The Quiet Light Podcast

If you want to know the value of your business and where it comes from, do the work. Take the time to collect the data, then hone in on what is the right fit for your company. Prioritize figuring out what makes your business tick in order to grow a sustainable brand.

The bulk of Babak Azad's body of work lies in growing the Beach Body brand from 100 million to over 1 billion in revenue in eight years. Now working as a consultant in marketing for multimillion dollar businesses, Babak and his team focus on customer acquisition, retention, and the power of customer experience. Babak is here today to talk to us about building a lasting brand by helping business find a few channels that work well and hitting those home.

Episode Highlights:

• Babak shares his unique way of looking at customer acquisition in every type of business he touches.
• Why business metrics are not as difficult as people think if they start with the basics. Start somewhere and then refine over time.
• The importance of knowing what a good customer is worth in any business.
• The things business owners should be tracking at a minimum.
• Look at the levels and the patterns. Get things right for a few to start off before rushing around trying to scale up too quickly.
• It is crucial to your success as a marketer to seek out and hone in on the best channels for your business.
• What your strategy should look like once those channels have been targeted effectively.
• Use service marketplaces such as Fiverr and Upwork to find small ways to find qualified staff to collect crucial data.
• How Babak helps clients discover the right intersection of branding and direct marketing then infuses that with customer sustainability.
• Why it is so important to start taking care of the customer.
• Hear Babak's 4 pillars of brand building.

Joe: So Mark I know that amongst all the Quiet Light Brokerage, Jason is probably the fittest. But I occasionally do get my butt kicked by someone online with beachbody.com. Most recently a young lady … I can't remember her name but I keep going back to it. I love the program and I love the story behind Beachbody's success. Because as you know I'm an old radio spot ad, radio infomercial, TV infomercial guy and that is where Beachbody started; I believe. And you had them on the podcast is that right?

Mark: I did. Yeah, I think pretty much everybody has heard of Beachbody at some point or another. I mean it's a huge brand; huge name. I was able to talk to Babak Azad. He was the Senior Vice President for Media and Acquisitions; really fancy title, big companies … that comes with the big companies are fancy titles but his role at beach body was to figure out their customer acquisition strip. And this is what he does now. He's no longer with Beachbody. He did leave a little while ago. He's now with Round Two Ventures and they help e-commerce companies eight figure or nine figure, primarily e-commerce companies hone in on their customer acquisition strategies. What was great about this discussion is seeing as at scale, seeing what a … somebody who's in charge of a business that when he came into to Beachbody they were doing 100 million dollars in revenue annually. That's a lot of money.

Joe: It's a lot.

Mark: When he left in just a few years later they were doing over a billion dollars in annual revenue.

Joe: Wow. How long was he there for?

Mark: I don't know. I would have to take a look to see but it wasn't more than a few years. So he's really responsible for the explosive growth. I mean again a lot of people have heard about Beachbody or remember hearing about them. Way back when I was in college which unfortunately is too long ago now, so I remember hearing about them then. Now I mean everybody knows Beachbody. Everybody knows the brand and that was because of his customer acquisition strategy. We talked a lot about what that was and we talked a lot about problems and mistakes he sees especially in seven figure e-commerce businesses and even eight figure e-commerce businesses as they're trying to grow. I'll leave some of the mystery for the actual episode here but a couple of things that I pulled away from this that I thought were really good; one, he said that if he comes across a company and they have more than four main acquisition channels that he's guaranteeing they're wasting money and that they are completely … not doing what they should. Some people get all worked up and you know they think oh I need to be on Pinterest, I need to be on Instagram, I need to be on Facebook, I need to be here or there and everywhere. And he said that's not how it works. He said find a few channels. He says it should be no more than four. Ideally, it should probably be maybe three or even two to start. And do those well and just milk those for what they're worth. Really hit those homes. That was one thing that I really pulled away and the other thing I pulled away was his emphasis on data collection. And I run into this problem since that I own all the time as I always want the data collection to be perfect. And then I get kind of lost in the weeds, right? You get all the state in front of you. You have your analytics. You have all this stuff coming in and you're like what do I do with this? And his response was what I've heard from so many other successful entrepreneurs, just start doing something with it. You know he said go out and hire a college kid, go out on Upwork and have them put it into Excel and start analyzing the data. He said the data will start bubbling up from that by itself and start giving you insights and then that can direct you into what you should actually be collecting; a fascinating conversation from somebody who's done some pretty big time stuff.

Joe: Yeah. It sounds like the data will speak to eventually. And even though when he left it's a billion dollar company I think that the lessons that he's learned along the way are incredibly valuable for those doing six and seven figures in revenue. You know a few weeks ago we had Ryan Daniel Moran on the podcast and he said: "find your customers". Find your customers and then send them to the least half of resistance to ordering. So it's going to be interesting to see how those two things jive with … back in what he said here in the podcast. Let's get to it.

Mark: Absolutely, let's go.

Mark: Babak Azad thank you for joining me.

Babak: Thanks a lot Mark, glad to be here.

Mark: Did I butcher your name?

Babak: You did not. You did it well the first time. Thank you.

Mark: We literally just rehearsed this. We rehearsed it and then I hit record. I'm like I'm so going to screw this thing up. Cool, I … thank you so much for joining me. I know you and I talked about a year ago for a piece I wrote on entrepreneur.com and I'm super glad to have you on the podcast right now. We have a little bit of a tradition here at Quiet Light where we have our guests introduce themselves because hey you're better at knowing what your background is than I am. So why don't you go ahead and introduce yourself real quick?

Babak: Sure. I live here in LA with my wife and two boys. I started out as a math major investment banking business school. I kind of came from that route. I started a magazine here in LA which failed miserably; best 25 grand I ever lost. I needed some humble pie, what I read that point of my life and then spent eight years in Beachbody. So the bulk of my professional experience was there; built analytics and then oversaw media and customer acquisition. So P90X, Insanity, 21 Day Fix, Shakeology, all that. Those efforts are for eight years and we kind of had a nice clean 10X. I already got there at 100 million so there's already substantial scale; really I obviously helped to push that thing to over a billion when I left three years ago right when my second son was born. The simple version of it, I have to start something, the team fell apart really quickly and then I started working on building a consulting business. So that's what I do right now; help generally seven and eight figure businesses, sometimes nine on … heavy on marketing, support around customer acquisition, retention, and analytics and really much more recently heavily infused with customer experience and really how to … I'm leading to writing a book about it too but really just the power of customer experience that's very much consistent with performance marketing approach but also really layering in building a lasting brand. That's really where my focus is today and I love what I'm doing. I have some great clients and yeah … so I'm having a good time with it.

Mark: I love that you lead with the fact that you had a magazine startup that failed and then you just kind of glossed over the fact that you were part of the team that grew Beachbody from 100 million to a billion dollars. You know just a small footnote in your career history there.

Babak: Yeah it's a … you know I have a … I appreciate all the experiences. You never want to go through those negative ones. I think we all have gone through them and just … I had to say I'm not sure I'm as humble as I need to be at times but [inaudible 00:07:25.5] as I mentioned it was an important thing of learning what it's like. I've been really much more of an analyst at that point. And then yeah I mean Beachbody was awesome. I had a great experience and … but it was time for me to go. You know eight years was a long time there and I grew a lot. I met my wife through one of my best friends there and [inaudible 00:07:41.6] me up for kind of this next chapter that I'm in right now.

Mark: Cool we're going to be talking today about customer acquisition and also building a brand and some of the lessons that you pulled away from Beachbody and are now doing at Round Two Ventures is that right you're doing this at Round Two?

Babak: Correct.

Mark: Okay. I will link to Round Two Ventures and then your personal blog in our show notes and anything else that you want us to link to in the show notes. But … so we're going to talking a little bit about customer acquisition, lifetime value, and this intersection of branding. You have kind of this unique way of looking at this customer acquisition strategy, maybe we could just kind of start with kind of a general look at your philosophy when it comes to customer acquisition in the e-commerce but also in the SaaS world. You know I think metrics, being really metric heavy on customer acquisition and lifetime values, this is really kind of a SaaS world sort of conversation but you take it towards e-commerce and towards every other type of business as well.

Babak: Yeah it's funny because I started really with physical products and given that distinction which I mean physical products, we sold DVDs and multi-vitamins at Beachbody. And that's really where a lot of my real marketing and just … I would say professional experience came from. And so this distinction of physical versus info versus SaaS really was nothing I ever really considered until I started frankly getting out of that world and talking to other folks. You know when I was at Beachbody and then started to learn about this but yeah I mean … so first off I was a math major but you know I wrote a piece a bunch of years ago saying business metrics are not college math, [inaudible 00:09:12.7] barely high school math. And I think that's the first thing is … I think I know a lot of people who are intimidated by the metrics or surely daunted by how do you do it or their systems. And you know I'm a firm believer first just to start with something. I think Peter Drucker you know said what you don't measure doesn't get better and so with the opposite is very much the case. That what you do measure, what you report on, what you send in an email or whenever it's your phone because it's fun to mine you just start to pay attention. So there's always a bit of grounding of just the basics in fundamentals. And that's really I think my approach. I'm not a shiny bright object guy. I believe that if you get the basics and fundamentals then much of what you need to do starts to take care of them itself. But really when it comes to customer lifetime … I mean I look at e-com and frankly all of the businesses, you know fundamental is I grew up as a paid media guy in marketing. And I think it's evolving over time but you know from a Beachbody and beyond heavy on TV, heavy on digital, you know that was what I knew. And certainly one of the core 10X. If you're going to run paid is you've got to know what a customer is worth. You know people sometimes ask like what's a good CPA? It's like I don't answer that question because I don't know your business. I don't know what a customer is worth. You know are you … do you have business constraints around needing to be casual positive on day one, on day 30, ideal business goals. There's so many factors that come in so this but really my belief is … and I just don't know any other way is especially when you're running paid media you need to know what a customer is worth because you need to know how much you can afford to pay for them. That sounds really basic and fundamental and hopefully for a lot of folks that is. But you know that's the core of it because ultimately it's how do you know if you're going to spend more or less? How do you know if your numbers whether in Facebook or otherwise are good or not? You have to have some of that measure. So a lot of the core work that I do with folks … and really I'd write about and all that is really if you're going to be running paid you need to understand those basics around customer acquisition. And then again start with whatever you have even if it's all customers that's … you're not dissecting by ad said or by Facebook versus Google. Just start somewhere and then you start to refine this overtime.

Mark: All right. I love these conversations because I go into them sometimes not knowing what I'm going to ask and then after the first two or three minutes I've got a list of questions. So let's start with basics, you said start with the basics and fundamentals. What are those? What should somebody be tracking at a minimum?

Babak: So let's assume [inaudible 00:11:39.2] whether you're a SaaS business, info product, physical product you know certainly from a from a traffic side the core stuff of spend, click through rates, CPC's, [inaudible 00:11:50.5], cost per click, conversions, cost per acquisition … whatever that means for you; for some folks, that's if your lead gen versus you're loop driving to an order. Those are just conventions and so the philosophical stuff and the strategic stuff applies to both. Certainly, you want funnel metrics, how many people hit your site whether it's landers or blog pages … you know get through the funnel and so whether you have one step or a five step process I would say again start with … if you have GA set up or you have others tools set up, what kind of just basic tracking of how many people are hitting pages, what's your conversion rate, average order value, and then ideally over time … and whether it's someone converts on day zero or beyond, what is the value of those people over time. So I generally try to look in ice sized chunks of day one … day zero, day one to 30, 31 to 60, and then beyond. And depending on your risk profile, your business goals, all those things you may determine how long you want to look out and how much you want to apply towards customer acquisition.

Mark: Let's talk about that a little bit here because this is something that I've run across a few times recently. You know looking out over these different strata of periods of time; zero to 28 and then this kind of second up to maybe around 60 days; why are you taking a look at that? And you're taking a look at this in terms of the value that client is going to bring to you right?

Babak: Right.

Mark: So why break it out into those different groups?

Babak: Well first and foremost depending on the business goals and constraints, that can oftentimes going to define how you're going to approach managing. Let's say … I mean I'm going to talk about paid media for a moment, that's going to manage that because if you look at … if you need to be breakeven based on credit terms, cash flow, whatever that is; if you need to be breakeven by day 30 or day 60 then you need to know what that customer is worth. And so based on a margin basis not just certainly on a revenue basis but on a margin basis you need to know how much you're making by day 30, by day 60 cumulative and that's going to help to define what your CPA targets are. And then it's … again for me, there is no right and wrong whether you're managing to a breakeven, to a margin percent, and if you are just revenue driven and you've got venture funding and you need to be driving those are not for me to say. And I never have a perspective of right and wrong … it's those are personal and business decisions but you need to understand that. And then frankly once you have some of these base lines then it's a matter of how do you start to improve those things over time. So if you know what day one, day 30, 31 to 60 then presumably someone in your team whether it's the owner, the single person, or someone on the team is spending time testing to say how do we actually start to drive this and improve that. And again different models you may need to look at 180 days, you may look at a year … I mean I work with folks that have a one year break even because they can afford to do that; some folks breakeven on day one. And so different businesses and different models can allow for that and some it's much more difficult. So you just have to understand the nature of your business and then what kind of things you're trying to constrain with.

Mark: Yeah, by the way, some example … so something that I've run into in a business recently where we had a solid lifetime value number, and we were able to calculate it pretty well by taking a look at customers that had … this was a subscription based business, we took a look at customers that have canceled over the last six months and looked at their average lifetime value. And you know the number was something like I don't know $130, $140 but the average ticket value for any single sale was maybe about $30-35. What we found was that there was these whales and there right? These whales in there that were spending $3,000 and it took them years to be able to get to that point. So when you take a look at that lifetime value analysis we say okay that they might be worth $140 or $130 whatever the number was but was in order to do that you need a couple of these whales to wait for three, four years before you can actually get that value back.

Babak: Right.

Mark: So we had to kind of take a look at that from that kind of strategic way [inaudible 00:15:50.3] okay actually what are we getting from clients on average in month one and then in month two and then a month three and beyond that. We're not going to care too much about the lifetime value because it's going to take too long to recoup that cost.

Babak: Right. Yeah and some businesses may not be able to afford to wait that long for those whales to kick in. And really then it means A. you're managing your risk in a certain way. Again, whatever is appropriate and then you're basically operating at a higher margin than maybe you could operate if you could tolerate that and maybe you want to take some of that and spend it into media. But if you can't wait that long and there's just too much risk and it's too small of a percent and too inconsistent then that may just be the way you run it. I think I get in some ways the same question when you're first starting, it's … that's great if you have five years of data and you have a much more sophisticated and robust [inaudible 00:16:37.1] data in your business. But if when you're just starting you probably need to start more conservative right? An owner that has bootstrapped the business knows that you start with what you can afford and then as you learn, as you develop and have this history… the history in the business then you start to understand your customers better; what they're worth and then maybe you can start to manage your media and how you think about that better and surely hopefully concurrently you're optimizing the funnel so your customers are worth more, you're converting better, all these types of things right? But that's just the nature of again where businesses are in there maturity and how long they've been around.

Mark: Yeah one of the common objections I hear from people … because we ask people who are selling their business all the time what's the average lifetime value of a client? And one of the biggest objections I get to that is I have no idea because customers are still with me. And you said something at the beginning and that is just start. There's a lot of models out there, just start with something. Do you have a basic model that you like to follow? I know for myself I just like to take a look at okay I might sell if a customer is with us and from the Quiet Light perspective we can say the same thing. Our business is typically one off but we have people who have sold two, three, four businesses. All the same, we don't want to assume that, we're just going to take a look at what … the lifetime value I spend right now with the assumption it could grow. Do you have a recommended model for people that are saying I don't know how to [inaudible 00:17:58.7] for these people that are still with us?

Babak: So the fact that a customer is still with you for me is not a reason to not understand what a customer is worth. And so let's say they've been with you for … let's say the businesses have been around for a year and you've got 20%, 50% of the customers have been around that long. Do the average based on how ever long that cohort has been around. And if the other ones are … you know seem like they're directionally going that way then great. And then as you get more information you can start to build your model and add to it. But you know I think part of the thing also to be careful over depending on how long the business has been around is how many people are you looking at? So if you've got 100 customers versus 10,000 you trust more volume, right? And then the other part is just looking at I like to break things down into monthly cohorts. Let's assume it's just purchase, so I'm not lead gen but it's purchase, I like to look at who are all the people who first transacted in January, and then in February, and then in March and look at their relative month one, month two, month three revenues and certainly again margin and then start to see what kinds of patterns start to form and then again. And starting really that at that level and then you just start to refine this thing and as you get more data and … then great then you start to layer in. So worst case you're being conservative because you have customers who are going to stick around a little longer but that's a good thing and that's a good worst case to have as opposed to certainly the opposite where you may be overestimating or you may be overlooking at one group that's worth a ton and everyone else isn't remotely tracking towards that super high value group.

Mark: I think a problem that people run into a lot is they've up the perfect be the enemy they good, they want to get that perfect model and if they think they can get it then they don't do it. I know I've fallen victim to that quite a bit as well. I want to [inaudible 00:19:41.4]

Babak: Quote I have on my phone that shows up is perfect … done is better than perfect. And it's really easy to get stuck in that analysis paralysis perfection like … and also frankly this idea that everyone else has it better. I think a lot of people think that bigger companies or those using better tools always have better data but is definitely not the case. Like a lot of times the bigger companies they have too many legacy systems so I think oftentimes that comparison can pull people back because they think I'm never going to be able to achieve what someone else is doing or all that big data stuff. I mean just start with what you got and literally it could be Excel with a college kid and then you start building from there. Like literally it can be that that can be very very effective and I've seen it be that way.

Mark: Yeah that's a good lead into my next question because you know you started at Beachbody with 100 million in revenue right? So you guys wanted to go ahead and start digesting data, you put a million dollars towards hiring on a new team just to be able to digest data. The entrepreneur who has an e-commerce business doing three million, four million bucks that's a lot more of a challenge for them to bring on that much of a team. Excel, analytics, are there any other programs they may want to look at or systems that you know of that might be a good starting point or would you even recommend going out and hiring a college kid or going onto a place like Upwork to be able to have somebody to crunch numbers?

Babak: Yeah I mean so first of all when I joined again it was seven, what you think maybe a hundred million dollar business has in terms of systems and processes I would say first of all the tools today are so so much better. But I looking back, I work with some hundred million dollar businesses now that have dramatically better systems and reporting frankly because the tools are just much easier. So you know it took a year or so for me to get correlatively cleaner data and not even clean. So first of all even back then it wasn't like everything was so dialed in, that's kind of part of my point. And then second again like depending on people whether on Shopify or Magento or whatever your platform, honestly the basic thing is do a data dump. I've hired for multiple clients someone part time on Upwork to basically do some slicing and dicing; basic stuff, get some things in place. And we're not talking … so first of all even if you hire someone full time and let's say that person is 50,000 a year just picking a number, your exposure to that person is not 50,000 because within 90 days you should know whether that person is going to be working out or not. So let's say it's a quarter of that plus maybe a little bit more so oftentimes first people think about if you're going to bring on someone full time that that annualized cost that's really not what it is. You should know I think within 90 days that you're getting what you need and they're on a path. But at the very least there are definitely folks on Upwork and really just looking for someone who's got some similar work; I put people through an Excel test to make sure they can do the basics. It's all made up information and yeah you start with that and I've literally had college kids help out just … who were good at Excel. They don't need to know that much, they just need to know how to slice and dice some information. And maybe it's an MBA, I'm not saying you have to go there but certainly Upwork, Excel, using again basic tools. You do not need certainly anything remotely close to enterprise so you get stuff going. And I will say I do, I run some numbers for some of my clients and it's literally … I did one about a week ago, Excel, Hubspot, Shopify, GA piece it all together and we had a pretty rich view. It took some time obviously but we then had a pretty rich view of what those customers look like.

Mark: So with somebody who has a Shopify store or an Amazon store where you can't really track customers as well with Amazon, but let's say Shopify store where you can track your customers, or a SaaS application or anything else where you're tracking those customers would you literally just go out and do a dump of that data of the customers and go back and start to calculate okay this is what … you know graphing it out, these customers are worth this much in those first 30 days and then it starts to look like this when we move out?

Babak: Yup that's exactly. I mean … so and that's what we did. Let's say you're looking at 2017 data it's literally [inaudible 00:23:52.4] all the new customers and that's part of the thing is making sure they're new versus repeat. But let's just say you can identify that hopefully relatively easily; who are the new customers who purchased for the first time in January of '17, February of '17, March of '17 and literally track those people. Look at their February orders for January, look at the March orders for both like you know January and February and really that's literally started that way. And you can then start to slice and dice by traffic source, by product, by offer, by ad set. But that's next level, for some folks they just want to get the pure basics. Just start with that average thing and then once you have that and then you start to refine over time. But literally it's a data dump and you know if you can marry it with GA or with your CRM or ESP then great but at the very least start with the overall, start with maybe one line and then you just start to get better from that point. And frankly again that's what I did with Beachbody, that's what I do with my clients. And whether it's me or working with their teams you just start and then you start to refine over time.

Mark: All right so let's go to the other side of this conversation. We started to get a good sense for our lifetime value and what a client brings to us in terms of different time frames; the first 30 days, the next … the first 60 days and so on and so forth and we know our cash flow requirements. Again, people listening, you have to keep in mind if you're going to spend $50 on a client and they're not going to pay you $50 until month six you need enough cash flow to be able to get to that payback period. Let's build a strategy, what does the strategy look like then at that point from acquiring the customers and going through different channels? I know obviously with Beachbody you guys did television, you did radio, you did a lot of media which was hard to track. And we see this a lot with … you know online platforms are really good right now at tracking with view through conversions and everything else but there's still some of those mediums out there that aren't great and imperfect. How does that sort of factor into your decisions when it comes to acquisition channels?

Babak: Yeah I mean so no matter what channel you're in attribution is the bane of everyone's existence. A very very few people have it down and like oh I know what that means to have it down. You want to get to the point where you feel like a level of comfort and confidence. You know these days again most of the work … I have one client that I work with on TV and it's a very rare exception of how good their attribution model is but let's say that for the most part, most people are doing … I mean it's digital heavy. So for me, I basically focus and work with folks on really only a few channels so Google … which for me is Google and Bing. I mean people always forget about Bing, it's another 5, 10% and my joke is if you don't want that 5, 10% can I have it? And I'm joking but no one ever says yes. But it's using higher ROI's especially when you're talking slightly older demos. But Google and Bing, Facebook and Instagram, your internal e-mail and affiliates, and frankly just … and I said just but if you focus there I've seen plenty of businesses go well into nine figures; focus there. And then certainly you can layer on radio and podcast, TV, direct mail; but honestly Google, Facebook, affiliates, e-mail and internal … you know that's really where I put a lot of time and attention. And I'll say even then attribution is a bit of a mess because Facebook and Google don't talk to each other. So they're each one who takes some credit … you know or using GA last click, what's happening are people opting in through Facebook and then converting through e-mail? But you really just have to start to piece together things, at the end of the day again depending on your business model your PNL and bank account are the true measures of it. And so that sounds like a totally average overall view but yeah that's again I work with folks that have that and then they've got to a certain level of sophistication. So you start with … you know start and piece together what does Google say, what does Facebook say, like if you add up those two do you even have that many orders? You're going to have to be very careful about double counting but you just start to piece together this … the data starts to tell a bit of a story. I would just say one thing you mentioned view through, I am a very very very conservative on view through so the point of it I basically I ignore it; certainly from a GDN side and really even from Facebook. I just think unless you prove it I'd rather start with a [inaudible 00:28:07.2] and it doesn't work. I mean you got to prove it as opposed to just proving it. But I know that you know 28 day click one day view on Facebook is the standard set up. I moved most people to 7 day click not because it's right but mostly because it … we got to account for double counting, AdWords, what's going on in email, things like that. So there's … again there's no right and wrong but that's one of places I've kind of dialed in a little bit is looking at 7 day click. But honestly my biggest … the biggest mistake I oftentimes see with people with channels is they have too many. And so I think if people say oh I heard someone's doing something on Pinterest or YouTube or I got to do this, frankly if I see people who have four channels where it's 25% in each, that says actually something is not being done well enough. And usually, it's people who are really scaled, I kind of have this thing of two offers two channels, most businesses that have scaled substantively they've gone deep and hard in a couple channels which basically means they're left probably some money on the table elsewhere maybe but it means they're focused. And that means they're exploiting where things are working. And so I think that's one of the things, people think I got to be in so many places, I don't … I have not found that to be the case at all. And even though it sounds like you're concentrating your risk it also means you're exploiting an opportunity. And that's really I think oftentimes what you're really trying to do.

Mark: How do you know when to give up on the channel if it's not working or would you?

Babak: You know it's a good question I think at some point you have to make a call so it's … I don't have a rule around it and I put it that way hard and fast. I think it's … first of all, I like modeling off of other people; not copying but modeling. And so it is … it can be dangerous because you can see all these other people seemingly running a bunch of ads and yours may not be working but you may not know what their goals are and their goals may be different than yours. So I think it's always … you got to be careful about comparison but you know I think at some point you have to take … just like a lot of things you have to take an honest assessment and say do we feel like we've given this a fair shot? How much time and money have we invested? Frankly, what is it pulling because we all have tradeoffs whether you're a six figure business or a nine figure business everyone is resource constrained in their own relative way. So you have to pick and choose your battles and really where you think now. I guess … and sometimes the market maybe telling you something too that it may not be the channel but maybe the way you're executing on it right? Which may be kind of the same thing for you but I think that's one of the things too is really you have to take an honest assessment of what have you done, what have you tried, have you talked to people, have you pulled in whether experts or friends or done some research and you know. I think then it's relative to other things that you have in front of you, where is your time, your capital, your resources is better allocated.

Mark: Yeah all right that's awesome. I told you before we started recording this that we were not going to get to the one thing I really wanted to talk to so I'm going to get to it now. And that is something I find fascinating about your approach to direct response marketing because direct response marketing we often think about in terms of the money that goes in we want to make sure that we're getting a positive ROI out of that and we're just measuring that and that alone. And we see it almost as this opposite of brand marketing which is splash it out there splash it out there and splash it out there and it's kind of a long play. But you have this intersection and you do this a lot with Beachbody as well, you have this intersection of brand and also the direct response. If somebody is focusing on those four that you put out, the Facebook, the Google, affiliate, and internal e-mail, what can they do to start building a brand and why is that important?

Babak: So I think the first distinction is around something you said and I think a lot of people will latch onto which is brand marketing. And so really what I focus on and try to talk to folks about is building a brand. And so for me the distinction is brand marketing oftentimes is associated with you spend a bunch of money on media marketing whatever that's basically non-trackable and that is trying to build brand awareness but without necessarily tying it to some kind of metric. And I say that as opposed to focusing on building a brand. For me, that really comes down to the customer experience. And so those are totally can be integrated with a performance marketing direct response model. And really that's about how do you start to take care of the customer and treat them frankly like you would want to be treated if you were the customer. So I think it's less about brand marketing initiatives and it's more about this idea of does the word in the Lexicon around building a brand, about building something that's lasting; how often does that come up in the organization? I had breakfast actually with a friend this morning and we're talking about the idea of what's on brand versus off and what that means. But really at the end of the day, it's are you building something that's got some sense of sustainability? And I think oftentimes especially when you're earlier on the idea of shortcuts of doing things that are maybe … whether it's not as clean or not as brand building, I get that everyone's got to make their call all around those things but ultimately if you want to build something that's got some sense of scale and got some sense of sustainability I do believe you have to be focused on building a brand. Because when you do that you start to treat the customer better. You start to invest more in your product. You start to invest more in the kinds of media and frankly, that kind of stuff can be infused in your acquisition efforts. Did I mention that I'm writing a book on customer experience and that really came from how do you start to bring DR and brand together and really things like tapping into a sense of identity in community. That's not just brand marketing that's non-trackable, you can start to build that into your video ads on Facebook, Dollar Beard Club … now The Beard Club and they've done a phenomenal job of there's this sense of identity in association with you're a man with a beard. And so they tap into that and who you are, what that means, and so that is one layer of customer experience and building that brand that is clearly tied to performance marketing but it starts to infuse that. I would say two things like … you know so my four categories is really around the human and emotional stuff; there's product, there's the transactional experience, and then there's content like video. And they're not mutually exclusive [inaudible 00:34:16.0] stretch. But I'll say like with subscription businesses whether online … I mean media, SaaS, or physical box, one of the best places or best examples I see people have make some mistakes is around order notification. So this is not brand marketing, this is are you treating the customer better? Are you letting them know that next order is going to ship, that next feeling is going to happen? And oftentimes I see people say well if I send an email before that billing my churn rate is going to go up and my response is absolutely you're correct but also you know what happens is your customer is actually aware of that billing. They're not annoyed. I mean I think we all faced that thing where whether it's a meal subscription or otherwise, a billing happened and we didn't know about it we're annoyed we got to go cancel. We tell our friends, we post. That kind of stuff actually has an impact on the brand. And honestly one of the best examples I've seen of how to use that notification positively is Dollar Shave Club, they send a notification but they use that as a promotional opportunity to say your order is about the ship do you want to add something to it? And so whether it's their shaving cream or any of their other products they use that … and again 20 or 30% of people are going to open your email if you're lucky. So it's not everyone but you get the brand benefit of notification but then use that as a promotional opportunity and say do you want to add something more. And I would much rather be playing in that kind of world rather than trying to sneak in what you think is a one or two more orders but it's very hard to quantify. But you absolutely are hurting the brand if you're playing a longer game when you're trying to sneak stuff in and not be as clean and upfront. And yes Netflix and Direct TV don't do that but again those are very very different businesses than subscription boxes or something that you start on a risk free trial that frankly doesn't get the kind of use that Direct TV and Netflix would.

Mark: Could you repeat those four categories again? Those are great.

Babak: So the first one is really I talk about as like the human and emotional aspects. So that's things like identity, community, exclusivity, things that are raw human needs and traits. The second is really product, and there are multiple layers on it but I think it's kind of crazy that I have to focus and emphasize it but the number of people that I see that don't have the attention to detail on product. I've talked to people who's starting they want to private label fine but the better your product [inaudible 00:36:35.0] part it doesn't always win but a better product gives you a better chance at that. Third is the transactional experience, so how do you take people through your funnel, what is it like to get a refund, what it's like to get … I talked to customer service those kinds of things. And the fourth is content, so how do you use video, music, spokesperson, or a character. I mean really each of these things, there are plenty of examples of companies that are using all of them or just one of them to really start to enhance that experience and really start to rile their customers. That's the [inaudible 00:37:05.3] kind of thing but you basically need customers these days to be blown away. It is … you know I like to say it like it's … when people say it's the easiest time to start a business because generally the tools are easier but it's also like that means it's brutally difficult to compete and to differentiate. So you've got to be just a ton better than everyone else. And my experience is that customer experience and these kinds of things is really what you need and again it's infusing this idea of playing the longer game into performance marketing and direct response. These two are not at odds.

Mark: Cool. All right you got a book that you're writing right now do you have any idea when that's going to be done?

Babak: Best case is Thanksgiving time but I've started … I mean I'm happy to post a couple of links to some of the things I've started to write about whether in LinkedIn or in Twitter to just to kind of go a little bit deeper into these and show some specific examples. But yeah we're still talking a few months out.

Mark: Okay I know we've had a couple of other people that are reading books and we always get e-mails after saying "Hey can I get notified when that book is out?" So do us a favor one when you do have that out send me a message and I'll make sure I update everyone that wants to be updated on that. And then where can people learn more about you? Obviously Round Two Ventures, any other place?

Babak: Yeah I mean my business is Round Two, it's Round Two Partners. Visit the website. But yeah the same thing and it's like a holding company but my blog is the easiest. It's just my name, it's Babak Azad B-A-B-A-K-A-Z-A-D.com And that's what … I put a lot of content there and then frankly there and LinkedIn. I'm @BabakAzad pretty much on everything other than Gmail of all things but … another Babak Azad stole that from me but … he was earlier but yeah I'm on pretty much every platform. But my blog and LinkedIn are the two easiest platform.

Mark: Fantastic, this is great. So thank you so much for coming on, I really do appreciate it.

Babak: Thanks a lot Mark I'm glad to be here.

Links and Resources:

Round Two Partners

Babak's Blog

LinkedIn

Lianna Patch is funny. Not everyone can stand up in front of 150 entrepreneurs and make them laugh, respect her, and want to hire her all at the same time. Yet – that's exactly what she did when I attended the Blue Ribbon Mastermind event in Denver last month (August 2018).

When Lianna shares her passion, which is writing copy infused with humor that converts, people make more money. How? Their customers stay on page, get engaged in, and actually read what you write. Oh, and then they buy your product, write reviews and spread the word about your brand.

Humor makes people like you. So why not write copy infused with humor? Because you are not funny. Me neither, at least that's what my kids tell me (what do they know…). It is a skill we don't all have, clearly.

Episode Highlights:

• What Lianna does to help clients who come to her with the need for something new.
• How her techniques to boost add-to-cart conversions as well as purchase conversions.
• Why it is important to message-match across the board, through the entire purchase and follow-up process.
• The importance of building the relationship so that if the product is a one-off perhaps that client will be swayed to purchase other items.
• Lianna shares the biggest mistakes people make when writing online copy.
• Steps business owners should take to improve copy and what should be first on the list.
• What makes certain checkouts places that people want to revisit again and again.
• The importance of grammar and how intentionally not using perfect grammar can work if done the right way.
• Why Lianna thinks being buttoned up is a thing of e-commerce past.
• How to grab people's attention with web copy content.

Mark: Joe you spent a lot of years in the direct response world specifically within the agency world and buying radio ads right?

Joe: Yeah. Yes, I did brought a lot of copy.

Mark: Brought a lot of copy and this is an area that we're going to talk about today, writing copy. I find for myself when I have to actually write copy it's a completely different mindset from pretty much everything else and it can be difficult to do. Lianna Patch and she is a professional copywriter for specifically conversions right?

Joe: Yes Lianna Patch did a presentation at the Blue Ribbon Mastermind in front of 150 entrepreneurs and she writes copy that conversion … calls herself a conversion copywriter which I think is brilliant. I'm sure it's a phrase that lots of people have heard but for some reason, it is brand new to me. Although that's what I did, that's what my contractors did back in my radio days and my online days. But what she did was she infused comedy into her presentation and she infuses comedy into her clients' websites, their emails, their … all of their different campaigns and Mark it works. I'm telling you the presentation was fantastic she gave some examples of what the before and after copy was like and it just made me want to read it. When you go to her website it just makes you want to stay on the website and poke around and look at different things. And throughout the whole podcast, I keep going back to her website and giving examples that I think are just hilarious and make me want to keep reading. And I don't think enough of us e-commerce entrepreneur or SaaS entrepreneurs whatever you want to call yourself infuse the human factor and a little bit of comedy into your content so that people realize you're not just some big corporation that's sending your standard email. It makes a big difference I think.

Mark: Absolutely, any time you can get somebody to laugh that's going to loosen them up and also to disarm them a little bit from that and accessible as well. That's fantastic. You need to make sure you send me her website so I can take a look and enjoy some of the copy as well.

Joe: Yeah there's some great ideas there you can get right from her website. But this is important stuff, right? Our first line of engagement with our customer is content. There's going to be some visual stuff but there's usually some content as well. So anyone listening that has any online presence or hopes to buy one and do better than the previous owner I would strongly recommend they listen to this entire podcast.

Mark: All right, well let's get to it.

Joe: Hey folks it's Joe Valley at the Quiet Light Podcast. Thanks for joining us today. Today I have a very special guest, her name is Lianna Patch. Lianna, welcome.

Lianna: Thank you so much for having me.

Joe: You are apparently funny, you're from Punchline Copy. I saw you … I know you're funny because I saw you at the Blue Ribbon Mastermind. There's no question about being apparently funny.

Lianna: Okay.

Joe: You said some pretty vulgar sayings in front of a big crowd of entrepreneurs and you could have fallen flat on your face or they all could have laughed out loud. And you did it within like the first 60 seconds and I-

Lianna: I did.

Joe: We all laughed out loud so thank you.

Lianna: I'm so glad.

Joe: It made us very comfortable being audacious ourselves so thank you for that. And I've looked at your website and I want you to tell folks about yourself but then I'm going to just like comment on a few things as well. So the for the folks listening instead of me doing that introduction, that fancy thing, why don't you tell us who you are, what you do, and what you're all about?

Lianna: Sure. So I'm a conversion copyrighter which basically means I don't just make stuff up I base my copy on customer research and what people need to actually hear. And on top of that, I use humor as a tool to help mostly e-commerce stores and bootstrap software businesses connect better with their customers and retain customers longer.

Joe: Conversion copywriter, wow.

Lianna: Yeah.

Joe: I love that. Did you make that up?

Lianna: I did not.

Joe: Somebody else coined that phrase?

Lianna: I believe we can attribute it to the great Joanna Wiebe. She is a fabulous copywriter. I'm pretty sure she came up with the term conversion copywriting. She's the most well-known one.

Joe: Okay.

Lianna: And I met her in her first copywriter mastermind.

Joe: And we will attribute it to Joanna Wiebe. But conversion copywriter really stands out and tells people exactly what you do. It's pretty quick and pretty direct to the point.

Lianna: Yeah.

Joe: And you infuse it with humor so I just want for people that are not watching this video on the home page of your website … where is it, it says… oh, I've got to scroll down a little bit, where is it. All right there's something that says something along the lines of … oh my God it's gone I'm on the wrong page. Really. Anyway, it says something along the lines of blank blank blank AF and it's right there in your face funny as AF. And for those that don't have teenagers and don't understand … I'm sorry for those that don't understand what that means ask your teenager because they do. You have a knock knock joke on your website as well and it says "Knock knock who's there and the answer is a shitload of money." It's all good. It's all funny and it converts. So tell us about some of the experiences you've had with people that have terrible copy and how you fixed it and what kind of impact it has on their end mind revenue which is what folks are really looking for.

Lianna: Yeah. My favorite type of client to work with is someone that comes to me and says okay we did the thing where we hired a professional copywriter and we come off like really cool and corporate and solid and we hate it and it's not working and we need to be more personal and funny please help because they already know the value. They already know that humor is going to help them connect better. So one example that I have been talking about a lot lately because it's exciting … and it's an e-commerce brand that sells wedding rings, it's called Manly Bands. And I came in and worked on some of their product descriptions. And they already have a super fun brand. They were already using humor throughout. I like to think of them as like the Dollar Shave Club of wedding rings but their product descriptions were very short. And they were kind of funny but they weren't really converting. So I went in, wrote longer descriptions, which is funny for some people because they think oh short copy is better. People don't like to read, people will read if you give them a reason to. And we made them funny and we made them personable and kind of weird and they boosted conversions almost across the board; both add to cart conversions and purchase conversions. So that was a really great test result to just be able to point to and say "hey look it works".

Joe: That's great it's a … you know I'm old school direct response, I used to sell stuff on radio. We'd write a 60 second spot ad that had to convert with someone actually calling the 800 number. I started in 1997 as I said before but you have to write copy that converts and get an action. So I love the conversion copy and it's measurable. You also talked about not just on the website where people are looking at the product description, not necessarily in the cart things of that nature. But you really if you have a client and can touch every aspect of their branding campaign do you hone in on the and if yes what kind of things do you do?

Lianna: I do try to so I work more on the … I work closer to the purchase and post purchase for attention. That's kind of my jam. So I do a lot of emails. And I really feel like emails are one place we can use humor the most because it's the ability to build that one on one connection. You can be so personal, you can be so weird and funny in email and people will … you know even if it's coming from a brand they'll be like I like this. It feels like a real person in my inbox. Of course, it's top of funnel, sometimes you can scare people away with humor if you go about it the wrong way. It just depends on your brand and how willing you are to test those kinds of things. But if I can I'll address all of those touch points because they should be cohesive. There's got to be a message match between the ad, the landing page, the follow up emails, you know the eventual sale or whatever it is that you guide people to.

Joe: I think the instinct of an entrepreneur that's building a brand is to give the impression to the end customer. The first impression is to that hey we're a real company, we're doing things in a very professional manner; which kind of may be boring. I just had a business that won on a contract fairly quickly with multiple offers and his customer service emails and responses were "hey thanks for helping the little guy we're here just taking care of my son join us and really … really appreciate it" that kind of thing.

Lianna: Yeah.

Joe: I think that does resonate. I think using the word feel, it feels like a real person behind the email.

Lianna: Yeah.

Joe: And really reaches out and helps them quite a bit. So you will touch all aspects of it from … if you can. From the website to … I mean from the email to conversion, would you do follow up emails after the sale as well and work out as well all aspects of it there?

Lianna: Yeah. That's actually one of my favorite things to work on. I was just talking to my friend Val Geisler, she's an awesome email strategist about this and we were talking about especially with e-commerce businesses so many people are neglecting the long term post purchase follow up sequence. So someone has bought once and then they just get thrown back into this regular newsletter or sales email cycle. And there's no like follow up and say like hey do you want this product that sort of corresponds to what you bought. You get the review ask emails every now and then or take a survey but there's like two to three emails max after the purchase and then you just get lumped into existing customers. There's no specific long term nurture track to get you back for that second purchase. So that seems like a huge opportunity for most e-commerce stores and for humor because again they've already bought from you once. Now is the time to build the relationship more.

Joe: And it's not just spamming them with emails if you're writing good content that's funny and enjoyable and they like reading them. They're probably not going to unsubscribe.

Lianna: Right.

Joe: Perhaps.

Lianna: Right and you can test your sending limits like if you start to see a higher rate of unsubscribes back off; that's not rocket science.

Joe: So I did a podcast early in the week with a guy named John Warrilow and he's written several books and he has something called the Value Builder System. And it's all about creating recurring and repeat revenue in your business and I would think that what you're doing is helping build the relationship with the customer so that if they sell a one off product … you said earlier you know hey maybe you might be interested in this too, that follow up email sequence keeps them engaged and maybe perhaps will help them become a repeat customer and buy an additional product along the way.

Lianna: Yeah.

Joe: [inaudible 00:10:58.9]

Lianna: Yes and even if it's something that they might not need to of … I hear this a lot from mattress companies, I've worked with a few mattress companies you know A. they have other product lines. They have bedding and pillows and things like that accessories. But B. even if you move into a different business completely, if you've built those crazy rabid fans they'll follow you to whatever you do next.

Joe: So you've mentioned Man Rings was the first one or something like that.

Lianna: Manly Bands.

Joe: Manly Bands, I love it.

Lianna: It's great.

Joe: And a mattress company, so I mean very very diverse product categories here. What other kind of physical product companies do you work with? So that people listening can say oh yeah okay she can help.

Lianna: Oh yeah, clothing … I like to work with clothing. Honestly, any consumer product I think is really fun. I have to obviously believe that there's a benefit to it. I've had people come to me. Especially in the supplement world, I'm a little skeptical sometimes of actual benefits. So I like to try the product first and say can I get behind this? And if I can then I'll happily write a copy for it not that I can't but I will.

Joe: You know I wish we met …. what is it a decade ago now right? I sold my company in 2010 and boy you would had fun with that. I sold a colon cleansing product.

Lianna: Oh great.

Joe: We started selling colon cleansing on radio back in 2002 and a TV infomercial in 2003. It went 100% online in 2005 and ultimately built a digestive wellness center around it.

Lianna: Okay.

Joe: But boy you would have had some fun ones.

Lianna: Is that like colon cleansing from the outside in or from the inside out?

Joe: Well that's from the inside out.

Lianna: Okay.

Joe: No it wasn't [inaudible 00:12:39.2].

Lianna: That's easier to sell. Yeah, okay.

Joe: And it was … you know for those listening I mean you can't … you think what's fun about my product? You can't … you have to be serious about it something like that. We try to be serious about it and I think it was okay. We got lots and lots of testimonials and people would actually love to be … strangest thing ever people, when we produced a TV infomercial we had a producer travel around the country following up people to give testimonials and they'll actually get on camera and talk about their bowel movements and it's just crazy. And you would have had a great deal of fun with it and we could have made more fun of it and made it more enjoyable for all I guess. But I mean you can … from what I've seen [inaudible 00:13:21.0] for your presentation you kind of make every little aspect of it fun so that the entire feeling of the company is joyful and fun. For instance, the 404 redirect that you put up on the screen at Blue Ribbon Mastermind, can you describe that for the people?

Lianna: Yeah so that's one of my favorite places where people aren't expecting humor, to just give them a joke or something weird. And this is … what was it called? I think it was eventcenter.uk or something. The site's not there anymore but it's oh no you hit the wrong link this isn't here choose one of our developers to fire. And it's four guys and if you click one of them he puts his head down in his hands and the rest of them looks relieved and then it says oh no he's only been working here for six months. He was just an intern like you're so horrible. And then it redirects you back to the homepage.

Joe: Keeps people on the site versus you hit a 404 redirect … oh my god, this guy is terrible and you leave.

Lianna: There's so many great ones, NPR has one too that's oh there's nothing here but here's a bunch of other articles about missing things. And there's an article about like lost luggage, Jimmy Hoffa … you know our retirement, things like that. [inaudible 00:14:28.0] for them like.

Joe: That's fantastic. What would you say from your experience and the clients that you've worked with, what would you say are some of the biggest mistakes that they make when writing copy?

Lianna: One of the biggest mistakes no matter what industry you're in is making the copy all about you. One of the easiest ways to fix that is to go through it and say how many times do we say we or I versus you the reader because they should always know what's in it for them while they're reading.

Joe: Ok so back on the focus of the customer, what kind of things have you seen happen when people … if they want to take one, two, or three steps and try to improve their own copy? Is that step number one? What are the things should they do to try to make a big change and what areas should they focus on first? Is it the tagline on their website? Is it the email? Is it something in the cart? What do you focus on first?

Lianna: I'd like to focus on whatever is closest to the actual purchase. So that's going to have the biggest effect on revenue if you can improve your checkout, not just copy but UX. If you're using something that's not an out of the box thing like Shopify you might have some serious UX issues in your checkout that you don't know about. What else-

Joe: You're infusing humor in the copy in the checkout?

Lianna: If I can.

Joe: If you can.

Lianna: I was just talking about this this morning. It's interesting how things connect. I think it's Shopify doesn't really let you change the form instructions or form auto-fill like the placeholder text in the checkout but that can be hugely persuasive. And it's a great place to run tests because you can just change something like email address to your email address or your favorite email address and that can have a huge impact on conversions. And obviously changing copy on the buy button can have a big impact too. But all of those things come standard or you can't tweak them unless you're a custom coder. And I think even then it's hard to get that stuff developed so I don't know that's been like a pet peeve of mine with certain checkouts.

Joe: You want to be able to touch everything and change it and make it better.

Lianna: Yeah because there are … I've been through some check outs that are just delightful and it makes you want to keep going even if it's a multiple screen checkout. There's a … do you know Cards Against Humanity? I've mentioned that at the talk. They have actually a fortune cookie company.

Joe: Oh they do?

Lianna: It's called OK Cookie and the fortunes are horrific. I have one over there that says you will die at an Arby's in Columbus, Ohio. That's the kind of fortune you get from them. But their check out process is just written the same way that all their other copy is which is very informal. Like pop, your email address in here hit this button to whatever and it can be as simple as a verb change to make people think oh a real person touched this. This isn't just a robot that's going to take my money and maybe not send me these cookies that will make me sad.

Joe: Again going back to how the end customer feels in the process. Love it. You talked about grammar and that it's not always best practices to have proper grammar. I think … you know I was in the remedial English class in high school. I didn't have Mrs. Henderson I had Mrs. Lane and she was a step down so my grammar is always kind of poor. We were at a friend's house, I've got 14 and 16 year old boys and the neighbor was copied on an email because … it has something to do with the kids, the kids who are here and she asked my son if he'd already sent that. And he said yes, she goes oh there was a grammatical error and blah blah blah. And it's still read very well, it felt good and it was like from a teenage boy. And you can tell it was from a teenage boy. And the intent was good and I never would have corrected it. And she tried to after the fact you intentionally will misspell things and misspeak or misspoke whatever the case might be from what I can hear and what I've seen is that correct?

Lianna: Yeah.

Joe: Can you talk about that?

Lianna: Yes and if it's a weird thing to say because I spent so long as first a copy editor and then a content editor. So I've been like in the nitty gritty line level proofing and the overall structural editing for so long and I was such a stickler for such a long time. And then eventually I had to let go because my heart rate was getting nuts. It just wasn't … that was great for me physically. But I think it's important to do it intentionally so that it doesn't come across as an oversight. So for instance, if you're going to put in a misspelling like I just said gonna, I didn't say going to. Technically you know that's an allusion it's mashing two words together, cutting off the end of a word, that's intentional. It comes across as intentional. Misspelling a word in a subject line can be intentional done the right way. The example that I gave was spelling M-O-R-E more as M-O-A-R because that's kind of internet speak. That's obviously intentional. Even when subject lines do go out with actual unintentional typos they tend to get higher open rates. I just saw one from Wistia they're having an online conference called CouchCon. And there's a subject line with "its" and there should have been an apostrophe in "its" and I marked that unread in my inbox for days because I was like I want to know if they did that on purpose. I don't think they did.

Joe: I don't think-

Lianna: They got a bunch of replies.

Joe: I don't think I would have known if it was proper or not but did I just hear you say that subject lines that have misspellings or grammatical errors actually have a higher open rate?

Lianna: Sometimes I mean every … like if you're talking to any conversion copywriter they're going to be like it depends no matter what you ask them. So I have to just give that disclaimer right now; it depends. But I personally have seen it. Lower case subject lines often get a higher open rate because that's the kind of email we receive from our friends and family. We don't bother capitalizing subject lines, especially not title casing each word which I think that's officially dead now in the email marketing world. I haven't seen a ton of emails in my actual inbox so definitely in my spam folder.

Joe: You've never inquired on a Quiet Light listing because I know that with my follow up drip campaigns I will capitalize the first letter of each word in the subject line. I need to stop that is what you're saying?

Lianna: [inaudible 00:20:21.1] test for you just … yeah start running an alternative version of each of those emails with A. more [inaudible 00:20:26.2] well, if you were to do a true test you would just uncapitalize the rest of the sentence but you can try more conversational subject line. Then I could do a whole thing on subject lines so I like them a lot but yeah making-

Joe: So it's the first point of contact-

Lianna: Yeah.

Joe: And it never occurred to me to chill out a little bit and be more casual even though you know we were … and hopefully anybody listening will take this and apply it to their own business but we are online business brokers. We're selling businesses for a million dollars or whatever the case might be and sometimes we think we've got to be buttoned up and serious. We're working with entrepreneurs. We all work remotely, around the country, around the world in Brian's case and we try to be professional and serious but we can be professional and casual and funny at the same time.

Lianna: Yeah.

Joe: [inaudible 00:21:09.9] on our subject lines.

Lianna: There's a scale I think you don't have to go-

Joe: Are you telling me to loosen up?

Lianna: A little bit. I mean you … do you have that top button undone? Is that a-

Joe: I do. Yeah.

Lianna: See we're great, yeah, no tie.

Joe: It's hot.

Lianna: I don't think [inaudible 00:21:22.6] video so I just look like garbage so you know.

Joe: I'm in North Carolina, Lianna is in New Orleans did I say that right?

Lianna: No. I'm going to … no.

Joe: Say it, give it to me. Go ahead.

Lianna: New Orleans born and raised.

Joe: You actually have to enunciate it?

Lianna: Not New Orleans. New Orleans.

Joe: New Orleans not New Orleans.

Lianna: [inaudible 00:21:42.3] people say New Orleans.

Joe: All right it's New Orleans.

Lianna: Never New Orleans unfortunately.

Joe: Okay all right. Well, we're both hot and you know figuratively anyway. And that's why I have my top button undone. What other things can people focus on besides of the subject line, some of the stuff in the first point of contact with customers, what other little weird places do you think that they could focus on and try to be a little bit funny or a little more personal that the average person wouldn't look at that you've seen?

Lianna: One of my favorite places to look at is copy surrounding a call to action. So any time you're going to ask somebody to do something you should probably be addressing their objections and previewing what's going to come next. And it's really nice to see a human and funny touch around the ask. So I can't member if I mentioned this when you saw me speak but I wrote a call to action to start a free trial for a software product. And normally underneath you would see small text that says no sign up required or credit card required or whatever your information is safe with us that kind of standard objection reducing stuff. We wrote … oh I wrote a copy there that said we do ask for your credit card but it's just because we love online shopping. It's just a little reward for someone reading to feel like okay all right we're good. And obviously, that person has to have a sense of humor because if they take it seriously then they're not going to sign up but who is your target customer is that a person without a sense of humor? No.

Joe: Again personalize it, make it feel better. I'm looking at your site now and I must have moved my mouse off the screen and something popped up and it says I'd love to email you and there's three O's in the word love.

Lianna: Yes.

Joe: Now what is down below there, it says subscribe now and then nah, fam.

Lianna: Nah, fam?

Joe: What does that mean?

Lianna: It's a no thanks, it's another way to say no thanks. So you can just … it's good to know that it's not coming across entirely clear to everyone.

Joe: Well.

Lianna: It's like you can sign up or no, fam.

Joe: But I can tell like a human wrote this which is again exactly what is supposed to happen. And for those again listening and not watching so this … all of you have this exit intent … exit pop ups on websites. This one is personal and funny and I'm actually reading it. Normally I just X out, but now I'm reading it because you spelled the word love wrong, no fam; I don't know what that is. And I believe it's you in the image. Are you drinking coffee out of a box? Is that what's happening there?

Lianna: Drinking box wine.

Joe: Yeah. So there's a picture of Lianna sitting at her desk, her laptop is open and she's got a box wine up above her head and she's boozing it up. It's very very entertaining and it made me stop and look at it where I go to all of your websites whenever I'm doing work with you and if there's a pop up I generally just quick X as quickly as I can. So very cool just one other-

Lianna: Yeah that's a great place the exit intent pop up is so hard to get people's attention and people often think like you know I have only two sentences or I have to cut my offer just $20 off and it has to be no longer than that. But I worked with a client we … this is for my other business SNAP Copy so it's me and my business partner James Turner, we optimized his opt in offer to get people on his list for free planning. He runs a productivity website and the headline that we ended up going with was hey don't leave without your goodie bag. And it was boosted opt-ins by 129% and there was some additional copy and it was a pretty long paragraph of what they were going to get when they signed up. But people read it and signed up a lot more than they did when it said get free planners.

Joe: Hey don't leave without your goodie bag and it was an online thing just to get people to sign up and was there like I [inaudible 00:25:19.8] a goodie bag as a swag bag when you go to an event like Blue Ribbon Mastermind. What kind of goodie bag was it? Was it just something you could get electronically?

Lianna: Yeah it was a digital goodie bag. It was like free weekly agenda or a free monthly planner. He has a lot of free resources like that.

Joe: But he didn't say free gift it said hey don't leave without your goodie bag?

Lianna: Yeah.

Joe: Simple. You think it's simple but it's-

Lianna: Yeah.

Joe: People get too buttoned up I think.

Lianna: Finding new ways to say also the things that people are already accustomed to because we've seen free gifts so much, we've seen claim my deal a lot. I feel like that's kind of … it's still working because it's very clear but if you can find another way to say something that doesn't obscure the meaning of the copy then it'll get people's attention. And they're like oh I haven't seen that before.

Joe: Okay. So pretty simple stuff but not something I think everybody can do. You have a special skill. You're funny, you actually do stand-up comedy as well right?

Lianna: I do.

Joe: You do. Are you funny? Of course, you are right?

Lianna: People … you know I feel like I want to write a bit about that but it might be to hack because there have been better comedians writing bits about that. But someone did that to me the other day she was like so I don't get it you do stand-up but like you're not funny right now. And I was like maybe I'm not inspired.

Joe: Ah.

Lianna: You're not a good audience, I don't know.

Joe: I'm glad I didn't say that. I think what you do is fantastic. You know back to my radio direct response days I would write 60 second ad copy and we would be able to get direct responses; how many people called in when we gave out that phone number after 60 seconds. And so we knew exactly how well the copy worked. You're a conversion copywriter so you found a way to do the same thing and boost conversion when somebody visits a website or open emails and things of that nature. Do you find your clients doing split testing with your copy against with the original copy or things of that nature or did they just say this is really good it's funny let's go ahead and just put that in place and then they see how it works for a week or do they do an actual split test?

Lianna: If … so this is like this is where the cobbler has no shoes because I should be making sure that they do that but sometimes my clients are in that stage between small and medium business where they don't really have the team to split test appropriately or like they don't want to learn how to use Google Optimize, Optimizely, or any other split testing tool. So usually it's we see how the control over the original copy was doing then we implement the new copy and it sort of functions as the test and we see what the lift is; the uplift or downlift usually. Usually up.

Joe: Usually up, okay. Well, I had an experience many many years ago where we had … when we take the phone calls and someone didn't want to buy the product we would get their name and address and would send them out this simple little trifle brochure. Really simple, black and white or I think there was blue and white and you could tell that it was somebody stuffed the envelope and we hand wrote it and it went out. It was from that person that you talked to on the phone. We had a consultant come in and say oh that's not very professional, we need to step it up, we need to get a multi unfold brochure, colors and charts and graphs and all this stuff and of course we have to print out the addresses and make a professional. And conversion dropped by at least 50% and it was a real eye opener because it was in that personal touch and feel.

Lianna: Yeah.

Joe: And so I think everything that you said up on the stage at Blue Ribbon Mastermind made me want to have you here because I've seen it firsthand and I know how much a word here and there and a feeling here and there converts. And it's really tough online, it's getting easier and you know hopefully some of your work is being tracked with before or split tested and so your clients know. But I think that all I know is when I go to a site like yours I want to stay on it and I want to look.

Lianna: Good.

Joe: As opposed to a pop up like I know you got a rubber chicken being cut in half and blood spurting, it's cute and funny so I love it. I think what you do is fantastic. How exactly would people reach out to you? Is it simply punchlinecopy.com?

Lianna: Yeah.

Joe: Can they get a sort of assessment? How do you work with your clients?

Lianna: Yeah so I have different product test services on my site. Sometimes people just need … they want to use me as like an ad hoc email copywriter for instance. They'll come in and like buy one or two emails and they'll say rewrite my abandoned cart email because again it's close to purchase. Or rewrite my welcome email so I get fewer unsubscribes when I add someone to my list. So I have one off emails, I have something called upper cuts which is where I do an audit of your landing page from my heuristic perspective. So I'll take any customer research data that the clients have for these kinds of audits; the more the better. But I'll just look at it and say like this UX is garbage like this photo doesn't open, I can't zoom around the product, the call to action isn't visible enough from far away. And then I'll rewrite the copy line by line. And then I also do custom projects and I've got an intake form there. Yeah, there's a lot of ways to work with me.

Joe: Can you be funny in a sponsored ad or a Google ad? Do you work with anybody in those regards?

Lianna: I don't do a lot of top of funnel acquisitions.

Joe: It's a little tricky.

Lianna: I've tried … I mean I've done it. I haven't run ads for my own business in forever. I probably should but I'm the first result for funny copywriter so who needs to? Am I right?

Joe: So one other simple clean example is again … and people could just go to your website and go oh that's cool, that's cool, that's cool, and get some ideas. Again punchlinecopy.com but you know folks you probably have a chat now talk to us little thing down in the lower right hand corner of your website so somebody can chat with you. Lianna's has a picture of her.

Lianna: It's a bit [inaudible 00:30:59.5].

Joe: A caricature of you and it says you there and it has you looking up over the little pop up bubble as opposed to the standard stuff which is great. Again it's personal and makes it me want to click it just to see if you are there.

Lianna: Awesome. I'm not because I'm doing this but I just-

Joe: Everybody go to Punchline Copy and click you there and see what happens.

Lianna: Or send me an email. Most of the stuff on my site that I think people like the most is just stuff that makes me laugh because I thought it was hilarious to have that little thing pop up in the corner.

Joe: I like it. I like it all. Well, I think it would be great if some folks can use your sevices.

Lianna: Yeah.

Joe: And we have people on that I think can help more than anything else whether that's somebody that is in the process of trying to grow their business and make it more valuable or some of that's going to buy one and tweak it and make more valuable than what they bought it for. And I think copy is so essential because if it converts you are a … again conversion copywriter that just gets them more value for the money that they spent on advertising.

Lianna: Yeah.

Joe: So it is fantastic, we will put your details in the bottom of the show notes so people can reach out to you and any last minute thoughts on copy that people should think about [inaudible 00:32:18.1] got here?

Lianna: I mean I always want to challenge people to just try a joke somewhere. Like take your most boring email in any of your series and go in and add a joke or add an aside, you know add a PS that's kind of weird and see what happens.

Joe: Just to see what happens add a PS; I like it.

Lianna: Yeah.

Joe: Well PS folks thank you for listening to the Quiet Light Podcast, I appreciate it. Lianna, thank you so much for your time. You are awesome.

Lianna: Thank you. And so are you.

Joe: Well I appreciate that thank you.

Links:

• PunchlineCopy.com
• Punchline's Facebook Page
• Lianna on LinkedIn

If you sell an apron, a pacifier, or a pool cover, how do you create recurring revenue from that customer, and build a more valuable business? That is the question I asked our guest John Warrilow, and we got some pretty good answers! If you don't know who John Warrilow is, where have you been? John has written several best selling books, consulted with the like of Apple and Google and has built and sold multiple companies around the concept of subscription based revenues.

IF you want to build a more valuable business….listen up!

Episode Highlights:

• How entrepreneurs who have a physical product business can start a subscription base and achieve higher value in their business.
• Think about the things people use on a recurring basis and integrate that into your business to raise the value of the tail of your revenue.
• How Amazon started buying into the subscription business upon acquiring diapers.com.
• Ways John helps folks take a niche product and build out that subscription aspect.
• The key is convincing the end user to agree to a subscription for those consumables they uses and reuse.
• How you can stuff value into the subscription so users are tempted more by the higher value than by just getting 10% off.
• The many factors involved in the churn rate of your subscription business and how to use churn rates to calculate the average lifetime value of a subscriber.
• The ideal is negative net churn. Strive to offset churn with upgrades in revenue.
• The importance of cross selling to existing subscribers.
• Find good subscription expertise before setting up your recurring revenue business.

Links:

• Connect with John on LinkedIn
• Check out John's books on Amazon
• Built to Sell Podcast
• John's website
• Zuora
• Recurly
• The Value Builder System

Ryan Daniel Moran was a preacher-in-training turned entrepreneur. He moved to Austin with little to nothing to his him name, and launched Amazon businesses that he eventually sold for over 8 figures. Ryan did us all a solid – really – by documenting and sharing his journey. The Freedom Fast Lane Podcast helps entrepreneurs at every stage of their business, from startup to exit.

In this interview, Ryan shares his top three "mistakes", or as discussed, things he wishes he did differently as he looks back. He openly shares his story and journey, in the hopes that other entrepreneurs do things to maximize the value of their business (and life).

Through Ryan's conference, Capitalism.com, he helps bring like minded entrepreneurs and experts in the ecommerce space together to build brands and businesses that last.

While he may be a preacher-school-dropout, Ryan still has a way of delivering the goods when it comes to advocating doing the right thing…so good things follow.

Episode Highlights:

• [1:25] Who is Ryan Daniel Moran?
• [4:38] Is it better to buy or build?
• [6:43] Ryan thinks we're in a "seller's market"
• [8:05] What are Ryan's "mistakes" and what would he do differently.
• [11:30] Does it matter if you like your buyer? Does likability matter?
• [13:52] The likable buyer story…who won out over an all cash buyer.
• [15:12] Mistake # 1 – playing the short term.
• [17:25] Mistake #2 – telling people what to do and diminishing their talent.
• [18:51] Ryan shares his staffing team numbers. Inhouse and remote.
• [20:06] Mistake #3 – Ryan wishes he spent more money on advertising, customer acquisition, and brand building.
• [22:51] Why is a 100% Amazon business worth less than a Shopify store?
• [24:00] What channels would Ryan expand to – beyond Amazon.com
• [25:30] The first "nut you have to crack"
• [27:02] Ryan disagrees with Joe!
• [30:40] Brands last, product businesses don't.
• [31:06] Should you be thinking about a possible exit at all times?
• [33:05] What gives Ryan the "goosies". Ok…he didn't say goosies, that was JLo.
• [33:58] Know what you will do with your money before you sell!
• [36:10] Should you plan your next brand before you sell, or stay focused?
• [39:29] How do you get more Ryan Daniel Moran

Mark: So if I could go back in time I would do a number of things different than I did in my entrepreneurial past especially before I sold my first company. And I have told you the story before that when I sold my first company I sold it for $165,000 only to find out that a year later the same person who bought the company got an offer for 350,000 without changing anything about the business at all. So … and there's a lot of regrets I have by not going back in time obviously I think anybody would like to have that ability.

Joe: I'm glad it's that instead of saying you're bringing me on as a business partner.

Mark: Well, you're here so I can't … I might not say that to your face. Only when you're on vacation and I have somebody else filling in as guest host.

Joe: Well, Jason doesn't listen to the podcast, let's talk about him.

Mark: Right. Exactly.

Joe: Conversation … no regrets there. Yes and Daniel Ryan Moran was our guest and he talked about some of the regrets or as we called the mistakes because that's how he learns in life as many of us do by making mistakes and in trying not to make them over again. Fascinating … fascinating yes they're our podcast today Mark. I don't know if you recall … if you were there for his presentation at Smart Record over the last summer in Austin but he got up on stage and he spoke for 60 minutes with no script, no PowerPoint presentation and everybody was captivated. And the information that he has in it … volume of entrepreneurs that he works with and the velocities, and the approach, and everything about the way he does business and the way he literally … I mean not literally, preaches business. Okay, he's a … he was going to be a preacher so I want to say preacher school dropout. He chose to be an entrepreneur instead but the way that he talks about things is spot on with the way that we see the most successful entrepreneurs run their businesses. They focus on a number of different things and they implement those and maybe someday if they choose to exit they're in a great position to do so. Ryan talks about all of that including his own two exits that combined totaled over eight figures.

Mark: Daniel Ryan Moran, same Moran that comes from Freedom Fast Lane right?

Joe: Freedom Fast Lane Podcast where he talks about his story. You know five years ago he had a car and he drove to Austin, Texas and he decided he was going to launch an Amazon business and record his journey. And his journey is not over yet. It's on a new adventure, a different larger adventure but his journey kind of came to a new chapter after selling the last Amazon business that he had. But he talks about it all the way through on the Freedom Fast Lane Podcast. He got tired of seeing people do things the wrong way and learned ways to cheat at conferences and started to do his own conferences through capitalism.com and bringing good like-minded people together that build strong foundation long term value businesses and he talked about all of that today.

Mark: Fantastic I can't wait to hear it. Let's go to it.

Joe: Hey, folks, it's Joe Valley from Quiet Light Brokerage and today I've got somebody that a lot of you might know already. His name is Ryan Daniel Moran. Ryan, welcome to the show.

Ryan: Joe thanks about having me in, let's make some magic.

Joe: Listen I was having a barbecue last night we had some friends over and this is an absolute true story and one of them is an entrepreneur wannabe. She's in the corporate world and she bought some Amazon products and she tried something and it didn't work but she's going to go at it again someday and she's grilling me … she always asked me how things are with Quiet Light Brokerage and she starts asking about the podcast. I said yeah we're doing all right and hey have you ever talked to Ryan Daniel Moran just like that and here you are today we're talking to you. You're kind of a little celebrity I should say … little, you're kind of a celebrity; a rock star maybe for this … look it was a 50 year old woman. She's rather attractive and she knows who you are.

Ryan: Well you know it's like my ideal market is attractive 50 year old women. We all know that that's the market I'm after right now. So tell her to give me a … maybe call me maybe.

Joe: She loves listening and the fact that you're first and foremost helping people that's what she loves about it. She says someday she's going to get back to it but she loves listening and she's going to take that leap at some point in the future so good for you. And listen as I said prior to the intro we don't do fancy intros. So if you would … I know it's hard to talk about yourself but give folks a little bit of background about yourself; who you are, where you came from, and what you're all about.

Ryan: Yeah. I invest in and I start physical products brands. And the way that I got to that point was actually as a pastoral student back in 2006. I built my first website and started my first business in between high school and college on my shared dial-up computer in my living room and hand coded websites using raw HTML in a software program called Dreamweaver. If you are old enough to remember Dreamweaver and you know it well. So what's funny is we hear a lot of people who are talking about building and … or selling businesses thinking about the good old or either like all the opportunity is gone now or the good old days have these … man, I was hand coding websites in Dreamweaver on a dial up computer. Do you realize how much more opportunity we have now being able to build websites on platforms and sell products on Amazon? So the opportunities are way way bigger now but I was just trying to find a way to supplement my … what I expected to be $30,000 a year salary as a pastor. Now fast forward a few years I did not finish the pastoral route for reasons that would be probably best left on a second podcast that you have Joe that's going to be called quiet skepticism.

Joe: Yeah, some kind of … something where we're helping people, we're guiding them off that path right.

Ryan: Exactly; quiet go to the light we'll call it. And I did not finish that route and I became a full time entrepreneur. So I was in really involved in the internet marketing space for many years until I really decided or realized I hated that crowd. I didn't like hanging out with those people. So I was like what a conference where those people hung out and I took the skill set that I had from Search Engine Optimization from Pay-Per-Click Marketing from Email Copyrighting and I applied it to physical products brands. And I've had a couple of different exits in the physical products world and now I'm an investor in physical products businesses because it's what I know. It's who I can help the most. And I think it's one of the biggest upside is in the market right now whether you are selling or building a business or buying a business, I think there's a tremendous amount of white space with the transition from big brands into more what I call micro brands mostly Internet based that's where I see the biggest opportunities right now. So that's a … I've had a couple of exits and the total over billed were eight figures in cash exchange. I still own a minority stake in a few of those businesses and have a portfolio business but my primary focus is investing in physical products brands and I have a media company for entrepreneurs at capitalism.com.

Joe: Okay, so when it comes to investing people look at buy versus build. In fact, we had a podcast recently with our newest broker Walker Diebel who wrote about a book called Buy Versus Build and there's a really long subtitle and it was a … it quickly rocketed to the top 10 podcasts that we have. And you're talking about investing, do you think it's better to buy versus build at this point in your career or would you recommend somebody that's just starting out to scrape some dollars together and bootstrap something and start?

Ryan: Yeah, it's better for me to invest but it wasn't better for me five years ago. In 2013 when I took my first sale on Amazon.com for a physical product I know business investing in physical product brands. I know businesses buying physical products brands now … back then I was buying a lot of websites. And you know what I was buying Joe? I was buying search engine friendly websites with email lists … social media followings weren't this big back then, but with audiences, followings targeting each market that sold affiliate products; because that was what I knew.

Joe: That's what you knew.

Ryan: I would have been a lot of people who are like looking for the system and that you are the system. You are the machine. And your machine is unique to you. So applying your machine to different opportunities is where value is created. So for me, I'm … at this point, I have more upside as an investor because I already have all the retail connections. I have the connections to sell businesses. I'm connected to other investors. That's my own skill set but the entrepreneur who I invest in is way better suited to start that company than I am and that's what capitalism is. Where I get the value that I bring in combination of the value that you bring and when we bring them together it's greater than the sum of our arts. And so for me yeah I'm … I have more value as an investor but to say like it's better I think would be a mistake.

Joe: You know I think you're absolutely right. It depends upon the individual's situation without a doubt. I bought and I've sold and I've invested as well and I can say each were successful in their own way and each were very very difficult in their own ways as well. You'll learn along the way from the mistakes mostly.

Ryan: If I could Joe I will add though, I mean globally I think we're in a seller's market. I think we're looking at buying versus selling if I give it a binary choice I do think we're in a seller's market right now.

Joe: I have to agree with you 100%. When we have a good quality listing come … I had a conversation with someone this morning who wants to buy. And he's a referral from somebody who already bought and this guy is doing great so I want to do what he's doing. And the response is look when a great listing comes along you need to be prepared. So the more listings you look at the more you're going to know the right shit when it comes along. And you need to be able to act fast because you and a dozen other people are doing the same thing and they're going to make an offer on that business. So I agree it's a seller's market but at the same time, the multiple still don't get pushed too high. It's still the buyer to decide that. You and I as sellers, as brokers can pick whatever number we think the value of the business is but we don't make the final decision at the end it's usually the buyer. The seller's got a lot to say about it because they can say yes or no. But it's still the buyer makes the decision in terms of the value for the most part. But you just recently said you've exited a couple of different times in the last few years. What did you learn in that process if you look at the exit? Or maybe do you want to talk about the fact … the mistakes you made maybe building and what you can do to help the entrepreneurs that are listening or perhaps the exit and maybe a little bit of both.

Ryan: Yeah well, there's one thing in particular that I think was on the stake if you will and it was thinking that the buyer had all of the control. By the way, this is C money right here or by a … my … he is the one who wants to make great on the Internet.

Joe: For those listening and not watching somebody just walked into the background.

Ryan: Yeah, so the mistake that I made was thinking that the buyer had all of the control. And if I could redo this Joe, the truth is if you built something, if you built a business you're the one with the asset. You're the one with the goods that money is chasing you, people want to buy you and so often the seller comes into market and is like the thing that I'm after is the check and I'm hoping that I get the check and that immediately puts you in the frame in which you're the after. You're the one who is not in the power position. So we share them with an offer and the seller is like thank you please oh please Mr. Money Pants I would like your money. And now they're in a position to beat you up over earnings, over … in the negotiations. So what I wish I had done was recognize the fact that I'm the one with the goods. I'm the one with the asset that people want. I'm the one courting the offers. People are making offers to me. There they want one I got not the other way around. So if you're in that position and you're willing to say no and you combine that with the turn ship that says here's what I'm looking for, that to me puts the seller in the frame of mind repair and the negotiating position. I didn't do that. I discovered that after the fact and I really could only have learned that by going through the process. I learned … I personally learned by making mistakes and paying for them later.

Joe: We all do.

Ryan: Yeah but that's a mistake that I wish somebody had told me before I went to market.

Joe: Or is it … the buyer that you're referring to is it a strategic buyer or did you have your business officially listed and people came to you?

Ryan: Yeah, we had it listed and we were acquired by an equity group. I still own a minority stake in that company and I'm in great terms with the equity group. I'm really happy with the buyer. I have become friends and obviously business partners at this point. But had I gone to the market with terms that I wanted I probably would have ended up in a more favorable financial position when it came to closing.

Joe: Well, the next time you have a transaction you'll know that and you'll be able to make adjustments.

Ryan: Right.

Joe: Really I think like you said the check isn't the end all, it's more about … I think almost in many ways what your next adventure is going to be. I know that a lot of folks that I work with and myself included when I exited I was just … I sold too late. I was emotionally tired and I think that's the absolute wrong time to sell. You should sell … you should plan to sell, just don't wake up and decide to sell. But when you're emotionally tired you're not doing everything that you can to maximize the profits of the business and that's going to drive down the value. And you're going to get beat up at the end if you're so committed to that check that you can't negotiate a little bit more for something else and be willing to walk away from that buyer if they're if they're not a good buyer. And correct me if I'm wrong but just tell me how you think here, I always find that it makes an enormous difference if you like the person that's buying your business or the one … if you're buying a business from. It's not just about the check. It's not just about the money. It's the people you're doing business with. And I think that as a seller you can get more value if you're respected and professional and likable and the same as a buyer, if you're a buyer and you're professional and likable and complement the owner on the business that they built that you're going to get a better transaction out of it versus all the hard core raw street negotiations. What are your thoughts on that?

Ryan: I don't know if you are right or wrong because I intentionally don't do business with people that I don't like. [crosstalk 00:15:45.7]

Joe: So, therefore, anybody that wants to buy a business from you if you don't like them then you've got to do that to work with somebody you like. A classic-

Ryan: I don't think everybody has that mentality though. I think I would even go as far as to say the majority of people are buying and selling based on numbers or like the deal and very few entrepreneurs get to find every purchase as a person. And so I think most people are approaching it by numbers and logically rather than is there a connection here. I personally … just like for the protection of my own lifestyle am willing to say no to anything that I personally don't like. And what that does is it always puts me in a strong negotiating position because if I don't like somebody I have no problem walking away. And the person who has … the person who is most willing to walk usually has the upper hand in the negotiation.

Joe: I agree 100%. I find that from a buyer's perspective one of the questions I get a lot from buyers if I'm up on a panel or speaking or something like this is how do I negotiate up against an all cash buyer, somebody that's got more money than me? And the tried and true answer is really is be likeable. It's … you don't necessarily have to have more cash to get the deal done and I … the classic example is I sold a business last fall. It was about two and a $2.5M and the guy had two full price offers within the first 10 days. One was from an all cash buyer who was a little rough around the edges and was hard to work with. The other was from a really likable guy who was buying with an SBA loan and actually required 10% seller financing in that. The entrepreneur, the seller of this business had the choice; you could go for the all cash or you can go for the guy that he liked. He actually chose the full price SBA buyer and chose to carry a 10% seller note versus working with somebody that he didn't like. So in that situation, I think it makes a difference in terms of … buyers that are listening be likable. If you're working with a broker you absolutely have to be likeable because they're … as you said it's more of a seller's market. And there's a lot of buyers out there. There are buyers that are competing for that same business and when they're likeable they're going to build rapport and when you build rapport you sometimes learn about things before they hit the market as well. Ryan, talk to me about some of the mistakes you've made in your own business. Maybe two or three of the biggest mistakes that comes up at the top of your head. Looking back and learning damn I screwed that up if I ever do that again I'm going to it a different way.

Ryan: Well, every time I've made a mistake it was because I was playing the short term. So when I have made short term decisions I usually make bad decisions. I like to say that the longer term that I can make decisions the wiser I am and the better decisions that I make. I said before that people forget that behind every purchase is a person … that goes for customers too and all relationships are long term relationships. Or the best relationships are long term relationships. So if you are aware that behind every transaction is a person and you play it like it's a long term relationship you end up building the better company. Sometimes in spite of a short term decision, meaning … for example as we're recording this there's a … in the Amazon there's a thing we're calling review gate where Amazon is coming in and hit them onto your businesses and removing their reviews. And it's been a bloodbath. It's been absolute bloodbath. And the people who are soaring through it are people who have been doing of the right things the right way for the longest. And the people who are being hurt the most are the people who are the most profitable over the last couple years because they played the tactic game. And like there's absolutely room for tactics inside of every business but those who have been building really solid brands and building audiences and building followings they're going to soar right through this and capture a whole heck of a lot of market share. So the mistakes that I made were always in saying what's the Band-Aid solution here rather than building for the long term. So we take a rule now in the business that we're building, we say okay here's the situation that we're in rather than talk about how we're going to fix it let's say what do we wish we had started doing 90 days ago and that would have made today a lot easier to get through? That's the decision that we need to make today which is a really hard conversation to have when you're in reaction mode. But we force ourselves to ask that question because it usually addresses whatever the root cause is that we need to fix rather than going for a Band-Aid solution. So that being mistake number one, mistake number two would be as a leader telling people what to do. There's a great book called Multipliers that really morphed my brain in terms of how I can affect [inaudible 00:20:52.9] people. And what I realize after reading that book was that I have been diminishing the talents on my teams by telling people what I wanted them to do rather than casting a vision and inviting people to build their piece of that. Now that seems kind of a nuance and maybe overly simplistic but I couldn't emphasize enough the accountability that this book brought me on how much I was diminishing the people that I was working with, And the difference in energy and growth that happened once I started correcting those issues. So as an entrepreneur, we often have like our baby that we're bringing in to our team and we're telling people how to build the baby when reality if we're working with smart people they'll probably own that area of expertise better than we can even if we can't see it. And the big distinction of that book highlights is someone who diminishes their team is usually the smartest person in the room but a real leader makes the rest of the team like they're the smartest person in the room. And that was a huge shift in my overall happiness and with the growth of my companies and it's something that I wished that I had done before I was building companies to sell them.

Joe: What kind of staffing do you have just out of curiosity?

Ryan: Well, the company that I just exited was a team of four. The portfolio of companies … of brands that I have is a team of five. And my media company capitalism.com is a team of six.

Joe: And are all of those people in-house or do you do some … or the VA's are they working remotely or they come to the office every day?

Ryan: I'm only counting in-house people so that does not count freelancers. But no not everybody … we have … there's, we are a distributed team. So like I'm recording this in my office right now, one of my team members is just right here my side. But people will come in and out. Some people … like we have a team member in Canada, we have a team member in Germany, but they're all full time dedicated to [inaudible 00:22:47.0].

Joe: Good. I asked that because you know most people that are listening would probably be considered lifestyle entrepreneurs and they have to outsource staff and VA's and people working remotely. So it's good to know that even though they're not coming into your office every day this is really important [inaudible 00:23:02.3] get their short term vision don't have that long term vision so that you don't have major major stomach aches with algorithm updates we'll review gates in that situation and then over managing of the staff you know let them be their experts; anything else that comes to mind?

Ryan: As far as big mistakes that I've made … I mean we talked about the mistake in selling and as far as building the business I'll say I wished that I had spent more money on cold advertising. Like always like there's never been a business that was like ah you know I think I spent too much on advertising. I've only ever said I wish I'd spent more on advertising.

Joe: Yeah, where would you have spent it because these are primarily Amazon based businesses correct?

Ryan: The businesses that I personally built, yes.

Joe: Right. So where would you spend that money?

Ryan: So we just identified the problem because you said they were mostly Amazon based businesses so had I done things even better I would have doubled down on non-Amazon advertising. Because what … if you're an Amazon business which is like nails on a chalkboard to me because it means you're dependent on somebody else.

Joe: Right.

Ryan: It means that you're dependent on this channel and you've got to go double down on building a business has a different leg to the stool and that when you combine those things together magic can happen. If you've got an email list of 100,000 people that you've built from cold advertising or from buying tripwires and now you're combining that with the power of something like Amazon.com that's really really powerful. Most physical products sellers never make that [inaudible 00:24:32.6] or they get so myopic into one channel that they never spend the money and the time to go develop the advertising for another channel. I wish I had been comfortable losing my rear end on other advertising channels until I figured out those systems. It's interesting Joe, it's true that every channel you will lose for a while and then you figure out the systems and then you start to grow through it and you get profitable. The strange thing is that most people once they've figured it out and get profitable they're unwilling to go do that hard work in another area. So the way that Amazon worked in 2013, '14, and '15 was if you spend until you grab long enough you could outrank everybody else and go win but I never … I lost that hustle when it came down to Facebook Ads or influencers and people start looking for the immediate ROI. In what business is there immediate ROI? When you're building a long term brand that has sales potential … like buyers are buying the systems; they're buying profitable systems because you've already gone through that hard work of developing the systems that are profitable. But it requires you to go build them so I wish I had spent more on advertising, been more willing to lay it on the line, rolled more back into reinvestment. So I'll call that mistake number three.

Joe: So for buyers and sellers that are listening, entrepreneurs that are listening it's that one legged stool, two legged stool, three legged stool. If you're 100% Amazon business it's riskier than if you also have a revenue channel from Google Ad Words and driving traffic to your Shopify store and you might be doing wholesale or B2B things of that nature but right away as I've said before if you've got a business that's just at within $100,000 in discretionary earnings that's 100% Amazon same business $100,000 in discretionary earnings but you've got 60% Amazon, 25% Shopify, I guess that would be 15% percent [inaudible 00:26:36.4] my math here, another percent of B2B that business on the other side is going to be worth 15 to 20% more. So you might be breaking even or losing a little bit of money on that land grab trying to grab more customers but if you can turn that into even the same discretionary earnings that business automatically is going to be worth 15 to 20% more because the buyers will pay more for a risk averse business that'll be around for the longer term so very very good advice. What channel would you go to first? Because there are so many options these days and building a channel off of Amazon is hard as you know. You've got to learn a whole new expertise. Where would you go first and what do most of your successful folks do?

Ryan: Yeah and I'm actually going to cue on very creatively sidestepped this question because the obvious is Amazon. But where I would suggest is actually people double down on where the audience is. To me, this is the nut has to be cracked if their building a sellable company. And what that means to me it is for some people their audience hangs out following influencers. For other people that is they follow blogs or they have a blog where the audiences are already hanging out. Or some people they've got a Facebook where there's an audience. Now what most businesses, especially like a million dollar businesses, are doing is they're going channel first and trying to extract as much of it as possible. Like I'm going to go to Amazon try to rank and pull as much out of this pie as possible. Only a few people can win that game but if you switch it and you say where are my people who is the ideal buyer and where are they then the channel where you collect the order can always change. And that makes Shopify, Amazon, B2B a whole lot easier. The first nut that you have to crack isn't where the buyers hang out apart from the sales transaction and then you bring those buyers to the transaction. So the transaction to me … Amazon, easy no question. Put your product on Amazon the credit card is already there, people are already looking for it. No question, easy, done. The nut that needs to be cracked is what happens one step before that. And if there is … like if you don't have the influence, the list, the following, the traffic, the pay-per-click strategy that some way to go get those people and bring them into your ecosystem I think you are struggling from the get go and that's the primary question that I ask the entrepreneur.

Joe: Yeah and I think depending upon as you say the product and what they're offering some of those different channels will make more sense. You know I had a conversation with someone this morning that has several brands and one brand has incredible numbers with email marketing and that same expertise applied to that different brand doesn't do as well.

Ryan: Right.

Joe: They're driving people to their Shopify store though Amazon keeps growing and out phasing everything else. So I understand identify where your customers hang out and then you've got to go find those customers. To own that list though you need to send them to your own store, not to Amazon. So are you sort of balancing between sending them to Amazon because it's all there or?

Ryan: No, I just disagree. So I think that the loyalty to the brand is the customer experience. And you give the customer the ability to give you money wherever they are most comfortable making the purchase. I heard Brian Lee say where it's … Brian Lee is the founder of the Honest Company, the billion dollar brand with Jessica Alba, and I heard him say once that he considers it a win when the product is in the customer's home. That's when you've wo, not collecting it online e-commerce site, not getting into retail. It's when the product is in the customer's home. However, they get it and you want to release as little friction as possible getting the product into the customer's home. You will own the customer experience when you have their data. You have the ability to communicate a message in front of them. So if you've got the email list and you send them over to Amazon, Amazon rewards that and your conversion rate is probably going to be higher sending them to Amazon that sending them to your Shopify store. So there's a balance [inaudible 00:31:12.7] I know that I can get a higher immediate customer value sending them to my own web site because I can put them through upsells and cross sells to get their immediate data versus sending them to Amazon where I am going to have to work to get their data. I don't have any upsell experience. They might see a negative review. And so the entrepreneur is going to have to play the game of where the numbers make the most sense over the long term. But I think that the actual customer experience happens in when you communicate with them. And that's in the email message, that's in the outside of just a transaction, not just where their credit card is being added but words being communicated.

Joe: Okay, I get and I'm just going to repeat it for those that are … well not smarter than me; let's put it that way. So it's capturing the customer information up front, building that relationship with them, and then simply send them to the place that they can buy the product and experience the brand with the least amount of friction and get it in their home.

Ryan: Nailed it.

Joe: Okay.

Ryan: That's my opinion.

Joe: And it all goes back I would say and it's kind of almost unspoken that the brand has to be pretty amazing so focus on that first. Build a great product, a great brand so they have a great experience and then do all that other stuff as well.

Ryan: Yeah and let me address that because that often brings up the question how do I identify a brand? Like what exactly is the brand. And the brand is the way that trust is communicated to a very specific customer. Most Amazon sellers have no idea over their customers they know what their product is. If you know what you sell and not who you sell to you do not have a brand. Or you might have a brand but it's really lousy whereas if you know who the person is, it makes the product really really easy. I was just meeting with one of my team members today; we were expressing the frustration over one of our brands in our portfolio. Because when we acquired it, it sold a lot of product but it had no target market. And so we've had to do a lot of work to convert that brand into an actual brand where people are not just buying a product but they're buying something and it says about them sells. Those businesses last, product businesses don't because they're commodities. You forget about commodities and the minute that there's a better price or better customer experience their loyalty changes. But when you've got the brand people are very stingy with their trust. I want to give it to you, you have them for as long as you keep their trust.

Joe: Very important message right there. Ryan, any thoughts in terms of whether someone should be building this business and always think about the future and possible exits; do you try to instill in them that they should know the value of their business in the event they wake up some day and want to move on or do you just focus on building that brand and when you're ready the time will come?

Ryan: You know the real … the temptation for me is to say that no, you shouldn't be necessarily thinking about selling but I know that I'm in a different spot than everyone who's listening. So I would say if you are building this to make money, be building it to sell from day one. Because the very act of being in it for the money means that you will burn out, you will wake up and want to do something else. It's going to happen. So if that … and like let's just be real about it, if you're in it because of the payday, build it to sell because that's what you're in it for and the payday is the cherry at the end of the rainbow here. If you were in it because you've got a product you want to bring to the world then still develop the systems and processes that will keep you in the position to be in your zone of genius. And that will make you more sellable one day but I don't think it's necessary for you to know what it's worth or be making decisions based on that. So these are different goals. Now I build companies that I'm excited about and I am building them in the same way that we make something valuable because I want to be in a position where I'm just in my zone of genius. But it's a different mindset than if I'm building something because it's going to be profitable. Does that make sense Joe?

Joe: Absolutely; excellent …excellent. Hey listen I know we're running out of time here I just want to say that last summer I was at the stock market conference and you got up and you spoke as did another dozen or so very very successful entrepreneurs. Each and every one of them had a PowerPoint presentation. You got up there with nothing. And you talked for an hour and the audience was captivated as was I. You have a gift thank you for sharing it. I appreciate it.

Ryan: I just got goose bumps. Thank you so much, mate. I really appreciate it.

Joe: How do more people get to experience that and listen to you and hear what you do share?

Ryan: You know I'd love to answer that question, can I offer one more piece of advice before we go?

Joe: You can offer a dozen more pieces of advice.

Ryan: Wow, awesome. I'll leave it to one but if you are in this to please have a plan of what you're going to do with the money when you get it. Entrepreneurs are magicians. We remake things up here on thin air. We create value out of thin air. We create a bigger pie. We make money show up. And we also make things disappear.

Joe: Isn't that true?

Ryan: And if you do not have a plan of what you're going to do with the money it will slip through your fingers. I know you think you're the exception. I know you think all I have to do is invest this at 8% and I'm [inaudible 00:37:11.5]. I know you think that's how it's going to be. You will ball the money. I … right now I just heard you think "no I won't", yes you will. So if you don't have a net for catching the money and allocating the money for your lifestyle you will be back in the grind very very quickly. I promise you, I know you don't believe me. I'm here to tell you that's the case. Have a plan for what to do with the money once you get the money. It's actually my favorite conversation to have. At some point, I'll probably have more chops [inaudible 00:37:45.3] about investing once you have a big windfall. But for now, it's like have a plan like a plan is better than no plan. And that plan would probably be best done after you sat on the money for about six months and you've gotten used to that money being in the bank account. Your second question or actually your only question was-

Joe: Can I interrupt that?

Ryan: Please.

Joe: I definitely want to get to that but in terms of having the plan to exit, I'm always telling people look have your next adventure planned. Because entrepreneurs like you say they blow through the money, it goes through their hands like saying. I'm often saying maybe get that other opportunity started and launched long as it's not competing to get the ball rolling. So that you got some working capital maybe you're going to put it in … some of it you're not as bootstrapped although you'll be more successful probably if you are. Do you think maybe they should 100% focus on what they're doing on that brand before they sell it up until the day they sell or maybe when it gets big enough and good enough and they've done enough right they can take some of their attention and start Brand B while they're selling off Brand A?

Ryan: Wow, Joe. The reason I'm saying wow is because my experience is pretty unique and that was I took about a week off and then I immediately went back to workaholism and it was the worst. It was a horrible experience. Now full disclose like at the same time I was going through separation and I'm going through a lot life changes. I threw myself into work right after the sale. I celebrated by reading books on my patio for like eight days and I was immediately back to workaholism. And I like … I roasted my body, I mean I so needed a break and I did not give myself that break. I don't know if every entrepreneur was as burnt out as I was. I was more burnt out than I [inaudible 00:39:40.5].

Joe: Most ideal [inaudible 00:39:42.8] they come to me tired, exhausted, ready to move on.

Ryan: Joe, it's been over a year. I wouldn't even say I'm back now. You know I'm probably operating at 75% of capacity because I never really recovered. So should you go right back into it? I don't know. I think it depends on the level you're at and your own wiring. I make really good decisions when I'm relaxed and creative. I make terrible short term decisions when I'm stressed. And when I'm in that workaholic mode I'm a terrible entrepreneur. I wish I had just blissed out for like three months; I didn't.

Joe: I don't know what the folks that listen to you every week would do if you would disappear for three months though.

Ryan: Well here's the thing though Joe. I kind of did. Like my podcast sucked for like three months, three to six months and I was trying … like I'm sitting in front of mic trying to come up with things to say and I was uncreative as heck. So I sort of did disappear it was just a different way. And now I'm getting back to it and it's a completely different experience. But I actually think I did my listeners a disservice by not taking a break. And if have been just really upfront and be like guys I just got an eight figure check I am going to the beach and I will call you when I'm ready. My audience would've popped but instead, I was like operating from this place of like I'm so … oh my goodness I'm so tired and I turned off a lot of people. I know it's not the answer that you expected it's not the answer I expected to give you.

Joe: No, I like it.

Ryan: But I think it's true.

Joe: I think sleep and rest and meditation or whatever it is to focus on is absolutely necessary. So back to that original question and you know finding out what they do with the money after they sell. How do they get more of Ryan Daniel Moran? How do they experience what that audience down at Smart Market and myself experienced where you just talked and everybody listened and took notes and all that?

Ryan: Well, thanks so much, man, my media company is capitalism.com. My podcast is called Freedom Fast Lane. And I say things into a microphone and we hold events at capitalism.com that are specifically for entrepreneurs. And we're actually … we just rebooted the Freedom Fast Lane podcast. I feel as though-

Joe: With fresh energy.

Ryan: What's that?

Joe: With fresh energy right?

Ryan: Well yeah, I think you'd probably feel it from me. Five years ago I started this journey as a boy and I was … I just put everything I owned into my car, drove to Austin, Texas, started some new companies, I documented the whole experience from startup to sale. And then I kind of grew up while documenting the journey. And now there's a new journey and it's a much bigger one and so we just rebooted kind of the entire audience, the whole experience in the podcast. And my podcast is called Freedom Fast Lane. My company is capitalism.com.

Joe: Okay. Well, I'll make sure those are in the show notes. I'd love to see you be more successful on this new adventure, this bigger journey.

Ryan: Thank you.

Joe: Let's stay in touch. I think I may see you at the capitalism conference at the end of August; let's see. At the very least we'll be to as many as we can be over the next few years.

Ryan: Good to see you man, thank you so much for having me.

Joe: Thanks for your time, I appreciate it.

Links:

Capitalism.com

FreedomFastlane.com

Today, another serial entrepreneur, Rob Walling, joins us to discuss founding and generally running a bootstrap startup. We sat down and talked to Rob about his journey of getting his software startup off the ground, developed, and eventually sold with no outside funding.

Rob Walling is not only the co-founder of Drip, which recently sold for eight figures, he also writes a blog and hosts two podcasts for startups. He is most known for starting, running and selling Drip but he has also bought and sold several smaller SaaS applications, including HitTail. Finally, Rob is co-founder of Microconf, a bi-annual conference for software startups. Rob's goal is to continue to acquire new businesses while maintaining the time-clock free lifestyle his years of software startup and acquisition experience have afforded him.

Episode Highlights:

• The story behind Drip and what led Rob into marketing automation.
• Building and growing a SaaS company. Launching a new software business without a lot of staff or cash.
• Building the automation that ended up being the key factor that got Drip on the consumer radar.
• How the company managed to compete against the larger players.
• The luxury of being a small team and working primarily in person.
• Why Rob would now choose remote over local.
• Tips for hiring high quality candidates that fit in with your company's principles.
• When you know it is time to scale up your startup. Knowing when you have something that people really want.
• How to recognize when the option to sell comes on the radar.
• Knowing when you've found the right buyer.
• The importance of putting all the deal-breakers on the table and sticking to your guns.
• What small startups learn in the acquisition and transition process and how that changes their teams.
• The story behind Microconf, Rob's bi-annual global software conference unlike any other.

Joe: So this morning we were deep into a program called GetDrip and it's what we use for our automated email sequences. And I understand you had the founder of that gentleman … with that software as a service program on the podcast that's all right?

Mark: That's right and I think a lot of our listeners are probably familiar with Rob Walling. He writes over at Software by Rob. He is the host over at Start Ups for the Rest of Us Podcast. He's the founder or co-founder I should say of MicroConf the SaaS conference. He is also the founder of HitTail an SEO software and of course Drip – Email Marketing Automation; one of the leading email marketing automation softwares out there which was acquired by Leadpages a few years ago in an eight figure acquisition. So really cool guy, tons of experience in a lot of different areas especially in that start up environment. And Joe you and I like to have these calls with people … these conversations with people where we try and like pull out a certain lesson or something else. Remember the episode with Mike Jackness and the crazy high open rates and returns that he gets on his Facebook marketing. I went into this without any specific agenda. I just want to talk to Rob about his story and kind of the adventure he's been on since he started up Drip and some of the other things as well. But we didn't get into much else because we just kind of talked about his journey with Drip which was fascinating. And one of the things to think about with Drip, they started off in a world where there was really big competitors. You had Infusionsoft, you had Klaviyo that was still big at the time, you had MailChimp which was absolutely a monster, AWeber which had been around forever. And here you have this little start up with no funding just a handful of coders working out of basically a closet as it were. And they ended up blowing up into one of the biggest email marketing automation softwares out there and being acquired for eight figures by Leadpages a few years later. And so we talked a lot about how they do it … how do they go through that, how does he hire people? We covered a lot of territory but it was fascinating.

Joe: Well I think you said founder maybe five or six times there so I would think you would have to be fascinating when you're founding that many companies and that successful. So I don't think anybody wants to hear you and I talk about this anymore. Let's just go right to Rob.

Mark: Yeah let's get to him.

Mark: Rob thanks for coming on.

Rob: It's my pleasure thanks for having me.

Mark: All right so you've listened at a couple of the episodes of the Quiet Light Podcast you know how we work. Why don't you give people a quick introduction as to who you are?

Rob: Yeah so my name is Rob Walling and I'm a serial software entrepreneur probably most known for running … founding and selling Drip which is email marketing or marketing automation software. I've also or run a number of other SaaS apps including HitTail which is an SEO tool. I co-founded MicroConf which is a conference for self-funded startups. And I have a couple of podcasts. One's called Start Ups for the Rest of Us and the idea there is to help people … give people an option in starting software and SaaS companies that's like you don't need to raise funding to do it. And that podcast has been running since 2010 so we have like 400 something episodes. Another one is called ZenFounder it's with my wife who's a psychologist and we talk a lot about just trying to stay sane while running a business.

Mark: Well trying to stay sane while running a business that's a pretty hard thing to be able to do.

Rob: It is, yeah.

Mark: Yeah. That's pretty cool so we have a lot that we could talk about here. I want to talk a little bit about just building and growing a SaaS business. But one thing I want to start off with here is you're kind of like a member of the very old guard when it comes to Internet entrepreneurs. When I started in the online world it was kind of expected that you do everything right? You code, you market, you design, and you do everything top to bottom and it's a lot harder to do that today but you've been [inaudible 00:04:35.0] keeping up with that. So are you still actively doing a lot of the coding?

Rob: I am not. I backed away from it. I … you know we'll software professionally for a paycheck from about 2008 and I really enjoyed that time and it basically gave me a leverage and a little bit of savings to be able to start acquiring businesses. I mean that's what a lot of people don't know is I really only started a couple of software companies. I've bought way more than I … products and websites and software SaaS apps than I started so … but around let's say 2011, 2012 it just became … it just was no longer worth it for me to code. My time is more valuable doing all the other stuff … that pulling the big levers to move the business rather than sitting behind a [inaudible 00:15:19.12] even though I love it. I still write code on the weekends though. I hack with PHP scripts; I was scraping Twitter feeds and trying to do sentiment analysis. I was … it's just myself having fun. It's just fun to build things but I don't … I have a push production code in probably five years.

Mark: Yeah, I used to code … I started to code out of necessity when I first was an entrepreneur and at first, I had no money so I was like I need to build this … I think I built a very basic pay per click search engine and kind of advertising platform. I did that and pearled all things and then yeah again self-taught myself and since then I've missed doing it but I just don't have the time to jump back in. So the fact that you're doing it on the weekends [inaudible 00:05:58.8] for sure. So let's talk a little bit about building and growing a SaaS company because you've done it a couple times, you've done it successfully, and maybe also I didn't know that you were active in the buying world so let's talk a little bit about that. Let's talk about what you look for when you are buying this SaaS Company and how do you go about some of those code challenges. So let's start with a basic question; ball park number how many businesses do you … would you say that you bought over the last five or six years?

Rob: Let's go back a little further because see … once I started Drip which was 2012 so I bought zero in the last six years. But before then from let's say 2005 was my first acquisition and 2011 was my last so over that six year period I probably purchased I would say 25 or 30 different. They're either software products, SaaS, or even … I mean I bought like half a dozen Ad Sense websites back in the day. So I really enjoyed it. I mean the idea of being able to skip product market fit and not have to do all the hard work up front and have a great history has always been attractive to me. Especially if someone … I mean when I was writing softwares I was doing, I was contracted, I was doing 125 an hour or 150 an hour sometimes and I mean my time was super valuable. I was booked 40, 50 hours a week and so I was like wait let me get this straight I couldn't … back then it was Flippa, right? I mean it was before you guys, before FE and other folks, and I would go on Flippa and pay 18 months of net profit and sometimes I got totally hosed on it because Flippa can be a little bit dangerous but the ones that worked were life changing for me. By 2009 I was full time just on products. Sorry, that was a long answer but that's the value I see in acquiring over. I've told my wife like if I do this again … because I don't know if I'm going to do it [inaudible 00:07:44.5] have to but it's just a lot of work, there's no chance I'm doing it from scratch. Zero chance that I will do something from scratch for the rest of my life. I will always acquire from this point on.

Mark: And obviously, we are big believers in that. I mean that from product fit and like you said and doing our work is difficult. When you started Drip … when did you start Drip?

Rob: We worked on the code in December of 2012 and then we launched in 2013.

Mark: Okay, and you were originally just sort of an add-on or a layer on top of existing software programs right?

Rob: That's right.

Mark: So like AWeber and I think mail Chimp was one of the main vehicles.

Rob: Yeah, we were just like a pop up and auto responders but we also fed into mails because we didn't … we couldn't even send broadcast emails at the time.

Mark: Wow, all right so then you layered on top of that and did you always have in mind with Drip that it was going to be an automation; the sort of kind of logic sequence.

Rob: No, we didn't. And in fact, we resisted it pretty heavily because I didn't want to get into the marketing automation. It's just a big … at least in my eyes at the time it seemed like this big, enterprisey, clunky, old, really hyper competitive space with a bunch of funny competitors; just not a market I want to get into. I tend to like really tight niche markets where you can just own that thing and you don't have to … you're not fighting red water every day with someone else. It's not a feature race all the time. But it became clear about a year into running Drip … a year, year and a half that that was where the whole space was going. And not building that would have just relegated us to being undifferentiated; everybody just had another major product and by building an automation and building it in a way that was more elegant and … or you know at least I think so, more elegant, easier to use than Infusionsoft and Active Campaigns and some of the other competitors it … we became, that's how we got on the radar. I mean we were an unfunded marketing automation platform in essence. We didn't raise any money and we were five people basically in a closet in Fresno, California and we were number 12 on Data Analysis Marketing Automation List. And all the 11 ahead of us had raised … decked a million, some had raised nine figures, I mean it was crazy.

Mark: Well, that's one of the things I find fascinating about your story. When I first saw Drip kind of pop up you had these really large players out there that you knew had significant revenues coming in, significant funding, very large programming teams of developers, how did you guys manage to stay agile like that at such a small footprint of a company but still put out incredible code? What were some of the things … I'm asking you to go back here and kind of think back but [inaudible 00:10:28.3] so what was all those things that you did to be able to compete against these larger players?

Rob: Yeah, that's a really good question because Derek and I … so Derek is my co-founder with Drip and we are both software people. I've written code since I was a kid and so had he. And so we built the company. It was very much a product focused company you know a lot of [inaudible 00:10:47.7] tech companies launch and they're very marketing focused and the software is kind of a piece of crap. And then you'll see them get legacy over the years and eventually they can't ship features so they ship very very slowly, one or two releases a year. And for a SaaS app that's just not the way you need to do it. So Derek and I from day one built a very strong foundation. It took six months to get Drip into people's hands and it really … we could have done it in three months but it would have been shitty code. And so we focused early on of not having a legacy, we took our time to build a really solid foundation architecturally, and then the first three hires that I made were Derek who was a contractor at the time and then became W2 and then eventually got chairs and was retroactively made him a co-founder and then two other developers. So when we were a team of four which was three developers and me and I did everything else. And that allowed us without the legacy; it allowed us to ship really fast. We were super agile. We used to get hub issues and we just … we were, I mean we would hammer out features. We would hammer out an entire integration in less than a day. Because there was one dude who had built … he built 35 integrations for us. And it was just this relentless focus, there were no meetings, there were no … if there was a question we stood up at a white board. It's a luxury of A. being a small team and B. being in person. And I know if I build a team again it's going to be really remote but we move way faster because we were in person two to three days a week and then we're all at our houses the other two or three. And it was just perfect blend of like speed. I mean our velocity it's funny you call that out because so many people call that out and even [inaudible 00:12:22.5] Leadpages called that out early on and said how are you … you're like five people, how are you shipping this many features? And we were shipping multiple features a week and it was just getting in there. Our architecture was stable and the developers … also we hired really good developers we focused very much on that; Derek and I being two developers. We were super rigorous and super picky about who we hired and so there's a lot goes into it and then you know I'm kind of been rambling but it was really this relentless focus on the product comes first and the product is what is we're going to be really good at. And at the same time and I have some regrets you know of like I think I should have marketed it harder early on. I think I should have hired a marketer that was better than me. I think that you know there were certain things now that I look back that it's like didn't we focus on the product a little too much? But I don't know in the end I think it worked out.

Mark: Obviously it worked out. And this is kind of an interesting thing I've seen with software companies. I've read a book by the founder of Zoosk [inaudible 00:13:16.3] and they talked about their ability to push out code and features rapidly. It would be we've come up with that idea in the morning and pushed it out by midafternoon because they were able to do that. What sort of approval process did you guys have in place to be able to ensure that you weren't just getting all sorts of really conflicting features?

Rob: We had … well A. both Derek and I knew every feature that was shipping. And we knew that until we hit … I mean even … so I left Drip about three months ago it was acquired by the Leadpages you know I think it's kind of the punch line that some people know about that, and even when we were 10 or 12 engineers Derek and I still knew everything we were shipping and so it's just a product management. To be honest when there's only three or four developers you can keep it all on your head or on a whiteboard you don't even need that much process. Now soon as you tip to four or five then you need some type of can ban you know or something and then when you hit … when we hit seven or eight it was like all right we do need a weekly meeting now; 30 minute weekly meeting. But we had no standing meetings, none of that. I mean it was like you're writing code 100% of the time or you're talking about writing code. So we also had extensive unit test coverage. We had I think three lines of unit testing code of unit test for every line of production code so it allowed … that allowed us the safety of like pretty sure this is going to break anything because one of these tests would have caught it and then we do a sanity check on the server and push it. We … you know knock on wood we have very few over the five-ish, five and a half year run like production bugs that really did some damage. And we get a little things here and there but we only had maybe two that I can remember. It was like a scheduling issue, it's like oh crap we forgot to send emails for an hour like that's a big deal you know and that happened maybe once and there is [inaudible 00:14:58.5] so code quality was high and we focused on that.

Mark: So you mostly run your team local to some extent but at some point when you started to grow and before the acquisition with lead pages did you have a remote team?

Rob: We did yeah. Yes so there were 10 of us total by the acquisition and there were five of us in Fresno in office. And like I said we came in about two to two and a half days a week to that office and worked from home the other days and that was a great balance of there was enough time to whiteboard, there were enough days, every other day you're going to see some people and ask questions but then you could go home and get a ton of work done right. And then we have five people who are all over the place really [inaudible 00:15:38.5] guy in Mexico and we had a developer in another part of California and somebody in New York and stuff so it was … it worked out.

Mark: So given … you said if you start something again here in the future it will probably be remote even though you're not really convinced that's necessarily the better way to go about it; why is that? Why would you choose a remote in the light of the fact that you might think it's not the best way to go?

Rob: Yeah, I think the ideal way is that everybody can meet in a room a day or two a week. As I've said that was the best working environment I've ever had. I would go remote because it's just so hard to find the right talent at the right price in any given metro area. It's like you can go to Silicon Valley and yes there's a lot of engineers but damn are they expensive. Or you can come to Minneapolis and they're going to be less expensive but how many ruby developers are actually here and how many are going to leave Target or Best Buy to come work for me? It's going to be tough. If I'm making a nationwide search or even as I tip tend to go three time zones in either direction, three hours in either direction from where I am; so I'll go north to south. [inaudible 00:16:40.6] hire in Canada or Mexico Central South America you're going to just find really people who sometimes live out in the middle of nowhere and if you're able to work with them remotely then they can ship some really good stuff for you.

Mark: Yeah hiring people is always a challenge. I don't think I've ever talked to an entrepreneur and business owner and I'll throw myself in that ring as well, hiring people has an absolute pain. Do you have any insights that you want to give us right now?

Rob: Oh my gosh. We could do all episode on this.

Mark: You really could do all episode on this and so we'll keep it a little bit short because I want to talk a little bit about MicroConf and also more a bit of the history of Drip but this is more for me [inaudible 00:17:19.9].

Rob: Totally, yeah I know some quick tips. One thing that Derek and I did was we hired a lot around personality. We really want … especially when we were small it was like I want to be able to hang around in a room with [inaudible 00:17:36.9] hours a day [inaudible 00:17:38.6] I don't do that or I've worked at don't do that they really do hire based on skills and talent and as a result we passed over some pretty good developers. But we could just tell they were edgy or they were a little to opinionated or let you know they were just things it was like we were super super careful. So we did hire slow and then our hiring process took a long time. We also presented it for what it was. The job postings were written very … almost like a blog post or like it was very conversational, oh it was more like a sales letter it would start my job descriptions and say it was all you language, it was like you're an excellent developer the world is your oyster, you can go work at any company you want but here's why you don't want to work at an agency because that da da da da da, you know you could go here but come work for us, you can be fully remote you can be … and then I present the benefits. It was very much like either magic or writing a sales letter where you present the you language and then you're going to present the problem and then what are the solution like come work for us. So as a result we got really high quality candidates and it was a very … I bet I would say look we do not pay, don't come here if you want to make what you are going to make at a Fortune 500 company. We do not pay these exorbitant developer wages but here's what you get in exchange, you get the freedom to do this, there are no set working hours, you're fully remote we're going to send you a MacBook Pro, we're going to buy you two Dell monitors, we're going to … you know just all the stuff that; some developers don't want that. They just want the maximum paycheck and other developers loved it, there were people who came and said I can't get this kind of flexibility in work. So having … like what is your differentiator? That's what we figured out early on and we put it right from the start in the job description of like you … this is either awesome for you or this sounds terrible. And then the last thing on and I'll stop is one thing that I learned once we went into Leadpages, because our hiring process took a long time. It was 20, 30 hours a week for me at times and once we got to Leadpages there were two in-house recruiters, just full time recruiters who were freaking phenomenal. And I … one thing that I would do if I were to do again is try to find someone like that on an hourly basis and not a contingency recruiter where they charge at 15% of the salary but just find somebody on Upwork or whatever who's 50 bucks, 75 bucks an hour who I can have … I can train to do all these stuff, or they can train me frankly. Because once we get to Leadpages like they had bat it down. I mean they grew 50 people a year for a few years. So they had that process down and they taught me a ton of things that I wished I had outsourced more of that in essence is what I'm saying. I felt like as a founder I had to do all the hiring. But it turns out as long as I did the last mile and I would thumbs up or thumbs down someone it was plenty good and sort of the funnel was filtered so much for me. You know by the time we worked and we paid and so I was like I shouldn't have been doing that type of funnel stuff and hiring process.

Mark: Yeah, I can tell you, I just went through the process of hiring somebody on for Quiet Light Brokerage and typically with Quiet Light the people that come on and work with us they approach me about coming on as a broker. But we needed some work on the marketing side and so I put out a job application. It's a full time job and going through and trying to vet these people and you know you want to hire slowly but you've got a bunch of other stuff on your to do list. Outsourcing that and if you're able to do so makes sense. So the tip that you gave as far as writing the job post in terms of you … you're the second business owner that I've talked to recently that has given that tip. I think it's a phenomenal way to go about it instead of just saying we need this, we need that, we … or you know this is what we need given the benefits that you attract that top talent is a good suggestion. Okay, let's talk and go back again to Drip here, when did you realize that this was not just like a little project that you were going to have as like a super niche product and really something that could play with some of the big boys? I mean now you guys would be direct competitors with a Mail Chimp and with an AWeber and those guys have had to play catch up to you frankly in some ways or to what you built. So when was that realization? What made you turn and say okay I'm going to go all in on this for a while?

Rob: Yeah, it was a very difficult decision and it was a hard one to make as I said because I've had a lot of lifestyle businesses and I value my lifestyle very highly. And it was a decision of boy am I going to continue to have a lifestyle business or am I going to scale up like a startup? Do I want to go all in on this? And I was talking with Derek about it too but it was really a turning point for me. So we started doing our early access in mid-2013 and we launched to our launch list in November of 2013, and it took us until August of 2014 to hit product market fit. We were just struggling you know just adding and it was when we added automations, the initial automation there wasn't even the work for us that are all visual it was just kind of almost like if this [inaudible 00:22:22.1] stuff. That was game changing because we started growing I don't know 20% month over month. We're already flailing around a bit until June as we start rolling out missions then it was like all right now we're going 10%, now we're going 15%, now we're going 20% and it was like boy this is becoming a fact. You know this is we have built something that people really want and we at that point we weren't ahead of … you know Infusionsoft had a visual builder and Active Campaign did too and I don't know it was Klaviyo I mean there were competitors around. We weren't ahead of them but we had just done a very elegant job. You know it's kind of like we had built a really easy to use platform like on Mail Chimp and we added automation to it in a way that really didn't exist quite in the same way. So that was when it was really towards the latter half year of 2014 it was like man this thing is growing fast and we have to hire lift the staff up like that was the realization.

Mark: Was that the point in time when you decided that possibly selling was on your radar?

Rob: No selling came on the radar in 2015. And it was we were staffing up and I realized [inaudible 00:23:29.7] Derek and I have a lot of conversations that's like we can't hire fast enough. Like we don't have the money you know. Running Drip was … especially with the staffing and trying to keep up with everyone else it was just an expensive thing. I mean SaaS apps obviously have great margins and we had a great gross margin but our net margin was not very good because I kept hiring. You know it 10 grand of MRR and now I go out and hire another developer every time because I know we have to keep up with all these competitors. So that was when I realized you know we had a need to raise an angel round, like a seat round probably half a million or we may want to think about answering one of these e-mails we're getting to acquire us. So we got maybe five pretty serious inquiries, we got more than that they were just you know whatever. You get weekly funding offers from a junior rep at a VC firm and every couple of months we get an email of like we'd like to acquire you and about five of them were people who companies or funds who actually had the money to do it. And that was when it was coming all right so what we do, do we take chips off the table you know cash out in essence, have a good outcome for us and the employees or do we push more tips and basically raise funding you know to at a valuation? Because we probably would have raised funding similar to the valuation we're going to be acquired at and that puts you in for two three four five more years of doing it. So that was a big decision process for us and frankly, I was burning out a bit. I mean I was struggling to run the company. I didn't delegate or outsource as much as I should have. Next time around I would it a little differently for sure.

Mark: So how did you decide Leadpages was going to be the partner that you're going to work with? You had five serious potential acquirers.

Rob: Yeah, Leadpages was just the best strategic fit and I knew the CEO Clay Collins. We kind of ran in overlapping circles. He was in like the Internet marketing space and I was in more of the startup space but we overlapped a bit. He had been on my podcast and stuff so it wasn't just like oh we have these five suitors and we're going to pick Leadpages. It was kind of like well let's kind of follow each of these tracks you know and then we had … and it didn't all happen at once right it was over the course of maybe 18 months that like these five conversations happened. And so we just kind of followed each of them to the logical extent and the one that made the most sense and just kept coming back up again and again because deals fall apart like this right? Because someone puts a number on a piece of paper and you're just like yeah that's nowhere close and then it's like all right well then we're out you know. And then two months later you get an email and it's like hey so we want to rekindle the … and that's how these things go right. So it took 13 months from the first email when Clay reached out to when the deal closed. And it was really about six, seven months of hard negotiation during that.

Mark: Sure yeah and that walking away right? That's so typical on a lot of these deals especially in a strategic deal, being able to walk away and you know people just set goals and objectives change over that time as well so they can re-evaluate things. What was some of the things that you learned going from a complete startup environment where you're a super agile small team that you're building and that kind of hanging on to this year past sort of growth and then being absorbed by a company that had raised tens of millions of dollars and much different sort of environment; what sort of transition was that?

Rob: The transition, it was probably one of the best that I've heard about. They did a really good job of kind of leaving us alone for three to four months because we just … we were all shell shocked. I was … it was so crazy I mean we [inaudible 00:27:00.2] moved here and then go on [inaudible 00:27:02.5] pick off [inaudible 00:27:03.0] people we were and it was just this culture shock for us. So they made it as good as it could have been I think. They didn't screw with the product nobody said [inaudible 00:27:11.5] all our people came on board and joined the team. So I feel like the transition went as good as it could have but it was still hard on me and hard on some of the team members because it … we have been just this tiny little team and then you get kind of absorbed into 170 person company. But I mean to Clay's credit he set it up really well. So I learned a bunch of stuff … the interesting transition, there was a mental transition at a certain point is we've gone from basically being kind of cash strapped to having tens of millions of dollars in the bank as you said from the funding they raised. And I just realized we had to think about things totally differently. Like I needed to stop every week checking our AWS bill and trying to turn servers off and adjust things on the weekends. It's like that was no longer … it was not worth saving $500 a month for all that time. And you have to be cognizant of the money but it's like 500 bucks a month is just a rounding error. They probably spend that on toilet paper in a month and it's like focus on some … if I'm going to spend that mental damage do it on something that grows the bottom line or that improves the product. It was things like that and we … when we can finally pay everybody market rate salaries it was so so cool. We had to hire a lot of junior people and train them up [inaudible 00:28:22.5] up so we … it took us a while for people to really hit the ground running. And once we got here and it's like oh man we can pay market rate. We're able to hire senior engineers for the first time ever and that was another game changer of like the luxury of having someone come in and like come with code three days into their job because the code base is solid and they are super advanced. They've been doing it for seven years instead of six months like some of the folks that … who are great developers now but they were just very junior when we hired them.

Mark: You have a lot of other projects besides Drip obviously over the years. You've had Start Ups for the Rest of Us, you've had MicroConf; they were totally cool with you just continuing on with those projects?

Rob: Yeah that was the nice part is you know as Clay and I talked through the whole acquisition it was like … I was like Clay here are my deal breakers number one we can't … I'm not going to fire anybody like I do not want to lay people off and we didn't. Number two I do not want to screw our customers like please don't pivot us into some crazy niche or leave the customers behind that we already have, shut the product down you know let's not do damage to that. And [inaudible 00:29:23.3] deal breakers although I have like a price, oh I want it … I said it kind of needs to be for enough money that I never have to work again. Like that was one of my things and so we figured all that out. Oh and that was … the third one I was like look I do MicroConf and he knew that and I do the podcast and I don't spend that much time on them. In all honesty like the podcast is about 30, 40 minutes a week and MicroConf typically was off hours and it might be 20 hours aside from when I would go there [inaudible 00:29:54.0] offer and he said yeah that's good. And I said I do a lot of public speaking too and I said you know I'll be representing Drip and Leadpages at that point so it's actually a … perhaps of benefit to the company so it was good. That would've been a really … I was going say be tough but I just that would've been a deal breaker. I don't think I would have not stunned the podcast or the conferences it's just something I've done forever you know.

Mark: Yeah, let's talk about MicroConf for a quick … for people that don't know what is MicroConf?

Rob: Yeah MicroConf is a conference that's run twice a year in Las Vegas and then in Europe and it is a conference for self-funded startups, so bootstrap startups. And we're not anti-funding. It doesn't mean that companies that raise funding can't come because certainly a lot of … 80% of what funded and unfunded companies worry about is the same thing. It's hiring and it's marketing and it's building a good product and then there's just 20% percent that we just don't talk much about at MicroConf. And so we get about … we have a Growth Edition which is for businesses that are providing a full time income or more. So it's a lot of six seven and some eight figure businesses but it's definitely smaller. Its SaaS focused but we do get e-commerce people we do get Word Press plugins and info marketers and stuff. And that conference the growth one is about 250 people and it sells out every year. And then we have the Starter Edition which is from idea to full time income and that's at the same time right around the same time in Vegas and then we have of course the Europe edition which is here in a few months in Croatia; it's in October. And I'm excited to go to Croatia and now we started selling tickets for that a couple weeks ago. So we try to get … we wanted to build a conference that we wanted to attend. Like Mike and I who was my co-host with the conference, it was like I go to these conferences and there's multi-tracks and there's the vendor halls and there's all this bullshit. I really just want to come, I want to meet entrepreneurs. I want the attendees to be top notch. I don't want it to be the marketing guy, the C level guy from this oracle or it's like that no that doesn't help me you know. I want the attendees to almost all be entrepreneurs in a similar space. And then we want to keep it small. They tend to be about 120 to 250 attendees. And then we want to get really good speakers that may not … these are not like the big name speaker who comes up and pumps you up and you know there's time and place for that but it's super super tactical and so that's what we've … it's kind of like if you want tactics and some inspiration come to our conference. If you want just pure inspiration and you just want to get pumped up then go see Tony Robbins or go to the World Domination Summit. It's just a very very different thing. So that's my spiel on it. That's MicroConf.com if folks are interested.

Mark: Yeah absolutely and I absolutely love those smaller conferences the 100 to 150 attendees, you know 200 attendees but where it's really focused again on the people that you get to know from those conferences. I just find that you do get to know people so much better and the partnerships and relationships that come out of that more than pay for any sort of price that you're going to have to pay. Your location is Croatia, are you kidding? That's incredible.

Rob: Ain't that awesome? Yeah, I'm stoked. We did it in Barcelona … we did in Prague for two years, Barcelona for two years, and then we did it in Lisbon, Portugal last year, and this year we're upping the game. It's going to be a little harder to get to but man we're stoked because I've never been to Croatia. We do try to like put it in places that A. people would want to go to but that we want to go to as well. You know it's an excuse to visit a cool country.

Mark: Yeah absolutely, all right we're up against a clock here but what does the future hold for you? You left there a few months ago.

Rob: Yup.

Mark: What are you looking at the doing here in the future?

Rob: I don't know yet. I started writing a book about my experience. I've written a couple books about software startups and that kind of stuff. And I started writing another one and then I kind of … I got about 12,000 words in and I was like you know I don't know that I want to do this right now. It was all about my experience with Drip and everything and it was funny I just kind of petered out. So I don't know if I'll come back to that. I don't have a deep desire to do anything bigger than Drip. I think I'm going to take another few months off and I know something will come up and I'm probably going to acquire something is what's going to happen. And but I wanted to do something that like it needs to make money for my personality you know like I just I have to that's how we keep score right? But I kind of want to do something in like … even in the hobby space that I really enjoy. I can't imagine going back and then doing another SaaS app. It's just I've been there I've done that what's new? Like could it be a just a completely different thing that I really enjoy that it also makes some money but maybe it's not some big fancy startup that's acquired.

Mark: Well awesome. Well, good luck with all of that and let's make sure that we stay in touch especially being local to each other here. But let's make sure that we stay in touch. Thanks so much for joining me.

Rob: Absolutely Thanks for having me on

Links and Resources:

Rob's Website

Startups for the Rest of Us Podcast

Zen Founder Podcast

Microconf

Rob's blog

Combined, Mark and I have reviewed thousands of profit and loss statements over the years. What we've seen and learned in that time, is that certain key financial metrics can make or break the value of a business.

In today's podcast we cover all of these metrics, including one that could cost a seller hundreds of thousands in value, and give a buyer huge instant equity. If you think the financial metrics and details are boring, wake up!

You work night and day and risk everything to build your business, and it is more than likely that your business is your most valuable asset. Having deep financial details will bring more you more value, peace of mind, and maybe someday help you create a "lifetime event" sale and an exit that will change your life, and the lives of your descendants for generations to come.

Episode Highlights:

• [:10] How long does it take to do a valuation?
• [2:35] What are "clean financials"?
• [4:02] YOY trends tend to be the most important financial factor.
• [6:12} We always look at a monthly view of the financials. Not just quarterly or annually.
• [9:15} Revenue by Channel show a deeper view of overall revenue trends (and reveal gold, or roadblocks).
• [14:40] Any channel that has you "own" the customer brings more value.
• {15:20] After total revenues, Mark views gross profit margins next, as do many buyers.
• [17:20] COGs should not include 3rd party fees!
• [18:41] Gross profit margins below 20% make Mark nervous.
• [20:10] Joe loves to see advertising expenses by revenue channel (this does not have to be in the P&L).
• [23:14] When you "get" the metrics right a business value can instantly jump by hundreds of thousands of dollars.
• [25:31] Trust offsets risk. The lower the risk is the more value your business will bring.
• [27:03] Don't hide negative trends…if you've recovered. A recovery shows how resilient the business is.
• [28:23] Drilling down to specific expenses and their trends tell a fuller story of the business condition.
• [30:19] QLB brokers Advertising, Saas, eCommerce and other business models.
• [31:01] Certain metrics are key with SaaS and Subscription based businesses.
• [33:49] Discretionary earnings equals net income, plus add backs.
• [34:06] Discretionary Earnings as a percent of total revenue "comfort levels" vary depending on the niche.
• [38:01] Revenue by SKU can show huge built-in growth if some were launched in the trailing 12 months.
• [39:55] Joe & Mark get into the weeds. Go there with them and learn how to increase the value of your business by hundreds of thousands of dollars, or buy one and get instant equity.

Mark: All right Joe you probably know this from your experience here at Quiet Light Brokerage but how long does it take you … when you're talking to a client for the first time or somebody who's requesting a value of the business, how long on average do you think it really takes you to be able to get an estimate of the size of the business and the value of their business?

Joe: Yeah there's really no short answer to that. I feel like you want me to tell you five minutes but the answer is it's at least an initial call you get a ballpark range. And then you got to look at the financials and look at the trends, know your trends and look at the details of the financials. It's so much of that answer and the time frame around it depends upon how good their documentation is and how much they know about their own books.

Mark: Sure and just you know I want you to answer whatever you want to answer. I'm not going to feed you answers; answer the truth. Yeah, well I think that's true. We've been looking at businesses for a while. We've looked at a lot of businesses in the roles that we have. And so I thought it would be good for us to have a discussion today to talk about some of the things that we look at in a business's financials to really be able to determine its value pretty quickly. What are some of the things that you with your expert eye from all the deals that you've done, what do you look at when you look at a company's financials? Now I know every buyer out there listening to this you probably have the reports that you look at. We have the advantage of working with lots of different buyers. We see the different approaches that different buyers have made. And I know that over the last 10 years I've expanded and changed what I look at and probably look at more things and things maybe that wouldn't concern me as much directly but I'm looking at to try and anticipate what buyers would want to see.

Joe: So what is … what's the number one thing you look at first? You're always looking at this one thing what is it?

Mark: By the way, if anyone is wondering no we don't have a guest so you have to live with Joe and I for the rest of this episode. But we'll try to make it entertaining. Okay, so what do I look at first and foremost? I have gotten very addicted to looking at trends. Trends to me to it's one of the most important thing with somebody's financials … outside of whether or not they're clean of course right? They've got to be clean if I'm going to … if we're going to be able to make any real valuation.

Joe: Can we define clean? What do you mean by that?

Mark: That's a good question actually.

Joe: Somebody in the audience was just asking it they just [inaudible 00:03:03.7] through to my head.

Mark: You're anticipating what people are going to be asking weeks from now; I love it. What are clean financials? So clean would be separated from other businesses. And that doesn't mean that you have to have completely separate tax IDs. That's ideal … you know separate tax IDs and separate books. I would love it if that's what you had but at least within QuickBooks or Xero or whatever you're using, some way of identifying this is for this business. This expense goes for this business and that expense goes for another business if you have multiple businesses running. Also actually having that tracked clearly and so that you're not just taking estimates on things and finally not mixing in a lot of personal expenses into it. In the episode that I recorded with Brian we talked about some of the warning signs. We saw in financials … and that episode is aired by now so go back and take a listen to that, but one of the warning signs that we often see are round numbers.

Joe: Oh yeah.

Mark: Round numbers are … yeah, these are not clean financials; these are estimates.

Joe: Unless it's payroll but if you've got expenses of advertising of $1500 a month or your phone bills … you know $2300 a month yeah the round numbers are always challenging. But clean financials are so important because it allows us to look at things from an analytical eye and from the buyer's eye. And you yourself you say you look at trends, which trend specifically do you hone in on?

Mark: Well the number one trend I like to look at would be year over year trends. So there's … when we're looking at trends just as in general for a business there's two main approaches that people take. One would be a month over month so are we doing better this month than we did the month before and was that month better than the month before that and how does that look. And maybe you spread that out and do like a quarter over quarter analysis. I like to take a look at businesses more from the year over year analysis. So if I'm taking a look at July of 2018 I want to compare that against July of 2017. Or if I'm going to do it on it like a quarterly basis I might take a look at quarter two of this year and compare it to quarter two of the year before and of the year before that. And the reason that I do this is I think people have seasonal businesses without knowing that they have a seasonal business. Obviously like Halloween … you know I've sold a number of Halloween sites in the past, that's an obvious seasonal business, Christmas obviously a seasonal business. Gardening and supply store a little less obvious but when you think about yeah it's a seasonal business. I think those aren't too far off stretches. But when you take a look at a company like Quiet Light Brokerage we also have seasons. We have our busy seasons, we have our a little bit less busy seasons. Summer, it tends to slow down a little bit. It's not appreciable. It's not like one of those things where you can look at and say it's going to be absolutely dead. And I wouldn't call us having a seasonal business but in the books, it does get reflected that way. So I like the year over year financial analysis because it controls all of those variables and also some of the variables for having a few extra days in a month or a few less days in a month.

Joe: Yeah I think you've got to specifically look at that month over month analysis because of the seasonality. You know some will say well is there the best time to sell my business and it's really the time that's right for that particular individual. But when you're comparing December of 2018 to December of 2017 that is what is most relevant. It's not necessarily all of 2018 against all of 2017 because if you just look at the annual numbers of '17 versus '18 it's only going to paint a partial picture. We're always looking for monthly trends beyond that. We can … we look at that bigger picture and that's what we can talk about, that big picture in the teaser where people are going to see the listing for the first time. You know 60% year over year growth or whatever the number might be. But you've got to drill down into that month over month. How does December … I guess it's year over year December of '18 looked to December of '17. Because you could have had a great first three quarters and then in the fourth quarter of 2018 it could have fallen off a cliff. It still may look like 60% growth year over year but the most recent quarter could be down dramatically. And that dramatically reduces the value of the business because of the risk going forward.

Mark: And the other thing that I found and I wrote a blog post on this a several years ago, we'll link to it in the show notes and if you and I were professional podcasters I would have done like actual show prop and been able to have this example at my fingertips. But I did this blog post years ago on how to perform a year over year financial analysis. And then I put together some dummy data and this actually kind of randomly happened when I put it together. Where at from a month over month standpoint the business looked like it was growing and growing at a good clip. But when you took a look at it at a year over year financial analysis what you're able to see is that the growth was slowing dramatically on the business. And that was extremely valuable in that and again it's a pretend scenario to be able to see the actual trend. What is … where is the direction of this business going? The other thing that I want to point out about this and I don't want to spend [inaudible 00:08:10.9] of time on this specific topic of year over year financial analysis but I think the one thing that we need to kind of pull back on with online businesses is we tend to really take a microscopic view of the financials. We'll often take a look at just the past couple of months and consider that to be a trend. Starting to broaden out our timeframes I think is a good thing to do especially from a buying stand point and understanding what is the context of the earnings of this business. When I started Quiet Light Brokerage in 2006, 2007 well most companies were just a few years old. Now we're seeing businesses that are 20, 25 years old on the long end and so we have more history to work with. And I just think year over year is a better solution for that. So that's my number one thing that I look for.

Joe: I agree and I'm going to drill down beyond that and the next thing that I would look at but you know not being professional podcasters shows that we're human which is exactly what we are. Okay, that's too much ego there, sorry folks. What I do when you talk about a particular blog and we're not prepared for it, all you're going to do is Google Quiet Light Brokerage and year over year analysis and boom there it is. So for the record, you've done a great job on the last decade. Beyond the year over year comparison, month over month comparison what I drill down into next is revenue by channel. Because a buyer is going to look at it and see what's happening in the most recent three months compared to the same three months last year or year to date things of that nature. And so that shows the trends of the business and which way it's going. Beyond that what I like to drill down to and this goes to documentation is revenue by channel. So is it … let's say it's in a physical products business am I getting 60% of my revenue from Amazon, 25% B2B, and 15% from a new Shopify store. And then beyond that what are the trends within those channels? For instance, I had a listing awhile back where it was it was 100% Amazon and they like most started out on Amazon.com and then expanded to Germany, UK, Canada, Japan, Italy, and those countries took off and were really growing at the same time the US started to trend down. So they put all of their efforts into the new countries and stopped putting efforts into the country that was generating the most revenue. Overall if you look at month over month numbers as a whole we were still up, year over year we were still up, but there was a concerning trend within all of it and that was that the biggest revenue generator was dropping and then it was being replaced with other channels. So overall I guess if you just look at the broad picture it was okay but when you … you want to drill down into those things to get a really clearer picture of it. And that goes for Shopify channels [inaudible 00:11:11.5] or Shopify whatever it might be and then the B2B side too. These are if you're selling physical products. Same goes for content sites or SaaS sites, whatever they might be; advertising sites or SaaS sites. If you've got different methods of advertising and revenues whether it's straight up sales from your website or affiliate revenue you want to break that out in your financials so that you can see them. So you can see what you're doing right and what you're doing wrong but also so that your broker, advisor, exit planner, and your buyer can see it as well. Because you have some great things in there … you know if you started a Shopify store nine months ago and it's already at 15% of your total revenue it's only nine months out of the trailing 12 so you've got built in growth there and that is a really exciting thing for buyers.

Mark: Yeah I dealt with a client recently where we were having a little bit of trouble moving his business because it was not on a decline. And he had a lot of revenue but there was a couple of problems with the business where it was sick in a few ways. And what I found is out of our buyers … and we had lots of inquiries on this business because we put it up at a pretty low multiple, most buyers backed out right away when they saw the trends they just kind of backed out and said "No I'm not really all that interested in this business. I don't want to turn around but I have you." And the buyers that we've grown to know over the years that they're really successful at what they're doing they took a little bit more time and the first thing that they started to do is exactly what you're talking about. They started to take those financials and some of those summation numbers that we see in financials and they started to break them apart. They started to really dig into those numbers and see okay what makes up this revenue. And when we started to break these apart what can we find in here; what's sick and what's healthy? And is what's healthy sustainable and is what's sick is that fixable or is it something that we can just get rid of? And so they started looking at that on a per channel basis but they also started looking at it on a per SKU basis as well in running an analysis. And one of the things that we found with this is that you could actually lighten up the workload of this business and actually increase profitability significantly by removing a large number of the SKUs because they were not all that profitable. But again the front is still the multi-channel analysis that you're talking about. But I think this general principle of when you're looking at revenue especially with an e-commerce business that can have multiple channels of revenue don't just take the summation number, start to break it apart. And from the sell side, if you're selling don't be afraid of reporting those numbers either. There's opportunity in those numbers that you can show potential buyers and I think a little dose of humility for all of this goes a long way. Sometimes somebody is going to come and take a look at your business and be able to have an observation that maybe we've been missing for a while. And from a selling standpoint that's your opportunity if a buyer comes in and notices something that you missed. And so give them that data, give them that opportunity to make that sort of observation. And I think that's a good thing for people to look for. Is there any channel in your opinion that you like better than others or that you look at and you would weight as more valuable than others?

Joe: Oh yeah I mean any channel you own the customer. If it's just your own website where you are owning the customer completely and you can remarket to them and upsell them and reach out to them socially via email, whatever method you can. But absolutely owning the customer brings more value than … you know in Amazon platform for instance. Amazon is growing like crazy so don't discount it if you're selling physical products. You have to be there in my opinion. You're missing out on a tremendous amount of revenue if you're not there. But owning the customer is the most important thing in terms of overall value. One of the things I want to jump to Mark is … it's on our list here to talk about in terms of the year over year analysis and drilling down and getting below that total revenue line to either gross profit as a percentage of total revenue or discretionary earnings as a percentage to total revenue. Which one do you look at first?

Mark: I look at gross profit first if it's an e-commerce business and just because it's a simpler number to digest. Now there's only really one thing that's getting thrown into that gross profit number you've got your revenue, you've got your landed cost of goods sold and that's pretty much it that's going into the gross profit number. So it's an easier thing to really understand and really at the core of an e-commerce business is that you know what is the cost of your product, and what are people willing to pay for it right now, and how is that trending. And I think with e-commerce businesses specifically because price competition is a real thing with e-commerce businesses and most niches you have to really pay attention to how is the profitability of this industry holding up over time. Is it becoming more competitive? Is the competition happening on a price front? Or are suppliers becoming more aggressive in their pricing as well? So that's one of the first things that I look at when I start to really dig into those financials. I want to see how is that gross profit margin holding up over time, is it getting more expensive to do this business or is it holding up?

Joe: You know it's funny I think I agree with you that what you should have in your expenses above the gross profit line are your cost of goods sold, your landed cost of goods sold. But I often see them in from bookkeepers and they include in some cases fees associated with third party platforms. I don't know if there's a right way or a wrong way but you got to dissect to that a little bit when doing the analysis. Is there a particular percentage of profit that you look at and you're like no, your cost of goods sold are just simply too high, the margins are too tight, this is going to be really hard one to sell. Do you ever run across any of those?

Mark: I do and I'll get to that in just a second I'm going to chide all the book keepers out there that are including fees in there as cost of goods sold. The technical definition for a cost of goods sold has to be … be involved in the actual production and sourcing of the product itself; the transactional cost. So if you're keeping your books that way it's a minor issue and a crawling issue that I won't fight too hard but it's supposed to go on the regular operational expenses instead.

Joe: I fell asleep in accounting class. I just focus on what I focus on. I told you this story before. We work with Scott of Catching Clouds, Matt of CapForge, Fully Accountable is a recent one that's come across my desk and all three seem to do a really solid job. And having a great bookkeeper brings a windfall of cash when you go to list your business for sale.

Mark: Absolutely and one of those guys might disagree with me and then we can whip out our pocket protectors and have a pen fight over that.

Joe: All right yeah … let's keep the people awake. We don't want to talk about that.

Mark: All right, move on. So percentages absolutely, you want to see a healthy gross profit percentage. I talked to one buyer and I won't say her name because I don't know if she wants me saying this but she told me that she wouldn't look at a business that had less than 50% gross profit margins. I wouldn't go that far. In my opinion, when I'm looking at the business from a broker standpoint I start to get nervous when gross profit margins dip below 20% is when I get nervous, 25% and lower I'm a little uncomfortable with that but you know I think that's doable. I think the average that I'd see would be right around 35%; 30-35% would be the average. Obviously the higher you can have it the better. There are certain industries, electronics being one of them that tend to just have really low gross profit margins and you know the problem with that and just thinking about it I have basic basis if you're … say you have a 10% gross margin which for a lot of electronics that's where you're at, you're looking at having a million dollars in revenue to be able to generate $100,000 in just gross profit. That's a lot of money that you have to generate in order to get some gross profit. So my rule is about 20%.

Joe: It doesn't count your advertising; it doesn't count your payroll or anything like that so.

Mark: Or your transactional fees [inaudible 00:19:26.7] marketplace.

Joe: Exactly as it should be down below that gross profit line. So that's going down that P&L you know you've got total revenue you've got gross profit and then you've got all these expenses in there. One of the things that I always look pretty closely at if I have the detail up above is the advertising channel. Do you ever get to see advertising expenses by channel in a P&L?

Mark: By channel … I'm trying to think if I've seen it. With Amazon, you'll see it. Sometimes you'll see Amazon advertising expenses broken out separate from-

Joe: Wouldn't it be amazing to see it there? Just for those bookkeepers out there and those people that are doing it themselves.

Mark: Oh my gosh.

Joe: If you've got revenue by channel up above the total revenue line why not have advertising by channel down below? It … you can do it in QuickBooks and Xero you just got to have a subset of it. In the exported P&L it may say just total advertising but you can show that separately. And the reason I love to look at that is because it can show too heavy of a weight in one particular channel again in the advertising dollars. This is airing in August of 2018, as many people listening know there was an algorithm update in Facebook in April. And a lot of people got hurt by that and if they were overspending on Facebook advertising and they might have found themselves too heavily weighted on one channel and that advertising didn't work as well anymore and their revenues might have dropped. Or they had to pick up the ball somewhere else and it took a while. So it goes to that detail. The more detail we can see the more we'll understand those trends and a buyer can make a more informed decision. If somebody's stroking a check for 100,000, 500,000, a million whatever the number is, they worked hard for that money, they saved it, they're smart, they're intelligent, they're going to get through those numbers eventually and it's better to do it upfront in advance so that once you're under a lot of intent you get all the way through the closing. So I'm always trying to drill down into those details. I would love advertising by channel. I don't always get it but it's a question that I'm always asking and is that spending by channel going up or down. I think if you can again diversify by channel and if it's Facebook, if it's Instagram, if it's AdWords, if it's inside your sponsored account or whatever it might be, if you're selling SaaS products, affiliate whatever you might be doing; having that level of detail is truly ideal and I'm always looking for it if I can get it. I can often get it out of just a P&L but generally, there's enough detail in the back end for the client … the person owning the business to be able to share that.

Mark: Yeah I've used an analogy some time … and by the way, real quick just kind of a public service announcement here if anybody is listening to this in your car it's late at night you've been driving for a while put this on pause go put on like a really exciting song for a little bit and then come back and finish it.

Joe: Come on.

Mark: No just … all right so I-

Joe: This is huge. This is all huge that just-

Mark: It should be exciting.

Joe: You and I do this all the time and it's exciting for a client when we go through these numbers and we find something and all of a sudden they realize that if we do this right their business … they don't have to generate any more revenue but their business when properly presented is worth a quarter of a million dollars more. So that's pretty exciting you don't have to generate more revenue.

Mark: Well absolutely. So I'm actually going to bring this to Botany of all things. I think its Botany or probably not but the study of trees and tree rings … you're looking at me like I'm crazy.

Joe: I am. Well, you are. Okay.

Mark: Yeah well I am a little bit crazy but one of the cool things that I learned years ago about the tree rings, you know when you slice a tree and you can see all the rings and stuff like that. Scientists are able to tell all sorts of information from those rings. They're able to tell if there is a fire a certain time in that area, or if it was a drought year or if it was heavy rains that year, and the average temperature as well. You can find all sorts of information like and the reason I bring this up … there is a point here besides me just talking about the fun things I learned on the side outside of work, is that financially I'd look at financials in sort of the same way. It's the record of the business and its quantified what's happening to your business in other ways. Facebook's algorithm change is an actual change in your customer acquisition strategy and it shows up on those books. There's very little that happens in your business that's not going to show up somewhere in your financial records. And so when you keep detailed financial records what you're doing is you're keeping a story of your business in a quantified way. And for buyers who are trying to evaluate a business, you know buyers look at this from all sorts of different ways; especially experienced buyers. They're going to look at your business from an ROI standpoint. They want to understand can I make money from this? But they're also going to look at it from the story of the business and try and get in the head you as a business owner and what it's been like to run it for the past number of X years. And so your point about keeping more beautiful records and breaking advertising down into channels AdWords or Facebook, we've messed around with Pinterest for a while if you've done some Quora advertising or have you. That's part of the story of your business that you can tell when you really start to break down financials historically.

Joe: Yeah and I think it's important to understand that all of those details are important to be able to share. Somebody listening that's planning on selling their business they may want to say I don't want to share those negative trends, I don't want to talk about that fire that I had back in June of 2017. It's going to come out so you might as well get those details out there and ready and available for your buyers because trust … when you lay it all out there it builds trust. And trust is important because it offsets risk a little bit. And again when you offset that risk a buyer is willing to pay more for your business. And it's all important … it goes into your social media accounts too you know. I've had … and I'm going to tangent but … and I won't name names but I had clients that are selling their business and I pop into their social media account and their profile picture is them on the beach topless with a beer on their hand and chugging whatever. Those are men topless by the way. And I'm like it's great but just put a shirt on for a little while, just change your profile picture because we're trying to build trust and respect in who you are. Buyers want to buy from client sellers that they like and that they trust more than anything else. So that's why you want to share all those rings of the tree and tell the full story because they'll look at the mistakes that you've made and the expertise that they have that you don't and go opportunity. I have capital to not run out of inventory and you did, I'm smarter than you are, or I have more money than you are. That's really really critical stuff to have. Anyway-

Mark: With the negative trends in the past by the way I just want to say one quick thing. It's not a bad thing if you have a negative trend in the past. In fact, I like it when I see a business that has had a decline and recovered. I can go to a buyer and say look how resilient this business is.

Joe: Exactly.

Mark: They ran out of product for two months and they're still chugging along great; it didn't kill them.

Joe: That's right. I actually had a situation where a client had a patent infringement claim filed against them. And not just against that particular client but against everybody that was selling a similar product. And it turns out that everyone else stopped selling that product period. My client hired an attorney, fought the infringement, won, and ended up being one of the only sellers of that particular product anymore and that just … the revenues shot up, gained more market share. And it's an ugly thing … a patent infringement; you don't want to talk about that right? No, you absolutely do because odds of it happening again incredibly low and in this situation, it turned out to be very positive as well. So I say expose all the rings of the tree in your analogy in botany. Let us know if botany is not … I think it is the right phrase but-

Mark: I think it's like the big family. I think there is probably a more narrow specialty. Somebody-

Joe: We are sitting in front of computers; you want to drill down a little further? We've talked about advertising by channel what would you look at next in a let's say a financial presentation or a profit and loss statement?

Mark: Well you know I'm going to start getting into these specific expenses and I want to take a look at what the individual average … or what not advertising, the individual expenses are to see are any trending higher. Basically, is this business getting more difficult to run, is it getting more expensive to run? And the other thing that you can see from just kind of an expense profile would be attempts at growth. You often see expenses ramp up when people expect growth so you can get the sense for where the business is arcing from taking a look at individual expenses. So I would look at staffing costs, they really ramped up. Are you seeing a lot of professional legal fees ramp up? That will be something that you wanted to begin to and try and get a little bit of explanation into. But really trying to get in … again some of those individual expenses and see spikes and anomalies. You know things that kind of stand out because those again are going to be the big stories that you want to get into later on. So we move a little bit away from trend analysis when we start looking at that … when we start getting into just kind of that anomaly analysis of a financial statement to see what questions do we need to be asking on this particular business.

Joe: Yeah and it's not just anomalies where there's spikes in revenue but sometimes expenses disappear. And when they disappear for the last two or three months of the trailing 12 and now they want to sell their business they're just … either they made a mistake or just forgot to put it in. But they're just cutting costs to increase their discretionary earnings. So we always … we drill down into all of that, every buyer will and we do it for them, ask those questions and get it exposed so that it's a good investment for a buyer and the selling achieves their goals as well.

Mark: Something I want to ask you about Joe, you know we get talked a lot … Quiet Light, in general, is pegged a lot as kind of like the e-commerce broker like that's what we do but we actually sell a lot of SaaS businesses.

Joe: And content or advertising business. If you look at the revenue on close transactions here to date it's an awful lot of SaaS an awful lot of content in there as well.

Mark: Right and I explain to people it's actually not a majority of e-commerce it's a plurality for us as we're less than 50% of our deals are e-commerce it's more around 40, 45% percent. I want to get into subscription based revenue and how do you look at that when you're evaluating business. What are you … you've done a number of SaaS businesses or a certain number of SaaS businesses, how do you evaluate subscription based revenue?

Joe: Yeah anytime someone's looking at the subscription based businesses to buy you know the eye that I look at it with is what does it cost to acquire that customer and what is the lifetime value of that customer? Could they have different terminologies for it churn rate and so on and so forth … you know how [inaudible 00:30:20.7] if you get 100 new customers how many are churning every month, meaning how many go away? You want to keep that very low. Well I was looking at that churn rate but the simple way to look at it is … from a buyer's perspective is if you've … you know I just closed a transaction it was a software as a service business, it's been around for 14 years and it was created originally as a solution to a developer's problem. The developer created it and then it just sort of grew organically. And 14 years later he had a very successful business but he didn't have any data. He was only spending about literally like $300 a month on advertising. I'm like okay well what is the cost to acquire that customer with your advertising and then how long does that customer stick around? What is their lifetime value? So that a buyer wants to look at it and go okay it costs you $100 to acquire a customer but the lifetime value of that customer is $400. My margins are really strong that means okay I can spend more money on advertising dollars and I can double the revenue of this company. They're always looking at that aspect of it from a subscription based business. And that could be physical products or software as a service. That churn rate is really really important, lifetime value, and repeat customer. Once you've gained a customer and if you've got the ability to offer them additional products and upsells that's something that I'm always looking for if you've got that model where you can add to it. The percentage of repeat customers that monthly recurring revenue; always looking at those numbers. I mean just saying that there's a monthly recurring revenue of $60,000 right away you just do the math on that that's $360,000 of revenue that you're not putting advertising dollars to because it's already recurring and there's a fixed margin there. That stuff is really exciting and if you're an owner of software as a service business or a subscription based model box business you've got to have those numbers because that's what buyers are going to look for. They're going to want to know how much does it cost because I'm bringing a whole lot of working capital I'm going to blow this thing up and they want to know the cost to acquire that customer and lifetime value; two most important things in my opinion.

Mark: [inaudible 00:08:10.9] things?

Joe: We got a couple more.

Mark: We have a couple more?

Joe: Yeah drill down to the bottom discretionary earnings we know … hopefully, everybody knows discretionary earnings is your net income plus your add backs. Net income of the bottom of a profit and loss [inaudible 00:32:44.9] statement add back to the personal expenses you run through the business that are your own benefits and one-time expenses. So you get net income plus add backs equals seller's discretionary earnings. Where do you feel most comfortable, where do you see buyers feel most comfortable in terms of that discretionary earnings as a percentage of your total revenue?

Mark: Boy that's a great question and I think it depends a little bit on the business itself. So SaaS companies tend to have higher SDE to revenue percentages. Content sites can have … depending on how they're set up can also have a higher percentage. E-commerce tends to have a little bit lower percentages relative to revenue. So I'm not sure if I've looked at this in terms of percentages as far as SDE to a percentage … I would assume since you asked the question that you have.

Joe: I have and you know 10% percent you could have at least I think. I can tell you what I don't want and I've turned away businesses I just simply won't list them because they're not going to sell are those that have 1 or 2%. You know look I'm not talking they're doing three million in discretionary earnings off of 30 million in revenue. That's a sellable business no question about it. But when you're doing 1 or 2% of your total margins you're spending a lot of money on advertising dollars, you're carrying a lot of working capital and inventory, you make a mistake a half a percent one way or the other and your profit drops dramatically. And any time I've looked at those, anytime we've listed things that have a smaller percentage margin there in discretionary earnings buyers get really nervous and they look at it from that point of view. So you've really got to do that math and not go oh yeah it's 200,000 in discretionary earnings. You've got to go okay it's 200,000 and what percentage is that of my total revenue, and how do I improve that? And then you drill down into those expenses. Dave Bryant who's part of the e-commerce podcast … EcomCrew Michael Jackness, he was our client and a year before we sold his business he did that. He looked at that bottom line sellers discretionary earning as a percentage of the total revenue and then drilled down into certain SKUs and looked at the profit margin of those and either renegotiated the ones that were not profitable enough or got rid of a few and added about 40,000 of discretionary earnings to his business and about $120,000 to the list price of the business. So I … you want to get at I'd say shoot for 10%, 5% gets a little you know depending upon the business and how large total revenues are but it's always a case by case basis. [inaudible 00:35:18.2] get down to that 2, 3% range I get really really nervous as do buyers.

Mark: I do think that part of it is revenue dependent. I've found with businesses that have kind of eye popping revenue numbers that even if the discretionary earnings is a very small percentage as you point out … if the business is doing 30 million dollars in revenue per year and it has really low percentage of discretionary earnings it's still a sellable business because you got 30 million dollars of revenue per year to be able to play with. It's when you get in those territories of say you have $500,000 of revenue and your discretionary earnings is just 10% of that so it's $50,000 that's not a lot of room for error before you're at negative territory and you don't have a lot of extra room in capital to be able to really pull into the growth of that business. So I think that's a good thing to be able to look at. I think a lot of it depends on the size of the business.

Joe: Yeah I completely agree. Look we didn't start … we didn't time this podcast, we have no idea how long we've been chatting for but I want to touch on one more thing that is really important I think for buyers to look at in terms of opportunity and for sellers to track in terms of again opportunity to get more value for your business. Buyers in terms of if they're not detailing it and you can figure that out you'll see built in growth and that is revenue by SKU. And that is whether it's a physical products business or a subscription business; again, box or software as a service. Because sometimes software as a service they offer different packages and what not. If you've launched a SKU, a new product in the last 12 months and I've seen this before and let's say you've got a dozen SKUs and six of them are only … they're under nine months old and staggered within there, you've got built in growth. And so what I like to drill down to if I can get it is revenue by SKU for the trailing 12 months. Because if a SKU was launched six months ago but it's already up to 18% of the total revenue that's huge because you've got six more months and it's growing. It's absolute built in growth and it brings more value for a buyer. You can push the value of the business a little bit higher and if you can share that detail with the buyers they're going to get it. They're going to look at it and go yes I get it I understand it. Classic example of that is Kent Renner. We had him on here on the podcast early on back in December right? 300% year over year growth and he only owned the business for six months. The business had a total of 16 SKUs when he bought it. Nine of them had been launched within the trailing 12 months and represented about 40% of the total revenues. So it's absolute built in growth and Kent's took that business and it was doing a million in revenue when he bought it to three million in total revenue inside of it … a total of 12 months. And that was because that revenue by SKU detail that Evan the seller was able to provide and sort of built in past to growth for it for Kent to take over.

Mark: Yes so I'm going to make a point here in this but beginning way to into the weeds on this topic here but I'm going to just venture in there anyways and just as an advanced tactic for buyers to look at I think what you're saying there is absolute gold. And again I've seen some of our top buyers do just that. They really get into the SKUs and these are particular get it. So let's get into a situational analysis here and say you have an e-commerce business that recently launched some SKUs within the past year or two years and … now I'm saying this because I have this case with a client, they're keeping their books on a cash basis. From a buying opportunity, in my opinion, this is like absolute gold because their costs relative to the revenue is going to be very very high. They're building up inventory in a product that is growing in sales but it isn't really there yet and so you have super depressed or understated gross profit which is going to pop very soon. This is like one of those signals that you're like buy. Like if you know what you're looking at buy this thing because it's going to pop in the next year and you're going to see that massive growth. You get maybe too much of the weeds there.

Joe: Yeah getting into cash versus accrual accounting with cost of goods sold way into the weeds but I'm telling you right now as a buying opportunity if you're looking at other brokerage firms … which hopefully you're looking at everybody. Any experienced broker is going to take a listing and go yeah okay there's the discretionary we'll do a few add backs and here's the multiple on that discretionary earnings. An experienced broker is going to take that same profit and loss statement, a physical products business and make sure that the cost of goods sold is presented on accrual basis. That discretionary earnings number … most often with the business, it's growing rapidly where you're taking excess working capital and putting it back in the inventory that discretionary earnings is going to pop. And I've seen a quarter of a million dollar increase in the value of the business because of it. Let's see if I can do some simple math. Imagine you have in the trailing twelve months a cost of goods sold of a million dollars on a cash basis. It's a big number but I'm trying to do round numbers. And let's say that on a cash basis you're over inflated by 5%. If you flipped it to accrual instead of having 35% cost of goods sold your real cost of goods sold is only 30% but because your cash your 5% higher. 5% times that million dollars that you've got there on the books is $50,000. If your business is worth three times that's $150,000 added onto the list price of the business. Or if you're a buyer and it's not presented that way it's $150,000 of instant equity when you're buying that business.

Mark: Right so for those of you listening you know need to fact check out some of the not … botany is the right field of science and also if Joe's math is correct on that because I don't know if it is. But we'll go with it and the point is there. I think the general rule of thumb that we follow here is a growing business that's kept on a cash basis is going to understate their discretionary earnings and their gross profit generally speaking. And a business in decline that is on cash basis generally overstates their discretionary earnings if they're not putting money back in the inventory at that point. So those are the basic rules of thumb. Keep in your mind there's exceptions; there are always. I think this is been a long podcast right now. We have not been timing it. We're probably around the 45 minute mark.

Joe: Hopefully you guys are still awake. If there's any questions that came up during the podcast shoot us an email inquiries@quietlightbrokerage, mark@quietlightbrokerage, joe@quietlightbrokerage, anybody's first name for the most part @quietlightbrokerage.com.

Mark: That's right and this format of an episode … normally, of course, we'd like to bring on guests and the friends of Quiet Light Brokerage onto the show and we have more of those coming up here in the near future. We've got some pretty good guests coming up. But we wanted to start spring cleaning some of these episodes where it's just Joe and I talking or maybe we'll talk with somebody else within the company not to really give a background on them but to give insights or some of the ways that we attack some of the issues that come up when buying or selling an online business. Give us feedback on this, please. We'd love to hear it. You can send an email like Joe said to mark@quietlightbrokerage or joe@quietlightbrokerage or if you don't want us to know and you just want to complain about us send it over to [email protected] and he's god at keeping secrets so you can complain to him.

Joe: Sounds good. Thanks, Mark I appreciate your time.

Links:

• Learn the Value of your Business
• www.quietlightbrokerage.com
• [email protected]
• [email protected]
• [email protected]

Today we welcome Bryan O'Neil, one of our very own, to discuss owning and running a brokerage firm and being a top advisor to buyers and sellers. Based in the United Kingdom, Bryan is joining us today from Costa Rica, where he is living the true traveling entrepreneur lifestyle. His career has had him in the mix for over 10 years and he has seen a lot from the many angles of the acquisition process.

Before joining Quiet Light, Bryan was one of the original co-founders and a director of Flipping Enterprises, as well as a co-founder and the concept creator of Centurica – the world's first website due diligence agency. He was also a consultant at Flippa.com and was responsible for the launch of their brokerage service, Deal Flow. Today we tap into his wealth of experience as an entrepreneur and pioneer in the internet brokerage industry.

Episode Highlights:

• What Bryan finds exciting when starting with a client and the signals that he looks for right away in a potential transaction.
• The importance of paying attention to the soft side of a deal and the personalities brokers are working with.
• We discuss the burnout rate for the online business broker.
• How brokers develop a sixth sense for what is going to be a smooth deal and how hard or easy it will be to work with a seller or buyer.
• How the relationship between the owner and the prospective buyer is one of the most important aspects of a transaction.
• The broker's valuation is merely the prediction based on the marketplace.
• Which niches that Bryan gravitates towards in his work.
• What red flags brokers look for in transactions.
• One thing that buyers don't look at enough in the valuation process.
• Why buyers also need to look beyond the transaction.
• Something buyers focus on that is sometimes an impediment to the transaction progress.

Joe: So Mark, I understand you had a conversation with one of our very own who probably has more experience than most of us combined in terms of owning brokerage firms and being a top advisor as well.

Mark: Yeah within Quiet Light Brokerage I am obviously the most experienced broker since I've started the company. I've been doing this for ten and a half years now but Bryan and I started off our conversation just kind of reminiscing on his career arc. When you take a look at our little industry that we have here within this kind of online business brokerage [inaudible 00:01:27.0] when you take a look at the companies that have sprung up and really kind of made their mark on the industry you typically see that Bryan has been somewhere right in the mix of all of those companies in that startup phase. So he's been at this just as long as I have. He's been doing this for about ten years now and his resume is impressive.

Joe: It really is and he's been the easiest to work with because he really doesn't need any help which is pretty great given the level of skill and experience he has. But it's funny with Bryan it seems like every time we talk to him he's in a different country. You know he lives over in the UK but I think the last call we had he was actually in Cuba and working really literally from anywhere in the world like the true lifestyle entrepreneur. Did he get into specifics about the companies that he's started that are well known in this industry?

Mark: He did. Yeah absolutely and people that listen to this you guys are [inaudible 00:02:22.7] of companies we talked about the companies. I'll save it for that. And by the way he was in Costa Rica now when we actually did this interview. So he was doing it from his hotel room and asked me in advance "Do I need to shave, is this going to be video?" I said "Yeah Bryan you should shave it and you know comb that hair and all that." So he did and the audio … because it's a hotel room the audio is a little bit echoey. I'll apologize for that but … and then if you're like me I can't listen to accents very well. We make fun of Bryan for his British accent all the time. But what he has and his observations in the industry and he's seen a lot from a lot of different angles. And so in this one of the things that I want to tease for you guys to listen to, we talked about the things that he finds exciting when he's dealing with a client. You know that up front call and Joe you and I know about this, when we have somebody calling to us that they are starting to explore that possibility of selling you develop a really quick sense for what's going to be a good opportunity and what's not. So I wanted to see if I could kind of haul that out of him, what are some of the signals that he looks for right away that makes him go yes this is going to be a really nice client to work with.

Joe: So the signals are being not just the client but the business itself that buyers are going to be excited about is what you're talking about.

Mark: Well we talked about both and I will reveal this one thing, we talked about this so often the theme just came up again which is we also have to look at those soft sides, the personality; are you reasonable to work with. Those sort of things just naturally come up. Whenever you talk to anybody who's experienced this industry that part comes up.

Joe: Let's get right to it we don't to give too much away.

Mark: Awesome let's go.

Mark: Bryan how are you?

Bryan: Hi Mark, doing good thanks. How are you?

Mark: Good, thanks for agreeing. I know you're in Costa Rica right now right?

Bryan: Oh I am indeed. So I'm going to be here for a couple weeks and I'm actually traveling a little bit right now so yeah I'm seeing a few new places.

Mark: We have a game here at Quiet Light Brokerage which is try and guess where Bryan is in the world at any given moment and if you can get it down to the quadrant of the globe that's usually pretty good. So [inaudible 00:04:25.1] world traveler. You are our European representation for the company because you live over in England correct?

Bryan: Yeah I'm mostly based in England and [inaudible 00:04:35.5] but yeah because I'm kind of traveling quite a lot but yeah I'm keeping a base there.

Mark: I got to ask you a question completely unrelated to any of this but it seems as if British people travel a lot more than pretty much any other culture I know. It seems like just popping out to the States for a quick visit is no big deal for most British people. Is this true or am I just completely stereotyping?

Bryan: Oh I should [inaudible 00:05:04.2] of your place to Europeans in general. I mean it's probably true but the fact that we've kind of grown up that way. Because you know living in Europe … it's never really a big deal to travel to a different country because from pretty much any place in Europe … any other place in Europe you can get in a matter of hours. So like from Helsinki to Milan you would have a two and a half hour flight. So I've kind of started the traveling from quite young. Same with everybody who's grown up in Europe and then I suppose that kind of sets the mindset for later.

Mark: Right. I find that fascinating. I mean if we plan a trip to Europe, its multi month ordeal to try and plan. For you, I just find out like oh I decided to come over to the States next week or I'll be over in the States the most. I was amazed so … good to have you on this side of the globe though. Of course, even though you're down in Costa Rica I know you'll be up here in the States real soon as well so … cool. So out of the Quiet Light Brokerage team … for those listening, Bryan you've been with Quiet Light now for over a year now. A little bit more than … I think about two years now, I think-

Bryan: Yeah yeah.

Mark: A couple of years, so for those of you that are keeping track which I don't anticipate as too many but we have a number of people here with Quiet Light and the assumption is typically that Joe is the most senior, most veteran broker on the team. The reality is out of experience outside of myself, you have by far the most experience. And in some ways, you have more experience than I do at the Quiet Light team. What I'd love to do is just kind of go over your background real quick as to how you get started in this industry.

Bryan: Yeah sure. So I think we have to go like back to 2007, 2008 something like that so I think 2007 actually. So I suppose my sort of segue into this was when I first started building some fairly simple Google ads and sites and stuff like that. I think that was about … yeah even earlier actually so that must be like 12, 13 years ago. And you know I was also doing that so I had a few sites and then at one point I wanted to sell one of those sites. And it was back then there weren't really too many options because there weren't pretty much any growth [inaudible 00:07:26.7] facing an online businesses that Quiet Light started that just after that time. Most of the others started at quite a lot after this. There was, however, Flippa or what later became Flippa that kind of started emerging so it was-

Mark: It was the same platforms at the time right?

Bryan: Yeah it was like an Australian developed web forum and they started a little section that was there for people to buy and sell websites and that's what later turned into Flippa. So I found that I sold them my site and then it said hey you know there's quite a lot happening over that. And then that's got my interest and I started buying some sites. And then what I started doing this essentially back then the content of flipping sites was quite bare and profitable. So pretty much before I knew it what I started doing was I started picking up sites that could do with some quick improvements and I would do that, so I would improve those sites and I would sell them off anywhere from a couple of months later to a couple of years later. And that basically got me to a place where other people at one point started reaching out to me asking hey you know you're doing a really good [inaudible 00:08:45.5] you've got a lot of fair above listings and then you're getting good prices can you help me sell my site? Can you draft the listing copy sort of guide me through the process and so forth? I thought hey you know why not. So yeah I charged a small percentage and helped these people and that … this was myself and my business partner back then and we kind of started doing that to the extent that these at one point became the main thing. So we kind of for a long time we never really formally became website brokers, but then at one point think it must've been a year or so we did, we said hey that's a business so we better turn it into business and that's when we started a company that was then called Flipping Enterprises. Now they're called FE International. And so that was kind of the start.

Mark: Right and just to be clear so Flipping Enterprises was the original version, they've reincorporated and changed significantly since then but that was back in 2009 I would say.

Bryan: That's 2009 yeah.

Mark: Yup, okay so yeah and Quiet Light started in October 2007 if I remember right. So that was a few years later; fascinating. Okay, then you moved on from Flipping Enterprises to … which one was it? You were … I don't know you're a co-founder of Centurica and then you're also part of Flippa, which one came first?

Bryan: Centurica first. So yeah a couple years in I think that must have been 2011 or 2012 I kind of cited that I've had enough of that part of the industry for a while anyway. And at the same time I saw a need at … for sort of buyer education and due diligence services in the industry. So obviously back then the industry wasn't arguably still ease. The journey has been very very young and there aren't really many resources available and the one issue that I run into quite a lot in speaking to buyers is that they didn't have any professional to turn to when evaluating a web business to purchase. So yeah that's when myself and my two other business partners Justin Gilchrist and Kaspars Peksens started Centurica. And yeah that took of quite quickly and was really really well. I think with regard in the industry and so we built that up over the course of couple of years and at that point, I exited from Centurica first and then about I think six months later the whole company have sold to the guys who [inaudible 00:11:26.5].

Mark: Right that would be a [inaudible 00:11:28.3] over with Rhodium as well. I remember when you started Centurica, I was at Affiliate Summit East with Jason Yellowitz who was speaking at that conference. I ran into Chris Kite who was a friend of ours and he had mentioned what you guys were doing and I had heard about you before as well with Centurica. And I remember telling Chris I said these guys are absolutely insane. I would never want to do by side do due diligence for anybody due to liability issues. But I … one of the many times I've been proven wrong over the years and the companies well over the years have been a very good resource. I know that those that listen to a lot of our podcast so that we refer or recommend them a decent amount. I think [inaudible 00:12:15.5] does a really good job and is a good person. But I remember hearing about you guys at first and thinking you guys are crazy, who would actually want to be in that position of liability, but it's a good resource. And Justin Gilchrist, that's a name I remember. When he first reached out to me and I was thinking oh man just another person trying to get into the space and it turned out to be a giant in the industry. Justin if you're listening we miss you in this space, feel free to come back anytime you want. So you left there and you went on to another company within the space.

Bryan: Yeah. So from there, it came my sort of a company idea with Flippa. So I guess I got into a discussion with the guys of Flippa who back then wanted to sort of break through into the brokerage industry but with very little success thus far. So what we ended up doing was … I essentially ending up quote unquote consulting them for what was supposed to be a year, it turned out to be two and a half years. And I went there to build out their brokerage platform called Leadflow. So yeah close and short this put it that [inaudible 00:13:29.9] nicely and by now that part of the company is actually separated from Flippa. And my good friend Jamie whom I basically hired as the main guy there and the main senior broker has now taken over running Leadflow and managing it. So they've kind of spun off from Flippa but yeah that was another interesting two year career.

Mark: Yeah I get asked sometimes how large is the industry that we operate in. And I try to explain to people it's pretty small but there's good money in it. When I look at your career arc your fingerprints have been over pretty much every major ebb and flow of the industry that we're in. You've definitely been around and seen a lot of different changes and influenced a lot of the changes. I know when Flippa was starting their deal flow a lot of the brokers just out there were paying close attention because Flippa had such a large audience or has such a large audience still. And so there was a real … and so a little bit concern but also just kind of curiosity. How are they going to change from a marketplace into a brokerage? And it's fascinating to watch the changes occur over the years. And then you joined … you left the brokerage industry, I tell people when they want to come on as brokers I tell them that burnout in this space is real, it's not easy. I probably … I think the average years or the average about time before somebody is just completely frazzled was probably around five years if you're really really good. So you took a break for a while.

Bryan: Yeah I kind of. So well … not so, not really for very long but I think that at the time that I had between Leadflow and when I joined you guys was probably about half a year maybe, maybe first a two year. So there I kind of needed to … knew the break from [inaudible 00:15:24.8] to concentrate on the other stuff that I was doing … I'm then doing. This is stuff like I think that entrepreneur syndrome anting up here that I can never sit still and do one thing. So yeah that's the kind of break but yeah I thought that we would give up and get off in this industry. And it is very much a real thing and very few people can last for a long time and at the same time remain sane so yeah.

Mark: I took time off so I mean I wouldn't say I was brokering solid without any break for about eight years and then I took over a year off before I took on another client. But there's something weird about this space where it kind of becomes an addiction even after you leave-

Bryan: Yeah if you say those I can-

Mark: Yeah it is there's something just super fun about it when you actually do start doing deals and are able to help people. But then once you get into it a lot you do get burned out and Joe and I comment sometimes that you know that you're reaching that burnout stage when somebody comes to you with a fantastic business and you feel like it's a burden. Like oh please you know that makes more money and you're ah I felt that I don't want to deal with this right now.

Bryan: I think we've all been there. The highs are really high and the lows are super low once they've set. It's kind of like … but it's nice because it's a … I think it sort of evens out because I can be really burned out at some times but at the same time when I then do a deal where everything goes nice and smoothly and I worked with people who are good to work with and you know I can see that we're helping the seller, we're helping the buyer, everybody's happy with everything then that's the kind of feeling that sort of very nicely balances out the few negative experiences.

Mark: Absolutely. So I want to talk about … I want to get into that here and hopefully, this will be the real value part for people listening. You know with your or my experience combined that's 20 years of doing this and it'd be interesting for us some time to see if we could estimate what our total closed amount is between the two of us. I bet it'd be a pretty big figure there. But what I want to talk to you about you know when you're in this space of brokering and you're advising people every day it doesn't take very long before you develop a sixth sense for what's going to be a good deal and what's going to be a really difficult deal. So I want to see if we can kind of break out some of those things and I'm going to ask you this and see if you and I kind of agree on some of these points here. But I want to start with the positives, so somebody calls you out of the blue or you got a valuation requests coming through the website and you are in charge of it, you got on the phone with them, what are some things that you look for or if you hear immediately you know those signals start going off this is a great deal, this thing is going to … people are going to love this thing; what are some of those key figures or key indicators?

Bryan: Well I think sort of objective stuff aside such as you know what that business is and what their numbers are and so forth. I would say that I get really excited when I talk to a seller who's clearly easy to work with and on the same page with us. And I think I can't really quantify this to a large extent but it's just sort of the gut feeling if you will that you and I … I'm sure that you as well kind of just get even after a couple minutes into meeting somebody. And I can kind of tell that having probably spoken to over I think two, three hundred sellers in the last 10 years I've sort of developed like I said a sixth sense of being able to tell whether somebody is going to be easy to work with or difficult to work with later on in the process. And when I say that I don't really mean so much the future relationship between the owner of the business and me the broker but also that often translates into the relationship between the owner of the business and the eventual buyer of the business. And that's a super important thing because as you know Mark relationship quality if you will between the buyer and the seller is the one thing that can very easily make or break a deal and that's probably the most important thing when it comes to [inaudible 00:19:45.4] any transaction.

Mark: Yeah you know I think that that sort of intangible comes down to … at least for me, it comes down to the reasonableness that I see from somebody. And it's when we have a discussion and I want to explain where I see value in the business and maybe where I see some problems in the business you know are they absorbing that information or are they fighting me with that … with that information right? So if you say oh you know the trends on the business are kind of negative and we want to make sure that the trends are going in the right direction. If they come back immediately and say well you're not looking at the right aspects of my business in order to value it. At that point, I'm almost hearing that they're not listening to what we're saying there and just trying to fight us and trying to convince us into a higher valuation. And you know the reality is the marketplace is brutally honest. You know I could say whatever you want me to say it's not going to change that the reality of the marketplace at the end of the day. So that's sort of are they there to listen, are they there to absorb, and of course, I'm there to listen and absorb and learn the business as well. But I think it's that touch of unreasonableness that's one of the soft signals right?

Bryan: Yeah and I think this is actually the one thing that's, unfortunately, a lot of people speak to us and get wrong but we're not the people that they need to convince regarding the legend of their business because we're not paying them the money. It's our job to take the business to the market and I just set them up basically, to be honest. And contrary to the belief that some people have what we say or in what words we describe a particular business is not going to influence the valuation of the business because the vast majority acquires at far more sophisticated than that and they look beyond the [inaudible 00:21:31.9] if you will. So there is really very little we can do to influence the value of the business all we can do is reflect what the market at least came to be.

Mark: The one thing I try to explain to people is that our valuation and the valuation approach is a predictive value. And that said I had a conversation with a buyer this is probably a few months ago where they took a look at a business I was representing and looked at the valuation approach and he came back to me and said well you know I was looking at this valuation book and I think we should really be using this approach to place a valuation on the business. And of course, you know being a buyer he wanted the price lower, understandably so. And so his valuation approach significantly discounted the business and I had reply that was said that I don't care what sort of formula you use or approach you use, you can use whatever formula or approach you want, end of day we're just trying to predict the marketplace and what one buyer in that marketplace is going to be able to do or be willing to do for that business. The same thing with that on the sell side is just that. What sort of niches do you tend to like when repping a business?

Bryan: That's a really interesting question I think that's changed over the years quite significantly. And interestingly enough I think if we would to go back about five years then ironically I hated e-commerce. I really and truly hated e-commerce because it was difficult. There were always issues with stuff like transferring over tangible inventory etcetera etcetera. But that has actually changed 180 degrees and nowadays I would say that I actually have grown to like e-commerce. And if we took all of my closed deals then I think e-commerce has actually easily been the majority. And that kind of adds up with what Quiet Light is doing as well because if you look at the industry in general then you can kind of see certain soft specializations and for Quiet Light that specialization is quite easily e-commerce even though we obviously represent businesses across pretty much all business models and niches. But yeah I think e-commerce nowadays is where our collective expertise and most of my expertise lies in over the last four, five years.

Mark: That's fascinating. I know our numbers break down and just under 50% of what we do is e-commerce so that'll be a plurality, SAS comes in second; probably behind that. And then we get into the different types of sites that can really break out from there; completely unintentional. You know I didn't set out and say I'll then become have this soft specialty in e-commerce but by any means. That's fascinating. Well, let's talk a little bit about some of the things that when you're doing an initial valuation call are a kind of those warning signals or kind of those oh man this thing is going to have difficulties selling. I know for me I'm super focused on trends. Trends are probably the number one thing I would look for but I'd be interested to hear what you look at and what some of the big red flags you look out for would be.

Bryan: No absolutely I can feel them, trends are a big thing. And I think that the most common sort of warning signs that something might be off would probably be either a significant drop in revenue as of late. So if we see the business being just stable growing for a year or two years and then over the last three months you have a sudden drop in revenue then that certainly indicates that something is very likely off there. Or in the same bane if I see continuous decline over a longer period of time even if it's a slight decline then that also indicates that something might be wrong and there may be some sustainability issues with buying that particular business or the industry that the business operates in or something along those lines. And I think apart from this another thing that is a little controversial because it often results in false positivities if business books are really messy then that can be a warning sign. But also that's when we come in because it's a … that first stage is for us to determine whether that's a true warning sign or if it's just somebody who has never really paid attention to keeping clean books and running that part of the business properly. Which happens quite often because in our industry we often see businesses that have grown essentially out of hand for the owner of the business, they just started a really really small business not worrying about stuff like proper accounting and things like that. And before they knew it the business grown tenfold or a hundredfold and that part of the business has been neglected. But you know in those situations we always try to figure out what's actually going on behind the scenes and whether those things can be fixed and if it's just a case of some negligence or if it's a case that the seller is in fact trying to hide something and got to the books which we do come across I mean on the end as well.

Mark: Yeah the books obviously would … are something that we focus on first and foremost. And I think for me it's … messy books don't scare me as much. It's the overly simplified books that scare me. When I get a P&L that's only in Excel and it's a total of 15 grand lines in there I'm thinking something is not right with this.

Bryan: Yeah this happens often as well. I kind of put the two in the same bucket, maybe I shouldn't but yeah they sort of go in the same bucket because if someone has taken an hour to put down some numbers in an Excel spreadsheet and it doesn't really have anything firm up there and that can definitely issue. I actually saw a P&L just a few months ago where I noticed that for some reason all the revenue numbers were round numbers. I'm like that's not right, that it cannot be, I mean I'm listing up one client and there are you know two clients and you charge them $7,000 a month each then that just can't be the case. And then it came out that yeah I was just taking some approximates because I don't really track the actual figures so based on what I know how the month was I kind of put that down. No that doesn't really work like that. So if you want to sell your business then you have to have the exact figures and know exactly what the business has been doing. Because even if a broker exists who is happy to list the business having something like this then you came be a 100% in that you're going to run into issues the moment you have a buyer or actually before that.

Mark: Yeah round numbers and P&Ls are always a warning sign. I've never had round numbers or very very rarely. All right, I'm going to put you on the spot; I didn't prepare you for this question. But what is one thing that you think buyers need to pay more attention to that they currently don't pay attention to? Or maybe let's put it this way, out of the reports that a business could offer what do you think is one report or one thing that the buyers really don't look at that might provide more insight into the businesses that they're evaluating?

Bryan: That's a really good question I think in terms of reports I'm not sure if there is anything major about that. But I would say that I've noticed quite alarmingly that a lot of buyers don't really look beyond the actual business that they are evaluating. And when I say that what I mean is that they don't look at the industry as a whole. They don't kind of pay enough attention to the competition, to where the industry is actually going; whether the industry itself is likely going to be growing for the next five or ten years or the kind and sort of the external stuff like this. And I, myself included actually when I started buying businesses years ago then I later on noticed that I was guilty of the same thing. I was just concentrating on that particular business and the trends and the books of that business that I completely started ignoring everything else, everything that was around it. And I got burned a few times so I learned. I wish I learned before getting burned.

Mark: Yeah I think that's fantastic advice, looking beyond seeing if there's room for growth within the industry itself. I had a conversation with Jeff Hunt and asked him a similar question and he said knowing where your customers are coming from which I thought was fantastic advice. You know understanding that the process of you're looking at a business, to acquire a business and you see that it has customers, understanding fully how are these customers being acquired. So I think those two bits of information might be quite useful. Okay, so we'll bookend this and I'll have this as the last question here for our conversation. What would you say is the one bit of information you see buyers frequently look at and you think is probably not as important as they think it is?

Bryan: That's a good and very difficult question. I'd say that it doesn't happen very often but I think the reason why I say this is because over the last few days I've actually had two separate conversations in the thing where I've been asked for things like the company's liabilities financial and balance sheets and things like this. I think that's due with a little bit of misinformation. So you know exactly what I mean but just so all the listeners know, the vast majority of the deals that we do in this industry are asset purposes. Which means that what you're buying is the website, any trademarks, any Amazon accounts you name it but you're not buying the [inaudible 00:31:27.9] which means that you're not buying any liabilities, you're not buying any entities themselves, any contracts, etcetera unless they're transferred over. Which if I close because it makes things simpler and … a lot simpler to both buyers and the sellers and this often means that in terms of the information required in such due diligence as a buyer you don't have to spend your time and money making sure that corporate entity itself is in good order because that's never going to be your concern or your liability. So that's something that I've come across a few times just recently. Apart from that, I don't really think there are a lot of things that happened too often. Maybe at times getting a little bit too granular with old stuff is something that I would rather not spend that much time on. Obviously looking at … you know spot checking certain months or certain periods is something that can easily be very beneficial because if there's anything funny then the stakes will come up this way. But I wouldn't necessarily go back to 2015 or 2016 and start asking questions about why it was there a small bit in revenue in March 2016 because [inaudible 00:32:49.8] seller doesn't even remember it or if they do and if they can find out then that information is really quite irrelevant right now.

Mark: Absolutely getting to that granular detail years ago could be an absolute pit fall for buyers. And I think there's obviously buyers who wanted to protect them against risk as much as possible as do we. We want to make sure buyers are protected from risk but you can spend all your time looking for what's going to get you and then end up losing out on the big picture sometimes as well. So that part is a balanced net. Cool. Hey, this has been fun. With our team being spread out all over the country literally all over the world we don't get a whole lot of opportunities for a face to face. So this podcast and the video portion of this is an opportunity for you and I to have a face to face conversation which is always fun. And whoever is listening can either I guess benefit or suffer through that conversation. So all right any last parting words of wisdom for the listeners?

Bryan: Well not really but I think if there's anything then I'd actually like to go back with … go back to where we started off which is if I had one piece of advice over to the buyer and sellers is be a nice person, be good to work with and that's something that is always going to pay off. If you're making yourself difficult then any eventual deal is likely going to be difficult as well. But if you keep an open mind and remain realistic then likely you're going to enjoy the whole process working with us, working with the other part of the transaction and everything is going to go nice and smoothly.

Mark: Absolutely I think our listeners have heard this from us before. You know these are financial transactions but they're also human transactions.

Bryan: Exactly.

Mark: And you've got to get all parts right, cool. Bryan thank you so much for joining and yeah we'll be talking and I'm sure. Everyone that wants to reach out to Bryan you know how to contact him you can find his contact information on the site. He's got a ton of experience. So I'll offer what I offer for myself personally and that is if anybody has questions or want to run something by Bryan just reach out and it works as well. We're here to help and more than happy to talk to anybody who wants to ask us a few questions. Thanks, Bryan.

Bryan: Absolutely, my pleasure Mark.

Links and Resources:

Bryan's Website

QuietLightProfile

Once upon a time I (Joe) had an AdWords PPC budget that hit $45,000 a month. Over 5 years I learned AdWords on my own, had no training, a half dozen campaigns and a handful of ad groups. I thought I was pretty savvy and successful. This was about 10 years ago and to be frank, I'm older, wiser, more seasoned and would tell my 10-year younger self that I was a novice and wasting a TON of money. Don't be like me.

Since 2010 I have heard dozens of entrepreneurs tell me they outsourced their paid advertising unsuccessfully. So when Jason Yelowitz introduced me to Strike Social Founder I was a little skeptical. But success and growth speak for themselves.

Patrick McKenna boot strapped Strike Social from his kitchen table in a rented home in LA about 5 years ago. In 2016 Strike Social was named on the Inc. 500 List for the fastest growing companies. Their rank? Number 17!

Strike Social helps brands improve their paid advertising campaigns, dramatically. One example Patrick gives is an ecommerce company that had their CPA go from $80 dollars to $16. This created great problems for the client. The first was rapid growth and much better margins. The second was access (or lack thereof) to monies for inventory. As you likely know – running out of inventory is an issue. Rapidly growing brands lack access to capital, run out of inventory and lose ground on the path to growth.

Strike Social does a free analysis of a client's paid ad campaigns, a free test, and when the client comes on board and grows so fast they don't have funds for enough inventory, Strike will provide working capital for inventory. If it weren't for the rank of number 17 on the Inc. 500 list and the fact that you don't get there without proving yourself, I'd say it all seems too good to be true. After chatting with Patrick on today's Podcast, I say try them out get a free review. At the very least you'll learn what you are doing right and wrong in your own paid advertising campaigns.

Episode Highlights:

• Instagram's paid advertising platform is the next Facebook. It's working.
• In Google AdWords you should have 1,000+ campaigns, not 6.
• Facebook is content driven and ads need constant testing.
• Video ads in Facebook can be as short as 3-4 seconds.
• YouTube is great, but not for direct conversations and CPAs.
• Strike Social developed technology recognized by Techcrunch.com that helped propel them to #17 on the Inc. 500 list.
• Strike Social will provide working capital to clients so they can ramp up inventory to match growth.

Mark: So one of the things that I find most difficult and frustrating about running a business in today's internet world is this idea of having these coordinated campaigns across multiple channels and multiple platforms, and the degree to sophistication which you need to run each campaign across each platform. For example with Facebook and Google, it's not so much to do just [inaudible 00:01:25.5] a couple of key words and hoping everything works for Facebook bring up a couple of ads and hoping it works. You really have to delve in and get super detailed. I understand Joe that you talked to somebody today that's doing this for a living. And they started a company and not only have they just started and are doing well but they're ranked really high in the Inc. 500 list specializing in running these cross-platform campaigns that are really highly refined.

Joe: Yeah. It's Patrick McKenna from Strike Social and about five years ago he bootstrapped a company, he was literally working from the kitchen table in a rented house in Los Angeles. And he developed software that would analyze paid advertising campaigns and then go way beyond what you normally do in an excel file and so on and so forth. Standard stuff right? Well, that's what I thought when he was introduced to me by our very own Jason Yellowitz, they're neighbors. Patrick's company Strike Social in 2016 was ranked number 16 … no number 17 on the Inc. 500 list. And I think you and I have talked about this that that's impressive, number 17 on Inc. 500 list, you don't get there by accident. You don't get there without being really really good at what you do. Over the years, the last six years that I've been doing what I'm doing I talked to dozens and dozens and I might want to say hundreds that [inaudible 00:02:49.9] of people that started their own Google Ad Account and developed it as their business grew and managed it themselves and then got to a point where they said you know what I should outsource this. And they found somebody online and they outsourced it and what happened? It failed. That cost for acquisition went up, the budget went up and they had to bring it back in-house. Dozens of times I talked to these folks. So when I first connected with Patrick I was skeptical but then we talked, went into detail and he gave me some success stories that are really truly just incredible Mark to the point where I need you to listen to this podcast and consider talking with him about Quiet Light Advertising. They do testing for free. They do an analysis with their software and they'll do a test for free as well. And then they prove themselves and then like every other agency they get paid on a percentage of spend. But here's the kicker they've taken some clients and grown their businesses so dramatically that clients run out of inventory. That's the number one thing we tell folks is don't run out of inventory. It seems so simple but when people bootstrap the company and they grow they don't have enough working capital. And I've listened to other podcast, you know the EcommCrew Mike Jackness podcast where they talk about trying to find sources of working capital for inventory. Well, Strike Social will be that source for their very own clients. Because they've run into it so many times where it was so successful the client ran out of funds to buy more inventory. So they became that working capital source. So really impressive story, I would encourage everyone to listen all the way through to the 31 minute mark where he starts to talk about the working capital aspect of it. But there's a lot of good stuff here. He talks about some basic things that everyone should do. A quick story and then I'll stop talking. But when I ran my own Google AdWords campaign for the company that you brokered for me back in 2010, the most I ever spent was $45,000 in one month on paid advertising. I worked my way up that, up up from that in 2005 to 2010. Of course, after the crash, it was much lower but at the max … at the peak, I had a total of 10 campaigns set up in Google AdWords. And I had it all done with my keywords and I used all the software at the time to find those keywords and develop them; 10 campaigns. So in talking with Patrick, he talks about that their clients have an average of 1,000 to 6,000 campaigns and that's for one product, Mark. And that just makes me think about … again, yet again how much money I lost in two ways, really on wasted advertising spending and on not making it so good that my cost for acquisition came down dramatically. And I just want to encourage everyone that's listening to think about it and listen to what they're saying and have a conversation with them because odds are you're not doing it as well as you could be if you're doing it yourself. Just like what we talked about with book keeping, Excel is not accounting software. The basic pieces that you pull together for managing your campaigns across multiple platforms is not as good as what these guys have either. And it's worth to listen to him, worth a test I think in my opinion and experience.

Mark: Yeah and I really have to agree with the fact that if you're doing it in-house and look I'm running some campaigns in-house right now for both companies that I own. That for a variety of reasons … but you have to understand if you're going to run it in-house, if you're not going to have a specialist, chances are you're not going to be doing it as well as it could be done. Because AdWords is an environment that really takes specialization. Facebook is an environment that really takes specialization. Frankly, I'm saying up a good automation sequence falls in the same category as well. So I'll be interested to listen to this. I definitely will be listening to this. I'm always looking to pick up on some information.

Joe: Yeah and look Instagram is also in there as well. It's something we talked about. You know when AdWords was it that was the player Facebook came along and started to become the second option. Well, Instagram is now that option to Facebook and it's really starting to work. So those that have not expanded to those channels, listen, take a look, learn. And the other thing look this wasn't a pitch for this guy's services. This was helping people understand what they may or may not be doing right or wrong in their campaigns. And he talks about three things that you can do and focus on. And at the end Mark, I didn't ask him for a contact information like at all. It's in the show notes of course but for those that only listen the company is Strike Social. It's strikesocial.com and you can email them at [email protected] that's [email protected] it's a … we didn't talk about it at the end so I want to throw it in now.

Mark: Awesome well let's get to it.

Joe: Hey folks its Joe Valley of Quiet Light Brokerage and today I've got Patrick McKenna with us from Strike Social. How are you, Patrick?

Patrick: I'm good. How are you, Joe?

Joe: I'm fantastic. Folks, anybody that knows Jason Yellowitz here at Quiet Light, you should, he's been around for I think longer than everybody except for Mark Daoust the founder of Quiet Light. Jason was my broker when I sold back in 2010 and he happens to live across the street from you right?

Patrick: That's right we live in Reno, he's right across the street. Kids are always running in my house.

Joe: Jason is a good man and I wouldn't mind having him as a neighbor. I often poke fun at Jason and his Bathrobe Millionaire book but it's a heck of a success story and I still don't have a piece of the bathrobe. Have you ever seen it laying around his house? Did he save it? Seriously is it like behind like a glass case hanging on the wall?

Patrick: It's on the mantle sitting up there. He's very proud of that.

Joe: Next time you're in I want you to take a selfie in front of it and send it to me okay?

Patrick: [inaudible 00:08:47.7]

Joe: Look in all seriousness Jason is top notch. He's my mentor. He's mentored to many. He's a terrific guy. And he introduced you to us. And as I mentioned before we started recording we do not do fancy introductions here at Quiet Light on the Quiet Light Podcast so I know it's going to be hard for you but I want you to brag about yourself a little bit because you have a heck of a success story. Tell us about Strike Social and what you do, what the background is and all that good stuff for us.

Patrick: Sure, yeah we … you know Jason and I are sort of kindred spirits. We've been through the battle, it sounds like you have too … I mean a business is incredibly challenging. We did it like anyone else does it. We take the plunge, you bootstrap on a kitchen table out of our rental house in LA. And we started that process in March of 2013 and then we launched some technology and we got recognized in TechCrunch for this advertising technology, this analytics platform. By November after that article came out we're selling like crazy and that was some different challenges. You think initially that wow this is great and that my products rate and the market loves it. And then you start to realize that you're putting yourself out of business because you're trying to fund invoices and all those types of things that come up when you're running a business. So we went through all that stuff, raised a little money in 2014, raised a little bit more in 2015 and it's standed globally and by 2016 we're recognized in Forbes Fast 500 fastest growing companies in the US.

Joe: What number were you?

Patrick: Number 17.

Joe: 17 out of 500?

Patrick: Yeah.

Joe: That's incredible.

Patrick: Pretty amazing. That was up 2016 revenue numbers and we're excited to see where we land this year for Fortune List. It will be the 2018 release that will be 2017 numbers so-

Joe: Got you.

Patrick: It's that it so.

Joe: It sounds exciting and painful all the same time. You've literally started on a kitchen table at a rental in LA. and then grew the business, bootstrapped it from there. Probably like many of the listeners who are you know the listeners that are sellers and entrepreneurs and listeners that are hoping to step into the entrepreneurial role that you're playing now. That's pretty incredible. Tell us about what Strike Social does and who your typical customers are.

Patrick: Right. So initially we went out to the largest agencies in the world and we sold execution services around advertising. So initially we started with YouTube now we're across all the social platforms and search as well. But we would basically like take on and execute buys for their largest customers. So our customers will be X-box in PNG and pick any Fortune 100 brand, the big guys. And then we started doing that here in the US then we went to Asia and then went to Europe and I don't know if you know who the holding companies are but you know WPP [inaudible 00:12:17.3], the big guys that I mostly don't talk to a smaller company. So it was really nice to have that reign for us to go sell in to and it was a really profitable situation for us. And we kept building technology and investing in technology and people and locations. We have a location here in Chicago where we're headquartered. And then we have a location in Poland and a location in Manila. We've got about a hundred people here now and we've got boots on the ground from Japan, and Korea, and Australia, obviously the US, Singapore, Europe. So it's been a really really fun ride and yes you go through all of the emotional ups and downs of running a business when you're buying one.

Joe: Yeah. Good problems with that kind of growth, really good problems. Talk to me about the technology that you developed that originally got you recognized in I think you said TechCrunch and you said analytics platform. Can you talk about the actual service and why someone would use … like why these B2B advertising agencies would use yours versus having an expert in-house do it. What does it do and what's different about it that made you the 17th fastest growing company in 2016?

Patrick: Yeah I think when video first came out I think it was really challenging for companies to understand, it is kind of a new medium, how do I be successful here? So our analytics platform so they showed them how to be successful. But what we did is we executed the media guys. So we look like a typical agency, we don't really like that word because we built software solution to help us with that. And then overtime what we've done is we built this incredible artificial intelligence box that allows us to go across platform, plan and execute strategies. And so it's all … it's a human and technology solution combined. And like I talked about advertising now it's a complicated orchestra. And what you need at the end of that is execution so … and we can talk about that more but it's very challenging to stay up to date on these platforms and you need a partner and a technology solution to really execute and do well.

Joe: Okay. And you started out with YouTube, so at that time there were not a lot of experts in the field of buying advertising, buying that advertising space on YouTube.

Patrick: That's right.

Joe: You know when I … when Jason sold my business back in 2010 I was spending a boatload of money on Google AdWords and I learned it from the ground up. I did it myself starting in 2005 and I … at one point I never had any training so I can't imagine how much money I wasted over the years. I mean it was a point where I topped out at spending $45,000 a month. I mean Jason loves to tell the story of how I got mad at American Express because I went above my average so I cut my advertising in half and it's the stupidest thing I've ever done. But I did it because I got mad. It is a ton of money; I blew a ton of money by not being the expert. But you guys learned that expertise in terms of buying ad space on YouTube and then you expanded to the other social media platforms. So are you now doing paid ads on Google AdWords, on Facebook, Instagram, Snapchat, things of that nature?

Patrick: Absolutely DBM, Amazon, all the ones-

Joe: What would DBM mean? You got me right there.

Patrick: Sorry … Doubleclick Bid Manager is Google's DSP solution to get the rest of the web that's not … that you can't do in AdWords.

Joe: And what's DSP stand for?

Patrick: Digital Supply-side Platform, so that's how Google goes and buys display advertising on say the [inaudible 00:16:36.9] within New York Times.

Joe: Okay.

Patrick: Yeah. So it's another Google product. It's part of their Google Suite and actually it's interesting that you bring that up that's … that they had a tagging solution there that … and we find this a lot in companies that are running small businesses on just AdWords that you can get really good multi variant testing on that platform rebuilt technology to allow you to expand that. I don't know how extensive you got with your test. But one campaign maybe you have 40 different variables, maybe you're really good and you get up to a hundred. We'll do like 6,000 with their technology.

Joe: Wow.

Patrick: So yeah we're testing age, demo, interest, topic, keywords-

Joe: Let's get really down to it. People that are listening, their ears might be perking up and this is why we're talking because you don't get to be number 17 on the Forbes fastest growing companies by screwing up.

Patrick: Yeah.

Joe: Because you wouldn't have the clients that would be referring and helping you grow your business further.

Patrick: That's right.

Joe: So my initial thought as I said on our first call was more often than not I do valuations and exe-planning for people and see that they were doing fine on their own advertising. Managing it themselves and then outsourced it and it totally blew it up as in bang and their cost for acquisition went up. And usually, in my experience, it's not a great thing. Your success in having people use your services changes my mind. So let's talk about specifically we've got folks that are … was their physical product owners and of course there's content as well but I think you said you don't really do a whole lot of content stuff. Correct me if I'm wrong but let's say we've got physical product owners that are mostly because of the crazy growth on Amazon doing Amazon sponsored ads our advice is always go well beyond Amazon grow your business so it's not one revenue channel. Your value is going to be higher but they are challenged with how to do that. So do you do an analysis on a business and you're looking at Facebook advertising for that physical products, do you take over the Amazon, sponsored ads, do you do Instagram all of these things?

Patrick: Yes, all of them. And you know what before we start with any business we start with an audit to get to a genuine conversation. You'd say okay here in the platforms you're on tell us about your objectives, lets pull your data into a dashboard that you'll own and take possession of. And more so you … where we see some quick wins and easy gaps and then we'll go take you know what if you like what we're saying we'll go run a test for free to see if we can improve what you're doing.

Joe: How much is the cost of the audit that you do?

Patrick: It doesn't cost anything.

Joe: Okay the audit is free and the test is free.

Patrick: The audit is free, the test is free. That's right and we just rolled out this … the reason I'm talking to you and I'm just talking to Jason about this is you know we just rolled out this Strike Marketing Partnership. You know we have a very large e-commerce company under our belt right now and we are able to take that business and improve their cost per lead from $80 to $16 and it really grow their business. They were able to-

Joe: Were they profitable at $80?

Patrick: Yes. Yeah, they were.

Joe: Okay.

Patrick: Dramatically improved their numbers and now they're on a path to being a billion dollar company.

Joe: And so you took it from $80 cost per lead … was it cost for lead or cost for acquisition or both? I guess it doesn't matter but you took it from 80 to 16 and then where they able to use the same budget or I mean-

Patrick: They were able to increase it. Yeah you see that's the key and I think the one point I want to make Joe is that we are entrepreneurs here and we're in the advertising marketing space and like one of the guys that's on our staff started panatea until he started the March Air Movement and sold it to a very large Japanese company because he doesn't need to work. But he's passionate about entrepreneurs, entrepreneurship and he's an expert in building that brand. And when you said content you know content is critical in … when you start talking about AdWords and multi variant testing you can't apply that same learning over to Facebook. It's a completely different platform. Everything is grouped together. You have to be a little bit patient and let Facebook find that first customer for you. And then it starts to learn who your customer is and it's started in and it's off to the races. But if you're open at that platform and if you're doing it the same way you're doing it on AdWords whether it's YouTube or just AdWords so you're not going to perform there, you're just … you're not doing it right.

Joe: Okay.

Patrick: So-

Joe: What are in that Amazon Seller account? Do you guys handle the sponsor ads as well?

Patrick: That's right yeah and we have a seat on Amazon so we have a partnership with them. Seat means that we get a seat.

Joe: You know I was going to ask that.

Patrick: Yeah sorry. I can see it on your face, what's a seat?

Joe: Okay.

Patrick: And seat that means that we're in their partner program and we can log into their technology and buy inventory at stale.

Joe: Sure.

Patrick: So … yeah and that means we also have a rep, and that's the other thing to is that these platforms change all the time. And one of the recent ones was GDPR it's made a … GDPR oh.

Joe: Come on now GDPR what's that? This is going to be the acronym show. What is it?

Patrick: Yeah the acronym … I'm sorry, I spend a lot of time in advertising so you know neither all … there are all things … GDPR is a … it's a European Union situation where the user is in control of their own data.

Joe: Okay.

Patrick: And the platforms, you have to basically ask permission or I think you've probably seen on sites you go to now. They're saying a. so do you like content, you need to accept my cookie. And if you're in someone's database right now and you have a European client in your database you needed to e-mail them and say hey by the way I need you to okay the fact that you're in my database. Initially, don't do that, I mean don't be that; you can get fined significantly.

Joe: Most of our … the people in the audience, the people that are listening I shouldn't say most I mean it's anywhere from somebody doing a hundred thousand a year in revenue to you know 40 to 50 million in revenue. So it's all over the map there a little bit. Let's give some stuff away for free here that I don't want this to be obviously you do the evaluation and you do the test for free. And then let me just answer that; let's answer the quick question because people are going to say well what happens after that? Do you get paid on a commission basis part of the advertising how does it … part of the advertise you spent?

Patrick: Yeah I think that's why we fall in that advertising agent bucket because we get a percentage of the media.

Joe: I did the same back in my Media Mind days when I used to buy time on radio; percentage of what you're spending.

Patrick: There you go.

Joe: And about the job you do on that cost for acquisition the more you're able to spend because the budget goes up. So it is the right-

Patrick: Portion.

Joe: Way to do it. Yeah. All right so let's talk about that aside do you have any sort of hot tips? What can someone do just on their own looking at their own advertising budget in whatever platform you want to talk about?

Patrick: Sure.

Joe: Give away some tips or what can somebody do that's using … let's start with Google AdWords. What's the biggest mistake people make and how can they fix it?

Patrick: Yeah I think that one of the biggest mistakes, I mean you can kind of take this across all platforms is trying to figure out the audience and the actual attribution and then finding the adjacent audience. So I'll give you an example, and our artificial intelligence does this. The idea is that you need to expand your audience. So you find an audience that gives you a high lifetime value and you recognize that in keywords or interest in Google AdWords. For example, you might be targeting 18 to 54 year olds in AdWords. You need to break each one of those segments up and realize that 18 to 24 year olds aren't interested in the same thing as a 45 and through 54 right? So if you're trying … if you're targeting people who are interested in the NFL, the 18 year olds that also have that same interest are interested in the UFC. And so you have to find those adjacent audiences to lower your cost of acquisition. Does that make sense?

Joe: Yeah.

Patrick: You expand the reach of the audience size and that's something that our technology does and our big people are doing that.

Joe: Okay so it's finding out their like audiences. I always hear something on the Facebook algorithm in the paid advertising part of that similar audience or look alike audience, is that what we're talking about?

Patrick: Kind of, on Facebook it's different. So AdWords is a multi-variant test platform. You're basically setting up … hopefully, you're setting up somewhere between 10 and 150 different campaigns. We're going to set up about 1,000 to 6,000.

Joe: I think I had five or six and I had multiple things underneath there. So you're talking about 1,000 to 6,000 campaigns?

Patrick: What was what was your target audience age range?

Joe: From the women 25, 54 but I honestly can't recall if I even know. No, not much. I don't want to talk about that because I lost a whole lot of money the more we talk about it.

Patrick: Oh my gosh.

Joe: Wasted money. But you're doing a thousand campaigns inside of Google Ad Words?

Patrick: You can [inaudible 00:17:10.1]. That's the only way, get out to get that. No, no, no, that's my product. That's the only way to get down to how am I going to expand this audience? What does this audience …. what is this audience also interested in? So it … what you basically said, what you told the platform was I want women 18 to 54 is that what you said, 18 to 54?

Joe: 25, 54 but-

Patrick: 25 and 54 and you basically said they all have the same interest and they don't.

Joe: No they don't.

Patrick: And they're not even on the same device. So you've got to break it out by device; tablet, mobile, desktop. And you've got to break it out by each age group. You've got to break it out by each interest. And you got to break it out by each keyword. Because if you don't get that data in there you're science is [inaudible 00:28:04.6] value is.

Joe: Okay so someone doing this on their own in an Excel spreadsheet doing … think they're doing fairly well odds are that they could be doing a whole lot better.

Patrick: Basically.

Joe: Right. Another … okay so the tip there was I keep, I want to call it look alike audiences but it's not.

Patrick: Just call it multi-variant testing. In AdWords, you've got to multi-variant test, and you've got to get as granular as possible to get the learnings out of that, out of that platform.

Joe: Multi-variant testing, okay.

Patrick: Yes.

Joe: Second so the tip, the next thing you'll sit down and tell somebody to look at?

Patrick: So on Facebook, it's completely different. You can't, you have to bucket everyone together and then as soon as Facebook finds you that acquisition and that's you know obviously Facebook and Instagram then it starts to learn okay now I know who you're looking for and it starts to find all the people that look alike. That's where the look alike part comes in. Facebook's AdWord is working in the background to figure that out. When we first set out it might be looking at your return and saying oh my gosh I'm doing way better on AdWords. You have to stick with it. And one of the things that we see as well is that you have a longer sign up or click to buy solution in your platform. What you'll see is people will start that buy on Facebook and they'll get to your form and realize that they don't have enough time for this and they need to go sign up on the desktop. And they'll go to Google search, look up your brand and you have to be able to do that. And that's where that DCM code comes in to play; from double click.

Joe: Okay.

Patrick: It actually digi up and see the assist on Facebook to AdWords, give the credit to Facebook that was the person who … that's where they saw the ad. They'll just go in to the desktop to finish filling it out

Joe: Okay.

Patrick: That makes sense?

Joe: I did evaluation maybe three weeks ago for someone that back in the first quarter they reduced tremendous volume in their business by Facebook advertising. And then the algorithm update hit in I think April, you know by May. And they went from let's say a half a million a month in revenue to 40,000 a month in revenue.

Patrick: Yeah.

Joe: Incredibly painful.

Patrick: Yeah.

Joe: They then jumped to Google AdWords and made adjustments on Facebook. But that type of algorithm update how do you and how does your agency … [inaudible 00:30:34.3] agency, how does your service address that, fix that, take care of that, and make sure that your clients are not going to be suffering from that major algorithm update that Facebook seems to be doing on a regular basis?

Patrick: Yeah, it's a good point Joe I mean we're all sort of at the mercy of the changes that happen. That update may have been Facebook's response to Cambridge Analytics which was kind of like on the back end of that GDPR stuff I was talking about. So they have made changes and all these platforms change all the time. What we had is like when I was talking about Amazon with the seat, we're in Facebook's Ad Manager; we have a Facebook rep so we … those changes come to us before. Hey look here's how you're going to have to set these campaigns up in the future to be successful. Be prepared for this, this is going to be our algorithmic change and they'll never tell you what's in the science behind it. But you bring up a valid point about Facebook; it is a very content rich platform. You have to be testing instead of multi variant testing, different light items of campaigns. What you're really doing there is your multi-variant testing creative. So you have to look at an audience and you have to understand is the audience tired of my ad? They're seeing the same ad over and over again. Are they tired of that ad or is the audience exhausted with my product? They don't want it anymore and I have to go somewhere else. But typically what we're doing in Facebook is a lot of creatives popping. So well create a slot, 15 different pieces of creative image a week period [inaudible 00:32:19.0].

Joe: So with AdWords the campaigns you could have a thousand plus potentially.

Patrick: Yeah.

Joe: Maybe at least 6,000 with Facebook it's more about the creative and fifteen different creatives over a two week period.

Patrick: Yeah that's right.

Joe: And then you'll continue to test that and swap it out to just continually monitoring the click rate and conversion rate.

Patrick: That's right.

Joe: What about video on Facebook is that something you're doing and recommend?

Patrick: Yeah you know [inaudible 00:32:46.1] there are working really well, there's video component in there. But yeah we're seeing great conversion off of short video. And you know you … on that creative side you have to have high quality images and the videos don't have to be very long; two, three … three to six seconds perfectly in there.

Joe: I think the quality I think the audience gets because that's the number one thing in terms of their own website and the Amazon seller accounts is top quality photos that should be the first thing. All right so we talked about Google AdWords, we talked about Facebook, any other thoughts in terms of you sitting down with somebody having a drink and what they should look at if they're running an e-commerce paid advertising campaign?

Patrick: Yeah I mean actually on the paid advertising side I … you just have to keep exploring the platform's interest, is that really good … if you know how to use that platform it's becoming a very good conversion platform. And it's interesting when you start to see these new platforms come out typically because they're new there's not a lot of complex decision there so if you can … it's kind of a land grab. It's kind of like what Facebook did to Google. Facebook was a new platform, they finally got their Ads Manager to work properly and Power Editor is what they call it. And people have done really really well. Same thing is happening with Pinterest now. They've got their advertising technology and algorithm is starting to do really well in the backend of collecting data and saying oh this person who bought this is also buying this and they look alike kind of thing. Pinterest is becoming a CPA platform.

Joe: Okay, so AdWords, Facebook, Pinterest … and when we say AdWords when we say that we are talking about Google content searches plus I assume were talking about YouTube looped in there as well.

Patrick: Yeah YouTube is very tough in terms of direct conversing. What you have to do on YouTube is you use YouTube as a mid-funnel driver to your branded keyboard search. So I know that that sounds challenging but your creating an awareness campaign but you're looking at how that's driving cheap CPA in AdWords because it's your brand and that costs less than say some generic term that like clubs or something like that; whatever you're selling.

Joe: Okay. So when you work with a client do you work on … obviously, you've got a budget that you work on, goal setting with either cost per lead or cost per acquisition things of that nature. People … my point is that I know that when I was in the audience is just listening thinking about hiring someone that I was worried that they're going to blow up my budget on it.

Patrick: Oh yeah.

Joe: Do you work with them on all those goals as well?

Patrick: Oh absolutely and everybody is logged in. We're typically buying on your account so nothing's getting taken out of there. And again like everything starts with that audit. But back to your point about I think what entrepreneurs do is they need that margin or store ad to be really high to afford the inventory. And what we go about with Dave and some of the other entrepreneurs here is we want to help you with that. So we'll [inaudible 00:36:19.8] with you so that you can take a little bit more risk on the advertising side. And we talked about this a little bit before the show and it's what I talked to Jason about-

Joe: Yeah let me just jump in and get to the point so people understand.

Patrick: Yeah.

Joe: Part of the biggest problem that a bootstrapped physical products company has is amazing growth and lack of capital to buy more inventory; they're growing at 100% month over month, year over year. And they're taking all of that working capital and putting it right back in inventory and just trying to keep up. And what I do or anybody at Quiet Light does evaluation for that business we talk about planning. One of the simplest things to be more profitable is just don't run out of inventory. But it's kind of hard because they run out of money and can't keep up with that growth. So what you're talking about is as an agency, as a firm, as a partner-

Patrick: As a partner.

Joe: You're willing to work with them and lend them money to buy that inventory.

Patrick: That's right. When we went from $80 to $16 CPL, we broke our partner's logistics. That … I can sum up what you're talking about in just amazing growth; we have the same problem. So you don't have enough capital, no bank is going to give you a decent loan, your business is too young in the first three years and so we recognize that. We're able to look at your advertising and we'll tell you what we can do on the execution side. But we have to make sure that you have the logistics down in the inventory to go take those risks. And we want to take those risks with you. So overall it's to grow your business as big as you possibly can. So that's the goal. That's how we make money.

Joe: It's [inaudible 00:38:11.9] it's not all that different from Quiet Light, we're here to help. We have that … sometimes that stigma of oh you're a broker and that was the hardest thing for me going from entrepreneur owning my own business to entrepreneur that's a broker advisor is that those entrepreneurs they say you know I never want to sell my business. I don't want to talk to you. I don't want you to talk me into something. But we are here to help and help you grow your business and build that relationship so that when you plan to sell you'll exit and you'll exit well.

Patrick: That's right.

Joe: And what you're doing is the same thing is you're helping more than anything else. Of course, you're a business trying to make a living too and obviously doing it very well. But you're going to do the audit for free, you're going to do the test for free.

Patrick: Yeah.

Joe: And then you're going to dramatically reduce that cost for acquisition or cost for lead whatever the case might be in what the parameters are that you set with the client.

Patrick: That's right.

Joe: And they're going to have a problem which is dramatic growth and they're not going to be able to keep up with the inventory. They probably already can't keep up with the inventory purchasing and you're going to be there to help fund the inventory purchases and keep this growing which allows you to spend more money on their behalf and a great cost really a great cost for acquisition and make more money for yourself along the way as well.

Patrick: Yeah. When we started our company we did it on American Express and Google AdWords buy in YouTube. It [inaudible 00:39:37.5] credit card every $700, so you know I feel your pain that you were feeling and we get it and it's real. Growth is tough to manage; very tough to manage. So for me, I like to consider myself sort of a scaling expert whether that embodies locations and sales. I'm good at that. I mean there are people here that will just do that … building a brand from scratch and selling it for hundreds of millions of dollars.

Joe: That's amazing that you get that kind of talent that is choosing to work with you. It's kind of a great working environment for these folks.

Patrick: Yeah.

Joe: Ok look I never have to work again for the rest of my life but you're making it fun and we're changing people's lives so let's go ahead.

Patrick: Yeah and think about Joe, I meant it's exciting. I mean you're in this business because you get to meet really interesting other entrepreneurs. And they all bring something interesting to the table. When they take a nap on we've all been in that battle together and this is a new sort of idea like why are you doing this so-

Joe: It's great.

Patrick: Yeah it's got to be a part where we're really excited about it and happy to bring it to the market.

Joe: Yeah listen, I want to end it here simply because people should be reaching out to you. It's a very least they're going to learn something in the review process. They're going to learn at the very least what they're screwing up on, what they're doing wrong, and what they can do. Choose to do it themselves or-

Patrick: Anything works, that's right.

Joe: Have you test it and prove that you can do it better than they can. And then they can free themselves up for other things as well like additional product development and clean documentation on their financials. So I say that in every podcast episode hire a good [inaudible 00:41:23.0].

Patrick: That's right.

Joe: And one priest, they've heard me preach before. Patrick listen thanks for being on the show. Thanks for taking time out of your day I know you're very busy. We'll go ahead and get this produced get it out to folks and share it with you as well so you can share it with your team.

Patrick: Joe thanks for having me.

Joe: It's great man, thank you. We'll talk to you soon.

Patrick: All right man, take care.

Thanks for listening to another episode of the Quiet Light Podcast for more resources from this episode head over to quietlightbrokerage.com. If you're enjoying the show please leave a rating and review on iTunes. This helps share the messages from the show with more business owners like you.

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For decades, Harvard's MBA program has been primarily focused on the traditional model of entrepreneurship. In the past 6 years an elective course on the acquisition of established businesses has been attracting as many as 30% of the program's candidates. We had the pleasure of sitting down with Royce Yudkoff, who teaches the course "Entrepreneurship For Acquisition" at Harvard Business School's MBA program. Here at Quiet Light we've also had the honor of collaborating on the course for the past 5 years. Today, we delve into the details of how Harvard is sending experienced professionals out into the business acquisition marketplace with hands-on experience that is invaluable to their success.

The trend toward real-life marketplace experience as a replacement for textbooks has taken hold in Harvard's MBA program. These case-study and field guide learning modules are teaching candidates the key ways to enter and be successful in the acquisition arena. The course Royce teaches alongside Professor Richard Ruback is focused on how to screen potential acquisition targets, do the financing, negotiate the typical deal terms, and do due diligence when buying a small business.

Episode Highlights:

• Harvard MBAs are on average 28-35 years old so all they come into the program with professional experience.
• The course works with real life companies and case studies so students learn about how companies succeed in buying existing businesses.
• The course follows the entire arc of buying a small business from the search, to the financing, through due diligence, and up to the transition of ownership.
• The participants are learning how weaving good business practices from the very start of the process leads to better chances of ROI and growth.
• Royce explains how the candidates are taught the best financial practices for buying for a business, whether through traditional bank or private equity investment.
• The course follows students through the program and beyond by performing surveys and gathering statistics on success rates for those who go on to acquire companies.
• Royce shares the single most common contributor to the success and non-success in the search and acquisition process and what he advises all buyers to look for in a potentially successful business.

Mark: Joe did you know that a dream of mine that has gone unfulfilled in my life was to attend the Harvard Business School?

Joe: I didn't know that knowing that your nickname was slacker in college I would think that'd be the last dream you could ever have.

Mark: Well, we technically changed my name my last year mainly because I had a t-shirt that said slacker on it. And it made a terrible first impression when you walked in the class the first day the professor sees that. You get targeted pretty quickly.

Joe: You know we did a tour of Stanford last summer because I have teenage boys. We happen to be there, my kids probably won't get in; I understand 3% do. And when I graduated from college, I went to Northeastern University in Boston, when I was done I was done. I never wanted to go back to college. Touring a campus like Stanford or I imagine Harvard just at any age would make you want to go back.

Mark: Yeah it's a fantastic school. I love their MBA Program there because they do things a little bit different. It's not textbook based, it's case study based. So a Harvard MBA student, when they attend that school first of all the school pretty much requires that you have real world experience. Not 100% but it's really hard to get in if you don't have any real world experience. They want people who have been out there in the field doing stuff. And the entire class structure itself is also based around case studies. So you end up with a group of people that you do these case studies with and you study real life, real business scenarios and go about how … figure out how to address those real world scenarios. It's a way of trying to replicate some of the things that they're going to actually experience when they leave Harvard Business School. So yeah a few years after I graduated college and had a job and I thought well it would be a lot of fun to attend that. I really liked the idea of it but life got in the way. Bad grades got in the way and it never was something that I actually was able to pursue. I went so far as taking a GMAT but I never actually applied. But I bring this up because for as you know for the past five years we've been working with Harvard at Quiet Light Brokerage. They have done what a lot of people that listen to this podcast know, they have really started to turn their focus towards entrepreneurship acquisition or acquisitions and entrepreneurship and the combination. And they have a whole course that they teach on it; how to build … sorry how to buy a small business and lead an entrepreneurial life through acquisitions. And for those five years, we've actually been working with them, they approached us to see if we could support their class with some supportive materials and me being the closet Harvard fan boy that I am was like absolutely that sounds really cool.

Joe: Excellent, excellent. Well, I'm excited to listen to this podcast. I know that they did some studies that show the people that go through this course and the success rate that they have. And it's really more about buying versus building which is a little follow up from almost with the podcast with Walker that you had so I'm excited hear it.

Mark: Yeah absolutely so there are some statistics in here, people ask us this all the time you know what percentage of buyers are successful. Well, Harvard is actually tracking that. They're taking a look at the kids who go through the courses … and I shouldn't say kids these guys are 30 years old with tons of experience. But they're looking at people who go through the courses doing acquisition and they're tracking to see how they're successful. Also in this episode, we talk about what they're teaching on the course, what they're guiding their students as far as how large of acquisitions they should be making, how to do the financing on these large acquisitions. So it's really a chock full of a lot of information that's been taught at the highest levels at one of the leading institutions in the world.

Joe: And all of it hopefully and an awful lot of it can be applied to the businesses that we're listing. Because I'm going to just throw some numbers out there for those that haven't been to the website recently, we've got listings of really all shapes and sizes. But we've got a couple up there in that I think minus under LOI just under nine million dollars. Brian's got one at twice that amount. And then, of course, anything from a couple hundred thousand dollars up to that 80 million dollar range. So these larger listings that take more funding from Venture Cap money or from a larger SBA loan are really becoming more prevalent. So I think everything that these guys talk about and the book that they published as well can be very helpful to the audience here today.

Mark: Absolutely let's get on to it.

Mark: All right Royce, how are you?

Royce: I'm great it's a pleasure to be with you today Mark. Thank you for organizing this.

Mark: Oh my pleasure. I'm so glad to be able to actually finally talk to you and see you in person as well. We've been working together I guess sort of indirectly now for what four or five years?

Royce: Exactly and you've been a big help to our course in Harvard Business School so we're very appreciative. I should start with a big thank you.

Mark: Well it was always my dream when I was in college and then shortly after college to get my MBA at Harvard. I started looking at the GMAT and I took PEP courses for that and then life happened. And I never got around to actually doing it. I actually talked to a Harvard recruiter at one point, sat down with them and was going through that but then it never did happen. So the fact that I actually get to participate in you guys program is kind of like a dream of mine come true that I get to actually work with you guys at least indirectly if not directly as well now. All right so the Harvard Program, how long have you guys had this Entrepreneurship Through Acquisition Program?

Royce: That program is now in its 6th year Mark, and for decades Harvard has had a large program teaching people about traditional entrepreneurship; what I refer to as rubbing two sticks together and make fire, meeting … going into startups. But about half a dozen years ago we started teaching about the idea of buying an established profitable company usually from a retiring founder and the idea has really created a lot of excitement at Harvard. About 30% of all of our MBA students take these courses to try if this is a potential career and learn about it; which makes us probably the largest elective course on campus.

Mark: Wow, that's fantastic. Now you do this and one other professor Richard … is it Ruback?

Royce: Yes Richard Ruback. So Rick and I created a course and we co-teach it and it's really become our … the center of our professional activity. Including following our students closely who go down this path. We stay very connected to them after they graduate from the program.

Mark: Yeah I know that's great. So I want to make just one point about Harvard's MBA Program and again I know this because I looked at potentially participating in this program but you guys are a little bit different than other MBA programs in the way that you set up your courses right? That it's a lot of this case study sort of approach to everything is that right?

Royce: I think the two differences in our programs from what most people think of as MBA is this first exactly what you said which is we do not lecture, we do not have textbooks. The whole two year program is set up around cases which are sort of short nonfiction business stories. And the discussion the faculty elicits about the decisions they require to be made. And the second difference is our students typically come to us at about age 28 and graduate at age 30. So they have six or seven years of mid-level, junior level, executive experience before coming into the classroom. So they're not kids; they're young professionals by the time they leave. Those are the two distinctions I highlight about HBS.

Mark: Yeah and one of the things I love about that … so one of the knocks against university especially among the entrepreneurial community is that a lot of entrepreneurs see university degrees and MBA degrees as being almost wasted money right? Because a lot of them have become successful. But what I love about you guys program is the fact that you do require that experience is not textbook learning, its actual looking case studies. Delving in deep into these actual cases and amplifying a real world experience in the classroom setting.

Royce: Yeah you're exactly right. That's the purpose of the case studies. In addition, the faculty is routinely engaged in a commercial world too and thus expecting to bring that into the classroom. And we also utilize experts like yourself Mark, and bring in work done by experts or even experts as guests into the classroom. So we try to stay very engaged with the practical commercial world.

Mark: That's great. That's absolutely great. I absolutely love that. Now you guys have also … you and Rick have also put together a book. And for those watching at YouTube at … this is the book here, HBR Guide to Buying a Small Business. And you put this out two years ago is that right?

Royce: Yes we'd put it out two years ago and it's been very satisfying. Our goal was to produce a very practical handbook that walks people through each step in buying a smaller firm and to try and reach beyond campus to the thousands of people who are thinking about it or wanting to do it and give them something that's just immensely practical and we've been very gratified. I think almost everyone who goes down this path ends up reading this book and we get lots of comments that it's been helpful.

Mark: That's a really good book. I mean I've thumbed through it before and you know I've learned a lot in this industry by doing and that has its learning curve. Frankly, a book like this to start out would have been really really useful in shortening that learning curve. So it was a really good book and I assume that you can get this on the HBR website correct?

Royce: The HBR website and even more conveniently on Amazon, so it's just an easy thing to buy and a kind of quick easy read as well.

Mark: It is a quick easy read. There's large margins in there as well so that people can take notes alongside it; which is super super helpful. So all of you out there that are readers and soak up as much information add this one to your list; for sure it's definitely one to add. You're getting some good information here. All right so let's do this, let's get into some of the material that you guys actually teach in the Entrepreneurship Through Acquisition Course. What is the format and what is the structure or maybe what is the syllabus that you would look at for a typical is it on a semester basis or is it a full year?

Royce: Yes it's a full year course and we start with an overview of the small firms market. Sort of what are some of the management issues in running a small firm, how do you buy small firms. And we let people sort of figure out whether this is of interest to them generally. And then the course gets really really practical. We kind of follow each step in a small firm acquisition beginning with how do you source opportunities, how do you evaluate them, how do you do due diligence, how do you finance them, and how do you negotiate the legal documents and then we move them to sort of a transition because almost always after a firm is sold the seller stays on for a while at least part time teaching the new owner the ropes. And that is somewhere between three months and 12 months part time for the seller but it's a key part of making these purchases successful. So that's how we [inaudible 00:11:59.1] we like to say we're following the arc of the small firm acquisition.

Mark: Now the arc is something that our listeners are probably very familiar with. It's something that we have laid out on our site as well. I want to ask a broader question with the popularity of your course. When people think about Harvard Business School I think a lot of them think about graduates going into large financial firms you know working in Boston, working in New York, and really kind of working with a Fortune 500's out there. Do you see a lot of your students now pursuing this more entrepreneurial path?

Royce: Yes I do and it's a great comment you made because I do think Harvard is viewed that way. And one of the reasons this program is important is it's highlighting the fact that the business school makes a difference in ways that help ordinary Americans. In other words we send our well trained, smart, energetic graduates into cities all across the country and they create jobs for regular people that make their lives better. I'll give you a quick example, one of our students … and this is very representative is a woman named Jennifer Rouse. She spent about five or six years as an engineer at a couple of leading manufacturing companies in the Midwest. Came to HBS to be trained as a general manager. Fell in love with the idea of running her own company. Instead of getting a job out of HBS she searched and bought a revenue cycle management company in the Pacific Northwest that essentially handles the billing for municipal ambulance services to insurance companies; very specialized complicated set of procedures. And she's grown the business from about 40 employees to 70 employees over the three years she's owned it. So it's been an enormously gratifying experience for her and profitable one. It allowed an entrepreneur who wanted to retire to get his just reward and take cash out of the company. But it's also created a lot of good paying jobs in that mid-sized city. So kind of all the way around it's exactly what our business school ought to be doing, we think. And that's what we're trying to do in this program.

Mark: You know one thing I think that people don't understand about our industry and when I talk to them for the first time, they often ask "Who buys an online business?" And one thing I've found is the synergy that exists between the bootstrappers and the startups, these guys that are really really good at the hustle and they can create something amazing out of practically nothing. And then they grow up to a certain size where it now needs management and now needs … it kind of enters into that phase two and a lot of these entrepreneurs don't want to do that because they don't want to be managers. They don't want to do that additional growth step of now managing lots of people.

Royce: Yeah and I think that's exactly right. These businesses reach transition point where once they needed someone who is not only energetic and smart but knew service they were providing incredibly well and 15 or 20 years later it's more about a trained manager who's got a certain managerial skills. I'll also add to your comment that there's a life cycle to entrepreneurship. You know the 60 year old entrepreneur who's made a lot of money in their smaller firm quite likely might not want to work as hard as they did when they're 30 years old. And that's a very sensible decision that the business may have a lot more potential in it in the hands of a 30 or 35 year old who's willing to put in those 60 and 70 hour weeks. And that's another transition that makes sense for everybody.

Mark: Sure. I remember one client that I worked with. He had … he was selling … well just say durable goods, I won't go into exactly what he was selling, but he was sourcing all the inventory putting it in to a secondary garage and fulfilling all the orders on his own. I mean he was working 45 hours a week and have really maxed out and I asked him I said "Why are you selling them?" because business is growing, it's growing rapidly. Why not hire on some people and kind of expand to an actual warehouse. And his answer was probably the simplest most logical answer I've ever heard it was because I don't want to. Yeah, I don't want to manage people. I like doing this on my own but that's the obvious next step.

Royce: Yes. Yeah, exactly and it's a very human thing and the right answer is to put the business in the hands of someone who's going maximize it. I think conversely from the perspective of a young entrepreneur through acquisition, I see this opportunity as so much lower risk than starting a company from scratch. Because you're buying an established proven profitable business with a business model that really works and an owner who will sort of do an orderly transition with you. So it's a way to express entrepreneurial desire without taking the enormous risks of a startup or having to have some idea.

Mark: Right you're absolutely … and I think this is something we talked about in a recent podcast and that is the difference between buying versus building a business and how you can get that leg up and get that initial startup so much faster. There's much less friction in working with something that's already established like that. So let's do this, let's follow the arc of the deal that you had talked about a little bit earlier and let's give the listeners here and the few viewers just a little flavor as to what this arc looks like. And maybe some of the things that you guys teach in the course as well. Let's start with this how do you source your deals? This is a problem for so many buyers out there. I've talked to some buyers that are looking for a year and a half, two years for a good business. And the good ones frankly I know from experience when we put something out that's good we're going to get a lot of intent on that within four or five days and so it can be really tough. So what do you guys teach as far as sourcing deals and some of the tips that you would offer there?

Royce: You're exactly right. You know sourcing is immensely difficult in a small firm space. First of all, there are two paths people go down. One, which we certainly recommend is dealing with the intermediary professionals in the small firm space. As you know there are hundreds and hundreds of these across North America. And you're required to just do an enormous amount of outreach because unlike say with real estate where there are multiple listing services, confidentiality is extremely important to these owners of smaller firms. And so you only get to see these firms by establishing relationships with reputable intermediaries. So it's a great deal of work to establish that kind of dialogue. And then on top of that, once you have done that, the majority of businesses that are for sale are not high quality businesses. They're average at best and a few of them are really good businesses. So it's an enormous outreach and sourcing process that frankly takes from the time someone starts sourcing to the time they close the average time is about 18 months to find a good quality business negotiate diligence it and close that. So … and that's 18 months of full time work. Probably the question I get asked most often by aspiring entrepreneurs through acquisition is "Is this something I can do part time?" because it would be so great to do it part time right? You could keep a full time job, earn income, and you imagine you might be able to do it next on weekends like rebuilding an old car or refinishing a basement. But the truth is I've never seen anyone do this part time. It is for everyone who goes down this road it is a demanding full time job to source, evaluate, diligence, negotiate and it takes an average of 18 months. So it's hard.

Mark: What are some ways in your opinion that people can speed that up if they're really anxious to get going? Like their working a corporate job right now and they want to get out of that corporate job. Do you have any tips on how they can speed that up?

Royce: Yes we see that a lot of people that have worked in a corporate job they just find it unsatisfying and they want the professional independence that comes with this kind of entrepreneurship. You know it's hard to make this go faster. I've seen people close quickly because we've seen scores and scores of people do this, I've seen people buy businesses in as little as five or six months. But I have to say my conclusion after years of doing this is that those are just flukes; that in the same way that the person struggles on for two years is a fluke. That you get some outliers but it's just really hard to make the process go faster. And one reason for that is out of those 18 months probably the last four months are spent in that deal you'll close on. You know doing that signing the LOI, diligence, financing, closing. So really you're talking about a little over a year of searching before you finally get to that deal that makes. I wish I could hurry up this process. But it's one of the reasons that I suppose this space hasn't been beat up or overcrowded is that someone has to really want this.

Mark: Sure and I think that's really good advice. You're right there's some luck of the draw right? There's just some pure luck on the draw. I talked to one person years ago I was … when we first tried to do the podcast and it didn't really work, but I talked to one buyer who said that he was ready for that sort of 18 month time period and within two months something just spread across his desk and it was perfect. But he didn't have a financing lined up for it and so he had to let it go. But it was that luck of the draw. It came to him perfectly; right away if he was ready he would have been able to move on it. That actually leads well to my next question which is financing. What are you guys advising your students and what are you seeing them actually do in terms of financing some of these deals?

Royce: Yeah so the typical acquisition is financed with about two thirds debt and one third equity. And let me deal with each of those. On the debt side in the small firms marketplace, it is almost universal for the sellers to take back some amount of seller paper usually 20 to 25% of the purchase price is taken back in what's on average at four, five year subordinated note. There are few exceptions to this but it's a very large percentage of the transactions. And about 45% on average of the transaction is funded by a senior bank loan. And this comes in two flavors; one, is just a regular way, a commercial bank loan will typically finance a little under half of the deal and it will be repaid over five to seven years usually from a local or regional bank. The first candidate being a bank the company has an existing relationship with. The second path is the Small Business Administration has a terrific program called the 7(a) Program. I'm sure you're familiar with this. It's administered through banks. Most of the banks that lend commercial loans also will do a 7(a) guaranteed loan. It is a wonderful loan product because they will lend against businesses that have no tangible assets; service businesses that just have cash flow. They lend up to 80% of the business. They lend over 10 years. There are no covenants. It's a very very attractive loan with a single exception that you are required to sign a personal guarantee on it. So it's something for very thoughtful consideration by the entrepreneur. But those are the two sources of debt. And as I said with the salary debt they cover the two thirds of the purchase price. One third is usually raised from friends and family. And most common is that these prospective entrepreneurs will go around and raise money in $100,000 here or $200,000 here from anywhere from six to 15 individuals and they will cut a deal to divide the prospective profits between their investor group and themselves. Because this typical small business that we see … when we talk about a small business we're talking about a company with one to two million dollars of EBITDA that might sell for five times EBITDA or 10 million dollars of which three million dollars might be equity. And so it's not that difficult to raise that amount of equity by passing the hat.

Mark: I think one thing that a lot of our buyers that come into us feel is that they can't reach that level of a transaction right? They can't reach that 10 million dollar acquisition and so they start out a lot with these $200,000 or $300,000 businesses and then they find that they've effectively buying that job. So it seems like you guys are really pushing a lot of your students to think a little bit bigger than that and do … in buying a business as well.

Royce: Yeah I think that's exactly right. You know I think they are … when you get to a very small business and you are the entrepreneur you're showing up every day to process out that day's work and that's that $200,000 EBIDTA business. You know when the business gets to be a million dollars you usually have some department heads who report up to you and you're coming in thinking about the week's objectives or maybe the month's objectives. And then when you get up to a business with say two million dollars in EBIDTA, you're really managing a little further it than that. So the jobs are very different along the way and so with that we tend to point our potential entrepreneurs towards the larger end of that spectrum. But entrepreneurship can surely be expressed anywhere along the spectrum.

Mark: Yeah, I think a big phrase that we hear all the time in our space is work on your business rather than in your business. And it's a transition point for a lot of people. But it seems like you guys are really pushing people to start with a business that you would work on because some of that infrastructure is going to exist already.

Royce: Yes I think that's right. That is our goal. We recognize that people have different resources including experience in managing and opportunity to access capital.

Mark: Right. Do you have any tips for people that might be considering reaching out to friends and family? How do you get over some of the discomfort maybe with asking friends or family for investments?

Royce: Yeah I get that question a lot so I do have some recommendations. I think the first recommendation is just a psychological one which is when you go to someone to ask them for an investment you really have to make yourself feel that you're not asking for a favor. It's not like you're asking for personal loan, your presenting an opportunity to that person. And it's one you believe in so sincerely that you're going to dedicate the next five or seven or eight years of your life to it. So it's very important to really be in that psychological headspace. My second recommendation is to actually start with the people who know you best. Because they're going to be really inclined if they respect you and like you to line up behind you and then it's going to make it easier to go to people who know you less well. My third recommendation is the time to approach people for investing is when you start your search; it's not when you find your company. Because what you want to do is collect a group of people who might be interested in investing and update them across the year or year and a half that you're searching. Because when you do this, it allows them to get to know you better. It shows them that you have lots of energy, it shows them your street smarts, you talk to them of that deals you looked at but ended up rejecting which gives them a sense of your high quality standards. So when you finally approach them with a deal in hand they've been expecting this and now you're making one sale, not two. You've sort of sold them on the idea that you're a hardworking and street smart entrepreneur who is being highly selective and now you're simply selling them on the merits of the business. So for that reason, it's tremendously important to approach them early and get them to follow you. It's also a much more comfortable discussion than showing up with a deal in hand because you're able to say look if you're sincerely interested in this I'll make the investment and inform you about my journey and you'll have plenty of time to decide. It takes a lot of pressure out of that discussion. When you approach the types of people I see are entrepreneurs approaching … and here you should think about people who are partners in law firms, entrepreneurs have their own small businesses, these people don't have … while they are wealthy people by normal standards they don't have the resources to invest in private equity funds. They can't just throw up a check for two million dollars or five million dollars that private equity fund would expect. So when you come to them with the opportunity to participate they would essentially as a private equity investment; it's very additive to them. It's not an opportunity they see every day to make the kind of returns you can make buying a private business.

Mark: Yeah and I think … tons of really good information in there. You're right as far as that relationship is concerned when you're asking somebody for money, building that relationship over time makes that discussion a little bit easier and also gives you the flexibility. That example I brought up of the guy who started his search and didn't have his funding lined up in advance, he actually gave me that exact same point. He said had I been having these conversations with friends and family in advance I would have been able to do this deal very very quickly. But it was just way too much for him to try and call in together an investment group within a few weeks. These things don't happen in a week, they happen over months and even a year.

Royce: Absolutely and as you know from your own professional experience in those last eight weeks before closing the entrepreneur is sort of fighting on multiple directions. He's dealing with a lender, he's dealing with lawyers on a purchase agreement, he's finishing his due diligence, he's dealing with investors; you just don't have time to sort of raise investment capital from scratch.

Mark: That's great. All right let's talk a little bit about the transition stuff and then we're going to be rounding out as far as our time here is concerned. Now there's some stuff obviously that happens in between, we've talked about ways to search for a company and source those deals. It can take about 18 months on average depending on a little bit of the luck of the draw, talked a little bit about the finances and some of the vehicles there. So let's assume now that you find that business, you find a good opportunity, you've gone through negotiation. And I know there's a lot that we could talk about just through the negotiation stage but I want to talk a little bit about the transition period and plan. How important do you think it is to keep previous employees, previous key people, previous owners on staff and what other elements do you think are really really kind of you should almost always take these steps in a transition?

Royce: The advice I give entrepreneurs through acquisition is twofold. First, the first and most important advice I give them is in your first six months don't make any important changes. You'll have lots and lots of decisions to make but if an important change is one that is expensive or hard to reverse hold off on that. Because you will be a different person at the end of six months than you are on the day you walk into that company. And if it's the kind of enduring profitable business we hope people will buy, it certainly can wait on these decisions. I also find that transition periods can be relatively short. Three to six months is usually all you need in a transition period with some occasional access to the seller after that. By the way, this is another reason why having a seller subordinated loan is important because you want the seller to be financially on side with you after the purchase. That that seller is going to introduce you to his or her important clients. They're going to make an endorsement of you as the person they're entrusting the business to. They're going to answer a lot of process and historical questions that in a small company aren't written down in any textbook. But for most of these businesses that transition can take place well over three to six months. And after all, you want to buy a business that is not so centered on the selling entrepreneur that transferring it isn't easy. In other words, if that transfer is really really really hard that might not be a business that you want to buy. So I think that's a consideration you want to have before you step in and commit to the business. But a three to six months transition I've seen works pretty well. By the way, it might be helpful as long as we're sort of at this point in the arc of buying a small business if I shared a little data we collected over the years of that success in this path.

Mark: That was my next question, so perfect timing.

Royce: Okay.

Mark: Yes let's go there.

Royce: Well we've had the chance to survey a fairly large number of entrepreneurs through acquisition and what we've found over that six years that we've been doing this is of the people who embark on a full time search to buy a company about 70 to 80% of them end up acquiring a company and closing on it and about 20 to 25% try it, give up, and go back and get jobs that are pretty much like the jobs that they had before they embarked on this path. Of course, they've spent a year or to a year and a half doing this and that hasn't been a profitable use of time except in terms of experience but they go back and get a job that tends to look like what they had three quarters of them end up closing on a company. And then we turn to the question of is this successful? It's harder to get that data because these are all private companies but over the years Rick and I have had the benefit of actually getting some very active investors in these type of small firms to share with us their financial history of all their investments. And we've collected about 60 different transactions made by a handful of professional investors and what we found is that approximately 80% of those are profitable and about 20% are unprofitable; which is a really high rate of investment success. I mean if you think of that investing in the stock market and do you get four out of five investments profitable, I mean that would be a tremendous bar of success to have. And of the investments that are made both winners and losers the average rate of return to the investors has been about 22% annually; which is also a very high return consistent with what you would expect in private equity investments. Very importantly these results don't tell any specific individual what their results are going to be. I mean you could find a company or not to find a company, you could be successful or not successful. But I think it suggests that the area is a reasonably fruitful area to try and achieve success in. That's what I take away from the data.

Mark: That's really good and I get these questions all the time so I actually now have something to go back to people with. This is great. I am curious on the 20% that are not successful; do you guys have any data as to what's leaned to do at not being profitable?

Royce: Yeah. Well, of course, there's always a huge element of chance as you and I have talked about earlier in this. But yes I think that there is a single most common contributor to success and non-success in the search. And that is when an entrepreneur through acquisition start searching on their very first day looking at their very first prospective deal they quite rightly set their standards unbelievably high. In other words, nothing would get them to buy the first company they see because they want to learn what's available in the market. And as they see more and more companies they gradually bring down their standards into what normal market is for a small company. In other words, they start to say okay I'm going to raise the price I offer into the range that companies transact that. I'm not going to require that this company be absolutely perfect. It's okay that it has some flaws like every company. And their quality standard gradually moves to market. How quickly they were able to learn what a small company really looks like determines how successful they're going to be. Some people never get there. Some people it takes a year to get there. Some people can do it in 60 to 90 days and they have a much better chance of buying a company in the time period. By the way Mark just as in the side the same thing is going on with sellers as I'm sure you'd recognize that person who owned a business for 30 years enters the market with a price expectation. It is well above market and as they get feedback from the market they're gradually bringing their expectations down to market or they're leaving the market. What you're looking for is the collision between those two forces entering the zone at the same time but that speed of learning is the difference between being highly likely to succeed entrepreneur through acquisition and not.

Mark: A lot of the work that we do at Quiet Light Brokerage with sellers is that sphere of expectations in trying to bring them to that place. Or more importantly I guess advising them to only enter into the marketplace when their expectations have moved because it's got to happen, right?

Royce: Exactly. And it's a delicate conversation as I'm sure you've experienced many times.

Mark: It is you know we try to be very just blunt with people. My personal background is before I started Quiet Light Brokerage I got really good advice from an intermediary who told me to wait but then when I actually went to market with them they actually blew my expectations up higher and when I got those first offers and it's how people at the marketplace is brutally honest. You know I might be nice the marketplace isn't, they'd just be honest and blunt. And when I got those first few offers it was like a punch in the gut. Like wow okay I'm not even in the same neighborhood of what you guys are talking about. I want to leave with this question, if you were to be talking to a potential buyer and you were to give them one or two just solid pieces of advice and that's all you had time to be able give them because that's also all the time we have left, what would you tell them?

Royce: I would tell them to look for an established, slow growing, slow changing company because for a first time entrepreneur having an enduringly profitable business is the most important thing. It will allow them to make the kind of mistakes a first time CEO makes and still be successful. Sometimes people are enamored by fast growth but fast growth means change, competition, new customers. So something that's established and slowing growing and proven is what they want to look for. And it's okay that it is in a quote boring type business, you'll find plenty of excitement as being a CEO. That would be my number one piece of advice to a potential buyer.

Mark: Well I wish I had talked to you before I did my first acquisition. I think that would have been helpful.

Royce: Yeah.

Mark: Royce, thank you so much for coming on here. Again I've been completely enamored working with Harvard Business School over the past several years. I hope that we can continue to work with you guys and someday maybe if it works out for your guys you'd be able to come out there as well and I'll meet you guys in person so thank you so much.

Royce: Thank you and we're very grateful for your participation.

Links and Resources:

Harvard MBA Program

Entrepreneurship through Acquisition Course

Royce's Book

Similar to outsourcing fulfillment, today's podcast guest says for many entrepreneurs, it may be best to outsource the collection, management and disbursement of sales taxes with the new Economic Nexus ruling by the Supreme Court.

In this podcast, first we cover what the decision means to online entrepreneurs, and how it will impact the average business. For some no action needs to be taken. For others a lot of action must be taken. And ignoring the details is not really an option.

Sometimes the least interesting subjects and work as an entrepreneur bring the most value. Well-managed financials are one such thing. Held within the broad "financials" umbrella is now sales taxes. While the answer to the questions, "should I collect" used to be grey. Everything is fairly black and white now. And the subject is never going away.

Episode Highlights:

• Don't geek out on Sales Taxes. Outsource it. See SALT experts below.
• If you have Nexus it means you have an obligation to potentially register and collect sales taxes or income taxes in a given state.
• Physical Nexus is where you are, where your business is, where you are storing inventory or where Amazon is storing it.
• Economic Nexus is the change with the Supreme Court decision. The states could define other ways to define Nexus. For instance either $100,000 in sales or 200 transaction in the last 12 months – and you could be required to collect sales taxes on those revenues that occured within their state…regardless of Physical Nexus.
• Economic Nexus takes effect immediately for the 24 states that already have them on the books. (Links below will lead to finding the 24 states)
• Notice and Reporting are other ways to determine Nexus. It's really confusing!
• You MUST register to collect sales taxes. If you collect and do not remit, it is CRIMINAL.
• Hire an expert to register to collect sales taxes. There are 45 states that require it.
• Only register where you have to if you are a small seller. But if you are doing 10-20 million in revenue, "suck it up" and register everywhere.
• SALT experts can handle almost everything for you. See notes and links below. SALT is an acronym for Sales and Local Tax Experts
• Use www.WhereStock.com to determine where Amazon is holding your inventory. Seel link below.
• Taxjar is a good option if you wish to take on managing this yourself.
• Scott & his outsourced accounting team at Catching Clouds use Taxify (but recommend both options)
• The Supreme Court Decision may not increase a buyer's liability in an asset sale.

Joe: So Mark Jason got an e-mail this week and he had a question and it was "What makes Quiet Light different?" And Jason gave it an interesting answer and I want your feedback on it. It says "Well the formal answer is that we're all entrepreneurs but that's not really it. The difference is that Mark … you Mark Daoust is one of the best human beings on earth and that permeates everything we do. As a result, he attracts good people that are always doing good work with the best interest of others even if it's painful for the broker we ignore our own incentive to do what's right." Did you pay him to say that?

Mark: Yeah … well, I'm not going to say exactly how much but he got paid for that. I think it's a little over the top. I mean really.

Joe: But he didn't write that down. He said it to someone and someone wrote it down and shared it with me. And I … look I shared this to put you on the spot. You look by the way very much like an internet entrepreneur today. You've got a t-shirt with some ducks on it, a little duck, duck going on there.

Mark: Duck, duck, gray duck. I'm from Minnesota and I [inaudible 00:01:53.2] I'm going to put this out there, it's a more sophisticated game. All you parents out there stop this duck, duck, goose crap. It's all duck, duck, gray duck; that's what we're doing here.

Joe: Don't know if we have time to go into what the heck you're talking about with duck, duck, gray duck. Well just … I thought you were going into hockey or something like that. I wanted to touch on one more thing you know Jason talks about that and you and the environment that you've created here and the caliber of entrepreneurs and advisors that you brought on. I listened to a podcast last night with Chuck Mullets and for those that are the buyers in the audience today, if you have not listened to the 27 tools for due diligence I think it was, listen to it. Because some of the tools in there were just amazing and I've been doing this for a long time and I haven't heard of any of them. I have to take my hat off to Chuck and give him some compliments for the job that he did there. I was really really impressed. He's a … I'll say it, he's a lot smarter than I thought he was.

Mark: Ah, you know the bar was pretty low, to begin with.

Joe: But I want to just raise myself up a little bit and show you something.

Mark: What's that?

Joe: I have on-

Mark: Oh you have on Chuck's shirt that he made for you.

Joe: I have my Quiet Light logo shirt on. So there you go.

Mark: While I'm wearing ducks.

Joe: Oh I didn't shade you there. Okay, listen this podcast is about something that's really important. It's about the Supreme Court decision to change the way that sales taxes are to be collected. Let's not get into details, let me just tell you that we had Scott Scharf on again. We specifically talked about the problem and the solution. What does this mean to e-commerce entrepreneurs and how do you solve it? I can tell you right now when you get three quarters of the way through the solution is … if you are up for it just like you outsource your fulfillment to a 3PL you can outsource your sales tax collection and distribution and management. And if it were me that would be my recommendation but it's absolutely there and you don't have to deal with all that little detail and there's a lot of it.

Mark: Yeah and I like to say a word to people that share a person holiday with me, and when I read and hear about some of these red tape sort of restrictions that are coming down, I have a tendency to plug my years and go la-la-la-la I don't want to hear it.

Joe: Right.

Mark: I like the days of the free open web when it was just easy to do things. But the fact of the matter remains this is the direction we're going.

Joe: Right.

Mark: Restrictions, regulations are going to come into play more and more frequently and these aren't necessarily bad things we just needed to understand how to navigate them. And so an episode like this is timely, I'm glad that you got Scott on the line to do this episode because this is the [inaudible 00:04:34.0] time the episode given that this decision just came down a few weeks ago.

Joe: Yeah some of the things that we talk about here on the Quiet Light Podcast are painful as entrepreneurs. Particularly those that don't love this detail, they love the excitement of driving revenue and the marketing aspect of it. These painful things when you pay attention to them will make your business more valuable if and when you ever decide to sell. So again listen to the whole thing. Get through it, he talks about it in detail point by point. But I try to keep him on track so it's not … he doesn't geek out too much. Scott loves this stuff.

Mark: Scott? Never.

Joe: He calls it geeking out himself. So we try to get on track to … okay how do … how does a guy like me, how does a guy like Mark, like an entrepreneur listening, how do they overcome this giant massive ball of red tape? And really, I think the answer is, outsource it. And we're going to give all of the ability to do that down there in the show notes.

Mark: Sounds great.

Joe: Let's go to it.

Joe: Hey folks it's Joe from Quiet Light Brokerage and today I've got Scott Scharf on the line with me from Catching Clouds. And we're going to talk about the Supreme Court decision that's come down regards to sales taxes, define what the problem is, and then give you a solution to it in the second half of the podcast. Scott welcome … welcome back actually right?

Scott: Yeah it's great to be back.

Joe: All right so you know we don't do fancy introductions. Tell these folks who you are and what you do at Catching Clouds so they understand what level of expert you are here.

Scott: Yeah at Catching Clouds we're e-commerce accountants who are really experts in the accounting e-commerce businesses and of course sales tax management; which is why we can talk about this topic. We've been doing this for the last seven years and we love solving problems for e-commerce, sellers, anybody that we interact with it. And this Quill decision is definitely one of those things.

Joe: Quill decision, that it that's the name of it? Q-U-I-L-L.

Scott: Well, yeah so Quill was a decision from what 26 years ago that the Supreme Court overturned their own finding that really delimited what states could do to go collect sales tax from small businesses that are selling across state lines.

Joe: Good. Okay, so they overturned it. So, folks, you heard Scott say that they're e-commerce accountants and I just want to reiterate … and you know my little soapbox here. E-commerce accounting, accounting, good financials, clean documentations, it's one of the four pillars to get maximum value for your business. So if you're using anything other than Xero or QuickBooks seriously consider talking to Scott if you want to get maximum value for your business. Because Excel spreadsheets for a 20 million dollar company or if you're doing a half a million in revenue doesn't matter, you're going to lose value in the sale of your business if and when some day you decide to sell. So there's my little pitch, definitely-

Scott: [inaudible 00:07:24.7]

Joe: these services. Okay so if I understand this correctly this is no longer physical nexus which I think everybody that's listening knows the definition of it; what it means. Is economic nexus, can you tell us what the heck that means for these folks?

Scott: Yeah so actually physical nexus still applies so it's not that they got rid of physical nexus it's just not the only consideration deciding if you have [inaudible 00:07:52.0] of fancy.

Joe: So let's say what physical nexus is anyway then, go ahead.

Scott: Okay. Well, physical nexus … well, first nexus is if you cross a threshold and you have nexus based on some parameters means you have an obligation to potentially register and collect sales tax or income tax or other things in a given state. So if you don't have nexus you don't have to do these things. Okay, that's the first part. So there are different types of nexus, the first one is physical. It's been around for quite a while. It's where you are, your business is, your business is founded, you have employees, you have property. Okay for an e-commerce business, it's wherever you're storing your inventory. If it's at a 3PL on either coast you have a nexus where you're storing your inventory. If you're an Amazon FBA seller, when you send inventory to three or five warehouses they'll move it to up to 26 states that's your inventory and it creates nexus. There are a few other ones out there but from a physical perspective … I've been around for a while, there's like affiliates and other things. But the main thing it's where you are and your property is.

Joe: Physical nexus, okay. And now we've got economic nexus, what is that?

Scott: So economic nexus what states have determined and the brakes were taken off with the Supreme Court decision that they could define other ways to determine nexus to basically either require your business to do reporting and other function or register and collect sales tax in those states. So what they've done is said hey if you're doing over typically in the standard is based on the Supreme Court decision $100,000 in sales or actually more importantly 200 transactions either in the last calendar year or in the prior 12 months and that would mean that they're expecting you if you're a larger business to register and collect sales tax from there … of any consumers buying products you're shipping to into that state.

Joe: How many transactions do you say? It was 200?

Scott: 200.

Joe: So if it's a $20 sale it's only what 1,000?

Scott: $1,000. So $100,000 people see the $100,000 and think that oh God there's no way I didn't know you'd do $100,000 in any states last year, but it's totally based on your average. So if you take your average sale price and multiply it times 200, if you've done more than that revenue in any states that have these laws you're over that threshold.

Joe: Okay so economic nexus passed by the Supreme Court, when does it take effect is it immediate or is there-?

Scott: It's immediate for the roughly 23, 24 states that already had these laws on the books. And the only thing that was holding them back were these court cases that were just … was decided a week and a half ago.

Joe: Okay so there's 24 states, not all 45 that collects sales taxes but that is 24 of them. And for folks listening, we will add a list of those 24 states but there'll be a lot of resources in the show notes that we'll give you that through their software as well.

Scott: Well and it's not just economic nexus, you have to remember there's now notice in reporting states that aren't doing economic nexuses but have set thresholds for doing notice and reporting. They're basically two different new ways of determining nexus and they're both in effect now and there are other states that have them starting later this year and more. So it's multiple ways of nexus that might impact your business.

Joe: Okay so I'm just going to say a few years ago I did a presentation at Rhodium Weekend all about e-commerce selling and part of it was sales tax collection accounting. So I wanted to say to Yana if you're listening I was right. She came after me after that now that's never going to happen. It's right. So really just don't even worry about the 24 states I think physical nexus, economic … basically get prepared to collect and remit sales taxes everywhere and use a special service that can allow you to do that. First though … and we'll get to that but first do you have to register to collect sales taxes?

Scott: Yes. You have to if you are not registered you don't have a license and a number from the state, it's criminal to collect sales tax and not remit it and not have a license. It's also criminal to collect sales … have a license to collect sales tax and not give it to those state. Those two things have additional penalties and they'll come after the business owner's criminally. So you need to have a license before you start collecting sales tax and then once you start collecting sales tax you have to give it back to the state either monthly, quarterly or annually; whatever they say.

Joe: Okay just to clarify, you used the word criminally three times. That's a little scary.

Scott: Well it's … but unfortunately both Amazon and Shopify and these other sites, I mean literally there's a button in Shopify that you can click that says collect sales tax in all states. And it's easy to start collecting sales tax in the 45 states that have sales tax. So technically it's very easy to hit these buttons and not realize and you just want to be careful. And in difference between criminal is there's additional by jail. Everything else related to sales tax is expense and cost which is more likely to happen but maybe not as painful but can be pretty painful based on penalties and interest and other things.

Joe: Right. Okay, so first and foremost let's just define and answer this simple basic question that some folks have been asking, does this mean … and I know the answer to this thus do you, does this mean quote unquote I have to start collecting sales taxes? The answer is yes. The answer is you should have been collecting them before, you had to before. Correctly?

Scott: Well correct, if you have physical nexus that goes back in time. Okay, most of these economic nexus laws are new. And the way they're currently written is if you pass the threshold then the expectation is you register and start collecting sales tax going forward. So there's going to be nuances and changes but in general, if you exceed most of these thresholds for economic nexus or notice in reporting basically the expectation is you go out, you register now, and you start collecting forward. And there's no … depending on the state but for most states, there's no real risk of you owing money or have not done whatever in the past, you can go forward. But when you have physical nexus because of Amazon FBA or a 3PL then you need to consider if you register and collect going forward where you still have a risk of any previous outstanding liability which I know within a sale you're very aware of to make sure you know both the seller and the buyer are aware of any business liabilities or do you go back in time and pay anything that you didn't collect in the past; which isn't fun. Collecting sales tax or paying in sales tax you didn't collect from the consumer on each individual sale.

Joe: Yeah because that's directly coming out of your profits now instead of collecting and just passing it through.

Scott: Yup.

Joe: Okay, so let's jump to making this easy for people that are listening. The bottom line is that they need to start collecting sales taxes and remitting them. Obviously, get registered to collect sales taxes. There're software out there that does this right? Because you're talking about you need to do this, you need to do that, and for me as a former physical products e-commerce seller, my eyes would roll into the back of my head, I would [inaudible 00:15:15.0] more and I'd never wake up again. Can't … Can I just pay somebody to do this for me and if yes what are the options and how much would it cost me annually or monthly?

Scott: Well the first part, so you don't pull out your own hair, is there are multiple services out there that will help you with the registrations and register you in multiple states because it will drive you crazy. Every state is a little bit different. On average I'll pay about $100 per registration plus $20 to $50 in registration fee for some states, that's the first piece. So if you've decided to register in two, five, ten, whatever number of states you need to get registered first and I suggest … it'll just drive you crazy, is would be to get registered and there are a number of services out there that can do that for you.

Joe: Okay and we'll put those in the show notes but why Scott only five or ten whatever you decide to get registered? And why wouldn't you register for every state that requires you to collect sales taxes? I guess maybe because you never sell any … somebody in the state of-

Scott: So one it's just that overhead in the cost of doing business. So the first thing there are 45 states that have a sales tax and we are all heading sometime … I would have said three to five plus years that we're going to collect sales tax on every e-commerce sale, it's now probably two to four years or two to three years. It's going to happen a lot faster but there is a cost even on the low cost tool or outsourcing it … and I'll talk about some of those numbers in a minute, but you really only at this point want to register for sales tax where you have to. You shouldn't have to if … now if you're already a 20 or 30 million dollars e-commerce business just suck it up and go to all 45.

Joe: Right.

Scott: Anybody else below there, you're paying more money for compliance and tools and registrations. And in some of these states when you register for sales tax nexus you are in some ways volunteering to pay income tax. Potentially depending on the state and the situation; minimum franchise tax like in California which is $800 a year, and then additional fees, and not only the sales tax cost but paying a CPA to file and deal with franchise tax returns and income tax returns. So you want to as a small business or even a medium sized business minimize that overhead and only do this in the states you need to but you definitely want to start the big states where the population are. California, Florida, Texas, and those other bigger ones is the basics to get that going but you would want an easier way in. So figure it out for the first batch that you're doing and then do another batch and another batch. So you just can't stop your whole business to do sales tax and you just have to balance those things out. But at the same time, you don't want to show this huge [inaudible 00:17:52.3] selling and talking to Quiet Light. This huge compliance overhead and its overkill and it's going impact your own profitability and the money you're taking out of the business. So just want to find a balanced approach as you get there.

Joe: How do you determine that? Is there a tool or process inside of Shopify or if you're an Amazon Seller that tells you that you know what sales you have by state?

Scott: Yeah so there are two … for sales price there's a couple of ways to do it. So the first if you're an Amazon FBA seller there's a great tool called wherestock.com you pay him $30 and they'll log in … we'll get you the link, and they'll connect your Amazon site and they'll … it'll take them about a day and they'll give you a report showing you all the warehouses where you have inventory and when it started. How far back in time if you had inventory in the Michigan warehouse and if you go through that list and you don't see North Carolina or some states because of the type of your products it'll tell you, you might have had or five of these main states that you've never had inventory in and you don't have nexus there; which is great news. The next piece is really a matter of downloading all of your orders out of Shopify for the previous 12 months or the last year and then just pivoting the data or doing a total if you know how in Excel to show you your sales; both the number of sales in each state and the total dollar volume in each state. So you want to know your own numbers and any that you're over $100,000 in sales or unfortunately $10,000 in Washington State, Pennsylvania, and Oklahoma starting on Sunday I think. I think it just started Sunday. I think it was July first and it's happened right before it. Those are $10,000 in sales which is really low, everybody else is 100,000. So that'll … you'll go through those states and add up the ones that you have, look at the ones that you have the most amount of sales and income in and start with those. You want to know your own numbers and work through your own list. The other option is and I can provide a link to our tax calculator that we have in there … bunch of other people putting them out there that basically take your average sale amount enter it and it will total all those things up. But those are the two things; one, all of your income across all of your sales and then this Amazon wherestock report to let you know what's going on in FBA and that'll be in your information and then you just build a list and you work your way through your own priorities on how many you want to do; all at once or a few at a time.

Joe: Okay so just to dumb it down a little bit. If you're doing 20, 30 million dollars just suck it up and do all 45 states. But if you're doing maybe just a million dollars in revenue, which is fantastic, do this report because you don't want to have to register in 23 states that instead of all 45 if you don't have to.

Scott: Right.

Joe: Someone else talked about it in this way. I mean that registration alone is going to cost you $100 to $150 so maybe $3,000 or so for 23 states that you don't have to register in. But if you're only doing $1,000, $2,000, $3,000 in revenue in the state of Montana it doesn't make any sense to register because a. you're not going to hit that threshold and b. realistically Scott is if someone in the state of Montana that works in-

Scott: Montana is a bad example they're not on sales tax.

Joe: Okay.

Scott: So pick one of the few states that doesn't have one but Nevada or however else-

Joe: How about Maine?

Scott: So it's always a risk man, your question is so should you or not you … are you going to, can you fly under the radar-

Joe: Yeah.

Scott: Are they going to find you tomorrow and what's going on? So it's a risk management decision between the cost of compliance to your business versus the overhead and the cost of compliance and then the chance of being caught. There are four million Amazon sellers, there's between five and ten million businesses doing e-commerce these days. The states just had their handcuffs taken off and they're all going to go woohoo let's go get this money from out of state sellers. It's going to take them a while to ramp up and the chances of getting caught are very very low and they have been low and they're still very very low okay? But there isn't really no ambiguity now; there's no more well, maybe, or there's this court case, or whatever else.

Joe: Right.

Scott: So until now and whenever possibly the Congress does something or more lawsuits happen which take time this is the way things are today and you just have to make that decision of a risk management. So you never want to mess around with the IRS when it comes to payroll taxes or W-9s and contractors but for sales tax, you're going to have to balance those out. But the chance of being audited or being notified by the state is significantly higher than it's ever been in the past.

Joe: Okay let's talk about the services that are out there; as in the software or services that you recommend for listeners just … you can do your download calculator that I'm going to provide in the show notes to determine the revenue by state and things of that nature to decide where they want to register. But what softwares or service programs do you recommend that folks check out that you have seen people use consistently that make this a whole lot easier?

Scott: Yeah for people doing it themselves I would start with TaxJar it's by far the easiest to use most straightforward they … not only do they pull in all the data but they process the filing for sales tax and the payments in all 50 states. It's both the easiest and I, from what I've seen the lowest cost. They're a great tool. They have a great blog and a ton of information and support and it's the best way to do it yourself. The next one that's a little more powerful-

Joe: Hold on a second.

Scott: Yeah?

Joe: In terms of a TaxJar thorough cost ballpark if someone's to put in all the states what would the overall cost be to … and do they do registration or just compliance?

Scott: Okay so TaxJar does not do registrations.

Joe: Okay.

Scott: It's only the sales tax data aggregation to pull it all together from channels. Pull everything together. One note is if you have sales that are outside of Amazon, Shopify, or BigCommerce you have to import that data into TaxJar so that you have the complete thing. From all the sales so your filings are accurate. But in general, you're going to pay a monthly fee between I think 29 and up to 500 depending on the number of sales. Whether it's a thousand per month, 5,000 you know … in larger apps you're going to pay a base monthly fee no matter what; totally reasonable wherever your SaaS thing. And then you're going to pay a per-filing transaction. So if you're paying filing quarterly you're going to pay four times somewhere between $21 and $30 per filing. I don't have their pricing memorized.

Joe: Sure.

Scott: So if you're filing quarterly your costs are going to be lower. If you're filing annually it's going to be these monthly fees. So if you're a smaller seller the pricing can work out to be fairly affordable. They also have kind of an unlimited filing piece so if you get over a certain level … and I haven't done the math whether it's 20 states or 30 states but there's a certain point where you can pay it for kind of an unlimited plan and get to a max price. I think that's in the 4 to $6,000 for the year kind of total. But you can using that tool max that out and really lock that compliance cost in. Not counting your time making sure it's being done right. Importing data, dealing with notices, and just making … keeping an eye on it, it's not a set and forget process.

Joe: So, on the high side it sounds like maybe $500 a month and your maxing out the services there, on the low side $29 a month so it all depends upon the size of the seller and how much you do. Okay, you are about to mention another-

Scott: So the next one I would say is Taxify and that's what we use because we're doing hundreds and hundreds and hundreds of returns every month. It's a little more powerful in certain ways. They have integrations. It can handle a wider range of different businesses and there's … it's just they're really kind of head to head but for DIY most people go with TaxJar just because it's easier to use. TaxJar is more powerful if you have a more complex business. You might want to consider it or compare the two. Pricing is pretty similar between those two and-

Joe: Those using TaxJar you said TaxJar, not Taxify.

Scott: No we're using Taxify. We are using Taxify. Our accounting practice for us to file we use Taxify but I've known the TaxJar guys for six years now and they really do have a great solution. And any of our stuff we talk about those two is really the primary ones to consider third one is-

Joe: Hold on I want to just interrupt again sorry. On this option, you're saying you already use it which means that with your accounting services for sellers of a certain size I assume, the collection, the management, and remittance of the sales taxes are part of your services as well.

Scott: Correct.

Joe: So I don't have to learn the software, I can hire you guys to do it.

Scott: Correct.

Joe: Okay.

Scott: Well and I'll talk about some other … outsourcing is absolutely a viable, just like you outsource fulfillment to a 3PL or to Amazon FBA, sales tax is something you don't want to geek out on. I've done it for the last six years, it drives me crazy but I geek out on it. It just … it will distract you from listing products and buying products and designing new products and all the front end stuff to generate more income. That is absolutely something you want to … you might like that we look at here's how you do it yourself and you should understand anything you outsource but we do that. We offer the service but we also do notice management. The states send all kinds of notices. Even if you pay on time they'll send you a notice but if you don't respond to the notice they'll fine you for not responding to the notice. So there's more to it than just a set and forget tools. These tools are phenomenal as they deal with the complexity. Because every return is different, they have 50 different fields. They really aggregate the data and reduce the complexity of filing and paying which is awesome which is why we use automation. But then there's there is more to it.

Joe: Okay, you're about to mention a third option for folks.

Scott: Yeah third option is Avalara TrustFile. Now if you really are already a 20 or 30 … so Avalara has two products, they have a smaller and a lower end one which I don't think is as powerful as TaxJar or Taxify called TrustFile which you can use. They've cleaned up their pricing but it's still a little confusing but they're a viable tool. If you're already let's say five or really 10 million and you're doing more than just e-commerce you can consider Avalara AvaTax which is their higher end tool which will give you more control automated. If you have an accounting department it is definitely a tool you would consider. Quite a few CPA's and accountants use AvaTax as well to do more complex larger sales tax across multiple businesses. So those are really the key players, there are other smaller players out there but those are really the key players that are really focused and understand what's going on out there.

Joe: Okay. I was listening to your better half Patti on your YouTube channel. She does a great job, by the way, great Q and A's there. I think she mentioned SALT experts and what they do and what not. Can you define what a SALT expert is and why someone listening might want to consult with one of them?

Scott: Absolutely so a SALT; Sales And Local Tax expert, these are people that will do one, they can do a nexus study which tells you where you have nexus and it'll tell you whether your products are taxable or not, are they a food, are they a candy, do they have flour in them, are they clothing or … they can go look at all that. You can all interpret what the states say but these are people that do it all the time and will contact the state anonymously or you. The next thing they will do is what's called a voluntary disclosure agreement. If you owe a state tens of thousands of dollars of back tax and you want to come clean because you want to clear out your liability to sell your business and just make sure everything's done right, they'll go to the states anonymously and say I have this seller and they'll represent you. And in some cases get penalties, sometimes interests, and can potentially get a payment plan if you're cleaning up historical sales tax. And you want that person representing you a SALT expert, not your CPA. Unless they've done it multiple times in their own state you really want to talk to someone that's an expert. They're the people you want to call if you're audited to represent you and help you get through an audit. So those are the unique things we haven't talked about but the main thing is you can outsource your sales tax compliance to them. They will do the registrations and most in almost every case they will set things up. Most of them are very technical … in our case we at Catching Clouds we're really great at setting up Shopify to collect sales tax right and Amazon and eBay and in the more technical configurations. So we're very technical accountancy but they will help advise you on those things. They're all over it. They talk to me about the technical stuff, we're really good friends. It's a great community. I'll try to just solve this for sellers but then you can pay them a monthly fee or a per-state fee to take care of the data collection which you have to give them. The filing, the payments, notices, and kind of provide a complete service to outsource your sales tax. You can go to one person, pay them to take care all of your sales tax that's going on and advise you and then they're the ones that are keeping tabs on all the changes that happen every week; every month if that's the route you want to go. Which is a good way to go, in general, I'll give you a safe number, you really want to budget at least $50 per state per month. So you're looking at between $600 and $1,000 per year for this to not be an issue to worry about but you need to budget the right amount. Plus you want to have that same space because everyone's … Arizona's awful that they'll come back the second year and hit you with hundreds of dollars additional fees per county and everything else that you didn't count on and you can't get around and they'll deal with these random issues.

Joe: Okay, great. I have a list of those from your website for those listening again in the show notes SALT experts will be available. Sounds like a one stop shopping place to go and just outsource all of this. Of course, some people that want to do the work themselves will have those calculators that you talked about there as well Scott and the links to the Taxify and TaxJar and Avalara. A couple of quick questions before we wrap this up, and maybe they're not quick questions but historically when someone sells their website … their physical e-commerce business in this case, the question of liability for past sales taxes that should have collected is really really gray, right?

Scott: Yeah it is.

Joe: And only once for those listening how do you solve that problem as a buyer? In most cases, most buyers don't worry about it. They really never have and these are people that are a lot smarter than you and I combined. They don't worry about it; pretty high level folks. In one case I had and think about this as a seller, I had someone that it was … the business sale total value was around $758,000 but they did the math and they said look in the 24 months that you've been around you should have collected X amount of sales taxes and let's call it $50,000 in that purchase price, in that $750,000 in the asset purchase agreement $50,000 was set aside in Escrow for potential sales tax liability purposes. And when the buyer went out to register to get their sales tax in the state of California, Texas, whatever if that state said yes, of course, we'll register you but we know that you owe us from this brand, you didn't own the company but from this brand you owe us $17,000 then that money would have come out of that 50,000. For the record, the buyer was able to register in all the states that he wanted to register and not a single state said okay great but you owe us money hence all 50,000 was released. How does this Supreme Court decision in economic nexus change that liability moving forward for the buyers of these businesses?

Scott: I don't think it … I think it only increases the chance of the state contacting you and having to either answer the questions or go through an audit and all of these things are moot until you're actually audited. And you're at that point where you're dealing with an auditor and then then they ask for historical records and financials and everything else. Up until then, it's not really an issue. Unfortunately, though it's the decision of that state; are they going to hold the new business and whoever bought that Amazon seller account? They want to attach the liability to the Amazon account where it was being sold that you buy a continuing Amazon account which is what most people do or is it tied to the prior business and the business owner? The people selling you need to be concerned when you get that big chat to set some of this money aside if the states come after you historically because if you've spent it all, it really … in most cases tends to tie to the original business owner of the business. So I would say that there's … it's really if you're buying [inaudible 00:34:44.4] sale you have to be worried about it more than anything else. If it's an asset sale you're buying this asset, starting a new business, you've got to register fresh and move forward. There's a small risk but only after you've been audited. So it's just a couple of nuances there.

Joe: So very very small risk and only after you're audited and the odds of being audited again, incredibly small.

Scott: Correct.

Joe: Okay. Let's talk about those out there that are wholesaling. They're buying products and wholesaling them, they don't have to collect these sales taxes is that correct?

Scott: They don't but you have to follow the rules. The first is and what really does this finding really change is instead of collecting tax exemptions certificates; so for every B2B sale you have to get a tax exemption certificate and it's not just a picture of the sales tax license on the wall of someone's cell phone. You have to have something that has your business name on the top that other companies who you sold it to their tax licenses whether it's one state or multiple states. And it doesn't matter which states they are and an owner or a business manager an approved person of that company signing at the bottom saying they're responsible for the sales tax. Okay?

Joe: Is it on a form? Is it an official form that they would fill out?

Scott: There's a form per state and there's a great multi-state form. I can get you all of the links and if you want to have a process that you have them and keep in mind that they pretty … a lot of them expire every year. So you want to have all of these forms from your five or 10 or 50 or 500 B2B customers on file. And if you get audited by any given state then you need … then you have these to say hey I didn't have to collect sales tax but if you don't have the forms or they're expired or you're missing them that … then they can say all of that was taxable and you owe the sales tax. Even if the other company sold it and collected sales tax they can double dip and come after the information. What this decision really changed was two things related to B2B sellers. But first, as most people tend to collect tax exemption certificates for their own states where they're filing where they would expect their own business to get audited. Now that it's kind of every state can look at all this information, B2B sellers should start collecting tax exemption certificates on every sale. And if you have your top five or ten B2B customers, go back and get them from those ones and … to make sure you've got this filed. And then just set it aside in case you're audited. The second big impact of this for B2B sellers is now your B2B sales, number of transactions, and dollars volume count towards these economic nexus thresholds. It's all of your sales. It's your B2C sales and B2B. And even if you're 100% B2B and you have no tax you're still going to cross this threshold. And the states are still going to expect you to file a return. And it is going to cost you the same amount in compliance for you as it does. Even if you give them no money like every number is zero.

Joe: That's really important for people that are doing both B2C and B2B. I was thinking just wholesale B2B but we have a lot of clients that they'll sell to let's say for instance chewy.com they're selling their own website but they wholesale to Chewy. They need to pay attention to this stuff as well. That's great information.

Scott: It's all of their sales. It combines both and it's looking at all of your sales. Because what the really the states are doing and all these laws are meant to do is to get to the point where every transaction is taxed and they get a sales tax from every sale. That's what they're trying to do so pretty much most of the pain goes away if you register and collect in a state. You don't have to worry about different fines and fees or other unknowns, you can start defining your cost of compliance but that's really where we're going.

Joe: Okay. Do you think this Supreme Court decision is good or bad? Overall for the individual states that are going to be applied this collect and collect is what I'm saying.

Scott: I think it's bad for e-commerce sellers. I really do. The compliance costs just went from an unknown maybe I can avoid them to … and we're heading that way so I think it's bad for e-commerce sellers. Of course, it is great for the state bureaucracies that are going to go out and collect a bunch of money from other states until something else changes to back it down. I think it's going to increase the risk for smaller sellers and even mid-range sellers of having more unknown's that could impact your business. From us, as consumers, we're really getting to the point as a company … a country since we're so consumer based, it's all about products and services and things along those lines that we're really heading to the point where we're going to pay a sales tax on everything. It's just that the cost and the complexity and potential risks to all small businesses, not just e-commerce businesses, anybody that has a product and ships it out of state or does anything else now has to be concerned about that much more in running a business that you know e-commerce businesses are 24/7, running really fast, the rules are constantly changing, you just didn't need this additional in my opinion large overhead of cost of doing business to really impact them.

Joe: Right at the end of the day hopefully it would be great for states and the roads and highways and schools in the state in which you live. But for now, it's a major complexity that you as an e-commerce owner have to deal with. Scott, as always you're fantastic. These details are great … for me personally they're overwhelming many times but that's the point of the show notes and simplifying it and really … perhaps hiring that SALT expert to do the vast majority of this work for those listening that choose to go that route. Scott before we depart any last thoughts or recommendations for people that are listening; both buyers and sellers?

Scott: Yeah. Just take a deep breath plan out time once a month or a quarter to focus in on this. Add up your numbers, decide your risk tolerance, and then move on. And then don't worry about it for that month or quarter. And then when you decide to do it, think about what it is you're doing and make a decision and move on. You don't have to stop all your business or sales or everything else. Just take a practical approach. This is one more thing that has to be on your regular process; like checking your insurance or other things that you're validating. And just keep moving; keep selling and growing. Balance the risk and then just move on.

Joe: That's great thanks, Scott. As always appreciate it look forward to seeing you at the next event and hopefully lots of folks will reach out to you here. And be at peace of mind here with what you've shared. Thanks so much, Scott.

Scott: Well, thank you.

Links:

Catching Clouds eCommerce Accounting

Patti's Q&A about Sales Taxes and the new SCOTUS Ruling

Catching Clouds Academy

Fox News Supreme Court sales tax ruling: The winners and losers

MSNBC Supreme Court Rules States Can Require Shoppers To Pay Online Sales Tax

Internet Sales Tax | What Online Retailers Need to Know

Sales Tax Nexus Threshold Calculator

Sales Tax Permitting with SalesPermitted.com

Get your FBA stock locations summarized and delivered to your inbox.

Sales and Local Tax (SALT) Experts – Outsource Everything

Cathie Stanton and Lauren Stinson, Cherry Bekaert ► http://cherrybekaertsalestax.com/

Michael Fleming ► www.salestaxandmore.com ► https://www.salestaxandmore.com/chart…

Diane Yetter ► www.salestaxinstitute.com ► https://www.salestaxinstitute.com/res…

SaaS Sales Tax Apps:

TaxJar ► https://www.taxjar.com/

Taxify ► https://taxify.co/

Avalara ► https://www.avalara.com/us/en/index.html