The Business Inquirer #123
In this week's issue, I highlight 3 listings including an ecommerce brand, an IT MSP, and a Shopify app.
Hello Friends!
In this week’s issue:
🛒 eCommerce - 1 listing
☁️ SaaS - 1 listing
💼 Online Service, Media, Marketplace - 1 listings
⚒️ Tools & Resources
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🛒 eCommerce
Kayak Paddle (SellerForce) - $190k
Launched in 2013
98% of sales are from a specialized kayak paddle
Sold DTC, Amazon, eBay, Walmart
Revenue: $137k
Profit: $51k
Margin: 37%
Multiple: 3.73x
💬 Quick Take
An interesting listing with some hair on it. On one hand, it can be a great acquisition for a first-time buyer. But on the flip side, there’s a lot of concentration risk with just a single product driving majority of sales and a wholesale agreement with Walmart accounting for 75% of revenue. A lot of due diligence is required on this one.
✅ What I Like
Proprietary Product: The business holds 3 patents and a trademark-pending product, offering it a solid competitive advantage in the market. This could deter potential competitors and protect future revenues.
Strong Sales: The company has a history of selling out its stock, indicating strong product demand. Their products are being resold on eBay at up to 5 times the retail price, suggesting there's a significant potential for price optimization.
Established Supply Chain: The company has a reliable manufacturer supplying their exclusive product line, reducing the risk of supply disruptions and maintaining product quality.
❓ Concerns
Dependence on Single Product: 98% of sales are from their specialized paddle, which makes the business vulnerable to demand fluctuations for this single product.
Operational Overdependence on Owner: Currently, the owner handles all major tasks from shipping orders to customer service. This could be a risk if the owner is unavailable for any reason.
Wholesale Agreement with Walmart: The company’s existing agreement with Walmart.com accounts for 75-80% of their total sales. This is a big risk.
COVID Boost: The business almost certainly benefited from the pandemic and the increase in outdoor activities.
💸 Valuation
The business is being sold for approximately 3.7x profit which is in line with other e-commerce listings. I do think that the valuation needs to be adjusted lower due to the risk factors outlined above.
💼 Due Diligence Questions
Excluding the COVID period, how did the financials of this business look?
Can the manufacturer continue supplying the same product quality and quantity post-acquisition? How does that contract look?
What is the stability of the wholesale agreement with Walmart and its terms?
Are there any legal issues related to the patents?
How often do stockouts occur and what measures can be taken to avoid them?
Can the current owner provide insights into the seasonal sales fluctuations?
What are the details of the wholesale agreement with Walmart? When does it renew?
DueDilio can help you assemble your M&A deal team including due diligence service providers. Our marketplace has over 250 highly vetted service providers that fit your needs and budget.
🚀 Growth
Expand to International Markets: Leverage the Amazon platform to enter non-US regions like Canada, Europe, and Latin America.
Increase Direct-to-Consumer (DTC) Sales: Enhance DTC channels and leverage Amazon's FBA to make shipping more efficient.
🙋🏻♂️ The Buyer
Someone with e-commerce experience, particularly with Amazon, eBay, and Walmart platforms.
An individual or company with experience in outdoor recreational products or sports equipment.
A buyer with international business experience who can capitalize on potential growth in non-US regions.
A strategic buyer who already has operational infrastructure in place to manage logistics and customer service.
☁️ SaaS
A/B Testing Shopify App (Acquire) - $500k
Launched in 2020
A/B tests shipping rates and free shipping thresholds
Revenue: $130k
Profit: $110k
Margin: 85%
Multiple: 4.55x
💬 Quick Take
Unique Shopify app. Great margins. Not a lot of operating history. May fit well into a Shopify app portfolio for cross-sales.
✅ What I Like
High profitability: The business has an impressive Adjusted EBITDA margin of 85%, highlighting strong operational efficiency.
Steady growth: Despite industry headwinds, the business achieved a 28% top-line growth in the last 12 months.
High customer value: With an Average Revenue Per User (ARPU) of $90/month and a Lifetime Value (LTV) of $660, the business is effectively monetizing its customer base.
Excellent reputation: The business boasts a perfect 5.0 rating on the Shopify app store, indicating high customer satisfaction.
Outsourced team: The presence of an outsourced tech and support team who are familiar with the business's operations and are willing to continue working with a new owner reduces transition risks.
❓ Concerns
Lack of History: Business is relatively new. Not a lot of operating history.
Dependence on Shopify: The business relies heavily on the Shopify platform, making it vulnerable to any changes in Shopify's policies or fee structures.
Narrow focus: The app's exclusive focus on shipping rates, while a strength in providing specialized service, may limit opportunities for diversification and cross-selling.
💸 Valuation
The asking price is $500,000, which implies a profit multiple of 4.55x. This is lower than the average industry multiple for software businesses. The lower multiple is justified considering the narrow focus of the business, low revenue, and reliance on the Shopify platform.
💼 Due Diligence Questions
What is the churn rate of customers, and what steps have been taken to improve customer retention?
Can we get more details about the outsourced tech and support team? How many are they, and what are their key competencies?
How dependent is the business on the original owner? Are there any customer relationships or operations tied to the owner?
Have there been any significant changes in the revenue and cost structure over the past 12 months?
DueDilio can help you assemble your M&A deal team including due diligence service providers. Our marketplace has over 250 highly vetted service providers that fit your needs and budget.
🚀 Growth
Implement aggressive marketing strategies to attract more Shopify Plus or Advanced customers.
Explore the possibility of expanding the app's features beyond shipping rates to increase its value proposition.
Leverage positive reviews and high ratings on the Shopify app store in marketing campaigns.
🙋🏻♂️ The Buyer
A buyer with experience in the SaaS or e-commerce space, ideally with an existing portfolio of Shopify apps for cross-selling opportunities.
💼 Online Service, Media, Marketplace
IT Services (BizBuySell) - $3M
Software development, cloud architecture, and migration services
Based in NJ but can be relocated
Revenue: $2.6M
Profit: $797k
Margin: 31%
Multiple: 3.76x
💬 Quick Take
The IT MSP sector is on fire right now with a lot of interest from business buyers. This business has a fully remote team already in place. Multiple service areas. The valuation seems reasonable.
✅ What I Like
The company has a diverse client base, with revenue coming from the NPO Education, retail, advertising, and technology spaces. This diversity reduces the business's risk exposure to any single industry.
The business has a strong referral system in place for acquiring new clients, which indicates high customer satisfaction.
It benefits from low labor costs by utilizing long-term offshore contractors, which boosts profit margins.
Significant monthly recurring revenue suggests a stable and predictable income stream.
❓ Concerns
The company has no dedicated sales team or go-to-market plan, which could limit its growth potential. The new owner may have marketing expenses driving down their margin.
The business model relies on offshore contractors, which may present challenges in terms of communication and quality control. How easy are those relationships to transfer to new owner?
The company's focus on small to medium enterprise clients might limit its ability to take on larger, potentially more profitable projects.
There seems to be a lack of diversification in the service offerings, with a significant focus on managed services and software development.
💸 Valuation
The company's asking price is approximately 3.75 times its profit which appears reasonable.
💼 Due Diligence Questions
What is the contract length and renewal rate with current clients?
How dependent is the business on its two owners and what are the plans for knowledge transfer during the transition period?
What are the exact responsibilities of each employee and contractor? What’s the risk of them leaving?
Can you provide more details about the company's financials, including a breakdown of revenue by client and service type?
DueDilio can help you assemble your M&A deal team including due diligence service providers. Our marketplace has over 250 highly vetted service providers that fit your needs and budget.
🚀 Growth
Invest in a dedicated sales team to actively pursue new business opportunities.
Expand the service offerings to include other cloud platforms in addition to AWS.
Develop a robust go-to-market plan to increase brand visibility and attract more clients.
Explore partnerships with larger IT service providers to take on more significant projects.
Leverage the company's expertise in PCA and HIPAA to target healthcare and financial sectors, where these regulations are critical.
🙋🏻♂️ The Buyer
The ideal buyer would have a background in technology, particularly in cloud services.
They should have the resources and network to expand the business, particularly to larger clients.
They should be capable of managing a remote team and have a good understanding of managing offshore resources.
They should have strategic vision to leverage the company's PCA and HIPAA expertise and tap into new markets.
⚒️Tools & Resources
I want to share some tools & resources that I have found helpful. Please note that some of these are paid sponsors of the newsletter.
DueDilio - #1 marketplace to hire highly vetted M&A due diligence service providers. Your source for finance, legal, tech, and other key areas of due diligence. Submit your project, review proposals, and hire.
PrivSource - PrivSource helps you source deals and connect with transaction partners without ever paying a success fee.
X5 Deals - Proprietary deal sourcing. They do the outreach and send you relevant, actionable deals directly into your inbox.
Rejigg - Platform that connects searchers/investors directly with owners of off-market software businesses ($500k - $15m revenue) considering exits. All deals are sourced by the Rejigg team, ~5 added per week.
Scott Oldford - If you're interested in gaining insight into the process of building, scaling, acquiring, and selling online businesses, Scott Oldford can help.
BizNexus - Marketplace + off-market origination in one platform. The marketplace averages about 10k active listings & pre-CIM opportunities, and the off-market origination focuses on data & multi-channel.
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.
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