Today's episode is with your host Coran Woodmass breaking down four real world examples of consumer product brands that sold for $1MM, $10MM, $100MM and $1B. Coran discusses what drives value from the buy-side in each of these transactions and how to think about this if you want to sell your business in the future.
- Example 1: $1.1MM Exit
- Example 2: $10MM Exit
- Example 3: $100MM Exit (Native Deodorants)
- Example 4: $1 Billion Exit (Dollar Shave Club)
- Why exit your business?
- Dealmaking 101 Tips before you go to sell
Mentioned in this episode:
On Truth About Exits it's just you and me. I'm going to walk you through four real world examples and discuss what it really takes to get deals closed. Now in my day to day role as a deal maker, I focus specifically on consumer product brands and in particular brands that sell on online, e-commerce businesses, businesses that sell through Amazon sales channels and alike.I'm going to walk you through four deals that have happened and give you my perspective on what drives value and what it took to get those deals closed from what I know about those deals.
Without further ado, let's dive right into four real world examples. The first deal I'm going to talk about, the first two deals actually are deals that we've actually advised on the exit with the seller. We specifically focus sell side our internal motto is actually Sell Side For Life. We are a sell side advisor, we help our clients go to market and sell for the highest price with best deal terms. That's our value add. The first deal I'm going to talk about is a $1.1 million exit. It was listed for $1.1 million sold for just under that value. Let's talk a little bit about this business first and then also let's talk about what drove the value in this deal. Now the business itself sold. It was a single brand with a single focus target market. The target market was baby and mothers. This is a great niche by the way. There's a lot of products to sell in these categories. I can't reveal the brand on this one as we're under NDAS and we can’t disclose those details. The first two I can actually reveal the brand but I can give you as much information as I can about the niche and the deal itself. This business, I love this business. We could have solved this business 10 or 20 times over if we had more of them. The interesting piece about this as far as buyer motivation, let's dig into that really drives the value here.
First up, the buyer that acquired this business was looking to acquire multiple Amazon based brands around the $1 million purchase price. This was perfectly in their wheelhouse. The business itself had high margins of over 40% net margins. It was about 43% from memory. This one had a lot of cash flow to internally to help grow the business and a lot of profit there. Like I said, it was a single brand focused on a single target market. It actually had a lot of repeat purchase around 25%, which is very high for online businesses. With that sell through Amazon unique designs that weren't easy to replicate. The products themselves, the owner had taken the time to create unique products and not just sell any random product that they could source easily.
A downside of this one or what also drove the value was it was a single sales channel. Amazon was about 99% of the revenue that the business generated. This deal sold just on the list price at about three times earnings, which at the time this sold, this was about the average average multiple that will value that a business like this would sell for.
Now let's look at a $10 million deal. This one we were also negotiating, we're still at the time of recording this are very close but still haven’t quite close this deal. I'm going to walk you through this deal. The reason I'm going to talk about a deal that hasn't yet closed, although looking very likely to close is there's some real interest when we talk about the buyer on this one that we're interested and actually made serious offers LOI, a letter of intent on this deal will be interesting too but first up we'll go with the main buyer that we've moved forward with this brand was focused on the home decor niche and had a lot of history in the business about seven, eight years in that niche, which is a lot for ecommerce businesses. The buyer motivation here for this deal they wanted to add revenue and they also believe they could improve margins via their internal supply chain.
That's why they were interested in this deal. Number one was to add top line revenue. The other thing about this deal that was very interesting to the buyer was simply the size. This would literally add about 20% to that top line revenue of the acquire, this is very attractive to acquire 20% more revenue out of the gate. They had one brand that focused on the home decor niche. Again, a massive niche very passionate a lot of repeat purchase opportunities, upsells, cross sells in that space. They had a lot of scope to grow the business itself. What drove the value in this deal was, it actually had comparatively low compared to other businesses of this size. It had a single sales channel, mostly Amazon. Actually in this case, that's all the buyer wanted. But that's what drove the value here.
Now I can't disclose the multiple on this one. It was a healthy, very healthy multiple. It sold just under the list price value essentially. It's quite an interesting deal for the seller. He's very happy with the proposed deal and the buyers are also very happy. But this is what drove the value in this deal.
Now let's talk about the other buyers in this deal. There were two other buyer groups. The first I want to talk about is what we call a fundless sponsor in this case it was two partners that had formed a private equity group. They actually had individual private equity groups and than joint forces potentially to acquire the deal. Now when you hear the term private equity group, most people, if you've heard anything about exits, everyone thinks that a private equity group is the holy grail and there is only one type of private equity group. Well, actually there are many flavors of private equity groups. Just because they say they have a fund or they have x amount of capital doesn't always mean that's the case. The buyers that put in this offer, we're actually a fundless sponsor in their case that had industry backgrounds in consumer products that was great. There were executives at other companies, they had a lot of experience, they had MBA's, they had investors that were interested in that concept. They'd pitched a concept of acquiring consumer brands and they had a game plan. What they needed to do was find the deal first. Once they found the deal they needed to vet the deal and make sure it was a good deal but then also go and pitch their investors. They didn't actually have committed capital or a fund necessarily. They're also a fundless sponsor is also more than likely wanting to use debt to acquire a business.
These are things that you need to understand when dealing with a fundless sponsor. Now, we were very close to terms with these guys and we knew all of these things. We knew we'd have to essentially help them sell the deal to their investors, which is part of the deal. We were happy to do that. What actually happened during this period, which was late 2018, one of the partners in the private equity group had traveled to China and was getting some feedback on the niche and also regarding potential trade disputes between the US and China. Came back to the US with let's say a pessimistic view on this, on this particular niche, this particular deal and actually pulled the LOI before we were done negotiating. In this case we didn't move forward with them but I found this really interesting getting to understand the motivations and what it would take to close this deal and also how they would fund the deal.
If you're ever dealing with a fundless sponsor or if you're ever dealing with a private equity group, ask them what they're the groups funding structure looks like and you may find that they're actually a fundless sponsor. They also call themselves independent sponsors because fundless sponsor sounds a little bit negative but it is essentially the same thing. You could also find an independent sponsor fundless sponsor that's had success closing deals before. Personally, I look at a private equity group that's closed deals before and raised capital before with a little bit more optimism because they've done it before, especially if it's in a specific area. As I mentioned at the top, we focus on e-commerce and consumer products. If they've done deals in this space before then that's a very good sign. The next buyer that I'd love to talk about here is the strategic buyer.
Again, if you've had anything about selling a business, any, any information you've talked to someone that sold a business, you may think that a strategic buyer is the buyer you want to get. The perception is that if they're hyper strategic, they can plug your products into their buyer pool, they can plug your products into their distribution channel or whatever it is. If you have a consumer product brand as well, whatever your business you may think it's strategic will because they can plug into their existing infrastructure and blow up that revenue or cross sell or whatever you think they would pay more. Now sometimes that is the case and we're actually going to talk about two of those in a minute. But in this case specifically, the strategic was owned by a private equity group. They had a portfolio company that was hyper strategic in this business in this niche that wanted to acquire the company and specifically bring in our client to run the combined businesses, which he was actually interested in.
But then the problem with this deal and again we got very close. We were close to signing the deal here. What stopped the deal was the fundamental fact that the partners in the private equity group, were fundamentally value investors but a value investor essentially wants to get their investment for nothing in fact that bought the portfolio company that was the strategic out of bankruptcy. That’s where they operate in buying distressed assets and improving them. That was the motivation coming in was how do we spend as little as possible to acquire this business and in this case also bring talent to the team, to the combined business and make it better.the upside for them was very high. The downside for our client was he had upside and downside. We discussed all the options with him.
We came up with a strategy of what it would take to get the deal done. Unfortunately, we didn't close that deal with the existing deal that we have that I mentioned when first starting to talk about this deal is a much better outcome for the client. It worked out okay. But I want to highlight this strategic business because that's what you really need to figure out. It's not just this, there are many flavours of private equity groups and many flavours of strategics. The funding funding is one piece but also the operations teams and the motivations of the executives behind the business will often oftentimes dictate what the offer could actually be and whether the deal is a good deal or not.
Next, let's kick it up a notch and let's talk about a hundred million dollar exit. Now, I wasn't involved in this deal, but I have heard the founder speak and I've also researched this one a little bit.I'm going to give you my perspective on this deal and what drove value. The company is called Native. I'm a customer of Native, they make deodorants and have now expanded their line. Now back in 2017, November 15 2017, Procter and Gamble acquired Native for $100 million. It was a decent sale. Moiz the founder of the company, I saw him speak and he said it was a 10 times EBITDA purchase. They were making about $10MM a year at the time they were acquired. He also mentioned that it was Procter and Gamble's first acquisition in about 10 years. What drove the value here on the buy side?
Why did they pay 10 times EBITDA for deal like that? When the first we spoke about was only three times? Well as I mentioned it was the first acquisition Procter and Gamble had made in 10 years they clearly wanted Native, they didn't want any consumer product brand. When you're the only option or one of very few options, this drives value because the buyer is competing to acquire your company. Next, they had a single product, a single sales set that's a tongue twister. They had a single product, a single sales channel and a single target market. They only sold deodorant although they had many variations. They had a single sales channel through own website and at the time they were acquired, they were only selling into the US nowhere else. You couldn't buy this outside of the US directly from them at least.
The whole strategy was direct to consumer via their own website. That's all they focused on. Next Moiz himself was 100% bat shit, crazy obsessed with creating the best product, constantly iterating the product. He was obsessed with creating the best product, overly obsessed too. He showed slides in his talk about how he was obsessed about creating the products that drove value that because the product was the best it could be and they were constantly improving. Next, I believe the business itself had about 60% repeat purchase, mostly via subscription. If you're looking at income from a business, the absolute gold standard is repeat purchase. If what it takes, what it costs to acquire a customer and how long they're likely to stay as a customer, you can work out your lifetime value of the customer per customer. If you've got 60% repeat purchase fire subscription model and you can keep growing that business, you're printing money at that point.
This was a money making machine as well as being a great product. The last piece that in my opinion, drove a lot of value in this transaction was Moiz the founder and CEO and the whole team was staying on to continue to drive the growth of the business as a partnership. They weren't looking to exit the business. All of these aspects are what I believe that really drove value as far as Procter and Gamble wanting to acquire Native deodorants.
Let's look at an even bigger deal. Let's look at $1 billion deal. Now, you may have heard of a company called Dollar Shave Club. They made headlines when Unilever bought the company on July 19 2016 for a billion dollars, I believe it was the largest e-commerce sale at the time. Now reading off the news wire release business, wire release from Unilever I'll give you a couple of points about this deal and then we'll dive deeper into what drove value here.
The first thing you may not know about Dollar Shave Club was at the time of acquisition they had 3.2 million members. They started out selling dollar dollar razors on a membership and they built a database of 3.2 active members and the turnover at the time of sale was 152 million and was on track to exceed 200 million in 2016. That's pretty powerful. Now what drove the value here was the buyer motivation, well Unilever and in fact all large consumer brands have one common problem. They have no idea how to compete with these niche direct to consumer brands that are taking stealing market share. They’re used to advertising, they’re used to having retail distribution. They’re used to wholesaling there products, they don't know how to sell direct to a customer and also starting from zero was really hard. Instead of starting from zero they're very interested in acquiring other businesses, which is why you're starting to see more of these acquisitions happen.
Now, the 3.2 million customers on a recurring membership that is insane, to say you have traction at this point is an understatement. This is a movement. This is a force of nature at this point. They wanted to get their hands on that. While researching this deal, I looked into Unilever a little bit and what I realised, what I discovered was Unilever in 2015 had a budget of 8 billion billion with a B, set for marketing in 2015. To spend $1 billion in order to acquire about 200 million in revenue is a pretty good deal. It's all about perspective. $1 billion to most of us as a is a lot of money and it is. But when you compare it to what Unilever's spending on just marketing alone with no direct result to revenue, that's an amazing deal.
When they could spend a billion and acquire 200 million and growing in revenue plus that put the deal at about 6.5 times revenue, which is pretty awesome. That's a great exit. Now think about it from Unilever's perspective they’re not just a financial buyer they’re what we call a are hyper strategic. Of course they could look at leveraging their unfair advantage, which is offline distribution channels, supply chain, and even talent. Now I saw Michael speaking, I had a chance to ask him some questions at a conference and he answered most of them. He couldn't talk too much about the deal structure unfortunately. But one of the things he mentioned in his talk was once they closed the deal with Unilever he was able to access high quality talent. Now if you think about it a lot of executives that go through MBA programs go to top tier schools.
They want to work for companies that have the backing of a large business, not necessarily a startup. I mean at 200 million, that is more than a startup but a startup that's coming from nothing. They want to be associated with big companies. Once they did the deal with Unilever, Michael was saying he was able to attract better talent to help continue to grow the business. Also, Michael said in his talk that he'd spent a lot of time getting to know the CEO of Unilever. They didn't even run a sales process on this deal. They actually did this as a partnership essentially they started talking and then over time they got more comfortable about the idea of a partnership. Now a couple of reasons why Michael and the team may have wanted to sell this business is that raised a lot of money, about $150 million to get to this point.
I mean like that competing against Gillette, Schick these big massive companies with huge deep pockets. They needed to spend a lot to acquire their customers and acquire that market share with that VC backing that we're constantly going out needing to raise more capital. This solved that problem for them because they could access deeper pockets and also distribution. It was a real win win and of course again in this deal, the founder CEO, Michael and the whole team stayed on to continue to drive the business forward and grow the business as a partnership. That's what really drove the value here from the buy side. Also why the CEO and owners wanted to sell the business.
Now to switch gears here for a minute, you may be thinking why sell if you're an entrepreneur, you're making good money or you're looking at this from the outside, you're thinking $1 billion is great but he was making 200 million anyway. Why would you sell or that $1.1 million deal? Why would they sell? If we look at it from the entrepreneur's perspective, why would you sell? Where I start with this conversation or this topic is to think about where you started, not where you are now. When it comes to the value of a business and thinking about should you sell or should you not? This is where I want you to start to take a minute to think if you're an entrepreneur, back to when you started when was your first entrepreneurial endeavour and what did it take to get you where you at today?
If you're considering selling or looking forward towards an exit, think about all that pain, all the choices the getting up early, staying up late, fights with the spouse to do business instead of doing more fun stuff to get that momentum going in the beginning you feel bootstrapped that's probably were you are. You may be thinking about selling and what if when you sell your business, you could unlock generational wealth. Now this of course will depend on where you live as far as what generational wealth means to you. But as we've just seen in those four examples at each level, depending on where you live and what your goals are that could have been generational wealth. Definitely at the top levels, a hundred million, billion, even 10 million is a really good amount of cash.
Some past clients motivations to sell, I'm just going to go through a couple of real world examples that we've had with our clients. One of them was looking to unlock capital out of his business to buy a house for his family and moved back to Poland. That's not unlocking generational wealth but that's actually a meaningful change and important thing for that seller to do. He had other income streams this wasn't his only business. Next was investing outside of the business. A lot of our clients actually spend a lot of time investing outside of their business and they realise once they get to a point that if they can generate decent returns and sell that business for x amount, as long as they net that out of the sale, they could predictably put that capital to work and then maybe either go to the next level or not have to work again.
They could choose whether to work or not and that's pretty compelling. The next reason that we've seen as motivations is literally financing growth and removing personal liability. That 10 million exit I talked about before, the client there was actually on the hook for the loans he had on the business to continue growing the business and he knew that his personal liability was getting higher than his comfort level and he also knew that that was limiting growth. Simply by putting more capital into the business, he could see a clear path to growth and while the business was growing, this is a great time to do that. Then take the cash off the table as well.
The next is straight up bragging rights. If you're an entrepreneur and you have a seven or an eight figure and nine figure exit, it's awesome. If you go to an event business conference and someone says, Hey, that guy over there sold for eight figures. That's interesting. It's something interesting to say. I've seen some people say I'm a full cycle entrepreneur. If they've built and sold a business, there's all sorts of names behind this, but also there's a swagger that comes from just having that exit.
The last thing is legitimately to unlock generational wealth. What if you want to set up your family and your children's Children's children for generations, right? That's part of the option when it comes to building a business as opposed to having a job. You can actually sell the thing when you're ready.
Something people don't admit is that they're actually scared of the income going away no matter how diverse the businesses how sustainable the business is, how predictable it is, there's still fear of what if it all goes away, especially if you've built the business from scratch. At some level than may be fear, there's definitely fear involved at some level. I’d be aware of that. If you're an entrepreneur, fear on the buy side as well, you'll know this already, that there is fear in play. But if you're an entrepreneur, your why is the only one that matters when it comes to selling or not selling a business. The same people that told you you're crazy for starting a business will probably tell you that you're crazy for wanting to go sell a business. But if it's the right time for you and everything stacks up, then it may be the best option for you.
I love this quote from Peter Shankman. I saw him speak at a conference a few years ago in Bangkok and he said lie to everyone else. Just don't lie to yourself. I'll give you some context around this. This quote Peter was saying before saying this quote, he mentioned he speaks all over the world. I saw him in Bangkok, he lives in New York he speaks all over the world and whenever he gets asked to keynote in Las Vegas, he said he would only do an afternoon or lunch time spot or he wouldn't go at all. The reason for this at the time was he knew if he stayed over night in Vegas, he gambled too much, drank too much and had too much fun and then the rest of his week would be shot. Now in Peter's defence on I believe he now no longer drinks so this may not be a problem anymore but at the time he knew that about himself.
That's when he came up with this line of lie of lie to everyone else just don't lie to yourself. If you are thinking about selling a business get real with yourself and give yourself permission to think through every possibility and make sure this is the right decision for you. Why your why is because at the end of the day, your why the only one that matters. If you're thinking, okay, this is cool with we've gone through some examples I understand why I might want to sell and I want to sell, what do I do next? I'd like to take you through real quick, my top deal making 101 tips.
The first tip I can give you if you're thinking about selling your business is that value is driven by the buy side. Value is driven by the buyer as we've discussed in these four examples today, I hope I've been able to impart on you why the buyer bought that business for the, for the value thought it was worth.
That's the only thing that matters. Whatever your investment banker, business broker, friends, you think that business is worth is irrelevant. Yes, you can have targets. Yes, you can set prices in advance but at the end of the day, the only one that matters is who's going to buy the business and who's going to write the check. Understand that before you go into the process.
The next step. My next rule for deal making is for the most part, for 99.9% of businesses, one is none. What I mean by that is one buyer is generally not what you're looking for unless you’re Dollar Shave Club that has that relationship. You, you probably want multiple buyers. It's almost always better. We had one client last year in 2018 who is a great personal friend of mine. He's actually been on the, the show Truth About Exits as well. His name is Mark. You can go and listen to his episode. What we didn't talk about in that episode, was quite a few things, but one of them was he had a strategic buyer in mind for his company before we were looking at going to market. Mark said to me should I just do a deal with these guys and then not even go through the process. He actually reached out to that buyer and the buyer said sure I'd love to take a look at the business send out your deck. That's actually how we got started working together was we started working on that with him. But at the same time I said look if you're going to, if you want to sell the business, why don't we run a process and see what options we have and try and build as much demand on the buy side as we can.
He did agree to do that. Those initial buyers, we're actually in the process. I went and met with them that based out here in Austin. We met them in person and we got them in the process. While they were strategic and while they were friends and it would have been a great deal for both of them, the value that those buyers would have placed on the business was nowhere near where the market rate for that business should be. Also they wanted to acquire him and have him run that Amazon side of that business. There would have been more strings and less cash. The deal structure just wouldn't have worked right. But on the surface it looked like they were the perfect buyers. In almost every case you want multiple buyers and the biggest thing you can do to boost the value in a deal scenario is build your business such that it is differentiated from the competition, the fact that they want your business specifically instead of just any business.
That one point $1 million deal we talked about, that buyer was literally looking at anything in that price point that's sold on Amazon. I went to their office they had and on the whiteboard in their office onto the next one, literally written on a whiteboard because they had that much deal flow. They were looking at everything. Whereas if you've got a Native or a Dollar Shave Club, this is a style business. It doesn't have to be that large. If you have some defensibility, something really unique about the business that buys, want your business, that's what's going to drive huge value for you and stack the deck in your favour as a seller.
What did we learn today? Let's do a quick review. First up, we learned that the buy side drives value. Next we learned that control of sales channels are valued higher. In the case of both Native and Dollar Shave Club, they actually had those customers directly through their website. They weren't relying on a third party platform. That's valued higher brands targeting a single target market. It definitely preferred and consumer products. I would argue that that would be preferred in almost any scenario. If you had silos in your business that targeted single target markets and you had more of them, more than one that's cool. But if you have one single target market and your whole business is compounding in that market, it's greatly preferred because you have more leverage there. Next we learned that recurring revenue is absolute gold. It gives you predictability for your future revenue and it makes the buyer more confident buying your business over someone else's if you have recurring revenue and then if it works for you, staying in the business after the sale can actually give you more leverage. The vast majority of buyers out there have more capital than time at all levels. Even that Unilever example, they didn't have a team to deploy and take over Dollar Shave Club. The fact that Michael and his executive team and the whole team really was staying on with the business to continue growing was really attractive and that's part of what made the deal at deal for them and a win win.
But at the end of the day, as an entrepreneur, as a founder, as a business owner what you build will appeal to different buyers. When you go to sell, you really need to understand this. What you build will appeal to different buys when you go to sell. The best part is it's your choice. You're in charge. You don't need to do what anyone else says. Hopefully this has been an example of a framework to look at some value drivers for you but it's at the end of the day it's your choice whether you want to a million dollar exit, 10 million, a hundred million, billion dollar exit or not sell at all. It's completely up to you. I'm not saying you could go and predictably sell for $1 billion, those work that you need to do but we've shown today and gone through some examples of what drives the value to that billion dollar range to 100 million to 10 million.
It's up to you what you do and you don't have to sell. My personal philosophy is if the business is built such that you could sell it at, at will if you ever needed to, hopefully one day maybe you need to sell the business went out all going to live rather ever. Unfortunately, if you need to sell the business then it's ready to sell. If you could choose when to sell the business, you have way more leverage. That's what we like to focus on is helping our clients figure out exactly when the right time for them is to sell their business. I hope that's been a cool episode with just me on today., of course this is what Truth About Exits is all about what it takes to close deals. Let me know if you'd liked this one and I'll talk to you again soon.