If you own a healthy business that operates on a platform like Amazon, chances are you’ve considered selling the business itself.
Whether you are looking to phase out slowly or flip the switch into retirement, there is a robust market of investors and aggregators with an appetite for the right brands.
TJ Hyland is the Director of Global Partnerships at Elevate Brands, an aggregator that specifically looks to acquire businesses that buy and sell on Amazon in order to continue to operate and grow them. In the past two years, they have acquired 30+ businesses.
He let us into the behind-the-scenes factors that go into a successful acquisition, and what you should do to prepare for a successful exit.
Consider your options for an acquisition
When selling your business to a company like Elevate, you have options. You can sell it in full, handing over 100% and walking away entirely. But that’s not the only option. Joint ventures or partnerships are additional forms of acquisition that are a potential for your business.
Types of acquisitions:
- Joint venture
“We’re flexible in deal structure,” TJ said. “We do 100% acquisitions, absolutely. If the seller wants to sell, we don’t need them, they don’t want to be involved, they want to take their money and go to the beach, cool. They can do that.”
But Elevate also does joint ventures, known as a 50-50 split. While sometimes a little bit more complicated on the legal side to draw up, joint ventures can be incredibly successful.
“One of our most successful brands is actually a joint venture that has grown pretty significantly. That was done in early 2020, and we’re actually about to close another joint venture,” TJ said.
The third and final type of sale is a partnership. In these scenarios, Elevate acquires a majority of the business, and leaves 20-40% of the business for the original owner to continue to operate in some capacity.
In a partnership sale agreement, the original owner always has the right to a second exit.
The value of second exits
When owners stick around after a sale as part of a partnership, Elevate incorporates what is called “second exit” terms. This allows the owner to sell the remainder of the business when they’re ready.
“The first multiple, what we call like sort of the upfront, is pretty standard. That is what you are walking away with today when we sign this agreement and the funds go into escrow,” TJ said.
“What we like to do is if it’s a partnership where the original owner is staying on is to make sure that second exit is at a higher multiple. Because then you, as the business owner, are even more incentivized to grow that business.”
Under the umbrella of Elevate and working with the firm’s significant resources, founders can often help their company grow much faster than they did while working on their own. When that does happens, everybody wins.
“In theory, you can do more, buy more inventory, grow the business faster. And say in two years, you have already agreed upon multiple upfront of where you can have that second exit,” said TJ.
Average offers in today’s M&A market
The mergers and acquisitions market is hot, and shows little signs of slowing down. According to TJ, the best offers that he has seen have been around 6x multiples.
“Right now our average that we see is more in the 4-6x range. We’ve said that we think that they’re going to sort of plateau a little bit. But at the same time I still see some offers come across with 7-8x. I would like to think that it’s going to slow down, but I really have no belief that it’s going to.”
Wondering exactly what it means when someone says they sold their business for “3x” or another multiple? TJ broke it down for us.
“Multiples are a number that you would multiply times essentially what is the core value of your business in terms of profit,” he said.
You might be familiar with the term EBITDA, which stands for earnings before interest, tax, depreciation, and amortization.
Elevate uses a similar benchmark called SDE, which stands for Seller’s Discretionary Earnings. SDE is more common in the M&A industry.
Both EBITDA and SDE function to provide a snapshot of the business’s operational efficiency, as well as the profitability.
“Why we prefer to go at SDE is because from a seller’s perspective, there’s a little bit more things that you would write out that wouldn’t be part of the value of your business,” TJ said.
“If you have a company car, if you have this warehouse space that we’re not going to take over, if you have a number of these other things. There’s a little bit of a difference in terms of what sellers do and how sellers value their business.”
Finally, the multiple itself is times that number. For example, imagine your business was doing $1 million in revenue and your SDE was $250,000. If you are offered a 4x multiple, that means that your payday would be around $1 million for your business, or $250,000 x 4.
Get your financial system in order before starting the acquisition process
TJ says that now is a great time to consider a strong accounting system. One that will paint a clear and accurate picture of your financials should you choose to sell your business.
“It’s never too early to put your business in a good position. The number one thing that businesses come to us and do not have a good grasp on is their financials. And whether that’s because they started as just themselves as a side job and they never really took it seriously and now they’re actually running a multi-million dollar business off Excel sheets,” TJ said.
When you approach somebody that’s potentially going to offer millions of dollars for your business, they’re going to want a bit more context than a collection of Excel sheets.
Your financial information isn’t the real problem here. It’s the type of accounting system that you use.
Many businesses use a cash accounting system. But when it comes to selling your business, a much more attractive and useful system is accrual accounting.
The difference lies in the timing of when sales and purchases are recorded in your accounts.
“The biggest difference is that accrual accounting portrays a more accurate portrayal of the company’s health. Because it includes your accounts payables and accounts receivables. Whereas, cash accounting is more sort of time of transaction,” TJ said.
Navigate the LOI process
If you get the point where you are offered a letter of intent to consider from an acquiring firm, known as an LOI, take it seriously.
When Elevate Brands issues an LOI to a client, it means they are 100% committed to the purchase. Only an extenuating circumstance would cause them to withdraw the offer.
“We do most of our due diligence upfront. We will ask all those questions before actually issuing an LOI. Because what do you have to think is these are generally people’s babies, right? They grew them from nothing to now something really nice. And they have employees and families and everything that might benefit from the sale of this business. So we take LOIs incredibly seriously,” TJ said.
The LOI will specify that the acquiring firm intends to pay you a certain amount of money for your business, over a certain number of years within a clearly stated timeline.
After issuing close to 100 LOIs in the past couple of years, Elevate has only backed out of one of them that TJ can recall.
“Sometimes the seller backs out because they accept a different LOI, that’s a different situation,” TJ said. “But if we issue an LOI, unless something drastic happens we really want to go through with that. Because you don’t want to be messing with the seller. It’s a mentally straining activity to be selling your business, and emotional.”
Don’t stop ordering inventory after acquisition
A common misconception is that when once you are under contract to sell, you can stop doing regular business tasks such as ordering new inventory. In reality, you should continue to run your business as usual.
“Do not stop ordering inventory. You cannot sell your business if you have no inventory,” TJ said.
“If we buy your business today and there’s enough inventory to last for one month, and you haven’t placed that next order yet and that order takes 90 days to get here, that means we just bought a business that’s going to sit empty, probably lose the Buy Box, lose all the rank for those two months and kind of start at ground zero again.”
When a firm wants to acquire your business, they expect to be able to seamlessly continue business as usual from the day they take ownership.
There’s no downside for the business owner to do so, as you will list all purchased inventory on your P&L statement, and will get the value of that inventory back as part of the sale agreement.
The bottom line is that you should continue to operate your business as if you were we’re going to be owning it, even as you prepare to sell.
Implement good advertising systems
A company’s advertising systems should not be overlooked when preparing for a sale. The better the systems, the less work an acquiring company will have to do.
“We absolutely want them to have systems. Whether it’s a manual person on their team or a solution like Teikametrics or somebody else,” TJ said.
Having a healthy advertising plan in place will eliminate legwork for the acquiring firm and see what keywords are working.
“When we do acquire a business, day one we do deep dives into the listings, checking all the keywords, the campaigns. How can we improve conversion without changing too much? There’s a whole growth plan that we talk about on what do you do day one, month one, Q1, and then ongoing,” TJ said.
Whether you do advertising work in-house or outsource it, it’s helpful to show the potential in your business and help the acquiring firm understand if there is the ability and value in taking it to the next level.
TJ said that the big-picture view of advertising that Teikametrics provides is extremely valuable for Elevate to use when evaluating business opportunities.
“Teika gives a really good holistic view of the business,” TJ said. “The reporting is really good. And it allows us even before we acquire the business, as part of our due diligence of they’re using Teika, it really helps us understand how is the ad spend affecting organic sales or paid sales, and whether it’s being successful.”
The idea of selling your business may be brand new to you, or it could be something you’ve considered for a while. Regardless of where you are at, it’s never a bad time to think long-term and set up your business for a successful future exit.
Watch the full webinar replay of, Lessons Learned From A Year of Roll-Ups