The Truth About Selling Your E-Commerce Business | EP. #235

1 - > Paul Rafelson: The brokers are typically like real estate 2 - > agents, like a lot of them are going to just tell you what you 3 - > want to hear, so you'll push the deal forward. They don't care 4 - > what happens to you after the deal closes. 5 - > Narrator: Welcome to the Ecom Show Podcast. I'm your host, 6 - > Andrew Maff, owner and founder of Blue Tusker.

From 7 - > groundbreaking industry updates to success stories and 8 - > strategies, get to know the ins and outs of the e-commerce 9 - > industry from top leaders in the space. Let's get into it! 10 - > Andrew Maff: Hello, everyone. 11 - > Welcome to another episode of The Ecomm Show.

As usual, I'm 12 - > your host, Andrew Maff, and today I am joined by the great 13 - > Paul Rafelson, Rafelson Law and Seller Basics. Paul, how you 14 - > doing, buddy? Ready for a good show? 15 - > Paul Rafelson: I'm ready for a good show.

You? 16 - > Andrew Maff: I am. This is going to be great. I'm super excited 17 - > to have you on the show.

I actually, for whatever reason, 18 - > so many conversations with like different people, in like 19 - > lawyers and attorneys, and all this different stuff in 20 - > e-commerce, everyone's got an opinion, everyone's got a 21 - > thought, and super excited to have this conversation with you. 22 - > What I usually like to do here, just to kind of give everybody a 23 - > little bit of a lay the land, is start them off relatively 24 - > stereotypically. I'd like to give you the floor, just tell us 25 - > a little bit about, like, your background, how you got started 26 - > at Rafelson Law, how you started it, and we'll take it from 27 - > there.

28 - > Paul Rafelson: Sounds great. All right, well, yeah, thanks for 29 - > having me on. Yeah, my name is Paul Rafelson, and I've started 30 - > Rafelson Law back in 2017 and Seller Basics is another company 31 - > that I run, which is started in 2020 Yeah, I've been a lawyer 32 - > for going on 21 years since I left Villanova, generally saying 33 - > because I know you're local. Go Philly, but yeah, no, it's been, 34 - > it's been an interesting journey.

I work most of my life, 35 - > I work for really big companies, I worked for Microsoft, for 36 - > Walmart, or General Electric, and then about nine years ago, I 37 - > wrote a blog post about a tax issue affecting Amazon sellers 38 - > and the constitutional law issues around that, that made 39 - > that argument that you know all the sellers were tax cheats, 40 - > kind of weak, and we just, that sort of snowballed into a full 41 - > practice. I always say, like, you know, we, I was an Amazon 42 - > seller 20 years ago, believe it or not, or 20-24, years ago, I 43 - > don't know how long it's been, but back when I was in law 44 - > school, and I was at Villanova, I was paying for school, flippin 45 - > DVDs and video games and things like that, so I had had some 46 - > understanding of the Amazon world when I was asked to write 47 - > this blog post and some frame of reference, and it just kind of 48 - > went somewhere and turned into this need to have a small 49 - > business law practice, and that's that's what I did, but 50 - > totally unintentional, totally accidental.

51 - > And today, you know, I always say, like, we're focused on what 52 - > I call the global small business, that you know, before, 53 - > before e-commerce, before the internet, right? You would never 54 - > say I'm a global small business. 55 - > It kind of sounds weird, but you know it's probably the most 56 - > common description of every one of our clients who are in the 57 - > space or small businesses, is that they're global small 58 - > businesses, that they're importing from China, they're 59 - > selling in all different countries, right?

So that the 60 - > idea was to kind of bring that GE, Microsoft, Walmart 61 - > experience of multinational corporate practice to Amazon 62 - > sellers in e-commerce sellers, not just Amazon, all e-commerce 63 - > companies, just so that they kind of have that kind of 64 - > guidance that they need, so that they're aware of the potential 65 - > pitfalls that are out there, because I always say, like, the 66 - > lawyer you would hire to open up a store in the middle of Main 67 - > Street isn't the lawyer you want to work with when you're opening 68 - > up an e-commerce store.

You need a lot more specialty, a lot more 69 - > focus on specific subject matters. So that's pretty much 70 - > how it happened in a nutshell. 71 - > Just kind of, you know, wrote a blog and it snowballed from 72 - > there. 73 - > Andrew Maff: Yeah, that's awesome.

So, like, what's the.. 74 - > you have, like, a specialty now? 75 - > Obviously, the blog was tax-related, but are you still 76 - > focused on the tax side? Are you like suspensions, acquisitions?

77 - > What's.. what's the.. what's the focus right now? 78 - > Paul Rafelson: Yeah, so tax is something I know a lot about.

I 79 - > have a master's law and tax, and I in constitutional law and tax 80 - > is a really different ball game. 81 - > It's really has to do with constitutional law when you're 82 - > dealing with state tax. So that's kind of how I got in. I 83 - > got a little bit type casted, I'll be honest, but no, we were 84 - > our practice over the last seven or eight years has been very 85 - > little tax, actually.

It's been mostly IP,mergers and 86 - > acquisitions, so helping sellers buy or sell or Amazon business 87 - > or e-commerce companies, we do a ton of that, corporate 88 - > structuring, partner, you know, managing investors, if you want 89 - > to take on investors, you want private equity, whatever, 90 - > whatever it is, we kind of do it, Prop 65 compliance with just 91 - > general compliance issues with your products, we built a firm 92 - > that is just solely focused on the needs of meeting the needs 93 - > of 90 odd percent of Amazon sellers, that you know, we 94 - > believe our firm can proud, you know, can easily support most 95 - > Amazon sellers, and I say most, because, yeah, there's going to 96 - > be some that are just going to be so highly specialized, so 97 - > they're probably going to need something a little bit different 98 - > than you know, but for most Amazon sellers we really, really 99 - > try to be on top of it.

Whether you're selling supplements, 100 - > whether you're a reseller, doesn't really matter. We've 101 - > been through, you know, we've been at this for a long time. 102 - > We've been doing it for a long time. 103 - > Andrew Maff: Yeah, the mergers and acquisition side is 104 - > obviously very sexy, so very curious, curious on that side.

105 - > Let's, let's go back in time for a second, because obviously 106 - > you've been at this for a while. 107 - > What was it like, and what do you see as the differences now 108 - > comparative to the like aggregator fun time, fun roller 109 - > coaster that we had for a few years there? 110 - > Paul Rafelson: Yeah, no, that was a fun time. So that really 111 - > we had an M and A practice in 2018 We had M and A practice in 112 - > 2019 but really wasn't really that busy.

And then in 2020 or 113 - > it's actually in 2019 we started working with a few of the 114 - > aggregators, and 2020 came around. We were doing a few 115 - > more. Well, it's not 2020 we're doing a ton more. By the end of 116 - > 2020 I think we were closing, and it was like something six or 117 - > seven deals a week.

It was, it was insane. In the last 118 - > everybody wanted to get their deals closed ASAP before the end 119 - > of the year, because the way these aggregators worked was 120 - > they, you know, the only way they got the money out from 121 - > those, and you know, they say we raised 100 million, but they 122 - > can't touch that money unless they have targets identified, 123 - > because that's how they every time they acquire a target, you 124 - > know, if you acquire a target for a million dollars, your 125 - > valuation theory of your company as the acquirer theoretically 126 - > goes to that 4 million, so you have more room to be, you know, 127 - > there's this whole scheme that some of the lenders that went 128 - > across different aggregators were doing, so it was fun.

129 - > No, we, it was an absolute bubble. I have Facebook posts 130 - > talking about it, but it was a great time to be a seller. I 131 - > mean, if you sold in 2021 you did well. Now, could you have 132 - > done better holding on to the company yourself?

Maybe with the 133 - > company of grown, maybe, but if you were to sell today, you know 134 - > that that multiple of, you know, 6x that might have been common, 135 - > and I'm talking about closing cash, not not all in with earn 136 - > outs and other incentives, but just in terms of closing cash, 137 - > we were seeing 6x payouts for companies that don't usually 138 - > command that kind of multiple, but that's how crazy the market 139 - > was, and so now it's probably, you know, if it's sort of like a 140 - > one to $2 million company, you're probably looking at, 141 - > like, you know, not only picking on the small companies, but it's 142 - > just they're easier to sort of explain it, like you're probably 143 - > looking at about a 3x multiple, big give or take, right?

So it's 144 - > multiples have come down in half, but theoretically you 145 - > should have, if your earnings have gone up and up and up over 146 - > those few years. You probably still did better keeping the 147 - > money and growing the business, but for those who people wanted 148 - > to exit, that was a great time to exit in 2021 because they 149 - > were getting those. 150 - > They knew my clients, unlike other folks' clients, my clients 151 - > pitched million in lending, now you've 152 - > knew they were not going to see those rentals, they were not 153 - > going to get those payments, because, like I would explain to 154 - > them, I said, 'Look, I can write the best contract in the world 155 - > for you.

I can write the most ironclad contract world has ever 156 - > seen, but there's a very good chance their investors won't 157 - > allow them to sign it. And two, even if they do, the end of the 158 - > day, I can't make money grow on trees, right? So you could have 159 - > an open and shut case, right, but going to court and actually 160 - > enforcing those rights and collecting on these companies is 161 - > a whole nother story, so I always made sure my clients 162 - > understood, especially during the aggregator bubble, that you 163 - > know you've got to be comfortable with the deal you're 164 - > making at the door here, because there's a, there's a high 165 - > possibility what these guys are doing has never been done 166 - > before, it's kind of risky, it's kind of irresponsible the way 167 - > got a lot of room to really, really go and buy some 168 - > they were doing it, I mean, it was, I mean, just some of the 169 - > stuff was crazy, and you just have to understand that you're 170 - > companies, you know, using SBA loans, which sometimes these, 171 - > not going to see that.

So, our clients were very, very, very 172 - > even these big aggregators, they would do that just to get, just 173 - > fairly warned about the situation of where the earn outs 174 - > were going to go, and where I thought these companies were 175 - > to take advantage of the favorable rates. 176 - > going to be, but you know, they did get a 6x multiple, so there 177 - > was there was that. Today, it's definitely lower multiples, 178 - > although we just had a big news event about a week or two ago.

179 - > They upped the minimum, so that the SBA typically doesn't lend 180 - > more than 5 million, so your typical deal size is around 5.5 181 - > 6 million if you're doing SBA lending. Now they just upped it 182 - > to 10, so I don't know, man. We could see another aggregator 183 - > bubble.

I honestly feel like the ones coming. I feel like there's 184 - > going to be another attempt to roll up Amazon businesses this 185 - > time under the auspices of AI, right? 186 - > Narrator: Is your e-commerce business experiencing falling 187 - > revenue? Bluetuskr has helped many brands like yours excel.

188 - > Unlike other marketing partners, Bluetuskr leverages a team of 189 - > specialists to ensure every strategy is created and executed 190 - > toward your business growth. As an extension of your marketing 191 - > team, Bluetuskr prides itself on helping to fill in the gaps and 192 - > develop strong omni-channel strategies to diversify your 193 - > business from the rest. Ready to scale your marketing 194 - > initiatives? Visit their website, bluetuskr.

com that's B 195 - > L U E T U S K r.com 196 - > Andrew Maff: So, someone, someone great once told me, and 197 - > I think his name was Paul, that you should still have a lawyer 198 - > before you go to a distributor, someone that's actually, you 199 - > know, obviously helping you sell a business, that was you, by the 200 - > way, it was you that told me this, or broker, sorry, damn it. 201 - > So, what's the.. so I guess that makes no sense.

I would imagine 202 - > that that is a common thing that brands don't think about. Am I 203 - > correct? 204 - > Paul Rafelson: Yeah, I mean, I think I think there's some great 205 - > brokers out there that do a good job, some, some less so, but 206 - > yeah, when you go to sell your business, and you're going to 207 - > market one, you know, you want to look at, you know, if you're 208 - > under a million and a half, 2 million in SDE, you're probably 209 - > going to work with a broker, you're probably not going to 210 - > work with a banker, but you know, once you start to go 211 - > around 2 million or so, give or take, you know, you maybe you 212 - > want to work with a banker, it's a whole different world, but the 213 - > biggest thing, regardless of who you work with, is, and this is 214 - > what I've seen in the broker contracts that bothers me, is 215 - > things like if you walk away from an LOI, you still owe us 216 - > our commission, right, which is crazy, right, so like you get 217 - > the letter of intent, which is the sort of the start, the 218 - > kickoff of the M and A process of selling or acquiring your 219 - > business, right?

220 - > It's a long, long way away. I always say a letter of intent is 221 - > like negotiating the price. When you negotiate the full purchase 222 - > documents, we're actually doing a risk negotiation. We're 223 - > identifying these areas of risk and assigning, signing it to 224 - > among the parties and dividing it up among the parties, and 225 - > that's what really the complexity of M and A is about.

226 - > I know everybody's trying to do their own M and A on Claude, but 227 - > it's like they kind of missed the underlying context, which is 228 - > this is really about risk management. It's not about some 229 - > boilerplate document that just needs to be signed. It's nothing 230 - > like that. These documents are harsh.

231 - > So kind of going back to your point, the brokers have their 232 - > documents too, and you want to know when you're working with a 233 - > broker that's the right fit for you, that's right fit for your 234 - > industry, and when you sign a document with them, you want to 235 - > make sure that you're not going to be in any situation where 236 - > you're kind of overly locked in. 237 - > So, for example, I might negotiate my broker contracts 238 - > differently than the default, where it says, you know, anybody 239 - > that we contact, you're not allowed to contact, or if you 240 - > sell to them in the next three years, even if you're not 241 - > exclusive with us, you have to give us a commission, right, 242 - > because we contacted them first.

243 - > So, like, for example, for my clients, I would negotiate that 244 - > differently. I say, look, you can't just box my client out 245 - > because you're doing a lousy job after you emailed 1000 people 246 - > with an email, you know, at an email distribution list. That 247 - > doesn't, that's not fair. That means if you do a crappy job, my 248 - > client's locked in for three years.

What I will accept is if 249 - > the people respond to your email like they actually looked at it 250 - > and respond and say, I want to know more, you know, we can 251 - > count that as a, as a, you know, your, as your efforts, but I 252 - > don't necessarily know if I would just count your email 253 - > distribution list as being purely your efforts, but most 254 - > importantly, I think is those definitions of success that they 255 - > use, which again oftentimes aren't success, right?

Like a 256 - > letter of intent is a long, long, long way away from a 257 - > closed deal and getting paid if you're selling a business. So to 258 - > say that you would owe your broker a brokerage fee if you 259 - > walk away from a letter of intent is it's bad. You could be 260 - > owing your broker, you know, six figures or more for having 261 - > really not done anything for you, just because you walked 262 - > away from a letter of intent, so you know again, you want your 263 - > lawyer there to sort of negotiate those terms and say, 264 - > look, I'm going to do whatever my lawyer advises, and I'm not 265 - > going to be penalized for it, right, if my lawyer and I think 266 - > this is a bad deal, I'm not going to, you know, have to 267 - > worry about your commission is a way to, as a way to sort of 268 - > force me to taking this deal that I think is a bad deal.

So 269 - > those are just kind of examples of things that I think about 270 - > that. Yes, even at the broker level, it's a good time. 271 - > Plus, you want to have a plan, right? You want to, you know, 272 - > the brokers are typically like real estate agents, like a lot 273 - > of them are going to just tell you.

What you want here, so 274 - > you'll push the deal forward. 275 - > They don't care what happens to you after the deal closes. They 276 - > get paid, they get their commission, and they're gone. 277 - > They don't care about whether or not you're going to get earned 278 - > out.

I hate to say there's a lot of them don't like it's just a 279 - > reality. It's our job to kind of help you through that process. 280 - > So, like, again, you should be, you know, the lawyer you hire in 281 - > this process, the only person you're hiring, it's really going 282 - > to have to have your, your full interest at heart, like we're 283 - > legally required to have your best interest at heart. That's 284 - > why I don't do things on success fees.

285 - > That's why we do hourly billing, because if, if my getting paid 286 - > was determinative of your deal closing, there's a consideration 287 - > that that's an ethical quandary, if you will, because I may tell 288 - > you, you know, I wouldn't never do this, but, like, the idea is 289 - > that lawyer might advise you to take a deal, probably not a 290 - > great deal, because that's the only way they're getting paid, 291 - > they just sell that work, so we just do hourly, and, but I think 292 - > it is, it's so this is the biggest transaction of people's 293 - > lives, you know, in most, I don't know any client I've 294 - > worked with in this space who said I've done something bigger, 295 - > unless they're just a serial, you know, private, you know, one 296 - > Andrew Maff: if of those folks, but for most of 297 - > our Amazon seller and e-commerce clients, this, these selling 298 - > your business is the biggest transaction I ran into, so it's 299 - > not the time to go cheap, it's, 300 - > Paul Rafelson: it's a non-recurring charge, right?

301 - > you know, you may have gotten this far by going cheap on your 302 - > You're trying to say, look, this stuff is sort of non-recurring, 303 - > legal and whatnot, but, but selling your business is not, 304 - > because it can get really nasty if you sign the wrong documents, 305 - > or it's extraordinary, right? 306 - > Like, I bought a G wagon for my if you're not figuring, so you 307 - > can, you can all the money you got paid, you could end up owing 308 - > more than that back to the, to business because I saw a TikTok 309 - > video about it, right, like it the south, to the buyer, right?

310 - > You could be paid a million doesn't mean that you're that's 311 - > real. Oh, no, no, that's real. 312 - > dollars, and the buyer could have the right to claim 313 - > unlimited funds from you for the damages that they have. So, it's 314 - > That happens, or where I get my boat, I deduct my botox, which, 315 - > really, you know, people do need to understand that this, this M 316 - > and A stuff is serious, but you know it's great, you know, but 317 - > just not the time to go alone, you know.

318 - > you know, I look, if you think you can make a case for that, 319 - > I'm not going to get into deductions and whatnot. 320 - > There are plenty of people out there who can talk about that, 321 - > but if that's something you want to do, like, you should feel 322 - > fine. You should be able to do that, you know, barring the tax 323 - > advice side of things. You should be able to do that and 324 - > the way we don't penalize you for doing things like that is by 325 - > doing these sort of add-backs, where we take and take out 326 - > things that don't really belong, like, you know, I'm not buying 327 - > your car, so the $300,000 expense of the G wagon is 328 - > something that you would probably add back, because I'm 329 - > not buying the car right, and it's not part of a normal PNL 330 - > for a business, unless you're in the G Wagon business of some 331 - > kind.

332 - > So it is, it is, but you know the other discretionaries can be 333 - > things like, you know, you launch a product and in January, 334 - > so you spent three or four times the normal PPC required to 335 - > maintain it just to do a launch. 336 - > Well, I would argue that, that you know, if I have 12 months of 337 - > data and three of those months were the launch months, I would 338 - > normalize those, right? Want to normalize those. If you've paid 339 - > a lot of tariffs and those tariffs are now 340 - > unconstitutional, right, you're getting them back, right?

That's 341 - > going to affect your SD. You want to do a tariff adjustment, 342 - > so there's.. you know, the add-back concept is, is kind 343 - > of.. it is based on this idea of like extraordinary and 344 - > non-recurring basis.

It's not just sort of this arbitrary 345 - > thing where you add back, you know, what you feel like, like, 346 - > oh, he doesn't need 10 VAs, or you know, it's a little bit more 347 - > structure around that thought process, but yeah, I mean, once 348 - > you add and take care of all those ad backs and everything 349 - > that you know, whatever you get to that number, assuming the 350 - > other side agrees, I would say 3x is about what you would see, 351 - > you know, for like a healthier above half a million dollar 352 - > profit company, right?

If you're, if you're doing like 353 - > 200,000 profit, 250 like you could be looking at, like, a 2x 354 - > closing cash deal easily, so you know, once you kind of get over 355 - > that 500 to 600,000 threshold, you tend to start to see 3x pop 356 - > around more often, and then that kind of really seems to hang, 357 - > unless you have something special, in which case we can 358 - > bring you to, then this is where, again, considering a 359 - > broker versus a banker. A banker will really look at your 360 - > business, it's going to cost you a lot more in the long run.

It's 361 - > the idea is it'll make you a lot more, because you shall, you 362 - > should hopefully sell at a higher price, but there's a 363 - > little bit more you know bankers are really more expensive than 364 - > just kind of go into a broker, but if you have a unique 365 - > product, you know what's the one that sold to Unilever, you know, 366 - > Dollar Shave Club sells to Unilever, right? Like, you know, 367 - > if Dollar Shave Club just went to a random broker and got, you 368 - > know, 4x that wouldn't have been as good a deal as what they got 369 - > from Unilever.

370 - > So, sometimes, if you're the right fit for the right company, 371 - > you need a broker or a banker that understands your industry 372 - > and can find you those deals and will not just put you out to the 373 - > general public to be bid on at, you know, 3x multiples, which is 374 - > generally what we say in those cases, but that's what we call a 375 - > strategic acquisition, and those do take more time, but certainly 376 - > something to consider as well. 377 - > Andrew Maff: Yeah, Paul, super interesting.

This was this was 378 - > great. I really appreciate this, because all these, every almost 379 - > every episode I've ever had is always about like the minutia of 380 - > the brand running the day to day, like the you're in the 381 - > thick of it, and this is this is all very interesting insight 382 - > into the end game, like what happens at the end, what are you 383 - > dealing with, what could you get? This was awesome, I really 384 - > appreciate it. We'll definitely have to do this again, but I'd 385 - > love to give you the floor, tell everybody where they can find 386 - > out more about you and more about Rafelson Law.

387 - > Paul Rafelson: Sure, no, I appreciate that. Yeah, no, feel 388 - > free to bring me on, we can always talk about the high level 389 - > stuff, you know, we see a lot in this world, everything from Prop 390 - > 65 to compliance to IP, it's a fun world. 391 - > You can find me at ecom.law, a c o m dot l a w, Rafelson Law is, 392 - > or rafflesenlaw.

com ecom dot law is our main law firm. And then I 393 - > also own a company called Seller Basics. Seller Basics is like 394 - > account health, it's like imagine if somebody came up with 395 - > health insurance for your Amazon account, that's what Seller 396 - > Basics is. It's an account health service, so that if your 397 - > ASIN ever goes down or your account ever gets suspended, any 398 - > type of trouble with Amazon on the account health front, as a 399 - > subscribing member to Seller Basics, you get free help.

400 - > So it's unlimited help for as long as you're a member, right? 401 - > So it's like insurance, right? 402 - > You got to be a member before the bad thing happens, so long 403 - > as you're a member before the bad thing happens, and you 404 - > maintain your membership anytime something bad happens with 405 - > Amazon, we help you get reinstated. We have the ability 406 - > to escalate it up to legal.

407 - > There's no extra charges when we do those escalations internally 408 - > within Amazon. And then you also get free legal consults. You 409 - > ever just want a lawyer on call that knows your business, you 410 - > can have that too. And that's part of the, as part of the 411 - > membership, I think it's like 200 bucks a month or something, 412 - > it's not a ton, but it's it's sellerbasics.

com, I created 413 - > that, we created that right around the start of the 414 - > pandemic, and literally thought it was gonna fail, and it's 415 - > right out the door, because we like, like a week or two after 416 - > the launch, we're in lockdown. 417 - > Like what's going happen this whole industry, but then we had 418 - > price gouging cases and all sorts of crazy stuff, and we 419 - > found our stride and ended up getting a lot of people, and you 420 - > know, Seller Basics is a great, it's a whole separate team, ex 421 - > Amazon, ex sellers, and they all do a great job, they understand 422 - > the account health, they understand the policy, and so 423 - > check them out at Sellerbasics.

com that's my other 424 - > company, and yeah, if you want to email me, Paul@ecom.law, just 425 - > feel free to email me. Love, love hearing from people. 426 - > Andrew Maff: Beautiful, Paul.

427 - > Thank you so much. Obviously, everyone that tuned in, thank 428 - > you as well. Please make sure 429 - > you do the usual thing: rate, review, subscribe, all that fun 430 - > stuff, and whichever podcast platform you prefer, or head 431 - > over to the ecommshow.com to check out all of our previous 432 - > episodes.

But, as usual, thank you all for joining us, and 433 - > we'll see you all next time. 434 - > Have a good 435 - > Narrator: Thank you for tuning in to the Ecomm show. Head over 436 - > to ecommshow.com to subscribe on your favorite podcast platform 437 - > or on the Bluetuskr YouTube channel.

The ecomm show is 438 - > brought to you by Bluetuskr, a full service digital marketing 439 - > company specifically for e-commerce sellers looking to 440 - > accelerate their growth, go to BlueTuskr.com now for more 441 - > information. Make sure to tune in next week for another amazing 442 - > episode of The Ecomm Show!