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Build a Business Worth Buying brings you candid conversations with industry leaders, M&A experts, and successful founders. Learn advanced strategies to scale, optimize, and prepare your business for an acquisition—because building a business worth buying starts with smart decisions today.
Tom Shipley (00:00)
all the money we invested in the business was gone. We second mortgaged our house. we maxed out our credit cards.
We even took loans out against our cars we both had two small daughters at home. Our wives were not happy with us,
Aaron Alpeter (00:47)
This was probably one of the most impactful ones that I've sat on throughout this whole podcasting experience we've been on. We've got Tom Shipley, who you probably have heard about. If you don't know him, you've probably known about his brands. He doesn't just talk about acquisitions. He has used them as oxygen for his businesses. When his first beauty brand, Atlantic Coast Brands was
was running out of cash, they had about $331,000 in revenue, and he didn't give up. Instead, what he did was he acquired a $15 million supplement business that was throwing off about $1.5 million in cash, and he used that to start building platform. Within three years, that combined engine crossed over $100 million.
built generated over a billion dollars in revenue, and he ultimately exited to private equity.
Since then, Tom has raised $100 million for a role platform known as Foundry Brands. He built and sold a digital agency aggregation play and now teaches founders how to make M&A part of their operating system through a conference series he puts together called DealCon.
Aaron Alpeter (01:46)
Tom, I am so grateful to have you on today.
We had a call a couple of weeks ago and I just got to know you a little bit and I was just like, oh my goodness, I have to have you on the podcast. I've really been looking forward to this and I wanna dive right Can you take us back to your beauty brand that was doing around $330,000 of revenue?
that was running out of
Tom Shipley (02:05)
just for a little bit of context. one that most valuable lessons you learn in special forces is, whether it's good medic or good soldier is one who improvises, which what does that mean in business? It means that you will never have enough resources to solve anything, including a mass casualty. Then if you're a medic, you need to be resourceful and in business, it's not about your resources, but resourcefulness.
So basically when you're very challenged with your business and you think there's no option, there are always options out there. It's about just taking a step back and understanding the opportunities that are there.
three years before this happened I had a business, another $15 million a year business that basically ran out of cash and we were done.
And again, I had a fairly big team and we ran out of options and it opportunistically, it happened that I was given an opportunity to buy our company. We did it and it solved that problem that we had fast forward three years later, my partner and I decided to take my blueprint on how to build iconic brands using direct response marketing. I remember two former special forces guy living in Richmond, Virginia, and ever we said, we're going to build the first 2005.
the first hundred million dollar beauty brand using direct response marketing. Because now we say, of course you use direct response marketing. Back then, people laughed at us. And we had such strong conviction that we went financially all in. So to building this new business, was Hydroxytone, it a skincare product, it was Alenico's brands. all the money we invested in the business was gone. We second mortgaged our house. We basically, our 401Ks, we maxed out our credit cards.
We even took loans out against our cars because we found we own them, we could take loans in it. But we were even through that and we both had two small daughters at home. Our wives were not happy with us, but we were clearly at the end of the year, what did we have? We had a business model that we proved work. We had 331,000 in revenue. We were about breakeven, but the customer lifetime value was great. And so was the customer acquisition cost in several to three different channels. The problem is, is we just ran out of cash.
And at that point, and we went through every type of capital we could get from debt to equity and no one would invest. And again, because the idea we had was so absurd and let alone we couldn't get loans also because we had a business that slightly lost money, less than a year old. So then I turned to my partner. said, you know, the only, the one playbook I have is the last time I ran out of money with our business is we bought a business. Let's go buy a business. And as we did, we bought up.
$15 million business in Hoboken, New Jersey, throwing up a million and a half of cash flow. But what is as important as the cash, because we needed like oxygen, is it was just two of us in a little office in Richmond, Virginia. What this business in Jersey City had is they were a great online, they were a supplement company, they had their own products, so they had their own tech stack.
They had designer, developer, fulfillment, customer service, everything that we needed. So we put our little $331,000 brand on top of this company. And within three years, we did a hundred million in revenue. And over that first little skincare brand that everyone laughed at us about is we did over a billion dollars. And then we had other different skincare and beauty brands that we created after that. But if you think about this,
is what I believe is that acquisitions can solve almost every single business challenge. And that's just something to remember is you come up with a business challenge and I will demonstrate how acquisitions can address itself.
Aaron Alpeter (05:46)
It's fascinating. mean, I want to dig into this a little bit because you're out of money. How did you buy a business with no money? How did you structure that in order to make sure it worked? And why did acquired a company think that this was a deal worth doing?
Tom Shipley (06:00)
If you're buying a profitable business and if you can basically present yourself as a responsible and good entrepreneur operator, there's so much money on the sideline right now where basically lenders are looking for places to put their money. So what they saw is two good operators, they didn't care about the business that we had.
It was irrelevant. What they saw is they had saw two good, two good entrepreneurs that wanted to buy a profitable business that had business for five years growing every single year. And that two young people had launched this business and we were coming in to take it to the next level. And we were good operators. That's what the lender saw. And we basically raised mezzanine level debt deal structure. did in that business is we paid 85 % cash.
And based on the low multiple, basically we bought it for 2.8 times its EBITDA at that period of time. We basically gave them 85 % of it in cash. We got from a mezzanine lender, which means it was mid-tees interest rate with a little bit of equity kicker. Okay. Is what the lender got. And then two years later, we grew this business so much that we ended up buying the extra 15 % for almost the same amount of money that they got for the 85 % of their business.
So was a big win. Now, what did they get out of it is they saw that they had significant other opportunities that they were interested in. They were 25 years old. They saw they were had the ability to take their first set of chips off the table and their first exited business. And then over time, they stay with us for a year and a half. And then we did a slow separation of they went off and did their next business. I have this belief that every entrepreneur
should have and has the ability to have three exits in their lifetime. So for them, it was their first exit at the age of 25.
Aaron Alpeter (07:47)
How did you go about approaching them or even having that conversation or thinking that, you were.
in a position to even do this because it sounded like this was the only option to your point.
Tom Shipley (07:58)
in general, now that I've done had 16 acquisitions and exits, I have a different perspective than the people in my network and I've seen thousands and thousands of deals. So first of all, you should always be have conversations with entrepreneurs. And it starts as very simply as, what do you love about your business? What is your favorite part? what's your next chapter look like?
What is your go with this business and yourself? And suddenly entrepreneurs, we love to talk about our babies. Okay, so we'll, we a lot of time we'll share with you and that's where you identify opportunities. In this case, it was very simply us saying is that we love your business. We either are going to spend the next several years building it or we'd love to buy it. And they said, oh, you're interested in buying our business. Let's talk. What are you thinking about?
That's as easy as it is. Okay. Now I have a more of a programmatic way. I've constant conversation. I've outreach. So my goal is to talk to at least three sellers every single week. And basically I have my drip series of my LinkedIn outreach and my email outreach. so qualified sellers within my box are basically coming and shopping my calendar. And I get to have incredible conversations. Again, that's how you do it programmatically, but in that situation, that's how it happened. ⁓
And therefore we're able to their goals. And basically it was our goal also.
Aaron Alpeter (09:22)
Yeah. Was there any sort of anxiety that you guys had about the time when you were taking on this mezzanine debt to basically give them the cash that needed given the interest rate was so high?
Tom Shipley (09:31)
No, because like everything I do, model out period. And I make sure that we can support the debt, even if there is a hit in the business. now I structure deals differently. And the reason why is I bought one business where there was zero cash at close. It was all in seller notes and it was a contingency seller note. If it worked, I bought two other businesses. did 90 % seller notes.
where basically you're paying a coupon on a monthly basis to sellers and the 10 % cash to close, I borrowed on their business. So again, there's different ways to structure it. Let me just throw out something too. Over the next 10 years, there'll be $14 trillion of businesses that will be transitioned from baby boomers. There are 1200 baby boomers that are business owners that are retiring every single day.
75 % of their businesses, they will try to sell and they will not be successful in selling. Sometimes they go through one process, two process, but a certain point when they can't sell, they'll look to essentially give it away or close the business down. And so would they rather just close it down or would they rather turn their legacy over to a good entrepreneur that would take care of it and to make monthly payments over three to five years?
And that's it. So you're talking about a very big universe. I'm not talking about businesses that are throwing up a hundred thousand dollars a month. There are some business that meet the criteria or a hundred thousand dollars a year. There's some business out there that are throwing off a million a year that meet that buy box to doing there. And I know a lot of people that just got burned out and they shut their businesses down. And for me, I'm sitting there as there are other better options to shut your business down. Let me flip it, Aaron At Atlantic Coast Brands, and I had a brand called Bellaplex. It was a skincare brand.
We gave all our attentions to our biggest brands and therefore we had this smaller brand that needed love and it was just stealing attention away from our $1,500,000,000 businesses. So basically we said, let's just sell this. We tried to sell it, could not find a buyer for it. It was generating $7,000,000 a year. So then we said, okay, I just want to find someone so I don't have to take a write-off in the inventory. So, and again, had my financials. So I basically found, we found someone.
that was willing that bought the brand and all they had to do is to pay us as they sold off the inventory. And the inventory, remember in this business is about 12 cents on the dollar on every jet dollar of revenue is what the inventory costs. So for them, it was a home run. And for us, we can move on focus on our biggest bands, bigger ROI. And so there are a large number of reasons of why people are out there and why there are deals out there.
Aaron Alpeter (12:17)
there's a lot of great experience you can get by starting a business and having a small business. You just learn things so quickly by being in the driver's seat. And it's almost as if the playbook is, you know, learn what you don't know, you know, make some mistakes and then go.
Go try to inherit something that somebody's trying to spin out. Is that the right way to think about this?
Tom Shipley (12:40)
I think of it differently. think that building a business from scratch is kind of like being dragged through asphalt and glass, period. Okay. And the risk, the probability you're going to succeed in a business, getting it off the ground, generating a million dollars of revenue, passing your first year, you're talking about less than 5%. What's probably is going to hit $10 million and still be in business after five years, you're talking about 0.1%.
What's probably, it'll still be in business after 10 years. Again, so it's low. ⁓ What is better? You spending your time there and then every year saying, what's my new products? What different sales initiatives? Let me hire people from scratch and gamble 50-50 whether the new hires work out and really add value or not versus let me buy an existing business. One that has cashflow ⁓ EBITDA processes system and has a reoccurring business model that generates cash. And let me
Bet about that and let me bet about the upside that. A friend of mine he has a different business model altogether is he finds operators that basically want to leave their corporate jobs. goes and he's great at buying and negotiating businesses. He goes and finds businesses that they take over those operators.
He basically comes in for 15 % of the capital, whatever it takes to close. And typically he gets under 20 % equity in the business, but he basically helps put an up person who wants to leave their corporate job. They've been a consultant at Deloitte or whatever, and they want to be in this. They're smart people. So he'll find a great business, negotiate terms and negotiate the deal, and then provide support services for them. On his side is the marketing side. So he's also collecting monthly checks from that business. Plus he put the deal together.
rather than this guy leaving his job at Deloitte, starting a business from scratch, taking all the risk, he immediately goes into a into a business that he owns and it's his dream to operate it and have a successful, in a successful 20 year business he walks into. So again, you can say what, you know, what gamble, how much of a gamble are you taking by buying an existing business that's generating profit if you do your diligence properly on the business?
If you don't go in and say, great, I'm buying a furniture store, but you know, I really like the look of the feel of this building and let me create a restaurant out of this. Okay, well then you didn't buy business. And that's an exaggeration, but some people buy businesses and they're so much humorous, they want to change everything on day one. That becomes risky.
Aaron Alpeter (15:12)
Yeah, that's so fascinating. Is there ever an indication where a company going out and trying to buy another business, even if it's cash flowing, ends up introducing more risk than enterprise value?
Tom Shipley (15:25)
Okay, the answer is yes, but everything's about probability. Okay. First of all, I'm an industrial engineer by background. So I like to take and make it simple and replicable steps. So the same thing in the way I find deals, the way I do due diligence and the way I look into it. I have good people that do diligence for me. I do not have an internal corporate development team that I keep on staff to do everything. I do keep it very lean and contract these out.
And basically you don't spend, young money to do due diligence. There's ways to efficiently and effectively doing that. if you bring in an advisor, but if you know what you're doing, you're, but you're doing your due diligence in the business, you understand, that it's solid from the contracts, the employees, the businesses and walking away and that they have good documented systems and processes and as replicatable that really lowers the risk. I'm going to say that from what I've seen is.
80 to 85 % of all transactions are successful when someone buys a business. Okay? So then there's a percent of them which are mediocre and then there's some that will absolutely fail. Now, how do you reduce the probability? You know what you're buying. You do your due diligence. You make sure the person you're buying from is trustworthy, otherwise don't do the deal. Okay? some people are really great at buying distressed businesses.
that are challenged, are losing money and turning them around because they could do such a great deal. I do not buy distressed businesses. I do not believe in catching a falling knife. I broke that rule about three years ago and I got burned from it. I did a deal where I bought a business. They had everything one of my businesses needed.
and they had such great customer acquisitions. The product they had was good. They just did, were horrible operators in managing the business. And they were behind in taking care of their customers and they were distressed and therefore they were losing money and they were, they basically ran out of cash. So I, you know, I went in, I said, well, this is a win for this business. can do a tuck in with this. And the deal that I structured was that ⁓ is basically, I pay you zero close.
If we can turn your business around, which are closing down anyways, then we'll pay you X amount of dollars starting six months from now and we'll phase it off over the next three years. And I set this up as a separate LLC. So therefore it wasn't going to impact me in a way that my other, my other company, in that case, it was an agency, was closing down so fast. We didn't have a chance to finish my
our due diligence. So I broke two rules, never speed up and not complete your due diligence. And rule number two is I don't buy distressed businesses because of how good the deal is. And this case, we broke both rules and it ended up costing us money. Now, again, it wasn't devastating in any way. We protected ourselves, but we lost money on the deal. And then we ended up closing that business down. And the thing that was most expensive was the loss of time that it was trying to turn that business around.
Let me ask you this, Aaron, the probability of you launching a business, launching a new channel and being successful and getting a strong return on their money or a new product or hiring a new people altogether? The probability of success is typically best case 20, 25%. That'll be something significant in scale. But you look at all the dollars behind that at Atlantic coast brands, we launched one of our brands and it was profitable from the early get go, but
To get this up to $35 million, the way we scaled it, we ended up putting in $7 million. We were $7 million underwater for this brand. We would have been better off using $1 to $2 million of equity, the rest of it leveraging debt and buy a successful business with all the working capital that needed in it, and then scale it to the next level.
Aaron Alpeter (19:10)
When it comes to the businesses that you're thinking about buying, there is clearly a thought of like, let's do direct response. And so you start with beauty and then supplements, it's also direct response. But now you've grown into lots of other things.
Do you have a core thesis that you've developed in terms of these are the types of things that we're going to invest do you treat it as a giant conglomerate or do you just look for good cash flowing business that you think you can operate?
Tom Shipley (19:35)
So I like to develop ⁓ centers of excellence and expertise around different platforms that I'm investing time or resources into. The more desperate you get as far as disparate as far as separate, the more you're diluting diversification is good. I also love the ninth wonder of the world, and that is multiple expansion. So multiple expansion for your listeners out there is
If I have one business generating a half million of EBITDA and another business generating half a million dollars EBITDA, the market may value, let's do easy math, both these businesses at two times your EBITDA. So they basically have both worth a million dollars. Assume there's no debt on it all of a So have two businesses worth a million dollars. You put these two businesses together, now you have a million of EBITDA. If they're a good solid business and growing, now you have a business that's a million dollar EBITDA.
they might trade for four times. So by combining them together and then integrating them successfully, synthetically in one transaction, which could take 90 days, you went from a million dollar value to a four million dollar value. So suddenly you synthetically created $3 million. That's the power pool of multiple expansion. Now it might be from a three X to four X as far as the increment.
But that's the beauty of multiple expansion on it. one of my business, Matt Bodner calls it the ninth wonder of the world.
Aaron Alpeter (21:01)
I love that. Yeah, that's great. Now, when you acquire one of these businesses, how much of your time or your team's time are you putting on it?
Tom Shipley (21:08)
it's, it's great question. So let me also take a step back as far as the core question you ask, as far as what would I prefer to do? I'd rather buy and basically do additional acquisition into my existing business because I'm creating a sellable asset. Why is the multiple increases? The larger your EBITDA, the lower the risk from it being a stable business. Also you get buyers with real money coming in and
be able to buy larger business with larger EBITDA. So that's the power of really growing a business and growing the EBITDA of it. If I just buy separate businesses, then basically you don't get the power of combining them together for multiple expansion. Also, there's a question of focus is I might have two businesses in the same vertical that are separate that I'm basically doing acquisitions into, but at least I'm leveraging my network as far as my resources, then also can bring in full-time resources to help on both.
from that perspective. So I don't like to get too wide as far as what I'm buying. There's some different segments that lean themselves better to aggregating than others. And I'll put it is, if I'm basically in the e-comm world and I put together a bunch of different consumer businesses, but they're totally different niches, the buyer out there might not be willing to buy all those businesses. And you have to be very, very careful whether the buyers are gonna buy all those brands together.
versus if I have an advertising agency, that's, you know, and I'm selling that, an agency is an agency and I offer these types of services and there'll be a buyer for that. If I'm doing home services, the same thing. So you have to be very careful what you're stacking together. So I'm gonna say e-coms, the most difficult when you're talking about, or when I say brands, not e-com, but just brands in general. And certain segments, they're just easier to group together and then scale and integrate.
Aaron Alpeter (22:56)
Yeah. And if you were to buy two agencies or two e-comm brands, is the thought that you would keep them separate and there's just natural synergies there as a group? Or would you try to say, no, we're going to merge them all into, you know, new op-co?
Tom Shipley (23:09)
Okay,
you always want to merge is some back office, your accounting, finance, HR, and the common things that is agnostic for your customers and also your employees, okay? Those are the easy things to integrate. I don't want to say.
at a snap of the finger, but it's easier to integrate from that perspective. And there's great cost savings. There's a lot of people call them synergy to work with on that. When you're talking about brands, ⁓ the big question is, do I, I might have a parent brand and whatever that company is, is the parent brand. But then let me give an example of, I had Aaron Huberman talk at ⁓ our, DealCon we just had last week. And I asked him on the stage, what is his strategy? He said, very simply is, ⁓
they're all hawk media. The question is, are they retain their own brand? If there is brand equity, which because they're customers and they're scaling, they have a great reputation in this niche, he'll keep the name and call it a hawk media company. However, if the brand doesn't really give them that much advantage and they have a better advantage by being hawk media, they're the PR division or what else, then they'll rebrand,
From a product brand perspective, how much of a lift you get by how strong the parent brand, by being a procter and gamble company, but typically brands are brands and brands that are basically out there underneath it. However, if I have a brand like Keranique my brand,
We could have launched new products in two different strategy. Either one is we built them from scratch, that was our go-to playbook, or we could have bought hero SKUs that really don't really have much brand recognition, but they have great velocity on Amazon, great reviews, know, $5,000 five-star reviews, something like that, had strong velocity. We could have put it under our Keranique brand and then expanded those products, take that exact product with a strong.
loyal customer behind that and expand that throughout our channels. But I would have just put that Kearney brand on top of it if it didn't have his own brand name. and the incredible thing right now, what's going on with the aggregator business. We had $15 billion come to the ecosystems for an asset class of Amazon that people used to pay max two times EBITDA for.
They came in and it basically through a thrash, you know, changed the world. And now suddenly these same brands that you couldn't sell for were not only couldn't sell for two times and then getting payment terms on it. Suddenly there was bidding awards between six to 10 times EBITDA with all cash at close. And they paid for the working capital, the inventory on these businesses. Well, a lot of those aggregators have blown up because the economics didn't work and they're not operators, didn't know how to run the band, financial architecture.
for whatever reasons, buying things at too high of a price, the operators left. So a lot of those brands are out there and are now being the investors went out, they need to just take the write down and move on. So that with a lot of these funds that are out there. So those same businesses are now selling, many brands are out there for one to two times even up. I just found this out from someone who is at DealCon who's basically,
He had a great hundred million dollar business on his own and he's out there now buying these brands and these products for one to two times even. So yeah, the world has changed. So that's where there's some real interesting opportunities in that niche.
Aaron Alpeter (26:34)
Yeah, that is remarkable. And I guess if you're using debt to buy out the debts on the business, you're not personally guaranteeing that you're kind of insulating yourself a little bit, which is fantastic.
Tom Shipley (26:42)
Under with
the exception of SBA and SBA, you know, I don't want to discount SBA SBA Financing are is really incredible if you have confidence in that because the biggest negative to SBA financing is that you're putting a personal guarantee on it However, if you're a confidence in what you're buying You have 10 years basically it comes with 10-year terms So we're talking about your monthly payments to satisfy that debt as you make payments over 10 years
it's pretty low relative to the asset you're buying. And if you're increasing the value and what you're going to get off of that asset is pretty significant. And especially if you're combining businesses where you're getting the multiple arbitrage, it's really a winning strategy.
Aaron Alpeter (27:25)
Yeah, that's fantastic. Let's talk about aggregators and Foundry a little bit. one of the things that you were able to do was to build a structure that allowed you to manage 100 brands simultaneously and go out and just be buying these things and evaluating them.
Tom Shipley (27:38)
it was all our skill and brilliance, but it was also being at the right place at the right time. we were one of the early, the earliest people coming together in this niche. So we had great timing from that perspective. my partner and I,
I knew we were going to be putting, Atlantic coast brands on the market. was the very beginning of COVID. bandwidth. was no longer driving three and a half hours.
each way to my desk in Jersey City for Northern River County. So I time on my hand. So I called a buddy of mine up in Austin, Texas, who had a great Amazon agency. And I've known Brian for years. said, Brian, let's do something fun. Let's buy personal care brand together and let's see if can scale it. said, what do you think? said, I'm in. I called him up the next day and I said, said, let's add a zero to that. This is a little bit small. We're thinking.
Let's build a platform that over time we can build, we can buy and manage 10 brands. He said, easy enough, I'm game. Then I spent the weekend thinking about it as at Atlantic Coast Brands, we had challenges managing more than a couple large brands because they always got the oxygen, the resources, because it was ISROI and little brands didn't. So the question that I learned at that period of time by reading a great article by a professor from Harvard.
He basically said, one of the most powerful questions you can ask is, especially when your operations team tell you can't be done, ask, flip the question around, say, what would have to be true to make it possible? Not why won't this work? What will have to be true to make this possible? So I asked the question, what would have to be true for us to add a zero? What would have to be true to make it possible for us to buy a hundred brands and manage to over time?
So we sat and we wrote down all the operating assumptions that would have to be true. And then we went through each one. Can we make this true? Can we make this true? And eventually we said, yes, we can. From that, we built a business plan, a business model. And then we hired a young guy to put together a 16 page deck for us. We went out and had seven private equity meetings and got six term sheets for a hundred million dollars. So, and again.
It was this period of time Thrasio again, was the first big aggregator out there. They just closed their first big round at some crazy. It was ⁓ some crazy valuation, but that became the headlines. And now suddenly everyone wanted into this game and we are the first people. so we had this big vision. So here's a secret that I learned is if we were to go out there and said, we're going to start with one brand and then two, and let's bring in investors to do this and let's hire some people to support us.
There's not much excitement around that because we had this big vision and we had plan to get it there. We were able to recruit some incredibly top talent on the team at the same time and not pay them out of pocket was we're putting together the capital and we're able to then recruit big dollars behind us because we thought big, we add zeros. And what I recommend for every entrepreneur is to go through the two zero experiment, not because you should go out and add two zeros and come up with a strategy.
But I'm always looking for ways to break paradigms. We're really stuck in getting an endless lips and a head about what is possible. So the way to break that is to imagine your business at a zero, 10 times bigger. What would that mean to operate? What would that look like? What opportunities are there? And that will be to have to be true to make that possible and then another zero, just to give you some ideas, which may flip back to your current business. Is there ways to grow your exponentially. Typically there are.
that were trained in this society based on incremental growth.
Aaron Alpeter (31:08)
Well, there's also just this romanticism about organic growth and the grind. People respect the grind in these stories about, ⁓ you shared earlier, but we mortgage our house, we took loans on our cars. We romanticize that in this culture. But I would love to skip that part and get to the end where you're able just to have a meaningful business. Why do you think that we have that constraint as just an entrepreneurial society?
Tom Shipley (31:36)
because that's what we're trained for, especially in small and medium-sized businesses. But if you look at it, all large business at some point hit a wall where they can't guarantee 20 % of their growth, best case 10%. And usually at a certain point, they have investors and other thing, and that's just not acceptable. And then if they have a bad year, then they have to make up for it if there's a black swan event.
tariffs, black swan event of COVID, black swan event of 9-11, black swan event of 2008, you name it. Black swan events happen in specific niches. They happen also, it could be regulatory. So therefore, is you have a bad and then you have to make up for them, how do you actually get that? Now here's a really interesting data point. If you are successful enough, unless you're a mature business and you shoot for 20 % annual growth every year, with ivory factors considering, and if you end up growing by 10 % compounding every year,
You've had a really good five year run and congratulations, you've increased your enterprise value by 60%. That's great. Now imagine this, every year you spend 5 % of your resources just to acquire a business, having seller dialogues and buying businesses that are half your size every year, and you continue stacking your organic growth. At the end of five years, you've increased, and remember, multiple expansion. You've increased your business value.
not by 60%, by 2000%. Now again, you don't have to buy a business half your size. could buy it be a 30 year size. It could be every other year. But again, you're grinding it. New strategy, new marketing approach, new salespeople, new, da, da, da, da, Okay. And the thing that I learned in the challenge I had is we're on this hamster wheel. At Atlantic Coast Brands, what I learned is every channel, every product will lose its efficiency.
So at one time we were third largest print advertiser, as someone's asking what's print, Parade Magazine, USA Today, USA Weekend, magazines. We were third largest print advertiser in the United States. And I'm gonna say fast forward five years later, we did zero. One time we were the third largest short form radio advertiser in the United States. Fast forward five years later, we did zero. One time we were the 15th largest short form TV direct response advertiser. Fast forward five years later, we probably did 1%.
One time we were the 15 largest infomercial company in the United States. Fast forward five years later, we were doing maybe 5 % of our business and now it's down to zero. Every channel we're way out. And so as channels are wearing out, Facebook was great for us as majority of our business, but it's not as effective because of all the algorithm changes, as well as some of the other changes like iOS 14. So it's not as effective. You're constantly in this hamster wheel. How do you get off that hamster wheel? I'm not saying stop it.
You nearly have to grow organically, but you need to stack to achieve your ultimate goals, whatever they are, whether it's bigger strategic alternatives for you, cash for you or exit or several exits out of your existing business.
Aaron Alpeter (34:42)
Yeah, you mentioned earlier about every founder should have three exits. Can you go into that in more detail?
Tom Shipley (34:47)
Yes. So if you look at your first exit for most entrepreneurs, they're fine. It's not the most, it's not that big thing, but it gives them financial freedom. They're able to, or a level of financial freedom. They're able to pay off the debt, money for a down payment for a house. they're able to live at a different standard and really take the pressure off their shoulders. The second event that I see for most founders is cause
They also, every time you have an exit, you're operating in another level. It's as my first business, my dream with my consulting business was get to a million a year. My dream for my next business, the T Shipley catalog was get to 10 million. Obviously I shared with Lenacoste Brands, it was the first hundred million dollar a beauty brand. Okay. Using direct response marketing. I kept on adding zeros. So typically based on lessons you learn, you have more confidence.
your next business will be larger and that typically your second exit will create real wealth for you. That means you have total freedom to do what you want to. You don't worry about money again. The third exit is typically generational wealth. Now there are two different strategies for three exits and then you can do a lot more if you want to. The three strategies are one is you do it with separate businesses, three separate businesses. The other strategy is let me do it. I love my current business. Let me do it here. What does it mean is I grilled
built a great business is at a meaningful size where it's interesting to five to 10 million in EBITDA. It's interesting for private equity. Let me bring in a great private equity and let me take cash off the table so I have that first exit. Now there's situations that typically happen when you're refinancing the restructure that there's next payment where you get your second exit of the wealth that you don't really have to worry about working, but you love what you're doing. You continue on. It can mean that you leave the business, but you still have rollover equity after each time. And then when that
private equity firm exits, which they typically do in five to seven years, then you get your third and typically based on the way they're growing and they're doing acquisition, it's not with your risk money, it's with theirs. Typically that, and they're very good at what they do if you pick the right partner, your third exit is the one that creates generational wealth. So it can be from separate business, separate exit, or it could be off the business you're in. But that's the three different levels that on average I see, there's always aberrations, someone hits it out of the park and has that
billion dollar exit on the first one, but I'm saying on the average.
Aaron Alpeter (37:11)
Yeah. You make it sound so easy. Just have three exits. It's amazing. I'm super motivated by this. I'm sure our listeners are just like, man, this is great. Where do I find some deals? What has to be true about either a founder or a business for them to be ready and mature enough to handle an acquisition?
Tom Shipley (37:16)
Yeah.
Okay, let me start with this. The reason why I talk about founders is there are different groups of people that are out there. There are three. There are people who want jobs and never want anything to do with entrepreneurship. And I would even argue in certain ways they are. There's no saying that someone has a job for life. They're all in certain ways entrepreneurs, but that's a different discussion. There are those people that are entrepreneurs that are wannabe entrepreneurs or want to do entrepreneur through acquisitions. And there are some great resources out there. And I'm going to say,
Um, typically I'm saying 3 % of that population every, ever succeed and actually falling through because that tenacity, that DNA to actually take the leap of faith and just, it's an entrepreneur has to have this level of. Rit and tenacity that it's just who we are and who we're built or we have no choice. And this is what we do. And that's why I like working with entrepreneurs that have existing businesses because you've already.
gone through that, you have a successful business at some level. Even successful where you suddenly run out of money and you don't have an options like I did twice, we had the grit to make a successful business model, two different business successful models that were out there. So at that point, you have the ability to do an acquisition. It doesn't matter the size you're at. It doesn't matter. You know, I say, don't do it your first year in business because that's, know, unless you have to, because you want to make sure you have a good team in place and your SOPs, you don't need a large team.
But you want to the foundations of your business in place because it will be distracting. You will have to spend, know, basically of your time is probably 10 to 15 % of your bandwidth on this. And it's consistency with everything here and it's consistency. It's consistency of talking to sellers, consistency of pulling, know, of knowing who to turn to from an attorney to advisor or someone who can inexpensively do your due diligence for you since depending on the size, you're either going to want to spend a lot of money or just a little money on things like due diligence and legal.
But understand, it doesn't matter the size, as I proved twice, it doesn't matter your access to resources, it's resourcefulness. But ideally, you find people in your ecosystem that can give you guidance.
Aaron Alpeter (39:42)
Yeah, that's fantastic. When you think about buying that first business 20 years ago and buying business today, what are some of those key things that you're doing differently now that you wish you had done 20 years ago?
Tom Shipley (39:57)
there's this quote about, sometimes it's better not to prepare, prepare, prepare, aim, aim, aim, aim, aim, aim, aim, aim, aim, aim, aim, Sometimes it's good just to aim a fire. Sometimes it's just good when you, as Yogi Bear said when you get to a fork in the road, take it. And so when you don't have a lot of experience and that certainty, you hesitate to do it. And what I should have realized years ago is I had a program like way to scale my business. did it twice.
and we should never have stopped. We shouldn't have taken the hubris that we had that basically said, that basically is where we have great product launch teams, we have great product development department, let's do everything internally. That was hubris and very expensive. It was, let's leverage our platform and let's go. And in hindsight, what I would have done is I would have done tuck-in acquisitions into our platform plus had other
investments in equity and support businesses that supported our business and basically have equity. as they have exits, we get additional exit from that. And I get additional cashflow because we're controlling where those business go to. And what's better if we have a vendor that we like to us go and either taking over buying or having a meaningful share of that vendor that we're already sending business to. And sometimes you can negotiate those deals without even putting cash in those businesses.
Aaron Alpeter (41:22)
Yeah, no, that's that's brilliant.
What are some of the most common things that go wrong when someone buys a
Tom Shipley (41:28)
Okay, first of all, on desirability bias and commitment bias. We entrepreneurs are so guilty of this. Let's talk about desirability bias is
see only the upside because we view, we had this vision of what could be. We're visionaries. This is we do great. And so we imagine this, we see the upside and we focus on that. We don't focus on the downside and we have everyone telling us the downsides around us.
And we don't listen to them because that's where we built our business. had the desirability and we had that vision and we just made it happen. The other is commitment bias. We entrepreneurs, we get things over the finish line. We have the grit tenacity and the will that even though we hit brick walls along the way, we figure out a way to get out of the finish line and nothing is going to stop us. The reality is, is not every day you look at you get done. You need to have a way of having objectivity, looking at the data and saying,
Is this information you're collecting, is this go or no go? Does this fit your original deal thesis? Is there a real reason why you're doing this? Because a lot of times a deal comes along to good be true, but there's no real reason why you should be doing this. It doesn't fit. You should pass and find one that does actually meet the goals that you set off to be. And the big thing is understanding when your desirability bias kicks in and your commitment bias is so strong, you're not looking at the red flags.
And with everything, just because you find a red flag in due diligence doesn't mean you should walk away from the deal. You can either say, ⁓ is this risking the business? And how is this being cured? Can you cure it? Can you the seller cure this before you close? Such as I'm buying to buy a business and all the agreements are not assignable. You can say to the seller is that unless you get these agreements, your customers to make these agreements assignable, then the deal is off and then that's their job.
the person has a history, has a lot of historical lawsuits. Great. They idemenify you, you keep some cash in, in an escrow account and you require them to have a rectum warranty insurance, which makes sure that there's some bigger dollars that's protecting you. Or there's small little things you find that you cure at the end. And as part of your, integration and day one strategy.
but really identifying what those things are, are really, really important in your due diligence process.
Aaron Alpeter (43:42)
Yeah, that makes a lot of sense to me. And it almost feels like when you know that you're ready to do to buy deals when you're willing to walk away from it, like not necessarily that deal, but you've got to have the maturity of understanding yet to be willing to walk away from something.
Tom Shipley (43:49)
⁓ You have to understand. Okay.
So Aaron, I also want to bring something to your attention is nothing in life is easy. Nothing is easy. Having a baby, raising kids, not easy. Whatever you say, stuff happens. with same thing with building businesses to me, it's all about, what is the greatest lever that I could find that gives me real leverage in building businesses.
And what can I do to mitigate risk and make things and therefore acquisitions is a lot easier, more predictable than just planning on high organic growth from any type of business at some phase of growth. If you're growing by 80 % a year, unless you're some massive constraint on you, then that's something different.
There's a really good chance if you put the right post in today, and there's language that we use that basically,
looking for a business of this size that's doing X, Y, and Z that are really great. I'm interested in
investing in or acquiring or having collaboration discussions or JV discussions. If it's you or if you know of a company, me. Now again, I have the exact wording on that. It's something like that. do it every event and whoever posts that at every one of our events ends up getting amazing deal flow. And if the first one doesn't respond, then put one up two weeks later also. And that's basically it. So it doesn't have to be anything elaborate, but understand that
If you want to go with a really conservative case and scenario, go out and have 100 seller conversations and you most likely will close one at the end. You'll get all the way. The data is probably more of 50 seller conversation. You get to a successful deal. Why is you have outreach, you get to X amount of sellers, you have seller conversations, you're going to do your initial due diligence on that. You're going to find those you want to go further with. You're going to get enough information to do an LOI on.
You're talking about a subset of maybe 10 of those, 10 of those 50 or 10 of those 100 and a little y. You're gonna start your research. You're gonna identify those that you wanna get the finish line and out of those that you typically are getting
purchase agreements on, you'll close one out of every two. So again, just understand that everything's working. That's why I you're gonna invest 10, 15 % of your time over a year into buying a business. And you're gonna have your company
Invest 5 to 7 % of resources to support you.
Aaron Alpeter (46:15)
Yeah, that's great. We talked about this generational transfer of wealth that's happening, I think, 14 trillion dollars, which you said ⁓ that's an enormous amount that's there. Is there guardrails that you would recommend people look at for what businesses are too small that should just be wound down and which businesses are too big that you're like,
I don't know if I should be taking on a $50 million business or a billion dollar business because there's just other businesses out there, other acquirers out there.
Tom Shipley (46:42)
Okay, first thing I look at is EBITDA margin, okay? And let's talk about service business every second. I'm gonna say most ecom businesses and brand businesses, many are sitting around that 10 % EBITDA range, okay? Most businesses I look at are between 15 to 25 and sometimes you get higher. the tighter the EBITDA margin,
the higher probability it can quickly swing to negative. So that's the first thing I look at. The second thing from the side is the business is throwing off only a hundred thousand a year. That means less than $8,000 a month. ⁓ Is it really worth this? Is the juice really worth the squeeze? Meaning what you're to spend on legal to actually get this this deal done and the time you're going to have to spend. So I'm going to say that under a quarter million is tough to do to really justify in less, for example,
unless it's an aqua hire. Okay, have an Amazon agency and I went for deal flow and I need to offer this to my current customers, TikTok services and I find a great boutique TikTok agency and might have four people in or five people, but they're really good what they do and therefore by bringing them in to my agency, suddenly I can sell it to my 300 clients.
In addition to that, really scale that, I know how to back that up. In addition to that is I can use this for lead gen because it's easier to get leads off of TikTok and TikTok shops is Amazon. So these are examples. I love aqua hires and then you're basically acquiring for different reasons. And then size means a lot less versus the skillset I'm bringing into my company.
Aaron Alpeter (48:12)
That makes a lot of sense. Great. Well, Tom, I know we're coming up on time here. This is great. I think we'd be remiss if we didn't hear a little bit about DealCon. I just want to share a little bit about what that is, where people can learn more.
Tom Shipley (48:26)
Absolutely. you can go to dealconlive.com to learn everything about our next DealCon, which is coming up October 9th through the 21st. My goal is very simple is I curate and we end up interviewing everyone that comes in the room to make sure that it's the right room. And right now we had 165 amazing entrepreneurs. And our goal is to as much as we can share
are first of all, knowledge about how to acquire businesses through our process. We teach, we have incredible speakers, we have our network of lawyers and the resources that I use to do deals in the room, that you can develop direct relationships in the room to do that. My goal is very simple. I spend most of my time building my own platforms. I'm investing a third of my time because I want to change the EQ and IQ of every business owner. One is that acquisitions are possible.
It's a very strong strategy for growth. you're implementing AI, which most everyone should, the larger you are from organization, the more resources you can invest into AI to be more competitive in your business. Especially if you have AI in your business, you're buying business that aren't AI enabled. It's a huge advantage for you again. So it's RippleFact. So I want to change the philosophy that every business owner should be looking to scale through acquisitions. Here's the playbook and here are the resources.
If I can stop watching some business owners, like this is, don't mean to be insulting children playing with chainsaws as they're out doing acquisitions because they saw a YouTube video on it. Okay. And they have the methodologies and no, not the total how, but they know who to turn to. Then I've helped create incredible value under our ecosystem because I'm the biggest fan of entrepreneurs. We're the ones in the trenches. We're the ones on the field, changing the world, changing the economy.
building jobs and actually not waiting for permission. actually are taking advantage of it. So I can support other entrepreneurs having bigger impact by knowing how to scale and solving almost every business challenge or acquisition. That's what DealCon is about. And that's where you can learn more about it. And periodically, if you reach out to me, we do do, I'm going to say one day pop-ups where I pull together 40 entrepreneurs. We fly our team together and we have
one day event, typically people apply for that. I pick up the tab on that. And if you're interested, email me at tom at tshipley.com and just express interest. And again, my goal is to help.
Aaron Alpeter (50:53)
Well, Tom, this has been a fantastic podcast. I'm gonna listen to this probably at least 12 times myself. So thank you so much for being on. We have one question we always like to end with, and you've seen, gosh, thousands of businesses at this point. What is the best example of a moat that you've seen a business build?
Tom Shipley (51:10)
Okay, and I'm just gonna caveat this because the world is changing right now. The world is changing because knowledge and data was used to be the most competitive interest that we had in any business. And small and medium sized businesses were great and looking for inefficiency is making efficient. The challenge with AI is that knowledge is becoming commoditized and so the same moats that I might've spoken about three years ago, I'm not gonna talk about right now.
So there are certain things that have inherent months to that. I'm just gonna bring up an example that you might be surprised with, which is ⁓ Rawlins Pest Control, Oregon Pest Control. And the reason why I'm saying it is, they went out and they did an acquisition spree of a lot of independent pest control, companies. The advantage is they have the data and the efficiency they have from basically doing things on mass and advertising lead gen. But more important is,
the more clients they have and customers they have in certain areas, they can service these customers with concentration at a lower cost. And that's part of the game in pest control is the density of your customers. So I can say that's a brilliant strategy and is AI gonna disrupt that? And it's a service business? No. Do they have a great moat? As long as they know how to serve these customers at the highest level from a service perspective, they're gonna have a clear advantage there and then they can leverage AI to take.
the next level, but I'll give that as my example. I look for things and data where you're the company of record and own the data, that's your next moat, but a lot of other moats are going to disappear with AI.
Aaron Alpeter (52:45)
Yeah, love that. Tom, thank you so much and thank you all for listening to this episode of Build a Business Worth Buying.
Tom Shipley (52:52)
Thanks Aaron, appreciate it.