What Buyers Look For in a SaaS Business with Thomas @ FEInternational.com – Escape Velocity Show #22


Every business at some
stage has a problem that happens at 10:00 PM
on a Sunday or 4:00 AM on a Wednesday. Whatever it is, you have to have
a business where you are not going to hate it
or yourself if you have to make that personal
sacrifice to handle it. So the way I look at it
is, if you’re on vacation, if this business interrupts
you for the entire vacation and you lose your one week of
vacation you have per year, are you going to end up
resenting the business or the team or whatever? That’s smart. If the answer is yes,
then maybe firstly, you should probably not be
buying a business at all, and you probably should not
be buying that business. [MUSIC PLAYING] Ignition sequence
[INAUDIBLE] 3, 2, 1. Thomas, how’s it going, man? Hey, buddy. Good to see you. So good to have you on here. I love that we just
bantered for 20 minutes. Hopefully, Jared’s
going to put all this– All the good bits. All the good stuff. You are the co-founder–
are you CEO of FE? No, I’m definitely not the CEO. OK, so you’re not
responsible for actually the important stuff. I just get a credit
for the good stuff. There we go. And I get none of the
blame for the bad stuff. Somebody else takes care of it. FE International broker for tech
companies, internet companies? Yeah, [INAUDIBLE] focus on SaaS,
e-commerce, content business. Yeah, you’re the SaaS guy
that I sent everybody to. How long you been doing
that now, a decade? Yeah, nearly a decade. So we founded in May, 2010. And just got named Inc., in
the UK version, top company. Yep. So that’s crazy that you’re– So Europe has an
Inc. 5,000 list, and the US has an
Inc. 5,000 list. We have two entities
and we’re in both. And we think we’re
the only company in the world that got on both. Fun fact. OK. And why do you
have two entities? So as a company, we
started out in the UK. That’s where we were
originally based. We have a UK entity, and
then have a subsidiary entity in the US. And maybe we don’t
have two entities. We have employees in the UK. We have employees in the US. So you have to have an
entity for both, yeah. And what is it that, when a
company’s thinking to sell, and when they come
to you, what do you– what’s the stuff
you help them with? Yeah, so at a fundamental
level, usually we try to keep a really open
mind with founders who are thinking about selling one day. So it’s never only speak to us
if you thinking about selling tomorrow. At a very base
level, we’re trying to get them an understanding
of what their company’s worth today and where they need
to get to in the future. So for most founders, what we
think the business is worth today is not what
they want to sell for. But usually, people
from there have a time- or a value-based
goal, and we’ll help you determine what that is. So it may well be that
today your company is worth $10 million dollars,
and you want $50 million or $20 million $100 million. It doesn’t really matter
what that number is. That’s a very personal
number, and that’s something that we would then help you
determine and also figure out with– I like to call it personal
and company stakeholders. So that might be your wife or
your husband or your business partner. Could be your investors. So you’re aligned with what
you’re trying to achieve. Because otherwise, you’re
going to be in a situation where have great company,
you maybe have a co-founder. The co-founder wants get
to x, you want to get to y. And if they’re completely
different numbers, you’re not going to be aligned. So you actually help–
you suggest that to them, right off the beginning. So that’s what we want
to do because the nature of our business, we only get
paid if your business sells. We don’t take a retainer. There’s no incentive
for us whatsoever if your business doesn’t sell. And you get paid based on
the numbers that you want. The value of the business. So you want it to be– The higher the value,
the more we get paid. And we’re fortunate
that we’ve been in business nearly 10 years. We have a huge amount
of inbound interest. I guess the value of
referrals compounds over time. So we’re not short of business. So in our best interest,
give you the best advice. So if you come back to us
with a $50 million company, that’s better than a
$10 million company. But you have to make
that decision yourself. We don’t say, your
number should be 10, and we also never tell
people if their goal is realistic or unrealistic. We might just give
them a timeline. So if you’re $100,000 today and
you want to get $50 million, we’re probably not going
to be working together in the next 12 months. That might need a fundamental
pivot or shift in your strategy to get to where you want to be,
or just a change in ambition. Maybe it’s like you’re probably
not going to get to $50 million working 10 hours a
week, but yes, you can have a nice business
kicking off $200K a year working 10 hours. So you have to really
align those things. I remember– and maybe
they’re still around, sites like Flippa. What’s the difference
between a Flippa– I mean, I feel bad,
Thomas, asking you this question because I– It’s a fair question. But it’s a real thing. What’s the difference
and what do you feel the value add can be
by having somebody like you support a process? Yeah, so there’s lots of
marketplaces out there. I guess whatever you’re
selling into in the world is a marketplace. I generally think
marketplaces and the mechanism of the marketplace work really
well if you have a business. And there’s plenty of
place other things. Maybe it’s antiques or anything
like that below $10,000. At that level, it really is
just the highest bid wins. So if you bid $10,000, I
bid $5,000 for this glass, then you’re going to
win every single time. But a business is much more
of a complex transaction. If it’s a– and
what we generally advise to clients because most
people don’t understand when they start the process is
often, the highest number or the highest bid is not always
the offer you want to go with. It’s all about the terms,
the structure, the alignment. If you’re going to sell
your business to someone for $10 million, there’s going
to be a transition period. That deal is unlikely– or that
can be unlikely to be all cash. So you have to align with
them, you have to like them. A lot of people think
it’s just about the money until they realize
that you’re effectively selling your legacy. You want to make sure that– It’s going to be in good hands. Yeah. You want to make sure
that in five years time you say, I sold x. You’re proud. That x is still doing well. It’s not shut down, bankrupted,
was run into the ground by the acquirer. So fundamentally, the mechanisms
behind the marketplace, which is purely bidding, does
not work for bigger business. And then beyond that,
marketplaces are self-serve, so you have to figure everything
out yourself, the valuations, the contract negotiations. The kind of buyers looking
on marketplaces also completely different
from the kind of buyers who are working with
M&A firms and strategic buyers. So the marketplace mechanism
works well below $10K. Beyond that, you really
want to be in a position where you have someone
who can help you weigh up the different options, get
multiple offers for you, and ultimately find out the best
offer and structure for you. And I’ll say beyond $1
million, it’s very rarely the highest bidder wins. It’s usually a combination
of structure, bid, fit. How much you like them
is really important part, and that’s why having an
advisor like us in the way is good because we’ll do
calls, for most deals, have been in-person
due diligence meeting. So that alignment is a
really important part of it. So say at a fundamental
level, that’s the main difference
between an M&A firm like us and a marketplace. It’s really just the mechanics. How do you avoid– I mean, as somebody takes
a performance-based fee, how do you protect yourself
to not work worth a dud? Yeah. So I’d say, at the moment, the
vast majority of our business is inbound. We’ve completed over
750 transactions. And entrepreneurs, as
you know, like to talk. They like to share
their knowledge. So we get a lot of– from a marketing perspective,
it is actually quite difficult to track where
our business comes from because you may have heard
about us and you worked with us and you think– I remember reading your blog
post, hearing about you, and then I think you guys
worked on Rob at Drip. Drip. Yeah, but it was 2016. So I was like, OK, these
guys are doing real stuff. Yeah. So from that perspective,
we have a very long client lifecycle. We do lots of things where
you’re going to hear about us, but not anything– you’re never going
to see an event and I’m handing
out business cards saying, hey, come work with us. Come sell your business. It might be a podcast, it
might be a video interview, it might be a book, it
might be a conference. It could be all sorts of
different things like that. So we have lots of
different touch points throughout the process. Your magazine. The magazine, exactly. We do tons of
different stuff to be– I wouldn’t even say front of
mind, like, middle of mind. You know who we are. We have a good reputation. We’re fortunate– so
internally, we effectively consider ourselves to be
as exclusive as Harvard with the intake of
businesses we work with. So for every 100
businesses that inquire, we might only take them
one or two of those. So a lot of is we have a huge
amount of inbound interest. We can be very selective
with who we work with. Because we’ve sold so many
businesses over the years, we know what sells. We know it doesn’t sell. Sometimes we may be a
little bit speculative. It might be a business
model we’ve not seen before, but we think will be a
good fit for our buyers. In that case, you
might be a bit more conservative with the
valuation or the fee structure or just setting expectations. We’ll always be straight up. We never say, yeah, we’re going
to sell it this [INAUDIBLE] $10 million in three weeks. We’re always honest. And I find that if you’re
not charging people any money, as long as
you’re honest and upfront– But you’ve got to do
some real work just to get it ready for marketing. So you’ve got to create– Yeah. We have a team of
nearly 45 people. Do you ask for them to give you
an exclusive so that they’re not– So we do ask for exclusivity. We don’t ask for any retainer. And the exclusivity starts once
a business has been listed. But we have a team of 45 people
and publicly, you’d maybe only see five of those people. The vast majority of the
work is behind the scenes. It’s the evaluation team who
are building valuation models to make sure that if we
tell you your valuation is x, that x is accurate. If we value it too high, the
business isn’t going to sell. If we value it too
low, then you’re going to be frustrated
if the business sells in 30 minutes with 20 bids. So it is a bit of a balancing
act between too high, too low, and just right. And people hire us because
they actually want to sell. We’re definitely not
a company come to you if you want to send it to five
companies and see what happens. We’re hire us, we will
sell your business. We will be honest
with you upfront. Probably not going to
get 50x, but you’re also going to get 1x. So we invest a huge
amount in the process. We have a 94.1% success rate
for businesses we take on, so it’s very rare for
us to get it wrong. How do you expect
generate demand or how do you create the
market for companies? Like, if I’m a founder
and I’m like, OK, I want to sell my B2B SaaS
company, I don’t even– most of them wouldn’t
even know where to start finding people
that buy these things. How have you guys done that
and what’s the promotion? I think of real estate. Real estate’s similar, where
they package up the house and they have real estate
listings and stuff. What is your– what
do you guys do? Obviously, you have your own
list and audience and stuff, but what is the process
of promoting, marketing a company for sale? So as we’re going through
the process of preparing the business for sale, our
M&A team, who are effectively the sales guys– it’s their
job to go out and find the bar and sell the business to them. As we’re going
through the process– Will they go cold to companies? To some extent. So I’ll go through the process. So they will be building out a
ideal target demographic, who’s going to acquire this business,
and that will not just be one buyer profile. There’ll be lots of
different buyer profiles. That might be
private equity firms looking for B2B SaaS doing
$1 million AOR, which is quite generic criteria that
hundreds of PEs will have. It might be the
individual who’s saying, I want to buy a business. I’m going to use a SBA loan. So we’ll narrow it down. And then of our network– we have about 41,000 buyers
in our database or network– we will then narrow that down
on a particular business, usually to about
1% of that to 2%. So it’s usually
400 to 1,000 buyers that we’ve said,
based on the criteria they’ve provided to us, but
that’s budget, business model. Can people get added to
that list on your website? Yes. Anyone can come
onto our website, and you can sign up to get
our listings, which are just generically sent to you. You get a weekly newsletter. That’s a very passive form of
marketing from our perspective. And then there are various
email flows and call flows that if you want a better
chance of buying a business, you should get in touch
with someone on our team, provide them more
information, and make sure you’re qualified
because then, effectively, the way
the process works is– Those people get the first stab. Yes. So we go out in three phases. We go out in what we call
pre-marketing phase, which is two weeks of
extremely segmented list, and that’s where we start the
strategic outreach as well. So it might be here are 50
PE firms we’ve identified that might be interested. A lot of clients come to us
they already have some interest. What would the email sound like
if you send it cold to a PE firm or to a strategic company? So if it’s cold, it
would usually just be something as simple as, hey,
and then with an introduction. I’m Thomas, founder
of FE International. We’re representing a business
that, based on your criteria, I think might be a good fit. Here is a teaser. So in that case,
we would attach a– What’s teaser? –one- or two-page
PDF, which is a very– That’s prospectus-ish. So it would be a very
anonymous high level. So it might be this
is the industry. This is a high-level financials. If you want more
information, they then have to sign a confidentiality
agreement with us. [INAUDIBLE] stage,
we’ve sent them a prospectus, which
is usually 40, 50 pages for the average
business we represent. That’ll get sent across, and
that’s also what the people who are in our pre-marketing– They get that? Yeah. OK. So they skip the whole thing. Because they’ve
already qualified themselves to even give
us that information. So we know they have the money. We know they’re ready to go. We know they’re going
to keep it confidential. [INAUDIBLE] that process,
two weeks after that, we almost always have
a bid or multiple bids, depending on the
size of the business. If it’s relatively
small, so let’s say it’s $100,000 business,
probably already sold. If it’s a $10 million
business, you’ve probably signed
to get indication of interest, which
usually something you send before a letter of intent. And then we’ll work
through that process two weeks after it
goes out to everyone. So that’s what you might– if
you’re on our generic email list, you’ll say it. Hey, Dan, here’s a new listing,
couple of bullet points. Fill out this form is
if you want a little bit more information. So that stage you get that. And then beyond that,
we also use a bunch of third-party
sites which are very similar to real estate, which
is, effectively, like MLS. For us, that very rarely finds
a buyer for that business. That’s really just
network building for us. It’s people who are
browsing to buy businesses. We want them in our network. They might buy in
two years’ time. But the only way to
find these people is if you’re actually selling
a business in the first place. It’s a little bit
chicken and egg. And I know strategic can
range, but somebody’s got a million ARR SaaS
company looking to exit. What’s the multiples looking
like in the market today? So on a SDE basis,
so that’d be– Salary discretionary– –an income minus what
you’re paying yourself. Explain SDE because
most people don’t– Yeah, so it’s effectively your– depending on the size
of your business– And it stands for Salary
Discretionary Earning. Salary Discretionary Earnings
or income or cash flow. So it could be– all those
things are effectively the same [INAUDIBLE]. So it’s effectively
what your business makes on an annual
basis net, pre-tax. Minus your salary. Minus your salary, minus
any other benefits you take. So it might be a car,
conference travel. Things that are not a part of
the business that you just– Vacations –decided were
business expenses. Yes. And everyone does it, so
there’s not nothing to– I talked to a guy once. He said, every business
has two sets of books. Yeah. So there’s no shame in that. No judgment, no shame. Everyone does it. I always say to people,
treat us like you would with your attorney. We will help you if you
give us the information. A lot of people
are super sketchy, and they’ll say, oh, actually,
my business makes millions, but it doesn’t show any profit. We won’t work with those people. Yeah. You can’t disclose it, right? Yeah. You asked how we vet people. Part of it is if we
think in any way they’re acting dishonest in the
process, we just kick them out. And we have. We will do that to people– On both sides? –a long way down the process. I don’t care if they’re
three months into the process and we’ve spent tens of
thousands in team overhead. If we don’t think
they’re honest, that’s going to burn our
reputation down [INAUDIBLE].. So yeah, we just kick them out. And I guess that’s the
fun part being a founder. Or my business partner,
CEO can handle that. So those hard conversations
sometimes have to happen. Yeah, so [INAUDIBLE]
that, and then you also might adjust out
any one-time expenses. So for example, if you’ve
gone through a rebrand. You’ve spent $100,000
to redesign your site, and that’s something you
haven’t done for five years, we might be able
to adjust out that. Anything that is not reasonably
likely to be recurring. So there’s definitely a
little bit of a subjective. Everyone will argue, this is
too high, this is too low. You can’t include this. You can’t– so the way we do it
is we’re just transparent with what we present. We say, well, this is SDE. If you make an
offer on a business, we’ll then share all that
information with you. If you’re not happy with
it, then you can push back and say, well, I don’t believe
that this is [INAUDIBLE].. So there’s always a little bit
of a discretionary process, which I guess is quite
an ambiguous term. But effectively, that’s
why you’re hiring us. So we’re going to present your
financials in the best way possible. And then it’s our job
to negotiate with buyers why that’s justified. So let’s say $1 million AR,
SDEs usually look like what? I’d say you’re probably going
to be $400,000 to $500,000 on the average SaaS
we see at that size. Multiples are going to be
anywhere from 3.75 to 4 up to 10, depending
on the business. But still, it’s a
3.7– even at 3x, you’re at 1.5 on a $500,000 SDE. I feel like most
SaaS company founders think that they’re worth more. Yeah. So the key variable
is really growth. So growth [INAUDIBLE]– OK, so the 3.7 upward,
what’s impacting the– Growth rate is
probably the main one. And would get you a 10x? I’d say at least
100% year on year. Say for three years? Just in the last 12
months would be fine, depending what’s
happened to achieve that. If you’ve– Saved a lot of money on ads. Let’s say you’ve just
launched a new version, and a bunch of people
signing up, which is great, probably not. If it’s sustainable and– so the other key is
expansion of revenue. If you can showing [INAUDIBLE]
negative [INAUDIBLE] you can show that your
expansion revenue is surpassing anything
you’re losing, then that’s extremely powerful. So working on a
business at the moment, which is mid-five-figure deal. He does in the region of $4
to $5 million AOR, extremely profitable. Runs over 50% margin. The multiple on
that is nearing 10. OK, so he’s at $5 million AR. Let’s call it 2
and 1/2 in profit. And you’re looking at 4x. Is it because of the
expansion revenue? He’s significantly
higher than that. So that valuation
is north of 30. OK, wow. So that business is growing very
consistently, in the 3% to 5% month on month level. Has a lot of enterprise
clients, has a huge amount of room for expansion. And in his business– and this would be
relatively rare. I guess the kind of people
who are listening to you are probably not going to fit
this dynamic because he doesn’t spend much time in the business. He sits back, works
a few hours a day, isn’t really that proactive. He just happens– he’s a– Serial entrepreneur? No, he’s not a serial
entrepreneur at all. He actually does a
little local politics. But the business he runs, he’s
an extremely good developer, built a good product. Found market fit years
ago, and has signed up some really big enterprise
clients who love the product so much they keep expanding
revenue without him having to do a huge amount. So he fundamentally
built a good product. I’d say in the world
of bootstrapping, that’s my vision of a unicorn. Yeah, pretty rare. You don’t see
businesses like that. But I mean, those
multiples can happen if you have that
expansion revenue, if you have that
consistent growth, and if you have a huge amount
of potential outside of that. So buyers for that business
are a multibillion dollar fund. And that’s the thing is
that there’s more buyers. People don’t
realize that there’s no lack of capital in the world. There’s just lack of
big enough opportunities for people to deploy capital. They don’t want to
write little checks Yeah. So we haven’t added
up recently how much investable capital our
buyer network has, but it would be safe to say it’s
in the trillions of dollars. For sure. There’s this huge amount
of money out there and funds, contrary
to popular belief, want to deploy that capital. They have to deploy
that capital to generate returns for their investors. So if there’s a good
business– on that business, I believe we had over 10 bids,
which will qualify bids– good bids. So that was extremely
popular for a business that is fetching mid-eight figures. So most people think the
bigger business gets, the less buyers is going to be. In reality, once you get– I’d say $1 million ARR
probably is reasonably good. That’s the beginning. But $5 mil plus– Once you get above
that, you definitely start to get some bigger fish. And then once you get
to $5 million above, you start to get
to the next level. So in this case, it’s
a multibillion fund making an acquisition. This would be one of the
smallest deals I’ve ever done. When the deal gets
announced, you would– some of their other portfolio
companies are household names. You would have read
about in tech crunch when they did their deal. So in that situation,
those multiples do happen. The average slow growing
million dollar ARR business is probably not going
to be like that. Probably going to be in that
four to eight times range. And that’s why–
right at the beginning we talked about valuations. That’s why we do
a valuation early. We don’t commit you to
an engagement agreement because most people assume
their valuation is much higher than it actually would be. And that’s what– But the truth is, is SaaS is
in the unique space of having higher multiples than
restaurants, agencies. It’s a cool business. Yes. I mean, if we were
comparing compared to their content or an
e-commerce space business, the valuations on average
are almost doubled. So the valuations are
definitely higher. I guess the trouble
in [INAUDIBLE] SaaS is everyone knows someone
who’s had an exit which was at 20 or 50 times, so
they assume they can have [INAUDIBLE]. They can have the same thing. The reality is, if that
is going to happen to you, you’re probably not going
to be listening to you or listening to
me because you’re going to have someone
knocking on your office door or cold emailing
you who legitimately wants to acquire at that level. So we don’t see those too often. But for 95% of founders,
that isn’t going to happen. That’s why they hire
us, and that’s also why we don’t hard sell
people at any stage because you have to get
comfortable with the fact that the valuation we tell
you, you might not like it. But that’s the reality. It also means there’s a
94.1% chance you’re getting a check at the end of it. For some people, it’s
a big enough amount, you might not ever
need to work again. What’s the hardest
part about what you do? Like, personally,
what do you find– So personally, on a person
level, I travel a lot. I work a lot. The nature of entrepreneurs
is entrepreneurs work all the time. Our clients are
entrepreneurs, and they’re based all over the world. So we have– particularly the
senior members of our team, we travel a lot. We’re working with
people constantly, weekends, evenings, mornings. Emails. All the time we’re on. Hundreds of emails
a day for all of us. On a deal by deal
basis, I’d say the value you don’t realize that
the M&A firm brings is every deal at some stage
will have some form of problem. Selling a business is
an emotional process. Buying a business is
an emotional process. It’s our job to manage
that and make sure that– assuming both parties
are acting in good faith. If there’s anyone who’s trying
to misrepresent or defraud or we think there’s
a problem, we’ll just draw a line
under and say, hey, we’re not proceeding
with this at all. So for us, we have
a good reputation for selling businesses. But day to day, we
have to have a lot of difficult conversations
with people and say, no. So we get a lot of
inbound complaints from people where
they’re saying, well, I wanted to
buy this business, and you wouldn’t let me. That’s not fair. Well, our client is the seller. We don’t represent the
buyers, ultimately. And what are you saying to them? It’s just the bid they offered
or the terms they were– Well, there’s lots
of different factors. I mean, ultimately,
we’re hired by a seller to sell their business. To represent the seller, yeah. And we have to make a
recommendation which is multifaceted. That’s how good their bid
is, how likely we think they are to complete,
what we think they’re going to be like
to work with post-sale, and then we let the seller make
a judgment call from there. But they very much
lean on our expertise. So buyers often get frustrated
because they’re like, well, I– Why did you represent me? I made the highest bid, or I
emailed you back the fastest. And generally, if
people are going to be combative at that
stage, then they’re probably going to be awkward
at other stages in the process. And it’s our job to balance
all of these different factors and make a recommendation. How often do you go
to sell it and then the seller is having seller’s
remorse, like cold feet? I would say everyone will have
a form of remorse at some stage. Part of the reason why
we don’t hard sell people upfront, we want them to
effectively come to us and tell us [INAUDIBLE]. So essentially, if you did
get them hard sold up front, then you’re going to deal
with the repercussions down the road? Yeah, it gets much, much worse. So we want you to come to us
and be like, hey, I’m ready– Now is the time. –to start the process. I’ve spoken to my
personal stakeholders. So I’ve spoken to
my husband, wife, kids, whatever it might be,
spoken to our shareholders, investors, business partners,
key executives in the company. We’re ready to go. I’d say there’s always
some form of remorse once you sell because, for a
lot of people we work with, they don’t necessarily have– they don’t know what
they can do next. They might say, well, I’m
going to bank the $10 million, and then I’m going to take a
year off and figure it out. So remorse is not a bad thing. I think I’d say one
of the things I’ve learned over the course
of 750 transactions is you can’t fight
against things like that. So we just have to
kind of roll with it. We know it’s coming, and it’s
just managing that at the time. But ultimately, part the reason
we have such good reputation is we don’t force
people to take a deal. If we really want to walk
away last minute, you can. We don’t then send the
attorneys off to you with demand letters
or anything like that. If you want to walk
away, you walk away. We want you to sell kind of
in good faith and happily, and not in a position
where you’re like, yeah, they sold my business,
but they kind of like put a gun to my head
and made me take the deal. We don’t do that. That does mean sometimes
we lose out on revenue. Yes, we could put
retainers in our agreement. We could put all sorts
of termination clauses. But we’ve always
felt that not having that builds a huge amount
of brand goodwill long term, which is something that
marketing dollars couldn’t buy and really can’t buy. So it’s always
worked well for us. Attorneys would look at our
agreement and be like, guys, this is stupid. You have a two-page agreement
for a $30 million business. Why don’t you have all these
other provisions in there? But ultimately, we
want our clients to be happy when they sell. And if they’re not,
contractually, you can walk away. It’s our job to expect that to
happen throughout the process. And just be ready
to deal with it. So that’s the hard
part, is knowing that there’s going to be
issues coming up on every deal. Every deal? Every single deal. Every deal. Most deals. There’s always– every
single deal we do, there’s always going to be a
difficult conversation someone has to have with one party. Sometimes that’s
multiple conversations. Sometimes that might be jumping
on a plane, depending on the– Size of the deal –complexity of the deal. And the bigger deals
get, they get complex. There’s lots of things
that will be challenging in that transactions, so there’s
lots of things to balance. It might be accounting,
technical, legal. There’s lots of different
things we’re trying to balance. And while the seller
is our client, we very much do try
and create balance. So if we’re representing
you, we don’t then turn up with a
one-sided contract when we’re speaking
to the buyer, or refuse any due diligence
questions they have. We’re very much saying, well,
we think this is reasonable. What matters to you? Do you care about
transition period? Do you care about valuation? Do you care about– what do you care about most? And then we’ll balance that,
and we’d say to the buyer, OK, well– I think all negotiation
is a balancing act. I think people who
are bad at negotiating think you have to win
every single time. They don’t know how to look
at the pieces of the pie. Yeah. It’s like, here’s
10 things I want. Here’s 10 things you want. I want my 10. You’re not getting any. I think it’s a balancing act. It’s like, OK, well, I
want these two things. Maybe you can have
these eight things. Maybe you can have
all of your things, but this is important to me. And that balancing out then
creates the situation where, at the end– And that is your expertise. –everyone’s happy. Yeah, and that is why people
work with an M&A firm to be able to get through that, A.
Have these negotiations without frustrating the buyer because
if you’re the one negotiating, that’s– Yeah. You end up paying and
they’re not paying you. So we hope that if they
hate anyone, they hate us. Yeah you’d be the
bad guy, the bad cop. We’re starting a
new SaaS company. What needs to be true? We’re starting the
best SaaS company. Thomas, what are
the characteristics of this business? So you have to have– maybe not when you launch,
but at some stage– No, we’re doing this. This is real. So let’s say we. What are we doing? You absolutely have to
have a pricing model which has expansion revenue. I also like products that– This is the first
thing you’re saying, is we need to figure out how
to make so the product has expansion revenue. You have to– you’ve
hopefully spoken to someone like Patrick Campbell. He’s been on the show. Re-watch his stuff. He is, I guess,
the godfather of– don’t know if I’m
allowed say that. But he’s the guy
you speak to about– Value pricing. –pricing. You want value pricing. You want expansion revenue. Doesn’t matter where that
comes from, but you want that. I would say the
best SaaS businesses we see target I’d like say
B to small B and above. That might be customers
that have at least– Like a mid-market? –10 to 25 employees. I do not like businesses
where their biggest cohort is freelancers,
individuals, consumers. So we’re going $2 mil
revenue-type businesses. Yeah, I’d say a
million and above would be a nice target, anything
that has employees and is going to consistently need a product. I also think the product
has to fundamentally solve a need so that
business will always have and be something that– Will always have– –if the worst thing
happens to that business, you’re not the first
thing they cancel. So for example– Critical workflow. –marketing tools can be
fantastic, high growth, super popular, but they
tend to trend in and out. And if a recession comes, do you
cancel your fancy new marketing tool subscription
or do you cancel your something that’s monitoring
your server on the back end? You want– I always think that
the best companies are those that if you describe
it to someone, the average person
on the street, they have no idea what
you’re talking about and I think it’s super boring. If people think it’s
cool or sounds fun, or it’s really interesting– If it’s going to get
covered on Tech Crunch. –its probably not going to
make a business long term. You want something that’s a
deep part of that company’s infrastructure– Core, workflow, infrastructure. –and core, and will
forever be that. And boring. Like, people always– one
of most common questions I get when I’m interviewed
is, hey, Thomas, what’s hot right now? What should we build? What should we do? What industry
should we go after? Yeah, this crypto stuff. We just– yeah. We avoid stuff like that. And I say, well, if it’s still
popular in five years, yeah, we’ll pick it up. But you won’t see us and selling
the biggest trending business. We’re usually selling
boring B2B SaaS that’s been around for ages. It might not have a
fancy-looking website. It might not have
a fancy sales team. It’s probably just a good
product where people like it. People talk about
product-led growth. I like businesses that
fundamentally have that. If you have a business where– similar to what I’ve done
in a service business, it’s if you have a good
product and a good service, I don’t need to
be the best sales guy in the world for people
to want to work with us. They come to us based on
our reputation and based on, if you want to sell a SaaS
company for $10 million, hopefully realize that
we are your best option. Yeah, you can speak
to lots people, but hopefully come back to us. And that’s the same if you’re
building a SaaS product. You want something
where you are the top of mind in your industry
if anyone’s saying, hey, I want the x or y. What about the niche? Do you think that’s
really important initially when you’re building
out this B2B? Personally, no. I mean, I would say
just general advice for founders when
they’re starting out, I think you need initially to
be interested in that industry and niche. I like to think in my
business, for example, I read absolutely everything
that happens in the industry, very related and
even slightly broader than that because I’m
genuinely interested in it, not because I’m
getting paid to do that or because I’m told I have to. I’m genuinely interested. If I wasn’t and you said, oh,
what do you think about this or what do you think
about this product, or what do you think
about this person, it’s important you have a
fundamental understanding of industry. And if you’re not interested,
it doesn’t really work. I know a lot of people say,
oh, you don’t necessarily have to launch a business that
you’re personally interested in. I don’t really think
that’s true, particularly– [INTERPOSING VOICES] If you’re going to be
in business for 10 years or 20 years or 30 years,
it has to be something you’re truly interested
and passionate in, at least somewhat related to that. Somebody is looking
to buy a company. I get asked this all the time. Non-SaaS people come across
the founders [INAUDIBLE] SaaS wants to sell. What should they look for? What are the things
they’re supposed to be doing in due diligence? So the first thing you
should do before you even get to due diligence
is establish what will you get out? What’s your what’s
your value add? If there’s three
things in the world you’d say you’re best at or
top percentile, what is that? Is it sales? Is it marketing? Is it design? Is it development? And then you want to find
a product which is usually lacking in those areas. Doesn’t necessarily have to
be terrible in those areas, but you want a business where
you know you can go in there and improve it. And often it’ll be difficult
to know what that might be. So maybe the home
page converts at 5%. You’re not going
to know if that’s going to go to 7% or 15%. But at least if you’re,
say, a CRR expert, you might kind of
say, well, I’m pretty confident with some good
split testing and A/B testing. I can improve that. Or it might be that a
lot of SaaS companies, particularly B2B
companies we see, are terrible at email marketing. They might send emails,
but that’s about it. They don’t do converting
people from free trial to paid. That’s part of their flow
that’s usually quite bad. Recovering canceled accounts
usually never happens. Encouraging people to upgrade
usually never happens. So [INAUDIBLE]
spot companies like that and you’ll get
a email marketing and you understand
the customer journey, those can be
fantastic businesses. And then again, I definitely
think you want something that– Play to your strengths. You want something you’re
at least interested in. Not deep domain,
but [INAUDIBLE].. The way I look at it is,
even if you’re acquiring this business– let’s say you
have investors, you [INAUDIBLE] going to be the
one wanting it day to day, every
business at some stage has a problem that happens at
10:00 PM on a Sunday or 4:00 AM on a Wednesday. Whatever it is, you have to have
a business where you are not going to hate it
or yourself if you have to make that personal
sacrifice to handle it. So the way I look
at it is if you’re on vacation, if this
business interrupts you for the entire vacation and you
lose your one week of vacation you have per year, are
you going to end up resenting the business
or the team or whatever? Customer, yeah. If the answer is yes,
then maybe firstly, you should probably not be
buying a business at all, and you probably should not
be buying that business. And then in regards to the
due diligence of here’s the things that go look for
to make sure that you’re not buying a dud, if you’re
not working with the M&A expert, what are those? What’s that checklist? Yeah, so I’d say,
firstly, hire people to help you in that process. Don’t try figure it
all out yourself. Even if it was me
doing an acquisition, I would definitely be calling
in favors or hiring people who– I can’t buy [INAUDIBLE]. What are they going to do? I can’t write code, so I’d hire
a developer friend or agency to go through the code. [INAUDIBLE] And the way I like
to do it is don’t– it’s the same with
valuation companies. There’s companies out there
that will provide valuations. And you can pay them
$10K to do a valuation, but then they won’t
actually sell your business. You can find companies out there
that will do due diligence, but they won’t actually
then run your business. So I like to hire companies to
give you a scope or effectively a quote and say, Dan, you
have a marketing agency. I have a $10,000 a month budget. What would you do
with this business? Wow. That’s smart, though. Because then from there, you
can say, if they miss stuff or– they have no incentive
to bullshit that process. But for the most
part, they’re going to do this for free because
it’s a statement of work. Yeah. So firstly, you’re
entering that in good faith and say, hey, look, I’m looking
at acquiring this company. If I do– Can you go in? Yeah. If I do and I give you $10,000
a month, $50,000 a month, $1 million a month, doesn’t
matter what that number is, what would you do for me? They’re going to–
I can promise you, they will dig deep into
that business to tell you what you need to ask, what
you need to look out for. If you just hire
someone to look at it, anyone can give you an opinion. Like, yeah, that
business is great. Buy it. But– [INAUDIBLE] want to
own it afterward. Are they the one
writing the check? Are they the one who’s
answering the phone at 10:00 PM on a Sunday? Are they the one who’s
giving up their vacation if it goes wrong? So be very careful. The people involved
in due diligence, are they going to
help you post-sell? You do need to
understand as well, if you’re going to write
a check, ultimately, you are the one– probably, you are the one
who’s responsible for that. So yes, you should
hire people and bring in experts in the process. But ultimately, the
buck stops with you. You have to make that decision. If you don’t understand or you
don’t know, make sure you do. Yeah, so I like to bring in
experts to kind of understand different parts of the process. The fundamental
thing to ask yourself is, if I buy this
business today, do I have everything I need to
continue running the business, assuming the founder or the
founders disappear on day one? You just assume that. So in reality, it
basically never happens. But it’s good– But you have to work on the
assumption, what do I not know if that founder disappears? And then hedge against that. That does not mean– and again, the
art to negotiation is creating balance. So there’s very
rarely a situation, assuming there’s not been
any misrepresentation, where that makes it a no-go. Due diligence is
always a balancing act. Find a problem, hedge
against that problem. So it might be, oh,
it’s the founder left, the code is not
really documented because he written all
of them from day one. So contingent on the deal,
instead of saying, oh, this is too risky. We’re out, which is very
much a first time buyer– [INAUDIBLE] That’s why we like
to work with buyers who are experienced because
they don’t walk away when there’s that issue. So in that case, you
might say, OK, well, I want the owner to
fully document or spend 100 hours doing it before we
release any funds from escrow. Or maybe instead of a
three-month training period, you want six months. We’ve got to do things to create
incentives and keep it fair. So it wouldn’t be, I’m
not paying you $10 million for the business anymore. It’s now $5 million. It’s not– It’s not proportionate to
what you’re asking now. So I think one of the
challenges we have– and I don’t watch a
huge amount of TV. But the challenge with
all of the business shows on TV and anything
that shows negotiating on TV, I always feel like it’s
overdramatized to the stage where people think
negotiating is all about screwing the other
person over and cutting the number in half. If you’re in a process and you
cut the valuation to $5 million from $10 million– You’re losing the seller. –because the code’s not
very well documented, that’s just stupid. So be careful of what
you have seen elsewhere. Negotiation is a balance. Negotiation isn’t
all about who’s the loudest or the
smartest in the room. It’s always about
creating that balance. So be practical in the process. And also don’t be
don’t be afraid to ask if you’re working with us in the
process and you’re the buyer, and the saying genuine
you’ve spotted or identified that makes you uncomfortable. Bring it up. The worst thing is if you have
all these things start building up, and you say, hey, I’m out. Or I’m just not comfortable. Almost everything can be hedged. And sellers we work with,
because we don’t hard sell them in the process, most people
spend many years or months researching how
the process works. They will probably–
and we probably do not know about this. They will probably speak
to other people who have– Sold [INAUDIBLE]. –worked with us
before and been like, what’s the bad stuff
I need to know? And that’s usually in due
diligence, stuff will come up. Expect it. And we will train you
through the process. This is going to happen. But you don’t always
know what it is. And depending on the
buyer or working with, what they might spot what
might be an issue to them might mean nothing to you. So if you’re a
developer, and day to day you’ve spent the last 20 years
looking at it every single day. And someone says, oh,
I’m a bit uncomfortable. This code’s not well-documented. You might think, oh,
that’s stupid because it’s easy to understand. So in that case,
it’s like, well, why not offer them 100 hours
of this or 500 hours, whatever it might be. So create a balancing act. As a buyer don’t be afraid
to ask things, but avoid the drama in the negotiation,
and make it proportionate. And that way you’re going to
end up in a situation where– even if you sign a contract
to buy some business, if you’ve kind of screwed
them over at the end and you know they have to sell
the business because– They don’t any other– yeah. They have to sell and you
put a gun to their head. Going through a
divorce or something. Then once you’re outside
your contracted support period in, say, 12 months
time, don’t expand pick up the phone when you need them. Something major happens. So I think it’s [INAUDIBLE]
just in business in general. Play the long game. You can go to a huge number
of conferences, events. You can read blogs. There’s seemingly tens of
thousands of people out there. But the one thing I’ve learned
after the years is actually the industry is– [INAUDIBLE] is actually
very, very small. And there are usually a very
specific group of people that– Influence. –that influence
whether people like you or they don’t like you. And it’s important not
to screw people over just for your own good. I call these invisible doors. Essentially, there’s
doors that you don’t know that might be
closed because of something to a person. Yeah. Don’t screw people over. Be honest throughout
the process. And ultimately,
realize that our job is to have difficult
conversations. Our aim is at the
end the process, if you sell your business,
you have a great relationship with the buyer, and the seller
has a great relationship with the buyer. Everyone has a
great relationship. But if there’s any sort of
ill will, that’s towards us. We’re the ones who effectively
throw ourselves under the bus to get a deal done. if it was like, something
was forgotten or– Thomas wouldn’t let me do it. –or misplaced in the process,
as long as we don’t think it’s anything malicious,
we might say, well, we mislaid this file,
or that’s on us, or sorry we missed communicated. So that’s what I mean from
a marketing perspective, we have a difficult business to
market beyond just reputation. Even when deals happen, we can’t
publicize them all the time. Usually, they’re private. You very rarely get the
buyer and seller up on stage at a conference talking about
how they sold their business. Here’s a term sheet,
here’s a contract. Just never happens. Over the last
decade, you’ve been building this business, Thomas. I’d love to ask,
who have you had to become to continue to
grow this kind of company? So I think at a
fundamental level, you have to be a good negotiator
to sell businesses day in day out. There’s no way to
get around that. And how have you done
that for yourself? I think the big thing for me,
I’m naturally an introvert, and I naturally
avoid confrontation. The big thing for me was not
learning to be confrontational, but learning when to
push, when not to push, learning when you have leverage,
when you don’t have leverage, learning to have to make
that difficult phone call. No one likes making
different phone calls. The nature of my job
data has to happen. Our team have to do that. We train them as they get
more confident, do more deals. That becomes more
natural, and you realize that, ultimately,
we’re doing it for the good of the client
and the good of the deal. Another thing you
realize is that if you feel uncomfortable
doing something, you have to tell people. We never do things–
put it this way. I’ve never done
anything where I’ve gone to bed at night
saying, I think that person got screwed over,
or we made someone do something that they shouldn’t have done. Never once gone to
bed and felt that. So I think it’s super important
to do the right thing, even if that’s not something
that financially benefits you. It might be– a deal recently,
eight-figure deal, the client, towards the end of
the process, was beginning to feel a
little bit uncomfortable. And she said, hey, Thomas, what
happens if I want to walk away? Are you going to come after me? I’m going to say, well,
no, absolutely not. If you’re comfortable,
walk away. In the end, it worked quite well
because she said to the buyer, hey, look, so I was no longer
comfortable with your terms you’ve been gradually changing. Therefore, take it or leave it. And the buyer took it,
so that worked well. But if I was not willing
to have that conversation, say, well, of course,
you can walk away, that never would have happened. So I could have pushed
her into it and said, oh, well, we spent
all this time, all these flights I’ve been
on, and late night phone calls. It’s not fair. Like it’s cost us $10,000. So never do anything that makes
you feel uncomfortable or bad. If you do, you should probably
be in a different business. We work with a lot of people
who leave the banking industry, and they then want to
launch a private equity firm or buy a business. And for a lot of
these people, they have stories of
just how they hated their job because they’re
made to sell things they did not believe is in the
best interests of their client. And you’re in a
position of power. If I say to you, hey, your
business is worth $1 million, and it’s actually
worth $10 million, and then my buddy’s buying
that business off of you, yeah, I’d probably get away with
that, but it doesn’t really do any good in the– Long-term. –long run. So I’d say, learn to be a good
negotiator, learning just to– learning that things, as a
business owner in general, things will go wrong. Every day there’ll
be new problems. So I don’t think there’s ever
a day in my life where I get up and there’s not
something has gone wrong. You just ultimately
have to realize that as a business owner. I’m lucky to have
a business partner. He’s CEO. So between the two of us, we
both have completely different skills. We are quite different,
personality-wise, so that means
day-to-day problems, we can usually separate
them out and say, OK, well, I’ll deal with this. You deal with that. And that works quite well. I think you do need to have
that someone to fall back on and that kind of mechanism. It doesn’t necessarily have
to be a business partner. It could be a key executive. But having that support
network is important because as the business scales,
what you realize as well– and this is really the
big fundamental change that happened for me beyond
just refining my skills, is you realize, as
a business grows, your responsibility
is no longer– your goals become
a lot less selfish. When I started out, I was
like, oh, my biggest goal is to become a millionaire. Kind of did not come from
a background of money. A millionaire to me
was a unachievably– I’ve arrived. –large amount. So I was like, OK,
well, millionaire. And then you get
there, and you realize that now you want $10 million. And you think, well, get
there and you think, well, that can just keep going. But actually, what happens
is your responsibilities completely change. Like, when I started
the business, I was young, free,
single, had no– OK, well, I’m now married
and I have considerations in that part of my life. From a business perspective,
we have a team of 45 people. They have kids, mortgages,
dreams, ambitions. They want to do well. So you realize that a
lot of the selfish goals I had starting out were not
really what I think about now. Day to day, it’s all
about serving clients, but also the team. I don’t want to be in a
position where someone says, Thomas and Ismael, my
business partner and CEO, they ran the company
into the ground because they were paying
themselves all the profit, driving around in fancy
cars, buying nice apartments, going on vacation all the
time, didn’t take it seriously. So that’s one thing I say to
entrepreneurs really early on. If you’re going to learn one
thing, is before you hire– maybe the first couple of
people, it doesn’t matter. If you actually want to hire
people and grow your business, you have to realize that
once you hire people, that their life is
in your control. Unless you’re a sociopath,
you really don’t want to be in a position where
you’re responsible– your bad decisions
are responsible for– Pain in their world. –people not being able
to pay their mortgage or people losing their job. I’ve fortunately never
been in a position where– so I’ve had to let people go
over the years, unfortunately. But I’ve never
been in a position where I’ve had to let anyone go
because we’ve over hired or– Made a bad decision. –something’s not working. It’s always been kind
of in good faith. It’s like, hey, it’s
not working out. So that’s a big
thing to realize, that your goals when
you start your business will almost
definitely be selfish. As you grow, becomes much
more about the people. Serving. You can’t just walk away. You are responsible
to those people. And if you’re not willing to
take on that responsibility, don’t start a business
or keep it small. Don’t grow. Hire two people, hire
freelancers, work from home, do what you want. Everybody should check out
your blog, FE International. You’ve got a lot
of great content on buying, selling,
all the whole process. Where do people find
you online, Thomas? So if you can’t find
me at a conference, then you’ll find me online. All of our social media
channels are super active, so Twitter, Facebook,
Instagram LinkedIn. Find me there. What’s your favorite? LinkedIn? I’d say I’m usually
on Facebook the most. You can always email me. I would say, in general,
we very intentionally built a really good team of people
who are good at their jobs, and they’re better at their job
than I would be at their job. Therefore, if you have
a specific question, yes, you’re welcome
to reach out to me. But generally, the
team, if you’re looking to sell a business,
we can give you a valuation. Probably not talking to me. If you want to buy a
business, speak to that team. They’re good at their job. So you’re welcome to
seek me out, [INAUDIBLE].. And your email is Thomas at– [email protected] Perfect. So you can always
email me directly, but the team are great. They’re the ones that
are going to help. [INAUDIBLE] job. And they’re in the
office every day. I’m usually At a conference. Dude, every place
I go, you’re there. Really appreciate it, Thomas. Thanks, Dan. Thanks so much. Cheers. Awesome talk. Thanks for watching this
episode of Escape Velocity. Be sure to like and
subscribe, and leave a comment with your biggest insight
from our conversation. Be sure and check
out the next episode. [MUSIC PLAYING]

3 thoughts on “What Buyers Look For in a SaaS Business with Thomas @ FEInternational.com – Escape Velocity Show #22

  1. Thomas Smale, CEO of FE International, has a 94.1% success rate for selling businesses. Hear what he has to say about the perfect SaaS!

  2. The business is interesting 👍 but I dont understand how they are specialized in SaaS and ecommerce business and their website looks like an old 2007 websites..

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