Blog

E-commerce may seem like a retail staple to us, but for many people the legitimacy of online businesses never became apparent. The power of brick and mortar always sent a strong message to consumers that said “this is a real business.” But what’s keeping online businesses from getting the same message across?

In 2007, online retail stores amounted to $175 billion and are projected to grow to $370 billion by 2017. Multi-million dollar acquisitions are happening now more than ever and they just keep growing while storefront are cutting back to make way. Gap, RadioShack, and Staples all plan to close down hundreds of stores in the coming years, going the same way as Blockbuster (who turned down and offer to purchase Netflix for just $50 million in 2000).

The web is not always considered to be a viable “storefront,” if you will, but as more multi-million dollar businesses make their debut from a humble home office, we see that success doesn’t demand brick and mortar. This infographic gives the rundown for what is actually going on in the world of e-commerce and what we can expect for the future.

“What get’s measured, get’s managed” coined by management theorist Peter Drucker. One of the most important things in running a business is knowing your numbers. We talk to Scott Scharf of Catching Clouds about that exact fact and the value of a great accountant.

Listen To The Full Interview:

[powerpress]

Subscribe to Podcast: Itunes 

On this week’s episode, we talk with Scott Scharf as he talks with us about the value of a good accountant for your ecommerce business. We discuss why a great accountant can not only save you money but also allow you to grow your business successfully.

What You’ll Learn From This Episode:

• Ecommerce accounting best practices
• How cloud inventory can help your ecommerce business
• Why you might be liable for thousands in sales tax

Featured On The Show:

• Catching Clouds

Transcription:

Jock: Jock here, and welcome back to another episode of the Digital Exits Podcast, In this episode, we’re going to be talking about what I believe is a topic and business process that most entrepreneurs inherently really are bad at, and that’s accounting, specifically, ecommerce accounting with Scott from CatchingClouds.net. Scott, how are you today?

Scott: I’m doing well. Thank you, Jock.

Jock: Excellent. So we connected via Shopify. You’re a prolific publisher of guest posts on topics around accounting and ecommerce. Do you want to start with sort of a quick background on the company and what you do for your clients?

Scott: Sounds great. Catching Clouds is a partnership between myself and my wife. She’s a CPA and accountant, and I’ve been in IT for 30+ years, focusing really on process, and spent most of my career working with small businesses, but also some time working for large multinationals. Catching Clouds, we provide outsourced accounting services for ecommerce businesses. So we understand not only the accounting and the cloud tools and specifically ecommerce tools like cloud inventory, sales tax, and others, but we actually have virtual bookkeepers that do bookkeeping for our clients on a daily basis so your books are up to date. As ecommerce businesses, the things that you look to outsource, that you probably don’t want to do are your shipping, if you’re still fulfilling all of your own products, definitely help on marketing, even though I know Jock will say, “Look, you’ve got to do a fair amount in order to be yourself and understand what’s going on,” that’s his space. And then the accounting, because most people don’t go into business to do the accounting, okay? They go into the business to make money, to do great things for their families, and then provide great products as well as help the local communities. And they probably enjoy the products or hobby or niche they’re in, or certain aspects of their business, but it’s typically not accounting. We really focus on making that a manageable process for ecommerce businesses, so that they have current, accurate, and actionable financial information so that they can make the right decisions, as well as look forward and know if they’re profitable or not, and how they’re doing as a business.

Jock: So we’ve had a previous discussion about when your services are required, and there’s a certain threshold that you need to be at as an ecommerce business before you should start really considering outsourcing your accounting. So do you want to sort of go through the growth stages of an ecommerce business, and then when you start to make sense for the company?

Scott: Absolutely. Really, for businesses, same thing if you’re starting your own business, you end up doing the work yourself for a while, and there are definitely different stages in an ecommerce business. But you definitely have to hit at least $1 million dollars and be a million-dollar business, so you’re looking at $60-70,000 per month of consistent revenue. Anything below that, you really need to be looking at your business and spending that money, a certain percentage, whether it’s 50-50, or 66% and 33% on both inventory and marketing your business, so people continue to come to your business. You want to find that balance. If you’re spending money on either outsourcing your accounting before that time, or spending it on outsourcing to a warehouse too soon, it can slow down your growth and it’s not necessarily the best strategy. So we really want to give our clients the best advice. Anybody below that point, we really try to point them at how to do it themselves until they can’t take it anymore. Now, if you have really high margins, or you see a good run rate, and you’re really ready to invest in that, and you understand that it’s going to cost you in sales that you’re either marketing to or the products you’re buying, we’re happy to talk to people, but that’s really the key threshold, and then really looking at the complexity of your business. We work with mostly multichannel sellers, selling on Amazon, eBay, one or multiple shopping carts that really have a lot going on in their business, and they need someone that can help pull all that data together so that the information makes it into their financials and they can understand how their business is doing.

Jock: We talked about your outsourcing accounting. However, there are other services that you provide that, I think, is a unique proposition to any ecommerce store out there. Do you want to sort of discuss that?

Scott: We, of course, do the accounting and we actually do the work. Really, ecommerce businesses end up with a couple key things that send us all the copies of all the documents of what’s going on in the business and you still have to pay your own bills. We want access to your data, not your money, so we’re going to keep that information. What we’re offering is not only the accounting and doing the day-to-day bookkeeping and the controller who will help you interpret your numbers and walk through them. And everything we do is fixed fee. This isn’t an hourly, variable thing. You understand the cost to your business each month. And the other key piece we provide, with my technical background, is all the cloud accounting tools. We set up the accounting. We migrate your existing data. We help set up the cloud inventory, and help find the best cloud inventory solution for you. If your business is either mostly drop-shipping, or you’re doing lots of B2B and wholesale, or you’re multichannel, or you’re multi-currency, and you’re selling in multiple marketplaces and regions around the world. There might be a different cloud inventory solution that’s best for your business. We help you find that solution and then we help implement it so these things are set up properly. They’re integrated together, where we’re pulling all the data that we need from the accounting perspective, but then we really focus in on helping optimize the process for our clients, whether it’s optimizing your purchase process, your inventory management process…and then, of course, knowing profitability per SKU and the other components. So it’s a combination of not only the accounting, and somebody that’s actually doing the accounting for you, and then we’ll explain that information back to you, but it’s the automated technology tools to connect that data in the cloud. As an ecommerce business, you’re already in the cloud, and we want to pull that data together and make it more visible to you and provide tools that you can see. The nice thing about zero.com, the cloud accounting platform that we use, you can log in 24/7 and see your books, and know every weekday, by noon each day, everything’s been updated so that you know that you have current information and you’re not just running your business off the balance in your business checking account

Jock: What’s the biggest problem that your customers have when they initially come to you?

Scott: They don’t know if they’re profitable or not. They…they’re not quite sure and there’s a big difference between the cash in the bank and whether your business is profitable or not. They just don’t know where they stand, and so there’s a lot of stress related to not knowing. Think how stressed you’d be if someone told you that you had five minutes, and then you were going on Shark Tank, in front of the Shark Tank hosts, and you have to rattle off your customer acquisition costs, your profitability per SKU, what your revenue is, what your average margins are. And if you don’t know those things, you need know those inherently so you can sleep better at night. That’s really the main thing. And then, the time they lose, not just stress, spending time doing accounting, vs. focusing on sales or social media and driving more business to their business, or getting better deals on products they’re purchasing.

Jock: You talked about some key metrics there – customer acquisition costs, customer lifetime value, etc. Part of the accounting process is you calculate those things?

Scott: We pull different data together. So from the accounting perspective, we’re going to pull together and tell you if you’re profitable as a business. We’ll keep track of your sales tax liability so you know if you have $5,000 of sales tax that’s not yours. We’ll show profitability per channel – Amazon margins vs. Big Commerce or Shopify or other pieces. Then when we’re implementing different cloud inventory tools, we will focus on what your key metrics are and help implement the right tool. So cloud inventory is going to show you your profitability per SKU. The good ones will show you the velocity at which products…which products aren’t selling or selling slower. When you’re looking at your customer acquisition costs, and some of those other lifetime value components, then you need to adapt those and make sure that you are monitoring those metrics and pulling that data typically either into an ecommerce CRM solution. There’s the right place to do these things and aggregate the data. Cloud inventory is fundamental for keeping track of profitability per order, profitability per SKU, the cost of goods sold, the value of inventory, how much inventory or cash are you sitting on? And then you look at those different elements. We can help identify the best tools for your business to get those answers

Jock: Can you give some examples of how, when a client comes to you and they’ve started tracking their data, how that’s changed the growth and profitability of their business?

Scott: Yeah, absolutely. One of…the key challenges are is that you’re awash in data, and things like Amazon Seller Central can provide some insights but not great insights. The key thing is, we’ve had people that have held back on purchasing inventory, or moving into another channel because they didn’t think their business was profitable, and they kept putting more and more money aside into savings, not understanding that they could see the trends in their business to really identify how they were doing as a business, that they were doing $50,000 at the beginning of January of last year, and that they’ve been easily adding, and you can look at it, 20% doing the things that they’re doing. Then what we can do is identify those trends where you see a month that dropped off, not just because it’s a month that’s not Christmas, and dig in, pull up the data, and say, “Hey, because we know this challenge, let’s go look,” and we were able to find what was going on. In their guts, most business owners know something’s wrong. Sometimes, and a lot of times, they might have the right gut reaction as to what it is – customer service or costs are a problem or repricing or competitors, but you can’t really get to that final answer to kind of teach your gut. Over time, we provide more and more value of really being able to analyze those numbers, so on a weekly basis, when we provide a cash flow report, they know what they should be spending their money on, whether it’s more marketing or more products, or a balance between the two, or when they can be safe to actually take money out themselves. There are a lot of people that really starve themselves personally for funds for way too long when they actually have a business that’s successful. We have a client now that has a full-time job, has a viable going ecommerce business. They’re going to clear well over a million dollars, and they’re concerned that can they afford to quit the job and my – our – response is, looking at the numbers, is they really can’t afford not to, because they have plenty of cash flow to cover their overhead and their personal overhead, and they can cover that change in their income from the job that was going to be a fixed amount of money that year with maybe a little bit of a bonus, to making more money each month in a week, and then the other three weeks, they’re just making additional profit between focus on selling, purchasing smarter, adding products, listing products faster online that they’ve bought, which is just cash sitting there getting no interest. Those are the kind of things that those decisions – bigger decisions as well as point decisions – that we really help make on a consistent basis because these conversations come up every week.

Jock: Let’s transition to someone that’s not at a million dollars in sales yet. You’ve got a lot of data from your clients that is helpful for someone growing an ecommerce business. What would be your tips for someone not yet at that million dollar mark?

Scott: Treat your business as a business, not a hobby. That means, do the basics. Sign up as a business, as an LLC or a partnership. Open up a separate business bank account. Make sure you get a federal EIN so that you’re putting any of the business assets against the business tax ID, not your personal one. Open up a business checking account and keep as much as possible, your finances separate, and keep track of every receipt. Scan it, take a picture on your phone, but treat it like a business. That’s the first piece. Get registered for a sales tax license, at least in your own state. There’s other issues related to an Amazon FBA seller which we could or could not talk about, it’s kind of down the rabbit hole with those things. But treat your business as a business and don’t commingle things. It’s OK to use a personal credit card to fund the inventory and keep your business going. Don’t commingle them. Use a separate card for the business and then use another card for going to the grocery store and buying clothes and living your life. You can use a personal one if you don’t have credit in your business yet. That’s fine. But treat it like a business. And then the next piece is, if you’re treating it like a business, is set up accounting. Our preference is zero.com, but QuickBooks online is a viable option as well. Connect it and do enough – you’re becoming an entrepreneur! Learn about doing the basics in accounting. And then, you can look at cloud inventory, but just keep track of everything. Keep a copy of everything, so when you go to that point so someone like us, or another CPA or someone else that can help you really organize your business can get access to that information so you have access to everything. And then make sure you stay compliant with sales tax using a tool like Taxjar.com or Taxify.co. But those are really the basics. Treat it like a business. Think about it – you’re being a business. Learn about being a business. Set up the basics of registering with the state and becoming a corporation. Separate checking account and then set up the basics that you need. These cloud accounting tools are only going to cost you $30 a month. Sales tax might cost you $10 a month plus a little bit for filing. And then look at a cloud inventory tool that might cost you between $50-100 a month, but it will help you optimize your business. If you do those things and take the time to optimize those things, those are the core basics and then you can grow from there.

Jock: We were having a discussion about valuation on businesses that are purely reliant on Amazon. I’m going to add a high level of a discount to that business. What are your thoughts on that particular topic?

Scott: The challenge with Amazon – selling on Marketplace – is, if you’re looking and you have your own brand, that’s a little bit separate. You can control the MAPP pricing. Those are other pieces. You’re one of many. There are rarely any areas where you’re the only seller there. There are a couple other challenges too, if you’re selling on Amazon FBA – so fulfilled by Amazon – where you ship your 1000 widgets to Amazon and they handle everything else. That’s wonderful from a logistics standpoint. You’re not packaging every single product, you send a couple big shipments once a month, a couple times a month, and then money just flows into your bank account every two weeks, and then you monitor customer service and then buy more products and move forward. From a logistic and starting standpoint, that’s really great. The challenge from an Amazon FBA seller is that Amazon generates sales tax Nexus in fifteen states. And that’s wherever Amazon has a warehouse, they’ll dynamically take all of your product and move it around. As a single seller, if you’re not selling your business, from a risk-management perspective, you can decide to, “I’m only going to register in my state, or a handful of states,” but that is a liability to the business, which is that sales tax liability, where you’re not collecting and remitting sales tax in 1-15 other additional states, so that’s one of those challenges where it’s one of those technicalities. It’s a risk-management decision, as the business owner, if you’re not going to sell. But if you’re looking forward to selling your business in x amount of time, you want to focus on making sure you’re sales-tax compliant, your personal property tax returns for your business, and, of course, any income taxes are all up to date on top of making sure you have accurate financials so that you get the full value of the business.

Jock: So let’s talk about cloud accounting. For those who don’t know what it is, can you explain it for me, and then can you explain the benefits for someone who’s already got an existing solution in place, but the solution you provide and how that’s different.

Scott: There’s a new world of tools in the cloud. Not only are your shopping carts and Amazon online, but there’s a wave of cloud accounting solutions, and the benefits of working with these and many cloud tools is that they’re modern interfaces, they’re easy to use, they’re in the cloud, so they’re available any time as long as you have internet access, which is most places anywhere in the US these days. You don’t have to be concerned about versions, or backing up the data, or making updates when there are new features or updates or changes to tax codes or other changes. You don’t have to do that; you pay for a solution that is stable and online in the cloud. The advantage of some of – the additional advantage of the accounting solutions is online, they connect to your online banking. So online every day, real time, each day, they download all the transactions from the previous day from your bank. You don’t have to type any transactions in. You don’t have to export and import any data. It’s going to dynamically pull all that information together. The other advantage is having a solid cloud accounting platform that has an ecosystem of add-on partners, like Shopify has add-on partners for mailing, through MailChimp or Constant Contact. Accounting systems like QuickBooks online or Zero have a whole ecosystem of add-on tools, whether it’s expense management, or bill payment, or cloud inventory. These tools will integrate together and feed all the information from one cloud app to another so you don’t have to do the data entry. And it’s always online. Compared to what a lot of businesses are on, they’re either on QuickBooks Desktop, or they’re using QuickBooks Enterprise, and advanced inventory, leveraging that tool. Now you can take a solution like that, instead of having it on one of your PCs in your office, which you have to back up and protect, and make sure it’s protected from viruses, from power outages, and all the other things you have to do to protect a server or a dedicated system with that data, you can host QuickBooks in the cloud, and there are a number of certified QuickBooks hosters in the cloud that will do the online backup and get you partway there. You still have QuickBooks which is a much older technology. It’s not a great database, it’s not optimized for the cloud, but you can keep using QuickBooks Desktop and QuickBooks Enterprise hosted in the cloud at places like Right Networks or Cloud Nine, and get partway to the cloud, so you get some of the protections, but you still don’t get all the automation, the efficiency, the automated upgrades, and a number of the other capabilities you get with a new cloud accounting platform. The next level of these cloud accounting platforms, is they’re finding newer, better, more efficient ways to get things done with automating billing and payments and automatic payments and receiving information from different areas, where there’s new capabilities, features, functions, and whole new ways of doing things that are much more efficient, that small business leveraging very dynamic cloud companies like Zero, can take advantage a lot faster than either mid-sized companies that are working on big solutions like Dynamics or NetSuite or others. These solutions are evolving rapidly, and you can take advantage of these functions very easily on an ongoing basis.

Jock: Let’s talk about sales tax. The conversation that we had the other day. What are the risks for an entrepreneur and, first of all, what don’t they know? And then, now that they know what they know, what are the risks?

Scott: Sales tax, unfortunately, is a reality for really any business, whether you’re a retail store and you’re collecting locally, or you’re an online business. It is a reality. It is based off main term called nexus and where does your business have nexus? Your business has nexus where you are, where you’re registered as a business, where your employees live and work, and you’re where you have significant personal property, whether that’s a warehouse or your inventory, and you own your inventory until it’s received by the end customer at their home. It’s where you store inventory, not where it’s in transit. You’re only in one state, all of your employees are in one place, your warehouse is there, you have nexus in one state. Where you have nexus, you are required by law to register for a sales tax license, collect sales tax on every transaction where anybody’s buying in that state, not anywhere in the US, but in the state where you have a tax license, and giving all that money that you collect to the state. It is worse to not collect any sales tax and owe money out of your own profits to a state, than you holding money that you’ve collected as sales taxes and not given it to the state. That’s where you cross over into illegal criminal activity. It’s painful to register online for many of these states. Then you have to know how much you’ve collected and how much you should collect. Most shopping carts have an automated configuration, whether it’s Amazon or Shopify or Big Commerce, that you can say, “Hey, I’m in Florida or Colorado or California,” and it will start automatically calculating sales tax, collecting it, and giving it to you. So if you turned on sales tax a year ago, and you’ve never filed or remitted, you need to go look at how much money you’ve collected and make sure you go file that. Another challenge is, if you’re an Amazon FBA seller, you need to collect or remit in up to 15 states. It’s your decision on which ones you register in. You want to register. To keep track of that, manage it, you really want to look at an automated tool, like Taxjar or Taxify.co, that will pull in all the data from YouCommerce or Shopify or Amazon or wherever else and you can upload any direct sales or any other sales you have which will total up all the information and then show you how it needs to be broken down so you can fill and file those sales tax funds that you’ve collected. Or at Taxify.co, that will actually file in all 50 states. Taxjar will file in some states, up to 26 states, and Taxify will file in all 50 states. It’s kind of a matter of registering where you have nexus, collecting sales tax and configuring it, and another key component is if you have sales tax nexus, you have to collect on all sales, so if you sell on Amazon, EBay, Etsy, and your own shopping cart, and in person, you need to collect sales tax for all of those transactions. Make sure you’ve configured every site. It’s still fairly complicated for getting every site. In general, sales tax is extremely complex. There are 13,000 jurisdictions in the US. We’ve gone a little crazy on the compliance stuff. What you can do is make the best effort, find a balance between the time or cost that you’re paying for someone to either do this for you, or for you to do it yourself, to be compliant. And there’s no law that says that you have to spend 100% of your time or all your profits or anything else on the business. You need to find that balance of risk management, but you always want to stay current in your own state, where they can come audit you, both as a business in the state, and you’re physically there. So, those are the key elements. What you don’t know is that one of the hard things…it’s make the best bet, do a little bit of research, read a few blogs. You will hear people finding different things of “I found this trick to not do it!” Well….no. There are a few tricks, like with California. The big trick, I’ll tell you, is you want to register for a sales tax license, not with the Secretary of State, in any of these states, especially California, because if you register for a sales tax license, you’re saying, “I want to be able to sell products.” If you register with the Secretary of State, you’re saying, “I’m a business in that state.” Then you might have to pay income tax in that state, and a ton of other paperwork, you’ve got to pay your accountant to do an income tax return in that state. So when it comes to California or any other states, especially your Amazon sellers, you can only log on to the California site to log on and register online, but when you get to the point where it asks you for the Secretary of State information, stop there, save your reservation, call the Board of Equalization in California and tell them that you’re just a remote seller, and they’ll uncheck that requirement to register with the Secretary of State, and then you can get only a sales tax license. The only state, if you’re an Amazon FBA seller, that requires, by law, that you can’t get a sales tax license without registering in the state, is the state of Washington. That’s my super-detailed tip that I’ll cover

Jock: What haven’t I discussed that you want to talk about?

Scott: OK, you didn’t go into business to do accounting, but take the time to understand your business. Whether you’re watching TED talks, or you’re reading business books, you really want to take the time to continue to grow your education as an entrepreneur. I suggest getting the book Financial Intelligence for Entrepreneurs. It’s very dry reading. It’ll take you a while to get through it. Keep in mind, I’m not an accountant, my partner is. But you will start to learn the terminology. You’ll start to learn when you show some business people your financials, and they can look and in five seconds, tell you that your business is either failing or doing well or talk to you about it, and that’s where you can start learning about those things. So what I have to say is, if you’re going to do the accounting yourself, educate yourself. You don’t have to enjoy it, but it’s a reality of being in business. If you’re going to outsource anything, whether it’s the accounting or the warehouse or whatever else, do it yourself for a while so you understand what you are outsourcing. When you’re interacting, just make it clear as to what your expectations are. You want specific reporting and answers to specific questions, but in general, keeping track and knowing your numbers will help you stay in business. There are a lot of businesses that are profitable but go out of business because they’re not monitoring cash flow, which is critical. There are other businesses that you don’t realize you’re losing money, and you don’t take the time to cut back and drop products or make other big changes to stay in business because you’re just not aware of the issue until it’s too late. Take the time, and when you’re ready to outsource, do it as smartly as you possibly can.

Jock: If someone wants more information about your services, where can they go?

Scott: Thank you Jock. You can go to our website, which is CatchingClouds.net. Please look around. We have quite a few blogs. We’re constantly trying to share the information so if you have any specific questions. The best thing if you have very specific questions and you’re interested in outsourcing your accounting services, please contact us at 720-414-1444 ext. 1. Or you can reach out to [email protected] and we’ll definitely respond. We really enjoy working with entrepreneurs and ecommerce entrepreneurs that have already taken the risks, that are putting their kids’ college fund or looking to quit their job, or if they’ve quit their job or they have an established ecommerce business and they’ve been doing it for years, we really enjoy working with these people, helping them optimize their businesses and make them better. Jock, I really appreciate the opportunity to talk today.

Fan of Warren Buffett and Berkshire Hathaway and ever wondered if they lost everything today how they would start over again? Well in this interview we chat with a fellow value investor Mason Myers from Greybull Stewardship about that exact conundrum.

Listen To The Full Interview:

[powerpress]

Subscribe to Podcast: Itunes

On this week’s episode, we talk with Mason Myers. Mason shares his experience investing in companies as a value investor. We discuss why Berkshire Hathaway loves to invest in recurring online businesses. We also talk about value investing, search funds and investing in general.

What You’ll Learn From This Episode:

• Lessons from a value investor
• What is value investing and why is it important
• Can you sell your online business to search funds?
• Why Berkshire loves recurring online businesses

Featured On The Show:

• Article: Why Berkshire loves recurring businesses
• Grey Bull Stewardship
• Mason’s Blog

Transcription:

Jock: Welcome back to another episode of the Digital Exits Podcast. I’m your host, Jock Purtle. And today, we have Mason Myers, from

MasonMyers.com and also Greybull Stewardship. Mason, welcome to the podcast.

Mason: Thank you very much, Jock. It’s good to be here.

Jock: Excellent. So we’re just chatting on the call beforehand. I actually came across your personal blog when I was doing some research into search funds, and I was telling Mason that I read every single article on his site over a one or two day period, which is a big kudos to him. Love the content. He talks about investing through his company, Greybull, and then value investing, which I’m a big fan of. For those who don’t know, value investing was coined through the book The Intelligent Investor, and then Warren Buffett has built his fortune based on that sort of strategy. So let’s jump over to you. Want to give everyone sort of a quick background of you as an entrepreneur, and then do you want to tell me a little bit about Greybull?

Mason: You bet. Thank you, Jock. I began as an entrepreneur and an operator, so my heart really is with management teams and the founders of companies. Right out of college, I was into journalism, and I started messing around with the internet. I graduated from college in 1993, so, started a company in ’94, bootstrapped it, merged it with another company, got venture financing, went public, and did a lot of M&A through that public company. So that’s sort of where I learned to do M&A deals, and to work with other entrepreneurs and founders. To jump ahead a little bit, I started my investment fund, Greybull Stewardship, in 2010, and we are focused on companies with $1-3 million in EBITDA. Usually they’ve been around for a while, they’re good companies, and they’re growing well. They need capital for growth or they want to take some chips off the table, and that’s what I’m focused on today.

Jock: So I guess there’s two lines of questions there. With Greybull, did you raise a fund? Was it your personal capital? What’s the partner structure? Tell us a little bit about that.

Mason: Because I came at investing from being an entrepreneur and an operator, I really wanted to find an investment structure that worked best for entrepreneurs. So what I focused on was finding an evergreen fund structure, where we’re not forced to sell the companies on a certain timeframe. As you know, Jock, most investment funds are operated on a ten-year time horizon. So the investors are forced to make the investment, grow the companies as fast as they can, and then sell them again, which may work great for certain companies, but for other companies, maybe they want to own it for a longer period of time and let the value compound, or pursue a different strategy that doesn’t necessarily work in that timeframe. So I wanted to make sure my investment fund worked for them. So the most important thing to know is that it exists in perpetuity. There is not a ten-year fund life to it. So we can own the companies as long as it makes sense, and I won’t put pressure on the entrepreneurs to sell sooner or later or whatever it may be.

So yes, I did raise funds from other folks, and from my own funds. The fund works on four-year cycles, so I get a refresh of capital every four years.

Jock: So it sounds more like an operating company rather than a fund structure. Would that be a good summation?

Mason: Yes, in a way. I know we’ll get to Buffett and Berkshire Hathaway a little bit later, but I really tried to model this on what he’s been able to do. He says that his favorite time frame for an investment, or his favorite hold period for an investment, is forever. There are obvious reasons for that, because you get tax advantages, and you get a lot of value by just letting the companies compound in value over time. So yes, I wanted to create a structure where you could hold investments for a long time, just like he does. And yes, Berkshire, as you know, has many operating company characteristics, because it owns operating companies, and that’s the same with Greybull Stewardship.

Jock: So let’s go to your philosophy on value investing. What does value investing mean to you?

Mason: Well, I think what it means to me is, as an investor, the safest way to invest is to buy something at a fair price, and sometimes at a good price, but particularly when you’re talking to good companies who are growing, no one’s giving their company away, so the idea is to try to find a fair price for both the seller or the founder, and myself. So for me, it means, number 1, getting into the investment at a fair price and not overpaying too much. And the fair price means to me that you’re paying on fundamentals of the business. Ultimately, it comes back to a projection or forecast of the cash flows that an owner could expect to take out of the business both today and into the future. In investing, that often gets boiled down to EBITDA or free cash flow, or something like that. So I like to think of businesses as a multiple of free cash flow minus capbacks, or a multiple of EBITDA. And that’s the way I think about it. As Buffett says, “Price is what you pay. Value is what you get.” So I focus a lot on trying to pay a fair price and make sure I get a lot of value.

Jock: What’s a fair price?

Mason: It’s such a difficult question because all companies are so different. So I think it depends on the size of the company. It depends on the growth rate of the company. It depends on the competitive advantages, or, as Buffett would say, “the moat around the company,” which is really a way of saying, “How certain are you that these cash flows are going to continue well into the future?” I operate in smaller companies, $1-3 million in EBITDA, sometimes a little smaller, so typically I think that those EBITDA multiples, when you take all of those factors above and others, they probably trade anywhere from 4-5-6-7 X EBITDA, something in that range.

Jock: Have you seen valuation prices fluctuate over the five years that Greybull’s been alive?

Mason: What I find interesting…yes is a way to answer that question but to separate that into two buckets. The first bucket is larger companies and public companies and so forth, and those valuations have definitely gone up. Today they are much higher than they were previously. When you get into smaller companies, it’s more about finding the right fit between the investor or the buyer and the seller or the person seeking growth capital. So those valuations actually do not fluctuate as much, maybe a little bit, as they sort of reflect the trends of what’s going on in the broader investment world. Really, it becomes more about finding the fit between the two sides of the table. And so that becomes more important than the pure valuation, which means the valuations are not fluctuating as much in that part of the marketplace.

Jock: So you look for businesses that want either growth capital or for the entrepreneur to take some money off the table. Are there any other sorts of structures that you’ll invest in, or are those the only two?

Mason: Those usually capture the bulk of what the objectives are of the founder, the owner of the business. Of course, you can do a combination of the two, and I’ve done that several times, where they’re selling some equity to diversify, but also we’re putting money into the business so that we can help grow the business. But yeah, it’s usually some combination of those.

Jock: And then, are these companies coming to you, or are you finding them through bankers, or what’s the deal there?

Mason: It’s both. I think the most important characteristic of what the investments that I end up having made is that we both, myself and my partner, the founder of the business, usually spend a lot of time making sure it’s a good fit. I named my company Greybull Stewardship. Greybull is a little town in Wyoming where I was born, but I put the word “stewardship” there because I wanted to convey to founders that I want to be a good steward of their company and what they’ve built and support them in being a good steward. So really, I tend to find entrepreneurs and founders who really care about who their partner is. They’re not selling and bailing out and going to do something else. Maybe they’re selling a minority of their company to grow, maybe they’re selling a majority but they’re staying involved, so really we both have usually spent a lot of time making sure there’s a good fit with strategy, with personality, with timeframe – you know, maybe the entrepreneur has something in mind with what they want to do with the business – etc, so that’s usually the most important thing that happens, regardless of whether I meet the entrepreneur through a banker, or we meet independently. People drop me e-mails all the time through my website, and that’s often a way to get introduced. I am also often introduced to people by my investors, the people who’ve invested in Greybull Stewardship. So it’s all of the above, but once the introduction happens, it’s usually about making sure it’s a good fit.

Jock: So let’s move gears and talk about tech, because you’ve got a lot of technology that is destructing sort of very mature, old businesses. I guess the question to throw at you is, Can companies really survive forever with so much innovation and disruption happening, and it’s going to happen in the future?

Mason: I think that’s a very good point, and if you were to look at the data, the half-life of how long companies last in the S&P 500, for example, it’s gone down dramatically in the last 100 years. Obviously, with technology always changing things, it creates a lot more dynamism and ever-changing landscape for the company. So yes, I think it’s not possible to stay forever, but I do think it’s possible to identify companies that have stronger competitive advantages, and have a reasonable likelihood of succeeding maybe 5, 10, 15 years into the future, and you can make a reasonably educated guess about that. I tend to like those companies better, where even if the technology changes, you can see how they have strengths that will allow them to be successful for 5 or 10 or 15 years. I’m not so good with things that may be hot for a year or two, and then who knows what happens? I just don’t find that that necessarily fits my personality, and plus, it’s extremely difficult to pick companies that are going to be very successful in a year or two in a rapidly changing environment.

Jock: A great show for someone that’s fresh or has no idea about competitive advantage to watch is Shark Tank. They’re always talking about what differentiates you from your competitors. I guess my question to you is, you’re making a decision purely based on the future cash flow potential of the business, but also that “moat” that we talk about, that competitive advantage. What in your mind defines sustainable competitive advantage?

Mason: That’s a very difficult question, and it’s hard to answer without using a lot of clichés, but I’ll do the best I can. Really, sustainable competitive advantage to me, means, is there some advantage that the company has that other companies, no matter how hard they try, are really not going to be able to replicate or put a dent in that company’s business model? You can get into, then, sort of ideas or lists of things that make competitive advantages strong. Some of them that many people have cited, but I think that are helpful even though they are very rare and probably not that replicable for most people, are things that have network effects to them. Maybe it’s a two-sided marketplace where each side benefits by having the other side be very large. A couple of classic ones are Microsoft’s operating system and Google on search. So Google will always have better search results when they have 80-90% of people doing search through them, because they can always tweak the algorithm and they have the best data to deliver the best searches. It’s really difficult for someone else to break into that, because they can’t ever get a large enough search volume. Microsoft operating system, same sort of thing. So those network effect things’ competitive advantages are happening more and more, particularly because they’re enabled by the internet, and two-sided markets. And you can sort of go down recent huge success stories of AirBNB or Alibaba or über, all sorts of great network effects. You can see them in real time happening in front of us all right now. Beyond that, oh, go ahead Jock…

Jock: Can you define a network effect for me a little bit better?

Mason: Usually it’s easiest to think of it in a two-sided marketplace like über. Each side benefits more by participating in the marketplace that has the most people on the other side of the market. So if you’re a consumer wanting to use über, you want to go to the place where they have the most drivers. If you’re a driver, you want to go to the marketplace where they have the most users. So the service is more valuable to each participant because of the large numbers on each side of the marketplace. So someone else cannot break into there unless they have as many cars on one side or as many consumers on the other side of that marketplace.

Jock: Right, so I guess I might talk about a business we had recently where one side of the equation was servicing big box retailers, the other side of the equation was servicing wholesaling vendors, and they had a technology in place that made it easier for both parties. I’m just going to use an example we had. Is that a sustainable competitive advantage?

Mason: I don’t know. I’d have to know a little bit more about it. What do you think? What did you see in it?

Jock: My questioning around it was, could someone go and develop a similar technology? And they probably could, for a million bucks or something. And then the other question I asked was, could someone go and steal those companies that they were servicing, those big-box retailers? And I guess, yes, they could. It would probably take a year or two sale cycle, but technically they could do that. And then if one falls, then probably they all fall, if that makes sense. I don’t know. This is not my strongest suit.

Mason: I think, from what you just said, it sounds like there are some advantages. You like that, where they could have a couple of years of runway, but I think it’s very helpful to think about the ones where no matter how much money you have, or how much time you have, a new competitor or new entrant cannot necessarily replicate the advantage. So you could think about über, or Google search, or Microsoft operating system, or Coca-Cola’s distribution system. A lot of people think about Coca-Cola’s brand as a competitive advantage, which it is, but I think the stronger one is the decades of investment they have made in having a Coke within reach no matter where you are in the world. It’s almost unfathomable to think about how you would replicate that distribution network from scratch, which then makes it an unbelievable competitive advantage for the long-term.

Jock: That makes a lot of sense. How do I compete against über? I can’t, to be honest. Look at Lyft. Lyft is trying to compete, but they don’t have the distribution or the customer base. That’s a good point. I guess the question, then, gets reframed. You, personally, are buying smaller businesses in the $1-3 million EBITDA range. Technically, if someone had a big enough checkbook, they could come and replicate that business model. So I guess my question to you is, how do you find that sustainable competitive advantage on a smaller business?

Mason: That’s a great question. What you may be looking for is not something like Coke or Google or über, but something that within its niche, within its marketplace, it has almost as equivalent of a competitive advantage. Even if you had billions of dollars, you wouldn’t necessarily go after that for some reason. Maybe it’s too small of a market, even though it’s a very nice healthy marketplace for the companies I invest in. Maybe there are reasons why your structure of your company wouldn’t allow you to go after that marketplace, for example. Plus, I like to take the lessons and the models from the very successful companies and try and see them at work in smaller marketplaces. One investment that I’ve made – I haven’t yet announced it, but I can announce it here – is a company called OnSource. What they do is they, on one side of their market, they have insurance companies, who need photos taken of autos or homes, usually once a claim has come in and they need to have a photo of the car’s bumper or whatever. On the other side of the market is a network of thousands and tens of thousands of independent contractors who take the photos. So via a smartphone app just like an über driver, they accept a job, they go and take the photos and then get paid through the app. That’s a different marketplace, but within that marketplace, this company has huge competitive advantages, because it’s nearly impossible for a new entrant to replicate the network of independent contractors that they have. The insurance companies may have a different dynamic. Someone, theoretically, I think, could sell into them over time, but the insurance companies are always going to want to go to the marketplace where they can get their photos taken the fastest, because there’s the biggest network of people there. So it may not be as big of a market as the world-wide taxi market like über’s going after, but it’s going to be a pretty big market, and you can see the dynamics that that company has, which gives it very, very big advantages over anybody else who would try and come in.

Jock: So I think we’ve talked a little bit about B2B sustainable competitive advantage. What about business-to-consumer sustainable competitive advantage?

Mason: Well, we’ve talked about B2C a little bit, with Google search, and über, and things like that. I think the same dynamics actually apply. B2C, I, in a way like those maybe even a little bit more, because it feels like millions of individual consumers is a bigger network effect than, call it hundreds or thousands of businesses. It feels like it might be easier for a hundred businesses to make a different decision than it would take for millions and millions of consumers to make a different decision. So I like it when there are many, many players on either side of the market.

Jock: That makes sense. I was just thinking in terms of smaller companies. The examples we’re using seem to be a lot more B2B, rather than B2C.

Mason: Yeah, I hear that.

Jock: Well, let’s talk search funds. A client of ours came to us and suggested that we do some outreach to a search fund in terms of an acquisition for their business. At the time, I had no concept of what they were or what they were all about. I did some Googling and found a great article that you wrote. What’s your experience been with search funds, and what are your comments on them?

Mason: I think they’re a great innovation. I think there are two related innovations in sort of financing of businesses and the M&A marketplace for businesses. One is search funds, which we’ll talk more about, and the other is independent sponsors, or what used to be called fundless sponsors. In both cases, a person or group of people find a company and strike a deal with the company, and then go find the capital to close the deal. This is an innovation, because 20, 30 years ago, you needed to raise funds through a traditional private equity fund structure, a venture capital structure, and these days, there’s just a lot more innovation happening. These two innovations are interesting, and obviously, other ones are crowdfunding and AngelList and that sort of thing. To get more into a search fund, as you know, Jock, they tend to be people coming right out of business school, so they’re relatively young. They’re in their 20s or 30s usually, and they have some management experience and some business background, and they want to run a company. So they raise a little bit of money to fund a search process over a 1-2 year period, to then try and find a company. When they find a company, the people who funded the search get a first shot at financing the acquisition. Then the search fund person takes over the company and starts running it.

Jock: What experience have you had with them, if any?

Mason: I’ve not invested in search funds myself, because I like the model where the management team at the company is staying in place, and search funds tend to like a situation where the founder or the management team is leaving so that they can take over and run the company. But I’ve interacted with many, many search funders over the years. There’s a wide variety of outcomes. You have people who spend a couple of years trying to find a business and they just can’t find it, or they had a couple of false starts in their couple of years and they just couldn’t get a deal done by the time they need to go on and do something else. And then you have people that have had unbelievable, humongous successes. The most famous search fund success is a company called Asurion, which is insurance for cell phones, and it has become a multi-billion dollar business that has been recapitalized several times by very large private equity funds. So the search funders who did Asurion are as successful as any household name tech entrepreneur that you could name.

Jock: I want to pick up one point. You said that you like to keep management in place, whereas search funds like to take management out and replace them with new management or operators. What is your take on the pros and cons of doing that?

Mason: Well, there’s certainly a place for both. When I say the search funds usually like to take over the company, usually, it’s in a very friendly way, with a transition period with the existing management team or founders. So everyone’s going into this wanting to make it successful and there’s usually a transition period and it usually goes pretty well. But I think it’s just different strokes for different folks. The search funders want to have the experience of running a business, and certainly there’s a lot of business owners out there who want to sell and don’t want to keep running the business after a transition period. So there’s a really natural fit there between those two things. I like to find businesses where the management team has a lot of equity, wants to keep some equity, and wants to stay in place. For me, it’s just a strategy selection, because I like situations where the management team has a great track record with a particular business, because that gives a much higher likelihood that that track record is going to continue into the future. I like that as an investor. I also am a pretty hands-off investor. I like to be available if and when a management team or founding group wants to discuss something or kick something around or whatever, but I like it when they’re independent and making the decisions about running their company themselves. That tends to be the case if they founded a company or they’ve been running a company for a long time, you have a pretty good degree of confidence that they’re going to run it well into the future.

Jock: Have you had any experience where you’ve had to replace management completely? Or where you’ve got a smaller company where it’s 100% owner operated? I’m just thinking from our listener point-of-view. Most of the people that buy businesses through our brokerage are becoming owner-operators, so my question to you is, do you have any advice for them? Have you got any advice to a company that, let’s say, is an investment portfolio that is buying the business and then having to replace the operator? What’s a checklist on success of that business moving forward, if that makes sense?

Mason: When I came out of business school, I did what you could call an unfunded search. I bought a business where the owner wanted to leave, and I was going to step in and run the business. So I’ve done that personally, and I’ve done it in other situations where we’re buying a business and the CEO wanted to leave so we needed to hire a new CEO. It’s difficult, is what I would say. I think that the first thing is that the person buying a business should go into it with their eyes wide open. They need to find ways to learn as much as they possibly can from the outgoing management team. Whether that’s a lot of little interactions before the deal closes, or whether it’s a specified transition period after the deal closes, or both, I think they need to find ways to interact a lot with the management team and sort of learn as much as they can. The other advice I would give people is generally, I would give the existing people the benefit of the doubt in the decisions that they’ve made. So you might look at a business and see lots of decisions that they’ve made that you agree with, and lots of decisions that they’ve made that you may not agree with. But I would be slow to make big, huge changes to a business that’s working, and really make sure that you deeply understand why the prior management team made the choices that they did before dramatically changing things. Now, of course, there are always reasons and times that you need to make dramatic changes for whatever reason. But if the business is working well, I think it’s better to sort of watch and see the business in operations for a while and then later make decisions or changes if you need to. What else comes to mind? I’ve been in situations where you want to make the change right away and the old management team isn’t around anymore at all, and I’ve also made transitions where the people stick around. No matter what, I think it helps everybody to make the transition just the right amount of time, but not too long. If it’s belabored or too long, I think the people in the company get confused about who they should be going to for decisions and for answers. So you want to make sure it’s long enough for you to learn, but once that period’s done, you want to make the transition so there’s a clear leadership.

Jock: Are you a fan of the 100-day strategy or the first 100 day strategy?

Mason: I think it’s a helpful tool, for sure. It’s a helpful tool to get your thinking started. I would almost not force yourself to do too much in the 100 days. Most of the businesses that we buy, it takes a year before you really understand how things are going. In a lot of businesses, there’s seasonality, where Q4 may be great and Q2 may not be so great. So you can’t really implement a 100-day strategy because you really need to watch a whole annual cycle for how the business works. I think it may sound good and maybe there are some simple things like accounting, monthly reporting, Qmetrix Dashboards, and things like that that you may want to put in place that are good things to do in the first 100 days, but as far as deeply understanding a business, I think it takes watching and living inside a business for a year before you can really feel confident that you understand it.

Jock: Very nice advice. Let’s go to Charlie Munger’s comment about if he had his time over again, he would be buying online, recurring-based businesses. What’s your take on that comment?

Mason: I think it’s very interesting because, as your listeners may know, Warren Buffett and Charlie Munger, the chairman and vice-chairman of Berkshire Hathaway, have often said they don’t want to invest in technology businesses because they’re too difficult for them to understand. What they mean by that is they can’t necessarily predict what’s going to be the dynamic in the business in ten years into the future. What I like about what he said, is that it’s showing that the things that they’ve looked for throughout their investing life can be found in spades in online businesses. And that there are many of them. So that’s one, is that there’s a lot of opportunity to find them. Number two, that when you do find them, they tend to have very rapid value creation like some of the behemoths that we talked about earlier. So if you look at their track record, they’ve looked for competitive advantages, economies of scale advantages, network effects, in what they did in the heart of their investing career. So you could pick out a few things like newspapers. Back in the day, those had a network effect component to it because advertisers wanted to be with the newspaper that had the most readers, and the readers wanted to go to the newspaper that had the most content and the most other readers, because they wanted to be seeing what everyone else was seeing. Big consumer products companies that had invested in big distribution networks and brands and so forth. A lot of the elements of online businesses with recurring revenue, unique direct-to-consumer distribution patterns, brands, recurring revenue, those are things that they’ve looked at throughout their life. It would just be applying their same thinking to this vast arena of online businesses today.

Jock: Maybe I’ll throw in a personal question. You invested in a business brokerage. Tell me about that deal and why you thought it was a good investment.

Mason: There are a couple of reasons why I thought it was a good investment. First, the business is called Murphy Business Brokerage, so this is a franchise company whose franchisees help people buy and sell Main Street businesses, so construction companies, restaurants, nail salons, and things like that that would be your normal Main Street type of business. There are several reasons, but the first that comes to mind is that I live this every day, and I see the need. When people are buying and selling businesses, they’re often not experienced at doing it, and it helps them to have an experienced person by their side, helping them through every step of the process. I’ve written several blog posts about the benefits of doing that, so I know there’s a need. I’ve also seen the advantages that a franchisee of Murphy has over an independent broker who may be trying to buy and sell businesses. Murphy can make one investment in a database or a certain technology or research on valuations, or any subset of Main Street businesses, dental offices or restaurants or whatever. They can make these big investments which is very hard for a solo practitioner to make. So all these franchisees get tremendous value by being part of the Murphy system. And it helps them when a gym owner wants to sell their gym, inevitably, across the country, there are five other Murphy brokers who’ve sold gyms and they can share their experience and wisdom with what it takes to sell a gym properly. There are some competitive advantages there, certainly over solo practitioner brokers, and the Murphy system is vastly superior in their technology and their training, than other brokerage systems that are trying to build this sort of national network. So there’s a lot of competitive advantage there. The last reason is that they’re really high-quality, high-integrity people in the system, and, as you know, Jock, that’s a really important thing with any intermediary or brokerage business. You want to make sure you’re working with the best people.

Jock: Bit of a selfish question there, but thanks for the answer. Anything that I haven’t asked that you thought about, that you might want to share?

Mason: We touched on recurring revenue a little bit. You had asked me about that earlier as we were talking. That is another point that I wanted to make with online businesses. If you can think about the recurring revenue that Buffett and Munger saw in consumer products companies and they still see today with backing of Heinz or Burger King or Anheuser-Busch deals. Duracell, Gillette, all sorts of things that they’ve done through the years with consumer products. With the newspaper type businesses. They love situations where you know the revenue is going to be there in the future. I think with online businesses, particularly subscription-based, SaaS models, or other recurring revenue models, that’s really a key element of having a valuable business. I think a lot of the businesses that you probably are working with, Jock, have that component and that characteristic, which would be really important for your buyers to make sure they appreciate and understand the value of that.

Jock: If we look at the sales data on recurring SaaS-based businesses, versus say, an e-commerce businesses or an advertising based site, SaaS is certainly selling at a much higher multiple than the other business models.

Mason: Yeah, no question. The marketplace has really come to appreciate that, as it should.

Jock: When I do a valuation on a company, I’m always saying that at the end of the day, my valuation is a guess. What the market’s going to pay for the business is what the market is going to pay for the business. That data on recurring valuations basically backs up everything we’ve been talking about for the last forty minutes.

Mason: Yup. Very much so.

Jock: Good stuff. If someone wants to find some more information about you, do you want to give them some resources?

Mason: You bet. I appreciate the comments you said about my blog earlier, Jock, and that website is my name, MasonMyers.com, and my investment fund is called Greybull Stewardship, and you can find it just by doing a Google search. Yeah, thank you very much, Jock, I appreciate being here.

Jock: No worries. And I’m happy to give you a plug for Greybull. What’s the perfect type of business that you’re looking for?

Mason: I love recurring-revenue online businesses that are growing at a healthy rate, and the management team wants some capital for growth or to take some chips off the table and they want a good partner for the long term.

Digital Exits publishes a yearly online business valuation report that analyses the previous years sales data from BizBuySell.com the leading business for sales classified website. In this data we analyse both for sale by owner and for sale by broker online businesses sold in the 2014 period.

The goal with this report is to give tangible data to both buyers and sellers on the valuation multiples of online businesses.

You can see all past reports here:

• 2013 Online Business Valuation Report
• 2010-2012 Online Business Valuation Report

Some interesting observations for 2014:

• Total sales transacted increased $30 million from 2013 data.
• The total transactions volume double from 2013 to 2014
• Ecommerce business transaction volume double
• Software business transaction volume tripled
• The average multiple decrease dramatically from 2.7 X to 2.06X

We Analyzed 182 Businesses From 6 Business Models