Blake Hutchison: In 2022, the biggest e comm business we sold was 10 and a half million dollars. And just so you all know that sold at 6.5 times net profit. The best is skeletons in the closet. If there's stuff that isn't good about your business, just get very transparent. So here's the thing, right? Buyers will pay for performance, but look for opportunity.
[Voiceover]: Welcome to Add to cart. Australia's leading e commerce PODC Express delivers all you need to know in the fast moving world of online retail. Every week, Nathan Bush from E Suite and an e commerce industry expert will share the news, research and insights that you need to know to keep you at the top of your game. And of course, keep your customers adding to Cart.
Nathan Bush: Welcome back to Add to Cart. How good was last week with Davey Fogarty from the Ooty? I got so many messages after, after that one of people just genuinely enjoyed Davey's approach to e commerce. How much he loves it, how much he gives away and how honest he was with his own journey. It was just brilliant to hear. All right, this week we changed tack a little bit and we're going to talk e commerce business exits. So most of us are growing businesses at the moment, but what happens when you go to sell? Well, I think it's fair to say that e commerce businesses, we've ridden a roller coaster of valuations over the last 24 months and it's impacted everyone in the industry from small businesses to large publicly listed e commerce brands to technology providers and platforms. One day they're revolutionizing the way that customers shop in the eyes of the media and the next day e commerce is the worst business model in the world. Of course, those of us in the industry know that the day to day of e commerce rarely reflects what the market says. So my guest today aims to make the valuation and the trading of e commerce businesses much more realistic and much more fair. Blake Hutchison is the CEO of Flippa, a global marketplace created right here in Australia for buying and selling online businesses. Founded in 2009, Flippa has 3 million users worldwide who can browse for e commerce businesses, content sites, SaaS, businesses, apps and digital services, all available for sale in the marketplace. Now Flippa is a matchmaker to connect buyer and sellers. And Flippa's notable sales have included Mark Zuckerberg's forma website, Facemash, overnight success story, shipyournemisglitter.com and retweet.com unfortunately, we've missed out on buying all of those. In this chat, Blake shares his thoughts on what makes a business investable. He also talks us through how to make the exit process smooth sailing for all involved and why he believes in those who execute today and measure tomorrow. Now, if you enjoy this conversation and you're keen to hear more about founders Exit stories, Blake has extended the invite to Add to CART listeners to a special Sydney event that Flippa are hosting and it's called the Exit. It'll be a chance to hear about successful exit stories of fellow entrepreneurs, including add to Cart's previous guest, Gabby Leibovich. It's on March 16th in Sydney. Register your interest at flippa.com events forward/exitdinner. Now, make sure you keep an ear out in this episode for a question from an Add to CART listener. It's a really great question and I'm
Nathan Bush: so happy that they asked it.
Nathan Bush: Now, if you want to ask questions of our upcoming guests, make sure you check out our Instagram because I give a little bit of a preview and in our stories of who's coming up, simply go in there, drop me a voice note, and you can have your question featured and put to one of our guests. All right, let's get into today's chat. Thanks to our partners, Shopify plus and Paclio. Here's our conversation with Blake Hutchison, CEO of Flippa. Blake, welcome to Add to cart.
Blake Hutchison: Thank you for having me, Nathan. It's good to be here and looking forward to the chat.
Nathan Bush: Oh, so am I. We were just discussing then that you've actually turned your home office into your sunroom. Back into the sunroom. Feels like the signal is everyone back to the office.
Blake Hutchison: Yeah, I don't know. Like I must admit, I said to a few staff members, gee, Monday and Fridays on the street here in Richmond, Victoria, Australia, feels busier than ever before. Well, not busier than ever before, but busier than it has for a couple of years. So I do wonder whether there is, there is some pressure on staff or maybe coming from employers to get back into the office, even more so than maybe two or three days a week. So we'll see what happens. But for me, I do actually like working from the office and so as, yeah, as we just alluded to, I decided to turn the office back into a sitting room just to create another space that didn't feel. I mean, I work stupid hours as it is, so I don't need a room that reminds me of how long I work.
Nathan Bush: I don't think do the separation properly. Now, we are here to discuss what you guys are doing at Flippa, which is really Exciting for people who haven't heard of flippa or used flippa.com before. Can you share what your mission is and how you add value into the buying and selling process for E commerce businesses?
Blake Hutchison: Yeah, thanks. So we're a marketplace to buy and sell online businesses, the number one marketplace globally. To do that, our mission is to democratize the exit and to enable business ownership. So we can just go into that a little bit. So democratizing the exit means making a transaction or sale process of your business accessible to everyone. And the reason we think that's important is because so many businesses out there today help people start businesses and it's never been easier than before. We know that. And so many businesses out there today are helping people grow businesses. And that's all good and well, but the average business has a life cycle of five and a half years and of course many fail far before that. But when I say fail, fall over. But there are so many out there who are not actually cognizant or aware of this enormous, enormous group of individuals and or companies globally who will buy small businesses. And most people think the world of exits belongs in unicorn territory and billion dollar price tags. It's not the case at all on the buy side, enabling business ownership for everyone. We actually believe that starting a business is really risky and buying a business is less risky. And so our marketplace is there to help first time business owners get a fast start or there to help very established business owners actually grow through acquisition. And that mission therefore is pretty lofty. And we do that mostly from Australia, but we're very global. So our product and engineering team is based here in Australia. Our sales and marketing team is predominantly based in Austin, Texas in the US and we have 3 million users all over the world.
Nathan Bush: Beautiful. And when you say about buying a business being less risky than starting a business, what's the rationale behind that?
Blake Hutchison: I think there's a couple of things. So most people go into a business without the necessary skill set to go from call it 0 to 100 or 100 to a thousand customers. And so it's all good and well to say I'm really good at making candles, so I'll become a candle e commerce retailer or I am passionate about food, so therefore I'll start a food blog. Very natural, common stories. But the reality is you can only do that for so long until you need to make a buck. And so now you need to actually understand how to commercialize your efforts. And the commercialization of a business is not only difficult, but it's Time consuming. It's not only difficult time consuming, but it's also costly. So let's say for argument's sake, I imagine doing $100,000 in revenue. So to do $100,000 in revenue, I might have to find 1,000 customers paying 10 bucks each. So how do you find a thousand customers? 10 customers is actually pretty easy. You just talk to your mom and dad and a few friends and a hard root customers most of us can even imagine. But a thousand customers is difficult. So the cost of acquiring a customer is, well, if you're extraordinarily efficient, maybe it's sub $10. But lots of companies will pay in excess of $100 to acquire a customer. So now let's do that math. So the cost incurred to actually get yourself to some semblance of scale is high and the risk of you not getting there before you run out of steam and or money is very high also. Whereas I can actually acquire that customer base, I can buy a business, and it will tend to cost me less to acquire that business and that customer base and that cash flow than it would to get to that point in time. So let's just do that a little bit. So I've got a business doing a hundred thousand dollars in revenue. I'm certainly not suggesting that everyone just has this money sitting in their bank account, but $100,000 in revenue, maybe it's a business doing $50,000 in net profit. So therefore it's got a 50% profit mark. That'd be a good performing business. So it's doing $50,000. Now to buy that business, I might have to pay between two and two and a half times, let's call it expensive, and let's say two and a half times. Sometimes, if it's a really good quality business, maybe they go to seven or eight times. But anyway, just for easy math, two and a half times. So I now have to pay $150,000 to acquire that business. But with my $150,000, I just acquired $100,000 in revenue from that. I've got a platform from which to grow. I've got a platform from which to optimize, and I've actually got cash flow. And the cash flow comes back into the business and is essentially an annualized return on my investment. So much like buying an investment property and putting tenants in there, because I've now got revenue generation coming through this asset. It is in fact like that. And I get an annualized return on investment. Now my annualized return on investment in that particular case, if it's making $50,000 profit and I paid $150,000 for it, is actually a pretty healthy third. Right. It's like 33%. So that's really strong. And most asset classes couldn't give you that return. And so that's what we mean. It's a safer pathway because it's actually already assured. It's happening now. Of course, if you don't do your due diligence, then that's a bit silly. And that's not what I'm talking about. What I'm talking about is it's a genuinely good quality business with verified information, verifiable information, and therefore it's a safer bet because it's already doing what what you have intended to achieve by starting something from scratch. So hopefully that helps.
Nathan Bush: Ready to go back and flip burgers for a living?
Nathan Bush: Nah, me neither.
Nathan Bush: But one of the most surprising results that came out of Shopify's recent global survey was that despite the cost of living pressures on customers, 2/3 of customers are still open to splurging on themselves, at least monthly. The most common splurge?
Nathan Bush: Takeaway food.
Nathan Bush: But even if you aren't in the grease game, it is promising. Because no matter how price orientated the market is, customers will find opportunities to treat themselves. You've just got to find the right moment to wave the smell of that juicy burger under their noses. Something to think about as you're planning 2023. To view more resources to help with your 2023 planning and see how Shopify can take your e commerce business to the next level, visit shopify.com au today.
Nathan Bush: Do you find, because obviously you're a two sided marketplace here. Do you find that there is a difference in mindset between those business investors who are willing to buy into a business versus those who are looking to start. So your candle example is a great one, right? Is that I can start making candles and typically you might find that that person does a bit of a soft start side project hustle. Whereas those who are ready to buy you pretty much have to go all in to maintain that momentum and that cash flow.
Blake Hutchison: Yeah, it's a great question. I mean, so typically someone who's buying a business is probably a little more ruthless around, well, the financial health of the business. Whereas someone who actually is passionate about candles and therefore starting from scratch. I say this, this is a flippant comment, it's a gross generalization. But they're generally not going to be as commercial as that person who looks to acquire Now, I think that's shifting and I think there's a blurring of lines, but that's what I would caution people around. Right. So it's one thing to say I love dogs and then start a business related to dogs, because then it's not about loving dogs, it's about commercializing dog stuff. And someone who buys a business, they don't actually necessarily love dogs at all, but they buy it because it does a good job selling to people who love dogs. So there's just a ruthlessness to people who acquire businesses and that relates to them understanding its financial performance and therefore its opportunity.
Nathan Bush: Yeah. Infliba.com specializes in E commerce businesses and digital assets. We've obviously had a bit of a turbulent time over the last few years in terms of valuations of businesses and health of businesses and consumer spending. How are you finding, as a general statement, the market for business health in E commerce right now? Yep.
Blake Hutchison: I mean, obviously challenged. You know, the heady days of. Of the pandemic are gone for the moment. I was about to say long gone, but I just don't. I actually don't believe that. I don't believe that people suddenly become familiar with ecom for the first time and suddenly forget how good an experience that was. But clearly there are extraordinary pressures unseen by most e commerce business owners, which mean that only the best will survive. The good thing about that is only the best is a lot, because there are so many E comm businesses now. I think that Shopify has 2 1/2 million active ECOM business owners. Big commerce, I'd be guessing, but maybe it's. Call it half a million, then you've got Woocommerce, then you've got Prestashop, then you've got Amazon, fba, then you've got all sorts of others. Now, what we haven't seen dry up is demand for E comm businesses. Obviously those buyers are savvy and so they're going to use market pressures as a means to negotiate. The important thing for business owners who are in the E comm domain, and I'll say business owners doing sub 5mil, sub 5 million annualised is. What you need to understand is your business was never overvalued to begin with. You should never have been pegging yourself to the public markets. You should never have been pegging yourself to e comm businesses. Sitting on the COVID of Forbes magazine claiming fastest growing business in history. I'm talking about Thracio and the FBI, Ag space, those types of things. You weren't in that league, unfortunately. But that's a good thing now because your business was never overvalued to begin with. So you should not be compressing valuation on the basis of public markets or any buy side negotiation tactic. What you should be doing is looking for comps around your size. And so we see E commerce businesses doing between $100,000 revenue and $10 million present revenue. And on average you'll get a 2.5 to 3.2 times net profit multiple for your business. So lots of buyers are out there now. Clearly what's happening right now is E commerce business owners are a little bit skittish. So on Flippa we're seeing more SaaS, business owners, more content. So that's publishers, bloggers, et cetera. Apps. Apps are very, very strong right now and there's a big buy side demand for apps. You're right, we only do digital assets. I think by absolute numbers of listed businesses on our platform there would still be more E comm businesses but for absolute number of sales transactions, content number one, apps number two, SaaS number three and e commerce currently number four. But I think that will come back.
Nathan Bush: And is that going back to your earlier point around people looking to sell e commerce businesses are valuing them too high at the moment or are they being just a bit hold offish until they work out what the market's doing?
Blake Hutchison: Yeah, they're just a bit skittish. But the other thing is, right, buyers don't want to buy an asset which is declining. And so buyers are trying to figure out where these businesses are long term sustainable. And so if it's short term, ie I'm having supply chain pressure, that's okay. But if it's a more long term, well this business wasn't actually world class or viable to begin with. What they did was buy cheap ads on Facebook and quickly get themselves to a size which was clearly strong and positive. But in a new world of capital efficiency, can they get to profitability? Can they remain profitable? And aren't they long term sustainable? And what they sell, is it something that people they can imagine wanting? Right. Those businesses are in extraordinary, extraordinarily good shape because the dry powder for E commerce very, because buyers aren't silly. They know that the long term trend toward E commerce is alive and well. While we may be having a short term hiccup, it's not like E commerce is hugely mature, it's actually still immature. And so they know that buying an asset today gives them an extraordinary opportunity through the next two to five years.
Nathan Bush: And you mentioned some of those operational metrics that they'll look into or operational performance, stock issues, cost of acquisition. What do buyers generally look at as a foundation metric to work out if it's long term healthy?
Blake Hutchison: So I'll tend to look at gross profit. So that's obviously revenue minus cost of sales. And so in your cost of sales line you'll probably have your Facebook expenses and things like that. So they're going to have a look at that. But then more specific, they'll have a look at things like refund rate. I'll have a look at things like average transaction value and the thing around average transaction value. It relates to unit economics. If you're selling something for 15 bucks, boy do you have to sell a lot of them. And boy oh boy, do you have to find a cheap pathway to customer acquisition because you've only got a $15 basket size. So they'll look at basket size, which is average transaction value, as I said, refund rates. They'll look at customer reviews. Can they imagine, you know, using those customer reviews for marketing purposes and acquiring new customers on the back of that net promoter score and or quality review. They'll look at inventory levels and whether you've actually got the capacity and capability to continue to sell through at the levels that you have done. And finally they'll probably look at your SKU range. I'll do that for a few reasons because a lot of people go a bit hard and 80% of their revenue is derived from 20% of their inventory range. In which case the buyer will say, well that's great. They'll operate like private equity and they'll gut it and just retain the 20% of the base that is producing 80% of the revenue. And other buyers will say, wow, this is fantastic. They haven't optimized for the rest of the inventory base well, or the rest of the SKU as well. So buyers are all a bit different. It depends on whether it's an individual or a company buyer. If it's a company buyer and they're looking at bolt on opportunities, what they're doing is they're looking for inorganic growth, right? So they're looking to acquire a million dollars in revenue upfront. They take the hit on the balance sheet, but they've essentially added a million dollars in revenue to their existing E comm business.
Nathan Bush: And obviously you look across a lot of E commerce businesses and models. Is there a business or a model
Blake Hutchison: if you want to sit on the
Nathan Bush: fence a little bit that you go, they have just nailed the model in terms of being an investable business from an E commerce standpoint, I mean despite
Blake Hutchison: the fact that it's a little bit out of favor right now just by nature of the aggregators being flavor of the month and now no longer other than that, I still think that particularly in Australia actually I'm sure your listener base is global but particularly in Australia, FBA represents a substantial opportunity. There are still categories that are less well explored. Amazon as a marketing channel I think is more effective than you can get elsewhere and your cost to acquire the customer is lower on average than it is to try to control that end to end experience yourself. Logistics is really hard. Housing is really hard as a whole hostorship and those types of things them taking care of that. I still think it's a business model which if you're a good quality E commerce operator in a D2C context I would be diversifying and testing it A B testing your core business versus this business model and seeing how it goes for you. But I generally think that's really, really strong. I mean the other thing that I would say is that owned product is still the most defensible. So anyone can acquire something from Alibaba, put a new brand on it, string a value proposition together, acquire some customers cheaply and get your first few orders. I think if you've got an owned product that you own, you manufacture, the brand is homegrown, then that D2C business, whilst it may not grow as quickly initially, I think is long term more sustainable.
Nathan Bush: Yeah, it's really interesting both those points, but especially the Amazon point because I think a lot of our listeners, me included, would have assumed that buyers looking at a business that is attached to the Amazon ecosystem is risky because of the reliance on a giant like that.
Blake Hutchison: Yeah, I'm not suggesting that buyer doesn't exist but on average buyers are very, very positive on Amazon and again we'll just come down to unit economics. So have you, have you been able to factor in and do you have some breathing room for Amazon's likely an ongoing tactic to price gouge you? Not the end consumer but you. But I think if you factor all of that in, it's still a more efficient business model than going at it all yourself. Because it just comes down to skill set. There's too many things to control in D2C for the average person.
Nathan Bush: Especially if you're a one man band.
Blake Hutchison: Yep, that's why we have not actually seen funds for Amazon businesses dry up at all. All that's happened is the aggregators who each had 10 to 50 million dollars to spend. They've gone a little quiet while they figure out how to operate versus aggregate. But there's a whole slew of others who are still buying Amazon businesses. Absolutely. Yeah. Amazing.
Nathan Bush: That's a really good insight.
Nathan Bush: What is the average sale value that
Nathan Bush: you're seeing on Flippa at the moment for e commerce businesses?
Blake Hutchison: Yeah, so look, we have a average is a slightly funny one for us just because we have such a broad array. But I'll just bring up our latest insights report here, which just for anyone's benefit is sitting on the Flippa blog. I think that's flippa.com forward slash blog. So the average sale value, which takes into consideration very small businesses and businesses up to say $20 million is $158,753. 150,000. Call it 160. Now in 2022, the biggest Ecom business we sold was $10.5 million. And just so you all know, that sold at 6.5 times net profit.
Nathan Bush: What made that business so special?
Blake Hutchison: So a lot of people don't like the vitamins and supplements space, but they found the perfect buyer in the sense that the buyer was already an existing company, market leader in a particular category. Of the vitamins and supplements space, this was the next best player. And so it's a, it's a bolt on acquisition and they were willing to pay a premium as a function of that. Great.
Nathan Bush: Now I'm assuming that the buyer would have already had that business on their radar as an acquisition target. How does Flippa use your magic to kind of match them together to make it known that this could happen?
Blake Hutchison: Yeah, that's a really good point. I must admit. I'm actually not sure where they had it on their radar. So what Flippa will do, and it's simply a function of scale, is Flippa will programmatically match to buyer profiles, mandates, preferences, which is all encompassing in the mandate they create on our platform. And then we will also layer in their search history and buying patterns. And so we get around a thousand new buyers joining every day globally. And so what we're then able to do is say thank you very much for listing with Flippa. Thanks for choosing us as your pathway to exit. Let's connect some data. So they'll connect into their QuickBooks Online or their Xero, they'll connect to their Amazon, they'll connect to Shopify, BigCommerce. Whatever it is they use. We will tend to have an integration and connection straight for it. They'll Then connect. Once they connect, Flippa can see all the data. That's good, that's really positive. And buyers like to see that. Once we've got all that data, our verification team will do the checks and balances on that data and then the matching will begin. And so the matching can happen to be candid, it can happen manually, it can be literally one of our relationship managers says this is great, we've got a fantastic asset here and go and introduce it to one of the buyers that they're personally working with on a mandate. Or alternatively it will happen programmatically where the platform will send a notification, email or, or SMS text message to that buyer and say, look, we think we've got something for you that happens programmatically that just spins every night. Buyer comes in and says, this looks interesting to me, I can see the data. Can we now, you know, begin the process and have a discussion?
Nathan Bush: And it's all anonymous up to this point.
Blake Hutchison: Once a buyer inquires, the buyer is no longer anonymous. So the seller can see who the buyer is. Or if we are managing the sale on behalf of the seller, which happens a lot for higher value deals, we, we can sue. The buyer is. The asset itself at that level will be subject to a non disclosure agreement NDA. So that needs to be signed by the buyer. In some cases, certain aspects of the data room are also protected. And if the seller wants, although we discourage it just because financing is readily available, particularly in the US market, they can also make sure that it's subject to funds verification. And so we can do that programmatically in the US and the uk. We can't do it programmatically here in Australia just by nature of, you know, open banking and its accessibility. So yeah, it just depends a little bit as to what you can and can't see based on how that particular deal has been set up in our platform.
Nathan Bush: Yeah, but by any means you could sign up as a buyer today and have a browse through what's listed.
Blake Hutchison: Yes. You will be able to see enough information about any given asset to make a decision as to whether you want to acquire. Great.
Nathan Bush: And if you're selling your business, do you set a target price or a range or how does that work?
Blake Hutchison: Yeah, so a lot of our listings will have originated with a valuation. So we have a free valuation tool. That tool is built around not only 10 years worth of historical sales data, but it's also rationalizing market trends and what's actually going on in our marketplace today. So that will give you an indicative Valuation, it's just to be completely transparent and candid. It is an indicative valuation. We ask a few questions to understand the asset as well as its performance. So then yes, we will give you a target price and we will then give you a range from which you are allowed to list. So for example, if we gave you a million dollar valuation, we would not allow you to list that at 20 million bucks because the marketplace looks silly. And so we get a lot of people trialing that. Right? So we reject hundreds if not thousands of listings a month because someone will say well let me just see if I can get 20 million bucks for my million dollar assets. Like well you can't. It's just not the way it works. So million dollar asset, we might let them price up to maybe 2 mil. Right. And then let the buyer base communicate back to that seller base which where they expect valuations to get to. Because occasionally you can, like I gave you the example of before, you can get strategic buyers who will pay over what the market's willing to pay. So we do have to have this relatively broad range.
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Nathan Bush: Ugh, ugly.
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Nathan Bush: do you get any insights into the motivations or the reasoning of sellers which could play into it? You know, whether it's a I need a quick exit, I know you know this has always been on my roadmap or what the intentions are behind it.
Blake Hutchison: Yeah, it's, it's more often than not really straightforward. It's not sinister. So the average business that sells on Flippa is four and a half years old and so the average reason is yeah, I've been trying really hard for four and a half years. I'd now like to buy a house. I'd now like to put my son or daughter through college. I'd like to go on a long holiday. It's really quite straightforward most of the time They've gotten their business to a point where frankly they're a little bit exasperated because once you get a business to a certain size, it's actually a different skill set and it is probably more so less down to the passion that you might have for the particular topic or category that you probably started the business around. And it's now it's financial performance and optimization and that requires an operator. And so yeah, we do get insight, but it's often not that interesting to be honest.
Nathan Bush: So say you get to say the three year mark and you're kind of like, okay, in the next few years it's probably coming up.
Nathan Bush: Do you have any tips or anything
Nathan Bush: that you've seen around the best time to sell in terms of what you would have to have in order in your own house before you go to sell?
Blake Hutchison: Yeah, so there's a couple of very high level points. One, clean financials, right? Don't have a buyer inquire and say, well look, I better find a bookkeeper for the very first time and get my stuff organized. So if you're not using cloud accounting, use cloud accounting. If you're not sure what your marketing expense line and or performance actually looks like, you're going to get found out pretty quickly. So figure that out. Just watch. Listen to a few podcasts on how you calculate roas or TAC customer acquisition costs. You know, just get to get yourself to a sense where you can have a meaningful, mature discussion about the unit economics, business sops. Right? That's probably okay, sub 50 grand, but once you get to 100 grand, buyer's actually going to say, how do I operate this thing? In fact, I actually reckon go lower than that. Once you get to 25 grand, a buyer's going to say, how do I operate this thing? What are the standard operating procedures? What works, what doesn't work? And how do I press all the buttons? Right, you want to have that actually mapped and documented.
Nathan Bush: And does that include the tech decisions that you've made along the way?
Blake Hutchison: Yeah, but look at, let's say you're a $50,000 asset, which is very different to a $5 million asset. Let's face it, you're probably using Shopify, you're probably using QuickBooks online. You may. Well let's hope you've got Google Analytics turned on. So definitely do that. If you haven't already done that, you've probably got a sense of your basic level analytics around what's the average transaction value, what's your refund rate? You probably have some sense around your inventory management, what does it cost you to acquire a unit and what is your margin on that unit? So as long as you have those analytics set up, we tend to find that the toolkit or tool set managing or governing these businesses is pretty, pretty simple. But for argument's sake, let's say it was a more complex business. Yes, you would want to have that all documented in your tool set and rationale for why you chose a particular tool set. Diversification of revenue or at least understanding where revenue opportunity is. So if someone says, okay, well you're doing $50,000 direct, that's fantastic. Just having a, giving them a sense of if they were about to take it over and you had your time again, what are the two or three things you think you would be able to capitalize on that you haven't? And then the best is skeletons in the closet. If there's stuff that isn't good about your business, just get very transparent. You'll find that they love it. Actually a buyer will say this is great. It's actually not as bad as you think. Just get transparent and candid around it. Don't hide it. Because if you hide it, I guarantee you Flippa and anyone else in the space will be encouraging every buyer to do so much due diligence that you get found out.
Nathan Bush: You mentioned due diligence earlier and it was going to be the question that I came back to. What are the most common skeletons you see lying around?
Blake Hutchison: Sometimes people don't have their ducks in a row as it relates to things like percentage of sales that are actually refunded. So they'll say something like $30,000 revenue, but it's actually only $25,000 revenue because $10,000 got refunded. But the top line still says $35,000 because that's money in the door before it went out the door. So that is common little hidden costs that people trivialize. So we had a case where someone trivialized and essentially guessed, made a guesstimate of their hosting costs, but it was quite a high traffic site. And so finally assets had been transferred, money sitting in escrow. We're talking about a couple of million dollar transaction. And then the buyer got access to AWS or some other hosting account. I can't guarantee it was AWS and was actually able to discover that the hosting costs were literally 30, 40% higher than what was reported. And that makes a material difference to your profitability and makes a material difference to the enterprise value of business. So that's common when people trivialize A cost base and then dependency on you. If you can start to remove the dependency on you, it becomes a more salable business.
Nathan Bush: Makes sense. One thing that I've noticed that you haven't mentioned and that we talk a lot about in E commerce is brand equity and customer loyalty. Is that valued by buyers?
Blake Hutchison: Customer loyalty, yes. Brand equity, typically not. So customer loyalty is a function of your repeat rate.
Nathan Bush: You can see it in the numbers.
Blake Hutchison: You can see it in the numbers.
Nathan Bush: So I would.
Blake Hutchison: I would actually consider that. And you are right, it is important. And you can see that for the financial metrics for the most point. So here's the thing, right? Buyers will pay for performance, but look for opportunity. And so if you have fantastic brand equity, that will be reflected in its financial performance, most likely. But if you don't have great financial performance and you say, but isn't my brand outstanding? I've got 500,000 Facebook followers or Instagram fans and they absolutely love everything I post. The buyer is still going to ask the question, well, they might like everything you post, so you've got lots of thumbs up, but where's the cash? Where's the true attributable value to this audience? So brand equity tends to matter a bit when you've got a differentiated product. So for instance, now they're everywhere. But remember coconut bowls, right? So coconut bowls. I know the individual who actually owns coconutballs.com, right? It's like, cool. Good brand, good domain. For a time there, he was one of the very few people that was basically processing the coconut shell and turning it into a sustainable, reusable product. They're kind of everywhere. You can get them in Kmart. Now, he's still got a cracking business built on that brand equity, but that's actually a bit of a rarity. It's a bit of an anomaly. And I would still maybe argue, and I hope he's not listening, but I would still maybe argue that if a buyer came across that business, they would probably still say, great brand, absolutely love it. I'm not discounting your business as a function of having it, but I actually just want to see whether that brand is reflected in the numbers.
Nathan Bush: Yeah, that makes a lot of sense. Lead with the numbers. What buyers want to see, not what you want to tell the story about.
Nathan Bush: Now, if you don't mind, I've got
Nathan Bush: actually a listener question that I want to throw too. It's from Ian Calvert, who's a consultant in the space and I believe you might even know him. And he's had some experience buying and selling. I'll throw to his question.
Blake Hutchison: After Shopify Exchange Marketplace closed last year, did you see an influx in new listings for e commerce businesses on Flippa? Yeah, it's a good question from Anne. I'm looking for our little traffic spike chart. So, yes. So what happened was obviously Shopify is a dominant brand. And so if you were to type in Sell my Shopify store business or Buy Shopify store, no matter how good you are at your job, Shopify is a behemoth and a powerhouse. And the Shopify brand name in that keyword string would then mean Exchange Marketplace was very prominent in search. Similarly, I think, and correct me if I'm wrong, but I think when you're in you. When you're in your Shopify dashboard, it wasn't that hard to actually just published to the Exchange Marketplace. Long story short, we saw a traffic spike, very substantial traffic spike, because we now own keywords. So if you type in Sell my Shopify business, we probably come up number one. Certainly in the US that is the case. So big traffic spike. And then, yes, what we did was Shopify had communicated to most of their sellers that Flippa was a good option for them. We also took our liberties just to be very transparent. You know, we, we growth hack ourselves. So we had one of our VAs go and contact every single business owner on the Exchange Marketplace and say flip is a viable option. So we picked up, I don't think it was an enormous amount, but maybe 50 to 100 listings within a couple of 48 hours of the announcement. Yeah, right.
Nathan Bush: And did that closure from Shopify, did it alarm you in any way that they were leaving the space or were you just partying?
Blake Hutchison: It didn't alarm us at all. I've worked for big companies before. Small things are a distraction. So if you are looking to focus, if you are looking to rationalize your operations, if you're looking to double down on what you do so well, if you're looking to drive material shareholder return, if you're looking to ensure that your staff working on the core business are remunerated extraordinarily well for the great effort that they have, then you kill the stuff that is not working for you or trivial in the grand scheme of things. And so our core business is buying and selling online businesses. Their core business is helping people start and grow online businesses. They're in a very different space. They started having gotten to know Flippa so way back when Exchange Marketplace started a couple of months after we had gotten to know Shopify, and they clearly saw it as a opportunity but frankly I think they saw it as a side project. We know people there at very, very senior levels and their view of it was this is your core business, it's not ours. Our business is up 300% year on year. So we don't, when someone closes, we don't see it as a reflection of the opportunity. The target addressable market is a couple of hundred million active sites, stores and apps around the world. Our year on year growth as I just alluded to is very, very strong. And we know that buyers don't go to Shopify to buy. They go to people go to Shopify to start, whereas buyers come to flip it to buy. So it's just a different value prop.
Nathan Bush: Beautiful partnership opportunity.
Blake Hutchison: Yeah, yeah it is. You know, I think that it's a funny one because if you're a SaaS business, you do everything in your power to protect churn. So I would imagine that candidly we are the last thing that they would ever think about all of their business orientates to helping their big, their bigger businesses get better bigger and their smaller businesses get a good start. But yeah, I do agree with you. It's obviously a fantastic referral opportunity and we remain close with certain members of the Shopify team. Yeah, great lesson.
Nathan Bush: One of the things that I read about you and it's obviously you've had your time at Luxury Escapes, we've had Adam on the show before. We can see that Gabby is one of your investors in the series A funding. So for some friends of the show on there and you know, some leaders that I really look up to and have known for a little while with that experience that you've had in those types of businesses, those fast growth businesses and those kind of leaders around you, what's your leadership style? How do you get the best out of your people?
Blake Hutchison: It's a great question. I mean one transparent and candid communication as, as to where we are at and what we expect. The second thing is I'm very big on, on people who execute today and measure tomorrow. And so some people hypothesize too much, strategize too often you're actually better off. Strategy is a function of good quality execution and so for me so long it is core to what you're trying to achieve. You should be quicker at actually executing. So as your strategy is more informed when you get to that planning period and I think that fast growth businesses that I've been a part of have done that well and slow growth businesses that I've been A part of haven't. So to some extent I've just reflected on those experiences and then said, well, one, one is an ingredient for better success and the other one isn't. So that's good. I mean, I think if you ask, ask my staff, they'd say, you know, my, my leadership style is, is one of urgency. My view is that your best staff are the ones who obviously have a lot of fun doing what they're doing and have a passion for it, but they are all of think, say, plan and do. And so when you get very big, you can have some big thinkers, then you can hire some consultants who plan, and then you can pass that plan down to someone who wants to execute. Whereas I'm a believer that there's kind of three types of people. There's people who receive work, people who create work, and people who don't do work. And I'm only interested in the former too. Right.
Nathan Bush: I love that, I love that philosophy of flipping strategy on its head. Is that strategy is the output of execution.
Blake Hutchison: Yeah. I mean, every day of the week you do something, you go, wow, there's some data. Cool. I think our strategy should this way or that way as a function of that. But first you've actually got to execute. And so that, that means that nothing should ever be contemplated as too big, because it's impossible to execute on something too big fast enough. So pick small impactful initiatives and they can be big, but then break them down into very small. So as a classic case of that, we have what we call the Flipper off market. And in its first instance, all it was was a directory digital assets that we had mapped from all over the world. And much like Google claims to organize the world's web, which of course they have, Flippa would like to organize the world of digital assets and essentially become the Bloomberg of the digital asset universe. So, but first you've got to get the assets, understand the assets, and then publish them to the marketplace and see what people think of them and whether you've got anything right about that directory. And you're able to do that pretty quickly. But what we weren't able to do as quickly was then connect the sell side to it. So if there was a buyer interested, then programmatically notify the sell side. So that's now what's coming as a result of getting the first half off the ground and finding out that buyers were actually expressing interest in these things, knowing full well. I'm being very candid here, but the button wasn't actually doing Anything, we were capturing that as a means to understand the opportunity. Now the opportunity has become such a huge strategic priority for us that we're orientating a lot of time and effort onto it now. But we couldn't have done that without the buy side data.
Nathan Bush: Brilliant. That's a great example. Thank you for sharing that. Now you've mentioned huge growth for the Flippa team and international expansion and some of those initiatives that you just talked to. What's next for yourself and the Flippa team over the next 12 months?
Blake Hutchison: Probably the first thing is just doing more of what we're doing, but elsewhere. So we just hired a commercial director in Europe and we've hired our first two advisors. In fact, I think they start today in Amsterdam. And what we found was that we were getting lots and lots of engagement in the European market and the UK as well. But we didn't have the seniority of staff on the ground to be able to satisfy that customer base. And we are a marketplace, we are peer to peer for the most part. But the reality is once you get over a hundred thousand dollars, people expect a lot of help. So let's provide them the help. The second thing is we recently launched Flipper Invest which gives people the opportunity to raise capital on the platform versus exit on the platform. And the reason being is it still is the case that small business owners are constrained capital wise. And so unless you're a white male in Silicon Valley with ties to Sequoia and Andreessen Capital is still hard to come by. But there's great quality businesses that aren't in the domain of venture capital or private equity that fantastic. What were buyers on our platform now would be investors who will give a good quality operator $50,500,000 to continue to grow what they're doing so well. So we believe that the raising opportunity on our platform is really, really viable. And so we launched Flipper Invest. So imagine us investing further there too. Brilliant.
Nathan Bush: Okay, so if we've got listeners listening to this, wanting to either get started buying or having a look at what they could buy, or potentially selling their business, what's the best way for them to both upskill themselves and also get started with Flippa?
Blake Hutchison: Yeah, I mean there's a couple of things. There's the sort of content side of things. So I would encourage you to hear stories of people who have done it. So you can go to Humans of Flippa on the Flippa blog and there's a lot of videos of people who have been there and done it. You can listen to our podcast, which is called the Exit and it's actually bigger businesses, but we think that those business owners have fantastic stories to tell and their learning experiences are helpful to people. Let's get a little more practical. The best thing actually is to go to Flippa.com and hit the search button. Filter by your business model. Let's assume AECOM go and filter by revenue or the net profit that you currently have and have a look at all the businesses that are currently for sale versus that are of similar size to yours. Read those listings with no intention of buying them and get a feel for how you actually articulate what it is about your business that could be viable and valuable to somebody else. If you're a buyer, I'd actually encourage you to do the same thing. I'm not suggesting you've got 50 grand, you suddenly go and spend it. Do not do that. What I'm suggesting is you can learn a lot from watching the listings play out. So go and watch a few. And so by watching a few, you'll get a sense for how long they take to sell. In some cases, if you have comments on a listing, you'll get a sense of what other buyers are asking. Go to Flippa and look at our due diligence checklists and get a sense for the types of questions you can ask and use the marketplace as a learning opportunity.
Nathan Bush: How good. I bet you'll get a nice little number of visitors from Australia after this because who could resist the curiosity?
Blake Hutchison: We do find it's quite a funny thing. We have a massive traffic base. I can tell you that if you,
Nathan Bush: if you won't notice us.
Blake Hutchison: Well, I had that many active buyers, I'd be a lot happier. But yeah, I mean we, we know that a lot of people use our site for inspiration and you know, we're obviously okay with it, right?
Nathan Bush: Blake, thank you so much for joining us on Add to Cart and sharing
Nathan Bush: what Flip is up to so far
Nathan Bush: and how our listeners might get involved.
Blake Hutchison: Thank you Nathan. I appreciate the time.
Nathan Bush: I'd be very interested to know from you whether that episode has triggered an itch if you weren't already considering exiting, or whether you are ready to exit, whether that sped up the process at all. Keep me in the loop. Shoot me a note on LinkedIn or social. I'd love to hear from you. Now, regardless of whether or not you are looking to exit your e commerce business, here are my three top takeaways from this episode that I think everyone can use.
Blake Hutchison: 1.
Nathan Bush: The Multiple Equation Blake shared that most e commerce businesses are currently selling at multiples of 2.5 to 3.2 times average earnings. Now that's net profit, not revenue or gross profit. And of course there are exceptions to this both upwards and downwards. But it always pays to be realistic when planning your exit. And also keep in mind what Blake said about the average e commerce business being four and a half years old when selling. Number two Amazon FBA as an option to be honest, I was really surprised when Blake said that Amazon FBA businesses are really attractive for investment. If you're not familiar, that's fulfillment by Amazon, where they basically warehouse and ship your items for you, taking that part
Nathan Bush: of the customer journey out of your hands.
Nathan Bush: Now I had previously heard the opposite of what Blake said where this was a downside for investment because costs were high and they posed a significant cannibalization risk. But I do get Blake's point. If you can let the experts do what experts do really well and you could say Amazon do fulfillment very bloody well, it frees you up up to create value elsewhere in your business. Number three Play with the valuations. I would be lying if I said that I did not visit the Flippa site and play around with the valuations both on imagined businesses and of businesses that I knew. Even though I'm not in the market for buying or selling an e commerce business. It's a great tool to understand the levers to create value in e commerce business and to understand understand where the market is really at. Well worth a play. If you're in E commerce now, don't forget about the event that Blake has invited. Add to Cart listeners along to it's called the Exit. It features Gabby Leibovich from Catch of the Day March 16th in Sydney. Register your interest at Flippa.com events forward/exitdinner to get the highlights of today's episode. Head on over to add to cart.com and sign up for our free newsletter each Tuesday we will send Monday's episode summary links and discount codes for you to go next level on. And if you're looking to explore your next e commerce opportunity, come and Visit us at eSweet. We're a dedicated e commerce talent agency connecting the best e commerce talent with the fastest growing brand brands in Australia. Head on over to esweettalent.com au where you can download the free ecommerce salary guide and sign up to our weekly ecommerce job emails. Thanks for listening and until next time, keep those customers adding to car.
