Selling Right Channel Radios

Selling a Dropshipping Business I eCommerceFuel

It’s been eight years since Right Channel Radios first opened its eCommerce doors. After a cart migration, major website overhaul and lots of lessons learned over the years, the business has officially been sold.

Today we’re talking about the biggest takeaways Drew and Andrew walked away with after selling eCommerce businesses. It takes more planning, strategizing and moments of doubt than one might think.

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(With your host Andrew Youderian of eCommerceFuel.com and Drew Sanocki of Nerdmarketing.com)

Andrew: Welcome to the eCommerceFuel podcast, the show dedicated to helping high six and seven figure entrepreneurs build amazing online companies and incredible lives. I’m your host and fellow eCommerce entrepreneur, Andrew Youderian.

Hey guys, it’s Andrew here and welcome to the eCommerceFuel podcast, thanks so much for tuning in today. Joined by Mr. Drew Sanocki, the man from New York City consultant and business owner extraordinaire. Drew, how are you doing buddy?

Drew: Good, how are you doing?

Andrew: Good, I was looking at Nerd Marketing and things are looking sharp over there man, you’ve got a pretty beautiful brand and site with some awesome content.

Drew: It’s getting there. I read some book on design for founders, I think it’s called “Design for Founders,” taught me a lot about typography which I got into, you can sink a lot of time into that but I love it now, it’s really interesting, I recommend it for anybody who is looking to brand a site or a blog.

Andrew: Yeah, it looks super sharp, I was jotting a bunch of notes down and stuff that I’m totally going to swipe for the eCommerceFuel site, yeah it looks sharp man.

Drew: Oh fun, good.

Andrew: But yeah, today talking about some kind of crazy, crazy news. I sold the business.

Drew: I know. Congratulations.

Andrew: Yeah thank you. Sold Right Channel Radios which is the business I’ve had for, man, I guess where it all started back in 2008 so owned it for eight years and just this last couple of weeks ended up closing on the sale.

Drew: So is this the first official announcement?

Andrew: Publicly it is, I’ve been chatting with people in the community about it, the private community but in terms of public announcement, yeah, this is where it’s getting broken.

Drew: Well that’s great, well congratulations, this is your second exit.

Andrew: Yeah.

Drew: Isn’t it?

Andrew: Yeah, thank you, this is my second one, sold TrollingMotors.net a couple of years ago and this is number two.

Drew: That’s great, got all sorts of questions for you.

Andrew: Yeah, hit me man, it’s kind of strange doing a podcast about selling your own business but you were kind enough to come on and help me do it so it wasn’t just me talking to people.

Drew: Well I’m happy to be here, I sold my first business, it seems like ancient history now, but back in 2011, 2012.

Andrew: Yeah, Design Public, right?

Drew: Yup and then we sold a business where I was the CMO, Karmaloop, we sold that about a month ago.

Andrew: You’re partnered up with a private equity group for that, right?

Drew: Yes, I mean they did the deal, I did the diligence on the deal, came on board, helped return the company to profitability and we sold, they made most of the money off of the deal unfortunately, but yeah.

Andrew: Probably it’s safe to say they probably brought most of the money to the deal, right?

Drew: Yeah, I was a mere pawn.

Andrew: Yeah so I thought it would be kind of fun to just kind of talk quickly about why I sold, who I sold it to and then get into some lessons, both kind of some lessons I learned from the sale and also get your kind of thoughts on it.

Drew: Sounds good.

Long-Term Prepping Before Putting Up a “For Sale” Sign

Andrew: So probably the biggest takeaway for me, and this is something I realized after the fact, kind of at the sale but it was something I was trying to prep for was long-term planning with a business pays off just enormously and I have been prepping to sell this business for close to two years. It started back in, I think 2013 or 2014…2014 we had a terrible year, awful, down 30% I’ve talked about that before and I had to make that decision do I just sell it at a decreased, at a low valuation, low multiple because it’s in free fall and walk away and do something else? Or do you kind of the opposite call of I’m going to really double down, do a big redesign, try to get it back up to speed and make it more valuable in terms of exiting?

So thought through that, within probably the 12 months prior to the sale was really, really intentional about focusing on profitability, tracking the ways our suppliers billed us to make sure there weren’t any mistakes getting over missed. With spending I was crazy, not insane but fairly anal about hey, any non-discretional expense let’s wait on that because you’re effectively, you’re paying 3X for anything you spend in that year because if you lose $1000 in profitability on a 3X multiple that’s a $3000 hit on the purchase price. So I mean for me long-term planning paid off enormously to the tune of hundreds of thousands of dollars thinking through that for the 18 months prior. And I’m guessing, is that something you guys did as well Drew?

Drew: Yeah, and I think for the same reason. Ours was in ’08 where revenue was down 50%, maybe you need that experience or to go through that experience to think about selling because before that life was great.

Andrew: Yeah.

Drew: And we always said why would we sell this for a crappy e-commerce multiple when we could just run it for cash flow?

Andrew: Yeah.

Drew: Well boom, revenue is down 50%, that’s probably why you would want to consider selling. At some point business might be riskier than you think. And after that in ’08, we used that downturn to sort of reinvent the business, we moved to being a virtual company, we re-platformed, we did a bunch of site changes, we wanted to do anyway. Then we showed three or four years of growth, whatever that is until we sold and the whole time we were very intentional about that, okay, now we know what we want to do with the business, we focused on standard operating procedures and making sure they were all written down in metrics and yeah, so that planning really paid off.

Andrew: You know it’s funny too, there’s a lot of cases where investing in marketing or new business development is very worthwhile. Where maybe in the next year it’s not going to pay off, but long term it will, but I think the philosophy behind running your business leanly to prepare for a sale, a lot of that is something that’s great to carry over even if you’re not planning on selling, right? Yeah, because you should always be worried about your suppliers short changing you, you should always be really scrutinizing your expenses to be like “Oh, is this really that valuable?”

Drew: Yeah.

Andrew: So for me if you can get in that mindset all the time, it’s probably going to make your business that much more profitable even if you don’t sell.

Drew: Yeah, it helps to go through a sale first because then you’ve got that mindset. Whatever, it’s like the Michael Gerber “E-Myth” mindset or the “Built to Sell” mindset to name another book, but just that process approach to the business really helps and I think the biggest payoff for me was that I didn’t have to do an earn-out, we sold the business and we were done. And the reason we didn’t have to, we weren’t locked up in any sort of earn-out was because the business was so turnkey. We literally could pass it off to the buyer and he had a lot of confidence that he could run it.

Andrew:: So that helped you negotiate a completely 100% upfront.

Drew: Yeah.

Andrew: Got you.

Drew: Yep, yep.

Andrew: Yeah, for me too this deal was 100% cash and I mean people talk about doing earn-outs, owner financing, things like that but as we get to maybe a little bit further on, for me you sell for a 3X multiple, if I’m going to sell for a 3X multiple one of the biggest reasons I’m selling for such a low multiple is to reduce my downside risk, right? So why sell for 3X multiple but then effectively be the bank and effectively be on the hooks, you still assume the risk, right? If the business doesn’t do well then you’re not going to get paid back, so why not just hold on to it anyway and have the potential, hopefully if things go well, to have that cash flow asset in the future? It always surprised me when people are to sell for such a low multiple on a good business, but they’re willing to take an enormous amount of risk and a lot of time seller financing.

Drew: Right, right, agreed.

The Emotional Turmoil Of Letting Go

Andrew: Another big lesson I learned is just because you make the right decision does not mean it’s easy to make. It can be a really emotional process going through this. Like when I sold Trolling Motors that was not emotional at all for a lot of reasons that we won’t get into, I knew it was something I wanted to sell, I wanted to focus on my other core businesses and that was fairly easy. For me this was the first time that the sale was really emotional, there were days where I just lay awake at night thinking, “Am I crazy? Why am I selling this business?” You know, running numbers in my head, thinking about all the time we put into it, and even though I think long-term macro sense, and especially for some of my personal goals it was the right decision, “Oh, there was some angst that came up.” There’s one point the deal almost fell through and I was pretty excited because I thought I was going to get to keep it, but did you have any of that? Was it emotional for you on Design Public?

Drew: Yeah. It was… I loved that business, I loved running that business. In the back of my mind it was more, I was really burnt out on it so I was ready to go, but there’s always that am I going to be able to repeat that success on the next thing? For us also we just had some really big competitors who raised a lot of money, hundreds of millions of dollars, Wayfair being one of them that came into our space and did I want to double down and compete with something like that. I don’t know, but I guess that made it an easier decision for me that I wasn’t losing as much sleep over it as it sounds like you were.

Andrew: Yeah, you ever meet someone who’s got a… I won’t have you name any names, Drew, but maybe you’ve been in a relationship like this where you know you need to leave, you know it’s not a good fit, you know long term you want to do something else, but you’re just like “Oh, I can’t leave. It’s so much fun right now.”

Drew: Yeah. I think it’s the nature of decision making.

Andrew: Yeah.

Drew: Whether it’s dating somebody or making a big decision but you know you always have a little bit of buyer’s remorse or regret or something right after you made that decision.

Gut Instincts Never Fail

Andrew: A third thing that kind of stuck out to me was the importance of trusting your gut when dealing with people. The ultimate buyer and I had a fantastic rapport and it ended up being a great fit for a lot of reasons, but one of the things I did first before we connected was I went to my two suppliers, I have a couple of primary suppliers for the business, or had I guess, I mean talking in the past sense, that would have been great fits for the business. The first one surprised me, it would have been a home run, they would have gotten half a million dollars in additional wholesale revenue on top of the profitability of the business and it just, they competed with us on the retail side, like a slam dunk, home run deal for these guys. They didn’t even look at the custom prospectus that I spent two days building for them, which blew me away.

And then the other supplier, they were great, but if I had to categorize I would say they tend to be a little bit more especially versus the first one, on the more unorganized side, there was times where I tried to set up calls that they didn’t go through right or they wouldn’t call me back at the right time and even though they ultimately ended up being interested and they probably could have paid a little bit of a premium over who I ended up selling to, I decided not to go with them because I thought that there’s a good chance that A, even if we do close this deal it’s going to be a nightmare to get done and B, there’s a good chance that four months down the road it ends up falling apart. I just had that gut feeling about that and so I think at the end of the day thinking through, trusting your gut on the buyer’s side, I’d rather give up a quarter of a multiple for a great buyer as opposed to trying to maximize your gains with someone that is a little sketchier.

Drew: I agree with that. It’s in both of the exits that I’ve been involved with it was the buyer with whom we had a better rapport throughout the whole process that ended up being the buyer.

Andrew: Did you have that with either of the exits where you had someone who was willing to pay more but it didn’t sit right for whatever reason?

Drew: Yeah I think in the second case we did, in Karmaloop but Design Public it was just clear that the people who ultimately bought the business were, I don’t know, were good guys, we hit it off, they knew what they were doing, they knew what they were getting into and all that meant it was more of a no-brainer to work with them.

Selling Isn’t About Immediate ROI

Andrew: Fourth lesson that stood out to me was selling a business like this is not all about the immediate ROI on a cash flow basis. I’m a very financially driven person, well driven to some extent, I look at the lens, I can view the world, and business deals a lot through the lens of finances, returns and if you were to ask me four years ago before I sold my first business like, “Hey, would you ever sell a business that was generating, giving up a 33% return on your investment?” Because if you sell for a 3X multiple that’s about what you get, I’d say are you crazy? No, treasuries are yielding 2%, 1.5%, there’s no… You’ve got to go to Mongolia, right Drew if you want to try to find stuff.

Drew: That’s a subject for another podcast.

Andrew: Subject for another podcast, we’ll just leave that there. But yeah, so financially terrible decision from an immediate ROI standpoint, but I think what I realized throughout the process coming to terms of okay, I want to sell and actually selling was it’s about more than that, it’s about potentially having a little extra head space, because any time you have a business it’s in your mind even if you have it fairly well automated. For me a lot of it was about moving on, I’ve been doing this business for eight years, I’ve learned so much in the last eight years that really probably there’s some different things that I would do from scratch or buying a business, looking at one, it would be kind of nice to be able to apply some of that knowledge from a clean slate, and like we kind of alluded to earlier, there’s that risk involved too, like you’ve got the risk of a business declining over time or having a catastrophic thing where Google delists you or maybe one of your suppliers pulls out. So it’s more than just about the cash flow for a couple of months, you’ve got to look at a much bigger picture and I think sometimes that’s hard to do when you’re seeing short-term really good cash flow from a business.

Drew: It doesn’t always make financial sense, but I couldn’t agree more with both those things. I bounced back and forth between operating like I did at Karmaloop and now I’m consulting again and even with consulting if I take on too many clients it just takes up so much head space that I really have trouble carving out any extra time to buy another business and look for businesses and do things that I know will lead to long-term wealth. I totally get it, you want to sell the business to sort of clear out that head space so you can focus and be creative on something new. And the other reason you mentioned was, what was the other reason you mentioned? You had two good reasons there.

Andrew: Head space, moving on and risk.

Drew: Moving on and risk, oh the risk. Yeah the risk thing is something that I think I underestimated it, I probably blocked it out but there were so many nights I just… You go to sleep and you’re afraid to wake up the next morning, you’re afraid to open your inbox because you’re just thinking “Did the site go down, did Magento crash, what customer issue is going to come up to my level?” You have no idea, but it’s just in the back of your mind and to be done with that, to wake up and just not worry about the site being down, someone popping up on Slack and getting in your grill about this is just awesome. You had to have cash in the bank and then you’re not on the hook for any of those things which you’re ultimately on the hook for no matter how much you have automated your business.

Andrew: Yeah, can you put a price on not having to worry about Magento crashing in the middle of the night? I’m not sure if you can.

Drew: It was huge, that was my life for so many months when we first went over to Magento and just to be done with that was great.

Taxation on Capital Gains vs. Ordinary Income

Andrew: Oh man, I love it. Last big lesson I learned is thinking through and planning on the tax front is really, really important. I mean we could probably, Drew, do an entire episode on thinking…taking through this and the difference between a stock sell and an asset sale and all these different things but we may be just do an abbreviated version. A couple big things that stood out to me especially with this deal was thinking through at a high level are you going to be taxed on capital gains level or on ordinary income level? And for one great thing about internet businesses, especially and I’ll say this for drop shipping businesses, we have… The sale was structured, there was zero physical assets transferred with the sale. Zero inventory, no buildings, everything sold was digital. A website, supplier relationships, an email list, and one of the wonderful things about that is that instead of being even in an asset sale, getting a little bit inside baseball here, but even in an asset sale which the deal was structured as, because they were intangible assets that I sold everything was taxed at capital gains rates versus ordinary income rates which are much higher and saved tons and tons of money. So just something to think about and kind of a nice little advantage of running and selling internet businesses.

Drew: Yeah, agreed.

Andrew: One of the downsides, and this is something I didn’t think about effectively until near the end, was like I mentioned looking to buy a new business. And you think through, whatever you sell the business for, let’s say for the sake of argument, you sell the business for $500,000, if you sell that business you can’t go back out and purchase another business for $500,000, you lose let’s say 25%, you’re going to lose that amount because you’ve got to pay taxes. So immediately just the transaction costs with taxes reduces the amount you’re able to buy a business for and reduces the amount you’re going to be able to acquire a new income stream for. And there’s some things that you can depreciate the price of the business and the goodwill over time but a lot of times that’s a 15-year plus schedule, I didn’t think about that until further on down the line. I don’t think it would have changed my decision to sell, but I remember having this moment where I thought, “Oh, that stinks.”

Drew: Yeah, it’s not like buying a house where isn’t there some rule like you sell a house, you can buy another one in six months?

Andrew: A 1031 exchange, yup.

Drew: There aren’t any for buying and selling businesses.

Andrew: Yeah so it’s brutal. So think through that, if you’re on the fence, you’re not sure, make sure you are thinking about that because you effectively lose when you sell, yeah, like 25%, 30%, depends on how it’s set up, but yeah, a good portion of your ability to reacquire a new asset which is brutal.

Drew: Right.

Andrew: Was that something that you really thought through when you sold or was that something, I guess you weren’t, maybe with Design Public you weren’t necessarily going out to look for a new business right out of the gate, were you?

Drew: No, no I was just happy to sell. But these days I think that is definitely what the private equity guys think about a lot, you know tax implications of selling businesses and things like whenever they have an exit. I’ve also learned from them largely you want to go bigger if you can when you buy a business, the bigger deals just make sense, everything makes more sense when you go bigger. So the transaction costs tend to be fixed, but the legal costs, the paper of the deal, and things like that, just the bigger you go the better it ultimately would be for you. The same amount of work goes into growing a bigger company as it goes into growing a smaller company. So I would think about that now, I would think about okay, if I’ve got a certain number of capital how do I buy the biggest business possible? Maybe it’s structuring the deal the right way or maybe it’s partnering with a fund to back me and get the size up a little bit.

Andrew: Interesting. Yeah, given I’m looking for new businesses, so you would try to go as big as you potentially could just because this economy is a scale?

Drew: Yes, yes.

Andrew: Interesting.

Drew: And that’s, I would say out of every PE guy, private equity guy I’ve ever spoken with, you know let’s say 50, it’s the advice that 50 out of 50 have given me.

Andrew: Go as big as you can, huh?

Drew: Go as big as you can.

Tips from Drew on Buying a Business

Andrew: No kidding, interesting. Any other, going forward I was looking for a new business to buy, any other tips or advice given that you’ve…you know the space, you’ve been looking at way more businesses than I do, you know that process much better.

Drew: I think deal flow is the hardest thing and you’re probably in a great position because you are exposed to so many e-commerce businesses through the forums. But I think deal flow is probably the hardest thing for anybody looking to buy a business. I’m in a situation where I get some cast-offs from these bigger funds where they pass on businesses that are a little too small for them, so 5 to 10 million dollar deal size and those are the ones I’ve been looking at. Anything bigger you’ve got to line up a lot more funding for. And anything smaller, I’ve just had beaten into my thick skull that it’s not worth my time. If you want to live off this business you’ve also got to make sure that it’s big enough to throw off enough cash where you can do that. So that means you buy something on Flippa, you make 10K a year off of it and you can get it to 20K a year, can you really live off that? Probably not, maybe in Montana.

Andrew: Maybe in Montana where we all ride horses and live in thatched huts though.

Drew: Yeah, the people that I know who do this, they make their own deals happen, they’re sort of very proactive with what they’re looking for, they often go out and convince somebody to sell, they have proprietary deal flow, so, you know, they might find this person who is ready to retire and has a great business that offline, they’ve never gone online or maybe they’ve only sold through one channel or something like that and they convince that person to sell, so I think that’s probably the way to go.

Andrew: Interesting, that’s good advice. There was someone I know that kind of just an acquaintance, but they’ve got an incredible business and I was chatting around asking someone a favor because I was considering about selling, but I think I’ll be looking at that and I think there’s a good chance too I’ll be hopefully maybe contacting people in the community, on the mailing list, listening to the podcast, to see if there’s anyone interested in selling things that meet my criteria, so feel free to reach out to me, eCommerceFuel.com/contact. Particularly I am looking for businesses with great proprietary products, really interesting stories, I love stuff made in the USA, I love high quality things, looking for products that ideally have a history of repeat purchases or people looking to repeat. So feel free to reach out to me if you have got a business that meets that criteria or even a product that meets that criteria. It will be something that’s on my radar definitely for the next six months or so. So, at this point, Drew, I’m looking forward at least for a couple of months having a little bit less of a hectic work schedule this summer.

Drew: Yeah, take the summer off, what are you doing next week?

Andrew: Next week, what’s going on next week? Probably going to do some mountain biking in Missoula, pick up a bike down there.

Drew: Nice.

Andrew: So my one little present to myself for selling the business, see a friend. I mean yeah, I still want to keep working through the summer. But yeah, take a little bit more of an easy summer especially given that we only have two months of good weather here. Got some really cool stuff in store for eCommerceFuel, I was telling you about the software directory that we’re working on, a lot of improvements to the community, continue to work on kind of the small Amazon business I’ve got going on and of course, look for that next business to buy, so that’s what’s on my plate going forward. When you’ve sold, what do you out… You know, paint the town red? Did you do anything crazy? What did you do when you sold the business?

Drew: Well I dreamed about it for so long and I had a great dinner with my now wife and my brother to celebrate, my brother worked with me at the business and yeah, I mean spent more than I usually would on a dinner, so that was fun. It wasn’t like, for eight years of working I got one dinner out of it, it was just nice. I did sort of check out for longer than, in retrospect I should have tried to jump to something else sooner I think. I took about a year where I didn’t do much and I went off on a bunch of different tangents, I thought of business ideas and I really got into survivalism.

Andrew: Survivalism?

Drew: I got paranoid that the world would come after me and I wanted to hide my money and do all that, it was just dumb to spend a year doing that without starting anything. I would recommend that you do something. Set a… Give yourself…

Andrew: Somewhere in Mongolia is a buried treasure chest of three quarters of Drew Sanocki’s wealth.

Drew: My wife would come home from work and I would still… She’d go to work I’d be on the sofa, she’d come home I’d be on the sofa, unshaven, just like I’m thinking about business ideas, just leave me alone, you know? So don’t do that, start something.

Andrew: I’ve got some other good advice too from somebody who’s been through sales and had this happen and said one of the most dangerous places to be after a business sale is kind of sitting with a pile of cash in your bank account that you feel like you have to do something with. And his advice was be really patient, there’s lots of opportunities in the world, there’s lots of things that you can pursue, but once you pull the trigger on one, especially if you take Mr. Sanocki’s advice and really kind of go all in if not close, you’re committed at that point, so yeah…which I thought was that be patient, you don’t have to rush, it was a good advice. On the flip side, you know…

Drew: Probably the opposite of my advice.

Andrew: Yeah.

Drew: I think for me it was because I thought I would start something else and I just kept trying to figure out what the next Facebook was going to be and it’s just no idea was good enough and that was the downside of having some cash in the bank. It’s like the pressure was off, I could think all day about great business ideas because I knew I could pay the bills. To some extent if I had that pressure, like I needed to start something to pay the bills, then it would have pushed me towards a very different kind of business than the ones I was just daydreaming about.

Andrew: Yeah. It’s funny because I kind of get that sense too, you’ve got a little bit more money in your bank account and that does give you a cushion, it’s nice to go out and have that dinner. But for me as well I kind of feel like this next month when I look at the income statement, it doesn’t list your bank balance, it just shows how much you made that month, it is going to be significantly leaner, then that is going to be something that for me I feel like that will give me a little bit of kick in the butt to say, yeah you can have a month or two and have fun, but you see too many months of that lean income statement and ooh, that gives a… That’s good motivation for you. As Andi my wife puts it, she’s like “Well, you killed our golden goose. What are you going to do now? It lays the golden eggs.”

Drew: Thanks.

Andrew: If you’re a community member there’s a thread I started in the community that talks about the business transaction in much more transparency and more detail, just given some of the nature of the things I had to not get quite as detailed as my last sale, but come on over to the discussion in the forum if you’re a member and if you’re interested in seeing the nitty-gritty, we’ll link up to that in the show notes. Drew, thanks for being willing to hop on and talk business sales and bat this around with me and looking forward to hopefully both of us finding the perfect business to buy in the future.

Drew: Yeah, it was fun, anytime, congratulations again.

Andrew: Thank you, I appreciate it.

Drew: Enjoy it.

Andrew: Want to connect with and learn from other proven eCommerce entrepreneurs? Join us in the eCommerceFuel private community. It’s our tight knit vetted group for store owners with at least a quarter million dollars in annual sales. You can learn more and apply for membership at eCommerceFuel.com. Thanks so much to our podcast producer Laura Serino for all of her hard work in making this show possible and to you for tuning in, thank you for listening. That will do it for this week, but looking forward to seeing you again next Friday.

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Post tagged in: Buying & Selling Stores, Entrepreneur Profiles, Lifestyle & Growth, Podcast

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