Ep 276: How To Scale An Ecommerce Business To A 7-8 Figure Exit with Paul Avins

Jaryd Krause:

Do you know what it takes to sell your business for seven or eight figures?

Hi, I’m Jaryd Krause. I'm the host of the Buying Online Businesses Podcast. And today, I'm speaking with Paul Avins, who coaches entrepreneurs and CEOs on how to scale up their sales, profits, and shareholder value to prepare their business for seven and eight-figure exits.

Now, in this podcast episode, Paul and I dive into acquiring businesses and a few tales that Paul has around acquisitions for himself personally. We also discuss the difference between owning a business, being an operator, and being an investor, and how they're all very different.

We also dive into the difference between the skills needed to start a business, the skills needed to grow a business, and the skills needed to be an operator and owner and/or sell the business. There are massive differences between them.

We also talk about an example of how he helped scale an e-commerce brand, how long it actually took them to do so, and the things they needed to put in place to get more distribution and sell more products to existing clients and new clients.

We also talk about how to prepare your business for an exit, the things that you need to be thinking about, the timelines you need to set in place, and the things you need to do to get the highest possible exit or price for your business.

We also discuss how to carry yourself through the selling stage of the business and the common pitfalls and traps that entrepreneurs can face while they're trying to sell their business and run their business at the same time.

And lastly, Paul shares his tales of two different entrepreneurs that he is very impressed by and what we can learn from those two people and their character in how they show up as entrepreneurs.

Now, this is such a valuable episode. We do talk about buying businesses. If you are wanting to buy a business and you haven't got my Due Diligence Framework, what are you even doing?

I give it away for free. It's helped me make a lot of money, it's helped my clients make a lot of money, and it saved us millions of dollars as well. Now, get that at buyingonlinebusiness.com/freeresources, and let's dive into the pod.

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.

Paul, it's so good to be talking to you. Thanks for coming to this pod.

Paul Avins:

Oh, listen. I’ve said it before, it was a real privilege and a pleasure, and thank you for the opportunity to share. So I'm looking forward to this conversation, actually. Yeah, I'm really excited for this one.

Jaryd Krause:

Yeah, me too. I mean, when I found out about you, I was like, yes, we need to talk about how you've helped CEOs and entrepreneurs scale in terms of how to get ready for an exit. And that's what I wanted to pick your brain about.

Before we hit the record button off air, what people don't know is that you mentioned you've helped people buy a bunch of businesses before as well. You bought businesses yourself.

And yeah, congrats! I want to ask why you buy a business? Or have you bought multiple? What's your motivation for that?

Paul Avins:

Oh, good question. So I've done pretty much all of them now. So I've done startups with funding, raising venture capital. I've done startups with credit card debt. I've done scale-ups myself. I've done joint ventures.

I've done buying businesses out of administration or out of Chapter 11 bankruptcy, and then scaling and selling them. I've done that. I like to say I've done the whole wheel of business, which includes having failures, right?

So I'm really honest, open and transparent about this. I've had two fairly painful business failures in my career. One that nearly cost me not a lot of money but my health, my life and all those things, but the stress of it all.

So I've done the whole cycle. And for me, there's just such a great opportunity when you can acquire something that's reached the limit of the entrepreneur who started it—their skill set.

And I think it's a very different type of skill set between starting something and commercializing it, which is getting it to the point at which it can actually make revenue and money, and then scaling it and getting it ready for exit.

And I think—it's taken me a long time to realize this—they're very different skill sets, right? They're really different. So it took me ages to figure this out personally.

So just for context, yes, I've been business coaching for 20 years. I now don't really call it business coaching; I call it scale-up coaching because I think it's a very different thing that we do that other people don't.

I'm not talking about making people really good at operationalizing their businesses. There are lots of people out there who do that. I'm talking about how we can help you scale your business and build what I call a grown-up business that has tangible and real-world value that someone is prepared to pay for in cash or pay for with money, right?

The biggest single thing that most entrepreneurs are doing is running this program that says, “Hey, one day I will sell...” because this has all got to be worth it. And the staggering statistics that really shocked me are—certainly in the UK—less than 18% of businesses that go up for sale ever sell.

So that means there are this enormous number of people who are running businesses, thinking they are building businesses, and thinking that at some point, at the end of the rainbow, someone's going to come along and offer them a ton of money for it.

And that's usually their pension plan. Usually their biggest financial investment is in their business—time, energy, and money. Most entrepreneurs will sacrifice a lot to build something significant, and I'm talking seven figures and above.

So I specialize in clients and helping people go from a million dollars and up to 25 and exit, right? That's kind of the space I operate in because we've got a proven model at that point.

But I think too many people don't understand—and I've been in rooms where this conversation has happened. Somebody has looked at the business and said, “It's not worth very much money.”

And the entrepreneur has gotten really upset because they're like, “You don't understand. I've spent 25 years building it.” And actually, what they didn't understand was that they'd spent 25 years running it, not building it to exit it, and they're two very different strategies.

This is why I'm passionate about three things: strategy, talent, and cash. You've got to have a clear strategy, which may include acquisitions. Absolutely, it should do.

You've got to have the right team around you or you're never going to exit. And thirdly, you've got to have the right commercial model that generates the right cash to be able to exit in any way, shape, or form.

I normally have a tripod on my desk. It's like a tripod, right? Oh, here we go. Here's one I made earlier. It's like a tripod. If any one of those three isn't working, it falls over. It falls over.

This is what most business owners go through, and I've been through this pain of thinking, “If I just focus on the money,” or “if I just focus on sales,” rather than realizing we need to get good at building all three.

We need a clear strategy; we need the right talent and the right team, and that's a critical skill set. And that's what it takes to get a business off the ground—generate sales, prove a concept and figure out whether there's product market fit. That's one skillset. Then scaling it, totally different.

Jaryd Krause:

Yeah, I'm with you. I'm absolutely with you. I have a lot of people come to me and say, “Jaryd, why should I buy a business when I don't know how to start one or run one?”

Well, you don't need to. Typically, when you acquire a business, you have people who're already operating it, and somebody else has already started it.

What you do need to do if you want to be the operator—there's a difference between operator and owner, and I'll talk about that in a second based on what you just mentioned.

You can be the owner. You can acquire the business, have an operator put in place and make sure you hold the operator accountable for scaling.

Now, when you said 18% of businesses that go up for sale sell in the UK, my assumption is that they're probably brick-and-mortar offline businesses, more so than digital assets. I'm sure there's a bunch of assets that are online businesses that go up for sale that don't sell because they're not great.

But for the offline assets, my assumption is probably because you've got these people that have built these businesses, but what they've actually built for themselves is a job, and nobody wants to buy a job, right?

That's why the book The E-Myth really highlights the difference. If you guys haven't heard of The E-Myth, it's by Michael Gerber. I'm sure you have, Paul. It's massively different—operators and owners.

Paul Avins:

I spoke on stage with him, actually. I spoke on stage with Michael Gerber. Sorry to jump in.

Wait, he's a really nice guy. The E-Myth is brilliant. However, The E-Myth, in my opinion, talks to a different time and a different age, so it doesn't talk to digital businesses right now in the same way.

The E-Myth was mainly going, “Look, you need to view your business like a franchise prototype, like you're about to have 50 of them or 100 of them,” which is fine and great, and it’s a good frame to start the conversation with.

I prefer to start the conversation with, “You need to decide if you're going to be an operator, an owner, or an investor,” and they're three different things, right?

And for me, the challenge with Michael Gerber's stuff now in the digital world—and this is why I think a lot of businesses that are going up for sale are physical right now—is because the vast majority of people who are hitting retirement age built physical businesses.

I've got clients of mine who just bought a language school, or just bought a body shop, or just bought a glasses manufacturing business in the UK. They're physical businesses.

And all of the people who ran those and started those are hitting retirement. They're sort of 58, 60, or 64; they want to retire. So that generation and those assets are now coming to the marketplace. That's happening a lot.

Where I think there's an actual bigger opportunity is because most of the digital assets that have been created have been created by people who fundamentally are not really driven to scale it big—my opinion, my take, and that's a massive assumption, but that's my experience so far, right?

They're very good at getting it off the ground and hustling and getting it started, but the skill set to scale it, they don't have that. And therefore, they're like, “Well, can somebody just take this on and scale it?”

For me, like I said to you before, I'm looking at this commercially right now. I think buying digital assets that have massive scalable potential, if you understand how to scale something, is just starting up as a big opportunity. I think we're at the beginning of a massive wave of opportunity with that.

Jaryd Krause:

I mean, I agree. I have been doing this for a long time—many, many years. As soon as funding becomes more available for digital assets, this thing's going to go ridiculous.

Multiples are going to go higher, and people are going to be focusing more on online businesses and acquisitions of online businesses. The M&A world of online business.

Now it's very interesting, like you said, the opportunity that is available with just digital, but it's also vice versa.

For someone who has bought an e-commerce business, the opportunity of them going away and creating their own manufacturing plant and running that business, as well as having their own digital sales arm attached to it, is huge.

They can cut costs, they can produce faster, better products by maybe acquiring a manufacturing arm for their business; and it could be an offline asset.

The same goes with people—you've said you've helped people buy. There was a $14 million deal that you guys bought for no money down recently that you mentioned. Now, I know that, as you know, there's caveats with that story, of course.

Paul Avins:

That's not common. That's not common. Just to be really clear, that's very rare. That's the first time I've seen any of our clients do an eight-figure deal. It took two years to put it together.

But here's the lesson for me. There are loads, but here's one of them: We were very clear on the growth strategy. I mean, for context, that business was on the verge of going bankrupt four years ago because of COVID and now it’s £22 million.

Jaryd Krause:

Nobody gets to a £22 million business without it being distressed.

Paul Avins:

Yeah. I mean, you make a really good point here, and I don't think this guest talks about it enough. I don't like buying distressed businesses and I don't encourage clients to buy distressed businesses because they are a massive drain.

And if you've done one, and I have, they're enormously draining and distracting. And what you actually want to do is strategically add something to a model that is already working and then that accelerates it.

So with that £14 million acquisition, the business was at £7 million, has a great leadership team, has an amazing CEO, has funding, has a massive customer base and has huge demand.

Therefore, after the acquisition, you go, “Look, that's a £22 million business when it’s done.” And then in 12 to 18 months, it's going to be a £30 million business. And at that point, it's the biggest in Europe.

Jaryd Krause:

Yeah, yeah, I'm with you 100%. In all resources: time, capacity, focus, marketing, team, talents, all that sort of stuff, less resources are needed to scale a lot more than to turn something around.

Because it’s just like physical law or a natural law that's coming down really fast to get it to change trajectory, there are so many more resources needed. You need to put in two to three or three times more resources just to turn that trajectory around.

Paul Avins:

Yeah, yeah, I feel that one at the moment. I've just gone through one. I fell into this trap. Just to be clear, I fall into the ambition-over-logic trap sometimes, and I can see the upside, but sometimes I ignore the downside.

I think if you've never bought a business before, here's the biggest thing I would say. There are two or three things that I would always caution people about.

Number one, buy something that you have a real interest in. Because this is going to take a lot of your time, energy, and attention. So don't buy something you're not interested in.

Number two, the team is really critical, right? If you're buying anything, it doesn't matter whether there are only two or three people; if it's an online platform or it's outsourced, you're still going to need people. So you've got to be really clear about who you want to work with.

And thirdly, you've got to get really comfortable with what the growth opportunities are in the business that you're buying. If you buy it, that's why I start with a strategy all the time. Are you really clear that—okay, first of all, don't do anything for the first hundred days, right?

I always say that to everyone who buys a business. Do not change anything for 100 days, right? Just don't, because you don't know what works. Yeah, you’ve got to get to know the people; you’ve got to get to know what's working.

Now, I'll give you my favorite thing to tell clients to do in the first 30 days. It is to go in and get the existing team to give a list of all the things that are currently frustrating them, right? And some of them you can fix for pennies on the dollar, right?

So when I bought a PPC agency out of administration, I went into bankruptcy. It wasn't bankrupt, but it was close. And I sat down with the team, and I went, “Right. What's all the things that are annoying you?”

And they gave me a list, and at the top of their list was the fact that they only had one screen, they wanted two. And the fact that they didn't have screens meant that their necks were hurting, their backs were hurting.

And I was like, “Right.” We got them two monitors each. We gave them proper stands and chairs. And all in all, that probably cost a thousand dollars. Not even that, right?

The goodwill that bought me for changes I wanted to make down the road was enormous because they were like, “This guy really cares about us. This guy's just fixed things that have been annoying us for ages, and the last owner never fixed them.”

And therefore, suddenly you go, “Okay, well, I've now got emotional equity with the team, and they're going to trust me now.” Because the hardest thing when you buy a business is people don't trust you, right? They don't trust you.

They're like, “What are your motives? Why are you here? What are you like? Are you going to be better than the last person around the company? Are you going to be worse?”

And you have to build trust in the first 30 days. And it requires going in and fixing things that have been annoying them that, honestly, most of the time are really easy to fix.

Jaryd Krause:

Yeah, I love that. And people are hopefully not hearing that it's only a thing with an offline business. That can be done in digital businesses too, with your team as well.

I know people who sit down with their team once a week and buy everyone food. They get it delivered, and they have one party, one big party, every week, or every month. And there's so many things that you can do for birthdays for people and all that sort of stuff with a digital team.

But then, like you said, Paul, they've got your trust, and then they believe in your vision as well because you've earned their trust. And then they're just going to work so hard. You can't measure goodwill. It's really hard to measure that tangibly.

So, yeah, where to go from here in the pod? I mean, it's been an exciting ride talking about acquisitions, but once somebody has acquired a business, we established that you don't need to know how to start a business and/or only operate it. You can learn to operate and then you can have people come in with a strategy.

Now, how do you help people once they've acquired a business to get that scalability to an exit? What are some of the things that you put in place? I mean, if you’ve got three pillars, maybe we go through those three pillars.

Paul Avins:

Yeah, we can absolutely do that. I mean, I've got a different framework, which we can talk about. I just want to talk about the mindset piece around how you see yourself when you buy a business.

Because I think this is where a lot of people get caught, and I got caught, right? So if you buy a business and you're under-capitalized—let's use that term—so you've done it, but maybe you've done it on debt financing. Maybe you've done it on deferred consideration, so you’re paying for it over two or three years out of profits, whatever the deal structure is that you've done.

And I think you made a really interesting point at the moment, most of the banks, certainly in the UK and stuff, are not funding digital assets, right? They don't see value in that yet. They still fund physical assets, but they don't really have digital assets there yet.

I think that's coming, and I think outside the UK might be easier. But in the UK, it’s quite hard to get e-commerce sites and stuff funded. It's not as easy. The banks don't get it yet, right?

Partly because the generation of people who are at the top of the banks are used to physical things they can see, feel, touch, and put a charge over, right? But that's just the reality.

I try not to, in case I ever need to borrow money from them, and I don't want them to find out that I did that publicly. But yeah, I think they're behind the times; let's put it politely, right?

Here's the thing. So I've always said that—and I use the UK language because it's a different world—but if you call yourself a managing director or an owner, I don't think that's the right job title.

I think the reason why I say you should call yourself a CEO is because, for me, your job is to create expansion opportunities. That's your job. You should be constantly looking at how we grow this business, not how we just run it.

So that's why your number two, your COO, even if they're not called that, could be called a general manager, right? Even in a digital world, somebody has to be the operational expert; your job is to focus out, not focus in, right?

Now, at the very beginning, yes, you might need to focus. But once you're on board, your job should be Where are the growth opportunities? What are the market sectors? And what's the strategy for driving growth?

And there's only really four things that you can look at. Are we selling existing products to existing customers? Is there an easy way to make cash in the first instance? Are we selling existing products to new markets?

Are we creating new products for existing customers? Are we creating new products for new markets? And making new products for new markets is the highest risk, most dangerous thing you can do.

So if you've got those four strategic growth drivers, which order are you using them in? And then, how are you going to do that? You can be an e-commerce business, and it still applies.

So I've got an ecommerce client that we've worked with for the last two years. And we've grown that business from half a million to £2.1 million in two years. Organic. That’s all organic. No acquisitions, right?

And that's been about taking existing products and taking them to new markets. So we've taken it to 17 new territories around the world, right? We've found distributors and partners in 17 different territories. And then we've introduced new products to the existing customer base.

So they've got a million subscribers on YouTube on their channel that they built their platform out of. They've got this massive customer base. We've got about 100,000 people on email.

So now we can launch a new product to an existing customer base because that's an easier way to generate cash. So we've done two things. Does that make sense?

Jaryd Krause:

Yeah, absolutely. If it was me personally, and I was a chief expansion officer, if you'd want to call it that,. I just thought of that when you said that your CEO should be thinking about expansion; why not call it chief expansion officer instead of executive?

So with that, if I were the CEO, I would probably go for new products for an existing audience, but first do a survey workout with everyone's needs, fears, frustrations, and desires and actually build a product they tell us to build. So it sells like hotcakes.

Use that money to roll that over into expansion of market share, acquiring more market share for existing products that are best sellers.

Because who knows? Maybe this new product that you created could become your new best seller that you need to use with your new partners that you create in terms of distribution network.

So let's use this e-commerce brand as a sort of case study, an example. It's going to be relevant to everybody listening. How did you go about expanding into new markets and acquiring partnerships? What did that look like for you guys?

Paul Avins:

Yeah. So first things first, when I talk about scale, the first part of that is that they have a really clear strategy. So we created a two- to three-year expansion plan that basically says, “For the next two years, these are the key drivers of growth. This is what we're doing. These are the market opportunities that we see.”

And then we got really clear. So that's the strategy, right? The strategy is to take existing products to new markets and then create new products for existing customers. Those were the two strategies, right?

Then C is for customers, right? So who are the customers, and what are the channels? So, for me, in scale, who are the customers we want to target, and where are the channels we're going to find them?

So once we're really clear on the channels—and interestingly, LinkedIn was where we found a lot of distributors around the world. We were able to find them online and then we were able to kind of connect with them.

We started putting out a lot of content on LinkedIn, and we hadn't done that before. They went viral on TikTok, and that got them half a dozen distributors. So what's really interesting is that while TikTok didn't get them a lot of customers, it did get them visibility and distributors.

And then we had retailers. So we had distributors, retailers, and end-user customers. So we had these three customer groups that we were targeting, right? So end-user customers are B2C. So we focused on Amazon as the main channel. So Amazon became the biggest thing. We went in massively on that.

We hadn't gone into the Amazon US. So that became an obvious thing to do—to take what's working on Amazon in the UK, in Europe, and then move it into the US. So that's a great piece of leverage. Massive.

And then we went, okay, who are the top 10 retailers in the US? How many are we currently dealing with? We were dealing with five, maybe. I can’t remember exactly. Who are the top three or four sports retailers in the US, and how do we get to them?

And there's an interesting story here, right? Because this is the power of asking for help and the power of the network. So we were trying to get in—I won't say the name of the retailer, but let's just say the biggest sports retailer in the US, right? It’s massive. It's huge, right?

And we were trying to get to the buyer in that organization, and no matter what we did, we couldn't get them to respond, or my client couldn't get them to respond, right? So we tried letters, we tried DMs, we tried all kinds of stuff, right?

Just nothing. Nobody would bite. We’d send samples. We’d done all of that stuff, and nobody was biting at all. No response.

So in the end, we found two key people that we figured, in the organization, were involved in the new product listing and all the rest of it. We basically went on LinkedIn and asked for help from my client's network.

We said, “Does anybody in my network know these two people?” and tagged them in, “because we just wanted a 10-minute conversation with them.” That's it. We just wanted 10 minutes with them, and that's it. “Can anybody get us an introduction?” We got three introductions off the back of that LinkedIn post.

So sometimes it's just about being clear about who you're trying to target and then asking for help from your network. Nine times out of ten, your network will either know somebody or be able to introduce you. And that's now become a key account, which could potentially be huge this year for the business.

But you've got to be really strategic with who is in the top 10 or 15—if you’re distributors or retailers, what’s your D2C play? What's your direct-to-consumer play? What's your distributor's role? Who are the distributors? And then, are you doing OEMs or are you doing white labeling and letting other people sell your products through their channels?

So getting really clear on the customers you're talking to and the channel strategies that you're using becomes really critical. And then it's about creating the right assets to attract the people you want to do business with.

So the YouTube channel became a massive thing for them. They just hit a million followers and subs on YouTube. TikTok has become great for building brand awareness. Instagram videos, Instagram shorts, and Instagram reels became massive for them.

So those are the three channels to build brand awareness and LinkedIn was the outreach channel. So while content wasn’t massive on LinkedIn, we’d post some content on LinkedIn, but nowhere near as much as on YouTube, Instagram or TikTok.

But LinkedIn was the outreach relationship builder because we could find the right people to talk to, connect with them and then set up conversations.

So we were really strategic with that decision about what's our direct-to-consumer play, what's our channel strategy and what's our country partner strategy? So that was really clear

. And then, when you've got that, you can focus on what assets we need to create, like brochures, collateral, and marketing campaigns. That's the asset.

Then, okay, great, how do we leverage this on a massive scale? How do we leverage this? Do we have salespeople on the road in-country knocking on doors?

In fact, one of the things that really worked—because most people don't want to do this with e-commerce businesses—was that my client did two or three big road trips where he just went around Europe and visited all the distributors.

They literally got on a plane and then train and then spent three weeks on the road creating content while he went, but visiting people face to face. Because people forget that. They want to do everything online.

And actually, do you know what? I just came back from Dubai and part of the reason was because I wanted to get on a plane and go meet people, shake hands and network.

The old salesperson in me says, “You have to burn the shoe leather, right?” Sometimes you have to go and do the hard yards and go meet people and shake people's hands. You can't get into a country if you're not prepared to get on the plane and go meet the major players in that country and go talk to them.

And I think even if you're an online business, do not be afraid to go face-to-face and meet people to convert people if it's strategically thought out.

Jaryd Krause:

Yeah. And it's going to provide the ROI for one person to go away and do that. And it might do it over a couple of months for a couple of accounts that could be opened or distribution channels that could make millions of dollars. It’s going to provide a great ROI.

Paul Avins:

Yeah, completely. But you also learn so much more. If you're sitting in a room with a potential customer talking about your products, you're going to get more feedback. You learn much quicker; you refine the messaging, that filters through to the marketing that you're putting out.

And there is just this thing, relationship depth is built face-to-face. And I think you can do Zoom calls and that's cool, but we were talking before and you were saying, “Hey, look, if you're ever out in Bali, in my part of the world, come see me.” And I'm like, “Yeah, great, let's do that. I'd love to do that.”

Sometimes you've got to go and meet people face-to-face because it just accelerates trust. That's what it does. It accelerates trust in your brand, in your product, and in you as an entrepreneur that you are trustworthy. And if your competitors aren't doing it, it becomes a massive differentiator.

Jaryd Krause:

It's a bit of a wow factor. It's like, okay, well, there's these distributors, say, this sports company; they've got a bunch of different people just emailing and texting them and all that sort of stuff. And you did it through the intro.

But for example, if you found them through a networking event that you got invited to or somebody set up an introduction at a restaurant, it's much different and it makes so much more of an impact. And probably you could get the wheels moving a lot faster and maybe selling a lot faster as well.

But it's all depending on what the business is, the product, the market, the distributors and all those. There's much it depends on, but yeah, you're right, I'm with you on the face-to-face stuff.

So with that distribution, or that scale that you've gotten, is there anything else that you want to mention around how you help them with scale before you move on to preparation for exit? Or what might you do to help somebody like that or a company like that prepare for exit?

Paul Avins:

Yeah, loads, but we haven't got enough time to teach you all of it. But I'll give you a couple of critical things that I think entrepreneurs don't know they don't know.

So the first thing is that you've got to realize that you've got to be clear on what kind of revenue you're generating. We call them three different types of revenue, right?

So the holy grail of revenue is repeat, recurring revenue. So people that like SaaS products or anything like that's recurring, where people are paying an amount. That's the holy grail, right? The more of that you get, the bigger your multiple gets.

So if you buy a business that doesn't have a recurring revenue stream, the first thing I would be looking at with you is saying, “Okay, how are we going to create a recurring revenue product in this business?” Because without that, there isn't a lock in value on exit, right? So that's the first thing.

Then you've got what we call transactional value, which is that people buy once every now and again, but then there's a repeat income stream. So for his product, it lasts about four months. So customers come back every four months and buy.

So that's repeat income, that's not recurring income, for which you are on a contract; it gets shipped every 30 days, whatever. So that's a different kind of contract.

So you've got to look at the revenue and go, “How much is one-off transaction revenue? How much is repeat income? Because people come back to consume the product or use the product and buy. And how much is recurring?”

And that's really critical to understand because if you get that mix wrong, when you go to exit, it's very hard for somebody who is trying to value your business to value it on future revenue if all your revenue, for example, is a one-off revenue stream.

So if it's people coming to you and buying once and then they go and they don't come back, that business is very hard to give a multiple that's going to be exciting simply because there's no recurring revenue, right?

So when I'm buying your business, I'm buying future revenue. Essentially, that's what I'm buying. I'm buying your ability to project how strong the revenue is going to be two or three years out. That's why I'm buying as an investor.

And if the kind of sales revenue that you're making isn't solid, it isn't predictable, right? And this is why distributed channels are so important, because if you go direct-to-consumer, you've got no real control over that. Some of them buy, and some of them don't.

But you can start to build up a really good pattern of, say, a distributor; if they're a retailer, they order this much stock every year, and they order it every year. So that's repeat income, not recurring.

Then you go, “Okay. How do we create a recurring income stream in this business model where people sign up and they pay $30 a month?” Because if we get 15,000 people on $30 a month, the value we've just created in this business is exceptional.

So understand the kind of revenue that the business generates. And by the way, I'm just sharing that because that's one of the critical things I look at—if somebody's looking at buying a business—what kind of revenue are you buying?

And also, how fast can we increase the recurring revenue or the repeat income? How fast can we do that? So I'll give you a really quick example of this. So an offline bit example, but it'll make sense, right?

So a client came to me and runs four of their practices, doing about £4 million in turnover a year. But all their revenue was just people coming in whenever.

Now I've got another practice that I coach. 78% of all their revenue is recurring. So you immediately look at that business and go, “The 78% recurring revenue business is like five times more valuable because of that.”

So all we did was launch a recurring revenue product for his customer base and suddenly his revenue's gone from zero to 20% being recurring. What we've just done to the balance sheet is make that business two or three times more valuable in one marketing campaign.

So we create a balance sheet value. Yes, we create cash flow. If you want to scale, you need to create cash flow, but we'd also create a balance sheet value because we've got recurring revenue.

So understanding the makeup of the money, how it's made up and how you can change the makeup of the money model is a critical piece of the scaling conversation. Because if you don't build it for longevity, if you don't build it the right way, you get less of a valuation on exit.

Does that make sense, Jaryd? I'm just checking.

Jaryd Krause:

Yeah, yeah, I'm with you. Exactly what I see you're doing is looking at how I can increase the multiple And the only way to increase the multiple when you're selling a business is to make sure the business is less risky, has a lot of cash, and is very predictable.

And through those different types of revenues, adding them or expanding those revenue streams to be just that,. So I'm totally with you.

Actually, I've had a guest on the podcast talk about how to promote e-commerce businesses. Yeah, it's really cool and that's helped.

Typically, an e-commerce business can sell between one-to-three-year multiples, but if you add this extra revenue stream and it's a 30-day recurring thing or 60 days or whatever it is, yeah, your multiples go way up really fast, like you said.

Paul Avins:

Yeah, I mean, we got this during COVID so it's a bit skewed, right? But we have had a client exit for a 32 multiple, which is just mind-blowing annual.

Jaryd Krause:

32 annual multiples?

Paul Avins:

32 EBIT, yeah.

Jaryd Krause:

Wow. Because when you say 32, sometimes people listening are thinking about content websites and monthly multiples, and digital assets typically under a million dollars get valued at 30 out of a monthly multiple. But when you say 32 annual EBITDA, 32 EBITDA, what sort of business was that?

Paul Avins:

Insane. So there's a lot of things that build value in that one. And that's unusual. Just to be clear, that's not normal. Most people are getting four or five times as many, typically.

But if you build the right team—and this is the bit I see that most people don't do, right? So the first thing I would say to clients is that if you buy a business, it should have a team; It might have two or three people; it might have outsourcers. The first thing we encourage them to do is profile everyone on the team.

And the reason you do that is because you are very quickly going to understand who you are working with, what their strengths are, what their weaknesses are, and how to best manage them. And which ones are likely to wobble because of their profile that they won't like to change and they'll be nervous and worried?

So the first thing I always say to clients is, “Look, in the first month we should profile everybody and understand, have we got the right people in the right seats?” Because most businesses probably may or may not have that.

And secondly, how do you manage and motivate the people that you've got? And rather than take six months to learn about them, why don't you profile them? And you'll learn about them in the space of a few days.

And they're going to feel like you invested in them because you said, “Look, I'm going to invest in you to understand you, to learn about you, and to help you be able to be more successful in your job role.” Wow. As a member of that team, whether I'm an outsourcer or not, I suddenly feel more valued.

And when someone's buying a business—if you are what's called a cog in the wheel, so if you are the cog through which all decisions have to flow—it's very hard to exit that business without some kind of earn out or lock in for two or three years.

Because people say, “Yeah. but if we take you out of the business, nobody knows everything.” so your job is to actually make yourself redundant.

Jaryd Krause:

They call it key-person dependency.

Paul Avins:

You're absolutely spot on. Yeah, they do. And if we take the e-comm client of mine, for example, with this, one of the things we're doing at this stage of the business, now that we're over £2 million, is we're starting to invest in talent. We're starting to bring on the next level of management that he needs to get out of boxes.

So now that we've built the model, we know it's profitable, and we are now reinvesting some of that profit back into people so that we can start to get him out of any operational dependency. So that, as you said, he doesn't become key man dependent.

So that then becomes a strategic move at this stage in the model, right? It wouldn't have worked a year ago because we weren't profitable enough to do it.

Now that business is profitable enough, you go, “Okay, that becomes the next strategic move is to start bringing in talent that can free up the CEO and the owner to get ready to grow the business, but also to focus on getting the business ready for potential exits.” If that's the strategy, if that's what they want to do, right?

The client I'm working with, that's not part of the next two-year plan, but building a leadership team or a senior leadership team that can operationalize and run that business really efficiently is part of the next 12 months, 18 months strategy, because it builds so much value into the business should we ever want to exit.

Jaryd Krause:

Yeah, I love that. So there are so many things. It's going to be dependent on the business. They're going to be dependent on the owner of the business and what they actually want.

But roughly how much time would you tell business owners, CEOs and entrepreneurs that they should budget for to get ready for an exit, to get rid of key-person dependency, to make sure you can get the recurring revenue or de-risk the business so the multiple can be increased at the time of exit?

What's the rough sort of timeframe? I mean, it's different for each business and goals for each one, but just giving some people, the listeners, something to think about when they want to exit.

Paul Avins:

Yeah, so that's a really good question, actually. I don't get asked about it enough. The thing I say to most clients is, “Look, it's probably dependent on where you are at and what you have. And that's a variable. But it's probably two years to get your exit ready.” It's probably two years.

Now, you might do a quick job of that and you might have things in place, but it's probably going to take two years to get your exit ready, to really optimize it, to get it into the best position to sell it, and to get the best price for it, right? And then it's between six and nine months, or anywhere up to a year, to sell it.

So people tend to think it's quicker to sell it. And nine times out of ten, in my experience, it takes longer than they think. It's more complex to negotiate. Again, the bigger the multiple, the slower the sales cycle, right?

So I say it's two years to build the team and get the P&L in the right position and shape. If you're going to sell the business, you've got to go back and look at all the contracts that you've ever signed with customers. You've got to look at all the contracts that your team has.

There's so much due diligence and you still have to grow the business during that phase, right? And I'll show you this because we've lost deals too. I just want to be clear with people that we've had people who've had deals, and they've lost them, or they're blowing them. And I'll tell you why in a minute, if you want to know.

Based on the research, the data, and the people that we've talked to in this world, the reason why most exits fall over is because revenue drops during the negotiation period.

So it might be nine months before you're negotiating to exit this business. And because you are distracted, you haven't been focused on driving the business. Nine times out of 10, because you haven't put a good COO in place to drive it.

But because you are distracted over here trying to sell it and it's a full-time job trying to sell a business, right? It takes a lot of effort and time, negotiation, due diligence, legal fees and all that stuff.

If, halfway through that, your revenue drops by 30% because you are focused over here, that will normally kill the deal. At their very best, they're going to come back and negotiate with you on price. That's what we call the risk zone. It's a massive risk zone.

Jaryd Krause:

I like that. I like that explanation of the risk zone when selling. It's really good to explain it that way.

Paul Avins:

It happens. And this happened recently. Our client of mine had a really great offer on the table—multiple seven-figure offers. And then they had a contract with a national company, which was really valuable. But the contract came up for renewal during the exit negotiations, right?

So straight away, the buyer said, “We're not going to close this deal until we know that contract is renewed.” It didn't renew; they lost it, which immediately absolutely crippled the valuation of that business.

It meant the buyer was now not sure about all the other contracts they had because they lost that one, and it created doubt in the buyer's mind and the buyer pulled out.

And you go, “Oh, okay, we got to go back around and rebuild the revenue.” And I've said, “You've got to dig in for two years now.” It's two years to dig in because we're going to have to go back and rebuild the revenue and come back to the market.

And I've seen this, Jaryd, so many times, right? People spend the money mentally before they have it in the bank.

Jaryd Krause:

Oh, it's the same on the acquisition side, Paul. People acquire the business in their head and live the lifestyle in their head that they perceive they're going to have as a business owner with all this money and forget, like, Hey, I bought the business and actually, I've got to do some work here.

Paul Avins:

Well, it's because most people aren't investors, right? If you're an investor, you'd be buying it knowing that and putting a team in place, and then you could do that.

But, yeah, I've seen it where people get so excited that they've already planned out how they're going to spend the money and the holidays they're going to take. And I'm like, “It's not done until the money is in the bank. Stop doing that because otherwise it just hurts.”

A lot of deals fall over in due diligence because, no matter how good you think your business is, you've got an optimism bias. You've got that optimism bias about how great your business is, right?

And then your buyer looks at your business and goes, “Yeah, but that contract's not in place. This bit is not right. That bit isn't solid. You're using old tech for that.” They start looking at your business like what's wrong with it. And you don't, right? You look at it as what's right with it because you're selling it.

So that mismatch creates a massive bit of friction in the middle. And I'll give this tip out to everyone. Anytime you get your accountants involved with negotiating the exit, you are really putting a lot of risk into the deal.

Because most accountants are not used to the M&A world and don't understand it. And they also have an invested interest in their client not selling, right? Because if their client sells the business, they lose a customer. So most accountants mess things up. Sorry to say that, but it's true.

Jaryd Krause:

Yeah, yeah, they can. And also, you've got to pay your accountant to do all this work. Then you've got to pay for your legals on the acquisition.

And then, say, it's a six to 12 month timeframe of you focusing on getting all the documentation and everything presentable for the acquisition side to do their due diligence. You've lost six to 12 months if the deal falls over.

You haven't just lost revenue in the business; six or 12 months of work have gone as well. So you would obviously advise people to keep running until they're past the finish line while adding that extra workload with DD.

Paul Avins:

The best thing you can do if you're in the sales process is—because if I'm buying your business, I'm buying future revenue, right? And I'll tell you the other thing that causes deals to fall over, and it's shocking, but it's true, it’s bad financial information.

Most people don't have really good financial data. They haven't got really good P&Ls. They're not running good cash flow forecasts. If you can rock up and say, “Hey, look, here's our three-year cash flow forecast. Here's our last five years profit loss. Here's our balance sheet currently.”

And if you're a buyer, you're going to sit there and go, “Wow, this is unusual because it is, right?” Most people's financial data is the thing that takes the time to sort out.

Especially if the business is over $2 million, I'll always bring in an external accountant to start an FD to start tidying up all the accounts and stuff and making it presentable. Because you've got to make it presentable to the buyer. And that can take six months. By just doing that, it can take six months.

You've got to go back through the last two or three years of accounts and they were probably built for profit. They're built to minimize tax and maximize lifestyle.

So you've got lots of offsets in there and now you're trying to position the business to maximize value on exit. You've got to go back and look at all the accounts and that takes six months.

And this is the stuff that causes people to lose energy during the process. Because most entrepreneurs love to move—I don’t know about you, but I'm this—I love to move fast, make decisions, get stuff done, and make it happen quick, right?

And selling a business is one of the slowest, most frustrating things you will ever do. And you have to master patience. If you want to go on a course on mastering patience as an entrepreneur, try selling your business, because it will absolutely teach you that.

Jaryd Krause:

Yeah, definitely. And you're not just dealing with one person who might want to buy it. It could be multiple people. So, Paul, we could chat all day, but I'm so grateful for everything that you've shared, and I know that you've got so much you could share with me. Maybe we'll do another podcast.

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.