uh also when we acquire some of these earlier businesses, like once you get to about twenty, thirty million dollars, other debt facilities open up for you that are at a higher quality that you can get out of this space. The other part I really hate about it is, you know, really preying on kind of the smaller earlier brands. The most important thing that I think every small brand misses is their vendors are their biggest creditors. And I'll just I'll position it this way. I'm gonna go back, we're gonna go back to I'm gonna buy uh let's say that your t-shirt brand is doing $10 million evaluation, doing about two to three million in EBITDA, around like $15 million in sales. The first thing I'm going to do when I buy Kurt's business is I'm going to go to every single one of his vendors and negotiate terms. And I'm going to be like, hey, if we pay you net 30, we're now going to pay you net 60. We paid you, you know, whatever these terms are. We're gonna extend it all out because then I just got a 30-day loan from Hertz t-shirt manufacturer. I just got a 30-day loan from the ad agency or the dev agency or the whoever that I need to pay these big buckets of money. And if I can turn that inventory in less time than when I need to pay those people back. I just made money. And so for anyone you ever heard like referred to as cash conversion cycle, I know it's a very, very boring financial term, but it's really important for you to understand in your business. of every major milestone. Hey, we just did a million in sales. We just did two million in sales. We just did five million in sales. Uh there's like a there's like the mo I call it the Mois Ali special. Because his favorite thing was you go to all your vendors and be like, hey, we had this amazing milestone together. What can you do for me? How can you make this cheaper? How can we get better payment terms? And I think smaller brands just assume like they have zero leverage. But you actually do, and the bigger you become at that company, the bigger, the more important you are to that vendor. And so like as you look through your biggest line items, It's always the either payment amounts or terms with your product sourcing vendors, your fulfillment vendors, and usually your advertising vendors as well, like your agencies and all those other things. And if you think about it, if you're starting to scale up very quickly, You're probably paying them five, ten, twenty grand a month. That's a hundred thousand dollar, you know, client for their business. Like you've you've become very important to their business. And so working around payment terms, finding ways to be more flexible is the easiest way, because you know, the perfect world is I Get inventory today, I sell it in under 60 days. All of my payments are 60 days. I've essentially you know this never works this way, but I've essentially made free money And this is what all your retailers do. So like the if you've ever seen Acquire does this amazing coverage of Costco where you have to pay, they will pay you out on their sales in net 30 terms. They sell your items in 28 days. So you ship them your product, they sell your product, they collect all the cash for the full value of the customer, and then they pay you. Right? No cash actually left Costco's bank account when you selling Costco. And so if you can start running that similar model with your vendors of, you know, I'll keep this to manufacturing to be the simplest, assuming most of them are like in China. They are, you know, they get debt way cheaper than we do. They have a lot of terms. They want to keep your business and keep your business growing. If you can, you know, get your product 60 days out. You sell your product, you know, you have 60-day payment terms. As long as you sell your product for less than 60 days, you have the cash now to grow faster. It will never work out perfectly with all your vendors. Well, you want to do this in as many places as possible of essentially limiting as much as possible the cash out of your business before the cash comes into your business. And all these like incredibly fast growing brands that probably most of the people in the space are looking to and idolizing, they've actually mastered this piece way more than they raised a bunch of money or they took on a bunch of debt. The other piece also in this same component is a lot of times, depending on if your business is growing very well, your manufacturer, your 3PL will also either loan you money or invest in your business. Like I can't tell you how it was an option. Yeah, I can't tell you how many successful brands were just like, yeah, we needed a $100,000 line of credit and we asked our manufacturer, and our manufacturer extended us a hundred thousand dollar line of credit on top of our current like payment term. Like, you know, don't you know don't be a like a vulture and like take advantage of everybody, but create mutually beneficial, you know, relationships with all of your vendors. You could Essentially fund your business another cycle by just getting bay better payment terms on other pricing or on um you know there's also there's also for that example you could pay your vendor more but have better payment terms. Right. If you have really this is why we like really high gross margin businesses. If I have 80% gross margin and I need another 30, 60 days, I might pay them and my gross margin comes down to 75%. So they get paid 5% more, but now I've just bought myself two months.
Kurt
This is really good advice.
Jeremy
It's really understanding, you know, you can do this in any business. Like we do this at Coco, like depending on the vendor, like we'll pay different payment terms. And sometimes you pay a little more, sometimes you pay less, like it's all in the negotiation. Ideally, you pay the same amount, you just have better payment terms. And yeah, you essentially you buy yourself a ton of time and a ton of growth. And every successful business has figured this metric out. It's always super boring. Everybody's eyes glize over, but it's the most important thing if you want to grow and grow quickly without taking on a ton of capital in it.
Kurt
Well, I'm I'm glad I asked and I'm glad you brought it up. Because that's good advice. But you know, it's the kind of thing it's not exciting, it's not sexy, it's not AI, right? that so it doesn't get talked about, you know, not in these shows and in these spaces, because it it's just not gonna sell as well and get as many eyeballs. But like that's, you know, the real meat of a business is that cash flow.
Jeremy
True. I need to build a cloud code or like some AI agent that does this for brands and everybody will find it really. I mean anybody could like you could just put in the whatever your preferred LLM is. Hey, here you know, here's my latest invoice. How can I negotiate better payment terms? And it probably actually will spin on something pretty good.
Kurt
So there's your AI spin for everybody.
Jeremy
It's a sexy part of the book.
Kurt
No, it doesn't even have to be hard. We can get an AI to do, you know, half the work for us. So, okay, going back to your acquisitions, are you still looking for, you know, your next perfect acquisition? You got Coco, you like it. What else are we on the hunt for?
Jeremy
Yeah, so we're still looking for that ten to hundred million dollar brand. I actually have a two or three sim uh I have two or three deals to look through this week. Um so we're still looking for that. And then we're also looking for other acquisitions that would make sense to pair with Coco. So a very, very common playbook that you'll see in this space is, you know, we buy one business, what's another business that makes, you know, one plus one equals three. Very, very hard to do. Most people don't do it very well But if we can keep buying more other software businesses that make sense and we can scale up, that's also something that we're very interested in as well
Kurt
That's yeah, I think that's the play a lot of people make and then it's just you know it's harder than than anyone expects to be able to merge two businesses and like get the synergy out of it that way.
Jeremy
Yeah, especially in this space where at least on the consumer side, so many brands are so unique that it's almost like it's almost impossible that synergy with another company. Like they're very successful because they've done something incredibly unique and different. On the software side, it's a little bit different because we can offer multiple services to the same client base. Um, but yeah, it's a it's a very interesting challenge. And you know, um hopefully I don't have to look through another 500 before we acquire our next one. But um yeah, we're we're always l on the hunt looking for our next deal.
Kurt
So you've got this great newsletter, where could people sign up for it?
Jeremy
Yeah, so the best place to get all everything all Jeremy if you're still listening uh this this far into the podcast and this is still interesting. Uh my LinkedIn is the best place. So Jeremy Horowitz, H-O-R-O-W-I-T-Z. The link to my newsletter, I post content daily about something e-comm related and kind of in this space, uh as well as Coco and everything else that I'm working on.
Kurt
All right, uh Jeremy Horowitz, follow him in. Follow him on LinkedIn. Jeremy, thank you so much.
Jeremy
Thanks for having me on.
Kurt
Hey, before you go, I was hoping you would check out our new app, Promo Party Pro. It is what I want to be the single best, easiest way to run a free gift with purchase promo on Shopify. We just put it live in the App Store. We've got less than 50 users. We want your feedback. So if you need to run a free gift with purchase promo in the near future. . Install it, try it. There's a live chat. I check that all the time. And so if you have any issues at all, you know, or any suggestions on how we can make it even easier to use. Let us know. We're happy to help. If you want to try it, search promo party in the app store. Promo Party Pro's the app. Give it a shot. It's got a free trial. Thanks.