Show notes
This week we are talking about add backs, what is a legitimate add back, and how they affect your business valuation. The value of a business is dependent on earnings but it is also dependent on the company's discretionary earnings such as the add backs of owner salary and benefits. Then there are those one-offs – those non-recurring expenses which are also known as add backs. Those are the add backs what we are dissecting on today's episode. A seller's due diligence when it comes to discretionary earnings can help buyers see their potential ROI without any grey area. Episode Highlights: Why we work off the seller's discretionary earnings and what that is. How discretionary earnings are a case by case calculation for each business. The three levels of add backs. Why it's important to take a scalpel to those third level add backs. Questionable add backs – what can fly what cannot. How math and logic are the key tools to determine legitimate add backs. Transcription: Mark: Alright, welcome back Joe. I know you just came back from Blue Ribbon Mastermind; Ezra's event. It was up in Seattle, is that right? Joe: Yeah, a beautiful city and a great event. On a personal level, I had a great time. I took my 17-year-old with me and just explored the city in off-hours. Business-wise I'm telling you Ezra Firestone is sort of the Tony Robbins of the e-commerce world in my view. He gets up there, he's real, he says it like it is, he shares his own information to the Blue Ribbon Mastermind members and it's such actionable, transferable information. And the level of entrepreneurs and intelligence at the Blue Ribbon Mastermind I think is nearly unmatched; it goes very politically correct I think, right, nearly unmatched? Mark: Yes. I think every conference that we come back from is our latest favorite conference. But Blue Ribbon and Ezra's events have been fantastic since we started going to them. And you're right he's just a fantastic guy. He gives a ton of information and has a ton of insight to share. So one of these days I'm going to get to go to the event instead of you because I want to get in on some of these. Awesome, glad to have you back, we do have a couple of conferences coming up. We will be sending these out in our email; our newsletters that go out every Thursday or Friday depending on when we get our stuff together so pay attention to those. Alright, this week Joe you and I are going to do the podcast. Joe: That's right we have two very special guests. Mark: Two very special guests; that's right. We're not bringing anybody else in on this one because we want to talk about add backs; what is a valid add back or what is a legitimate add back? And I know for a buying perspective this can be a little jarring the first time. If you're just coming into the acquisitions industry; if you're looking for your first acquisition and you look at a profit and loss statement that we provide you might be wondering well why are these guys throwing all these expenses back at me, these were on the tax returns shouldn't they be included? So Joe why don't we start with that? Why do we work off to this number of seller's discretionary earnings and what is seller's discretionary earnings? Joe: That's a good question and a great place to start. Just defining it simply is the best way to go. So when you're running a profit loss statement as a business owner; hopefully in Quick Books or Xero or something like that, you're going to get a net income line at the bottom. So let's say you do it for the trailing 12 months you get a net income. But there are certain owner benefits that you get as the owner of the business. You have an Internet-based business; you may write your car off in that business. You may pay yourself $200,000 salary in the business. All sorts of things like that they're generally owner benefits and then there are some one-time non-recurring expenses; these are things that do not carry forward to the new owner so they're classified as add backs. So net income plus add backs equals seller's discretionary earnings or SDE. It is what business is in this general category are multiplied by; they're valued at a multiple of the trailing 12 months seller's discretionary earnings. So that's the critical nature of an add back; it can make a tremendous difference in the value of the business when using a proper formula. If you don't do that the add backs properly you're either going to under inflate or in some cases, unfortunately, some inexperienced brokers might over-inflate the value of your business. So it's critical for both buyers and sellers to know how to calculate seller's discretionary earnings and what is a valid or legitimate add back. Mark: Yeah and I think on that the thing I would like to just add here and emphasize is that there are rules to seller's discretionary earnings. I know I've talked to some sellers, I've talked to some other brokers frankly outside of Quiet Light Brokerage and they feel as if well if you can make an argument for it then we can add it back and they approach this almost as if it's just a free for all as to who can make the best argument. The fact of the matter is there is an actual definition for seller's discretionary earnings and there are rules to follow. Now that doesn't mean that there aren't some situations that require interpretation. And we're going to go into some of those scenarios in this podcast today where you have to try and figure out is this a legitimate add back or not? But at the heart of seller's discretionary earnings when we are showing seller's discretionary earnings what we want to do is we want to show a baseline number for buyers to understand what is my potential return on investment? When you think about all the different buyers that are going to look at a potential opportunity, every buyer comes with their own set of assumptions, right? Some buyers might already have infrastructures set up to run a business; maybe they already have a marketing team in place or maybe they' already have a warehouse if it's an e-commerce business or if it's a SaaS business maybe they already have a development team in place. Those assumptions need to be worked into their own evaluation of the business. What we want to show is a baseline number so that you as a buyer can figure out what your potential return on investment is for you. And that's going to vary from one buyer to the next. So seller's discretionary earnings that's all it is; it's a baseline number, we want to be consistent from one business to the next that's why there are rules as to how we calculate this number. Joe: Right and even though combined we've got 20 years of experience doing this and have sold well over a hundred million in transactions just the 2 of us combined it's still a case by case basis and you got to dig into each particular business and get an understanding of the nuances of it to determine whether or not it's worth doing an add back based upon the size of the business and the total number of add backs and if it should be done. Generally speaking, there are 3 different levels of add backs; the first 2 are pretty standard, it's the third one that we want to spend the most time on today because of the nuances of them. But let's run through that first and second level. Mark, if you want to start off with that first level why don't you address the owner's salaries in add back. Mark: Yeah, absolutely. Joe, I like the format you put together here. You created these 3 levels of add backs; the obvious, the one time expenses, and then the ones that require a bit more interpretation. So the very top of the list here are these a level one obvious add backs. We have things like charitable donations; obviously, that's purely discretionary nature. We have accounting expenses such as amortization and depreciation. And then we have one owner salary. And I know there are buyers out there that look at this and say well why are you adding back somebody's salary; like you need to pay yourself some money? But this is a standard add back that we always include and it's part of the standard definition for seller's discretionary earnings. The reason for this is how you pay yourself as an owner, how much you pay yourself, and the format you pay yourself is completely discretionary. You could in theory not pay yourself any salary and just take distributions from the company from the profits. Or you can pay yourself a very large salary and run all your payroll tax through that which will show up on the profit and loss statement. What we do for the owner's discretionary earnings we do add back one owner salary. But there is an exception to this and that's if there's multiple owners that are working full time on the business. Because we know that if there's multiple owners working on a business you can't add back all of their salary. You can only add back one. Did I explain that well Joe or does that need more? Joe: Let's go a little bit more. What happens; what do you do Mark if you have 2 owners that are working a combined 25 hours a week, one is doing customer service and logistics, and the other is doing sales and marketing. Do you add them both back? Mark: I would add both those back. Joe: Okay. Let's flip it up; let's say that one is doing sales, marketing, logistics, and the other is a developer. And the level of work that that developer does still only takes 15, 20 hours a week but it takes a different skill set than the average person has. Do you add them both back? Mark: No, I would not add both those back. Although we will discuss this in Level 3 add back. I might adjust that second owner salary depending on what they're getting. But the reason I wouldn't do it is because of the specialized nature of it. So what we're assuming here is that the buyer is a single person who is coming in and needs to run this business. I wouldn't expect most buyers to have developer skills to run a business. So maybe you do; if you do, that's great you're going to do really, really well. But most people can't be that sales and marketing plus developer role. I've done this for over a dozen years now. I've run across that skill set a handful of times. It's not very, very common. Joe: That's right. So those are the; even though these are just Level 1 add backs there are some complexities to it that require some attention to detail on the nuances of one business to the next. The only other things that are pretty obvious in there are personal meals and entertainment, travel, mobile home…mobile phones; everybody's got their own mobile phone that expense doesn't charge for. You've already got that expense. Things of that nature are pretty much Level 1 add backs. Jumping on the Level 2 add backs it's really focused on those one-time expenses; things like a trademark or a copyright, patents, things of that nature. And then there are some that are a little bit deeper like legal expenses and lawsuits and enforcement letters and things of that nature even the thing that we have to do often Mark which is referring potential clients; people that we do valuations for that are not using a kind of software. We'll refer them out to a bookkeeper. So in this situation Mark, tell me if we're on the same page. We will get a call somebody has got a great business but they've got 3 years of data in an Excel spreadsheet that is not using any accounting software. Or they might be using Fetcher and piecing different pieces together. I would refer them out to a bookkeeper like CapForge, MuseMinded, Stellar Accounting, Catching Clouds; one of those and get them on Quick Books or Xero. And generally, that's a one time expense for them to build that, put that data in the software in arrears maybe $1,500, $2,000. To me, that is without a doubt a one-time expense and an add back; would you agree with that? Mark: Yeah I would and I'm glad that we agreed because if we don't it's just going to be an absolute brawl on the podcast, right? Inaudible[00:11:27.2] here is fighting with the microphones. No, absolutely that would be a one time expense. It's something that does not carry forward. But we have a great example of that with somebody who's been a friend of Quiet Light Brokerage for a while; Scott Deetz from Northbound Group. He's a strategic advisor who helps clients in a lot of ways. He does a fantastic job with his clients. Specifically a lot of Amazon stores but he also works with other companies as well. He does forecasting and a lot of preparation for an exit. And his fees are all one time expenses. Even though that you can see a monthly fee during that preparation, the goal is to prepare for an exit. So those are fees that get added back in the bottom line. So recasting books going back and trying to recast those books either in accrual format or just cleaning them up I would totally consider that to be a one time expense. As with the other things that you mentioned; the trademarks and the logo design, you shouldn't be punished for the expenses that are really necessary to be able to run the business or only occur once or will occur in the future. Joe: Yeah. And there is again always nuances; sometimes an owner is going to buy a new computer. But it's their new laptop that they use and they're going to keep that and it's not going to carry for you then that's a one time expense; things of that nature, a case by case basis from business. So again nuances, deep-diving into the business, no 2 are alike. Mark: I have been hearing you say this for a long time our own kind of sliding into this Level 3. But in Level 3 you always say math and logic Mark; it's for math and logic. What makes sense? How does the math work out? And look this actually works out for Level1 and Level 2 as well. You have to use math and logic. But Level 3 is where we start getting into the interpretation of different expenses, right? Because these are the grey area ones where maybe it's not as straightforward as saying amortization and depreciation; that's a pretty obvious add back. Charitable donations; pretty obvious add back. So let's go into this Level 3 and get some examples on a case by case basis. Here are things that we've seen in the past which; look at Quiet Light we've actually had some pretty big discussions with all of the advisors of Quiet Light that we have this large group chats and sometimes we've disagreed in trying to work out how we should actually treat these expenses. And I want to start out with one that Joe you and I have talked about a lot and that would be events, trade shows, and Mastermind fees; how do you handle those? Joe: I almost moved this to the bottom of the list so we didn't start off with one that is pretty tough and it was talked about a lot. This is a case by case basis. If somebody joins a Mastermind group in the trailing 12 months prior to selling their business and they pay $20,000 to join that group, it's a one time expense; absolutely an add back, it kind of moves up to Level 2. But let's say they also choose to go to an annual event that that Mastermind group has. And they do that at their own expense; let's say they go to Seattle, I was just at Blue Ribbon, those people that were in Blue Ribbon; I'm sorry at the Seattle event not all of them were at the Miami event just 6 months prior and so it's definitely a choice to go to the event or not. Some people never go. There are lots of people that are in eCommerceFuel that we've never met because they never go to any of the events. So the choice to go to an event, it's an expense that doesn't carry forward. It's one that I see as an add back. Our team has talked about it quite a bit; that's an add back. But there are other types of Masterminds and events; we'll call them events in this situation that are not add backs that you and I have talked about. So if you are an advertising agency or any kind of company that's going to these events to build your company brand and reputation even amongst the people that are part of the Mastermind it's integral to your business. Like us, we go and we sponsor. That's integral to our business; our business models. We are sponsoring, we're getting our own brand and our own name out there; that's not an add back. An ad agency does the same but might just be a member of the Mastermind or events and is doing training courses in free valuations or free testing things of that nature we would have to really dig down into that one and determine if it's an add back or not. And it's probably not an add back. But for the rest of the folks most likely an add back; the only adjustment you and I have talked about that is we'd have to look at and say logically does it make sense to add this back? Do we have 2 lines of add backs? Is it a business that's valued at 250,000 or 2.5 million? Sometimes you say you know what at this level it's not worth adding it back; let's just leave it alone it's only going to add you another $300 per month back to it and you can play with a multiple in that situation. Would you agree? Mark: Yeah I absolutely agree. You have to pick your battles on this and if you have to really fight to be able to justify an add back you should look at it and say is it really worth it? Like is it is a big enough expense where I'm going to gain enough potential value out of adding it back and making that argument. I want to throw a little wrinkle at you, Joe. We have not discussed this before and it's a question that I'd like to get your opinion on. The difference I see between these Mastermind fees, events, travel-related expenses would fall under this idea of is it a personal development or business development, right? I don't add back the business books I buy. The business books I buy are personal development and I consider that to be just for myself. Obviously, there's a business application for that. I want to become better at what I'm doing but I think that's more personal related. So the line I see is again this idea between is it development for business or is it personal development? So if I go to Pubcon without really putting Quiet Light name on it I'm just an attendee I would consider that to be a valid add back. Let's go into a scenario where you have an employee; let's say that you have somebody who works specifically as a content writer for you and is possibly doing SEO and you send them to MASCON because you want them to become better at SEO for the purpose of your business. How would you handle something like that? Joe: It's off the top my head not an add back. But then you've got to look at the history of the business because that's business development, right? You got to look at the history of it; is that something that they're going to do every year, are they're going to get new information every year and develop their skills, are they going to send different employees, have they done it for the last 2 or 3 years? You got to look at all those nuances again and determine whether or not it's an add back. But because it falls in that business development versus personal development I think you and I know everybody on the team would lean towards no that's not an add back. Mark: I would agree. So again this is where you have to kind of take a fine scalpel here and kind of slice this up and really understand what's going on behind this add back. And again as you went out with this Joe math and logic and I think reason as well. You have to be sort of reasonable with some of these so that it's not just you're going through; sometimes I see sellers come back with their own add back schedules and they're super aggressive and every last dime is trying to be added back. And it's a question at some point where you have to ask them what can we really say is a reasonable add back versus just being as aggressive as possible? Joe: Right. So let's take that scalpel and dig down into a P & L for instance; of course we're not doing it live here, but one of the things that that when you peel back the different layers that we always ask the question okay you're spending a lot of money on advertising here; what type of credit card are you using for that advertising? And then are you getting points back on that, what are you doing with those points? 9 times out of 10 people are doing cashback credit cards or converting them over to travel but they're pushing all that over on the personal side of that's an owner benefit. It's income, right? You're getting cash back, you spend $10,000 you get $400 back. If you spend $10,000 a month on advertising and you get that $400 back and you slide it over to your personal side and it never shows up on your profit and loss statement we need to look at it closely. It's an add back. You can multiply that times whatever number you want and then make the decision, right Mark whether it's worth it to add that back or not. Jason and I had a listing that we worked on last fall where there were about $24,000 in cashback points added up over the course of 12 months and it was very, very measurable; clear and distinct because that person spent a lot of money on advertising plus he bought used inventory that was going to be refurbished. And he bought them from different places on the web. And all of that was done with a credit card. All of that was converted to cashback points that moved over to his personal side; amounted to about $25,000 on an annual basis. It's a significant number. The business was listed at a 4 time multiple. It was cash in his pocket so we did add that back and it bumped the valuation by $100,000. If we're talking about a business that's $4M but that amounts to $3,000 then maybe you don't add it back. You just got to play around with those numbers a little bit and again use more math and logic there. Mark: Yeah and I think here that the key that I would look at would be the consistency of it. If you're advertising budget is over $100,000 a month for example and you're putting that on your Amex gold card and part of your strategy is look I'm getting some margin from the points I'm getting back; that's pretty obvious in that category of its part of your existing business model. But like you said if you have just kind of a small amount of points, it's probably not worth the effort to put that in there and try and justify that. So I think that's pretty reasonable. Joe one question that we hear a decent amount would be website redesigns and we can also throw in here product development or even in the SaaS world development on a SaaS product. Why don't we start to unpack some of these and we'll start with the website redesigns. Obviously, most people who have a web-based business unless you're purely Amazon have a website and part of that is you're going to have to redesign the website every now and then. I mean there are some sites out there that have look exactly the same since 2000 but most businesses do update that and those can be expensive. You can easily drop 10, 20, 30, $40,000 on that if not more. So how would you approach website redesigns or website redevelopments? Joe: I would look at the history in the P & L to get a clue of the way the business has been run because that's the way it's going to be operated in the future. And if there's never been a website redesign and it's on a good current up to date platform like Shopify and the business is trending in all the right directions then; obviously there's been a website redesign because that's the point of this add back so let's say that it's been done in the last 12 months but had never been done before and the business is 7 or 8 years old and it's just been put on a new platform and they spent $20,000 on it I would say that; and I have in the past done 100% add-back on that website redesign. But again it varies from business to business. If I'm looking at a business that's operated like Quiet Light Brokerage just by example you have a tendency to redesign the website often. I think there's been 3 or 4 versions of it in the last 7 years that I've been with Quiet Light. So, in that case, it's either simply not an add back or you do some math and let's say you're going to redesign a website every 3 years you might take that cost; $10,000 website redesign and add back 50% of it or a third of it and things of that nature. Because if it happened in the last 12 months it's not an expense that's going to happen in the next 12 months so there has to be some mathematical adjustment there. And again math and logic; look how often it's been redesigned, do the math on when in the future would you redesign again, and just do partial adjustment more often than not. Mark: Yeah, I would agree 100%. And the thing to look for here obviously if it's on the last 12 months it probably isn't going to get looked at too closely. But I think you have to look at why. Like the Quiet Light website gets redesigned a decent amount and that's simply because I get anxious about stuff like that. That's just kind of what I do. I'm always tweaking; always thinking that I should dust scraps and start it over again. And so I actually do think with Quiet Light it's mostly discretionary in nature but again this reasonableness needs to come in. Joe: Not always discretionary but it takes 12 months every time that you start. Mark: It's absolutely ridiculous. Joe: Why don't you touch on product development? It's interesting you bring that up. I've got a physical products e-commerce business and I'm developing new products; do I get to add that cost back? Mark: Yeah I think again we need to use math and logic here, a little bit of reasonableness, take a look at what type of business you are in. Here's the thing about e-commerce; Chad Reuben when he was on the podcast about a year ago mentioned this, product development is the lifeblood of most e-commerce businesses; you rarely, rarely run across a business that is truly evergreen with its product or you never have to iterate. Apple comes out with an iPhone every year. Android products are constantly coming out with a new phone every year. Car companies constantly come out with a new car every single year. Product development is the lifeblood of businesses. So on that note no I don't think that you can add back product development costs. I do think maybe if you're coming out with like a large truly one time sort of burst maybe I would look at it. Joe: Maybe if there's a mold, right? If you paid $5,000 for a mold of that product that mold is going to last 10, 20 years perhaps. That mold maybe partial add back but yeah I'm 100% on the same page; product development is the lifeblood of a business. The molds thing is so rare; 105 businesses I think I've sold in the last 7 years and I think maybe only Sean van der Wilt's business has actual molds that are part of it and that he owned. In other cases, it's generally the manufacturer that has the mold anyway. So yeah adding back product development expenses can't really do it. What about the SaaS development? We're not all e-commerce here; we're selling content and SaaS and things of that nature as well. You've got a developer that's been doing some certain projects within the last 12 months; are you adding that back? Is that black and white? Mark: It is not black and white but I do think that if you are looking at for example your initial build of the software that's going to be very intense, very cost-intensive. That I think could be added back. Regular maintenance, regular feature updates; absolutely not because a SaaS business needs to have updates, needs to have new features added. If you're going to redevelop the entire SaaS product from the ground up; maybe you're switching technology stacks, that's something where I would take a look at that and again reason and logic need to really…math and logic really need to reign with this. But generally speaking no; just as product development is the lifeblood of an e-commerce business, software development is the lifeblood of a SaaS business. Joe: We are 100% on the same page. There is no question about it. Mark: No fights here, thank goodness. Joe: Yeah. We've got 3 points left and really the last 2 points I think are ones that get missed most often and can add a tremendous amount of value to the business. But the first one of the 3 here is pretty obvious and maybe we could have we actually talked about moving this up into Level 1 but it's a repaid relative. I sold a business a couple of years ago where the owner of the business paid his brother to do customer service. They paid him $20 an hour for 20 hours a week worth of work. I talked to the brother. I talked about his job and what he did. He said yeah I really only put in about 5 hours a week. Most of what I do is automated; it's canned responses with customer service. And so we talked about the work and the level of detail there and just added some logic there and some math and said look you are grossly overpaid. Your brother loves you. I'm going to suggest that he fires you; and again this is just before Christmas, of course, he didn't. Mark: Oh my you told him to fire his brother. We've talked about this before. Joe: I know. It was a $10,000 add back or whatever the number was. So we just did some math, right? We said alright how much does it cost to get a really good high-quality virtual assistant; $4 or $5 an hour. Okay, let's double that. We know you're only working 5 hours a week but we're going to go with you 20 hours a week times whatever the number is and we're going to add it back. So instead of the $20 an hour times 20 hours we took $10 an hour on those 20 hours a week and we added back the adjustment there. It's in black in white in the add back section with an explanation of why. So math and logic applied to a situation like that; that overpaid relative and it absolutely works and is am add back. And it has to be a big enough number to be an add back. In this case, the total add back was a pretty sizable number. So pretty clear there in my view would you agree with that on Mark? Mark: Yeah I had a guy who had a really cool business. His mom was doing his bookkeeping and he was paying her $250,000 a year for her bookkeeping services. Joe: What? Mark: That's a pretty expensive bookkeeper. That's a pretty obvious case of look it's a relative; he's paying his mom good for him, what a great son; better son than I am to my mom, and pretty obvious add back. And look I'm going to tie in something that we had from Level 1 here and that is where you have 2 owners and you brought up the example one owner is business development and marketing, sales and marketing and the other one is a developer. And I said well we should take a look at that developer side probably and probably not add back his salary but you've got to take a look at how much is he getting paid. I'm dealing with a client who has that sort of set up and the developer side; they're both getting paid the same amount of money and it's basically the profits of the business. We're going to add back in a reasonable and a pretty generous salary for a replacement development. And that's kind of the way that we would look at that is what is a replacement cost? You don't want to be super aggressive on that. It's got to be reasonable. It might be a little bit generous to say here's what the replacement of this person would cost. So you can do that with relatives. It can get a little bit tricky. I had one company that I dealt with where literally the company was basically run by this guy's family which brought up some issues with the transferability of the business. Because there were so many people involved that were family related but they were all getting these big fat paychecks. And so if we had gone to market; we didn't go to market with that one but we would have had to go in and try to find reasonable replacement costs for most of these people which will be then a little tricky. Joe: Yeah. Look, I can assure all sellers out there; all business owners that are smart enough to do some thinking and planning in advance of a sale, your buyers are going to be intelligent people that are going to be thorough and diligent. And doing that logical adjustment that Mark just talked about for that developer who's your business partner that is a non-transferable skill you've got to hire that out. You're just going to have to do that and it's going to help build trust and help you achieve your goals in getting your business sold. If we have to push the multiple if it makes sense because there's other amazing trends in the business then we can push the multiple a little higher as long as it's still within a reasonable area. The next add back is one that I just did this year as an example with Mike Jackness when we sold Color It. And I'm going to go ahead and mention the podcast series that Mike and I did because I think it's invaluable for both buyers and sellers to listen to and Mark I'm going to just tell you right now I think that you and I did a decent job in doing the intro for the podcast and then me doing an interview with Mike on our podcast. Mike did a much better job on his podcast. So I'm going to point people… Mark: They're actually pros at this. They're very good at it. We're just kind of fly by the seat of their pants. Joe: Yeah. He did an amazing job. And he actually did a series of 4 in total; 2 of them were with me and the one at the beginning one at the end was with his staff, his staff down in the Philippines before and after the sale. So he went through the whole arc. But it's episode 247 of the EcomCrew Podcast and the first one was Preparing Your Business For Sale and the second one was What It Was Like Going Through Due Diligence And Actually Getting It Sold. Now one of the things that we focused on in Mike's add back schedule was cost of goods sold. Let me give some just general numbers here; broad examples, these aren't actually from his business but let's say that what he did do was he renegotiated the cost of goods sold on one particular ASIN. He could have done it on more if he had planned in advance of selling his business instead of deciding to sell his business because he was emotionally ready to move on. We could have waited another year and he would have had a much more valuable business. But we didn't do that because he was ready. So in this situation again it's magic and loss; math and logic; oh my goodness, see this is why Mike's podcast is better…math and logic. Mark: Well I'm sure a lot of buyers out there look at sleaze and say this doesn't look like magic; it doesn't make sense. Joe: I said magic and loss; oh man, oh man. We're not editing that out. Chris, don't touch that. Alright, so Mike renegotiated the cost of goods sold on 1 ASIN. The reduction in cost was it came down $1.60. It was already on the books. He already had product in Amazon FBA and it was shipping and it's been in FBA already for 2 months. What we did; it was a $1.60, so what we did was we looked at the sales per month of that ASIN for the other 10 months going back in the P & L took that dollar amount and multiplied it times $1.60. Let's just say for simple math it was 1,000 units a month, right? I say simple math but here I am looking to the other calculator. If you got 1,000 units a month times $1.60 we're looking at 1,600 dollars a month times 10 months it's a $16,000 mathematical and absolutely legitimate add back; math and logic there. That times the multiple applied to the business; let's just say if it's 3 times that's a sizable add back, it's $54,000, no, $48,000. How's my math? Mark: We'll 48,000. On this I want to go back to where we started this conversation; why do we do these add backs at all? Again it's the idea that we want to show a buyer they're expected return on investment and we want to show a set number standardized approach so that you can interject your own assumptions. And the reason that this is completely valid to do even though you can take a look and say well the actual expenses were not this is because this is the forward-looking numbers that we know are going; the way that the business is going to be run in the future. Joe: That 10 months of expenses there will not carry forward so we needed to make an adjustment for that. Mark: Exactly the only thing we would need to verify would be in due diligence the supplier is going to give the same or similar terms to the new buyer. That would be the only thing that we really need to confirm there. So I think this makes complete sense. Joe: 100%. Mark: Did you get any pushback from buyers on that? Joe: Not an ounce and the buyer that bought the business is; I mean he went to Harvard, he's a very smart guy, he's bought 4 other businesses from Quiet Light Brokerage, and he understands all of this. And he's got investors that review everything so no pushback at all. Mark: Yeah. Alright, next one on your list you have here reduced fees times units sold. Joe: Look, everyone listening that's considering a sale of their business this last one is why you cannot have one conversation with a business broker for 30 minutes and decide that that's the one you've got to go with because if they're incredibly good at sales they're going to talk you into something in 30 minutes. Now I shouldn't say that because; well, look you've done research on Quiet Light, you've listened to the podcast, you've listened to different examples so maybe you can but you got to dig deep. This happened to me recently in like the third conversation on having in a review of the profit and loss statement. This is why we review profit and loss statements. We learned that the owner of this particular business that I'm talking about repackaged; worked on repackaging all of his product SKUs and in doing so it changed the level of pick pack and ship at Amazon. So he was at let's say Level 5 and he came down at Level 4; now these are costs. They're not called that but his fees at Amazon went down. Let's call it a dollar. So instead of $5 pick pack and ship fee, it was $4 because it was a smaller package, lighter package, things of that nature. So he did that. Again let's go to the same thing we did here with Jackness's business. He did it in the last 2 months, it's on the books for the last 2 months, so we're going to the prior 12 months and went okay how many units did you sell during those prior 12 months or 10 months times a dollar per unit and we're doing an add back for that because that adjusted expense in the past went away and it does not carry forward; same thing, different scenario. Mark: Yup, absolutely. So I think there's 2 ways when we're looking at some of these kind of I don't want to creative add backs but the ones that require a little bit more explanation. The one thing that I would just encourage people to keep in mind is that when we see some of these add backs which go back and recast numbers there are some situations where it makes sense to rather than going back and doing that add back bake in some of the value into the multiple as opposed to the trailing 12 months. If we keep in mind that the basic approach to estimate in value in a basic valuation approach would be your trailing 12 months discretionary earnings times some multiple, it doesn't matter if you increase your discretionary earnings by 10% or increase your multiple by 10%; the result on your valuation is going to be the same. And so I think there is a little bit of discretion and strategy that needs be taken into account by both the broker and the seller when it comes to determining where do we want to get this value in. The thing you need to always keep in mind is are you actually offering real value to a potential buyer? Is this really going to be valuable for the forward-looking future for that; I don't know if there's a backward-looking future, for the future of the new owner of the business and where are they going to get that value? So you might be hearing this and thinking this is pretty complex I don't know if these things would be really a legitimate add back or not. Look if you find this difficult that's because some of it is and some of it does require discussion. And as I said at the beginning we have these discussions at Quiet Light all the time. We will share something with the entire team and say what do you guys think this? Here's what I'm thinking, I should have it added back. And sometimes we disagree but we always are able to figure out where that line should be. So I'm going to just throw this invite out; if you have a question on whether or not something would be an add back ask us. Hound us and say what do you think of this; do you think this would be a legitimate add back or not? And that would be on the buy-side or on the sell-side. If you're look at an opportunity and maybe with another broker or directly with the seller and they're adding something back and want to know what our thoughts are let us know. We'd love to weigh in on it. Joe: Let's route another invite there and let's find a way to do an actual valuation; we'll do video as well as audio. We'll remove the client's names. We'll just use first name and we won't use the business name. And we'll do it sort of Mike Jackness, Ecom Crew Under The Hood Valuation and record it so everybody can hear the process we go through. Man that being in a 2 or 3 part series because it's such a long in-depth, detailed process. The only thing I want to throw is that we are developing webinars here at Quiet Light that will be up on the new 48-month long redesign that Mark's been working on. Yes that's a little wise-ass comment there but the webinars will be up, they will be available in detail for you folks to dig deeper and see us go through some of this add back schedule in the process of doing one that is titled "What's a Legitimate Add Back?" and all of this will be in webinar format where you can see actual profit and loss statements and whatnot. Mark: Sounds great. I look forward to doing those. I don't have anything else on add backs. I think we've just covered the entire topic as deeply as you possibly could actually no we could probably talk for another couple of episodes in some of these things but I don't have anything else to add for this one. Do you have anything Joe? Joe: No, we're good. It was great having 2 very special guests on the podcast; one much more special. According to Andrew Youderian, you're special. Mark: I like that guy. He's such a good guy, isn't he? Joe: Andy Youderian. Has anybody reached out to him with my little Easter egg stuff that I did on the video? But we're not showing the video yet, right? Mark: I had and actually we are showing the video and that's something for you guys to know. Subscribe to us on YouTube at Quiet Light Academy. These podcasts are now up in video form so you can look at our pretty faces while you listen to us argue about add backs. I don't think anyone has reached out to him about the little Easter egg we had in that podcast episode. Because I talked to him recently and he didn't bring it up. Joe: So for those that have no idea what we're talking about and have stuck with us at the end of this podcast here's the deal. I was driving down the road listening to the Quiet Light Podcast where Mark had Andrew on with state of the e-commerce. Mark: One of the best episodes I think we ever did. Joe: Whatever you say Mark. I think this is the best episode we've ever done. Alright, so Andrew says yeah you guys have been doing a really good job. I got to tell you Mark I think you have a bit of an edge over Joe. Because Mark and I always competing with who's got the best episodes and the most downloads. And I swear I almost; I had to pull over I was laughing so out. It was so, so funny. He's a bit of a prankster. So I figured I'd get him back. And so I had an Incredible Exit Series on, we had somebody; actually it was an Incredible Acquisition, right? Karl Selle bought Smart And Fresh and so we had Karl on a podcast about that and during the podcast I pretended that our producer Chris interrupted us and handed me a sheet that it was kind of an emergency, he was looking to get in touch with somebody named Andy Youderian. I could not pronounce Andrew's name properly. But for those that go to the YouTube channel you'll see that I have an EcommerceFuel t- shirt on and that the EcommerceFuel podcast is in the background; a mouse pad is in the background. So clearly I know Andrew Youderian. I want to call him Youderainan from now on. Clearly I know Andrew. My kind would call those Easter eggs. I think that's what they're officially called in Marvel movies. So I just threw in a few Easter eggs there. It was kind of fun. We did get one person that sent an e-mail to me and he goes I think the person that your producer is looking for is Andrew Youderian for EcommerceFuel. And I said well that was kind of a joke. I had to send a note back. But it was kind of fun. Mark: Well he was right though. It is the person we're looking for. We have an Easter egg coming up in one of the movie quotes so you guys have to dig deep on these movie quotes. And I don't know which episode it's going to be live on. Listen to the different intros. There's going to be one that you're going to have a really hard time finding but I'll tell you what I want you to find this one whenever it airs. That's really, really difficult and I will get with our producer next week's podcast and make sure that we give you a little hint as to which podcast to listen to for this movie quote because it's just an absolute gem. Joe: Awesome. Let's wrap it up with that. Links and Resources: ECom Crew Episode Quiet Light Academy YouTube