Apr 9, 2019
Today the newest member of the Quiet Light team, David Newell, joins us to discuss the four pillars for buyers and sellers, particularly when they apply to SaaS businesses. David knows SaaS super well and covers all the metrics that buyers and sellers need to pay attention to on both sides of the acquisition process. We discuss everything he looks for when listing a SaaS business, the challenges in measuring some of those metrics, and some common SaaS buyer pitfalls.
David started his career in investment banking and worked in that environment for four years. Looking for a taste of life on the outside, he started brokering online, eventually working his way through the ropes to a head broker role. David is now a successful entrepreneur in his own right, with a brand in self-discovery and personal development which has grown from a podcast to a full online brand. Inner Truth offers a wealth of courses, community, and content for anyone embarking on a journey of self-truth. We’re very pleased to welcome David to the Quiet Light team.
Episode Highlights:
- David takes us through his background and the SaaS business floodgate that opened for him as he learned about this niche and began brokering SaaS deals.
- The top three things David feels are important to hone in on to add value to a business.
- What churn is, how it’s calculated, and why it’s a cornerstone to a SaaS business.
- The difference between MRR and ARR and how each can affect the revenue profile of your business.
- David’s software recommendations for measuring the metrics he looks at in a SaaS business.
- We get into what micro SaaS is and how it differs from the traditional SaaS model.
- Potential pitfalls of owning a SaaS business and the challenges to consider when getting into the SaaS acquisition arena.
- Tips and advice for folks preparing to sell their SaaS business.
- Compelling acquisition tips on how to do the good work before getting ready to sell.
Transcription
Mark: Joe we are quickly being outnumbered here at Quiet Light Brokerage. We just hired on somebody else who hails from the UK.
Joe: Yes; David Newall, a fantastic guy, and another Brit. I guess Brian’s not a Brit he’s a—
Mark: What is he?
Joe: He’s Estonian, that’s what he is.
Mark: Yeah but he’s kind of an international mutt when we would think about it. He’s Estonian but he lives in the UK sometimes but now he’s looking at living who knows where.
Joe: Well, he’s a true entrepreneur. He’s been living all over the world with his wife for the last 12 months. And we just got together at the Prosper Show last week with both David and Brian and Brian’s wife; a first time we’ve met a Quiet Light spouse right? First time you’ve met … you’ve owned this company for almost 11 years and you’ve never met a spouse until last week.
Mark: Over 12 years. I mean talk about the age of the modern company right? We are a distributed company. Everybody lives in different states and when we see each other it’s at conferences. So it’s pretty rare for me … very rare being that this is the first time ever that I met a Quiet Light spouse. And I think the only reason that I did is because Brian and his wife don’t actually have a home that they go to.
Joe: That’s right.
Mark: I mean obviously they have places where they live but they’re constantly on the move which is fun but I’d like to meet more of the spouses.
Joe: I’m with you. Yeah, they were in Vegas and then they were heading down to … I think it was Panama for two months and eventually they’re going to make their way back to the UK and settle down I believe but we’ll see. Time will tell. But yes we have a new member of the Quiet Light Brokerage team. His name is David Newall; a former investment banker, a former head of brokerage services for a competing firm, a fantastic guy. I gotten to him a lot on the podcast but even more last week and I knew we were going to hit it off well when I started calling him Harry Styles because of his British accent and his affinity towards Taylor Swift. Everybody call him Harry if you want and I think he called me grandpa at one point. So I think we’re going to get along well.
Mark: Didn’t sort of from Australia though, is he? I mean—
Joe: Not at all, that’s what I kept saying just to bust his chops a little bit.
Mark: Well, let’s get to the meat of it though because David really knows SaaS super well. The guy is a genius when it comes to SaaS businesses and you guys talked about some of the metrics that both buyers and sellers need to pay attention to in a SaaS acquisition.
Joe: Yeah, we did. We went through everything that he looks for when he’s listing a SaaS business for sale and he’s done dozens and dozens of them personally. So all of the different metrics and what some of the challenges are in measuring those metrics from a selling standpoint and then we focused and flipped it over to what buyers should look for and what some of the pitfalls are. Very, very knowledgeable; a very smart guy and it’s going to be a great podcast for those SaaS business owners out there.
Mark: Well, I love having these British guys on staff because they make us sound so much more intelligent.
Joe: He does. Come on now there’s nothing like a good southern drawl though. I don’t have it but there’s plenty of folks that have.
Mark: Well, it helps that David is actually a really really smart guy so it’s not just the way he says words, it’s what he’s saying. He’s always extremely insightful. And he puts things in a very simple way as well that makes it pretty easy to understand and adjust.
Joe: Yeah so let’s get to the accent. Let’s focus on SaaS and what David has done in his history and how he’s going to help the Quiet Light team build a much, much bigger brand and a great, great addition to the team for all the buyers and sellers out there as well.
Joe: Hey folks it’s Joe Valley with Quiet Light Brokerage and today I’ve got one of our newest brokers with us. He has a ton of experience. It’s David Newall. David welcome to the team and Quiet Light’s podcast.
David: Thank you, Joe, it’s a pleasure to be here.
Joe: That’s a funny accent. Is that Australian?
David: It’s British and I saw you write it as Australian in an email the other day. I was absolutely savaged by that. I was going to reprimand you.
Joe: I was only kidding. I was on the phone with Ben. We won’t say his last name but he’s like yeah tell him he’s a great guy but I really don’t like that Australian accent. He was kidding at the same time as well. Anyway, I’m going to kick this off just the way we do with every guest David and that is can you give us some background on yourself? Tell us about who you are, where you’ve been, that kind of stuff.
David: Yeah well, I started life out in in investment banking actually. I’ve been a business degree undergraduate and then I launched myself into the windy world of investment banking. And I worked in merger and acquisitions for Citi Group in London for four years which as you can imagine is a very intense environment but also an incredible learning environment. And there I got to work on some of the biggest tech media and telecoms, M&A, Capital Races, for the first four years of my life. And you learn a lot, you earn a lot, you don’t sleep very much and so at a certain level you start to think I wonder what life looks like on the outside of this office. And so I left that and took some time to travel and then shortly thereafter I decided it would be really good to get involved in something smaller where I could have more a managerial position and bring a lot of the experience that we had into a more exciting and a hotter area. And so that’s when my online business brokerage life actually began. And I started life out at one of your competitors.
Joe: Our competitors; you’re on the team now.
David: And yeah so I started like everyone does with this so that’s the bottom realm with always the view to building up and becoming the [inaudible 00:07:48.7] which is just the head of brokerage and operations there. And so with the three attendant that I have, we obviously expanded very well out of London and moved overseas to Boston. Built a team up and so in that time yeah I must have done about 75 deals and sort of oversaw the rest of the team doing about 200. So a lot of deals across a lot of business models and a lot of niches. And yeah it was a very exciting endeavor.
Joe: You know I was out for a walk this morning and yes folks I’m in North Carolina and it’s sunny here and I was thinking about having this conversation with you this morning and the fact that you mentioned the last time we chatted that you’ve done 75 deals. And I’m thinking wow David might have more experience than I do. And I’m adding mine often. I think I’ve done more but I’m doing it longer, that’s the key.
David: Yeah for sure.
Joe: But you have me by doing a larger deal than I’ve done as well which is it’s great to have that experience that you bring to the team just because that’s everybody here at Quiet Light, a very successful entrepreneur business person and a great deal of skill and talent in the internet space as well. You are also an entrepreneur as well can you touch on that just for a moment?
David: Yeah, that’s right I mean I think one of the things that was just becoming kind of a burning seed for me in 2016 which is the year that I sort of decided to leave was to strike out and become sort of my master and flex my entrepreneurial feathers a little bit. And so I spend the best part of sort of nine months, ten months as really resting and thinking in to what I wanted to get involved in. And my personal interest is massively in self-discovery and personal development. So I got really deep into yoga and meditation and shamanism and breathe work and all of these wonderful tributaries that are now becoming really big parts actually of modern culture. And so around this time last year, I actually launched my own online brand of self-discovery called Inner Truth and it started as a podcast and then we since added on audio courses with various famous speakers from around the world. And yeah the podcast is growing exponentially now and I’d had some really amazing people and I’ve got to interview some of my favorite authors, singers, writers, speakers, yeah it’s mostly really famous people so it’s kind of an interesting life now hopping on the podcast every week we have a celebrity and—
Joe: It’s pretty neat.
David: Yeah yeah [inaudible 00:10:18.8]
Joe: Yeah, it’s … Mark and I did a podcast on the benefit of podcasting for your business and for us at Quiet Light it’s just opened up doors to very successful authors, professors at Harvard, whatever it might be and then there are these celebrities inside the world we live in which is e-commerce and SaaS and so on and so forth. But it really is a great tool for anybody that’s running their own business. Start with a podcast, it doesn’t cost that much. You can always edit out stuff that you’re not good. I think actually when we did that podcast I must have stuttered and stumbled in the first three minutes and we decided not to edit any of it because we said look if we can do it anybody can.
David: Yeah, 100%. I mean on the first episode I recorded it was an hour long and I spent four hours editing it.
Joe: Yeah.
David: Well, I’ve got the last move and now and there’s a lot less going on. You sort of have to force necessity when you’re doing some of the bigger guns now.
Joe: You certainly do. Speaking of big guns let’s talk about some of your experience in the e-commerce brokering world or internet business brokering world. A lot of folks think that Quiet Light is really specialized in physical products or e-commerce as they label that whereas the largest deal I’ve ever done was a content business. The next largest after that was a SaaS business. Sure I do lots of Shopify stores with an Amazon component or more these days an Amazon business with a Shopify component but you have a tremendous amount of experience in the SaaS base right?
David: Yeah exactly I think you know around 2014, 2015 we really started to spot this emerging trend of micro SaaS businesses coming up and sort of not really being thought about perhaps and valued in a very sophisticated way given the strength of these businesses, the IP mode that they’ve got and the recurring revenue. And so we really started to pour a lot of attention into what makes SaaS special. And yeah we’re very happy to start working with some great names like Patrick McKenzie and Rob Walling and as they bought their businesses to us and we did successful exits for them; the floodgates opened really. And so for me yeah I think … you know I sold several dozen SaaS businesses over my time and culminating over course the successful sale of Rob’s business direct in Leadpages in 2016 which was an incredible transaction an awful massively personally gratifying because Rob is such a good friend and great to get a life changing exit for him but also to sell into a company as big as that with Claire as a CEO; a super dynamic deal environment and yeah definitely a lot of learning.
Joe: Yeah, Mark had Rob on the podcast talking about his story of building Drip and exiting from it and it was a great, great podcast. If anybody hasn’t listened to that please do. But it’s kind of funny I remember when you were doing that deal and we were getting wind of it and it’s funny we just thought oh yeah no we don’t want to do 10 million dollar deals or whatever the number was. You have to fly all over the country, you got to put a tie on then you … and I don’t think you probably did any of that. And now we’re doing deals that are that size and a little bit bigger so we all grow up in this business and have to evolve so to speak. So let’s talk specifically about SaaS David. For the audience that’s out there, if they’re running a SaaS business, if you’re working with them through Quiet Light, you get a referral and boom you’ve got a SaaS business that you’re going to value what are the top three or four things that you’re going to sort of hone in on that is going to bring more value? Maybe even speak to the buyers here what should they be looking at and what would you look at as the seller’s broker?
David: Well, I think that one of the most important probably least looked at and least understood metrics of any SaaS business is churn. Churn really is the cornerstone of successful SaaS business because it is completely cancerous to revenue growth if you don’t get that right.
Joe: Can you define that for folks that are just beginning to look at SaaS; what churn rate is and maybe how it’s calculated?
David: Yeah, churn rate I mean you can look at it from a revenue perspective or you can look at it from a customer account perspective. Revenue is probably more helpful and that’s simply telling you how much revenue, how many customers you’re losing per month through cancellations, expiries or sort of billings that aren’t going through.
Joe: That’s measured against total revenue and what’s a good churn rate in the SaaS world?
David: Well, that’s a great and a pretty seminal question that comes up a lot when you’re evaluating SaaS businesses that specifically are targeting different end users. So if you’re thinking like the B2B space the monthly customer churn rate actually varies quite a lot depending on which business segment you’re looking at. So if you have a SaaS business facing an enterprise segment it’s going to have a materially different monthly customer churn rate than one interacting or facing against an SMB segment because those end customers have different purchasing behaviors. So in enterprise, for example, you know very, very, very low monthly churns expected and we’re talking like 1.5 to 1% a month which annualized is 6 to 10%. When you’re looking at SMB something doing 3 to 7% is—
Joe: What does SMB stand for David?
David: Small to medium sized businesses.
Joe: Thank you.
David: And so annualize that’s more like 30 to 60%. And so now you can start to see that the difference between a 6% percent monthly churn rate and a 4% monthly churn rate is going to have a mega, mega, mega difference to the revenue profile of the business 12 months out from now.
Joe: Yeah, let’s just … I want to talk about the other two aspects in terms of things that you look at in terms of the metrics but the churn rate measured against the revenue; obviously, the revenue has to continue to climb and new customers need to come in at a higher phase than the churn rate in order for the business to be growing. Or even actually just staying steady right? They can be losing 5% a month and be gaining 5% a month in revenue just that. And the beautiful thing that buyers love about this is that … or SaaS business is that it’s the recurring revenue. And they generally trade at a higher multiple. If you’ve got a straight up e-commerce business selling physical products with its own brand even with a patent I think that a SaaS business that’s growing and has lots of growth opportunities and a reasonable low churn and workload is going to trade at a higher multiple. Is that your experience as well?
David: Yeah well, I think that the recurring revenue piece is one explanatory factor for that premium in multiples. I think the other is simply the moat that exists around the average SaaS business; having that intellectual property. We work in a space where if you can find product market fit for a very quick rate with an Amazon business and very quickly start to scale it but with the SaaS business you might have to pile in anywhere between 10,000 and 100,000 into development and may not even make a penny. And so one of the things that actually make these micro SaaS businesses very valuable when they come to market is that actually, they’ve simply found product market fit after having put down a lot of Cap Ex. And so it’s interesting that that’s actually a large amount of the value proposition for people that are looking to acquire these and scale them because that in itself is finding a diamond in the rough.
Joe: Right, so that risk is one of the four pillars for those that listen often. It’s one of the four pillars and it’s the lower the risk as David’s talking about the defensibility of the business, that moat around it, it lowers the risk so therefore the value of the business goes up. All right throw in another couple of metrics that you generally look at and it’s important for buyers to think about as well when they’re looking at SaaS businesses.
David: Yeah well, I think acquisition channel for the customers is really important and I think the really premium SaaS business at the higher end of the multiple range are just like every other type of business managing to acquire customers across a multitude of channels so the concentration risk is low. And that within those channels the competition is relatively low. You can look at say a SaaS business in the project management space which is absolutely saturated with VC vat competitors and that’s a pretty frightening spot to be in. You’d much prefer to be somewhere in a quieter segment just like we’d look at in e-commerce. The same rules apply. I think it’s quite nuanced in SaaS though because you have put down a lot of Cap Ex upfront to develop product and so you have to be pretty savvy when it comes to acquiring customers at a reasonable rate.
Joe: Okay. So we’ve got the cost to acquire a new customer, the channel that you’re getting them from, the churn rate, anything else that really jumps out that you’re looking at?
David: Yeah, I think the profile in terms of the revenue of the business is really important. So obviously we’ve been talking about MRR but there’s ARR as well right?
Joe: So that’s Monthly Recurring Revenue and Annual Recurring Revenue.
David: Yeah, exactly and it’s very tempting when you’re a business owner and this is kind of an important thing that I think a lot of business owners can trip up on to want to sell lifetime and annual plans at a gracefully discounted rate in order to book that revenue. But when it comes to sell it presents a pretty lumpy revenue profile at a major risk for the acquirer. And so actually the multiple that can be applied to MRR should be higher than ARR because it’s more predictable. And this is, even more, the case when you know you’re using debt financing to buy a business. And so something that I would always do when I’m evaluating a SaaS business is actually use something of a blended multiple where I value MRR higher than ARR.
Joe: Right so to further detail that and explain a little bit that annual recurring revenue if you have one or two months a year where let’s say the subscriptions are opened up and there’s a flood of customers with a special promotion and a steeply discounted price for an annual subscription but you’re selling the business a few years later and you are nine months away from or actually just say two months after that annual subscription, the person that’s buying the business they’re going to go 10 months without having that big bump in revenue. They’re not doing any daily or weekly or monthly work for that revenue. It’s going to occur so there’s no discount necessarily but it can become a challenge like you say when they’re getting debt financing. They’ve got a monthly payment to make every single month and if that big bump is not going to come for 10 months it can be a bit of a challenge. That’s great.
David: Yeah, and it’s not entirely guaranteed that those annual subscribers will renew a great wish that came in there and I think people expect a certain level of annual around Black Friday but if the business is struggling to show MRR growth in off months then that’s a bit of a red flag potential.
Joe: Right, so from the buyer standpoint you think really the focusing on the monthly recurring revenue … you got to look at the annual recurring revenue but the more attractive business would be one that’s got more monthly recurring revenue because it’s spinning out that risk a little bit more.
David: 100%.
Joe: 100%. Okay, software that’s out there to help SaaS owners measure these metrics. It’s a challenge like I’ve looked at trying to calculate at lifetime value. It’s very, very difficult. Everybody does it a different way. Is there a particular software that you’ve seen more SaaS owners use than not?
David: Yeah I mean I really like the Profitwell analysis actually. I think whatever you use standardize. I think it’s not helpful to swap between Chartmogul, Baremetrics, Profitwell, and just keep skipping around because then you’re looking at very inconsistent numbers and methodology as in if trying to evaluate a number of SaaS business that’s just not an additional complexity that you want to commit into your analysis. So I think stick with one and the one … the dashboard I’ve seen as the friendliest and the most well explained and the easiest to use is Profitwell. And in particular, looking at their cohort analysis the churn is this incredible way of seeing whether the business underlying is improving or getting worst as new customers are coming on board.
Joe: Okay, Profitwell or wells?
David: Well.
Joe: Well, Profitwell. Yeah, I’ve seen Baremetrics used quite a bit on the SaaS businesses that I’ve sold. It’s a great tool for buyers and sellers just to go look at it and study what these metrics are that people are analyzing these businesses on.
David: Yeah, 100% and there’s a bunch of open source businesses upon the Baremetrics platform where you can just go and look right now. I mean you can look at Baremetrics and their own metrics I believe on their own platform and I [inaudible 00:23:14.4] I think convert kit was on there for a while. They may still be. So it’s fascinating to have a poke around and once you’ve looked at a handful of SaaS deals you can really start to get a feel for what makes sense for and what doesn’t around from all of these metrics.
Joe: I got you. David, you’ve mentioned the term micro SaaS more than once can you define that for us? Is there a certain size? Is that what you’re referring to?
David: Yeah I mean I think of micro SaaS as sub a million dollars in value but really when I think about it more deeply it’s characterizing the business that has not gone down the sort of venture capital deep investment. You know fast growth, pushing for a revenue multiple exits and instead gone for the bootstrapped—
Joe: I got you.
David: Slower grave way of doing it. And that is absolutely not to say that you can’t take a micro SaaS and push it into that revenue growth multiple VC back territory. It’s just that I think a lot of the businesses that we look at in our world tend to fall into the micro SaaS class version.
Joe: Yeah, I sold one last year that literally was started by someone that had a problem and he solved it himself. It was sort of a self-calendar tool and he had it for 14 years but he was an engineer by trade and you could tell by the interview that I did with him that he was not comfortable selling or talking; very, very much an engineer. The person that bought it very much the opposite of that and is already talking to private equity folks to invest or get it to a certain point and take it beyond this sort of micro SaaS market that you’re talking about.
David: Yeah this is a really important point actually that I want to extend because what I’ve observed in my experience is that a lot of the businesses that come off exit were designed by the engineer, by developer types that find a problem that solved that and pushed it out to friends and family and other developers, acquire a customer base. It starts to grow organically but they simply either don’t have the appetite, the interest, or the skill set to market it. Nor do they want to. And so these businesses become right for marketers to take them over and actually work on building them out from a marketing standpoint because a lot of them are in very good shape on a technical side. They just need more sales effort poured into them.
Joe: Yeah, the one I sold it was doing … I forgot exactly, let’s call it a quarter million dollars in discretionary earnings. His advertising budget on a monthly basis was $325.
David: Yeah.
Joe: Yeah, I get emails every week now from them. I’m on their list; the guy that bought it and they’re doing a much more aggressive email campaign, retention campaign, and adding new tools and features for the existing customers. Let’s talk about the pitfalls of owning a SaaS business for those that are potentially buying one for instance. What do you see as major pitfalls and I had a gentleman named Ezra Firestone, you probably know Ezra.
David: Yeah.
Joe: I had Ezra on the podcast and we talked about a number of things. He’s very much into yoga and meditation too by the way but we talked and he’s got e-commerce businesses and he got SaaS businesses and he talked about the differences and what he likes about each and what he prefers. But I’d love to hear you talk about pitfalls and I’ll tell you Ezra’s feel.
David: Yeah, I think that the IP roadmap for any SaaS business is always something that you have to be very clear on. I think you can easily fall into a trap where you start the design … excessively design the product either on specific customers and then it becomes this very odd sort of pool of mud. They like to use that phrase in SaaS world where you’re designing around specific customers or you’re just adding features to it that perhaps aren’t really needed. And actually, I think a lot of SaaS business actually benefit more from dialoguing with customers about how to use their products more effectively. Because oftentimes they’re only using about 20 to 30% of the functionality and then often churning away because they’re not aware of the other 70% than just by adding feature sets for the point. And of course, this really does stack up because as you add more features that’s going to add more complexity. You create more of a UX headache for your customer base. You create more of an operating manual to train your sales team with and everything starts to become … to slip out of control of. And I think that having a very clear crystal clear vision about the road map is actually like something that yeah probably keeps a number of SaaS owners up at night contemplating that. I think churn is a real challenge for micro SaaS businesses specifically because a lot of the time there ain’t SNBs so they’re naturally facing against a client base that’s got higher churn. And the best way really to reduce churn is to really improve your onboarding experience and your customer success. And something we’re all absolutely crushed during one of the best in class onboarding processes I’ve ever seen but it is expensive to do that unless you go down a very intelligent sort of IT lead onboarding route. And that’s a challenge that I think a number of business owners struggle with because once you get up into massive scale on your VC back so you can have a whole sales team that come on and really help train every single house member when you’re in this micro space you don’t have the capital to do that. So you got to think very creatively about really educating customers, really onboarding them very well so that you can solve the churn issue and scale the business well. And the churn is also important because it really starts to impact your ability to run paid for example [inaudible 00:29:03.4] acquire customers that way and so there’s a lot … you have to be just very, very thoughtful such I’d say churn is quite a headache as a SaaS business owner.
Joe: Yeah, it sounds like any business with customers. Take care of the customers first. Make sure they’re using the tools to the greatest extent possible and that will reduce the churn. Which will, in turn, give you more money to do paid advertising than more than $325 a month. Yeah, I was going to go to the same place not that there’s a right business or a wrong business to buy, they’re just physical products businesses are just different than content versus affiliate versus a SaaS business. So anyway I was talking with Ezra about it. He owns both. He owns Zipify and he owns BOOM by Cindy Joseph or a portion of that one. In the physical products world, you create an ad and it hits and you scale. You spend more money on the ad. With a SaaS business it may be the same but then you’ve also got more support, more customer onboarding, and focusing on that churn rate and the metrics and you’ve got the cost of those developers which are also a lot more expensive than the cost of really good customer service people or graphic designers in the physical products world. A big, big difference though and again it all balances out. With the physical products business you have to have working capital for inventory. Your business is growing like crazy … sometimes I’ve sold businesses that have been 24 or 36 months old and had in-depth conversations with the owners of those businesses David. They bootstrapped it. They don’t ever take any money out of the business. It’s just growing and all they do is take every ounce of profit just trying to keep up with the inventory demand; that working capital demand. And sometimes they still run out of inventory. So there are two different ways to look at it; two different worlds. Those people that exit on the e-commerce world they don’t take a whole lot out the first couple of years if they hung on that accelerated growth always slows down a little bit and they can then start taking salary and pull some more money out of the business. But you don’t have that physical product or working capital requirements inventory in SaaS but you’ve got more expensive staff and developers that gosh if you’ve got a key developer and they go away it’s a key employee and you’ve got to replace them. It can be very challenging and very expensive. So I’m not sure which is right. I always … I think people that are new in the in the internet space that are coming from the corporate world and want to live … work at home and see their family more and travel less and I’ve talked to a lot of people like that they say what … where should I go? What space should I look at? And I kind of think that they understand more easily physical products and can easily say I sell a widget versus I sell software to that people subscribe to to help them manage their calendar better. It’s very different; very challenging I think. What are your thoughts on that?
David: Yeah, I agree entirely. I think there’s a lot of things to think about with SaaS. It comes down to … as in life right? You always have to choose what problems you want to solve for and some people like solving for very intellectual problems. It’s very interesting looking at the buyer base for SaaS companies that often people that enjoy the intellectual challenge of having a lot of the moving parts to think about. And there are people that enjoy the challenge of just scaling e-commerce. So it’s … yeah, a totally personal preference. I don’t think that one is better than the other. I think it’s entirely a form or like disposition of character.
Joe: Yeah. Well, listen, David, we’ve had you on talking about SaaS. You had more than SaaS experience right? You sold lots of content, lots of physical product sites in the past as well.
David: Yeah, more than I can remember. I mean when I really started my brokerage career I spent almost exclusively doing content sites so we have all of the … it comes in affiliate stuff, Ad Sense sites and I love them because again you know we talk about these beautiful nuances between different business models. For me, it was just so interesting looking up the SBA strategies of these businesses, looking at the approaches that these owners are taking to rank specific pages. And I got super into ad optimization group and it just fascinates me with this psychology of ad revenues and clicks and so forth. So yeah I actually have a lot of reference for Ad Sense likes and I think I often look at them from my own personal acquisition perspective because I just love the pessimity of those business models.
Joe: Yeah, yes, absolutely for those that don’t understand it’s good quality content developed over time that’s driving organic traffic and you’re getting paid for clicks either through Ad Sense or a lot of folks doing affiliate stuff as well when they’re doing product reviews and things of that nature. But that was the larger one that I sold last year which is under 9 million and it was a content site; just crazy, crazy growth. A great story too and we’ve had Ramon on the podcast. And this goes to the relationships with the people that we work with. The first one that we sold for Ramon a few years ago, let’s call it five years ago it was maybe $125,000 business and a few years later he comes back as a client again. He says okay I’ve got another one like this out. It’s 425,000. And then he comes back in December of I guess it was ’17 and you know he’s got one where we think it’s valued around 5 and then we get it under a Letter of Intent and it’s just exploding growth. And so he says Joe I just don’t think I can do this. It was a hard, hard call for him to make on a Saturday afternoon in April of 2018. And he had to walk away from a 5 million dollar deal because revenue was growing at 300% every month which really just drove the multiple down and the total value up. We pulled the listing and the same person it was under LOI for 5 million, he didn’t go away. He wanted to stick in and he knew that the value was there so he bid it up and two others bid it up and it sold for just under 9 million; a great story for that guy.
David: The high quality strategic exit there to come back at that level.
Joe: It was a risky move to walk away from 5 million but it worked out for sure. And the buyer was fantastic too. You’ve got to have a good buyer and good seller on both sides of the table. Structurally business on the side I know but it was a combination of private equity money, a little bit of SBA money, some family fund money came into it, and then the owners… the buyer’s personal money as well and as strange as it is that particular by David also bought the largest SaaS business that I ever sold. So relationships with buyers are critical as you know. Any quick tips or advice for people that are thinking about selling their SaaS business, what should they do? Should they just focus in on churn or maybe have a conversation with you with an eye to exit even in 12 to 24 months, what are your thoughts there?
David: Yeah well, I think definitely I’d advice there as based on how far you are out. If you’re quite far out I do think it’s worth split testing price increases. Over the years we’ve seen a surprising number of wins from people making micro price improvements. I’m obviously not grandfathering existing customers by trying that out. I think if you are closer into the potential exit talking six months like the really important stuff is actually things that seem to become incredibly easy to miss. But I’ve seen over the years things like just securing IP properly and then that’s much more than just getting trademarks sorted out. But actually, if you’ve had a lot of third party developers working on the code getting proper IP assignments. Because the number of transactions I’ve been involved where they’ve got to be done retroactively is a little bit uncomfortable. I think another piece is around security. Again if you’re not patching passworkds properly or if you’re storing credit card data or any of this kind of things, like if there’s any aspect at leaking they really need to be on top of that. I think absolutely avoid any kind of large discounting, annual plan discounting. Don’t sell any life time plan type things. I mean that attempt to sort of artificially increase revenue earnings three to six months out is really, really, really visible unless of course, it’s around something obvious like Black Friday. And I think that don’t be too heavy with sort of trying to cost cut because again that’s really obvious when you come into a sale that if in the last six months you suddenly just gone extreme and leave in order to get an attempt at inflated SKU it becomes very obvious to any experienced buyer.
Joe: Yeah very obvious.
David: I think one of the things that really does have a pretty big impact in terms of leveraging the multiple up is as much as possible obviously document source code and annotate that well. But as you can try and bring in … if you’re the owner/operator and you’ve done a lot of the IP yourself and built a codebase really start to consider six months out bringing on a developer in time to hand that off. Because if you can show you by the time you come to exit that the third party developer has been in the business for six months, understands the codebase intimately, and has made … pushed out various updates; that is going to be a very compelling acquisition proposition for a buyer versus … you know that all of the knowledge is inside the owner’s head and then we’ve got to do like fulfill the email gates at transition and our third party developer is part of this. So do that work before and you will get paid multiples upwards on the backend.
Joe: David, unknowingly you’ve talked about the four pillars; the risk, the transferability, the growth, and the documentation. It’s not just financial documentation but it’s SOP’s and all the other stuff as well. All of the things that you’re speaking to sellers about buyers can focus in on the same thing when they’re analyzing a purchase of the SaaS business. Everybody, David is reachable david@quietlightbrokerage.com. Reach out to him there. He’s up on the website now. A phone number extension is there as well. We’ll put it on the show notes too. David welcome to the team. I’m thrilled that you’re a member of the Quiet Light team now. Thank you for being here.
David: Thank you, Joe catch you.
Joe: Alright, talk to you soon.
Links and Resources:
David’s
Quiet Light Profile
David’s
LinkedIn
David’s Podcast