Thursday, May 30, 2024
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TMBA599: The Art of Acquiring Businesses

We’ve shared a lot of stories on this podcast from entrepreneurs who have started their own businesses, but one strategy we’re increasingly seeing used to accelerate the path to wealth is to purchase a business that already exists and to leverage debt to do so.

Today’s guest is an expert at that.

He started with a loan from the Small Business Administration and now has a team of roughly 80 people who are managing niche eCommerce companies. They are selling anything from high-end business cards to their most recent acquisition,

In today’s podcast, Shakil shares the story of how he purchased his first business, how he has grown to where he is now, strategies for taking advantage of Small Business Administration loans, and much more.

E-commerce finance is difficult. It requires a methodical, disciplined, and persistent process with a trusted partner and deep subject matter expertise.

Ecom CFO provides the process, tools, and team to maximize profitability at a lower cost than you could otherwise hire and manage yourself. If it touches the bank account, they manage it.

There is no better way to optimize your e-commerce business profitability than to reach out to the team at Ecom CFO, and a big thanks to Ecom CFO for sponsoring the show.

Do you have ideas for things you’d like Dan and Ian to discuss on future episodes?

Our producer Jane would love to hear from you at [email protected] or leave us a voice message using the record button below.

Dan: Happy Thursday morning. Welcome back to the podcast. Little travel segment at the top. I’m in New York City, on the 20th floor of an amazing hotel in Soho. I’m paying $150 bucks a night. What an amazing time to be in New York. It’s opening up, the vibe is good but there’s not that many people here so you can kind of do everything, it’s pretty low stress. So there you go, some travel content, hopefully a lot more of that coming down the pike. We’ve been looking to fire events back up this week, internally. And so it does look like in 2021 we’re gonna have some events for listeners of this pod. I’m so looking forward to that.

Speaking of travel, like looking at this skyline, this amazing city, it really inspires me to think bigger. And that’s one of the themes of this year for us, Ian and I want to push our comfort zones. We want to learn from people who are building bigger businesses as we aspire to do that ourselves. So today’s guest is part of that vision. One of the things that’s evolved over the years since we’ve been doing the pod is you sort of the ‘on ramps’ into entrepreneurship, how you can get into it. Often we talked on this show about sort of cracking open a laptop, leveraging your skills and experience and building a business from scratch. But there’s also an enormous opportunity to get a head start by buying a business and especially using debt to do so. And today, I’m going to speak with someone who is an expert at that.

Shakil: When I was super active, like last year, probably looked at let’s say 1000 deals. And out of the 1000 deals. I sent questions or got on a call with the seller on 100 of them. If I like the business on 30 of them, I will do a follow up call. Out of the 30 I’ll probably place LOIs on 15 of them. And out of the 15, maybe three or four get accepted and majority of them I’ll typically close on. So I do look at a lot of businesses.

That’s Shakil Prasla who, through his own company, SZ ventures dot com, has been buying online businesses for nearly a decade. SZ ventures now has a team of around 80, who run niche e-commerce companies ranging from like metal business cards, who run e commerce companies that have products ranging from like cool metal business cards, to his most recent acquisition, gloves dot come, like what an amazing time to get into medical grade hand coverings. Now Shakil’s name has come up many, many times over the years, he’s attended our events and shared his ideas with our community because he has because he is really really creative with using leverage in so many different ways to buy over 15 businesses over the years. And when I say leverage, I’m not just talking about money but also psychology too. So as you’ll hear Shakil has learned what it takes to close deals with owners who, in today’s market, are getting a lot of offers to sell. We’ll also touch on different forms of debt financing like government loans, bank lending, and seller financing, all from someone who has walked these paths many times.

Shakil: 2012 was when I first started my online business. And it was after I got my MBA, I wanted to sell things online. I just didn’t know how to, so I packed my bags, and I went to the Canton Fair. And I just walked down the aisles, just looking at widgets and gadgets and things people are selling, and I had no understanding of what your MOQ was, or what FOB was. I just heard people saying it.

Dan: Minimum order quantity, freight on board.

Shakil: There you go. I didn’t even know what I was getting myself into.

Dan: You must have been so excited, though, to be in China like walking around. That sounds amazing.

Shakil: It was great. I just stayed there for two weeks. And I decided to import something that’s really small and could have high margins, and it was jewellery. And I came back to the USA and I went to a website called oDesk, which is Upwork now, and I just started hiring outsourced employees. Except the problem was I still didn’t know what I was doing. And it was really challenging. After the next year, I was barely making any money. And so then in 2013, I sort of went on Google, and I typed in, ‘What jobs do online business owners have?’

Dan: This is 2013. So just for context, like you’re in debt at this point.

Shakil: Oh, yeah.

Dan: Now you’re sitting in a beautifully large home with 80 employees. So, just to give a sense for these things can happen quite fast. It’s a long time in how it feels but in the scope of a life when you’re looking back from your deathbed. It’s not actually very long to completely transform your life.

Shakil: It’s been a struggle. It hasn’t come easy. And we’ve had some bad purchases and bad employees and lost a lot of money. But those are sort of war stories that you learn from and you become more careful, you end up actually becoming more risk averse. If I look back at what I was doing, it’s kind of crazy what I was doing. The number one risk I see in people when they buy online businesses is there’s a knowledge gap. And what I mean by that is, people buy a business, but they end up buying a full time job, because they don’t understand the business. And that was me in 2013. Luckily, the first deal worked out. But I learned a lot from that first deal, where I wanted to make sure that I at least bring a unique skill set. And so every deal I’ve always bought a business where the past owner was lacking something that I could provide. Now, I’ll give you real life examples. One of the businesses I bought, the owner, was only working 10 hours a week. He was a golfer, so during the weekdays, he would miss his customer calls, he would let it go to voicemail, he lost a lot of sales. And, and I learned that by asking him, you know, ‘Hey, Tom, what are two things you would try to do, but you haven’t been able to get the time to do’ or ‘what could a new owner do to increase sales’. And that’s where I was able to learn that look, ‘I just missed most of my calls, I call them after hours, and they typically have moved on’. So I said, ‘Alright, I’m gonna buy the business’. All I did was I hired someone from the Philippines, to answer the call from 9am to 5pm, and paid them $500 a month. And I was able to increase sales in the first three months by 40%. And there’s a lot of opportunities, just like that.

One of my most profitable businesses I bought, to this date, and I clearly remember this seller’s response. And I told him, ‘You are growing really quickly. Why did you pause your paid ads, they’re performed really well’. He told me ‘Shakil, I don’t want to have a big company. I don’t want to hire employees. I have two employees, that’s good enough for me. I paused the ads, because it was just becoming too stressful for me’. These little opportunities, I’m not doing anything unique or ordinary. It’s just finding these little voids that a lot of businesses have, as entrepreneurs we just get burned out. We keep doing the same thing over and over again, we have the software that we don’t use, but we just keep paying for it. We have this growth strategy. We see it, but we don’t want to learn the skill set to do it. We just get comfortable. And so a lot of these businesses I end up buying are based on that.

Dan: How did you go from being a broke MBA student with some jewellery from the Canton Fair that wasn’t selling to acquiring an online business?

Shakil: It took a lot of risk. My first acquisition, I ended up going to a credit union. And I think my interest rate from there was 12% or 15% a year. I just told him, ‘Look, I’ll personally guarantee it. I’m looking to buy a business’. And that’s how I was able to get the first $50,000 through a credit union. And luckily I was able to make that work at 12% a year but the business again, I bought it at a close to 2x multiple, was generating enough money to where it would pay back in two years. Now, Dan, if I had failed on a business, I don’t know what I would be doing. I don’t know if I’d keep buying online businesses because the first one had to work out for me to be where I am at this point. But I’ve used a lot of different financing options to get to where I am.

Dan: You had the jewellery store so you knew about the opportunity. But was it the frustration of knowing how long it would take you to get that to scale that inspired you to get financing instead?

Shakil: What really triggered from starting versus buying was, that whole year I struggled with getting revenue from $0 to $100 a month, to $1,000 a month. Finding the marketplace, finding the marketing solutions. And when I started looking at buying businesses, it was really just buying a business in a box. It came with all these strategies, it came with all these failures, it came with all these relationships. And that’s what the real value was, you could start making money from day one, versus day 365.

Dan: So you go down to the credit union, and you take a $50,000 loan. And what was that first business you bought?

Shakil: Mr. Cold dot com, beverage coolers. So it’s a you know, when you get hurt you put on an ice pack. These are koozies that were wrapped in that ice pack. So you throw it in the freezer, you take it out, put a beer in there and it keeps your beer cold for four hours. So if you’re floating down the river in Austin, keep a beer in there, or soda in there, it will keep it cold for several hours. And this, this seller was a teacher, she was a former teacher, she wanted to go back being a teacher. And it was making close to, I think, $29-30,000 a year. They were just doing it on their website. And all I did was two things. I sold them on eBay and I sold them on Amazon, I just added a different revenue channel. And I was able to make my money back very quickly.

Dan: Now, a lot of people fantasise or even try the concept of buying businesses with the sense that their tinkering with that business will indeed improve it. But often it hurts it or doesn’t help at all. Having tinkered now, or deployed capital and strategies across a broad portfolio of businesses. Do you have some sense for you know, what, what works and what doesn’t in terms of having an impact on that business?

Shakil: You bring up a good point, COVID has kind of forced a lot of people to relook at their careers. And so I’ve seen a lot of people try to go buy businesses this year. And the number one mistake I do see people making is they are buying it just for the cash flows, and assuming that it can become passive. And that’s far from the truth. If you look at any business summary or prospectus as a may state, and it may even understate what the seller’s time is in a business a week, a lot of them say the owner is only working 20 hours a week and making $200,000 a year. And to anyone that’s never bought a business, they’re like, ‘Wow, that is amazing’. The only thing about that is the owner was able to only work 20 hours a week, because they built the business. They were able to build those relationships up and they’re able to make decisions quicker, based on what they know about the industry. For someone like me or you, Dan, who goes into the business, we’re not able to make those decisions quickly. You have to learn and that comes from years of owning the business. So, I think the number one mistake I see people making is they think it can become passive. And number two, is they think they could add value to the business. I really think with people buying businesses, it’s okay, go buy a business, but start small. See where you could provide value. It could be anything, it could be cutting costs, it could be outsourcing, it could be making things more efficient. It could be, if you’re good at Facebook ads, Google Ads, if you’re a good content writer, If you’re a designer, add your skill set into the business, but find that void first.

Dan: I’m curious. So let’s go back on your timeline just a little bit, we’re at 2013-2014 timeframe, you’re taking the $50,000 loan? You’re having someone in the Philippines, pick up the phone, increase sales by 40%? Was there a moment that you could take us to when you were like, ‘Man, this is gonna work?’

Shakil: The first company I bought, I was able to pay off the loan. And which was, basically, to get my money back by month six. So not even two years, but by month six. And at that point, I realised that I’m onto something. I could keep doing this, I could make these small purchases, and maybe scale up and learn all kinds of different models. And so that’s when I realised I could keep doing this over and over again.

Dan: But it’s hard to take just $50,000 and turn it into generational wealth. So at what point did you start experimenting with different financing options?

Shakil: It was probably my fourth acquisition. So the first one was a credit loan, the second was cash. And the third one was seller financing actually. It was because I wanted to keep getting larger acquisitions in and once you get to even like the low six figures, as a business owner, a lot of your cash is going to be ended up tying into the business itself, whether it’s inventory based or whether it’s expenses, and so I knew I didn’t have that much money saved up. But I knew there were ways to get financing done, whether it’s a bank loan, whether it’s a seller financing, whether it’s a SBA, whether it’s a performance earnout. And I just started reading up on different financing options, and just pitching it to sellers. The number one thing I’ve learned is, let’s just say, Dan, you’re selling a business. And you have two buyers – me that’s asking you for seller financing, or someone on the flip side that’s willing to give you a cash deal. All things being equal, you most likely will just pick a cash deal that gives you money up front, why the hell would you give me seller financing. And so one thing I’ve learned is that sellers have different motives. And so things that I do is I try to build a good rapport with the seller, build trust. And I do that by, you know, telling them, ‘Thank you for allowing me to look into your business, to your secrets, to your business plan. I know it’s not easy sharing these sensitive details, I will keep this to myself, and I want to grow your business, I want to grow the legacy that you have created. And these are the skill sets I bring, you should give me seller financing because I have a track record of growing businesses. You can trust me because I will hold this business as collateral. So if I default, you take the business back. I’ll give you weekly updates. And you could tell me, yes or no’, a lot of sellers still like to be involved in the business still. It’s really hard for someone to just turn it off, sell it and get rid of it. So I tell them, ‘Happy to keep you involved as well’.

Dan: What’s interesting, sorry to interrupt, and as you talk to me like a human being and like an entrepreneur to entrepreneur, and it’s interesting, like, that’s very competitive, like thinking about, I’ve sold three businesses thinking about all the offers, and the buyers that I’ve spoken with, that would be pretty compelling for me to hear someone like you speak to me like that, because you’re solving a lot of my problem, which is like, well, I don’t need all the money right now what I need is to like get this business off of my plate. The problem set that sellers are trying to solve is often so complex. And by becoming a trusted person to speak with about that. That’s not really what you’re hearing from most buyers.

Shakil: That’s what it comes down to – how do you differentiate yourself. When you sold your three businesses, and I’ve sold businesses too, it’s really hard to share these details where a competitor could come in, steal your ideas, do this and that. Your guard is down, you want to make sure that the seller feels comfortable with you. And just telling them what benefits you bring. ‘For seller financing. I’m happy to give you 8% a year. So instead of your $100,000 being at the bank getting less than a percent, why don’t you make a bit more money. Maybe there’s some capital gains tax that you can defer, based off the structure that we do see, you don’t have to pay all the taxes up front’, you end up being a little more creative, but you you’re only able to get there once you’re able to have this kind of talk with the seller, understand what their needs are to.

Dan: Have you made an eight figure acquisition yet?

Shakil: Gloves dot com is pretty close to that, with the inventory.

Dan: It seems that there’s different strategies and tactics at different levels. And I don’t know if you’ve seen some of those gradations in your career. But one of the things I was thinking of as you were talking about these strategies is like sub eight figures it seems, I’m sure beyond too, but there tends to be so much ego involved on both sides of these deals. Because the amount of money is really significant for a person, not like a company organisation or board of directors or whatever. This is a person’s life work. This is like a big portion of their net worth. And so I found that a lot of buyers were like thinking they were doing us favours and treating us tough guy stuff. Same on our side, we would get really emotional and people would like to critique what we were doing, you don’t I mean, it’s a big deal. And so a lot of what you’re saying seems to minister to that idea of – if you can tap into the person behind the deal, you differentiate yourself a great deal.

Shakil: You make a good point that, there’s different ways on how you want to even go about a business, if you’re going to critique a business, don’t come and say, ‘Dan, your business is declining? Why the hell did you not put in the time?’ There’s different ways to say things. So, you know, ‘I understand that you were not able to put in the time for the business. Do you think that’s the reason the business declined? Would you have done anything else to stop it from declining?’ You’re able to bring a lower offer by poking holes in the business. And if you just flat out say, ‘Your business sucks, because of a, b, and c’, the seller is not going to like you. But if you structure in a way and say that, ‘These are a little bit of a risk I do see in the business. But here’s kind of where I think I can lower the liability’. Depending on how you frame it, the seller could have a different viewpoint on you. And if it’s a good business, they’re probably talking to a bunch of buyers. And a lot of times, someone wants to sell a business, because they are either bored of it, they see a new opportunity, or they’re just burnt out. But if you come in and are able to just show your skill sets or provide a business plan, a seller might say, ‘Hey, you know what you’re a smart person, I’d like to keep 20% of it. And at least take the majority of my wealth off the plate. But I want to enjoy the upside. In return I’m happy to give you some kind of seller financing’. So it becomes a win win for both parties. And that’s where a good deal comes in.

Dan: It feels like that kind of structure is becoming increasingly possible as there’s more legibility around these assets. Certainly that option wasn’t even on the table when we exited our last business. But, in retrospect, something I’d be very interested in because it solves my problems and keeps me motivated to be more in that ownership advisory chairperson role, rather than the actual entrepreneur with 100% of my personal net worth locked up in the business.

Shakil: The daily grind is real, you get tired of it. One thing you did bring up is sort of these internet assets. There are non tangible assets, in 2013-2014, it was really hard for any banks to even give loans to these things.

Dan: Do you mean by that, the bank can’t go out and seize your Amazon account, like effectively. They don’t have staff on board to do that kind of thing?

Shakil: That’s essentially what it is versus a real property where if you don’t pay your bills then they could take over the property itself. But now, because the buy and sell of internet businesses is becoming more mature, a lot of banks, a lot of private investors, and a lot of funds are putting a lot of money in this online ecosystem to purchase online businesses, like now is a great time to buy online business.

Dan: Well, let’s talk about that because one of the reasons I wanted to call you up is – your use of the SBA system here in America. Our business was bought with an SBA loan, for example. I’m curious if you could describe that system, how you use it, and a little bit about what the opportunities might be for listeners.

Shakil: So an SBA loan is given by a bank, but most of the loan is backed by the US government. And so if you default, the bank could get the credit back from the government. Obviously, they’ll still go after you. But the terms are great. So it can be as low as 10-15%. down. So you’re buying a million dollar business, it’s only $100,000 down. And it’s over 10 years. And the interest rates are prime plus 2.75%. So, at today’s rate, I think that’s 6.25%, which is still cheap. And I always just look at what multiple you’re buying it for. If you’re buying it 4X multiple that’s 25% ROI and you’re borrowing at 6%. So there’s that margin that’s profit for you.

Dan: What you just described to me is, basically, a deal term that is like, better than a mortgage 15 years ago, but for a small business, why haven’t I dropped my microphone and just ran out my front door right now down to my local bank to get an SBA loan? Why isn’t everybody talking about this?

Shakil: It does take a while to close, it does take up to 120 days to close. You do have to get insurance and other types of liability insurances. So if anything happens to you, the beneficiary is the bank, and so they get the million dollars, that’s their way of hedging kind of the risk of giving me the loan. The question you asked is, why isn’t everyone doing this? And the thing about right now, is it’s just a buyers market, there’s a lot of people wanting to buy businesses, there’s a lot of people cashing out their 401Ks doing cash purchases. And so people are just going for the cash buyers. That’s that’s downfall of it. An SBA loan does take a while to close. And so imagine you’re sitting in due diligence for 120 days versus 15 days. Sellers see that, and that’s why they prefer not to deal with an SBA buyer. Unless again, you sell yourselves. But there is one way around that. And that’s where these ‘off market’ deals come. You can make postings in different forums, you could let your Facebook friends know, you could let accountants know. Who are people that every business talks to? Its accountants, tell many accountants in your area or in the state that, ‘Hey, I’m looking to buy a business. If any real clients ever mentioned selling their online business, tell them to talk to me’.

Dan: You had some swagger with that one, ‘Tell them to come to me’, I like it.

Shakil: Probably in a less aggressive tone. Let’s say you love pets, look up pet supplements and go down Google or look it up on Amazon and reach out to everybody. One out of 100 may respond. But that’s where kind of the numbers come into play. You just have to keep reaching out to people and build up your offline market pipeline to where you and the seller are only talking to each other, there’s no one else out there. And you have a better chance of getting that SBA loan, which, you know, as you said the terms are really, really good.

Dan: It sounds like, over the years and with your portfolio, you started out with a more operational focus, like, ‘I gotta get somebody to pick up the phones, I’m gonna do an SEO campaign or whatever’. And like, as your portfolio has grown, you’ve gotten more financially focused?

Shakil: You’re absolutely correct in that assessment. The first few businesses, I was more in the weeds on the ground, doing the customer service, I was doing the pick and packing, I was running the campaigns, I was learning as much as I could. There came a point where you’re making enough money, and you start looking at – if I’m working 60 hours a week, how do I shave off 10 hours of it, and pay somebody else to do this task? Okay, now, how do I shave off half the time. It progressed towards making enough money, but using some of that cash flow to pay somebody to do these tasks for me, and now I can keep focusing on acquisitions. I think I learned, probably in my fourth acquisition, is how do I hire a CEO, or a manager or even bring on a partner to run the business for me, and I could just give my high level guidance, build a good team in place, come up with goals and now let the engine run itself? And how do I keep repeating this? And that’s what I was super obsessed with – I don’t want to work four hours a week, I want to work four hours a business week?

Dan: How did you come up with the idea of the SBA loans I’ve been working so well for you. Why then go and raise capital for the acquisition of

Shakil: SBA has a maximum loan amount they could give you which is $5 million. I already maxed that out. I would love to just keep doing it more and more. But there came a point. A lot of people kind of talk about how much revenue they’re making and how much money they’re making. And I caught myself bragging about how much debt I’m holding. And someone looked at me, they’re like, ‘Wait a minute, you don’t have trouble sleeping at night?’ I’m like, no, it’s because I sort of grew up in this environment where even my dad was just taking a lot of debt to run his businesses and stuff. And so for me, it wasn’t foreign. But it came to a point where I was personally guaranteeing a lot, I became over leveraged. And so I had to look at sort of alternative solutions where I could take advantage of the market. And today’s market is where a lot of VCs, PE groups, and fund managers are wanting to throw money into acquisitions of online businesses, because there is potential for a larger exit, based on these kinds of mini purchases.

Dan: How do you go about formulating that value proposition, then to these investors?

Shakil: I reached out to a lot of people that have raised money, investment bankers, just anyone that’s ever talked about raising money, and I wanted to understand what it is that investors may want. Is debt financing? Is it equity? Is it a larger exit? Is there a sort of a social enterprise that they want to be involved in? Then with gloves, for me, it was a lot about just making people healthier, it’s the pandemic, how do we get gloves access to people. And we were able to bring on a couple investors that saw the vision of us making this into an eight to nine figure revenue business by showing them the plan that we had for the future. The track record that me and my partners brought about buying online businesses and growing it that really helped, the track record. Keep in mind, like throughout this whole journey, it’s just a learning process, everyday is just a learning process. And for me, it was the first time raising money from outside investors. That’s good thing about having a good network is just reaching out to your friends, someone that’s done that before, post on LinkedIn that you’re trying to raise money, does anybody have time that they could give to you in return for advice about buying companies, and that’s what I did. Ask people who the hell has money that they could give to me and through that network, I was able to raise money.

Dan: When you started this off, I mean, obviously you’ve created you’re in the process of creating incredible success. Did you set out with that vision of I’m gonna go big here, or was it something that you sort of continued to fall uphill into, so to speak,

Shakil: It continued to adapt. I remember, in 2013, my goal was to make $60K a year. And then I got married, I realised expenses are a bit more, and then you sort of have these once, then you have kids and your expenses go higher. It’s sort of weird, I wanted to make a lot of money to where I’m content, I’m willing to sacrifice for time back. And that’s where I am today. You go through all these war stories, you go through all the stress, and you sort of want to just settle down and make enough money, but also give time to whether it’s volunteering or talking to cool people like you, Dan, or giving time to your family or community. It has shifted quite a bit. And that’s where I am today is how do I become more content and still make enough money.

Dan: Big shout out to today’s guest, Shakil Praslar, founder of SZ ventures dot com, talking about how he has achieved what this show is all about – more freedom in your life at your own terms. Absolutely enjoyed this one. If you’ve found interesting ways to leverage buying business in this bullish market, we’d love to hear from you. I hope you enjoyed this one. Absolutely so many opportunities out there, and we’re gonna continue to explore them on this show. Before we go shout out to our sponsor, Ecomcfo dot co. We appreciate them bringing this episode to you. So I got to get to the zoo. I’m out here. We’ll be back next Thursday as usual. See you then.

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