In this episode of SaaS Boss show I interview Thomas Smale of FE International.
Thomas shares his advice on what it takes to have a successful exit when you want to leave your business. However, before going down that road, much thought and planning should go into getting an accurate valuation so that you can have a profitable exit as well.
At FE International, Thomas Smale has consulted or worked on over 800 transactions. He’s pulled together some of the best practices from most experienced investors and snippets of knowledge from their acquisitions to provide some guidance for new and seasoned buyers alike to answer: how do you value a SaaS business?
Things we discussed:
Outlook on the market due to COVID-19
SaaS valuations
What founders should know to get the best offer for their SaaS company
The process of selling a SaaS
Will the founder or the team need to stay after the sale?
What can we do now if we consider selling a company in a year?
What do buyers look for in a company they are purchasing?
and much more.
Learn more about Thomas: https://feinternational.com
Thomas Smale Interview Transcript
Natalie: [00:00:00] Today it is my pleasure to speak to Thomas Smale of FE International about selling and buying SaaS companies and what we can do to make our products sellable. Welcome to the show Thomas.
Thomas: [00:00:14] Thanks Natalie.
Natalie: [00:00:15] So Thomas, you are the largest size broker with over 800 deals, right?
Thomas: [00:00:22] Yep. That, that’s correct. We also work on e-commerce and content based businesses, but we’re pretty well known for SaaS and would definitely the market leader in that space.
Natalie: [00:00:33] How did you start working with the SaaS founders?
Thomas: [00:00:36] so, I founded the company in 2010. I was at college at the time and I started out trying to find ways to make some extra, extra money and I started buying selling domains and then buying and selling for websites myself.
And as a college student, I didn’t have any money. So the problem we’re trying to buy business is. You need money to buy a business, and if you want to sell a business, you have to have one in first base state. Because I had never heard those things. I was maybe buying something for $100 selling it for 300 which was fine.
But then I realized the skills you learn, just buying and selling in general, who’ve gotten us to the size are applicable as you get bigger. If you can negotiate for $100, you can negotiate 10,000 you can negotiate for a million. It doesn’t really change a huge amount. so I started producing a lot of content.
I had a course, but lots of different things. Teaching people how to bond. So websites as it was at the time. Started teaching people, I thought I’d make all my money as a coach in the kind of selling people books and coaching and whatever that might be.
But it turned out what happened is people read my content or listen to my content or sold the content, whatever it might be like came to me and said, Hey, tell them us are in this business. Can you set up for me? and at the time I had, I didn’t really know what that, that meant at a professional level.
They would pay me to sell the that business, fold them, and then it kind of snowballed from there. And if you go back to 2010. What we do today didn’t really exist. The SaaS industry was much, much smaller. if you had a hundred thousand or a million or $10 million business, there weren’t that many firms out there that could help you, particularly not in the online space.
We started doing deals with people who, relatively well known, people who might have had their own podcasts or their blog with an audience. And then those people once said, work with us. Tell their friends, their audience, and then it really snowballed. So in 2012 so two years in, we completely pivoted away from doing lots of different stuff into just MNA, where we help people who own businesses sell those businesses.
And then if you jump forward to 2010 that’s still what we do today, just for the team of. Oh, you have a 50 people, three main offices. and we welcome much bigger deals today than we did five years ago.
Natalie: [00:03:07] So your team consists of over 50 people.
Thomas: [00:03:10] Yes, that’s right. Yes. So we have a breakdown of, team in London team in New York. I’m in San Francisco with a small team. and then we also have a small team who are remote. And at the moment, obviously with the, the virus, everybody. Hiring has come to a bit of a slowdown in the last few weeks, just cause we’ve physically gone on board people.
But we are also still hiring people. we’re growing a lot. We don’t see that slowing down.
Natalie: [00:03:44] In the market that we’re in right now, how is it affecting what you do and what’s your outlook on the market in the next few months to a few years?
Thomas: [00:03:52] Yes. I guess firstly, why caveat is things are changing very quickly.
If you asked me this question two weeks ago or a month ago, probably would have given you a different answer. If you go back to February, February was our biggest one. so we did more deals than ever before. More deals by value than ever before. As we’ve moved into March, deals are still happening but buyers and sellers are not necessarily nervous, but I think people have been fade, distracted by personal disruptions. Lots of people have friends or family members. You might have like lost that job. they might have, depending on what city they live in, they might, if they have kids, that kids might not be at home.
I’ve had some clients saying I’m still working, but I have three kids running around the house. It’s difficult to, to concentrate and focus. most people in the industry we work in, I already have the ability to work remotely. So that’s not really been a huge disruption. And obviously the public markets are kind of jumping up and down.
So some investors, kind of waiting. but what we’re finding is that the majority of small businesses we represent have very consistent cash flows. So for the last 10 years, you could have put your money in the public markets, say into a S and P 500 index fund. I made 10, 15, 20%. Yes. Doing literally nothing.
And you could, you could buy a buy business, run it yourself, and generate similar but better returns. so now the market shown way down, earning an online business can be run from anywhere in the world, suddenly becomes extremely attractive. So in the short term, things are a little slow, just because by as a very disruptive, but there was a still happening. And we expect it to pick up significantly. Probably say April, may onwards. Once people settle in and they go, well, okay, I lost a much a bunch of money with my public stocks. Why not buy business like run, enter in the world?
And then I never have to go back to my day job. The ability to work remote day as to think it’s definitely desirable for a lot of people hence why we think the market will continue to pick up. And if you go back to 2010 when I started the company that was coming out with the back of the previous recession, and that really created the industry, because back then things like SaaS weren’t really that mainstream.
Natalie: [00:06:25] What would your advice be to SaaS founders, in this current uncertain times? Not necessarily those that are looking to sell, but just in general.
Thomas: [00:06:33] A lot of that advice, it depends on what their business is. we’ve seen a lot of businesses doing really well. we’ve seen a lot of businesses doing fine, and we’ve seen a lot of businesses that are declining somewhat, and that, that really reflection of the industry you’re in.
And then I think a lot of the metrics, things like churn, you’re not necessarily going to see right now. It might take a couple of months for companies to start counseling if they’re going to counsel. So I think for most founders, I think now, particularly for the next three months, now is a good time to be conservative.
Not super aggressive with any kind of growth strategies you might have before. And if you’re self-funded, I mean, we’re a self-funded company. We don’t have any credit cards, external that investors, so myself and my business partner funding effectively, we’re profitable. We have cash in the bank.
We’re in a very fortunate position where if you have a self-funded, profitable business, you’re doing significantly better than a lot of other companies that might have to lay off a huge number of people.
Some will probably even go completely out of business. so I think there is a lot of personal disruption. Make sure you have enough cash to pay a team if you have to make any changes. They like tough decisions. I think it’s best to make those sooner rather than later. one of the things we found is not that we necessarily need to make cuts, but there’s a lot of expenses we previously paying that we’re probably not really that necessary.
So subscription services, lots of things like that. So for us has been a good opportunity to go through it and say, well. Here’s this tool we’re paying $100 a month for. We’ve never used it. Let’s just cancel it. whereas when you’re in growth mode and everything’s going up, it’s easy just to ignore the things.
So I think for a lot of founders, instead of just focusing on aggressive growth, maybe look at ways where you can be a little bit more conservative in the short term.
Natalie: [00:08:37] I think generally speaking for the SaaS industry as a whole, I think being in this industry is just a blessing really. Because all other businesses dentists, restaurants, unless your SaaS is in the land space or like similar, they’re taking hits, I think with you already generated in some. A monthly income and you don’t have to, even if you’re not growing, you’re still getting this income, right.
Unlike other companies that unless someone’s coming to them for a face to face interaction, they’re not generating and then a business. So I think like the SaaS industry as a whole is really a blessing.
Thomas: [00:09:16] Yes. For sure. We actually just published an article about this, or it’s about to be published in off South magazine that we run from SaaS back.
But we’re talking about how one of the big advantages of SaaS is you’ve got that recurring revenue. So even if you’ll not growing, you still have money coming in every month, but it’s like you say, a lot of businesses, unfortunately right now we’re not in that position. it could be a lot worse.
Natalie: [00:09:43] I have read this book Built To Sell and I really liked the idea of that where, if you have not read prior to recommend it, where you really think about your business make it sellable.
If the business realize heavily on you as the founder, then your business is not really sellable. how do we build and grow our businesses so that they can be sellable so that it’s not like three years down the road when we are ready to solid.
Oh no, you need to spend a couple of more years not having this business as much reliable on the phone there. So what are some things that we can start doing right away or as soon as we have an idea for SaaS, for example, what are some things that we can put in place?
Thomas: [00:10:24] Yes. I think firstly, like fussy is a good book. It’s definitely worth reading. my immediate caveat would be the example he uses in the book is of a, a web design company or like a, an agency. The founder. I think it’s just one founder in his example who is they provide all of the service. They meet all of the clients.
They do a lot of the work and the argument in the book is, well, it’s reliant on the founder. If the founder leaves the business doesn’t have much value. The one of the good things about SaaS intrinsically is people are signing up for a software product effectively. Well, it’s generally not that relying on the founder.
What we do tend to see whether the reliance on the founder is they’ve usually built it themselves with a partner. So if an or a program or a developer, engineer, whatever you want to call that, they’ve written all the code themselves.
So one thing we see in SaaS businesses. The RNs should definitely do if they’re considering selling anytime. And even if you don’t want to sell today, the vast majority of people that speak to us and meet us have no intention of selling. first thing is like, don’t commit your code.
Keep a kind of handbook of the changes you’ve made. What different things do. I’m not developers. I’m definitely not an expert on the, the best practices. So if tomorrow you had to leave your business, could I know the competent developer come in and do that same work that that you’ve been doing?
And then on the marketing side, let’s say you personally driving clients back to your business.
From a buyer perspective, there might be a little bit of, love it, too much reliance on you. So I’d say if you have any marketing channels, like podcasts, like conferences, whatever they might be, which relies on you physically being there, maybe try and find ways to limit that. So that might be, if you have a team, maybe have some of your team members go to the, that or.
Well, just accept the fact that as part of the transition in the sale process, you will have to spend a little bit longer with the business. So in general, basically any business can be sold, but the more you can remove yourself and the businesses Alliance on you as the founder the easier it’s going to be itself and the less time you’re going to have transitioning out at time of sale. So if that thing’s well documented, sometimes you see founders or sit in on the demo calls or the sales calls doing all the follow-ups.
If you’re going to hire people to do that, that’s definitely helpful and a good thing. but it does also depend on the size of your business. If you’re up $10,000, MRR is probably impractical tire, like a team of salespeople. If you’re at $100,000 MRR, then you should probably not be the one right in the code, and you should probably not be the one giving the demos. Well also, it’s a bit of a balance. You do also need to focus on like running a business. You call them. It’s impractical to say, outsource everything from say one, particularly if you’re, if you’re self-funded. so there’s a little bit of a balance between, yes, you want to build a sellable business, but you will say, have to have a business that’s actually making money and growing.
Natalie: [00:13:45] Even if the founder is the one who is doing all day demos and outreach, I would still recommend to document as much as possible all the steps that you are doing because that would be the easiest way of you when you’re ready to bring on someone who can help you do that. To train them so that you don’t need to sit next to them and explain, this is how we do it and you don’t need to spend time creating those materials. Right. Just a report like a video off or screenshare how you are ready to do that.
Thomas: [00:14:17] Yes, exactly. I mean, it’s a really good point. You bring up the kind of things that make your business more sellable. Also make it easy to onboard new team members and new employees.
In general, if you have documentation, which is good enough for your employees, well, contractors or freelancers to follow. Then it’s going to be good enough for a buyer as well. so that’s a really good way to look at it. And that’s why when we talk about building businesses as sellable, I’m making it more sellable.
Even if you don’t want to sell today, all of the things you can do to make your business more scalable. Also just make your business better. In general, you’re going to onboard new employees and team members better. They’re going to learn faster, be more productive. Get you better results.
Natalie: [00:14:58] That’s a great point.
when you make your business more sellable, that’s exactly what has to happen overall. The business is going to improve from all the perspectives of special operational.
Thomas: [00:15:09] Yes, it does. It definitely.
Natalie: [00:15:11] is there a minimum MRR for SaaS companies that you start when you start working with them?
Thomas: [00:15:16] In terms of companies, we will represent an actually sell. We don’t necessarily have a minimum say like go, I know him to be $1,000 MRO in terms of when we will speak to people and have a conversation. Any stage, if you’ve launched a business, you have some traction, we’re happy to talk to you and pointed in the right direction, particularly if you want to sell one day in the future.
Natalie: [00:15:37] I heard you say that there’s no formula that can be applicable to all SaaS businesses. but just a rule of thumb. How much a SaaS can be worth based on their MRR or different metrics?
Thomas: [00:15:51] Generally, no, I don’t. I’ll give you some reasons why. No. firstly, if I just gave a generic range, and I’ve seen this happen in the past and then lots of groups in communities, someone goes in there and says, I have a business making $50,000 MRR, we’re all, what’s it worth? And there’s always 10 ounces. Some people saying, Oh yes, the formula is five times ARR. That’s way business as well. And then someone else comes in and says, it’s three times. Someone else says it’s, it’s 10 times. the reality is it’s a range and it really depends on the business.
lots of different ways this could go. You could have a business as worth, say. As a multiple of your MRR, and then you analyze it, you could have a business worth five times your net profit. So that’s your MRR minus any necessary expenses. Not including your, your salary. So we call that net number SDE, and then we use the extrapolated for 12 months.
The SaaS companies we sell on our fridge will be somewhere between three to six times that annualized number. Um. But there are businesses that have the higher end of that range and the lower end of that range. so that’s why we always keep our doors open for conversation cause our valuation model has, are either over a hundred thousand data points.
We pull into it from deals we’ve completed in the past. and every business has different variables and there are things that are far too difficult to explain in a, even a, a blog post we’ve written it. 20,000 word piece about valuation before, and that still can’t fully explain how to do it because there are 70 different factors.
So as a rule of thumb, somewhere between three to six times annualized SDE, but the number could be higher than that. It could be lower than that. and it really depends, but there’s definitely no fixed formula. And every business is different. If you gave us 10 different businesses to what valuation team, every single business would have a at different multiple.
It’s not three, four, five or six it might be 3.67 it might be 6.13 so it really depends on various, hence why we try and avoid giving generic ranges and generic multiples. Because it does depend. There’s no set formula. I guess that’s part of the value we add as well. Like we have that data, we have a whole valuation team, and that Ernie job is to value businesses.
So we very much applier a science to it with a model that has lots of data points. It’s not just five times or four times or 10 times or whatever it might be. So there is a lot of misinformation out there, which to be honest, it’s like one of our biggest challenges as a company is. Getting set up, misinformation and explaining to people that what they were told by a random person on Facebook or Twitter or LinkedIn or whatever it might be, is not necessarily the reality.
Natalie: [00:18:59] So for example, if you realize that they can sell for let’s say, $1 million, and then your fee is how much.
Thomas: [00:19:09] 15% of that.
Natalie: [00:19:10] So then the whole amount goes to the founder because, there’s also a thing called taxes. Right. And that’s a pretty hefty amount.
Thomas: [00:19:21] Yes. we work with clients all over the world.
We don’t give tax advice cause it really depends on your personal situation. generally faking, and this is definitely not tax advice, usually are going to be paying capital gains.
So the advantage of selling a business is the, you don’t have to pay income tax paying capital gains, which in most countries, for most people, is a lower rate than the regular income tax you pay. but there are other exemptions, in the U S for example, if you’re going to C Corp for five years, he might pay no tax .
In England, they just actually changed this very recently, but they used to other attacks entrepreneur’s relief where you’d pay a lower tax rate on the first 10 million, like since reduce that to 1 million recently. so part of the reason we don’t and can’t give that voice is our clients are everywhere.
Is very complicated.
It’s in the buyer’s best interest for you to pay the least amount of tax possible because then they have to pay less for the business. Well, the number you’re willing to sell for is, is less a LOA. So buyers in general are really happy to work with you as a seller to get that liability down. that’s part of the reason why it’s worth having that conversation early.
With us because you might say, okay, well a million dollars is the number I want that she needs to get more than a million dollars cause you have to pay us to pay other professionals in our pre tax. maybe you have some money. Investors maybe have some debt. Maybe our business partners, maybe we have employees who get bonuses tied to a sale.
So $1 million can very quickly become $500,000. Hence why it’s good to have that conversation early and figure it out. The worst thing. From our perspective is, is in progress sets a a $10 million deal. And then the seller last minute realizes, Oh, I have to pay tax. I now need $12 million. So we spent a lot of time, we don’t, we’re intentionally not a marketplace.
We’re M&A firm. You’re paying for our advice and our team’s expertise. So we spent a lot of time vetting the clients we work with. We don’t just work with anyone that comes in and it definitely causes some frustration. We get a lot of feedback from people saying, F he sub cause they, they wouldn’t welcome me or they wouldn’t take on my business.
That’s because we can come on to premium with buzz cause they know on average you’re only going to be looking at good businesses with founders who are motivated, sell and realize they have to pay professional fees, tax, and anything else that might be relevant. That was one moment.
Natalie: [00:21:57] Your success rate is 94% which is absolutely stellar.
Now, how many companies apply to work with you and how many companies do you actually started working with?
Thomas: [00:22:11] I don’t have the number of my head in terms of how many apply to work was every year, but it’s in the thousands. Tens of thousands. If you track all of the different contact points we have in terms of the number of businesses we take on, way on the 1% of companies that inquire, should we say no to the vast majority.
We like people who have already done their research. Say for example, if they’ve listened to your podcast first and said, well, I had nothing in Thomas speak. This is all answered a lot of my questions to us. That’s a good thing. Cause they’re taking the process seriously and doing the research versus people who just come in and say, Hey, I want $1 million.
Get me $1 million. Thanks.
Natalie: [00:22:52] So what are some things that we should consider if we think about selling a company. And again, it’s not like this year, right? But we’re always like in a year or sometime in the next two years.
Thomas: [00:23:04] So first the putting the most important thing is like, how much do you want.
The majority of people will have either a time-based goal. Say I want to sell by the end of next year. Well, a value based goal, I want to sell for $10 million. Most people then have a, they think they have one of those is actually a combination. So most people think they want to sell next year, but in reality, they want to sell next year, assuming it’s worth at least X.
Maybe they want to pay off debt. Maybe they want to buy a house.
Maybe they’ve had kids and they want to spend more time with the kids. maybe they’ve got married and they want to spend more time with us house. Maybe that. Planning on getting married. Maybe you want to go traveling. Lots of different reasons. We see people selling, I wouldn’t say there’s anything specific beyond that you have to do, cause it really depends on your of puzzle, circumstance and situation.
And then once you have that, you can come up with a plan that’s specific to your business, because let’s say for example, you have a business today that’s worth $10 million and you want to sell at the end of next year for $12 million. Assuming your business is good and growing steadily, it’s reasonably likely your business is going to be worth $12 million in a time anyway.
Whereas conversely, if you come to us in your businesses worth $1 million a day and you want to sell for $10 million in 12 months time. That’s not necessarily impossible, but what you’re going to need to do to get there is significantly different from the person who already has a business worth 10 million and just has to affect grow 20% so that’s why it’s really important early on, you establish, well, your business is worth and how close that is to go because your plans might need to change.
And
Natalie: [00:24:46] is this something that your team can help and advice on? for example, if I’m, I have a business that’s worth this right now, but I want it to be that, then is it something that your team can help and advice? Those are the areas of improvement that you need to work on?
Thomas: [00:25:01] Yes, definitely that. So we spend a lot of our time, the vast majority people who come to us are not ready to sell now.
They just want to get an understanding of, well, that business is worth today. So we spend a lot of time with people. Who one evaluation and then come back in. It’s not uncommon for people to come back in a year or two years or five years, seven years. That’s why it’s important to find someone you like and trust early on. A lot of people think with an advisor, it’s all about like, who has the smallest fee? Who has the fanciest website or whatever it might be. It doesn’t really matter what their website looks like. It doesn’t really matter how much they charge.
You should really be looking at who do you think is most likely to sell your business. And he’d actually like and get on with.
Natalie: [00:25:48] Do you see that there are some low hanging fruits that founders can work on or fix when they come to you that majority of them have this problem or almost everyone should focus on those areas of improvement.
Thomas: [00:26:02] Yes. I say plenty of the most common one, and it does depend a bit on the business stage. One is people who don’t outsource support still amazes me. How many founders a 50 K MRR, all still on school support tickets themselves?
Generally, the founder always thinks they’re the best person to be doing sport, but they usually not. Particularly SEO if you’re busy. I used to think I was the best person to answer all of our inquiries, but in reality, as we’ve grown, we’ve got too big. So I usually kind of joke that I’m the worst person to try to speak to because I’m really busy and I have Fiji other lots of priorities, so I’m not going to give you as much attention as the person whose only job is to talk to clients.
Exactly the same in a SaaS business. Yes, you might be the founder. Yes. You might know more about the product than anyone. But that doesn’t necessarily mean you’re the best person to do that. Oh, say one outsource support as soon as you can. Lots of people make that mistake. The second one that we see almost all the time, particularly with self funded, is pricing.
Almost always too low. A lot of buyers we work with, when they acquire a business, the first thing they do is increase prices. Doesn’t necessarily mean they, don’t grandfather in existing clients, but they’ll immediately increase prices. The majority of products we see are not that price elastic.
Meaning you can put your price up and the mod will not change disproportionately. and usually to us, that’s usually a psychological thing by founders.
No, they could charge more, but they just don’t want to, and they’re resistant to it based on what they’re willing to do. but ultimately what you say to people, if you don’t do it yourself. A buyer’s going to do it, and they’re just going to extract value immediately. so that’s probably the most common thing we see.
I mean, pricing is no, exactly. So it’s for sure, but there’s no reason why you can’t test different pricing. And I’d see what, see what happens.
Natalie: [00:28:02] I brought a couple of your interviews and one thing that interested me was that different buyers are looking for different things in the company that they want to purchase, which, which is surprising, right?
Because I thought that there you focus on those five things. but no, some, some buyers want actually to see the numbers that they can improve. Others want already to see good numbers. So. As a general recommendation, what do buyers look for in a company that they are purchasing?
Thomas: [00:28:34] Yes, you are right.
It does really depend on the buyer, but in general, almost all buyers, and you should always assume that they’re looking for a business that makes as much money as possible. So if you have something like pricing that you can change and you can increase the revenue of your business. There is almost no situation where that’s a bad thing to do.
well I, it really depends. you work with three main types of buyers. So firstly, you have individuals, partnerships. Um. That could be all sorts of different groups of people. They might be buying businesses anywhere, generally from $10,000 to $5 million.
They usually people who have full time jobs, and they might be the kind of people that are at the moment in the current environment are saying, well, I just lost my job. Or I like the idea of working from home and having more control of my income. Maybe I should buy a business. It can move on from anywhere in the world.
You then have strategic buyers, strategic buyers, really very, they can be buying again anywhere from $10,000 to the biggest companies that exist in the world. And I always say that basically every buyer is in some way strategic. They’ll have a strategic reason why they’re requiring it might be the customers are a good fit for another business arm.
It might be financially, the business has a revenue party folders. Beneficial to them. it might be they’re like a really good developer and they know the tech stack better, better than the previous owner. most people wrongly assume that that business will get acquired by a strategic buyer.
And by that I mean someone that. If you say to the average founder, name five companies that would buy your business, almost all of them will name big competitors in that space. So say, but Derby, Apple. Facebook, Instagram, whatever it might be. Depending on their business, everyone thinks some huge company is going to come along and buy them.
Yes, that does happen. and that’s what people read about. Says what a confirmation bias. You’re like, Oh, Whoa. This company got acquired by Facebook for $1 billion. My company is similar, therefore I will also get acquired for $1 billion. the reality is the vast majority of acquisitions don’t go to companies like that.
And then the final group is investors, private equity firms, funds.
You hear them cool. Lots of different things, but fat fee, they are people who are using other people’s money. To acquire businesses. they generally are financially motivated, so they’re interested in how much money the business is making, but that’s where it really varies. Funds have, we have thousands and thousands in our network, and there is almost no similarity between them.
They will have different criteria, just generally, that’s going to be based on cashflow or revenue. Hence why. Every single buyer group, how much revenue you’re making is that I’ve been to everyone. How much profit you’re making is relevant, almost everyone. And then probably the third thing is like whether or not the product is strategically a good fit of saying they’re interested in.
And that’s not something you can control or change. You shouldn’t pivot your business because Apple will say they don’t like the space you’re in. If you’ve already built a product in the HR tech space, then you shouldn’t pivot a business based on feedback of a couple of random people.
Because there are lots of funds who just by HR tech businesses, and then a lot of businesses would never buy an HR tech business. So there’s not right or wrong. but a lot of people do get either bad advice or they get a little bit kind of, they changed their mind or they get worried because they’ve been told by one or two people that.
The industry they’re in is not popular. So lots of people make the mistake of trying to build a business around what they perceive to be popular loss? People will ask me if they’re early stage like, Oh, what’s a hot industry right now to, to build in? are we saying that’s a stupid question because what happens, what’s hot now?
It’s probably not going to be hot in 12 months. As we’ve all seen in the last month, and we will see in the next coming months like lax, one events do happen, things do. Things do change quite quickly. So again, the answer to what was it, good business a month ago, most people would have said, Oh, like travel industry, SaaS, where people are flying and traveling than ever before.
But if you’re in that industry today, no one would give you the answer. People would say, video conferencing. and then in six month’s time, it will no doubt be something completely different. yes, alternative buyers a different, there’s no right or wrong answer. Fundamentally, buyers are looking for a good business. It was well run. We’ll continue to make money, and it does actually make money. All of the other things, really personal preference. So you definitely should never build your business with one bar in mind.
Natalie: [00:33:50] I hear from many founders, and even my husband has this situation where, someone comes and say, Hey, we’re interested in your business. how often did you come across something that the competitor, for example, is trying to get all this information?
Or what are some pitfalls that we should watch out for when we have someone who comes and says that, Hey, I’m interested in your business. I’m looking to buy let’s talk about this. And then you share all of the information only, only to know that in, in, in a week. No one’s interested in you.
Thomas: [00:34:23] Yes. Unfortunately It does happen a lot. I guess for context. Over the last 10 years as the industry has gotten more competitive by A&M and firms like us, well, private equity firms trying to buy businesses, they’ve, the, the smaller firms have needed to get significantly more aggressive in terms of how they run business.
So we do not do any outbound email. very rarely cold email anyone saying, Hey, we have a buyer for your business. You should set up. Cause it’s, it’s not true. smaller firms, if you’re trying to start in the space. Yes. Have to do that all the time because they haven’t stolen any other businesses, so they didn’t have any word of mouth.
They didn’t have any credibility to get into. You don’t poke offs. they didn’t have the money to go the events. so they have to kind of mislead people. Same with buyers. A lot of buyers out there know that if they can cut out the middleman, I, yes, that 99% of the time they’ll get a better deal cause they can negotiate.
Have sneaky terms or clever terms. and there’s also just a lot of, on the serious firms out there that probably don’t actually have the money, I will just reach out saying, Hey, I’m backed by private equity or this VC fund. I want to buy your business. And most people, when they hear private equity or VC or anything like that.
They get excited and they think, okay, well this is my moment. Someone who’s going to buy my business a millions or tens of millions or billions of dollars. So they will openly disclose a bunch of information, in general, I would say, unless you know exactly who you’re dealing with, so if someone, you maybe a competitor or whatever, if you know them well, it’s really up to you what you’re willing to disclose and what you’re not willing to disclose.
We have a very set process in terms of what we’re willing and able to provide to buyers if we’re representing you, but really it’s down to your discretion. I would just say generally speaking. If you don’t want to hire an advisor early on, and I definitely would suggest you do similar to if you get, if you got sued and someone served you and said, we all suing you, the first thing you do is not cool up to the judge and try and like negotiate a deal yourself.
It’s exactly the same in your, you would called your attorney same. If you’re selling a business, you should be hiring an have iPhone. If you don’t want to do that, yes, that’s fine. Which one says success will be lower, but make sure the buyer as much research as you can do is serious and qualified.
Have they bought other similar businesses before? Do they have the cash? Do you like them? It’s a really big factor that a lot of people forget. Most people assume that our job is to find you, the buyer who will pay the most money for business and well, that is mostly true. It’s less important. You find someone who’s a good fit.
But if you are actually in a position where you do want to sell, you should probably just hire a professional because it’s, there are lots of different, lots of different sneaky things that buzz will do to mislead, to get information from you that you probably shouldn’t not give them.
That’s really what we make our fee for. Knowing these things that you yourself, you could read all the books in the world, but private equity funds and people who do this for a living are sneaky and they will do things to get information that you probably shouldn’t be disclosing and they can wait also, but they can also waste a bunch of your time.
I know lots of people who have spent months working on. What they think is a potential acquisition cause they think they can save 15% by doing themselves and then in three month’s time they haven’t sold and they’ve completely wasted that time. And then that only then do they actually realize the true value of hiring a profession in the first place.
Nine times out of 10, you will appreciate you’ve done that versus trying to do it yourself.
Natalie: [00:38:16] What are some metrics, specifically, if there are any lesser known metrics that are impacting the multiplier for a evaluation?
Thomas: [00:38:26] lots of different factors that affect valuation.
probably some of the most important ones. so your growth rate, well, that’s really a metric as such for your growth rate is, or almost always one of the most important. A second, it’s probably revenue churn. If you have a net negative revenue churn or your upgrades outweigh your downgrades and constellations each month, then that’s a very powerful metric.
It does tend to be reasonably uncommon to see with self-funded small businesses, it’s much more likely if you’re a much bigger company like Salesforce, for example. . They have a sales and retention team on, they’re working with big enterprises probably grow and buy more seats every year. that’s definitely an important metric to keep track of.
It really depends on the buyer by, as Karen look at lots of different metrics to, you could spend your entire time obsessed over particular metrics. I’d tell you right now, and then you could speak to a buyer and they say. They don’t even ask you about that, that metric.
So let’s say in general, you should focus on the metrics that are important to your business, not what you think is important based off what you think a buyer will think is important. So ultimately, if it’s a metric you can help track that will grow your great business. Do that.
If we are onboarding you as a client, we will ask you what the important metrics are, what you track, and then we will use the best metrics. When we’re talking to buyers, we will say, well. In this business ticket response time is really important. Over the last 12 months, average response time has gone from two hours to one hour during business hours.
This business is good, this business is improving. but if response time is an irrelevant metric cause you only got one support ticket a day, then we probably not use that. We probably use something like right conversion rate from conversation to becoming a paid client. It really depends.
Natalie: [00:40:32] It is a common belief that founders. Need to stay after the sale for a few months to a few years, which I’ve heard your interviews and it looks like that’s not the case in majority of cases, but what about the team?
This team needs to stay. For example, if I have a team of support or like developers when I sell the product, does the team use to stay as well?
Thomas: [00:40:53] Yes. If I see 20 or found a question, yes, that’s true. Generally, the founder can transition out quickly. The caveat would be. That’s based on my experience working with clients who work with us and gender.
If they work with us, they think about these things and plan them in advance and we get them good deal terms, which means they can leave the business. I hear of lots of people who have tried selling the business themselves. Maybe they have successfully done it, but as part of that, they’ve agreed to a five-year employment contract. when it comes to team, I would say almost all of the time, and again, this does vary, but almost all the time it’s important the team do stay with the business. If they are not staying. So generally the founders would leave, the team will stay. If they are not staying, then you would expect either worst deal terms or contingencies around replacing that team member.
If the buyer comes in with a full engineering team and your developers are leaving as part of the sale, probably not going to be a problem. If the buyer does not have that. Then as part of the transition, your team might have to do say, six or 12 months of training to the new buyer versus a 30 day handover.
If the team was. Team Mustang and you might as part of that, have to cover recruiting costs, or there might be some contingencies reliant on new developers joining the business or whatever that might be. so generally speaking, we prefer working with clients where the team will stay with the business.
If your team are not going with the business or some of them are not going. Finding the right buyer becomes more and more important because you need someone that is competent and willing and able to take over what you already have.
Natalie: [00:42:44] Alrighty. I have a couple of questions from people that asked on Facebook. Neil Napier is asking, how are you being affected by event closures since you sponsor a lot of them?
Thomas: [00:42:58] Yes, that’s a good question.
So we do, so I personally spend a lot of my time on the road. last year I flew nearly 300,000 miles as a company. We went to over one of them per week. so a big part of our business is events. to be honest, like events for us are just a good way to meet people in person and build trust in and Goodwill.
The vast majority of our business is what a mouth and people have heard about us and what those before. in the short term, it makes no real difference. we also run our own conference, which we’ve had to over a month ago now. We made the decision to postponed that event, to later in the year. so it’s been somewhat disruptive from that perspective.
But ultimately every business owner we work with, they’re just adjusting and they’re doing slightly different things now. so it’s been disruptive personally because I have less travel, but it means that as a business owner, there’s always new things to be working on and doing. So we guys to a lot of events doesn’t really affect us in a negative way. And it means there’s a lot of things, like for example, podcost one, I’m on the road, January will avoid doing podcasts cause I like to make sure the kind of cameras set up properly, set up properly in a hotel room it can be quite unreliable at a conference. It can be noisy, wifi can be unbelievable. so just means at the moment I’m doing more podcast interviews. I would usually. which is also a good source of kind of business and Goodwill for us.
Natalie: [00:44:28] And thank you for that. Jacob Anderson is asking, what’s the average deal structure, upfront cash, earnouts, deferred payments?
Thomas: [00:44:38] Yes. Again, the answer is it depends. generally speaking, the smaller the deal, the more likely you are to get all cash. So 100% cash as deals get bigger. It depends. generally speaking, and this is very general, we advise people somewhere between 70 and 80% cash up front for the average business, and then the rest paid over a period of time.
One thing tonight, if you work with us, we only get paid when you get paid, so we don’t get paid on the total value. Well we do, but we only get paid as that money reaches you. So if we agree, a $10 million deal does $1 million down, you’re not paying us on $10 million upfront, you’re paying us on 1 million.
So our incentive is to get you as much money as possible and the best structure as possible. So generally say to people, 70 to 80% we do lots of deals that are 100% cash. And we do deal with sort of less than that. I don’t, I would say in the current market for the next couple of months, we probably see more people looking to put less cash up front.
They might’ve done three months ago, but that might be offset by some other things. It might mean that you get paid more over time.
Natalie: [00:45:51] Simon toe, is asking what is the biggest regret or missed opportunity in your career?
If you could do your first two years again, what would your priorities be versus what they were?
Thomas: [00:46:04] So I don’t know if I would’ve changed a huge amount early on because ultimately early on I didn’t start the business with the intention to do what I’m doing today, but it really know what I want it to do.
I think if anything probably should have focused on the MNA side of the business sooner and earlier. It did take two years to realize that that was the most profitable part of the business, in hindsight, that makes complete sense.
At the time. The industry didn’t really exist. There was not really any demand for selling SaaS companies. We have created a lot of that market. I guess I’m fortunate enough, I don’t really have a huge number of regrets.
They were always things, if you look back, you, you probably could have done differently. But I think ultimately if you make, um. Could of decisions with the right framework and with the right intent plays. I’ve never gone to bed at night and lost sleep over making a bad decision or doing the wrong thing.
Ultimately, as a, as a business owner with my business partner, we make the best decision we can at the time, and if it turns out to be the best decision in the end, then. Sip it. You’ve done the best you could at the time. So I try not to have too many regrets, life is short.
Thomas: [00:47:26] exactly. I know I was saying, as long as you are honest about what you do and you don’t go around screwing people over, I’m ripping people off and being dishonest in the longterm, you would do well.
Natalie: [00:47:37] This is going to be the last question and a chance for us to kind of summarize everything that we’ve talked about. question from another person on facebook and he’s asking, I’m just about to launch my SaaS and he, I know him, his, he has the multiple businesses. Should I have a plan of selling it from day one?
Otherwise, when is a good time for me to get serious about selling it and what trans should I follow?
Thomas: [00:48:01] I do think you should think about selling it from day one in terms of realizing that it’s possible that you can sell. but genuine, my advice to it sounds like he has a few businesses, but if you are a new founder, he never watched the business before.
The most important thing, it’s probably not listening to this podcast right now and hearing the advice I’m giving for later stage businesses, it’s figuring out how to make some money and grow your business. Because if I, if I was listening to this information when I started my business 10 years ago.
Well I was doing that is not what I’m doing now. So it’s a bit different with SaaS cause you’re building a product. But generally speaking, your business will change and it probably will pivot in the first few months or weeks or years. And it might be a little bit different. So the most important thing is finding a way to, yes, traction, generate revenue. Make a profit. Hopefully high people grow. Whatever your goals might be. My, my suggestion would not be, if you are a zero revenue spending a month documenting your code, yes, you can do that.
But it’s pretty much a waste of time if you don’t make any money. I see lots of people out there who do make the mistake of, they spend all their time, they launch their product and then they go get interviewed on 20 podcasts about how they launch their product. It’s not saying that drives any, any business.
So yes, that then famous cause they’d been on 20 podcasts, but they still have to work on the revenue.
Natalie: [00:49:56] Thomas, thank you so much for all of this wisdom that you’ve shared. it’s going to be very valuable for all of us and for listeners, so thank you so much.
Thomas: [00:50:05] Yes, thanks so much for having me.
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