The Truth About Selling Your E-Commerce Business | EP. #235

Paul Rafelson 00:02
The brokers are typically like real estate agents, like a lot of them are going to just tell you what you want to hear, so you'll push the deal forward. They don't care what happens to you after the deal closes.

Narrator 00:10
Welcome to the Ecom Show Podcast. I'm your host, Andrew Maff, owner and founder of Blue Tusker. From groundbreaking industry updates to success stories and strategies, get to know the ins and outs of the e-commerce industry from top leaders in the space. Let's get into it!

Andrew Maff 00:25
Hello, everyone. Welcome to another episode of The Ecomm Show. As usual, I'm your host, Andrew Maff, and today I am joined by the great Paul Rafelson, Rafelson Law and Seller Basics. Paul, how you doing, buddy? Ready for a good show?

Paul Rafelson 00:38
I'm ready for a good show. You?

Andrew Maff 00:40
I am. This is going to be great. I'm super excited to have you on the show. I actually, for whatever reason, so many conversations with like different people, in like lawyers and attorneys, and all this different stuff in e-commerce, everyone's got an opinion, everyone's got a thought, and super excited to have this conversation with you. What I usually like to do here, just to kind of give everybody a little bit of a lay the land, is start them off relatively stereotypically. I'd like to give you the floor, just tell us a little bit about, like, your background, how you got started at Rafelson Law, how you started it, and we'll take it from there.

Paul Rafelson 01:14
Sounds great. All right, well, yeah, thanks for having me on. Yeah, my name is Paul Rafelson, and I've started Rafelson Law back in 2017 and Seller Basics is another company that I run, which is started in 2020 Yeah, I've been a lawyer for going on 21 years since I left Villanova, generally saying because I know you're local. Go Philly, but yeah, no, it's been, it's been an interesting journey. I work most of my life, I work for really big companies, I worked for Microsoft, for Walmart, or General Electric, and then about nine years ago, I wrote a blog post about a tax issue affecting Amazon sellers and the constitutional law issues around that, that made that argument that you know all the sellers were tax cheats, kind of weak, and we just, that sort of snowballed into a full practice. I always say, like, you know, we, I was an Amazon seller 20 years ago, believe it or not, or 20-24, years ago, I don't know how long it's been, but back when I was in law school, and I was at Villanova, I was paying for school, flippin DVDs and video games and things like that, so I had had some understanding of the Amazon world when I was asked to write this blog post and some frame of reference, and it just kind of went somewhere and turned into this need to have a small business law practice, and that's that's what I did, but totally unintentional, totally accidental.

Paul Rafelson 02:37
And today, you know, I always say, like, we're focused on what I call the global small business, that you know, before, before e-commerce, before the internet, right? You would never say I'm a global small business. It kind of sounds weird, but you know it's probably the most common description of every one of our clients who are in the space or small businesses, is that they're global small businesses, that they're importing from China, they're selling in all different countries, right? So that the idea was to kind of bring that GE, Microsoft, Walmart experience of multinational corporate practice to Amazon sellers in e-commerce sellers, not just Amazon, all e-commerce companies, just so that they kind of have that kind of guidance that they need, so that they're aware of the potential pitfalls that are out there, because I always say, like, the lawyer you would hire to open up a store in the middle of Main Street isn't the lawyer you want to work with when you're opening up an e-commerce store. You need a lot more specialty, a lot more focus on specific subject matters. So that's pretty much how it happened in a nutshell. Just kind of, you know, wrote a blog and it snowballed from there.

Andrew Maff 03:41
Yeah, that's awesome. So, like, what's the.. you have, like, a specialty now? Obviously, the blog was tax-related, but are you still focused on the tax side? Are you like suspensions, acquisitions? What's.. what's the.. what's the focus right now?

Paul Rafelson 03:56
Yeah, so tax is something I know a lot about. I have a master's law and tax, and I in constitutional law and tax is a really different ball game. It's really has to do with constitutional law when you're dealing with state tax. So that's kind of how I got in. I got a little bit type casted, I'll be honest, but no, we were our practice over the last seven or eight years has been very little tax, actually. It's been mostly IP,mergers and acquisitions, so helping sellers buy or sell or Amazon business or e-commerce companies, we do a ton of that, corporate structuring, partner, you know, managing investors, if you want to take on investors, you want private equity, whatever, whatever it is, we kind of do it, Prop 65 compliance with just general compliance issues with your products, we built a firm that is just solely focused on the needs of meeting the needs of 90 odd percent of Amazon sellers, that you know, we believe our firm can proud, you know, can easily support most Amazon sellers, and I say most, because, yeah, there's going to be some that are just going to be so highly specialized, so they're probably going to need something a little bit different than you know, but for most Amazon sellers we really, really try to be on top of it. Whether you're selling supplements, whether you're a reseller, doesn't really matter. We've been through, you know, we've been at this for a long time. We've been doing it for a long time.

Andrew Maff 05:10
Yeah, the mergers and acquisition side is obviously very sexy, so very curious, curious on that side. Let's, let's go back in time for a second, because obviously you've been at this for a while. What was it like, and what do you see as the differences now comparative to the like aggregator fun time, fun roller coaster that we had for a few years there?

Paul Rafelson 05:37
Yeah, no, that was a fun time. So that really we had an M and A practice in 2018 We had M and A practice in 2019 but really wasn't really that busy. And then in 2020 or it's actually in 2019 we started working with a few of the aggregators, and 2020 came around. We were doing a few more. Well, it's not 2020 we're doing a ton more. By the end of 2020 I think we were closing, and it was like something six or seven deals a week. It was, it was insane. In the last everybody wanted to get their deals closed ASAP before the end of the year, because the way these aggregators worked was they, you know, the only way they got the money out from those, and you know, they say we raised 100 million, but they can't touch that money unless they have targets identified, because that's how they every time they acquire a target, you know, if you acquire a target for a million dollars, your valuation theory of your company as the acquirer theoretically goes to that 4 million, so you have more room to be, you know, there's this whole scheme that some of the lenders that went across different aggregators were doing, so it was fun.

Paul Rafelson 06:40
No, we, it was an absolute bubble. I have Facebook posts talking about it, but it was a great time to be a seller. I mean, if you sold in 2021 you did well. Now, could you have done better holding on to the company yourself? Maybe with the company of grown, maybe, but if you were to sell today, you know that that multiple of, you know, 6x that might have been common, and I'm talking about closing cash, not not all in with earn outs and other incentives, but just in terms of closing cash, we were seeing 6x payouts for companies that don't usually command that kind of multiple, but that's how crazy the market was, and so now it's probably, you know, if it's sort of like a one to $2 million company, you're probably looking at, like, you know, not only picking on the small companies, but it's just they're easier to sort of explain it, like you're probably looking at about a 3x multiple, big give or take, right? So it's multiples have come down in half, but theoretically you should have, if your earnings have gone up and up and up over those few years. You probably still did better keeping the money and growing the business, but for those who people wanted to exit, that was a great time to exit in 2021 because they were getting those.

Paul Rafelson 07:51
They knew my clients, unlike other folks' clients, my clients knew they were not going to see those rentals, they were not going to get those payments, because, like I would explain to them, I said, 'Look, I can write the best contract in the world for you. I can write the most ironclad contract world has ever seen, but there's a very good chance their investors won't allow them to sign it. And two, even if they do, the end of the day, I can't make money grow on trees, right? So you could have an open and shut case, right, but going to court and actually enforcing those rights and collecting on these companies is a whole nother story, so I always made sure my clients understood, especially during the aggregator bubble, that you know you've got to be comfortable with the deal you're making at the door here, because there's a, there's a high possibility what these guys are doing has never been done before, it's kind of risky, it's kind of irresponsible the way they were doing it, I mean, it was, I mean, just some of the stuff was crazy, and you just have to understand that you're not going to see that. So, our clients were very, very, very fairly warned about the situation of where the earn outs were going to go, and where I thought these companies were going to be, but you know, they did get a 6x multiple, so there was that. Today, it's definitely lower multiples, although we just had a big news event about a week or two ago. They upped the minimum, so that the SBA typically doesn't lend more than 5 million, so your typical deal size is around 5.5 6 million if you're doing SBA lending. Now they just upped it to 10, so I don't know, man. We could see another aggregator bubble. I honestly feel like the ones coming. I feel like there's going to be another attempt to roll up Amazon businesses this time under the auspices of AI, right?

Paul Rafelson 07:52
That they're going to have the AI efficiencies, right? You know, everybody's talking about how, if you're not in e-commerce and AI, you're dead. Like, you can't just be regular Amazon seller right now, if you're not embracing AI, so I don't know, that's not my job to figure that out, but you know, I could totally see under the auspices of AI a bunch of people convincing investors that you know now with AI we can run these Amazon stores and achieve maximum efficiencies and economies of scale, and I'm sure that that's being pitched as we speak, and you will start to see the rumblings of a new round of aggregators of AI aggregators. That's my prediction. I don't know, I'm wrong a lot. So, I mean, I don't know what that, you know, especially with $10 million in lending, now you've got a lot of room to really, really go and buy some companies, you know, using SBA loans, which sometimes these, even these big aggregators, they would do that just to get, just to take advantage of the favorable rates.

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Andrew Maff 10:59
So, someone, someone great once told me, and I think his name was Paul, that you should still have a lawyer before you go to a distributor, someone that's actually, you know, obviously helping you sell a business, that was you, by the way, it was you that told me this, or broker, sorry, damn it. So, what's the.. so I guess that makes no sense. I would imagine that that is a common thing that brands don't think about. Am I correct?

Paul Rafelson 11:32
Yeah, I mean, I think I think there's some great brokers out there that do a good job, some, some less so, but yeah, when you go to sell your business, and you're going to market one, you know, you want to look at, you know, if you're under a million and a half, 2 million in SDE, you're probably going to work with a broker, you're probably not going to work with a banker, but you know, once you start to go around 2 million or so, give or take, you know, you maybe you want to work with a banker, it's a whole different world, but the biggest thing, regardless of who you work with, is, and this is what I've seen in the broker contracts that bothers me, is things like if you walk away from an LOI, you still owe us our commission, right, which is crazy, right, so like you get the letter of intent, which is the sort of the start, the kickoff of the M and A process of selling or acquiring your business, right?

Paul Rafelson 12:22
It's a long, long way away. I always say a letter of intent is like negotiating the price. When you negotiate the full purchase documents, we're actually doing a risk negotiation. We're identifying these areas of risk and assigning, signing it to among the parties and dividing it up among the parties, and that's what really the complexity of M and A is about. I know everybody's trying to do their own M and A on Claude, but it's like they kind of missed the underlying context, which is really about risk management. It's not about some boilerplate document that just needs to be signed. It's nothing like that. These documents are harsh.

Paul Rafelson 12:55
So kind of going back to your point, the brokers have their documents too, and you want to know when you're working with a broker that's the right fit for you, that's right fit for your industry, and when you sign a document with them, you want to make sure that you're not going to be in any situation where you're kind of overly locked in. So, for example, I might negotiate my broker contracts differently than the default, where it says, you know, anybody that we contact, you're not allowed to contact, or if you sell to them in the next three years, even if you're not exclusive with us, you have to give us a commission, right, because we contacted them first.

Paul Rafelson 13:25
So, like, for example, for my clients, I would negotiate that differently. I say, look, you can't just box my client out because you're doing a lousy job after you emailed 1000 people with an email, you know, at an email distribution list. That doesn't, that's not fair. That means if you do a crappy job, my client's locked in for three years. What I will accept is if the people respond to your email like they actually looked at it and respond and say, I want to know more, you know, we can count that as a, as a, you know, your, as your efforts, but I don't necessarily know if I would just count your email distribution list as being purely your efforts, but most importantly, I think is those definitions of success that they use, which again oftentimes aren't success, right? Like a letter of intent is a long, long, long way away from a closed deal and getting paid if you're selling a business. So to say that you would owe your broker a brokerage fee if you walk away from a letter of intent is bad. You could be owing your broker, you know, six figures or more for having really not done anything for you, just because you walked away from a letter of intent, so you know again, you want your lawyer there to sort of negotiate those terms and say, look, I'm going to do whatever my lawyer advises, and I'm not going to be penalized for it, right, if my lawyer and I think this is a bad deal, I'm not going to, you know, have to worry about your commission is a way to, as a way to sort of force me to taking this deal that I think is a bad deal. So those are just kind of examples of things that I think about that. Yes, even at the broker level, it's a good time.

Paul Rafelson 14:52
Plus, you want to have a plan, right? You want to, you know, the brokers are typically like real estate agents, like a lot of them are going to just tell you. What you want here, so you'll push the deal forward. They don't care what happens to you after the deal closes. They get paid, they get their commission, and they're gone. They don't care about whether or not you're going to get earned out. I hate to say there's a lot of them don't like it's just a reality. It's our job to kind of help you through that process. So, like, again, you should be, you know, the lawyer you hire in this process, the only person you're hiring, it's really going to have to have your, your full interest at heart, like we're legally required to have your best interest at heart. That's why I don't do things on success fees.

Paul Rafelson 15:27
That's why we do hourly billing, because if, if my getting paid was determinative of your deal closing, there's a consideration that that's an ethical quandary, if you will, because I may tell you, you know, I wouldn't never do this, but, like, the idea is that lawyer might advise you to take a deal, probably not a great deal, because that's the only way they're getting paid, they just sell that work, so we just do hourly, and, but I think it is, it's so this is the biggest transaction of people's lives, you know, in most, I don't know any client I've worked with in this space who said I've done something bigger, unless they're just a serial, you know, private, you know, one of those folks, but for most of our Amazon seller and e-commerce clients, this, these selling your business is the biggest transaction I ran into, so it's not the time to go cheap, it's, you know, you may have gotten this far by going cheap on your legal and whatnot, but, but selling your business is not, because it can get really nasty if you sign the wrong documents, if you're not figuring, so you can, you can all the money you got paid, you could end up owing more than that back to the, to the south, to the buyer, right? You could be paid a million dollars, and the buyer could have the right to claim unlimited funds from you for the damages that they have. So, it's really, you know, people do need to understand that this, this M and A stuff is serious, but you know it's great, you know, but just not the time to go alone, you know.

Andrew Maff 16:04
Oh, yeah, and one of the.. I've said it probably dozens of times on this show, I've always said, cheap is expensive, and if, especially in a scenario like this, if you go cheap and you try to cut corners through an M and A situation, it's going to cost you way more in the long run than you actually anticipated it to.

Paul Rafelson 16:13
Absolutely.

Andrew Maff 16:13
Question, where you said you said it's you're seeing about an average of a 3x right now. I assume that's on EBITDA, correct?

Paul Rafelson 16:13
Yeah, that's on EBITDA SDE. You know, so take it into account ad backs and whatnot, if there are any, you know, people, I think people have this over-exaggerated concept of what an add back is, and it's really just a simple thing, it's a non-recurring charge, right? You're trying to say, look, this stuff is sort of non-recurring, or it's extraordinary, right? Like, I bought a G wagon for my business because I saw a TikTok video about it, right, like it doesn't mean that you're that's real. Oh, no, no, that's real. That happens, or where I get my boat, I deduct my botox, which, you know, I look, if you think you can make a case for that, I'm not going to get into deductions and whatnot.

Paul Rafelson 17:56
There are plenty of people out there who can talk about that, but if that's something you want to do, like, you should feel fine. You should be able to do that, you know, barring the tax advice side of things. You should be able to do that and the way we don't penalize you for doing things like that is by doing these sort of add-backs, where we take and take out things that don't really belong, like, you know, I'm not buying your car, so the $300,000 expense of the G wagon is something that you would probably add back, because I'm not buying the car right, and it's not part of a normal PNL for a business, unless you're in the G Wagon business of some kind.

Paul Rafelson 18:31
So it is, but you know the other discretionaries can be things like, you know, you launch a product and in January, so you spent three or four times the normal PPC required to maintain it just to do a launch. Well, I would argue that, that you know, if I have 12 months of data and three of those months were the launch months, I would normalize those, right? Want to normalize those. If you've paid a lot of tariffs and those tariffs are now unconstitutional, right, you're getting them back, right? That's going to affect your SD. You want to do a tariff adjustment, so there's.. you know, the add-back concept is, is kind of.. it is based on this idea of like extraordinary and non-recurring basis. It's not just sort of this arbitrary thing where you add back, you know, what you feel like, like, oh, he doesn't need 10 VAs, or you know, it's a little bit more structure around that thought process, but yeah, I mean, once you add and take care of all those ad backs and everything that you know, whatever you get to that number, assuming the other side agrees, I would say 3x is about what you would see, you know, for like a healthier above half a million dollar profit company, right? If you're, if you're doing like 200,000 profit, 250 like you could be looking at, like, a 2x closing cash deal easily, so you know, once you kind of get over that 500 to 600,000 threshold, you tend to start to see 3x pop around more often, and then that kind of really seems to hang, unless you have something special, in which case we can bring you to, then this is where, again, considering a broker versus a banker. A banker will really look at your business, it's going to cost you a lot more in the long run. It's the idea is it'll make you a lot more, because you shall, you should hopefully sell at a higher price, but there's a little bit more you know bankers are really more expensive than just kind of go into a broker, but if you have a unique product, you know what's the one that sold to Unilever, you know, Dollar Shave Club sells to Unilever, right? Like, you know, if Dollar Shave Club just went to a random broker and got, you know, 4x that wouldn't have been as good a deal as what they got from Unilever.

Paul Rafelson 20:31
So, sometimes, if you're the right fit for the right company, you need a broker or a banker that understands your industry and can find you those deals and will not just put you out to the general public to be bid on at, you know, 3x multiples, which is generally what we say in those cases, but that's what we call a strategic acquisition, and those do take more time, but certainly something to consider as well.

Andrew Maff 20:55
Yeah, Paul, super interesting. This was great. I really appreciate this, because all these, every almost every episode I've ever had is always about like the minutia of the brand running the day to day, like the you're in the thick of it, and this is this is all very interesting insight into the end game, like what happens at the end, what are you dealing with, what could you get? This was awesome, I really appreciate it. We'll definitely have to do this again, but I'd love to give you the floor, tell everybody where they can find out more about you and more about Rafelson Law.

Paul Rafelson 21:26
Sure, no, I appreciate that. Yeah, no, feel free to bring me on, we can always talk about the high level stuff, you know, we see a lot in this world, everything from Prop 65 to compliance to IP, it's a fun world.

Paul Rafelson 21:40
You can find me at ecom.law, a c o m dot l a w, Rafelson Law is, or rafflesenlaw.com ecom dot law is our main law firm. And then I also own a company called Seller Basics. Seller Basics is like account health, it's like imagine if somebody came up with health insurance for your Amazon account, that's what Seller Basics is. It's an account health service, so that if your ASIN ever goes down or your account ever gets suspended, any type of trouble with Amazon on the account health front, as a subscribing member to Seller Basics, you get free help.

Paul Rafelson 22:15
So it's unlimited help for as long as you're a member, right? So it's like insurance, right? You got to be a member before the bad thing happens, so long as you're a member before the bad thing happens, and you maintain your membership anytime something bad happens with Amazon, we help you get reinstated. We have the ability to escalate it up to legal. There's no extra charges when we do those escalations internally within Amazon. And then you also get free legal consults. You ever just want a lawyer on call that knows your business, you can have that too. And that's part of the, as part of the membership, I think it's like 200 bucks a month or something, it's not a ton, but it's it's sellerbasics.com, I created that, we created that right around the start of the pandemic, and literally thought it was gonna fail, and it's right out the door, because we like, like a week or two after the launch, we're in lockdown.

Mario Simonyan 18:48
You mean on like the infringement side and unauthorized seller side?

Andrew Maff 18:52
Yeah, we're all the above. Like, who do you usually work with?

Mario Simonyan 18:55
again? Most of the clients that have these issues, and the ones we work with, are the ones in the supplement space and sort of cosmetic space, right, but we've also had clients coming, like from pharmaceutical, not sure if you would put them into supplement space, but there's a pharmaceutical company we're working with, where we've worked with, and I think we still are working with, there's there's a client we're speaking to right now who's got merchandise, who's a large YouTube sort of personality, and obviously I'm not going to say their name, but they're, they're in talks with Netflix, potentially having to deal with them, and they've got merchandise, so it's, it's, it's across the board. It's like infringers don't, don't sort of discriminate and say, I'm going to sort of only copy this if there's money to be made, they're going to go ahead and copy it right, or if they've got an inventory source, they're going to go ahead and bring in inventory, and obviously I understand their perspective too, right? Yeah, our job is to help out these brands.

Paul Rafelson 22:56
Like what's going happen this whole industry, but then we had price gouging cases and all sorts of crazy stuff, and we found our stride and ended up getting a lot of people, and you know, Seller Basics is a great, it's a whole separate team, ex Amazon, ex sellers, and they all do a great job, they understand the account health, they understand the policy, and so check them out at Sellerbasics.com that's my other company, and yeah, if you want to email me, Paul@ecom.law, just feel free to email me. Love, love hearing from people.

Andrew Maff 23:25
Beautiful, Paul. Thank you so much. Obviously, everyone that tuned in, thank you as well. Please make sure you do the usual thing: rate, review, subscribe, all that fun stuff, and whichever podcast platform you prefer, or head over to the ecommshow.com to check out all of our previous episodes. But, as usual, thank you all for joining us, and we'll see you all next time. Have a good one!

Narrator 23:43
Thank you for tuning in to the Ecomm show. Head over to ecommshow.com to subscribe on your favorite podcast platform or on the Bluetuskr YouTube channel. The e-comm show is brought to you by Bluetuskr, a full service digital marketing company specifically for e-commerce sellers looking to accelerate their growth, go to BlueTuskr.com now for more information. Make sure to tune in next week for another amazing episode of The E-comm Show!