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Shakil Prasla is on the cutting edge when it comes to profiting from the growth of million-dollar, one-person businesses. Rather than build these tiny, high-revenue operations from the ground up, the millennial entrepreneur from Austin, Texas, buys them through his company SZ Ventures, which he founded in 2013.
Today, SZ’s portfolio consists of 12 very small internet brands, which had aggregate revenue of $28 million in 2018, he says. Of the 12, 10 were run as one-person businesses before he acquired them—among them Cards for Causes, a seller of greeting cards that donates 20% of each purchase to a charity; FlexZ Fitness, a premium gym apparel company; and Socks Rock, which makes custom socks for sports teams, businesses and nonprofits.
Although some of these sites are still run by the original CEOs, SZ Ventures employs a core team of 42 people who serve the whole portfolio, performing jobs such as marketing for the entire group. Each company in the portfolio pays SZ Ventures a management fee in return. This helps keep personnel costs in check. “We’re able to spread those costs across 12 companies,” says Prasla.
If this type of investment catches on, it could be a boon to the growing number of nonemployer businesses that are breaking $1 million in revenue. The number of nonemployer firms that generate $1 million to $2.49 million in revenue hit 36,161 in 2016, up 1.6 percent from 35,584 in 2015, according to the U.S. Census Bureau. That number rose by 35.2%, from 26,744, in 2011.
I had a chance to meet Prasla and his wife and infant son on a recent trip to Austin. Here’s how he pulled it off.
Take time to learn the ropes. After getting a bachelor’s degree in economics from the University of Texas at Austin and an MBA from the Acton School of Business, Prasla—who worked as a financial consultant—realized he wanted to be an entrepreneur but faced a dilemma common to many budding entrepreneurs: He was not sure what kind to start.
Researching business ideas on the internet, he came across a blog on how to start an ecommerce company and got intrigued. After learning about Alibaba, a giant marketplace through which ecommerce stores often import goods from China, he traveled to China to research his options firsthand. Over about a year, he educated himself on topics including search engine optimization, marketing and pricing and, once he knew the basics, dived into his startup. “I learned by doing and by researching what other people are doing,” he says.
Prasla’s first business was ProCuffs, an online seller of cufflinks and other accessories that he financed with his savings. “After about a year of learning the ins and outs of business, I finally made it profitable,” he says.
Then Prasla had a stroke of luck. He came across a broker called QuietLight Brokerage, which was selling a business called MisterCold.com. MisterCold sells beverage coolers. When he inquired about the business, the broker sent him a prospectus. As he pored over the prospectus, he realized that the cooler company was not investing heavily in marketing, and thought that by giving it more TLC, he could grow it. He bought the business in 2015 for $52,000.
With that business growing, Prasla soon decided to acquire more ecommerce businesses. He focused on an area many investors overlook: one-person businesses and others with very small teams. To Prasla, they had lots of untapped potential.
“If you look at any kind of business that’s just being run by one person, they’re doing everything,” says Prasla. “They’re working 70-80 hours a week. They’re not delegating. They’re getting burned out. They may not be investing time in themselves to learn new skills sets. Those are the types of businesses I like to buy. I can take over the business and delegate the tasks to multiple people.”
Find low-cost financing. After using his savings for his first acquisition, Prasla turned to loans, frequently those backed by the U.S. Small Business Administration. Banks don’t usually want to lend to ecommerce businesses, which don’t often have real estate as an asset, but the SBA’s guarantee took some of the risk out for them. “Why the banks like them is they are backed by the U.S. government,” says Prasla.
And from Prasla’s point of view as an entrepreneur, the loans were relatively inexpensive. Typically, the interest rate on his loans has been prime plus 2.75%, he says. At the time of our interview in April, he was paying 8.25%.
Another plus is that SBA-backed loan only require the borrower to put down 10% of the money to make a purchase. That was convenient, given that his priciest acquisition cost him $3 million. (Its annual revenue was $10 million.)
Even better, he had no risk of losing his home by borrowing to finance the acquisitions. In Texas, entrepreneurs don’t have to put down their homes as collateral, under state law, he notes.
Set rigorous deal-spotting criteria. Prasla decided early on that he would only invest in stable businesses that had been operating for at least five years and that were making at least $300,000 in profit. That helped reduce the risk of making acquisitions.
He looked for deals where he would make one-third of the acquisition price in net profits each year, assuming the company’s valuation was three times net profits. Even with loan financing, he found, he could make money on an acquisition of a very profitable business.
“If you buy something for $100,000, you should be making $33,000,” he says. “You could borrow at 8.25% and make $33,000.”
In recent months, he has narrowed his focus to acquiring very small businesses focused on home construction, in niches such as engineering supplies. “There are always going to be buildings coming up and down and new boom cities,” he says.
Plus, sticking to a common theme will give him more options to sell when the time is right, he notes. “Even though we have shared resources, investors want to see a common concept among all of the companies,” says Prasla.
Dig into the financials. Because some sellers exaggerate how well their businesses are doing, he and his two business partners—one with a background in accounting and the other in finance—studied the financials of each potential target during the due diligence process.
“I look at about 100 ecommerce deals a month,” he says. “I’m able to quickly see if an acquisition is going to be a good fit for us or not.”
Find economical ways to deploy talent. To ensure a brand gets off to a strong start after the acquisition, Prasla asks each CEO to stay on for at least three months afterward, as part of the deal. He holds weekly calls with the CEOs to manage all of the brands.
How does he keep everything organized? “At the beginning of the year we come up with three goals,” he says. “We focus on these three goals only and break them down into micro actionable items we can do on a weekly basis. We track them on a project management system to see how things are going along.”
Beyond that, the company relies on a dashboard that tracks each brand’s financials and customer reviews. “I think data is very important,” he says.
Don’t do it all yourself. Prasla used to handle all of the financials in his business on his own, given his strong background in this area. As keeping up with this became more complicated, he brought in a CPA to maintain QuickBooks for all of them. “He does it even better than I did,” says Prasla. “That saves me five hours a month.”
The company shares information on each brand’s revenue and profits with its employees, providing a summary for each team member. That way, they know how each site is progressing and can see the results of their work.
Stay involved Although individual CEOs run each of his firms, Prasla is very much involved in the day-to-day, and the income he gets from SZ Ventures isn’t passive.
“There’s no way my business would run if I was sitting on my couch watching TV,” he says. “I’m a very active operator.”
Then again, he enjoys his involvement. “We’re all lucky to be alive in this era,” says Prasla. “It’s pretty easy to start a business with a low amount of money.”
His advice to others who want to start or acquire ecommerce businesses? Don’t just follow the money. Make sure they’re a good fit for your interests, skills and knowledge.
“If you’re good at finance, find a company that’s not doing a good job with inventory that you can help,” he says. “Don’t just buy it because it’s making money.”
May 28, 2019 at 10:36PM
Forbes – Entrepreneurs