Many of you know what it takes to choose a product, start selling it and make a profit. That’s why you’re dedicated readers of the Private Label Insider! Many entrepreneurs are looking to the successful “exit” or sale of their business or getting an equity investor to spur growth and fully monetize their investment.
But what are the functional elements you need to build in your business to standardize your business processes and prepare yourself to grow into a brand, not just a product business – and be prepared for that all important investment to spur growth or sell your business?
An interesting analysis of Shark Tank pitches on Digital Exits shows that the hallmarks of a successful pitch include the following features:
- Product based businesses are the most successful in terms of getting an offer.
- The sharks like products in the food and beverage, household and kitchen, or sports and fitness categories.
- The entrepreneur MUST “know the numbers” such as sales, profit, and margins.
- The entrepreneur should have a realistic valuation.
- The business should have solid sales numbers.
- The sharks love businesses that are highly scalable and have high-profit margins.
- The business should be fairly established (rather than brand new or just at the idea phase).
- The sharks are likely going to want 20% – 25% or more in equity.
- The sharks love anything that is proprietary and has the option to be licensed.
If you’re looking for financial independence, not having to answer to a boss ever again, and choose what you want to do every day, growing your own business and getting an investor or eventually selling could be the path to financial independence you’re looking for.
“I roll out of bed in the morning, whenever I want, and I work right away because, to me, that’s the life. That’s freedom. The whole point for me is that I love the freedom of being an entrepreneur, that I do what I want to do when I want to do it.” -Lori Greiner
Product based businesses
So good news! Anyone selling on Amazon likely has a product based business that they’re growing – either a digital product (book, music, or video), or much more likely, a physical product.
“I learned that nobody’s better than you at getting your business off the ground. The experience you get is priceless.” -Lori Greiner
Path to Growth:
Product based businesses where there’s a clear product line are also more likely to do well, so growing into new flavors if you’re doing one type of food or beverage, or multiple sizes, if you’re already doing well with one size, are obvious next steps to growing your individual product into a broader product line business.
Another approach is to do complementary products – for example, if you started with couch covers, you might do automotive covers next, as the customer who needs a couch cover for their active pets or children will likely also need automotive covers.
Food/Beverage, Household/Kitchen, or Sports/Fitness Categories
Sharks like product businesses in the food and beverage, household and kitchen, or sports and fitness categories. This is because they’re the most likely to appeal to a broad audience and be able to expand to a mass market audience.
If you started in another niche, there’s no reason you couldn’t add a more mass market product to complement your current product line – but this isn’t necessary! It’s simply the path of least resistance when getting to the point of sale. BUT – to get there, these are highly competitive niches.
In my experience, you will often not make any money for up to six months when launching food and beverage, particularly any food with a shorter shelf life, because while demand is lower, your minimum order quantities are often also lower. So while this is a product category with very broad appeal – everyone eats and drinks things – it’s also wildly competitive, and often has quite narrow margins, particularly when shipping to consumers in small size shipments.
Household and Kitchen are also broadly appealing as nearly everyone needs a place to live and prepare food. However, given that the joke products that everyone references (garlic presses and apple slicers) are in this space, it’s also pretty competitive, although not nearly as much so as food and beverage. In this space, innovation in form, function, or accessories is key.
Sports and Fitness are in many ways more competitive even than household and kitchen because your potential customer base is smaller.
“Most people think it’s all about the idea. It’s not. Everyone has ideas. The hard part is doing the homework to know if the idea could work in an industry, and then doing the preparation to be able to execute on the idea.” -Mark Cuban
Path to Growth:
Demonstrating demand using smaller size/quantities that are break even or lose money to attract new customers is the way to grow in the food and beverage space. Make sure to price your 3 pack, 6 pack, etc., as profitably as possible. You absolutely must run follow up emails and I highly recommend Display Ads to grow traffic to your profitable listings. Then, once you have proven growth and customer interest, reach out to Amazon Vendor to try to work with them on Amazon Pantry and Prime Now, so that your smaller items can now also be sold profitably.
For growth in other durable hard goods in the household/kitchen, and sports/fitness, the path to growth is finding suppliers who can perform the same value of workmanship that you expect for lower per unit cost. One of the main challenges the Sharks point out during pitches is how much margin you have to give distributors and retailers so that they can have margins as well as you. That means you typically need to be selling at retail for 3-4x your FOB price at the lowest.
Know Your Numbers
What are the numbers that the Sharks are always asking about? Easy – gross revenue, net profit, and gross and net margins. This comes from a basic profit and loss statement, which is in this order:
- Total revenue in the given period (usually broken up by revenue type).
- Next come operating costs which include COGS (cost of goods sold), Research & Development (R&D), interest expenses, and administrative/sales costs directly related to the sales of products you sell.
- This is your operating profit, often called your gross profit. The percentage of this total divided by your total revenue is your gross margin.
- Then comes your other income and expenses, usually taxes, some overhead costs not directly tied to profit, and any subsidiary information if you have them.
- After these costs are taken out, these are your net profits. This number divided by the total revenue is your net margin. From these, you should pay yourself, other shareholders, or pay dividends, etc.
“Here’s how I think of my money: as soldiers. I send them out to war every day. I want them to take prisoners and come home, so there’s more of them.” -Kevin O’Leary
Path to Growth:
Stop using a spreadsheet! I can’t tell you how many of our clients come to us and they’re still using a spreadsheet to track the numbers that go into this Profit and Loss (and other financial statements).
To really know your numbers, you need to keep track of your expenses in actual bookkeeping software programs. Mark Cuban complained about small business in an episode a couple of years ago that they likely would require his team to get them set up on QuickBooks – because so many small business owners hate accounting, and don’t take managing their numbers as seriously as they should.
Ultimately, revenue shows customer interest. If you’re thinking that you want to get an investor or sell the business, one investment that may be worthwhile is advertising on Amazon, to show the size of the market and customer interest in the product. It will reduce your net profits, but increasing total revenue will show growth potential, depending on the type of investor you’re looking to attract.
Revenues and Scaling
Speaking of revenues, the Sharks really hate when a business valuation is based on total revenues, rather than a multiple on net profits. But also take care not to undervalue your business – a recent business evaluation done for a client showed a valuation of more than $225k based on the profit margins and conversion rate on the listings. Customers really loved the product. So make sure you include more data than just the revenues in your business evaluation.
“An entrepreneur must pitch a potential investor for what the company is worth as well as sell the dream on how much of a profit can be made.” -Daymond John
Scaling refers to the ability to grow from a small business to a large multi-million dollar business. Some businesses are running out of the owner’s garage, or a rented kitchen. You can’t scale to multi-millions in revenue from your garage, in most cases.
Path to Growth:
For food and beverage businesses, this usually means finding a co-packer. The capital expense of large industrial equipment that can produce food at an industrial scale is usually out of the reach of most entrepreneurs, but working with a co-packer to manage your production needs is a great way to grow.
Be aware that if you choose a co-packer, you should make sure that their values align with your own. If they don’t, you may want to simply continue to bootstrap your own way rather than potentially offend your customers by producing and selling an inferior product to the ones that got you into their hearts in the first place.
If you’re trying to grow your profit margins in durable goods in household, kitchen, sports/fitness, sometimes moving to a new supplier or even just sourcing so you have leverage with your current supplier is critical. The more you need to produce, the less you want to be dependent on one source for your product. If you do multi-source, you need to clearly work through what you need from a supplier, and perform an audit to compare potential options in an impersonal, data-driven way.
Must be fairly established
Typically, the business needs to prove it can be consistently successful. There are exceptions to this, as the Sharks have invested in products that were barely launched, but had phenomenal sales.
“The difference between the real winners is how long they take to feel sorry for themselves. My winners feel it … but they come back up and say, ‘Hit me again.'” -Barbara Corcoran
Path to Growth:
Stay in business! This is easier said than done. One of the things I love about the way that the Sharks treat money is that it’s just like time to them. You have a certain amount of it, and you need to allocate in such a way that more comes back. No emotional attachments, no feelings – just basic pros/cons and then allocate the cash.
I’ve worked with multiple entrepreneurs who have had great ideas, solid business performance, then ran out of cash to keep going because they tried to expand too fast. Proving you can consistently stay in business, grow and support the business over time, helps in trying to find a buyer of investor when the time comes to grow or exit your business.
Licensing and Intellectual Property
Intellectual property refers to a broad variety of unique content, but typically what the Sharks are looking for are patents. Typically, a utility patent is $10k or more with a reputable attorney, but if you want to work with us and our partner attorney for a design patent, it’s as low as $5k to start, which includes coming up with the idea for the innovation, work on the drawings and concepts for the design patent and have it registered with the USPTO (United States Patent and Trademark Office).
Sometimes entrepreneurs will tell the Sharks that they have a trademark registered – and of course, that’s necessary for Brand Registry on Amazon, but anyone can get a trademark if they’re willing to pay for it. The real point of differentiation that you can get other companies to license, or to get Amazon’s intellectual property enforcement team to take down infringing competitors, is with a patent.
It can be somewhat difficult to get a design patent. You do need to narrowly focus on the specific innovations that you’ve made and make sure that it’s actually solving a problem. My favorite example of this from a Shark Tank perspective is Tiffany Krumins concept for Ava the Elephant. It was a novel delivery device for liquid medicine for children.
“A brilliant idea doesn’t guarantee a successful invention. The real magic comes from a brilliant idea combined with willpower, tenacity, and a willingness to make mistakes.” -Lori Greiner
Path to Growth:
Licensing is a great approach that can go both the way of having your licensor completely take over the day to day running of your idea/business, or license someone else’s intellectual property onto your products.
For an example of successfully growing your licensing businesses using someone else’s intellectual property, see CozyPhones who have successfully licensed with Paw Patrol and Teenage Mutant Ninja Turtles..
For an example of successfully licensing out your business/idea to another producer, see what Tiffany Krumins recently did with her business. By finding a licensing partner, this freed up her time to focus on her passion, helping new entrepreneurs get started with expert advice on her podcast.
If you have a successful brand and you want to learn who is available for licensing, I highly recommend learning more about it at the Licensing Expo.
Getting ready to sell or take an investor
If this is where you’re headed, I highly suggest using a tool like Basecamp or Teamwork or Asana to set up the milestones that you want to achieve and break them into manageable tasks. Determine what you want to handle yourself, what you want to outsource, and what you want to hire for.
With an organizational tool, you can make sure you didn’t miss anything important in preparing your detailed business pitch to investors.
“A goal without a timeline is just a dream.” -Robert Herjavec
If you’re looking to improve your organizational structures, learn from other entrepreneurs, source with a new supplier, make sure your product is legally compliant to get through a due diligence review or explore cheaper transportation options — I invite you to join our product development Masterclass, “Design, Develop & Launch,” the end result of mine and my business partner Leohoonani Texeira’s combined 11 years of Amazon experience, and 16 years of combined product development experience.
You can learn on your own, but sometimes that’s more expensive and much more stressful than learning from your fellow entrepreneurs and from expert product developers. Ultimately, you have to do the work, but sometimes it’s better to work from a proven template rather than striking out blindly and hoping for the best with your product idea or fledgling business.
To learn more about our Masterclass and join my Wednesday “Ask Cascadia Live” sessions, please ask to join “The Former Amazonian’s Guide to the Zon” group on Facebook.
“It’s not about money or connections–it’s the willingness to outwork and outlearn everyone when it comes to your business. And if it fails, you learn from what happened and do a better job next time.” -Mark Cuban
Co-founder of Cascadia Seller Solutions, a company committed to helping brands succeed on Amazon. Cascadia Seller Solutions helps brands through effective account management, brand development, consulting, and education courses for sellers. thinkcascadia.com