The D2C eCommerce Business - Kelcey Lehrich CEO of 365-Holdings.com - e6

Hey, Michael here. You will now hear some episodes of the Michael Girdley Show that we had branded differently, called Unusual Profits or some such like that. Same show, same person, just me interviewing people and producing content that could be helpful on your journey and mine as well. So with no further ado, here's the episode. Hey, Michael here. Sponsor for today's show is actually a product that I'm a part of called DM Bridge. And what DMBridge is, uh, is a service that we built, uh, to solve the problem that Twitter's direct messaging functionality is a total mess. So we built DMBridge to help you fix that. Um, a lot of the other solutions, uh, do things like requiring you to install a whole nother inbox. We didn't want another inbox, so we created DMBridge. And what it does is it takes all of your Twitter DMs and has them appear inside of your email inbox. So you can reply to them just like it's a regular email. You see them just like it's a regular email. You can search them later like it's one of your regular emails, all just by using DMBridge. So, uh, we're currently live with the product. Uh, would love for you to sign up and become a customer, uh, and check it out. So you can find that at dmbridge.app, uh, and go on there, put in your name, uh, and be either part of the beta or join us as part of the live use of the product. And again, check it out, dmbridge.app. All right, everybody, welcome to another episode of Industry Anonymous, which, which Kelsey, I shared with you. This is the 6th episode of these that I've recorded. So thank you for being lucky number 6. But I may have to change the name of the podcast because nobody has wanted to be anonymous yet.

We're on Zoom here. I was gonna wear a ski mask when the camera came on just to really set the mood.

I could tell you I would deserve that. That would be perfect. So, well, cool. Well, thanks for making time. For those of you that might be first-time listeners, this is a podcast where I interview people that are experts, usually operators in niche and interesting industries and markets, usually in the small business space. So Kelsey, super excited to have you today. So thanks for making some time.

Thanks for having me.

Yeah. Well, let's, let's start with how did you get, well, first of all, what is your business? As I understand it, you are a holding company of direct-to-consumer brands that sell generally straight from your website, e-commerce. Is that, is that accurate? Or how would you describe it?

That is accurate. So I'll zoom out and just give you the quick, uh, quick backstory. So 365 Holdings is owned by myself, my business partner, Justin. Two of us have been doing business together for about a decade now. Started with various like small, local service businesses and got to the point about 4 years ago where we saved up enough money to take out an SBA loan and buy our first e-commerce business. If you look at some of the content we put out today about kind of our thesis and our view on the world, what we're trying to do, it's much more polished now than it was 4 years ago when we bought the first one. Uh, what we want to be today at 365 is kind of a permanent home for small brands. So when an owner or founder of an e-commerce business is looking for a great acquirer, we want to kind of check all the boxes as a perfect home for that brand to live for a long time. We have a focus on vertical integrations. We're building out a big team and trying to own all the important resources needed in-house with our own staff. We have a long-term view of holding these brands for measures in decades, not measures in months or years.

Right. To go back a bit to your starting point, so it was a decade or so ago and you guys took out an SBA loan which is a government Small Business Administration loan. So I guess a 7 loan is what they are technically, is that right?

Yep. So that loan was 4 years ago when we really focused on e-com, but our relationship for Justin and I goes back a long time. And those were businesses that were so small that we didn't need a loan to buy them as young scrappy entrepreneurs.

Yeah. Well, great. And so what was the first business that you guys acquired? Can you tell me the story of that?

For sure. So we bought a franchise of a networking business called AmSpirit Business Connections. So if you've ever been to a go to a local coffee shop and you see the realtor and the mortgage guy and the accountant and a bunch of small local business people all talking and exchanging leads or referrals to potential customers. We ran a franchise business focused on that business model. I was a business broker at the time. He was a financial advisor. Networking was what we were told we needed to do to be successful. So I figured, all right, well, we'll go buy a networking business and, uh, we'll kind of double dip. We'll get paid to meet people.

Fascinating. What was the name of that again?

Yeah, it's called AmSpirit Business Connections based in Columbus, Ohio. It's short for American Spirit, basically the idea being the members are salespeople, business owners, entrepreneurs, folks that are self-employed, kind of the backbone of the American spirit of what kind of drives this country.

Got it. And are you guys still in that business today? Because I don't see it on your website.

No, we sold that years ago. There's been more LLCs and brands than you can easily find on our website or our LinkedIn backgrounds. We owned a piece of software that did reporting for financial advisors. We had a payment processing company. We once thought we were going to get into the senior living business and buy some real estate. We tried a number of things over the years, really focused around local kind of service businesses. And then that SBA 7 loan that bought the first e-commerce business really set up everything that exists today. And so we've since sold or divested all of those other lines of business and are just focused purely on 365 and its e-commerce brands. Got it.

What was the first e-commerce brand that you bought?

Today, it's been rebranded a few times, but today it's Steel River. We make outdoors gear. Probably you and all your friends there in Texas would be great customers. Pocket knives, backpacks, machetes, lanterns, flashlights, paracord, kind of focused on the outdoors, kind of adventure market.

Yeah. And then, so how does— walk me through how Steel River works as a business. So that is not— that's just a website, you're running ads, and then you're selling people custom gear that you have created for your brand. Is that kind of how it all ties together? Is there something missing there?

Yeah. So we're a private label manufacturer. So all the designs are our own. We're not buying somebody else's product to retail. We're developing our own. And we use a combination of email marketing, affiliate traffic, and advertising to drive customers to the website to check out for offers. We use a pretty aggressive marketing model in that business. Lots of upsells, lots of add-ons, lots of bonus offers. We sell some training content as well through that brand. It's really where it started, was more in a training business model, selling courses and info products. But today it's really focused on kind of that outdoors gear.

Yeah. And so this is, you're distributing all this out of a warehouse in Akron, Cleveland area?

Yep. So our office is in Akron. We've got, uh, moving office spaces here the next week or two, which we're very excited about. We've got a large warehouse facility and we pick, pack, and ship all of our customer orders out of there. We receive an inventory and stock everything there. Uh, we even have some, uh, in-house production capabilities that we've built out over time to kind of focus on that vertical integration, uh, interest that we have. So one of our brands is a food business. We built out some food co-packing capabilities, FDA certified, uh, had the Ohio Department of Agriculture in for an inspection. We built out an actual production facility there. So all of these things are done in-house.

Yeah. Well, super cool. I'd love to dig into those, but I have a couple of questions about Steel River, if that's okay. So that was your first, first e-commerce business, those types of products. I'm just trying to think through the economics of it. So if you were to be selling those through a conventional retailer, you'd be selling them at wholesale. To them, which, you know, say it's typically $100 product. So you're getting $40, $50 at wholesale from that to sell to a retailer. How do the economics work when you go direct to consumer for a physical product good like that?

So the margins on the product itself are great. Markups on physical products for e-commerce, you're typically going to mark something up 3, 4, 5, 6x potentially.

Yeah. So say this, the Sentinel Stealth Knife, that's $60. That means you're making that for $12 to $15. Is that your cost?

Probably less than that. The big variables there being freight tariffs and duties. So when steel tariffs went into place a few years ago, that certainly drove our cost of goods up. The unit cost of the actual widget, the finished good, is usually steady and high margin. It's all the other stuff that really eats away at the profit of a business. That we've experienced. Advertising costs, costs for those inbound freight and tariffs and duties can vary widely. If we have a promotion scheduled where we need inventory and there's not enough of it on hand and we have to make a decision between air freight and sea freight, knives are pretty heavy. If we're going to mail those, it's going to be quite expensive to not put those on a boat. So the margins all look really good on the surface for e-commerce, When you really dive into the cost of acquiring customers, all the other packaging costs, shipping outbound to fulfill an order and paying DHL or USPS or FedEx or the post office, those are much more the cost drivers than the actual finished good.

Got it. You're sourcing these directly from China for, say, this knife or the pen? Yep.

Across the business, we've got, I don't know, 50 or 60 suppliers. Steel River is definitely import heavy. Most of that's coming from China. Our other brands have a mix of China, stateside, Canada, Pakistan, elsewhere.

Yeah. Super interesting. And then I guess there's an inflection point where for a business like this, if you're shipping less than a container load or less than a 20-foot container load, that's where you start to have challenges with shipping and stuff like that that you're talking about. So getting your brand to a point where you're bringing in enough throughput, right? You're doing enough throughput of sales to where you can bring in a few containers a year or more of these things. Seems like that's where your cost per unit can go way down given shipping, I guess, is $10,000 a container these days from Shanghai to the US. Is that how you think about it? There's economies of scale, you got to get to a certain size to make it work?

That's definitely one driver. I don't think that's the main cost driver.

And what is the main cost driver? Advertising costs or?

Advertising cost, and I would say, I'm trying to think of the best way to explain this, the impact of building a business. So we're really focused on a brand, right? We want to buy businesses that are built around an end market, and they're gonna have a lot of products in their catalog 'cause they want to focus on the customers in that market and meet all their needs with all the different products they can sell. You can't necessarily have your end goal just be filling a container load of products from China to optimize your margin. When there's so many other problems to solve around the customer journey, email marketing, advertising, product page development on the website with landing pages, iterating on products. You might not want a whole container load of a product because it might be the first time you're doing it and you need to make different sizes, different shapes, different colors, variations. If you're really doing a high-volume bulk product business, maybe you're focused on like selling a SKU on Amazon, that's probably a much more important driver to move towards. For us, The drivers are probably much more around iterating on customer development and really understanding what customers actually want moves the needle for us farther and faster than shaving our shipping cost by a dollar per unit.

Yeah. I guess that comes back to this idea that these are really high gross margin items, deservedly so. I mean, they look high quality from the website, but where the battle is getting won is not on the cost side, it's getting one in the trenches, right, so to speak, around—

For sure.

—around understanding your customer, the marketing channels, all that kind of stuff.

Coupled with the fact that I don't know how many people necessarily pay full price for the products, right? There's a lot of couponing, discounts, sales. Even strong brands are expected to run promotions. Yeah, super interesting.

Cool. So love to dig into— you have other brands. How do you think about like a brand like Steel River and your niche of staying outside of kind of the pure FBA space. So it feels like there's, there's the rebels and then there's the people in FBA. So FBA is the Fulfillment by Amazon people that are Amazon-first brands tied to the Amazon platform. But then you're on the rebel side where like you're, you're direct-to-consumer commerce and avoiding that from day one, just saying we're gonna, we're gonna be a rebel. So How do you think about what sort of things are appropriate for FBA and what sort of things are appropriate for the Rebel Universe?

I think I would analyze it maybe slightly different than appropriate for, and maybe say, what are the aspirations of the business you're trying to build? If you're trying to build a business around product and there is search volume for product on Amazon, you can go do demand capture. Amazon has customers, they're typing in keywords. You can architect a great product, build a great listing page with optimized images and descriptions, you can get reviews, you can play the game of, "I want to capture demand on the Amazon platform." It's a fantastic game. It's not one that we're playing. There's many people doing it successfully and it's its own ecosystem. We're playing the brand-building game. We want to buy businesses that are built not around the product but around the end customer. So for Steel River, it's the outdoorsy types. For our Nikki's Diapers brand, it's parents that want to use cloth diapers and kind of practice sustainable parenting. For Cultures for Health, it's a brand that sells products for fermenting foods at home. So you have to be a very particular individual to decide that you want to ferment your own kombucha instead of buying it at the store for $4. Hmm. There's health drivers, there's lifestyle drivers, there's economic drivers of why you might decide to make that decision. We're selling a brand and an experience and a lifestyle around people interested in outdoorsy activities, sustainable parenting, fermented foods and cultures. So we let the customer goals, customer lifestyle, and the community around the brand really drive a lot of the brand development, less so than what's ranking well on Amazon this week. So we do a little bit of revenue on Amazon. It's mostly like a catch-all, for when somebody is interested in the product, but they'd rather buy it on Amazon because they're a Prime member or whatever the case might be. But our focus is really building those brands that are customer-centric, where we understand the end markets that we serve, and we're building content and community around those markets, and then iterating on great product development that meets the needs of those users. Just a different game. Yeah, super interesting.

So just to try to pare that back, like if I'm thinking about a typical Amazon game player, right? They know that people are looking for step stools, right? And they're, they're going to try to— there's a lot more demand capture around that and duking it out around that particular idea. You're inverting that, right? And you're thinking, yeah, here's the persona, the customer that we want to go after, and their motivation, and then building a brand to just target exactly that. Whereas Amazon, I think, does a pretty bad job of targeting those people at this point. and we'll continue to do that. Yeah. Very interesting. So digging into the Nicki's Diapers business a little bit. So this is obviously targeted at a niche of moms. And is that who— is that— that's who you're looking at there, this health-conscious mom, this eco-friendly mom?

Yeah. So the motivations for cloth diapers, one, it's definitely an eco-friendly decision to not fill up landfills with disposable diapers. And two, it is far, far, far less expensive to buy a stash of cloth diapers and make that one-time investment than to just buy disposable diapers for 2 or 3, 4 years for your child. So that kind of that life cycle of cost savings is huge for a lot of our customers, and many of them would also identify strongly with the focus on environmentally friendly parenting practices. Those are the two main drivers. Got it. Okay, that makes sense.

Then if I dig into the Nicki's Diapers business, It's actually, if I look on the website there and it's N-I-C-K-I apostrophe S diapers, there's actually a handful of sub-brands underneath the Nicki's Diapers brand. So what is the—

That's a very different model within, within our business. So Nicki's is the biggest product catalog that we have. We have 4 house brands that are private labels where we manufacture and own everything soup to nuts about that product catalog. That's 4 of the 100+ brands that we retail. So we're both retailer. And private label manufacturer brand owner. So kind of a hybrid model there.

Really very interesting. So what's the rationale there? I mean, you're fragmenting your brand awareness to some extent. What caused you to do that?

So one, it's the business that we acquired. It was already operating as a retailer. Two, Nicki's is a relatively large player in the cloth diapering niche of parent products. In growing market share, it just makes sense to be a one-stop shop for customers. We have a great rewards program. We've got a low free shipping threshold. We do free gifts with all the orders. The industry has long been built around a retailer versus manufacturer relationship. While we are both a retailer and manufacturer of our house brands, we are a retailer for many, many other smaller brands, and we're frankly an important retailer for many of the small niche brands in that ecosystem that don't have a big direct-to-customer sales channel. You might build a basket of $50 of various branded products at Nicky's the way you would when you go to the grocery store and you buy a bunch of stuff for your weekly shopping. We end up doing that as a retailer in this market.

Trey Lockerbie That makes sense. Okay. And then, I mean, just looking at the websites, it looks like Nicky's is bigger than the other ones. Would that be a fair In terms of total revenue?

Uh, by SKU count, for sure. Like by a huge factor in revenue, it's kind of in the middle of the pack. Interesting.

Okay. Yeah, I was, I was, well, we're going to get to the portfolio nature of your business, but it is curious if I look, as I look at the Nickys website, I'm curious why not, there's no link back to 365, uh, anywhere that I could see quickly there. You know, just curious why, why keep the brand total? I mean, you can't, come back to 365. Curious why that decision.

365 is not a consumer-facing brand. I want potential employees to know about it. I want potential co-investors to know about it. I want bankers and entrepreneurs and people in our network to know about it, but it doesn't affect the end customer. They don't— they shouldn't care necessarily that the ownership of their favorite supplement brand, like Alternascript, that we own, uh, is owned by a company that also sells emergency food. It shouldn't really impact that customer's decision too much. So it just isn't really applicable to do brand building for 365 on the back of the brands.

Trey Lockerbie But to push back on that a little bit, and it's your company, and I'm interviewing you, so I'll shut up, but it seems like the type of mom who would be interested in the products that Nicky's has might also be interested in Valley Food, which is your food safety and emergency storage business. Or am I just misthinking about how the segmentation really works?

I've never met an intelligent person who didn't ask that question. I've certainly thought that over the years about various strategies we've deployed, and it's a better idea in concept than in execution. Yeah.

But you run experiments in there, it just doesn't work. Essentially. Yeah. Okay. Well, that sounds great. I mean, I can see how the knife company is not going to be appropriate for the diaper mom. I totally feel like that's a— Super fun. Really interesting. And then let's maybe zoom up to how you think about having a portfolio of these things. What's the rationale to start to build out a portfolio, you know, from the original one that you had, and then turn into this kind of thing that you have now?

I think I said earlier that the content we put out publicly about our strategies and our thoughts is much more polished than when we bought that first business with an SBA loan 4 or 5 years ago. It's definitely been an evolution, but I think Justin and I always wanted to operate a portfolio of businesses and we kind of lucked into and stumbled into e-commerce being a great platform to do that on top of. So it's more just been an entrepreneurial aspiration for a long time to have a collection of businesses. The strategies around focusing on media companies, focusing on vertical integration internally, focusing on direct response advertising, kind of the hallmark strategies, I think we deploy really well. On the brands that we buy. Those have taken time to learn and develop in the niche of e-commerce.

Yeah, well then, as I'm hearing that, I imagine there's gotta be knowledge cross-pollination of, okay, this worked in terms of making this tweak to Facebook advertising or Instagram advertising, and you cross-pollinate that way. And then I gotta imagine there's economies of scale around different vendors you're using, all that kind of stuff. Even sourcing, it's gotta help when you start to have scale. For sure, 100%.

We see that employees can be put into functional roles where we have a full-time video guy. Most of the brands that we are in our target market, if you talk to an owner or that wants to sell their business, they would never dream of hiring a full-time video person. They might contract one, but like it wouldn't be a sustainable ongoing thing. And so our small brands living inside of 365 get the shared benefits of all of those resources. and it makes 365 into like this really awesome platform for growth and development for those brands through the shared services model.

Yeah, that's great. So, I mean, how do you think about organizing your business from an execution standpoint? Like how, how do you have it structured now in terms of who owns the P&L for each of these and stuff like that?

Yep. So, uh, we loosely follow the EOS model. So I sit in kind of that visionary or CEO role. So I get to do fun stuff like go on people's podcasts, get to talk to people about selling their company. I get to talk to lenders and investors about raising money to do deals. I get to do all the fun stuff. I write some strategy memos, kind of give some direction, but I'm focused on the long-term. Justin really runs the business. He's our president, integrator in the EOS context. He runs the P&L, he runs the meetings day-to-day, HR, project management, kind of hitting our business goals here in the short-term. Below him, we have kind of the traditional functional departments. We don't manage the business today, by brand. If you're in marketing, you work in marketing. You work on Brand A today, Brand B tomorrow. Brand C might need none of your time this week and Brand D might need a lot of it next week. It's going to ebb and flow. So we view the brands internally as lines of business within the 365 ecosystem, and your functional role will have you doing a variety of things this week. Trey Lockerbie Interesting.

Interesting. Okay. Yeah, that's actually counter to the way we've set up our software company, which I think I've talked about a lot, which is We push P&L out as close to the edge as we can, which is a different model. It's also, I think there's a reflection of you two guys as partners reflecting a bit about how Tiny is set up with the Tiny Capital guys up in Vancouver, Andrew and whatnot, but they're not centralized like you are. It's an interesting decision to be completely centralized. How do you think about that long-term? Is that going to scale well, or do you think that because your niche is so narrow, that works when you're at 15, 20, 30 brands?

I think that this is the ultimate question, and I've spent some time thinking about it, much like I spent a lot of time thinking about the exit strategy or the holding period. Finally solved that answer to that question, and that's a permanent hold, permanent capital model for us. On the internal structure though, I think there'll be ebbs and flows over time where people have more or less focus on one brand internally. I do think we've planted our flag pretty firmly for 365, that we're The business is 365, you work for 365, you have a functional role, and you're assigned tasks within that line of business and various P&L responsibilities or KPIs in your functional role. I know a lot of folks doing great holding company strategies that have taken the other approach. Time will tell if we make a change there. I think that internally for us on a wholly owned subsidiary, we're going to continue running this model. I could see if we did a joint venture or took on a significant amount of outside capital to do an acquisition that was not a wholly owned subsidiary, I can see that changing, but for the 365 Holdings team, I think it's going to continue to be the shared services model of building traditional roles and trading the brands as lines of business within the holdco. Trey Lockerbie Yeah. Really interesting.

Yeah, I'm curious to see how it goes. I'm a lazy man, so the way you're doing it sounds like a lot of work.

Ian Formigle Hey, I think it's a lot of work too, but Justin's the one that gets to deal with it all day to day. I get to have fun and be stuff like this. So hopefully he doesn't hear this.

Who do you guys compete with? You don't have to worry about the Thrasios and the FBA guys, the roll-up guys of the world. Are they picking at your D2C brands at this point?

I'm friendly with your co-host for your other podcast, Bill D'Alessandro, over at Elements. And for as much as we have a similar model, we're actually probably still quite different in maybe our investment thesis and some of the focuses. So I'm sure there's transactions that he and I both look at and we don't know it. And there's probably some transactions that I pass on that he thinks are are the greatest thing ever and vice versa. So no, the roll-up companies focused on Amazon FBA, like the Thrasios of the world, there's a handful of them now. I don't view them as competitors because we're not going to buy a business that's doing more than 20% max of its top line on Amazon. Frankly, it's just other individual buyers. There are certainly some holdcos and some other small portfolio operators in the e-commerce space. I do think for as similar as a lot of us are, and there's a handful that I know, We're all pretty different in our focus. I really do think that on a given transaction, if there's 5 of us, 1 or 2 might think it's great, and the other 3 or 4 are probably going to pass. So it's probably more individual acquirers that are the competition for deal flow for us.

That has been one of the things I've been fascinated about being in the software M&A space. At subscale, the same thing has happened, right? The types of things that Tiny acquires versus Dura versus the Xenon guys who are out of Vegas, who've been around for a long time, Like, they do very— Xenon does very developer-heavy stuff, right? And it's just like, like, Duro looks at that stuff and it's like, yeah, it seems like a lot of work. Like, they look— so, and then Tiny's like, Andrew's buying like digital marketing companies now. Yeah, yeah. You know, he rarely do those, those intersect, which is— which it surprised me. I would have thought it would have been more homogeneous then, but everybody kind of ends up in their own swim lane of the stuff they do. Really well. You know, we just do boring enterprise software. It's like the boring or the better, like we'll take it.

It's like the service guys, like some of them want to do HVAC and don't want to do plumbing and vice versa. Um, I think there's so much nuance to small business that for as much similarity as there might be, there probably is less than a lot of us would think, like the Amazon versus the D2C conversation.

Yep. Well, and Bill, Bill D'Alessandro talks about his niche being lotions and potions. Right. I don't have any of those brands. Yeah, you got, I was like knives, no. Diapers, no. No. Food, no. Food, no. And then, so tell me about your fulfillment business. So what is, that's the one thing that looks kind of out of the ordinary with the rest.

Yeah, so that's not a consumer-facing brand. It only has one really for HR purposes and recruiting. Like we're 2 miles from an Amazon fulfillment center that's recruiting for the same type of labor force that we are. And so we wanted fulfillment to have a brand presence publicly for hiring. That's probably the one exception to our shared services model as far as economics go. The cost driver of storage and pick, pack, and ship is a very specific cost driver in e-com, and it's a little fungible in that if you don't want to do it yourself, there's a liquid market of service providers that will bid on that service for you. So we wanted that to be We want a separate corp for like legal and tax and all that kind of stuff. And then two, we wanted real economics. We wanted to really understand and give the P&L owner of that business specifically real cost drivers to then burden back in invoices to the brands so that the brands had to be accountable for the cost of doing business. I don't know that it's valuable for me to move around expenses on a spreadsheet about the video guy's time. Like that's— if it's a good decision, we should just do it. What I do think matters is that we're paying full freight to ourselves for the amount of labor that goes into kitting up some special deal of the week offer that takes a ton of labor. That's a real cost of doing business. And the marketing guy might think he's a genius because he makes a lot of money selling the deal of the week bundle. But if it costs too much to kit up and assembly labor in the warehouse, we should pay that price. So that's the one exception to our model where we want real economics in terms of pricing. Ceremony.

Yeah. Super cool.

And then how many people do you have now working? Across a couple states and a couple corps and everything, the whole family is about 70 folks. That's great. And they're all US-based? Correct. Yep. Uh, we have two developers overseas, but yes.

Yeah. But at this point, nobody sourcing, nobody in China sourcing for you guys. It's all— Yeah.

So one of the benefits of buying established brands is kind of inheriting those established vendor relationships. We've got a really good supply chain team. Uh, I have talked to people that, feel like they need to head to China to visit vendors and do product development. I suppose if you're going to build the next Shark Tank or Kickstarter caliber multimillion dollar widget, that probably is a great thing to do. Again, with our focus being more on the customer and kind of iterating around what they need, we can generally do everything we need to remote. And so no, we haven't needed to do that yet. I think we wanted to make a China trip and then the pandemic happened and it may not be on the, uh, on a to-do list here in the short term.

I've done it numerous times. The first 3 times were exciting. The last 12 times were like, oh my God, can't believe I have to spend 18 hours on a plane again. Right, right. So, so I think that's the ideal business travel. If you can figure out how to make it that you just go to every city once and only once and check it out, you're like, that was great, loved Bogotá, never going back. I think that's, that's the ideal kind of scenario. Love it. So risk-wise for this model, so right, I can see on the FBA side, those guys are totally dependent upon Amazon, or if you, if you get into the FedEx route business, you're totally dependent there. For you guys, I would assume you're pretty heavily dependent on like Facebook advertising, Instagram for growing the businesses, or is it you're hoping for word of mouth? Or how do you think about that in terms of the development of the brands?

So we do want to have as much diversification as possible. And so Back to the Amazon example, happy to list the products on Amazon, may not invest as heavily there as an Amazon pure-play operator would, but getting some diversity to that channel, that makes sense. In each business, we tend to have a lead customer acquisition channel. Maybe it's SEO and Google PPC, maybe it's Facebook ads, maybe it's affiliate traffic. There tends to be a lead in each business of what has the best market for us to do customer acquisition on. We try to deploy best practices across and get diversity there, and sometimes it works and sometimes there just isn't a market for a given traffic channel in a given business. So the portfolio as a whole is well diversified. Any one business can have a risk of platform changes, like the Facebook ads change recently, the Google ads change that just got announced I think yesterday. Certainly we have Amazon issues with our own, you know, small chunk of business there. We really kind of just want to have all the problems and have them diversified as possible and let things kind of ebb and flow. We see last year huge outsized demand in the pandemic for emergency food because people didn't want to go to the grocery store. If there's a consumer slowdown in spending, some of our brands might not do as well. You might not need high-end supplements from our supplements brand if the economy slows down, but maybe you want to buy cloth diapers instead of disposables for your kids. So it's really for us, I think, about diversity Because if you have any business that's not on the Amazon scale, you're going to have some platform risk to somebody. We just try to have a little bit to all of them and spread it around.

Trey Lockerbie That makes sense. That makes sense. As you think about where you guys, I assume, are looking to do future acquisitions, and you talked a bit about raising outside capital in the future, probably means scaling up and maybe buying some bigger brands. Where do these types of businesses trade? Do they trade at multiple revenues, at a multiple of EBITDAs, at multiple pro forma EBITDA? How do you think about it from where the market looks at these types of businesses?

Ian Formigle Multiple of trailing 12 cash flow. Could be EBITDA, could be SDE, depending on the size of the asset. And then the hairy part is typically the net working capital, typically in the form of inventory, sometimes accounts receivable if you have some wholesale business. That tends to be the real hangup in valuation and expectations, but we're not playing the venture scale game. There are venture scale consumer product businesses that grow at a venture scale rate, raise venture scale terms, and sell on venture scale outcomes. I view our market as small businesses that sell on the internet. And so they're trading at small business multiples, 3, 4, maybe 5 times if it's a really high quality asset, but these are typically underwritten as multiples of cash flow and to support bank debt. They need to provide a reasonable IRR without doubling the business again next year, We do some really fundamental quality of earnings underwriting, not a Q of E like you go hire an accounting firm, but just what actually happened here. Did you make all your revenue last year because one SKU went skyrocket in the pandemic in April, or did you have a sustainable business that's got diversified sales channels and diversified SKU count? So 3 to 5X.

Yeah, it makes total sense. 3 to 5X plus carrying cost of inventory plus adjustments. Typically, is that how you think about it?

Depending on the size and scale, we're typically going to include net working capital if we're going to get to the top end of that range for the pro forma to make sense. If you're paying a full heavy 4+ multiple, 4.5, 5, inventory is probably already included in that number to some reasonable degree. If you take the typical, like, we're going to capitalize earnings approach to a business, then you have to include everything necessary to produce that earnings. Yes, I need the website, But I also need all the inventory too, because without that, there's no gas in the tank.

Got it. Well, if it's any consolation, even in asset-light businesses, net working capital is always a fricking hassle. It's the last thing that everybody's like, oh my God, we got to argue this.

So the things that always hold us up at the 9th hour are gift card revenue. Hey, you got $30,000 of revenue that you've earned revenue and pure margin on that we're paying you a multiple of. but now we got to give people free product. So we need to offset that post-closing as an adjustment to working capital. Hey, you took some prepaid subscriptions. These people have— we have to ship them stuff next month and you already claimed the revenue. And again, we're paying you a multiple of earnings on that revenue. We need to offset the fact that we have to deliver those products now here in the future. So those are always interesting expectations to help maybe first-time sellers come to understand if they didn't get good advice from somebody beforehand.

Yeah. Super cool. Well, cool. So one more question and then love to close. What, if anything, would surprise people about your business? What kind of things do they learn and they're like, "Oh my God, I had no idea." Are there any things that come to mind that are really surprising?

I think that from the outside in, the whole Amazon conversation is always one that throws a lot of people for a loop of understanding the difference between direct-to-consumer marketing and just going on Amazon or Target.com or some large retailer. I think most people just generally don't know how many viable real businesses there are that employ 20, 30, 40, 50 people that you've never heard of that are selling some niche product only on the internet. They're not in retail distribution, they have a loyal following and they're selling tons of product online. Our core thesis is that years ago, there was a small number of big brands, and we drove to stores to buy those products. The future is dominated by a huge number of smaller brands. They're still viable going concerns. Hopefully they're in our portfolio, and people aren't driving to the store to buy them anymore. We're shipping them out of our warehouse to their home. So I think just the size and scale and scope of what independent direct-to-consumer brands looks like is surprising to a lot of people.

Trey Lockerbie Yeah. Well, basically what you just gave is the bear case for Kraft Heinz. It's the same thing, just that at these, the, you know, the more durable good side where you're playing, which is, which is super cool and super smart. Appreciate that. Great. Well, this is very cool. I've learned a lot. So thanks for educating me. Hopefully, hopefully my learning came across and I know that people find it interesting as well. How can people support you, follow you? What would be, what would be a helpful thing to close with?

For sure. Head to our website, 365-holdings.com. You can sign up for emails there. We send maybe one a month, only interesting things, either New articles, job openings, M&A announcements, opportunities to invest, if we're going to raise capital on something, it'll all be handled through email, so opt in there. If you want to follow me on Twitter, I'm not hard to find.

Are you usually replying and disagreeing with me?

I'm usually arguing with Michael Girdley on some topic. So those two places would probably be best. That's great.

Well, great job, Kelsey.

Thank you so much. Thanks for having me.