Chad Fondriest·March 7, 2024

How to Buy a Tiny E-Commerce Business & Grow to $4m in Sales | Chad Fondriest Interview

Chad Fondriest, a 20+ year SBA lender and part-owner of a bank in Columbus, Ohio, bought a tiny e-commerce wreath and faux-floral business, Darby Creek Trading, in 2018 for $130,000 (roughly 4x SDE) financed almost entirely with an SBA loan and under 10% down. The business, founded in 2004 by a retired hobbyist couple, was doing only $150,000 in revenue and had never sold Christmas products despite being a wreath company. Chad and his then-partner (and then-romantic-partner) Josh, who had industry contacts from Victoria's Secret store design work, expanded the SKU count, redesigned the website, turned on Google ads, landed large one-off B2B projects, and got onto Wayfair and Amazon, driving revenue to $4 million within five years and SDE to roughly $650,000. The growth wasn't clean: he skipped counting inventory during diligence and inherited dead stock, later nearly wrecked the company by letting creative staff overbuy inventory unchecked, which forced a contentious buyout of Josh's equity stake after their 50/50 ownership structure produced decision-making gridlock. The episode is unusually rich in tactical e-commerce and SBA-lending lessons (vendor relationship transfer, inventory diligence, EPC tax traps, working capital sizing) delivered from the rare perspective of someone who has been both the SBA lender and the borrower.

Deal facts

purchase price: $130,000
multiple: 4x SDE (paid); guest says in retrospect should have paid closer to 3x
sde ebitda: SDE was $32,584 at acquisition (2017 tax return basis); SDE approx. $650,000 as of the interview
revenue: $150,000 (2017, at acquisition) growing to $4m (current, ~5 years later); gross revenue in 2017 tax return was $137,826 per his underwriting spreadsheet
financing structure: SBA loan, ~9.8% down (~$15,000 down on ~$138,000 original loan, plus $20k working capital and financed closing costs); later did a partner buyout financed with another 10% down payment plus an additional $100,000 injected; ~$300,000 in SBA debt outstanding at time of interview
notes: Sale price of $130,000 included inventory; buyer later discovered much of the inventory was unsellable and had to be liquidated/donated. Business is Darby Creek Trading (DarbyCreekTrading.com), a faux/silk floral, wreath, garland and home decor e-commerce brand founded 2004, bought in 2018.

Why this business

Chad was a 21+ year SBA lender who had long wanted to own a business but kept 'poking holes' in deals until the right one came along. His partner Josh had spent a summer sourcing faux floral arrangements for Victoria's Secret store design and complained that vendors in the silk floral industry couldn't deliver, flagging it as an opportunity. Months later, at a broker-hosted lunch seminar Chad co-ran for local searchers, a broker he'd known for years (EMT) specifically brought a listing for a small silk floral e-commerce business and said 'I bought that for you and Josh.' The small size of the deal (~$130k) meant the downside risk was low even if it failed, while the existing revenue, customers, employee, and vendor relationships gave it a head start over starting from scratch.

What's working

Website redesign and modernized Shopify theme (funded by early B2B wins) unlocked Google ads, email/Klaviyo marketing, and conversion
Massively expanded SKU count and seasonal design range (from just spring wreaths to all major holidays), tripling/quadrupling SKUs
Landed two large one-off B2B custom projects with Victoria's Secret that generated more revenue than the company had made in a prior full year, funding the website overhaul
Getting listed on Wayfair (and earlier, inheriting an established Amazon presence) drove major revenue and appears to have boosted Google/SEO via brand recognition
Explosive organic growth during COVID as home-decor demand spiked
Discovered and scaled adjacent, unplanned product lines (e.g., the 'Eric and Eloise' bronze wall-mount animal busts) by testing small batches with the existing customer base before committing to larger inventory buys
Inherited vendor relationships and favorable, seasoned pricing/payment terms (30% below list, 3-6 month terms) simply by buying an existing entity rather than starting fresh
Joined the eCommerceFuel forum/community, which he calls a 'game changer' for finding software, vendors, and best practices
Eventually implemented a cloud-based inventory system (after 2+ years running on paper 'recipes' in three-ring binders), enabling scaling into a 35,000 sq ft warehouse
Moat is design quality and being first/best on trend-driven products (e.g., working directly with Chinese factories to execute designs they wouldn't otherwise make), rather than patents
High average order value (~$195) gives more room to profitably compete on Google ad spend

What's hard

Overpaid at 4x SDE in hindsight; should have paid closer to 3x
Never verified/counted inventory during diligence and ended up inheriting a warehouse of unsellable stock that had to be liquidated or donated
E-commerce invites fast competition: any high-margin product that sells well gets copied by rivals who can source the same product and undercut on price/ads
Made a bad, taste-driven inventory bet (white Norfolk Pine garland) that didn't sell despite looking beautiful and getting social media traction, illustrating the risk of personal taste overriding numbers discipline
Overbuying inventory as creatives were given free rein without enough budget discipline nearly caused a bankruptcy-level crisis and directly precipitated a forced buyout of his 50/50 business/romantic partner (Josh)
The original 50/50 equity split with no tiebreaker led to decision gridlock ('whoever yelled the loudest won'), which he says was a structural mistake
Was slow to meet Amazon's on-time delivery requirements when overwhelmed during COVID, got 'called onto the carpet,' and ultimately left Amazon (a decision he still isn't sure was right)
Ran a manual, paper-based 'recipe' inventory system for years, which became unscalable and delayed proper inventory control until a cloud system went live in late 2022
Outgrew warehouse space repeatedly (1,500 sq ft to 5,000 sq ft to 35,000 sq ft, at one point illegally parking overflow shipping containers in the lot)
Difficult to size total addressable market for a niche product category like wreaths; hard to know true growth ceiling
Fashion/trend risk: must correctly predict next year's colors and styles roughly a year in advance due to import lead times from China; getting it wrong (as with the pine garland) can waste significant capital
Learned the hard way that titling a building in an EPC (eligible passive concern) can backfire on high W-2 earners because passive losses become non-deductible above a certain income threshold

Notable quotes

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.

One of the mistakes that I made back then... especially if they're buying a business that has inventory, you want to go count the inventory or hire someone to count the inventory... we ended up buying a business with a bunch of inventory that ended up being all the stuff he couldn't sell.

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... when a designer fights to keep a product that's the one we want.

The problem that led to was there was no tiebreaker, it whenever we came to a disagreement we were 50/50 and it was basically whoever yelled the loudest won and that doesn't work.