Discover more from The Business Inquirer
The Business Inquirer #115
In this week's issue, I highlight an e-commerce business and demonstrate how an AI like ChatGPT could help in the analysis and acquisition process.
This issue is going to be a little bit different than usual. I’m going to be highlighting an e-commerce listing that the seller has sent me. I’m also going to demonstrate how an AI like ChatGPT could assist you in analyzing and acquiring a business like this.
In this week’s issue:
🛒 eCommerce - 1 listing
⚒️ Tools & Resources
This issue of The Business Inquirer is brought to you by DueDilio.
DueDilio is a leading marketplace to hire highly vetted M&A due diligence service providers.
Our large and growing network of independent professionals, boutique, and mid-size firms specialize in finance, legal, technology, commercial, and other key areas of business diligence.
We save our clients the time, hassle, and cost of hiring a due diligence professional.
Submit your project.
Review qualified proposals.
Hire a service provider.
Simple and FREE.
The Greek Co - $269k
Sells custom apparel for 24 national sororities
Sold through DTC and on Etsy
Operated by the owner with no employees
✅ What I Like
Very niche e-commerce business that serves a specific market. The owner works 20-25 hours/per week and there may be opportunities to automate or outsource a lot of the existing work. Great margins and valuation is reasonable. The business is for sale by the owner (firstname.lastname@example.org).
❓ Questions & Concerns
There’s seasonality in this type of business. Are the licensing agreements exclusive or are there competitors? Is there any pricing power? What have been the roadblocks to getting more sororities on board?
💼 Due Diligence
Relatively small deal size so you want to do as much of your own DD as possible. Financial DD will be straightforward for this type of e-commerce business. The two key areas are legal and e-commerce-specific areas of due diligence.
You’ll need an M&A attorney to review the licensing agreements and any contracts.
I would expect the legal costs for a transaction of this size to range from $8k to $12k all in.
You want to review the tech stack, website, and marketing.
Through DueDilio, you can hire a DD provider who focuses on the e-commerce industry and they can do a quick audit. You should budget $3k to $6k for this.
Expand to more sororities
Look into adding fraternities
Add additional products besides apparel
Think of adding a subscription box that would bring-in recurring revenue
Influencer marketing on social media
🙋🏻♂️ The Buyer
Good business for a first-time buyer. Helpful to be familiar with college Greek life.
If you’re interested in this listing, contact the owner directly - email@example.com.
AI & ChatGPT
There’s been a lot of recent online discussions around AI and ChatGPT. It’s not a replacement for your M&A deal team but it can absolutely help you to quickly analyze a potential acquisition. I think this is especially useful for first-time M&A participants.
For this example, I’m using ChatGPT 4 to help me analyze The Greek Co. Keep in mind that I am using very basic prompts for this exercise.
Let’s dive right in…
Pros of Acquiring TheGreekCo.com:
Established Market: TheGreekCo.com has an established market of 24 national sororities, which means it already has a solid customer base for its products.
E-commerce Presence: The business has an online presence through its website and Etsy store, which allows for easy access to customers and lower operating costs.
Niche Market: TheGreekCo.com targets a niche market, which means less competition and potentially higher profit margins.
Scalability: The e-commerce model is scalable, and it allows for expanding into new markets, such as other Greek life organizations or colleges.
Brand Recognition: TheGreekCo.com has already built a brand in the sorority apparel market, which can be leveraged for marketing and growth.
Cons of Acquiring TheGreekCo.com:
Limited Market: The business is limited to the sorority market, which may be challenging to expand.
Seasonality: Demand for sorority apparel may be seasonal, which could lead to fluctuations in revenue.
Competition: The market for sorority apparel may have other competitors, both online and offline.
Intellectual Property: There may be potential legal issues with using sorority trademarks and logos on the apparel.
Integration: Integrating the acquired business into your existing operations may prove challenging and time-consuming.
Expand Product Line: Develop and introduce new products to cater to the needs of sorority members, such as accessories, home décor, and gifts.
Market Penetration: Increase marketing efforts to reach out to more sororities and individual members.
Collaborations: Partner with sororities and other Greek organizations to create exclusive merchandise and increase brand visibility.
Social Media: Enhance the company's social media presence to engage with customers and increase sales.
Improve website and user experience: Optimize the website for search engines (SEO), enhance the user experience, and streamline the ordering process to boost conversion rates and customer satisfaction.
SBA Loan: Consider applying for an SBA 7(a) loan to finance the acquisition, as it provides favorable terms and rates for small business acquisitions.
Seller financing: Negotiate with the seller to provide partial financing of the purchase price, which may lower upfront costs and demonstrate the seller's confidence in the business.
Traditional bank loan: Approach a bank or other lending institution for a business acquisition loan, which may require a higher down payment and a shorter repayment period.
Private investors: Seek investment from private investors, such as angel investors or venture capitalists, who may be interested in the growth potential of the business.
Personal funds: Utilize personal savings or funds from friends and family to finance the acquisition.
Due Diligence Questions:
What are the company's financials, including revenue, profit margin, and growth trends?
Who are the company's primary competitors, and what differentiates TheGreekCo.com from them?
What is the company's customer acquisition strategy and cost per acquisition?
Are there any outstanding legal issues, such as disputes over trademark usage or intellectual property?
What are the company's existing supplier relationships, and are there any exclusive agreements in place?
How does the company handle inventory and order fulfillment?
What is the company's organizational structure, and what key employees are crucial to the business's success?
Are there any outstanding debts or liabilities that could impact the acquisition?
What is the company's growth strategy, and what potential challenges may arise during scaling?
How does the company's technology infrastructure support its e-commerce operations, and are there any necessary upgrades needed?
An SBA (Small Business Administration) loan can be a useful financing option to acquire a business like TheGreekCo.com. The SBA offers various loan programs designed to support small businesses, and the most common one used for business acquisitions is the SBA 7(a) loan program. Here's how you can use an SBA loan to finance the acquisition of TheGreekCo.com:
Eligibility: First, ensure that both you (the buyer) and TheGreekCo.com meet the SBA's eligibility criteria. The business must be based in the United States, meet the SBA's definition of a small business, and operate for profit. The buyer should demonstrate good credit, relevant industry experience, and the ability to repay the loan.
Pre-qualification: Before starting the acquisition process, get pre-qualified for an SBA loan. This involves contacting an SBA-approved lender and providing preliminary financial and personal information. Pre-qualification gives you an idea of how much financing you can expect to secure and demonstrates your seriousness to the seller.
Letter of Intent (LOI): Once you've identified that you're eligible for an SBA loan and have a pre-qualification in hand, negotiate and sign a Letter of Intent with the seller. This non-binding document outlines the terms of the acquisition, including the purchase price, financing structure, and any contingencies, such as securing an SBA loan.
Loan Application: Prepare a comprehensive loan application package, including a business plan, financial projections, personal financial statements, and details about the target company (TheGreekCo.com). The business plan should outline your growth strategy and how you plan to use the loan proceeds to acquire and grow the business.
SBA Lender: Work with an SBA-approved lender to submit your loan application. The lender will review your application, perform due diligence on TheGreekCo.com, and assess the viability of the acquisition. If the lender finds the acquisition worthwhile, they will submit your loan package to the SBA for approval.
SBA Approval: The SBA reviews your loan application and, if approved, provides a guarantee to the lender, usually for 75-85% of the loan amount. This guarantee reduces the lender's risk, making it more likely for them to approve the loan.
Loan Closing: Once the SBA approves the loan, the lender will finalize the loan terms and provide you with a closing date. At closing, you'll sign the loan documents, and the lender will disburse the funds to complete the acquisition.
Post-Acquisition: After acquiring TheGreekCo.com, use the SBA loan proceeds according to your business plan, such as working capital, inventory, or marketing initiatives. Ensure timely loan repayments to maintain a healthy credit profile and a strong relationship with your lender.
Keep in mind that SBA loans can have longer processing times compared to traditional loans, so factor this into your acquisition timeline. Additionally, SBA loans often require a down payment, usually around 10-20% of the total project cost, which you'll need to contribute upfront.
The cost of due diligence for an e-commerce business like TheGreekCo.com can vary widely depending on the size and complexity of the company, as well as the scope and depth of the due diligence process. However, I can provide you with some rough estimates for the different areas of due diligence:
Legal Due Diligence: Legal due diligence involves reviewing contracts, intellectual property, corporate structure, and any ongoing or potential litigation. For a small e-commerce business, legal due diligence costs can range from $5,000 to $20,000, depending on the complexity of the issues and the hourly rates of the attorneys involved.
Technology Due Diligence: This involves assessing the company's technology infrastructure, including its e-commerce platform, data security measures, and any proprietary software. Technology due diligence costs can vary significantly depending on the complexity of the systems and the expertise required to review them. For a small e-commerce business, technology due diligence costs can range from $3,000 to $15,000.
Marketing Due Diligence: Marketing due diligence includes analyzing the company's marketing strategy, customer acquisition costs, and online presence (website, social media, and SEO). For a small e-commerce business, marketing due diligence costs can range from $2,000 to $10,000, depending on the depth of the analysis and the expertise of the marketing consultants involved.
Considering these estimates, the total cost of due diligence for an e-commerce business like TheGreekCo.com could range from $10,000 to $45,000 or more. Keep in mind that these are rough estimates, and the actual cost of due diligence for your specific acquisition may vary depending on the factors mentioned earlier.
It's important to view due diligence as an investment rather than an expense. Conducting thorough due diligence can help you identify potential issues, mitigate risks, and make an informed decision about the acquisition, ultimately saving you from potential losses or unforeseen complications in the long run.
[Your Name] [Your Address] [City, State, Zip]
[Seller's Name] [Seller's Address] [City, State, Zip]
Subject: Letter of Intent for the Acquisition of TheGreekCo.com
Dear [Seller's Name],
This Letter of Intent (LOI) serves as an expression of our interest in acquiring the business assets and operations of TheGreekCo.com (hereinafter referred to as the "Business"). We believe that our acquisition of the Business presents a mutually beneficial opportunity for both parties. This LOI outlines the general terms and conditions of the proposed acquisition.
Purchase Price and Terms: The total purchase price for the Business shall be $[Amount], subject to adjustments based on the results of our due diligence process. The purchase price shall be paid as follows:
A cash down payment of $[Amount] at closing.
The balance financed through a combination of an SBA loan and/or seller financing, with specific terms to be negotiated in the definitive Purchase Agreement.
Assets Included: The acquisition shall include all tangible and intangible assets owned by the Business, including but not limited to:
Furniture, fixtures, and equipment
Intellectual property rights (trademarks, copyrights, domain names)
Customer lists and relationships
Vendor contracts and agreements
Business records and financial data
Social media accounts and other online presence
Due Diligence and Confidentiality: Upon execution of this LOI, we shall commence a due diligence process to evaluate the financial, legal, operational, and other aspects of the Business. Both parties agree to maintain strict confidentiality during the due diligence process and shall not disclose any information related to the acquisition to any third party, except as required by law or as agreed upon in writing by both parties.
Exclusivity: During the period from the execution of this LOI until [Date], or such other date as the parties may mutually agree upon in writing (the "Exclusivity Period"), the Seller agrees not to solicit or entertain any offers, inquiries, or proposals from any other party with respect to the sale, transfer, or disposition of the Business or any of its assets, and to negotiate exclusively with us for the proposed acquisition.
Definitive Purchase Agreement: If our due diligence process is satisfactory, we shall negotiate in good faith and execute a definitive Purchase Agreement, which shall include representations, warranties, indemnities, and other terms and conditions customary for transactions of this nature. This LOI is not a binding agreement, and no obligations or liabilities shall arise between the parties unless and until a definitive Purchase Agreement has been executed and delivered.
Closing: The closing of the acquisition is anticipated to occur on or before [Date], subject to the completion of due diligence, negotiation of the definitive Purchase Agreement, and satisfaction of all conditions precedent to closing.
This LOI shall be governed by the laws of the State of [Your State]. We look forward to working with you to complete the proposed acquisition. If the terms outlined in this LOI are acceptable, please sign below and return a copy to us.
[Your Name] [Your Title/Position] [Your Company Name, if applicable]
Accepted and Agreed:
[Seller's Name] [Date]
Please note that this LOI template is for informational purposes only and does not constitute legal advice. It is essential to consult with an attorney to ensure that any LOI you draft is tailored to your specific situation and complies with all applicable laws and regulations.
I’d love to get your thoughts…
⚒️Tools & Resources
I want to share some tools & resources that I have found helpful. Please note that some of these may contain affiliate links. This means that I may receive compensation if you sign-up and use them.
DueDilio - #1 marketplace to hire highly vetted M&A due diligence service providers. Submit your project, review proposals, and hire.
PrivSource - PrivSource helps you source deals and connect with transaction partners without ever paying a success fee.
BizNexus - Marketplace + off-market origination in one platform. The marketplace averages about 10k active listings & pre-CIM opportunities, and the off-market origination focuses on data & multi-channel. Local Boston company and I consider the founder (Adam Ray) a friend.
X5 Deals - Proprietary deal sourcing. They do the outreach and send you relevant, actionable deals directly into your inbox.
Import Dojo - a newsletter that sends eCommerce and Amazon FBA businesses for sale to your email inbox. They send deals each Wednesday at 9:00 AM CST.
Cerebro Capital - Cerebro has a network of 1,500+ lenders who can provide debt financing for your acquisition, refi, etc. $500k minimum.
Deal Flow Scout - Peer-to-peer deal flow exchange. Free, open, transparent.
Deal Sourcing Guide - A directory I put together of online marketplaces, brokers, DFY deal flow, and more.
How did you like this issue of the newsletter?
If you enjoyed reading this newsletter, why not share it or subscribe?
Important Disclaimer: This newsletter is provided for informational & educational purposes only, and should not be relied upon as legal, business, investment, or tax advice. This newsletter may link to other websites and certain information contained herein has been obtained from third-party sources. While taken from sources believed to be reliable, it has not been independently verified. The Business Inquirer makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. References to any companies, securities, or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any business, tax, or investment decisions. Content in this newsletter speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.