A conversation with a friend regarding investment advice got me thinking about a lesson from one of my favorite movies….
This lesson on business valuations is from the late 19th / early 20th century, but it still holds true today.
In this episode of the eCommerce Lifestyle podcast, I share my thoughts on how to create the best deals possible when acquiring existing businesses and / or assets.
Mentioned in this Podcast:
- eCommerce Lifestyle Podcast: Whatcha Gonna Do With All That Cash???
- eCommerce Lifestyle Courses
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eCommerce Lifestyle Podcast Show Notes : Oil in the Ground: Investment Advice from the 19th Century
Table of Contents
- What is the Value of Investment
- How Buying Inventory turned into a strategic investment
- Look for hidden value, look for oil in the ground
What is the Value of Investment?
Hey, everybody. Anton Kraly here again, and welcome to another episode of the eCommerce Lifestyle podcast. So I did an episode, I guess it was last week, late last week, and it was about where to put your cash, so kind of what to do, where to invest, where I invest and what I would recommend other people do. If you haven’t listened yet, go back. It’s just titled, What You Going To Do With All That Cash? And that episode got some great feedback. It got lots of comments on social media. And we got a few emails in from people, as well, just kind of asking for different investment advice on different opportunities that they see. And because of that, I did want to expand on that, my thoughts, I guess, a little bit, specifically a different way to kind of look at assets when you’re looking to invest.
Again, this is kind of expanding on what I spoke about last time, so if you haven’t heard the first one, go back, because that’s really my primary thought process and I guess strategy behind investing cash that the business kicks out. But what I want to talk about today, I guess, is a lesson that I got from one of my favorite movies. If you haven’t seen it yet, go download it right now. Go on whatever you use, Netflix, iTunes, whatever, and check out the movie There Will Be Blood. It came out I think in 2007, and it’s with Daniel Day Lewis. In my opinion, it’s his best movie ever. Just an amazing movie all around. Amazing acting by everyone, amazing plot, amazing scenery. They nailed it. Again, it’s called There Will Be Blood.
It takes like late 19th Century, early 20th Century, basically in the states when oil is becoming a thing and when people are starting to basically build businesses around the oil industry. So in the movie, the guy, Daniel Day Lewis, his I guess arch nemesis, the character is this guy named Eli. And in the beginning of the movie, the guy, Daniel Day Lewis, is trying to buy Eli’s family’s land, because Daniel Day Lewis knows that there’s oil under it and he’s trying to make a deal so he can get access to that oil.
So basically the guy, Eli, the deal never works out, he won’t do it. And at the end of the movie … there’s obviously a whole bunch of twists and turns that happen, but at the end of the movie, the guy, Eli, is super desperate, basically, and he needs cash. So he goes to Daniel Day Lewis, who at this point in the movie is super successful, huge oil baron, literally generating the most oil from anyone in the country, and then the guy, Eli, comes to him and he’s like, “Listen, I really want to make this deal happen now. Will you give me money? Will you buy my land, my family’s land?”
And the guy, Daniel Day Lewis, is not in a good state of mind at that point in the movie, but he basically gives Eli an example of why his land is now worthless. And he says to Eli, “Listen, picture you have a milkshake and picture I have a milkshake, and picture I’m all the way over here on the other of the room, but I have a straw that reaches all the way over to your milkshake. Guess what happens? I drink your milkshake.” And that’s how he explained to him that by buying land all around Eli’s family’s land and basically building his oil farms, they were able to suck up all the oil underneath everyone’s land, including Eli’s. So he was basically able to overtake that business and he was able to buy that oil at land prices. And this is really the key message, okay? The key here is he bought oil, which is worth, I don’t know, 100, 1,000 times, probably more, worth more than the actual lands, but he paid land prices.
So this is a key. When you’re trying to spend your cash and invest into businesses, you have to look at what value you’re buying at. And when I say “what value,” I don’t just mean what multiple. I don’t mean someone says, “Okay, I want 30X monthly net,” and you say, “Okay, I’ll give you 25X monthly net. Like yeah, that’s all great and well as far as negotiating goes, but what I’m talking about is what value are you paying in terms of the assets that you’re getting.
How Buying Inventory Turned into Strategic Investment
So in that scenario, right, the main character, he paid, again, for property which was worth basically nothing, and what he got in return was the ability to suck all of this oil out of the ground, not just under the property that he bought, but the properties all around, ’cause that’s how oil works, it’s all connected, and he was able to extract all that and turn it into dollars.
So I’ll give you some real examples of how this transitions I guess into e-commerce, or if you’re buying really any type of website or business. But this I could totally tie in and relate to a conversation that I had, I think it was on Friday, with a guy from Drop Ship Lifestyle. I’m not going to give his name, ’cause I don’t know, I didn’t ask him if I could, but he’s a huge part of Drop Ship Lifestyle, a huge part the community, definitely someone I consider a friend. And we were talking, ’cause he kind of had some questions and was looking for some investment advice for a business he was planning on buying.
Now, this business that he’s planning on buying is not one that he found on any website brokerage, it’s not one that was listed on all the websites trying to sell websites, which is fine. But the way that he found it is because this company is actually one of his suppliers. So he runs a drop shipping store, sells for a bunch of different brands. And he noticed that one of the brands that he sells for, that he sells a lot of product for, basically sent out an email to him and their other retailers, and they said, “Listen, we’re selling our products right now at …” I think it was “10% over your wholesale costs. We’re removing our MAP policy for the next X-amount of weeks.” And basically what they were trying to do is just clear out all their inventory. They were trying to get rid of everything.
So he did what I think is the right move to make, and he reached out to them, and he basically wanted to see what was going on. And what he learned is that this company, right, this brand, this manufacturer, this supplier of his, they’re involved in a much bigger industry than the one that he’s in, and they own other product lines and other product types in other industries where they’ve been established for a lot longer and where their company’s making a lot more money.
So what they’re basically looking to do at this point, they decided that the industry that he’s in, that that brand that they had built there, that physical product brand, basically isn’t worth them proceeding with. But they’re not looking to sell it, right? They were just looking to clear out inventory and then move on, or stick with what they have that’s working better for them as a business.
Now, what’s crazy here … again, what value are you paying? He was trying to figure out, “Okay, I’m already selling these products. I want to get into having my own product line, anyway. How can I actually work out a deal where I could basically take over this brand?” Right? Now, normally if you want to buy a business, buy a brand, you are paying valuations on the brand, on their revenue, on their profit, right, on their trademarks. You’re paying the value on everything that they’ve spent years building up, all their social media accounts, their email list, their followings.
Normally when you’re buying a business, like a physical product brand, you’re paying for all of that. But because this company has basically made that decision that they’re just going to liquidate their inventory, and again, stick with their other, more established product lines, what he is negotiating right now, it’s definitely not a done deal yet, but what he’s negotiating is literally buying out their remaining inventory, again, products that he’s proven to sell, because he’s selling them every day on his website already.
Look for Hidden Value– Look for Oil in the Ground
And in this deal, he may be able to buy their inventory at wholesale cost or maybe a small markup, and in addition to just getting that inventory, get their website, get their trademark, get their supplier connections, get their retailer connections, get all the graphics they’ve invested into, get their email list, get all their social media pages, which again, if you just wanted to buy a business like this, like if I had a brand called Anton’s Desks and I was selling that, you wouldn’t be paying me wholesale costs for my desks and getting my entire business.
But because he saw this opportunity there, because this company, honestly, is you can call it distressed in this market and they’re not looking to really just even be involved anymore, I guess they have something else that is their cash cow, well, guess what? He might be able to get this deal again where the value he’s paying, the valuation, is based on inventory, not all that other IP, not all those other assets that are going to be included in the deal. And then what can he do with this? Obviously take it, turn it into something much bigger, have the full energy and focus on it, and be able to have a much more valuable asset than what he’s paying for it.
Now, this is something that … Just like when you first get into e-commerce and you’re looking for product ideas, you see opportunity everywhere. For me, I talk about this in my e-commerce training programs, but just going on a walk somewhere I see product opportunities everywhere, different things I could research, different things I could potentially sell. Well, when you’re in an industry and when that’s your primary focus, right, not when you have 50 different stores, but when you are dominating an industry … The person I’m speaking of does consistently well over six figures a month in sales in that one industry. He’s there. He’s in it every day.
He can see opportunities like this, where this company sent him an email saying, “Hey, for the next X-amount of weeks, MAP is not really a thing anymore, and you can only pay …” whatever it was, again, “a 10 or 20% markup on our products.” He saw that opportunity to call them, and now he’s in the process of negotiating a deal where he can have his own established company already that has ins with, I’m not going to give names, but some of the biggest retailers and biggest online retailers already, and no, not just Wayfair or Hayneedle, but some of the biggest, the most established ones, where he can possibly take this thing over and have his own physical product brand.
Now, before that, right, another place that’s good to invest money is obviously into building your own product lines. But think about the benefits you can get if you can negotiate a deal like this, because now you don’t need to create your own unique products, you don’t need to figure out who’s going to manufacture it, you don’t need to figure out how it’s going to be manufactured, you don’t need to build the website, the marketing material, get the professional photos done. You get it all
So that’s definitely another good way, guys, to invest money. Don’t just look at the land or don’t look at the ground. Look for the oil in the ground. Look for the things that you could get on top of what you’re buying that may be hidden to the actual buyer or that the buyer may just be so done with they just want to move on, or like in this scenario that I’m talking about right now, they just have another business that has been their primary focus for decades, so they’re just moving on.
So if you could find that, you can pay value at land’s costs and you can get value in oil costs. Huge key when investing in businesses. Keep that in mind. Again, you’re not going to find it on any brokerage, even though there’s nothing wrong technically with buying sites from brokerages, but look for the oil, look for those opportunities. Keep your eyes opened. And the deeper you get into your industry, the more deals like this you’re going to come across, or I should say the more deals like this you’re going to be able to manifest, to create, and to make happen.
So I’ll keep you guys posted with my buddy, the guy from Drop Ship Lifestyle if this deal goes through. And whatever happens with it happens with it, but I just thought I would share that with you, because if you’re not looking for it, you’re never going to see it.
So yeah, hope you guys find that useful or valuable or whatever. If you do, definitely let me know. Go to ecommercelifestyle.com. Click on episodes, and then you could see every single podcast I’ve ever published. And get engaged there. Leave a comment. Let me know what you think. Let me know what you want to hear more of, what you want to hear less of.
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So thanks, everybody, and I’ll see you the next episode of e-commerce Lifestyle. Bye.