Learn from a CEO at a DTC Holding Firm About How Potential Buyers View Your Business

The Profit Forecast: Episode #8

Kelcey Lehrich, CEO and CoFounder at 365 Holdings

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Ben Tregoe: [00:00:00] Kelsey. It's great to see you. Thanks for joining. Hey, thanks for having me. I think it would be great for everybody to hear more about what you're doing at 365 and what you guys are looking for on companies, and then get it a little bit into like what you're seeing in the market and what companies should be doing.

Ben Tregoe: But first, why don't we start with just like a, an intro to the 365,

Kelcey Lehrich: for sure. Appreciate that. And happy to be here. The story of 365 is I guess the story of myself and my co-founder Justin, we've been doing business together for about a decade. And most people assume that we got an e-commerce because we had like a marketing background or worked in e-commerce which couldn't be further from the truth.

Kelcey Lehrich: But six years ago we used an FBA to buy an e-commerce business. Shortly thereafter, I kind of developed the thesis that I think we have today. It's probably much more put together now than it was when we first started. When we first started, we just wanted to buy a company. It could have been.

Kelcey Lehrich: Anything that we didn't have to eCommerce. We just kind of stumbled into it, frankly, if I'm being really honest, And now through time we've developed some operating experience and a view on the market, and that's been a great evolution, but I'd be lying. If I said it was a brand plan to start with. So six years ago about brand number one.

Kelcey Lehrich: Today we have six brands portfolio of companies that we operate and 85 people on the team. Our view, we get lumped into kind of that aggregator bucket. It really wasn't a word, frankly, when we started I called it 365 holding. So I just needed a name. There wasn't even a big brand idea behind that.

Kelcey Lehrich: It was, Hey, we're gonna buy a company and we're gonna have more than one. And so we need this holding company. Like it was not that thought out to be really candid. Today now I, have a view that is there are many, High quality, durable niche, long tail brands. If you look at consumer spending, it kind of starts in America in the 1950s post world war II and is dominated by a small number of big, companies.

Kelcey Lehrich: And they use mass media billboard radio TV to. To sell to consumers fast forward to the internet. And now we have Facebook and Google and Amazon instead of ABC and billboards in New York times and, radio and this unlocks the long tail. So if you have a organic peanut butter brand, a vegan leather belts company, a t-shirts for moms who don't like yoga, like you insert the wildest avatars or customer profiles or brand identities, and they exist on the internet.

Kelcey Lehrich: Thanks to Facebook and Google. And Amazon is long tail of. Consumer demand is unlocked and our belief is that there will be hundreds or thousands of what I call a micro brandand. It's a brand. So when a person says a product category, the consumer identifies a brand name back to that product category.

Kelcey Lehrich: So we're recording, I'm holding a Yeti water bottle. You say water bottle? I say Yeti, that's a well known brand. But there are dozens, hundreds, thousands of small ones that unless you've seen the ad, unless you've bought the product, nobody knows what that is. Pair of shoes that you like food, you give your dog the thing you clean your car with.

Kelcey Lehrich: There's just thousands of these. And they're gonna be subscale businesses. They're gonna do seven or eight figures in revenue. They're good businesses. They should be profitable. They should. Long term providers of value to their customer base, but they're not gonna hit escape velocity. They're not a platform business that can be backed by private equity can be bought by a strategic can achieve venture scale returns.

Kelcey Lehrich: They're just small businesses. And so one day they either get sold or maybe they, frankly can die. If they're not, they don't find a home. We want 365 holdings to be a platform home where small brands can have a long. Ahead of them get operational excellence and best practices from supply chain to creative and advertising and web dev and kinda the whole nine yards of the founder can look back and say, my business is now at a place that's a good second home.

Kelcey Lehrich: It will live on for a long time. Be profitable, take care of its customers. Create great products. Know my business is not the next publicly traded darling D TOC stock. I'm aware of that, but it is a good business and I want it to have a successful. Our vision is to be that best choice for a home for these small, long tail niche brands that we think have some durable, long term profitable reason to exist.

Kelcey Lehrich: And those the businesses we wanna acquire and hold onto.

Ben Tregoe: Well, that was awesome. And there's a lot there to explore at the beginning. And at the end you use the word durable. So what does that mean to you when it

Kelcey Lehrich: comes to. . Yeah. There is actual product market fit between demand from customers and the ability to deliver products that satisfy some need or value proposition of some kind that is independent of arbitrage on paid media.

Kelcey Lehrich: I think everybody we're recording this in almost July of 22 and everybody in the last 18 months woke up to the end of paid media arbitrage and Facebook CAC. And that's well established. For a long time, though, you could have a business that was effectively a [00:05:00] promotion you could buy clicks at some cost and sell 'em at some other cost, and you could drop ship, pop sockets from China, and you could make cash flow or profit that wasn't a durable business though.

Kelcey Lehrich: Durable business has probably the best example would be if people are familiar with Kevin Kelly's thousand true hands, like there's thousands of people who get intrinsic value and they would be sad if that company was. That's durable product market fit. They have a need. The company can produce a product with gross margin that satisfies it.

Kelcey Lehrich: It's a viable business outside of just the arbitrage of paid ads that we saw the last couple years. So when

Ben Tregoe: 365 is looking at an acquisition, does it have a test or test for that durability?

Kelcey Lehrich: It shows up most in LT, VM retention. And it shows up most in new customer cohorts by channel and just kind of trend this through time.

Kelcey Lehrich: I don't have a hard and fast metric, but those are the first places I'm gonna go. Look is the K and LTV cohort reports. What is happening through time? Where are customers coming from at what cost on what products and what are they going and doing through time. And do I get a sense that, and does the team get a sense that.

Kelcey Lehrich: That experience is durable. We'll continue to happen at a cost that makes sense, and that we can at least sustain the current level of product innovation, customer service, excellence, creative, whatever the secret sauce is that allowed that thing to exist in the world and be successful. Can we at least perpetuate it?

Kelcey Lehrich: And then there's probably some things that we think we can do better hopeful. Then maybe the founder didn't have a chance to execute on team limitations, capital, whatever it might be, but is there a fundamental fit? That's allowed it to be a sustainable business and we think we can perpetuate it.

Kelcey Lehrich: Yeah.

Ben Tregoe: Do you think, do you look at things like pricing power or, you know, the ability for a brand to charge above what the competition charges or is that not important to your

Kelcey Lehrich: math? Yeah, I think pricing power does matter. I'm probably less worried about it competitively and probably more worried about it.

Kelcey Lehrich: From a conversion rate, product market fit, will the customer pay what we have to charge to exist as a business? Yeah. I don't know that we have a good methodology. If I'm being Frank to really solve that on the front end, we're certainly gonna underrate to the history. Yeah. And we'll look at some near term drivers of demand and product cost.

Kelcey Lehrich: I don't wanna. Think that I have that more solved than I do. I think that's a work in process for us, but I do think pricing power is an important thing. It probably comes back to that durability of demand component of is this I think people really want and willing to part with hard earned dollars to pay for.

Kelcey Lehrich: I saw somebody recently talking about Kind of the mask on AOV and the math on C and where CPMs are in kind of this big holistic picture of if the average American makes this salary and that breaks down to this much per week of payroll and they have rent and they gotta do the math of like how many discretionary purchases could a human make.

Kelcey Lehrich: That's a middle American human right. Pick your customer retire 25 to 35 college educated mix ADK. Just pick this person, hypothetically, do they have the ability to buy. Product in your set per week or one every other week, or if your a be $800 and it's, that's their only purchase for the month and they gotta save up for it.

Kelcey Lehrich: Break breaking down that math psychologically was an interesting exercise. I saw somebody do recently about get out into this customer's shoes of like how real is that? And it's probably more of a a finger in the air test of like, does this pass muster? Does it make sense?

Ben Tregoe: Yeah. I, think sort of tangential to that, it's shocking to me when, you know, we've looked at the income distribution in the us, you know, it's a very steep pyramid, so, you know, you're 80 K household, you know, but you getting up to like a 200 K households, not that many households.

Ben Tregoe: Yeah. So you've gotta wonder, you know, unless you're. You know, a real everyday usage or, you know, like you're saying the discretion or not, some people will save up and cause it's like, oh my God, I love that brand. And I'm gonna sure a ton of money on it. But I think people aren't really, a lot of times aren't having thought through this sort of potential demand and then they overestimate that damn.

Ben Tregoe: And then they get themselves in trouble by trying to, you know, expand beyond sort of their natural. Group. I mean, have you found that or,

Kelcey Lehrich: I mean, yeah.

Ben Tregoe: Businesses that aren't gonna ever scale, like yeah. So do you sort of think there's a natural limit to a lot of these businesses, I guess is my question.

Kelcey Lehrich: That is a fundamental problem to solve that is both a pro and a con. So I look at our portfolio today and we've got brands ranging from emergency food to cost diapers, to at home fermentation supplies, to hair restoration shampoo, and a few other things. [00:10:00] When you end up in that niche, that long tail of small brands pro and con Tam is probably limited.

Kelcey Lehrich: There's only so many humans that want to buy what you're selling. There is a, non mass market demand problem to solve for. You can either create demand through advertising or capture it through advertising and Amazon, but like, There's only so much demand, only so many of these things being sold. Thinking about that on one of the spectrum, and then thinking about the durability of that demand on the other end of the spectrum, making a judgment call.

Kelcey Lehrich: If I'm buying this business that we think is gonna grow at some certain rate, I think our businesses should grow. Kager the GDP of the internet. In other words if, the internet is growing at. Five or 10 or 15% a year. And us GDPs at 3%. I think we're gonna grow at five or 10 or 15% a year plus or minus.

Kelcey Lehrich: I don't think we're gonna grow at 30%, 40%, a hundred percent. I just think as possible we're in niche markets that only have so much demand. So that's on one of the spectrum there. The spectrum is okay. There's only so many players. We can be a best practices, executor in the space. We can drive cost through scale.

Kelcey Lehrich: We can do things that other. Businesses we compete with in the niche, maybe aren't capitalized to do. And it's a pro to con it's just part of our business model. I think through time will by necessity need to eventually perhaps exit some of the smaller brands or we do saturate the TA and get into larger parts of the long tail.

Kelcey Lehrich: I don't have a good predictive model for when and how that will happen. Other than I think through time, it will inevitably. I just don't have a good forecast to predict which ones it will be in that portfolio. We get, we see some amount of like power law outcomes of we make an investment, we go buy something, put a bunch of work, financial capital, human capital, time, energy, and on the front end.

Kelcey Lehrich: What I knew then versus what I know now in the rear view mirror, just wildly. Outcomes versus expectations. And so we'll continue to kind of evolve that process, but it's, very much an art and not a science. And it's a fun challenge to solve on an ongoing basis. All right. Well, there,

Ben Tregoe: there's clearly a good story or two in what you just said.

Ben Tregoe: So like what, would be an example of,

Kelcey Lehrich: so go win. I thought

Ben Tregoe: this, and if you thought,

Kelcey Lehrich: you know, something else our, largest business today is our emergency food business. We bought it heavily distress. Paid very modest amount for it in hindsight. And it does a lot of revenue relative to the original purchase price.

Kelcey Lehrich: Yes, we've rebuilt it from the ground up. We've done a new website, new brand. I we've done a lot in the pandemic and demand from the last two years of the world being a bit upside down has driven demand in emergency supplies. No doubt about that. However, as a percentage basis of where it was and where it is now, you couldn't have predicted the home run success that we're proud to stay with that one.

Kelcey Lehrich: I have another brand in the portfolio that we've paid a much higher price for that has had much less excellent financial outcomes through time. A whole bunch of reasons why that probably don't make sense to get into for today's conversation other than to say, at the outset, the distressed brand with the low price tag and a question.

Kelcey Lehrich: versus this multiple for this really long established stable thing which one's gonna look better. Wouldn't have guessed what happened. Yeah.

Ben Tregoe: Interesting. And are those learnings that you can now apply to new? Brands or is it learning that like, well, you just never know

Kelcey Lehrich: Yes. To both. Yes, there are learnings every time.

Kelcey Lehrich: I think anybody get's operating in acquisitions in business and life, like you'll learn things. I joke that every transaction, the purchase agreement template gets a few paragraphs longer and I try to avoid that, but it's inevitable. Our due diligence checklists grows every time. It's just kind of part of the deal.

Kelcey Lehrich: But the learning for me has been that we will have. Like it or not a portfolio of outcomes that has a wild distribution that is hard to forecast and so good at bats. And many of them with intelligent underwriting and good decision making are important will produce uncertain outcomes and getting enough good at bats with enough.

Kelcey Lehrich: Good input through time will pay off. Yeah. So doing diligence and getting as many bats as possible to, swing at is an important part of the plan going.

Ben Tregoe: I wanna jump back to something you said a couple minutes ago, which shocked me, frankly, where you said the growth rate is somewhere between the cer of the internet and then, you know economic

Kelcey Lehrich: growth rate us GDP as a floor.

Kelcey Lehrich: Yeah. Right.

Ben Tregoe: So you're like, oh, okay. A single digit or what, you know, 10%, whatever it. I mean, that's like heresy in the world of VC and you know, it is, and in certain markets you know what I, mean, I guess I there's so [00:15:00] much in there that I'm trying to get to, but like, yeah. Did, people basically overestimate the potential growth or was it that they thought more companies could achieve those stellar growth?

Ben Tregoe: Than, actually could, or, you know, is there just basically a rethinking that, that needs to happen, that people are like, look, 10, 20% annual growth is like ridiculously good,

Kelcey Lehrich: probably just a different maybe culture or set of expectations or corner of the internet or corner of business, perhaps to shade that answer.

Kelcey Lehrich: I think certainly if you are used to seeing. Disruptor venture backed attack this large market. Do the DN VV playbook. Like yes, if that's the story that you approach, Hey, we're buying e-commerce businesses with. I would expect you to think that my statement about growth rates is, silly. If on the other hand, your approach is these are fundamentally retail, consumer discretionary businesses, which have existed in America for hundreds of years.

Kelcey Lehrich: And they were never expected to grow at these crazy growth rates. That was never a. the only difference is that instead of it being on first in Maine, and you're a shopkeeper and you walk in every day and you unlock the door. Now we have Facebook and Amazon and, ups and FedEx. I don't know why we would have these crazy growth rates.

Kelcey Lehrich: We're not attacking these large markets with disruption and, a war chest of venture funding. We're buying fundamentally sound small businesses that have the wind at their back. Consumer demand and consumer shopping online. But there's still just fundamentally niche consumer businesses that provide a product to consumers who are in the market for that thing.

Kelcey Lehrich: Part of it is, like that, that Tam approach of take the mattress business, right? Like so many companies got back to do the bed in the box. I don't need to rehash that here, but we knew how many mattresses were sold in this country. You could do venture scale math to figure that. We sell kombucha kits.

Kelcey Lehrich: I don't know how many people want to drink kombucha, let alone make their own, but it's a smaller number and it's not gonna grow that fast. I think it'll grow it aggressively, but it's not gonna look like changing the way consumers buy mattress.

Ben Tregoe: Well, if, why would you sell one of these companies? If, you know, like they're growing along, they don't, you'd said, you know, well, maybe we would have to exit them and, you know, reinvest.

Ben Tregoe: Yeah. If, they're good companies, why wouldn't you just like, sort of keep 'em in the portfolio? Are they drags an overhead

Kelcey Lehrich: or what? It becomes a capital allocation problem. Not necessarily of dollars but of time. We see. The team can only scale so much on a shared services model to focus on so many things at once.

Kelcey Lehrich: We're developing a process internally that I stole, frankly, from big business. There's this McKenzie process called a growth share matrix where you map growth rate of the industry you're in versus your market share. And is your industry growing or shrinking and is your market share growing or shrinking?

Kelcey Lehrich: And it gives you kind of an intellectual answer of where to invest capital could be financial dollars or resources of any kind in our case, it's humans and, labor hours. Particularly in marketing and ops and things like that. And the answer comes when you have cash cows, you should harvest cash.

Kelcey Lehrich: When you have stars that are growing in a growing market, you should invest into them. If you have question marks or if you have laggards if the right capital allocation decision is to divest, let's sorry, solve the question marks either they're either stars or their laggard. Or we need to do best of them.

Kelcey Lehrich: And so we're trying to build a, regimen and methodology internally to say, can we classify things as cash cows, as stars, as question marks or as laggards. And if we can build that methodology, can we have the discipline to them? Let that algorithm decide when to sell where to invest and then ultimately what to buy next.

Kelcey Lehrich: Yeah. So we're putting some working to that. It's a big project for this year. We're at the halfway point of the. I think starting next year, it will be a better tool in our toolkit. It's a slow moving decision making framework, but I think it's a helpful lens that people smarter than me at McKenzie figured out a long time ago.

Kelcey Lehrich: And it was built for big business, but applies so well to what we're doing with niche eCommerce. Yeah.

Ben Tregoe: Interesting. So what switching gears, if I'm a founder of, you know, brand, like what would make me an ideal candidate for 360?

Kelcey Lehrich: couple, few years of profitable earnings and steady, consistent growth and a durably sustainable demand driver in the business.

Kelcey Lehrich: So what that looks like to us is probably something that's more than three years old, probably. We have businesses that are 12 and 18 years old in the portfolio. Definitely evidence of like product market fit through things like reviews. Organic traffic, email list, there's content or community.

Kelcey Lehrich: That's also super helpful. A lot of those things, once we get past that, like CAC LTV cohort. We look at those softer metrics of like, do we have a dominant position on Amazon and Google and the SES? Do we have voice of customer with reviews and [00:20:00] feedback? That's a a moat around the business. Do we have audiences and own media that we can tap into for things?

Kelcey Lehrich: So all of those things add up to be more attractive, more valuable, more beneficial to us as an acquiring platform to then leverage for the future. And the more those are under utilized, the more maybe we can grow it faster than that conservative expect. I'm just not going to underwrite anything more than that.

Kelcey Lehrich: Even if the business I'm looking at has grown 50% year over year, I, as a buyer will underwrite it down to 10 or 15, cuz I'm just not convinced that we can sustain that. Yeah. And I certainly don't wanna fund it predicated on, that being the case.

Ben Tregoe: Right. And so what level of profitability do I have?

Ben Tregoe: Like what would. An attractive EBITDA margin for you.

Kelcey Lehrich: We, won't today. We won't look at anything. That's not at least 500,000 of annual cash flow, EBIT as a good enough metric, in my opinion for, cash flow, for most cases in eCommerce, most cases. Okay. And that I, all things being equal, a greater, even a margin percent.

Kelcey Lehrich: Being better. If it's at least 15%, maybe 20, if it's more than that. Fantastic. That high teens is a good expectation. Yeah. We're gonna have a different cost structure. Our team burdening in et cetera. So I kind of worry more about contribution margin cuz we're gonna have our own cost structure that we'll, figure out on a go forward.

Kelcey Lehrich: Yeah. But could that business be operated in a profitable cost structure historically? And then my new costs should be the same or, hopefully better. Cause we have some scale and some EF. But high teens as a starting place and at least 500 K of cash flow.

Ben Tregoe: I mean, that's like high teens. If you look at the Banbridge D TOC index, I mean, you know, there, the, I think the highest in there is like 30, you know I should be looking at it right now, but you know, the twenties would be, is great for a public company.

Ben Tregoe: Yeah. So high teens is, you know, a real achievement. I. How, do these founders, you know, what drives that profitability are? Are people just like, how have they gotten themselves there? Is it they've? Yeah, I guess I'll just leave it at that. Like, how do you think

Kelcey Lehrich: people are looking? I, think it's back to the, topic earlier.

Kelcey Lehrich: It's like they discovered durable niche, product market, fit customers, pay inappropriate price on an appropriate cost of goods and like their, the business model fundamentally works at that size. The question mark for me. what does it look like on a go forward? And again, if I underwrite to the GDP of the internet, 10 or 15%, Kager not venture scale expectations that math is relatively straightforward.

Kelcey Lehrich: Like will people still buy cloth diapers? Probably like we should do a good job with it. Will they still want shampoo to make their hair look thicker and fuller? Yep. People still losing their hair. We're all vain. That's, a market to be in Back to my like earlier example, like drop shipping, pop sockets.

Kelcey Lehrich: I don't know like that. That's a ad there's technology risk there. So we won't do fashion. We won't do technology. I wouldn't do iPhone cases. There's, certain risks. I wouldn't wanna take on nothing wrong with those businesses there. They have there's plenty of great operators in that space.

Kelcey Lehrich: Plenty of great brands that do things or that they take what I would call technology risk clothing. Actual technology, cords, cables, cases, things like that. That's just a different innovation cycle. That makes sense for us. I love branded products that consumers have affinity for. Right.

Ben Tregoe: And is there, you know, one thing you'll hear commonly is like, oh, I love consumables.

Ben Tregoe: You know? So your shampoo business, obviously. Do you have a preference in those areas or?

Kelcey Lehrich: It certainly helps, but in my opinion, it goes back to the earlier statement of like the retention cohorts. It'll show up there. All things being equal. I would buy a straight sale business with no recurring revenue that's contractual that has better retention metrics over a subscription business with high churn and CACs that we're competing against the venture funded competitors.

Kelcey Lehrich: That's probably a harder game to play for us as an organization. I'll just go to the straight sale business and we'll figure out how to do good email marketing. But that's probably an easier mountain for me to climb.

Ben Tregoe: Okay. So that, go. But do you, you don't have a preference for a business model, like subscription over straight sale.

Ben Tregoe: It's long. Okay.

Kelcey Lehrich: And then my my preference would be to diversity. Every business has a lead, a product that is the leading skew, a channel. That's the leading customer acquisition. Like there's something I just don't want. A hundred percent of one thing. We won't buy an FBA pure play Amazon business.

Kelcey Lehrich: We won't buy in a business. That's 80% Facebook traffic. I love diversity. If we've got 20% revenue on Amazon, 10% unsubscribe and save and 70%. That's traffic of email affiliate, Google. We've never done Bing, and we're not that good at Facebook. Love that's a home. Like we know how to sink our teeth into that one.

Kelcey Lehrich: It'll take us some time. We'll figure it out. But like that's a business I want, we know what to do across that. Right.

Ben Tregoe: [00:25:00] So the, opposite of that being like, Hey, 80% is coming from Facebook. You're like, well, how much more can I optimize this? And I'm not sure that it, I can make it

Kelcey Lehrich: work anymore. I guarantee you, I can't do a better job than the person that's currently making that work really well.

Kelcey Lehrich: They're the founder. They figured this out. Who do I, who am I to think that I can do that better than them? Yeah, I don't maybe, but like, I don't wanna take that risk that's not a good investment for me when they're the smartest person that got it to this.

Ben Tregoe: so you, you don't want Amazon bus, pure Amazon business, but what about, you know, omnichannel?

Ben Tregoe: How, is that important to you all

Kelcey Lehrich: or a risk? Diversity's great. Concentration is bad. Diversity is good. A little bit of, a lot of things. Amazon wholesale brick and mortar distribution. If it's profitable, like love it. We've got the team to support it and I would lean into that for.

Ben Tregoe: So the other thing going I, think that a lot of times founders don't factor in is like life after the sale. Like how, what does life after the sale look like for a founder for you guys?

Kelcey Lehrich: If I were to look back, I think all but one individual that I can think of. Knew they were going on to do something else.

Kelcey Lehrich: Entrepreneurial, there was a motivation for their sale. They, had a reason that was some business or career or life change objective. Maybe only one founder perhaps was gonna cause I retire or be done. Somebody shape form. They're still a young family. I think many of them have the sense that they were the zero to one, even though, even on a non venture scale, they felt they could start.

Kelcey Lehrich: And I felt they had a business. I wanted to. And that we could go from one to N but they were gonna go zero to one, I think as founders, myself and Justin who runs our day to day, we are not zero to one people. We are one to N operators and I wanna find those really good zero to one founders to take their baby off their hands and give it a great long term home.

Kelcey Lehrich: And it

Ben Tregoe: okay. So that, wasn't the answer I was expecting are when you do a deal are, the founders like out entirely or do they, you know, are they, are you keeping 'em around for a little bit, like.

Kelcey Lehrich: How does it work? Yeah. Our historical process has been, we buy 100% of the business, pack it up and other than like, we don't need, we don't need to be trained or transitioned other than the nuances of the business, the suppliers, the vendors, real specific stuff.

Kelcey Lehrich: Like we don't need to learn Shopify. We don't need to learn Facebook ads. We don't like, we know how to run. We know how to run in eCommerce business. Maybe not your eCommerce business, but we understand what to do with the thing. So we position ourselves as a low maintenance, low hassle acquire. And historically every business we have pursued, they have wanted to exit completely.

Kelcey Lehrich: We're happy to do that. We don't have a place for 'em on our team. We have a shared services group. We don't necessarily need a founder to join us. And likewise, only once have we inherited any meaningful amount of employees or, team members or contractors. We tend to have a intent to acquire that is strategic in that we're gonna use our shared services platform to scale and grow and reduce.

Kelcey Lehrich: Many of the businesses. Sometimes in the scale we look at are already packaged or positioned to be very dynamic or flexible in those regards. They're not a platform scale company with a full team, and those are sometimes easy things to do that being said at all of that is subject to change in a future environment.

Kelcey Lehrich: Like next week, we can strike a deal with a founder that makes a very different model for us going forward. Historically, that has been our process. I expect that to continue, but who knows what the future brings? So very

Ben Tregoe: different than selling or taking PE money where you sort of sign up, correct. The management under a boss and then, you know, got healthy.

Ben Tregoe: If you. Screw up yeah.

Kelcey Lehrich: We look for some sellers skin in the game and earn that, or seller note, nothing crazy 10 to 20%. Like we want to know that they're invested in the success. Yeah. And wanted to stick some of the valuation on that. But and we've done everything by that. We've done overing, fraction of asking heavily seller finance.

Kelcey Lehrich: We've done every structure you could imagine, but traditionally, like. Hey, it's a good business. I wanna pay a fair price for it. I need you to hold on to a note for two or three years, something reasonable. And that's been a good fit for the businesses we've been pursuing. So you, started

Ben Tregoe: before the aggregator.

Ben Tregoe: Boom. Right? How has that changed the dynamics of finding great companies and speed to offer and closing? things like

Kelcey Lehrich: that. The vast majority of the aggregators are focused on pure play, Amazon FBA. Some of them have said they want to do D TOC, but best I can tell. And from talking with others, that's conversation, talking points and not market activity.

Kelcey Lehrich: If somebody has data to the contrary, I'd love to know that I do know the handful of other D TOC hold goes or aggregators. There's only a few of us, so we all tend to chat a little bit. There's just not that many people doing it. I was somewhat resistant to the term aggregator when it, that came outta my, oh, that's not us.

Kelcey Lehrich: I do think our [00:30:00] business model is different long term capital, long term home for businesses, not private equity, not venture capital. Right. Cause it's a different approach, I suppose. The hold to see how that evolves through time is HoldCo

Ben Tregoe: a better when you guys okay. So for the hold cos but what, you're not, so you're not seeing this like a gazillion business brokers bringing you like 900 deals.

Kelcey Lehrich: And I do get those, gazillion business brokers with the 900 deals. And I look through them every week and I sift through them. And the ones that we like will chase down. The fact is the market is bigger for things that look more like a I think what was the old joke? It was like the garlic press on Amazon was like the original, like poster child of like an example product.

Kelcey Lehrich: Yeah. In jungle scout used it for years in their marketing. So like typical quote unquote FBA stereotype, garlic press, you know, kitchen, accessory business. Those, I don't need to spend a lot of time with those. Right. When I find something interesting, we'll spend more time and go deeper again. I don't think that the FBA aggregators of the world are who we're competing with.

Kelcey Lehrich: I don't think they're looking at those transactions that. and how does

Ben Tregoe: deal flow come in and I'll move off this after this, but is it from brokers, investment bankers or direct by the, or sort of all over the above?

Kelcey Lehrich: Everything we've purchased to date has been a broker or investment banker or M and a advisor, some kind marketing, a business with a sell side mandate in some way, shape or form.

Kelcey Lehrich: We do get inbound deal flow. Most of it, unfortunately is not a good fit. However, I love it because it gets me a chance to connect with founders and talk. I love to talk with operator. About their brand, their product. Like, I love connecting with those folks. I tell a lot of them like three seconds in, I already know that like, I'm not gonna provide what it is they're looking for, but I wanna be their friend.

Kelcey Lehrich: I wanna talk to them. Like I'm happy to, talk, shop and compare notes. And like, I love to do that. Cuz I'm an entrepreneur. I'm very Frank upfront that like I'm not the solution they're necessarily looking for. I would love one day to build a brand that does attract deal flow that is deal flow. We can execute on.

Kelcey Lehrich: In the meantime, I'm happy to build my network and relationships and just talk to other entrepreneurs. Cuz I find that to be a fun thing to do.

Ben Tregoe: What advice would you give to a founder? So if, the best solution is coming in through a broker or investment banker, what should founders be looking for in that broker or banker?

Kelcey Lehrich: Maybe the step before that would be like aligning your business ambitions with the reality of the market. Are you building something on venture scale? Are you building something truly unique that can attract the strategic buyer or not? I, if I'm being super candid, I have more of those, like one off founder conversations where their expectations, God bless them are just wildly off base of like what they think they view as a strategic pitch to a buyer.

Kelcey Lehrich: We're not, we're typically not a strategic buyer, but if I'm just being really candid at them, I'm like, I'm sorry. Like, I don't think that giant company X use that particular asset as something they wanna pay 30 times revenue for like, if I was you, my advice like would be to not pursue that strategy. I don't think that's going to be what you want it to be.

Kelcey Lehrich: I think the headlines crunch base and tech crunch and the thorac fundraise and like just the news. It's an easy distraction for founders that maybe haven't gotten a good broker or good investment banker or good advisor to tell them here's, what's actually happening with assets like yours. And everybody wants to be the headline.

Kelcey Lehrich: And the fact of the matter is that's the long, tails, a fraction of businesses. I have a ton of respect for people that can pull that off. I don't think I'm in that category. We're buying small businesses at reasonable prices and like doing boring operational stuff. I just would encourage folks to like really align expectations with market and get advice from people that you trust about what you actually have and what you don't actually have in terms of a viable, premium asset, or just a great business that doesn't command this crazy, huge valuation, which is fine.

Kelcey Lehrich: I would just advise you to calibrate your expectations are so you

Ben Tregoe: are the valuation expectations just completely outta line, or are are people doing the math sometimes?

Kelcey Lehrich: sometimes like, like I think people overestimate, in my opinion, from the conversations, I've had many people overestimate what they hope is a strategic thing.

Kelcey Lehrich: Yeah. Hey, I built this great brand. Well, it does a million bucks a year and it pays you six figures and like you have a contractor. That's a great lifestyle business. I don't think giant company X doing a hundred million cares. I'm just being candid. Like they don't care about your million dollar. I think it's a great small business.

Kelcey Lehrich: Let's embrace it for what it is. I don't think they're gonna pay you $30 million for it because it doesn't move the needle for them. Like it really doesn't, it's just a brand, it's a good brand. It's a quality business. It's not this big strategic asset that you hope that it is. I would advise you to embrace what it is, not what you want to.

Kelcey Lehrich: Yeah.

Ben Tregoe: Let's switch gears a [00:35:00] little to the change in economic environment or the market or whatever you want to call it. What do you think has been the biggest. Impact and, I'll well, let, yeah, let me just ask that and I'll tell you kind of what we've seen. Yeah.

Kelcey Lehrich: I'm hoping the answer is cooling expectations on all fronts for valuation as a buyer.

Kelcey Lehrich: That's a very selfish thing to say, but I, think that is the, practical and pragmatic answer from talking with folks about transactions, we're seeing that actively change in the venture side and the private equity side and the SMB side. Expectations are getting realigned. So that's good news for me as a buyer, I guess.

Kelcey Lehrich: I am concerned about future paths for, raising capital as we need it. Debt or equity, whatever that's gonna look like through time. I think it'll be more challenging. It's still a bit early. I don't, I wish I had some big insight. I think we, I see a, small, unique slice of the world, and I think things are cooling a little bit by call it a turn of EBITDA on the expectations prices might be.

Kelcey Lehrich: I'm probably not qualified to speak beyond that, but my general sentiment is it's key. Yeah. One last asterisk on that. There's still always a buyer for a good business. Yeah. If you produce cash flow, if you solve customers' problems, if you have an actual asset, you can market it and get a good reasonable, fair value.

Kelcey Lehrich: Good reasonable fair value. Today is not what it was in January of this year. Right.

Ben Tregoe: Well, I think it's that last problem or that last statement that is so important. Like it's

Kelcey Lehrich: an anchoring bias. Say that again, it's an anchoring bias. I had this price expectation and now the bid is here. My house last week was worth this and the realtor.

Kelcey Lehrich: Like it's an expectation as an entrepreneur that is devastating emotionally. I get it. I, would feel the same way. I'm not looking forward to the data happens to me. I'm sure it will. It's part of the entrepreneurial thing. I.

Ben Tregoe: I well, one thing that we're seeing is, you know, people, I think still have unrealistic growth expectations, you know, that are gonna get fueled by customer acquisition.

Ben Tregoe: I'm like, oh, if I just could really figure out my, you know, customer acquisition, you know, I'd be back on, on path. And I'm not sure that everybody got religion around profitability and cash flow.

Kelcey Lehrich: I've got this opinion that maybe, non-consensus, it's a strong opinion of mine. I'm curious what you think.

Kelcey Lehrich: I firmly believe that if you are subscale, call it under 50 million. Yeah. SMB or even a scaling small business that is maybe venture funded or private equity or whatever. But if you're subscale as a CEO, as an executive product market fit is incredibly important, but that you need to have.

Kelcey Lehrich: Deep and passionate understanding of customer acquisition and be the driver of that. I do not believe that anybody under 50 million, the leadership should ever delegate the responsibility for growth or new customer acquisition. You can use an agency if that's the right like structure for your business, but the agency's not gonna solve your problems.

Kelcey Lehrich: Then doing new creative next week is not gonna hit your KR target for your growth rate on revenue. That's your problem as a CEO or a founder. A, consultant is not gonna fix your Facebook ads and cut your cat in half. That's not possible. I don't care what the tweet thread from somebody said last week or the podcast, like that's your job as a founder is to solve that durably through time.

Kelcey Lehrich: I think that's the most important thing I can do in our organization is lead like responsible conversations around growth expectations and forecasting is really, hard. Yeah. I don't even think I'm that special at it by, any means. I do think it's a very important thing that leaders, founders, CEOs, executive.

Kelcey Lehrich: Should own. And it's I feel like there's many people who want to pass the buck to an expert to tell them how to do it. And my advice is like, that's gotta be something you own if you're in the driver's seat. Yeah. That's

Ben Tregoe: interesting. And what is it? Is it when you're saying that they're owning it, is it setting the right metrics around that?

Ben Tregoe: Like C and I think

Kelcey Lehrich: strategy and expectations, like, like to expect that no switching agencies won't cut C and. Right. Like, like take a finger in the air. Like it's a hundred dollars AOV and a $40 C on Facebook. We're spending three grand a day. That sounds like relatively reasonable. It's unlikely that some guru is gonna take your CA from 40 to 20, right?

Kelcey Lehrich: Like some metric conversion rate, CPM click, like something would've to happen. So dramatic that this great machine learning platform, you know, didn't figure it out before you and, the new account structure, hack guru, guy's gonna fix. I just think that's not realistic. Yeah. And that's a, responsibility of leadership.

Kelcey Lehrich: Yeah.

Ben Tregoe: What about that? Applied to like financial planning and forecasting. I mean, you know, we, I think sometimes run into businesses where there, it tends to be underinvested, you know, and off and outsourced.

Kelcey Lehrich: Yeah. I [00:40:00] think that the way I'm wired is to have a finance bent. I'm now seeing an R phase of business that it's super important to surround myself and my co-founder.

Kelcey Lehrich: Who's also pretty good at Excel and understands financial modeling. The two of us, we need our VP of finance and our VP of supply chain. We need more sophisticated help. There's not enough hours in the day. That requires a certain amount of professional help at a certain point, whether. Contract to Banbridge or, an outsource CFO, or you build the team internally?

Kelcey Lehrich: I do think having some rigor there is super important. Thankfully, Justin and I were more than dangerous enough with finance and accounting and a spreadsheet that we could get to this point. But last year we started investing in proper leadership team particularly around finance and last year in supply chain this year.

Kelcey Lehrich: And it's made a big difference in the, team it's slow. It's not the fun part of the business, but it's very necessary.

Ben Tregoe: Are there common mistakes that you see founders making, like, you know, currently in this environment, you know, you're like overinvesting or underinvesting in certain functions or

Kelcey Lehrich: maybe the, just not to be the dead horse, but the profitability business model questions of like, are you optimizing for this revenue growth ramp?

Kelcey Lehrich: That's gonna get you around the funding or are you optimizing to be in business next week and provide a lifestyle for your family? Yeah. And being very honest about which of those two things you want. Which of those two things are possible given the business you're in the market, like all the other externalities CPMs supply chain cash on hand, like take all, take your aspirations against everything that is reality for you and calibrate.

Kelcey Lehrich: Yeah.

Ben Tregoe: It's, that example you were giving? A few minutes ago of like the million dollar business and the guy's like pulling out six figures or the he, or she pulling out six figures that's like great business. I mean, you know, You see so many of these businesses that could get single digit millions or tens of millions of dollars with, you know, that type of cash flow that you're describing, you know, 15, 20 plus

Kelcey Lehrich: My, current best idea is to wait for the fall.

Kelcey Lehrich: When some venture backed companies become venture orphans or fallen angels, whatever word you wanna describe. And they were gonna do it from 20 million of revenue to 40, and they couldn't hit their funding round. And now it's getting fire sailed and I'm gonna take it from a 20 million revenue business to 12 million.

Kelcey Lehrich: and it's gonna be 3 million of EBIT that profitable, cuz we cut out all this craziness and on a, revenue metric, it looks like a big loss, but on a profitability basis, it's now a great asset to own. I'm looking forward to finding deals like that's underwrite and I fully believe shrinking some of the, those businesses that had overestimated capabilities of growth and then rightsizing them down on a P and L basis.

Kelcey Lehrich: And I'm, not talking about like the, crazy like private equity style, like fire everybody stuff, but just the me metrics of. Revenue cogs ad spend and leave SG and a outta the conversation, just rightsizing contribution, margin expectations on a go forward basis. There's lots of assets like that, that I've already started to see.

Kelcey Lehrich: And I think we, I

Ben Tregoe: love it. I mean I, I don't love that will happen to these companies, but I think it's really smart cuz I just think there's gonna be a ton of 'em

Bainbridge_TheProfitForecast_TheeCommCEO'sPodcast_EP08_V2 (1): it.

Kelcey Lehrich: I, feel bad for founders that don't achieve their goals. Don't get me wrong. I'm human, but I'm also a capitalist to say there's an opportu.

Kelcey Lehrich: And if we can be the solve for that I'm happy to capitalize on it. If we can be a good, soft landing for those types of businesses accomplish our financial metrics and goals. Of course, while also respecting what was built and, taking it on to exist in the future is a great opportunity that I plan to try to execute on.

Kelcey Lehrich: Are

Ben Tregoe: you guys funded, you know, for that strategy, are you just all funded from your cash flow or are you raising money as. To do these

Kelcey Lehrich: historically, we have had no outside equity in the business. We have borrowed by hook and by crook anything we've needed and used retained earnings. We've maxed out SBA exposure as founders.

Kelcey Lehrich: We've guaranteed everything to date. I'm starting to understand that our next phase of growth might require us to make some changes in capitalization, or we syndicate the next deal. I, don't know exactly what that will look like. I do expect at some point I will need to bring in outside capital.

Kelcey Lehrich: I'll need to find a financial sponsor to partner with. I don't exactly know what that looks like just yet. It's a problem I'm actively trying to solve, but I think we've hit a point where if I want to continue growing at a certain pace, And I don't want to slow down. That'll be a necessity. On the other hand, we could choose to slow down, just run off retained earnings, right.

Kelcey Lehrich: Maybe recalibrate our expectations for growth slower and do fewer deals. And that'll be a decision we need to make at crossroads. Yeah.

Ben Tregoe: Given you've mentioned it at one point sort of different types of equity and debt financing, you know, for capital for these businesses. So in the stage you.

Ben Tregoe: they're, they've found some product market fit, but they're not ready to sell to you yet, but they would like to raise equity. Like, what do you think is the, that type of company, right. For a new type of equity. And, if so, what does it look like? [00:45:00] Because you know, the VCs, aren't gonna walk into that company and be like, oh yeah, you're planning on growing at 10% a year.

Kelcey Lehrich: okay. Again, bets, a calibrating expectations, I think, depending on all the inputs to that equation. If a founder really is passionate about their business, then I don't know their full economics and preferences. Yeah. And there's, a lot that goes into this, but I think the right answer more often than not is probably crowdfunding for a lot of folks.

Kelcey Lehrich: You get I'd say advantage economics, most likely, probably from non-institutional capital source. You maybe have an engagement place with your customers that lock in some loyalty and some dollars and things. That's certainly not a tech crunch, sexy headline, and I don't know, again, all the inputs that go into the future exits and like there's a lot of variables there.

Kelcey Lehrich: I do think for many subscale businesses that have an audience particularly. That's a great place to go looking for capital.

Ben Tregoe: So it would be, you know, go to your customer base. You're big fans, they would get equity. And what is that? And a loyalty program maybe, or is there like a, are you thinking there's like a, dividend

Kelcey Lehrich: in that, or I think smart entrepreneurs should take advantage of anything and everything.

Kelcey Lehrich: If they're gonna do that. Yeah. Perks loyalty. Access content like the, way that any of the equity crowd funding sites can create packages and tier. I think it's an entrepreneur's playground of creativity to match cash coming in with things people want. I think access is probably underrated.

Kelcey Lehrich: If you have a real like raving fan base. Private chats and phone calls and AMAs and interview, you can do all stuff. Wow. I think that's a creativity process. That's

Ben Tregoe: interesting. All right. So have you seen that in anybody's cap tables or is that's an idea that

Kelcey Lehrich: that's something I've, recommended to, several people and I think one or two of done.

Kelcey Lehrich: Yeah. What

Ben Tregoe: do you see in cap tables? Are, the cap tables, like just friends and family mostly, or, you know, when you're.

Kelcey Lehrich: Typically it is founders maybe friends and family.

Ben Tregoe: So the founders, like what would be a, typical ownership percentage of a founder of one of your acquisitions?

Kelcey Lehrich: The most of them would be by and large, a hundred percent founder equity.

Ben Tregoe: Oh my God. That's awesome. So they're not even doing equity to the employees? No,

Kelcey Lehrich: Holy smoke. Nope. So someone's selling it like

Ben Tregoe: 10 million and they're just taking it. I mean that's or whatever the number is

Kelcey Lehrich: five. Yeah. 1, 3 10. Like any of those numbers? Yeah, those are that's the American main street, small business dream of, I built a small business.

Kelcey Lehrich: Yeah. Worked nights and weekends and used my credit card for payroll and like all, those stereotypes. And then we get bought for 3 billion bucks or whatever the number is. So yes, that that is the, typical, that's be fun for us when

Ben Tregoe: you close that deal. And the wire goes through. To see for sure.

Ben Tregoe: You almost kind of wanna have them in the conference room when that happens. record that. It'd be so cool. Tell me about you. You're based in Akron. So tell me about that. Like it, like, how's that been is, it, can you recruit, you know, like, are you like the number one, you know, job to, to get in Akron? Or is it like, you know, is it an advantage or are you guys remote?

Ben Tregoe: How do you, can anybody join or do you have to move to Akron?

Kelcey Lehrich: So both my founder and I have always been in Northeast Ohio our, whole life. So Justin lives down in the Canton area. I live a little more up in Cleveland than Akron's halfway. So that's where, HQ is. Our employee base today is 99% in house onsite.

Kelcey Lehrich: Full time W2 go to the office three or four days a week, work from home kind of flexible quasi hybrid, but like we're an in office in person culture. We had. Q3 kickoff meeting today and everybody, but like one person I think couldn't be in, then they were on the Google meet and like everybody else was in the kitchen.

Kelcey Lehrich: Right. It's a big kitchen, but like all 50 people were in there. Awesome. And that has been an interesting dynamic with hiring. So I do think when it comes to line level, labor warehouse, pick back and ship manufacturing we do have challenges like everybody does with the labor force and being a small participant is hard.

Kelcey Lehrich: the flip side of the coin is that for career hires in the office that are doing supply chain or finance or HR or operations or marketing, it's better. There is not a hotbed of performance marketing professionals in Northeastern, Ohio. We're beginning to build them and train them. And I think the ones that have good opportunities find us.

Kelcey Lehrich: Yeah, it's definitely we are definitely a leader competitively locally to recruit marketing talent and e-commerce. But the talent pool is small. So we put a stake in the ground that we will train and develop some of our best employees, [00:50:00] probably four or five of them started as interns. We trained them.

Kelcey Lehrich: Yes. They're bright. They're incredibly smart. They did get a college education, but they'll all tell you that college was kind of like the marketing wasn't that helpful and all the good stuff they learned, wasn't working or listening to podcasts or taking courses that we paid for from, some people like they got their real education in the internship.

Kelcey Lehrich: Right. And now they're. Highly valuable employees that we're excited to have, but we, built them into a professional. We didn't buy them as a professional. Yeah. And we're proud to do that, like as co-founders Justin and I think that we're buying these brands and we're giving them a home and the founder gets like, that's a good thing, but that doesn't like doesn't give me a satisfaction.

Kelcey Lehrich: More if it's a diaper company versus a food company I, don't have a particular passion for the brands that we own. I have real passion for our team and for the organization that we have. And so being able. Recruit rock talent and build professionals. And occasionally we get one recruited away and like, that's not fun, but like having that culture and watching people grow and get promoted and become leaders like that is something that we as founders are really excited about building the org.

Kelcey Lehrich: The brands that we own, we want to have a great platform for. I think it'd be a mistake if I was super excited about one of 'em. Cause it would get all my attention. I get better if they're things I'm Not that passionate about, and we can be passionate about the team and the employees. Yeah, that's

Ben Tregoe: awesome.

Ben Tregoe: Cool. All right. When you have your, office is in Akron, you have your portfolio companies. Are there any times that you get everybody together?

Kelcey Lehrich: So internally as an organization we, we use thes process. We have the whole meeting, cadence and whatnot, but I found Inside of e-commerce and more importantly, outside of e-commerce, there's a groundswell this like holding company idea that's happening right now.

Kelcey Lehrich: I have a friend in town, his name's John. He runs a portfolio of home services, business, HVAC, plumbing, mold remediation, stuff like that. And between Twitter and podcasts and certain communities online, we just noticed there's a lot of these like small mini holdcos. We all wanna be Warren buffet and own Berkshire Hathaway one day.

Kelcey Lehrich: And so John and I actually hosting a small conference in Cleveland this summer. It's called HoldCo. Built for holding companies. I think we'll have 5% of the attendees that are e-commerce people. And then it'll be SAS and they'll be manufacturing and trucking and restaurants. It's kind of a diverse, eclectic crowd.

Kelcey Lehrich: Nice talking about probably less venture capital and less private equity and much more like. buy a steady, durable, small business, compound them through time, give them great ownership. A lot of kind of wild, interesting ways to make money and make a career out of holding companies. So as passionate as I am about e-commerce, I'm also passionate about that kind of holding company world and excited for the first annual hold co conference.

Kelcey Lehrich: All right. So when is it? July 24, 25 and 26 in Cleveland, Ohio at hold COCOM on Twitter or hold COCOM co F do com still find tickets are still available or you could DM me if you have any questions, that's when he wants to reach out, but tickets are available and it'd be a lot of fun. Nice. I'm sticking our claim on the food and beverage and experience and the content will also be very, yeah, there's gonna be some entertainment.

Ben Tregoe: I, I guess I shouldn't have asked that without

Kelcey Lehrich: knowing, but there, there, will be Depending when this episode leaks, I don't wanna give any secrets away, but there will be some fun stuff. Yes. It'll be a, it's not a conference. It's not a go to a hotel bar. Right. And sit all day. The venue is, a comedy club.

Kelcey Lehrich: so it's a, non-traditional kind of fun kind of experience. That's awesome.

Ben Tregoe: That's really fun. Good. Well, I look forward to hearing about it. Well, cool. Thanks, man. This has been really.

Kelcey Lehrich: Thank you for having me.

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