Case Study: How Proper Planning Positioned These Sellers for a $12,000,000 Exit
April 21, 2022
You’ve probably heard the phrase “it’s important to time your exit.” But when we talk about timing your exit, it has nothing to do with “playing the market.”
By timing, we mean that you should evaluate where your business is currently at, where you want it to be, and what your personal financial goals are.
When planning your exit, you want to sell into strength. That means you should have a solidly performing asset that simply needs some shaping up in the right hands to soar.
Ideally, you should start any new business venture with an eventual sale in mind, even if it isn’t in the cards in the immediate future.
But even if you didn’t start your current venture with that mindset, all hope isn’t lost. What would happen if you started taking exit planning seriously and dedicated a good six months to it?
You could end up like some of our marketplace sellers, who took the time to prime their business and then negotiated a $12M deal within 17 days of listing it.
Let’s take a look at how they did it, what their concerns were, and how we guided them to an even bigger exit than they thought possible.
What Does an Eight-Figure Business Look Like?
No matter where you’re at in your digital journey—just starting out, scaling your business, or getting ready to exit—you’re probably wondering about the structure of an eight-figure business.
In this case, the sellers had a 98% FBA and 2% self-fulfillment model. They were selling over 200 SKUs with an average of 4.5 stars over thousands of reviews. They had diversified marketplace channels, with the majority of off-Amazon orders fulfilled through Multi-Channel Fulfillment (MCF).
There was an element of seasonality to the business, but the sellers had attempted to correct this by diversifying their products to help boost sales in off-season months.
The business was highly streamlined, and the sellers even had their own warehouse that picked, packed, and bundled items to be sent to Amazon. That freed up a large chunk of their time to focus on ways to scale the business.
All this translated into a highly successful business pulling in $699K in average monthly revenue and $172K in average monthly net profit.
Like many sellers building online empires during the pandemic, they experienced stockout issues. In fact, all their bestsellers had gone through stockouts of between one and three weeks over the previous trailing 12 months.
Although the stockouts and self-owned warehouse could have been seen as negative points, they represented easy wins to aggregators and roll-ups for scaling the business. By closing down the warehouse and moving operations to a lower-cost location, as well as increasing the amount of inventory on hand, groups with large amounts of capital could increase sales while reducing costs.
Despite the stockout issues, the business was on track for 15-20% growth, with low-season sales up 40% over the previous year.
The Optimal Way to Plan an Exit
The sellers were aware that they had a few bumps in their business model. They came to us in late January 2021 to talk about possibly listing in September 2021. They were heading into their low season and still having a few supply chain issues.
They knew it was the optimal time to focus on getting their business into solid shape before listing and came to us with a target exit goal in mind.
While they were ironing out some of the wrinkles, they touched base with our seller advisors with questions about how to make their business as attractive as possible for a future buyer.
At the time, they were handling all customer service themselves, although they had extensive standard operating procedures (SOPs) for the tasks. A specific concern was whether they should start outsourcing their customer service tasks a few months before listing.
We normally recommend that sellers streamline their processes to make them as hands off as possible.
However, this does come with exceptions, and this was one of them. Businesses at this level of operations are more likely to be acquired by large firms with in-house teams dedicated to handling and scaling operations.
In cases like this, our vetting and sales teams advised that hiring VAs at this point wouldn’t be a big step up from having solid SOPs in place. They also noted that hiring employees could result in buyers including additional operating expenditures in their valuations, leading to lower offers for the sellers.
Avoiding making major changes to either operations or cash flow at the last minute can actually make a business more attractive to investors with deep pockets—and more profitable for sellers making an exit.
Why The Sellers Chose Empire Flippers
The sellers knew it was a great time to start thinking about selling. Across the board, multiples skyrocketed toward the end of 2020, with businesses selling faster and for more money in 2021 than ever before.
The sellers wanted to go through a brokerage and started vetting different ones. They appreciated both our approach and process-driven nature.
But they were still on the fence about which brokerage to choose. When looking at selling for a potentially life-changing amount of money, it’s normal to want to go with a brokerage that can get the job done.
We had recently changed our commission structure to a blended commission, making listing with us more attractive to seven-figure-and-up sellers.
More importantly, we also had figures to back up our recent success in selling seven-figure-plus listings. At the time, we had sold over 40 seven-figure listings, and our average time from list to offer was 20 days.
After considering the advantages of our brokerage and our success rate, the sellers were happy to formally submit their business for vetting a few months earlier than originally anticipated.
Vetting Concerns
Once the business was in the vetting process, the sellers came back with a fresh round of questions. They wanted to make sure everything was clear and accounted for to prevent any problems during the due diligence period.
One area of concern was their accounting method. The sellers were using cash-basis accounting instead of an accrual method, and they were concerned that this would be flagged by a buyer during due diligence.
Fortunately, we use a standard methodology when building our own P&Ls for every business that comes through our platform. Our buyers are aware of our methodology and trust that our P&Ls are accurate.
Another concern highlighted by the sellers was inventory calculations. This was a unique business in that its inventory was based on components instead of SKUs. As previously mentioned, the inventory was sent to the sellers’ warehouse, where it was assembled and bundled, creating the SKUs.
This could have made it difficult to get an accurate count of inventory on hand when it came time to negotiate a deal. To preempt any problems, we came up with a multi-part solution. Inventory stored directly with Amazon would be calculated by SKU count. A second category of “total inventory” was created to give a general overview of inventory unrelated to SKU count.
A final area of concern during vetting was the landed cost of goods. These costs are highly variable by nature and it can be difficult to calculate an average when shipping costs rise enormously.
For these sellers, they had seen their costs rise from $4K per container in early 2021 to an incredible $10K toward the middle of the year. They were concerned about accurately reflecting their landed costs over the past year.
The good news is that, given the shipping challenges over the past few years, buyers expect to see these fluctuations. The best thing to do is use a weighted average over 12 months. If the methodology is sound and can be proven to buyers, the fluctuations don’t typically cause problems.
After all concerns were addressed, the sellers were ready to go live with a listing price of $9.4M, which put them at a 55X multiple.
Heading into the First Round of Offers
Before the listing went live, we knew it was going to get significant interest, especially among aggregators and rollups. We’ve started a select listing process to help handle the deal flow for these listings expected to receive a high volume of offers.
When a business is part of our select listing process, it goes through two offer rounds. During the first round, sellers typically take calls with all interested buyers for a specified period of time.
All buyers who want to make an offer on the business have until the first-offer deadline to do so. The seller reviews the offers and decides who they want to bring into the second round.
During the second round, buyers solidify their offers based on seller feedback.
After speaking with 15 interested buyers, the sellers in this case received nine quality offers. Of the six other potential buyers, some opted out of making an offer because they didn’t want to take on running or transferring the sellers’ warehouse.
All of the offers involved some sort of deal structure. This is normal in businesses of this size. The complicated operations and large amounts of cash involved mean that deal structures are usually in the mix.
Some of the offers included holdbacks, while others offered stability payments and performance-based earnouts.
How the sellers felt about the offers
The sellers had a clear idea of what they were looking for in an offer. They were mostly concerned about upfront payment amount and uncomplicated earnouts.
They wanted to figure out how to get the maximum upfront payment without seeming too aggressive. This is a common pain point with sellers, and it’s part of what can make negotiations complicated.
Once all the first-round offers came through, the sellers jumped on a roundtable with our sales team to walk through everything. Being able to discuss the offers, provide feedback, and talk through goals helped the sellers feel confident and able to negotiate from a position of power.
It also gave them greater insight into what was being offered. Some of the offers needed clarification, especially where they concerned earnouts tied to seller discretionary earnings (SDE) ranges.
Although they were happy to listen to additional specifics about these types of offers, they preferred to have earnouts based on revenue instead of SDE because they thought revenue was a more transparent figure.
Other points of concern for the sellers were the due diligence timeline and the asset purchase agreement (APA) timeline. Like many sellers, they preferred offers that would get everything done in as little time as possible.
After speaking with our sales team, the sellers realized that their significant number of suppliers could slow down the due diligence process while the buyers vetted and established relationships with all of them. The sellers agreed that a bit of flexibility was needed for due diligence provisions in round two offers.
Navigating negotiations
Navigating negotiations is tricky in most cases, but when millions of dollars are on the line, it can be a significant stressor for sellers.
In this case, the sellers specifically wanted guidance about how vague to be when discussing other offers with potential buyers.
Although it sounds like a stressful situation to be in, this is actually a great opportunity for sellers to ensure they walk away with the most capital possible. It’s important to maintain confidentiality, but speaking vaguely about other offers can spur competition among buyers.
Setting a baseline for an upfront payment amount and establishing what your expectations for an earnout or stability payment are—while remaining consistent—is a great way to handle situations like this. This approach does not require you to disclose the exact terms of other offers.
The important thing to remember is that you don’t want to set a firm, finite number. For example, instead of saying you want “$10M upfront,” it’s better to say, “We’re looking for eight figures upfront.” This establishes a baseline but gives room for the buyer to offer more than a fixed minimum amount.
After evaluating the offers and solidifying their exit goals and negotiation strategy, the sellers were ready to move on to round two with four potential buyers.
Competition Heats up in the Second Round
Based on feedback from the sellers, the potential buyers were encouraged to come up with risk-adjusted offers. Instead of offering earnouts tied to SDE, for example, they could offer some sort of guaranteed stability payment or holdback, combined with earnouts in years one and two.
In the second round, buyers were under even greater pressure to produce the best offers that considered what the sellers wanted. It was one of the most competitive deals we’ve ever seen on our marketplace.
The winning offer came in at $11.15M upfront with an $850K stability payment if the cumulative 12-month EBITDA exceeded the 12-month EBITDA prior to close. That brought the sellers to a $12M exit.
It’s not uncommon for deal structures to push a deal over the asking price, as aggregators and rollups compete to secure particularly attractive assets.
In this case, all upfront amounts offered were over the asking price as well. Once the bar was set during the first round of offers for upfront amounts over eight figures, the buyers who continued on to the second round knew they were in a high-stakes competition.
Along with offering a higher price upfront and an attractive stability payment, the winning buyers made their offer even more competitive with an all-expenses paid trip to Hawaii for the sellers and their spouses.
Who would pass up $12M and a free trip to Hawaii after just 17 days on the market?
Migrating Eight-Figure Assets
Migrating the assets from seller to buyer was a smooth process, with one minor exception—the sellers had taken out a Small Business Administration (SBA) loan using inventory as collateral.
Financing is tricky when it comes to online businesses. Until recently, it was difficult to get a loan for an online business purchase. Loans are often tied to physical products, such as inventory. They can also come attached to transferable assets, such as Amazon Seller Central accounts or Shopify stores.
The buyers wanted to wait to start the inspection period until they had proof that the loan had been paid off and that a Uniform Commercial Code (UCC) filing had been issued by the SBA. This would have delayed the transaction by at least several weeks.
It wasn’t an ideal solution for anyone, so the buyers came back and asked to start the inspection period immediately but wanted to withhold $150K until proof of the lien release was provided.
On paper, it seemed like a possible solution, but it would have effectively changed the APA.
Understandably, the sellers were hesitant to change any aspect of the APA at the last minute. Their hesitancy and the buyer’s worries about the lien created a bit of tension toward the end of the deal.
Our migration advisor jumped in to mediate the situation, and all parties agreed to start the inspection period immediately. The APA wasn’t changed, which was a relief to the sellers. Instead, they agreed to sign an addendum guaranteeing payment of the loan without altering the terms of the deal, which helped the buyers feel at ease.
Within two weeks, the buyers confirmed that the business was exceeding the minimum operating requirements, and a life-changing amount of capital was released to the sellers!
Planning Your Own Solid Exit
As you can see, it pays to be proactive in planning your exit. In this case, the sellers came in with a clear idea of what they wanted, listened to our seller advisor’s feedback to achieve their goals, and worked with our buy-side team to create a pathway to a profitable exit.
The same tools are available to you, so you can exit your business with the largest amount of capital possible.
You can submit your business today to get started on your own life-changing exit.
If you’re not quite ready to take the leap, you can also use our free valuation tool to get a general idea of what your business could be worth, which is a great first step in planning your future financial goals.
