How To Buy An Existing Online Business with Dana Jaunzemis
In the podcast:
00:57 – Episode Overview
08:11 – Why Would Someone Sell their Business
10:47 – Dana’s approach and Factors in Buying a Business
15:57 – Dana’s Importance in Buying a Business
21:18 – Data Pitfalls that People Should Be Aware of
29:30 – What Would Dana Do Differently If She’s Starting All Over Again
30:57 – Does the Location of the Business Matter in Purchasing
32:53 – Profit Margin Ceiling She Looks for in a Business
37:40 – Ideal Return on Ad Spend
39:17 – How Long is the Duration of ROI of the Business She’s Acquiring
42:27 – Going Back on Her Journey When She Started Buying Businesses
45:10 – Where You Can Find Out More about Dana
Dana Jaunzemis and I talk ALL about what you need to know before you buy an existing online business. Proper due dilligence it imperative before you launch into buying an established online business, so Dana and I talk about the key things you need to look out for, the 2 ‘deal breaker’ requirements she believes is needed, and a WHOLE lot more. If you are considering purchasing an existing business, don’t miss this episode.
Welcome back to another episode of Teach Traffic. I’m your host, Ilana Wechsler. And today we’re talking to a lady called Dana Jaunzemis from HomeHealthTesting.com, about how she goes about buying an existing online business, rather than building one herself from scratch. And Dana and I talk in depth about the metrics that you need to look at before you take the plunge to buy a business to beat the due diligence aspects.
The two main criteria before she buys a business that are kind of like deal breakers for her. And really all the pitfalls and honestly, anything you will really want to know when it comes to buying or acquiring an online business. really knowledgeable on this topic.
She’s done it seven times before in the last 20 years or so. So she definitely knows her stuff. And we cover lots of really useful information. So we’re going to make a summary of this episode available. So you don’t have to worry about writing down notes. I’m going to create a summary of all the nuggets of gold that we talked about in this episode in our show notes that you can access from TeachTraffic.com. And let’s get stuck in today’s show.
Welcome to today’s episode, Dana.
Thank you. I’m happy to be here.
Yeah, I’m really stoked to have you here. We met for the first time in Miami about six months ago at Seller Summit. Unfortunately, I didn’t catch your presentation, I think I’m going to definitely watch it in the recordings.
But you’re sort of known in the industry as somebody who acquires businesses, build them and then possibly sells them or just add them to your portfolio. For the benefit of our listeners, do you mind kind of touching on I guess how you fell into this and the process by which you you now adopt this technique?
Sure. And I have enjoyed that in your podcast, you always do ask people kind of their journey, how they got there. And I think that’s so interesting in business, because none of us end up doing what we thought we were going to do. At least I most people don’t. Right?
Totally, I used to want to be a Vet. (laughs)
Interesting. Yeah, I was an accountant.
I find the right. And he’s absolutely fascinating.
So I did start out in accounting. And I did not like being an accounting. But what was interesting about it is I worked for the firm I worked in and well owned, actually was we did about 100 different small business accounting, income statements a month, and then tax returns every year.
So I get this crash course, in how business kind of worked from the inside, before I ever had a lot of experience working in business, which was super interesting, because I saw you know, from this was pre internet days.
So these are convenience stores and donut shops and beauty shops like all these really mom and pop small businesses, who was making money, who wasn’t who was good at it and who wasn’t in it, it just gave me this insight into how all these businesses operated so differently. And while some might look really successful on the outside, they might not be on the inside.
So I had this really great foundation of accounting. But I actually did not like accounting and client work at all. So I left that field, and then I started a business. And I didn’t actually like that business that much either. So I sold it.
And that was kind of the turning point for me, the day I sold it, I just had that a little bit of a lightbulb moment, the guy that bought my business, when I handed him the keys to all the equipment and what I was selling, it just dawned on me, he was walking out of there with a profitable business, and I had to start over. And I was like, I think he’s the smarter guy here, he has a profitable business, and he’s just starting. And it’s already making money.
So I decided then I was like, Well, I’m gonna try that I’m gonna buy a business. And so that was like seven businesses ago and over 20 years ago, that then that’s all I’ve done since then I just finally, you know, got the the idea from selling a business. But then I realized I’m not a very good starter. It’s not my skill set, really.
And my skills are better used after the business is up and running. And so that’s what I set out to do. And it’s just been so it’s made business so much more fun. So that’s kind of, and I just keep reiterating the same process, and I buy business that succeeded kind of on the last wave of technology, and its profitable doing it that way. And then I will take it to where it needs to be today.
Interesting. It’s funny, you mentioned the insights that you gained when you were an accountant, I think, firstly, you would have seen the obvious disparity between revenue and profit, right with a very clear lens.
But you probably get the same insights that I have got having run an agency for seven years in terms of offers that are working and certain industries, or niches or niches, as Americans pronounce still can’t get used to that.
You know, the way different industries work and convert, and there’s definitely I’ve had some clients where I’ve taken them on having never entered that market before.
And I’ll be like, wow, what is going on in this market, like these people are rabid. And they love everything that we offer them, etc, versus others where it’s like complete crickets, and you see nothing.
So I think you would have seen similarities and what I’ve seen having run an agency as well. But right, you and then you get that same insight when you’re buying a business because all that data exists.
Unlike starting a business, this is really, I’m like you I love data, absolutely love it. And to buy a business, you already have years of data you can look at, which makes a total versus the startup where you’re you have to create the whole concept and build the database of where what is this business going to become?
Where when you buy a business, you know, I can I can look at every transaction for the last five years and come up with, you know, hypothesis of how we’re going to grow this business.
Why Would Someone Sell their Business
So before we kind of touch on the data aspects, and I definitely do, I’m glad we share an appreciation of data because the data definitely does tell a story. Let’s just quickly touch on why you think somebody would sell such a business?
And I guess, I mean, I can appreciate the benefits, why you’d want to buy one versus starting one from scratch. But for for our listeners, maybe they kind of haven’t exhausted or thought about all the the advantages for why you might want to buy one.
Because obviously you’re you’re paying a substantial price for it. So that you know, trade off what I mean, I would imagine speed of entering a market is a big reason why you would buy one versus starting it from scratch.
Right? But I mean, I guess if you think something’s worthy of buying, why would someone then be willing to sell such that business? Do you think?
Well, partly because they’re tired, and they’re just and they’re bored. In all honesty, I think we all had a place in our business where we’re just bored with it. You know, and for some people that might be three years in other people, it might be 10 years in, and there, you’re just you’ve thought about it enough.
Obviously, the other obvious reason is someone is retiring. So that certainly happens. But I think a lot of small business owners finally just get tired of it. They it’s, it’s, it’s not an end, there’s a personality issue in there, too.
If you’re someone who loves starting things, then growing it five years later isn’t near as fun to you, where that’s where I’m going to find my fun. But if they’re a starter, if that’s their personality type, then the last thing they want to do is to be you know, chained to this business, that is the same thing they’ve thought about, they’re ready to explore something new.
So I think there’s a lot of personality type things that go into it. And then the a lot of people just burn out throughout that startup stage. You know, the first two to three years in a business are really hard. They’re, they’re exhausting, right?
And they can be demoralizing. Like it, you don’t make as much progress as you hoped. And you get to a point. And if you if you hit that I’m tired of it. And I’m getting bored with it.
And I haven’t accomplished as much as I wanted with it. Sometimes they’re like, okay, I’ll just sell this one, and I’ll go do something else, and it will be better. Because they’re, they’re just done thinking about it.
So that’s kind of I’ve seen, I mean, I’ve talked to so many sellers over the years. And a lot of it is just an emotional, it’s not the state of the business.
It’s they’re done mentally.
Dana’s approach and Factors in Buying a Business
So let’s say you…one decides that you’re going to explore this option. Is it the kind of situation where you like, what are the initial steps?
Do you kind of look for businesses that are actively listed as being for sale? Or would you think to approach a business?
I always look for active sales listings for the biggest reason, because I actually want the owner to be ready to go, in all honesty, because I want to take over, you know, on closing day, I kind of after we go through maybe a training process, I want to get them out of the way and take this new this business and run with it.
So I don’t, I don’t really want to try to convince someone to sell their business and there’s enough good businesses for sale, although it takes time to find them. I just don’t want to do the convincing, you know, of somebody to sell.
So there’s plenty for sale. I usually go through brokers, I don’t…I’m mostly because I want the seller to have already contacted a broker, and they’ve already done the homework of getting it ready for sale. And we is a faster process to me.
Yeah, that makes sense. So when you say getting it ready for sale, I’m assuming you mean the financials and all the data, etc. and all that.
So let’s sort of touch on, on that. The Data aspects, are there any specific was there like one key thing that you’re looking for, that would deem a business really attractive to buy? This is another one?
Well, I have two criteria that are kind of, they must be one of them, it must be profitable, I will not buy a business, that’s not making money. Even if it’s turning a lot of revenue, if it’s not making money, that’s just not my thing. I want it to already be profitable.
So that’s one thing, and then I like them to be I prefer five to seven years old. I’ll go lower now maybe down to three, but probably I wouldn’t haven’t considered one below, really five years old. So those are two things that if they’re they don’t meet those two criteria, I’m going to move on.
What about on the profitable aspect? What about if there’s a way that you can see that you can turn it around pretty easily to make a profitable?
Let’s say they’re spending a fortune on traffic? And it’s just not optimized very well.
And you think you could turn it around pretty quickly? Are there sort of some easy leavers that you could you could move that? Or is it just not? You just wouldn’t do
I’ve never run into one that it was that easy. So I can’t I am not going to say I wouldn’t do it. I’ve seen plenty of mismanaged businesses. And I guess what I’m looking for is something that despite how crappy it’s being run is still profitable, because I find that more attractive.
So I don’t want to I don’t want to buy the worst business on the block, I want to buy a business that despite how bad the current owner is treating it, it’s still profitable, even if it’s, you know, not that profitable.
But at this point in my career, I will probably buy anything that’s not doing at least 50,000 a year in profit in US dollars. Because I also wanted to capture my interest enough. So if it’s really small, you know, it’s, it’s, it’s not gonna, I’m not going to be as compelled to work on it.
So I really prefer just something that is it, it is profitable. Because I think we all can fall into the trap of looking at a business and saying, Oh, these are really easy things to change. And maybe they’re not so easy. Maybe there is something hiding in there, that’s telling that’s holding that back, something you don’t know.
And so I kind of want some profits, when I buy it.
Yeah, fair enough. And the minimum of five years is that because you sort of have this, this time under their belt, probably gone through a couple of cyclical cycles, if there were any, is that sort of the reason behind that.
And because I want the data, so I want enough data that I can make some guesses and stabs at what’s working and what’s not working. So I’m looking, you know, I want to look deep into that data and, and find out where’s the opportunity in this business based on what has been working.
So I don’t necessarily want to go out and just radically change the business and go try to attack a new, you know, demographic, or a new product line or something like that, I’m going to actually dig really deep in the data and say, you know, they have this core group of customers that are buying from them.
So let’s go get more customers like that, because we must be succeeding right there somehow. So for me, I want as much data as possible, as much history as possible.
Data’s Importance in Buying a Business
Okay. So let’s sort of delve a bit deeper on the data that you do look at. So you mentioned the customer data.
So is that sort of the profile of a customer, be it you know, a female between a certain age bracket that seems to love the products, more than let’s say, a male or a different age bracket? Is that the kind of profiling data that you look at? Or do you look at different data numbers?
Well, I, I have a love of b2b businesses. So my preference is to find a business that has some level of repeat customers. So with like my current business, home health testing, which I bought, we sell drug test.
So we have a lot of businesses that purchase from us, you know, regularly, whether it be monthly or quarterly. So, I’m looking at Yeah, what is the what type of businesses that? Where can we find more of them? How can we communicate more like them? So those are the kind of things that we’re looking for, but like we’re profiling, you know, that demographic of a business, I don’t work very much in consumer side stuff.
So it’s more on a business or a really strong niche. So that, you know, if we know that very specific people doing one thing by this product, then some of that skews a little bit toward consumer.
And I will buy actually, when I bought, you can tell by the domain name home health testing, this is a good example. Because home health testing the person who founded it, started it to sell to individuals, sell drug test individuals.
And if you asked him, like, when I found out about the business for sale and talk to him, I was like, why did you start it and he gave me this very big reason of people deserve to have, you know, their own health test at home and privacy and all these things.
But when I started looking through the data, he had all these businesses buying from him. And I asked him about it. And he was like, well, that’s not really why I started it. Well, it doesn’t matter. That’s why you started it, you have these customers, but the whole site, everything, all the communication on the site, was targeted toward individuals.
But our most profitable customers were businesses. So then I’m going to take that you know, and obviously target more of those type of customers. But then I’m also going to start changing the website to talk to them to meet their needs, and to answer their questions versus the direction he had taken it.
And think that’s what happens a lot when people start businesses and why when you buy it, you can make really fast progress as somebody starts a business to do what they think is going to work in the marketplace. And a lot of small business owners actually never listened to the business.
Because at some point, especially when you get as long as like, five years after that business started, the business took a life of its own, you know what I mean? And it is now its own entity that is attracting customers on its own, because it’s strong enough, and it’s been around long enough. But a lot of times that person who started it never acknowledged that the business became this own thing that does something different than the identity they wanted it to have.
And when I see that happen, and I’ve almost all my purchases and all honesty that that has come out during due diligence, I have found out that the owner has no idea where the gold is in his business. And that’s when I get super excited, because I’m like, wow, all I have to do is change this website, talk to businesses, and reach out to more businesses.
And we can triple the size of this thing. Really fast.
Yeah, definitely. I think it’s a common trap for really anything like not just business owners, but anything that you’re doing that you become so invested in it, you look at it with a very narrow lens. And it is when you get too close to something.
And it’s very hard to step back and get a helicopter view and have a really good sense of the lay of the land, to see actually the big picture of what’s going on.
And I find this when I ordered Ad accounts and Google Analytics, you know, they people don’t actually kind of go in with a different eye and and get a real sense of what’s the 80-20 here, you know, so 20% of the businesses were actually probably generating 80% of the revenue, but he didn’t kind of perhaps, take the time to get that helicopter view.
And a lot of times when you are the person who started the business, you want to prove your idea, right? So it’s hard to say, Hey, I’m going to start this business for individuals, and then you’re selling to businesses.
And that weren’t really wasn’t your idea. And I think a lot of people just won’t let go of the idea that and they want to be right, that this was the business they were starting.
So there’s great opportunity in that. There’s just tremendous opportunity.
Data Pitfalls that People Should Be Aware of
Would you say you mentioned briefly, the doing the due diligence, the and the pitfalls that are often hidden in the data? Do you mind sort of touching on what what are some of these pitfalls that people could look out for that would avoid them making some sort of, I guess, classic mistakes.
One of the biggest ones in buying an ecommerce site specifically is cost of goods sold. And I don’t know why it’s so difficult for all of us to agree on really how we do cost of goods sold.
But it really is probably the biggest, like if somebody’s giving you financial statements, how they did their cost of goods sold is like a crapshoot, you have no idea and is going to be up to you to figure out if that business really is turning that profit that they’re stating.
And cost of goods sold. And inventory values can really be a tough thing. In trying to prove it. Depending on how large the business is on a smaller, it’s a little bit easier.
And then when when I do due diligence, and because again, I have this accounting background, which is great for during due diligence, because you really want to kind of triangulate your data.
So if they’re giving you an income statement, then you want to see well does that agree with? You know, maybe the revenue in the cart? And then does that agree with how much money was deposited in the bank? So you’re trying to find three different sources and see how close you can get them?
What are some of the ways that people could misrepresent their cost of goods sold, though? I mean, surely, that’s just information that they’ve got from their suppliers? How would they be hiding that the real figure?
They’re not actually hiding it. And I will say most of the what you discover and due diligence is nothing was malicious. It’s ignorance, in all honesty, on somebody spark sometime on their accountants part.
I’ve seen people they don’t do cost of goods sold, they just post everything that they purchased. I mean, this is actually really common, they don’t even run an inventory account.
And everything they purchase, they just put in cost of goods sold. And so they have these wildly, like a high month and a low month on profits.
And then they don’t back out inventory at the end of the year is it? I can’t explain why is so difficult for everybody. But it is one of the hardest things for there to be a consistency and how people do their books with cost of goods sold.
You would think that’s the role of their accountant is to create and follow a standard practice and create that industry, I guess, set standard practice for it.
Right. But it doesn’t for some and a lot of people don’t go to accountant on a regular basis, they just go at the end of the year.
So then and do their taxes. So then you’re trying to recreate this data in a way to to find out how the business is functioning all year long. It can be tricky.
And if you’re not comfortable with it, you really do need to get somebody on your team to help with that. Because it it can change when you’re talking about your you’re going to pay possibly a multiple, three times the profits of that business.
If the profits are off, it’s severely impacting the price you’re going to pay.
Correct. So is that standard in the industry to pay three times multiple?
That’s what we’re seeing right now. I mean, it’s been as low as two. But right now we’re seeing it’s averaging around three, two and a half to three and a half, depending a lot goes into that, like the age of the business and the sector.
It’s in things like that. But right now threes kind of common three times annual profit. Yes. Okay. Then the other rookie mistake that I think is happens a lot is rushing to buy something.
So if you decide, like, say, you listen to this podcast, and I think you’ve done others on buying a business, and you listen to them, and you’re like, yeah, that’s what I’m going to do, I’m going to start looking for a business, and I’m going to buy one before the end of the year.
Well, what if there’s no good ones for sale or that are good for you, by the end of the year, it’s not something you rush into, it’s because there’s not always good businesses that are good fit for you available. So I look all the time, I’ve looked solid for 20 years and all honesty, and I only buy businesses every five to seven years.
So there’s not I mean, I’m really picky. But you it’s it’s hard to find the good ones. And it’s, it’s not really always just because they’re not there, you also want to make sure you’re looking at something that you’re going to bring value to.
And that’s part of the due diligence process for me. So not at note, I’m proving every number that the seller is telling me of what I’m buying. And at the same time I’m looking for, where’s opportunity? And where can I add value.
And I’ve looked at some where I don’t see any way for me to add value, because there’s not things that are in my skill set. Or that I’m that I feel like I’d want to spend time doing. So you can’t just say just because it’s profitable, that if if your goal is to, to grow it, which is always my goal.
I mean, if you’re just buying them for cash flow that maybe you don’t want to add value. But if you want to grow it, you really need to know where your skills going to plug into this business.
Yes, absolutely. Is there a minimum amount of website traffic that you look for certain businesses? Or is it sort of relevant?
To me, it’s irrelevant, because I’m looking at that profit level. Where are those profits coming from. So there, because I could, if I set my minimum is traffic, then I might miss a really great opportunity.
I had a purchase a couple years ago where the site got very, very little traffic, but it was still very profitable, was the traffic it did get was incredible. And they were repeat customers. So it wasn’t a traffic issue. It was profitable. Despite having no traffic.
I guess it would be a case for many high traffic businesses that are not that profitable as well.
Exactly. So the traffic isn’t the biggest. And actually that same business that I purchased, they had no Google Analytics ever set up on the site and no ads had ever been run.
That would make it hard to get a real sense of what is going on online without Google, or some sort of analytics software installed. In that situation, would you request that they install Google Analytics and maybe have it run for a month before you actually purchase?
I didn’t need to on that one, because I had such a strong belief in the repeat customers that were there. And I could see easily on just some common keywords that the SEO was in line for it.
And I knew it wasn’t much traffic. I mean, that was evident. But it had enough other really great things going on that I could I could let that one slide.
Yeah. What about the issue of suppliers? So say you acquire a business?
And you know, they’ve obviously got that business? Has that got their relationship with suppliers? Is there any certainty that that the new relationship that then you will have with this suppliers will continue?
I always…during due diligence, require that I’m allowed to speak to each supplier? Right, so I get the seller’s permission that I’m going to call them.
And I will ask how much the seller owes them, if anything, you know, what their average purchasing was even I’ve already looked at all the invoices and make sure that, you know, they’re what I looked at, from the sellers point of view, agrees to what the vendor says.
But and then I actually just point blank, ask them, you know, why still be able to buy from you?
I guess where they say, like a gentleman’s handshake of nothing sort of signed on a dotted line, but there’s sort of verbal agreement that you can develop this new relationship with them.
What Would Dana Do Differently If She’s Starting All Over Again
Okay, cool. If you were starting again, it or you know, sort of, I guess, knowing what you know, now and you were starting, what what advice would you give someone?
To start reading businesses for sale now. And actually, I would give that advice to even any entrepreneur, if you want to get MBA and small business, read businesses for sale, like get used to learning how people how other businesses operate, even if you’re not interested in them.
So to me, that, I think is where the breadth of my knowledge has come from. Because I have read so many businesses for sale, I know so many weird things about small business, just because I’ve followed businesses for sale.
And I feel like that has been the best thing that I’ve done. And it has helped me understand, like profit margins, and things like that, what business types make incredibly more money than other business types and things like that. So it’s just it’s been a great fun thing in my career, to have always studied businesses for sale.
And I think there’s tons to learn from it. So even if you think you might be buying two years from now, just start subscribing to businesses for sale on. biz, buy, sell, or whatever platform you want, and start getting used to the language and how they’re sold and how they’re packaged.
Does the Location of the Business Matter in Purchasing
Does where the business is located didn’t make a difference Do you find to say, if you see a business listed in Europe, that looks interesting. And you’re in America.
I think if you can figure out the logistics of it, if you are comfortable figuring that part out, I don’t think it would matter. When I bought home health testing, he was it was operating in the United States, but the owner was in Thailand and running it from there.
I think as long as you know, it’s going to always come down to like you have to have, even if it’s something you’ve never done, when you learn about the business, and the more you learn, you’re like, wow, I had no idea this was this was even possible this type of business.
But you still have to have that understanding a basic good basic understanding of what’s making this thing work. So if you are looking at a business in Europe, you know, you should have a decent understanding of what are the complexities of that business based, you know, from what you’re used to seeing. So thanks for scare you off. I don’t mind hard work.
I like to work hard. And there were plenty things I don’t know when I buy a business. But I kind of want to have that, like a confidence of I get this, I get what’s going on here.
You know what I mean?
And that’s typically outlined in a listing, is it?
Yes, I can then in your conversations with the seller, sometimes you might not understand right at first, but when they explain it, you know, you don’t want to buy something that you just don’t, you’re clueless. And I think there’s plenty of online businesses, I’m clueless about how they operate.
So there are things I could get in trouble. And so I try to just stick with that. I have to have a good understanding, and maybe a inkling to why customers are buying from it.
Because if I can’t, if I’m always in that position of going, I don’t have any idea why people buy from this, then I don’t know that I would know how to make it better.
Profit Margin Ceiling She Looks on a Business
One thing I haven’t asked you yet is what do you find? Or is there a typical profit margin of such a online business? Or does it vary really wildly depending on what they’re selling?
On net profit margin?
Or even gross profit margin?
It does vary on the on each business, I can tell you what I my require my personal requirements are I want a gross profit margin of more than 50%.
In the business I’m buying, I want a net profit margin already have more than 10%, maybe pushing 20%.
And then we’re going to push that even further. So I’m going to increase the profit margins by when we grow it is my goal.
So what are some of the ways that you would increase your gross profit margins? Are there some easy ways we do?
Again, we dig deep in the data, we do an 80, you know, 80/20 analysis on which items are providing the most of our gross profits. And we focus only on those. So an example when we bought the drug testing site, I think at that time, it had about 50 items on the site. And there was about 10 of them on a classic at 20, that we’re providing 80% of the margins.
And so instead of focusing on the whole catalog, we actually hand picked, we went deeper and deeper into the data and pick the two out of those 10 that had the highest margin and had the opportunity for growth.
So we just focus then on really blowing out our best efforts on two products instead of the whole catalog. So we really yeah, we really focused on, where can we drive some margin in this business.
And that makes total sense. But when you say really focusing on just those products, focusing how like driving, Google Ad traffic, doing running some kind of promotions, that kind of stuff?
Driving ad traffic, maybe cutting off, if we don’t have a big enough budget in our budget, right, then we’ll cut off ads to all the other products, and really just put all our ads toward two products, and get really good at those and write a ton of content, write really good content really do videos on the products, like just put all our efforts for maybe a year.
Into one or two products or one category on the website instead of doing everything. We just focus down on where can we make… because and I think one of the reasons I like buying a business also is because I need pressure to work well. I’m a procrastinator. And you know…
And sounds like one (laughs). That’s a compliment by the way!
Yeah, but if I don’t have like something that’s really driving me and pressuring me. So I said, really, you know, big goal that I’m going to double the profits in a year when I buy a business.
And I’m hell bent on doing it. So in order to do that, I’m talking about the profits of their business not doubling the top line, it’s actually a lot easier to grow the top line, right? Yes, if you’re not worried about if it’s profitable, or not, I could grow any top line, but I’m going to double the profits of this business. So I have to have some, a pretty concentrated way to get that done fast.
So that’s why we drill down. And we’re trying, in all honesty on an e commerce business to move the gross margin of the business up. So if I buy businesses doing 50%, gross margin, probably after we go through the data and make our decisions on where we’re going to focus our time, by the end of that year, it’ll probably be doing 55 or 60%, in gross margin, which is all going to fall to the bottom line for us.
And we do that by this concentrated effort where we’re putting all of our best efforts on the products and and at the same time, I’m negotiating with the vendors, and I’m letting them know that I’m going to triple the amount we’re buying of this.
And I’m negotiating better pricing. So yeah, we’re going to do everything we can do in marketing.
And then on the behind the scenes, we’re negotiating with our vendors and even things like if we’re buying more, we save a ton in shipping because you know, we’re not buying, we’re buying and bigger, you know, we might be buying by the pallet versus the carton and things like that.
So not not only are you increasing your top line, you’re reducing your cost of goods sold.
Ideal Return on Ad Spend
Yep, that makes total sense. From an ad point of view, you said driving traffic to these best sellers?
What are your thoughts on what is an ideal, I guess, return on that ad spend, or you find there’s generally two different schools of thought.
And some people feel that their ads should just break even so that you know one times return on their ad spin to build a customer base and a repeat customer base and build their business that way versus others, which I guess a perhaps a little bit less aggressive in their marketing strategy and name to get some kind of profit from their ads.
What do you which camp do you fit into?
Um, at this point, we’re not in high high growth mode with our companies. So I’m more on the profit side of our ads.
So I do, we’re kind of targeting the two x two, three x return so that we are profitable on the ads. But in the early stages, when I’m doing that concentrated effort I would go for, I don’t like to lose a terrible amount of money.
But I do want the data to understand what’s working. And to find out. If we have some identified audiences and demographics that we could be targeting. I’m willing to spend more in that first year, I’m willing, first year or two, when I take over a business.
I’m willing to run our ads at breakeven or a little bit of a loss. And but we also we have repeat customers, so it’s easy to justify.
How Long is the Duration of ROI of the Business She’s Acquiring
You said, when you buy one, it’s a three times multiple. So how quickly do you require? I guess no guarantees.
But how quickly Are you looking to, for it to the investment to repay itself?
Well, it’s, since I’m buying on a three x multiple of what it’s doing now. And my goal is to double or triple it in that first year, year and a half.
I’m kind of wanting my money to be flowing back in under two years, right. So if I hit my goal and growth, then in under two years, the business is returned, has returned.
But I’ve also worked in the business, so we negated my time. But then at that point, after two years, then all of that free and clear, my money is back in my pocket. And now we have a business.
Let’s say I bought one that was making 50,000. Now it’s making 150,000 because I tripled it in profits, you know, and I put my money, my original investment has already come back. So now I have a nice business that has a good cash flow per year.
Yes, definitely. And you somebody who creates a portfolio of such businesses or you a flipper, and you like to flip?
I do not flip, I keep them shockingly, 10 years or more. Because so what happens and the reason I do that is that first year, when we hit all that growth, obviously my cash flow is even though I’m not profitable, my cash flow is tight, because I’m spending on ads, and I’m having to buy a lot more inventory.
So even though I got it to this three x position, I’m not really going to start feeling really great cash flow until we stop, we, we bring back that growth just a little bit.
And if I have really good results in the first year, and I hit my triple of the profits, then I know I’ve still got some runway, so we’ll stay in growth mode, maybe another two years. So now I’ve owned it almost five years, but then I’ll kind of pull back on the hard growth, and we’ll turn it into a cash flow machine.
And that’s when it’s lovely to keep them it’s really nice, because you’re efficient. You have I have a really good staff and everybody knows what they’re doing.
And it’s not very stressful. So I enjoy that period of business where they just they make really consistent good money.
And we have great customers and great staff. So it’s those are the hard ones to let go of.
Right? Well, I guess it’s You’ve worked hard to get it to that point. So why not? Reap in the benefits of it? Okay, is there something which I have not asked you that you think is important to cover? If you consider going down this avenue? We pretty much covered covered everything. I did, I think, a long list of questions and across them all off as we’ve been going through them.
Going Back on Her Journey When She Started Buying Businesses
I think one thing I didn’t mention in my journey was when I said that I sold a business, I sold one business, and I decided I would buy my next business, I actually did not when I sold that business, I did not make enough money to go out and buy another business, I only had a very small little amount of money that returned from the business I sold.
So I kind of bootstrapped my way through buying businesses by taking partners in the first few years. So I found a business I wanted to buy, but I did not have enough money for it. But I find it really easy to find investors, you know, through my own network, because I’m not asking them to invest in a start up where they don’t know they’re going to make their money.
I have an income statement, you know, I have a business I’m going to buy that’s making this much money, and I can make my payments to my investor out of the profits. And so I bootstrapped my way through this process.
Now I can buy my businesses on my own with my own cash. But when I started out, I had always a 50% or more investor, a lot of my first investor own more of the business that I did. But they had money and I didn’t.
So it was fine. But then we sold it. And then I took that money. And then the next time I bought a business, I didn’t have to take as much invest outside investment. So then I got to the 50/50 level, and then I eventually bought them out.
And now I’m on my own. But it sounds like you know, a lot of times people think oh, I just I’ll never be able to do that. I don’t have any money. But it’s really easy to convince an investor to buy into a profitable business. I mean the money and you can see the profits.
And is the idea that a couple of years in you would buy that investor out or they happy to stay.
Either way, I’ve done it both ways. I’ve done yeah, buyouts at a certain date and time where you say, you know, this is when it’s going to transition.
I’ve had some lend me the money without taking equity, which is unusual.
They just wanted to make the interest, but they trusted me. So it’s easier, it’s just much easier to because you they can see the cash flow, they can see that they’re going to get their money back.
Yes, yes. Rather than some crazy idea that….
Right. And that’s, that’s really hard to get investment money in. But it’s it’s kind of a lot it easier in this in this realm.
So it’s a good way to kind of bootstrap your way by using other people’s money because you have proof that you can pay them back.
Yes. Well, this has been fascinating for me, and I hope for our listeners as well. I’m mindful of the time I know it is your nighttime.
And I know how I am at nighttime, so I don’t want to take up any more of your time. So Dana, before we sign off, where can people find out more information about you
and all the stuff that you do?
I write semi annually, blog http://44ideas.net/. So I’m not a big blogger or I am occasionally on someone else’s podcast like yours. And my blog if you ever just wanted to contact me is http://44ideas.net/.
And that’s the number 44?
Alrighty. We’ll make a wrap. Thank you so much for taking time out of your evening, especially.
And the pleasures been one and I learnt heaps and I’m sure our listeners have as well. So thank you again.
Right. Thank you so much.