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.
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๐ฐ Articles
Bloom Equity Partners published a State of the Market as it relates to SaaS.
Summary:
Business fundamentals remain healthy for public software companies
Private markets have not yet meaningfully corrected
There is a lot of uncertainty around the future of both the private & public markets (Ukraine, rising rates etc.)
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Twitterโs favorite anonymous attorney continues with his/her/theyโs SMB Legal M&A Masterclass with Session #17 talking about SBA 7(a) loans. This is a really great intro to the program.
One program in particular โ the 7(a) Loan Program โ tends to work really well for small business acquisitions.ย ย
The SBA has a statutory charge to advance the interests of United States small businesses, among those interests is access to capital.
To accomplish this goal, the SBAโs 7A Loan Program provides a guaranty from Uncle Sam to the SBA lender for a portion of the loan effectively in lieu of what collateral might normally be present. Because this guaranty can serve as a potential source of repayment, the presence of the guaranty is often the difference between a deal happening for a buyer or not.
For both a seller and a buyer, however, there are some best practices to be made aware of before going exclusive with a lender.ย
Session #17:ย Introduction to the SBA 7(a) Loan Program
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Searchfund member Jonathan Oh of Straightforward Equity had a great post about his firmโs first SaaS acquisition. In the post he discusses the process of sourcing, structuring, transitioning, and operating the business. I actually jumped on a call with Jon and heโs building something interesting to help with deal sourcing. Stay tuned.
A couple of lessons we learned along the way:
1) Fortune Favors the Fast:
When buying, once youโve found a target that meets your requirements, move quickly and make sure you communicate the intent to move quickly.
Early in our search, we came across a deal we loved โ weโll call this TheOneThatGotAwayInc. Financials were solid, our team was very familiar with the tech stack (Ruby on Rails), and we liked the founder. He had built a great business, had clear other priorities leading him away from the project, and he seemed eager to work with us. This deal matched everything we were looking for, but it almost felt too good to be true: this was so early in our search, that we felt like we needed to create some space for us to come up with other options before doubling down on a purchase.
We took a week to get him an LOI, and we were too slow. In that time, another party had sent over an LOI, with a strong intent to close in less than 30 days.
When we found TheOneWeClosedLLC, we were aggressive. We sent over an LOI, with intent to close in 30 days. We closed in 14 days. Even in that time though, the seller received multiple offers (with most offering a higher valuation) โ but the seller chose to stick with us, because none of the other offers came close to offering a swift and easy close, and we were the only offer that had funds in hand.
We flew to meet the seller in person on the day of closing to sign purchase agreements, transfer funds, and transfer owner accounts in person.
2) Signals from Seller Personality:
When we sold our previous SaaS company, we went under several LOIs with potential buyers. In hindsight, those we engaged with fell into two camps:
(a) Folks we trusted were dealing with us in good faith, and that we trusted would steward our product and people well, and
(b) Folks we couldnโt read well, and gave us pause on whether they would steward our product and people as well as we hoped.
We realized that this revealed a lot more about us as Sellers, rather than providing a rubric to evaluate our potential buyers. We cared a lot about the product and team we had built, and so we wanted to sell to a Buyer that would care about the business and people in a way that would benefit all, especially our employees that would stay on post-acquisition.
As Buyers, we tried to find a Seller that cared about their business and people well. Of course, we had a fairly rigorous financial and technical due diligence โ but perhaps the most important gauge for us was whether our read of the Seller gave us signals on how he had built and led his organization. With TheOneWeClosedLLC, we knew we had found a Seller who had operated with integrity with his clients and his employees, and it made the transition of ownership pleasant and relatively smooth.
Reflections after closing our first SaaS acquisition
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IBBA and M&A Source published their Marketpulse Q42021 Survey. Branden Yamada of Ecom Exchange posted a great summary of findings:
๐๐'๐ ๐ฎ ๐ฆ๐ฒ๐น๐น๐ฒ๐ฟ'๐ ๐ ๐ฎ๐ฟ๐ธ๐ฒ๐!
There are more interested, active buyers than there are quality deals on the market.
๐๐ถ๐ฟ๐๐ ๐๐ถ๐บ๐ฒ ๐ฏ๐๐๐ฒ๐ฟ๐ ๐ฎ๐ฟ๐ฒ ๐๐ต๐ฒ ๐บ๐ผ๐๐ ๐ฐ๐ผ๐บ๐บ๐ผ๐ป ๐ฏ๐๐๐ฒ๐ฟ๐ ๐ณ๐ผ๐ฟ ~๐ฎ๐ ๐๐ฎ๐น๐๐ฒ* ๐ฏ๐ฟ๐ฎ๐ป๐ฑ๐โ โ
This means you should consider using a broker or M&A advisor to guide them and save you headache, unless you're familiar with exits. First time buyer + First time seller = complete disaster.โ โ โ โ โ
๐ฐ๐ฌ% ๐ผ๐ณ ๐ฏ๐๐๐ฒ๐ฟ๐ ๐ถ๐ป ๐๐ต๐ฒ ๐๐ผ๐๐ฒ๐ฟ ๐ ๐ถ๐ฑ๐ฑ๐น๐ฒ ๐ ๐ฎ๐ฟ๐ธ๐ฒ๐ (๐ฎ-๐ฑ๐ฌ๐ ๐ ) ๐๐ฒ๐ฟ๐ฒ ๐ฒ๐ ๐ถ๐๐๐ถ๐ป๐ด ๐ฐ๐ผ๐บ๐ฝ๐ฎ๐ป๐ถ๐ฒ๐ โ โ
Buyers and Owners should both be aware of strategic buyers and their competition. Companies are having trouble finding talent which may be what's driving more acquisitions for company growth.
๐ฑ๐ฐ% ๐ผ๐ณ ๐๐ฟ๐ฎ๐ป๐๐ฎ๐ฐ๐๐ถ๐ผ๐ป๐ ๐ฎ๐ฟ๐ฒ ๐ฐ๐น๐ผ๐๐ถ๐ป๐ด ๐๐๐ฐ๐ฐ๐ฒ๐๐๐ณ๐๐น๐น๐, ๐ผ๐ป๐ฒ ๐ผ๐ณ ๐๐ต๐ฒ ๐ต๐ถ๐ด๐ต๐ฒ๐๐ ๐ฟ๐ฎ๐๐ฒ๐ ๐ฟ๐ฒ๐ฝ๐ผ๐ฟ๐๐ฒ๐ฑโ โ โ
I believe this was due to strong economic confidence, deal refinement by brokers and increased competition.โ
๐๐๐๐ฒ๐ฟ๐ ๐ฎ๐ฟ๐ฒ ๐ฝ๐ฎ๐๐ถ๐ป๐ด ๐บ๐ผ๐ฟ๐ฒ ๐ณ๐ผ๐ฟ ๐ฑ๐ + ๐๐ฎ๐น๐๐ฒ* ๐ฏ๐๐๐ถ๐ป๐ฒ๐๐๐ฒ๐โ โ โ
Bigger businesses fetch higher multiples in general, so owners and buyers alike should be aware of which brackets their brands fall into.
๐๐๐๐ถ๐ป๐ฒ๐๐ ๐๐๐๐ฒ๐ฟ๐:
You should be exploring more ways to source ๐ผ๐ณ๐ณ-๐บ๐ฎ๐ฟ๐ธ๐ฒ๐ ๐ฑ๐ฒ๐ฎ๐น๐ and have your limits clearly defined so you're not over-investing on high competition deals. Direct/mass outreach, relevant communities, referrals etc.
๐๐๐๐ถ๐ป๐ฒ๐๐ ๐ข๐๐ป๐ฒ๐ฟ๐:
About 56% of owners who sold their business ๐ฑ๐ถ๐ฑ๐ป'๐ ๐ฝ๐น๐ฎ๐ป ๐ณ๐ผ๐ฟ ๐ถ๐ ๐ฎ๐ ๐ฎ๐น๐น. This means they likely left money on the table (timing & other factors). Very few owners think about selling when the business is at its peak, explore your options now.
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Bain & Co released Global Private Equity Report 2022
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Jordan Novgrod continues to put out great content in his Small Business Acquisition newsletter. His latest issue breaks down all the basic terms that you may see in a business listing such as cashflow, SDE, and EBITDA.
Cashflow and other broker definitions
๐งต Twitter
I havenโt seen a more detailed thread on tech due diligenceโฆ
Widely applicable advice on keeping your investors happyโฆ
Itโs a must to learn the basics of accounting but for $50/m you can also just hire someone to take care of this for youโฆ
This is a great โfollow alongโโฆ
Brett knows what heโs talking about. Check this out if youโre thinking of launching a productized serviceโฆ
Learn deal sourcing from one of the bestโฆ
This is the wayโฆ ๐
A lot to unpack in this thread. Returns vs. leverageโฆ
๐ค Thoughts, Events, Other
Flippa
The CEO of Flippa sent out an e-mail update on their marketplace. Iโm not sure if itโs available online so I copied parts of it belowโฆ
For the period January to March 23rd:
30,774 buyers joined Flippa
14,107 completed profiles and were broken down into three buyer types:
Company - defined as an established organization looking to grow through acquisition
Entrepreneur - defined as a full time entrepreneur looking to own and operate
Side Hustler - defined as a prospective buyer looking to earn a side income
Companies only made up 8.9% (1,255) of overall buyers but with an average budget of $3.9M, this cohort dwarfs the other two
76% of Side Hustlers intend to buy more than one asset. This is interesting. Side Hustlers tend to buy multiple assets. They run them all separately - typically content assets or apps - and they amass small fortunes
The numbers here are wild. Just YTD they had 30k+ new buyers join their platform with 14k completing a profile.
๐ Tools & Resources
These are tools & resources that I personally use or have used. They may contain affiliate links so Iโll 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.
X5 Deals - Proprietary deal sourcing. They do the outreach and send you relevant, actionable deals directly into your inbox.
Curators - Proprietary deal sourcing. You need targets that fit your investment criteria, and Curators delivers week after week - we even update your personalized database on a daily basis with new information on best-fit targets.
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. Iโve been using it for several years now. Free 14-day trial.
ProjectionHub - Access to 50+ CPA-developed financial projection templates. 25% discount using code โduedilioโ at checkout.
Logology - Best automated logo & brand identity tool Iโve 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. Iโve 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.
Thatโs all for this issue of What I Learned Last Week!
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