Buying and Selling Digital Real Estate on Flippa - Flippa | EP. #47

On this 47th episode of The E-Comm Show, our host and BlueTuskr CEO Andrew Maff is with Blake, the CEO of Flippa.com. Flippa invented the concept of digital real estate and is now the world's largest marketplace of buying and selling online businesses. Prior to Flippa, Blake has worked in leadership and growth roles at fast growing companies including Xero, Luxury Escapes and Lonely Planet.

Tune in to this episode of the The E-Comm Show as Blake shares everything you need to know about the digital real estate industry, the acquisition process, as well as how to successfully sell your business on Flippa.

If you enjoyed the show, please be sure to rate, review, and of course, SUBSCRIBE! 

Have an e-commerce marketing question you'd like Andrew to cover in an upcoming episode? Email: hello@theecommshow.com

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Buying and Selling Digital Real Estate on Flippa - Flippa

SPEAKERS

Andrew Maff and Blake Hutchison

CONNECT WITH OUR HOST: AndrewMaff.com  |  Twitter: @AndrewMaff | LinkedIn: @AndrewMaff

Blake Hutchison

Blake is the CEO of Flippa.com. He is responsible for growing the world's largest marketplace to buy and sell online businesses. Prior to Flippa, Blake has worked in leadership and growth roles at fast-growing companies, including Xero, Luxury Escapes, and Lonely Planet.

Transcript:

00:03

Flippa offers you choice and it tends to be that flipper can drive competition for your asset.

00:09

Hey everyone, this is Nezar Akeel from Max Pro. Hi I'm Linda and I'm Paul and we're Love and

00:17

Pebble. Hi this is Lopa Van Der Mersch from RASA.  You're listening to and you're listening and you are listening

00:30

Welcome to The E-Comm Show, presented by BlueTuskr, the number one place to hear the inside scoop from other e-commerce experts. They share their secrets about how they scaled their business and are now living the dream. Now, here's your host, Andrew Maff. Hello,

00:50

everyone, and welcome to another episode of The E-Comm Show. I'm your host, Andrew Maff. And today I am joined by the amazing, amazing Blake Hutchinson of Flippa, CEO of one of the largest marketplaces for buying and selling online businesses. Blake, how're you doing? Great, very good show?

01:07

Yeah, ready for a great show. Thank you, Andrew. Thank you for the nice

01:10

anytime this is gonna be I'm super excited for this one. I love talking acquisition and game plan and ending game plan. Super fun. So let's, let's pretend no one knows who you are. We'll just lie to him. And tell us a little bit about your background, where you've been how you got here and all about Flippa.

01:28

Yeah, thanks. So I'm the CEO here Flippa. I have been in my role for about four years. But the flipper is a lot older than that. And to some extent, you know, people have been buying and selling businesses for hundreds of years, but flipper invented this concept of digital real estate, the idea that business owners all over the world can trade online businesses and find a pathway to exit among a big buyer base universally. Personally, I've done lots of different things. I've been on leadership teams and fast-growing tech companies, including zero, which is one of the world's largest cloud accounting, and software businesses. I've run online travel agencies, I was the chief revenue officer at luxury escapes, which is an online travel agency just for luxury travel, in fact, the fastest growing company in Australia, you can hear the thick Australian accent. I've also spent a lot of time in the US and I'm currently with our Austin-based team which assists online business owners all over the world. So Flippa started 13 years ago, and I've been here for four years. And we're having a great time of it. There are lots of wonderful business owners all over the world who use our platform, including e-commerce business

02:53

beautiful. So what is essentially like the ideal seller that is essential, you know, looking to obviously sell on Flippa? Obviously, I know it's a marketplace, right? So really what you're doing is you're providing the platform, you're not actually acquiring any of these businesses yourselves, correct?

03:14

That is absolutely correct. We are a platform, we are a marketplace. We're very much a middleman with an advisory service where required. And so what that means is that we're completely agnostic. So if a seller wants to use a third party broker on our platform, or a third party broker wants to bring a seller to our platform to access our large and kind of unparalleled buyer reach they can do so if a seller wants to work directly with flipper and use one of our advisors on our staff, they can do so we have a network of buyers all over the world. And that's kind of what makes our platform so attractive. And it kind of takes a lot of the heavy lifting out of the exit experience. So we connect to data sources so that we can interrogate your performance and show that to buyers. So we connect a stripe. I'm going to talk about the E-commerce angle here, right, so we're going to connect to stripe, we connect to WooCommerce. We connect to Shopify, we connect to Google Analytics where you need to showcase the traffic data. We connect to QuickBooks Online. So that means that it's easy for a seller to list and will pull down the data and will rationalize it. It also means it's easy for a buyer to understand the performance of your business and that's a really important piece. You asked me what makes the perfect seller I guess so. I'll talk in averages. So the average ecommerce business that sells on flipper is four and a half years old. Now that might scare some of your community because maybe they've got a six-month-old econ business or 12-month-old econ business and like I want to sell it today. They could, they could, but it's less likely to be as interesting as a mature business. And that's a really important thing for people to understand. They are most likely to be doing a quarter of a million dollars in revenue and above. Okay, so that can be again, a little bit scary to your community. That's not to say that if you have an asset that's doing $50,000 revenue, or $100,000 revenue, you can't find a buyer on the flipper. In fact, there are far more buyers for smaller businesses, but talking about averages here. So the average seller is doing $250,000 and above in annual revenue. And the average seller is operating on multiple multiple channels, right direct to consumer plus FBA, direct to consumer plus Walmart. So they tend to be distributed in their revenue generation. Again, that's not to say that if you're a pure-play Shopify retailer, you can't sell and flipper Of course you can, there are lots of buyers who want those, those assets, but just talking around averages.

06:26

So you'd mentioned about, you know, making the whole acquisition strategy or the whole concept significantly easier. Because I know from you know, from an E-commerce perspective, the sellers work incredibly hard to get their businesses to a certain spot. And then when they're ready to get, you know, acquired, they're ready to sell. It is a nightmare. And it is like they've built all of this just to be stressed out for months on end. How long does it typically take once you know, you've found a prospective buyer, and then they actually are able to sell?

07:01

The bigger the deal, the longer it takes. But the average is 90 days call in three months. That's the point at which time you have a letter of intent in your inbox. At that point in time, there's some due diligence that will likely play out. The best buyers are cash buyers. And that might upset some of your community who wanted to use an SBA loan or for 140 1k rollovers. But if you talk about it from the sell side, you talked about the stresses of creating a great business. And going through the acquisition, the best buyers are cash buyers because they can move faster. And so 90 days to loi, and then you typically have a 30 to a 45-day closed period. And that doesn't mean though, that some bigger deals don't take a longer period of time, right? So we're doing deals up to kind of 14 million and as low as 5000. So 5000 all assets, lots of buyers, lots of cash buyers deals get done very fast. A $14 million ecommerce asset, you tend to be talking to fewer buyers, and the due diligence process is a lot more burdensome.

08:29

So with E-commerce though, as I know, a flipper, obviously, is a marketplace for a lot of different online businesses you have like SAS companies, etc. I, in my opinion, those might be a little bit quicker, simply because it's all digital assets that then get turned over, you know, the password gets changed, things like that. But from an E-commerce perspective, you have inventory changing over you have different, you know, tax laws, especially if you're Amazon and you're overseas and things like that. How does that whole process get handled within the platform?

09:01

Yeah, so what, what Okay, so within the platform, we have a few things going on. So the first thing that happens is programmatic buyer matching. So we looked through all of the mandates. We looked through all the purchasing history, we look through all the buyer intent data, and programmatically whether you're using an advisor or you're doing it yourself, programmatically the platform is bringing buyers to the table. You can choose to sell protected by a non-disclosure agreement. You can also choose to sell where your listing is only visible to verified funds buyers. So the first thing the platform does is act as a business development engine for you. The second thing that happens is buyers will start to inquire and you'll be involved in discussions now. Either you or your adviser, m&a broker, m&a, advisor, whatever it might be, there's a discovery process Once the preferred buyer has been found, that preferred buyer can use our embedded Letter of Intent functionality, and they can use our on-demand flipper legal services, which include templates and or bespoke projects as required. They can use the flip of the due diligence service. Now then you said, how does that happen on the platform with respect to transfer an inventory and things like that, there is a point where the platform's not able to handle certain things. And so we have integrated escrow, we have integrated trust accounts. So we can handle the fund's movement, including things like stability payments, earnouts, and those types of structures, the platform can handle. But what the platform can't handle is you've got a million dollars worth of stock sitting in a warehouse, you're going to have to figure that out with the buyer, and the buyer is probably likely to draw that up in some kind of transfer of assets agreement contract of sale. They may even insist on coming and doing an inventory check or analysis or stocktake of that inventory. So that the most common econ business will be sold on the basis of a trailing 12-month revenue and net profit performance, plus the cost of inventory. And inventory is often sold at cost. In some cases, buyers are savvy enough to try to understand the 8020 rule. So show us the 20% that is generating 80% of the revenue. And we're going to acquire that inventory from you. But this is an asset sale, so you're going to be left over with the rest is pretty savvy, right? So they're going to do whatever they can to optimize the asset and ensure the performance of that asset. And so they might take your strengths, but leave behind your weaknesses. Sometimes your weaknesses, though, can be their strengths. So they might take that on to knowing that they have the capability to either move more products or optimize to sell. So hopefully it's helped. So

12:23

I know the concept of acquiring other ecommerce sellers is something that I've always thought is a genius move I think not enough ecommerce sellers actually move on because of the concept of expanding the product line. Or even if you're not expanding the product line, maybe you have someone who, you know, sales aren't great, but they have a huge list. And that list is a relative community to someone else. What do you typically see from an acquisition side? Are you seeing buyers going after someone with you know, a nice profit margin doing really well? Or are you going after someone who's just got a nice community that they're able to leverage themselves?

13:06

Yeah, a little bit of both. I mean, some buyers will buy on the basis of profitability. And they're looking to buy that for cash flow generating purposes. Some buyers are acquiring revenue. And some buyers are acquiring revenue plus potential and the potential comes off the back of perhaps to your point, they have a community. So perhaps it's an automotive parts EECOM business, but they have a really passionate community talking about Ford parts. And they have a YouTube channel that's got a big audience where they talk about these parts. Maybe they have a big Facebook community that talks about these parts and how much they should cost. And there's a trading community going on there. In which case, you know, someone who is in the automotive space will acquire the revenue, they may be less concerned about profitability. Because they've been they realized they can optimize that using their own skills and or services they have, and they want the big audience that might come with that. So this is the interesting thing. Each buyer has a different motivation. But to your point, there are people buying to get incremental value out of their existing business.

14:35

Are you typically seeing DTC sellers or are you seeing more drop shipping or wholesale or something along those lines?

14:45

Your drop shipping is a little bit out of favor. But there are actually some really good quality drop shipping businesses, but it's a little bit out of favor, you know, there's supply chain challenges. the cost has gone up The likelihood of your customer receiving their product has some risk and therefore refund rates are typically higher on drop shipping businesses. So you know, fan-favorite direct-to-consumer. My next fan favorite is FBA. Next fan favorite after that multichannel, so direct to consumer, Amazon, eBay, and Walmart, you know, obviously making that mix up that you kind

15:28

of get from, you know, from an E-commerce perspective, you have a lot of really big aggregators out there, right? Like you have all these companies that one of the biggest ones that you know, a lot of Amazon sellers are aware I was through ASIO. And, you know, they acquire a lot of those sellers. What is the what would you say is the big differentiator on why a seller would want to go and basically use Flippa versus just going to an aggregator?

15:54

Yeah, that's a great question. It tends to be that flipper offers you a choice. And it tends to be that flippers can drive competitive competition for your asset. And so we have all the aggregators shopping on our platform. We do deals with the aggregators all the time. We, in fact, have a dedicated relationship manager for the aggregators, and bigger buyers, for that matter. And so what you get is flexibility and choice. And so what's interesting is, remember, the aggregator term is just a fancy new term for people who are acquiring businesses. There are lots of people that acquire FBA businesses and have for some time that isn't actually called aggregators, their private equity. So, you know, you want to, you want to avail yourself of choice and opportunity. The good thing about the aggregators is they tend to move fast, because it's a hyper-competitive industry, and they're all going up against each other to for who can acquire the brands. Now, of course, that's slowed down a little bit, for obvious reason. But there's still, for the average FBA business owner, there is a plentiful dry powder, and lots of choice by way of your exit, buyer. And so some of the aggregators got to the point where they were buying very, very big, very, very, very big businesses only right, but for the average ecommerce business owner, which is why flip out kind of refers to itself as the investment bank for the 99%. The average e-commerce business owner, is sub 10 mil, sub one mil. And so you want to remember that there are actually lots of high net worths. There are lots of other company buyers and institutional buyers that are not aggregators that are shopping, and give yourself choice.

18:01

So let's say, DTC brand, I'm done. I don't want to do this anymore. What it What would you say? Are the appropriate steps to take before you even bother putting up your you know, your business on Flippa?

18:20

Yep, I would say sign up to cloud accounting software, QuickBooks Online, and Xero FreshBooks. Sage, I don't really care what, why. Hire a bookkeeper or an accountant and tell them to get your trailing 12 months, preferably 24 or 36 months' worth of data on those platforms. So that can be easily rationalized and understood by a prospective buyer. I would say that if you have inventory issues, and your revenue is declining, fix those inventory issues, and fix your revenue base before you're trying to sell because there's lots of choice for buyers that don't buy assets that are distressed. Typically, there are some aggregators, by the way, who only buy distressed

19:11

assets Martling a discount,

19:13

but for the average. Yeah, totally. For the average buyer. turnarounds are hard. And you declining 10% month on month because you've got an inventory or supplier issue that needs to be resolved. So fix that up. The second thing is to rationalize what you're willing to take, depending on your situation. We've seen buyers who have million dollar offers, sign a letter of intent, signed letters of intent, signed contracts of sale 48 hours later, they ring up and say now I want another $50,000 Because they just do, you know, sitting on the couch and they're like, Oh wow, actually got a deal done. Maybe I can extend I'd like more out of this, that is a surefire way to ruin and kill a deal. Buyers are not patient, there are lots of deals for them to do. So rationalize what you're willing to take. And anything above that, just get a deal done.

20:18

What would you say is one of the common mistakes you see from E-commerce sellers when they're looking to, you know, finally go through the acquisition process?

20:29

Yeah, it's a great question. Probably. I mean, without sounding like a broken record, probably just knowing their financials and having their financials in order. Yeah, yeah, I'd probably say that's the biggest, biggest mistake, we say,

20:49

where do you see, you know, because obviously, you guys have all the data on companies getting acquired companies that are buying people like you, obviously, that's your whole business. Where do you kind of see things going as time goes on? Because obviously right now we're in a very volatile market, things are changing, it's possible that buying is slowing, it's possible that people who want to sell has increased. So what how do you see it you know, kind of once the smoke clears in the next six to 12 months?

21:20

So for sellers who are operating sort of sub-10 mil, the macroeconomic pressure may have impacted your actual business, supply chain, cost of goods, etc. But it hasn't impacted buyer or investor appetite. And the reason being is that remember that these businesses were undervalued and underappreciated, to begin with, they weren't overvalued. They're not publicly traded stocks. They do not venture capital, backed businesses. They're genuine, with all due respect. And I personally love small businesses, they're genuinely small businesses, they're small business owners, and they're the lifeblood of the economy. They're undervalued, small businesses are always undervalued. So it's not like the buyers who are interested in this space have suddenly said, Oh, wow, I need to find the valuation floor before I start shopping again. Because we've already always operated on the floor. So that's kind of point two is kind of ecommerce is not dead. In fact, it's only the beginning. You would know better than I would, but I think it's something like total retail is 14%. Right? So total e-commerce as a percentage of total retail, please correct me if I'm wrong here, but I think it's something like 40%. Yet, people know it's a more convenient way to buy. And so ecommerce will continue to be a critical part of consumer spending and a critical part of people's lifestyle habits. And so accordingly, we expect better, and more ecommerce business owners over time. If you look at Shopify, while their enterprise value is down substantially, the number of new businesses starting on Shopify each quarter is actually up year on year. So I guess philosophically, we actually think that 2021 And sorry, 2022 and beyond will be a richer ecosystem for the buying and selling of these assets. Clearly, some people who had businesses that were built for the benefit of a pandemic might struggle because if you're selling masks and you did really well that's probably not such a good business you know, I'm kind of walking around the edges here, but I tend to think that there's enough buyer demand that for someone with good quality business, they can get the exit if they want to, you know, but you start to see trends so coming out of in the pandemic, no one wanted to buy travel based assets for obvious reasons. Coming now travels hot again, we see 600,000 keyword searches on flipper every month, and travels near the top again. So health and wellness are typically at the top cooking based and Home and Garden. It's their very, very people who know that even in a recession, people are going to still buy things for their home, they need to upgrade stuff. So it tends to be certain categories are a little more

24:51

so I would imagine the pet industry because I know one of it's one of top recession-proof industries tends to be pets because even if you're You're stuck at home and you can't afford anything. You obviously still want to spoil as much as you can your animals. Is that another one that you tend to see? Up in the top?

25:11

Yeah, that's right. I mean that the pet industries are super lucrative industry. And there's plenty of people who are, who are Nisha flying it and finding a particular area of interest. You know, we've seen dog beds specific. Econ businesses sell really well on Flippa. Because people always have pets, and they always need to upgrade their dog beds. In fact, my dog's eaten about 25 dog beds, so I'm always uploading,

25:42

you should buy 101 of the businesses so you won't run out. What about So you mentioned Sub Sub 10 million, you know, a sub that eight-figure mark, let's real quick, before we wrap stuff up here, what's your stance on multiples? Because that's always, you know, what the seller wants to know is? What am I going to get for this? I've heard notoriously sub-10 million, you're looking at about a two to 4x. Maybe if you're lucky. If you're pushing it, you might push a six. But then if you're above 10, you're closer to a six or eight. I could be total BS, I don't really know. What's, what's your thought on how to value an E-commerce business?

26:20

Yeah, so you know, a super, super well, optimized business is typically getting two to four. And under optimization, business gets higher, right? Because the buyers can actually see substantial opportunity. It's so it's being acquired on. And just to be clear, you and I talked about profits before here, right? Yep. Cool. So some people like revenue multiples some people profit multiple sometimes people do monthly we do annually. Right? So let me just I don't know. Let me just pull up a couple of examples here. So well, okay, so this week, a $2.5 million asset, just as an example, sold for 3.62. That's jewelry.

27:09

So when you say $2.5 million asset you're including annual? Well, I guess you're also including inventory at that point as well. Correct?

27:17

No, we're not including inventory. So that's, that's without inventory. So $2.5 million dollars was so frequent six, two times profit. Last week, another one here. It's a bigger one. So six 6.3 6.3 times a bit smaller assets. $750,000 sold at 6.3 times. I'm just looking through last week's data. Another one here. middle. It's only six figures again. 2.82. So you know, I guess? Yeah, we can kind of say three to five times but each asset is a little bit different. Interesting. And what you know, we had a case last week. It was a golfing asset econ and future and the seller had lots of buyer attention, I could have got a deal done super quickly. And she and I, you know, I applaud this. I admire this patience. But she refused to sell to anyone but an avid golfer. And so accordingly, maybe she jeopardized a higher value buyer, given her desire to find a particular type of buyer. And so multiples are a really, really interesting way to talk about a business and its quality. Because there are so many variables.

29:02

I mean, that makes sense. We hear a lot of you know, these sellers that they want to sell their business, but it's their baby and they want to know that their baby's still gonna get taken care of even though they have to let it fly away so that it makes sense that's admirable I admire that it works. But

29:19

this is an interesting one actually. sort of dropped but 8.5 mils 6.43 times profit multiple on 8.5. And you're

29:29

saying 8.5 mil profit.

29:34

No, that was an $8.5 million price like the sale price. That's what the US is okay. That was 6.4

29:42

times profit. Interesting. So yeah, it's in that two to six area. Cool. Yeah, Blake, really appreciate it. This was fun. That was cool that we got actual data on it. That was great. I don't want to take up too much more of your time. I would love for you to do the usual everyone Know where they can find out more about you more about Flippa and we'll wrap this thing up.

30:05

Yeah, thank you, it's been fun. You know, check out flippa.com best way if you're a buyer to get into is just to start to browse around other ecommerce assets and get a feel for them, and how much they've they've been bought and sold for. If you're a seller, you can get a valuation at any time by just going to flip it.com and hitting the valuation tool there. It's based on comp data. We've got five different machinings, machine learning models, assessing categories and types a Shopify, a pet some garden, so you can get a valuation if you need to, if you want to get me personally, give me a blake@flippa.com always happy to help people out. It's a new industry. It's quite foreign to many, many people. So reach out to me directly. I'm obviously on LinkedIn, just give me a Blake Hutchison. I'm sure if you search that I'll pop up there. And again,

30:53

thank you, Blake. Appreciate it. Obviously, everyone who tuned in thank you for tuning in. And make sure you rate review, subscribe, and all that fun stuff on whichever podcast platform you want over YouTube or just head over to ecommshow.com and pick your poison. But as usual, appreciate you all joining us and we will see you all next time. Have a good one. Thank you

31:11

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