Building an Ecommerce Business, Part 18: Selling the Company

Launching and then growing an ecommerce business can be both exciting and stressful. The reward for many entrepreneurs is to sell their companies someday.

I’m the founder of Beardbrand, an ecommerce business in Austin, Texas, that focuses on beard care and men’s grooming. This is episode 18 in my series on building an ecommerce business from the ground up. The previous installments are:

• “Part 1: Choosing Partners,”
• “Part 2: Selecting Platforms,”
• “Part 3: Early Days,”
• “Part 4: Copywriting Matters,”
• “Part 5: Paid Acquisition,”
• “Part 6: Hiring Employees,”
• “Part 7: Shipping and Fulfillment,”
• “Part 8: Customer Service,”
• “Part 9: YouTube Strategy,”
• “Part 10: Apparel Sales, Manufacturing.”
• “Part 11: Selling on Amazon.”
• “Part 12: Acquiring Companies.”
• “Part 13: Raising Money.”
• “Part 14: Using Kickstarter.”
• “Part 15: Content Essentials.”
• “Part 16: Custom Manufacturing“
• “Part 17: Growing a Community.”

For this installment, I spoke with Michael Jackness. He is the owner of Terran, a multi-brand ecommerce company. He is also the host of EcomCrew, a popular podcast. Jackness has sold several ecommerce businesses. In this conversation, we discuss the most recent sale, which occurred earlier this year.

What follows is our entire audio conversation and a transcript, edited for length and clarity.

Eric Bandholz: You own and operate multiple ecommerce businesses. You’re also the host of EcomCrew, an amazing ecommerce podcast. Tell us a little bit about your background.

Michael Jackness: I left my day job in 2004. I got into ecommerce as a domain investor and an affiliate marketer. I then purchased Treadmill.com, which was my first ecommerce site. I ran that for a couple of years. I sold a few million dollars in fitness equipment and realized the perils of drop shipping.

In January 2015, we started Terran, which consisted of four ecommerce brands: Ice Wraps (hot and cold therapy packs); ColorIt, which I just sold (coloring supplies and products for adults); Wild Baby (baby clothing and toys); Tac Niner (survival gear).

The one we just sold, ColorIt, was about 80 percent Amazon and 20 percent on Colorit.com using Shopify. If we had turned off Amazon, it could have been 50-50. But many people come to ColorIt and then search on Amazon, find the products there, and receive free Prime shipping.

Bandholz: You started ColorIt in 2015?

Jackness: The concept started in 2015. We got serious about the business in 2016. Then we sold it this year.

Bandholz: It’s coloring books for adults?

Jackness: Yes. It was a huge trend in 2014 or 2015. We launched as just a coloring book company. And then we launched colored pencils. We realized that the accessories were more lucrative than the books. But over the last year, the books have caught up. We have enough titles now and we rank well on Amazon. They’re also defensible because we handle all the designs. They’re all copyrighted.

We’ve differentiated ourselves in the manufacturing process. You need $50,000 to $100,000 to get started printing at the level that we do. And we also have the original art component.

Bandholz: Do you own your businesses?

Jackness: I had a partner with ColorIt. The others I own wholly.

Bandholz: ColorIt sounds like a perfect business. Why sell it?

Jackness: I’m also looking to sell another one next year. Everyone has a different risk profile. For us, we started this brand conglomerate in 2015 called Terran with the goal of $10 million in overall annual sales.

Since then, we accumulated $1.3 million in inventory — inventory sitting in warehouses across four brands. I was losing sleep because as we continued to grow, we needed more and more cash, more and more inventory. I wasn’t in control of my destiny as a lot of my business was on Amazon. It was time to take some risk off the table.

Bandholz: So you and your partner decided to sell ColorIt. What were the steps from there?

Jackness: You can have two modes of business. You’re either focused on growth or profit. It’s hard to do both. When the time comes to focus on profit, it’s easier to switch that lever than the high-growth lever.

When we stopped the high growth for ColorIt, we decided to sell it. That decision happened relatively quickly. We had doubled our bottom line. The timing was right to put it up for sale.

So that’s what we did. We put it up for sale in January of this year. Within three weeks we had multiple offers. We had a good broker, Joe Valley from Quiet Light Brokerage.

Bandholz: How big was your company at the time?

Jackness: We had 15 total employees for the business, across all four brands. Revenue for all four brands was high seven figures.

Bandholz: Was the valuation for ColorIt based on net profit?

Jackness: Yes, more or less. Most ecommerce businesses go for a multiple of EBITDA — earnings before taxes, interest, depreciation, and amortization — plus add backs. A seller can add his salary back to that number as well as his company car, his personal cell phone, that sort of thing. You can also add back one-time expenses.

You end up with 12 months of adjusted, trailing earnings and then multiply that by whatever multiple you get. In our case, it was 3.1. Then you add inventory on top of that. That’s the final sales price.

Bandholz: Do larger businesses receive higher valuations?

Jackness: Yes. There’s a magic line, typically $1 million per year in EBITDA, where the multiples increase.

Other things that can help include channel diversification, intellectual property (having a trademark), and business longevity.

Bandholz: Did the buyer write a check and you turned over the business?

Jackness: Yes. Every deal is different, however. For our transaction, 90 percent of the purchase price was paid at closing; 10 percent was held in escrow for 90 days to ensure a smooth transition and to make sure that all the things that I promised were true.

For the inventory, we took a 12-month note — 12 equal payments at 5 percent interest. Normally I would never agree to that. But I thought that it was the right thing to do because of the amount of inventory that we had for this business. If we were operating at peak efficiency, we would have had about $300,000 in inventory, but we had $450,000. It’s not fair to a buyer to pay for our mistake.

Overall, I’m happy with the deal.

Bandholz: Final question. What lessons have you learned over the years in terms of buying and selling businesses?

Jackness: Let’s start with selling. I’ve never regretted selling a business. I’ve sold several now. I’m good at compartmentalizing. I always keep in mind the moment that I’m at when deciding to sell. You can’t look back. It’s similar to the stock market. Why did I sell my Apple stock at $100 per share when it’s now $200? It was the right decision at the time.

As far as recommendations on the selling side, I don’t want to get paid with my money. I don’t want earnouts. Write me the check. This is the price of my business. I realize it’s a lot of money. But I want to be paid up front so I can deploy that money elsewhere.

On the buy side, I have several suggestions. First, make sure to conduct due diligence. Don’t take the seller’s word. There’s a lot of morally questionable people in the world. Either do the review yourself or hire a company.

The company that purchased ColorIt hired Centurica, a professional due diligence company that specializes in ecommerce. It took five or six weeks for Centurica to comb through seemingly every detail of my business. They found a bunch of mistakes, which upset me as I strive to be thorough. But they were excellent. They found a bunch of little things that I didn’t even know about. So due diligence is important.

And you have to be willing to walk away. It’s easy to get emotionally attached or feel like you’ve put so much time into something and you get excited about it. But think a year or two down the road. What if it doesn’t work out and the excitement has worn off?

There is always another business. I’ve reviewed a lot of them. Many people I know look at 100 businesses before they buy one.

See the next installment, “Part 19: Just Do It.”