What Buyers Look For in a SaaS Business with Thomas @ FEInternational.com - Escape Velocity Show #22
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Summary
In this episode, we chat to the CEO of Effie International, a SaaS broker for tech companies and internet companies. We talk about the importance of having a good company culture, why it's important to have a good business culture and how to get the most out of your business.
Transcript
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Every business at some stage has a problem that happens at 10 p.m. on a Sunday or 4 a.m. on a
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Wednesday. Whatever it is, you have to have a business where you're not going to hate it or
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yourself if you have to make that personal sacrifice to handle it. So the way I look at it is like if
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you're on vacation, if this business interrupts you for the entire vacation and you lose your
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one week of vacation you have per year, are you going to end up resenting the business or the
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team or whatever if the answer is yes then maybe firstly you should probably
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not be buying a business at all and you probably should not be buying that business
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thomas how's it going man hey buddy good to have you on here uh i love that we just bantered for
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Effie International, broker for tech companies,
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Yeah, you're the SaaS guy that I send everybody to.
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How long have you been doing that now, a decade?
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And just got named Inc. in the UK version, top company.
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And we think we're the only company in the world
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We have a UK entity, and then we have a subsidiary entity
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And the main reason we have two entities is we have employees
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And what is it that when a company is thinking of selling,
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when they come to you, what's the stuff you help them with?
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we try to keep a really open line with founders
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So it's never only speak to us if you're thinking about selling
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At the very base level, we're trying to get them an understanding of what their company's worth today
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So for most founders, what we think the business is worth today is not what they want to sell for.
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But usually people from there have a time or a value-based goal and will help you determine what that is.
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So it may well be that today your company's worth $10 million and you want $50 million or $20 million or $100 million.
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that's a very personal number and that's something that we would then help you determine and also
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figure out with I like to call it personal and company stakeholders so that might be your wife
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or your husband or your business partner it could be your investors so you're aligned with what
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you're trying to achieve because otherwise you can be in a situation we have great company you
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maybe have a co-founder the co-founder wants to get to x you want to get to y and if they're
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completely different numbers, you're not going to be aligned.
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right off the beginning. So that's what we want to do
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because the nature of our business, we only get
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retainer. There's no incentive for us whatsoever.
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over time so we're not we're not short of business so it's really in our best interest to give you
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the best advice so if you come back to us with a 50 million dollar company that's better than a 10
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million dollar company yeah but you have to make that decision yourself we don't say your number
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should be 10 or and we also never tell people if their goal is realistic or unrealistic we might
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just give them a timeline so if you're a hundred thousand dollars a day you want to get to 50
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million we're probably not gonna be working together in the next 12 months
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that might need a fundamental pivot or shift in your strategy to get to where
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you want to be what is the change in ambition maybe it's like you're probably
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not gonna get to 50 million work in 10 hours a week but yes you can have a nice
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business kicking off 200k a year working 10 hours so you have to really like align
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those things now I remember and maybe they're still around like sites like
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Flippa like what's the difference between a Flippa I mean I feel bad Thomas
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asking you this question because i know it's a fair question but it's a real thing right like
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what what what's the difference and what do you feel the value add can be by having somebody like
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you support a process yeah so there's there's lots of marketplaces out there i guess whatever
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you're selling in the in the world there's a marketplace i generally think marketplaces and
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the mechanism of a marketplace works really well if you have a business and there's probably a
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to other things maybe it's like antiques or anything like that below ten thousand dollars
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at that level it really is just the highest bid wins so if you bid ten thousand i bid five thousand
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for this this glass then you're going to win every single time but the business is a much more of a
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complex transaction if it's a and what we generally advise to clients which most people don't
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understand when they start the process is often the highest number or the highest bid is not
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always the offer you want to go with. It's all about the terms, the structure, the
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alignment. If you're gonna sell your business to someone for ten million
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dollars, there's gonna be a transition period, that deal is unlikely or that can
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be unlikely to be all cash. Yeah. So you have to align with them, you have to like
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them. A lot of people think it's just about the money until they realize that
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you're effectively selling your legacy. You want to make sure that... It's gonna be in good hands.
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Yeah, you want to make sure that in five years time we say I sold X, the X is
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still doing well it's not shut down bankrupted was run into the ground by the acquirer so fundamentally
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the mechanisms behind the marketplace which is purely bidding does not work for a bigger business
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and then beyond that marketplaces self-serve so you have to figure everything out yourself the
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valuations the contract negotiations the kind of buyers looking on marketplaces or so completely
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different from the kind of buyers who are working with M&A firms and strategic
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buyers so yeah the marketplace mechanism works well below 10k beyond that you
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really want to be in a position where you have someone who can help you weigh
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up the different options get multiple offers for you and ultimately find out
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the best the best offer and structure for you and I say beyond a million
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dollars is very rarely the highest bidder wins it's usually a combination of
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structure bid fit how much how much how much you like them is a really important part and that's
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why having an advisor like us in the way is is good because we'll do calls for most deals there
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be an in-person due diligence meeting so that alignment is is a really important part of it
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um so say a fundamental level that's the main difference between a an m&a firm like us and a
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marketplace it's really just the mechanics how do you avoid I mean as
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somebody takes a performance-based fee like how do you protect yourself to not
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work with the dud yeah so I'd say at the moment the vast majority of our
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business is inbound we've completed over 750 transactions so and entrepreneurs as
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you know like to talk they like to share the knowledge so we get a lot of from
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marketing perspective it is actually quite difficult to track where our
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business comes from because you may have heard about us and you work with us I
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remember yeah reading your blog post hearing about you and then I think you
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guys worked on Rob at drips yeah that was 2016 so yeah so I was like okay these
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guys are you know doing real stuff yeah so from that perspective we have a very
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long client life cycle we do lots of lots of things where you're gonna hear
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about us but not in your face we never try you're never gonna see me at an
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event and I'm handing out business cards saying, Hey, come work with us, come sell your business.
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Where it might be a podcast. It might be a video interview. It might be a book. It might be our
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conference. It could be all sorts of different things like that. So we have lots of different
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touch points throughout the process. Your magazine. The magazine. Exactly. So we do tons of different
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stuff to be, I wouldn't even say front of mind, like middle of mind, you know, who we are, have
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good reputation um with fortune i mean so internally we effectively consider ourselves
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to be as exclusive as harvard with the intake of businesses we work with so for every hundred
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businesses that inquire we might only take on one or two of those so a lot of it is have a huge
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amount of inbound interest we can be very selective with who we work with because we've
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sold so many businesses over the years we know what sells we know what doesn't sell sometimes
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we may be a little bit speculative it might be a business model we've not seen
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before but we think will be a good fit for our buyers in that case you might be
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a bit more conservative with the valuation or the fee structure or just
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setting expectations will always be straight up we never say yeah we're
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gonna sell it this year and ten million dollars in three weeks yeah we're always
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honest and I find that it's not charging people any money as long as you're honest
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and upfront they can make do some real work to get it ready for marketing right so like you got
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to create yeah we have a so we have a team of like nearly 45 people ask for them to give you
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an exclusive so that so we do ask for exclusivity um we don't ask for any retainer and the exclusivity
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starts once the business has been listed but no we have a team of 45 people and publicly you would
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maybe only see five of those people the vast majority of the work is behind the behind the
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it's a valuation team who are building valuation models to make sure that if we tell you your
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valuation is x that x is accurate if we value it too high the business isn't going to sell
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if we sell it if we value it too low then you're going to be frustrated if the business sells in
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30 minutes with 20 bids so it's a bit of a balancing act between too high too low and
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just right and people hire us because actually want to sell we're definitely not the company
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you come to if you want to send it to five companies and see what happens we're a hire us
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we will sell your business yeah we will be honest with you up front probably not going to get 50x
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but you're also not going to get 1x yeah um no so we invest a huge amount in the process um we have
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a 94.1 success rate for businesses we take on so it's very rare for us to get it wrong how do you
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generate demand or how do you create the market for companies like if i'm a founder and i'm like
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okay i want to sell my b2b sas company you know i don't even like most of them wouldn't even know
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where to start finding people that buy these things how have you guys done that and like what's
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the promotion like is it you know i think of real estate right real estate similar where they like
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package up the house and they have real estate listings and stuff like what is your what do you
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guys do obviously you have like your own list and audience and stuff but like what is the process
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of promoting marketing uh yeah so as we're going through the process of preparing the business for
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sale our m&a team who affects you the sales guys it's their job to go out and find the buyer and
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sell the business to them as we're going through the process they go cold to companies to some
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extent so i'll go through the process um so they will be building out a ideal target demographic
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who's going to acquire this business and that will not just be one buyer profile that'll be
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lots of different buyer profiles that might be private equity firm looking for b2b sass doing
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million dollars aor which is quite a generic criteria that hundreds of p's will have um it
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might be the individual who's saying um i want to buy business i'm going to use a sba loan so we'll
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narrow it down and then of our network at the moment we have about 41 000 buyers in our data
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on a particular business usually to about 1% of that to 2%.
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that we've said based on the criteria they've provided to us,
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Can people get added to that list on your website?
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and you can sign up to get our listings, which are just
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That's a very passive, passive form of marketing
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And then there are various email flows and call flows
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that if you want a better chance of buying a business,
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you should get in touch with someone on our team,
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provide them more information, and make sure you're qualified.
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Because then, effectively, the way the process works is-
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which is two weeks of an extremely segmented list.
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And that's where we start the strategic outreach as well.
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So it might be here are 50 PE firms we've identified that might be interested.
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A lot of clients come to us and they already have some interest.
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What would the email sound like if you sent it cold to a PE firm or to a strategic company?
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So if it's cold, it would usually just be something as simple as, hey, and then with an introduction,
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We're representing a business that, based on your criteria, I think might be a good fit.
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so in that case we would attach a one or two page pdf which is a very prospectus ish
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so it'd be a very anonymous high level so it might be this is the industry this is the high
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level financials if you want more information they then have to sign a confidentiality agreement with
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us at which stage we would send them a prospectus which is usually 40 50 pages for the average
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business we represent that will get sent across um and that's also what the people who are in our
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pre-marketing they get that yeah okay so they skip the whole thing because they've already
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qualified themselves who even give us that information so we we know they have the money
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we know they're ready to go we know they're going to keep it confidential um so we start with that
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process two weeks after that we almost always have a bid or multiple bids depending on the size of
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the business if it's relatively small so let's say it's a hundred thousand dollar business
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probably already sold if it's a 10 million dollar business you're probably starting to get indication
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of interest which is usually something you send before a letter of intent and then we'll work
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through that process two weeks after it goes out to everyone so that's where you might if you're
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on our generic email list you'll see it hey hey Dan here's a new listing a couple of bullet points
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uh fill out this form if you want a little bit more information so that stage you get that um
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and then beyond that we also use a bunch of third party sites which are very similar to
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real estate which affects you like mls um for us that very rarely finds a buyer for that business
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that's really just network building for us it's people who are browsing to buy businesses we want
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them in our network they might buy in two years time yeah but the only way you find these people
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is if you're actually selling the business in the first place it's a little bit chicken and egg and
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i know strategic can can range but like somebody's got a million arr sas company looking to exit
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What's the multiples looking like in the market today?
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So on a SDE basis, so that would be your net income minus what you're paying yourself.
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Yeah, so it's effectively your, depending on the size of your business,
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it's probably seller discretionary earnings or income or cash flow.
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So it could be, all those things are effectively the same.
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So effectively, what your business makes on an annual basis, net, pre-tax.
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Minus your salary, minus any other benefits you take.
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He said there's, every business has two sets of books.
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it we won't work those people because you can't disclose it yeah you ask like how we vet people
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part of it is if we think in any way they're acting dishonest in the process we just kick them
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up yeah and we have we will do that to people on both sides a long way down the process i don't
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care if they're three months into the process and we've spent tens of thousands in team overhead if
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we don't think they're honest that's going to burn our reputation down on them so yeah we just
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kick them out and i guess that's the fun part of being a founder or my business partner ceo
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he'll handle that um so those hard conversations sometimes have to happen um yeah so from
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that and then you also might adjust out any one-time expenses so for example if you've gone
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through a rebrand you spent 100 grand to redesign your site and that's something you haven't done
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for five years we might be able to adjust out that yeah um anything that is not reasonably likely to
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be recurring yeah this is definitely sort of a bit of a subjective everyone will argue like
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this is too high this is too low you can't include this you can't so the way we do it is we're just
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transparent with what we present we say well this is SDE if you make an offer on a business we'll
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then share all that information with you if you're not happy with it then you can push back and say
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well I don't believe that this is an ad back so it's always a little bit of a discretionary
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But eventually, that's where you're hiring us. We're going to present
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So 3.7, even that 3x, you're at 1.5 on a 500 SDE.
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I feel like most SaaS company founders think that they're worth more.
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and a bunch of people are signing up because it's great.
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which is mid-five-figure deal he does in the region of $4 million to $5 million ARR,
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Okay, so he's at $5 million ARR, let's call it, $2.5 million in profit,
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So that business is growing very consistently in the 3% to 5% month-on-month level, has a lot of enterprise clients, has a huge amount of room for expansion.
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And in his business, and this would be relatively rare, I guess the kind of people who are listening to you are probably not going to fit this dynamic because he doesn't spend much time in the business.
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He sits back, works a few hours a day, isn't really that proactive.
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fantastic no he's not a serial entrepreneur at all he actually does a lot of local politics but
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the business he he runs he's an extremely good developer built a good product found market fit
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years ago and has signed up some really big enterprise clients who love the product so much
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they keep expanding revenue without him having to do a huge amount so he fundamentally built
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a good product that's i'd say in the world of bootstrapping that's my version of a unicorn
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and if you have a huge amount of potential outside of that.
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So the buyers for that business are a multi-billion dollar fund.
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And that's the thing, right, is that there's more buyers.
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recently how much investable capital our buyer network has but it would be safe to say it's in
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the trillions of dollars there's a huge amount of money out there and funds contrary to popular
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belief want to deploy that capital they have to deploy that capital to generate returns for their
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investors so if there's a good business so on that that business i believe we had over 10
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bids which were all qualified bids good bids so that was extremely popular for a business that
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So most people think the bigger a business gets,
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I'd say 1 million ARR probably is a reasonably good indicator.
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it's a multi-billion dollar fund making acquisition.
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This would probably be one of the smallest deals
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probably going to be in that 4 to 8 times range
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of having higher multiples than restaurants, agencies.
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compared to their content or any commerce-based business,
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The reality is if that is going to happen to you,
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you're probably not going to be listening to you
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who legitimately wants to acquire at that level.
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and that's also why we don't hard sell people at any stage
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like personally what do you find so personally like on a personal level i travel a lot i work a
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lot the nature of entrepreneurs is entrepreneurs work all the time our clients are entrepreneurs
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and they're based all over the world so we have particularly the senior members of our team we
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travel a lot we're working with people constantly weekends evenings mornings emails all the time
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hundreds of emails a day for all of us um on a deal by day deal basis i'd say the value you don't
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realize that the m&a firm brings is every deal at some stage will have some form of problem
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selling a business is an emotional process buying a business is an emotional process
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is our job to manage that and make sure that assuming both parties are acting in good faith
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if there's anyone who's trying to misrepresent or defraud or we think there's a problem we'll
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we'll just draw a line under it and say hey we're not proceeding with this at all um so
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we have to have a lot of difficult conversations for people
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buy this business and you wouldn't let me. That's not fair.
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And what are you saying to them? It's just the bid
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There's lots of different factors. I mean, ultimately
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and we have to make a recommendation which is multifaceted that's how good their bid is how
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likely we think they are to complete what we think they're going to be like to work with post-sale
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and then we let the seller make a a judgment call from there but they very much lean on our
00:25:40.340
our expertise so buyers often get frustrated because they're like well i why did you i made
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the high i made the highest bid or like i emailed you back the fastest um and generally if people
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then they're probably going to be awkward at other stages
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And it's our job to balance all of those different factors
00:26:03.480
How often do you go to sell it, and then the seller
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I would say everyone will have a form of remorse
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Part of the reason why we don't hard sell people up front,
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We want them to effectively come to us and tell us why we represent them.
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So essentially, if you did get them hard sold up front,
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then you're just going to deal with the repercussions down the road.
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So we want you to come to us and be like, hey, I'm ready to process.
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So I've spoken to my husband, wife, kids, whatever it might be.
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Spoken to our shareholders, investors, business partners, key executives
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i'd say there's always some form of remorse once you sell because for a lot of people we work with
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they don't necessarily have they don't know what they're going to do next they might say well i'm
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going to bank the 10 million bucks and then i'm going to take a year off and figure it out so
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remorse is not a bad thing i think i'd say one of the things i've learned over the course of 750
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transactions is you can't fight against things like that so we just have to kind of roll with
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it we know it's coming and it's just managing that at the time but ultimately part of the reason we
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have such a good reputation is we don't force people to take a deal if you really want to walk
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away last minute you can we don't then send the attorneys after you with demand letters or
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nothing like that if you want to walk away you walk away we want you to sell kind of in good
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faith and happily and not be in a position where you're like yeah they sold my business but they
00:27:39.100
kind of like put a gun to my head and make me take the deal we don't do that that does mean
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sometimes we lose out on revenue yes we could put retainers in our agreement we
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could put all sorts of termination clauses but we've always felt that not
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having that builds a huge amount of brand goodwill long term which is
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something that marketing dollars couldn't buy yeah really can't buy so
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it's always worked well for us attorneys will look at our agreement and be like
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guys this is stupid you have a two-page agreement for a 30 million dollar
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business why don't you have all these other provisions in there but also we
1.00
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want our clients to be happy when they sell and if they're not contractually
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you can walk away it's our job to expect that to happen throughout the process
00:28:25.240
and just be ready to deal with it so that's that's the hard part is knowing
00:28:28.240
that there's gonna be issues coming up on every deal every day every single
00:28:31.900
every deal most deals okay there's always get every single deal we do
00:28:35.260
there's always can be a difficult conversation someone has to have with
00:28:39.100
one party sometimes that's multiple conversations sometimes that might be jumping on a plane
00:28:43.720
depending on the complexity of the deal and the bigger deals get they get complex there's lots
00:28:50.960
of things that will be challenging in that transactions there's lots of things to balance
00:28:54.780
it might be accounting technical legal there's lots of different things we're trying to trying
00:29:00.660
to balance and while the seller is our client we very much do try and create balance so if we're
00:29:07.080
representing you we don't then turn up with a one-sided contract when we're
00:29:12.240
speaking to the buyer or refuse any due diligence questions they have we're very
00:29:17.160
much saying well we think this is reasonable what what matters to you do
00:29:21.360
you care about transition period do you care about valuation do you care about
00:29:25.140
would you would you care about most and then we'll balance that we say to the
00:29:28.340
buyer okay well I think all negotiation is a is a balancing act I think people
00:29:33.980
who are bad at negotiating think you have to win every single point.
00:29:38.040
It's like, yeah, I want his 10 things I want, his 10 things you want.
00:29:45.120
It's like, okay, well, I want these two things.
00:29:50.060
Maybe you can have all of your things, but this is important to me.
00:29:54.280
And that balancing act then creates a situation where at the end,
00:29:58.840
Yeah, and that is why people work with an M&A firm,
00:30:01.740
to be able to get through that a have these negotiations without frustrating the buyer
00:30:07.420
because if you're the one negotiating that's yeah you end up paying and they end up paying you yeah
00:30:12.340
so we hope that if if they hate anyone they hate us yeah you'd be the bad guy the bad cop um we're
00:30:17.820
starting a new sass company what needs to be true like we're starting the best sass company thomas
00:30:23.100
what are the characteristics of this business so you have to have absolutely maybe not when you
00:30:29.460
launched but some we're doing this is real let's say we what are we doing absolutely have to have
00:30:34.120
a pricing model which has expansion revenue um i also like products that this is the first thing
00:30:40.460
you're saying is we need to figure out how to make so the product has expansion right you have to
00:30:44.160
you've hopefully spoken someone like patrick campbell read what read watch his his stuff
00:30:49.460
yeah he's i guess the godfather of yeah don't know if i'm allowed to say that but he's he's the guy
00:30:53.940
you speak to about value price pricing you want value pricing you want expansion revenue doesn't
00:30:59.180
matter where that comes from but you want that I would say the best SaaS businesses we see target
00:31:05.840
I like say beta small B and above so that might be customers that have at least like a mid-market
00:31:12.680
10 to 25 employees I do not like businesses where their biggest cohort is freelancers individuals
00:31:20.900
yeah consumers so we're going to mill revenue type businesses and yeah I'd say like a million
00:31:26.360
above would be a nice target. Anything that has employees and is going to consistently need your
00:31:30.380
product. Also, I think the product has to fundamentally solve a need that that business
00:31:36.620
will always have and be something that, if the worst thing happens to that business,
00:31:43.400
you're not the first thing they cancel. So for example, marketing tools can be fantastic,
00:31:50.560
high growth super popular but they tend to trend in and out and if a recession
00:31:57.220
comes do you cancel your new marketing fancy new marketing tools description or
00:32:02.680
do you cancel your slang that's monitoring your server on the back end
00:32:07.000
you want I always think that the best companies are those that if you describe
00:32:11.320
it to someone the average person on the street they have no idea what you're
00:32:15.120
talking about and they think it's super boring if people think it's cool or
00:32:19.000
sounds fun really interesting it's probably probably not gonna make a
00:32:23.500
good business long term you want something that's a deep part of that
00:32:28.480
company's in core work and core structure and will forever forever be
00:32:33.240
that and I'm boring like people is one of the most common questions I get when
00:32:37.960
I'm interviewed is hey it's almost like what's hot right now what should we build
00:32:41.620
what should we do like what industry should we go after yeah and this
00:32:44.980
crypto we just have yeah we avoid stuff like that and i say well if it's still popular in five years
00:32:50.840
yeah we'll pick it up but you won't see us and selling the biggest trending business we're usually
00:32:56.380
selling boring b2b sass it's been around for ages it might not have a fancy looking website
00:33:02.440
it might not have a fancy sales team it's probably just a good product where people like it i think
00:33:10.080
a lot of people talk about product-led growth i like businesses that fundamentally have that
00:33:16.080
if you're a business where it's similar to what i've built in a service business it's
00:33:21.000
if you have a good product and a good service i don't need to be the best sales guy in the world
00:33:25.480
for people to want to work with us they come to us based on a reputation and based on if you want
00:33:30.560
to sell a sas company for 10 million dollars hopefully you realize that we are your your
00:33:35.340
best option yeah you can speak to lots of people but hopefully you come back to us and that same
00:33:41.360
you want something where you are the top of mind
00:33:58.900
I think you need to be interested in that industry and niche.
00:34:05.860
i read absolutely everything that happens in the industry very related and even slightly
00:34:12.780
broad on that because i'm generally interested in it because i'm getting paid to do that or
00:34:17.460
because because i'm told i have to i'm generally interested so like if i wasn't and you said oh
00:34:23.200
what do you think about this ipo or what do you think about this product what do you think about
00:34:28.400
this person it's important you have a fundamental understanding your industry and if you're not
00:34:33.660
interested that's not gonna work um i know a lot of people say you don't necessarily have to launch
00:34:38.440
a business that you're personally interested in i don't really think that's true yeah particularly
00:34:43.680
if you're gonna be in business for 10 years or 20 years or 30 years it has to be something you're
00:34:49.820
truly interested and passionate in at least somewhat related to that somebody's looking
00:34:56.120
to buy a company i get asked this all the time non-sass people come across the founders got a
00:35:01.760
wants to sell what should he what should they look for what are the things they're supposed to be
00:35:05.960
doing in due diligence so the first thing you should do before you even get to due diligence
00:35:09.200
is establish what are you good at what are you good at what's your what's your value add if
00:35:14.360
there's three things in the world you'd say you're best at or top percentile what is that is it sales
00:35:22.700
is it marketing is it design is it development and then you want to find a product which is
00:35:28.600
usually lacking in those areas doesn't necessarily have to be like terrible in
00:35:34.520
those areas we want a business where you know you can go in there and improve it
00:35:39.100
and often it'll be difficult to know what that might be so maybe their
00:35:42.900
homepage converts at five percent you're not gonna know if you get that's gonna
00:35:47.300
go to seven or fifteen but at least if you're say a CRO expert you might kind
00:35:52.760
of say well I'm pretty confident with some good split testing and AB testing I
00:35:57.600
can improve that or it might be that a lot of sass companies particularly b2b companies we see
00:36:04.100
are terrible email marketing they don't they might send emails but that's about it they don't do
00:36:09.440
converting people from free trial to paid that's part of their flow it's usually quite bad recovering
00:36:15.780
cancelled accounts usually never happens encouraging people to upgrade usually never happens so if you
00:36:22.740
spot companies like that and you're good at email marketing and you understand the customer journey
00:36:27.500
those can be fantastic businesses and then again I definitely think you want
00:36:32.360
saying that play to your strengths you want saying you're at least interested
00:36:35.900
in I mean not deep domain the way I look at it is even if even if you're
00:36:41.240
acquiring this business I say you have investors you're not gonna be the one
00:36:44.180
wanting it day to day every business at some stage has a problem that happens at
00:36:48.860
10 p.m. on a Sunday or 4 a.m. on a Wednesday whatever it is you have to
00:36:55.100
have a business where you're not gonna hate it or yourself if you have to make that personal
00:37:01.420
sacrifice to handle it so the way i look at it is like if you're on vacation if this business
00:37:06.320
interrupts you for the entire vacation and you lose your one week of vacation you have per year
00:37:11.040
are you going to end up resenting the business or the team or whatever if the answer is yes then
00:37:18.300
maybe firstly you should probably not be buying a business at all and you probably should not be
00:37:22.620
buying that business and then in regards to the due diligence of like here's the things to go look
00:37:28.860
for you know to make sure that you're not buying a dud if you're not working with an mna expert
00:37:33.700
what are those what's that checklist yeah so i'd say firstly hire people to help you in that
00:37:38.180
process don't try figure it all out yourself um even if it's me doing an acquisition i would
00:37:42.860
definitely be calling in favors or hiring people who like i can't buy any code what are they gonna
00:37:47.740
to do yeah I can't I can't I can't write code so I'd hire a developer friend or agency to go through
00:37:53.260
the code and the way I like to do it is don't it's the same with valuation companies there's
00:37:57.800
companies out there that will provide valuations and you can pay them 10k to do a valuation but
00:38:02.980
then they won't actually sell your business you can find companies out there that will do due
00:38:06.440
diligence but they won't actually then run your business so I like to hire companies to give you
00:38:13.540
a scope or a quote and say, Dan, you have a marketing agency.
00:38:23.420
Because then from there, you can say if they miss stuff
0.83
00:38:26.300
or they have no incentive to bullshit in that process.
00:38:28.780
But for the most part, they're going to do this for free
00:38:33.300
Yeah, so firstly, you're entering that in good faith.
00:38:36.860
You can say, hey, look, I'm looking at acquiring this company.
00:38:39.860
Yeah, if I do and I give you $10,000 a month, $50,000 a month,
00:38:43.520
million dollars a month doesn't really matter what that number is what would you do for me
00:38:47.340
they're gonna I can promise you they will dig deep into that business to tell you what you need to
00:38:51.600
ask what you need to look out for um if you just hire someone to look at it anyone can give you an
00:38:56.660
opinion like yeah that business is great buy it but are they actually gonna own it after are they
00:39:01.860
the one writing the check are they the one who's answering the phone at 10 p.m on a sunday are
00:39:05.940
they the one who's giving up their vacation if it goes wrong so be very careful the people you're
00:39:11.160
in due diligence are they gonna help you post sell you do need to understand as
00:39:15.780
well if you're gonna write right check ultimately you are the one probably you
00:39:20.340
are the one who's responsible for that so yes you should hire people and bring
00:39:24.420
in experts in the process but ultimately the buck stops with you you have to make
00:39:28.440
that decision if you don't understand or you don't know like make sure you do
00:39:34.320
yes I like to bring in experts to kind of understand different parts process
00:39:37.740
the fundamental thing to ask yourself is if I buy this business today do I have everything I need
00:39:45.620
to continue running their business assuming the founder or the founders disappear on day one
00:39:50.460
you just assume that it's so in reality it basically never happens but it's good but you
00:39:57.180
have to work work on the assumption what do I not know if that founder disappears and then hedge
00:40:02.720
against that that does not mean and again the arts of negotiation is creating a balance so
00:40:07.600
there's very rarely a situation assuming there's not been any misrepresentation where that makes
00:40:15.160
it a no-go due diligence is always a balancing act find a problem hedge against that problem
00:40:20.900
so it might be oh if the founder left the code is not really documented because he's written all from
00:40:27.180
from day one so contingent on the deal instead of saying oh this is too risky we're out
00:40:32.660
which is very much a first time buyer a lot of our job is that's why we like to
00:40:37.640
work with buyers who are experienced because they don't walk away when
00:40:41.060
there's that that issue so in that case you might say okay well I want the owner
00:40:46.820
to fully document or spend a hundred hours doing it before we'll release any
00:40:51.320
funds from escrow or maybe instead of a three-month training period you want six
00:40:56.360
months but you'll do things to create incentives and keep it fair it wouldn't
00:41:00.980
be I'm not paying you 10 million dollars for business anymore it's now five it's not it's not
00:41:07.020
proportionate to what you're asking I think one of the challenges with and I don't watch a huge
00:41:11.820
amount of TV but the challenge will of like business shows on TV and anything that shows
00:41:17.440
negotiating on TV I always feel like is over dramatized to the stage where people think
00:41:22.400
negotiating is all about screwing the other person over and cutting the number in in half
00:41:27.720
if you're in a process and you cut the valuation to 5 million from 10 million because there's
0.97
00:41:33.860
the code's not very well documented that's just stupid so be careful of what you have seen
0.94
00:41:41.420
elsewhere like negotiation is a balance negotiation isn't all about who's like the
0.94
00:41:45.700
the loudest or the or the the smartest in the room it's always about creating that balance
00:41:52.020
so be practical in the process and also don't be don't be afraid to ask if you're working with
00:41:56.420
us in the process and you're the buyer and there's something genuine you've spotted or identified that
00:42:02.680
makes you uncomfortable bring it up the worst thing is if you have all these things start
00:42:08.760
building up and you say hey I'm out or I'm just not comfortable almost everything can be
00:42:14.520
be hedged and sellers we work with we're very we don't hard sell them on the process
00:42:19.440
most people spend many years or months researching how the process works they will probably and we
00:42:26.020
probably do not know about this they will probably speak to other people who have
00:42:29.940
worked with us before and been like what's the bad stuff i need to know and that's usually in
00:42:35.940
due diligence stuff will come up expect it and we will train them through the process that this is
00:42:40.980
going to happen but you don't always know what that is and depending on the on the buyer you're
00:42:45.780
working with what they might spot and what might be an issue to them might mean nothing to you so
00:42:51.140
So if you're a developer and day to day you've spent the last 20 years looking at code every single day and someone says, oh, I'm a bit uncomfortable because code's not well documented, you might think, oh, that's stupid because it's easy to understand.
00:43:05.180
So in that case, it's like, well, why not offer them 100 hours of this or 500 hours, whatever it might be.
00:43:23.240
And that way, you're going to end up in a situation
00:43:25.160
where, even if you sign a contract and buy someone's
00:43:27.860
business, if you've kind of screwed them over at the end
00:43:30.480
and you know they have to sell the business because they
0.95
00:43:37.240
then once you're outside your contracted support period
00:43:40.660
in say 12 months time don't expect them to pick up the phone when so I think
00:43:47.160
it's very well just in business in general like yeah you can go to a huge
00:43:51.220
number of conferences events you can read blogs it's seemingly tens of
00:43:55.880
thousands of people out there but the one thing I've learned over the years
00:43:58.880
is actually the industry is regardless of entry and is actually very very small
00:44:03.000
and there are usually a very specific group of people that influence the
00:44:07.960
influence whether people like you or they don't like you and it's important
00:44:12.620
not to screwing people over just for your own good. I call these invisible doors.
00:44:17.020
Essentially there's doors that you don't know that might be closed because of
00:44:20.140
something you did to a person. Don't screw people over, be honest
00:44:25.020
throughout the process. I'd ultimately realize that our job is to have
00:44:29.620
difficult conversations. Our aim is at the end of the process if you sell your
00:44:33.640
business you have a great relationship with the buyer and the seller has a great relationship with
00:44:38.920
the buyer everyone has a great relationship but if there's any sort of like ill will that's towards
00:44:44.460
us we're the ones who effectively throw ourselves under the bus to get a deal done it was like
00:44:49.100
something was forgotten or i mean do it or or misplaced in the in the in the process as long
00:44:56.660
as we don't think there's anything malicious we might say well oh yeah we we mislaid this file
00:45:06.080
That's why, I mean, from a marketing perspective,
00:45:09.560
we have a difficult business to market beyond just reputation.
00:45:13.440
It was when deals happen, we can't publicize them all the time.
00:45:18.380
Very rarely get on the buyer and seller up on stage at a conference
00:45:27.200
um over the last you know decade you've been building this business thomas i'd love to ask
00:45:32.900
uh who have you be who have you had to become to continue to grow this kind of company
00:45:38.200
so i think at a fundamental level you have to be a good negotiator to sell businesses day in day
00:45:45.680
out there's no way to get around that and that means done that for yourself i think the big
00:45:50.640
thing for like i'm naturally introvert i think and i naturally avoid confrontation the big thing
00:45:56.020
for me was not learning to be confrontational but learning when to push when not to push
00:46:02.220
learning when you have leverage when you don't have leverage
00:46:05.240
learning to have that make that difficult phone call no one likes making difficult phone calls
00:46:10.580
the nature of my job day-to-day is it has to happen our team have to do that we train them
00:46:16.060
as they get more confident do more deals that becomes more more natural and you realize that
00:46:20.180
ultimately we're doing it for the good of the client and the good of the deal um another thing
00:46:25.700
you realize is that if you feel uncomfortable doing something you have to tell people we never
00:46:31.900
do things put this way I've never done anything where I've gone to bed at night saying I think
00:46:37.100
that person got screwed over or we made a we made someone do something that they shouldn't have done
00:46:43.020
never once gone to bed and and felt that so I think it's super important to do the right thing
00:46:48.720
even if that's not something that financially benefits you it might be with a deal recently
00:46:56.980
eight-figure deal the client towards the end of the process was beginning to feel a little bit
00:47:02.000
uncomfortable and she said hey Thomas I'd like what happens if I want to walk away you're gonna
00:47:07.000
like come after me and we'll say well no absolutely not if you're comfortable walk away
00:47:11.520
um in the end it worked quite well because I said to the buyer hey look so I was no longer
00:47:15.440
comfortable with your terms that you've been gradually changing therefore take it or leave it
00:47:21.840
and the buyer took it so that worked well um but if i was not willing to have that conversation and
00:47:27.760
say well of course you can walk away that never would have happened so i could have pushed her
1.00
00:47:32.480
into it and said oh well we spent all this time all these flights i've been on and late night
00:47:37.200
phone calls it's not fair like it's got this ten thousand dollars yeah so never do anything that
00:47:41.120
that makes you feel uncomfortable or bad if you do you should probably be in a in a different
00:47:45.240
business we work with a lot of people who leave the banking industry and they then want to launch
00:47:51.200
a private equity firm or buy a business and for a lot of these people their stories are just how
00:47:55.580
they hated their job because they're made to sell things they do not believe is in the best
00:48:00.300
interests of their client and you're in a position of power if I say to you hey your business is worth
00:48:04.760
a million dollars and it's actually worth 10 and then my buddy's buying that business off of you
00:48:10.020
that that can like yeah i'd probably get away with it but it doesn't really do any good in the
00:48:15.880
long run so i say learn to be a good negotiator learning just uh learning that things as a
00:48:22.360
business owner in general things will go wrong every day there'll be new problems so i don't
00:48:28.440
think there's ever a day in my life where i get up and there's not something has gone wrong you
00:48:33.360
just ultimately have to realize that as a business owner i'm lucky that i have a business partner he's
00:48:37.360
CEO. So between the two of us, we both have completely different skills. We are quite
00:48:43.880
different personality-wise. So that means day-to-day problems, we can usually separate them out
00:48:48.740
and say, okay, well, I'll deal with this. You deal with that. And that works quite well.
00:48:53.500
I think you do need to have that someone to fall back on and that kind of mechanism. It
00:48:58.720
doesn't necessarily have to be a business partner. It could be a key executive. But
00:49:03.480
having that support network is important because as a business scales what you realize as well
00:49:09.400
and this is probably the big fundamental change that happened for me beyond just refining my
00:49:14.880
skills you realize as a business grows your responsibility is no longer your book your
00:49:20.980
goals become a lot less selfish when i started out i was like well my biggest goal is to
00:49:25.660
become a millionaire kind of did not come from a background of money a millionaire to me was
00:49:31.340
of unachievably large amount so i was like okay well millionaire and then you get there and you
00:49:39.240
realize that you want 10 and you think well you get there and you think well that can just keep
00:49:44.640
going but actually what happens is your responsibilities completely change like when
00:49:50.000
i started the business i was young free single had no okay in the world i'm now married i now
00:49:55.980
have considerations in that part of my life from a business perspective we have a team of 45 people
00:50:02.440
they have kids mortgages dreams ambitions they want to do well so you realize that
00:50:10.440
a lot of the selfish goals i had starting out were not really what i think about now day to day it's
00:50:16.140
all about serving clients but also the team i don't want to be in a position where someone says
00:50:21.000
uh thomas and ismail my business partner ceo well they ran the company into the ground because they
00:50:26.640
were paying themselves all the profit driving around in like fancy cars buying nice apartments
00:50:31.780
going on vacation all the time didn't take it seriously um so that's one thing i say to
00:50:36.880
entrepreneurs really early on if you can learn one thing is before you hire maybe first couple
00:50:43.760
of people doesn't matter if you actually want to hire people and grow your business you have to
00:50:48.700
realize that once you hire people that you their life is in in your control unless you're a
00:50:55.580
sociopath you probably don't want to be in a position where you're responsible your bad
00:51:01.180
decisions are responsible for pain in their world people not being able to pay their mortgage or
00:51:05.480
people losing their job or well i've fortunately never been in a position where so i've let had to
00:51:12.000
let people go over the years unfortunately i've never been in a position where i've had to let
00:51:16.340
anyone go because we've overhired or something something's not working it's always been kind of
00:51:23.900
in good faith it's okay it's not working out um so that's a big thing to realize that your goals
00:51:29.320
when you start your business will almost definitely be selfish as you grow becomes much more about the
00:51:35.560
people you can't just walk away like you are responsible to those people and if you're not
00:51:40.880
willing to take on that responsibility don't start a business or keep it small don't grow
00:51:45.240
Hire two people, hire freelancers, work from home, do we want.
00:51:49.680
Everybody should check out your blog, FI International.
00:51:52.120
You've got a lot, a lot, a lot of great content on buying, selling, all the whole process.
00:51:58.960
So if you can't find me at a conference, then you'll find me online.
00:52:02.840
All of our social media channels are super active.
00:52:04.880
So Twitter, Facebook, Instagram, LinkedIn, find me there.
00:52:13.800
um you can always email me i would say in general we've very intentionally built a really good team
00:52:19.360
of people who are good at their jobs and they're better at their job than i would be at their job
00:52:23.980
therefore if you have a specific question yes you're welcome to reach out to me but generally
00:52:30.260
the team if you're looking to sell a business we can give you a valuation probably not talking to
00:52:35.080
me want to buy a business speak to that team they're good at their job so you're welcome to
00:52:39.840
Seek me out, but I'd always encourage you to thomas.feinternational.com.
00:52:44.360
So you can always email me directly, but the team are great.
00:52:56.440
Thanks for watching this episode of Escape Velocity.
00:52:59.660
Be sure to like and subscribe and leave a comment with your biggest insight from our conversation.