No one talks about buying businesses in APAC.
Introducing JJ Chai, co-founder of Rainforest, a Singapore-based e-commerce aggregator.
Today in 10 minutes or less, you’ll learn:
- 🌴 Rainforest’s acquisition criteria (it’s not what you think)
- 🤝 How they sourced deal flow & negotiation sticking points
- 💸 Financing options: cash, debt, and seller-financing
- ⭐️ Mistakes & advice for buying e-commerce businesses
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🛒 Spotlight Abroad: Buying $1M+/year e-commerce businesses
JJ Chai is the co-founder and CEO of Rainforest, an e-commerce startup that buys and operates online brands in the mother, baby and home categories.
Prior to launching Rainforest, JJ was a senior executive at xto10x, Carousell & Airbnb. He was also a junior partner at McKinsey.
🛣️ Tell us about your career journey going from building tech startups to buying e-commerce businesses.
Prior to starting up Rainforest, I was at Airbnb and also Carousell, both marketplace platforms. Marketplace startups invest a lot of resources to help sellers be more successful. There was always a significant group of sellers or hosts that could do better by having better pricing, responsiveness, photos and so on.
When the e-commerce aggregator model became popular (see Thrasio), I realised the same applies in e-commerce, where there are lots of opportunities to optimise & grow existing brands and stores.
We started off acquiring businesses doing USD $1M-$3M in annual sales ($200k-$1M annual profit). Later we did larger businesses in the $5M-$10M sales range (>$1M annual profit).
🌴 Your company Rainforest focuses on acquiring e-commerce businesses in the home, mom and baby categories. When you were just starting out, did you explore a variety business models/categories? What made you decide on this niche?
We were e-commerce focused from the start, but had a broader scope in terms of categories.
We soon realised that it’s difficult to realise synergies between brands when the buyer are very different personas and people across the brands. We landed on mother and baby because the buyer is typically focused on quality (over price) and that’s what we look for when we acquire a brand as well.
✔️ How should one think about the selection of businesses to acquire for side income?
If you’re considering buying an online business to run as an income-generating side gig, the key considerations would be:
- how easy it is to maintain (some only take 2-3 hours a week)
- your own familiarity with the business
🤝 Tell us about your first few acquisitions. How did you find the businesses? What were common sticking points during the negotiation (if any)?
How we found businesses:
- There are brokers globally that help match sellers and buyers of online businesses, at all sizes. You could even buy a small online business for $10k on such platforms. acquire.com and empireflippers.com are two examples.
- We got our first acquisition through Empire Flippers, and purchased it from a Singapore-based brand owner.
- As we established ourselves, we built a small team that reaches out to brand owners that rate well on Amazon. We also see direct inbound inquiries via our valuation tool we have on our website.
In terms of negotiation sticking points:
- Obvious one is valuation, but less obvious is around reps and warranties - in what situations do sellers assume responsibility and in what situations do the buyers assume responsibility, e.g. trademark infringement, bad batches of products, etc.
- A good legal firm familiar with M&A is critical. We use AEI Legal who’ve great experience at various M&A sizes & structures.
🛠️ Post-acquisition, how did you create the operational plan and execute with your team?
To operate and improve an online business, it’s useful to envision the ‘best-practice’ end-state and work backwards to figure the checklist of steps to get it there.
For individuals operating an online business as a source of income, there is a lot of material online on how to improve each part of the business from marketing to operations to financing.
For example, Twitter has an active ecommerce seller community. Check out #ecommerce or my list here, where a lot of interesting ideas and tactics get discussed.
💸 What financing options have you considered and used to buy businesses?
Acquisitions are paid for through a mix of cash from balance sheet, debt and seller-financing. It ranges widely, but something like 20-60% from the balance sheet, 20% seller-financing and the rest in debt - driven by the risk appetite of the buyer with debt.
While it’s harder for individuals to access debt for such purchases, it’s quite common for buyers to negotiate a deferred payment for part of the purchase, such that the buyer can pay some of it through the business’ profits over a period of time, say 12 or even 24 months.
🙅♂️What mistakes have you seen others (and yourself) make in buying e-commerce businesses in Asia Pacific? What would you have done differently?
Typically, these businesses are valued on a trailing 12-month performance basis. So one key thing to consider is whether the future business is likely to be similar/better than the past year.
This can be tricky with large macro factors like Covid, as it led to some very strong one-off performance in some product categories that were not going to last into the future. One example is a surge of travel products on the back of reopening of travel post-Covid.
⭐️ What advice would you give to someone looking to buy e-commerce businesses?
I think buying a business to grow it is a great entry point into entrepreneurship, and would derisk substantially versus starting from scratch.
A few key things to keep in mind:
- The seller should have skin in the game to help you succeed. Structure this into the agreement such that she gains more as you succeed into the future. A typical way is to have earn-outs, i.e. the seller gets further payouts based on future performance of the business.
- Go into areas where you have some expertise/insight as a user or business owner
- Focus on gaining knowledge on operating the business well. The buying part is the simpler part of it!
🏡 Where can we go to learn more about you?
You can find me on Linkedin where I write about entrepreneurship and interesting businesses from time to time.
If you’re looking for more inspiration to start or buy an online business, you can follow our Rainforest page where we also share stories of brands and tips for running an e-commerce business.
🌐 Beyond your borders
🇸🇬 OCBC Bank has launched digital account opening for foreigners — for the first time. This remote service is available to select citizens from Malaysia, Indonesia, China and Hong Kong for now.🤞 they open up to more nationalities.
🇨🇳 Chinese nationals will be banned from purchasing property in the US state of Florida starting on July 1. Yikes.
🇨🇦 Canada’s immigration minister announces a WIP “digital nomad strategy” for highly skilled workers in the tech sector. People who have a foreign employer can work in Canada for up to six months, plus have a path to residency. No wonder Canadians ranked as 3rd kindest country in the world.
🇺🇸 Americans’ say you need $2.2M to “be wealthy” in 2023, but those who report feeling wealthy have a much lower actual net worth, avg $560k. What’s more important than our feelings?
🗳️ Overseas ballot
Here are the results from last week’s poll:
Which goal do you consider most important when deciding whether to rent or buy a property?
🟨🟨🟨⬜️⬜️⬜️ 💰 Total return (25%)
🟩🟩🟩🟩🟩🟩 💲 Cash flow (50%)
🟨🟨🟨⬜️⬜️⬜️ 👥 Lifestyle choices (25%)
⬜️⬜️⬜️⬜️⬜️⬜️ 🗒️ Other (please specify)
Here is this week’s poll:
👉️ How I can help
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