Trent: Hello everybody and welcome back to another episode of The Bright Ideas Podcast, as always I am your host Trent Dyrsmid and we’re here to talk about e-Commerce and in fact, my goal with each and every episode is to shine a light on all the tools, the tactics and the strategies that have proven to be the most effective by today’s leading entrepreneurs.
And on this very episode, you can expect some really good stuff because my good friend Bill is my guest today and Bill is the CEO and founder of a company by the name of Elements Brands which he is building or has built already and continues to build into an extremely successful organization using the acquisition model that I’m not going to steal Bill’s thunder. Let’s hear it from him Bill thank you very much for making some time to come and be on the show.
Bill: Sure thing, glad to be here.
Trent: So in your own words, who are you and what do you do?
Bill: Yeah so my name is Bill D’Alessandro, I am the founder and CEO of Elements Brands and Elements Brands is a home, a long term home for consumer products brands. So, we acquire companies and help them to scale and reach their full potential.
So we focus on three specific industries; one is personal care so I think lotions and potions, one is household goods soaps things that are used around the house and pet products, everything from supplements to top of holes but no food. So, we look for great entrepreneurs who started really awesome brands of kind of hit a glass ceiling and don’t know how to make them any bigger and want to kind of turn the reins over someone else; so we acquire those brands and aim to hold them forever so we hope to build a large kind of Berkshire Hathaway style and glamour of consumer products brands and try to great home for these products for a longtime.
Trent: And there’s a whole bunch of stuff that I want to dive in deeper and actually something I just remembered that I’m going to type in my notes so I don’t forget about it, is the Shopify warehouse announcement because I know that bit that happened after we did our pre-interview, I definitely want to get your take on that.
Okay, so at some point in time you didn’t do this, so how did you get started? Did you just sit down and think, “Hey I’m going to be Warren Buffett Jr and build myself a conglomerate” or did it start in a different way?
Bill: I hate to be so stereotypical but I read the 4hour workweek and quit my job. I was working in investment banking and finance; worked for a couple years in finance after I graduated from college and the particular group that I worked in was called ‘Sell side M&A’ so we helped entrepreneurs to sell their businesses.
So we sold you know bunch of businesses for other folks and I remember always being so impressed with the entrepreneurs and you know all of us the Investment Bankers walk around in fancy suits and think we were cool and the entrepreneurs was taking 95% of the proceeds for the transaction and a lot of these guys would show up to the mended presentations and camel pants and you know I wanted their life.
Trent: You mean they had flip-flops?
Bill: They did! Yeah so I did that for a number of years and I read the 4hour work week while I was doing that and I thought like, “I think I can do this” so I started my first brand nights and weekends while I was working banking and I quit my job when I was about $150,000 in sales.
Trent: And you started the first brand? You didn’t buy the first brand?
Bill: Correct! I started my first brand in 2010 and by 2012 I was about $150000 in sales, quit my job, I did the 4hour work week thing, I skied on Tuesdays, I traveled around the whole thing, my laptop is super cool not really smug.
And I did that for a little while but what I realized was there’s opportunity to do something a lot bigger, you know rather than just build a business that was you know an Internet Cash Machine essentially, you know there’s an opportunity to go out and find these other brands and bolt them on with the systems that I already built.
Trent: And was this a consumer goods brand?
Bill: It was, it’s a personal care brand, it’s a skin cream
Trent: Okay, so $150,000 in sales you probably got 80%-90% gross margins on skincare I’m guessing and then so you were able to make it an average living off of that right?
Bill: I was making $50,000 a year in profit that was my number to quit was when I made $50,000 a year in profit I could quit.
Trent: Okay so now so at some point in your journey you decide, “Hey, I don’t want to start more brands but I want more brands” what was happening? What were you reading or did you have an Aha moment like, how did you shift in your head from “Hey, growing this company” to hold on a second, “I need to do something slightly different; I need to change my strategy and grow a multiple brand organization?
Bill: Yeah for me, it was actually— I went to school for Computer Science back in the day so I’m a nerd at heart and for me it started sort of in the systems that I was building for my first brand, I realized that I had built and this was in 2011.
So you know, Shopify wasn’t what it was and e-Commerce software in general wasn’t what it is today but I built a lot of software that allowed me to really automate my business and I felt like, “Man, you know I’m only doing barely 6-figures in sales and this software can support millions in sales” and I thought, “Man, would be great if I had some more revenue”
I looked around and saw all these businesses that were that really could use my software and one way of thinking would be men maybe I should advertise the software and sell to them but I had just come from this world of finance so I knew that is this could be bought and sold and just how much value could be created by implementing best practices at a business that you bought and own. And then instead of getting you know $199 a month, you can participate in all the synergies enterprise value to create a running IT business better.
So I wonder if there are other companies out there I can buy and bolt on to my platform and use my software to help run and that’s why I start poking around and realize there is an opportunity to buy other brands.
Trent: And what does your software do just for perspective?
Bill: So it was— is basically middleware so there is I was using a cart Foxey cart at the time actually still exists and I was using a 3PL but there wasn’t good software to kind of send orders from you know cards my 3PL so I had fully automated that; I’d also fully automated all the tracking numbers back from 3PL VAPI in the cart. I had written him into a management software to kind of track my you know weekly sales and I programmed in with kind of how much inventory I had which was point from the 3PL and also the lead times from my manufacture so it was automatically reordering from my manufacturer based on a margin of safety to make sure I never ran out of inventory and you know the shipping address of the 3PL.
I had automated a lot of stuff and I had you know a number of different metrics kind of on the back end that were being pulled automatically and I was really not spending a lot of time doing the mechanics business I was really working you know on the business rather than in business to use a colloquial phrase.
So I said, “Man, like I bet a lot of other e-Commerce business are wasting a lot of time doing all these things manually know what I am bottom”
Trent: Nice! So buying an e-Commerce business sound easy to do, I’m guessing it’s not quite so easy as it sounds?
Bill: Not quite so easy, not quite so easy it’s gotten easier done six acquisitions since one first deal was in 2013 it’s now 2019, six later, we got a lot better at it but it is still to use a friend of mine’s term like eating glass every day so we looked at last year almost 250 deals. Trent: When you say looked at, do you mean that you got a deal book and you looked at the financials or you looked at that many listings and then some of those listings you got a deal book and some of those?
Bill: I mean signed an NDA for almost 250 deals, received for criteria information on almost 250 deals; so beyond just what’s listed with the broker.
Trent: Okay so that is— sounds to me like very much a full time job and that’s probably what– are you the one that is undertaking the vast majority of that effort?
Bill: I used to be, we have a full time corp dev guy now who leads that effort for us but he just joined us in 2018 so from 2012-2018 I ran that whole process.
Trent: So you signed about 1.2 NDAs a day?
Bill: Almost 250 every 365 days so it’s about every one and a half days.
Trent: Wow! But I’m not counting weekends.
Bill: We’re not counting weekends fair enough; it’s almost as exactly 1:1
Trent: So where does one get that much deal flow?
Bill: If I told you everything that would be all of my secrets
Trent: That’s a good deal, so don’t disclose any of your secrets
Bill: But I will of course share some things that will be helpful to folks who want to buy an e-Commerce business; there are a lot of brokers out there, brokers a broker for a business is like a real estate agent for house you want to sell your house you hire a realtor, you want to your business you are business broker. There are a number of these brokers out there and they all have email list the you can get on so every time they have a business for sale they will blast out you can take a look at them.
There is a website I think that aggregates all of them called [inaudible 11:10] and then you can also going to bizbysell.com And just with those two, they’re not super organized but if you want to put in the Alba Greece you can see a lot of deals.
Trent: So is it been pretty much like one acquisition a year or did a number happen sort of quick in the beginning you know they’re getting slower or they slow in the beginning and now speeding up?
Bill: It’s pretty much very consistently one per year on average; so first deal in 2013 and now 2019, we’ve done six.
Trent: Okay, so the very first take away that I’d like the audience to have is calculate Bill’s success rate; one deal for 250 NDAs, so many times people get into and I know that in my business which and my numbers are actually little better there so my business is different than yours, my business I negotiate with brands to become Ideally their exclusive seller on the Amazon platform.
And man oh man we just saw a lot of frogs, we do a lot of e-mails, a lot of phone calls and our success rate is about 1%-ish but yours is less than a half; less half.
Bill: Yeah now you know we also can a lot of frogs too and sometimes I saw I were looking around were saying oh that’s interesting you know we’ve seen a few other businesses like this and we’re trying to develop a thesis for a particular space and sometimes we’re just interested. Yeah but yeah I mean you got it– it depends on how picky you’re being too, we’re very picky. I really want to get it right on the numbers are getting big at this point so I can’t screw it up, yeah.
Trent: What are some of the most when you’re looking at a deal what are some of the most common red flags that would cause you to go under and was not going to fit, again without disclosing any of your proprietary secrets?
Bill: Sure and these filters are our filters other people might have different ones so I hope folks listening don’t think that if your business gets credit here I’m about to mention you have a bad business, you just have a business that you know isn’t in our wheel house; so one thing that we look for is we look for at least 50% of revenue outside of amazon.com.
Trent: Which is really hard to find?
Bill: So that’s been sent out a fair bit and the reason for that is because I believe pretty strongly that if you can demonstrate that you consumers will come to your website and buy directly from you which is objectively harder than buying from amazon.com and you probably ship it slower than Amazon does it means they are really picking out when you’re putting down; like they really are bought into your brand story, they want to have a direct interaction with the brand and it probably also means that you’re pretty good marker and that you’re probably pretty good at it from an SEO perspective or pay Facebook and Google traffic perspective in that you’re able to attract traffic from a diversity of sources rather than just Amazon ads or ranking on the Amazon platform because at businesses all Amazon is a risky business right? The Amazon algorithm changes, or you get suspended or you get a black hat competitor that’s doing non-POS compliant bangs, I guess your listing is taken down, your business is gone overnight. So, we like to see that diversity revenue source. And so that’s one thing we look for pretty uncompromisingly.
So we are to measure industry focus person care household goods and Pet. So, we’re looking for products that are generally consumable lifetime value type products where the customers come back and buy again and again. That allows us to spend more upfront to acquire a customer because we know that you’re not just going to buy one time.
And we also run a couple other metrics one that we call revenue complexity, we like to see revenue non-complex businesses and the way we measure that is total revenue divided by number of skews. We like to see being equal we’d like to see a tight skew lineup that really flies rather than you know a huge long tail of all sorts of things. And the reason for that is supply chain complexity but also the amount of inventory you have to carry when stuff turns lower, you have to care more about inventory.
Trent: Yeah and then there’s just more capital tied up in inventory and you need a bigger warehouse you’re unconscious and then there’s just a spiraling effect.
Bill: Exactly! And that’s why we’ve learned that one the hard way with the businesses that have a ton of skews and caused a lot of heartburn. We also look at a metric called revenue density which is essentially how many dollars of revenue per ounce do you get and this is really critical in e-Commerce because things that are large, heavy and cheap can bankrupt you in e-Commerce versus things that are small and expensive are really where the money is especially when free shipping is table stakes.
So something like a bag of dog food which is relatively cheap and extremely heavy and large, will score very poorly on this metric where something like you know a one ounce jar of $50 skin cream will score very highly.
Trent: And when you say scored you mean you’ve actually developed a matrix either in a spreadsheet or something like that where you’re looking at each dealing you’re assigning a score which is somewhat objective or subjective?
Bill: Objective based on data.
Trent: Yeah so subjective as well okay, yes so you’re using these based on data to score and then your calculator is coming up with a score totals for you?
Bill: Yes, it will have like dollars/ounce like well blended of cross there will dollar cost average across all their inventory and say you know typically these guys get $2/ounce of revenue. When you think about it that means one upright the weighs one pound 16 ounces should cost $32.
Trent: And how did you arrive at that number? You’re simply looking at their price list and going, “Simplicity they have 10 products their average price of those products is whatever and there’s all the weights of those products so their average weight is whatever and it’s and it’s the you know the $8 divided by the average price divided by the average weight?”
Bill: I do it the other way, so I calculate the revenue density of each product and then I dollar cost average those numbers based on the sales loss of each skew. I don’t know if that’s the same my you have to as my high school math teacher, come out with the same answer or not.
Trent: You know I’d have to ask my wife on that one too, she’s good at Math, she’s great at Math.
Bill: So what were you getting out is yes we have a scorecard so if we don’t expect every business we look at you score at the top of the scorecard on all of these different metrics but it helps us get an idea internally of is this a great business for us or is a good business for us or is this something we’re not interested in? It kind of keeps us intellectually honest.
Trent: Okay, any more big red flags?
Bill: Obviously if you have declining revenue or if you’re extremely focused on wholesale like if you’re 98% wholesale retail that would be pretty scary for us although we bought businesses with declining revenues because we thought that there was opportunity there we could fix them; we thought businesses with a lot of wholesale revenue because we thought there’s opportunity to take them online. So you know another is in your deal breakers but these are things you kind of add up points in the YES column and points in the No column.
Trent: Yeah there’s not only a science but there’s an art here as well I’m getting. So, if you have a business that goes check check check check check on your score card, the question that pops into my mind is why owners because it’s just a great business that’s why you’re interested, why on earth would anybody want to sell that thing?
Bill: Sometimes I ask myself that question every day but now there’s plenty of reasons you want to sell your business; I mean Chief among them honestly that we run into all the time is just burnout. I mean a lot of times people have been doing it for 10 years, I mean some of the best business is the business that we like best been around for 10 plus years and that’s another thing we won’t buy a business has been around for less than 5 years.
We like to see a proven track record, so if you’ve been doing something for 5-10 years you know and you’re an entrepreneurial type person like probably many listeners who might be reading on the next thing it might be not indicative that the thing you’re currently doing is not cool or has lots of opportunity but you might be ready to move on you might be burned, you might We’ve seen people who just had a kid we’ve seen people who had a sick parent, you know a lot of times life gets in the way.
So, there’s plenty of reasons to sell and honestly those are kind of the situations we love because those are good businesses that people are selling for a personal reason versus somebody who kind of thinks they squeeze all the juice out of the business and is trying to unload it at the top and we’re definitely looking for that too that question of “Why are you selling?” is a critical one to us.
Trent: You know it seems to me there’s always opportunity with a fresh set of eyes
Bill: Yes always.
Trent: Okay, so we’re going to get a quick moment to bring you a message from our sponsor for this episode, the sponsor of this episode is a new software tool called Sellerly brought to you by a company that’s been around for a very long time called SEM rush. So Sellerly is a new tool that they’ve brought and it’s free and that brought it to the market to help Amazon help brands or Amazon sellers to split test what is working most effectively on Amazon.
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All right so as we’ve been talking through, a couple of things came to mind; so you mentioned why people sell burnout has a kid, had a life event, maybe they’re looking for some liquidity because they feel there are in their net worth is too cost traded in one particular asset but you did say something about you look to uncover somebody who is “selling at the top” Are there any particular strategies you have to help you identify when the seller isn’t burned out or isn’t having a life event and they just know something that you don’t know and you’ve got to try and figure out what that is?
Bill: Yes so, that’s called due diligence right? Yeah, absolutely. Our filter for having been in existence more than 5 years does solve for a lot of us because we see a ton of businesses there seems to be some sort of somebody out there is telling people start a you know Amazon business way to exactly 2 years and then listed for sale and sell it before you know it all go sideways. There’s a ton of Amazon business for sale that are exactly 2 years old.
And I have not done all the data analysis but I know that there are kind of serial sellers out there that will stand these things up work on him for 2 years and then try to flip them. And that’s not a bag I’m interested in holding. So you know we talked to– it’s more about trying to figure out do does the seller have legitimate reason for selling now and I will kind of keep digging until I can figure out what that underlying motivation really is and until I can understand that, I’m probably going to not be interested in buying the company.
So a big part of our diligence is really trying to get to know the seller well enough so I can understand what is really driving the sale process you know why sell and why now?
Trent: How long term average do you think your due diligence process takes?
Bill: We have always closed in under 60 days, typically from the time we have assigned LI, will typically have actually 70 for about 60 days sometimes we close earlier than that but 60 is our target; sometimes sellers can say I need another 30 days but we are kind of always ready to close provided the seller give us all the information we’ve asked for sort of a timely fashion, 60 days is always our target.
Trent: And during that 60 days to uncover their reasons for sale, you’re kind of coming in at it repeatedly from all different angles with all different variations of the questions to in essence try and trip them up if they’re not telling you the truth.
Bill: Yeah and it’s not necessarily like a 60 day game of gotcha it’s a little bit more like a 60 day game of trying to get in their head to understand where they’re coming. And trying to get them so I can understand their frame of mind and then you’re also trying to turn over all the other rocks in their business and say like, “Oh, I just talked to your major supplier and now I see that you know they’re cutting you off in 6 months” like talk to me about that might not be the reason that you’re interested in selling a business right now?”
You’re looking for things like that there really is trying to get in there head to make sure that you’re not going to be catching ab falling a knife.
Trent: When you’re going to do due diligence is a part of your process to have a dinner with them face to face?
Bill: Oh absolutely yeah I spend as much face to face time as possible; I would never buy a business without spending time with the founder. I insist that we have dinner together and a couple of wine if they do drink and I try to get a nominal personal level.
Trent: And then once you decide you’re going to close how long will that sound of you lying around for typically?
Bill: So I’ve learned that maybe we are different than most but we typically don’t ask very much from the founder after close, it’s you know a couple week transition period tops we get them out a month but we find you know we say yes help us 40 hours a week for a month but we find out the first 2 weeks where it is not a call and that we ask for like up to 5 hours a week for like 3-6 months after which basically just means please answer my phone call if I call you, but we never call— we just we find that we just never do.
We have a whole team here that is kind of focused on running integration and getting it really buttoned up process wise and onto our platform as fast as possible so the founder you know pretty quickly just takes on a role of, “Hey, I heard from this customer that hasn’t ordered in 2 years, we haven’t ever talked about it you know a background” you know you know that type of thing not really actually doing.
Trent: Okay, your portfolio of I think he said 6 brands is that right?
Bill: Okay, well so we’ve done 6 acquisitions we have 10 brands
Trent: Okay what are some of the— let’s say what are the top 2 or 3 biggest challenges in your job in running a company that has a portfolio of brands?
Bill: Yes so we’re in a sense I said 10 brands, the multiband problem is real when you have just one brand you know you can spend all day thinking about the products, the customers, the industry new hire really, really steeped in it but when you have 10 brands you have to be you know a horribly schizophrenia right; you’ve got to put yourself, you know just switch personas you know very often during the day and so we’ve started cluster our brands so our employees switch less often but there is the switching cost every time you change personas you lose a little bit efficiency.
So, we are hyper aware that this is sort of a pitfall and spend a lot of time trying to figure out how to make sure we stay in touch with each individual customer and also that we then roll out best practices you know, we figure out a funnel that’s working on brand A, you know let’s make sure that we do roll out in Brand B and Brand C and Brand E which sounds basic but it’s hard to organize all that make sure that actually happens.
That’s a challenge for sure, and then just reporting was a real challenge for us too because all of the kind of your standard accounting package is Quick Books, zero etcetera are not really set up to handle 10 Shopify stores you know plus Amazon plus wholesale. And break that all down so I can say show me up a P&L statement for Brand C and Brand A. So, in 2018, we launched on an ERP called Net Suite
Trent: Was just going to say, that was no small project implementing that thing.
Bill: It was not, it took us almost 9 months and we just actually yesterday was our one year anniversary of Net Suite and we all celebrated here as I have for year over year everything in Net Suite as of July 1st that was big project but we can’t run the business without it so we can say you know Net Suite, show me Brand B on Amazon, show me a Brand B on Shopify, show me Brand B wholesale and so you can see how your different channels are doing from a margin perspective and you know show me how much inventory we’ve had, what’s our return on that inventory you know automatically raised for me alarms first skews they’re dropping below 12 weeks of cover.
When you have 10 brands you have all these products and I’m sure you probably run into your business also if you’ve got all this stuff in inventory, just making sure you don’t run out becomes non-trivial.
Trent: Huge issue because every time you run out it’s literally like losing money because right making sales
Bill: Right exactly!
Trent: All right so and I had a great question in my head and now it just escaped because it was a part of our pre-interview, let me see if I can remember, it’ll come back to me.
Scaling your business, so you’ve used a particular strategy buying brands of a certain-ish size to get you to where you’re at; I assume then to get to $100m or $200m in annual revenue, the average size of your brands is going to have to go up because otherwise you’re going to end up with way too many of them and you’ve got costs due diligence and your ROI is not high enough because you know buying a $5m company requires probably as much due diligence buying out $25m company
Bill: Yes although I would divide your numbers by 5 so when we started we were looking at brands that were under a million in sales and now we’re looking at brands that are $1m-$10m in sales for all of the reasons you articulated in that, it’s not that much harder to operate a larger brand that is a smaller brand. But there is a ceiling on brand size where you know when you’re when you’re at $20m-$30m in sales; you know I’ll be betting against Procter and Gamble.
Trent: And they’re going to pay more than you; so above a certain size, you know you’re bidding against Procter and Gamble or whoever else and they’re going to pay more so the price is going to go up; so our thesis is you know how do we own 20-30-40 brands you know in a way that works and we build the process to do that? So, we can buy brands that are one to 1m-10m sales. And we intend to do that 50 times.
Bill: So that you’re not having to compete against P&G because you’re never going to win that bidding and you can outbid P&G.
Trent: Okay, so here’s what we’re going to talk about before we finish up I want to ask you about tools and the strategies to cope with some of the biggest challenges and I think those are probably somewhere along the lines of finding and managing talent in the tribute estimating how much complexity you can take out when you buy a new brand those are a couple things we covered in the pre-interview and that’s something I want to add to that is and this was as a result of an interview I did just recently I think in Episode 274.
I interviewed the founder of a company called Wicked Reports and we talked a lot about attributed revenue, do you happen to use Wicked Reports by the way?
Bill: No, not familiar with it.
Trent: Let’s hang out on this attributed revenue thing for just a moment because it was actually quite a fascinating interview; so we as marketers and I’m looking for your feedback so let me give you a quick scenario as marketers we design our funnels we think okay, I’m going to run this ad so I’m going to quit this ad we’re going to go to a lander they’re going to see my offer and some portion of the people are going to buy my offer and some portion of people are going to buy my offer and that’s kind of the end of it.
But that is in reality, funnels don’t really work that way because people do all sorts of crazy weird things while in the middle of your funnel that you didn’t necessarily anticipate. So, for example I see this ad, I click this ad and then I added to cart maybe a week or two goes by because I’m going to be buying for somebody’s birthday and then you know like I hope big amount of time goes by for a buy it or maybe I don’t buy it but then months and months later because I think it’s in your content maybe I buy it down the road.
And so, attributed revenue is figuring out well maybe I had a funnel that I an ad campaign that I was running first a 30 day period and I stopped doing it after certain days because it didn’t look like it was having great ROI But now 60 days later all those people are buying my stuff like crazy but you wouldn’t know that unless you had a really good attributed model in place, how do you deal with that challenge?
Bill: I mean that’s the central challenge of e-Commerce Thank you is that your vision I mean I know Facebook and Google themselves spend a ton of time and money trying to figure that out as do much larger e-Commerce retailers than us. But yes so we— one way this hits home for us is sort of the dot com to Amazon we call it the channel switching problem. So it is very common that people will see our Facebook ads click them, come to our site browse around become convinced to buy our thing but they want it Prime right? So, they open up a new tab they open up amazon.com they type in our product name clicking convert on Amazon no way to attribute that at all. So, we’re aware it’s happening because when I turn off my Facebook Ads my Amazon sales declined. So even though I’m not sending any Facebook traffic to Amazon I’m sending Facebook ads to my site. I also know that on Amazon and some of my listings where I’m really good funnels I have. Conversion rates that are 80-90 sometimes 120% conversion rate which doesn’t make sense on Amazon; so I know that’s traffic you know that is so high intent that they have been convinced elsewhere and they’re just using Amazon as a delivery mechanism.
So, we’re working now on kind of some correlation between we’re turning Facebook on and off and watching how Amazon moves for a couple of our different skews and trying to come up with a correlation which then you could apply sort of a let’s say you know you get an extra $0.30 of Amazon revenue for every dollar of dot com revenues you can imagine. Now you multiply all of your revenues when you’re trying to do your ads by 1.3 and it might change whether you turn a campaign off or not yeah.
Trent: Okay, well without turning this into a Wicked Reports ad it was a very interesting interview for me because this is something that I’ve been working on in my own business and for whatever it’s worth I would suggest maybe when you’re driving have a listen and see if if it will pick your interest oh well and that is episode just so that everyone is clear episode 274 brightideas.co/274
Okay so challenges we talked about in a pre-interview finding in managing talents; so we could probably do a whole interview about that but we won’t, let’s talk about maybe your one or two best strategies for finding and managing talents.
Bill: Yeah, so this is kind of the talent thing is something the base they didn’t see coming and building the business we’re now almost 40 employees and I thought I was starting an e-Commerce company but actually I was starting a company which made up of people that happens to do e-Commerce. And as we get bigger and bigger I’m sure this will just continue to become so much more about having the right butts in the right seats and empowering them to— our letting them know what the goals are and then empowering them to reach those goals and basically getting out that way myself and also getting other things out of their way so they can actually hit the goals I set for them.
So we spend a lot of time on goals actually we use a system called smart for goal setting which I did not invent the system. If you Google SMART goals you will learn about it but SMART stands for Specific- Measurable-Achievable-Relevant and Time bound.
Specific means not you know make revenue go up make revenue go up by 20% right specific measurable. Revenues and measurable goals that’s a good one but like you know happiness is not you know so make for happiness go up that’s not very measurable. Achievable if you’re using the Net Promoter Score you can measure Yes because then you’d say make the customer happiness score go up. Yeah you have to be able to measure it. Achievable obviously the means don’t set demoralizing high goals and then never pay anybody bonuses because you never got to any of your ridiculous goals and Relevant is really important and I think this where a lot of people fall down in goal setting Relevant means it has to be within the sphere of control of the employee who is in charge of achieving that goal.
So, you know if I set a goal in my shipping department for revenue to go up 20% this year that’s going to be a pretty demoralizing goal for them because they have no impact on that all right what they have an impact on is cost per package; so you want to set goals that people can affect because they can affect a goal that leads them to checking out pretty quick and base I’ll help marking hits their numbers and we have bonuses. And then time that he has time down which means you’ve got to know you have an end date where you to succeed or fail at a goal
Trent: Have you ever heard of the great game of business by Jack Stack?
Bill: I have, someone recommend that to me
Trent: Do you know his story of SRC in an International Harvester and how the whole thing?
Trent: I will very quickly encapsulate it for you but I would encourage you and anyone else to check it out because it’s extremely compelling. So back and I think it was 1983 in Springfield Missouri Jack Stack and a management team were running International Harvester; they were running Springfield re-manufacturing I think which was owned by International Harvester anyway.
Harvester was going towards Chapter 11 and so when that happened Jack in his I don’t remember how many employees but we’ll call it 100 issues place who are rebuilding diesel engine or engines. They were going to all these are jobs in 1983 and in Springfield that was not a desirable outcome obviously because there wasn’t any other jobs. So Jack and his management team over a period of time figured out how to buy their company from International Harvester and they took it on with a 90:1 debt equity ratio 9m bucks and they put down 100 grand I think is what it was, so there runway was incredibly short and the vast majority of their people were blue collar folks you know grease on their hands working out of the factory floor and they had to figure out how to get everybody aligned really quickly. And that was how and why the business was born.
And it is a combination of open book management and sharing a critical number and what you said relevant making sure that each and every person in each and every department understands how what they do or don’t do affects the company’s ability to achieve its profit goals and then they feel like well, “Okay, now I understand the rules of the game now I got to feel like I can win the game” which is what the whole bonus structure and so forth and so on so I think you would probably find really fascinating. There is another sense Jack’s created that I mean he was the first there’s us the entrepreneur’s operating system there’s all sorts of other guys who’ve come out with stuff management tools for this and maybe you use Excel.
Bill: The takeaway from the book that the person who recommended it to me he said was very powerful for them and has been very powerful for us because we sort of are doing it without knowing it he said back to sports and write one of the things that makes sports fun is that you can win and that you know the score.
If you’re playing pickup basketball and someone goes if not keep score right the game is a lot less fun and then you like you want to keep score and there’s a scoreboard so you can look up the scoreboard and know if you’re winning or losing in any one time and how your actions are impacting the score. And that actually happens very rarely in business we don’t go out of the way to tell our employees the score you know whatever the metrics are you know the metrics the points however we measure success, it can be easy to either you know hoard those metrics just for management or not communicate them to the employees in enough of a real time.
So, we have been pushing to get these metrics on TVs on the wall in real time so and then we also have weekly reviews of the past week so the employers know the score which sounds so basic but it really hadn’t hit me how critical it is to know the score.
Trent: Absolutely! Especially when you go through periods of adversity because here’s the thing, if you don’t tell employees how much money your company is making they will assume it is vastly more than it is and they will consider you to be the greediest bastard on face of the earth because you’re not paying them well. And transparency solves that problem because then they become educated about how business works and they realize, “Wow this is actually a lot harder to make a profit than I would have thought” and Bill’s not just taking $50,000 a year to find new boats and cars going on vacations doing all these things, “That greedy bastard why doesn’t he pay me more?”
Bill: Right yeah, a lot of people think revenue is profit; most I would think yes you’re not catch rain in accounting.
Trent: Yes We actually have huge weight boards on our walls with our P&L and our balance sheet and so we’ve go through them line by line and educate the people that work for us on what it all means and how their behavior can influence those things to the company’s benefit which will ultimately be to their benefit as well. And I’ll tell you it’s not easy to do all this stuff but it’s better than not doing it.
Bill: Right it’s a lot of work, we take 2 weeks just to set goals, yeah I like my time almost entirely but it’s worth it.
Trent: All right we are rolling up on finishing so I want to ask you got more questions than we will have time for; let’s talk about the desk drawer that was full of bills. Yes. It is as a as one of your due diligence mistakes and lessons learned.
Bill: Yeah so I mentioned this in the pre-interview when Trent asked me sort of what are some funny stories you know things that you have had to add to due diligence list as the years have gone on and in one instance you know we bought this company and we said you know you need to tell us all the money you owe to your vendors, your accounts payable right and they told us they gave us a list you know we spent a lot of time going through that list understanding it, vetting it etcetera.
We bought the business and then we went to place you know all the accounts payable got paid off, we made sure it got paid off but then we want to place another word or with a vendor and they said, “Well, you know you guys haven’t paid us, you still owe us all this money” And we disputed it because we didn’t understand and then about a week later we found an old desk we were selling some furniture and we found we’re going to the drawers of the desk and their old accountant had a desk literal desk drawer full of bills and she had never in put it into the system and the accounting system and as such had never been disclosed to us.
Now technically, these bills were the responsibility of the prior owner but our manufacturers didn’t care you know they said they were like as between you and them pay us or we’re not making any more widgets so we ended up eating about $30,000 as a result of that. You know kind of our failure to on cover that during diligence, we also may elected not to go after the seller for you know goodwill reasons essentially. But we did add to our list is instead of asking the seller how much money they owe their vendors, we ask the vendors how much money the seller owes them.
So, we asked the seller to get a statement of account from all their vendors so they get the vendors to say, “We actually think you owe us this much and provide that to us” and that validates it because ultimately the vendor owns you right you can’t you can’t make some price you don’t get at regardless of who’s responsible it actually is you’re paying them.
Trent: That’s a $30,000 tuition right there. All right last question you said at the very beginning of this interview that your goal is to build this portfolio of e-Commerce brands and own them forever. And as we are all very well aware, we live in a world where e-Commerce is changing a lot all of the time; one of the big changes that was announced in the news maybe 2 weeks ago, maybe a week ago, Shopify fire saying they were to spend a $1b building fulfillment centers so that we can provide today’s shipping as well Amazon is working their way down to one day shipping.
But so that’s just an example and I’m interested in your take on that but the second part to my question is this, how the hell do you have confidence to know that as you’re building your portfolio of brands that the great big dump truck coming down the road that you can’t see isn’t going to absolutely just nail you because again change is such a constant in our business so two part question?
Bill: Yes, I mean so the only constant is change I totally agree but there are a few things Jeff Bezos always says that everybody is so concerned with what’s going to change, that they never stop to think about what’s not going to change. And these principles that I believe are not going to change are also you know shares a lot of these as well which is that I do not believe people are going to stop wanting to buy things on the Internet.
I also believe that consumers are going to want more and more personalized and niche brands and products that fit their wants needs and desires exactly. We’re moving from a world of fewer larger brands that were dominated by the old Lion CPG companies like Procter and Gamble, Johnson & Johnson etcetera who made one type of laundry detergent that every housewife in America used right and it smelled one way, there was one type of Tide right?
We’re moving to a world where people want different types of detergents for different types of clothes in different scents and different sizes delivered exactly when they want it right and that same thing is playing out in every CPG category across the board. I mean everything from large urgent to be here I mean we’re all drinking Budlite lite 10 years ago and happy about it yeah yeah and think about all of now everybody wants like the local double hopped you know barrel age microbrew right people go somewhere and they when they ask the waiter what’s from here?
People want micro brands now and that that is a sea change that I don’t think is going well. So if you’re if you’re comments like I am that you always want to buy things online if you convinced in the fact that people don’t want more narrowly targeted brands and if you’re convinced that I am– like I am that people want brands people like brands there’s been a I think the death of the brand has been greatly exaggerated. There’s been a lot of hullabaloo on the Internet people won’t care what brand it is and they will just buy you know whatever has 4.8 stars on Amazon
Trent: There’s a great premium stocks on Amazon for 15 bucks why are they in business because they make a quality product that people perceive to be so much better and I actually bought a pair of their socks and I think comfy.
And you know I’m not going to go buy a whole bunch more pairs of $15 socks but some people who are maybe really, really into socks would be very happy to have an expensive socks actually because they’re like a sock purse.
Bill: Yeah, there is a value in Brand.
Trent: Yeah and the other thing too I think that supports your argument is that Amazon kind of sucks at I would say customer service but providing an engaging shopping experience like it’s at a checkout you get it fast, Amazon is really good at that but in terms of personalization and so forth and you can probably answer the question better than me, I don’t really think they do a good job there.
Bill: Yes because of customer experience; I heard a quote that Amazon has spent decades absolutely perfecting buying, they are incredible at buying but they’re still terrible at shopping on the front end and they’re very girlie of you know what you want narrowly like you can get it like they’ll mail to you before even click add to cart track you know right they were read your mind and they’ll be at your front door, they’re great buying but they’re still terrible at shopping.
Trent: Okay so, let’s close on the Shopify portion of my question and I think you and I when we were doing our pre-interview, you were talking about that you expected that something like that to come pretty soon and lo and behold I don’t know why you know what do you have a crystal ball or inside you know two cans and a string. You know within a week or two of you know having that discussion they can run the sewer and spend a $1b. Were you doing the happy dance in your office when you heard that or how big of a deal is that?
Bill: I would love to have inside information but sadly it is just a crystal ball. I just think it’s been so obvious that what Shopify wants to do is they want to be the tool kit for an independent brand to reach their customer and run an entire business and they want to be anti-Amazon right? And if you’re an independent business, the first biggest friction was doing online store right accepting money cart all that stuff was a really big friction and Shopify has— I don’t want to say they’ve solved it but they’ve made huge strides.
But the next biggest thing is fulfilment, I mean that is like you can take the order but now what and everybody is dealing with 3PLs and Amazon’s FBA is such a competitive weapon. I mean just look at all of the how to start a business courses out there all of them say start with FBA because it’s easier, you don’t even have to worry about it you get sort of this cart payment processing, fulfillment you know all in a magic wand situation right it’s great.
And so Shopify knew that it was easier to start a business on Amazon than on Shopify. Think that’s where this push in fulfillment is coming from any it’s exactly right that they this is the other big hole you know for merchants that if you’re going to start a business you have to take orders and Shopify is going to do both.
Trent: At this point in time do you do your own fulfilment?
Bill: We do!
Trent: And do you think that you will be able to stop doing that when Shopify has their network of fulfilment centers?
Bill: I think our business is a little different; we’re bigger than most I think and more complex you know we have 10 brands, I also think Shopify is starting with this is sort of the newer or the smaller business who wants it all kind of wrapped up in a little boat.
We have worked with 3PLs before and had a bad experience, I don’t necessarily think that the Shopify 3PL experience will be better than the other 3PL experience and the FBA experience is not great either as a business user of FBA right? So, 3PLs have their flaws and I don’t think Shopify has some magic wand that will solve all the flaws in the 3PL model. But what they will be able to solve is tightly integrating it with Shopify so it makes it much easier to start a business for smaller businesses kind of subscale businesses, I think it’ll be amazing I’ll help Shopify compete with Amazon as a place to start businesses.
Trent: And there will be more bands for you to buy.
Bill: Hopefully that’s the idea.
Trent: All right Bill, thank you so much for coming in and having what was an incredibly enjoyable conversation for me and I hope for the audience as well, if there’s anyone out there who has a brand that they want to sell and I want to talk to you, what would be the simplest way for them to be able to get in touch?
Bill: The best way to get in touch if you would like to explore selling us your business or just learn a little bit more about what that process would be like is to go to elementsbrands.com. And that’s both plural elements brands and then there’s a connect menu in the top right, there’s a form on there you can fill out; just you don’t have to disclose any proprietary information just a contact information and what type of business you’re in and we can start a conversation.
Trent: All right thank you so much for being on the show
Bill: Thanks for having me Trent.