The Flippa Buyer’s Journey featuring John Chen
John Chen is a serial Flippa entrepreneur. He has had great success previously buying a business via our platform, growing it, and then reselling it for an incredible profit. Recently, he purchased another business on Flippa and is hoping to replicate the success that he’s seen in the past. We’ll be following his journey over the next year to help us all understand a bit of what goes on behind the scenes when it comes to investing in a digital asset. We’ll learn what sort of potential John looks for and how he molds that potential over time.
We hope you enjoy this first video in what will surely be an exciting series and that it provides a bit of inspiration and wisdom for your own online business journey.
Read the video transcript below
Blake Hutchison: All righty, everyone, it’s fantastic to be here today. My name’s Blake Hutchison, I’m the CEO at Flippa and every now and then take the opportunity to meet and greet some of our buyers and sellers, and today I’m very pleased to be joined by John Chen. John’s based in New York and he’s actually been a longtime member of the Flippa platform, having first acquired a business a number of years ago and recently sold that as well on the Flippa platform. What we’re going to do with John over the next couple of months is actually profile his journey as a buyer on Flippa. H most recently has got back into the game, so he’s been very active on the platform and has recently acquired a new asset. So we’ll get into the detail there and then talk to John about his experiences, from looking for businesses ultimately buying that [inaudible 00:05:48], growing that. So thanks for being with us, and John, thank you. John, tell us a little bit about yourself and your journey with Flippa to date.
John Chen: Yeah, sure. I first found Flippa in 2017, I want to say. At the time I was working a hedge fund job and wanted to do something entrepreneurial but didn’t have any ideas of my own. So I went on the platform, bought a very small business, under 10 grand for the entire business, and over the course of two years, grew it to over a million in revenue and recently sold it on Flippa as well in September. I’ve been taking a little bit of time off, but I think this series is going to be great because I recently bought a new business on Flippa around the same size as the first one. But this time I want to document the journey and go through my process of how I think about it and what I’m going to ultimately going to do to try to grow it.
Blake Hutchison: Fantastic, John, thank you. And again, thanks for being a long time member of the platform. I think people will find this a lot of fun because one of the things that we know is that there’s lots of trading on Flippa, but what we rarely get insight into is that growth journey. So what people do after they’ve acquired something. So first and foremost, you started looking again what, two months ago now? How long has that search journey been?
John Chen: Yeah, when I sold it in September, when I sold Blush and Bar in September, I was looking just every week, just kind of casually browsing and eventually found the new business, which is called Gourmet Wedding Gifts. There were a couple of other businesses that I was interested in, maybe a couple in lead gen, and some of the times I would be really interested in the business, I would set up calls and then there’d be another buyer who would outbid me or something like that, and I just tried to tell myself to stay disciplined and not pay a crazy price or get into a business that was a little bit too big for me or get into a business that I didn’t really understand. I tried to leverage my eCommerce experience into something where I felt very confident that I wouldn’t lose money.
Blake Hutchison: Fantastic. You had mentioned in the lead up to to you and I having this discussion that you were disciplined enough to look through maybe 50 or 100 businesses. You may have seen lots of stuff before you actually decided to inquire or ultimately make a purchase. Talk us through that a little bit. How many things do you think you took a genuine look at before you finally settled on an acquisition?
John Chen: A genuine look at? Probably 25 to 50. But a lot more browsing. I think since I worked at the hedge fund, I was trained to disqualify a lot of opportunities very quickly. So if a business was declining or there’d be some element of the business I didn’t really understand very well, or if it was just a little too big, then that would just be like an instant pass for me, no matter how profitable it looks. And also price. If the seller couldn’t come to a price that was very reasonable or I thought I had a cushion of safety, then also that was an instant pass for me.
Blake Hutchison: So you ended up settling on Gourmet Wedding Gifts. When you first looked at the listing? What was the appealing too?
John Chen: Do you want to pull up the actual… I have the listing here. We can probably just go over the listing and go over if that’s okay.
Blake Hutchison: Yeah, that looks fantastic. You are going to share your screen then?
John Chen: Yeah, let me share my screen and let’s see if we can… Cool. Can everyone see?
Blake Hutchison: Yes. We’ve got you, that’s fantastic.
John Chen: Awesome. Awesome. This is Gourmet Wedding Gifts. When I first saw it… I like to look on the editor’s choice first. It just seems a little bit more curated list of businesses that are a little bit more interesting. So this one, what I found interesting about it, if we just kind of look through here, is that first was that it was in a niche that was interesting to me because I… The first business I owned sold jewelry, so it was kind of a similar customer, not the exact same customer, because this is for an event, but I knew that customer well. The second is that a larger percentage of the business was organic traffic, and I liked that it was more organic because even though most of our revenue from the jewelry business was paid social, that’s a little bit more unstable, a little bit more volatile of a traffic source than organic search.
John Chen: With organic search it’s not going to blow up over night, but it’s not going to go away either. I thought about protecting the downside first and said, “If I’m going to give someone money for this business, I’d like to know that I’m going to get sales that come from organic search.”
Blake Hutchison: Yeah, it’s a safer investment. Less dependent on huge mass marketing spend.
John Chen: Right. Less dependent on paid marketing and stuff. So here I looked at the profits, and we can actually go into more detail about the profits. The old owners did something that was really, really interesting that I thought it was a really big advantage. They sold half on Etsy. Etsy is, again, another platform, kind of like a Shopify or an Amazon. But I liked that because Etsy’s kind of this smaller, more insular platform that not a lot of people know. So if you have some traffic on Etsy that’s kind of working, it felt like to me it was more valuable. So those were the reasons for the traffic. I can get into… Do you have any questions so far, Blake, or should I get into-
Blake Hutchison: No, I think that’s super interesting. A couple of questions for you. You mentioned Etsy, and therefore the credibility of that as a sales platform. Clearly it’s a highly competitive platform and the community itself on Etsy is, I guess, relatively sophisticated. So if something is being sold there and selling well there you’ve got something of credibility. How do you think about diversification of platforms when you are looking at something like this? Was it a concern for you and did you ask the question as to whether there was other platforms that they were operating on or was it was a less of a concern for you?
John Chen: It was half on Shopify and half on Etsy. The Etsy thing is good because it’s kind of hard to get onto Etsy. Not every drop shipper or internet marketer can get onto Etsy. It has that homegrown feel. I know maybe it’s not as it used to be, but it’s still a little bit more protected and there’s a barrier to entry there. I felt relatively safe about the revenue on Etsy, and that was actually one of the deciding factors where half the revenue was from Etsy, half was on Shopify. If it comes from Shopify, it could be they’re selling to friends and family or they’re selling to whatever it is. But with Etsy, I was more comfortable that that was a real traffic source, and I said, “Okay, even if all the revenue from Shopify went away, the Etsy stuff is… I’m not going to get killed on this.” Etsy was a big part of it.
Blake Hutchison: And how did you actually interrogate that data? What did you ask the seller for as part of that due diligence process? Was it a matter of just trusting them? Did you jump into Shopify and answer yourself? What did you do to verify some of that [crosstalk 00:13:54]?
John Chen: This probably leads into the next point of the revenue and the profitability and how you prove that out. The revenue is fairly easy. You just get access to their Etsy account, their Shopify account, and see if you can just rebuild their revenue month by month. It might be off like a couple thousand dollars for the whole year or $1,000 for the year, that makes sense. For example, this business, they had some… They sold in-person sales or something, so that wasn’t that big of an issue.
John Chen: So the revenue is relatively easy to prove out that’s real. When it comes to the costs, what was really interesting was that they use QuickBooks and kind of just uploaded all these costs. But when you went into more detail to break down what the costs were… For example, this business, they said they did a about $8,000 a year in profit, but a large percentage of those operating costs were their personal expenses that they spent on Amazon and stuff. I was able to confidently add back maybe like five to 6,000 of seller’s discretionary earnings, and Blake, maybe you can go into that a little bit to to explain a little bit about how that actually all works.
Blake Hutchison: Yeah, I think that’s a super interesting point, John, thanks for raising it. So in this particular case, you’ve got a seller who’s connected to QuickBooks. That’s something that a seller can do through the Flippa platform. Now the upside is that it’s straight from the source, straight from plan accounting software. The downside is, as you said, you’re actually getting a full capture of the costs, and a lot of that will be personal expenses. It could be meals, entertainment, an owner salary, blowing Amazon gift cards for friends and family because it’s beneficial for that business owner to apply everything to a business account versus a personal account. And that stuff needs to be, as you say, added back.
Blake Hutchison: What the SDE calculation is, is that extracted. So it is revenue, obviously minus costs, and then the manual removal of anything which is non-carry forward. So something that you, John, as the new buyer will highly unlikely have to bear. Now obviously you’re not going to have to bear an owner’s salary unless you intend to pay yourself out of this particular business. You’re certainly not going to bear meals, entertainment, travel and Amazon gift card expenses. So they are taken out for the purposes of calculating the true performance of the business, and therefore what is what is termed SDE, seller discretionary earnings.
John Chen: Let me pull this up for everyone just so they can see. Here’s something that the old seller gave me. Everyone can see here?
Blake Hutchison: Yes.
John Chen: So here, the sales year to date, this is from 2019, it’s like 40K of sales. Costs of goods is costs of goods. You’re probably not going to get that down. But all this right here, you have to take a look at what of this is actually core to running the business. Is meals and entertainment core to running the business? No. And I even specifically asked them, I was like, “What is in office supplies and software?” Because if it’s office supplies, you’re buying labels or shipping or something, then you can’t really get out of that. But I found out that there were significant expenses in there that were not critical to the running of the business. Same thing with travel. They put their own travel expenses on there.
John Chen: And that’s a smart thing to do if you’re an owner because you want to lower your taxes, but when it comes to showing the profitability of the business, you could use a little bit more discernment into adding that back. For example, I paid… I think it was a total of 16 or 18,000 for the entire business, and that’s a two times multiple off this number. But if you were to add back a lot of this, the multiple becomes a lot lower, which increases your safety.
Blake Hutchison: Absolutely. Which is fantastic. So good stuff there. At that point in time, you’ve obviously gone through… You’ve spoken to the seller, you’ve interrogated this level of detail here. You then place an offer on the platform and that offer is accepted or not. Do you want to just talk through that process very quickly?
John Chen: Yeah, sure. I was very straightforward and honest with the seller. I know a lot of times if you list on Flippa, you’ll get a lot of initial interest, but people are just kind of poking and prodding around and you know, I told her I’m very interested in this business. I’m going to give you a letter of intent, which is just a short document that details the price I’m going to pay, the terms and everything. I gave her the offer and she accepted within a day or two, and then we went through a quick due diligence process and transferred all the assets, and that was that. The whole deal was done within two or three weeks. Very relatively fast close. Another thing I did was structure it so that a portion of the payment would be paid after the close, in case I found some liabilities, which I actually ultimately did find some extra liabilities, but we can speak to that in a little bit.
Blake Hutchison: Yeah, that’s super interesting. Smart, savvy buyer, made an offer that the seller was comfortable with but structured the terms such as they were protecting you from any, I guess, skeletons in the closet or ugly discoveries at a later date. And ultimately sellers will often accept those terms, as in this case, so I think in your case, John, correct me if I’m wrong, $18,000, and as you said, you held back some amount of that for any liabilities that you might find at a later date.
John Chen: Right. And that was actually super helpful because… So I offered 18,000 for the entire business. I paid 15,000 upfront and then 3000 in 30 or 60 days. And within the 30 or 60 days I’ve found out that their supplier, they actually had a bunch of unpaid invoices. It wasn’t like they were malicious in it. I just asked them about it and they said, “Oh, we’re totally sorry. We forgot about this.” So I said, “Okay, no worries. We’ll just take it from the money in escrow and we’ll take the amount that’s in escrow minus the liabilities and you can have the rest of it.” And that’s just a much cleaner way of doing it, I think.
Blake Hutchison: Fantastic. Well let’s get into what’s happened since then. So you’ve acquired this great new business, you’ve paid what you termed to be a reasonable price for it, the transfer of assets was reasonably straight forward. You’ve now got control of the business. How long have you had the business in your hands for?
John Chen: Probably than a month. Less than a month, yeah.
Blake Hutchison: And what have you discovered about the business in that first four weeks?
John Chen: Well, I knew this going about the business, but one big element that we really focused on is just cutting out a lot of the other products and things that they sell. The business is called Gourmet Wedding Gifts, but 95% of their sales are accounted one or two SKUs. Just these products right here, these heart-shaped stroopwafels. They sell a bunch of other things that are drop shipped from other suppliers and the margins on that are just way lower than anything else that they sell. So it’s not worth it to hold all these products. So I basically went in and got rid of all these other products where the margin would be 10, 15% and focused on selling this specific offer and this product and created a couple of landing pages and I’m testing out a couple of offers and such.
Blake Hutchison: How has it gone? Are you still selling through Etsy? Are you still selling through Shopify? Has anything dramatically changed in the running and operations of the business from that perspective?
John Chen: It’s going well. I think we’re on track to… Year over year it’s going to be a lot better, month over month I think is a little seasonal. But what’s happened is, because I’ve gotten rid of all those smaller offers, those other random products, like a personalized wine bottle or whatever it is, or corks or something like that, I’ve been able to see the average order value rise and the conversion rate rise… Or the conversion rate is a little bit lower but not lower enough where it’s that big of an issue, if that makes sense. The average order value went way up because the only thing people are buying are the stroopwafels or the wedding favors, and that average order value is much higher, 2, $300 because it’s for 100, 200 people. They had little gift baskets and stuff like that and it just wasn’t really worth the time or the effort.
Blake Hutchison: Just explain that to me and the rest of the community again. You basically removed some not profitable or less high-performance product. Is that correct?
John Chen: Right. So they had a bunch of other suppliers that they worked with and it wasn’t like they were drop shipping in that you can just click a button and send it from China. They actually had different vendors that they worked with, so anytime they got an order for that thing, they had to phone in to the vendor and then the vendor would charge them. It would be like you charge 2.25 per item and then the vendor does it for you for like $1.75 per unit. So it’s not a lot of profit there. I decided it wasn’t worth the time to hold all these SKUs and all that and really just focus on the core product. I also created a couple of bundles and landing pages focusing specifically on this core offer, and we’ll see how it goes. We’re starting to send a little bit of paid traffic to it and hopefully that’ll work.
Blake Hutchison: That’s super interesting. And so the organic nature of the business, when you were looking at the listing before, you said whatever it was, I think 65% of of traffic was organic. Is that still the case? Has that played out as you expected it would?
John Chen: Yeah. Almost all of the sales are organic, but we’re trying to add that element of paid. What I like about paid traffic is that… I think it’s really hard to make people buy something that they don’t want to buy. So you can’t just add paid traffic to anything. I like that this had that kind of product market fit, for lack of a better word, that’s kind of like an organic… I would’ve never known that this is what sells or this is what people like. We shot a couple of videos just trying to focus on this product as opposed to just try to come out with new products. I really don’t know new things that would work.
Blake Hutchison: Super interesting. You’ve essentially taken on… It’s a food business and it’s got huge amounts of opportunity because you’re operating in the wedding niche and there’s lots of demand for these types of kitschy product. But I hope you don’t mind me saying, you don’t know anything about this specific product space. Is that right?
John Chen: No. I know a little bit more about it now, but I didn’t know anything about this going into this or I don’t know… I’ve never made a stroopwafel, I’ve never made in one.
Blake Hutchison: Have you eaten one?
John Chen: I’ve eaten one. They’re pretty good, they’re pretty good.
Blake Hutchison: So who are your customers? Presumably the majority would be female buyers.
John Chen: Yep, yep. Females 24 to 32. Engaged and have an event or a bridal shower or something like that. Or the moms of these people who are looking for a gift for them.
Blake Hutchison: Awesome. We’re going to touch base with you in another four weeks time and see how it’s going, but what’s going to happen over the next four weeks, and then let’s… You and I will catch up and go through those things. So tell us what you’re up to.
John Chen: We’re really going to focus on the paid traffic and see if we can make it work. We’ve already tried to do a little bit of paid traffic, but I think what we’re going to try to do is do a free plus shipping funnel where… A large percentage of people who buy a full order or who buy a sample order convert to a full order. Just organically, those were the stats. It seems like if they get the product in their hands and they taste it, they love it. So we’re going to work out some way to get them the products, whether we lose money, a little bit of money, and hope that they reorder because it’s a relatively large order, 3 or $400 per wedding [crosstalk 00:27:53]-
Blake Hutchison: That’s fantastic. That’s an awesome shopping cart. As you and I both know, eCommerce, it’s tough when you’re selling things that are 10 $20 an item, it’s so much easier when you’ve got a hot shopping cart. How are you measuring yourself? Are you measuring yourself simply on month on month growth? Is it quarter on quarter? What kind of flexibility are you giving yourself through this period of experimentation?
John Chen: I’m pretty deep in the stats. I am mainly comparing this year versus last year just to see what the revenue looks like and then tracking number of sample orders that go out, number of orders from paid acquisition. But I’ll have a better idea of that in, I’d say, 30 days or the next time we talk because we just started advertising the offer and it seems to be like a little interesting. We’ll have to see where the CPA actually comes in at.
Blake Hutchison: Good. And you had had some success with your prior business, Blush and Bar from a PR standpoint. Presumably that was ultimately positive for you over the journey. This presumably looks like another business where you’ve got a good niche product which is reasonably well differentiated, and do you see that as being another opportunity?
John Chen: Yeah, yeah, of course. PR is good or good organic growth is good, but that stuff, it’s hard to control that. I’m sure there’s ways you can do it. But I’ve found that if you have… The biggest thing we can do is just put it in the hands of as many people as we can, and then once you hit a certain point, whether it’s from paid advertising or however you do it, if you get picked up organically, it’s just like a little boost that helps you.
Blake Hutchison: It sounds like a reasonably positive experience to date, but is there anything that… Other than finding a few liabilities in the business, which you presumably took care of as we discussed, and other than a couple of SKUs or product lines that you deemed not to be profitable or worthwhile selling, are there any other big learnings that you could share at this stage?
John Chen: I think one big learning I had was that if you’re going to buy a business for its cashflow and treat it as if it was a bond with a coupon, then it’s probably best to not do any work on it. And if you’re going to treat it as a project that you want to grow, then it’s worth thinking about… I have to spend upfront or willing to… For example, paying a designer to do a landing page or be willing to spend ads. The reason I think a lot of these really, really small businesses don’t grow is because they’re trying to fund it out of their cashflow, but the cashflow is like 500 to $1000 a month, which is just not big enough to spark the growth.
Blake Hutchison: Yeah. You want to have a purse sitting by your side, that at least you can experiment with and see if you can drive growth that way.
John Chen: Yeah, for sure.
Blake Hutchison: Fantastic. Well, that’s awesome, John. Really keen to stay close to the journey and we will touch base again in a month’s time to see how it’s all progressing, and obviously really hopeful that you get month on month growth and good luck with the paid marketing.
John Chen: We’ll see you in a month.
John Chen: Perfect. Thanks very much, John.
Blake Hutchison: All right.