Acquisitions Anonymous - #1 for business buying, selling and operating - A Pet Product and Saas business for sale. Which one do we like? - Acquisitions Anonymous Episode 106

Episode Date: July 7, 2022

Michael Girdley (@Girdley), Bill D’Alessandro (@BillDA), and Mills Snell (@thegeneralmills), we talk about an independent pet supply rep company in Alaska and Oregon. On the other hand, we looked at a second deal from a failing startup currently being sold on micro-acquire by Andrew and his team. Here we will figure out what they do, how the business works, and identify the Pros and Cons of the two deals.-----Thanks to our sponsors!* CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.-----* 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.-----Show Notes:(00:00) - Introduction to A Pet Product and Saas business for sale(00:55) - Our sponsor is Cloudbookkeeping.com(03:50) - Deal 1: A highly successful company that services pet product customers in Washington, Oregon, Idaho, and Alaska(05:00) - What kind of Business Model does the pet rep company have? How does acting as a fractional salesforce help in the market?(08:14) - In terms of assets, What else is bought?(13:52) - Why would you like to buy yourself a job?(15:18) - How does Geographical importance affect growth opportunities?(23:26) - Deal 2: SaaS data analysis business(25:51) - A $17m red flag on MicroAcquire!(33:49) - How could the growth continue during the coming years?(37:17) - What kills Deals the most? Who would buy this?(38:50) - Understand the incentives of each stakeholder in a Deal(41:25) - What is the current state of the market for Saas businesses?-----Links:* Cloudbookkeeping.com* Subscribe to the podcast if you’d like to listen instead:-       https://podcasts.apple.com/us/podcast/acquisitions-anonymous/id1533153678-       https://open.spotify.com/show/4rbeAODKXwwEOxf905He22* Looking to become a sponsor? Write us an email at [e-mail]* Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve DiSubscribe 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]

Hey, everybody. Welcome to another episode of Acquisitions Anonymous. This is episode like 4,000. No, I think we're on like 110 or something, but we're still having fun doing this. Today was an old school episode, no guests. And it was just me, Michael Girdley and Bill Delisandro, going through two deals that we thought were really interesting. And it went to some really cool places. The first one, which I think you'll love, was an independent pet supply rep company. So we'll talk about what that does and how it works. And it's in Alaska and Orrin's. again in all these places. So super cool. And the second thing is we looked at a deal from a failed, what looks like a failing startup that's currently being sold on Microacquire and represented by, enlisted by our friends there, Andrew and his team. So had a ton of, ton of good times, me and Bill, and hope you guys enjoyed the episode as much as we enjoyed making it. Before we get in the episode, here is a quick word from our sponsors for today's episode. Hey, Michael here, want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie.

So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your quickbooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about cloud bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie.

I know many of you have and see if he can help you make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast. It would help us and help Charlie know that we're supporting him as well. So thanks a bunch. and cloudbookkeeping.com as the sponsor for today's episode.

Bill, good morning, man. Welcome to Acquisitions Anonymous. It's an old school episode of just you and me. I love it. I feel like there's room to breathe in our recording studio. Well, when we have guests, like I feel like we do a great job of making the guests be very important. But it's also like a lot of times I'm like, oh, I wish I could have talked more because the guests were talking more. So today it'll be you and me doing a ton of talking.

So we have two interests to talk as much as possible. Thank you. So we have two deals today, and I think they're both really interesting. But you have the first one, which is something we've never done before. Yeah, this was a unique category, which is why I really jumped out to me. So this is one from Biz Buy Sell. It is an independent pet product rep group in Redmond, Washington. It cash flows $337,000 a year and is asking $950,000.

So it's about low under 3X, roughly. It's got revenue of 511 and cash flow of 337. So margins not too shabby. It's been around since 2006. Hey, you're missing the most important part. When you pull up the teaser, they have a picture of a puppy. It's the best. Which I will tell you from experience sells things.

So if you're trying to sell your business or whatever it is, put a picture of puppy on it. Keep going. So to be clear, I do not believe this business actually sell. Puppies. It says what they do is this is a highly successful company that services pet product customers in Washington, Oregon, Idaho, and Alaska with an established book of business that dates back to 2006. The owner services Washington and Alaska. The company retains two full-time independent contractors that cover Oregon and Idaho. Their jobs entail representing products from their manufacturers and vendors, and they also work with nationally known vendors and smaller vendors, too.

the reps visit the retailers, show them samples, take orders on behalf of the vendors, and then submit the orders to the vendors. Please note the company does not warehouse any products itself, but they do have many samples from all the vendors to show to the retailers. They say it is one of the most profitable businesses on the market, and it has five years of U.S. tax returns. It is a verified cash cow, all caps, that can be run from one's home. We will get back to that. NDAs will be required. They go on to just say that they work out of their home. It's recession-proof business.

The seller will stick around for six months, and it's because they are retiring. So, Michael, are you familiar with his business model? Yes. Yeah. And to make sure we're talking about the same thing and what this is, the way I understand this works is you are an independent sales rep, right, that represents 50 or 100 different products that all kind of sell into the same accounts. And for manufacturers or brand owners,

who don't have enough scale to have a full-time dedicated sales force, you act as like a fractional sales force and manufacturers rep for them in that market. And you might be selling 30 things or 50 different things or 10 different things when you go into these accounts. Is that how you read the way this business works? Yep, that's it. The phrase for that is typically rep group, which is what they use here or as you said, manufacturers rep.

And what's funny is I even wonder, I don't know who this is, but I wonder if we know them at Natural Dog Company, my business, because we were. work with, you know, 1,500 plus independent pet stores, right? So Michael's pet store, you know, and natural dog company, both are sort of not of the scale to have nationwide touches to everybody. So what these guys, if we want to have a presence in Washington State where we are not, you know, we'll contract with someone local there. And sort of the expectation is that they go into all the stores that carry us at like once a month and check on it, see if they need to order more, see if it's merchandise correctly, et cetera. And then also that

hopefully they're going into new stores that we don't even know exist, right, but they know exist because they're local, and say, hey, I represent natural dog company, you know, take a look at the products. They'd be great fit in your store, et cetera, and try to get an order. And then we will pay them a commission, which is, you know, typically on the order of, you know, five to 20 percent of sales, kind of depending on the model. Huh. And so, I mean, I guess the first question is I think about this, like I ran into this kind of model when we were in the Halloween business a decade ago. And it always to me felt like one that had a limited time frame, you know, with more brands going direct to consumer and kind of the rise of chains, both being two like headwinds

in your face. Like, do you think this is like a sustainable thing that's going to keep going? Or do you see this as kind of something with a potentially a future end of life and in a near future? So I go back and forth on it because you're exactly right that there is a ton of software innovation going on right now and has been going on to allow brands to connect with their retailer. directly, right? Tons of that, tons of trying to cut these guys out as far as the kind of order taking process. But the thing that I have learned in servicing thousands of small businesses as customers, no disparagement to any of our wonderful customers, but many of them are not great business

people. So we have many, many times had the experience of calling a account and saying, hey, like, how's the stuff selling? And they go, oh, my God, it's the best selling product in our store. we've been out of it for four weeks. Definitely we need more. And you're just like bashing your head on the table. Or we sell something to somebody and you ship it to them and then you call them to follow up on it a month later.

And they go, oh, yeah, we got it. It's still in the back. We haven't shelved yet. You're bashing your head on the table. So a big part of this job is not just to make the sale. It's to help merchandise the product and make sure it gets reordered and make sure it's, you know, it's not all messy on shelf and, you know, form. a relationship with the store owners.

When you have a new product, you can get it in. It's more messy than you want it to be, honestly. So these are the types of businesses. While I think technology will probably transform them, I think there will be a long tail of them that probably sticks around for a long time. It does not mean there will be awesome businesses forever, though. Yeah. Well, so as I think about what you're actually buying here,

you're buying relationships with the individual, like, mom-and-pop shops. you're buying relationships, established relationships, and potentially contractual relationships with the folks that are the manufacturer side. So you have a mode around those two different things. You know, what else in terms of assets are we actually buying here? I guess you're also buying some industry knowledge from the seller himself or herself who's retiring. Is there anything else that kind of comes to mind to what you're buying here?

A little bit. I mean, there's really, like if you read through this, the owner works from home. and covers Washington and Alaska, right? And then he's got two full-time independent contractors, which, by the way, is a contradiction, full-time independent contractors, right? Who are themselves, in theory, quote-unquote business owners, right? With whom I have to guess he probably, like, splits the commission.

So this is, like, really the dominant model in this industry where it's just, like, basically a bunch of one-and-two-person businesses, you know, collecting commissions, right? Many of them are driving around in their car, almost all of them. So that's why I flagged whenever you read and go, the owner works from home. If the owner works from home, he sucks at his job because the entire job is to be in the stores, right? And meeting the owners of the stores and making sure the product is on shelf, making sure they're not out of it. Hey, I notice the shelf is empty.

Do you want to place another order? Oh, yeah, we do. Right. So if you're working from home, you were almost by definition not doing your job. I mean, that's not what we, the brand pay you for. I can work from home, right? My people can call these people. That's not what I pay you for.

I pay you to physically walk in the door. So when I see the owner works from home and then I also see the owner services Washington and Alaska, you better live in Washington or Alaska, enjoy getting on a plane to the other place and enjoy being in your car. This is not a home-based business, but this is not a work from home business. Yeah, I would be, you know, Alaska's a state has a half a million people in it. You know, to put that in perspective, I live in the third or fourth biggest city in Texas, and we have like three million people in this one city.

So it's pretty crazy. I wonder how much time he, she is spending in the hinterlands of Alaska, you know, but after you, kind of after you drop off from Anchorage, Juneau, like, there's really, there's not any towns that are that sizable. I don't even know if they would have, have independent pet stores at all at that kind of size. Well, maybe they do. Well, they may represent also like farm and feed stores actually carry a lot of pet, which I would see a lot more of that in Alaska, you know, kind of general hardware like that. Like people, I mean, one thing I will say in favor of Alaska, like there's a lot of dogs and animals up there.

Oh, yeah. Right. You know, more so than other places, I would think. So you see a lot of pet get folded in the farm and feed or hardware in these more rural places. So how do we think this makes a ton of sense to me if the owner is just covering one. Washington and Alaska themselves. I kind of see how that that makes sense to me. It's kind of what I would expect.

But how does the company have these two other random contractors who are full-time, so therefore aren't really contractors? But how does that work for Oregon and Idaho? I guess that feels like a risk to me. I would, it would be a risk if those people left you were to want to aggressively renegotiate their contracts. So I think what this basically is, I mean, I don't know. This, I would bet, feels a little bit like a loose affiliation of sales reps, where you've got one guy that does Washington, Alaska.

You've got another guy. And maybe that's the main guy. He's got a lot of the brand relationships, et cetera. And he brought on, he wanted to expand in new states, right? So he brought on someone in Oregon and Idaho. And there's someone else in Oregon, someone else in Idaho, and said, hey, look, I'm going to introduce you to all the brands. You need to get familiar with all the boots on the ground, all the different pet stores in your area. You need to drive to see them.

Like, I'll basically bring all the relationships to you. and I'm just guessing like we split the commission somehow, right? So I'd be willing to bet, you know, those folks, considering they're described as independent contractors, feel a little bit like they own their own pet rep business and may be a little surprised when this thing gets sold and they don't get a piece of the enterprise value or may start to wonder, hey, can I sell my thing? You know, I would really understand those relationships and really make sure that they understood what was going on with this transaction and we're copacetic with it.

Yeah. I mean, switching gears a little bit. I think I totally did that. I think there's a lot to like about this business, right? You clearly have a pretty established model. You have a seller who apparently has done a pretty decent job, you know, managing their books. I think I think you would agree that the percentage of times that you find out that a business of this size has what these guys claim,

which is like actual tax returns and books for the past. five years that are accurate, like it's a pretty small percentage. So it looks like the business has been run in a very competent manner. You know, it's got a very straightforward kind of situation in terms of how the business model works. And, you know, I think I agree with you. It's not really going anywhere. You know, the downsides start to smell a little, little stinky. I mean, this has to be a business where you're buying yourself a job. Like, I don't, I don't see it any other way you could put in somebody as an independent kind of general manager over time, especially at this size. What, what do you think about that?

I think it'd be really hard. I mean, which in order to not work in this business day today, you would need to replace the owner as sales rep in both Washington State and Alaska. And then you would also need someone to oversee your then three sales reps. Now, unless maybe that was you, right, which you might be able to do, you know, in not a lot of time per week. But you would definitely, there would be some management overhead there. So you've got one to two heads you would need.

and you got $337,000 of EBITDA. So as a, I don't, I don't, I mean, I don't know, I don't love it as like a passive thing. Yeah. As far as like buy a job that makes $340,000 a year, maybe not bad, right? I'm especially getting an SBA loan. You got 10 year financing on this thing. You know, let's say you do pay a million bucks for it. It's going to cost you, you know, 120 grand a year to carry.

roughly. And then you got 337 a cash flow. So you got a decent spread there, but then you hire another rep who's probably going to make 100 grand between commission and everything, right? Like it's starting to get a little like you just bought $100,000 a year job for the next 10 years. Well, but there's a puppy involved. There's a puppy. There's a lot of puppies involved. Well, we haven't talked about that. I mean, this, the tailwinds of this business are at least excellent in terms of like the American drive towards you know replacing child rearing with pet rearing and like it's you got to you got to love that aspect of it you know as you think about growing a business like this can we put together a growth thesis i mean can he

add can he she add more brands can they expand their territory could they hire more reps you know what what comes to mind for you yeah so basically your your only uh updates are your only ways you can grow are add new territories or add new brands. Or I guess add new stores in your territory. Right. Right. Like you got to get to know all the pet stores, but kind of assuming you know all the pet stores, you can sell your existing brands more into the current pet stores, which I

wouldn't assume you could like make a step change on that as a new owner, right? They've probably kind of already tried to do that because ultimately the stores want what they want. You can go out to more brands or you go to more states. Going to more brands is definitely possible. are new brands showing up appearing starting all the time. It's a growth industry, right? Which is good.

And they're going to want reps because they're generally smaller companies, but then smaller companies don't move a ton of volume. So you've got to kind of balance how many clients do I want, et cetera. The new states thing, on one hand, you could see it's easy, right? I mean, he's successfully done it in Idaho and Oregon by hiring a, quote, full-time independent contractor in each state, right? So in theory, you could do it. But what you got to realize, though, is there are businesses like this in every state.

You know, like maybe I call these guys for these four states, but there's other guys that you can call for other states. So if you show up in the other states and you start going to the stores, your brands that you already carry may have a different rep in those states already. Right. So you'd have to essentially say, hey, brand, fire your guy in Nevada. Go with us. Why would I do that? Oh, well, we're just expanding in Nevada. So you mean you have no relationships in Nevada?

My current guy in Nevada has all the relationships in Nevada. I don't know if I want to do that. You know what I mean? As a brand. So I think it could be a little trickier than it seems to geographically expand. Super interesting. Yeah. And I think the other thing that comes to mind for this also is kind of the, you talk about this buyer business fit aspect.

Like if you, if your dream, I think, is to drive around in a reasonably priced American sedan with a truckload full of samples and go from store to store and get to know all the little store operators and the mom and pops in Ogden, Utah are, well, they're, they don't cover Utah, Ogden, Idaho, pretend there's an Ogden, Idaho, and get to know them and ask about their kids and send them cards on their birthdays and, you know, develop relationships with those people. And that's the most fun thing you could imagine doing, dropping in and schmoozing with them and taking them to breakfast and stuff, you know, and taking their phone calls at 5 p.m. on a Friday

when they realize they have no dog food for the weekend. Like if that's your dream job and that would be the most fun thing you can imagine doing, developing those interpersonal relationships, that would be, that's the right business for this person or the right person for this business. But man, I don't think I could handle this many people. I don't think it would work for the girly.

No, I mean, this is one of those like lifestyle jobs. You know, like you are, this is who you are. You're in pet stores. You love pet stores.

You love pet and dogs. You know, like some people love kissing babies. Like it's just. Yeah. you're in it. Yeah, good. Well, if somebody's out there, I think this is a cool one.

I mean, you know, and this is the type of entrepreneurship. I think a lot of people just miss as an opportunity to do, you know, as a person, right? They're stuck in a day job and it's like, well, this is kind of the thing you'd want to do. And, you know, this is another very viable path. You're not going to turn it into a bazillion dollars at some point. But, man, if this is what you love doing every day and you're passionate about pets and people, like, there's something here. There's some cool stuff here. Oh, yeah.

Yeah. I mean, if somebody, I mean, when you think about entrepreneurship, like, if you just call natural dog company, you're like, hi, I'm in Nevada. Like, if you don't have anybody in Nevada, you need to pay me anything except commission. I'm going to go to every single freaking pet store in Nevada and tell them your product is the best product of all time. You only pay me commission. Sound good?

Yeah. We're kind of hard to say no to that, right? If you throw in a puppy, I'm on there. Yeah. The last thing to mention about this model, which is interesting, is this is what we've about here is all organized around kind of independent pet. There's an entirely different iteration of this model that has been dramatically scaled, which revolves around the targets, the Walmarts, the pet coes, you know, all the big box retail manufacturers rep. One of the largest

companies in this industry called it Costa. It's traded. It's like a roll up of these things. And it's traded a million times between private equity. And what they do is basically like, your brand, you want to go to Target. Well, you can find Target. That's not that hard. But to know who the right buyer is, to know what they care about at Target, to know how it gets shelved, to know what terms in the target contract, they're really sticking it to you on or what terms are market, you know, and they take the target buyers out to dinner and, like, live in Minneapolis with them and, like, we'll really grease the skids. that's a whole different thing.

And they make a couple points on big dollars, right? I mean, Target could move millions of dollars a year your product. And they're making a couple percent on that. So you remind me of it, Michael, when you said, like, this won't scale to the bigillion dollars. It won't because the scale to a bill of a billion dollars is a totally different business model. You've got to, you've got to cover the big box guys.

And that is cutthroat. I mean, there's, you know, that's like the guy who takes the judge to play golf. Like the judge can only play golf with so many people. So like you've got like if you go to Target like there is like one or two brokers you just use for Target. There's like one or two brokers you just use for Walmart because they're like totally in bed and it's really defensive. Yeah, totally, totally cool. Well, there are guys there are guys here in San Antonio whose whole job is just to work the HB account. That's all they do.

Yeah. And they'll do it for kind of a lot of what you're talking about. And then I just had a friend from my gym. He moved from San Antonio, got hired straight out of college. college and he just moved to Bentonville. And his whole job is, you know, for Quaker to work the Walmart account. He's part of like a team of like a dozen people. That's all they do.

Yep. My cousin married a woman and she lives in Bentonville and worked for Diageo. Yeah. The liquor company just covers Walmart. That's it. It's her whole job. Crazy. Crazy.

All right. Well, okay. So let's talk about one last thing on this one. Asking Price. You know, this feels like one where just to recap the numbers, you know, it does $337,000 a year in cash flow. And then the asking price is $949,000. So what's the math on that?

It's like 2.7 times seller. 2.8 times. Yep. 2.8 times. So not a terrible price. You know, I think this is one as we've talked through it. There's clearly a limited universe of potential buyers. So my guess is you as a buyer could do some pretty fancy stuff with seller financing,

with, you know, even getting it a chance. cheaper price. You know, all those seem like things where I would play. Yeah. Yeah. This seems right for earn out for me. Yeah. I think it's fairly priced.

I just want a deal. Always looking for an angle. Right on, right on. Okay. Well, cool. So what we found one, this is a super fun one. And I mean, the puppy thing sold it. So we could have just stopped there.

But nice work. Yep. Go on our YouTube stream to see the cute puppy. If you're listening to audio only. Look how cute this guy. is you could just tell he's the type of dog that falls asleep in his food. That's that's exactly what this guy is. All right.

Let's move on to deal number two. And deal number two comes from our lovely, special, super nice friends over at Microacquire. So as a Microacquire customer, I found this deal looking through some of the stuff they had. So this one I thought was pretty interesting, Bill and listeners, because it's something that I think we're going to see a lot more of with a cratering going on in the venture markets, which is these guys almost raise some money and then have failed to raise money. So the asking price for this business is $15 million. So seven and a half times the revenue multiple.

Micro Require is so nice. They give us that math for us. It has between 10 and 100 customers. It's a three-year-old business, basically, three-and-half years old. January 2019 was when it was founded and has 16. people. It is a SaaS startup, and it does data analysis for sports, entertainment, and e-sports brands and influencers. By the numbers, they have $2 million in trailing 12-months revenue. They did $130,000 in revenue last month. So that seems to be right for what you would expect

for trailing 12 months, 12 times, what's maybe a little low for 12 times 130,000. They have $130,000 in MRR, $1.5 million in ARR, and their gross profit, so that means their profit after selling expenses, is $1.1,416,000. That's a very precise number. Interesting that that one's very precise, and the revenue numbers are not that precise. So $2 million, $1.1 million in gross profit, annual recurrence. revenue of $1.6 million, $1.56 million, and they've been growing 52% year over year. From there, it says the competitors are Jebbit, tradable bits, and Qualifio. Qualifio, I don't even know how to pronounce that.

The problem they solve for customers is first-party ownership challenge is a cross-industry problem. It has now become everyone's problem to understand who their digital audience is, especially as in a six-to-12-month period. otherwise they won't be able to market as they used to. So it talks a bit SaaS annual subscription, stuff like that. And then they talk a little bit about their story. We grew dramatically during COVID, 2020 and 21.

At the end of 2020, we went out to market to raise our Series A. After a very long due diligence process, we closed a $17 million investment in August 2021 from a strategic partner in the United Kingdom. Unfortunately, after all the documents were definitive, signed and sealed, the lead investor told us that their funds were not sufficient to complete the transaction. We know to find them of the breach of contract and regroup to figure out the next step. Then they say they don't really want to stop right now, but they've decided that the best path for them to do that is to do it. And so far, they've raised $5 million by some of the biggest funds in their space.

So I think, Bill, when we were talking about this deal beforehand, we were trying to figure out what the hell they actually do. So I pulled up one of the competitors. So I'll pull this up here. tradable, tradable bits is one of them. And basically what it appears they do, just so we can all understand it, they are a set of software components that you can use to run campaigns against your user base. So let's say you're, for example, a professional sports team and you have 500,000 people on your registered mailing list.

You can run campaigns against them to do surveys, to ask them questions about stuff, to segment them out and try to understand how you should kind of manage them. And then you can take that in the case of tradable bits and you can actually put it inside the arena. So like the San Antonio Spurs where I am, you can do that kind of IT infrastructure there to connect with the fans and like do live polls during the thing and all that kind of stuff and run these campaigns against them. And then you take that data and then you use that to run hopefully smart campaigns against them to benefit you and your sponsors. So that's that's the short answer of what I understand this is. And it's one of kind of these competitors that are doing this stuff.

Yeah, I think it's like hit the link in my bio and take a poll as to what your favorite outfit of mine I ever wore was and give me your email address and I'll tell you the results of the poll. That type of thing. So it's not this company tradable bits, but the best way I could understand what the heck they do based on the description they wrote is by looking up these competitors. And there's a few other ones here. So what do you think about this one, Bill? So I think this thing is losing money hand over fist.

And they're asking, the asking price is $15 million. And they've got $2 million in TTM revenue, but only $1.5 million of ARR. So, and then they got $1.1 million of gross profit. So what I honed in on is the $1.1 million of gross profit. And it says the team size is $16. Yep. So they got 16 people. So I just did the math.

And that means the most that the employees. could average is $70,000 a year. And that's not take home. That's like benefits. So they're probably making like $60,000 a year and $10 million of benefits, right? And you're trying to make a software product. I bet that people make more than that because many of them are probably engineers. And, you know, designers like skill Silicon Valley type people, unless it's all overseas,

one of the mullet businesses like you talk about, Michael, which I love. But I just have a sense that they're losing money. So you're going to pay here 15 million bucks to lose money. That scares me. Yeah. The other thing that's worrisome about this business, if you think about the customer type that they have, we looked at the tradable bits competitor and who they're selling to.

Like one of the things I've learned is how difficult of like customers, these big like CPG brands, esports brands. And even the worst is actually the folks that run like, the professional sports teams, like they are amazingly cheap. Like you hear all these big numbers thrown around and then you try to go sell them something. They're like, whoa, whoa, whoa, whoa, you have us confused with an organization that actually spends money. We just take money.

That's the way this works. So, you know, in a lot of those situations, when you see somebody who's actually a big vendor to a professional sports team, it's all done in trade. It's like, no, no, no. Like, we're doing you a favor by using your product. And then you get to mention to everybody that you're using it for the Dallas Mavericks or whatever. So it is scary when I think about the types of customers these guys have. These are some big enterprise, tight-fisted kind of customer bases that doesn't have me as excited as say other stuff. Like I'd much rather be selling into health care compared to selling into a professional sports team.

And that's saying something. Interesting. Yeah, this strikes me as also something that's really, really crowded. And I mean, they say in here at the bottom that they tried to raise $17 million. Right. They had it signed, sealed, and delivered, apparently. And then the entity that was going to fund them $17 million said that their funds were not sufficient to complete the transaction. So maybe that's a red flag.

You know, I want to understand, you know, who's run around signed $17 million term sheets and then failing to fund them. maybe it was during COVID. You know, this is like, I don't know if this is how event-centric this is. Maybe it was during COVID. But if they were raising $17 million, I'd be willing to bet several other folks have successfully raised $17 million to slug it out with you. So if you're buying this thing, you're putting in $15 million, so you're already $15 million in the whole.

And you're competing with folks that have Deca millions of venture funding to develop software and go to market in markets, as you mentioned, Michael, that probably have a long sales cycle with expensive sales teams involved. This is scary to me. Yeah, I mean, they're in a rock and a hard place when you kind of look at this situation. I don't know how old this listing is. They don't list here on MicroQuire when it was listed. And by the way, I'm a paying customer, proud paying customer of Microrequirer, so I highly

recommend everybody else do that. They're definitely friends of the pod and huge sponsors. are. So Andrew and his team have been awesome. But yeah, so seeing that, like, it does feel like 15 million for something in a pretty crowded space like this. They're looking for a strategic buyer. You know, a financial buyer is going to have a really difficult time making this work. You either need to be a plug-in for an existing, you know, strategic. You know, I don't think even PE is going to pay that kind of multiple for something with this kind of red ocean approach to what they're going after.

Yeah, I think this is tough. Now, this part of a big part of what makes this tough is that they have 16 people and they want $15 million for it. If they wanted, you know, $3 million for it and you could cut 75% of the team and this were run as kind of what you usually would find on Microwire like a micro SaaS business, right, that was actually cash flowing and maybe they had a niche, you know, that might look different. I don't know that this sector of the industry is fundamentally bad. I'm saying that capitalizing it this way, spending $15 million for it and going for it,

is a venture investment. And that's not the type of thing that I specialize in. Yeah. Seems like a tough one. Yeah, I mean, I think it's a cool little business. You know, I think continuing on with a 52% growth rate, I'd really be understood if I was to meet with the team to understand how that's going to continue. because, you know, I think you know, every deal underwrites if you just show 50% growth for the next 10 years.

So I'm curious, like, and that's what venture does. Like, can we, can we pay any price for this? And then it just keeps growing really rapidly. You know, I'd have to be really convinced by these folks that this level of growth is going to continue. It's just, it's just the problem gets harder and harder as your numbers get bigger because you've got to keep adding more and more clients and scaling that way and eventually like all kind of slows down. So I'd be really curious. the only way this 15 million works is, you know, if you're able to, as an economic buyer, the only way the 15 million works is if you're able to clearly show that this 50% growth

is going to continue over the coming years. And I don't know. At first blush, for somebody that doesn't know the space, it doesn't smell like it. Yeah, this is just tough because the way it's priced and the way it's built. And I think the transition from the way this is built, what all the employees expect, what the founders expect, all that to something that. you know, you could run as a small business would be incredibly painful. Yeah.

I mean, to make this profitable, let's say you're going to stop trying to grow rapidly. You have one and a half million in recurring revenue, two million in gross revenues. So some of that's probably services. So, you know, you're looking at really to make money with a $1.7 million, let's say, plus or minus business when you blend in the recurring revenue with the services revenue. you're looking to really need a team of like six or seven people to make that work. And it's also kind of the no man's land. Tough thing about businesses that are software that are this size is you have to hire almost these unicorn type people that can do multiple jobs.

Like you can't just hire a head of marketing or you can't just hire a CEO. You need a CEO player coach to be able to get into that business. And those people are like super hard to find, especially at the numbers that you can afford at a business this size. So anyway, that's just part of the way I'm saying that software like most businesses actually gets much easier above certain revenue levels. Like a $4 million business is so much easier to run than a $2.5 million dollar business. And a $2.5 million business is so much easier to run than a million and a half dollar business. And it's just because of the specialization that you can afford that comes with a bigger team size and bigger revenue and stuff like that.

So anyway, soapbox from Gridley on that one. Yep. this girlie this is your world this this scares a crap out of me uh for the right price i do this deal unfortunately the right price is not anywhere near this number so yeah uh it says it says open to offers michael it says open to offers well i've i've made some bad offers before so all right well you know i think this is interesting because you know if you're out there and you're a potential buyer of technology businesses like this, you're going to see more and more stuff like this. Like the gravy train, you know, has slowed down to a crawl on the venture side.

Growth equity is being very selective. Family offices are all slowing down in terms of the types of deals. They want to be, you know, risk exposed to now. And then the most important thing is you're starting to see the debt market for companies like this dry up, right? And that's what we've been seeing over the past kind of 24 months is there's been this explosion of private debt options for small technology companies and by and large those debt providers, their investors are starting to slow down on giving them money to loan these

startups. So like the chain is breaking down to where, you know, the free money train to where folks can keep growing without worrying about cash flow. Like it's all ground to a halt. So I think you're going to see a lot more like this if you're a potential buyer in the space. Yeah. And this is emblematic of the thing that, I see kill deals the most in kind of small business deals, which is a huge gulf between seller expectation on price and what it's actually worth. In this case, I think it's being driven by the fact that what it's actually worth moved with the market significantly. I mean, this thing is prices seven and a half times revenue. Right. You know, maybe that was, I'm not,

I don't want to say rational, but at least had comps to support it last year. So, you know, now the market has dramatically moved on these guys. And I think bridging that, golf is, I just see all the time, people, sellers just not ever able to get there. And whether they come from a past market or they come from just, this is that, the hard joke, which is like the price of the business is the balance on my mortgage. Yeah, totally. Yeah, just the difference here. If you have this golf, it's hard.

Just the difference here is the balance of the mortgage is what the VCs have put in so far. And I bet you when you do the math, there isn't any sort of market valuation of what this thing's truly worth. I bet you this is $15 million is the amount it would take for the original investors to get all their money back to get a small return, say like single digit IRAs, and then there to be enough money left over to pay the team something and to pay the founder something. And you end up at $15 million. I bet you that is exactly the calculus that they have done here. And this is also when like I said before where, okay, that's their number they want to hit. the only way they're going to get there is with a strategic and you as a value buyer or you as a economic buyer can just look at this and be like, oh, that's what's going on here. You know, my best bet is to just kind of hang around the hoop and see if a rebound happens,

but otherwise, like, you're never going to get to this $15 million number as an economic buyer. No. Like, it just doesn't work. And important to note to sort of the dynamics, like, if you offer 10, like, I still wouldn't offer 10 for this, but like if you did, the reason people will say no is because it's It doesn't, it's not like you offer 10, everybody takes 33% less. Like the VC's still got to get paid out.

So if you offer 10, the founder is getting nothing. So now all the incentives get wonky, right? Where the founders like, if I take 10, I get nothing. If I hold out for the 1% chance, there's a miracle here. I get, you know, 1% of whatever my expected value is. Screw you on your $10 million offer, right? So you end up where the incentives are not aligned amongst the shareholders that are selling. So if you can't hit their number, they can't do a deal at all or their incentives are not such.

And that's why these things don't transact. Yeah, they might as well just sit around and keep hoping, hoping against hope that the thing goes somewhere. And, you know, all you can do is a potential buyer when you have your numbers, you just kind of hang around. Say, okay, well, when you're ready, call me. You know, you check in every couple months. And then, yeah, maybe you get there. Maybe they don't. Yep.

And it's, you know, they've got to have hard conversations with their equity investors. And I think savvy equity investors will say recognize the pickle they're in and try to work out a deal where the founder can at least save face or take home a couple bucks so they can get some of their capital back. Otherwise, they'll be locked up forever and eventually take a zero. So fascinating. I love understanding the psychology of the way like all the human interactions are going on in the background. Because like, okay, the VC is just as an example here. like why doesn't the VC want to transact? Shouldn't they like, this is clearly a, you know, a dead zone company.

Like can't raise any more money and is not not going to continue on the venture path. Like shouldn't the VCs want to transact? But no, actually, they have a huge like principal agent problem where the VCs actually want to continue to show on their books a big markup for these guys. And if it transact, then they have to show a loss, which hurts their chances of raising their next fund, which impacts their ability to collect fees. So, and to have a job. So, like, there's this whole thing where, like, actually, everybody's motivated not to transact at all. And you as a buyer, I think, need to understand what's going on there so you don't waste a bunch of your time, which is exactly what we're talking about here. It's a great point.

So you end up with these zombie companies that can't transact or everybody loses. Absolutely. Well, eventually the chickens come home to roost because these funds all have, like, VC funds or growth equity funds all have, like, timelines to where, like, at year 12, when the company hasn't raised any new money, in seven years, eventually you get past the point of any believability, like as a GP, to where your LPs are like, wait a second, like, how do you have that still marked up at the price from 2009? Like, it just doesn't work. So eventually they capitulate, but by then, you know, they've at least bought them enough selves enough time as GPs to go raise their next fund.

And they could just be like, well, you know, hey, like, don't worry about that man behind the door. Like, there's nothing going on back there. Don't worry about that thing. We just swept that under the rug. and then the game continues on. But yeah, sometimes it just, it takes time, but it can't last forever. This has led to a rule of thumb for me at Elements Brands, which is that we do not,

I mean, I don't want to make a proclamation here, but generally as rule of thumb, we do not pursue deals that have raised institutional capital. We find it is not a good use of our time because of the dynamic that you just mentioned, Michael. Like, these deals can take three years to sort themselves out by the time the people, remove the guns from each other's heads or like decide to finally give up or whatever. And I've just found it's not economic for us to chase them. Yeah. There you go.

Make your job easier. Well, cool, man. All right. Well, this is awesome. Shout out to our friends at Microrequire. Definitely become a customer there. If you, if you're interested in buying tech businesses, Andrew of his team are great. I'm a customer and we appreciate them supporting the pod.

So I think that's it for today, man, we killed it. We killed it. We don't need anyone else. This is all fine. 10 out of 10. Best episode of the day. We miss you, Mel. See you next week.

All right, guys. Thanks for listening. And we'll catch you next time.