🧐 What I Learned Last Week
Week ending Friday January 21, 2022
What I Learned Last Week curates the most interesting content relating to business acquisitions, operations, entrepreneurship, finance, and more. WILLW is a publication of The Business Inquirer.
Let’s connect: LinkedIn, Twitter, Facebook Group, Calendly
Hello Friends!
PSA:
I’m traveling overseas and will not have a chance to write the Tuesday newsletter. We’ll return to regular programming on Friday, Jan 28th.
This issue of The Business Inquirer is brought to you by DueDilio.
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📰 Articles
Ted Laverette of Partner on Call has a free webinar coming up on January 26.
Invitation: Jan. 26 Zoom event - How to Buy a Business in a Seller's Market
Who’s selling whom? Beware of a disabling or fatal case of business buyer fever. Right now buyer fever is raging. It’s contagious. It’s fueling unhealthy competition among business buyers. And that plays into the hands of sellers.
Register for How to Buy a Business in a Seller’s Market
I also want to highlight a couple of popular books from Ted that you might find helpful:
How to Buy the Right Business the Right Way—Dos, Don’ts & Profit Strategies
How to Get ALL the Money You Want For Your Business Without Stealing It
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I recently came across an article from Endurance Search Partners written by a former McKinsey Management Consultant who made a career switch into the search fund world.
At Endurance Search Partners, having partnered with over 150 searchers over the past decade, we have seen former management consultants enjoy a particularly high rate of success in pursuing ETA – both in finding a great business to buy and in then being able to make the leap to being a great CEO.
As a former McKinsey management consultant myself and now a search fund investor, I wanted to get under what allows consultants to be so successful to help those considering or planning to search. To better understand this, Endurance Search Partners conducted a survey of former consultants who made the transition. Specifically, the survey examined what motivated them to become entrepreneurs, why they chose ETA over the start-up option, what skills were most valuable in the transition and CEO phases, and challenges faced along the way.
Making the Leap from Consultant to Search Fund Entrepreneur
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Karta Ventures wrote a guide about DTC and eCommerce turnarounds. Not everyone is purchasing turnkey businesses and a lot of time there’s a big ROI to purchasing a distressed asset and turning it around.
This guide is intended to give distressed DTC/eCommerce heavy businesses with $10mm to $50mm in revenue a high-level overview of turnaround management basics and resources to dive into. This does not come close to replacing advice from competent lawyers, turnaround professionals, or restructuring bankers. Restructuring is nuanced, it’s difficult to provide blanket advice that works in every situation. After reading the guide, rinse through a few of the books in the resources section, then reach out to professionals that are a good fit for your company and situation.
DTC in Distress- A Guide to DTC & eCommerce Turnarounds
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There’s been a lot written recently about the opportunities in creating solutions specifically for SMBs. TCV wrote an article about this topic and how to create tools for CFO’s of SMBs.
Why should we care, you may ask? Simply put, the aggregation of these services makes a lot of sense, and the market opportunity ahead is enormous. The financial services stack of the SMB has become increasingly fragmented over time (see below) and dealing with this fragmentation is not trivial. On the other hand, the benefits of consolidation to both the SMB and the vendor are compelling. SMBs benefit from having fewer vendors to manage, improved integrations between applications that reduce human error and save time for already-overstretched finance teams, and the ability to effectively leverage data across their financial flows (e.g. payments processors who are directly in the flow-of-funds are able to both underwrite loans more accurately and collect repayment more seamlessly). On the other hand, vendors benefit from having improved customer retention (notoriously challenging in the SMB space where structural churn is high), increased ARPU, and more strategic customer relationships.
Building the Operating System of the CFO: SMBs & Beyond
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AfterWork Reading newsletter published an interesting look at The Great Resignation, what it means, how it’s changing work, and what opportunities it presents.
Over the last few months, the spectre of The Great Resignation has darkened many companies’ doors.
The media’s analysis on the phenomenon has been uniform - citing COVID-induced burnout, greater desire for remote working, and the realignment of people’s priorities post-pandemic as the key drivers behind an impending mass exodus.
In truth, The Great Resignation is just one manifestation of much broader trends; ones which have been gaining momentum for many years. This article discusses some trends we see shaping the future of work and talent, and shares our view on some investment opportunities this creates.
The Great Resignation: opportunities created by the changing talent landscape
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There was a great discussion about business valuations in the MicroAcquire Premium Buyers Facebook Group. If you’re a member, you can access the full discussion here but I’ve copied the original post below as I think it’s informative.
Starting to see some “interesting” valuations in here, wanted to take a quick second and explain how investors look at this.
Could be the difference between getting “overlooked” and being acquired, so let’s jump into it:
~The main issue~
Over the years I’ve had the opportunity to deal with approximately $400M of acquisition deals.
Came during my days as a Commercial Loan Officer, having a Masters in Accounting, everybody always referred these deals to me.
Complex setup in itself, as you have to unwind tax returns, prior financials, etc…
And even though I noticed a lot of issues with the process, one “main thing” was always the valuation method.
In other words, when skimming through deals, investors will always look at TTM profit multiples first.
For example, if your TTM profit is $100K, then they’ll use that as their initial valuation.
“TTM of $100K, asking price of $1M, means this person wants a 10x multiple”...
And even though a 10x multiple is “possible”, you likely won’t find a lot of people interested in it.
For the most part, 10x multiples are reserved for large companies, ones who aren’t going to require a lot of work after the acquisition…
Meaning they’ll be receiving some “passive income” from it.
On the other hand, when you’re getting micro acquired, there’s a little more that goes into it.
*Increased marketing
*New product features
*Etc…
It’s a “fix and flip” mentality, and because of that, you can’t really expect over a 3.7x multiple.
Most want to go lower, but from my experience, 3.7x multiple seems to be the “max”.
If your asking price already fits within this mold (i.e. not more than 3.7x your TTM profit), great, you should be okay…
But if it’s not, you need to:
~Present as an Asset sale~
With this approach, you’re not necessarily selling the multiple, but you’re selling the assets of your business.
Little harder to do, but certainly achievable.
Just need to make sure the investor can see this right away, because if they can’t, they’ll scroll right past it.
I catch myself doing this everyday, where I’ll see a 10x multiple, not give any more thought after that…
But if you can mention “asset sale” upfront, then lay out your reason for it from there, it’ll be enough to bring people in (assuming it’s a good valuation).
Anyway, few different ways you can do this as well, but a few common ones in the tech industry are going to be:
*Labor Capital
*Data Sources, and
*“Intangible” Assets
Technically, all these are intangible assets, but we’ll break them down into specific categories.
That’ll allow investors to understand everything easier, and to give you a brief overview of what I’m saying…
Let’s look at:
~Item #1 - Labor Capital~
With this asset, you’re essentially telling investors how they’re getting a good deal on your “labor”.
In other words, if they went out into the marketplace and built something similar, it’d cost them $30K…
But since you’re a developer you did it on your own, and you’d be willing to sell it for $20K.
Bargain deal for them, making them interested in the business right after that.
That’s the first “main” item you’ll look at, then for:
~Item #2 - Data Sources~
This is something a lot of businesses don’t have, but for the ones who do, it’s a very valuable asset.
I’ve worked with entrepreneurs who acquire businesses for this reason alone, common example is Facebook Groups.
If you have a Facebook Group with active members, and it’s a decent size, you can make a lot of money off this asset alone.
Investors know how much work it took to build the group, and since your members are “engaged”...
They can easily turn this asset into a profitable source overnight.
Because of that, you’d want to lay this item out, and the valuation on these are all over the board.
I’ve heard of some people try for $1 per member, I’ve heard of others try for 10 cents a member, so there’s really not a “science” behind it.
If anything, I’d try and look at it from a profit standpoint, meaning that if you had 50,000 members…
And expect a 3% conversion rate, one that’s designed for their $5K clients, that means there’s $7.5M in potential revenue for them.
From there, you can try for a percentage of that, getting higher prices that way…
But at the end of the day, just give them something to “contextualize” with. If they can clearly see how it’s a potential $7.5M asset, they won’t have any issues paying a higher amount.
Anyway, that’s it for item #2, and for:
~Item #3 - Intangibles~
This is where you start looking at “intellectual property”, which might come in the form of patents and/or premium domain names.
I’ll be honest with you, this is the area most founders will “overinflate”, thinking their USP is worth more than the market will pay for…
But when done correctly, it can be a great way to increase the value of your business.
For example, maybe you have an exclusive contract with somebody, one that’s going to provide $300K of savings for your business this year - and something nobody else can get.
When shown to the right buyer, they’ll love this asset in itself…
And gladly pay $150K extra for it, as they’re getting a return right away.
Anyway, something I could talk about forever, but I hope you’re getting the hint either way.
What you want to do first is figure out the “value” of your assets, then list them out.
*Software that we built (costs $30K in the marketplace, but we’re selling for $20K)
*Facebook Group (50K active members, potential revenue source of $7.5M, we’re selling for $50K)
*Exclusive licensing agreement (worth $300K this year alone, we’re selling for $150K)
*Etc…
Everything that adds up to a $1M valuation”...
And when done correctly, that alone will help you sell quicker, even if your asking price is over the traditional “multiple” approach.
~To Recap~
If there’s one “main issue” I see a lot of people run into today, it’s not communicating how they came up with the asking price.
Instead, they just list a few things, hope buyers will reach out after that…
Generally doesn’t work well.
If anything, buyers will look at the “multiple valuation” first, meaning they want your asking price to be less than 3.7x TTM profit…
And if it’s not, they’ll likely scroll onto the next deal.
Because of that, you might have to position your business as an asset sale, showing everything that way…
And when done correctly, this alone will help you sell quicker - likely at a higher price.
Hope that helps.
-Sean
You can access this post and discussion here: https://www.facebook.com/groups/microacquire/posts/4751943921557782
🧵 Twitter
Disrupting BizBuySell has been talked about for a while. Will be interesting to see how Andrew approaches this…
Most relevant for real estate. This is a really informative thread explaining hard money lending…
Founder of ConvertKit provides some tips on SaaS scaling…
First post I’ve seen that points to a loosening hiring environment…
This is a great approach…
There’s a lot of opportunity in SaaS…
🤔 Thoughts & Commentary
MicroAcquire
I’ve had a few readers reach out to me and ask why I highlight so many listings from MicroAcquire. The simple answer is that they are the fastest-growing marketplace and they do a great job of updating their subscribers on new listings. They also have the most SaaS listings which is what I tend to focus on more. It’s as simple as that.
🛠 Tools & Resources
These are tools & resources that I personally use or have used. They may contain affiliate links so I’ll get a few pesos if you sign-up.
Cerebro Capital - Cerebro has a network of 1,500+ lenders who can provide debt financing for your acquisition, refi, etc. $500k minimum.
BizNexus - Proprietary deal flow, deal aggregator, and exit prep.
PrivSource - Deal aggregator for lower and middle-market listings.
Calendly - Leading scheduling platform to easily schedule meetings without the back and forth. I’ve been using it for several years now. Free 14-day trial.
ProjectionHub - Access to 50+ CPA-developed financial projection templates. 25% discount using code “duedilio” at checkout.
Logology - Best automated logo & brand identity tool I’ve come across.
DeepBench - Access a cutting-edge expert network. $200 discount.
OpenPhone - The best business phone solution that I have found. $20 credit.
Eloquens - Knowledge marketplace. I’ve bought a few guides and templates here.
Deal Flow Scout - Peer-to-peer deal flow exchange. Free, open, transparent.
Deal Sourcing Guide - A directory I put together of online marketplaces, brokers, DFY deal flow, and more.
That’s all for this issue of What I Learned Last Week!
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Important Disclaimer: This newsletter is provided for informational & educational purposes only, and should not be relied upon as legal, business, investment, or tax advice. This newsletter may link to other websites and certain information contained herein has been obtained from third-party sources. While taken from sources believed to be reliable, it has not been independently verified. The Business Inquirer makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. References to any companies, securities, listings, investments, or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any business, tax, or investment decisions. Content in this newsletter speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.