POD: Looking to Sell Your eCommerce Brand? Maximize Your Valuation With Tips From a Managing Director
July 19, 2022
May 10, 2023
min read

POD: Looking to Sell Your eCommerce Brand? Maximize Your Valuation With Tips From a Managing Director

The Profit Forecast: The eComm CEO's Podcast

Episode #1: James Cartales of Cascadia Capital

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Ben Tregoe: [00:00:00] Alright, James. It's great to see you again.

James Cartales: Great to see you as well.

Ben Tregoe: Thanks. Why don't we just start with you know, a brief intro of you and Cascadia, and then we'll just dive into some, you know, topics around like deals and what you're seeing in the DTC market does that.

James Cartales: That sounds like a great plan. So by way of introduction, my name's James car, I'm a managing director with Cascadia capital. I lead the firm's consumer retail and eCommerce practice. So Cascadia is a 75 person investment banking firm. We're headquartered in Seattle. Washington, we've got five offices around the country. And what we do is we help growth oriented companies optimize their capital structure and, and then ultimately exit events.

James Cartales: So. About 75% of my time is spent advising management and shareholders of privately held lower middle market companies on the sale of their businesses. And so over the last, you know, four or five years, we've really seen an increase in. The M and A space for, for eCommerce first brands and, and retailers.

James Cartales: Mm-hmm the other 25% of my time is focused on raising growth equity capital for, for similar businesses. So that's typically done, you know, as a, my minority investment non control, but where, you know, a founder is not ready to, to sell their company yet, but needs some, some capital to help. Invest in certain growth initiatives or in some instances, just, you know, recapitalize the business a little bit and maybe take a few chips off the table.

James Cartales: You know, we work on those deals as well, but yeah, so I think the, the common theme throughout all of my client base is, is really growth. And we're not. In the business of financial engineering. What we really do is, is we focus on quality growth stories, and then we try to match them up with good strategic or financial partners who, you know, buy into the story and, and want to basically be invested in, in that business.

Ben Tregoe: Nice. So what would be like a typical deal size, I mean, or not deal size, but revenue size of the companies that you work with? It, it ranges you know, the way that we look at the world is Our clients need to be kind of institutional grade in the sense that we don't go out and raise money from individuals or, or, you know, traffic in that market.

James Cartales: We're not crowdfunding deals for people we're working in the institutional market. And so this is typically private equity firms or, you know, larger either sponsor owned or publicly listed strategic acquirers. And so the targets that they're usually trying to buy. You know, from a, from a valuation standpoint, we call it 50 to 500 million.

James Cartales: That's the lower middle market where we play. Okay. From a revenue standpoint, you know, it's, it's gonna vary because valuation tends to be a function of the growth rate of the business, the margin profile of the business, and then in the eCommerce world, some of the other KPIs and metrics. Including your, your repeat purchase rates you know, your cohort performance over time and, and what you can demonstrate from a customer lifetime value standpoint.

James Cartales: Mm-hmm so there's not a one size fits all, but I would say, you know, typically the smaller end of, of our client base is gonna be. 30 or so of revenue. And it goes up to, you know, could be two, 300 million depending on the margin profile of the business.

Ben Tregoe: Well, I'm glad you brought up valuation, cuz everybody loves talking about valuation. So you know what you described kind of a, a mix of revenue growth margin profile. I assume that means profitability, but maybe not. So, how do you know investors or buyers think about those things? Is there sort of like a minimum hurdle of growth and minimum hurdle of, of profitability? Is it a, they blend them together, you know?

James Cartales: Sure. So we think about it in a few different parameters. I, I guess I would say you know, first and foremost, Growth is what everyone is [00:05:00] after. And, and growth is what drives multiple expansion businesses typically are gonna be valued on some type of a multiple of current financial performance. What we've seen increasingly is a migration in the eCommerce space towards valuing businesses off of a contribution margin or EBITDA margin metric.

James Cartales: If you go back 5, 6, 7, 8 years. I don't think investors were quite as. In tune with some of the unique realities of what it takes to be profitable in eCommerce. And so you saw deals that were, were getting priced off of revenue multiples. And to a certain extent, every revenue multiple implies a multiple of earnings or steady state earnings, but.

James Cartales: What you found was that there were a lot of companies that were chasing growth you know, wanted to, wanted to kind of try to be the number one player in the market. And so were seeking growth at all costs. And that ultimately led to some poor. Investment decisions because they lost track of the key metrics around their business.

James Cartales: And they were bringing in, you know, new customers at the top of the funnel, but they were low quality customers that weren't sticking around. And what I think has transformed in the last, in the last five years is that people have really started to recognize that eCommerce as a channel is so massive.

James Cartales: You don't need to be the only player. And in fact, in many respects, being niche is more attractive because your SEO can perform better. You can be more targeted and you can really compete with the Amazon. You know, you can compete with Amazon. If you have a, a real specific niche or brand that you own And so as folks have made that shift, they've really focused on profitable growth. Okay. And, and that is the most valuable type of growth that is out there in the market. Now, certainly you know, there are still instances where, where people are, are, you know, maybe just breaking even, but they're truly reinvesting in their businesses and, and those are okay.

James Cartales: Stories. And you know, what we do in that instance is you sort of look. In a two or three year time horizon, what would the normalized earnings potential to business be? What, what is the margin going to look like at that point in time? Can this business deliver, you know, a 10% bottom line or a 20% bottom line, and then you can kind of back into, you know, what a, what a appropriate multiple for that business would be today.

James Cartales: But. The the broader point is that there's been this shift in, in thinking and now investors and buyers are really focused on, you know, is the business making money today. And, and so these businesses have tended to trade a little bit more off of EBIDA versus revenue. Like they used to.

Ben Tregoe: You we'd mentioned earlier contribution margin. So is when would somebody apply it multiple to the contribution margin?

James Cartales: Sure. So where we, where we always try to position that is where you're, you're selling your business to a strategic acquirer. Because in that instance, I, if you're a growth stage business, you know, say you're doing 30 or 40 million of revenue, You need to have certain functions to support that.

James Cartales: Mm-hmm, , you know, back office administrative functions that realistically are just not relevant for, for a business that is a scaled platform that may be bolting on your, your company to it. And so in that instance, you know, we're always gonna push people to look at at the actual contribution margin of the business, you know, basically gross, profit, less.

James Cartales: Less freight and fulfillment. And, and and then value the business on that basis. Mm-hmm, interesting because that's, that's the type of cash flows that they would be receiving right. In reality.

Ben Tregoe: Right. So I'm gonna like, hold your feet to the fire a little, like you'd said, a 10 to 20% EBITDA margin would be. Good or is that sort of average or where what's the range of getting people interested in, on EBITDA margin?

James Cartales: Well, that's gonna depend on a couple of factors. You know, the first and foremost is what, what's the category that you know, the business is in. Yeah. And so what are the, what are the peers generate?[00:10:00]

James Cartales: If, if you look at the, you know, maybe the closest public comp or, or, or understand that, so. I mean, what's the, the sheer gross margin potential for the business. And that's also gonna depend on the positioning of, of the brand. Is it a premium brand, you know, can you garner a premium price from your customer?

James Cartales: Will they pay more for your product than they would pay for a generic version of your product? Right. And so directionally, you know, best in class gross margins are gonna vary from, in some categories. Supplements and nutritions, you you'll see 80% margins on that type of a business percent EBITDA margins, gross margins.

Ben Tregoe: Yes. Okay.

James Cartales: So, but, but then, I mean, those things can carry EBITDA margins of 35 to 40% because there's just not that much overhead. You know, and, and they're, they're cheap to ship. And, and so that's, that's kind of the high water mark. And again, that's why you see a lot of really robust valuation multiples, you know?

James Cartales: 20 times EBIDA for, for high growth businesses and that, you know, with consumable features in that kind of a, a bucket and then a kind of a more typical like products, business, maybe a durable products, or, you know, housewares kitchenwares or even apparel. Generally those, those gross margins are gonna range.

James Cartales: You know, 45 at the low end up to 60%. And that should translate into a fully burdened EBITDA margin of, you know, between 15 and 25%. Yeah, so that's what I would say is, you know, the high quality business certainly there are other strategies where, you know, maybe you, you strategically price a little bit lower and you're willing to trade some margin for volume mm-hmm

James Cartales: And if that's the brand strategy, then that also is a, it's a coherent strategy that, that you can articulate. And, and, you know, I think certainly not not have your alternatives impeded, but the bottom line is, you know, why do people go direct to consumer. Why is that a, a sound business strategy? Well, it's because of the margin recapture opportunity that you would otherwise be giving up to the wholesaler and the retailer mm-hmm you know, if you were going through a conventional two step distribution, mm-hmm

Ben Tregoe: I wanna come back to that, but I just want to finish off the kind of valuation conversation. Cause I, so many people are interested in. So if, if the high margin supplement business, let's say that is doing a 45% EBITDA margin, and you said a multiple in that range. Or would be a 20 X on that. Is that right?

James Cartales: So we've well, I mean, yeah, let's dive in a little bit deeper to some trends in the market.

Ben Tregoe: Yeah.

James Cartales: What you're seeing here and, and maybe I'll back up for a second and give you a macro view of the M and a landscape it's been. Super active in the last two years, we've been crazy busy. You know, our firm, it was, was a record year for us in terms of the amount of deals that we closed last year.

James Cartales: And, and we think 20, 22 is just gonna be equally as active, if not more. That's great, really good time to, to be a seller. If that's what you are and what's driving that, there's a couple of key factors. That affect our business, which is, which is really privately held, you know, M and a number one is that there is an incredibly Froy environment in the private capital markets.

James Cartales: And so what I mean, there is really your traditional middle market, private equity. People hear a lot about that. What, what does that mean, basically? Professional investment managers who are raising money from institutional limited partners like insurance companies, endowments, pension funds, the like they want to get exposure to private companies because that's where the potential for, for real, you know, significant growth and, and outsize returns is it's, it's hard to find a lot of attractive returns in.

James Cartales: In the markets these days, mm-hmm that are, that are steady and consistent over a five to 10 year time horizon. Yeah. The public markets will go up and they'll go down, but you certainly can't bank on generating, you know, [00:15:00] 20% annual return. If all you're investing in is, is public equities. Yeah. So that's, that's driven a lot of interest in, in private equity.

James Cartales: As an alternative. And so as these big institutional limited partners have been increasing their, their allocations to the private equity asset class, you've got a bunch of funds that are just raising tons of capital mm-hmm and that means they need to invest. You know, the dirty little secret of the private equity world is that for you to get paid your, your management fees on your capital, you've gotta have.

James Cartales: Be deploying that capital actively mm-hmm . And so there's about 840 billion of private equity capital that has, you know, yet to be invested, but has been allocated over the last two to three years. Wow. Chasing deals and, and you know, what I'm talking about there is, is capital that's focused on sub a billion dollar.

James Cartales: Transactions. So that's, you know, a lot of that is, is going after opportunities in the lower middle market. Mm-hmm . And so that sets your baseline because you, you kind of know that if you've got attractive attributes about your business and you've got a solid team. You're always gonna be able to go out and find a private equity buyer who, who will, you know, pay you fair market value.

James Cartales: So what we try to do at Cascadia is really go after, you know, that very tailored. Custom storytelling when we position a company to the market that makes your business a gotta have. And our goal is to, to find that sort of spike bid mm-hmm , that's, that's going to gonna lead to an above market outcome for our clients.

James Cartales: So let me then kind of bring it back to your original question about what, where are, where are you seeing valuations? Yeah. There are certain things that become. Trends and, and, you know, when a deal gets done and somebody makes a really good investment and, and generates a return to market notices and they look for the next thing, that's, that's very similar.

James Cartales: And so that's happened in, you know, consumable deals recently because there're so. Great for, for just an eCommerce model, for the reasons I mission, you know, you can generate super high gross margins. It's lightweight, it's easy to ship. You've got good repeat purchase behavior because it's a consumable product and people keep coming back.

James Cartales: And so that's one particular pocket where you're seeing. You know, deal after deal and, and people are chasing it. And you've really seen multiples drive up over the last several years. Mm-hmm but there's another, there's other good examples as well of, you know, certain sectors. But yeah, I mean, I think the high water mark in that industry you know, whether it's for humans or for pets has been, you know, about a, about a 20 X multiple on, on an exit for, for that type of a business.

Ben Tregoe: Wow.

James Cartales: But I would say that is a little bit of an outlier, right. To be fair. And, you know, for the audience to to not over inflate, this might be worth.

Ben Tregoe: Well, let's just so a 20 X, multiple like what a 45% EBITDA margin, the consumable space and what type of revenue growth would, would that. Company have, you know, to achieve that high of a multiple?

James Cartales: Yeah. I mean, for, for that type of a, a fer, you. Growth story multiple you you're probably looking at between, you know, 30% to 50%. Okay. Growth.

Ben Tregoe: Okay. I thought you were gonna say something like 300%, but okay.

James Cartales: I mean, it depends on scale too, right? Like these businesses have to have enough scale that there's there's meaningful cash flows there, right?

James Cartales: Yeah. When you're, when you're investing or, you know, looking to deploy a hundred million dollars of equity. Per transaction. You know, you can kind of do the math. If, if you paying a 20 X, like you've, you've gotta and, and when you introduce leverage a little bit you know, you, you need 10 million plus of EBIDA to, to sort of justify that, right.

Ben Tregoe: And then if you walk down like to the other end of the range, you'd mentioned durables or apparel, You know, let's say somebody's trading, you know, they don't know 15% EBITDA margin. Like where could they expect a trade?

James Cartales: [00:20:00] Yeah. You know, I would say that what, what the market, where the market is right now is gonna range from kind of.

James Cartales: High single digit multiples for, for a good growth story up to 14, 15 times. You know, depending on the attributes. So, you know, directionally with broad strokes and, you know, not getting into a specific company per se, that's where we've seen deals land recently. You know, if you, if you're checking all the boxes and, and you're, you've got a nice growth story, there's, there's definitely buyers out there. That'll pay. 11 12, 13 X for, for that, for that business.

Ben Tregoe: Interesting. And how, how much has that changed in the past year? I was sort of surprised when you said, you know, 21 was great, like, okay. That, you know, that's well known, but that you are seeing 22 lining up to be as equally. Good. If not better. So if those multiples shifted over the past year or so, or have they remained sort of.

James Cartales: Multiples had been pretty steady for the last, you know, 12 months or so. And that was one of the really interesting things that, that we saw, you know, when the pandemic sort of reached its, its onset and in Q2 2020, everyone was wondering, oh my goodness, what's going on with multiples? Like, are you gonna see a bunch of, of just valuation compress?

James Cartales: Yeah, there were some distress situations where, you know, people got really good deals because the business was just not appropriately capitalized, but that's not the story of the market by and large valuations have been pretty steady and, and pretty, you know, on a historical basis. So if you compare it.

James Cartales: 10 years ago pretty elevated. Hmm. And, and, and they've been staying there and we haven't seen that change too significantly. At all, you know, I think the, the biggest risk in the eCommerce space and it's kind of binary if, if you're a seller, right. Because you can. you know, it, it, it may not be the right time to, to sell your business if, if you don't have the right trends supporting that, that narrative.

James Cartales: And so one of the big themes that that people are focused on right now is, you know, maybe they're seeing some decelerating growth because 20, 20, and 2021, you know, we're, we're really big growth years driven by. Channel shift to online. You know, everyone's staying at home and, and four wall retail being closed.

James Cartales: And then obviously, you know, consumer spending and, you know, some of the stimulus benefits from, from government policy were, were a part of that as well in some integration categories. And so people are looking at really tough comp in 2022. So I wouldn't say that it's, you know, a universal growth year for people, but from the, the clients that I'm talking to and the business owners that, you know, I'm out there talking with on a daily basis.

James Cartales: We're certainly still seeing people who are, are comping positive over 2021 and continuing to grow really nicely.

Ben Tregoe: It's interesting. There seems to be, you're telling a very positive story. And, you know, you go read stuff in, in the press or whatever, and there's all, there's a lot of like people are worried about, you know, these recently public DSE companies, the, you know, they're missing earnings, the share, you know, the share prices are way down our index shows that, right.

Ben Tregoe: You hear anecdotally about it's much harder for these guys to raise VC money. So, what is the impact of the public market performance on, you know, your, your business on M and a? I, I would've thought there would be a more direct connection, but it doesn't seem to be that way or, or what am I missing?

James Cartales: Yeah. So really good question, Ben. And it's no secret. The public markets have sold off there's. Look, there's a, a litany factors that, that go into that. And I think some of those deals that got done last year in the, in the public space were done at valuations that they never should have been done at.

James Cartales: I mean, I traffic in the space. I've got a stock portfolio. I probably wouldn't have bought some of those IPOs or spec deals at the prices that, that they went public at. And I think if you were paying attention, you could probably tell that there were some issues around the [00:25:00] growth prospects and, and it doesn't surprise me at all that, that the valuations have come back down to earth a little bit now.

James Cartales: You're also in an environment on the public side where there's a lot of other factors that are, are beating these stocks down around, you know, interest rate risk. And, and the implications there on sort of the discount rate for the future growth prospects and then just kind of bearish sentiment in the public markets.

James Cartales: Mm-hmm cause of things like, you know, ongoing supply chain, risk global macro uncertainties and, and things like that. So, and I'm not a stock broker. I'm not recommending, you know, stock picks here, but have some of these things sold off a little bit too much. Probably mm-hmm now what's interesting is that we really think that the public and private markets are relatively decoupled.

James Cartales: Huh. They, you know, you've got a lot of the. Institutions that are long term holders in the public markets. But the reality is a lot of the day to day volatility is driven by traders and hedge funds and things like that who are moving in and out and, and, you know, trying to, trying to generate returns through.

James Cartales: Trading as opposed to through and, and, you know, picking the right spots and buying things, right. And looking for arbitrage opportunities, as opposed to more durable growth stories where mm-hmm , that's what, you know, in the lower middle market, private markets, that's where people are generating their returns.

James Cartales: And so they're taking a 3, 4, 5 year time horizon over these investments, and that tends to provide a little bit more price, stability. In the M and a world because frankly what you did in, you know, one month or one quarter, doesn't really change the, the long term growth trajectory. If you're, if you're still putting up double digit growth year over year, and yeah.

James Cartales: And you know, you're at the scale that, that we're talking about. So. Long winded answer to your question, but the markets are more decoupled than people would think. And certainly you, you know, it does inform perspective, but like I said, there's still this underlying Positive tailwind in the private markets, because folks are, are looking to, to increase their allocations of investment dollars that that really has helped support the, the overall market health.

Ben Tregoe: Yeah. It, it sounds like your base of buyership. I, I don't wanna lead the question too much, but there's this there's a. Private investor buyership mm-hmm what other buyership would there be for a D TOC brand? Who else are you guys going out to?

James Cartales: Sure. So a few different, you know, few different key buckets that, that people like to think about. So again, depending on the characteristics and. The potential for an omnichannel story and some of the other growth, growth attributes, private equity is always a, a very interesting buyer population. And there's a lot of different flavors of these types of investment groups.

James Cartales: But I think everybody recognizes that the long term macro trends are. Favoring, you know, non-store retail and as long, and, and that, what I always tell people is that over the next 10 years, the, the one thing I'm fairly certain is that people are gonna be buying more online, not less mm-hmm . And so that's, that's one group now, obviously there's, there's also a whole universe of.

James Cartales: Companies that ha have been in business for a long time, but are, are looking to increase their exposure or their penetration to the eCommerce channel. Mm-hmm . And so, you know, when you're, when you're targeting that population, you really look for a couple of different factors and, and one would be the strategic fit with a brand inside of an existing portfolio.

James Cartales: you know, or a capabilities based approach. So mm-hmm, what can you bring from whether it's digital marketing or [00:30:00] you know, some kind of, of Bolton product feature that really makes sense and, and is gonna help turbocharge growth because it is an attractive channel. But there's always that buy versus build story because it's no.

James Cartales: It's no secret that, you know, these trends are out there and the, the larger strategic companies. Or strategic buyers as we call them. So operating companies have also been making pretty significant investments in uh, mm-hmm in growing their own business organically. It's not like they've just been asleep at the wheel for the last few years.

James Cartales: Right. And then, you know, there's a third bucket of, of buyers out there, which are a little bit of a, of a blend of the two. And, and this has been a really interesting trend. That's that's arisen over the last three years or so, and that's kind. Direct to consumer and eCommerce aggregators mm-hmm . And there's been a lot of press about 'em, they've raised a lot of capital to go out and acquire brands and they all have a little bit of a different flavor.

James Cartales: Some of them are very platform focused looking for, you know, Amazon third party sellers. Some of them take a little bit of a broader. View and will look for brands that have eCommerce as their primary channel, but, you know, maybe fit within a more coherent or cohesive category theme mm-hmm . And you know, solo brands is one that is on everyone's radar, who ha has done this in a very interesting fashion.

James Cartales: And you know, to bring it back to what we were talking about earlier. Saw a really attractive, you know, entry into the public markets, but ha hasn't been able to sustain that over the last four or five months. Mm-hmm as some of the things outside of their control and, and some of the just realities of, of growth in the market have, have started to weigh on them.

James Cartales: Mm-hmm By the way that's one of the risks of the, the public market exit is once you, once you go there, the value of your company tends to be a little bit outta your control.

Ben Tregoe: Right. So you mentioned earlier, you know, whether you're on trend or not on trend mm-hmm how do you know if you're on trend?

Ben Tregoe: Like what for an entrepreneur. You know, how do they know that they might be the right trend in a now or in a year or two? And how would you know that you're out of favor?

James Cartales: well, look, I, I can't predict what consumers are, are going to want to do and, and you know, what the next hot brand is going to be. But what I can tell you is that.

James Cartales: If you're an entrepreneur or a business owner, you know, the market will find you. And if, if you've got a really quality product and a brand that, that resonates with folks, you're gonna hear about it and you're gonna see it in the demand. Right. And so that's the great. The great differentiator for being able to start something direct to consumer and online is that you can engage directly with your customers.

James Cartales: You can get that end user feedback in real time, whether it's on social or, you know, through your own website, inter interactions or, or polls, and, you know just customer engagements. And that's been a big, I mean, that's been a huge change from the legacy model where. You'd do some, some focus groups and, you know, you'd develop a, a really cool idea or what you thought was a good idea.

James Cartales: And then you'd go sell it into retail and it'd get on the shelf and, and it would either sink or swim. So. I think, look, you, you've always gotta be experimenting and tweaking your product and, and, you know, trying to improve it. But really listening to your, your customer feedback is, is probably the best insights that you're gonna glean on, on whether you're, you're capturing the right trends or not.

Ben Tregoe: What about the trends in the, the buyership though, it sounded like you were, when you're talking about the supplement space and private investors that, you know, oh, this, this became popular as a kind of thesis, right? Like consumables, the low shipping costs, the high margin, you know, it, that's probably, everybody talks about that now, but, you know, are there signs in the market that, that the private buyers. Are starting to develop a new thesis or is it just like somebody hears about a great deal and all of a sudden it's like, let's do more of those and then there's [00:35:00] a rush to do the next, you know, deal 2, 3, 4, 5.

James Cartales: Yeah. So, so a couple of couple of thoughts on that, you know, one, what are the attributes that any, you know, simplistic investor can. Can get their heads around. If it's a consumable product it's going to lend itself to repeat purchase. So you you've pay to acquire the customer once. And as long as you've got a good product, you're gonna, they're gonna keep coming back. So they love consumables across categories. Number two, you know, is it something that is.

James Cartales: Reasonable to fulfill because that's your other big cost mm-hmm, in your, in your direct to consumer model. And so that's, that's a second thing that they like to, to look at. And then number three is from a skew assortment standpoint, you know, can you manage your inventory? And how do you, how do you see that challenge over time?

James Cartales: And so, for example, when you get into things like soft goods and apparel some investors push back on, on those types of businesses, because all of a sudden, instead of having, you know, a green. Shirt and that being one skew, you've got a green shirt in five sizes, right. And that's five skews out of the gate.

James Cartales: And your inventory management becomes a much bigger headache right when you're, when you're dealing with things that, that have multiple skew vectors. So that's, I think. The simplistic way to take a look at, you know, are you, are you gonna be on trend? I, I don't see those trends changing too dramatically.

James Cartales: Hmm. What I do see changing, and, and this is an area where I've been spending a lot of time is businesses that have a differentiated supply chain approach to marry up with their, with their direct to consumer and, and eCommerce channel. Hmm. And so one of the big. Issues in the industry over the last year has been supply chain.

James Cartales: You can't and particularly where your manufacturing product oversees and then importing it. It, it sounds great, you know, and, and again, the demand side has been tremendous, but if you can't get the product or you can't get the product in time, it doesn't really do you any good. . And so we're seeing a big shift back towards, you know, more domestic production and, and on demand manufacturing to support businesses that are eCommerce first.

James Cartales: And so that has been one area where, you know, buyers have really been scrutinizing. Your supply chain, how much exposure do you have to China? How much exposure do you have, you know, to other geographies in Asia? What, what are the, what, you know, could you, could you find Western hemisphere sourcing, could you find domestic sourcing, right?

James Cartales: What are, what are the implications on cost going to be? I'm personally, a big believer that you're going to see with the advances in, in manufacturing and technology. You're gonna see a big shift in migration particularly in the textiles industry back towards onshore production, because the benefits from an inventory standpoint that you can gain.

James Cartales: From being closer to your, your end customer and being able to produce much better to meet your real time demand. Mm-hmm are gonna be so tremendous, you know, for, with respect to protecting your gross margins, because you're not gonna be tying up capital with excess inventory. You're not gonna have to discount and, you know, liquidate product as much.

James Cartales: And that's the real advantage of, of going direct is, is that you have that visibility into, into real time demand. But it's really challenging if you're reliant on nine month lead times. Yeah. And you place your POS today, you know, on March 29th, hoping that you can, you know, sell something in the holiday.

James Cartales: That goes back to what we were talking about a, a few minutes ago around what is the level of consumer sentiment about your businesses? So that's something that a lot of people don't necessarily think about all the time when they started in commerce business. They tend to come up with, with an [00:40:00] interesting product, an interesting brand.

James Cartales: and then, you know, they go, they go figure out how to source it and go find it and, you know, get product in a, in a warehouse and start selling it. It, it hooks in a little bit with, with the, the talk around consumables, whether it's, you know, food beverage or, or supplements, et cetera. Because that stuff does tend to be produced in the United States.

James Cartales: Mm-hmm and. It's benefiting from some of those, those trends I was just talking about. That's really interesting. Might, might save the apparel business. Well, I mean, that's another truism. I think people will be buying more things online in 10 years and, and I still think they'll be wearing clothes. yeah.

Ben Tregoe: what sort of switching gears to the deal side. What are some of the biggest mistakes you see founders or, you know, sellers making in a process?

James Cartales: Sure. So. You know, one thing that, that we see is people who don't want to let enough buyers into their process. There's kind of a couple schools of thought and one is that.

James Cartales: You're, you've got a lot of proprietary data in the, in the direct to consumer space and you don't want to give your competitors access to too much data. But at the same time to find an efficient market, you know, you do need to get out there and market your business and, and look, the reality is it can be time consuming and it can be distracting for a management team or, or a known.

James Cartales: So that tends to lend itself to, you know, maybe not getting a complete view of the market. So, so that's a great example of a time when you should hire an investment banker to. Offload a lot of that heavy lifting and, and handle, you know, your buyer dialogues and, and recommend sort of the, the ecosystem that you should talk to.

James Cartales: So, so I think that's one just easy way to stub your toe is, is, you know, taking the first offer or not talking to enough folks and testing. Buyer pop populations.

Ben Tregoe: What data are they particularly worried about? I mean, is this like the, the customer files or is it more just like, here's my margin structure and my repeat purchase rates and stuff like that.

James Cartales: It's both. I mean, I think Really easy to do a customer overlay with, with your customer file. But obviously, you know, do you really want, particularly if you're talking to a competitor or, you know, a strategic who work who's in an adjacent space, do you really wanna make. That information available. And so you, you've gotta stage things and, and you've gotta mask the data and, and do certain analyses, but, you know, that's, that's one issue.

James Cartales: And then the second issue is again, around supply chain, because there's always the risk that somebody could just go knock you off and, and, you know, go around you source from the same supplier. There is a little bit of a, and this is kind of funny, right? Sometimes you do see some concerns about. Could your supplier just go direct and, and, you know, cut you out.

James Cartales: Mm-hmm in my experience that just doesn't happen. Right? These businesses aren't, aren't equipped to manufacturing businesses, particularly internationally are, are not equipped to, to address the, the us consumer and, and, you know, effectively, effectively operate eCommerce platforms over here. But that's a question that we do get some from time to time. So I thought I'd mention.

Ben Tregoe: Do you, how, how well prepared financially are your sellers? Are they often, you know, the books are in order, they've got great models. They really understand the numbers or is there like, it can be a mess and, or do you, is it sort of, self-selecting like somebody, if they're not ready, they're not ready. You don't take 'em on.

James Cartales: I would say that the truth of the matter is that probably. You know, more of our clients are a little bit messier from a financial control standpoint than than you would like to see. And part of what we try to do is. You know, hook up the entrepreneurs that we're talking with.

James Cartales: Well, before they ever get to a transaction with a group like yours or, or, you know, just a, a high quality sort of bookkeeping or accounting firm, that's gonna be able to provide better [00:45:00] controls and better reporting. Look entrepreneurs by their nature. Don't want to invest heavily in non-revenue facing functions.

James Cartales: So they've gotta be able to see the ROI. And when you're just saying, Hey, you need to add finance staff. They push back and say, well, what's not gonna cost. I can, you know, I can, I can look at the data, but it's true that the more buttoned up you are going into a process, the more, the better your company is going to present to buyers.

James Cartales: There is a direct correlation with valuation because the perception of the company is, you know, very important when, when you're out there and, and people wanna think that, or, or people will believe that If you've got well prepared financials, a very clean, you know, professional looking model it's a well run operation in other facets that aren't as readily visible to a buyer. On the surface,

Ben Tregoe: we've heard that anecdotally that oftentimes sellers or people that are out raising money. Are completely outclassed in terms of their financial modeling and data analytics by the, the PE firms. You know, the PE firms will come in with much more sophisticated models, much more sophisticated analysis, and sometimes are even teaching the company things about their own company, which I guess there's a benefit, but it's also a painful position to be in

Ben Tregoe: You know, the, the buyer knows more about your business than you do. That's not a. Place to be

James Cartales: again. I totally agree with you. And, and I think that's why it's so important to, to get those things addressed ahead of time and, and be working with, you know, third parties that are knowledgeable. If you're considering selling your business in the next few years because it, it's absolutely critical.

James Cartales: You've got so much data at your fingertips with, with a direct to consumer model that you really want to be able to, to be. Having actionable insights. And, and using that data to drive your business you don't wanna be in a position where, where a buyer comes back and, you know, is, is pointing out things about your company that, that you, maybe you intuitively knew, but, but you didn't have a handle on with, with data.

Ben Tregoe: Yeah.

James Cartales: The other point I would make is that once you do go to sell your business, and you get in the market time is not your friend. You wanna move quickly and swiftly and the best way to do that again from a control standpoint is to have very tight financial reporting, a tight data package, and a handle on everything so that you can get through the due diligence process and, and not get bogged down.

James Cartales: You had asked what, you know, what can go wrong? Well, that, that is a big piece of it that can go wrong. If you get bogged down in due diligence, there's nothing but risks as a seller. Very rarely is a buyer gonna come back to you after they've gone through the, the due diligence process and say, Hey, we'd like to give you a positive purchase price adjustment.

Ben Tregoe: Right. That's a great point. You, the longer you give people the long more time, you get people to think about something, the more reasons they can come up with not to do it and things change. And yeah, that's a terrific point.

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