Summary

In this conversation, Jon Stoddard and Stephen Speer discuss the current state of the e-commerce sector amidst rising tariffs on Chinese imports. They explore the implications of these tariffs on pricing, supply chains, and acquisition strategies for e-commerce businesses. Stephen shares insights on how to navigate these challenges, emphasizing the importance of due diligence and strategic planning for potential buyers. The discussion also touches on the resilience of the American market and the potential for future growth despite short-term hurdles.

Takeaways

• Tariffs on Chinese imports are significantly impacting e-commerce.
• Margins for e-commerce businesses are likely to be squeezed.
• Prices across platforms like Amazon are expected to rise.
• Fear mongering about price increases is prevalent but may be exaggerated.
• Short-term issues may arise, but the market is resilient.
• Building significant working capital into deals is crucial.
• Due diligence is more important than ever in acquisitions.
• Diversifying supply chains can mitigate risks associated with tariffs.
• Seller notes may increase as a response to tariff impacts.
• M&A activity remains vibrant despite current challenges.

Watch the Interview

Listen to the Interview

Transcript

Jon Stoddard (00:00.406)
All right, so are you thinking about buying an e-commerce brand right now? So you better buckle up. Tariffs on Chinese imports are spiking and throwing the entire e-commerce sector possibly into chaos. We'll talk about that. Margins are likely to get squeezed, valuations could be dropping, and deal terms, they're gonna change.

There's a guy on X called Casey Adams. He's a founder of Harkla, a $5 million Amazon brand says these new tariffs could raise product costs by as much as 2000 for him. And these are sellers who rely on Chinese sourcing for watching profits vanish overnight. So what does that mean to an e-commerce buyer like you, whether you're trying to buy or sell today, I have Steven Spear today. I have Steven Spear from e-commerce lending joining me on the show.

He's funded hundreds of e-commerce deals and knows exactly how this terrorist arm is changing or likely to change the landscape of business by an e-commerce world. Welcome to the show, Stephen.

Stephen Speer (01:03.95)
Thanks for having me. I appreciate it, John.

Jon Stoddard (01:06.262)
Well, I think we're kind of the first to talk about this. So tell me a little bit about how, like my first question is, how do you underwrite a tariff risk in e-commerce acquisitions right now? Maybe it's not real yet. It's not being felt, but what would that look like?

Stephen Speer (01:23.874)
Yeah, that's a really good question, John. I think what we're seeing right now is a little bit of a lag between what's transpired the last few weeks and what has really affected Main Street. And we really haven't seen in effect deals at all, nor underwriting. But I could see in the near future as sellers start ordering more products and face these tariffs. We're going to see, I think we're going to see suppliers lower their price candidly.

from China, we're going to see prices increase across the Amazon platform and other platforms. ultimately everybody's going to share the burden. It's not just going to lay on the consumer at all. And we're also starting to see a little bit of the Chinese manufacturers have overseas operations, primarily in Vietnam. We're going to see those.

those suppliers start outsourcing basically their products and sell through countries like Vietnam. And we're seeing that right now.

Jon Stoddard (02:31.84)
Yeah, but is that still, let's say Chinese connected?

Stephen Speer (02:36.206)
Well, the products will be coming from, for example, one example on one of the deals that we have going on right now, the Chinese supplier does have a Vietnam wing of their supply chain, and they're going to be providing products through that warehouse. And they're not subject to the 145 % tariffs on Chinese goods. I believe the Vietnam tariffs were reduced either

Eliminated or reduced to 10%. I haven't been able to find the.

Jon Stoddard (03:09.494)
Yeah, don't think that's, I think Vietnam's actually siding with China at the moment. So I don't know where that's going. They're Chinese, they're cozying up to them, trying to be make friends because there's a long history of that and communist.

Stephen Speer (03:14.094)
Interesting.

Stephen Speer (03:23.884)
Yeah, as of two days ago, Vietnam was in negotiations with the Trump administration to relieve, to have a level playing field. And that's the last I heard unless something's changed most recently. Yeah, it's ever changing.

Jon Stoddard (03:38.728)
And it's dynamic. yeah. Have you financed any e-commerce deals where the product comes from China recently? Just... Yeah.

Stephen Speer (03:49.236)
Absolutely. Yes. And I think, you know, it has, you know, we have one deal that was supposed to close last week and a large deal, I believe it was around $15 million. And the sellers and buyers took a pause and they're going to wait 30 days to see how this all shakes out before proceeding with the closing, which I think, I think it's a wise move. Like you mentioned, it's ever changing.

You know, one minute it's, you know, 25 % tariff, then it's 90%. Now it's 145 and it just keeps moving. So we'll see how this shakes out. I think, I think we'll know pretty, you know, pretty quickly, let's say within the next 30 to 60 days, how it's going to shake out with China. And hopefully, um, during that timeframe, it doesn't disrupt business. Um, as much as people may think there's a lot of fear mongering going on.

Jon Stoddard (04:19.114)
Then it's 124.

Jon Stoddard (04:40.34)
Yeah. But it's one of those Chinese, one of those partners that I don't think Xi Jinping is going to blink. there is a, have a trillion dollar surplus. And I think that it's at some point they will negotiate. but that's going to be after a lot of card playing high stakes poker. Yeah. Yeah. Yeah.

Stephen Speer (05:00.268)
Yeah, absolutely. Yeah, it's a 3D chest match right now. So we'll see what happens there.

Jon Stoddard (05:06.774)
What do you think the debt service coverage ratio do you see in these deals with these variable costs? I feel like I, for instance, I looked at a, a tennis company, kind of a course plus a racket. And it was one those wood rackets where you learn how to hit on a small deal, but they bought every six months. So great, they can last six months, but now they're going to have to reorder for another six months. And that's going to look different.

Stephen Speer (05:18.456)
OK.

Stephen Speer (05:33.292)
Yeah, it will. Again, what we're seeing at least initially here is that suppliers are reducing their the prices absorbing the tariffs, whether that will continue or not is to be seen. And we're definitely going to see price increases, but I don't think it's going to be astronomical. Again, a lot of fear mongering, people think prices are going to double overnight, and they're just simply not.

Jon Stoddard (05:56.087)
Yeah, what about that guy? Did you follow that guy Casey Adams, founder of Harkla? He builds helmets for safety helmets for children. And he was talking about, this is on X, about a 2000 % increase for him, his cost to get it out of Los Angeles to ship to him.

Stephen Speer (06:14.382)
Well, I think, I think a lot of sellers or business owners for that matter are going to diversify their, their supply chain and they're going to start having products made elsewhere and not necessarily in China. And hopefully some of them bring, bring, uh, manufacturing back to the United States. And I think was the biggest intent of this. Tariff, uh, let's call it a tariff war is that to bring men recalibrating, right. And have a level playing field. And hopefully that means that

Jon Stoddard (06:38.105)
Re-leveling, recalibrating.

Stephen Speer (06:44.042)
that things will start being made in our country again.

Jon Stoddard (06:47.52)
Yeah, that'd be nice.

do want to note that Casey Ames, who has bought a couple of companies, one of his other companies is a course company with a hundred percent margins, which he makes 40 to 50 % of revenue from that. That's all United States based. So he is not completely going to be destitute. He still has this business to rely on anyway. So how would you treat these seller ad backs when they do come, when you see it, when cost of,

goods in may increase 20, 30, 100 % due to tariffs. How's that gonna look on a?

Stephen Speer (07:26.254)
Yeah, yeah, I'm a confused by your question in terms of ad backs, you ad backs are added back. What I don't see that relationship between that and cogs. So

Jon Stoddard (07:38.73)
Yeah. Well, being that it may be just a one-time expense, it's not going to be there next year. Yeah.

Stephen Speer (07:44.812)
Yeah. Yeah. But it's one time then definitely that, becomes an ad back and also keep in mind, and your listeners should, you know, I'm sure they're aware that, you know, we did hit quite a road bump, between 2020 and 2022 with a supply chain situation with, you know, transportation, costs going through the roof. And, a lot of these Amazon resellers still sold product and they still, you know, had good margins and they still made money.

Jon Stoddard (08:06.154)
Yeah.

Stephen Speer (08:14.356)
as you know, some cases they weren't able to, you they ran out of product, which couple of our clients did, but overall, you know, we did see prod prices increase, but we also saw sales increase. And, you know, the supply chain situation was pretty ugly. I think all of us remember that and we're able to write that out. Yeah.

Jon Stoddard (08:33.568)
Yeah, the gas went from a dollar, a dollar 80 to like $5 in some places. Yeah. Or, more in California.

Stephen Speer (08:40.236)
So, you know, we were able to survive that. And I think this terror situation will be able to survive it. You know, I think in some respects, there's gonna be, you know, some things that are going to be permanent and some things that are going to go away once hopefully our administration is able to negotiate a level, a more level at least, playing field.

Jon Stoddard (09:01.014)
Yeah. It doesn't seem like the current administration's at all too concerned about consumer goods, the cheap goods, like sneakers coming back to the United States are more concerned about, you know, the cell phones, computers, things that we need to run the economy, you know, $100 sneakers that are $400 sneakers that are, you know, $20 to make in China.

Stephen Speer (09:25.984)
And we're starting to see a lot of the chipmakers, you know, commit to bringing manufacturing back to the United States. So that's happened the last couple of days. So that was good to see. Right.

Jon Stoddard (09:36.606)
Yeah. Nvidia is coming back to Phoenix. It's like a huge $500 million commitment. Yeah.

Stephen Speer (09:42.432)
Lot of jobs for Phoenix and this is a positive result of the tariffs. I know that again, there's a lot of fear mongering on TV, but there are a lot of positive aspects of tariffs and bringing manufacturing, bringing jobs back to United States.

Jon Stoddard (09:58.903)
Okay, now I know you haven't seen it yet because not a lot of deals are crossing your table. Even one is paused for a thing. Are you seeing any reason to reduce loan to value or loan mounts on e-commerce deals?

Stephen Speer (10:12.398)
They haven't been affected. I can see potentially to your earlier point, seeing debt service coverage ratios internally, meaning within lenders, the increase from the base level of 1.15 up to maybe as high as 1.5 to absorb the increase of COGS. I think smart underwriters will realize that we're going to see prices increase proportionately to the tariffs and also

a lot of the suppliers will be absorbing the increases. So, but in terms of loan to value, it hasn't been affected. I don't see it being affected. And so, based on what's transpired the last several weeks.

Jon Stoddard (10:58.402)
What about working capital requirements or reserves or astros? Are they going to be hit with these tariffs post close or?

Stephen Speer (11:07.788)
Well, what we're doing, you we build working capital into all of our deals. yeah, so a lot of the working capital of a lot of the money is used to buy inventory upon closing of the business, meaning the closing of the transaction. you know, you know, it's going to prompt me to build as much working capital into deal as possible, because obviously, cogs are potentially going to go up. And, you know, probably the sooner they buy product, the better.

depending on what transpires in the coming weeks, but yeah.

Jon Stoddard (11:38.315)
Yeah. Let's take an example. For instance, let's say that tennis company with the racket, the wood racket. So normally last year they buy $500,000 worth of goods. Maybe they hit some levels where, you know, unit price goes down at $500,000, but now they can only buy $400,000 and the unit cost goes up. So now to sell the same amount, they're going to have to spend a lot more money doing this. I mean,

Stephen Speer (12:01.71)
Yeah.

Jon Stoddard (12:09.566)
Is this just going to be a year, bumpy year where they're just going to have to absorb this or?

Stephen Speer (12:15.18)
Yeah, I could definitely see that scenario happening. And again, you know, our intent here at Ecommerce Lending is to build in as much working capital as possible for our clients and also to make sure they have significant post-closing liquidity for road bumps or speed bumps. But I think, you know, I think this is a short term issue and I see, you know, I don't have my crystal ball, but I definitely see it going away.

Jon Stoddard (12:41.526)
Yeah. You think it's going to recalibrate at the next 12 months or, cause I think, you know, China's, you know, they're offended, right? They have to figure out a way to not lose face in this deal. It's very Asian culture. Yeah. Yeah.

Stephen Speer (12:58.69)
Very much, very much so. I don't see them caving. I do see a compromise though. I don't think it's going to be a one-sided negotiation on either side. But again, we'll have to wait and see.

Jon Stoddard (13:10.996)
Yeah. What kind of collateral do you think you'd need for an inventory heavy type e-commerce business?

Stephen Speer (13:18.132)
Yeah, so in terms of collateral, you know, the SBA doesn't require collateral. We'd like to see it, but it's not necessarily required. for I think back to your earlier point, we definitely want to see a significant working capital built into the deal to absorb, you know, price increases and, you know, our buyers having to increase the amount of inventory they purchase at one given time.

Jon Stoddard (13:44.438)
Yeah, let's make a distinction. It's like some of the, you know, $5 products that you sell for 20 versus a $500 or $1,000 product. It's a little bit slower moving. I mean, what's the difference going to be there?

Stephen Speer (13:58.094)
I mean, it's a big difference. think the higher the price point, the more impact the tariffs are going to have. mean, if a pen goes from $1.50 to $2, I don't think it's going to really dissuade anybody from buying a pen.

Jon Stoddard (14:12.786)
It's fungible. We'll figure out how to find.

Stephen Speer (14:16.27)
You know, candidly, I'm personally, you know, this my own personal opinion, I'm more concerned about the tariffs, the European tariffs, because a lot of us drive European automobiles. And I'm a little bit in their higher price points, obviously. So I'm concerned about, you know, the German carmakers, Italian carmakers, having those prices go up significantly, because that could really, really hurt the car market.

Jon Stoddard (14:39.51)
Good, but those people, the EU has already been invited to the White House to renegotiate and recalibrate those tariffs. And it's not so much as like, hey, you you sell a lot of German products in the United States. Great. Can we now sell Ford and GM and our American cars in Europe, please?

Stephen Speer (14:57.538)
I'm with you. mean, I'm, you know, I have relatives in Europe. happen to be born, you know, you're from Europe. And I could tell you that my relatives, one in particular bought an American car and there was a hundred percent tariff on that American car. So that was years ago. I don't know what it is now, but yeah, again, level playing field. And I think, you know, I think ultimately United States is going to come out a overall, but there's going to be a little bit of pain. And I think.

Jon Stoddard (15:10.55)
100%. Yep. Yeah.

Stephen Speer (15:26.54)
I think as Americans, you know, we're resilient and I think, you know, most people understand that there's a little bit of initial pain, overall and long-term, it's going to help our country.

Jon Stoddard (15:35.808)
All right, so let's put your crystal ball on and I'm coming to you or somebody's coming to you wants to buy an e-commerce company. What are you going to recommend? Like here's some advice based upon the tariffs and I'm binding from China, China. So a lot of my products. what's your advice to.

Stephen Speer (15:52.045)
Yeah. You know, I would definitely look at, see how many suppliers a given company has. do they have multiple suppliers in different regions of the world, or is it just China? So I would look at that. that's, that's imperative. I'd also request, P and L statements, profit and loss statements that are broken down by month to see, you know, see movement of cogs and to be able to forecast moving forward. If,

COGS is going to be a huge issue. I'd want to see a monthly breakdown to see what the tariff, what effect the tariffs have on COGS. So for example, let's just say right now it's October or November, where a lot of the buying happens. I would want to definitely see the COGS numbers broken down by month for the previous nine months. I mean, I think that would be prudent and

Jon Stoddard (16:23.712)
versus year to year, you'd wanna see month to month.

Stephen Speer (16:50.15)
because yearly amount based on last year really doesn't help very much. But I would see that and I would definitely have a lot of discussions with the seller and see what their take is on the tariffs and what they feel the effect on the business will be. And hopefully they're candid and they tell you the truth. But I would do far more due diligence and also start

seeking additional sourcing prior to closing of the given products that the business sells.

Jon Stoddard (17:21.312)
Yeah. What do you think about the multiples? Let's say he's selling at a reasonable 2.8 multiple tariffs come in. Is it justified anymore? And he gets majority of his products from China.

Stephen Speer (17:37.108)
I think it depends on the deal structure on the larger deals, the non SBA deals that we do. I would encourage a fairly large, earn out that's tied to EBITDA and not, revenue. And so if there is a situation, I think that mitigates risk in terms of, you know, on the larger deals and on the smaller deals, I would, I would tie a seller note, and have certain, certain EBITDA or SDE thresholds on that seller note.

Jon Stoddard (17:50.133)
Yeah.

Stephen Speer (18:06.516)
If net profit does take a hit, it lowers the amount of seller note and ultimately at the end of the day, that buyer would buy that business for less money because the owner would be paired back.

Jon Stoddard (18:17.654)
Yeah, something like a triggered, if it was a 15 % pretty healthy e-commerce EBITDA and it drops to five, you go, I can't pay you, right? Would you withhold payments or just no payments?

Stephen Speer (18:22.092)
Yeah.

Stephen Speer (18:25.782)
Yeah. Yeah.

Stephen Speer (18:30.294)
No, I'd have a curtailment written on the APA asset purchase agreement that if certain EBITDA numbers or SDE numbers aren't met that that whatever $300,000 seller note gets pared down to a smaller number or eliminated altogether.

Jon Stoddard (18:50.004)
And that seller note, what would you say? 30 % of the cap stack or.

Stephen Speer (18:54.99)
No, generally they're 10 to 20. Yeah, I would say 20%.

Jon Stoddard (18:57.27)
10 to 20, yeah. Do you see any changes in the higher seller notes with that? Possibly with these tariffs, yeah.

Stephen Speer (19:01.774)
I could see that. I could see seller notes increasing and having as long as they have that, you know, reverse earn out where or, or clawback, meaning the seller note can be reduced if certain earned. Yeah, absolutely. I could see that increase into maybe instead of 10 to 20%, maybe 20 to 30 % on, on SBA deals. And then the larger deals I could see earn outs increasing.

Jon Stoddard (19:14.942)
If you see a re-erosion in EBITDA or net income, yes, sir. Yeah.

Jon Stoddard (19:29.748)
Yeah. Steven Spear, that's fantastic advice. I really appreciate you giving an update on this tariffs. I'd like to have you back on maybe after six months and see what's flushing out, what came true.

Stephen Speer (19:41.378)
Absolutely. Absolutely. think we're all, you know, we're all going to be survivors. I think it's going to be a little bumpy and, but ultimately I think, you know, and A is still very vibrant. We, have a lot of deal flow right now, a tremendous amount of deal flow, and it's just doing a little extra due diligence to make sure you're not buying a business that, you know, is, going to be overly affected by the tariffs and, and not make money. Cause ultimately you buy a business to grow it, not buy a business to, you know,

Jon Stoddard (20:02.966)
Yeah.

Jon Stoddard (20:08.96)
Yeah. Yeah. I love the earn out suggestion. That's a great idea with the seller note and it did drops or claws back in it with an erosion of it. Perfect. Steven, thank you so much for spending time with me.

Stephen Speer (20:09.054)
survive.

Stephen Speer (20:19.427)
Yeah.

Stephen Speer (20:23.512)
John, thanks for having me on.