The EXITpreneur’s Playbook – Author Joe Valley

/ Podcast Episodes /

Episode 77

Joe Valley fired the man 24 years ago and never looked back ever since. He wrote “The EXITpreneur’s Playbook” to guide entrepreneurs in exiting their businesses the right way, specifically sharing tactical steps and mindset shifts that they need to get the most out of their exit. Joe can also be heard regularly in the podcast, “The Quiet Light.”

Tune in now and learn from Joe how to train for your exit strategy! 

[00:01 – 05:03] Opening Segment

  • We share our key takeaways from our interview with Joe Valley
  • FREE chapters from Joe’s book
    • Link below 

[05:04 – 13:10] Joe The EXITpreneur 

  • Let’s get to know, Joe, and how he fired the man
  • Training for an exit vs. planning for an exit
  • The biggest problem of entrepreneurs right now

[13:11 – 20:00] Should You Have a Broker in Selling Your Business? 

  • Establishing an exit goal the right way 
  • The role of the broker in a transaction 
  • Want some Amazon refunds? Check out Getida
    • Promo code: FTM400

[20:01 – 27:30] Earning Money All Day Long

  • Building a relationship with aggregators 
  • The main quality of a good advisor 
  • Joe gives a sneak peek about his book

[27:31 – 37:03] Managing Expectations Among Entrepreneurs 

  • Joe breaks down the Seller’s Discretionary Earnings 
  • What can entrepreneurs expect in today’s e-commerce space? 
  • He shares his experience dealing with the COVID-19 pandemic 

[37:04 – 43:23] The Mindset to Work for Your Goals 

  • “EXITpreneur” is not your ordinary book
  • Joe talks about the Ignorance Discount
  • Know more about Joe in the Fire Round!

[43:24 – 45:31] Closing Segment 

  • Connect with Joe. Links below
  • Final words

Tweetable Quotes:

“Good advisors earn their money all day long. Otherwise, they wouldn’t be in the business.” – Joe Valley

“[Good advisors] put more money in your pocket with a better deal structure so you could sleep at night.” – Joe Valley

Resources Mentioned:

Email joe@quietlightbrokerage.com to connect with Joe or follow him on LinkedIn, Facebook, and Twitter. Listen to his podcast or check it out online: website, Facebook and Twitter.

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David 0:00
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Joe Valley 0:42
But that ignorance discount is when you don’t bother getting trained. And you don’t understand the true value of the asset that you have. And you go ahead and sell it. When someone reaches out to you. Or when you’re tired. And you wake up and decide I can’t do this anymore. It’s too much risk too much overhead. Let me just get it done. That’s a total ignorance discount. You don’t want to do that. There started by bootstrap entrepreneurs that just want to fire the man, they just want to work from home, see their family more, and they bootstrapped it and they turn a side hustle into a full time gig. And then, like we talked about at the beginning, they get to their own level of competence and they just want to move on to their next adventure. That’s when it’s time to sell. The biggest problem that we have, I think as entrepreneurs is that we don’t set financial goals, right. It’s usually in terms of revenue, or maybe cash flow or net income. But the greatest value is probably in the exit. And I think that’s where the goal should be set in dollars.

Intro 1:38
Welcome, everyone to the firing the man podcast a show for anyone who wants to be their own boss, if you sit in a cubicle every day, and know you are capable of more than join us. This show will help you build a business and grow your passive income streams in just a few short hours per day. And now your host serial entrepreneurs David Schomer and Ken Wilson.

David 2:03
Welcome everyone to the firing the man podcast on today’s episode, we are joined by Joe Valley, the author of the exitpreneurs playbook, we just got done with that interview and it was awesome. Ken, what did you think?

Ken 2:16
David, man that was a great interview, you know who better to have on the firing the man podcast than Joe Valley. I think he had mentioned he’s been self employed for 24 years. When I heard you know that he was publishing the exitpreneurs playbook I’m like, you know, we got to get Joe on the show. He delivers tons of value. He taught he got deep into ad backs, state of the market aggregators, everything man, it was a great interview. David, what did you think?

David 2:42
you know, his experience really stood out to me he is a partner at quiet light brokerage he has bought, built and sold over half a dozen companies, he talks in the interview about you know, talking to 9000 entrepreneurs that are thinking about exiting their business and the wealth of knowledge that he has in this space is incredible. So I’m about halfway through the book absolutely loving it. Joe was kind enough to offer three free chapters to our listeners. If you go to firingtheman.com/exitpreneur, you can access those there. onto the episode. Joe, welcome to the show. How are you doing?

Joe Valley 3:16
All right, David, good to be here. Thanks for having me.

David 3:19
Absolutely. So first things first, tell us a little bit about yourself.

Joe Valley 3:23
Now you just cut me off when I start rambling too long. Okay?

David 3:26
All right. Sounds good.

Joe Valley 3:27
I’ve been self employed since 1997. I fired the man I think before they would have fired me, right? I gave my notice. And they were kind enough to actually walk me out HR had to walk me out of my last job. And it was a company that I started at in 1994, where I was employee number 34. three and a half years later, when I left there were over 1000. And it was awesome. until it was not right. I loved going in I tried to be the first one in the last one to leave. And I used to compete with a couple of guys that that’s what we’re going to do. And then it eventually got to the point where it was just working ants marching into work and then marching out and you couldn’t have the impact anymore. And like any small company, you grow to your level of incompetence, because you started early and they promote you to that level. I bailed left started my own company back in 1997. And I’ve been self employed since then, during that time I’ve built bought and sold over half dozen companies of my own. My last venture current venture is partner at quiet light brokerage firm. And I’ve just written the book The exitpreneurs playbook.

Ken 4:29
Nice. So Joe, what inspired you to write the exitpreneurs playbook?

Joe Valley 4:34
Well, that’s a good question. Look, in the last nine years, Ken, I’ve talked to probably 9000 entrepreneurs one on one conversations with people about businesses them trying to understand the value of business and could they exit or not, and too many of them woke up and just decided they were done and they wanted to sell which is you know, definitely too late. They’re not going to get the maximum value for it. No two businesses are alike. And there’s a lot of detail and everything is kind of specialized. So one conversation with one person may be different than the next conversation. And I just honestly needed to put it in some format, right? It’s too much water cooler talk where people are getting misinformation, even one on one conversations with an advisor, it can’t all be absorbed in one call two calls, 10 calls, there’s too much information. So the book is really a collection of all of those conversations that walks anybody through, where they’re at, in their business to their eventual exit, and everything in between.

Ken 5:34
That’s really cool. And I did get to read one chapter. And it was pretty deep. I enjoyed it. I’m excited to get to read the rest of the book. But you know, 9000 conversations kind of condensed into one book like yeah, to me, that’s packed with value. So I’m excited to see the full version.

Joe Valley 5:53
It’s a lot of conversations.

Ken 5:54
Yeah, absolutely.

David 5:55
You bet. So one thing that stood out to me in your book was you talked a lot about training for an exit, as opposed to, you know, exit planning. Can you talk about that? And what can entrepreneurs be doing to train for an exit?

Unknown Speaker 6:08
Well, doesn’t just sound awful exit planning, right? First and foremost, who the hell wants to do that. And that’s part of the problem is that it’s historically been called exit planning, and nobody wants to do it. Right. I have been an entrepreneur, right? for 21 years, and I’ve never written a business plan have never, you know, had an exit planning strategy necessarily. And so it didn’t really resonate. And honestly, the word exit in anything is almost a bad thing. Yet, the name of the book is the exitpreneurs playbook. So I’ve either done something great or foolish, I’m not sure which, but like anything else in life, if you want to go run a 5k, or triathlon or a marathon, you got to train for it, right. And that’s just exercise. But if you go out and run a 5k, without training for it, you may get through it, right. It’s not that far to run, but you won’t run as well as you could have, it wouldn’t have been as pleasant and fun and as strong and as competitive. And after you finish, you’re going to be in a lot of pain, because you’re out of shape. It’s no different than an eventual exit of your business. If you don’t train for it, if you don’t get the knowledge that you need, the path to that exit is going to lead to a deal structure, that’s not going to be great, the value that’s not going to be maximum, and then the training a transition or the longer transition period afterwards is not going to be attractive, either. It’s kind of like choosing your pain. Do you want to choose the pain of working out and getting in shape now, so you’re healthy later, or choose the pain of nah just have another beer and not do anything? and pay for it physically later? It’s the same when training for your exit in your business.

David 7:38
So, in terms of timeline, so you know, both Ken and I have a handful of e commerce companies. And the goal is to exit all of those. And you know, one thing that can you start too early? Or if that is someone’s end goal, when should they start training?

Joe Valley 7:54
Yeah, you know, historically, you know, you’ve heard people say, you should start thinking about your exit the day you start your business. And the problem with that is you’re just trying to keep all the wheels on the bus on the way to driving revenue. And it’s hard to do, right, you got duct tape on those wheels. The reality is I think, though, that if it’s in the back of your mind, at least that eventually this is a business that you can sell, right? When I sold mine in 2010. I woke up and decided to sell, I didn’t realize I could sell my business and I’ve been self employed for 13 years already. And it just occurred to me, wait a minute, I might have a sellable asset here. The difference today is that most people in the e commerce world realize that they do have a sellable asset. For the most part, the question is, how much is it worth. So I think the sooner you can start thinking about it, the better. Ideally, I think people that get the most value on their exit are, you know, given it one to two years in advance of actually exiting, you got to set that exit goal, ideally, and then reverse engineer, you need to know how to calculate sellers discretionary earnings. And to figure out the current value of your businesses and all this stuff. It’s fairly complicated, but the sooner you can do it, the better. But I wouldn’t give a specific date. Other than just give it plenty of time. You don’t want to wake up someday and realize that the days here and you haven’t done any training for it.

Ken 9:15
Nice. And so Joe you know something that David and I have been doing is kind of like what you were saying, you know, the ad backs and kind of going through all these motions and doing the planning. But one thing that we’re kind of like trying to figure out where the needle is what is the right amount to exit for, let’s say like, hey, as a solopreneur, or you have a small team, are you going to grow to you know, seven figures, you know, 1 million, you’re going to go to five, you’re going to go to 10? At what point does it become a headache and more. You know, have you seen it in like your m&a, like where do you see sellers most stressed out and capped out at?

Unknown Speaker 9:52
Yeah, it’s such an individual thing, right? You know, what’s the right number and it’s up to everybody’s individual goals and preferences, you just said something there, you know, do you get to a certain point and then you need to get it to the next level, you need to change who you are maybe, right, it gets to that level of making sure you don’t grow the business beyond your own level of expertise. Because if you get to a certain point, like, you get this entrepreneur affliction that we all have, which is, you know, called, I can do that, right? Like, well, I got 10 million, I can get it to 50, I can do that. But if you’re really bad at HR, and managing people, that’s a weakness of mine, right? So I either have to have someone in place to do it. Or if I do it myself, I have to change have to be better at that. And that drains the living, you know what out of me, so it’s better for me to never grow a company where I have to be a great HR person, or put somebody in place, maybe at that point, I’m going to go ahead and exit, right, maybe my sweet spot is growing to the business, you know, to a $2 million exit value, selling it moving on to my next adventure, and I stay there, I don’t need the bragging rights of selling a $50 million company or whatever the number might be, you have to understand who you are as an entrepreneur, I can’t help you with an exit goal on what’s right for you. That’s up to an individual. You know, I talked to somebody yesterday, he original 10 year plan was a $5 million exit, some things went wrong in the business. He’s tired, he’s frustrated, his wife’s in the business, they’re both exhausted. And now they’ve changed their mind, and they want a $2 million exit, if we can get them beyond that hurdle. And that emotional frustration, I think it’s best for them to make some changes and ride it out. So they get that $5 million exit. But they’ve got to make a decision that’s right for them as a family because their health and happiness comes first.

Ken 11:38
Interesting. Yeah, it makes sense. I think for me, you know, personally, I think when it feels like it’s work, then maybe it’s it’s time hitting a ceiling on that versus, you know, enjoying what I’m doing versus grinding and getting exhausted.

Unknown Speaker 11:53
Yeah, grinding it out, you know, on the hamster wheel and you can’t get off, I would still say that you should set an exit goal in dollars, you know, regardless of the time in your business, set an exit goal. And so you know, you’re always working towards something, because as you’re grinding it out, it might be less of a grind, if you know there’s an end in sight. But then if you’re marching towards that, and you’ve hit that goalpost, and your value of your business is there, you can always move it down, right, you can move that goalposts to adding another 200,000 or 2 million whatever the number might be, that’s the biggest problem that we have, I think as entrepreneurs is that we don’t set financial goals, right. It’s usually in terms of revenue, or maybe cash flow or net income, but the greatest value is probably in the exit. And I think that’s where the goal should be set in dollars. And what I find is that it makes the grind days so much easier, because you know, you’re marching towards something.

Ken 12:48
Yeah, that’s interesting. I like it. Now, how often so you say, okay, you’re gonna set the goal. And then how often would you recommend, you know, a business owner getting a valuation or figuring out where, you know, cuz for me, I’m like, I’m not gonna know a good valuation. Right. So How often would you say, you know, someone reach out to you? Or, you know, and find out what that is at that point in time?

Unknown Speaker 13:12
Yeah, honestly, it’s creating a relationship. It’s not Can you give me a valuation? Okay, see you it’s more creating a relationship. And that happens over time, you know, a client of mine named Joe, right, different Joe, of course, he came and he had an exit goal of a million bucks, we did the valuation looked at his discretionary earnings trends of his business, a couple of hero skews. And the reality is his business wasn’t worth a million bucks. So I kind of stomped on his heart a little bit, told him what he had to do. And he sort of understood how to work towards that goal of an exit. You know, we ended up touching base every few months without with updates, sometimes it would be two months, sometimes it would be four. But he marched towards that goal, hit that goal, but held the business longer, it wound up with about a two and a half million dollar exit, because he got training, he understood what he had to do. And those tough days got easier because he had a true exit goal in mind. And this is a kid that he was a father two days after his 17th birthday, his girlfriend was doing all of his homework so that he could just graduate because he was working full time. This is somebody that was grinding it out from a very young age, nearly went bankrupt, had drug addictions started an e commerce business, and he sort of grabbed on to that exitpreneur mentality and followed it through and now, you know, really doesn’t have to work given he’s got very low overhead, and he’s young, he’s gonna continue to work, but he’s happy to do it his way now at this point.

David 14:35
Now, Joe, you had mentioned starting a relationship, and I think that’s a really good point. And I’d like to dive into kind of the role of a broker in a transaction. And, you know, another thing that you mentioned was the entrepreneur mindset of I’m going to do this alone, like I can figure this out. as entrepreneurs, we go through that all the time. And so to use an example to illustrate this. I was talking to my cousin the other day, he is selling his house. He’s selling that house to his neighbor, and was contemplating whether he should get a real estate agent. And I recommended no, part of a real estate agents job is to find a buyer. And now, buying or selling a house is a fairly easy transaction relative to buying or selling a business. And so, can you talk about the role of a broker? And why you ought not to go at it alone?

Unknown Speaker 15:25
Yeah, you know, the real estate brokers out there in the world, if you’re listening, you may argue that it’s much more difficult than we make it out to be. And I think it’s probably true, you know, the role of an advisor, well, we call ourselves a client, call us brokers, I guess, call us whatever you want, it’s the biggest job that I have in the client relationship is actually managing your emotions and expectations, because I promise you every deal is going to go sideways at some point. And if you go it alone, you’re going to be so tired and frustrated, you’re going to basically drop your pants, so to speak financially, and just okay, I’m so close, I don’t want to lose this, I will take less. And that’s not what you want to do. My job is to keep your emotions in check almost more than anything else and be almost a therapist for you. Because it’s very emotional when you’re, you know, a week away from half a million, a million to $5 million, you will get very emotional because you’re so close. Back it up three weeks, you know, you’ve got to get multiple offers in front of you, not a single buyer. So our job is yes to first understand the true value of your business and make sure that it is listed at a price that will be attractive to both you and the buyers of the business. Second, you gotta get those buyers, we would bring hundreds of people looking at your type of business on average year to date, it’s recording this in mid June year to date we’ve had 4.4 offers on every listing year to date, things are kind of in a frenzy. In 2020. You’ve got to get multiple offers to the table, multi buyers looking at it not only see get maximum value, but also the best deal structure, you want to get the deal structure right. There’s a lot of nuances to it. You know, one of the things that you both probably heard of the aggregators that rolling up FBA businesses, right, anybody that’s got an FBA business has gotten one of those emails, they’ve created something called a stability payment. If you Google it, you won’t find it, but they make those on every offer. Essentially, it’s an earn out if the business is at 90% of what it was pre closing 12 months later, they’ll give you that earnout, or that stability payment. the problem with the way they structure is they say if it’s within 90%, you get 250,000. If it’s at 89.9, you get zero. So you’ve got to do different scales to that. But what if they run out of inventory? You’ve got to get that clause into it as well, depending upon the type of deal structure, if they run out of inventory, and they get to 88.9% instead of the 90%? Is it your fault? Should you get punished? No, there needs to be a clause in there to account for that if they run out of inventory, all bets are off. These are the reasons why I wrote the book. It’s there, it will help you if you’re selling the business on your own. But I think that the best approach, look, take this with a grain of salt because I own a advisory firm and I’m a broker as well. I do think the best approach is to have somebody on your side fighting for you, because things will go wrong, and they do go wrong. And that person fighting for you is making sure that your emotions are in check and that they’re still getting you the best deal and deal structure possible. If you go it alone, you just risk not understanding all the nuances and getting emotional at the end. And I know we all think we’re not we’re beyond that. But when money’s on the line, we tend to get a little jittery.

David 18:38
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Ken 18:41
You know you mentioned the aggregators and that’s kind of a you know, it’s fairly new thing in the last maybe six to 12 months. It’s really ramping up and you know, David and I get emails every week probably multiple emails every week from different aggregators saying Oh, hey, you know, love your brand, blah, blah, blah, you know, what is the right answer? So sometimes I delete them. Sometimes if I recognize that company, I might reply and let them know hey, I’m not interested but just at the end of the day, like Do you recommend like building a relationship with the aggregators or if someone is coming to, you know, Joe Valley at quiet light are those aggregators gonna all be sitting at the table anyway, does it matter?

Joe Valley 20:12
they’re all looking at every one of our listings, I would build the relationship, I just said a moment ago that it’s a good idea to have somebody on your side fighting for you. But if you go through the exploiters playbook, and you fully understand the value of your business, and you have enough aggregators that are looking, if you’re prepared, it’s possible that you may be able to do that on your own. It’s just when things fall off the rails, though, that it does get tough. And I’ve seen listings get delisted, I’ve seen utility patents show up where they didn’t exist before that take listings off the rails or transactions off the rails, all sorts of things can happen. And you got to have the right aggregator, and I’ll tell you what, it’s not just the name brand aggregators of the world that are out there, right? It’s not just Thrasio and perks that you want to talk to. There are 50 plus now and some of the unknowns as long as they’ve got committed capital in the bank, then I would have a conversation with them. But I wouldn’t talk to them until you understand the real value of your own business. You know, we had a conversation on Team the other day, you know, how do you help people that are talking to aggregators, and they think they want to sell to an aggregator, educate them, help them and let them go at it, if they want to go at it. If they understand the value of what the advisor does, then they’ll choose the advisor, you just have to make your own choice, right? We’re all entrepreneurs, we all think we can do that. And in many cases, we can right we’re all entrepreneurs right now we did it, maybe it’s possible, you could sell your own online business as well. I give you all the tools in the book to do that from calculating sellers, discretionary earnings to understanding the index schedule to there’s a chapter on aggregators, Chapter 13. It was added at the last minute, because of what’s happening right now been going on for a while, but it’s really, you know, hitting its stride now. And then there’s deal structures, I go through all of the deal structures that they’re going to throw at you. Here’s the problem with the aggregators. I like these guys, right, I’ve had dinner with many of them. They’re smart, they’re intelligent, they’re well educated, they’re really likable. And that’s how they’ve raised hundreds of millions of dollars. If they were all assholes, nobody would give them any money, right? But they’re good people. And people trust them. So they give them money. Their pitch to you that you’ve gotten in the email is, hey, we love your brand, we want to buy it, we’ll do it with cash, don’t pay a broker’s fee. And then you get your offer. And it’s not all cash, it might be 60% cash with 20% earnout and 20% stability payments. And oh, by the way, the working capital peg is we want two months worth of your inventory at no cost. It gets ugly, fast, right? But if you have 10 of them on your own, or through an advisor competing against each other looking at a package that you put together about your business, they’ll understand there are multiple offers coming in, and you need to do the best thing. We’re seeing more people get away from the earnouts. And they call them profit sharing, but it’s an earn out. Stability payments are ugly, the inventory, right? You want to give away $200,000 worth of inventory, you avoided the broker fee. But do you want to give away $200,000 for the inventory? I hope not right? The amount of cash that they’re needing to come up with as they compete with each other is rising, the deal structures are so much better than they were just two years ago. And you can go about it on your own. But it’s just a little tricky, a little bit dangerous. I think the again, total grain of salt, and I’m not here to pitch quiet light at all. I think good advisors earn their money all day long, otherwise, they wouldn’t be in business. Right? They put more money in your pocket with a better deal structure so you can sleep at night. That’s what they should do. That’s what they get paid for. If they don’t do that, then they are not going to survive.

David 23:42
Yeah, I absolutely agree with that. And one thing I want to add is in my previous life, I worked in a transaction services consulting firm, and probably saw somewhere between 60 and 70 deals during my time there. And what you often would see is the buyers would be much more educated in the process, it oftentimes wasn’t their first rodeo, whereas the sellers, they had spent their entire life growing this business. And so this was their first exit. And so I know with my brands, as we’re looking towards an exit, I’m going to need some guidance there. And Joe, I’m going to be giving you a call here in a couple years when the time is right. So But anyway, I think those are all really good points. Now, one thing that you’ve brought up a few times is seller discretionary earnings. And for our listeners that are unfamiliar with that. Can you describe what that is? And then talk about the industry multiples going on right now?

Joe Valley 24:36
Yeah, this is why I wrote the book, by the way, because it’s, I’m gonna explain it, but it’s going to go right over some people’s heads. I was on a podcast like this a few years ago, this guy brilliant, brilliant amazon seller. we dive into it, and then at the end of the show, he tries to reiterate it and he got it wrong. It’s simple. It’s a formula, but it gets pretty complex and I give you all the details there. So sellers discretionary earnings is simple and it’s surface level, its net income, right? So you’re gonna be able to run a profit and loss folks on an accrual basis. net income plus add backs equals sellers, discretionary earnings. Simple as that, then you say what the hell is an add back? chapter 11 is all about the Add backs there’s three different levels of add backs. An example of one that is often missed would be a cash back, right, you guys, cashback credit cards are essentially a discount on advertising or a discount on expenses. Most people don’t run that through their business, they just take that cash back and it goes over to their personal account. If it’s not on the p&l, they think, Oh, no, I can’t count it. It’s an owner benefit. If it’s an owner benefit, it goes in the add back schedule, right. As long as it’s a one time expense that doesn’t carry forward an adjustment or things of that nature. I’ve seen cash back or rewards converted, not just on paper to the cash value, you know, that can add anywhere from 25 to $100,000, to the value of a business, you know, and that’s in cash back. So then you apply the multiple to it, and it can go up quite a bit. Another detailed deep level three, one is, you know, if you renegotiated your cost of goods sold six months ago, you’re listing your business now, you renegotiated it six months ago, by $1 a unit, you sell 5000 units a month, every single month, well, you’ve got that first six months on your p&l that is not reflecting the new normal. So you take that first six months, $1 times those 5000 units, and then you put that in the add back schedule. So you’ve got $30,000, that would be adjusted and added back there. There’s 18 different types of add backs that I talk about in chapter 11 on add backs. And I think that it will help you understand a lot of people will just run a profit and loss statement and go wow okay. It’s not as valuable as I thought it was, you really have to understand the nuances of it. If you’ve got, you know, a salary. If you’re paying yourself $100,000, and you’re an owner operator of the business, that’s an owner benefit. Therefore, it’s an add back, what most people miss is the payroll taxes for that owner. They don’t add that back. There’s so many nuances to it that get really complicated, but simply put sellers, discretionary earnings is net income plus add backs.

David 27:06
And I know that’s a very complex topic, and I thought you did an awesome job of explaining it, but read the book folks, the exitpreneurs playbook. So walk me through this. So someone reads chapter 11, they have a very good understanding of sellers discretionary earnings, and they calculate that their sellers discretionary earnings is $500,000. Just some back of the napkin math, what could they expect in today’s current climate in e commerce business?

Joe Valley 27:32
So we’re talking physical product businesses, what you mean when you say e commerce business?

David 27:36
Yep. Right.

Joe Valley 27:36
So there’s a value range section that I put in the book, and it’s subject to change, right? That’s the critical thing. But there are certain ranges, you know, if you’ve got a business that’s doing less than $100,000 in discretionary earnings, that’s five years old, and then you’ve got a business that’s doing a million dollars in discretionary earnings, that’s five years old, same profit margin, same details, the larger one is worth more, not in dollars, but as a multiple, because it’s less risky, right? Because it’s more stable. It’s got a bigger client base, and it’s less risk. So therefore less risk equals a higher value. And I’m talking about multiples, not dollar. So there’s different ranges if you’re less than 100,000, maybe 100,000 to 500,500, a million and a million plus, you’re gonna see the multiples jump, so you got to calculate where you are. But at 500,000 today, are we talking FBA business? Are we talking Shopify type of store what are we talking about?

David 28:30
Yeah, FBA business.

Joe Valley 28:31
Okay, so an FBA business with a half a million in discretionary earnings today, if you don’t have any hero skews. Or if there’s not a huge fear of obsolescence like it’s in the electronic space or cell phone case space, where, you know, it’s constantly changing, it’s going to change and the new owner has to, you know, keep up with that. You’re probably in that three and a half to four time range anyway, right? I love to give broad ranges. I think in the book, you know, at a half million, I may say, anywhere from two to four times or two to five times subject to change though we recently had a listing in the pet space where it’s got recurring revenue and wholesale revenue. And it’s doing less than 250,000 in discretionary earnings. And it’s sold at a six point multiple, because it’s in the pet space recurring revenue and buyers love the pet space. So it varies greatly. I can tell you that a few years ago, if we were listing an FBA business for sale, we might have maximum listed at 2.74. So that it rounds down to 2.7 online, because anything above that buyers like I’m not doing that that’s too much risk. It’s an Amazon business it’s crazy the Sky’s falling. Nobody wants to buy those wasn’t the case. Obviously they all thought Amazon was gonna take over their brands and kick them out. Today, there are smart people like the guys at thrass that have raised a lot of money that have proven that it’s okay to buy FBA businesses and it’s happening in a great level now, so the multiples are getting pushed up. So, you know, I think you’d comfortably say three to four in some cases you may be able to go over four or five times. I talked to someone the other day that has a portfolio. It’s not an aggregator of FBA businesses, but historically he’s been buying up ecommerce businesses and tries to get them below three times he said to me, the other groups, I have to pay five to seven times now just to be competitive and buy that business. So the multiples have gone up pretty dramatically,

David 30:21
it’s good to see that creep up in multiples. And that’s something that has never made any sense to me. Again, as I mentioned, I did a lot of buyside due diligence for private equity funds, and take your average manufacturing company in Ohio, right. But I did a lot of deals that were in Ohio in manufacturing. And those would tend to trade for, you know, somewhere between seven and nine times EBIT da, which for purposes of this conversation is very similar to sellers discretionary earnings. And I could never understand why there was such a gap there. And the one thing that I’ve come up with was it is it, there’s a lack of assets on the balance sheet of an e commerce company, for instance, on my balance sheet, I have my computer in inventory. That’s it. Whereas those manufacturing companies, they have a lot more capex, they may have long term contracts. But you know, from an investor’s standpoint, you’re looking for cash flow in return. And so it always almost bothered me a little bit that there was such a discrepancy between your ecommerce businesses, and like your traditional brick and mortar manufacturing, say.

Joe Valley 31:26
Yeah well think about how long they’ve been around, right brick and mortar manufacturing hundreds of years. ecommerce, really a decade. Right? You know, I know, it’s been 20 years 21 22, I think my first ecommerce site was built in 1998, for 50 bucks, right? It had been around, but not at the level where the businesses are mature and they’re real. And Amazon and Google have done lots of algorithm updates where people are not cheating and lying and stealing at the level they could have even a decade ago. These are real businesses with real value. And private equity firms and others are starting to understand that. They’re started by bootstrap entrepreneurs that just want to fire the man, they just want to work from home, see their family more, and they bootstrap it and they turn a side hustle into a full time gig. And then, like we talked about at the beginning, they get to their own level of competence, and they just want to move on to their next adventure, that’s when it’s time to sell. And that’s these folks will buy it, though, they’ll still relative to the manufacturing companies that the multiples are still low, so they’re still very attractive, eventually, the multiples will continue to climb. But how long of a period that will be time will tell. Right now, there are more buyers than sellers, right, you’re in a good situation as a seller, if you put the right package together and you want to exit, you can move on. One of the evolutions of the aggregators is that, you know, some of them are they’re competing with each other. And some of them are now offering equity roles, right? So they may buy 70% of your the buy 100% of your company 70% in cash, and then you’re going to roll that 30% into a new CO and you’re just going to become a strategic advisor, you’re not going to do anything, well, that 30% instantly becomes worth eight to 10 times because it’s in their larger portfolio, you just have to be brave enough to stick around for a second exit that may take five to seven years so that 70% has to be big enough for you. And then you can still go off and do your own FBA business in non competing categories. It’s something that is starting to happen a little bit as well. And I think that’s going to be attractive for the right entrepreneurs that are willing to take that second bite of the apple because often that second bite, you know if it’s done right can be larger than the first bite even if it’s a smaller percentage of the overall original asset value.

Ken 33:51
Let’s take it back about 12 months ago, we got the pandemic hit and kind of all hell broke loose. But prior to that, at least in my experience and from other people I’ve talked to the growth of you know, the primary arrangement, say Amazon native businesses like 100% year over year, you agree in that range?

Joe Valley 34:09
Yeah, we were seeing pretty strong year over year growth. I can’t say that it went up dramatically in 2020. And where it will be in 2021. It’s still I don’t want to give you a percentage that we as a company acquired has grown year over year. It’s substantial. But it hasn’t tripled that substantial rate just because COVID hit and more people are buying online. It’s a little bit of COVID. But it’s a lot of the aggregators as well, not because they’re buying but because they’re educating and they’re educating people in the FBA world through hitting them with a million emails every day that they do have a sellable asset. The question is, what is the real value of that asset and how are you going to exit it in a way that’s going to put as much cash in your pocket and help you sleep later on.

Ken 34:53
Have you seen you know, with all the changes in the last 12 months, we have, you know, supply chain impact It’s really tough to get, you know, goods over, you have freight freight has like tripled. You have I just read something yesterday marketplace post put out Amazon ads just in 21, the first six months, their ad has went up 35% the cost of advertising. So with all that in play, businesses that you’ve taken a hard look at, has the increase in revenue? Has it stayed pace? Or has it slowed down? And as well as profit? I mean, with all of these squeeze plays here, what are you seeing?

Joe Valley 35:32
Yeah, no, it’s a little of both, right? The revenues, again every business is different. Some are struggling for one reason or another, that may be the owner, maybe the niche. But the question of increased freight charges has come up, right? In due diligence. In some situations, if they just went up, a buyer will say, Well, look, I, I need an adjustment because the new normal, just like I said, a reduction in cost of goods sold is the new normal, you do an add back for that, because that reduction is going to carry forward to the new owner of the business, you may have to do an adjustment to the new normal because of freight charges going up. The only problem with that is similar to the tariff was it feels temporary, right? So we didn’t do any adjustments, for the most part for tariffs, because it was political it was temporary. How long will the increased freight charges last? If it feels temporary, where there won’t be an adjustment for if the buyer wants to make an adjustment for that they need to do it before signing the letter of intent. There’s no adjustments after the fact you agree on all the terms of it. And then you’re in due diligence and you verify the numbers. And if there’s any changes, it’s math and logic, but you get it all up front in the letter of intent. But it is, Ken, you know question that has come up especially in regards to the freight. Just a question of if there’s a shrinkage of discretionary earnings as a percentage of total revenue or not. If it’s not, then it’s not an issue. If it is in the last 12 months, then it may become an issue for the seller and the buyer.

Ken 37:04
Now going back to the book, the exitpreneurs playbook. I really like that name, by the way. That’s pretty slick. So in reference a playbook. Now when I think of a playbook I think of like, you know, football or basketball. I’m kind of opening that playbook. And I’m looking around now it’s just a book. Like for me, I’ll read a book once. And it’s usually I probably won’t revisit it. Now David, on the other hand, David likes like little post its and he’ll tag every page on there. So is this a book like for David, where, you know, after all of our listeners go buy the book, when they have it? Are they gonna want to tag those pages and come back to it? Is that kind of how you structured it?

Joe Valley 37:40
Yeah, it’s not a memoir, right? You’re not gonna read it once and put it down. It’s not my life. It’s, as somebody put it the Ultimate Guide to selling your online business. That’s what it is. You’re going to dog ear it or you’re going to tag you know, I hope, this is me speaking as the author, but the goal would be having you highlighting and underlining it dog earing it, sharing it with somebody and using it as a reference guide. You could Okay, look, I’m working on my edX guide what the hell did Joe say about you know, or you’re in the middle of negotiations with one of these aggregators. And you come back to that chapter on negotiations and deal structures. It’s there for you. It should be a part of your toolbox a reference guide, an ultimate guide, something that you’ll refer back to and dogear the hell out of hopefully,

Ken 38:22
gotcha. Yeah, I will do that. This will be my first one.

Joe Valley 38:26
Good. I want to see it all messed up and dog eared and highlighted and pages torn out and post its and all that stuff. Let’s do this again in a year.

Ken 38:34
Absolutely.

David 38:36
In prepping for this interview, I was doing some reading and you talk in your book about the ignorance discount. Can you talk about that? what that means?

Joe Valley 38:45
Yeah, and it’s not meant to be insulting, right? ignorance discount is something that sellers give their buyers when they don’t do their homework when they don’t get trained, right. So they get an offer from an aggregator or a neighbor or you know, somebody that reached out to them, and they run their profit loss. They don’t fully understand all the nuances of accrual accounting versus cash accounting adjustments in the add back schedule for an employee that is now outsourced at half the cost six months through the year and so on and so forth. If you don’t get trained for all of those things, you’re giving your buyer an ignorance discount, meaning you’re getting less for the business and they’re getting instant equity. They absolutely love ignorance discounts. That’s why, you know, close rooms and close conversations. The aggregators of the world are going to prefer to buy from you directly because they know you’re going to get an ignorance discount if you don’t do your homework, if you don’t get trained. Publicly, they’ll say they love buying from advisors because we do all the work for them. We give them a beautiful package with a pretty ribbon on it, and they get to make a quick decision. And so there is a balance of what they buy between direct and advisors. They can’t buy enough from us. We don’t have everything that they need, right. They’ve got to go direct as well. That ignorance discount is when you don’t bother getting trained. And you don’t understand the true value of the asset that you have. And you go ahead and sell it, when someone reaches out to you, or when you’re tired, and you wake up and decide, I can’t do this anymore, it’s too much risk too much overhead, let me just get it done. That’s a total ignorance discount, you don’t want to do that you’ve worked your butt off for this, right? You don’t want to do that. There are a little nuances. And I will shut up about this. But there are little nuances in there, where if you just pay attention and get trained on little things, you’re going to add 5 10 20 $50,000 to the bottom line discretionary earnings, and then you’re going to apply a multiple to that, if you do that well in advance of selling your business, you will make more money by really understanding that part of the business than you will by adding new skews, it’s really that simple. That too much of an explanation there? I could go on.

David 40:50
No, that makes a ton of sense. And, you know, I think as entrepreneurs, we’re always thinking about the product launch, we’re always thinking about, you know, negotiating with suppliers, but just having a good core understanding of what’s going on as you approach an exit that makes total sense and probably is a lot less heavy lifting, as opposed to, you know, launching several more products.

Joe Valley 41:10
Yeah buyers love, you know, clear paths to growth, new skews that have been launched in the last 12 months, or new skews that are ready to launch, you just want to make sure that if you’re launching them on your own, that you’re at least breaking even on them, you know, as you’re moving up to the listing of your business. You don’t want to have a negative number there because it’s just gonna be that negative number time the multiple and it’s going to be that much of a discount off the purchase price of the business.

Ken 41:34
So Joe, as we’re coming up on time here, we have a fire round on firing the man podcast, a couple quick questions. fire round. Are you ready?

Joe Valley 41:43
No. Yes, yes. Yes, I’m ready.

Ken 41:46
The first one is actually kind of ironic. What is your favorite book Joe?

Joe Valley 41:50
Other than mine, it would be traction by Gino wickman. Gino is on the cover of the book. So I have to say his book, but I do actually love his book. I’m reading it now for the third time. So traction by Gino Wickman.

Ken 42:02
Okay, excellent. What are your hobbies?

Joe Valley 42:05
I work out on a regular basis with a group of guys who just love to kick my butt number one love to hike and travel when the pandemic is not here. So pre and post pandemic we’ve loved as a family to spend as much time as we can traveling the world together.

Ken 42:18
Nice. Yeah. doing more of that in the future, right?

Joe Valley 42:22
Absolutely.

Ken 42:23
All right. This is a new one we’ve added here. Since you’ve been self employed for 24 years here. What is the one thing that you do not miss about working for the man?

Joe Valley 42:32
Showing up when they want me to show up, right? I’m supposed to be there certain times I can work any if I wake up at two o’clock in the morning, I can’t sleep and I want to get something done. I can get it done, I get more done. So I don’t miss that at all. I love the fact that I can work whenever I want from wherever I want. And then I’m not reporting to anyone but myself.

Ken 42:51
Nice. Yeah, I like that. It’s a beautiful thing. All right, last one. What do you think sets apart successful ecommerce entrepreneurs from those who give up, fail or never get started?

Joe Valley 43:01
Yeah, it’s good question. I would say it’s a mindset, it’s a bit of F this mindset, I’m gonna go ahead and jump in here and take all the risk and hope it pays off, and a mindset of I’m willing to work twice the amount of hours three times the amount of hours for less money in order to have the freedom of flexibility that I want and be out and on my own.

Ken 43:22
Okay,

David 43:22
I like that.

Ken 43:23
Nice. Absolutely.

David 43:25
All right, and how can people get a hold of you, Joe?

Joe Valley 43:28
the exitpreneurs playbook can be found on Amazon, just do a search for exitpreneur, or go to exitpreneur.io. Or if you want to get a valuation for your business, you can go to exitpreneur.io or quietlight.com.

David 43:42
Very nice. And we’ll post links to all of that in the show notes. Joe, thank you for your time and appreciate you being on firing the man podcast.

Joe Valley 43:50
You bet, guys. Thanks for having me. I appreciate it.

Ken 43:52
Yeah, thanks Joe.

David 43:53
Thank you everyone for tuning in to today’s firing the man podcast. If you liked this episode, head on over to firingtheman.com and check out our resource library for exclusive firing the man discounts on popular e commerce subscription services. That is firingtheman.com\resource. You can also find a comprehensive library of over 50 books that Ken and I have read in the last few years that have made a meaningful impact on our business, for that head on over to www.firingtheman.com/library. Lastly, check us out on social media at firing the man, and on YouTube at firing the man for exclusive content. This is David Schomer

Ken 44:33
and Ken Wilson. We’re out

David 44:50
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Transcribed by https://otter.ai