#21 - How To Value, Sell and Buy Online Businesses

I want to buy your business. What's your discretionary earnings? or how about you buy mine, can you get an SBA loan approved? No idea what we're talking about? Don't worry, Joe Valley (@JoeValley2) from Quiet Light Brokerage breaks down exactly the specific concepts and the tactical approach you will need to learn to value, buy and sell online businesses. He's one of the best in the biz so listen up because he knows his sh*t. See acast.com/privacy for privacy and opt-out information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  First thing you gotta do is get the numbers right. Sellers discretionary earnings. Net income. Trailing 12 months. Profit and loss. Add backs. Slipped to accrual. Listening to business, getting under LOI and then having it fall completely apart. And due diligence because all the numbers are wrong. It's heartbreaking, it's debilitating, it's emotionally crushing, but it's reality.

• 0:23Speaker 00

  People listening, they know the value of their car, their house, their condo, their retirement account, but they probably have no real accurate idea what the value of their most valuable asset is, which is their business. So we're seeing larger, more mature businesses where the entrepreneurs are smarter, they're more educated, and the size of the businesses are much larger. You know, in 2013, when I closed 23 transactions myself, it was about $225,000 on average. In 2018, my average size was about $2 million.

• 1:00Shaan Puri?

  5 million is not enough. 10 million. 15 million. 20 million dollars.

• 1:04Speaker 00

  100 million dollars.

• 1:05Speaker 02

  Almost a half a billion in revenue. 850 million dollars.

• 1:07Shaan Puri?

  One or two people in a bedroom actually the threats to these like giant multimillion dollar companies because you have creativity and you have nothing to lose.

• 1:16Shaan Puri?

  Add another zero to that price, buddy. Add two more zeros.

• 1:23Speaker 03

  Every week, we sit down with self-made millionaires and ask them, how did you do it? I didn't start a podcast. I started my own personal business school and the teachers are the successful entrepreneurs behind the biggest brands and businesses that we find today. I wanted to know the real stories with all the details, like how did you get your first 100 customers? What did it feel like when shit hit the fan? I ask them, how'd you spend your money now that you're rich? And what would you do if you were starting over from scratch again today?

• 1:52Shaan Puri?

  If you're like me and you want to own your own business instead of living a nine to five job, this is the podcast for you. The Hustle presents My First Million.

• 2:06Shaan Puri?

  Here we are. I got Joe Valley with me here on the podcast. He's partner at Quietlight Brokerage, which if you listen to the episode, I think two, with Ramon Van Mir, who had an amazing story where he created a blog about soap operas, even though he's never seen a soap opera in his life, but he made one of the most popular soap opera blogs in the world. And when he needed to sell it, he went to Quietlight. He actually tried several different methods to sell the business. When he finally was able to sell it for nine million bucks, it was through Quietlight Brokerage. And that was the first time I had ever heard of it. And since then, I've been hounding your site to see what are the other opportunities? What are the other great businesses that are up for sale? Because, you know, if you're somebody who is looking for a business to buy and rather than

• 2:50Shaan Puri?

  start, these are businesses that are already running, have been running for years. They have income, they have profits, and they're not, you know, marked up like a crazy tech company with like 50 times, you know, revenue or something like that, very reasonably priced. So I love Quietlight. I wanted to get one of the main people behind Quietlight on the podcast just to talk about this. And so we have Joe here today. Joe, welcome. How are you feeling?

• 3:12Speaker 00

  I'm doing fantastic, Sean. Thanks for having me on. I'm going to jump right in to say something.

• 3:16Shaan Puri?

  Yeah, please.

• 3:16Speaker 00

  The beautiful thing about Ramon, who I count as a friend now, is that he didn't just sell a nine million dollar business. He actually sold a $200,000 business first, right? And learned from that and built another. And the next one that he sold through Quietlight was $400,000.

• 3:33Shaan Puri?

  Right.

• 3:33Speaker 00

  And then hit the motherload and jumped up to nine million. So I don't want anyone to think, oh, my gosh, that's amazing. I'll never get to that. People start where they start and they just keep going forward and fighting and ramping and succeeding. People like Ramon, it's an incredible success story. If anybody hasn't listened to that episode, go back and listen to it. He's got quite a story.

• 3:53Shaan Puri?

  And even better, his new venture, which he originally bought, I believe, off Quietlight and has ramped up, I think is going to be a hundred million dollar business. And, you know, in the time I've been messing around doing a podcast, you know, between episode two and wherever we're at now, fifteen or so, this guy's built another massive business that he bought and sort of renovated off of Quietlight. So.

• 4:13Speaker 00

  I just talked to him today and I tried to give him credit for that. I'm like, man, that's incredible what you've done. I said, it's all you. You've done some incredible stuff. He goes, he's so humbled. He says, no, actually, it's really my team. And I'm like, okay, Ramon, you hired the team, you guided the team, you inspired the team, you treat the team well. It's really you. So it's incredible story for sure.

• 4:31Shaan Puri?

  Yeah, yeah, exactly. Okay. So before we talk about how much we love Ramon for an hour, because I will do that, let's hear about you, your story. You know, give me a sense of your entrepreneurial background. So give me the two-minute version of who you are, how you kind of jumped into the entrepreneurial world, what that's been like for you.

• 4:48Speaker 00

  And I've been hustling since I could walk, to be honest with you, but we'll jump to the adult version of when I was grown up and launched my first venture, married back in 1997. And I was working for a company in Portland, Maine. I was the 34th employee and it was amazing. I love going to work every day. I get there early, I'd stay late. I couldn't imagine being anywhere else until I couldn't stand it anymore, right? It got so big, so corporate, so people just tried to climb the ladder, that there was a time when I couldn't imagine working anywhere else. And then, all of a sudden, within two and a half years, I couldn't imagine working there anymore. So I jumped ship and launched

• 5:27Speaker 00

  a media buying business back in 1997. We used to buy radio airtime for direct response clients, which really are now all internet-based clients. And I said to myself, if I could just make $50,000 a year working from home, I'd be thrilled. That's just incredible. And I had one client in 1998, my taxable income was just north of a half a million dollars. So I 10 times my goal at that time. And it took off and grew from there. It wasn't long before somebody knocked on my door and said, hey, look, I've got a call center. I hear you're good at buying media. Do you want to partner? Partner on something and we did and I launched my first product on radio, took it to radio and then did a television infomercial with it,

• 6:12Speaker 00

  let it run its course, did the next one, let it run its course and then took that one 100% online in 2005. And that particular one, we did 100% online from 05 to 2010 when I exited the business. So if you can imagine, we took it through the absolute best of the economy and the absolute worst of the economy. And it came up the other side of it emotionally toast, exhausted, not loving this amazing online recurring revenue, e-commerce supplement business that I had that was providing a very healthy living for myself and my family for less than 20 hours a week. And I just absolutely had to get rid of it. It's horrible story. People out there rolling their eyes going, what the hell's wrong with this guy?

• 6:57Speaker 00

  But if they're entrepreneurs, they know that you just get bored. It's time to move on. You've got to do something else. And so at the time, it just occurred to me, I never knew it before, that I had something I could actually sell. And so I started looking online and calling online business brokers, people that specialized in selling online businesses, which mine was. And I talked to three different brokerage companies. Two, I felt like all they were trying to do is to get their hooks through the telephone line into me for a commission. They just wanted me to sign an engagement letter. The third was Mark Doust at Quiet My Brokerage and he's now my business partner. And he looked at my profit and loss statement, gave me some good advice and basically said, Joe, look,

• 7:40Speaker 00

  we're coming off the tail end of the economy. Your numbers are just coming back. If you wait six months, you're probably going to put another $100,000 in your pocket and give some time to get organized and prepare. And I thought, who the hell is this guy? He's essentially telling me, go away. It's in your best interest, Joe, to hang on another six months and I'll be here when you're ready. There was no one else that I wanted to do business with at that time. And so I did, I waited, I implemented the things that he suggested and I tightened up my ship, so to speak, and made my business better for the next person that was going to run it. And more valuable for me to sell it as well. He handed it off to Jason Yelowitz, who's still a broker at Quiet Light, still a member of the team, leader of the team, really.

• 8:22Speaker 00

  We listed the business end of October, had it under LOI and sold around Thanksgiving. It was a 30-day due diligence process, so somewhere around that period. We got nearly full asking price, and then I had to figure out what I was going to do with my life. I had just bought a house that was built in 1989, Sean. Some of these people listening weren't even born then. And the guy that built it put shrubs around the yard, and there were 89 of them because I counted, because they were like giant tree stumps. And for a couple of months, I grew up in Maine, by the way, so I had a sharp axe. And I live in North Carolina now, but I was a total redneck out there swinging an axe for about 30 days, getting rid of all those stumps. It was, you know, physical therapy for me. After being just mentally challenged for so long, I just, I loved doing it because

• 9:07Speaker 00

  it allowed my mind to just wander in terms of what I wanted to do next. And I kind of came to the conclusion that I wanted to buy something, and I wanted to do what Jason and Mark did here at Quiet Light Brokerage, which was help others grow and exit their businesses. So I did both. I actually, I bought a content site and had 42 amazing days, and then the floor fell out from beneath it. It was the Penguin update, so it got crushed. All the keywords that were on Page One got crushed because the guy that built it cheated like crazy. And it was a very valuable lesson, lost about quarter of a million dollars. But that lesson has helped me in what I do now as a partner here at Quiet Light. I joined Quiet Light in March, April 2012, worked my tail off, closed 23 transactions

• 9:52Speaker 00

  in the first full calendar year. And then for several years thereafter, really closed more than 50% of total transactions for Quiet Light. Mark and I sat down, we agreed that we needed a partner, and we set a goal to do that and a path to do that about three years ago. And a big part of the goal was to minimize my role as the person closing so many transactions. So we've grown from a team of Three to a team of 10 and we brought on two brokers plus one more over the last three, three and a half years. And this calendar year of 2019 now will be the first year where I have enclosed nearly 50% of total transactions. We're doing so much this

• 10:36Speaker 00

  year and some of the other team members that are incredible entrepreneurs. I'll probably be 10, 15% of total closed transactions. And the entrepreneurs that we have, man, they should be on your show because they've all made their first million and more. Brad rolled up 30 content sites and sold it to private equity. Jason's been a super affiliate. All sorts of incredible success stories with the entire group. Walker's got a bestselling book, Buy Then Build, that your audience should buy and read because it's all about buying online businesses and building a portfolio, just like our friend Ramona's doing. But it's been a great journey. I think we've grown five times over since Mark and I decided to be partners and we've had a great success and we see great success in the future.

• 11:15Shaan Puri?

  Let me ask you, you know, I'm on Quiet Light right now and I'm looking at what's for sale, which I do probably once a week right now. And I see that somebody's got a real estate coaching business, you know, asking price 8 million, revenue 5 million, income 2.2 million. Wow. You see some things that just sold. So like this is a hockey training game, a patented hockey training game that's asking 6.9 million. But then you have other more affordable businesses that if I scroll down, you know, a 17-year-old online candy business that's asking 350K and does 1.1 million in revenue per year. And so there's all these different businesses. Let me ask you, in a given year, how many businesses get sold through your guys' site?

• 11:57Speaker 00

  2018, we did about 50 total transactions.

• 12:02Shaan Puri?

  How do they find you guys? How does the person who owns the 17-year-old candy business, how do they know, how do they find out I should list with Quiet Light? And are you reaching out or is it coming inbound? What is the primary way that people find you?

• 12:12Speaker 00

  It's through content that we've developed over the years. It's through our own podcast. It's through attending events. It's through helping people like Ramon who then, you know, share his story and people find us that way. We don't do any outreach and, you know, sort of show up and Knock on people's doors or email and say, hey, man, you've got a great business. I've got a buyer for you. We find that's a bit unethical and underhanded and not honest. So we don't go with that approach. We're here to help first. It's very rare that we will talk to someone and list their business for sale two weeks later. It's usually a longer process and it's the smartest thing that an entrepreneur can do is plan their exit. Because there's a million different little things that they should do to make it more valuable and prepare for the exit.

• 12:57Speaker 00

  First, they need to know what the current value is so that they can understand how to set proper goals. Unfortunately, you know, you and I both and people listening, they know the value of their car, their house, their condo, their retirement account. But they probably have no real accurate idea what the value of their most valuable asset is, which is their business. And that's a shame because there's so much misinformation out there. It's not easy. That's part of the challenge is that is it calculating the value is not an easy thing to do.

• 13:27Shaan Puri?

  And how does that work? You guys go in and calculate the value of the business or make a recommendation? Or the entrepreneur throws out their number and you kind of give some guidance. I see an asking price on the site. How did that number come to be?

• 13:40Speaker 00

  It's really more of our valuation process. The hardest part right now, I'll tell you, is calculating what's called sellers discretionary earnings. I don't want to get too technical, but that's the primary term. When people talk about, oh, I got a multiple of two, I got a multiple of three or four or five. It's a multiple of sellers discretionary earnings. And it should always be a multiple of the trailing 12 months sellers discretionary earnings. Now, what the hell is sellers discretionary earnings? It's net income. You run a profit and loss statement. The bottom line number is net income, bottom row, right? Net income. Well, you pay yourself a salary. You do some personal development. You travel, but you write it off through the business. You might even write off a car, but you have an internet based business.

• 14:22Speaker 00

  So you've got some personal benefits there. That's what we'd call them is owner benefits. Those are called add backs. So seller's discretionary earnings equals net income plus add backs. So you figure out, the hardest part is figuring out what seller's discretionary earnings is, or SDE. And believe it or not, Sean, the hardest part is actually getting entrepreneurs to use good accounting software.

• 14:45Shaan Puri?

  Right. That's what I was gonna say.

• 14:46Speaker 00

  Quick purchase zero.

• 14:47Shaan Puri?

  The hard part is that people don't have their shit organized. I know, because even the best entrepreneurs often don't have their stuff together, or they have weird things where two businesses are tied together and they need to actually split them and things like that.

• 14:59Speaker 00

  Yeah. And the more people I can reach to talk about that and get it through their heads that it's the most important thing they should be doing is making sure their financials are in good shape. Because someday they will wake up and go, man, I hate this. Or something in life will change where they want to exit and the best thing they can do is have good, clean financials and be prepared to exit.

• 15:24Shaan Puri?

  Right.

• 15:24Speaker 00

  Because when you are not prepared, I just had a client come to me where he was looking at another brokerage firm and it came to me and I felt kind of pressured, so I signed that engagement letter with him and then dug deep, deep, deep into the financials. He's doing 10 million a year in revenue. Turns out that all the top line revenue numbers are not accurate. So first thing we gotta do is fix that. Second thing we figure out is that it's all on a cash basis. So if a business is growing, physical products business is growing like crazy and they're using cash accounting, the net income is gonna be severely depressed. Right? So if you're taking all of the excess cash from the business and buying more inventory and that inventory is in your profit loss as an expense, you've got an extra $200,000

• 16:08Speaker 00

  or $300,000 or $400,000 in inventory on hand, it's gonna depress your net income by that $200,000 or $300,000 or $400,000. It has to be flipped to accrual and it should be done by a qualified e-commerce bookkeeper. They're out there. I'll be happy to refer anybody to any one of them. It's important, you should be doing it. We initially, this gentleman initially thought his business was doing 1.3 million in discretionary earnings. Well, after digging deep into it, the reality is with all the proper adjustments, the way it should be, he was doing about $800,000 in discretionary earnings. So he's gone from a value of six to seven million dollar range, right down to three and a half to four.

• 16:48Speaker 00

  It's heartbreaking, it's debilitating, it's emotionally crushing, but it's reality.

• 16:54Shaan Puri?

  Right.

• 16:54Speaker 00

  And I'd rather be brutally honest with somebody and get them on the path to achieving their goals and their financial success, than to lose them and overprice a business, take them through that emotional jungle that they'll go through in listing the business, getting under LOI, and then having it fall completely apart in due diligence because all the numbers are wrong. First thing you gotta do is get the numbers right.

• 17:17Shaan Puri?

  Right. That's the thing I liked about this, because the thing that for me, when I was looking at buying, I was like, well, trust is a big piece, right? Buying an online business, you're not buying, you know, it's not like you go, you see the house. Okay, you walked through the house, you know what you're getting here. These are online businesses, it's easy for people to inflate traffic, or, you know, like you're saying, like not have accurate numbers, things like that. What I liked was that you guys went really deep. Like the first one I clicked to find out more information, I got this like amazing packet of, here's interviews with the seller that were like very, all the questions I would have were already asked. There's the financials, there's a video, there's all this stuff. So I like that. It seems like you guys are going for trust and quality, right? You're like, you don't have a whole bunch of different businesses on the site, there's only a handful.

• 17:59Shaan Puri?

  But they are of a certain level of quality and the trust is that, hey, you know, what I see is what I'm gonna get. That's my impression of it. I haven't tried anything yet.

• 18:06Speaker 00

  Absolutely right. Trust is not, you know, one of the most important things. It is the most important thing. Remember, I lost a quarter of a million dollars by buying something from somebody that I shouldn't have bought it from. I got pressured into it, which is crazy because I'm a mature professional, a successful entrepreneur, but I still got pressured into buying the damn thing. But it happens, we're all human. Trust is so, so, so critical. I don't want anyone else to lose a quarter of a million dollars like I did in 42 days.

• 18:33Shaan Puri?

  Was that the case from day one, or was this something that evolved over time? Like when they started this thing in 2007 or so, did the site look like it does today, or was it different? Because I think a lot of people are gonna do this with their. Their business, right? With any business, you got to decide what are the one and two most important things I have to nail that I want to be best in class with? And I want to be different than the competition, right? Like there's no such thing as being better. You need to be different. And then you have to decide, okay, if I'm different, in what way am I going to be different? Is it going to be, I have the most selection, I have the lowest prices, I have the most trust. You know, you could trust me the most because I do this verification process, whatever it is. And so you decide on that. Everybody needs to decide. So I'm curious, how did you guys decide? Was that a day one decision or sometimes these things come in a year later, three years later, what not?

• 19:16Speaker 00

  I think most often it comes from the character of the person that's starting the business. And in this case, you know, Mark founded it in 2007. I joined the team in 2012. He and I are now business partners, but the character of Mark Dast is, you know, I would say unimpeachable, if you will. It's an interesting time to be saying unimpeachable. It's October 2019, for those that are listening three years from now. Is Trump still president? Good question. Okay, we won't go there. The goal really with Mark was like most entrepreneurs that start their business. The right place at the right time and made a good impression. And, and somebody said, hey, you just went through the process of selling your business. Do you think you could help me sell mine? And that started Quiet Life Brokerage and sort of evolved over time.

• 20:01Speaker 00

  Mark was just helping, helping through talking to entrepreneurs, giving them good advice, helping buyers. This is the one sort of unique difference that his approach was from others. Is that his goal was education, right? You go to the website, you look at the content and over the years, it's been a lot of content on how to buy an online business. How to buy an online business with a Rob's rollover program or an SBA loan, things of that nature. And so it's instilling that confidence and trust in the people who are really most important at the end of the day in these transactions. Who's the buyer? The person who's going to stroke a check for a quarter of a million or a million or two or nine. You have to have that trust with them.

• 20:44Speaker 00

  And I think most people in this industry don't do that. They miss the mark. They're just trying to sell and get somebody to sign an engagement letter, but you got to build trust with the people. People are going to stroke the checks and that's the buyer at the end of the day.

• 20:56Shaan Puri?

  Great. And so one thing that Ramon told me that I didn't realize early on was, he said, the person he sold his soap opera blog site to, they raised some of the money to buy it. Cause I was wondering, you know, is this guy just walking around with nine million bucks in cash to spend on an online business? And the idea was no, he, you know, he looked at the business, thought it was interesting, raised part of the money from investors to say, hey, let's buy this business and grow it. And then took a loan for the rest. And so, you know, when I look at these prices and I see, oh, wow, this is, you know, $6.1 million, should I buy this business? You know, for somebody who's listening, they might be like, well, I don't have obviously $6.1 million. That's part of the reason I like this podcast is because I'm trying to, you know, make my first billion bucks.

• 21:35Shaan Puri?

  And so I don't have this type of money. Tell me about the financing. I'm just curious, two tactical things. One is what percentage of the buyers do use financing, either SBA or other? And then what is the most common way of financing it? So people can sort of wrap their head around the possibilities of how do you buy something that don't quite have the cash for?

• 21:52Speaker 00

  Yeah. The most common way to buy an online business is through an SBA loan, Small Business Administration. There are little to no other resources out there in terms of lending institutions. That means that two things have to happen. First and foremost, the seller, the business itself has to be a pre-qualified to meet the standards of the SBA, which means there need to be a couple of years of tax returns. It means that the financials can't be commingled among five other brands, but you're only selling one. The tax returns don't have to match up to the profit and loss statements. Banking institutions, lenders do add back schedules just like we do.

• 22:28Speaker 00

  But in order to make your business more sellable to a broader audience, which brings more buyers, more offers, more competitive, closer to asking price, if not over, and a better deal structure, gets down to those financials and getting your tax returns filed properly and not commingling different brands under one LLC. SBA pre-qualified, number one, the buyers have to then also be SBA pre-qualified. Do you have the pedigree to run a business on your own? Do you have enough money to bring to the table? The lenders, really, what do they want to do? They want to get their money back. They're protecting their investment. So they want to make sure their business is solid and they want to make sure that the buyer is solid.

• 23:10Speaker 00

  Even with that, it's a great opportunity for the buyers. Because with an SBA loan, you can borrow up to 5 million personally. And that's how we were able to sell Ramon's business. We had multiple offers on Ramon's business and they were not all SBA. But we had three buyers bidding competitively. I don't know if he told you the full story, but it was pretty aggressive. And we went well over the original asking price and letter of intent that we had. I think one of them was SBA and two were not. One, the other two were raising money from outside sources. So there are outside sources, but it's investor money is really what it is. You've got to have friends and family and contacts with people with money that are willing to invest in you.

• 23:52Speaker 00

  This particular person that does this, that didn't win the bid is Harvard MBA. He's raised money before. He's very good at what he does. He understands treating investors well and giving them a good return on investment. So they trust him.

• 24:03Shaan Puri?

  So let's walk through an example. A business is for sale for, let's say, $8 million. So you're saying SBA can loan up to 5 million. You've got to come up with the rest through either your own money or investors' money. And walk through the math of, okay, you know, SBA requires you to put this much down. The income needs to be here. Are there good rules of thumb you can put out there for people who have never walked through one of these before?

• 24:26Speaker 00

  Yes, so these are rules of thumb, which means that, you know, they're in pencil and it changes depending upon who the lender is, who the buyer is, and what the business is all about. Anything sub $1 million, you could probably buy with 10% down. So you're coming to the table with 100,000 and you're buying a million dollar business. So they're loaning you 90% of the money, the SBA is. They're probably going to give you working capital money as well to buy the inventory and have some leeway in terms of waiting till the monies roll in. When you get above a million, depending upon the size, it's going to change and shift a little bit. That percentage that you need to put down is going to grow. And then on top of that, they're probably going to say, you know what? We want the seller of the business to have some skin in the game as well.

• 25:11Speaker 00

  So you, Mr. Buyer, this is a $2 million business. We want you to come to the table with... 10% and we want the seller to also take a 10% seller note.

• 25:22Shaan Puri?

  Right.

• 25:22Speaker 00

  So you've got to come up with 200,000 for a $2 million business, but in this case, we want the seller to have a note as well. So the lender is only risking 80% instead of 100%. And it will grow and change and shift like that as the business gets larger. And to be frank and honest with you, we're seeing that there's been a bit of a frenzy with SBA loans and lenders lending out, you know, 90% on transactions. It's going to change. Things are probably going to tighten up. And I think it's smart for both buyers and sellers if they want the SBA lending option to be there. It's going to grow to 15 or 20% down on a million dollar deal because it's safer for the lender.

• 26:03Speaker 00

  And that means the lender is going to keep lending money over the long run, which is ultimately really everybody's goal.

• 26:09Shaan Puri?

  Right.

• 26:09Speaker 00

  Yeah, it is.

• 26:10Shaan Puri?

  And when the lender looks at the business and they say, okay, cool, you're putting 10% down on let's say a million dollar business, what are the other sort of qualifications or expectations around income, history of the business? What are the other sort of benchmarks to think about in terms of you can borrow this much because there's this much income or there's this much revenue coming in?

• 26:29Speaker 00

  Yeah. And for those that are good at doing the math and calculating things, it's a 10-year note for the most part. Sometimes there's a five-year balloon payment where they'll refinance the note or something like that and do what's left, but generally it's a 10-year note at 5% or 6%. So 90% at 5% or 6% over 10 years. And then they work to, okay, well, how much cash flow is the business generating? How much do you, Mr. Buyer, need to live off of? And how much cushion do we need to have there? So they're looking for a debt to income ratio. What the number is, it changes all the time and I don't want to throw any numbers out there because it changes so much, but the bottom line is they need you, the buyer, to have enough cash flow to live off of. And we don't know everybody's car payment, mortgage payment expenses.

• 27:14Speaker 00

  So it's all about your overhead and how much cash flow the business kicks off after. Servicing the note.

• 27:21Shaan Puri?

  Right.

• 27:22Speaker 00

  So service that note, do you have enough to live off of through the ups and downs of the business and they're doing debt to income ratios there? Their favorite buyers, their favorite buyers of all time, I've sold lots and lots of these. The lenders will tell me, depending upon lender, but they'll be like, man, I love this guy. His wife, she's making $400,000 a year and she can support the entire household. Those are the favorite. When you've got a second income in the family that is sticking around and keeps their day job and can support the family, the buyer, the husband, the wife, whatever it might be, is much more likely to get qualified for that SBA loan. But they're really looking for a mature professional that can operate the business successfully. They're placing a big bet on that individual and they want to make sure that they win with that bet.

• 28:04Shaan Puri?

  Right. It's a lot less like real estate where they kind of don't even look at the operator for the most part unless you have a sort of a sketchy history. And they're just looking at the, what are the rents, what's the past 12 months look like? You know, when you buy a building, it's very much just off of the cash flow and they don't sort of assess your abilities. But it sounds like with online businesses, that pedigree matters.

• 28:24Speaker 00

  You gotta have some life and some business experience. I had a deal a couple of years ago, probably three years ago now, it was $2 million, beautiful business, growing like crazy, and we were under LOI through an SBA loan. And the buyers were two Harvard MBA students. And the mom or dad of one lended them the money for the down payment. And they got turned down in underwriting because they didn't have any real business experience in the real world. They went Harvard MBA, someday they would, they're very good pedigree, but no real life experience. So the banking institutions would rather bet on a high school dropout that has built and sold their own business or built and runs their own business than two kids that went

• 29:06Speaker 00

  to Harvard that have no real business experience, as would I.

• 29:10Shaan Puri?

  And how long does the process take? You say, let's say you apply for SBA loan, how long does it sort of end to end typically? Is it 60 days, 30 days, 120 days to be able to say, yes, we qualify you for making an offer on this?

• 29:21Speaker 00

  Pre-qualification letter that you'd get from a lender takes 24 hours, depending upon how busy they are. So you're gonna say, hey, wanna buy a business, I wanna do it with an SBA loan, what do you need? They're gonna send you a form, you fill it out. Send it back. He said, yeah, okay, let's have a conversation. You're qualified. I think you're qualified to buy a business based upon your experience and your assets and your cash. You could buy something for up to 1.5 million dollars. That's where we're comfortable lending you that money in terms of the value of the business. Now you've got some direction. You know, okay, I'm going to focus on buying a business and I can buy something up to 1.5 million. So why bother looking at something for 6 million? It's just a waste of your time. Assuming that you're going to be a entrepreneur where you're going to just do an SBA loan purchase.

• 30:03Speaker 00

  Once you find the business though, and you go under letter of intent, right? So a listing comes up, you look at it, you look at it in details you talked about, and you have a conversation with the buyer and you feel comfortable making an offer. And the offer is what you should be closing at ultimately, once you get through due diligence successfully. Letter of intent. Letter of intent is that non-binding, that letter that says, I'm buying the business at this much and we're going to close on this date.

• 30:29Shaan Puri?

  Right.

• 30:29Speaker 00

  And the terms are built into it. Then you go through due diligence and then you close. With an SBA loan, it's going to take 60 to 75 days to close. And by close, I mean money changes hands and the assets of the business change hands. From the letter of intent to closing, 60 to 75 days.

• 30:48Shaan Puri?

  Right.

• 30:49Speaker 00

  We've done it in as little as 30, but it's the exception, not the rule.

• 30:54Shaan Puri?

  Right.

• 30:54Speaker 00

  Cash deals are 30 to 45 days, SBA.

• 30:58Shaan Puri?

  At that point, the, the deal is sort of, it's yours to close. They're not shopping it beyond you at that point.

• 31:04Speaker 00

  Right. It's an exclusive letter of intent. No one else can make an offer or look at it unless you decide to walk away.

• 31:10Shaan Puri?

  Gotcha. And so what are some interesting trends you've seen, right? So one of the cool things about either being, you know, an investor is you see a bunch of businesses. Or in your case, you're a broker who's seeing different entrepreneurs who are building things. You're seeing what the buyer appetite is. How have things shifted? What are some trends that are interesting that you've noticed over the last few years?

• 31:28Speaker 00

  Well, the first trend is the size of the businesses that are available. We're all growing up in this e-commerce world, this internet world. We don't sell all e-commerce and e-commerce would be defined as a physical products business. We do. There's lots of SaaS and content affiliate stuff out there as well. Ramones was a content site. We're all growing up. We're maturing. We're losing our hair. We're getting gray. We've been doing this for a while. And the people coming into the space are coming into a more mature space. So this niche, this business niche is maturing. So we're seeing larger, more mature businesses where the entrepreneurs are smarter. They're more educated and the size of the businesses are much larger. You know, in 2013, when I closed 23 transactions myself, it was about $225,000 on average.

• 32:13Speaker 00

  In 2018, my average size was about $2 million. Right. So that things are changing in that regard. 10x bigger. 10x bigger. But at the same time, there's plenty of small stuff, too. Small stuff being, you know, sub half million or so. The other thing that we're seeing is the multiples, honestly, they've grown. There was a time that, you know, back to the multiples, a multiple of discretionary earning. There was a time that I would list things at 2.74 so it would round down online because buyers just wouldn't accept anything above that. Right? Now we're seeing businesses of the same caliber and size that are easily pushing up into the three to three to half time range. But there's definitely stages. Smaller businesses will be in a certain multiple range depending upon age and history

• 32:58Speaker 00

  and defensibility. But there's more bigger businesses that are getting larger and therefore the multiple is higher as well because they're less risk. There might be multiple channels of revenue, which means it's less risk. Less risk means a higher multiple. So we're seeing buyers be educated on that 100% or 90% plus Amazon FBA businesses buyers are becoming much more comfortable with. I wrote 10 steps to selling an Amazon business in 2015. And it was like I was pioneering something. Everybody's like, no, it says right there in the terms of the seller account that you cannot transfer control of an Amazon business. It said generally in brackets.

• 33:40Speaker 00

  And I had done it and I had gotten permission from Amazon Legal to do it in certain circumstances, in most circumstances and from Seller Central and the rest. So you could do it. Buyers are getting much more. Comfortable with that to the point where people are buying up Amazon businesses and building a portfolio of them back to the size and how size matters. If you've got something that's, you know, doing a million dollars in revenue, it's worth an awful lot less than something that's doing a hundred million in revenue. And not just in terms of discretionary earnings, but the multiple. The multiple changes dramatically when you've got a much bigger business and less risk. And that's what private equity guys are doing and family fund people and search funders

• 34:23Speaker 00

  and people that are just smart and building portfolios. They're buying up low value, sub one million, two million dollar, 100% Amazon businesses. When I say 100, it's probably 90%. There's always some trickle over to their website. And then they're putting a portfolio of these together and they're buying them at two to four times discretionary earnings. But when you pool them all together, you don't have a business doing 200,000 in discretionary earnings anymore. You've got a bigger business doing $2 million in discretionary earnings. And that three time multiple might immediately jump to six times multiple, or depending upon how defensible it really is, maybe even more. So they're buying them up low and just by pooling them together, they're becoming much, much more valuable.

• 35:06Speaker 00

  I have yet though, to hear of one or be connected with one that has gone that approach and been successful in selling it to a much larger private equity firm. That's the goal, that's the plan, that's the theory. And I think it's 100% legitimate. It's just that I don't think any of them have matured to the point where they've bought enough where they'll sell them off to a larger private equity firm.

• 35:28Shaan Puri?

  Right. And let's say, you know, when I look through the businesses that are on quite light, I love the variety. It's like you read one and you're like, oh, I didn't even realize this initially even existed, let alone thought of the business that might serve it. If you were to highlight your favorite child this year, you know, a business that either sold or is for sale either way, your favorite business that was on here where you're like, oh, you know, you're even tempted to buy it because you're like, that is a fin, this is a fantastic business or fantastic price or what's your favorite? Give us an example of one.

• 35:55Speaker 00

  Is it going to be crystal clear that you said this year?

• 35:57Shaan Puri?

  Yeah.

• 35:57Speaker 00

  So therefore I, Ramon is out, we sold his business. Last year, I have to say Ramon. So I had a listing this year. It was a beautiful brand, well branded, majority Amazon, 90% plus, growing, I think, you know, which they should rapidly at that age, but you know, 200% year over year. But again, that young, they should be growing. The owner of the business, I want to call him a former CPA, not a retired CPA, because he was about 30 years old and left the corporate world as a CPA to become an entrepreneur and run a business online and built it from scratch while his wife, who was a school teacher, stayed employed.

• 36:37Speaker 00

  And not only that, he was the stay at home dad to his two year old, running this business. But the beautiful thing, and this goes back to financials and instilling confidence, he's a CPA, but he outsourced his bookkeeping to an e-commerce bookkeeping firm. Love that guy, right? And I knew buyers would love him too. He had a beautiful brand, beautiful videos on all of it. I just loved it. And I remember I said to him, look, this has everything. It checks absolutely all the boxes. SBA eligible, growing like crazy, beautiful brand, easy transfer, all of the four pillars that we talked about. I'm like, look, I think we need to go out at least a three and a half multiple. It was a smaller business too. It was doing, I don't know, 400,000, 350,000 in

• 37:20Speaker 00

  discretionary earnings. So it wasn't really big yet. So the multiple's a little bit lower. I'm like, we need to go out at three and a half. And again, that's three and a half times discretionary earnings for the trailing 12 months. Inventory is treated separately at this size. So inventory is just purchased separately. So it'd be three and a half, whatever the multiple is, plus inventory at closing. And he's like, oh, I don't know. I don't know, Joe. I'm, I'm a little stressed out. Would it be okay if we went out at 3.3 instead? Which is absolute, again, just the opposite of what most entrepreneurs are going to be. They'd be like, oh, I don't know. Can you get me 3.6? So I'm like, look, I know we're pushing the multiple a little bit based upon histories, but you check every box. But okay, we'll go at a 3.3 because you have certain motives.

• 38:04Speaker 00

  And that's important for everybody to understand that listening. Everybody sells for a different reason. It's not always about getting maximum value for the business. You want to get as much as you can in a good deal structure to a great buyer so that you can just transition and move on if that's your goal. We've got one closing. It's under LOI now that the goal is to stick around. It's a $20 million valuation. It's 5 million. The guy wants to stick around and help grow it to 100 million and he's found the right private equity firm. Different goal altogether. But this particular seller, his goal was to sell it, find a great buyer and move on. And that's what we did. So we went out at 3.3. The response was exactly what I thought it was going to be. And I had to shut down his calendar and take it over to schedule three calls a day for five days in a row.

• 38:48Speaker 00

  I didn't want to do any more than three because these calls can take at least an hour, sometimes longer. And that's part of our process. Again, trust and instilling confidence. Build a great package. Have them look at it. Numbers are there. All that client interviews there and then the videos there as well. But we, we want the buyer and seller to be on a call too. So that you can ask the same questions and look at each other. Hopefully if we do a video conference call in the whites of each other's eyes. Because again, you're going to be all over the world. Who knows where the buyer and seller are going to be. So we wound up with about 15 calls. I just had to shut it down. We had 10 offers. The highest one was at about 3.65 times. And so we just had to shut it down. 10 offers on the business. Paul, the seller of the business, did not pick the one that was the highest value.

• 39:32Speaker 00

  He picked the one that he liked the most, which is really important. Another lesson for buyers. Simplest thing, if you want to be a good buyer, don't be an asshole. If you want to get the deal done over an SBA buyer, it's not necessarily about making the best offer in terms of dollars. It's asking great questions and making the seller of the business feel like they did an amazing job and, you know, I'm going to take over your baby and I'm going to do an amazing job with it. You're going to be proud of what we can do with it. And if you have staff, perfect. I'd love to keep those people in place. Is that okay? And it's exactly what Paul wanted. It's exactly what he heard from multiple buyers. But he chose one that ended up at about a three and a half multiple, all cash, transitioned the business in 30 days. And the buyer is very, very happy with the business.

• 40:17Speaker 00

  It's one of the best investments he's made and he's, I think he's bought three or four from us now.

• 40:20Shaan Puri?

  Hmm, like it. So I love this episode because I feel like it's Very tactical. And as somebody who tried to build things from scratch, definitely doable, definitely very hard. It is intriguing to me, the prospects of piggybacking off of somebody who's taken it as far as they can go. And either they're too tired, or they've sort of reached the limit of where they think they can grow it to with their skillset, or they're just ready for the next adventure. Taking something that has some momentum, that has some revenue, that has existing customers, that has existing either manufacturers or content supply, whatever it is. I love this idea. I'm surprised more entrepreneurs don't do this. I think there's definitely a, at least where I am at in Silicon Valley, there's a bias towards DIY. You know, you gotta, you gotta start it from scratch, do

• 41:05Shaan Puri?

  the whole hero's journey from day zero. And I think there's a whole set of people that are out there that are business people, and they can take a business, see it for what it is, analyze it, make an offer, and grow that business. And, and I hope that, you know, more people do this. And if you've done that, send me your story. I want to hear it. You know, if you're, if it's a great story, I'll put it on the podcast. But I love meeting people who are in this space, doing this thing. It is, to me, it's like the modern day real estate. And so Joe, I appreciate you coming on. Where should people get more of this? You said you have your podcast. Shout that out. Shout out, you know, the website, your Twitter handle, however else people should get more info.

• 41:40Speaker 00

  Awesome. QuietLightBrokerage.com. QuietLightBrokerage.com. That's the first place. If you're a buyer, you can drop your name right there and, and notify me on the first page, and we'll let you know anytime a new listing launches. If you're an entrepreneur that wants to fix your books and get it straight, and become Ramon, and sell for 200 and 400 and 9 million, please let us help. Fill out the valuation form and let us get started there. Or if you just want to shoot an email off, it's [email protected].

• 42:08Shaan Puri?

  Love it. All right, Joe. Thank you so much. This has been great.

• 42:10Speaker 00

  My pleasure, man. Thanks for having me on.