Acquisitions Anonymous - #1 for business buying, selling and operating - $0 profit offshoring company for $2mm. WHAT COULD GO WRONG?! - Acquisitions Anonymous 282

Episode Date: March 22, 2024

In this episode of Acquisitions Anonymous, Michael and Heather discuss a startup offering fractional virtual assistant and executive administration staffing services. They dissect the business's revenue, services, technology stack, competition, and reasons for sale. Despite the business's attractive revenue and customer base, they express skepticism about its profitability, questioning the claimed proprietary technology and discussing challenges in the virtual assistant industry. They analyze the recurring revenue model, customer acquisition costs, and potential profitability strategies, highlighting concerns about scalability and market competition. Additionally, they explore different staffing business models and advise potential buyers to scrutinize the offer and make informed decisions based on their assessment of the business's value and viability. Check out the listing here: https://app.acquire.com/startup/hGWo2ndPdMPPWZXm1PzNrm0nQPP2/ezq9cNQHR4Q8PAscMjEOAcquire.com is the online marketplace to buy and sell startups.Join 200k+ entrepreneurs closing life-changing deals. Buy and sell startups in as little as 30 days, supported by the best advisors and tech.Thanks to this week's sponsor:Are you looking to buy, grow, invest in, or sell profitable businesses? Well, guess what? The M&A Launchpad Conference is happening on May 11th, 2024, in Houston, Texas, and you're going to want to be there. It’s a one-day event where you can network with individuals who've been there, done that—think successful business owners, savvy acquirers, and private equity investors.At the M&A Launchpad Conference, attendees will gain first-hand insights from over 30 industry experts who have masterfully navigated the journey of acquiring, operating, scaling, and ultimately selling businesses for significant returns, including Walker Deibel WSJ & USA Today bestselling author of Buy and Then Build.And because you're awesome and part of the Acquisitions Anonymous community, we've got a sweet deal for you—200 bucks off your ticket. Just head over to malaunchpad.com and enter the code AA at checkout to claim your discount. I'll say it again, head over to malaunchpad.com and enter the code AA at checkout to claim your discount.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Acquisitions Anonymous. This is Michael here. Today, we had Heather and Michael Time, full-on Gen X Corner. We reviewed a deal from Acquire.com, which was a terrifically presented deal done by them around the virtual assistant space. So we talk into what virtual assistants are. Do you want to own a business in this space? And why wasn't this business making any money? So we dug into a lot of that.

and I think I had a couple stories to tell us well. So hope you enjoy this one as much as we did making it. Here is the episode. If you're looking to buy, grow, invest in, or sell profitable businesses, guess what? There is a cool conference coming up that I think you'll be really interested in it. The M&A Launchpad conference is happening May 11th, 2024, in Houston, Texas. And if you're interested in small business deals, you're going to want to be there.

It's a one-day event where you can network with individuals who've been there and done that. successful business owners, savvy acquires, and private equity investors. If you go to the conference, you're going to gain firsthand insights from 30 industry experts who has masterfully navigated the journey, acquiring, operating, scaling, and ultimately selling businesses for great profits. You're also going to meet my friend Walker Diable there. Walker's a great guy who is the Wall Street Journal bestselling author of Buy Then Build. And also Walker and the guys over at MNA Launchpad have extended a special offer for acquisitions

anonymous listeners. So we got a great deal for you, $200 off your ticket to the M&A Launchpad conference. So to claim it, all you have to do is go over to MAA launchpad.com and enter the code AA at checkout to claim your discount. So head over to MAlaunchpad.com and enter code AA at checkout for $200 off a ticket. So don't miss out on the conference. One of the big levels up for me is meeting other people in person that are doing the things that I want. want to do. It's one thing to follow them on Twitter, but the depth you get in person is just so much more real. So if this is something you're interested in, head over to maLaunchpad.com and get registered. They'll see you in Houston on May 11th, 2024. So based on how my schedule's going these days,

Heather, I go straight from Spanish lesson to Acquisitions Anonymous recording. So that's why I ran in here at one minute late. Ola, como stop. Well, it's funny because my Spanish tutor, I have two of them. I have one in Venezuela that I talk to weekly, and the other one I talk to in Spain. And they're both at the opposite ends of the spectrum. And this morning is the Spanish one. And she's like, she lives in France, but she's from Spain. So like she does like everything you would kind of expect

from a stereotypical French person, but in Spanish. So like she's super judgmental. So like she tries to always kind of get me to start judging things. And then she's like, then she judges me for not judging people. and like it's just really like the whole thing is just delightful if you're a student of culture definitely find somebody like that to go spend some time with on it yeah and castilian is very different from the Spanish that we hear in the U.S. primarily from central and south America I have been told I have a Mexican accent which is pretty good or not good but I can understand

my Venezuelan tutor is so much better than the Spaniard oh yes I went to Spain I understand a little bit Spanish and I had a really hard time in Spain as well. We'll survive. All right. So hey, I brought us a deal and it came from a choir and it's something we haven't done before. So can I read it to you? Yeah, please. Or do you want to read this one? You should probably read it since I can barely see it. Okay. All right, it is a startup located in Delaware that is for sale here in the U.S. It is a fractional virtual assistant and executive administration staffing platform. So we'll see what that actually means. Asking price is $2 million, and they're selling for 1.3 million times revenue. The asking price reasoning is we are open to offers. Well, at least they're honest about it.

We would like to get rich. They have 60 buyers who have signed more to get into active conversation about this one. Trailing 12 months revenue is $1.5 million, no profit, and $129,000 in last month's revenue. So they appear to be growing slightly because 129,000 times 12 is a bit ahead of a $1.5 million run rate with no monthly profit. So the company overview, this platform is a tech forward process-oriented professional administrative assistant firm with 100% recurring revenue. They offer two primary service lines, dedicated fractional virtual assistants, our core business, and executive administrative staffing, what we call our corporate business. All right, let's pause there. Are we on the same page about what a virtual assistant is or a VA is?

I understand what it is. I mean, people hire these folks. They're not going to be in the same geography. So you're not going to see them in person. They're probably overseas. And they're going to help you with administrative tasks managing your email, other just basic administrative tasks, right? Am I right?

Yeah, absolutely. Yeah. And people hire these folks and they set up meetings for them, answer their emails, kind of what a professional assistant. or secretary used to do, they just happen to be located in the Philippines or somewhere else.

Cool. With a well-defined process built around proprietary software, the business has stood the test of time to become a clear industry leader, building an impeccable reputation and onboarding numerous Fortune 500 customers. As a pioneer in the industry, the company has had 17 years

to develop a proprietary technology system and refinance process and optimize operation. 17 years. Wow. That's long time. The business has grown steadily since 2019, having found a sustainable formula for growth in operations, with extensively documented SOPs,

and the whole team staying on post-sale. A new owner will have plenty of time and resources to invest in growth and revenue and expansion. In 2022, they did $1.5 million in sales. In 2021, they did $1.2 million in net sales, and they have $1.5 million in recurring revenue. And then it says here they had 17, okay, above they said they had 17 years to develop a primary technology system,

but here it says the business was founded in 2019. team and has a team size of 21 through 100. Which is a big range? Is slightly big. Do you have 21 people or do you have 100 people? Because you're not sure about like 79 people there. Yeah, so that leads me to believe the way this business works is they have a call center that they have somewhere in the Philippines or whatever.

They have 25 or 30 people in there. And those people function as full-time employees located in the Philippines. and usually it's just the Philippines because it's usually just the Philippines. There's a lot of reasons why the Philippines is that way. But my guess is they have an office somewhere in the Philippines and then there's 20 to 50 folks working there and then a couple people in the U.S. doing sales

and that sort of thing and going back and forth and managing that kind of stuff. And those people will either be dedicated, fractional virtual assistants, meaning they care for a handful of clients for each virtual assistant, or they do, they're dedicated,

but in the end, they're employees of this company, the way I read this. Okay, all right. Tech Stack, they say here, front for inbox management, toggle for time tracking,

PHP for backend with some graded tools recently built in Ruby on Rails, vendor in place to manage those things. So it sounds like it's mostly off-the-shelf software, and then they have a bunch of folks here that are competitors,

double, zirchral, BELA, boldy, fancy hands. Let's see if there's anything else here. Key assets, other type, top tier staff, market leader in the space, proprietary tech, IP. So, yeah, so they're asking $2 million for a business that doesn't make any money. And it's been doing this. It's been doing this since, well, I'm going to say since 2019.

I don't know where the 17 years came from, but maybe the person who founded it had experience from other businesses for 17 years. I don't know. But I would think if you started this in 2019, then the pandemic hit and this whole concept was, you know, more widely adopted. Easier to say, okay, I'm already online anyway. I'm going to hire somebody overseas. So I would think you could be profitable by now. I understand they're growing rapidly and that's, I guess, probably the story behind why they're not. But I would think this kind of business could be profitable fairly easily. Maybe I'm wrong.

and I'm a little, you know, concerned or questioning the proprietary tech. Sounds like they sort of put a few pieces of tech together and they probably have a really good process, but I don't know if I would call it proprietary tech or doesn't seem like it is. Yeah. Well, I mean, you, you in theory could have some proprietary tech in terms of how workloads get allocated, maybe, and check in and check out. That seems like some stuff that would be kind of nichey. but the rest of stuff the tech-wise appears to be just off-the-shelf front is a shared inbox

software service and then what did what did they list here some of the other stuff so yeah I'm kind of dubious there's any IP there toggle for time tracking

that's an off-the-shelf app as well but yeah it begs the question so you've been around you're doing labor arbitrage and one of the things about labor arbitrage right labor arbitrage is we're going to help you

in an expensive geography hire people in an inexpensive geography and manage them is the nice thing about those kind of businesses, you know, we've seen it with ours, they make money from like day one, right? Like you should, you know, you're growing by hiring more people. So therefore you should be making money.

And that's the first thing I'm with you. I'm zgging into this and being like, okay, why at $1.5 million in revenue for the past few years and you've done what you need to do to offshore these folks, are you not making any money? Yeah. that that's a big question. I had a client that was in the recruiting business, not so much executive assistance, but, you know, they have, they serve certain specific, there were

staff income that served specific sectors in the U.S. and they have their call center, to your point, in the Philippines. They, and I remember talking through the deal one day, and they were explaining something that was proprietary, and I really thought it was technology. And when they finally broke it down for me, it was really just the process. It was the way that their recruiters in the Philippines, the way their call center screened for candidates and found really high quality candidates for the specific types of positions they were recruiting for. So a lot of times the proprietary stuff comes down to that.

It just comes down to applying some really good know-how into a space. So, you know, maybe there's a little bit of that. My next question, you know this business. Is a million and a half? Is that a, you know, where does that fall in the spectrum? of these kinds of companies. Is this a small, medium, or large? What is that?

To be totally transparent, like, I don't know a ton about the VA market because when we started our near-sharing business called Near, which is doing really well, we intentionally said we don't want to be in this space because we saw where it was going. This whole VA space, and you can test this on, if you're interested, Heather, go test this afternoon

on Twitter and go on and be like, hey, what's the best way to hire a virtual system and see what happens to your replies? You'll be attached. You just like, it is just like, and you can see it in LinkedIn and all this kind of stuff. And so we intentionally saw that this was,

you know, these virtual assistants, unfortunately are relatively low sophistication staff, right? They're commoditized in terms of, you know, stuff. And people who want to hire one, they're looking for the cheapest of cheap, right? like how do I get the bottom of the barrel? So there's this race to the bottom. And so we intentionally were like,

look, we don't want to be in the virtual assistant business because we see how that's a red ocean coming. And there's people carving out nice things in the VA space, but like, that's not a sustainable thing. Because, I mean, just look at how many competitors these guys have. Right, right. Double fancy hands virtual. And that's just, I mean, I guarantee I Google virtual assistant right now

or open up my LinkedIn DMs and it'll be like, would you like to hire a virtual assistant? Yeah. So I think this is relatively small. That's my opinion. Okay. But I also, it kind of doesn't surprise me they're not making any money

because it's just a red ocean. Right. They're having to just say, and they say 100% recurring revenue. That's sort of so. It doesn't make sense to me. I think it does. It does?

Here's how I think it works. I think it works that they have 30 people in a call center in the Philippines, right? And they're paying them above market wages there, but they're paying them $3 an hour. I mean, that's standard Philippine stuff. By the way, after we get through this, I definitely want to talk about cruise ships when you have a chance.

Oh, yeah. We'll talk about this next. So, because cruise ships have a significant tie of the Philippines. But I think they're paying that, and the people are happy to get it because those are good wages in the Philippines. And then they're turning around and they're charging some U.S. person, you know, something per month to be able to. to use those portions of those people.

So I think that's, and then when you sign up for that service, you pay a monthly subscription and you get up to a certain number of hours of VA time or up to a certain number of people that you've hired. And that's how it ends up being recurring subscription revenue. Okay. So it's just, you're just, you're not really getting your own virtual assistant at the lower end of the fee scale here. You're just getting so many hours of a person to help you with some stuff.

Yeah, you're paying $200 a month or $100,000. bucks a month and you're getting one-twentth of some fractional VA's time. Or it could be a combination of VAs. If they're using Front, that means multiple people are actually sharing inboxes. That's what Front does. Yeah. It's for teams sharing

an inbox and dividing up workloads and managing it through the whole thing. Yeah. So, and unless you're signing up for their corporate service, which is a dedicated person, then you basically are in the situation where you're getting a fractional part of a person. I see. So you have to have a lot of clients then. If the lower tier of clients is paying $200 a month,

how many clients rolls up to a million and a half? You're managing a lot of folks, right? That is the other reason why this sucks to be in the VA space. Because like, you do the math and you're like, okay, I want to build a $20 million of your business, you know, or $10 million of your business. And you're like, okay, my average client, let me just do the math here, my average client to get me to $10 million is going to pay $2,400 a year. That means I need 4,200 clients to get to $10 million in revenue.

Yeah. And that's, I guess, where the recurring revenue surprised me, because I guess I'm thinking more churn, right? And those $4,200-ish, you've got to have a lot of churn, a lot. Yeah, and think about, yeah, think about what you're spending. And maybe that's where all the money's going here. Maybe they're paying it all to grow the business, and it's all going into marketing and KAC.

Customer acquisition, yep. We could do a fun thing here. This is one of my fun ways to figure out if you're going to be paying a lot for customer acquisition is you go to Google and you say hire virtual. Oh, see how much comes up. Virtual assistant. All right.

So here, this person probably paid $5 for this. I mean, look at how many of these. It's like, you scroll forever. These are all ads, virtual talk for, and then, of course, Forbes gets in there because they're like, Forbes is the worst. When people put like,

oh, Forbes mentioned, I was like, you just pay 200 bucks and they publish your article, folks. Yeah. So, I mean, you can just see,

it would be interesting to go through here. And I'm just clicking refresh here, and it's showing me over and over. It's all ads. Yeah. First five are all ads. So this, that's,

to me, that's kind of my test for like red ocean-y type stuff. It's like, oh, competitive. Yeah, really, really competitive. So, and then people, the other thing you can do if you want to hire a virtual assistant is you can get, you can get circumvented where somebody like onlinejobs.ph. Are you familiar with that? No. So online jobs.ph is, is kind of the, it's like indeed for American companies that want to hire in, uh, in, for more of a platform to find them

yourself. Correct. So if you want to hire them yourselves, you can do that. Now, Like, I hired a VA once, and, like, I realized why I don't need a VA because I don't actually manage people and they need to be managed like crazy. And you have to do a bunch of work. Right. That's the way I have always felt is I don't have the time to tell someone how to do everything that I would need them to do. And so I don't think I have enough tasks that I could keep somebody like this busy. You have to do a lot of work to save the money on this. That's my experience.

Yeah. You're going to spend the money if you want somebody who can do stuff for you, that's good. you're going to spend the money to train them and get them good. You're either going to pay them more or you're going to do that training of them to get them there. And then, you know, the other thing that happens with a lot of Filipinos, like they just like pack up and move on. Like they're, if somebody else will pay them a dollar more, like, you're gone. Yeah, there's no loyalty because this is virtual.

Yeah, very different. So I'm just trying to think, is there a way to make this thing good? And add on to somebody else's kind of, you know, but again, And why would they? They can just compete, and that's what they're doing. So that doesn't seem like that play would happen or would have already happened before they listed it. I'm also kind of curious why they're selling. It's sort of, I feel like maybe they're burned out, right?

And they just, they didn't get it to profitability. And they just would like to exit somehow at this point. I don't know that I would be interested at all. And I don't know. And I can't really think of the right type of buyer for this at the moment, you know, just based on what we've just discussed. Yeah, well, it says here the reason to sell is open to offers, which to me sounds like those people that put Zillow Make Me Move prices.

And it feels very much, it feels very much like that. Yeah, I'd be happy to get out if you want to buy me out. I mean, ultimately, like, what are you buying when you buy this? You buy the customer relationships, for sure. You buy some trained staff. You buy a brand name and possibility. it is not easy to train these executive assistants like people that I see doing it

are spending a lot of time on it and that's what you end up in that's what you end up buying. So yeah, there's not a lot here. At $2 million, I would be curious, how do you make this thing profitable and how does it get there? So maybe that's a good question.

Like if you own this business, how are you thinking about making it profitable? Yeah, and they didn't give us much there to sink our teeth into here on the teaser. And I'm always a little, suspect of buying any, I know that the VC world works this way, but, or some of it does, I'm suspect of buying any business on a revenue multiple. I like EBITDA. Yeah, I mean, revenue multiples are fine as long as, and they're typically used for things like software.

As long as you understand, okay, well, what is the straight line to turn that revenue multiple into a profit multiple, right? And, you know, here, we're not even really sure what the gross margin is for these folks and the lifetime value of these customers versus how much you're paying to acquire them. And my suspicion is, let's say you're doing VAs and you're charging $100 a month for it and you're spending $70 to $80 a month to make those VAs available with all your expenses and everything. So your gross margin is 20% and you're spending $200 to acquire new customers. Your payback is 10 months. It just starts to feel like you're on a treadmill where you're working for the clients and the employees and you're

not really working for yourself. Yeah. Right. Exhausting. And this is why we went upmarket. Right. With your business. Yeah. It makes sense. This is Jeff Space. Yeah. And there's also, so interesting to talk about here is these guys do staffing. And there's two types of models in businesses like this. You can either do staffing or you can do placement. So, Are you familiar with the difference between those? Yes, I think so. How about some mansplaining? Can I mansplaining this to you?

Please, that's always welcome, right? It's Friday. Heather gets your regular dose of mansplating. Oh, do you know what mansplating is? I'll explain it to you. Oh, yeah. Please do that, too. Okay.

So mansplaining. Okay, so anyway, long story short. So for the audience, for the audience, not for you. So staffing is when you're a provider like this and you provide somebody a staff person, right? And they come to you with the job order and then you bring them a staffer and that's staffing. And you take a cut of the monthly payment. So that's kind of like SaaS, how these guys have done it. You get paid in arrears, right?

You get paid when you deliver that person per month. So they pay you $10 an hour to have that person and you turn around and pay $5 an hour to them. but you don't really get paid until you deliver them a client. And you only get paid as they perform. So then direct hire or placement is much more akin to recruiting models. And that would be a situation where they come to you and you say, I want a VA and you say, okay, I'll bring you a trained VA. I will find them for you.

I'll make sure they're trained. I will do the vetting. I will do all the stuff you need to do. And then you pay me a fee up front when you hire the person. And that's placement. So the trade-off there is you can see how with staffing, if they keep them for two years, you could eventually make more money than you do with placement

or with direct hire. The difference is, is direct hire just pays you your fee upfront. So let's say you have a staffing business versus a direct-hire business, so you start to think about which one of those is gonna have better cash flow. Not staffing, right? And because you're ending up taking the risk

if that person churns or leaves, and that's what's going on here, I think. Yeah. So you'll see a lot of companies end up, migrating towards direct hire or placement because the cash flow is a ton better. Right. And as a lender, what I've seen in the placement industry is a lot of times those businesses become sort of dependent on the recruiter. And they're very difficult to transfer because there's one or two great salespeople there that the whole business is depending on.

Yeah. So a lot of times those businesses end up looking more like professional services, firms, or real estate brokerages, which, again, to your point, like, those are notoriously difficult to transact and end up doing a lot of entrepreneurship through apprenticeship, which, by the way, I have a video coming up out on that. That's one way to come about entrepreneurship. That's a good stuff. It's not as good as a video. Not as a video we did about you, about how you can do entrepreneurship.

I'm glad. I don't want it to be documented. Yeah, it's just one notch below. I don't want to make anything better than that. So, yeah, a lot of times you look at those high-end recruiting firms and they look more like, in some of the big ones, there's some talk about. tier ones like Hendrick and Struggles, I think, is one. Challenger and Christmas is another one. And, you know, they perform much more like brokerages or law firms than they do like true,

true transferable businesses. Yeah, absolutely. So we're not buying this one, I guess. Look, I think it's the thing I like about this and Acquire.com does a nice job. I love that they didn't pretend it's a SaaS business. So I would potentially look at that. You know, I would want to understand how $2 million could make sense. I would want to get the owner to tell me that. And the fact that this at first glance doesn't look very good, to me, it's usually worth the 15 or 20 minutes to be like, okay, well, this is turning off smart buyers. Maybe there's a way to do a deal here that makes sense. And that thought for me is inspired by, I was talking to Eric Weatherholtz yesterday and we were looking at a deal. He's a really, he's a really,

real estate guy. And he basically was like, showed us a property that was $15 million. And he's like, well, I think it's worth $5 million. So I'm going to, I would offer that. It's like, well, okay, good job, Eric. That's the way to go. Well, I coach folks on their shopping to buy a business. Don't, don't let the list price scare you off. Make the offer you think is right. Just make the offer. You learn a lot. And sometimes it gets accepted. Yeah. Yeah. And there's nothing wrong with being a bottom feeder. That's what I tell myself. All right. Well, cool. Anything more on this one? Nope, not for me. Super cool. All right, everybody. Thanks. Tell your friends about the podcast. And we'll continue on the magical hunt to find the best deal ever. It's out there somewhere.

It might be a worm farm located on a boat in a harbor making pizzas in the British Virgin Islands. But we'll find it. That perfect business is there.