🧐 What I Learned Last Week
Week ending Friday, October 29, 2021
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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Hello Friends!
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What I Learned Last Week is brought to you by DueDilio. DueDilio is a due diligence concierge connecting business buyers and private investors with quality, pre-vetted due diligence service providers. DueDilio clients include individuals, search funds, independent sponsors, private investors, and SMBs requiring diligence on deals that are < $25M in transaction value.
📰 Articles
In The Trenches is a blog and podcast that talks about SMB and in particular, software operations. In the latest issue, they discuss the unique financial considerations of acquiring a software company. It’s a relatively detailed write-up that I think is a great read for anyone looking to acquire a SaaS.
For this reason, what follows is by no means an exhaustive list, but is instead a curated list of certain non-obvious considerations for the prospective software acquiror to consider based on my own experience acquiring, running, and selling a small- to medium-sized software company over the course of many years. Specifically, for every topic that I profile below, I discuss why it’s important to dig one level deeper than the simple “headline” numbers and conclusions.
Considerations Unique to Acquiring a Software Company (Financial)
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Big Deal Small Business has an interesting write-up on key man risk in business acquisitions. Brought on by a recent personal experience with a potential acquisition.
What if the seller incentivized a key employee to just stick around through Closing? I got lucky that this GM quit during DD. The seller could have paid him a transaction bonus to just wait around a couple months and then quit the day after we closed.
Big Deal Small Business: Key Employees in SMB
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Aleksandr Volodarsky is the founder of Lemon.io. I recently signed up to his newsletter where he shares his journey of growing the business from $2.7M to $10M in 2021. I’ve been enjoying it as he’s very honest about the journey and shares tactics that can be applicable to any business. You can sign up here.
Let me tell you the quick story of how we got started:
Started in 2015 as a side hustle after someone asked to find them a freelancer.
At $10k monthly GMV, I quit my job and invited a co-founder.
Took $60k from angel investors and blew most of it on Google ads.
Concept - Uber for web development. You post a task, and the next available developer picks it up.
Clients loved the service, but the business model failed to work on scale.
We grew 4x in 2018 because of a new type of client - early-stage startups.
Tried to fight the pivot. Transactional business - more opportunity to innovate + higher margins
I was wrong - transactional clients became less than 10% of our GMV.
Rebranded for the new target audience.
Closed Coding Ninjas (transactional business) to concentrate on lemon.io
Grew to $2.73 GMV in 2020.
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Axial is a LMM deal aggregator platform. This week they released a new report, “Lower Middle Market Pursuits.” There’s tons of great data and insights in the report and even a section devoted to the “Red Hot HVAC Sector”. Must read for anyone actively pursuing deals.
For the uninitiated, the “pursuit rate” is a new measure that tracks buyer interest in available assets as soon as a deal goes to market on the Axial network. It’s akin to a Nielsen rating that tracks the targets prospective buyers are “watching” and increases as interested parties request additional information. If NDAs, IOIs, and LOIs reflect the progression of interest among dealmakers, the pursuit rate offers insights into the very first impulses of prospective buyers.
Lower Middle Market Pursuits: Quantifying Buyer Intent In The LMM
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XO Capital writes about micro-acquisition deal structures. They discuss cash upfront, the churn out, the earn-out, seller financing, and SBA loans.
Generally you want to keep things simple. Often the sellers of small businesses don't know anything about finance and there's nothing worse than explaining to someone how they're not going to get all the money up front. But, these tools can help overcome the burden of tying up all your cash immediately when purchasing a new business.
Micro Acquisition Deal Structures
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Semrush recently published a blog post on how to do a SWOT analysis. My assumption is that if you’re reading this, SWOT is not a foreign term. If you’re like me, it’s been a while since you had to put one together. This article is a really great refresher course. I’m actually going to do this for DueDilio.
In this guide, we’ll explore the SWOT analysis and TOWS analysis. Taken together, these strategies will allow you to evaluate your business, streamline your business planning, and develop a stronger business strategy.
How to Do a SWOT Analysis (with Examples)
🧵 Twitter
This thread is too good. A step-by-step guide on evaluating an SEO strategy. Of course, it applies not just to SMB…
Financial models are usually wrong. Use them to figure out the sensitivities of the business…
Never too early to prepare yourself to be an angel investor…
This is something I struggle with as well. Not always obvious which parts to outsource and which to tackle yourself…
The Tweet heard around the world. A lot of debate around this one. It’s like a flat-earther arguing with an astronaut who’s just returned from space about whether the earth is flat. For the record, Jack is the astronaut in that analogy...
I first learned this lesson from my brother-in-law who is a successful business owner. It’s something I always keep in mind when thinking about pricing…
🤔 Thoughts & Commentary
Many Ways to Run a Business
Following up on the article about Lemon.io above I want to share an interesting recent conversation. Last week I had the chance to connect with someone who runs a very similar business to Lemon. This is a one-person operation, no fancy website, no technology back-end, no Twitter account, no newsletter, no office, no advertising, and the owner is an introvert. Two things this business does have are margins that are about 40% - 50% lower (yes, lower) and some of the top PE/VC firms as clients. This one-person operation does GMV that’s multiples higher compared to Lemon. Same business. Similar market. Different approach.
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Feedback
Next week I’ll be publishing the 52nd issue of The Business Inquirer. That means I’ve been doing this for a year now. I’d love some honest feedback on the newsletter. Things I can add, remove, improve, change. I feel like the format is pretty good at this point. If you use the voting buttons at the bottom, all feedback is anonymous.
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Sponsors
I’ve got a few sponsors lined up but would love to have a few more. If you’re interested in sponsoring this newsletter, please reach out.
🛠 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.
ProjectionHub - Access to 50+ CPA-developed financial projection templates. 25% discount.
PrivSource - Deal aggregator for lower and middle-market listings.
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.
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.