The market for eCommerce businesses has never been hotter. Now dozens of brand aggregators have war chests of $100s of millions of dollars with one mission - buy and grow eComm brands. We’re now seeing valuations in the 5-6x of EBITA where just a few years ago we were only seeing 3-4x multiples.
Now is a great time to sell an eCommerce brand. And, if done right, it’s still not a bad time to buy a brand.
Chris Yates is co-owner of Centurica a company that offers buy-side due diligence for digital businesses. He’s also the founder of Rhodium Weekend - a vetted community of digital entrepreneurs and investors.
Here’s a look at what we cover.
- Mistakes when going through due diligence
- Most important steps/tips when going through due diligence
- Mistakes when evaluating your own business
- As you hit different vacation tiers - types of buyers and buyers wants and needs change
- How aggregators are changing the landscape of DTC M&A
- What is Rhodium weekend? Mastermind and speakers. Real in the trenches stuff and fun activities
Mentioned in this Episode:
Chris Yates
Transcript:
Brett:
Well, hello and welcome to another edition of the eCommerce Evolution podcast. I'm your host, Brett Curry, CEO of OMG Commerce. And today we're talking about topic that is very, very timely, for me anyway, and I think it will be timely for you as well. We're talking about the nuts and bolts of buying an eCommerce brand. If you're a frequent listener to the show, you know that my business partner, Chris Brewer and I, we are actively looking at buying eCommerce brands. We're investing in a number of them, looking at buying others. And so, this is a really interesting topic to me. I almost wanted to do this episode just to pick the brain of my guest, but we're hitting record because it's going to be super valuable to each of you as well.
Brett:
And so, my guest is Chris Yates. He's the founder of Rhodium Weekend and partner of Centurica. Centurica, they offer buy-side due diligence for digital business acquisitions. We have a mutual friend, Joe Valley from Quiet Light Brokerage. Joe's a friend of the show, been on the show a couple times. Joe made the connection, and Chris and I chatted ... super, super smart guy. And so we're going to talk about due diligence and valuations and aggregators and tons of fun stuff going on right now in the land of M&A for D2C brands. And so with that, Chris, welcome to the show and thanks for coming on.
Chris:
Brett, thanks for having me. I'm honored you'd invite me.
Brett:
Yeah, absolutely. So give us a little bit of background here, Chris. How does one get into the business of buy-side due diligence for digital businesses? How did you get here?
Chris:
Yeah, so my story, I'll share it in brief and then if you want to dive in feel free, but ...
Brett:
Perfect.
Chris:
I was buying online businesses back in the early days, 2009, 2010. I did that for a few years, found it actually pretty isolating living in Montana and not being able to find other people who could speak the same language. So I started a conference in person in Vegas in 2012 and have done that annually since then, and built a community around that, and that's what Rhodium is. After doing that for a few years, one of the attendees/speakers of the event was the original founder of Centurica, and he approached me in 2015. He said, "Chris, there's two people in the world I'd sell this company to and you're one of them. Would you want to do a deal?" So I ended up acquiring Centurica in 2015.
Chris:
And then, from there I brought on my business partner, Brian, and we've grown it consistently since then. Where it's at today is we primarily work with funds such as the aggregators and things like that, as well as individual entrepreneurs who are doing acquisitions of eCommerce content, SaaS digitally focused service businesses. So we do the risk assessment, if you will, make sure that you're not buying a lemon.
Brett:
I love this so much. And, just a couple things. We'll talk about Rhodium Weekend a little bit later, but you are right that even just being an entrepreneur, being a digital entrepreneur, being a D2C eCommerce brand owner, it can be isolating, and especially in a COVID/post-COVID world, we're all isolated. And so, having these communities where you can gather together virtually, or now, we're getting it together in person is awesome. And, I've found a lot of the breakthroughs from my business and breakthroughs for just my way of thinking have come from these events. So, we'll definitely want to dig into Rhodium Weekend here in just a little bit.
Brett:
I want to make sure this is very actionable, very practical, but as my business partner and I, we've started digging into, "Hey, we want to buy a brand," and so we've built criteria and we're evaluating different brands looking to buy. But, it's tricky, right? You hear all these horror stories of people that buy a brand, they spend a lot of money, it all falls to crap. It all just blows up, so that can shy people away from mergers and acquisitions, and from growth through acquiring and buying brands.
Brett:
But, when you get it right, this can be absolutely awesome, right? So, let's talk a little bit about the due diligence phase because I think this is likely ... and, you correct me if I'm wrong because you're the expert here ... this is likely where a lot of people get it wrong, right? So, what are some of the mistakes that you see buyers making in the due diligence phase?
Chris:
Yeah, and you mentioned correct me if I'm wrong, you're not wrong, but I will say that before you get to due diligence, there should have been a lot of things that happened that will set you up for success, including having your ability to operate these businesses really dialed in. At the end of the day, the buying is not actually the hardest part, it's what you do after buying it. So, with that said-
Brett:
It's the integration of your current business and the new business and the operation of it. Yeah, totally makes sense. And this is one thing we're thinking through too, is how do we set the criteria so that we know hey, when we buy these brands, we're going to be able to leverage them and grow them and operate them and all those things. And so, I think maybe that the first step is that right?
Chris:
Yeah, it is. And, the same business in two different operators' hands could have very different outcomes. And, I think it's important to just make sure that if you're new to the game, that's when you can really have some challenges. And so, those who are seasoned are a little bit more strategic and they're thinking of acquisitions, the biggest challenge you'll run into is just finding one that's going to fit your very specific criteria. There's challenges on both sides. Not that they can't be overcome, but so in terms of due diligence, just to make sure people understand, that starts once you've agreed on price with the seller, typically. Commonly, you'll go through a process of a few introductory calls with them. You might read over prospectus if it's a broker. If the seller's doing it themselves, they may have prepared some materials for you to review.
Chris:
And essentially what you're doing prior to starting due diligence is you're taking the seller at their word, and you're asking them the questions that you need to know in order to number one, value this business, and number two, decide is this the right business for me to buy? And you can't really get into the weeds before coming to a price so just understand that you're taking the seller at their word and they're making a bunch of claims. So, your process of due diligence is really verifying those claims and getting more into the weeds to better understand the business.
Brett:
I love that. So actually, maybe we should back up because we talked about criteria and we brushed over it. Any tips or suggestions you have on that end, getting really dialed into criteria, knowing what we're looking for, knowing how to make those pre-evaluations before we get into price and then true due diligence?
Chris:
Yeah. Well, I can give you two really easy criteria that I think won't steer you too wrong. Number one, don't buy something that you wouldn't feel comfortable telling your most innocent niece that you own. When you get into those kind of gray areas of business models and-
Brett:
I make a lot of money, but hopefully no one knows about this.
Chris:
Yes, exactly. So, that will steer you properly. And this is just your first acquisition, again. Rules are meant to be broken, but I'm just talking about the first time acquisition. Two is don't buy something that's on the decline, whether it's the traffic or the revenue. Sometimes it's not always obvious that it's actually declining until you get the monthly numbers. Sometimes people talk about annual numbers and when you look at the trailing three months or six months or something, they ran out of stock and things are going really badly. So, that's the other one.
Chris:
And the reason I say that is it's hard enough to take over an existing business, learn that business, be able to maintain where it's at now doing all the things that the old seller was doing while also trying to turn that business around. So just being able to operate it at the point where it's at now is a challenge, but being able to turn a business around with major problems while trying to also learn the business and all the nuances, I haven't seen that go well for first time buyers commonly. So those are two basic rules of thumb that I would start with.
Brett:
I love that. And, there are some people that are great turnaround specialists. That that's their thing. They buy a distressed business and they know how to unlock the value and the potential and turn it around. But if that's not you, and that usually comes from lots of lots of experience ... if that's not, you don't buy a business that's on the decline because as you said, integrating and learning the nuances and operating is hard anyway, and so learning that and fighting a decline is all the more difficult.
Chris:
Yeah. And, it's hard because you look at the multiples on some of those businesses and you might be, "Oh, I can pick this up for 2X the annual profit," but if the run rate were to continue, that 2X pretty quickly looks much worse, and you have this idea of all the things you can do for the business to turn around and things like that. So I think that's more of an advanced strategy for those who have some experience and some deals under their belt. And, that is a fantastic opportunity if that is truly something that gets you excited.
Brett:
Got it. So we've made this evaluation, and like I mentioned before, OMG, is we're looking at buying some brands ... Rather, it's Chris, my business partner and I. We want to buy brands that we feel passionate about, that we feel like our marketing expertise and management expertise, we can really help leverage. And so, then we see that it's on the incline and not the decline. We're happy to tell our niece or our daughter about this brand. So we get to that point, we agree on a price, now let's talk due diligence, because you're right, we're taking the seller at their word. And, a lot of good sellers out there that aren't trying to blatantly lie, but we are all trying to put our best foot forward. So there needs to be some due diligence here and not just taking the seller at their word. So, talk us through then what what are some of the mistakes that people make during due diligence?
Chris:
Yeah. It's the old adage of trust but verify. And, there are people who are intentionally misleading you, but more often than not, it's just mistakes that they missed or maybe they embellished a little bit about an issue that's actually there. One of my friends, Mike, he says, "I know there's a meteor coming at this business, otherwise they wouldn't be selling it. So it's my job to find out where that meteor is, when it's going to hit and how to avoid it getting hit." That's just part of the game. But in terms of the process, we've done this hundreds of times and we found that there's a logical phase to go through in due diligence. I will also say that every seller is a little bit different and some of them are much more guarded with their information early on.
Chris:
And so, I will say that you can't always follow this exact process. It just depends on the seller and how comfortable they are with you and the ability to open up the kimono, so to speak. General rule of thumb would be for due diligence, start with the least sensitive stuff first, and then get to the most sensitive stuff closer to closing. But if the seller is willing to just open the kimono, this is the process of how we do it. Number one, we start with the financial verification, and that just means going to the original sources of the revenue and expenses. That might be access to the Amazon account. It might be supplier invoices from their recent purchases. It might be looking at their payroll reports from Gusto or something like that, getting all that original source data and comparing it to what they've claimed on their P&L. That process, why I think it's important to start with that is because if the numbers don't line up, it's really hard for any of the rest of this to really matter.
Chris:
And if they don't line up, usually one of two things will happen. Number one will be that you'll walk away from the deal because you don't trust the person in any longer, but more often than not, it's just a simple adjustment to the purchase price, using the same multiple that you went in with. And, if you found a mistake or something like that, you just adjust the purchase price down a little bit once you've found what the numbers actually are. And, the other thing in terms of the financial verification that is more subjective and where there's going to be more negotiation is going to be what is added back. So in past podcasts, have you talked about add backs and-
Brett:
We have talked about add backs, but just for people that haven't heard, this is things like the owners taking bonuses or other expenses that ... really seller's discretionary income. It could fall under that. But, why don't you talk through add backs from your perspective?
Chris:
Yeah. Simplest way I can put it would be, "Would this be necessary if you were to run the business in the future?" And if it was an expense that was a onetime expense, or they took a trip to Hawaii and called it a business expense for their annual meeting, that stuff, you would add it back. There are things that are much more nuanced than that. Maybe they tried an advertising strategy for six months. It didn't work out well, but maybe it drove some sales and they're trying to add back that entire expense. You got to talk with them about that, because that probably generated some sales and maybe shouldn't be an add back. Some of that stuff is going to be in a gray area and you'll just have to number one, verify that what they're actually calling an add back is really an add back.
Chris:
And then two is should this be an add back? So, that's a big part of that financial verification. What you're trying to do is on one side, you have what they claim their profit and loss statement was, what their discretionary earnings over, let's say, the trailing 12 months. And then you actually verify that from the original sources and say, "Okay, do these match up and does this trace all the way from the original source to their bank accounts, to their tax returns, et cetera, and all of that lines up appropriately?"
Brett:
Got it. And so, now getting into bank reports and tax returns, is that still early on or we're doing that closer to purchase?
Chris:
We would do that right in that financial verification process, yeah. We would compare again a side by side. We'd have what they claimed, what we verified, what their accounting system says, what their bank accounts say, what the tax returns say, put them all side by side and say, "Okay, what doesn't match up, if anything?"
Brett:
Got it. Awesome.
Chris:
And then, why? You got to have that conversation.
Brett:
Yeah, because there's always going to be some things that don't match up. Sometimes you're trying to make your returns look as low as possible from a tax standpoint, and then with add backs, trying to make the profit look as high as you can for evaluation purposes. So, evaluating the deltas there and then is the why sufficient and does it make sense?
Chris:
Correct.
Brett:
Okay, awesome. Financial verification. What comes next in the due diligence process?
Chris:
So usually in parallel with that, we're also looking for any obvious red flags as far as performances on the accounts, and that would be things like are they following terms of service of their marketing channels and sales channels? Simple things like that. So Amazon, as an example, we're looking at their performance notifications, look for anything egregious where they've had some past account suspensions, listings taken down for something other than just a simple complaint from a customer that was a one-off thing, but a repeat violation, any outstanding IP issues, things like that that right off the bat-
Brett:
This is where we're looking for the meteors, right? This is where we're looking for those potential meteors that are about to strike.
Chris:
And these are the ones that would be pretty obvious. You see that thing coming a mile away where it's like, "Okay, yeah, I'm in the Amazon account. I see all this stuff happening." So, we're doing that in parallel just to look for any obvious ... We bucket due diligence into two main buckets as far as our process. There's also legal, tax, things like that that we don't focus on, but for us, we talk about financial due diligence and commercial due diligence. The commercial is more when you're looking at the performance of the overall business, not necessarily just the financials.
Chris:
On that commercial piece, we do a quick run through to look for any obvious meteors or red flags in parallel with that. Once we've finished the process of the P&L, then we're getting more deep into understanding the supply chain, as an example. What do the supplier agreements look like? Are the prices trending good or bad over time? In the sales channels, we're looking at what is the performance of each individual SKU? Is it profitable? Are they consistent with launching new SKUs and are we seeing that in the data, or are some of the SKUs that used to perform really well starting to tail off? That could indicate competitors are nipping at their heels.
Chris:
Really getting granular in some of those KPIs that you want to see. You have to look at the advertising-
Brett:
You would avoid one-trick ponies, right? A business where really all the profit and growth is from one product, and they've got all these other ancillary products that aren't really doing anything. You want to uncover stuff like that.
Chris:
And that can be okay for some buyers, and this is where understanding your buyers is really important. For instance, we mentioned briefly the aggregators, they've got so much diversity because they've already got a portfolio. If you're an individual buyer and you're just doing a single deal and it's got one hero SKU that generates 80% of the revenue, which is actually pretty common, and it might be one parent ASIN, but then there's five variations, but it's really the same thing. You're at the mercy of the performance of that particular one. So, unless you've got a portfolio to diversify, that would be a pretty risky scenario for an individual buyer just buying a single business, so understanding the context of the buyer is obviously important.
Brett:
Okay, awesome. So we got our financial verification, the commercial verification of due diligence. Anything else you want to add to that process?
Chris:
... For a strategic buyer, somebody who's really sharp on operations, this is also when you're looking at how do we transition these assets and how do we grow this? What are the opportunities to reduce some of the risks that we discovered? Because you're always going to have risks. So that becomes every risk is also an opportunity. For instance, if you see that and you're willing to buy a business that has a hero SKU, then the question would be, "Okay, this is a risk. I'm comfortable with it. How do I mitigate that risk?" Well, clearly you, you institute a new product launch process or something like that. Or, I plan an additional acquisition or two to help diversify in a related space or something like that. So that process of looking for opportunities for improvement, all of that good stuff is also part of that.
Brett:
Fantastic. So, let's talk a little bit about valuation tiers and how the buyers there change and how what they're looking for changes. I know you mainly work on the buyer side of things. This I think will apply to both buyer and seller to a certain degree. I know a lot of people listening, a lot of my friends who own D2C brands have just had partial or full exits, and so I think understanding the tier of buyers is useful from a few different perspectives. So walk me through that. What are the different tiers and how do the buyers change at those different tier levels?
Chris:
Yeah. So, one thing I'll mention just to set this up is I always say it's not the price, it's the terms in a deal. So if I said, "I'll pay you $10 million bucks for your business right now, but I'll pay you a penny a day until it's paid off," that's not very attractive terms. But the price may look really good, so this is something that you want to keep in mind with different types of buyers. We'll talk about this a little bit in terms of common deal structures and those kinds of things. There's cutoffs in terms of purchase price for different types or avatars of buyers. If you think about from this lens, which is an individual who's out there looking to buy a business, could be a successful entrepreneur, could be somebody coming out of corporate who's trying to buy a business who doesn't have a lot of experience, but it's just a single person trying to do a deal.
Chris:
It's pretty common that somebody like that maybe would have up to, let's say, $500K in cash available to put into a deal. May come out of an IRA, self-directed or, they might just have had an exit on some past business or something like that, but there's not as many people who've got more than $500K laying around that they can go do an acquisition. So, there ends up this segment of acquisitions that are sub $500K where a lot of those deals get done with a good amount of just cash, right? So, these are the cash buyers commonly. Sometimes there will be more creative deal structures if the buyer is savvy. But, you're commonly going head to head with other cash buyers who are willing to pay a majority upfront.
Chris:
They're not getting any loans, they're not in a fund. That type of buyer are commonly going to be more heavy ... So there's the less experienced buyers. These ones are going to be looking for a seller who's willing to either stick around for a little while and train them. That's a big motivator for them. So if you want to just sell it and be done and walk away, that's probably not going to be the right buyer for you. And then, you have the more experienced people who can step in and really run with it. Maybe they've got the infrastructure in place. So there's definitely a broad spectrum in terms of who they are, but the deal structure is usually they're competing against one another and it's commonly mostly cash up front if it's a $250, $300K type deal.
Chris:
The next category I would say is between, let's say, $500K and $3 million, $2 million, something like that. This is where you get a lot of people who are SBA. They're using a SBA loan to do the deal. Commonly a lot of lenders, they don't do a lot of deals under $500K, and you're competing against a bunch of cash buyers, so it's less common that there will be SBA loans and deals in that range. So, this is a buyer where for a seller, this is actually pretty attractive assuming you can get the deal to go through and your business qualifies for being able to qualify for a SBA loan because you will commonly get 80, 90 or 100% of your cash upfront at closing.
Chris:
So, that's really attractive. Due to the way the SBA rules are, there can't be a lot of really creative deal structuring. It is commonly you get your money upfront, so that actually can be a pretty attractive buyer for you.
Chris:
But what we've seen over the last year or two is we've had multiple billions of dollars raised in these Amazon aggregators is those buyers are getting a little bit squeezed out by the aggregators who are in that low seven figure range-
Brett:
Yeah, because that's a space that aggregators like to play, right? In that one to two million dollar valuation range. That seems to be a sweet spot for at least some of the aggregators I know. And to your point, I think you mentioned this in prep, what was it? Something like $8 billion dollars raised in the last ... was it quarter? I'm maybe saying that wrong but-
Chris:
It was in the last year and a half or something like that. I don't know where it's at exactly because this is what's publicly announced. It is not a small chunk of change. But yeah, there's money in that range certainly. There's that range where you've got a couple main buyer avatars. You've got the people who've got funds who do this all the time, and that would be the aggregators. And then, you've got the individual coming, less experienced entrepreneur who might be using a SBA loan or something like that.
Chris:
The reason I have that cutoff around that two million dollar mark is the less experienced people commonly can't get approved for more than that two, two and a half million range unless they have a bunch of assets. But, SBA loans can fund deals up to five million if you have a pretty experienced acquirer, so there is opportunity even up to five million but most of it happens in that $750, one million, two million dollar range for that.
Chris:
That's an important buyer to understand, and for a seller, ideally if you can get more potential buyers to the table, that's going to commonly result in better terms and a better price for you. Knowing who those buyers are, it's helpful for you, and knowing the trade offs in terms of deal structures. For aggregators, and the ones that I've been one publicly available talks with, have talked about their deal structures a little bit. You'll get a good chunk of money up front, but there's commonly going to be some kind of a second bite to the apple-
Brett:
An earn out type of thing.
Chris:
Yes.
Brett:
Performance based.
Chris:
Yeah, so there's some uncertainty as to what your final result will be there, but whereas with a SBA buyer, you don't have a lot of opportunity to get upside in the business that you sell because the SBA has to look at this and say, "Can they support this loan?" That's actually a limiting factor on your valuation. An aggregator might be able to get you to a six or 7X but that's just not feasible for the SBA because of their underwriting. And, it's not the SBA, it's the bank underwriting requirements to qualify for those SBA loans.
Brett:
Got it. Yeah, totally makes sense. We've got the $500K to two million dollar range. That's your SBA buyers, maybe some aggregators. What's the next tier above that?
Chris:
That's where it starts to get a little big for SBA loans, where they can't fully fund it and it starts to get big enough for, let's just say, some of the smaller, private equity funds, aggregators, et cetera. There's a certain scale, if you look at like the private equity world, there's the lower middle market, which is whatever it is, $50 million dollars enterprise value or where once something's earning, let's say, about a million bucks a year in EBIDA that's where a lot of private equity tends to come in. But, there's this gap there in that range where it's several types of buyers ... a little too big for the unexperienced buyers, but it's still small enough where some PE is interested and you've got a lot of the funds, like the aggregators, playing right there.
Chris:
The other category, I would say, that gets introduced there would be like the fund-less sponsors. These are people who find a deal and they raise money, either after finding the deal or, with a thesis that they ... but they don't have the committed capital until they find a deal. And, so that's a whole other buyer and that adds some uncertainty in the deal because if they don't have the money ready to go right now, whereas these aggregators, they've got this all ... It's a war chest that they have to deploy, whereas a fund-less sponsor, they got to go get the money. And we've seen deals that lasted ... in due diligence period prior to closing after the LOI ... years because they've been trying to sort out the funding.
Chris:
That's a more risky category, but you tend to see more creative deal structures and earn outs or certain partnerships or things like that in that area as well.
Brett:
Awesome. Any advice or tips that you would give from the buyer perspective of deals structure? I know there's a million ways to structure a deal and and it's got to be at least a win-win to a certain degree, but are there any guiding principles or overarching tips that you would give for how should you be thinking about deal structure?
Chris:
Yeah, so I have one rule of thumb with deal structures. Be happy with the money you get up front, and the rest should be a cherry on top for you. Don't put all of your eggs in the ability for a buyer to execute on whatever growth strategy that they think they can execute on because there's just a lot of uncertainty and there's meteors coming at the business that even they don't see. My general rule of thumb is if all you got was the money you got at closing, you should be comfortable with that possibility. Not necessarily happy but comfortable with that being a possibility. So that's a first rule of thumb, and you want to fight hard for getting that money up front if you're you're selling. Buyers, obviously, want to reduce that as much as possible because that helps in a lot of way.
Chris:
So, for other general rules of thumb, so from a seller's perspective, if a buyer is offering you something that's based on the performance of the business, you as the seller being confident in that business is a really good sign to the buyer that this business will continue to perform well into the future, if you're willing to do something like that. So that's actually, it can be seen as a positive for buyers. I wouldn't say don't ever be open to that, but the key in my mind in terms of simple principles would be make that earn out as objective as possible and simple as possible. So, I've structures where it's like, "Okay, if we execute these three strategies and we hit this tier, then your payout goes to this." The simplest way for me in that stuff is just do it on gross revenue, percentage of gross revenue. You're not going to be able to control the expenses of the business post-closing-
Brett:
Right. Gross revenue, that's a number that can't really be fudged, right? All the other numbers can be fudged or open to interpretation or open to all kinds of things that may be outside of your control after the new buyer comes in type of thing.
Chris:
Yeah, exactly. And then, usually I'll set ... let's just call it two main ... I'm trying to think of the word, but just caps. So one cap would be a time based cap. So, let's say that the earn out will last no longer than two years and be some percentage of gross revenue during that period, or a cap of a max. And as a seller, you may not want to negotiate this, but commonly buyers are going to look for a cap on the valuation. So if they just kill it on that business and they grow it really, really, really big, and it had nothing to do with anything that you did as the seller, does it make sense for you to do that? I don't know. So, commonly there's going to be a time boundary bounding it by time and by maximum payout is common. And you as a seller may want to say that I want a minimum number. That might be a minimum monthly payout, a minimum quarterly payout, a minimum annual payout that they'll be obligated to if they just totally screw the business.
Brett:
Got it. So even if things go south because of the fault of the new buyer, getting that minimum payout agreed to.
Chris:
Right.
Brett:
Totally makes sense. Okay, awesome.
Chris:
Yeah, and be careful of anything where it's subjective because the buyer's going to be saying one thing and you're going to have to renegotiate payouts all the time. And, that can be very problematic. It's not a very healthy partnership, which is what you end up in that case.
Brett:
Yeah, so simple, objective. Those are the keys to having those hard conversations, because we're trying to protect against the what if's that are bad ... What if things go south? You want to have things clear and objective and simple so you can hopefully move forward in a way that's less bad than the alternatives. So, that's awesome.
Chris:
And I would say just commonly the other deal structure you see a lot of ... two common ones. One is a hold back, and really that's a milestone payment. It's usually more structured when maybe an asset has been transferred, or a key employee has stuck around for a period of time, or you've provided a standard operating procedures manual. And, that's stuff that can come after closing in some cases. Maybe after three months, you can an additional flat payout, but you're incentivized to make sure those checkbox items are done.
Chris:
So, that's another common one. And then the other one would be a seller financed structure where it's just a seller note, where you're basically becoming a lender to the buyer and you get structured payouts not dependent on the performance of the business.
Brett:
Got it. Really helpful stuff, good stuff there. We've talked a little bit about aggregators so far, and the $8 billion raised over the last year and the half, or whatever the number is. It's pretty astronomical. And, I know some different aggregators, some of the owners of these aggregators, and some of them are sitting on $400 million up to a billion dollars individually for this group. So, they need to buying assets. They need to be going out there and acquiring brands. If they just sit on that money, they're not getting any kind of a return.
Brett:
I know one of the impacts of aggregators is we are seeing multiples rise, and especially with the eCommerce COVID bump that we've had recently, those eCommerce multiples are definitely on the rise. But, talk about aggregators a little bit and how you think they've impacted the landscape of M&A when it comes to D2C brands.
Chris:
Yeah, so one thing that may not be obvious, and I don't own an aggregator. I have no interest in any. I do have many clients who are aggregators. So, obviously I'm not speaking from my own personal experience running an aggregator or anything like that, but from what I understand, many of these aggregators, a big chunk of their funding comes in the form of debt. So that is something to keep in mind in terms of how much of a hole this is burning in their pocket. If you raise an equity round, the return you get on that, the speed at which you need to do it might be much more of a hole burning in your it, whereas debt can be deployed and you don't typically have many expenses until you deploy that debt. So, I think that's something to keep in mind, but regardless, their motivation, my understanding ... Commonly, what the play would be if you look at Thrasios and Perch, they do multiple funds of rounding ... multiple. Multiple rounds of funding-
Brett:
Rounds of funding. I'm with you. I heard what you meant.
Chris:
So, every time their valuation should go up, and the best way to drive their valuation up is to generate more revenue and show revenue growth in the business. And the key driver to that revenue growth is going to be their acquisitions, so the more they can acquire and show revenue growth, the better their next round of funding is going to end up being. So, it's a big motivator for them to deploy that capital. They also have to temper that a bit with is this a long term sustainable business? Because at some point, the shoe's going to drop if they're just being reckless. So, there are aggregators who will pass up on deals, but for a good brand, for a good business, they are aggressively acquiring. And, we're seeing five, 6X multiples not being uncommon these days. Times-
Brett:
Right, when used to it was three was the average for eCommerce brands, or maybe even less than that, but five to six is not uncommon right now.
Chris:
Yeah, and in fact, a few years ago, Amazon companies were actually typically valued less than a similar Shopify based company, or eCommerce company off Amazon because of that Amazon risk. But, that's flipped now. It's interesting. Amazon business is actually valued higher commonly than some of these other eComm off Amazon businesses.
Chris:
Yeah, so what's that doing to the space? Number one is everybody's businesses got a whole lot more valuable just if you look at what your business is worth. Just the equity component of it. If you did nothing other than keep your business stable, your business became two or 3X times your trailing EBIDA more valuable over the last couple of years. That's a clear thing.
Chris:
Two is it increased your liquidity. What that means is you can sell your business and take your chips off the table much more easily than you could potentially have in the past. That's another factor. To me, it's the ability to sell these companies is almost becoming such an easy path. What I think will happen over the next little while ... I have a couple simple predictions. One is those who are really good at new product launch type companies will have an opportunity ... and, there are people who just love that. The starting the new brand and kicking it off and launching products and incubating something, this is a major opportunity for them to spend two years doing that on a brand and then turn around and sell that business and then go do it again, and turn around and sell it.
Chris:
Whether or not that window will continue to be open over time, I think that's an area that is super, super interesting. The other way-
Brett:
One quick thing, I'll chime in on that just to clarify it ... I think people are probably connecting the dots but just in case they're not. Now if I'm getting a five to 6X multiple on my business where before it was a two and a half to three, now I can sell 80% of my business, 70% of my business, maybe get all that cash upfront that I was expecting before, but I get to retain some and maybe get that second exit. I have several friends that have done that very thing and it's pretty attractive right now to get some of those chips off the table.
Chris:
Yeah, absolutely. And that brings me to my second point, which is the aggregators, the reason your friends were able to get that second bite to the apple, which is commonly what it's called in the industry, or that earn out, or whatever it is, is because these aggregators have really gotten good at operating. The ones that are really building the great teams and the brands and the machine of being able to take a brand that maybe has some room for improvement that's not following all the best practices and be able to put that through their machine and make it earn more, and solve any challenges with funding inventory, as an example, that might be slowing down your ability to grow the business.
Chris:
That all gets taken out of there and their ability to grow these brands has gotten very, very good for many of these aggregators who have been in the game for a little while. What that means is everybody else who's competing on Amazon will need to also up their game. It's not longer just one single product image will be sufficient. You need great video, you need great photography. You need great listing, you need great advertising. If you're being inefficient in any of those areas, aggregators who are buying you will see that as a good thing, but if you're just straight competing and you're trying to hold your business, just know that you got to be on your game. I think that's another one.
Brett:
For sure. If you're retaining your brand and going head to head versus aggregators, yeah, you need to be really good. The days are gone of just putting a product up on Amazon and living off that Amazon traffic. We have to think like merchants and like retailers and brand builders. We're building brands, not just hocking a few products on Amazon. That's a big difference.
Brett:
Well, cool. We're about out of time, Chris. It's been absolutely fantastic. Tell us a little bit about Rhodium Weekend, and then I want to hear more about Centurica as well and any resources you want to point people to. But let's start first with Rhodium Weekend. You started that because being an entrepreneur and acquiring digital businesses is lonely, so what do you guys do at Rhodium Weekend?
Chris:
Yeah, so I just basically created the event that I would want to attend. It looks like a mastermind, sort of like a conference where there are speakers, but the speakers are commonly the attendees and they're sharing their case studies of real in the trenches experiences. We do a lot of round table discussions, a lot of fun activities at the event. We went curling as a group last year, as an example. It's intended to be something where ...
Brett:
That is the one Olympic sport where I've seen the memes where it's like ... The Olympic team for curling looks like just a bunch of dads who were bored one weekend and decided to join the Olympics-
Chris:
That like to drink a lot of beer and play on the ice.
Brett:
Yeah, exactly.
Chris:
100%. But, it's an awesome sport. So it's really just intended to be a group for people who want to learn from others who are in the trenches and find people who are a few steps ahead of them. For instance, for you, Brett, you may want to find somebody who's already bought an eComm business and they've done that five times or whatever, and you can learn from their mistakes and not have to make all the same ones and get that mentorship. And then, the cool thing about Rhodium and the culture I've created is one of paying it forward to one another. So then you'll be able to take your lessons learned, whether it's related to that or related to what you do at OMG, and share those to the people who are a few steps behind you. So, it's this virtuous cycle of everybody's helping one another and contributing, sharing best practices and things like that.
Chris:
I curate the group. I meet everybody before I invite them in. We have our typical members, anywhere from top line six figures to low nine figures, with our average member being low to mid-seven. Again, top line annual gross. We have different business models so you can learn from one another. eComm, content SaaS, services.
Brett:
So, media and what not. Love it. Rhodium Weekend, R-H-O-D-I-U-M, weekend.com. Check that out. Let's talk a little bit about Centurica as well because as we're getting into this, as we do due diligence, we're working with you, we're not going to try and do all that on our own. I think that's silly. Talk a little bit about Centurica, how you work and then do you guys have any resources or guides or anything you point people to in the early stages?
Chris:
Yeah, so I'll answer the last piece first, which is resources. On our website, we have a free service called The Market Watch, and what it is, is you can go to our website and see most of the brokered listings that are on the market currently, be able to sort them by business model, price, multiple, et cetera, set up email alerts, if you want. That's great for people who are looking to get a feel for the market, what's going on right now, and to stay on top of stuff when it comes up on the market in one place. I still encourage you to go to each broker, as well.
Brett:
An unbiased opinion, Joe Valley was like, "Hey, if you guys are looking for deals, you just got to get on the list. Watch deals. It's curated." It's just part of the process. You need to do it.
Chris:
Yeah, and we have a team who goes through manually and categorizes them and checks them. So, that's a free service. And then as far as what we do for services, we try to make things as simple as possible with a flat fee based structure. And, it's based on the size of the acquisition you're doing. We look for clients who are multiple acquirers. So rather than seeing you once and then not seeing you again for five years, if you're doing a few deals a year or one a month or multiple a month, that's who we have been specializing in helping lately.
Brett:
Okay, awesome. Well, Chris, this has been absolutely fascinating. I was excited already about doing deals and buying businesses, and now I've got more information at my disposal and more resources. And so, we turn that up a notch just a little bit, so appreciate it. Nice job, and we'll have to do this again some time.
Chris:
Sounds great.
Brett:
All right. Thanks, Chris.
Chris:
Thanks, everybody.
Brett:
And as always, thank you for tuning in and we would love to hear from you. What would you like to hear more of on the show? Give us topic suggestions. Also, if you have not done so, would love that five star review on iTunes if you feel that the show is worthy. That review does help other people will discover the show. And with that, until next time, thank you for listening.
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