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…buying an Amazon business or an ecommerce business. We’re going to talk about all the ins and the outs with an expert in this field.
Now his name is Joe valley and he came on and really gave me some good tips but then more importantly just some really best practices for running your business in general. This way here if you ever wanted to exit or ever wanted to sell the business you can and you won’t have any problems as far with financials and things like that. Really great conversation. This guy has sold millions of dollars worth of businesses and not just Amazon businesses, ecommerce businesses, he actually had one himself that he sold for a pretty good amount of money.
Then he’s also made a couple of mistakes that led him into the business that he’s into now which is buying and selling businesses. He’s going to talk about that because right now we’re kind of all talking about like, “Oh my gosh, look what happened with Amazon.” We talk a lot about what happened to him with the Google slap and it was very similar except it was a lot worse because they didn’t give him a second chance. Amazon saying like, “Listen we know the review thing it’s going on, we got to kind of step in here,” and basically just say, “Listen you can’t go out there and exchange a discount for a review.
You just can’t do it and we’re not going to let you do it.” They’re going to probably still refine that even more. But you guys have heard me say in the past is that, or maybe you have and if you’re new to the show welcome to the show by the way. Google’s been doing this for years where they’ll just going to come up with these updates and all of a sudden websites are getting penalized. I think it was really great to have him come on and explain that story which that wasn’t even planned. He just kind of came on and then shared it and then I’m like well we got to dig into that a little bit and just to let you guys know that when you are playing on someone else’s playground, their land you have to play by the rules.
[00:02:06] Scott: When you are going to build a business that you possibly want to sell there’s a few things that you want to make sure you do right. Even if you’re not doing it right now you can still correct that. You can kind of course correct and that’s what he’s going to explain as well. He’s going to give us some tips on how to do that and even if you don’t want to sell it’s still good practices for running a business. This isn’t just on Amazon business. Yes, we’re going to be talking about that because a lot of you are starting there but you guys know that, I’ve said this all along, that the Amazon business is the start then we want to build outside of that.
Here at The Amazing Seller Podcast we’re definitely going to be focusing really, really hard towards that now that this update’s happened and everything because I think it’s woken everyone up and we really got to start focusing on that. It’s a great time I think to have on Joe and really explain about best practices so we can make ourselves a little bit less at risk for something that happens in the future. Guys, I’m going to stop talking now so we can listen to this amazing conversation that I had with Joe. But I just want to remind you guys if you wanted the show notes or the transcripts also he’s going to have a link for us that you can get some best practices. I think he put together a nice little PDF for us. Head over to theamazingseller.com/270 and you can get all the show notes, the links and the transcripts there.
I’m sure you’re going to want to do that because this is a pretty solid episode. Definitely go over and check those out. Let’s go ahead and listen to this awesome interview that I did with Joe Valley, enjoy.
[00:03:36] Scott: Hey Joe, what’s up man? Thank you so much for hanging out with us today. How’s it going?
[00:03:40] Joe: Awesome. Good to be here. Thanks for having me on Scott.
[00:03:43] Scott: Yeah. No problem. We had a little bit of a technical difficulty but we got it figured it out now. I think we’re going to be good to go.
[00:03:49] Joe: I think so. Back to the old school way.
[00:03:51] Scott: Back to the old school. The reason why I wanted to have you on is because some of us are either going to be faced with possibly selling our Amazon business or even our outside of Amazon business. What I wanted to do is really kind of get your opinion and kind of your tips as far as like what do we need to do to prepare for that or even to maybe build something and then kind of move towards that and I know that you have some expertise in this. Why don’t you just give us a little bit of a background as far as like what you’ve done and where you’ve kind of gotten this expertise from and then you can maybe share those tips so we can kind of understand this whole process?
[00:04:37] Joe: Absolutely, happy to. I’ve been self-employed since 1997 so I’m kind of an old guy just over 50 years old. My background is in the direct response marketing business, in radio, did some television infomercials, things of that nature. The last product I had I took 100% online in 2005. From 2005 to 2010 all I did was ecommerce, nutritional supplement site, built the business up and sold it in 2010 through Quiet Life Brokerage. I went to work for Quiet Life Brokerage in early 2012. Simultaneously I bought another business, it was a lead generation business.
I bought it March 1st 2012 and on April 12th 2012 it got hit by the Penguin Update. I was making a cool $10,000 a month for doing literally nothing on a weekly basis and then it dropped in half and so on and so forth. I learned a lot. I’ve had some great successes in ecommerce and in business and then some good failures too. You learn from these failures just as much as your successes, probably more.
[00:05:37] Scott: Let’s stop on that for one second because as we’re recording this just this past week this big update came on about Amazon, about their review policy and everyone got all worked up and got excited about it. Not in a good way but kind of all paranoid and kind of like, ‘What do we do now?’ I’ve kind of told people like if you’ve been in this game at all in other parts of the online space you’ve seen the Penguin, you’ve seen the different updates from Google. Google literally, some nights you’ll wake up… Sometimes you’d wake up the next morning and your business is basically gone, like literally. You’ve got traffic one day and the next day you have zero. You’re basically telling me that that kind of affected you in that way.
[00:06:18] Joe: It absolutely happened to me. On the ecommerce business that I built all I did was write good quality content over 5 years. Helpful content, white hat SEO, I didn’t know the term until after I sold it. I did the right thing. I looked after the customer. I think obviously the business that I bought they cheated. They got to the top of the rankings with bad link practices and I didn’t know enough to look for it and I think the same holds true with Amazon. Amazon obviously is an enormous market place now and I think that if you do the right thing by your customer you’re not going to have problems.
I sold the business this summer… I was telling you about a little earlier where she was doing fantastic, incredible numbers on Amazon over the course of two and a half years. I’m taking putting $700,000 of profit in a pocket every year. Then in the fourth quarter of 2015 a competitor came along, knocked off our products, gave away 1,000 products for free reviews and really started eating into her profits. But she was smart. She took some of her revenue or some of her products offline, started selling them B to B. Started doing custom grading and things of that nature and that revenue offset the loss on Amazon and she had a stable business that she was then able to sell in June of 2016.
[00:07:39] Scott: She had to pivot. She’s seen it happen. Again I don’t think Amazon or even Google for that matter does any of these things to penalize the people that are truly building something by the book in a sense. It’s where you’re doing right by the customer, you’re putting good value back into the market place and then they’re going to reward you. It’s the ones that are, like you said, they’re doing back linking or they’re trying to shortcut the system. Someone that’s giving out 1,000 units to try to eat in on a competitor that has never been something that I would have ever said to do. In the beginning I’ve always said you need sales.
We need sales so why not go out and find people that are interested in your product and go ahead and ask for them to kind of try and test your product like you would in any other business maybe with 100 units and then that’s it. After that it’s all about pay-per-click, it’s all about getting more sales, getting ranked inside of the Amazon platform and then hopefully maybe even driving some outside traffic to a landing page or all that stuff.
But like you said this happened to her and this whole update is really to go after people that were doing that because guys or gals with deep pockets could do that, they could afford to do that. There’s not a lot that we could do or that we even want to do to compete with that because you’re playing with dirty people in my mind.
[00:08:58] Joe: I think you’re absolutely right and their revenue trajectory is kind of just like a shooting star. It goes up and then it drops. She sent me a note the other day that their reviews had been tucked by Amazon, they’re one fifth or what they were.
[00:09:16] Scott: That’s happened yes.
[00:09:17] Joe: The buyer for business is pleased because their sales are climbing back up again and they’re in a good situation.
[00:09:22] Scott: I did want to touch on that. I know we didn’t even plan on that but I wanted to because I didn’t even realize that you were slapped by Google and that’s a good point because I keep telling people kind of about that. I’m like this could happen.
[00:09:34] Joe: It’s a great lesson.
[00:09:34] Scott: It’s a great lesson. I’m sorry that you had to learn it for us but it is a great lesson. I know other people that the same thing happened. They were doing $20,000 a month and then within one day they got slapped by Google and their business had lost all the rankings and now all of a student that revenue is gone to zero. At least Amazon didn’t say you can’t sell, they basically just said we’re not going to allow you to do reviews like that anymore.
Any reviews that came from some of these review clubs that they didn’t really approve of or the people they didn’t approve of they’re going to wipe out those reviews. Again I don’t think of it as much as a Google slap was. A Google slap was like if you had those kind of links they’re going to detect them you’re gone, done and there’s nothing you’re going to do about it. Let’s talk a little bit about this because this is interesting now, I think, because some people may right now be building a business on Amazon and maybe even their ecommerce store or maybe one or the other and they’re thinking to themselves, maybe what I’ll do is I’ll build this thing up to a certain revenue number and then turn a good profit.
Then maybe sell it and maybe get out of this business and then reinvest that into something else. I want to talk to you a little bit about that. What do you seen people do in this space as far as like buying and selling businesses whether they’re FBA or whether they’re an online business?
[00:11:01] Joe: In the last 4 years I’ve closed about $30 million in transactions, about just under $14 million in the last 12 months. Of that in the last 24 months about $5 million of strictly FBA businesses. I’ve got one closing on Friday of this week, it’s October 11th, I’ve got one closing Friday. It’s a 10 year old Amazon store, 100% Amazon closing for $1.8 million and it’s being done through an FBA loan because it’s got the history, it’s got the legs. It’s over 3 years old and it has the tax returns.
There are more buyers out there for good ecommerce businesses than there are sellers. The problem I have with the sellers is educating them and I’m so glad you’re having me on here because it’s almost like an intervention. My job is to do valuations, all day every day and we do it as part of our service because we’re success based brokers. We only get paid as a transaction closes. We only want to take on good listings that are going to sell. 90% of the people I talk to, we don’t list their business.
We give them some advice in terms of getting their financials in good clean shape and building a stronger business so it has more value 6, 12, 18, 24 months down the road and helping them understand the valuation process and how the multiples work so that they can set some personal goals. Once they reach them they can say, “Hey, this is great I’m going to sell the business,” or hey say, “This is great, I’m rolling in dough. I’m working 10, 20 hours a week, why in the world would I ever sell it?”
[00:12:49] Scott: Right. Why don’t we dig into that a little bit? Why don’t we talk a little bit about some numbers? Let’s talk about a good clean business to begin with. Let’s talk about that first. If we’re building a business or even just a brand and we’re starting on Amazon what are good practices there as far as what would an investor that would possibly want to buy that be interested in?
Is it a business that has multiple products and has some legs there? What kind of sales history are we looking at? Are we looking at a site that could be a site that sells three different kinds of brands or branded products in three different markets? Is it better to be more market specific? Maybe you can give us some details on that first and then we can move into some of the account being clean and all that.
[00:13:40] Joe: Let’s start with the basics. The most important thing an entrepreneur can do which many, many don’t is start using Quickbooks or Xero or some sort of accounting software, have good clean financials because when they want to sell their business good clean financials are really one of the most important things. The second is having it easily transferable, third maybe being risk averse. They don’t want to be competing against other sellers on Amazon selling the same products. You want to probably have private label products, you can take your own brand and go off onto your own URL or daily deal sites or coupon and so on and so forth.
But clean financials is the most important first step. So many people start these businesses as hobbies and co-mingle financials with other businesses all in one bank account. That’s okay, that’s what people do. I get it. You may have don’t it yourself. Once you hit your stride a little bit, remove everything else from the profit and loss statement and from the bank account except the one business that you’ve got incorporated in it and then focus on that only.
But just to be clear, by clean financials I don’t mean do not take advantage of the benefits of being an entrepreneur. You can still write off the things we all write off as an entrepreneur. When you run a profit and loss statement you get a net income when you’re doing Quickbooks or Xero, there’s net income but then you’ve got to create an add back schedule and that’s what I do. All those personal benefits that you write through the business become part of an ‘add back’ schedule. Let’s just say you pay yourself $100,000 a year, that you write your car off through it, that you write your health insurance through it, your cell phone and that trip to Disney with the family last year.
Between all of those it adds up to $150,000 but if you run a profit and loss statement in Quickbooks it may show that you’ve got $50,000 in profit. When you then create the ‘add back’ schedule in all these personal benefits that you had built into it, you add the two together and you get $200,000.
[00:15:49] Joe: That’s the most important number to understand when you’re running a business and trying to get that evaluation done. It’s called seller’s discretionary earnings. The value of these businesses are a multiple of your trailing 12 month seller’s discretionary earnings. If it’s $200,000, a good amazon business right now probably going to list in the two and a half to three time range.
It’d be two and a half to three times that $200,000 seller’s discretionary earnings but it’s going to vary greatly Scott. If the business is… The youngest I’ve ever sold it was listed when it was 18 months old, sold when it was 20 months old. Historically we’ve always said let’s not list anything under 24 months old because it was Google and organic rankings and odds are they cheated to get to the top. It’s a little different with Amazon. In this market place you can get to the top of the rankings by doing the right thing and not cheating. Offering a good product, getting good reviews in a positive way and still do very well.
I’d say at least 18 months old but the older the business is, the more stable it is and the longer track record of success you have and the less risk there is. Remember risk is a big thing that buyers are looking to avoid. They’re spending a lot of money and they know it’s a risk but they want a business that’s going to have low risk and the older the business is the lower the risk is.
[00:17:17] Scott: That makes sense.
[00:17:19] Joe: Then the other thing is when you start on Amazon and you create that brand and then you want to add SKUs to it and build on Amazon.com, CA, JP, UK whatever it might be, go off of Amazon as well. Growth opportunities help sell businesses faster and for more value. Buyers are not looking at a business that’s generating let’s say $100,000 in annual discretionary earnings and say, “Great, I’m happy with that. That’s all I want ever to want. I’m going to write you a check for $250, 000 and I’m going to work 10, 20 hours a week like you and then I’m going to make $100, 000 a year for the rest of my life.”
That’s not what they want to do. They want to buy the business and they want to grow it and if you’ve already opened up those paths to growth like I’ve heard you talked about with daily deal sites, with any other market places; Walmart.com, eBay, which is not as big but Walmart is just crushing it right now. Some of those market places if you open up those paths when you go to sell your business even if you don’t have a 12 month track record there it shows that the paths are real. That they’re actionable, that they’re creating profits for you and that the growth is there.
That business now has multiple streams of income, different growth opportunities, you’re on Amazon and you’re off Amazon in different market places. There’s less risk, more growth opportunities, different streams of income. If you have another business that is equal in size… Let’s say it’s generating just on Amazon, 100% Amazon marketplace, $100,000 in discretionary earnings, that’s a lot riskier. There are growth opportunities but you haven’t take advantage of them. You haven’t opened up those paths yet so the buyer has to come in and do that work.
[00:19:14] Joe: The buyer’s going to get 100% of the reward for that instead of you getting some of that reward. If the business came to me and was on a left let’s say with all those marketplaces open and multiple streams of income and was at least 24 months old it my list, if it’s growing month over, month year over year it my list in the three and a half time range because it’s a pure ecommerce business. Whereas that pure Amazon business you’re going to be in that two and a half to three time range. In fact the highest one I’ve closed that’s pure Amazon is $2.8 million, that’s that ten year old business closing at the end of this week.
[00:19:52] Scott: Again, it’s got some history, right?
[00:19:55] Joe: It’s got some history. I’ve come close just simply on others that had just astronomical growth and a beautiful brand and lots of expansion opportunities, $2.7 million, $2.6 million in that range. But still there’s a big difference between $2.7 million… Now that same business $100,000 in discretionary earnings you’re looking at a value of let’s say $280,000 plus the cost of goods saleable inventory you have on hand at the time of closing versus $350,000 plus inventory. It’s a big difference.
[00:20:31] Scott: Makes total sense. Everything you’re saying makes total sense and I think looking at a business you’re not looking at just the one channel. I think that’s what you’re really saying here is like as many… I’d say any additional revenue stream that you can show that the business has access to or that is pulling in is going to strengthen that brand or that purchase for the investor.
If you can see also potential growth opportunities that might not maybe optimized as much as they can… Because you might get someone that, kind of like you said made the path but they didn’t really know what to do once they got the path paved and then for you to come in and have the specialty to be able to do all of that outside direct response marketing maybe or those other things that can bring in additional revenue to scale but at least you have the groundwork set. I think that also helps versus like you said just being on Amazon. What I’m gathering though is history has a lot to do with it.
We want something that’s at least 24 months, I would say, that’s showing those earnings. But then also trying to have some external channels already in place I think would be best. Now, what about stuff like maybe that business also has a really good… I would say a good maybe person on their team that is good at creating maybe paid traffic to sales as like their own sales funnel and that’s like it’s own channel in itself. Does all that come into the mix as far as like is this…?
[00:22:12] Joe: Absolutely.
[00:22:12] Scott: Okay. You come from being in the supplement business yourself, I mean that’s a lot of that. You build the funnel, you go and you test traffic to it. You might build a different funnel from a different audience that positions them differently and depending on how many you have that’s how many more are going to keep pulling into the business.
[00:22:27] Joe: Absolutely. Every component of the business comes into play for the valuation of it and the more revenue streams there are the more stable it is, the more growth opportunities there are, the higher the business is going to be pushed in the valuation range. The range is always changing. I don’t want your audience to get stuck on the multiples that I’m giving because I’m still waiting for that Amazon only business that is three or four years old with private label products, it’s growing month over month, year over year that I can push well beyond the three time multiple.
They’re out there. I’ve talked to some of the folks but the business is still too young. We’re probably looking at first quarter of next year when we’ll have some listings where we’re going to break that three time multiple range and get up into the three and a half time range. Simply because the growth is just astronomical in some of these businesses and that has to be taken into account too.
If you do the simple math of… The way the multiples are done, three and a half times the seller’s discretion… What that means in the buyer’s mind is that it’s going to take them three and a half years to earn their money back. But when you’ve got a business that’s growing 25% year over year, if you had that listed at a 4 time multiple and all things remained the same the buyer’s going to make their money back in 2.7 years. The growth, the year over year growth of the business really, really comes into play in the valuation process.
The stronger the growth, the longer the history then that multiple platforms, whether it’s pay-per-click, Facebook advertising whatever it might be, all relates to the stability of the business even with that growth being risk averse buyers are willing to stroke a check for a lot more money.
[00:24:16] Scott: From what I’m gathering right here, again to kind of simplify things, number one is once you get your stride definitely make sure that you’re doing clean bookkeeping. You’re definitely got your accounting to where it’s separate than your other businesses that you’re dabbling in so this way here things can be sorted out so you can see exactly what that business is doing. Secondly, I’m seeing that you definitely want to build a business that has opportunities to grow outside of just Amazon.
Yes you could do it on just Amazon and like you said but it’s going to maybe longer history and it’s going to show year after year growth. I still would find that as an investor to be risky because I only got one leg to stand on. If that leg ends up giving out I’m done and then I got to figure out how to get those products marketed outside. I’d rather come into a business that has at least some external channels. That’s just me personally if I was investing in a company and I’d like to see a trend that was growing, that wasn’t just going to be a fad or something. Like hoverboards, let’s take them for example.
If I’ve seen a hoverboard, which actually funny enough I did, that was for sale that I could have purchased and I didn’t even think about it twice because obviously it’s a fad and not to mention I wouldn’t want to have the liability issues. I’m just saying you have to look at those things as well. But really we’re talking about financials, we’re talking about a business that has growth opportunities and if you’re just starting it’s really about finding that market that has products being served to that market that aren’t going to just stop in the next three four years.
It’s something that you can continue to grow and then once you get to a place like that and your financials are in place and all that then you have the opportunity to possibly basically sell out. Go ahead and cash in on that particular business. Am I hearing that correctly?
[00:26:06] Joe: You simplified it greatly, thank you. I do this every day so I throw a lot of information out there but that’s it.
[00:26:12] Scott: No it’s good, no it’s great. Again, I find that stuff to be kind of like common sense in a sense but there is a lot of nitty-gritty that goes into it. But I think if people can just visualize like you have this business and if it only resides in that one location it’s riskier, period. If you can open up a bunch more shops like you were franchising it in a sense like if you had a brick and mortar you’re more stable because you have more ways that if one does work the other one will and kind of make it that way. I love that.
I know that your company right now basically that you work for that’s what you guys do. You guys analyze businesses and really for you I look at you as like the varsity basketball coach. You want to know why? You’ve got a firm system right here.
[00:27:01] Joe: I’m not tall enough.
[00:27:02] Scott: That firm system right now when you’re training the kids when they’re young you’re training those people that are building these businesses to build them right because if they build them right then you have an opportunity to cash out when you get to the varsity leagues. That’s just kind of how I think about it.
[00:27:20] Joe: It’s a good analysis. We’ve been around for 10 years. Mark Dow started the company in 2006. Each one of us have built, we’ve bought and we’ve sold our own online businesses. We’ve had great successes and epic failures like my investment back in 2012 so we’ve learned the hard way. We look at ourselves as business advisors not just brokers, we do. We coach, we advise, we help people. 90% of them again we more or less tell them to go away. “Go work on this, go do that and we’re here for you when you’re ready.” It’s exactly what Mark did for me back in 2010. He told me to go away. I did and I came back and made a lot more money when I sold it at the right time as opposed to when I thought I wanted to.
[00:28:10] Scott: Then you basically though your company… This is kind of how I look at it too, you’re like in the real estate business technically. You have properties that are for sale and you have buyers that you know that would interested in a certain type of business then you can pool those together and then you can make a phone call. That’s how I think about it as kind of if I was to do real estate and I have a wholesale guy that basically, and he knows I’m an investor, you can kind of match me up with an investor. Is that kind of right? You have people that come to you, I’m sure, but you also have people that are like, “Hey, if something comes across your table and looks like this, this and this give me a call.”
[00:28:45] Joe: I have an ever increasing list of those. We have a database. People sign up to get notified when we have new listings come out. When a listing is done, the marketing package is complete and ready we put it live on our website and it goes out to our database all within the same 24 hours. Now there’s nothing in there that reveals the name of the Amazon store or the URL of the website or anything like that. It’s completely confidential, it’s just a teaser. Somebody has to have an NDA on the file before they see the full marketing package.
It initially goes out to our internal database and for a decent listing within the first 24 hours we’re going to have anywhere from 100 to 200 inquiries of that listing. They’ll get to see the full marketing package then they’ll follow up and ask questions with me. We wait about 10 days and then we go out to the larger MLS listings for businesses for sale but it’s a pretty streamlined process.
[00:29:44] Scott: Now let’s flip it over and let’s say I’m an investor. I’m going to look at your properties. First off, let me ask you this, what’s the range? If I wanted to invest, what’s the range…? Again we’re not going to hold you to it but what’s the range of a starting price up to, I’m sure it could go up to as much as it wants to, as much as it’s valued at but what’s the low end and then maybe upwards?
[00:30:11] Joe: If I look just at my own personal listings in the last 24 months the highest valued one that I sold was $3.3 million and the lowest was about $120,000.
[00:30:20] Scott: Okay. Going down to like… I’m just trying to get people a feel too. Maybe there’s people listening right now that are like, “I don’t want to go build the business. I want to go and buy one and then build it further.” There’s people that I’m sure that are listening that are maybe in that camp.
[00:30:39] Joe: It’s a great way to do it. It’s amazing really because I talk to guys that went to Wharton School of business, Harvard MBA, they’ve got all the education they could possibly have but they can’t seem to launch a successful business. Whereas, I’ve talked to mothers of four with four kids running around like crazy and they fight and they scrape and they work hard and they get lucky. All the stars were aligned and all of a sudden they’re making $120,000 a year working 20 hours a week. “Joe it’s not what I want, sell this for me.” I’m like, “First of all you’re crazy, you need some help, take a vacation you’ve got a good thing here.”
[00:31:26] Scott: I get it.
[00:31:28] Joe: There is that opportunity for people that have been trying to build a business and just can’t get all the stars to align even through all the efforts that they’ve made. Buying a business is a good opportunity, you just have to be careful. You don’t want to make the mistake I made and get hit by an algorithm update. There are companies out there that you can use to do financial analysis when you make a purchase or they’ll do an Amazon analysis now as well, a company called Centurica. A guy named Chris Yates owns the company and does a great job. I refer a lot of my buyers to him to help them with the analysis if they’re not good at it themselves.
[00:32:06] Scott: You’re kind of looking under the hood?
[00:32:09] Joe: People are investing their life savings Scott. We want to make sure that they’re happy. We want them to be happy and successful and say good things about Quiet Light and the company that they bought it from and what comes around goes around. Maybe they’ll come back to me in 3, 5, 10 years and want to sell the business, maybe buy another one.
[00:32:29] Scott: That’s a great point. Let’s wrap up here but let’s maybe first kind of touch a little bit on… I think I know what the answer’s going to be but I just want to kind of put it there. What is the number one thing that you think people that are starting a business that they do wrong that they could do differently?
[00:32:54] Joe: It’s back to the basics. They co-mingle funds with multiple companies. They’ve got multiple websites generating multiple streams of revenue and they just put them all on one bank account and they don’t know how much money they have.
[00:33:10] Scott: I knew that was going to be the answer. I thought it was but I wanted to highlight because I do think it’s important too.
[00:33:14] Joe: It’s good data. I sold a business in, I don’t know, it must have been March. It was that young Amazon business. It was 20 months old. They didn’t collect a nickel of sales taxes. This is huge. This is one that people must do. Invest a little bit of money in the sales tax software, the collection process, the distribution process. Collect and pay sales taxes where you have an access, you’ve got to do it. The listing that I sold had to take $70,000 out of their pocket at closing, set it aside in escrow to offset not having collected sales taxes.
The liability in certain states, there’s an article in the American Bar Association, that the buyer share with me, shared with the seller, says that certain states have written laws to have that liability carry forward to the new owner of the business. This is huge. The new owner of the business is going to discover this and this has happened more in the last 12 months have buyers wanted tax clearance certificates than in the last four years combine.
[00:34:21] Scott: I actually I had one of the founders of Tax Jar on just recently and we talked about all about sales tax and all of that stuff and I do think things have to be cleaned up there. I still think it’s just not even clear as far as where and what. We all know nexus but whatever state your inventory in is technically to be the one you’re to be liable for. We may ship into one location but Amazon then moves and we don’t know it until we have something like Tax Jar that will tell us that and then still in then we don’t know if it’s 100%.
It’s definitely something I think that people should go over to Tax Jar, check that out again and just do your research. Hire someone that you trust to maybe look at that but that’s definitely important and I think that on the basic level you need to be collecting sales tax in your state or any state that you have nexus in, 100%. Again if you’re going to sell the business that’s where that would come back to bite you if you weren’t doing that right now because then that will come into play and then really what you’re doing, what it kind of sounds like you’re doing there is you’re taking 70 grand and you’re putting it in escrow and you’re saying, listen, that money might not ever need to be touched but if we ever get a suit that’s where the money’s going. Is that true?
[00:35:37] Joe: Yeah. Well in this case they had 12 months. They had 12 months to go out and get tax clearance certificates from the states and if they got them and they didn’t owe anything to that state then that $70,000 will not be reduced. At the end of 12 months… The 12 months is not up yet so we don’t know how it’s going to end up. At the end of 12 months if there’s $35,000 left that $35,000 will be released to the seller. If all $70,000 is gone, then it’s gone.
They calculated the potential sales tax liability using services like Tax Jar and came up with that $70,000. We also calculated that if they had invested $3,700 in the software, the collection and distribution over that 18 month period they wouldn’t owe anything. It’s an 1,800% return investment if they had invested that 3700 bucks.
[00:36:28] Scott: Got you. That’s definitely good, so really financials. We got to make sure that we’re up on our financials and I mean really right down to the basics. Again, how much did it cost for the goods? How much did it cost for all the expenses to sell the goods and all of the basic stuff that we do when we do our taxes?
[00:36:48] Joe: Even separately knowing your beginning inventory and your ending inventory and your purchases for every single month in an excel spreadsheet most people don’t do but it’s critical. That allows to get the accrual accounting method in your profit-loss statement if you have to put it in there manually. If you do cash and your business is growing your discretionary earnings are going to look very small and they’re not very small. You’re constantly reinvesting money in inventory. In a growing business you have to use the accrual method which, hey I hate accounting too but you got to use it to get value, the best value.
[00:37:25] Scott: Hey, Joe this has been really actually great. I’m glad I had you on because I learned a bunch and I also kind of re-confirmed my feelings of how to really do it properly. If you’re going to ever sell. I say the word ‘if’ because some people might say, “I don’t want. I want to build this thing into something else and to just keep growing it and that will be my retirement or maybe that’s something I really enjoy this market that I’m in.” If you are interested in look into this or looking into Joe services, Joe how would people get a hold of you?
[00:37:57] Joe: Just go to the website quietlightbrokerage.com, there’s a valuation link they can click on it and we’ll do a free valuation. There’s no pressure, we’re here to help. What comes around goes around, that’s all it is.
[00:38:09] Scott: Definitely I’ll link that up in the show notes as well and I know that you have also some tips and stuff like that as far as how to evaluate and all that stuff and that’s all on your website as well?
[00:38:21] Joe: There’s a lot of resources on the website, there’s an e-book, ‘10 Steps to Selling Your Amazon Business’. It’s really 10 steps to selling any internet business. That can be downloaded as well. That will walk someone through the entire process from calculating broker commissions, legal fees, taxes all of it.
[00:38:37] Scott: Okay, cool, good. Joe, I want to thank you again. It’s been really nice chatting, I’m sure we’ll talk again in the future. I just wanted to say thanks for spending time with us and giving us a little education on how to sell a business if we want to sell a business. Thanks again man, I really do appreciate it.
[00:38:54] Joe: My pleasure Scott, nice talking with you.
[00:38:56] Scott: There you go. That’s some good information to know. Now, whether you are in camp A which you’re starting a business and you have plans to maybe grow it and then sell it in 2, 3, 4, 5 years that’s good information. We need to build the foundation. Now on camp B you might be someone that’s like I think I just want to maybe buy a website or maybe get a couple of partners and buy a web business or an ecommerce business or an Amazon only business. You may want to do that to kind of cut some of the startup. I think this is all good information.
If you’re buying a website or an Amazon business or an ecommerce business, these are the things you need to look at and make sure that are being checked. It’s like buying a car. If you’re buying a used car you want someone to kind of go through the car to make sure that you’re not buying something that has holes in it or flaws in it. It’s the same idea. On the other side, Camp A, the ones that want to build something and possibly sell it well you want to have these things done so when someone does go and look through your financials or through your business and see what kind of revenue streams you have you can show that you’ve got a solid business not just a one-legged business.
I want to thank Joe again, really appreciate him having on. I’m sure if you guys have any more questions or anything he’d be more than happy to answer them. He’s told me that so definitely hit him up and definitely go check out his services. I’m going to put everything in the show notes again, the transcripts, the links, all that stuff that we discussed will be there so theamazingseller.com/270 and you can go check all of that out.
I just want to say guys depending on where you are in this journey this is just good information to have so just remember that it’s there for you when you need it. Again, I’m a big fan in just-in-time learning and that means if you’re not thinking about either one of these right now maybe you’re not thinking about selling and maybe you’re not thinking about buying but you may in the future and now you have that in your tool box. Focus on what you need to learn now, take action on that and I promise you that will help you move forward.
All right guys, that’s it. That’s going to wrap up this episode. Remember, I’m here for you, I believe in you and I’m rooting for you but you have to, you have to… Come on, say it with me, say it loud, say it proud, let’s stay together now, “Take action.” Have an awesome amazing day and I’ll see you right back here on the next episode.
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