Throwback: Unlocking the Secrets to a Profitable Exit

In this episode, host Josh interviews Scott Deetz, an expert in helping Amazon and e-commerce entrepreneurs maximize business value and prepare for successful exits. Scott outlines the four pillars that make a business attractive to buyers: risk diversification, profitability, growth rate, and earnings size. He shares actionable tips, including building a data room, implementing monthly strategic finance reviews, and structuring accounting to maximize add-backs. Scott also discusses the importance of separating owner and business expenses to boost valuation, offering practical strategies for entrepreneurs aiming to scale and sell their businesses at top valuations.

Chapters:

Introduction to Scott Deetz and His Expertise (00:00:00)
Scott is introduced as an expert in helping Amazon and e-commerce entrepreneurs grow and exit at top valuations.

Defining a Valuable Platform: Four Key Pillars (00:00:18)
Scott explains what makes a business a valuable "platform" for buyers: risk diversification, profitability, growth rate, and size of earnings.

Deep Dive into the Four Pillars (00:01:07)
Discussion of each pillar: risk diversification, profitability percentage, growth rate, and the importance of earnings size.

Capital Strategy and Growth (00:03:25)
Importance of capital strategy as a process, not an event, and how it fuels business growth.

Recap of the Four Pillars (00:04:29)
Josh summarizes the four pillars: profit margin, growth rate, size of profit, and risk diversity.

Input Metrics: Profitability, Scalability, Repeatability, Defensibility (00:05:46)
Scott introduces the underlying drivers: profitability, scalability, repeatability, and defensibility, leading to sellability.

Case Study: Operations vs. Product Innovation (00:07:16)
Discussion of a case where an entrepreneur excelled in operations and delegated product innovation.

Actionable Takeaway 1: Build Your Data Room Early (00:08:15)
Advice to start organizing a data room early, structured as buyers would want to see it.

Actionable Takeaway 2: Implement Strategic Finance Monthly (00:10:03)
Recommendation to review financials, forecasts, and company valuation monthly, not just accounting numbers.

Actionable Takeaway 3: Structure Accounting for Add-Backs and Valuation (00:11:17)
Organize accounting and company structure to maximize add-backs and improve valuation before exit.

Clarifying Add-Backs and Corporate Structure (00:13:06)
Further explanation on separating owner-related expenses and structuring entities for optimal valuation.

Horizontal and Vertical Corporate Structuring (00:14:09)
Scott details horizontal (multiple entities) and vertical (account codes for add-backs) structuring for better exit outcomes.

Conclusion and Final Thoughts (00:17:12)
Josh thanks Scott and hints at a future episode.

Links and Mentions:

Tools and Concepts
"Data Room": "00:08:15"
"Strategic Finance": "00:10:03"

Actionable Takeaways
"Build Your Data Room": "00:08:15"
"Implement Strategic Finance": "00:10:03"
"Organize Accounting with Add Backs in Mind": "00:11:17"

Key Concepts
"Profitability, Scalability, Repeatability, and Defensibility": "00:06:14"

Summary of Four Pillars for a Platform Company
"Profit Margin": "00:05:19"

Transcripts:

Josh 00:00:00  Today I'm super excited to introduce you to Scott Deetz. Scott helps Amazon and e-commerce entrepreneurs unlock growth and profitability bottlenecks in their businesses, and then exit for a top valuation. Scott, welcome to the show.

Scott 00:00:15  Hey Josh Scott. Great to be here and I'm really looking forward to it.

Josh 00:00:18  Scott, maybe we can dive a little bit deeper into that case study. At the beginning, you talked about, you know, that they were you identified that they were a good platform, right? So that they could continue to grow. What does that platform mean?

Scott 00:00:31  Yeah. So the pillars of a great platform, the way that I think about it, my mentor, and has done over $20 billion of transactions. So, you know, you know, old school 30, 40 years in the investment banking world. And he his number one thing that he said to me was, Scott, it's not what the seller is selling, it's what the buyer is buying. So I would encourage everybody to not think about what you think is valuable in a business, but think about what buyers value in a business? The first thing that buyers value is not growth, but it's risk diversification.

Scott 00:01:07  So the first thing that you need to think about is that you need to be compliance as a part of risk diversification, but also true diversification of your products so that no one product has, you know, more than, you know, 20% of your revenue. Otherwise, Amazon shuts it down or new competition comes in. A buyer can't get comfortable with that risk profile. So, so the first thing I would say is you analyze your risk. The second pillar of valuation is your profitability percentage. And so a lot of people think that if they have more profitability, that they're more valuable than if they have smaller profits. And while that is one of the pillars, a company that has 25 or 30% profit margins is just much more flexible and therefore valuable than a company that's 10 or 15%. So the second thing that we saw in this company was that they had a. Ability to have profitable products. And then we went to growth percentage, which is the third pillar. And I would if you wanted to benchmark a minimum growth percentages 20% per year.

Scott 00:02:19  Now with Covid and Covid bumps, you might not all be there. but remember, you're not selling what you've done. You're selling what the business can do with the buyers capital infusion. And their definition is that minimum 20%, ideally 30% year over year growth is required. Well, if you think about what that capability really is, what we saw in this platform was a capability to successfully innovate and launch new products into the marketplace, because once a product gets up to a certain level, it kind of is what it is. So for people that are looking at action items that they can have today, it's that ability to have a successful launch model to drive the growth rate to that particular output. And then the fourth one becomes the size of the earnings. If you can prove that you can do it over a longer period of time, then you become more valuable because 30% growth on a company with a million of revenues is a lot different than somebody with 10 million of revenue. and so I think it's just important to think along building in and that's where that capital need comes in.

Scott 00:03:25  Yeah. Because, you know, in this situation, back to this case study we saw in them even what they didn't see. We saw the platform, but they were think of it as borrowing money from uncle Bob. And if you go by, borrow 50 grand from your uncle, that's no problem. But when your business is at 10 million and you go ask them for 1.2 million, you know, uncle Bob says, you know I love you, Josh, but you know, I'm not the right investor for that level. So you have to think of your capital strategy not as an event, but as a process where you're always looking at what capital at the lowest risk, in the lowest cost to fuel that growth. And a lot of people get to a certain level, they don't have the capital planning. So then the growth rate, you know, levels off. So we saw the platform and we brought the capital strategy to place, and we did it through a combination of debt and equity.

Scott 00:04:17  And that's what continued to fuel the growth because the person already had in place the ownership group alr...