Enter 2023, I left my comfortable startup job after 4 years. I could continue be an employee and toil away on high leverage things (maybe?). I could have another exit after half a decade? Are these things even worth it in this business climate? Are there other things I can be doing with my time?

I had followed a number of people on twitter that kept posting random things about buying a business and I had found the indiehackers forum. It finally dawned on me that I could buy product market fit and skip the hardest step.

Before I bought Oxbridge Notes I had never done an M&A deal before, my partner had done major transactions but those tend to be entire teams of people. When I talked with my friends they were surprised that I was going to buy a business, because who would actually go out and buy a business.

Why would I want to buy a business? I have been following a community of people on twitter and various other solopreneur sites that talk consistently about building a business that sustains mid-5 to 6 figures a month.

Sourcing

There are a number of deal channels that we use to find candidate companies, given this was our first company that we sourced we use one of the major marketplaces for companies. I’ve put together some channels that I think are useful to source from listed from the most difficult to source to the easiest to source.

• SEO Tools
• Referrals
• Google Alerts
• Newsletters
  • SMB Deal Hunter
• Marketplaces
  • acquire.com
  • flippa
• Brokers
  • Website closers
  • Quiet Light

Criteria and narrowing down

Our criteria for an acquisition was honestly pretty basic, we had top line revenue numbers in mind, basic tech details and a vague sense of what we wanted to do.

When you are searching you are looking at broad criteria to narrow on, so for instance tech stack will be broadly scoped and then more specific and detailed questions will come later. I wanted something that was manageable from a technical perspective (javascript, Ruby on Rails).

Our list of criteria ended up looking like:

• Physical vs Digital: We’re looking for digital businesses right now. Physical businesses come with a different set of challenges that we do not feel ready for.

• Business Type / Industry: We prioritize businesses in the B2B SaaS space.

  • We shy away from social networks, and mobile applications, preferring enterprises with tangible products and robust margins. Oxbridge did not really fit our initial parameters but stood out to us in our search.

• Age: We want businesses that have been around for more than 4 years.

  • Personally I like staying away from hype cycles for the majority of the businesses that we work with and having them be a few years old helps with that.

• Price: The cost of the acquisition is one of the larger deciding factors.

  • Many investors use the capitalization rate to determine how long it will take to get a return on their investment. With revenue and price its much easier to work out what-if scenarios for return rates.

• Tech stack: JS, RoR, Python etc.

  • What appears to work best in this space is a relatively small and contained monolith, frameworks and languages that support these ideas are what I tend to skew towards.

• Revenue:

  • Revenue should come from the sale of goods or services
    • Ads are a very viable way for businesses to monetize eyeballs but it is not for me.
    • AdSense and Ezoic are the names that I most commonly see in terms of getting ad value.
    • Affiliate-esque programs that generate revenue can be difficult to manage. While not completely ruled out here it is not a preference.
  • Annual profit or revenue multiples
    • e.g. purchase price is 300,000 @ 2x = 150,000 profit / revenue
  • Multiples
    • Agency: 1.0x - 2.0x
    • SaaS: 2.0x - 3.0x+
    • Typically sites like acquire.com use revenue * some multiple to get the valuation for the company. ¹

• Location: US or Commonwealth

  • There are a number of accounting and tax issues that parties must take into account when buying an international business. For instance we manage 5 currencies and the financial process for 5 different currencies which includes forex losses and gains for all 5.
  • If the deal goes wrong outside of your jurisdiction it will be hard / impossible to recoup your funds so this must be taken into consideration as well.

---

Analyzing financials

Typically the next step once you have narrowed down a few companies that make sense to you is to review the financials, on many sites you will receive access to these with an NDA.

My partner reviews these with a high level of scrutiny. My version of reviewing them involves a lot less scrutiny and is focused on reverse engineering spend on things like servers.

There are two main things to consider when analyzing financials, the balance sheet and the P&L statement.

Remember to get updated financials as the deal progresses. It is not unusual for peoples focus to slip once they have decided to sell.

Balance sheet

The balance sheet shows assets, liabilities, and equity which is a fancy way of saying that we have things we own, people or companies we owe, and money we have put into the business.

For small acquisitions most people do not have a balance sheet, if they do have a balance sheet you will want to review the assets that you may be purchasing.

Profit and Loss Statement

The profit and loss statement shows where cash goes for a given period.

This sheet will give you the best view of what is spent where. In many cases books can be messy or things may be miscategorized. There are some major things that I like to look for when i’m reviewing a P&L statement:

• People:

  • If the company has employees, this will be a large percentage of the budget². My preference (currently) is to not have employees.
  • Most companies have a few contractors and thats fine.

• Hosting costs: This gives a sense of how much money they are spending to serve however many clients they have. This can be anything from 50$/mo to well over 1,000$/mo depending³ on what kind of business they are running (and architecture choices).

• Software costs: You’d be surprised at how much companies can spend on software and how many vendors they end up using (or maybe not). Getting a good picture of the vendors we will need to move and the complexity can help later in the deal process.

There is one elephant in the room however, sellers discretionary earnings. This is basically a fancy way of saying:

Adj. EBITDA = (
   Net Earnings +
   Interest +
   Taxes +
   Depreciation +
   Amortization
)

SDE = (
  Adj. EBITDA +
  Owners Compensation
)

There are things like retirement plan contributions, travel and so forth that can be considered a benefit to the business owner and so these items may be adjusted in the P&L. Another way to think about this is what is the total benefit that the business provides to the owner⁴.

---

Deal Negotiation

We worked through the deal details over chat, had a few calls with the founder and came to agreeable terms. We agreed that we would use an escrow provider but did not submit an LOI (letter of interest).

It is not unusual to ask the seller for post-sales support or consulting. In the case of Oxbridge it was our first business and we agreed that we would need help. This involved special terms to pay him out above and beyond the price of the deal.

FAQ on deal negotiation

Throughout this process we had a lot of questions and uncertainty about how it will go and what is the norm. I wrote down some of my questions that I had when I was going through this.

What is the communication pace with a seller or buyer?

Sometimes parties are motivated and want to get it done ASAP but on the flip side there may be no rush to get the deal done or it may need to get done by certain key dates (end of fiscal year or end of quarter).

Is it normal for communications to stall in the deal process?

It does happen unfortunately, and when this happens there may be unspoken reasons why it has happened. We have found that smaller parties may be overwhelmed with the deal process (lawyers, laws, taxes, etc.). Our solution to this is to have strong touch points and timelines for deliverables ($).

Asset sale vs entity sale?

Asset sales are preferred for us because you do not have to worry about acquiring the legal entity. In many cases we are purchasing entities internationally and it is likely to be difficult to transfer it to us.

It may end up being more of a time crunch for the parties however. Accounts may be hard to transfer in a given period and you may need to manually migrate things to new accounts.

What is Sellers Financing?

In some cases the buyer will want the seller to retain a portion of the deal over a period of time so that the seller is invested and the buyer is derisked. This is sellers’ financing, which is basically saying that the seller is giving the buyer a loan much like a loan would. The terms of which would need to be defined in the negeotiation phase.

---

Due Diligence

Many sellers claim that they only work 2 hours a month but actually end up being a lot more involved. Due diligence is the part where you determine if this is the case or not.

We had a lot of questions and our seller gladly answered them over chat, which was incredibly convenent because of time zones and such. I will say that many sellers will want to have a chat right away and give you a pitch.

I like to focus on the whole picture of the acquisition in these conversations:

• What does the product do?
  • You’d think by this point in the process you’d understand what a product or business does but sometimes the marketing is really far off from what you would expect. Sometimes their product contains so much stuff that you would never even see! Digging in here is very high value for me.
• Why do users want to use it?
• How do you get users?
• What level of support volume is there? How many emails per day? Are there calls?
• What marketing funnels are you using?
• What does it cost to acquire users?
  • Is this something that we can lower?
• How much does content marketing cost? How many people are needed to run this operation?
• Is there social media and does it acquire users?
• How is the SEO? Is there programmatic SEO at play here?
  • I like to do my due diligence here myself and look at ahrefs and see how they rank and what keywords they dominate.
• How much do you make off of each of your users?
• What does it cost to run the business?
• What involvement is there from the owner of the business?⁵
  • I look for non-answer answers here, if it seems fishy then we need to dig deeper.
• Are there large and important clients / users? How much time is spent on them?
  • It really depends on risk concentration here but having only a few clients and having them make up a large portion of their revenue may be risky to take on. Are they staying because of existing relationships?
• Do you work with data that is highly regulated? e.g. student data, credit card data, healthcare data etc.
  • I’ve worked for years in the compliance and secure programming space and this can be an indicator it may be harder than it seems for one person to run this. It’s important to understand what the compliance, legal and insurance risks are before diving in.

Technical

In these conversations I need to understand what sort of tech is at play as well. I like to ask a number of questions that proxy to complexity of the project.

• What language / framework are you using?
• How many lines of code is the codebase?
  • Probably a crap metric but it gives some idea towards complexity, something built in Rails and 10,000 lines will give you a sense of what you are working with.
• What % is unit tested?
  • Again probably a crap metric depending on how you look at it but there are companies we’ve talked to that have had none or close to none and worked with serious financial data. This would be a liability to take on and make sure that it was correct.
• Are there cron jobs that need to run?
• Are the servers containerized?
  • I’ve evaluated a number of deals that are pre containers! It’s important to understand if there is something that is not easy to reproduce.
• Are the build processes repeatable?

These all help determine what sort of commitment it will take to learn the codebase and provide ongoing maintenance and improvement efforts.

---

Actually doing the acquisiton

Assets would be delivered on a specific timeline once the money was in place, we first find out what assets there are and the follow that up by providing a timeline to the seller of when we will need these to be handed off.

Inventory

Because we are working with digital businesses there is typically no inventory, however if you are looking to buy physical business, inventory is a critical part of due diligence. While a business can generate say 100k$ in revenue, they may be doing it with an aging inventory worth millions.

It can really impact your financial picture and the purchase price of the deal.

Vendors

Even though we are working with digital businesses we need to determine what accounts and services are being used. These businesses typically have a lot of services being used (10-100+ services).

Core Accounts

• Money Accounts (Stripe, PayPal)
• Domain
  • These are quite easy to transfer (usually)
• Hosting (AWS, Heroku, Render): These accounts can be transferred in their entirety in many cases. Sometimes the seller may comingle their personal account with work and it may be difficult to transfer
  • Servers
  • Database
• Code management (Github, CI/CD)
• Operationally relevant APIs
  • Authentication (e.g. Clark)
• Ads (AdWords, Facebook)
• Google workspace: This may or may not even be possible to transfer if you are transferring regions. We’ve had some difficulty with this in the past.

Additional Accounts

• Marketing stack (email marketing, traffic monitoring, SEO related, backlink services, web design software, etc)
• Social Media accounts
  • Twitter
  • Facebook
  • LinkedIn
  • Pinterest
  • Crunchbase
• Logo and any other related illustrations/designs
• Any wikis or knowledge bases (confluence, notion, etc.)
• Messaging instances (e.g. slack)
• Product related software (lucid chart, figma, etc.)
• Engineering stack (monitoring tools outside of the ones listed)
• Legal documentation (if not in google drive)
• Any subcontractor relationships: transfer the contract or provide an introduction

Timing

Once we have a set of things that we need to transfer we need to work out the timing logistics. We typically target 2-3 weeks to accomplish this and it can be tight to finish this on time.

Date	Action
T0	Complete Asset Purchase Agreement
T0 + 3 Day	Money in escrow
T0 + 4 Day	Add me to github
T0 + 5 Day	Add me to heroku
T0 + 7 Day	Transfer github to me
T0 + 10 Day	Complete Final Diligence
T0 + 10 Day	Transfer Agreed Upon Account
T0 + 11 Day	Release funds from escrow
T0 + 12 Day	Seller receives fund
T0 + 14 Day	All remaining key accounts ownership transitioned

This is our typical timeline. For our Oxbridge acquisition it was particularly stressful because we compressed this timeline to 7 days.

The timeline played a key role in achieving the deal and having an understanding what parties need to do on what dates. We have found this to be a key way to reduce anxiety between the parties.

Moving money into escrow

Kind of like buying a house this feels incredibly stressful and you want to make sure that you got all the details right. Allow yourself extra time if you have not worked with an escrow provider because they may have rules and regulations such as not being able to purchase companies⁶.

One other important thing from a procedural perspective is having an organized trail of money, if you are acquiring an entity under an LLC, you should first wire money to that LLC and then wire the money to your escrow provider.

---

Wrapping it all up

We had a tense week of moving accounts around and switching DNS over but it actually was seamless to move the whole business over. The hardest part was that we needed to move on the end of the quarter at midnight UTC!

It’s honestly been a great experience for me and I do not think this is for everyone. It took an immense amount of work and self-motivation to get the acquisition and business operations over the finish line and for things to keep moving smoothly.

I will be writing more here on this blog about how we operate and did our first major redesign of the project.