Host: After over a decade making SBA loans to acquisition entrepreneurs, Chad Von Drist decided he would buy a business himself. What he ultimately bought suited him well. Despite its size, Darby Creek Trading, an E commerce brand selling decorative wreaths, did only about $150,000 in annual revenue. Talk about buying small. But Chad's plan was to pursue this project on the side while keeping his day job as an SBA lender. The risk seemed low and the upside interesting. Well, even in his fantasies, he didn't imagine the upside that he is enjoying today, five years later. And by the way, Chad still has his day job. Now. You've heard don't buy too small on this podcast countless times and that is a solid rule of thumb. But today's story is a counterexample, one showing that even a tiny business can provide a meaningful head start that makes all the difference. Not always. Indeed not usually, but sometimes. So many exceptions. So much nuance in our world of buying businesses, which is part of what makes this fun. Please enjoy this interview with Chad Von Driest, owner of Darby Creek Trading. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. August Felker is a two time successful searcher, first with a traditional search fund. The second time around he did a self funded search. Today August runs Oberle Risk Strategies, an insurance firm with a dedicated practice group for searchers and acquisition entrepreneurs like you. If you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. A great no risk way to get to know August and team. They love helping searchers. They've worked with hundreds. Oberly is a specialty insurance brokerage for searchers by a former searcher. Check out oberle-risk.com O B E R L E D risk.com link in the show notes Chad Fondries welcome to Acquiring Minds.

Guest: Hi Will, pleasure to be here. Thanks for having me.

Host: Chad, you bought a tiny business. A hobby business as you called was doing a grand total of $150,000 in annual revenue when you bought it. You've had it for five years and you push that number from 150,000 to 4 million in annual revenue. I'm looking at the chart of growth over the last five years and it is one of these very dramatic up into the right lines. Very a beautiful chart really. Now, in addition to this business that you bought, you were and still are An SBA lender yourself. So we're bound.

[3:18] Guest: That is correct.

Host: We're bound to get some insights on that front as well. And that came first. So start us off please, Chad, with some background on you. How does one get into SBA lending?

Guest: I. Right place, right time, will. I fell into it. I just. I got lucky. You know, when I was in college, accounting professor took me under her wing, was friends with the president of the local community bank and asked me if I needed a job for the summer because they were looking for help. And, you know, that led to a career in banking. I've been a banker now for 21, going on 22 years. After I graduated, they gave me a full time job, taught me the business, turned me into a lender. And one morning the bank president shows up in my office saying, so we have this new deal, existing bank client, family, they own a bunch of hotels. Their nephew wants to purchase his first hotel. It's in an undesirable area of town. We don't really want it in the commercial conventional portfolio. There's this SBA program out there. I don't really know how much about it, but I think it'll fit. They'll be here at 10am here's the file. Call this guy, Scott Harden, who was the local lender relations rep for our district office. And this was back in the days when the district offices approved all the deals. Obviously, our bank was not a PLP lender, so we had to get direct approval from Uncle Sam via the local office. This was before they centralized all of that processing. So that's. I called Scott, he walked me through it. He was very gracious and helpful. Thankfully, he had the heart of a teacher and he taught me how to do it. And we were in business. That was our first deal. It was a independent exterior corridor, two story hotel.

Host: So you had been a commercial lender and then this deal needed SBA financing to occur. You, trial by fire, learned it and then continued to do more SBA loans thereafter, correct?

Guest: Yeah. So we did that deal. Then I taught the other lenders kind of what we were looking for. We did a handful of others, and then one morning, the president shows up again saying, hey, one of my friends said, you can sell these guarantees to Wall street, make money. Why don't you figure out how to do that? Sell those loans you just made. So I did, and they liked that and asked me to do more. So we kept going.

Host: And so now doing packaging the loans together and selling them to Wall street seems like a different job. And A different skill set than being the frontline lender. You're doing both. What? What?

Guest: Well, I was the entire department in those days.

Host: Okay.

Guest: You know, the. At that time, I was even typing loan documents on an electric typewriter because they. You know, we didn't even know there was software out there that you could buy that would tie into Laser Pro to generate loan docs.

[6:04] Host: And what year was this? Because I hear typewriter. I think seven 70s, but we're talking much more recently than that.

Guest: This was the early 2000s, and when we figured out we would have to type these documents, one of the other older employees said, you know, I think I saw a typewriter in the attic. Why don't you climb up there and see if you can find it?

Host: Wow. I guess the SBA loan program itself was like a dusty old business, like the kind that so many of our many acquisition entrepreneurs like to buy. Okay, so carry us. Carry us forward, then. You can. You said 21 years as a lender, so take us through kind of the rest of that time.

Guest: So that Community bank was acquired by a larger regional bank at that time. The. The folks that bought it didn't see value in the SBA program. They wanted me to stay and do loans for apartment buildings and residential flips, and that just wasn't something that I was interested in. So, essentially, I made a cold call, the national director of the program at Huntington, and that landed me a few meetings, which turned into interviews, and we developed a friendship, and eventually they hired me. I was the first hire for that department outside of the bank that they made. So they came from a bank called Unison. Huntington acquired them prior to acquiring SkyBank. And so they. To listen to them tell the story that the Huntington acquired them to get the SBA department. I don't know how much truth there is to that, but.

Host: And. And important context here, Chad. Sorry to interrupt. Is that Huntington is one of the leading, or by some metrics, the leading SBA lender in the country, correct?

Guest: Yeah, Depending on how you measure it, whether it's dollar volume or units. You know, I think they, in Live oak, trade number one and number two, back and forth. Huntington's usually number one by units, Live Oak number one by volume. Our group, you could say, was responsible for taking them there. And then once we reached that point, we left and acquired a little bank for ourselves, and I'm still there.

Host: And what. What year was that?

Guest: We. I. I was employee number one of that group, which is probably a story for another time that I left Huntington to go to Mid, in December of 2015. I was at Huntington from 0708-15.

Host: Okay, and so in 2015, you and a few of the folks there at your, at, at Huntington do kind of a, A startup bank?

Guest: No, we acquired 85% of the, the corporation corporate stock. And so they, I think officially they called it, it was a, a recapitalization. Recapitalization. Okay.

Host: And that bank is, is your employer. When you have your SBA lender hat on to this day and you have equity in that, you're part, you're part of the ownership.

[9:08] Guest: Yes, I am an employee with a minority ownership stake in a long term incentive compensation plan.

Host: Most business buyers acquire their target company using an asset purchase, which means that you've got a brand new legal entity that needs to be ready on day one to properly employ your new team. Payroll, HR documents, tax accounts, workers comp, benefit plans like medical and 401k. You need to make sure all of that is transferred or set up on day one. Aspen HR understands this challenge and the delicate timing that searchers have to juggle. Led by a successful former searcher, Mark Sinatra, Aspen HR can assist searchers to ensure a seamless transition for the employees. If you are structuring an asset purchase, contact Aspen HR for a free consultation. They'll walk you through their proprietary checklist for asset purchases that assesses your readiness for HR payroll and benefits. Check out aspenhr.com or contact Mark directly@mark spenhr.com you've spent years, over a decade making SBA loans dealing with small business owners, entrepreneurs, and you are now one yourself. So what's the connection? How did, how did this metamorphosis happen?

Guest: I've always, you know, my, my background by education. I have an accounting degree. So I've always been business minded. I've always wanted to have a business or invest in a business or have some type of involvement. I just didn't really know what shape that would take. And you know, my years in banking, I saw what can go wrong. And so that led me to develop a fear as to, all right, if I'm going to take this leap, it better be the right one. And so over the years when opportunities would arise, I would poke holes in them. And so many holes that there's just no way that it would work. And until the right one came. And so you know what I tend to tell clients and folks that ask is when the right one comes, you'll know. It's a long process. You have to kiss a lot of frogs. And the Right. Deal will come along if you're patient and if you're open to that opportunity. So in my case, and this was, we bought Darby in 18, so this was pre Covid. And at least locally, how I went about obtaining business is I teamed up with business brokers and CPAs and attorneys and we would put on, you know, breakfast or lunch seminars, you know, once a month and talk about the process. You know, how do you find a business to buy, where do you get the money, what is the legal documents, what do those look like, what's the deal team need to be those sorts of things. And as part of that, the brokers would always bring new listings. They'd print flyers and put them out on the back table. And you know, after breakfast one morning, I'm, I'm looking over the, the listings and one of them jumped out at me and you know, I turn around and I asked the broker, hey, Emmett, what's this silk floral E commerce business you got here? And his answer was, oh yeah, I brought that for you. You and Josh need to buy this one. And you know, so leading up to that, you know, my partner in life and business was on contract to Victoria's Secret with the store design team and was on a project to source faux floral arrangements for the stores. And during that project, I spent, you know, what felt like an entire summer listening to him complain about how all the vendors in that industry could not deliver and there was opportunity there. And if we ever decided to get a business together, that that's something we should strong consider. So when that, when I saw that flyer that said silk commerce or silk floral E commerce, it just kind of rung a bell and caused me to ask.

[13:10] Host: Well, so it's, it's quite a coincidence if your partner had said we need to get into, by the way, silk floral, which you explained to me in the pre call is the industry name for, as you also said, faux flowers or fake flowers, essentially. So you literally, your partner had literally said, silk flower florals, here's an opportunity. And low. Whatever. However many months later an E commerce business in that space, one presented itself. I mean, that what, what a coincidence. I, I thank you, Emmett, or whatever the broker's name was for. Yes, for making that connection.

Guest: Yeah. So, I mean, what a niche. You know, I've been financing deals for Emmett for years. We'd known each other for a long time. So you know, when he says, yeah, I bought this for you, he knows me, you know that immediately there was a level of trust there. I was like, okay, we really need to give this one some strong consideration.

Host: And Chad, to be clear, so you were, you were kind of passively searching. You were, you know, as an SBA lender, you were doing your lending thing, but you were looking at deals. You were looking at deals, actually. Okay.

Guest: And actually at, at lunch earlier this week, Emmett reminded me of a few of the deals he showed me prior to Darby, you know, that, that I was essentially a tire kicker on. And in though in that process, he sort of realized what, what would actually work for us. And that was part of why he said, yeah, this is the one for you.

Host: How right he was. And so just going back to this moment where he brings the listing for you, you all are holding. Hosting local. What did you call them kind of lunch and learns breakfasts where you bring in aspiring local entrepreneurs or the acquisition. Curious. And you, you give an hour or so on how to, how to buy business. I've never seen anything like that. I mean there's obviously a lot of education now targeting searchers, including things like this podcast, but the idea that there's kind of enough of a critical mass in a local city, in a medium sized city. You're in Columbus, right? Correct. To bring enough people to something like this seminar to make it worth doing. Just give me how often did you do those? How much of an audience could you attract? I'm just curious.

[15:31] Guest: We were doing them toward the, you know, when Covid sort of killed that. And we haven't started it back up since. But toward the end we were doing the monthly to an average of, you know, 10, 12 guests.

Host: Wow. And so these people were basically searchers. They probably didn't identify as. Absolutely they were.

Guest: They didn't identify themselves as such at the time. But that's, that's exactly who they were. And, and every single event would lead to at least two deals.

Host: Really?

Guest: Yeah, every single event would lead to. To new loan requests that would end in closings. Wow.

Host: Well, so two deals a month, 12 attendees. So whatever. One, six. What is that, 16, 17% close rate. That, that, that not bad at all. That, that's probably. I mean that's better than the, the business schools are, are doing in terms of their ETA education, I think. Okay, great. So tell us about, tell us about this silk floral business. Tell us about Darby.

Guest: Well, so DarbyCreekTrading.com we sell high end luxury faux floral arrangements, wreaths and garlands and other home decor products. Company has been around since 2004. The, the founders were a retired couple. She was a crafter. Her Husband was a retired IBM coder. They started it around the infamy of the infancy, I should say of the Internet. And he built an E commerce store for her and they operated out of their garage and they met with some success. You know, that was their retirement side project, you could say. And you know, eventually they outgrew their garage. They moved into a small warehouse. They brought on a couple of contractors to help them manufacture or assemble the product. And you know, eventually, and I should also mention the seller was a, an amateur photographer, which certainly helped with E Commerce. So he did all the product shots and whatnot in his studio. And then eventually, they know, they decided they didn't want to work anymore and wanted to enjoy their retirement. So they listed the business for sale.

Host: And at the time, just curious, from the tech, the tech stack perspective, was it still running on the, on the E Commerce store that this gentleman sounds like he, he coded from scratch in? Very impressive.

Guest: No, he actually switched it over to Shopify.

Host: Okay.

Guest: But he was running it on a, on the Shopify, very basic, bland white background, basic theme. And then he custom coded a lot of the features in. You know, he switched to Shopify very early on when that product launched and he custom coded a lot of things that he didn't need to. So by the time we came around, you know, it was, a lot of the custom coding that he had done needed to be removed and replaced because it was redundant and was causing problems for some of the additional apps and things that we needed to use. So one of the things that led us to scale the business very early on we hired a firm to essentially rebrand their website. We kept the branding, the name, of course, but they know, they redid the Shopify theme and really modernized the website. And that's the point at which we turned on Google advertising and started using the customer email database. We launched Klaviyo and those sorts of things. So that was really the point at which Darby began to scale.

[19:06] Host: Well, and let me, let me pause you. Can I pause you? Because we're going to, we're going to get there.

Guest: Sure.

Host: Spend a lot of time on the growth because going from 150,000 to $4 million is going to be, going to be an education. The now $150,000 in revenue there. And you said, you said the co founder, co owner, the wife was a crafter. Was she making these arrangements? Did you say?

Guest: Yes.

Host: Okay.

Guest: Yeah. So she, it was. So at that time they were only doing wreaths and they were only doing spring wreaths. And that Was one of the reasons we saw value in it was. So when we did the first buyer seller meeting, you know, we realized very quickly, you know, the quality of this product was spectacular. But, you know, there was room to increase it. And we realized if people were willing to pay this much for this product, there's definitely growth opportunities here. Like if, if they're willing to pay this much for this, then they're willing to pay more for a better product and we can sell them that. And a wreath company that doesn't sell.

Host: Christmas, right?

Guest: Come on. If there's ever a time of year when someone puts a wreath on their front door, it's Christmas.

Host: I mean, I have to, I have to tweak the previous owners. It's like being in the ornament business and like skipping the Christmas season. It's like.

Guest: Yes.

Host: Did you ever get an answer why they weren't? Probably because she was a hobbyist and she made this product, she liked spring wreaths and just. I thought, I'll sell these online. It was probably just interest driven as opposed to strategic. No.

Guest: Well, they tried Christmas and they bought the wrong products and it didn't sell. And that turned them off to the entire idea. So they, they stuck with only products that they knew they could sell.

Host: So $150,000 in revenue. I mean, how much ste does that. So tell us about the terms of the deal. More numbers, more terms, if whatever you

Guest: want to share, please. So I went back in prep for this and, and pulled my, the spreadsheets that I developed when I underwrote the deal. And so look, so we bought it in 2018. So at that time, we were underwriting off a 2017 tax return, and their gross revenue was $137,826. For that year, an SDE was 30,284. I paid a four times multiple on SDE. Looking back, I probably overpaid, probably should have paid closer to three. But, you know, you live and learn. Also another thing that I did was so that the sale price was 130,000 and that included inventory. One of the mistakes that, that I made back then that, that I strongly suggest to every borrower I speak with going forward since then, especially if they're buying a business that, that has inventory. You want to go count the inventory or hire someone to count the inventory and actually review those reports. You know, I took the seller's word for it. I walked the warehouse, I looked at the stuff. But did I really look at this stuff? No. And you know what happened? We Ended up buying a business with a bunch of inventory that ended up being all the stuff he couldn't sell. So we liquidated what we could, we donated the rest and we started over.

[22:20] Host: And you basically started over. Now let's think a little bit here about the appeal of the business. So on the one hand it's like, wow, a wreath business that, that isn't selling during Christmas, screaming opportunity. On the other, it's a, it's an old, you know, it's a 13, 13 year old business at that point. It hasn't grown much. So yes, there's some glaring opportunities, but still you just, you just worry if a business hasn't, hasn't shown much growth over that long that, that many years. Like, sure, they tried Christmas wreaths once and it didn't work, but you just think that maybe they try to get. I don't, I get nervous if a business is, is, is would be that I would have been nervous with a business that was showing so little revenue for so long. You clearly makes sense, but you, but I agree with you, but it didn't bother you because you saw enough opportunity. So talk us through how you got over a business. And as you also, as you just said, you didn't know this, maybe if going into it, but in retrospect, you basically dumped the inventory that was there and kind of started over. So you were essentially buying a brand. Would you, would you say in retrospect that that's what it was, it was more than that?

Guest: Yes, I would say that, but I would add to it.

Host: Okay.

Guest: You know, we bought a brand that had existing customers, we bought a brand that had existing vendor relationships and payment terms. And those are things that I wouldn't have gotten as a startup.

Host: Yep.

Guest: You know, the first time we went to market to, to buy inventory was eye opening to me. It was something that, that you know, lender sees a lot, but lender doesn't see everything, you know, so, so being on the other side of the desk, so to speak, really opened my eyes in that. So we walk into the first showroom and we, you know, after introductions and they say, oh, we've been working with your company since the beginning. We love you guys. You know, we know the seller, blah, blah, blah. They're like, okay, here's our sale tags. Look at the price. You see that price on the bottom of the tag, the lowest price, Your price is 30% below that number. That's what opened my eyes to. Okay, so the, so another real value that never occurred to me in buying existing Business is those vendor relationships that's very important. And let, and, and so in addition to, hey, you get a price that, that's, that's lower than everybody else, or they're telling me is lower than everybody else, you also get, you know, three to six months to pay us versus if you're just walking in off the street, you think they're going to give you the lowest price and terms? No, they're going to give you the highest price and they're going to expect you to swipe the credit card before you leave the building.

[25:05] Host: Now, Chad, I just on Monday had an interview, interview with Russ Hadlock, who did an asset purchase and is struggling right now. And one of the things that he encountered was because it was an asset purchase, none of the pricing that his seller was enjoying from vendors did he inherit. It was just the opposite. They used the fact that he was a new owner and it wasn't the same entity. It was a, it was a. His was a brand new entity because it was an asset purchase to raise prices on him. And they, and, and they didn't, they didn't extend any goodwill to him in terms of terms either. So it was actually the exact opposite story of what, what you experienced. I wonder if there's a rule of thumb here or it. Or what that has to do with. Because, because you could imagine in your case that you walk into that showroom and they say, no, no, all the, all those, all those benefits, all that we were extending to Darby were really to the previous owners. You're not them. Therefore, we're resetting you at market prices. I mean, you could imagine something like that. Anything to say about that? Your experience being so different than Russ's?

Guest: Yeah, well, I haven't listened to that episode yet, and I will because I, I want to hear that story. That's very, A very unfortunate situation and I'm, I'm rather lucky that. That, that was not my experience.

Host: Yeah. Yeah. And just because this is such a. Going to be such a crucial point for people, is there some way that you, at least in your case, you feel like you could have assured yourself before doing the transaction that the existing vendors would have continued to extend you advantageous pricing, Advantageous terms, or is that something you just got?

Guest: Yes.

Host: Oh. You okay?

Guest: I think, yeah, I think, you know, when I go buy the next deal. Absolutely. I want to talk to your sales reps from your vendors. Like, let me see your. So once, once we have assigned Loi, and we're in the due diligence phase, and I Have access to ask these questions. One of those questions is, all right, who are your top five vendors? I want to meet those sales reps. Great. And I'm going to ask the sales reps, a, what have you been selling? B, what are the prices? C, how. How's the seller been paying you? Do they pay on time? D, what payment terms have you granted to them? And E, what information do you need from me in order to give me those same terms?

[27:31] Host: Yeah, it's. It's not something that has come up in my. In my interviews. Maybe I just haven't known to ask. Um, but it sure seems like a. A lot could hinge on the, you know, the pricing remaining the same under your ownership versus the previous.

Guest: Right. That scenario that you shared with me in my years of. Of lending people money to buy businesses, I've encountered that only one other time, and unfortunately, that was a deal that did not go well. You know, that deal ended up defaulting. There was an element of seller fraud. And, you know, that was. It was an unfortunate series of events, and they had the same experience, except in their case, the. The seller had not been paying the vendors. And so the vendors told the buyers, we're not. You're not. We don't consider you a fresh entity. We consider you to be the same entity. And, oh, by the way, you owe us money, and we're not selling you more product until you pay us.

Host: Okay, Chad. And so you're. You like the business. Is your plan here that you'll do it on the side, that you'll go. You'll.

Guest: Yes.

Host: Okay, so, yeah. What was the plan? Flesh it out for me.

Guest: So the plan was, you know, look, I'm business guy, accountant. I'm not creative. So I was never intended to make product here, and I've tried. And all the reefs that I've. That I've made did not turn out well. And so now the staff does not let me make product. And when I try to make product or try to make suggestions, they remind me as to how bad my. My. My product designs turned out. So. So I don't do that. I let the creatives create. So when we were looking at. At this, you know, the idea was there was twofold, right? It's a small deal. The sale price was. Was small. And I knew that if the whole thing tanked, would it hurt? Sure. Would it kill me? No. So that was a risk I was willing to take. And then in addition to that, we knew the business had clients, had a revenue stream, had an employee, and it did not require, at least at that time, I thought it did not require, you know, an abundance of our time. And my partner was. Had time available to dedicate to this. And then, you know, at that time, he was a, a manager in a photography studio for a large national e commerce company that had opened a second photography studio locally. And that has been the gift that keeps on giving. Because while that company encountered trouble and closed that studio, it allowed us to pick up very talented people. So we left. You know, we, we picked up stylists, we picked up buyers, we picked up photographers from, from that entity when they closed. And, and then just years of, of having friends in, in the space. You know, we've, we've been able to draw upon a lot of very talented folks in our network. You know, one of the, one of the luxuries that we have here is that Columbus is home to five or six major national retailers. Their home offices are here. So all of the executives and the national creatives and folks are here. So there's a, there's a rather large labor pool locally that we are able to pull from when we need to. Great. And so that was in the back of my mind as we were underwriting this deal as to, okay, how do we scale this thing? Where are we going to find people that can help us do that?

[31:07] Host: Great. And as you said, just the psychology here was $130,000. And, and it was an SBA loan.

Guest: Yes.

Host: Okay.

Guest: Of course it was. That's my, that's what I do. That was my experience. I was, I was comfortable with it. And, you know, I've been at this for a long time. You know, you can't, you can't be in the business of making loans to people to buy businesses for 20 years without generating the hubris to think you can do it yourself.

Host: So well, $130,000 for, for an, for the enterprise value is low enough that you could see somebody just buying, stroking a check for that business. So. So did you do 10%, did you do $13,000 down? Did you really?

Guest: Yeah, I did. I did. According to my spreadsheet here, I did 9.8% down. It looks like I put in 15,000.

Host: Great. Okay.

Guest: They gave me 20 grand in working capital. They financed the closing costs. It looks like my original loan was 138,000.

Host: Okay. And did you think also about the size of the business? Did you ever get the. I get. Allow yourself to fantasize that it would grow as much as it has? I mean, really,

Guest: I remember fantasize about Fantasizing about reaching a million. And. And in doing the back of the napkin math as to, all right, how many wreaths do we have to sell in order to generate a million dollars?

Host: Right.

Guest: And, you know, shortly thereafter, we did, and I was surprised. So then it was all right, how many do we have to sell to get to $2 million? And then, you know, it just. We had explosive growth during COVID So, you know, when. When people were locked at home staring at their four walls and deciding, hey, maybe I should put up something decorative and something nice to look at, they found us, they started buying. And then it turns out, you know, if you provide a quality product and do what you say you're going to do and charge a reasonable price for it, they come back and buy more.

[33:03] Host: Well, it is, though, one of those. And this is the tricky part about products and, you know, selling products, it's really hard to know what the tam with the total addressable market is for. For a niche product like a wreath. I mean, to your point, it's like you're doing the napkin math on how many reeves do I have to sell to get to $1 million now? $2 million? How many people really buy reeds? I mean, what are. I mean, let's just go to the website really quickly. How much does one of these sell for? What is it? What's maybe the average order value?

Guest: Chat average order value is $194.09.

Host: That's a great average order value. I mean, these are. These are clearly premium. And I'm looking at the website. It's gorgeous. These are premium wreaths. These are not your grocery store wreaths, Correct? Yes.

Guest: Yeah, we. This is not a product that you can go buy at Hobby Lobby.

Host: Right. But still, you're like, how many people in the world really are going to buy a $200.

Guest: Yes. At the time, what was in my mind was, how do we sell product to Victoria's Secret? How do we sell product to their other brands? How do I sell product to other national retailers? And so I thought since Josh was, you know, doing contract work for the store design team, we would have an inn and we would be able to sell them product. Ultimately, I was right. It took longer than I thought, and it didn't last as long as I thought. But we did. We landed two very large projects for them that provided more revenue than the company had ever made in a year. And we used that revenue to. We dumped it back into the business. And that's how I afforded to hire the firm to redo the Website and we dumped a bunch of money into Google and we were off to the races.

Host: Great. Well, we're going to get to the races right now. But just so I understand, when you say you wanted to sell into Victoria's Secret, you mean just for, for their store decor.

Guest: For store design. For decor, yes.

Host: And so, so There's a big B2B component here where your end customer are, are, are retailers and businesses.

Guest: I think there's that, that is an untapped market for us.

Host: Okay. Even though it was one of the First Markets today, 90 you went after sounds like.

Guest: Yes, even though it was with the first market that I went after,

Host: it

Guest: is, it has not been a market that I continued going after. You know, we found the low hanging fruit was selling to, you know, the existing customer base and finding more of those customers that are buying for use in their own home.

Host: Okay, so now let's, let's get, let's get in and hear all the levers that you pulled. You buy the business and you've already said some of the things you did. But, but kind of take us through systematically all these changes that you've made. That take, that took it from 150,000 five years ago to 4 million today. I'm taking notes.

Guest: You're taking notes. So like I said, the, the redesign of the website was critical. You know, we, we upgraded the, the product photography, we upgraded the designs of the product. We started designing a lot more product. You know, we probably tripled or quadrupled the, the sku count of, of the products. You know, we, we say there are six seasons and not four. It's the four seasons you know of. And then you add Christmas and every day to that. And then we went, we went deep onto designs for holidays. So it's not just Christmas. Did you know Halloween is the second most decorated for holiday? You know, so we went, we went big into Halloween. We went big into Thanksgiving and fall, we went big into Fourth of July. So if there's a holiday, we have a design for it. The other thing was after we landed that first big project for Victoria's Secret, we, we sold them a, a package of floral arrangements that are called Water Illusions. And those are faux floral arrangements that are set in a clear resin that looks like water. So we sold them that product and we didn't know how to make it, so we had to go figure it out. And so we spent a little bit of time, trial and error with different mixed resin mixtures and calling around and asking a bunch of questions and relying on our vendors to figure out, you know, who to buy this from and what mixture, what to buy and how to mix it. And then we had to figure out the hard way as to. This stuff has a very specific curing process. It has to cure for 72 hours at a set temperature. And if it does not, if the temperature fluctuates, the product does not cure properly. And so we had, we had a few examples where vases exploded because the product didn't cure properly or it would crack or bubble or ripple. And so there was a learning curve there. But once we figured it out, we duplicated it and we added it to our product line and it's a very high selling product.

[37:54] Host: I'm getting the impression here, Chad, and sort of help educate us please, on an E commerce business, consumer E commerce business, that when you have a brand and you have enough historic customers, you have a big list and I guess you have some inbound traffic. You can. And you have an infinite shelf space because it's E commerce. You can kind of start. You triple the skus. You just said so. So you can just start kind of throwing more stuff. I don't mean to minimize it because you're obviously clearly doing serious product development and this is really high quality products. But like you can start throwing stuff out there and know that you have

Guest: an example to share with you on that.

Host: Yeah. And know that you're going to. If it's a good product, know that you're immediately going to. It's going to start generating profit.

Guest: Yes. Do you still have my website up?

Host: Yeah, I do.

Guest: Okay, go to the section, there should be a section called Eric and Eloise. And on the navigation page or under maybe the home decor section or if you're on the home page, just scroll down and you'll see the unique collection.

[39:01] Host: Got it. Shop Eric.

Guest: So those are. Yeah. So those are a bronze metal wall mount of an animal bust. And then they have, you know, it's a, it's a, a deer wearing glasses and smoking a pipe or a rabbit wearing a monocle. That's the Eric and Eloise collection. So very first shopping trip we went on to buy inventory. I'm walking through a showroom and I see these things and I fall in love with them. And I'm like, I just want to buy some for my own house. It never even occurred to me to sell them at Darby. I just liked the product and wanted it on my own wall. So we brought it, we bought a few and you know, one of the first things that we did Was we started doing these little pop up shops at local markets and the very first we would want. Did. The very first one we did was called the Junk Bash and it was at the fairgrounds. We, we, hi, we paid some friends to help us, you know, set up our booth and we, we had the most beautiful booth of anyone else there. And I brought two of those wall mounts just to hang on the back of the booth to, you know, make it look pretty. And everyone that came past asked if they could buy one of the wall mounts. And I spent most of the day saying, no, those aren't for sale, those aren't for sale. And then it occurred to me, everything's for sale. Yes, you can buy one of the wall mounts. And, and at that point we were like, well, let's put them up on the website. So we did and they started selling. So then we just started buying more and more. And then, you know, there's, you know, at this point, eight to 10 different products in that line and it's turned into one of our top sellers. And it was just something that I happened to see in a showroom that I liked and decided I wanted on my own wall.

Host: Well, that just is just such beautiful scale that you can fall bass backwards into a new product category and just go to the, and you guys didn't even design the products. It was a, it was a third party designer manufacturer. You realize there's demand and you literally just have to put it on your website and you have an entirely new source of very profitable revenue because you've already got the traffic, you've already got the brand. I mean, for all of my listeners who buy home services and, and you know, very, you know, not scalable services businesses, you know, delivered by hand, they're just going to be so envious of how easy you can switch on new revenue, how easily you can switch on new revenue.

Guest: Well, it is making it seem too easy.

Host: I mean you are, you are.

Guest: Okay, so, okay, sure. Comparing it to a home services business, sure. I, I can sell many different products versus they, you know, their product is time and expertise.

Host: Right.

Guest: You know, but you know, the, the ease with which I can add a product is also a risk because if we add the wrong product and it doesn't sell, then we're stuck having paid for a bunch of dead inventory that we can't, we cannot sell at a profit and have to sell at a loss or, or worse have to donate or trash. So you know, I've made mistakes like that. I've bought products that haven't sold.

[42:12] Host: But can't you, you know, do small releases where, like taking, taking this line for example, you have a, you know, you buy $10,000 worth of the product and you promote it to your existing audience and then if they buy, you buy $100,000 of inventory. I mean, can't you, can't you mitigate your risk and how you release a new release, new offering to your, to your audience.

Guest: Yes, and that's exactly how you do it. But then competition enters. You know, the E commerce is fraught with competition. And especially if, if we buy a product like this from a vendor that all the other E commerce sellers have access to, you know, the good ones pay attention and if they see that we're selling a product at a high margin and they know where they can get it, guess what, they're going to go buy it and they're going to list it on their website and they're going to pay Google to promote it and they're going to try to charge a lower price and steal customers. Everyone does it. I mean I even had, I even found wreaths in a retail store with Martha Stewart's name on them that looked eerily similar to my own designs.

Host: Well, this is why I'm in the market for, I'm in the market for coffee table for our living room. And this is why, you know, there are a few designs I see at every single retailer that are just the exact same.

Guest: Exact same thing.

Host: Exact same thing. And clearly somebody was, somebody was first with this new beautiful design and it was successful. Everyone else copies it. Sure, sure. And, and by the way, don't, don't let me make you think that I am saying E commerce is easy. I have been nothing but terrified by E commerce businesses since I learned, I started learning more about them. So don't get me wrong. And we're going to turn to that in just a second. Second, just the nature of E commerce. Okay. You also turned on Google. I don't know. Have you, is there anything more to say about that other than you started paying Google for, for clicks, any, anything. Because that was a big, that was also a big, that was a, that

Guest: was a game changer for us.

Host: A game changer.

Guest: Very huge lever, but also expensive. You know, I had to get very comfortable with the idea that we were going to spend a lot of money to generate traffic to our site and would they buy, you know, so you essentially you pay Google to send qualified leads your way and then it's up to you to entice them to buy and you and to deliver that, that product or service and in exchange for a happy customer, hopefully a return customer and a good review. So I had to build the model that was not in my original underwriting. I had to build a new model to say, okay, how do we calculate customer acquisition cost? How do we calculate return on ad spend? How do we figure out what the right percentage to spend is? You know, and then that there's a little bit of trial by error, trial and error to that. But once we figured out, you know, there is enough margin to these, to this product line, our customer acquisition cost is rather low that you know, we can dump money into Google and expect to expect it to return handsomely for us. And that worked.

[45:17] Host: And were you the one doing that or were you, were you working with like a digital agency and looking over their shoulder as customer acquisition costs started to come in and stuff or were you literally in Google Ads system yourself? I'm curious, how much did you have to learn?

Guest: No, I had to learn all of it. I hired a firm to do it and I looked over their shoulder and tried to, you know, learn by doing.

Host: Well, the other thing about of course, I guess all business but thinking specifically about competing on Google and cost per click is when you have a high price product, when you're selling 200, $300, $400 reads gives you a little bit more, more room to play with this.

Guest: Gives you a little bit more room to play with. You're absolutely right.

Host: Yeah. Excellent. So returning to your chart here of your gross revenue, so you buy it at 150,000 and within two years. So at the end of calendar year 2019, you are at around 600. You're over 600, right?

Guest: Yep.

Host: So you've quadrupled the sales of the business in two years.

Guest: Yes.

Host: Great. And at that point I assume a lot of the levers that we've been discussing have been pulled and yet when you look at this graph, the growth gets only more interesting in the next two years.

Guest: 2020 Covid. That's when we really took off. And so, and then 21 we took off again. So there's two things we haven't discussed yet. That, that, that happened to lead to this and it wasn't simply the, the website redesign. So the website redesign happened. We went live. Black Friday of 2020 I think is when the new website launched. Oh. Because we, you know, we spent 19 landing those B2B projects that I referenced earlier in the discussion. And then we took the money from those projects and invested it in, into the website. But we also did during that time was we got onto Wayfair and we started an Etsy shop. And early on in this, one of my first hires was a friend who was a buyer at the same large e commerce company that my partner had worked at. And one of the first things that she did was, was get us in touch with Wayfair. And when they sent their initial spreadsheets and requests for information, it was way over my head. But I was very fortunate in that we handed it to Katie, and within a day or two, she had it all filled out, knew exactly what they were looking for, and we just breezed right through their approval process. We got a lot of products listed very quickly, and that turned into a large revenue driver. And it also, not knowing this at the time, but it also greatly helped with our Google an SEO, because having our products and our brand name up on Wayfair really created, you know, a lot of brand recognition. I guess the algorithm recognized it and rewarded us for it.

[48:39] Host: So all of these products are. Are branded as Darby products. Darby Creek Trading product. Great.

Guest: Yes.

Host: And that is obviously really important. So you are. You are not a platform selling these different wreaths with different manufacturers. They are all branded your product. So you are the manufacturer, for all intents and purposes, from the consumer's perspective.

Guest: Oh, and they're all our designs, right? Yes. So with our vendors. Our vendors manufacture silk florals. We import those florals, we cut them up, and we turn them into our products.

Host: Yeah.

Guest: So we make it. We assemble everything here in Columbus.

Host: And getting on Wayfair, it being the lever that it was. What about Etsy? What about Amazon? What about who am I, who am I forgetting? There's probably another platform or two where this stuff. Those are probably the big three. Etsy, Amazon and Wayfair.

Guest: Those are the big three. When we brought. When we bought the company, the seller was already on Amazon and he'd been on Amazon for a while so long that they recognized Darby Creek Trading as a. As a name brand. Even though he didn't have a registered trademark, they treated him as though he did. And because of that, he was able to get the buy box on all of his products. And he was basically able to charge, you know, basically he set the price. So we inherited that. Unfortunately, one of the mistakes that I made during COVID when we got completely overwhelmed with sales, you know, I allowed our delivery dates to slide past Amazon's requirements, and I was a little lax. And when they started calling me on the carpet for it, I was a Little lax in answering quickly and getting our delivery times appropriate.

Host: And so you're no longer on Amazon.

Guest: Excuse me, we are no longer on Amazon. I chose to leave Amazon. Their fees are high. They sit on your money for a month. And I felt like we had the traffic and the customer base that we didn't need them, wouldn't make that same decision. You know, they are the largest retail e commerce retailer in the world. I am certainly missing a lot of, of eyes on my product by choosing not to be there. I might go back on at some point, who knows. And then I do consider that to be a mistake that I made and, and, and leaving Amazon.

[51:06] Host: And the mistake was in leaving Amazon or in being slow to respond or one kind of begat the other.

Guest: One begat the other.

Host: Okay. All right. The.

Guest: So what I should mention is, you know, at the time all of our orders were made to order. So at the time we weren't designing a product, making a large number of them and storing them in the warehouse. We didn't have the space to, to do that. So we were making everything to order. So we would make a sample photograph and get it up on the site and then if it sold, we'd make one to fulfill the order. And as a small business doing, you know, a couple of hundred grand, less than 500 grand in revenue, you can do that, but as you scale, you can't do that. You have to have product and it has to get out the door and has to get out on time. And not delivering product on time does not allow one to continue to be on Amazon.

Host: Yeah, yeah.

Guest: At least at that time it didn't. Now they have a special program for made to order and custom products, but we weren't a part of that at that time.

Host: Well, the expectations of Amazon are well known to be onerous on the vendor or on the, on the, Are you called the vendor? What are you guys called? The people selling on Amazon?

Guest: I think so the vendor.

Host: And, and so they're, they're. I don't think you're alone in saying that in deciding that the requirements, you know, the squeeze ain't worth the juice. Ain't worth the squeeze. Did you say worth the squeeze? Yeah, but it sounds like you're not super clear on that. Like you, you, you're kind of a little bit back and forth and you may decide, decide in fact in the future that the juice is worth the squeeze, but it's, it's not clear cut. I mean you really got to, you really got, it's a big Strategic decision to be on Amazon and you really have to accept a lot of pain if you're going to be on that platform.

Guest: Yeah, that's, you're right. Well, you do. Pain is the right description. You know that they charge a lot. You know their commission structure is pretty high and then they charge you to, to advertise your product. So you know they're getting, they know how to, to extract every last dollar from you at the time they, as they possibly can.

Host: Let's hear more about E commerce. I mean we've already been kind of been talking around it a lot. Is there anything more to say? The, the, the inventory management is notoriously difficult and, and, and it could even break a business. I mean bring a business to its knees. Maybe say something about that and anything else that E commerce, it's special to E commerce because I made it sound

Guest: so easy earlier and it is not. There's, there's so two points that I want to make on, on E commerce. Inventory management is critical and for the longest time we ran a paper based system where you know, Josh and the designers just knew what we had in the warehouse and where it was. And I had no idea how many units of an individual piece we had. And we, you know, all of our designs we had, we referred to them as recipes on pieces of paper on a three like on a, on a three ring binder. We had sets of three ring binders for the designs for every sku and you know, when we were fulfilling orders, they'd pull the recipe, take the recipe to the warehouse, grab the flowers that they need, bring it back, cut them up, make the product that's not scalable. And I wish we would have implemented a cloud inventory solution way before we did, but we didn't. So you know, you live and learn. And the second thing, or maybe the first thing was that was very helpful. As I became a member of the E Commerce Fuel forum, I found them listening to podcasts and decided to sign up. And it was another game changer. You know, it introduced me to a community of other e commerce business owners that shared in the same pain points as me. They were able to recommend solutions for various areas of the business, lots of apps or pieces of software or service providers. It's been immensely helpful. And then they have annual conferences and regional meetups. It's just, you know, it, it was truly one of the, the defining decisions that I made that helped me scale this company. So kudos to them. And you know, I imagine there are similar groups for other industries, you know, Find your group really, because it ultimately it's not rocket science. Other people have done this. You know, success leaves clues. Follow the clues.

[55:53] Host: And now Chad, you're so on that cloud inventory piece.

Guest: If, if I might. Yeah, so we, that began, that ultimately was a two year project that began in 21. We went live late 22 with that, you know and in so doing we quickly outgrew our original space. So when we bought the company in 18, we rented a 1500 square foot warehouse out by the airport. We outgrew that within six months or so when that we bought, let's see here in probably the summer of 19, about a 5,000 square foot warehouse. We outgrew that in a year. So in the summer of 20, I found our warehouse was completely full. We had four shipping containers sort of illegally parked in the parking lot that were also full and we had more inventory coming. So we then found the warehouse that we're in today which is 35,000 square feet and thankfully it is not full in part because of our cloud inventory solution. So I now know what we have and where it's at and how many products that we can make with it and when we need to reorder. You know, that was also very challenging is trying to figure out when you run a paper based system what you need to reorder and when. So for any person thinking about getting into E commerce, inventory management has got to be on your due diligence checklist and it's got to be something that you pay attention to.

[57:32] Host: It's obviously gone super well for you chat. Not without, not without mistakes, not without some pain. But I, I think it's fair to say buying a business, doing 150,000 and taking it to 4 million a stat that I, I can't resist keep. I can't stop repeating.

Guest: We're not done growing.

Host: Exactly. And you know, this is only your five. I'd call that a smashing success. But do you, would you recommend to the audience that they look at E commerce and maybe also now straddle your SBA lender identity which still exists with your E commerce entrepreneur identity. What do you think about E Commerce as an opportunity for searchers?

Guest: I think it's an amazing opportunity. The, the lending space for E commerce isn't great. There's a lot of. I probably most banks don't like it and the reason why they don't like it is they don't understand it. So find one that does because the, the opportunity out there is absolutely immense. Retail's changing, right? Retail's not dying, it's changing. Think about the Yellow Pages, right? The yellow Pages didn't disappear. They just turned, they went online. They went, they turned into Google. That's what's happening in retail. You know those mom and pop shops on every street corner in every town in America. You know, are they, are they closing? Yeah, but does that mean they're. The, the, the need for the product is going away? No, it's going online. And so for me, I think, I think E commerce is full of opportunity and I'd like to buy more, I'd like to help other people buy more. But I think it requires some thought and some effort. You know, I would be looking at E commerce businesses that had a proprietary product, E commerce businesses that have a moat. You know, what's your competition look like? How easy is it to get into this business? What are the margins? You know, when you find a great product with a high margin that sells, you're inviting competition and it's only a matter of time before competition comes and prices go down. And so you've got to figure out what those barriers to entry are. And you do that by selling a product that is not easily replicatable. You know, finding a product that is in demand, but maybe not widely known.

[1:00:04] Host: And how to. So in your, let's take this to Darby. Now what is your moat? Is, is it hard to make these reads? I mean there's, there's real skill to it. So somebody can't just set up shop across the street from you and start making wreaths in the same way.

Guest: Oh, they could. Yeah, they could. So my mode is, is in quality and it's in design. So you know, we make very high end designs. We are been recognized many times over by, you know, all the design magazines. We've been in El Decor, we've been in the New York Times, we've been in the Wall Street Journal, we've been in Home and Garden, Martha Stewart, you name it, we've, we've been in it and on all the lists. So ultimately our moat is people come to us for the design, but people buy stems or premades. So in, in this business, when I say pre made, what I mean is one of the vendors that manufactures faux florals, they make wreaths in their factories in China. And those wreaths tend to be a lot lower price than what I can make here in the United States. Fortunately for me, those designs aren't necessarily designs that people want to buy. So what I, what we have found is the Chinese factories can make absolutely anything we Want. The problem is they don't know what we want. And it takes one of us going there and describing showing them what we want to get the high level of design. Not a lot of people do that. Great. Very few people do that.

Host: The other thing you said is finding a product that has a decent sized market, strong demand, but that maybe is a little bit under the radar. Reeves are such a good example because going back to trying to figure out how big this market actually is and it was bigger than you suspected. Certainly bigger than I would have suspected.

Guest: Yeah.

Host: Yeah. Now that you kind of have a sense of the size of the market, or maybe you don't, maybe you still wonder how many. How do I get down to myself, $10 million a year of reads. But you probably have a somewhat better sense of the size of the market. Is there anything that you can tell searchers who might be looking at an e commerce business about how to, how to gauge the ceiling on their market and how many more more how much growth they might be able to, to extract from a business, from an E commerce business?

Guest: I wish I had a, a simple answer to that, but I don't. I haven't quite figured it out. I mean there's, there's things you can do to figure out how much your competitors are selling in the E commerce space. There's places you can look to see what they're importing and who they're getting it from. But in terms of figuring out exactly what their gross revenue is, that's difficult, you know, and figuring out exactly how much of a, a market exists is difficult. What I did in my case and, and sort of how we justified it was, you know, look at the big boys, you know what Williams Sonoma's selling this product, you know, that they're not selling, you know, they're not selling my designs. I sure would love to sell to them, but I haven't cracked that one yet. But you know, if, if you follow the big boys. Right. What are they selling? Where are they going?

[1:03:38] Host: Yeah.

Guest: And if, and if they're selling this product, obviously there's a market for it.

Host: Yeah. And another thing that strikes me about you, about your business and, and this is going to demonstrate my lack of retail expertise. But you know, you're, you're building a brand here that's associated with the kind of the, the hero skew, if you will, the reeds. But you've now, you're now diversifying. You've got the bronze, the Eloise collection that you described earlier, which are not wreaths. Although they all are wall hanging products, you could imagine that Darby Creek Trading just becomes a home decor brand. And you expand your, your product categories into everything related to maybe not everything, but all, all manner of adornments and in light furnishings in the home and it. And so instead of being a product that Crate and Barrel sells, you become a Crate and Barrel or a small Crate and Barrel. How do you think about that?

Guest: I love that. I agree with you. That's the direction of going. I want to create, turn it into a lifestyle brand. I'd like to have a collection of stores and I'd like to sell as many products as I possibly can. You know, we've tried, you know, we've, we've tried selling pillows, we've tried selling, you know, throws and rugs and things. And what we found is there's a lot of competition. You have to have the right stuff. And you know, it's very hard to compete with the likes of Crate and Barrel or Williams Sonoma and any of their brands. You know that it's difficult to find what's new and what's next. And when you do find it, it's difficult to, you know, keep it for yourself. That goes back to my earlier point where I like a product that is proprietary. You know, not that floral designs are something that you can patent, but it's something that are not easily duplicatable.

Host: Yeah, yeah.

Guest: And like your, your example with the coffee table, right. You find the design that you like, everybody's going to knock it off, everybody's going to sell it. So, so the trick is trying to find something that, you know, can fly above that.

Host: Yeah, but you did just, you did just say something about, you know, that a big part of the game of your business is figuring out what's next. I mean, there's a trend aspect.

[1:06:04] Guest: Absolutely.

Host: And you know, as searchers, as people who, who are kind of oriented to buying something that is eternally profitable and doesn't change. You know, often we look at this through the, through the lens of technology. I don't want it to be disruptible by AI. I don't want it to be disruptible by Amazon. Well, another, another thing that might disrupt your business is if you're in kind of a fashion or trend business, you just get the trend wrong for the next cycle and then you're up a creek. So, you know, that, that scares me.

Guest: That's part of the business I'm in.

Host: Okay, so I, so is there anything to say that to, to kind of, that you do to mitigate that risk or. No, that's just the nature of the beast. You got to be on trend.

Guest: You have to be on trend. You have to know where, where designs are going. At least in our business, I think a product has about a six week life because our products are very seasonal. And essentially, you know, the trick for us is we import all the products from China. You know, we have to place an order for that inventory a year in advance and then it takes a while to get here. And then we have, you know, then we cut it up, design it, make it, photograph it, get it listed. That all takes time. So we have to know what next year's trend is today. And not only what the trend is, we have to know what color it is. I'll give you an example. If I move the camera a little bit, you see this, you see this black vase beside me? That's a trend for. You can quote me on that. That's, that's a trend. Black terracotta vase is the newest trend for 20.

Host: And we're talking for 2025 or late 2024.

Guest: We are talking for next year.

Host: Wow. And you are also though, making it sound like if you're in the industry, if you're in the business, figuring out what next year's trends are maybe isn't so hard because everybody in the know is already talking about it. So it's, it's not lightning in a bottle that you have to catch. You can basically, you know, as long as you're in the mix, you know, you know the direction of things, it's probably also you're selling because everybody kind of talks to each other and kind of oligo. Oligarch oligopolistically decides, guys, this is what we're doing sort of thing.

Guest: Yeah, well, simplistically, you know, Pantone drops their color of the year every year. So, you know, things like that, things like that. And, and if you pay attention, you know, we, we, you know, we look, we keep our eyes open, we go and look for. We're constantly on the lookout for what's new. And if you pay attention, you start to see the same things popping up. And that's the clue, right? Once you see that same color pattern or that same shape or that same, you know, vase or, or flower or whatever it may be that's in your market. Once you start seeing that a couple of times, that, that's there. That's the key. Like, oh, okay, I've seen that somewhere before. Or then you see it again. All right, this, that's, that's what's coming.

[1:09:08] Host: Very interesting.

Guest: You know, we, we can make, you know, it's, it's not easy and, and we've certainly made bad bets. I'll tell you a bad bet that I made, Chris, this past Christmas, I went deep into. So our hero product for Christmas for the past few years has been Norfolk Pine garland. And Norfolk pine is a very short needle. The product grows in a tropical environment and it's very soft. So it's that pine tree that they use, at least in the Midwest, they sell it in grocery stores at Christmas time. And it's the pine tree that you touch and it's not prickly, it's very soft. And so we've, you know, a hero product for ours, you know, very, very top selling product is, is that that pine in a garland and a wreath in the traditional green color. Last year, the vendor that sells it came out with the product in white and they did it in Norfolk pine and they did it in a couple of other materials. I thought it was beautiful. I thought it was. What's next. I bought a container full of. Didn't sell. It was our hero image on the website all of the Christmas season last year. It was gorgeous. It was absolutely gorgeous. Everybody commented on how much they loved it. We got lots of traction on it from the influencers and social media. Didn't sell. Wow.

Host: Well, this is one of those where, you know, you, you know the business well enough, you're into the product and the kind of the direction of the industry well enough that you are now bringing your own tastes to bear on things. And that's probably a dangerous temptation because you really still want to be numbers disciplined. I don't know how you could have been numbers disciplined about that. It sounds like there was a, sounds like there was a lot of evidence that this was going to sell. But, but, but it also sounds like your judgment was a little clouded because you personally thought it was so gorgeous.

Guest: Well, it wasn't just me. My designers, like, loved it too. You know, I mean, they. Part of, of what is, is joy. What brings me joy and grief at the same time is managing creatives. Because what I found the hard way was was they all think they have an unlimited budget and left to their own devices, they will spend an unlimited amount of money. You know, I can put my creatives into a showroom and if you give them enough time, they'll figure out a use for every single product in the showroom and want to buy all of it. And so, and that's what got me into trouble and sort of led to my partner buyout situation. So what I found is I, it's my job to manage the budget. It's the creative's job to figure out what we're buying and, and what's next and what colors and sizes and all of that. It's my job to keep us on budget. And I got into trouble when I didn't do my job. So what I found is, you know, let the creators create, let them pick out everything they want and then we gotta work on the budget, which means we have to cut products. And so we, we, we boil it down to okay, for example, you guys bought 10 different bird ornaments. Okay, there's room in the budget for three. Seven of them have to go, which seven are you killing? And what I found is they will fight to keep the ones that they really love. And for me, those are the ones that will sell. And I have found it over and over and over. When a designer fights to keep a product, that's the one we want. When they look at a product and like, yeah, okay, that's the one we cut.

[1:12:56] Host: Great system.

Guest: Took me a while to, took me a while to learn that one.

Host: And when you make a bad call about the, for the hero product for a season, big season, Christmas season, how, how devastating or not to the business is, is a miss a miss like that.

Guest: Well, as evidenced by, you know, what happened with that led to my partner buyout. I mean it could be a deal killing event, it could be a bankruptcy causing event. You know, we.

Host: You want to tell us too much

Guest: inventory, I'll keep it brief. So I'm not a creative, I'm an accountant by education. And early on in this business, you know, for me personally spending multiple days, eight to five walking through showrooms of fake flowers, it gave me a headache. And I found myself sneaking off to conference rooms to just take phone calls from borrowers and work on their deals. Instead of working on buying inventory for my company, I let the creatives do their thing. And in the early years when we were small and the inventory budget wasn't that big, me not being intimately involved in those decisions wasn't that big of a deal. But as the company scaled, I didn't change. And you know, I stopped going on those buying trips and it led to overbuying, you know, and having being a banker for so long, I've seen this happen. I mean, heck, I can remember back to credit training, you know, the professor giving case examples. And one of the case examples was, you know, wealthy dad runs Family business wants to groom his children to teach them how to run a business. But they're not ready to come into the family business. So he bought, buys them a beer distributorship, thinking that's an easy business for them to run. And you know, fast talking salesman convinces the kids to buy a rail car full of beer instead of what the, the amount that they usually buy. And now since beer is a, a product that has a shelf life, you know, they bought more inventory than they could sell. The inventory went bad, they had to dump it, and ultimately that company went bankrupt because they bought too much inventory. You know, and I've seen that happen in real life over and over. You know, the beer thing was a case study, but I've seen it happen in real life. I know better, and yet I still let it happen in my own business. You know, business is hard. You can't take your eye off the ball. You got to pay attention and I didn't. And so that led to, you know, a situation where my back was against the wall and, you know, I had to do, I had to dump money in to save the company. And you know, early on, when we put this together originally on my original loan application, I was 81%, Josh was 19%. And the bank came back saying, well, Josh is integral to this business. He's going to be the one running the day to day. We want him on as a guarantor. And I said, great, we'll change him to 20. I'll go, you know, I'll go 80. And they said, no, go 50 50. And I didn't give it enough thought and I said, okay, fine. And the problem that that led to was there was no tiebreaker. It whenever we came to a disagreement, we were 50, 50. And it was basically whoever, at least in our relationship, it was whoever yelled the loudest one. And that doesn't work. You know, there has to be a decision maker. At least what I have found for me, there's got to be a decision maker. And when we reached that impasse and I had to put more money in to save the company, my ask was, I'm going to need some of your shares. And so I ended up buying all of his shares. But, you know, it was a rough time. I don't recommend it. Somehow we survived. We're still friends and he still works here. He's still my chief creative. And we have a much better relationship now than we ever did before.

[1:16:49] Host: And did that impasse cause the. Cause the relationship to end? The romantic relationship?

Guest: Yeah, I did. I think I told you that story.

Host: Yeah, well, amazing though that you, you salvaged a relation, a relationship at all, and that he continues to work for you. So you did something right. Somehow we.

Guest: Somehow, yeah, somehow. Okay, Very fortunate.

Host: So, Chad, let's, let's net out what this business has done for you financially, if we could. You had a very small SBA loan. You, I assume, paid that down very quickly because of the growth of the business, enabled that, and it was, and it was such a small loan. So you owned it outright pretty quickly or with your, with your then partner. You then. But you referred to having to put more money into the business. So how much money have you put into the business? And today we already know it's at $4 million. What does SDE look like today? Sure. Trying to, I'm trying to connect these two dots to have a sense of what this is, frankly, done for your personal balance sheet, your own, your own net worth.

Guest: Yeah, yeah. Well, I put in the original down payment. When I did the partner buyout, I put in another 10%. I also put in another on top of that. So the partner buyout deal, I bought all of Josh's shares. There was a 10 down payment, and we termed out my credit line at that time. And in addition to that, I put another 100,000 in. So today we're sitting on roughly 300,000 in SBA debt. And then SDE last year was about 650.

[1:18:35] Host: And SDE is always a tricky concept in such an inventory intensive business like yours, like many E commerce businesses, is that SDE not really take home money because some giant chunk of that actually goes to inventory or. No, SDE is the, is the money that Chad can take home.

Guest: So I run a cash based accounting system. That SDE number is what's available. That's after working capital needs and inventory and all that.

Host: Good for you. And so now we're rewinding a little bit here, but when did you, when did you go all in on this business? Because you're, you're now running a quite a large business, but you bought this as just kind of a side hustle experiment thing. When was it that you were like, okay, let me, let me actually devote 110% of my attention to this.

Guest: I'm still not there. Well, I'm full time at the bank. You know, I spend most of my time doing SBA loans rather than helping other people. Darby is set up that it runs independently of me. You know, I do the bookkeeping, I do the payroll, I make major decisions. But the data I'm not involved in the day to day. I don't make wreaths, I don't make product, I don't ship product. Now at Christmas time I'm printing labels and, and you know, helping pack product when we're crazy busy. But for the most part, you know, I run the SBA business from my office here at Darby. And then if, you know, there are things that, that employees need, they come in and ask, you know, if there's a customer service issue that needs elevated. You know, what tends to happen is, you know, we sell, you know, those floral arrangements are, are packed in glass vases. Occasionally, you know, you have a, a delivery that, that doesn't go according to plan and, and maybe a vase, you know, boxes opened up and a vase is broken. And so typically we ask for photographs of that to ensure that the vase was broken and we can figure out how it was packaged improperly. And then we issue a replacement or a refund depending on what the customer asked for. Occasionally customer service issues like that have to be elevated and they ask me what to do. So they come in and ask, hey, do you want, you want to give a full refund? Do you want to give an additional discount? Those sorts of things.

Host: So it doesn't sound like you have a general manager. You, you.

[1:21:02] Guest: There are four managers. I have four department heads at Darby.

Host: Department heads, but there's nobody over. But they all report into you even though you're not full time.

Guest: They all report to me. So I, you know, Wednesdays are my days that I'm full time in the business, that I'm here all day and we, we meet and discuss what's going on and. Yeah, so one day a week, I guess is the, the real answer to that question. I'm here, but you know, I'm, we're doing other things while I'm here the other days, but Wednesday is my full day for Darby.

Host: And so people are going to want to know why you continue to make SBA loans. You've given a few hints. You're, you're an owner in that bank. You don't like walk in the showroom looking at, looking at flowers. So maybe the day to day isn't something you love and you like. You're an accountant, you're a numbers guy, so maybe you like it. But still presiding over a rocket ship. $4,000,000 E commerce business doesn't demand strategically that you give it 110%

Guest: in time. I will get there. You know, I, part of the bank acquisition was a ten year agreement. I'VE got two and a half years left to that. Eventually I will retire from that, go for full speed into not running Darby, but, you know, acquiring other businesses that we can bolt on to Darby and

Host: just to round us out here, Chad, So being on the other side of a, of a transaction now and for five years into this and still working with searchers, whether or not they self identify as searchers and helping people become business owners via your sba, your very active SBA lending career, do you have any insights from your own experience as a business buyer, business owner today, that, that maybe other SBA lenders don't because they're always operating from one side of the table. Now, you've seen both sides.

Guest: Lots.

Host: Oh, okay.

Guest: I've learned lots of things. I don't know if we, we don't know if we have time for all that. Let me give you the, the highlights reel if I can. Yeah. Here. Okay. So the best one that I got, right. When you do an SBA loan to buy a building for your business to occupy, your SBA lender is going to ask you, hey, do you want to form an EPC to hold title to this building? EPC stands at SBA jargon. That stands for eligible passive concern. It's nothing more than a real estate holding company. So the question becomes, do you want to title this building in your business name or in that of a real estate holding company? Having spent so many years asking that question, my personal answer to that question when I bought my first warehouse was, of course we're going to put it into an epc. Why wouldn't we? I learned the hard way why we wouldn't do that. And I am currently buying the warehouse I'm talking to you from today, and it is being titled in Darby's name, not that of an epc. Here's why. Tax rules dictate that any tax losses from your Schedule E are not deductible against your W2 income if your W2 income is above a certain threshold, which is roughly 100 and $125,000. So those losses, so you know, they'll tell you the reason you want to put it in a holding company is so you can charge yourself rent and then the holding company can deduct the depreciation. So essentially, you get two tax deductions for the price of one. Yeah, that math works if you're allowed to deduct those losses against your W2, which you are not if you make too much money. So I did not realize those tax losses until I Sold the building. And for that reason, when I buy this building, it's going in Darby's name. That is the best example I can give you is something I learned as a business owner that made me a better lender. Something that I didn't know when I was simply a lender.

[1:24:57] Host: Great.

Guest: And there are more. If we have time.

Host: We do.

Guest: Okay. Due diligence. You need more, you need to do more outsource. If you can hire, hire help. Don't cheap out. Right. Do you need a quality of earnings report? Yeah. You do. Is the bank going to ask you for one? No. Should you buy one anyway? Yes. Inventory I alluded to earlier. Yeah. Go count the stuff. Lay eyes on it. Don't cheap out on your attorney. Hire someone that's done this before. Okay. You do not want the partner sitting at the top of the skyscraper downtown. You want the guy with boots on the ground that's done this before, that does SBA deals. And the way you know is when you bring up seller note, what their response is. The lawyer that says, oh, seller notes, we're not dealing with that. Or oh, seller notes, they're not very common in sba. Yeah, they are and they should be. And if you don't have one, you need one. Why? Because you need something to offset if the seller wasn't completely factually accurate with their description. And if you didn't catch it during due diligence, you need something to offset. Ideally, you have a seller note, but in addition to that, you also have an escrow account that you had some of the sale proceeds dropped into so that you can have a post closing adjustment. Because guess what? There's going to be things that need adjusted, like receivables, payables, credit card receipts. Did you know and I didn't. Another thing I didn't know until I bought a business. The credit card processors will not process your application until you've closed. Once you've closed and you swipe credit cards, you know where that money goes. The seller's account. If you don't have a great relationship with the seller, you're not going to see that money. I didn't. And I had a great relationship with the seller. You need an escrow account with some sale proceeds into it, so you ensure you get that money back. It's your money, but if you have no vehicle to get it, you're not going to get it. Sorry, might be going too fast here.

[1:27:00] Host: No, that's great.

Guest: Working capital. Whatever that number is you think you need, you need more up crease. Increase the working capital if you're not getting it on the balance sheet from the seller in terms of a, like a working capital adjustment to the purchase price, meaning cash they leave in the, on the books or in the balance sheet money that you get at closing if that's not part of your deal. And not every industry, it's not appropriate in every industry. It's appropriate in most, but it's also not commonly discussed. A lot of sellers, you know, just are old school and are going to say, whatever cash is in the bank, I'm taking with me. That's very common.

Host: Yeah.

Guest: So in that case, you need to build working capital into your deal. Whether it's permanent working capital, you get a lump sum at closing, or whether it's a credit line that you have access to in the future or some combination thereof, you need it. And whatever the number it is you think you need, you need more. Here's why unknown expenses will come up. Unknown expenses are things that, that searchers don't even know that they're going to encounter. Right. That attorney's bill is going to come in and even if you negotiated that flat rate thing, there's going to be something unknown that pops up that's going to cause a bill. There's going to be deposits to the landlord, all the utilities insurance that you know you need, business insurance, well, they expect to be paid and they expect to be paid in full up front. You know, all those things get, get lumped in. You got to build those into your budget. And then lastly, you want to scale this business. Well, growth costs money, right? Whether you're a service business or whether you sell products, whether your inventory is time or it's physical inventory, inventory growth costs money. If you got to buy more inventory to sell more product, that costs money. If you need to hire more people to perform more services, that costs money. If you need to market your business to get it in front of more eyes so that they can potentially buy your product, that costs money. Needs to go into your budget. You want to turn Google on, that costs money. You want to hire an SEO expert to get your page to the top of Google. That's not cheap either.

Host: Great Chad anymore. That was fantastic.

Guest: I think we've hit the highlight reel, but in about 10 minutes after we finish this call, a bunch more will come to mind. So I'll drop you an email.

Host: And what about industry? You've already said that you think that E Commerce remains just a giant opportunity for searchers. So you're very pro E Commerce. What Industries do you like?

Guest: Okay, well, the standard banker answer is any industry that allows a business owner to generate enough cash flow to do three things. Number one, generate enough cash flow that you can afford to pay back your loan. Number two, generate enough cash flow that not only can you pay back your loan, but you can also pay yourself a fair living wage. And number three, enough cash flow that leaves you room for upside potential so that you can scale that business and grow its value so that you could hopefully can sell it at a massive profit. Any business that can do those three things is a good business. Some are better than others. I love predictable recurring cash flow. So businesses with a subscription model or businesses that sell a product that's consumable and needs the requires you to come back and buy another one. Or businesses where, you know, lawn care, I love lawn care. I love pest control. I love, you know, any business that has recurring revenue needs. That's where I'm looking. You know, I passed on a business recently that I thought was a bolt on to Darby. Turns out it wasn't and I'm glad I passed on was another home decor product. But it's a type of product that people buy once and it's a high quality product. It lasts 15, 20 years. People only buy it once. They spend a lot of money on it when they buy it, but they only buy it once. That's not scalable. The final nail in that deal was last week when I was at the market in Atlanta. I was talking to the owner of a vendor that manufactured the product and I told her my experience and why I chose not to buy the product. And her response was, I understand. I'm actually closing this business.

[1:31:15] Host: Well, Chad, I would have thought that wreaths are not products that people buy over and over. Maybe, maybe you figured out a way to have people buy six for the six different seasons of the year. But. But after I got my six, am I going to be coming back to Darby for more?

Guest: Yeah, my top customers come back every month. They buy something new. Our best customers with regard to say the floral arrangements, they tell me. So I buy a floral arrangement from the table in my foyer so that when I come and walk through my front door, I see something beautiful when I walk into my house and I keep. And then I keep it there and the season changes and I need a new one. So then I buy another one and I move that other one to another room and every month they buy another one. I just keep buying. So, you know, the. Are there customers that will buy a Christmas wreath and hang it on their door for a few seasons and come back to us in four years? Yes. Are there customers that will buy a new wreath and swap it out every few weeks? Yes, there are. And it's my job to find more of them.

Host: The whales, the wreath whales.

Guest: Well, it's not just wreaths. It's arrangements and garlands and other home decor products. Whatever, you know, ultimately, whatever we find that we can sell.

Host: Chad, what didn't. What didn't we cover? We're wrapping up here. What. Anything in your. In your prep notes or otherwise that you wanted to make sure you shared with the audience that we didn't get to?

Guest: Yeah. Two things, if I may.

Host: Yeah.

Guest: So one of the things was I wanted to talk a little bit about how I allowed fear to keep me from making the leap for as long as I did. You know, don't do that. Jim Rohn statement that I love is that, you know, start from wherever you are and with whatever you've got. You don't need to wait for perfect because perfect will never come. Because sometimes good enough is good enough. You don't have to wait for the perfect business. You can take an average business and make it perfect, or you can, you can scale it. You can. You also don't have to quit your job to do this. You know, you find people that you know and trust and you partner up with them. And at least in my case, I think one of the things that. That has allowed me to do this to the scale that it has was, you know, I spent 20 years helping other people get what they want. You know, it reminds me of the Zig Ziglar quote, right? You can have everything in life that you want if you help enough other people get what they want. And that's what I've done. And it's allowed me to have a network of experts in every industry and every service that I can call upon when I need help with something, and that's been absolutely invaluable. So if you don't wait for the right opportunity, you find the one that's good enough and you take the leap. You mitigate as much risk as you possibly can. And once you've got that comfort level, you take the leap and then it works out and you go do it again.

[1:34:20] Host: Well, it's striking.

Guest: That's my advice.

Host: It's striking to hear you say that, Chad, because you, you were self described as somebody who, who was 20, trained for 20 years to look for the. Poke holes in. In businesses and look for the negatives and look for the risks and just be, Be as negative, Nancy, as possible. And so to hear you have a conversion. Not. I'm sure you still are very, are very meticulous about assessing a business's viability or.

Guest: Absolutely.

Host: It's. It's financability. But at the same time, there's a, there's been a spirit shift, it feels like, and you're in your. And you're telling the audience to not be seized by fear. At some point you gotta, you gotta step off the ledge.

Guest: Exactly.

Host: Great.

Guest: Look, there's a difference from the banker's perspective versus the entrepreneur's perspective. Right. The banker is the negative, Nancy. The banker has to figure out where the risks are and can we mitigate them to make it fit within our loan perspective criteria. Invest. The. The entrepreneur doesn't necessarily have that same investment criteria, doesn't have the same box, doesn't have the same constraints.

Host: Well, the other thing.

Guest: And so I think if you can.

Host: That's such an important difference to, in, in terms of the, the philosophical or the psychological approach of the lender versus the entrepreneur is that lenders don't enjoy any of the upside. So if things go just great, they're not, they're not going to benefit from that. So all they, all they can do. Am I, am I wrong?

[1:36:00] Guest: Oh, man. No, you're absolutely right. The reason I'm laughing is because you've reminded me of a couple other points that I was hoping I would get to share. Right.

Host: Sure.

Guest: And so this depends on the bank, okay? This depends on the bank that the lender works for because they're all different. But in the bank that I grew up in, no, you did not share in the upside, but you absolutely shared in the downside. So if your loan went past due, you were making the calls to get the collect, the payment. If the loan defaulted, you were the one going and repoing the, the, whatever collateral you had. And I, I had an experience doing that. I made a loan to a chicken wings restaurant that defaulted. The. The owner shows up on a Friday night, tells the staff we're done. They all leave, didn't clean up or anything. And the bank didn't find out till a week later. And I was the one that had to go repo all that restaurant equipment of rotting chicken carcasses. So that was not fun. And that was the time that I decided I'm not going to do any more restaurant loans. Thankfully, I haven't had to go repo anything else since then. And then I go to big bank And Big bank doesn't even tell me if a loan goes past due, let alone if it go defaults. They don't tell me nothing. The, the, the idea Big bank was go make more loans. It doesn't matter. They're all good when you made them. We're the ones making the decisions, not you. So go find more deals. And if they go bad, they go bad. Let us handle it. You don't need to know about that. That doesn't need to impact your decision making at all. Just go find more deals. Which is completely the opposite of the way that I was raised in this business, which is you make the decision, it's your responsibility. If it goes bad, you clean up your mess. And I still believe that. I still operate that way. They just don't tell me if it goes bad.

Host: And so does that mean, which is still weird to me, does that mean that an SBA lender at a smaller bank is going to be more conservative? Because they're going to be, they're going to be the ones repoing, you know, whatever, whatever's left when things go.

Guest: I think so. I think so. Yeah. I absolutely think so. Unless they were, were young and green like I was, and they didn't even know that was the case when they were making the deals.

Host: Chad, how could people reach out to you?

Guest: So business Twitter is at SBA, Chad. F or LinkedIn is just Chad Foundries. Email chadarbycreektrading.com Great.

Host: And there it was. Darbycreek trading.com for anybody who wants to buy some very tasteful decor for their home for a chat. It's really, it's a, it's a really, it's a beautiful, it's a beautiful store, Chad. Really neat. Really.

Guest: Thank you so much, Will.

Host: Yeah, well, thank you. Thank you very much for coming on, Chad. What a, what a ride. I, Yeah, I, I just, I love that you bought a tiny hobby business that a couple that are an old retired couple started just for, for fun. And you've turned it into, you know, the next Crate and Barrel. So really, really cool. We'll, we'll, we'll be eager to see how things go over the next few years. Chad. Fondriest. Thank you.

[1:39:11] Guest: Thank you, Sam.