Ep 267: $7500 – $500K Buy, Scale & Exit Ecommerce Brand with John Chen

Jaryd Krause:

Buy, scale, and selling secrets that you need to know. Hi, I'm Jaryd Krause. I'm the host of the Buying Online Businesses podcast. And today, I'm speaking with John Chen, who has bought two online businesses from Flippa and sold one, both being e-commerce businesses. And he knows a lot about scaling and exiting in e-commerce.

In this pod, John and I talk about the business he bought from Flippa, how much he bought it for, how he scaled it and how he sold it, how much he sold it for as well, why he sold it, and everything that he learned through the process of not just buying it, but growing it, and then also selling it. And he shares his advice on each stage all the way through the podcast.

Specifically, we talked about how he grew the business, his mindset around growth, his mindset about e-comm, having product market fits, how to stay in the business, keep motivated to stay in the business, and then also the things that he learned when it came time to sell the business, get the business ready for sale, and how to make an exit very profitably.

Now, there's so much value in this podcast episode. I know you're absolutely going to love it, but before we dive in, we do talk about buying businesses. If you have not yet received my Due Diligence Framework, don't risk buying a business without it.

It's free. You can get it at buyingonlinebusiness.com/resources. It takes the guesswork out of buying businesses, and thousands and thousands and thousands of people have this framework, so use it. All right, let's dive in.

Do you have a website you might want to sell, either now or in the future? We have a hungry list of cashed up and trained up buyers that want to buy your content website. If you have a site making over $300 per month and want to sell it, head to buyingonlinebusinesses.co/sellyourbusiness. Or email us at [email protected], because we will likely have a buyer. The details are in the description.

John, thanks for your patience, and welcome to the pod.

John Chen:

Yeah, my pleasure. I'm happy to be here.

Jaryd Krause:

Yeah. I'm looking forward to having a chat about what you've been up to. So you bought a couple of businesses off Flippa. Congrats. And there's one particular one that you bought, scaled, and made an exit, which I really want to dig into. So tell me about that business. Tell me a little bit about that.

John Chen:

Yeah, sure. This was probably 2017, so it was my first business I've ever bought. I got pretty famous on Flippa for buying it and selling it on Flippa. I bought it for $7,500, and then two years later, was able to sell it for a little over half a million dollars. So over a 50x return.

And I am happy to share what I was thinking when I bought it, how I grew it, what I was thinking when I sold it, and everything along the way. And I am happy to just share what I learned along that journey with your listeners and anything that can help them in their journey.

Jaryd Krause:

Yeah, man. Cool. Cool. So $7,500. And you bought an e-commerce business. Why? What made you want to buy an e-commerce business?

John Chen:

Yeah. I mean, to be honest, I didn't know what type of business I wanted to buy. I think the reason why I picked an e-commerce business was because, like every other business, it didn't feel like you were getting really good value in terms of the multiple or anything like that.

I mean, even in e-commerce, you weren't really getting a great multiple, but the business was doing $1,000 a month in revenue. And for $7,500, you couldn't get any other business that was doing as much revenue, profit or anything like that.

Jaryd Krause:

Yeah, yeah. Fair. And so I often speak to people that look at wanting to start and they're starting out and like, “I want to buy a business.”

And sometimes, if they're buying a business and they don't have experience with digital marketing and the business is heavily reliant on digital marketing, I sort of shy away from that, but you've done the opposite.

You've gone and bought a business. Did it have digital marketing before you bought it? Was it running paid ads at all before you bought it or not really?

John Chen:

Not really. Because it was making $1,000 a month in revenue. So if you really think about it, it's doing $30 a day in sales and sometimes you did a hundred and sometimes you did zero and they were selling to their friends and family and all of that.

I think one of the biggest lessons I learned, and I think will be helpful for your listeners, is that I feel like when you buy a business, especially one that's relatively smaller, you're not buying a passive investment, you're not buying a bond, and you shouldn't really look at it in terms of the financials.

The way I looked at it was, I’m going to treat this as a real-life MBA and I'm okay with losing all of this money. I probably will lose all of this money, but I will learn a lot through this process and will be incentivized and motivated to learn about digital marketing by having this burn the bridges type thing.

Jaryd Krause:

Yeah, yeah. I don't know if I heard you correctly. You said not to look at the financials or bother with the financials. I would strongly suggest it’s important to look at the financials.

And maybe also emphasize that if you're treating it like an education and you're wanting to scale and grow that, the financials might not be absolutely everything, but I still think going through DD on financials is pretty important.

John Chen:

Yeah, yeah, definitely. And I come from a hedge fund background. So I did a lot of due diligence in the financials and that's what I looked at. Don't get me wrong. I'm not saying don't look at the numbers or anything like that.

Jaryd Krause:

Yeah. It’s just the way I heard it; maybe it was only me. I just thought I'd better make sure that I'm clear with DD. Because, as you said, you've got experience in DD. And it's pretty important, right? Tell me. Did you learn a lot through your experience doing DD? If so, what did you learn?

John Chen:

Yeah, I mean, when I bought the business, I found out that most of their sales—not most, maybe half of their sales—were like friends and family.

So when you're buying a business that's small—and it wasn't like they were trying to hide it or anything like that—it was basically like, “Oh, we're starting this little brand; we're selling it to our friends. Our friends are trying to support us.”

And then I bought it for $1,000 a month in revenue. A couple months later, half the revenue went away, because they were selling to just a rec center in Missouri or something like that. And they just didn't want to continue that relationship. Or some of the buyers have the same last name as the owner.

And it was like, “Okay, well, I really just gotta figure it out.” It was basically starting from scratch. But it was just like, “I paid for a brand name and a Shopify thing.”

Jaryd Krause:

Yeah. That's a really good way to look at it. Because when you're buying something for seven and a half grand, there's a big difference between buying a website that's got some functionality and a logo and a bit of a brand versus buying a business.

What I classify as a business is a system that provides an income with little input. And it sounds like this was not an established business, more so something that started out and then you built it into a proper business, which is awesome. But when you first bought it, what were your steps? And how did you build out your growth plan for this?

John Chen:

Yeah, I mean, when I first started out, I tried a lot of different things. I tried influencer marketing, I tried Google Ads, I bought books on SEO, all this stuff, and eventually settled on and focused on Facebook as the platform.

And I just thought of it as like, Oh, other people are able to make Facebook work. Facebook is a real company. It's not like a scam. They're one of the biggest companies ever. So I was like, “There's something that I don't know.”

And eventually, through a lot of pain and waiting, like spending my own money, I figured out creative and Facebook ads and all of that. And find product market fit, find merchandising, find products that actually sell to a very specific customer base and all of that.

Jaryd Krause:

So I got a side tangent story. Facebook is very much a real business. In fact, I saw Mark Zuckerberg just a few weeks ago. I was in Japan snowboarding with some friends. We went into a random bar. It's wild. I got some footage of me standing in line with Zuck’s literally just behind me.

And yeah, he was just sitting there, eating lunch by himself. There's a bodyguard in the bar on the other side of the bar, that sort of stuff. And I think a lot of people in the bar were really blown away. And I thought it was a pretty interesting story.

And I really enjoyed looking at other people's reactions when they realized it was Mark Zuckerberg. There wasn't a lot of attention around him. But people were talking in the pub and stuff. And it's quite an interesting thing that happened when I was in Japan a few weeks ago.

But aside from that side note tangent on Zuck’s and running into him, you decided on Facebook because that's where most of your audience was? Or did you decide based on figures on how much ROI you're getting from that particular platform compared to others? What made you stay with it?

John Chen:

Yeah, I mean, I tried every other platform. And I think I bought a book on Google Ads. And I tried reading it and it just didn't make a lot of sense to me. I tried running some of the ads.

And in the back of this book, it was a guy named Perry Marshall, who was this big Google Ads person back in the day. And then he had some referral thing where he referred me to this Facebook ad book. And then I joined that.

And then they had some group attached to it. And actually, a couple of people that you might know were involved there, like Molly Pittman, James Schramko was big within that space, or they knew each other.

So I ended up joining this group with this early agency founder, Molly Pittman, and they were just talking about how to run ads. And I learned that way.

Jaryd Krause:

Yeah, cool. Yeah, James, I was actually just talking about James Schramko the other week. One of my friends is catching up with him in a week's time. But yeah, closely connected with Ezra Firestone, it was probably in that book. Some people spend some serious coin—millions of dollars—on ads a year, maybe even per month.

But all right, cool. So then you started with your Facebook journey. And was that the main way that you scaled the business? And how did you decide what product was the number one to put ads into?

John Chen:

Yeah, I mean, it was really difficult, because with the products that we had, none of them were able to be profitable on ads. It was just a way lower average order value. It was a drop ship, but it was very low-quality, low priced stuff.

So we did a lot of testing. And I say a little tested—maybe hundreds of different styles and designs of jewelry—cat jewelry, dog jewelry, these stones, those stones.

And eventually, we came across one style of jewelry that, just overnight, was a huge hit. And the business went from maybe $10,000 a month in revenue at that time to $50,000 a month overnight.

It was basically like a rocket ship once you had this design of jewelry that really worked with some Facebook audiences. And it was the early days of the Mac jewelry style, like fine jewelry for every day, gold plated, sterling silver, and minimalist jewelry styles.

And yeah, we luckily jumped onto that wave and were able to grow it through that. And 50 became 100, 100 became 200, and eventually it grew to seven figures and got to a point where it was making a healthy amount of revenue per month.

Jaryd Krause:

Cool. Yeah, congrats. It's so important to understand that having the right product in front of the right market sells like hotcakes if you work that out.

And I guess people don't understand that when you're starting a business, what you're really doing is iterations to find product market fit until you get something that works and then it can be scalable. Because a lot of people try to get to that level that they can scale, spend a lot of money, and then burn out and never get there. But it's good that you made it. So congrats.

And how long did you have this before you sold it? And what were some of the key lessons you learned that you would love to share, like growing a business, I guess?

John Chen:

Yeah, yeah. So I would say that I had it for a little over two years, and I would say that, similar to your point, growth is not linear. It would be nice to think of business as, oh, you do X and you get Y and it's a formula, but it's not really like that.

Like you said, in the beginning, it's a lot of pain, a lot of testing, a lot of losing money, and it feels like you're digging for gold. And the hardest part, I think, is believing that the next product that you test, the next design, the next headline or the next marketing message is the correct one.

Imagine that you do something 20 times in a row, and they've all failed. It takes a certain mindset to be like, “All right, 21, this is going to be it.” And still be excited about that.

And especially if you've never gone through that journey before, it could be really frustrating to be like, “Well, I tried everything. This just doesn't work,” or “It's not my fault. Online business just doesn't work,” or something like that.

So my mindset was like an Edison, just testing things in the lab and just trying not to lose too much money while every day the ads were not profitable or this design didn't work or this design worked a little bit, but then, “Oh, it didn't work.” So when you find product market fit, you'll know it's product market fit.

Jaryd Krause:

Yeah, absolutely. You'll know it. And that's a really good example. Another one is Walt Disney. And there are authors and movie stars who talk about this as well.

The amount of rejection that he went through with Mickey Mouse to finally produce it was a high amount. It was insane. And now it's one of the largest empires in the world—Disney. So stick with it, guys.

Yeah. I like that mindset. And so, what made you decide to start? What caused you to think, “All right, I want to sell this now,” and then how did you go about getting the business sellable?

John Chen:

Yeah. So I would say this. I was running it for a period of a year and a half. And basically, it was my entire life. I didn't have any friends. I didn't go out. I didn't go on dates.

It was like I woke up; I checked the sales. I did stuff, and then I went to sleep. I checked the sales. And I basically got to a point where I felt a little burned out. And I think burnout usually happens when things are not working well.

Because if it was growing super-fast—I grew it from $1,000 a month in revenue to some months we were doing $200,000 a month. So when you grow that fast, it just feels so good, right? You're like, “Oh, I got to do all these things,” but it feels good because we're growing. It feels like you're getting pulled along.

And the business was still relatively healthy, maybe 100 or 120 a month in revenue. But when you’re used to that hypergrowth, then 5%, 10% growth doesn't feel that good. It doesn't feel that good anymore.

And then, too, Facebook ads are relatively unstable. Even back then, it was relatively unstable. So there are some days when my life flashes before my eyes. I had 90% of my net worth in this business. I was 27 years old. When I first started, I was trying to get food stamps because I didn't have enough cash.

So it was like my life flashed before my eyes, and I was like, “You know what? I'd like to take some chips off the table. And then the selling process is pretty stressful. I would say from the moment you decide to sell to the moment you get the cash in your account, it's probably another four to six months.

So the whole process and all that while you have to talk to people who are interested and still run the business and almost get to the finish line, but then they're like, “Oh, I can't get a loan, or whatever issues that can come up.

Jaryd Krause:

Yeah, yeah. Man, congratulations on sticking with it for as long as you did with the number of hours you put into it. I'm sure that you learned that that might not have been the healthiest approach or scalability for a business or yourself, but it's a really good life lesson, right?

I've done that myself too, where I worked so hard that I got glandular fever and was super sick. I didn't even know until I found out and a year later, I had to go through this wild protocol to get my health back on track.

And the sale—I'm really interested in the sale. So you decided to sell and take some chips off the table. I think that's such a wise move. Congrats on that. That sets you up for the next few projects and the next part of your journey. What did you do in terms of setting the site or the business up for sale? Was there much or was it already pretty ready to just hand over? Tell me a little bit about that.

John Chen:

Yeah, I mean, there were SOPs and everything like that. And an e-commerce business is relatively easy to understand. There's customer service, there's fulfillment, and there's marketing. And those three things are probably the core of the business and that makes up 90% of the business.

So, yeah, I mean, I tried to run the business from the perspective of a long-term owner. So I would always try to do things that were best for the customer, because I didn't really expect to sell it.

And it just got to a point where I was like, “Man, this is really stressful,” and all of that. But it wasn't like I was planning on selling it. It wasn't like I was pumping it and then hoping someone would take me out.

So, yeah, I'm happy to answer any questions that the seller might have had. Or what did you have to say about the sale process?

Jaryd Krause:

Yeah. Well, firstly, I think that's the best mindset for somebody who is growing a business—to not have in mind that you're going to sell it because then you can cut corners.

Firstly, before we dig into that, is this a self-product distribution business? You were fulfilling the product yourself. You were buying wholesale and then sending them out yourself. Or was it partly dropshipping? How was the model?

John Chen:

Yeah. When we first started, it was dropshipping. And then we got to the point where we found a proper supplier to actually make the product. And I mean, they were still based in China, but we had contact with them; they would make our branded boxes and everything.

But yeah, I mean, jewelry is very high margin anyway, so it’s not like we needed a lot of space and everything like that. And even back then, there was some program called ePacket where it was cheaper to ship from China to the US than from the US to the US. And customers, most of the time, got their order within a week or so.

So we had an arm in China that, basically, they would ship from China to the US. We would hold some inventory in the US as well and ship to customers. Shipping was relatively cheap. This was under half a pound, just jewelry. So that was the good thing about it.

So, yeah, mostly I'd say it's a hybrid model, but it wasn't dropship and we didn't know our suppliers or anything like that.

Jaryd Krause:

Yeah. Cool, cool. My question around getting it ready for sale was, did you have to get your P&L and finances sorted? Did you have to have your SOPs all built out? It sounded like you already had all that pretty well ironed out and ready for sale. Is that right?

John Chen:

So in terms of the finances, yeah, we kept basically good financials throughout the life of the business. And I mean, it helped that when I sold the business, the buyer got a really good price.

I sold it for probably less than it was worth, but for me, it was the right decision because I just didn't want to do this anymore at the time. So they got a really good price, so they weren't looking at every little planning expense or something like that.

Jaryd Krause:

Yeah. Cool. And so you said it was maybe a four-to-six-month process to sell it. So, did you list it on Flippa?

John Chen:

Yeah, yeah, we listed it on Flippa. We actually got pretty far with one buyer. And then, at the last moment, he couldn't get the loan. And then we talked to our second choice and were able to finalize a deal with him.

Jaryd Krause:

Cool, cool. And was it cash or was it a little bit of an earnout?

John Chen:

So it was a mix of cash and a seller note. So I would say it's 75% cash and maybe 25%, not earnout because it was owed no matter what, but it was a seller note.

Jaryd Krause:

Yeah, yeah. Cool, cool. Awesome, man. So for people who are building a business now, they've just bought one; they're building it out. What advice would you give to somebody wanting to sell their business and go through the process of an exit?

John Chen:

Yeah, I would say the thing that really helped me when I was selling the business—because you would get pretty far along the path with someone and then they just pull out or they're not that interested.

And I just kept telling myself that whether or not this business sells, the value is there. You can't deny that this business that was doing $1,000 a month in revenue and was now, at the time, doing $120 or $150 a month in revenue was not more valuable than it was before.

So I would just tell myself that. I would say if you're looking to sell a business and you're currently growing a business, people don't fall for tricks or anything like that; there are things that make your business more valuable.

If no one wants to buy your business, it's probably because there are things about it that are not attractive. You know what I mean? You want something that you can transfer over.

Every business buyer wants the same thing. They want reliability of revenues, recurring revenues, growth, and a high margin. They want something that's not attached to the owner or has a brand name, like jarydkrause.com. These are things that you would want as a buyer.

Jaryd Krause:

Yeah, I love that. And so, obviously, that's what you did in your listing. And what about your workload for this? How many hours a week were you working when you were selling it?

John Chen:

When I was selling it, I was still working 20-30 hours a week on it. And the same process could take, I don't know, five to ten hours a week. It depends on how many people were interested and how many people I had to talk to.

Jaryd Krause:

Yeah. And what about the training period? Did you have a long training period for the seller?

John Chen:

No. It was probably three months, and he would hit me up with questions after, but that was fine.

Jaryd Krause:

Yeah, yeah. Cool, cool. And so, how did you reinvest the money?

John Chen:

So I actually bought a couple other e-commerce businesses and have now grown them to similar revenue run rates and hopefully will continue to grow them, but I also bought a couple apparel businesses.

And I thought I was going to be done and ride off into the sunset, but I was like, This is really not enough money to ride there. So I was like, I think now that I had a little safety cushion and didn't have to operate from fear every time you had a bad day on the ads or something like that.

Jaryd Krause:

Yeah, yeah. And what's your plan with these next e-commerce businesses? Are you just building to hold, building to sell, or what's the goal?

John Chen:

Well, like I said, I feel like the mistake I made with my first business was forcing myself to sell because I was stressed. I think building value in businesses is the most important part, whether or not you capture it by just holding on to it or selling it.

I think that's relatively easy, but I would say you don't have to put much effort into it; it's like harvesting the seeds that you've been growing this whole time.

So I haven't decided yet, but I'm probably going to continue to grow them until it stops being fun-to-do business and this time just be a little bit more experienced.

Jaryd Krause:

Oh, man, that's really cool. And so I know that for myself, I've learned so many things through the different businesses I've had.

I've had media businesses, I've bought e-commerce businesses, scaled them, sold them as well, spent a bunch of money on ads, and then went different routes like information and selling info products sort of thing, membership and all that sort of stuff.

Now, what did you learn from the same business model from going from buying your first ecomm to buying multiple e-comm businesses that allowed you to make it funnier to run these businesses you have and stay in the business longer? Or even, what did you learn that was better for growth?

John Chen:

Yeah, I would say that in e-commerce, what you sell really matters. It's not really about your charisma or your ability, it is to some extent, but certain businesses just do better than others because of the nature of the product.

And a lot of times, it's not skill or anything like that. It's just the DNA of the product that you're selling. So businesses with a subscription component are generally better. Businesses with a higher margin are usually better. Businesses with higher average order values are better. And all types of little things like that.

I would say what I learned the most about an e-commerce business is that what you're really selling is not a physical product. What you're really selling is a solution to some sort of hyper-specific problem.

Like with our jewelry business, we called our customers and said, "Hey, what do you like about this?" And they said, "Oh, it looks so expensive but it's not." And we would sell a ring for $60, and they didn't know that we got it made for $5.

And they're like, "Oh, but it looks like this style that looks like $400." So to them, they were getting a good deal. We were getting a good deal. And everyone was happy.

So I feel like a lot of times, especially in e-commerce, people try to think about things like, "How do I trick this into people?" or "How do I force people into this?" You want a business so good that your customer knows your margins and is still happy to pay it..

I use this brand, Monos. So they make luggage. And they probably have really good margins. It's $200 for a suitcase, but they're so well designed that it looks really sleek. It's a great experience. And I need a piece of luggage.

And I'm like, "Okay, I'm not going to go make luggage. I’m not going to source my supplier for luggage and do it like that. I’ll give them an extra $100 for going through that whole process and having a brand and doing that.” So I would feel like my customers are hopefully saying the same thing.

Jaryd Krause:

I love that. I've found that the best way to grow a business is not typically what we think the customers want; it's actually just getting feedback from them and giving them more of what they want and less of what they don't want.

And that's exactly what you've done. With speaking to them on the phone and getting great customer feedback—I mean, you can go then, and they say, "Oh, we like the pieces of jewelry that were very expensive; they look like a $400 piece, but I'm getting it for $60,” then that's an idea straight away.

Go look at all these expensive pieces and how do I recreate those but make them a bit cheaper and make them look similar, if not better, but cheaper? And you can sell far more products, like hotcakes. So it's a really good piece of advice.

John Chen:

Exactly. And do you know the story of the jobs-to-be-done with milkshakes and whatnot? Cool. So I mean, this is my favorite story about this business and it colors like how I think that if you have a business it's basically a job to be done.

So there's this Harvard professor who was hired by McDonald's. And McDonald's asked him, "We need your help selling milkshakes. And we tried everything. We tried saying, "more milkshake," "more chocolatey," "more chocolate chunks," or "stronger," or "bigger," or “more value for a dollar,” and he's like, "None of that worked."

And what he did was watch how people use the milkshake or why they do it. And he noticed that most of the milkshakes or a large amount of the milkshakes were being sold early in the morning and before 9 AM.

So he goes up to these cars, buying these milkshakes through the drive-thru and he asks them, "Hey, what are you trying to do with these milkshakes? It's pretty early. Is there any job that you're trying to do with these milkshakes and why didn't other things work?"

And the people said, "Oh, yeah, I like a milkshake for breakfast because I can't eat a banana because I can't open my hands and what do I do with the peel? I can't eat a candy bar because it doesn't fill me up as much. I can't eat a sandwich or anything because my hands get greasy.”

“But the milkshake is this perfect thing that keeps me full enough until lunchtime where I don't get hungry again and my hands aren't dirty or anything like that.” So that was the insight that really powered a lot of the growth.

So we try to do this very similar thing, and I'll give you an example. One of our other apparel businesses that we bought serves primarily plus size women.

And when I purchased it, I thought plus size clothing was plus size clothing. I just went to different places and bought plus size clothing, marked them up and thought, Okay, plus size women get plus size clothing. Come get it. My revenue is going to go up.

And it wasn't until I called a lot of the customers that I noticed that they were—not all, but a majority of them—wearing these outfits to go to events, to parties, to dress up.

So that would explain why the plus size clothing—more plain or floral dresses—didn't really work as well as the shiny prints or showstopper, getting compliments like, “Oh, that's a cool suit that you're wearing.”

So knowing that job has to be done, we're able to merchandise a lot better because we're not buying plain T-shirts, we're not buying jeans, we're buying a dress for your next party. We're like, “Oh, this is our version of a luxury designer, but in plus size for you.” So that was a big lesson learned from the Jobs-to-be-done theory.

Jaryd Krause:

I love that story, man. Understanding what job somebody is trying to do and helping them fulfill that job with your product. And you can make it very subjective. Yeah, I like it. I like it a lot.

John, thanks so much for coming on. It's really, really been fun to talk to you.

John Chen:

Yeah, sure.

Jaryd Krause:

I really appreciate it.

John Chen:

Yeah, my pleasure, man.

Jaryd Krause:

Yeah. All right, everybody. Thank you so much for listening. I'll speak to you all soon. If you want to check out more about John, I'll link to his stuff. And yeah, thanks again.

John Chen:

Cool. Sounds good. Thanks, Jaryd.

Jaryd Krause:

Thank you.

Hey, YouTube watchers, if you thought that video was good, you should check out this video here on the 2 Best Types of Websites Beginners Should Buy. Or check out my playlist on How I Made My First $100k Buying Websites and how to do due diligence. Check it out. It's an awesome playlist. You'll enjoy it.