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.
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.
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.
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.
Age: We want businesses that have been around for more than 4 years.
Price: The cost of the acquisition is one of the larger deciding factors.
capitalization rateto 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.
Location: US or Commonwealth
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.
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.
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:
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.
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.
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.
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:
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.
These all help determine what sort of commitment it will take to learn the codebase and provide ongoing maintenance and improvement efforts.
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.
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.
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).
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.
|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.
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.
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.