Cash Flowing vs. Exiting Your Ecommerce Business in 2025
Torn between reinvesting for growth and taking an exit? In this video, valuation expert Jason Somerville from GW Partners and ecommerce accounting specialist Richard Starkey from CronosNow break down the key factors to weigh before you decide.
Get in touch with CronosNow → https://cronosnow.com/
Get in touch with GW Partners → https://www.gw.partners/
Get in touch with A2X → https://www.a2xaccounting.com/
00:00 Cash Flowing vs. Exiting Your Ecommerce Business in 2025
03:54 Preparing Your Financials for an Exit
08:15 Choosing a Path: Cash Flow vs. Exit
09:30 How Financials Impact Business Value
12:00 Timing: Is Now a Good Time to Exit?
14:47 EBITDA Multiples: What Are We Seeing in the Market?
22:38 How Poor Accounting Jeopardizes Deals
28:16 Historical Financials & Accurate Data
32:47 Boosting Buyer Appeal
40:50 Businesses Are Bought, Not Sold
The information in this video is general. Please consult an expert for advice tailored to your specific business circumstances.
Summary
First Things First: Know Why You’re Building Your Business
Jason opens by reminding founders that most ecommerce businesses are built with one of two goals:
- To fund a specific lifestyle through steady income (cashflow)
- To create a high-value asset with a future exit in mind
Knowing which camp you fall into is essential. But equally critical? Having a personal financial plan that maps out how your business fits into your long-term goals.
According to Jason: The plan comes first. The business decision comes second.
The One Thing You Can’t Skip: Solid Financials
Before you make any decision – whether to keep or sell – Richard and Jason both agree:
Get your books in order.
- Accrual-based accounting is non-negotiable
- You need accurate:
– Profit and loss statements
– Balance sheets
– Cash flow reports
– Inventory and COGS records
Most founders don’t have this when they start thinking about selling. That’s okay – but it’s also the first thing that needs to be fixed.
In Jason’s experience, businesses often have to delay going to market just to clean up their books – so it’s best to get on top of it.
Cashflow vs. Exit: The Financial Comparison
Richard explains the basic framework:
- Project your after-tax cashflow over 3-5 years
- Discount future cash to today’s value
- Compare it to a potential exit price (often based on an EBITDA multiple)
The reality? A founder might earn $200K a year on a $1M EBITDA business – but could sell it for $3M today. That’s 15 years of income in one transaction.
It’s not just about money though. Confidence in the future – and burnout – play huge roles.
According to Richard, if you’re exhausted and out of gas, the cashflow model becomes less attractive – fast.
Timing and Market Sentiment
Is now a good time to sell? It depends.
- The M&A market is turbulent.
- Buyers are cautious, especially when paying premium multiples.
- But good businesses can still stand out, especially if your metrics are holding strong during a tough market.
What’s Your Business Actually Worth?
Valuation typically comes down to an EBITDA multiple:
- Small businesses (under $10M in revenue): Typically 4-5x EBITDA
- Larger businesses: Can go into high single or even low double digits
But that’s just the starting point. Things that drive up your multiple:
- Diversified sales channels (not just Amazon)
- Subscription-based revenue
- Clean, verified COGS and working capital numbers
- Strong brand vs. being a “widget seller”
What Buyers Are Really Looking For
If you decide to sell, buyers are looking for:
- Predictable and sustainable growth
- Diversified revenue streams (Amazon + Shopify + others)
- A real brand, not just a product catalog
- Operational resilience (supply chain, SOPs, team)
- And yes – clean, defensible financials
Accounting won’t sell your business. But bad accounting can negatively impact a deal.
The Deal Breakers in Due Diligence
Bad accounting = restatements = lost trust = lower price (or no deal).
Richard shared his 15-minute “gut check” for any ecommerce P&L:
- Cross-check channel revenue vs. source (e.g. Amazon, Shopify)
- Look for stable gross margin %
- Verify balance sheet inventory vs. actual stock on hand
When to Get Serious About Clean Books
Clean books will ultimately help you make an informed decision about keeping vs. selling your business.
However, as a general guide, here’s what to consider when setting up your bookkeeping at different revenue thresholds:
- Under $30K/month: Use A2X for accurate revenue, even if COGS is rough
- $30K–$50K/month: Time to start investing in COGS tracking
- $1M+ annual revenue: You need accrual accounting, a proper IMS, and expert oversight
Setting Up to Sell (Even If You’re Not Selling Yet)
Want to make your business desirable to buyers?
Jason suggests focusing on:
- Predictable revenue (not hype-driven spikes)
- Clear growth opportunities (that you can show, even if you don’t act on them)
- A brand that earns the right to a second sale or referral
- Diversified supply chains to mitigate macro risk
- Strong operational systems (including accounting)
Final Thoughts from the Experts
- Richard emphasized that businesses are bought, not sold. You need to make yourself buyable.
- Jason reminded us that business owners don’t need to make this decision alone. Have your accountant, your M&A advisor, and a personal financial planner in your corner.
Transcript
00:00:05:00 - 00:00:26:21
Speaker 1
Hey, everyone. Thanks so much for joining today’s video. My name is Geoff. I’m the head of marketing here today to Ax ecommerce accounting automation software for the world’s leading Shopify, Amazon, eBay, Etsy, and Walmart sellers, as well as their accounting partners. And speaking of partners, I’m joined today by Richard from Chronos, now ecommerce, accounting and inventory experts, as well as Jason from GW partners.
00:00:26:23 - 00:00:53:18
Speaker 1
Exit and valuation experts. They’re both here today to talk to me about a topic that is either at the front or at the back of the minds of most ecommerce business owners right now, which is how do you think about continuing to fund their business, whether it’s through their own cash flow or when it might be time to think about selling the business and what the implications of that might be and what to expect from a valuation standpoint.
00:00:53:20 - 00:01:14:20
Speaker 1
Now, I know that there are other options, whether that’s lending or, potential investment from, from third parties. But we’re going to focus here today on, these two outcomes. So it’s cash flow in your business or potentially selling your business. These guys are experts. I just want to say, Jason and Richard, thanks so much for joining me today and lending your voice.
00:01:15:16 - 00:01:27:18
Speaker 2
Thanks, Geoff. Preciate a man. Glad to be here, man.
00:01:27:18 - 00:01:47:23
Speaker 1
Jason I’m going to start with you. I mentioned earlier that this is a topic that is either at the front or at the back of the minds of most ecommerce business owners. Do you mind letting me know why, why most people are thinking about this, and then we can jump into kind of what they need to consider, when they’re deciding which path to take.
00:01:48:03 - 00:02:12:01
Speaker 1
Yeah. Well, I think as far as the Y. I mean, I think as a business owner. Right? Usually you’re you’re you’re aiming for some outcome, right? It’s either going to be some exit at some future point, or you’re building your business to generate, you know, personal income for a certain type of lifestyle or your personal goals. So usually you’re you’re building your business for one of those two reasons, at least from a financial goals standpoint.
00:02:12:01 - 00:02:33:21
Speaker 1
And I think the, you know, the, the real important factor for to, to kind of decide, you know, do I keep running a business, cash flowing a business, or do I potentially sell a business is to actually understand, first and foremost, have an actual, you know, personal financial plan that is comprehensive, that covers all parts of your life and how the business fits into it.
00:02:33:23 - 00:02:41:14
Speaker 1
And then, you know, if you fully understand and have that plan, it allows you to be armed, you know, with the right information to make the right decision.
00:02:41:14 - 00:02:51:14
Speaker 1
Love it. Love it. And speaking about having the right information to make the right decision. Richard, do you mind talking to me a little bit about how factors reflect and practical financial terms?
00:02:51:17 - 00:03:11:18
Speaker 2
Well, I think in practical financial terms, you’re. You’re thinking about whether you’re getting cash flows every year for a couple of years, or whether you’re selling and exiting and getting more of the economics today. I think a big part of this is the emotional component, right? And I think through everything that’s been happening in the last few years, our founders have been through a bit of a wild ride.
00:03:11:20 - 00:03:22:14
Speaker 2
And the problem is, a lot of people rush to wanting to exit because they want to get out. But if they don’t have some type of idea of a plan, then they might make poor decisions upfront. But.
00:03:22:14 - 00:03:30:18
Speaker 1
Yeah. And a lot of it feels like it’s setting themselves up for success. For when? When the right time does occur. Right.
00:03:30:18 - 00:03:31:00
Speaker 1
Things
00:03:31:00 - 00:03:33:13
Speaker 1
are so uncertain especially as it relates to tariffs right now.
00:03:33:14 - 00:03:59:15
Speaker 1
Like I can’t tell you like if we say something today, by the time we publish the video, the rules of the game might change, right? And we can’t say that these external factors don’t influence or impact somebody’s decision on whether to continue running the business and cash it themselves or, or to sell it. But the important factor here that I think we’re going to get into next is, being prepared for the right moment.
00:03:59:15 - 00:04:20:22
Speaker 1
And, a big part of that is having solid financials. Jason, do you mind talking to me about, like, when you are valuing a business, what type of, you know, financial documentation you think it’s important to have in place to understand? You know, what somebody could potentially get for their organization?
00:04:21:07 - 00:04:43:09
Speaker 1
Yeah. I mean, I think it starts with. I mean, the the basic kind of most basic foundational item is just going to be really good accrual bookkeeping, which allows you to produce, you know, accurate, income statements, balance sheets and cash flow statements. That’s kind of that’s the foundation upon which any valuation is going to be built.
00:04:43:09 - 00:05:04:16
Speaker 1
And so if that’s shaky or, you know, it’s not properly, constructed, then you’ve built it on effectively, you know, a shoddy, a shoddy base. So it will likely fall apart under scrutiny. So I’d say that’s first and foremost. So it goes all the way down to your basic bookkeeping and just making sure that the accounting is actually accurate.
00:05:04:16 - 00:05:15:14
Speaker 1
It’s accrual based. And that the statements that, that come out of that, are, are reliable. That’s first, I mean, there’s a lot of it, but I’d say that’s like the fundamental basic first thing.
00:05:15:14 - 00:05:32:04
Speaker 1
And then, Richard, I have a question. Kind of a curveball here, but as an accounting firm owner, you get to see tons of ecommerce businesses, right? How many that come to your door have what Jason kind of needs to to to create a clear financial picture.
00:05:32:04 - 00:06:00:20
Speaker 2
Well, by the time someone’s coming to us, that’s pretty much zero of them, right? Because, we kind of specialize the. We work with Jason and, as one of the leading ecom investment banks. So Jason’s investments and clients are going through some type of due diligence, right? So although in the process of being incubated towards that. So the reality is most founders don’t value their accounting because they don’t understand it.
00:06:00:22 - 00:06:26:09
Speaker 2
So they’ve either got cash basis or they just specifically the cost of goods sold is a mess, right? That’s really difficult to do. Right? We’re kind of specialists in fixing the Cogs component. So most people have gone somewhere else. They’re doing cheap low cost accounting, which is good enough for a tax return. But by the time they’re thinking about an exit, they realize now they need to get their figures corrected.
00:06:26:09 - 00:06:33:22
Speaker 2
Right? So we’re in a bit of a situation that most people are coming to us because they want to exit and their accounts are a mess. Right?
00:06:33:22 - 00:06:53:01
Speaker 1
Got it. And then from an accounting perspective, how do you set them up? To appropriately calculate things like true cash flow, cogs, so on and so forth, so that they can kind of meet the needs. That, Jason and team have to be able to appropriately evaluate their business.
00:06:53:01 - 00:07:14:13
Speaker 2
There’s two main things. Right. So let’s talk about revenue. First of all, sales, founders specifically if they’re multi-channel their Shopify store often often has everything else plugged into it. So they’ll have the Amazon Etsy plugged into the Shopify store. And they’re often double counting or even worse, only counting cash flows. So, you know, for us, that’s where you guys come in.
00:07:14:13 - 00:07:34:14
Speaker 2
A to X is the leading tool in the market to really pull out the revenue and put it in the correct periods as well. Right? Not just when it’s paid. It takes a bit of setup. The second thing is a bit more complicated is cost of goods sold. And again A2 x has a kind of standard costing approach where you can put in a good landed cost per unit.
00:07:34:14 - 00:07:50:02
Speaker 2
And that helps get a good enough accrual number for some of the larger, more complex kind of multichannel sellers. You do need an inventory system as well, right? If you don’t have that in place and invested, you’re going to have troubles getting that data correct.
00:07:50:11 - 00:08:12:08
Speaker 1
So the Tldr here is, you know, before we can even get to a decision around whether to continue to cash flow the business or, when and why to sell. It’s really clear that you need, accurate financials, accrual based accounting, all of your financial statements in order. Profit and loss statement, balance sheet, cash flow, cost of goods sold.
00:08:12:10 - 00:08:24:11
Speaker 1
Richard, I’m going to pass the mic over to you, and I’m going to ask you a relatively simple question is like, now that you have kind of this structure in place, how do you start to consider the to pass that you have ahead of you?
00:08:24:11 - 00:08:48:04
Speaker 2
To to just restate the two paths. This cash flow, your business. What does that look like versus an exit? So in an exit, you get a big chunk of money in one time. Maybe it’s a bit of an earn out, but with cash flow in the business, you’re looking at either 3 to 5 years and then looking at how much money you get every single year over the next five years, you got to look at those numbers all off the tax.
00:08:48:06 - 00:09:12:12
Speaker 2
And then over the next five years, a dollar in five years is not worth a dollar today. So you need to discount that to today’s money as well. And then you get a nice numerical basis of what’s the next five years with the cash flow compared to selling today. And it helps you helps give you a framework. But what you said is, yeah, you need your financials and your accounts, high quality accounts in place.
00:09:12:14 - 00:09:19:14
Speaker 2
Otherwise you’ve got rubbish and rubbish out for that decision. Right. If if you don’t have the correct data. So decision is very flawed.
00:09:19:16 - 00:09:41:15
Speaker 1
Well, it’s hard to make a decision. It’s hard to know how much cash flow you’re projected into the future. It’s hard to know what the actual value of your business is like. Jason speaking. The valuation of a business. How do you use all of these, financial statements and information to understand what a business is valued so that they can understand the other side of the that coin from a decision standpoint.
00:09:41:16 - 00:09:46:17
Speaker 1
Like if they were to sell today, what could they actually get for their organization?
00:09:46:20 - 00:10:13:14
Speaker 1
Sure. Yeah. Yeah. I mean, you know, some of the key components that go into that valuation, process are, you know, things like you know, most recent trends in revenue margins, EBITDA, which is earnings before interest, taxes, depreciation and amortization for those in the audience that aren’t as aware. That’s, that’s probably the single most important metric for valuing a company, typically of the type that we work with.
00:10:13:16 - 00:10:49:08
Speaker 1
So, you know, a multiple of EBITDA is the is the kind of valuation methodology most buyers will use. With a lot of other data, let’s say, around that that would do would influence that that multiple. So everything again from growth rates of both revenue and margins, profits at a kind of every level of the income statement. So that going back again, having all of that information correct is is critical to being able to show, okay, well, this is what the business has done in the recent past, even all the way back to its inception.
00:10:49:10 - 00:11:07:23
Speaker 1
And then, of course, you know, projecting out into the future, because ultimately that’s what a buyer is buying, right? They’re buying the future. They’re using the past to help them get comfortable around predicting the future. So kind of as Richard said, you’ve got two things we’re doing here that are both future based. We’ve got future cash flows.
00:11:07:23 - 00:11:17:13
Speaker 1
What if I just keep the business? What’s that worth? And then I’ve got, you know, a buyer who’s going to try to, you know, value the future of this business and put a price on it.
00:11:17:13 - 00:11:24:15
Speaker 1
You’re also taking a little bit of risk off the table. If you choose to go down the sell right as well, right. Because I.
00:11:24:15 - 00:11:45:10
Speaker 1
take risk off the table. Well, there’s two types of risk, right? I think a lot of people, when they think risk, they only think downside risk. But yes, you take upside and downside risk both off the table. So a lot of times that decision I think it’s a a very good point, Geoff, because I think that decision is often based in a, in an owner’s confidence in the future.
00:11:45:12 - 00:11:57:03
Speaker 1
Right. So the more confident they feel about the future, and the more positive they feel a lot of times the less likely they are to consider, selling business.
00:11:57:03 - 00:12:18:21
Speaker 1
also interesting, like from a timing perspective, right? Like, there are certain, you know, macro conditions that make, you know, buying and selling, not the right time or the right time, but having all of these things in place sets you up for success when you potentially want to pull the trigger right? Which I think is an incredibly important factor.
00:12:18:23 - 00:12:41:04
Speaker 1
Jason, I do have a question. You know, we’re April, you know, as mentioned, April 25th, a lot of uncertainty in the ecommerce space right now, sentiment wise, in terms of like from a, you know, M&A perspective, is now a decent time or would you recommend that people wait, like what’s what’s your general feeling?
00:12:41:04 - 00:13:04:10
Speaker 1
Yeah. I think that’s a good question. I think the answer to that question has been similar over the last three plus years, which is, it’s very specific, typically to a particular founder’s situation. There’s not really one blanket answer that really applies to, to the majority of, of owners. So, you know, you’re right. There’s a lot of uncertainty.
00:13:04:10 - 00:13:27:12
Speaker 1
I’d say generally speaking, in the M&A environment, two things happen in periods like this. You get a lot of people that just hit the pause button because they want to just stop and wait and see, let the turbulence kind of simmer down before they make any big decisions. And then also you have people that are looking to be opportunists to look for things that are mispriced, that are, that happen to be available for sale.
00:13:27:18 - 00:13:49:05
Speaker 1
So they’re bargain hunting a lot of times. So where it gets difficult is if you have a really strong business and you’re wanting a really premium valuation because you believe you deserve it, because of the quality of the business that you’ve built. Periods like this are difficult for those kinds of owners to to really, I think, you know, get what they’re looking for.
00:13:49:07 - 00:13:57:02
Speaker 1
But there are lots of other situations out there where it still makes sense for a seller potentially to to exit the business for, for a variety of reasons.
00:13:57:02 - 00:14:05:15
Speaker 1
that’s one of the beauty of having good cash flows right now, right? You. You’re effectively buying yourself time to make a decision over the long term.
00:14:05:15 - 00:14:34:09
Speaker 1
You are. And then one of the flip sides, which is often not really talked about, is in a period where, say, there’s is disruption and you have a larger percentage of businesses that may be hitting, you know, more negative trends if you’re one of the businesses that’s not doing that, and you stand out and all of a sudden you look much more desirable because compared to the, you know, the mean, you actually separated yourself.
00:14:34:11 - 00:14:44:10
Speaker 1
Even more so all of a sudden it’s like, well, wait a minute now. I’m, I’m, you know, there’s kind of that scarcity, value there that that can kind of counterbalance a little bit.
00:14:44:10 - 00:14:59:09
Speaker 1
So, Jason, you talked about EBITDA multiple, as being one way, to, to evaluate a business. I know that this is an impossible question. You know, changes depending on a multitude of factors, but like, what multiples are we seeing in market today?
00:14:59:11 - 00:15:17:20
Speaker 1
Yeah. I think, I would say this. I agree. It is. It is an impossible question, but I’m not afraid to answer it, so, you know, it is. It’s it’s historically and continues to be a little bit based on size. I think that’s one point that should be clear to the audience. It’s kind of I always sort of tend to tend to categorize.
00:15:17:20 - 00:15:55:13
Speaker 1
You’ve got to kind of 0 to 10 million of revenue, kind of grouping. And then you kind of have that 10 to 50 million, and then you kind of have the 50 million plus. So I’ll start with, with the smaller and, the 0 to 10. You know, I think for the businesses that do transact in that world, you’re typically seeing things around that for kind of 4 to 5 times, EBITDA kind of neighborhood for, for good quality, you know, say, you know, and again, that’s, that’s a bit of a subjective term, but, you know, for, for kind of that upper quartile type of business, that’s certainly, from the peak
00:15:55:13 - 00:16:19:07
Speaker 1
in 2021, that’s down probably, you know, at least 35%, you know, and a lot of cases, there are businesses that, frankly, are just not sellable. Now that would have been sellable. It back during, you know, those kind of real big Covid kind of frenzy days of of e-comm business sales. So that’s the short answer. And then when you start to go up in size, the multiples tend to go up from there.
00:16:19:09 - 00:16:33:21
Speaker 1
And then even with the largest, private sales in the middle market and large middle market, you know, we’re seeing the ceiling being kind of in that, you know, high single digits to, to low double digits kind of neighborhood of a multiple of EBITDA.
00:16:33:21 - 00:16:40:15
Speaker 1
Nice. And then. Richard, how do other dimensions like inventory as an example, factor in to valuation than your experience?
00:16:41:14 - 00:17:01:08
Speaker 2
I think it’s not just cash flow is the driver of it, right? So sometimes you’ve got to check which multiple we’re talking about. Are we talking about a multiple that includes inventory or are we talking about an EBITDA multiple plus inventory. Right. You’ve all been on websites. So people are talking about an eight multiple but was really a two multiple plus inventory for some reason.
00:17:01:10 - 00:17:22:20
Speaker 2
But Ebit does trying to be a predictor of future cash flows for guys selling smaller businesses. They’ll often use the term seller’s discretionary earnings. So yeah, the guys who are selling $1 million business. Right. But you’re trying to figure out what the return is as an investor in their business. So if you’re buying something at A for multiple, you’re expecting to earn 25% return year on year.
00:17:22:22 - 00:17:52:10
Speaker 2
Right now, I think what’s really important to note is that there’s a big risk factor in how big or small that multiple is. So if you’re an Amazon only business and you’re smaller, there’s a high risk that it’s not going to work out right. So you might get a two and a half, maybe a three multiple. But if you’re multi-channel and you know 60% of your sales on Shopify with your own website and 70% of that is subscription based revenue, well, your multiples going to be higher because you lower risk, right?
00:17:52:10 - 00:18:15:14
Speaker 2
A less chance of a going wrong. The adjustments for things like inventory sometimes. Jason, you can correct me if I’m wrong, but sometimes you’ve seen guys who sell, but the buyer wants you to keep three months working capital in the bank or, and you usually want to exclude any financing that’s on the balance sheet. Right. So you starting the business, they must get sold out their own financing afterwards.
00:18:15:16 - 00:18:26:14
Speaker 2
But it’s important to note that you got to chase earnings. But you also need to think about the riskiness of your business in order to drive up multiples and Java value.
00:18:27:00 - 00:18:53:05
Speaker 1
I mean, you you guys work with tons of ecommerce businesses. You you get a window into their financials, you talk to them. I’m positive that you could very quickly make, distinction between whether they should continue to cash flow. The business or whether they should sell the business, like, right away. What what is that? Well, first and foremost, is that true?
00:18:53:05 - 00:18:58:18
Speaker 1
Like, can you guys quickly come to a conclusion on what path to take?
00:18:58:20 - 00:19:25:09
Speaker 1
Yeah. I mean, yes, fortunately for the clients, That is true. So we can we can tend to kind of pretty quickly give them, I think a really good assessment. And a lot of times, I mean, when it comes to just the math part of it, right? If you think about, obviously the larger the multiple, you know, of, let’s say EBITDA, because that’s what we’ve been talking a lot about that the business could fetch, you know, in a sale that the greater the chance that it makes sense to sell.
00:19:25:09 - 00:19:49:04
Speaker 1
Right. But to be a little more specific and going down to this whole idea of, you know, do I cash flow my business or do I sell my business? A simple example. And I know we were just talking about this earlier, offline, but a simple example is with a growing business in ecommerce, usually a lot of the cash is going back into the business to invest in more inventory in particular.
00:19:49:04 - 00:20:11:05
Speaker 1
That’s the number one, let’s say vacuum of cash in a growing e-com business. And so, you know, you might have $1 million EBITDA. What? But you really only put $200,000 in your actual pocket as the founder. And again, let’s say that that million dollar EBITDA business could get a three multiple, let’s say, which is kind of on that maybe lower end.
00:20:11:07 - 00:20:42:20
Speaker 1
So that’s $3 million. Okay. So that’s a three that’s a three multiple of EBITDA. But that’s a 15 multiple of what you actually put in your pocket. And so a founder really understanding that and saying, well, it would take me 15 years at this rate to put this amount of money in my pocket or I can put it in my pocket in six months through a sale and going through that type of, say, analysis and thinking through that, that’s the kind of thing we really try to help founders understand.
00:20:42:20 - 00:21:01:04
Speaker 1
And you know, I know Richard is doing a lot of the same things, too. And on the accounting side, you know, making sure that, well, we can get to that accurate number. So they’re really understanding. Well, these these are really my the two things I’m trying to compare. These are the reality, this is the reality of the situation.
00:21:01:04 - 00:21:07:19
Speaker 1
Nice. And. Richard, do you have anything to add to that? Given kind of. I’m assuming that you can also have that instinct, right? To
00:21:07:19 - 00:21:10:07
Speaker 1
know what the right path to take is.
00:21:10:07 - 00:21:26:22
Speaker 2
think you got to be cautious when an accountant tries to give that instinct. You know, we’ve, We know the numbers, but we might not know the practicalities. I had a previous, career in M&A myself, but I know how difficult it is to sell a business. Right. So, I’ve always been on the buy side.
00:21:27:00 - 00:21:45:03
Speaker 2
Selling a business is not easy because founders do have a lot of misconceptions about what their business is worth, because I read somewhere else that someone else got three times revenue, like some made up number. I wouldn’t say I’ve got the same feel for it that Jason does. It’s not what we do. We get the numbers right so that Jason can work with founders.
00:21:45:03 - 00:22:08:05
Speaker 2
Right? It’s a very specialized skill, and I think working Jason makes it sound easy because this is what he’s done for how many years? I wouldn’t say we’ve got that gut feel right, but we need to be able to get the numbers correctly and we understand the mess. I can do a spreadsheet, but I can’t help you solve your business because there’s not just money involved.
00:22:08:05 - 00:22:10:03
Speaker 2
There’s also a whole bunch of emotions. Right.
00:22:10:03 - 00:22:10:12
Speaker 2
Yeah.
00:22:10:12 - 00:22:25:01
Speaker 2
So this is a different discussion. If someone is burnt out, exhausted and hates their business versus someone who is excited about their business, but is just thinking about it from a money perspective, they’re going to want to hire multiple because they believe it’s going to grow, but maybe the buyer isn’t as convinced.
00:22:25:01 - 00:22:35:15
Speaker 2
So the math is one thing, but I think there’s a lot of emotion involved in this process because it’s someone’s child. They’ve played and sweated for this thing right?
00:22:35:15 - 00:22:38:11
Speaker 1
100%. Yeah. That’s a really wonderful point.
00:22:38:13 - 00:22:57:05
Speaker 1
I think that brings us into like a really good segue into the next section, which is, okay, you’re now talking to all these people. You potentially have a buyer, you’re going through a due diligence process. Jason. I’m just I’m really curious. You know, we talked about the importance of accrual based accounting and having all your financial statements in order.
00:22:57:06 - 00:23:07:05
Speaker 1
Can you tell me about any stories where, the accounting actually jeopardized a potential deal and what that look like?
00:23:07:11 - 00:23:12:15
Speaker 1
Yeah. Actually, unfortunately, I have more stories than we do. We have time for. For
00:23:13:06 - 00:23:27:15
Speaker 1
you know, Now, that being said, you know, we certainly try to do quite a bit of work up front to uncover any issues ahead of time. And a lot of times, you know, that will result in just a long delay, frankly, in going to market in the first place.
00:23:27:15 - 00:23:45:23
Speaker 1
Right? That that’s usually where, we catch things is we tend to catch it early so that that becomes like, you thought you were going to go to market in a month. Well, now it’s going to be six months because we got to fix all your accounting before we could show it to anybody. So that’s one. And that happens quite often to be honest.
00:23:46:01 - 00:24:07:16
Speaker 1
And then we’ve, we’ve had you know, we actually had one recently where unfortunately, there was a pretty big miss in terms of the, from the accountants perspective on putting together their cost of goods. But as Richard mentioned earlier, that’s a place that tends to be a particular problem area for a lot of ecommerce businesses.
00:24:07:18 - 00:24:41:06
Speaker 1
And then we ended up having to restate, fully restate the, the accounts in the middle of, diligence. Right. Which what happens there is now the buyers confidence in what’s been presented goes down significantly. You completely lose momentum in your deal process. And now all of a sudden your buyer is just skeptical right, about everything. So and then ultimately the price they want to pay now starts to go, go down.
00:24:41:06 - 00:25:09:20
Speaker 1
Right. So that happens hopefully not terribly often because, you know, you’re catching things up front, but, but it does happen. And I think that I can’t stress enough how much, you know, negative things being uncovered and due diligence for, to deal it, those things that that’s what kills deals far more often than even business.
00:25:10:01 - 00:25:26:23
Speaker 1
Performance starting to, you know, maybe take a turn is in diligence. Buyer uncovers something they weren’t told about or no one knew about. And it’s negative. And then all of a sudden, it’s it’s a domino effect of confidence. They just lose confidence.
00:25:26:23 - 00:25:55:23
Speaker 1
100%. And. Hey, Richard, in the spirit of. You know, you mentioned that, sellers that are doing sub 10 million are more likely bought rather than sold. And we’ve been talking about this idea of, like, you really need to have accurate accounting to set yourself up for success, whether you’re planning to sell today or planning to sell tomorrow, like at what point for those like sub 10 million sellers, would you say, it’s important to get your books in order to set yourself up for future
00:25:55:23 - 00:25:58:00
Speaker 1
success?
00:25:58:12 - 00:26:22:19
Speaker 2
So there’s a cost benefit here, right? So accountants on free. I think there’s a lot of kind of cheap accountants on the market at the moment. And accounting solutions that kind of feel automated. They’re not great, but they get enough of a job done. The reality is we we kind of have a cut off internally. So if you’re doing this than 50 grand, $50,000 a month, we are generally trying to look for a cheaper option for you.
00:26:22:21 - 00:26:45:19
Speaker 2
Right. So we might have a bit of a light option in terms of how we treat Cogs, etc. because the variance, the differences are so small that the additional cost and all that additional work is, you know, not really worthwhile. But I generally find somewhere between 30 and $50,000 a month in turnover. You really want to start taking your your cogs really seriously.
00:26:45:21 - 00:27:03:15
Speaker 2
So just to go back to the slightly smaller guy. So I’m going to do 20 or $15,000 a month. I still recommend a tool like a tool to at least get your revenue very accurate. Right. Because the Cogs, you know, whether you’re a little bit off here and there, there’s not a that size, you’re not in absolute crisis mode.
00:27:03:18 - 00:27:25:13
Speaker 2
You can still go to a bank and get a loan if you need to. But if your revenue is just, you know, you received ten grand from Amazon, well, that’s not revenue, right? There’s Amazon fees in there. It might be some sales from last month. And that’s what’s really powerful about what A2X does. Not just giving you actual revenue versus channel fees, but also getting the revenue into the correct months.
00:27:25:15 - 00:27:47:01
Speaker 2
And we all know Amazon takes two weeks for a settlement. Right? So if you get paid out in the 3rd of March, well, most of those sales are related to February. You need to show those in February. And the few that are in March, in March, I think it gets very important when you start crossing $1 million or maybe $3 million a year, that a lot of extra effort has to go into the cogs in the inventory.
00:27:47:03 - 00:27:55:23
Speaker 2
But understanding that’s going to just call it even double your bookkeeping and accounting and imagery systems fee. So you’re weighing up cost versus benefit the whole time.
00:27:55:23 - 00:27:56:02
Speaker 1
You
00:27:56:02 - 00:28:15:09
Speaker 1
have to pay for it eventually, though, right? Especially that that the context of the topic that we’re talking about today, right, is, you know, there’s no reality in which you get to a point where you don’t have to go through due diligence. If you’re selling a business and they’re going to want a clear picture of your financials over.
00:28:15:11 - 00:28:23:15
Speaker 1
Actually, that’s a really good point. Like Jason, historically, like from a historical financial perspective, how far do you guys usually look back?
00:28:23:15 - 00:28:53:16
Speaker 1
Well, I think you want it. Kind of. Rule of thumb is a minimum of two years. That you feel like, really, really good about. Like the accuracy, the kind of that that two years. That is the minimum. I think obviously we we’d rather have full history be, perfect. Right. But, two, I think you need at least two, you know, and a lot of times buyers beyond that will still want to, you know, look at information and try to understand, well, what was the history of this business.
00:28:53:17 - 00:29:04:17
Speaker 1
It’s told through the numbers. But but in terms of where they, you know, what’s really going into their valuation models and then their, you know, forecast prediction models. It’s the last two years.
00:29:04:17 - 00:29:09:09
Speaker 1
Nice and richer. I love what you said in terms of, like, when to start to think about it. Because
00:29:09:17 - 00:29:27:02
Speaker 1
you’ve probably done a lot of catch up work in your career. That’s in my opinion, that’s like some of the hardest, hardest work to do. You know, you get like, it’s hard to access the data. So, so getting on this as early as possible, even with a lightweight solution.
00:29:27:02 - 00:29:29:14
Speaker 1
And then, you know, as you start to get bigger and,
00:29:29:14 - 00:29:36:07
Speaker 1
your accounting requirements become a little bit more complex, starting to work with, an accounting firm like Cronos now becomes even more important.
00:29:36:09 - 00:29:54:22
Speaker 1
So, Jason, you mentioned, you know, you know, having two years of accurate accounting data. Great. But accurate accounting data, I think changes depending on who you speak to, because most people are going to think that their accounting data is accurate. But, Richard, you and I have been in the game for a long time, right.
00:29:54:22 - 00:30:14:20
Speaker 1
We’ve seen a lot of books and the reality of the situation is, you know, not two companies are alike in this area. How do you quickly evaluate if somebody actually has accurate financials versus, not having accurate financials? And then how can you know the people who are watching this video quickly make that same evaluation?
00:30:14:20 - 00:30:36:00
Speaker 2
Yeah, I think so. I’ve got a let’s call it a party trick that I. You know, I look at every new client in the first 15 minutes. I’ll pull up the last 12 months or 24 months. 12 months, because it fits on my screen. And what I’ll do is I’ll look at the total revenue per sales channel and compare it to what the Shopify or Amazon reports for the same period say.
00:30:36:02 - 00:30:58:23
Speaker 2
So I’ll pick three random months and see if it’s almost exactly the same. Shopify. As always, the risk people duplicate other sales channels to Shopify will oversee. The second thing I do is I’ll look at the gross profit defining gross profit as sales minus your cost of goods sold, the product cost of goods sold, taking that gross profit, dividing it by revenue to get a percentage, the gross profit percentage.
00:30:59:01 - 00:31:20:11
Speaker 2
If I look at that month on month over 12 months, if that’s not relatively stable right then I know there’s something is generally wrong, right? With the cogs in the inventory. The final step of that looks like it’s wrong, but maybe there’s a story. There was a tariff that landed, you know, last month, and therefore we’ve got a big spike in Cogs, gross profit changes.
00:31:20:13 - 00:31:41:06
Speaker 2
And there’s a story that’s different, you know, different reason. But then I would finish that off by quick look at the balance sheet. Founders are notorious for ignoring the balance sheet. If you look at the balance sheet, look at what your inventory on hand balances. Recalculate what that should be more or less imagery count times the cost of that number is not pretty close and close.
00:31:41:06 - 00:32:01:01
Speaker 2
I’m talking 90 to 110%. Well, then your books are broken, right? Something’s not working and your numbers are just made up. So I can do that in 15 minutes for any company. And that’s generally the way I will make a decision if the books are in good shape and need work, or if you can kind of accept what’s in there already.
00:32:01:01 - 00:32:15:04
Speaker 1
You heard it here first. Kratos now is offering a 50 minute service where Richard will, you know, provide his priority track and let you know if your books are in order or if they’re broken. Richard, I. Well, how do you do it?
00:32:15:04 - 00:32:22:05
Speaker 2
that you joke. But we do. We part of what we do is I keep we have kind of office hours, three days a week
00:32:22:05 - 00:32:22:19
Speaker 1
Oh, nice.
00:32:22:19 - 00:32:31:02
Speaker 2
can book and they can book a half an hour, call and we’ll have a quick look, and give it by so we can. Right. So that is something we can do.
00:32:31:07 - 00:32:33:12
Speaker 2
Jump on our website and book a time. That’s
00:32:33:12 - 00:32:36:04
Speaker 2
And I think Jason’s got a similar approach on his side.
00:32:36:04 - 00:32:38:19
Speaker 1
Nice. You know what? To that end, we’ll
00:32:38:19 - 00:32:46:03
Speaker 1
put the link in the description below. If, if you want to connect with either Richard or Jason and team for these office hours. That sounds awesome.
00:32:46:11 - 00:33:15:17
Speaker 1
So a lot of the discussion up to this point has been really around, you know, the business owners decision to either continue to capture the business or to sell. Let’s assume that they’ve now made the decision to sell, based on all the information that they have available to them and obviously the emotional factors involved. Jason, I’m going to I’m going to ask this question to you, like, how can or at least what can they do to make their business very desirable, for potential buyers?
00:33:15:17 - 00:33:32:18
Speaker 1
Yeah. I think some of that depends on the timeline. Right, that they’re working with. I’d say. You know, we work with a lot of clients, you know, two years plus before we plan to go to market and really try to guide them on how to develop their business so that it is a, you know, an increasingly more attractive acquisition target.
00:33:32:20 - 00:34:04:08
Speaker 1
I think the kinds of things that, buyers really care about, right, are going to be certainly, you know, growth and hopefully future growth opportunities, you know, that there’s plenty of blue sky for a business, and being able to define and kind of show that those opportunities exist, even if you are the owner that doesn’t want to necessarily go and actually, you know, kind of execute on those before passing the baton to the next, the next generation of ownership.
00:34:04:10 - 00:34:36:17
Speaker 1
You know, predictability, is always highly valued. Right? So, you know, a lot of times, I think founders will chase really fast growth in a, in a segment that maybe is also going to potentially see a fast contraction. Right? So some more volatility results in lower valuations. So buyers would rather see like steady upward continuous movement rather than you know a lot of say fits and starts.
00:34:36:19 - 00:35:10:14
Speaker 1
There. So I think trying to build a business that you know, can be predicted moving forward is key. Which usually there’s diversification that’s part of that. You know, I know a lot of the audience here. We’ve we’ve kind of alluded to different ecommerce channels on this discussion and you know, previously. So, you know, having a single channel, drive all of your revenue, is, you know, not as good as having multiple channels that you can, kind of rely on, whether we’re talking Amazon website or other marketplaces.
00:35:10:15 - 00:35:37:03
Speaker 1
Or, or even retail wholesale, you know, for, for a lot of these consumer product businesses. So I think that that’s also really important. And, you know, having a customer base that hopefully is somewhat passionate about what you’re doing is, is pretty key. And it usually that plays into the concept of brand. You know, I think that’s something that’s hard to put your arms around a lot of times for people like what is brand like, how do I define brand?
00:35:37:03 - 00:35:58:22
Speaker 1
How do I value brand? But that’s something that, you know, buyers are very, very focused on in the consumer world. Right? It’s like, have you built a brand or have you built more of what I would call, you know, a widget selling machine? Like, which one have you built? Widget selling machines are less valuable than brands.
00:35:59:00 - 00:36:26:01
Speaker 1
So, you know, and typically the way we, we, we sort of define brand, one way we like to define brand is you’ve earned the right to have the next conversation with the customer. Right? So, you know, whether that be because they’re, you know, referring you to their friends, hey, you got to try this product or because you have other things that, that they now want to purchase from you.
00:36:26:03 - 00:36:45:01
Speaker 1
That’s a good way to think about it, is are you building that? Either that loyalty or that willingness for your customer base to go out and, and talk about to you? So those are some key factors kind of in the e-comm world. And then and we touched on this earlier. But, you know, supply chain has become a big focus too.
00:36:45:02 - 00:37:02:03
Speaker 1
Right. Building a resilient supply chain. Building a diversified supply chain. And that now is actually becoming a big driver of valuation as well. Over ever since kind of Covid plus all the tariff craziness. So those are a few certainly.
00:37:02:03 - 00:37:40:07
Speaker 1
Nice. So the Tldr sounds like, predictable growth that isn’t necessarily volatile in nature. Decent channel. Diversification. As long as supply chain diversification, which is what you’ve added. And then, on the foundation of a solid brand where you have, tons of referrals, potentially returning buyers, and kind of all the amazing halo effects that come from having a really awesome brand, anything else or like, you know, it’s interesting we didn’t talk about accounting, right.
00:37:40:07 - 00:38:02:06
Speaker 1
Like and solid accounting. But I think it’s a it’s a really important, part of the discussion because people are buying a business based on the fact that they have good, clean, accurate books. Right. But it is a necessity when somebody is evaluating a business so that they can, you know, create a picture of all of the dimensions that we’ve talked about previously.
00:38:02:06 - 00:38:04:05
Speaker 1
Right.
00:38:04:05 - 00:38:13:13
Speaker 1
Yeah. And I would say, Geoff, it’s funny. I think you make a great point there. I would say it’s so essential and so expected that I didn’t mention it
00:38:13:14 - 00:38:15:22
Speaker 2
Yeah. So this was.
00:38:16:00 - 00:38:29:03
Speaker 1
A 100%, 100%. And speaking of that, Richard, so like it is essential, right? It is expected. How do you ensure that your clients meet those expectations?
00:38:30:15 - 00:38:49:03
Speaker 2
think it’s part of a larger discussion of as a business. If you want someone to buy, you well designed, the business that the person who buys it from you will have nothing but a good time, right? So you have proper speeds and processes for everything you know, from your logistics and your supply chain to how you do customer support and the accounting.
00:38:49:05 - 00:39:01:08
Speaker 2
Now, the accounting side, the problem is most founders don’t understand what that process looks like. Yeah, they they literally I’ve had people find me that I’m paying you like QuickBooks just does it doesn’t it. No no it doesn’t.
00:39:02:00 - 00:39:17:23
Speaker 2
It’s the it’s we have that regularly. But I think the a proper process where you map every single process from sales through to bank purchases through to inventory and keeping proper documentation is incredibly important, right?
00:39:18:01 - 00:39:34:18
Speaker 2
So if you have a bill in QuickBooks with zero or where’s the attached source documents. So remember due diligence is not just going to go, oh your accounts look nice. They want to look at the supporting documentation and how it got in right. They want to look at how you calculated landed cost. Well is there a spreadsheet or some tool.
00:39:34:23 - 00:39:45:20
Speaker 2
Was that where that was maintained? So keeping a proper consistent process for the accounting is incredibly important for due diligence. That’s what you diligence is. They coming to audit to
00:39:45:20 - 00:39:46:06
Speaker 2
Yeah.
00:39:46:06 - 00:39:46:19
Speaker 2
of
00:39:46:19 - 00:39:47:05
Speaker 2
Yeah.
00:39:47:05 - 00:39:57:19
Speaker 2
data is and that’s again I’m going to just give you what you guys do so well is every time you push a packet of sales data across, there’s an attachment with all the payout and sales, all the data.
00:39:57:21 - 00:40:06:23
Speaker 2
That’s due diligence, really. Right. That’s very different to someone going and just putting a Shopify report and passing a journal with no attachments in QuickBooks.
00:40:07:01 - 00:40:07:19
Speaker 1
But.
00:40:07:19 - 00:40:11:13
Speaker 1
So, Jason, Richard, you know, I’ve personally learned a lot from both of you today.
00:40:11:15 - 00:40:34:15
Speaker 1
I think this was an amazing video, and I hope it was valuable for ecommerce business owners that are, you know, currently evaluating which path to take, whether it’s to continue to cash flow their business or, whether it’s to, you know, start to think about selling. I think the common theme here that we’ve struck is regardless of what path you choose to take, you need to have clear visibility into your financials.
00:40:34:15 - 00:40:50:13
Speaker 1
You need to have accurate books, because that will set you up for long term success. No matter what direction you take. Is there anything that we might have missed or that you’d like to emphasize from our conversation? Richard, I’ll start with you just in case we might have missed anything.
00:40:50:13 - 00:41:14:15
Speaker 2
Yeah. Just to say, I’m definitely a believer in keeping businesses as that’s my bias, because of personal experiences. But everyone who’s ever had a successful exit that I’ve worked with, you realize that businesses are brought, purchased, not sold, right? The power sits on that side. So you need to set everything up today for 24 months down the line that you have a good story to tell.
00:41:14:20 - 00:41:23:11
Speaker 2
You have accurate data, you have accurate documented processes, and the buyer must be set up for success. If you don’t do that, you’re going to get murdered on valuation. Well,
00:41:23:11 - 00:41:23:20
Speaker 1
Yeah.
00:41:23:20 - 00:41:25:02
Speaker 2
no deal.
00:41:25:02 - 00:41:27:18
Speaker 1
Because you never know when somebody is going to come knocking.
00:41:27:18 - 00:41:29:05
Speaker 2
Oh, and you’re going to want to sell, right? Yeah.
00:41:29:05 - 00:41:29:14
Speaker 1
Yeah.
00:41:29:14 - 00:41:39:08
Speaker 2
want to go live on a. Yeah. You want a lottery and you want to go live on an island somewhere. You don’t want to have to try and fix up 24 months of accounting at the last minute.
00:41:39:08 - 00:41:45:11
Speaker 1
Yeah. Totally agree. Jason, anything that you might have, wanted to add.
00:41:45:11 - 00:42:08:12
Speaker 1
Yeah. Just like, kind of our recommendation. You know, in addition to having someone like Richard and his team, you know, on your side, making sure you’re accounting is great. Somebody like us on your side, making sure you’re understanding. You know, what your kind of strategic and ultimate M&A options are. You need that also really solid personal financial planner on your side.
00:42:08:12 - 00:42:31:09
Speaker 1
And then kind of the three come together really to help founders really kind of get good pure, you know, visibility, clear visibility on what’s the right way for this business to integrate into my personal financial goals. And so, you know, we can all work together to to make sure that that founder is, is making the right decision for, for them and their family.
00:42:31:09 - 00:42:54:08
Speaker 1
love that, so thanks for watching the video. All of the resources that we’ve talked about will be linked in the description below. There will also be a link to GW partners as well as Cronos. Now, so you could reach out to either team, after this conversation. Jason, Richard, I just want to thank you so much for sharing your expertise with us and for taking the time and then for everyone watching.
00:42:54:14 - 00:42:56:15
Speaker 1
We’ll see you next time.
