The Ins and Outs of Selling Your Shopify Business with Frank Kosarek of OpenStore

Will:
Hey everybody, we are back with another episode of Safety Stock. I am Will Davis. I am blessed to have Dan Magida with us. And Dan, it’s not just you, do we?

Dan:
What do you mean?

Will:
It’s just you’re not the only person that is with us.

Dan:
You mean blessing you today?

Will:
That is correct. You are not the only person that is blessing me today. We have another blessing.

Dan:
I, I know. It’s, it’s, it’s a nice treat we have today and we’re honored to be joined by Frank Rik, head of sourcing at Open store. Frank, how does it feel? Be blessed and in Will’s presence today,

Frank:
Feeling very, very blessed. Thanks for having me, Dan. Will.

Will:
Absolutely. Now, Frank, maybe, you know, a lot of times we start off by asking this question. Are you more of a summer guy or more of a fall guy? We are just in the fall.

Frank:
Good question. I think, I think I’m more of a fall guy. Honestly. I’m a big car person, a big outdoors person. So I like doing the fall drives in the leads. I like running outside, biking outside, and I live in Miami, so those things are just not possible during the summer. So I don’t know about You guys

Dan:
Are, is that possible in the fall in Miami, there’s, it’s What do you have? There’s no, the leaves don’t change colors in Miami. There’s no, it’s what you got the palm trees. Maybe a little falls a little

Frank:
Bit. A little bit, Yeah. You’ve not

Dan:
The northeast

Frank:
Here. Right. You get some fall for like a month in November when it feels like basically end of August in New York City and, and then you get a couple glorious months, and that’s back to summer again.

Will:
There you go. I mean, but still it’s Miami. It’s nice. It’s nice. It is.

Frank:
Yeah. Can’t complain too much.

Will:
So, Frank, can you, you know, for just setting the scene, for the people listening, tell us a little bit about open store. What is open store? Yep.

Frank:
Yeah, so open store is the the provider of liquidity for Shopify eCommerce merchants. So our mission is to make it possible for any merchant to sell their business quickly, transparently, and easily and use the cash that we we provide to move on to whatever’s next, whether that’s becoming a yoga instructor starting another e-com business. We, we noticed that this long tail of e-commerce merchants that are, you know, they’re not doing 20 million, 30 million in, in revenue they didn’t have a way to move on to what’s next, sell their business the way, you know, a much larger business would. So our mission is to create the infrastructure by which they can sell that business, move on and, you know, know, just continue that cycle of entrepreneurship or self improvement.

Dan:
Can you, are you able to go into detail just on what you look for in that, that vetting process? And we do just wanna off the bat, just congratulate you guys. You did just announce a latest round, I think it was around 32 million, so you raised 150 million over the course of the last couple years at evaluation of 970 million. So just congrats on all that growth. But yeah, what have you seen in the, I guess the vetting process? How many customers have you guys acquired to date and what’s that target ICP that you look for?

Frank:
Yeah, absolutely. At a high level, we’re looking for businesses doing the majority of sales on Shopify. So we want to, we want a situation where you know, the merchant is relying on the direct to consumer presence above all else wholesale, Amazon you know, for, for their business. We look for, you know, at least six figures in revenue. And we like to see that the business is serving at least majority of US based customers. Business can be headquartered abroad, not an issue but should be serving us customers. And then more importantly, I think in terms of maximizing the open store valuation, we look for brands that have evidence of stickiness. And what I mean by stickiness is repeat rates that kind of look like a subscription business and high average order values that are consistent, right?

We wanna see, hey, person, you know, customer A buys a product in January, they come back in June, they come back in December they’re loyal to the brand. And then finally what really gets us excited is stable customer acquisition cost. Of course iOS 14 has had a profound impact on e-commerce and, and all advertisers, right? So those merchants that can keep their customer acquisition costs stable with ad creative refreshes, audience refreshes we love to assign credit for that. And, and we think that’s extra impressive in our vetting process.

Will:
So if I’m, if I’m kind of playing this back in, in some ways, you know, making it easy to understand if you’re right now, iOS with 14 made it more difficult for people that are advertising to get data correct, to get information about how well something’s doing or who’s interacting with their products. And so what you’re looking for is brands that are overcoming that challenge and in some ways have a multiple pronged approach about how they’re getting to those customers and getting information about it. And additionally to that, you’re ideally looking for, you know, increases of sales. And at what point does margin come into play for what those brands are? Are you even thinking about that?

Frank:
Yeah, I mean, we don’t have a hard cutoff in terms of margin. What we look for is our valuation technique is a little different than other aggregators. You know, the standard across the industry is to say, All right, let’s take your profit and loss statement and apply a multiple to your revenue or a multiple to your ebitda, and that’s your price, right? What we do is, is much more programmatic and fully data driven, right? So we’re not choosing an arbitrary multiple. What we’re doing instead is pulling the, the businesses customer acquisition cost trend leading up to the price and then looking at their repeat transaction rate and their average order value. And basically computing, you know, per customer, what is, what is each customer gonna contribute to the business, right? We sum that up across past future customers, and then we discount that to today to come up with a price. So we’re not saying, Hey, you know, we’re not gonna move forward unless there’s a certain X margin. It’s really about how much of a flywheel effect can we detect through those three numbers and how does that affect the forward looking projection for the business? We can run that all algorithmically and, and get that turned around in as little as 24 hours, so,

Dan:
Gotcha. So we’ve seen Amazon aggregators as a whole, that market has definitely got more competitive over the last couple years, and then there’s been some valuation hits as well. And then you guys are on the Shopify side, and I mean, your valuation has obviously gone up with, with the latest round closing. How, how would you say your model differentiates from them for long term like growth? So you don’t possibly fall into some things that they did where it was grow too fast, but how do you operationally separate? And what do you guys do on the operational side once you acquire these brands? Yep.

Frank:
Yeah, it’s, it’s a great question and I think, you know, to start off have to hand it to a lot of the Amazon aggregators for sort of pioneering the path toward, you know, normalizing aggregation. I think they, they did a lot of work to make it commonplace and make it attractive. I think the primary differentiator comes when you look at the differences in the assets we’re acquiring, right? There aren’t as many Shopify aggregators. If you look at what you’re acquiring with an Amazon asset, Amazon still owns that customer, right? You are acquiring the Amazon seller central login you know, potentially a PPC strategy. And I would say the ceiling of potential improvements you can make to that asset are more limited. The upside is, it’s much more of a cookie cutter type asset, right? It’s, it’s, it’s boxed that’s neater.

You know, it’s, it’s easier to manage. But we believe, you know, the, the real be is the place on the power of the brand, the power of the, the story that each founder has built and leveraging that as a means of growing each asset. The flip side is that’s a lot more difficult, right? We have to handle all the customer acquisition, all the retention, the supply chain all of that falls completely on us, but we think the upside is significantly greater because we are owning the entire customer journey from end to end as opposed to you know, borrowing eyeballs from Amazon. That’s, that’s critical. And then I think to your second point Dan, around you know, valuation hits one thing that we’ve been extremely, extremely disciplined about is how we think about pricing. Our operational capacity is intimately tied to how we price businesses. So we will only price what we believe is reasonable for our internal ops capacity. I think where some of the disconnect has come with Amazon aggregators is they’ve priced it market you know, at, at a multiple, let’s say. And that ne not, hasn’t necessarily correlated to their ability to operate that brand post-acquisition. So our founder, Keith, credit to him for imposing this strong lockstep discipline between how we price and how we operate.

Will:
Let’s say I have a bloody married business and it’s doing about $750,000 a year in

Dan:
Sales. Is alcohol even part of your icp? Frank? Do you guys even go after those brands? Let’s just, maybe we do a practical again. We’re welcome.

Will:
It’s a bloody Mary mix, Dan. It’s not that I’m Yeah, it’s a William Mary mix. It’s not alcoholic. That’s

Dan:
True. Yeah. Are you in the beverage, Is beverage part of your target icp?

Will:
We’ll ask if Frank’s in beverage it is, and if he’s not, can be

Frank:
Beverage can be. Yeah, for sure. We have no hard lines in the sand you know, against any category, unless that category can’t be advertised on digital marketing. So your average, well guess what’s a typical, Okay, Yeah. Bloody Mary makes, I think, I

Dan:
Think you’re, I think you’re, I think you’re

Will:
Good. Thank you, Frank. Thanks, Frank. All right. You know, also too, you know, let me know if you’re available on Mondays and Wednesdays and we’ll talk , you know, on that side of things though. All right. So I am, now we’re at the point to where effectively you have cut me the check and now the business has been turned over to open store. What, what’s the next 30 days looking like for that business? Whether it be the employees or what are you looking like, How does, how do things assimilate? What’s going on from there?

Frank:
Yeah, that’s a, a great question, and I actually think that’s another place where we really differentiate ourselves. If you accept an offer from us to be clear, accepting the offer for your business, let’s say, is not obligating you to sell it, right? So we, we pick off a two week indulgent phase after you accept. And that’s where we, we basically validate that nothing about the business is different from how it was presented during pricing, right? So if you are honest with your submission, nothing to worry about. Once that two week period finishes we actually pay 80% of the total deal price at our closing phase. So let’s say you get an offer, you accept that offer diligence takes two weeks. Within that two week period, you’re getting 80% of the deal, which is the fastest payout structure that I am aware of and the entire market.

If you, That was pretty good to me. Yeah, I mean, you know, there are other ways to sell your business, but it might take six months, 12 months, 18 months, right? To, to get a payout. Ours is two weeks. And then the final phase is we do a, a 60 day transition phase where we learn from you will, how to run your bloody Mary mes, how to get Mondays and, and Wednesdays you know, get customers lined up to, to mix Bloody Marys on those two days. And of course, supply chain marketing fulfillment, all of that falls in, in the purview. And at the end of that 60 days, you, you receive your trailing 20% of, of the payment and your transition totally off. Important distinction on that last point. Our mission is to let founders move on to what’s next without feeling like they’re in, you know, blocked in with golden handcuffs for the business they just sold to us. So most founders like to transition off with their teams and that’s has been a huge net positive. You know, we’ve had some incredible founders already go out and start other businesses go back to grad school, et cetera. And the reason for that is because we’ve totally cut them loose from the business, right?

Dan:
Are those companies, so like the Bloody Mary Mix say, are, are most of the companies that you’re acquiring, are they lean teams to begin with just the, the founders? Or do, do any of them have say like a 30 person team already? Because that’s obviously maybe a little bit more sensitive for those employees if they stay on or transition off. How do you manage that?

Frank:
Generally? Pretty lean to answer your question. And okay, that’s a component of it where, you know, we, we, we certainly look for that in our ops capacity. If you can get the most out of a very lean team that is a signal to us that we can, you know, easily integrate this brand to our, our portfolio without having to spin up new functions that are one off right to, to serve that brand’s particular needs. Yep. and it’s also, you know, it’s a testament to the entrepreneurs to be able to reach the, the, you know, interesting revenue thresholds on such a lean team. So we take that as a validation of the team and the market, right.

Dan:
Operationally for you guys since Sherry, like, and this may be outside your purview, but more on the, just bring it to a little bit of a supply chain focus. Where on the, say the procurement or freight side, if you’re working with international, do you guys do like consolidation with some manufacturers or consolidate for freight income and freight shipments? On the three PL side, do you bring everything into your own dedicated fulfillment centers to manage freight that way? So it’s, everything’s under one roof, so a little bit cheaper, more operational insights there. I guess what do, do you work on that right now? Or maybe that’s a future good plan that’s lo and I just offered you guys just free consulting right there on the spot. Or what headwinds do you see in the market today that don’t, you don’t do that, or just in general, other headwinds in the business to look out for in the next year?

Frank:
Yeah, for sure. So I, I mentioned that, you know, our, our sort of reason for existence is to give Shopify entrepreneurs instant liquidity for their business, Let them move on to what’s next. I think the other side of that thesis is why does it make sense for us to do that, right? Operationally and one of our key these is that you know, if, if you are a single Shopify entrepreneur up against the world the leverage with which you can, you know, negotiate down shipping fulfillment you know, speculatively deploy capital to stock up is much more limited, right? Than what, what we can do with, you know, tens of brands in our, our portfolio, right? And so one of the hypotheses, yes, Dan, is consolidation of manufacturing fulfillment and shipping you know, economies a scale that start to accrue when you have multiple brands working with the same three pl as opposed to just a one off level of volume, right?

And so we, we do think about that you know, in terms of streamlining our, our filming pick and pack costs et cetera. I also hear, you know, I’m on the phone with merchants all the time, and I love to hear their stories, and I always ask, what what, what motivates you to seek a price from us? Why are you doing this? And I hear again and again they have trouble you know, accessing affordable capital to finance inventory ahead of a big season, right? So they’re constantly trying to figure out, okay, Q4 is coming. I don’t have enough cash on hand to finance what I, what I, I need to to finance to not to stock out. What do I do? Do I borrow from Shopify capital? Do I borrow from another lender? And one of the advantages for us is that, you know, we just raised that, that large round and we’ve raised we’re fortunate enough to raise other capital previously we can speculatively deploy that capital and make sure the brand is not stocked out at critical sales times. So that’s just another, you know, financial advantage that we have. And this ultimately is to the benefit of each brand, keeping them kind of alive and well during the, the high traffic times.

Will:
So, you know, I think the interesting thing is to your point is that when, when certain brands are struggling to order the amount of components, so raw materials needed to support what they think they’re going to have orders for, whether that be they know it’s the case and they, they’re about to launch into a retailer, or they’re seeing data across their DTC or omnichannel platform and you know, they, they feel they, they are convicted that they’re going to have these orders. Do you start seeing a bump at some point in time once there’s been an acquisition to where you’re like, Hey, now that this brand is properly supported, that you actually see, you know, there’s a year one or year two bump in terms of organic sales or non, whatever it may be that you’re like, it, it’s like the open store bump of when you buy someone.

Frank:
Yeah, it’s, it’s a good question. I think we do start to see that because we have a playbook of optimizations that we apply to every brand, right? Just kind of baseline improvements that we think every branch should have, and we apply those that’s, you know, conversion optimization storefront optimization, marketing, creative refreshes. And also frankly, just staying in stock , we see you know, roaz return on ad spends start to, to increase in a lot of cases when we take over, simply because when a paid visitor, you know, hits one of our pages, the the product they’re looking for is actually in stock now, and we can actually make that sale. So definitely that’s, that’s exactly our vision. You know, goal post one is let’s stabilize the business and get it to operate at least as well as it was when the founder was running it by applying that playbook. And then we start to get creative about, you know, what’s the next level of growth to take each of these brands to the next level. And that’s where things get really interesting.

Dan:
And to that growth, Frank how many customers have you guys acquired, I guess, to date, and what’s the, what’s the plans for, I guess, the next year? But also to piggyback on your last point where you wanna grow these companies, do you ever foresee, I mean, another, like liquidation them for those companies too, where they could raise their own funding outside of what you obviously already acquired for them or spin them off into their own separate entities outside like the the open store platform?

Frank:
Yeah, I’ll answer both questions. I, I can’t get specifically into the number of customers we’ve acquired, but you know, that is part of the vision, right? We are owning that customer journey end to end because the, the asset we’re acquiring is on Shopify and, and not on Amazon. So that is you know, that’s definitely a key part of the thesis and a, and a number were very attuned to with respect to, you know, is there another liquidity event for these these businesses after we’ve acquired them that isn’t our playbook. We are a buy and hold strategy, not a, a buy and flip. And it’s, it’s really that buy and hold strategy that makes us first off have a lot of discipline in how we price businesses and how we select the businesses to acquire, right? We’re committing to run these brands. And we also think that’s the real upside on the back end where our, our upside is not just the difference between our purchase price and a sale price, but really it’s the long term value created and the playbook we create to run this portfolio, right? So that’s, we’re we’re taking a longer term vision to it.

Will:
Do you find yourself at some point, like having a certain specialty in terms of like, Hey, we’re, we’re, you know, we’ve acquired enough brands to where we think actually we’re getting really good at knowing, you know, certain customer analytics or, you know, we’re starting to see where we’re really good at knowing the movement of glass because we’ve gotten that. Is there anything that’s like jumped out to where you’re like, Hey, we’ve, because of what we’re doing, we’ve actually become experts in X?

Frank:
Yeah. I, I think to date we’ve had no strong category focus, you know, saying, Hey, we do exclusively apparel or exclusively you know, food and bev, actually we own a, yeah a meat subscription business. We own a, a yoga a yoga apparel business. We own a drones business. So it’s, it’s really runs the gamut. And I think what we’ve actually realized is, is kind of the flip side of what you said. Well the inputs to a successful eCommerce store are relatively constant across a lot of different categories. You can actually apply a playbook you know, with some, I would say some small iterations and editing that works across the board. And what we’ve noticed, I think is the importance of marketing and the importance of keeping creative fresh, constantly testing, generating new creative so that when you’re on Instagram you know, and you’re, you’re showing an a to a customer, they, their scroll stops instantly. You have to keep going back to the drawing board and making people stop scrolling if you want, keep the flywheel moving. So once we mastered that, we think the category or, or the industry we’re dealing with actually matters not so much in so far as we can calibrate marketing.

Will:
Interesting.

Dan:
Well, yeah, that’s, that’s a very, Yeah, it’s true. But, but Frank, we really appreciate all your time and joining us playing safety stock. How can brands or even just entrepreneurs get ahold of you guys and what’s the best way of getting that valuation or just learning more about open store?

Frank:
Yeah, yeah. Well, the, the benefit Dan, is that our valuation process, it’s totally online, takes about two minutes to complete. Our, our site is@open.store. You can submit your email address and your website URL there, and then what we need is a connection to your Shopify account, which you can provide in about two seconds. And a recent profit and loss statement. And also if you use Google and Facebook ads, we, we use those critically as part of our analysis. But from there we receive your information and turn around the valuation if you’re a fit in, in 24 hours. And then from there you can kick off the exact process that that I mentioned before. But a couple of things to note on, you know, how, how to think about preparing your business for a sale, if that’s interesting to you.

You know, I mentioned the, the number one most important input to our model is how controllable is the customer acquisition cost for the brand. So anything you can do to show stability or even a decrease in customer acquisition costs will go a long way toward valuation. I think secondly, I always tell founders, you know, make sure you have as much documentation ready about your business as possible. So supplier relationships you know, what are the terms all invoices for your inventory true profit and loss statements that are up to date, All that makes our diligence process that much easier. And also, you know, makes it more likely that when you submit your, your initial application you’re not misrepresenting anything, right? There are no surprises. And then finally, I think the important piece is of course there is some psychology around, if I’m selling a business, do I, do I pull off the gas?

Do I stop hustling is hard. Just cuz I’m, I’m not interested anymore. And I think the advice I always give founders is, you know, keep running the business as if there was not an offer on the table, even if you are working with us. And the reason for that is, you know, we want to give you the max credit for the performance that’s continued, you know, through our pricing phase and diligence. So I would say, you know, my advice is keep, keep hustling keep your marketing, you know, fresh and and that’ll make sure you get the, the highest valuation on the back end.

Will:
All right, well if anybody has any questions that they want Frank to answer and you can always reach out to us at hello@anvyl.com. That’s A-N-V-Y-L.com. And if you want to know what other type of foliage is going on in Miami in the fall or winter, you know, also we can get some of that. And so let us know. We’d love to hear from you. And then, you know, we’ll be back with another episode shortly. Till then, thanks Frank.

Frank:
Thank you guys.