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 already had in place a repeatable growth model. They just needed more cash to to go into the system.

Josh 00:04:29  Awesome, I love that. So I want to kind of reiterate what you just talked about there because, you know, just basically sum up, what is that platform? What is it? You know, what’s that criteria that you guys identified like, hey, they’ve got all the right parts in order to actually take this business to the next level to get to that 75, $80 million valuation, right? So you identified four things to your pillar to make it a or four pillars, to make it a platform company, so to speak, that you talked about. So number one was profit margin. Right. You should be shooting for greater than 20% profit margin. Number two was that growth rate. Year over year growth rate you should be above 20%. Number three was the size of the profit right. And the growth of the business.

Josh 00:05:19  Obviously the bigger the business the better. And then the last thing you talked about is just kind of like risk diversity, right. And risk mitigation. and I think that goes in hand with, you know, is all your profitability in one skew. you know, what’s your Amazon account health standing. Right. All of those things that could derail something overnight and making sure that you’re you’re kind of clean. Is that correct? Is that summarize those four pillars correctly?

Scott 00:05:46  Absolutely. And then if, if we want to go even a little bit deeper, those are what I call the output metrics, right? I’m giving you the metrics of that success. Then you get inside the system and you say what really drives that? And the words that I use is first you have to have profitability. Right. and now you might not be profitable at a lower level. So you have to have a path to profitability, you know. So if you’re launching a bunch of products, you might not be as profitable.

Scott 00:06:14  Then you have to have scalability, right? You know, you got to have that ability to to drive scale. And that has to be repeatability. You have to be able to prove that you can do it over time, you know, multiple times. And then once you have profitability, scalability and repeatability, you want to focus on defense ability, which is the ability to recognize that if it’s all in one niche with a bigger and better audience, I’m now creating moats, you know, around my particular business. And if I’ve got the profitability that, the scalability, the defense ability, and the repeatability, then I’ve got the sell ability. Right. Because now I’ve got that pillar of how to think through that, and that will start to show up in those metrics. yeah. From that side of things. So,

Josh 00:07:05  I love that. I think you did a really good job that profitability, scalability, repeatability and then the defense ability. You could go through numerous case studies, but I’d love to hear that.

Josh 00:07:16  You know, you had a case study where somebody was actually really good on the operations, but they could they could go focus on hiring other people that could do a better job at, you know, product innovation. For me, it’s product innovation for our business. And I need to hand off operations. But other every entrepreneur is going to be unique.

Scott 00:07:35  So use that example because it was the minority. Normally you want to keep that product innovation because you’re the brand strategist. But I always like to use examples to where it opens people’s minds that you are what you are. And and you can still be very successful building a company, you know, on that. and that did spark. You talked about actionable. There’s sort of if I said three things that I feel are like now really nitty gritty, but people don’t think of when they’re starting the process. One of the ones that comes up in my mind as you’re building out your teams and your systems. We have every one of our clients that we start working with.

Scott 00:08:15  And even now, start building your data room today. And what a data room really is, is it’s a series of folders that are organized in the way that a buyer is going to eventually want to see your company. and so most people collect up all of this information. So think of it as that. It’ll have a subdirectory called legal. and that’ll be all of your organizational docs for your company. You know, you know, your, your operating agreements, those types of things. Your the second one will be financial, and it’ll have two years worth of supplier invoices and it’ll have your different, you know, financial, bank statements, those types of things. The next one is operations. And there’s a couple other, you know, categories there. But here’s the, the, the nitty gritty action item is that buyers are more sophisticated today than they ever have. And so if you show up in front of a buyer and they say, you know, what are you thinking of Josh? And you start negotiating.

Scott 00:09:15  You might get one level of valuation if you show up and you say, you know, hello, Mr. Buyer, here’s my data room. I’ve built it out over the last two years. I have all my invoices in order. I’ve got all of my suppliers in order. I’m not going to show all of you to that, but I’ve already been thinking about that process. And you’re starting to organize your room. I call it like your your room the way the buyer wants to see it, as opposed to having the messy junk drawer in the kitchen. And then you have to go figure out how to do it. Well, you’re having to build your data room right at the time that you’re the most busy because you’re in the middle of negotiations. So really tactical item number one. And we’ll talk about what we can provide, but we can provide people an an example data room structure so that it’s very, you know, we’ve called it from, you know, 5060 different buyers and how they like to see it.

Scott 00:10:03  You can do it in Gmail. It doesn’t have to cost anything. You don’t have to go buy a big virtual data room software, but start organizing your buyer and interesting, then your mindset will start to think like a buyer, which gets back to that earlier point. So that’s sort of tactical item. You know number one, tactical item number two would be implement this strategic finance on a monthly basis, where every month you don’t just update your accounting numbers on your profit, but you look at your balance sheet, your cash flow, your forecast and the actual valuation of your company. What am I worth and don’t see it as a pain. Like most people see accounting as a pain. Get excited that wow, my valuation went up $250,000 this last month because I, you know, hit the next level tier and it’ll start to relate your valuation to your day to day economics. So that’s the second one that I really always recommend that people get going on early in the process. And then the third, you know, sort of I’ll call it nitty gritty, you know, a tactical item that I think everybody, regardless of what seller you should have, is you should start organizing your accounting in thinking of add backs in mind and thinking about your structure in mind toward your exit.

Scott 00:11:17  So I’ll give you an example is you own a brand, but you also own a consulting company. Well, why not organize things so that all of your consulting expenses are in a separate entity? They never even hit your brand because otherwise I’ve got to go to a buyer and say, you know, I go to five conferences and I have $50,000 of expenses. And, you know, that should be, you know, added back before you calculate my earnings to then calculate my multiple, I call it the five for one mentality. When you’re growing your business, it’s very easy to, you know, throw away a lot of money. But at some point you have to have every dollar of profit that you can show is worth $5 or whatever multiple is. And most people don’t think like that. And so that that software that’s costing you a hundred bucks a month, it’s not costing you $100 a month, it’s costing you $1,200 a year or $6,000. Upon exit, you start to think about your business differently.

Scott 00:12:11  So Organizing. If you do have owner expenses, get all of your structures in place so that you’ve been tracking them for years or getting them into different companies. Otherwise, what ends up happening is that people, when you go in front of a buyer and you’re in, you’re making $1 million a year, but you showed another million of ad backs. What do you think a buyer does? You know, they kind of go really, you know. And so that’s the third one is to think with the five for one mentality in mind and structure your company well before you exit in these ways. And I almost guarantee you that it will help it. This will add hundreds of thousands of dollars to your valuation, if not millions, by just adopting data room mentality from day one. Strategic finance of all. Looking at all of the tier that and then third designing your systems and your numbers structure so that you’re incorporating your ad backs right from the get go and getting expenses out of the company that don’t belong there.

Josh 00:13:06  I love that, Scott. That was amazing. Those those are some knowledge bombs that you just dropped on us all. And I love to summarize, you know, the episode with giving people three actionable takeaways, but you did the job for me. So, Scott, you’re the first. You’re the first guest I’ve had that you summed it all up and like, here are your three actionable takeaways from listening to this episode. So thanks for doing my job for me, Scott. But I did want to go back to that, that third tip that you shared there in terms of like setting up your accounting properly and looking at the add backs. Now, did you say you should create a consulting company and run? Because I attend multiple mastermind events, I go to conferences, right. Or speaking or even running a podcast like this. Right. Are those types of you’re saying like create a consulting company to run those expenses through that, but then you’re kind of building the business so that it’s more, hey, tell me more about the more.

Scott 00:14:07  About.

Josh 00:14:07  Money and how that.

Scott 00:14:09  The nitty gritty of corporate structure is. There’s two ways to think about it the horizontal and the vertical. The horizontal is. What entities should I have? I’m Josh. Should I have all of my assets in one entity? Or should I actually be horizontal and have Josh Josh’s brand entity? Okay, let’s say I’m selling a baby product. So I have Josh’s baby brand, Josh’s consulting company, and I might even have Josh’s payroll company where I keep my team. Because if my mentality is that I don’t want to go sell to private equity, but I want to keep the the goose and sell off the eggs, then what I want to do is I want to have a separate brand company that has a separate, you know, my consulting business is stuff that shouldn’t hit any of my companies and then my team. I want to keep there, and I can rent my team out there. So based on your strategy, you design the right horizontal, corporate structure. And you were right to ask me to dig deeper because the ad backs are what are on the vertical side.

Scott 00:15:15  Once I’m inside of an entity. What things do I add? Back. So the easiest way to get a buyer to sign off on an ad back is to never have the expense there in the first place. Yeah, that’s the move that that $5,000 trip to prosper from your your brand company into your consulting company because you legitimately do consulting. So then it never even hits the PNL. But if you’re somebody that doesn’t have a consulting company, don’t just create one fake because buyers will sniff through that. Now you can go look at it and say, I believe that this was an owner ad back, because this is my professional development, and you’re not going to have that expense going forward. And you set up your structure so that in your in your travel budget, let’s just say you have travel and then you have owner related travel. And then that clearly shows the buyer, that owner related travel is meant to be an add back operational travel for your CFO or, you know, operator that is going to be expense in the business.

Scott 00:16:16  Most people don’t do it that way. They just have travel. And then when they get in front of a buyer, they got to go back through two years and try and figure out was this owner related or not. And they didn’t document it all along the way. And then the buyer pushes back on the ad back and says, hey, you really need this to run the business. If you set it up in different account codes, you know, literally a different chart of account of what expenses you want to be. Add backs. That’s the vertical part. So if you do this on the corporate across there and you do it on the vertical as an action item, I guarantee you that you can add hundreds of thousands of dollars of valuation to your company. When I sold my first company. you know, adopting this five for one mentality, we came up with over a quarter of $1 million and added over a 1.4, $1.5 million to the valuation by having a mentality of just not spending money unless it really is generating a return for growth, it’s that powerful.

Josh 00:17:12  Awesome. Scott, thank you again for joining us. We’ll look forward to a part two.

Scott 00:17:16  Awesome. Sounds great. Josh take care.