With this installment, I talked with Michael Jackness. He’s the owner of Terran, a multi-brand ecommerce firm. He’s also the host of EcomCrew, a favorite podcast. Jackness has sold several ecommerce companies. In this dialog, we discuss the latest sale, which happened earlier this year.
What follows is our whole audio conversation and a transcript, edited for clarity and length.
Eric Bandholz: You own and run multiple ecommerce companies. You are also the host of EcomCrew, an wonderful ecommerce podcast. Tell us a little bit about your own background.
Michael Jackness: I left my day job in 2004. I got into ecommerce for a domain and an affiliate marketer. I then bought Treadmill.com, which was my first ecommerce website. I ran that for a year or two. I offered a few million bucks in fitness equipment and realized the perils of drop shipping.
In January 2015, we began Terran, which consisted of four ecommerce brands: Ice Cream (cold and hot therapy packs); ColorIt, which I just sold (coloring supplies and goods for adults); Wild Baby (infant clothes and toys); Tac Niner (survival equipment ).
The one we just sold, ColorIt, was approximately 80 percent Amazon and 20 percent on Colorit.com using Shopify. If we had turned off Amazon, it might have been 50-50. But lots of men and women come to ColorIt and search on Amazon, find the merchandise there, and get free Prime shipping.
Bandholz: You began ColorIt in 2015?
Jackness: The concept started in 2015. We have serious about the company in 2016. Then we sold this year.
Bandholz: It is coloring books for adults?
Jackness: Yes. It was a massive fad in 2014 or 2015. We started as only a coloring book firm. And then we found colored pencils. We understood that the accessories were more rewarding than the books. But over the past year, the novels have caught up. We have enough names today and we rank well on Amazon. They are also defensible since we handle all the layouts. They are all copyrighted.
We have differentiated ourselves in the production procedure. You need $50,000 to $100,000 to begin printing in the degree that we do. And we also have the first art component.
Bandholz: Do you have your businesses?
Jackness: I had a spouse with ColorIt. The others I have wholly.
Bandholz: ColorIt Seems like a perfect company. Why sell it?
Jackness: I am also looking to sell another one next year. Everybody has a different risk profile. For us, we began this new conglomerate in 2015 called Terran with the aim of $10 million in total yearly sales.
Since that time, we gathered $1.3 million in stock — stock sitting in warehouses around four brands. I was losing sleep since we continued to grow, we had a growing number of cash, an increasing number of inventory. I wasn’t in charge of my destiny for a whole lot of my company was on Amazon. It was time to take some risk off the table.
Bandholz: So you and your partner decided to market ColorIt. What were the steps from there?
Jackness: You can have two modes of business. You are either focused on profit or growth. It’s tough to do both. When the time comes to concentrate on profit, it is a lot easier to switch that lever compared to the high-growth lever.
When we stopped the large growth for ColorIt, we decided to sell it. That choice happened relatively quickly. We’d doubled our bottom line. The timing was appropriate to put it up for sale.
So that is what we did. We put it up for sale in January of this year. Within three weeks we had multiple offers. We had a good agent, Joe Valley from Quiet Light Brokerage.
Bandholz: How large was your business at the moment?
Jackness: We had 15 total employees for the company, across all four brands. Revenue for all four brands was high seven figures.
Bandholz: Was the valuation for ColorIt based on net profit?
Jackness: Yes, more or less. Most ecommerce companies go for a multiple of EBITDA — earnings before taxes, interest, depreciation, and amortization — and add backs. A vendor can add his salary back to that amount in addition to his company car, his personal mobile phone, that type of thing. You could even add back one-time expenditures.
You end up with 12 weeks of adjusted, trailing earnings and then multiply that by whatever multiple you get. In our case, it was 3.1. Then you add inventory in addition to that. That’s the last sales price.
Bandholz: Do bigger businesses receive higher valuations?
Jackness: Yes. There is a magical line, typically $1 million each year in EBITDA, where the multiples increase.
Other things that may help include channel diversification, intellectual property (with a trademark), and company longevity.
Bandholz: Did the purchaser write a check and you turned over the company?
Jackness: Yes. Every deal is different, however. For our transaction, 90 percent of the purchase price was paid at closing; 10 percentage was held in escrow for 90 days to ensure a smooth transition and to be certain that all of the items that I promised were accurate.
For the stock, we took a 12-month note — 12 equal payments at 5% interest. Normally I wouldn’t ever agree to that. But I thought it was the ideal thing to do because of the amount of stock that we needed for this enterprise. If we had been working at peak efficiency, we would have had roughly $300,000 in stock, but we had $450,000. It is not fair to a purchaser to pay for our error.
Overall, I am happy with the deal.
Bandholz: Final question. What lessons have you learned through the years concerning purchasing and selling businesses?
Jackness: Let us start with selling. I have never regretted selling a company. I have sold several now. I am good at compartmentalizing. I keep in mind that I am at when deciding to market. You can’t return. It’s like the stock exchange. Why did I sell my Apple stock at $100 per share when it is currently $200? It was the perfect decision at the moment.
So far as recommendations on the selling side, I do not want to get paid with my cash. I really don’t want earnouts. Write me the test. This is the price of my organization. I realize it’s plenty of money. But I need to get paid up front so that I can deploy that cash elsewhere.
On the purchase side, I have several suggestions. First, be certain that you conduct due diligence. Do not take the seller’s word. There’s a good deal of morally questionable people on the planet. Either do the inspection yourself or hire a business.
The company that bought ColorIt hired Centurica, an expert due diligence company which specializes in ecommerce. It took five or six months for Centurica to comb through seemingly every facet of my organization. They found a whole lot of mistakes, which upset me as I try to be thorough. But they were exceptional. They found a whole lot of little things I did not even know about. So due diligence is crucial.
And you need to be ready to walk away. It’s easy to get emotionally attached or feel as if you have put so much time into something and you get excited about it. But think a couple of years down the road. What if it does not work out and the excitement has worn off?
There’s always another business. I have reviewed a lot of those. Lots of people I know look at 100 companies before they buy one.