13 Growing Your Business Through Acquisition - Chris Yates Jan 27 2022

Erik Martinez: [00:00:00] Welcome to today's episode of the Digital Velocity Podcast. I'm Erik Martinez from Blue Tangerine,

Tim Curtis: and I'm Tim Curtis from CohereOne.

Erik Martinez: Today, Tim and I are pleased to have Chris Yates here to discuss growing through acquisition. Chris is the founder of Rhodium Weekend and the owner of Centurica and specializes in buying and investing in Ecommerce companies as well as consulting in the process of buying and selling Ecommerce businesses. Chris, welcome to the show.

Chris Yates: Hey guys. Thanks for having me on.

Erik Martinez: Chris, why don't you take a few minutes and tell us a little bit about what you do at [00:01:00] Centurica and Rhodium Weekend and the journey that brought you to this point in your career.

Chris Yates: Yeah, I'd be happy to. I'll keep it brief. We can dig in more if you guys want. My story probably starts, the interesting part started in 2009, 2010, when I started buying online businesses. So, these would have been content, digital, informational products, a little bit of Ecommerce, stuff like that. Built up a portfolio over a few years and realized that, man, it's super isolating doing this online thing, especially when I live in Missoula, Montana, and wanted to connect with other people, so I started a in-person gathering, which became Rhodium Weekend in 2012. We did the first event in Vegas and have been doing that annually since then. So, in late September, we just did our 10th annual event, which is a lot of fun for me. It's pretty cool to get paid to do something I would do for free, but it's also given me some interesting platforms, I guess you'd say, being kind of a connector in the industry and being in it for so long.

I was able to acquire a company called Centurica, which you referenced a moment ago, back in 2015 from one of the members of [00:02:00] Rhodium. You know, it's kinda one of those things where he's like, hey, there's two people in the world I'd sell Centurica to Chris. You're one of them. You want to do a deal and so we did. So, I've been running that since 2015. I have a business partner who does a lot of the day to day, and what we do as a company is, in short, we provide due diligence for primarily, well-funded individuals or companies who are acquiring other brands, other Ecommerce brands, commonly, but we do also work with more content media brands, as well as SAS and things like that, a little bit of service businesses, if they're very heavily digitally driven. What I mean by due diligence is just essentially risk assessment, both on verifying the financials, as well as looking at the health of the sales and marketing channels.

Tim Curtis: So, tell us something about you that the audience may not know. Something that maybe is a little insight into your personality.

Chris Yates: Yeah. So, believe it or not, I'm actually very much an introvert. For many years, wanted to be the guy behind the scenes and not in front of things, and so actually getting involved in events and having, you know, [00:03:00] nearly a thousand person community of very successful entrepreneurs is very much outside of my comfort zone, but I've learned to make it my own.

Tim Curtis: Yeah. That's interesting cause, you know, a lot of people, whether they're more on the extrovert side or more than the introvert side, they tend to view life through those lens, and sometimes, introverts especially, can be at a disadvantage in taking a step forward, you know, to seize those opportunities. Sometimes they're held by their own, you know, inhibitions there. So, it's good to see that you were comfortable in at least stepping out, you know, in that regard. It's always encouraging to see people that will take that step out cause it can be scary. I've done it myself.

Chris Yates: Absolutely. Yeah, and the way I think about it, and this might be helpful for the introverts living is there's a big difference between introversion and shyness. Introversion has to do with how you interact with people and how much stimulation you have around you. If it's a lot, that tends to drain your battery, so to speak, and what I learned was I actually love people. It's more of how I interact with people. Like, I really, I learned that I didn't want to be on stage being the performer at my [00:04:00] events. So, instead I use what might be construed as a weakness as a way to shine the light on other members of my community who were doing interesting things.

Rather than me being the guy who's like the center of attention, I just get two people and I get them talking so I don't have to talk, right? So, actually being a connector became my style and I leveraged my strengths in terms of being able to do close, more intimate conversations instead of being a performer, right?

Erik Martinez: I totally get that. I'm very much an introvert myself. I like people as well, but I do not like being on the stage. I can do it from time to time. I can muster the energy, but I am super exhausted afterwards, so I totally get that. Let's dig into the topic of growth through acquisition.

When we talked about this maybe two or three weeks ago, you know, that was an intriguing concept because growing up inside these businesses, I've had the pleasure of working for a lot of entrepreneurs. Their focus is make a dollar, make the next dollar and do everything you can make the [00:05:00] next dollar and sometimes you're running on the hamster wheel going, why are we running so hard and making so little progress? Reality is you're making a great deal of progress, but you may have doubled your business and your profits are still the same. So, there's a lot of energy and effort that we are geared to go after and not necessarily enhance the value of the business in a meaningful way.

So, when you said, hey, let's talk about growth through acquisition that really kind of intriguing because most businesses don't go that route. Now, I happen to work with a client who has actually been doing some of this and we can talk a little bit about that later, but I'd like to hear your perspective on the main reasons for acquiring another business. What are those reasons and why should you consider this as an alternative to just growing organically?

Chris Yates: Well, I guess in terms of why I commonly see people that are doing acquisitions. Broadly speaking, there's two buckets of this, one being what I call the financial buyer and [00:06:00] the other being the strategic buyer. My world is much more on the financial buyer and what that really means the reason they're buying the business is for the cash flow. Essentially, they're buying a business for the earnings of that business and they're paying a multiple of those earnings.

In the strategic world, that's going to be the Google acquiring a YouTube, and that's not an area that I necessarily live and breathe, but typically, there's the gray area between those were things like acquiring another business to acquire their customers, or customer acquisition to put it in another way, would be a common reason that would fit both of those worlds.

The other reason I see is that whoever's doing the acquiring, they see the expected value of acquiring something being better than them trying to build it themselves. So, it's that buy versus build question.

Tim Curtis: When you're doing this sort of analysis, you're working with companies, do you see them doing that study between build it internally versus doing some sort of an acquisition, or by the time they've come to you, they're much more [00:07:00] acclimated on making an acquisition?

Chris Yates: Yeah. So, the people that we work with are certainly there. Where the build versus buy question becomes very salient would be on the valuation of the company that they're buying. So, for instance, let's say going to the Ecommerce world, a drop shipping business that has a single supplier that anybody can sign up to sell their same commodity product and they're just using paid advertising and they've been running it for six months and they've grown it to a certain level. You might look at that and let's say that they're asking a 10X of their earnings, right, if you were to annualize their earnings.

The question in your mind has to be what would the cap be of that valuation for this business if I were to go and build this thing for myself, taking into account the time value of money there. So, the question would be, I'm smart, I could probably build this business back to where they're at within three to six months and it would cost me X dollars to do it. So, that's going to cap the valuation of that business that they're looking at. So, I think a lot of people will do that math, unless the business has some strategic advantages or it's taken three, four [00:08:00] years or ten years to get it to that point and you would have to go through that same amount of time. So, that speed of product market fit, that speed of customer acquisition, that speed of revenue may be an advantage to you if you're trying to grow quickly, for instance.

Tim Curtis: I've spent some time, a lot of time actually, in the SAS world and I've been active in, you know, acquisition space, just recently, in the last two years, sold my own agency and certainly have some experience there, but it's interesting to watch the ebbs and flows. I would say that I have seen more strategic buying than I have financial buying. That could be just a product of the space that I've occupied, but it seems as if people are acquiring, perhaps it's a bit of technology, it's a bit of the technology plus the customers that come with that. It's more of a broadening of services. I have been a part of financial acquisitions that are a little bit more cut and dry and it's really just to build wealth or more opportunity. Would you say there's a balance between those two, or would you say no, you're seeing more [00:09:00] on one or the other?

Chris Yates: I definitely am biased in my view because I live and breathe, let's just call it the private equity world, which certainly has a relatively decent strategic component to it, but they're not paying the Silicon Valley prices. They're looking for a multiple of EBITDA. When you're in venture and larger companies and things like that, if that's the world you normally live in, you may be biased to say that, hey, I'm seeing a lot more strategic, but for me, private equity has been very, very active over the last four or five years. In the last two or three, just the Ecommerce space has blown up. As an example, about $10 billion have been raised over the last year to acquire Amazon FBA businesses and that is a world that we're living and breathing right now.

Erik Martinez: I find that really interesting cause we've had a series of episodes where we talked about Amazon and Amazon marketing, and I've really wanted to get into this question about who's buying Amazon businesses because [00:10:00] I find it mind blowing. Maybe it's just my little narrow worldview that here you have a platform where you have businesses that have been born in that platform and have grown successfully in that platform, that they don't control the environment. Amazon controls the environment and so I find that really fascinating. Can you expound on that?

Chris Yates: Absolutely. Yeah. So, my view on this is, it's a double-edged sword. So, to put it simply, basically, everybody selling on Amazon is building their business on rented land. That's just like the bottom line, but it has allowed the fastest unicorn, billion dollar valuation of a company in Thrasio, as an example, because in my opinion you get so much scale. Literally, all you have to be good at on Amazon, and there's a lot of things you have to be good at, but like, you don't have to be good at fulfillment of products. Amazon is amazing at that, right? You have to be really good at product branding, paid ads on Amazon, product launches, managing [00:11:00] reviews, customer service to some degree, Amazon handles a lot of that, supply chain, but you don't have to have warehouses fulfilling direct to consumer, which is very challenging at scale, especially when you're lumping a bunch of brands on to a single operation, if that makes sense.

Erik Martinez: Yeah, that totally makes sense. It is a fascinating world cause I work with a lot of businesses that have started out as direct to consumer businesses, right, and they have all those things. They have fulfillment operations, they have call centers, they have marketing teams and their own websites and their own brands and products, and they're expanding into the Amazon marketplace, and other marketplaces as well, much more rapidly than they can on their own. It's training these interesting juxtapositions inside their businesses where I think there's some conflict.

Give you an example. I have a client. They are heavily into Amazon. They are a 30-year-old brand, so they have a really established direct to consumer business, [00:12:00] and sometimes Amazon will come in and will buy all their inventory. One Tuesday afternoon, they come buy all the inventory and then suddenly you're going, whoa, hey, I'm still selling over here and now my customers have to wait however long it takes to get that item from wherever we're getting it back into our warehouse so we can fulfill it. We have this really interesting juxtaposition.

I think that is one of the things that is challenging about the Amazon business. Now, the other thing that we have studied is what's that overlap of customers. Is there any kind of overlap between their customers and the Amazon customer? I've found in every single case, and Tim, you might have a different experience than this, in every single case there is almost zero overlap between those. So, back to your point, you have this platform where you can grow, reach an amazing amount of customers for your product. Yes, there's a lot of competition as well, but you can grow pretty significantly just in that one channel.

Chris Yates: Yeah, and if we want to talk [00:13:00] strategy here, looking at Amazon and the overlap. If I were somebody leading marketing or Ecomm for kind of a traditional brand that sells brick and mortar or something like that, I'd be thinking about Amazon as a customer discovery channel, and ideally structuring the offerings I have on Amazon in a way that lends those people buying on Amazon to then get things that are exclusive on my brands so I can develop a direct relationship with those customers. For instance, you might sell equipment and then all the refill stuff has to come through you personally. I mean, that'd be a simple example.

The other thing that Amazon is amazing at is for those who are looking to create new product and figure out what is out there in the market. You can get so much visibility into using tools like Jungle Scout, Helium 10, et cetera, into exactly how much people are selling on Amazon. What their trends have been over time and if you put a product on Amazon, you can sell direct to consumer and get that instant feedback because people will review it if they [00:14:00] don't like it. They'll tell you, right? It can be a great sort of product testing ground as well. So, I've seen both of those used effectively strategically for brands that are primarily off Amazon.

The other thing I have seen is for companies that normally are selling brick and mortar, this is especially true with like private equity companies who are more buying those legacy type companies is, Amazon, if you take control of your brand on Amazon, ends up being very similar in terms of how you fulfill to any other retailer.

So, the example that you just gave is that brand you're talking about probably was selling what's called one key on Amazon or Amazon was buying wholesale from them. In that scenario, you don't have very much control over what happens with your products, your pricing, et cetera, on Amazon. So, it might be something where that particular person might want to think about shifting that over to 3P so that they have a little more control, or a lot more control over what's happening on Amazon and how quickly their product is getting sold and be able to do better demand planning for inventory levels and things like that because it's kind of [00:15:00] a black box a lot of times with Amazon when you're selling 1P to them.

Erik Martinez: Let's parlay that into now business acquisition strategy, if this particular client has the vision, because the owner has told me this, he has the vision that he's building a platform. They have a unique set of products that they're bringing to the marketplaces, Amazon which is the largest of them for them, or a distribution channel for these products, but he wants to be able to sell this business in, let's say the next decade. If he's selling primarily 1P and you're saying, hey, maybe you should sell 3P my brain goes and says, okay, is it because of that control? What is the acquiring company going to be looking at that says, Hey, this is a great platform or a great business to buy?

Chris Yates: It depends on who the acquirer is. As an all things it's very nuanced. When you say acquirer, are you talking about some of these companies that are specifically rolling up Amazon [00:16:00] brands, or you just talking about any acquirer that could be out there in the future?

Erik Martinez: Take your pick, but if somebody were looking to acquire his business, he's got pretty healthy standalone business without the marketplaces, but he's got a very healthy marketplace business as well.

Chris Yates: Well, so, my general rule of thumb is when you're not sure who's going to buy you, what you want to do is optimize for optionality and by that, I mean, you want to be in a segment of the market and position your business in a way that it's just a great business to own, regardless of who buys you. That's going to give you a lot of options, right, but there is also kind of a size component when you achieve certain, let's just say, EBITDA goals. Like, maybe you get to at least a million a year, or you get up to maybe five or ten million a year, the buyer pool changes. It tends to get smaller, but also the multiples tend to go up as you get larger, so when you're thinking that far ahead, you might want to think about what is your ultimate end goal? What do I [00:17:00] need? I need five or $10 million in my pocket after taxes when all this has done and then kind of work your way backward to figure out okay, how big do I need to be and who are the buyers in that size of the market, and then what do I need to do for my business?

So, it's hard to just broadly say that, but if we talk about these Amazon acquirers, for instance, they're getting better at this, but generally they don't like businesses that have a lot of off Amazon components to it, believe it or not. That, again, is changing over time as these companies evolve and get better at multichannel strategy, but they're looking mainly for relatively simple, clean products with good brands, really good track record on Amazon, really good reviews, all of that kind of stuff, and if you have a very complicated manufacturing that's happening for your products or something like that, you may not be the right target.

Now, however, I would flip that on its head for somebody like private equity. A private equity company is going to look at you and your Amazon exposure and have the same gut response that you had Erik, which is man, there's a lot of [00:18:00] revenue coming through this channel that we don't control. That seems like a lot of risks to me. So, having that diversity of channels could be very good. So, if you can have things buttoned up across all the channels that you sell and you have that good diversity and they're all working well together and especially if you have talented people who are managing all that. Then you're going to have the maximum optionality because you, as the owner, hopefully, have trained those people so well that they'd be very attractive for any acquirer to take on and be a good strategic fit because maybe they can help expand into these other channels. They're talented in all these channels, et cetera.

So, I think just the rule of thumb would be optimize for optionality, know who your potential buyers might be and work towards an end result that you ultimately want within that timeframe and that can help answer the questions.

Tim Curtis: I think you hit on a point earlier that I want to go back to a comment that just kind of stuck with me talking about Amazon and building your business on rented land. When I look at businesses that have either decided to potentially [00:19:00] acquire an Amazon business or they're launching Amazon themselves and kind of as a precursor, do we want to do this? Do we want to invest more in businesses on the Amazon side?

We hosted a round table with CEOs and had a very in-depth discussion about Amazon business and most of these brands had very rich, robust direct to consumer efforts outside of Amazon and were utilizing Amazon in various capacities. Their strategy was to utilize Amazon in a specific way, which I strongly endorsed, but what was really interesting about that is these were CEOs who some of them had anticipated what could occur within an Amazon ecosystem, some of them had not, and that whole rented land concept, some of them had not really thought through that. Some of them had built a tremendous business on Amazon and we're thinking about continuing to acquire additional FBA businesses.

What stuck out to me was the comments that they had about, for [00:20:00] example, in as a part of the piracy crack down, Amazon would send them a notification say, you know, in order to keep you functioning, we need to see your entire supply chain and it happened with several of them. Of course, that is a huge strategic private interest to that company. That's something that they keep very close to the vest and so they had to go to bat against Amazon because they knew that there was also another side to that. That they could very potentially be exposing themselves to another Amazon product. They were selling a lot of product on Amazon.

I think the lesson that I took away from that, and over the years as I've continued to work shadowing these businesses as they go into Amazon, if your end goal is to acquire those slim, clean FBA businesses and just continue to add your portfolio, I could see a lot of sense there. If, however, you are a business that has a very diversified selling channel mix, and you've got strong direct to consumer efforts, you really have to stop and think about Amazon or an FBA business from an acquisition standpoint, from a little bit of a different perspective. [00:21:00]

You've got to look at that and assess how your business has to change. Not only to mitigate the risks that come with Amazon, but also potentially to make sure that you are under control of your brand and you also said, if you take control of your brand on Amazon. I just don't know that brands necessarily go into Amazon fully understanding just how much effort it's going to take to keep on top of those things and many people want to acquire the business, but there's gotta be some sobriety about what all is going to be entailed. It takes a lot more effort than say just sending a PO over to Macy's, as an example.

Chris Yates: Yeah. I totally agree. I've seen this in traditional companies where they're amazing and very good at the B2B component to all things retail, product sales and all those kinds of things, distribution, and they try to use that same team, those same marketers, the same writers, the designers, to take products direct to consumer, it's like the learning curve is substantial there [00:22:00] and the effectiveness of people who are doing that is not always there and this is might be a reason to do an acquisition. I've actually seen this where they weren't just buying the brand, they were buying team as well because that team was very sharp at doing that.

You know, I think that's a way to step into this world, if you are smart with who you're acquiring and their team. It is very attractive to have a legacy brand with a high growth direct to consumer Ecommerce component to it from a valuation perspective. That can add a lot of value for any potential acquirer cause you're showing that you're living in both of those worlds effectively and that high growth component.

The reality is Amazon, if you look at the market share they have of all Ecommerce, it's growing over time. I haven't looked lately, but I know it was like over 50% or roughly around that number...

Tim Curtis: yeah. It is.

Chris Yates: and so you can't ignore it. Ideally, as I was mentioning earlier, figure out a way where strategically it makes sense for you and recognize that with any acquisition, the operations and the effectiveness of what happens after closing, will make or break that [00:23:00] acquisition.

I see it all the time where people who are just, they're buying a business kind of hoping to either just live in and do that. They've never run an Ecommerce business before, or it's just a totally new market they've never been in, but they think it's real sexy, you know, and sometimes those are the people that don't do a great job with that acquisition or it doesn't go well. Whereas, that same business with somebody who is very experienced would have gone really well. So, operations post-closing is, as you're saying, very key to success in any acquistion.

Tim Curtis: Yeah, and I think there's also the getting ready. Let's say you're thinking about being acquired, and we'll no doubt have listeners that are going to be in the position of, you know, hey, I want to be acquired some time here in the next X number of years as part of my exit strategy.

What I would say, just from an observation, having gone through this myself a couple of times, one of the most important elements and it often gets overlooked until you get post-transaction is a company could get begin to get prepared by beginning to include that [00:24:00] right of assignment inside their contracts. Most of the time, the right of assignment, meaning allowing the contract to carry forward to a new owner, a lot of times brands will not have that. It simply won't have been thought about and then they go through an acquisition and they're finding all of their contracts are not able to be carried through and they had not anticipated that. So, that's just an example that in my own life of what you can do to set the stage for a smoother transition and get a big piece of that concern out of the gate right away.

Chris Yates: This is definitely coming into legal areas, which I'm no attorney and I'm sure you're not either, so just you know, speak to an attorney with any of this stuff. In our world, most of the deals we do are asset sales, where that problem is magnified and it can be a deal killer and so I think that's very astute advice and kind of goes along those lines of optionality. You know, you may never sell, but you have the option to transfer those contracts with suppliers or whatever.

We do [00:25:00] also see ways around that through stock sales, where they just buy the actual entity and that's a way around it, but from a buyer's perspective, that's going to limit the number of buyers who are willing to buy you. So again, you know, you have less options, which is not what we're optimizing for. There sometimes can be ways around that if need be, if you find yourself wanting to exit next year and you haven't done that kind of planning.

Erik Martinez: So, let's pivot this back to the acquisition side. You were talking about great businesses to run. So, the question is if I'm going to try to grow through acquisition, what are the characteristics of the businesses that I should acquire? What, should I be looking for? What are those things?

Chris Yates: Yeah, so what we do as a company is obviously due diligence and deals can be made or broken within that due diligence period. What I would generally say, what people are going to be looking at in your business, they're going to look heavily at your financials. So, if you don't have proper accounting, you got to get that taken care of [00:26:00] right away. If you have this thing co-mingled with stuff you're doing personally, or other businesses you run, or something like that, where you can't really carve out and say this is the assets that I'm running, and here's the financials just for them. That's like a 101 thing you got to start with because the buyers need to be able to verify the earnings of that business, especially financial buyers. Maybe not so much on the strategic side. It may not be as big of a piece of the puzzle.

In terms of owners of the business. So, are you as the owner, the center of your business? If you were to take a week of vacation, does the whole thing fall apart? That is very risky for buyers. So, being able to extract yourself from the day-to-day operations of the business is something that makes that business more attractive and having systems in place.

At the end of the day though, a lot of what will get somebody to the table with you has to do with what your financials look like and what your growth trends and profitability look like. So, the best thing you can do for any business [00:27:00] is to grow that bottom line consistently over time.

If you grow too fast, believe it or not, sometimes that can be a turnoff. So, you know, if you're growing at 500% a year and the wheels are barely staying on the business, that sometimes limits the buyers you can have. Nice 20, 40% growth a year. Seeing that profit grow consistently over time. That's the biggest thing. If you're looking to exit within the next five years or so, just make sure you don't have any down years in terms of profitability growth. Keep that consistent and stable. That's the biggest thing that will, in my opinion, is going to get people to the table. So, those are a few things. I can keep going if you want.

Erik Martinez: I'm sure you can. I'm sure there's lots and lots and lots of nuances to this whole thing. So, if I'm an Ecommerce business today and I'm running into the limits of advertising in my digital world. You know, I'm doing everything I can on the paid search mediums. I'm doing everything I can in social. I'm doing everything I can in email marketing and conversion rate optimization, all those [00:28:00] various things and I still want to grow my business. What should I be looking at to say, okay, in order to keep growing, now we need to go buy a competitor, or we need to go buy somebody that does this. What are those triggers? When you've talked to businesses like this, what goes through their heads? What are they thinking about so that they can set the stage? Back to Tim's point and your point, you got to plan for this sort of thing, right? We can't just off the cuff, go say, hey, I'm going to go buy a business today and have it be done in 30 days. Well, I guess that could happen, but it's going to be the exception and not the rule. So, what are those people thinking about?

Chris Yates: Well, I guess, I wish I could get in some people's heads and know the answer to that question, but I would say, just to tweak your question a little, how do you know if I'm ready to buy another business might be a way to put it would be number one, do you have excess capital and if not, do you have [00:29:00] access to credit? Meaning the ability to get loans. If not, do you have the willingness and ability to raise capital because at the end of the day acquisitions are pretty capital intensive, unless you're like an amazing deal structurer who can get people to do a hundred percent earn-out or something like that, but generally it will take some capital up front.? So, that is in my view, kind of a requirement.

If you're targeting a certain size of acquisition, you need to have at least half or more, half to 80% of capital available to be able to deploy upfront in an acquisition. So, that goes without saying and getting those things figured out. For businesses or individuals there's capital out there in the form of SBA loans. There are investors out there who are looking to deploy capital and you may just have cashflow within your business that allows you to have some kind of a war chest that you can allocate out there. So, those are common things that I'm seeing these days in terms of that and you can leverage your internal capital that you have through [00:30:00] seller financing and things like that, to be able to buy bigger businesses. So number one is just make sure that you have the war chest and ability to go actually pull the trigger because it's just a waste of everybody's time if you can't make that happen.

Then two is do you have the operational infrastructure in place to be able to onboard this acquisition? I would say, ideally, you would have at least a brand manager or some kind of a leader. It could be a CEO of that division that you acquire, or your goal would be to acquire a company that that leadership team will stick in place. Where I think people mess up is assuming that their current team can manage it all, right, without having one person really in charge of that specific division because every business that you acquire is going to have its own nuances and those kinds of things. So, to be able to buy a business large enough to make it a priority for somebody or your team within that company?

I've seen situations, let's say you have a hundred million dollar business and you buy a million dollar little division. That division [00:31:00] tends to get ignored because there's just so much other things leverage wise you could do with your time. So, it has to be substantial size enough to really allocate the resources and the focus that it's going to require, because it will take a substantial amount, especially in those first six months or so as you're learning the business and onboarding it.

So, those are two things I would say off the top of my head that I think are key for people to think about whether or not they're ready for that.

Erik Martinez: That actually raises another question for me. I mean, how big is too big because once in awhile, David goes after Goliath? So, that really ties into the things that you were just talking about, having access to capital or an ability to raise money and in order to execute that, but what is really more common in your world? What's the most common type of acquisition and I know there's probably lots of different types, but what are you seeing in terms of, let's say businesses in that fifty to a hundred million dollar range? What types of businesses are they acquiring?

Chris Yates: Well, you know, in that range, I see a lot of [00:32:00] private equity being the most active acquirers. I'm no expert in the nuances of every private equity firm and many of them have very different strategies, but typically what that's gonna look like is they'll go raise money from endowments and various things like that. They will then go buy a platform company and that platform company, usually that's going to be their largest acquisition of the amount of money that they raise will go into that platform company. Depending on where they are, if they're lower middle market or middle market PE or whatever, that'll depend on the size of the deal, but they start typically with that, and then they're looking for bolt-on acquisitions that will be smaller and strategic that we'll be able to leverage that platform company that they had.

So, and I think ultimately what ends up happening is the whole organization that they build with all those combined companies together then gets eaten by a larger private equity fish because they've grown to a point where they're big enough for a bigger fish to buy them. So, that's a common playbook that we see in the world out there. [00:33:00]

In terms of like specific companies and how big of a business they're buying at 50 or a hundred million dollars, I don't have a strong viewpoint on that because you know, it's one of those things where I hate to say it, but it really, really depends. You know, but I would say very common to see larger companies buying smaller competitors. Very common to see larger companies maybe buying marketing channels or customer lists or those kinds of things. They're not going to be a small fish eating a big fish in that case. It's going to be, hey, this is a way for us to gain market share through acquisitions and pretty mixed results in terms of how effective it ends up being at the end of the day, but it does accomplish the goal of them gaining market share, taking other players out of the mix and those types of things.

Tim Curtis: I have a unique view in that I get to work on the private equity side and a lot of that is almost a more of a consultative relationship where they're evaluating, hey, what's happening in the marketplace? You know, what are we missing from our portfolio? But also helping them assess [00:34:00] the health of the companies they've acquired, you know, and they're investing in and they need to put some things in place.

But also on the flip side of that is working with individual companies that are interested in, example of bolt-on business. They may be very interested in Amazon and so they're looking for a strong Amazon list. Like an apparel company that's interested in apparel company that's having some success on Amazon because that's been a mixed bag for a lot of apparel retailers. So, they're looking for those types of, bolt-on type acquisitions, but in general, it would appear that the majority of the space is certainly venture, venture capital and investors picking up different brands. There's this also this side of the business that is really those individual companies looking to acquire other individual companies. Do you see a lot and what are the nuances of those individual companies that are looking for bolt-ons?

Chris Yates: I don't have a strong opinion on that one, to be honest, but, you know, in terms of the clients we've worked with, [00:35:00] these tend to be companies that are really designed for acquisition. So, they are actually building an acquisition machine. This might, again, be my bias because these are the clients we have most frequently within Centurica, but they actually have built a machine for acquisition. So, they have a deal box that they're looking for.

In your case, it might be, hey, I'm looking to roll up apparel brands, and in fact, I invested with a company that's doing specifically that, and they go out and they look for deals that are in their deal box. They go to brokerages, they do their own outreach, all of that kind of stuff and they're actually building kind of an acquisition machine where they built out processes for deal flow, for evaluating deals, for doing due diligence, for onboarding, for value creation. They have like this conveyor belt of the ability to do that consistently over time. So, for me, that's like the most common ones that I see personally. I don't work with a lot of just like individual companies that are out there doing that. You know, I do have those serial entrepreneurs who just get bored with their [00:36:00] business and they're ready to go do something new and they have money to play with.

I wish I had like, hey, this is the exact, you know, Avatar, but it can go as much as the individual entrepreneur's individual preferences all the way to like, my growth strategy is acquisitions purely, and that's all I'm doing.

Tim Curtis: Well, I think so many people are having good organic growth. We've certainly seen that among our client base. I think practically everyone has been up substantially year over year, but you're beginning to really hear the conversations about acquisition much, much more frequently than you did, let's say pre-COVID. It was heating up a little bit in 2018, 2019, but once we got past COVID and many of them had reset the foundation of where their business was in terms of growth.

Now, the conversation has just really picked up about mergers and acquisitions and that's been interesting to kind of anecdotally watch because that's not something I would have necessarily anticipated if you'd asked me a year ago. Would we be seeing this or would we be hearing this as much as we are? Are you seeing that same level of increased activity [00:37:00] from your broad perspective?

Chris Yates: Yeah, well, and I think there's a few drivers to that and one of them being a lot of these traditional businesses are used to selling to bricks and mortar. Once COVID happened that business dried up pretty quickly and they probably were selling to some component of Ecommerce retailers essentially, right? So, not brick and mortar retailers, but Ecommerce retailers that were selling their products for them, whether it be on Amazon, off Amazon, whatever. Companies are not dumb. They'll look at their balance sheet and say, hey, which of our retailers are growing right now and they start to realize, man, when I'm seeing what's happening, because Ecommerce adoption and COVID drove a lot of probably those people who are selling their products to grow a lot, and these companies see that and they're like, realizing, man, we either need to go direct to consumer or figure this out. Or look, we're selling at wholesale to these Ecommerce retailers. All we have to do is buy them and we have built-in margin because we're basically going [00:38:00] direct to consumer, without having a third party in between taking the wholesale margin.

So, I think there is definitely a trend there related to just realizing and waking up. Maybe some of these companies had, they're not in a bad way, but like they've had their heads in the sand. They've done things a certain way for a long period of time.

Tim Curtis: It's been rote, if you will.

Chris Yates: Yeah. COVID forced them to wake up and they realized, man, I'm behind the eight ball. The fastest way to get ahead of that is just to start to acquire some of these companies, bringing that expertise through those acquisitions and really make this happen. So, that's one area.

The other is just, broadly speaking, Ecommerce adoption. You know, investors have an appetite. There's not a lot of places to get yield right now. So, a lot of people were able to raise a lot of money to go do acquisitions and if you look at basically the playbook, it's you go do a few acquisitions, then you raise at a higher valuation, you go do some more acquisitions. Next thing you know, you're a billion dollar company, right? Once somebody laid those tracks, that just started happening like crazy. A lot of me too companies doing the same thing. I see it in both of those worlds, the traditional world, the venture [00:39:00] world. A lot of free access, and by free, I mean EIDL loans and things like that. Like, people were flushed with cash, coming through COVID.

Like you guys were, hinting at, they have a lot of things figured out. They're growing really quick. It's like, okay, well, what can I do in addition with this capital and so they're able to go do acquisitions and things like that. So, I think in my opinion, those are a few of the drivers that might've driven that. A hundred percent, I see acquisitions. I also see more kind of influencers talking about it as well. So, the more they're talking about it, the more it gets on people's radar.

Erik Martinez: Chris, I mean, with all this activity going on, there's gotta be businesses that you should just absolutely stay away from. What are some examples of those types of businesses or what are the characteristics of some of those businesses?

Chris Yates: I have two what I feel are pretty good rules of thumb. Number one is don't buy a business that's declining, either in its marketing channels, sales channels, or revenue or profits, especially for your first deal. Unless it's just like an amazing deal and there's some other reason you're doing it. Especially for your first deal, don't buy anything that's declining.

Two is [00:40:00] don't buy anything that you wouldn't feel comfortable telling your most innocent niece that you own and that'll keep you away from a lot of the junk out there. It's just a good rule of thumb. I know that sounds funny, but it actually is pretty applicable cause there's a lot of companies out there that have grown quickly. You know, maybe they're in the CBD space or maybe they're selling the latest fidget spinner. There's these trendy things that like are hot right now, or, you know, maybe they've done some gray hat sort of tactics to grow the business and whether or not it's sustainable is very questionable. That question will keep you away from a lot of that stuff.

From a business perspective, it actually makes sense because your options of growing more kind of shady businesses are really limited. Google advertising has really cracked down on your ability to advertise certain types of products and goods and the same thing on Facebook. You just have a lot less options and toolkits at your disposal when you're in those types of more regulated or shady type businesses. So, those are my two big recommendations.

Erik Martinez: If you have a client that comes to you and says, hey, Chris, I need your help doing due diligence. I want to buy a business. I've [00:41:00] got my eyes set on this type of business. From the time that they start that conversation with you to the time it closes, and I know it will vary, but how long does that process take? What should you be prepared for if you decide to move down this path?

Chris Yates: Yeah. Well, let's start at the beginning, which is you're ready to go start looking. What you will generally need to do is plan for six months of searching. You might find a deal in a month, but really six months I think is probably the average. Some people have been searching for years for the perfect business. It kind of depends on what your aperture is. So, just be aware this is a marathon not a sprint in terms of finding the right fit of a deal.

Generally what happens is once you get a letter of intent, meaning that you have an accepted offer. From the moment you have that accepted offer to closing that deal, there are a lot of variables, but in the Ecommerce world, 30 days is not uncommon for deals that are in that mid-seven figure range. If there is a bank loan involved, [00:42:00] 90 days is pretty common. If they're let's say a fundless sponsor, they're out there raising money for that deal, those deals can take anywhere from 90 days to a year to get to completion. So, really kind of depends on some of those variables that are at play.

Typical private equity deals, those might be anywhere from, let's say two to six months from LOI to closing, and private equity, they have sometimes more steps that they go through in terms of getting that deal actually locked up. And that process can take time in addition to just getting right to an LOI. Yeah, generally that's what it looks like from a due diligence perspective. Once we're ready to go, what that usually looks like is about a three week turnaround time from us getting access to delivering a final kind of report and findings.

Erik Martinez: That's a lot faster than I thought it would be. I was really prepared for you to say that the minimum amount of time is a year. You've just blown my mind. Thirty days on a small Ecommerce deal. That's pretty quick turn around.

Chris Yates: Yeah, and it's become the norm and it's because a lot of the [00:43:00] buyers out there are experienced and they've done this before. They know what they're looking for. They have processes in place. They partner with companies like ours who are very efficient with due diligence and they're able to get through that and that looks very attractive when you're comparing three offers of the same price point. One of them wants to close in three weeks. The other one wants to close in six months. You know, it's pretty clear which one would be more attractive, right?

Erik Martinez: Yeah, absolutely.

Tim Curtis: We've obviously discussed a lot. What would be one last key piece of advice you would give to a listener who's considering making an acquisition?

Chris Yates: Yeah. So, my biggest piece of advice is to get the reps in, and the reps in this space is looking at lots of deals and analyzing and assessing them, et cetera. For instance, one thing you could do on our website at Centurica, we have a free service. It's called the MarketWatch. We aggregate a lot of brokered listings. These are typically deals that are 10 million and under and you can go to any of those brokers, request a prospectus from those brokers, and in that prospectus, [00:44:00] they do a whole big long series of Q and A's, they'll give you the financials on the business, et cetera.

After you've looked at those for 20, 30 prospectuses, you'll start to say, this one's really starting to stand out, or something's not quite right with this one and it just takes those reps of looking at these deals, assessing them and saying, is this normal or not in this industry? That's going to go a long way to getting you prepped and ready to pull the trigger on that first deal.

You may look at something. It could be a great deal, but you don't know for sure because you don't have the context of having gone through those reps. There's no shortcut to that. It really just does take doing those reps, doing it consistently and finding that one deal that looks right for you and moving quickly.

Tim Curtis: MarketWatch on Centurica is a good place to go, to start to get a little more familiar with what's out there in what areas. What people are asking and kind of begin to acclimate yourself, I would say. So, that's a great suggestion.

Erik Martinez: Chris we want to be respectful of your time. We really appreciate all the valuable insights that you brought today. If somebody wanted to get ahold of [00:45:00] you, what's the best way that they can reach you?

Chris Yates: The best way to reach me, Centurica.com. Near the footer, there's a link that says schedule a meeting. I do 15-minute meetings with people just to, not a sales pitch or anything, just to meet them and help be helpful in those kinds of things. Hopefully, this isn't too big of an audience that you have that I'm going to get bombarded, but if somebody has made it this far, I'd encourage them to reach out.

Erik Martinez: Yeah, well, hopefully you will get bombarded a little bit. Well, Chris, thank you so much for your time today. This was fantastic. I know I learned a great deal. I'm going to be doing some homework after this episode

Tim Curtis: I made a note. I'm gonna be doing the same thing.

Erik Martinez: Well, Chris, thank you again. I'm Erik Martinez from Blue Tangerine,

Tim Curtis: and I'm Tim Curtis from CohereOne.