Acquisitions Anonymous - #1 for business buying, selling and operating - Is this $5M AI Assistant for Calendly a Smart Buy? - Acquisitions Anonymous 315

Episode Date: July 16, 2024

In this episode, Bill and Heather review a $5 million AI calendar assistant that integrates with Calendly. They talk about the pros and cons, including the tough competition, how to market the product, and the challenges of getting a loan to finance the purchase. Heather shares her expertise on loan ratios and interest rates, while Bill discusses the potential for growth and business partnerships. Enjoy it! Check out the listing here: https://app.acquire.com/startup/n9TFZ96MwCgfdsPjRX06g3pVqmo1/U89j3VW72keFk0NsQMY3?source=popularsThanks to this episode's sponsor:Acquisition Lab and their team have been longtime supporters of the pod.Acquisition Lab exists to help people buy a business and navigate all the complexities of the process, as well as provide a trusted framework, tools, and resources to support you from search to close.If you are serious about buying a business, check out acquisitionlab.com or email the Lab's director Chelsea Wood, [e-mail] and mention us ;) Hire incredible talent → talk to Near​Meet your hiring needs with top-tier Latin American talent for 70% less than US staff. Near takes care of all the headaches. Use this link to get a 5% discount on your first hireSubscribe 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]

Yeah. So what scares me the most about this is the bottom, which says we're selling because of lack of time and starting a new venture. I don't think so. I don't think so. I think most lenders will have the same kind of concerns about the future of this business. And the recent pricing change makes it really tough to finance. Welcome to another edition of Acquisitions Anonymous. I'm Heather Anderson. And today, Bill and I talk about, well, a controversial subject, I guess for me, which is calendly linked. You know, some people like them and some people don't. I guess I'm in the don't category, but maybe I'm starting to warm up to it. We'll see. It was a really interesting business from Acquire.com.

We go through the numbers and we go through the pricing models. Stay tuned for that. That's pretty interesting. I hope you like the episode and let us know. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab. Acquisition Lab and their team, they've been longtime supporters of the pod and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Divell, who's become a friend, the author of Buy Then Build, How to Outsmart the Startup Game.

So Acquisition Labs is an accelerator with a highly vetted, cohort-based, educational, and support community for people who are serious about buying a business. So a lot of our listeners like you, you tune in every week to our deal reviews, you want to get in on buying a business. You know, you're on this podcast because you're trying to learn how to buy a business. But if you're not quite sure where to start, Acquisition Lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talking about on the show. They provide a proven framework, tools and resources that support you all the way from search to close. They do it. There's a whole bunch of educational material and support.

So if you're serious about buying a business, check out AcquisitionLab.com or you can actually email the program director Chelsea Wood directly. Her email is Chelsea at buy then build.com. I have a beard. Good morning. Yes. This is, I'm at the beach for a week and my shaver died. So I have a beard.

I scrub really. The e-commerce guru would not, you know, be without something like that. But, okay, it happens. Well, I have done beer. When I lived in Colorado, I did the beard for a while and kind of swore off it when I moved back east. But it's just, I don't know. I don't love it.

Wife doesn't love it. So it disappears right after this podcast. Okay. So go on YouTube and see it before. So we had to hit record, Heather, because we were about to get into a spicy debate on Calendly because the deal today is related to scheduling and you jumped down and go, I'm not a Caldly person at all. I hate it.

Why do you hate it? I freaked out. Because I just don't like the idea of people putting things on my calendar without me knowing it or wanting that meeting to happen at that time or who is this person. And do we really need to meet? Sometimes we don't really need to have a half an hour call about that. And so if you're a busy person, it feels it feels kind of intrusive to me. I think it's because I'm old.

So it's not so much that it offends you when someone sends you their calendar link and asks you to do the work of scheduling. It's more that you don't like people shotgunning things onto your counter. It's both. I'm like one. I hate both. So yes, I'm a little slightly irritated when it's like, let's have a meeting. and here's my calendar link. Now you go figure it out.

I kind of don't love that either. But, you know, I get that the alternative that I still do, which is what time are you available back and forth with, you know, email is, it's pretty bad. So I get it, but I feel like there needs to be, and I know there was a platform at one time that did this, but I don't think it lasted, where you could see both calendars. If you were both signed up and it could just show you, here's where you've got common openings. And that's what we need. I'm sad to tell you that Calendly will do exactly that if you are both signed up for Cali

Oh, okay. Now I feel dumb. Okay. Maybe I should try some new things. If you sign up for Calendley and then I send you my Calendley link, when you open my link, it will overlay your calendar right on it so that you can kind of pick the gap. Okay. But I agree with you. It is terrible when people will crap things onto your calendar. There are, for the longest time, he's gone now, a sales guy. So I had my calendarly and my email signature, which was a huge mistake. And no one should ever do that. And I was like considering buying a thing, decided not to buy the thing.

This sales guy scheduled calendarly, like without like for the next several months, without even emailing me or anything. I'm like ignoring his calls because I told him I didn't want to buy the thing and he's following up unnecessarily, just kept scheduling with me on calendarly, incredibly rude. like without asking permission just from he'd saved my email in my email scene that's that's what i'm afraid of is that kind of thing uh because i'm i'm pretty careful with my time i have to be and i can't just let it go crazy like that or or find a day where three hours are just down the drain because of bad calumly you know situation so yeah i don't know what the solution to that is but maybe i should

get on it now that you told me that it does does sync up the calendars well i found one so this is this is what I do now for calendaring because my the reason I don't so I don't mind you send me your calendar calendar calendar I'll pick one I don't care it doesn't offend me um but what I don't like is what you're describing what I call shotgun calendar where you know I might have like a six hour under uninterrupted block and then someone schedules a meeting like right in the middle right hate that so calendarly does not have the option to force contiguous bookings so like if you like have meetings from like 9 to 11 and then like 4 to 6. Right.

I wouldn't mind so much an 11 to 12 meeting. Yeah. But like a like a one to two meeting right in the middle is much more annoying. So I switched to this one called Savvy Cal, which they did not pay me to say. But the founder was super helpful on Twitter when I complained about this. And Savvy Cal is a setting to force adjacent bookings. So you can own the people who have your link can only book next to other appointments. And so you always end up block, block, block and then wide open.

Perfect. That's what we do naturally. When we think about when I'm I open, we try to put them all together so we have some blocks of time. So that's great. I mean, they're all evolving. And I know there's, you know, these platforms will just keep getting better. But yeah, I'm still old school. Like email me and tell me what time you're available. Yeah. Or you needed an executive assistant who will do those emails for you. That even bothers me. Maybe you could hire one from near. Oh, maybe I could. Maybe I could. There's, you know, there's many solutions to my problems. But, I got to advance forward with technology a little bit, I guess. Well, so interestingly, Heather, today's deal, I think is attempting to solve with the problem you're talking about, which is that it's awkward to trade links. So this one's from our friends at acquire.com. And as it frequently isn't acquire.

It is a SaaS business. It's based in the United States in Colorado. And I will put it on the screen for everybody to see. All right. So from Acre, the only. conversational AI appointment booking solution for a $3 billion calendar SaaS platform. Insert, calendar.

So they're asking $5.1 million for it. That is a 6.4x multiple of profit and a 2.5x multiple of revenue. Their TTM revenue is $2 million. Their TTM profit is about $800,000. And their last month's profit is about $7,000. $76,000. So, you know, seems stable to up. They want six and a half times profit or $5.1 million. It says their asking price reasoning is based on industry standard multiples of 6x EBITDA for businesses in our sector and comparable sales on Acquire.com. Our valuation is in line with current market trends. Okay. No room for argument. They're telling you what is priced at.

description. We are the go-to-a-I appointment booking solution for businesses and individuals looking to improve their speed to lead. The most frequent use case is appointment-based businesses using our platform to automate nurture and conversational flow to educate, overcome objections, and set sales appointments. We began as a lifetime deal product launched in 2020 and leverage Google's Dialogue Flow AI. In December of 2022, we were positioned for strong adoption with the introduction of chat GPT, which normalized the use of AI. So let me kind of translate that. So they launched in 2020 pre-chatGBTGBT, and they were using something called Dialog Flow, which was a pre-GPT AI product from Google.

So they kind of already built a product around it. And then when ChatGBTGT came out in late 2022, it was kind of a hot swap. And their product got a lot better as soon as they could swap out Dialogues. flow and put in chat GPT. So my take on what this does is you're on the website of, you know, a hairdresser, a real estate agent, like anybody who needs to make sales types appointments. And this powers like the chat box and it's AI conversation with you, the lead. And then when it tries to convince you to say, hey, do you want to book an appointment with

Heather to originate an SBA loan? Like, are you interested? And it can ask you a couple qualifying questions. And if you're qualified, the AI bot can say customer, Heather is available at these times, looking at your calendar. And then the customer picks a time. And I think then it's triggering calendly to put it on your calendar and invite the customer. So I think the idea here is this is like a chat bot for, let's just use Heather,

Heather Vizzo as an example. You would put it on Vizocat.net and potential leads would chat with it. It would attempt to qualify them. If they were qualified, they would schedule them on your calendar using ChavisoCAP. chat GPT without your interaction. So that's what this product does. Pretty cool. It also says in September of 2023,

we stopped offering lifetime deals and have grown our MRR to $160,000. So let's come back to that pricing model here. To date, we are the only conversational AI solution that integrates with Calendly, has over 2 million paying users, and we have developed our platform to be able to be white labeled or rebranded for agencies.

With multiple large language model integrations and an ever-increasing option of AI solutions by businesses, we believe we are positioned to grow 10 to 15x beyond where the product currently is. It's been around since August 2020. It's subscription. It says built on No.js, AWS, Vue.js and Firebase. Its competitors are WooSender, Goobagoo, chatpot.com, and drift. It says they're selling because of lack of time and they're starting a new vein. venture. That scares me. Yeah. Okay. And it says they've got between 100 and 1,000 customers.

They've got two million bucks of annual recurring revenue and their growth rates 172%. Heather, what are your thoughts on this one? Well, okay, once again, we're looking at a business that is totally tied to one platform, Calendly. So you're making a bet on that platform sort of being, you know, having staying power. And this is to a space that I think is pretty competitive. I just actually heard of another sort of Caledly competitor on Twitter yesterday when I was complaining about a Calumly link coincidentally. And someone kind of popped in with that and I started to check it out. So I think that's the part that would scare me the most is that this is a very competitive space still where they're all

kind of trying to bring in the AI and make the features better and make it more seamless. and bring people like me, the people who have not really adopted it yet, you know, into the fold. I do think it sounds great. It sounds like a nice product in the way that it works. And I like the fact that it can, you know, be white labeled for agencies. I think that's kind of interesting too. You know, I do see that the, you know, we have to talk about the pricing model and the growth rate. So they've recently changed the pricing model. I got probably to get started. They offered lifetime subscriptions. and then once they got to a certain level of traction, they decided they could just go with monthly.

And so that's pretty recent. And so I think that's something you really have to dig in on because any kind of recent pricing change, you don't know how sustainable that is. So you don't then know how sustainable this $780,000 of profit is going to be for you. But I do think it sounds like a cool product. I just don't know how I would, you know, structure and how I would feel about buying a business that's so tied to one platform.

Yeah. So what scares me the most about this is the bottom, which says we're selling because of lack of time and starting a new venture. So they have here what is ostensibly an AI company, one of the hottest areas in tech, and they want to go do something else. Right? So they've built this thing since 2020, and they have a, a better idea, basically, that they don't want to do anymore. And this is the less good idea

that they want you to own, which makes me a little bit nervous. So the way this pricing worked is they launched with, and I've been Googling, since Michael's not here today, I have to take the Sherlock Holmes in the background. So there's this website called absumo.com. And Absumo, their business model is that they strike deals with SaaS products where they sell like a lifetime subscription for a single upfront price. So you might, you know, it's a SaaS that's $50 a month. You might spend $199 and get it for life or something. So these guys launched through App Sumo.

I'm pretty sure this is called New Oaks AI, just from Googling, because they integrate with, with Callendly, and they launched on App Sumo. And they, you know, it just kind of tracks. So what they were doing is they were selling, you know, one-time purchases. And it seems like in September, 2023, they stopped. doing that because they realized it was not creating a valuable business. So I bet they decided to sell this business in September 2023 and then they flipped to subscription. And now they have MRR of $160,000. Right. Since September, which isn't very long. Yeah. Yeah, which isn't very long.

So that's, so what's interesting here is that's, I'm guessing, unless they like ungrandfathered people, which would be a pretty nasty thing to do is to say you pay for lifetime and now you're going to start paying monthly. It seems like all $160,000 to MRR would be acquired since September, right? This would be all new customer, which I think sounds good, right? I mean, that's, that's a decent amount of new MRR that you've acquired semi-quickly. The problem is they haven't even lapped one year of this business model, right? I mean, they're nine months in. It's June 24, and they started this in September 23. And, you know, so their, their oldest cohort is nine months and the meat of their cohorts are probably three to six months old. You really don't know

what lifetime value is at all. No. The whole idea of churn, what is customer churn? Churn? Churn takes time. We can't, you know, so if it's been really recent, they say our churn is really low, well, that doesn't really have any meaning to you because you need time to see what the churn is going to be. Yeah. So I think that's that's a big challenge. What was the total revenue? The revenue is $2 million. So that's probably, that's also probably all pretty recent, right? That's the 160K MRR. So that my quick math, they say revenue is $1.9 million.

160,000, which they say is their MRR times 12, is 1.92. So I was initially worried that they were going to say some of the revenue was from the one-time purchases and some was MRR, but I think they may have normalized here. here and kind of said it's run rate two million and sales. So what I was thinking about there is it costs them a million two-ish to get those, those clients. You know, so there is there is a customer acquisition cost here that is also not seasoned. You know, it's also pretty recent, you know, because the the margin is, you know,

is 800,000 or a little bit less than that on two million of revenue. So, you know, that what is it going to cost you to keep that going? what did they do to get those customers signed up since September of 23? I think that's something so recent is just very, very hard to predict what it's going to do going forward. Yeah. So, and here's the other thing that scares the crap out of me. I mean, I, and here's, they say they're selling it because they have lack of time. They have another idea.

The reason they have another idea is that I think this business is about to get road killed because Caldley is working on their own AI. So they are pretty. dependent on Cali here, right? Like this is sitting on top of Calendly. I'm sure they could kind of build around Cali and start to interface with your Google Calendar or whatever directly. So I don't think this is inherently tied to Cali but what's happening is Calendly is going to launch this

as a feature and just build it into everybody's Cali accountly accounts. Why wouldn't they? Right. Yeah, why wouldn't they, right? Because it'll drive more Cali account. It'll drive more. They could sell as an upsell feature or drive more retention for Cali. And all of Cali's competitors have probably build that too.

I think what these guys have figured out is that they have a feature, not a product here. And they're probably on borrowed time. Just because the new LLMs are pretty easy to integrate, only getting easier, I would worry a lot about getting kind of crushed from behind, from the Cowlays and the Savvy Cals of the world, just building these chatbots. The other thing I worry about being crushed at by is like the intercoms, like all the other chat. widgets that you can put on a website are going to build could build a calendar integration also with an LLM and they've already got distribution because they're already on all these websites. So this reads to me as super, super competitive. Hey, Michael here. Today I want to talk to you about my company, NIR that we started, well, four years ago now. And my story with near is I discovered that hiring

could happen pretty much anywhere, not just in the U.S. And I discovered there's a gold mine just south of us here in the U.S. in the case of Latin America. I hired numerous folks out of there, including a gentleman who eventually became my co-founder at near a man named Franco and he and I are business partners in the company. And what I found was as I started to hire in Latin America, started to hire globally, like, it's totally different than hiring in the U.S. and it's like super hard. And I needed a partner. I needed a company that could help me as I start to try to navigate things like, how do I do background checks or how do I do reference calls or like how do I deal with overseas holidays. Like all that stuff was really hard to do. So we started a staffing company.

It's called NIR. It's run by my two partners. They're in there every day, making sure the customers are happy. And I'm a happy customer too. And, you know, one of the things I'll share with you is that when I first started, you know, doing global searches to build companies, I thought it was just like VAs and call center employees. But I've just been blown away by the caliber of talent that you can find anywhere, not just the U.S. And, you know, I think that's one of the magical things about now we can all run global searches for hiring roles and NIR as a partner and all that. So if you're interested, I want to talk to us, we'd love to help you. If not, that's fine too. But go to hire withnear.com and definitely give them a hauler, tell them I sent you. And if you put in hirewoodnear.com

slash a appad, you'll get a 5% discount on your first hire. So you win, we win. Hopefully that helps. All right, go to hirewoodnear.com slash aAPod and get 5% off for your first tire. All right, thanks. Now back to the episode. No moat, basically. There's probably no moat. And with so much technology, I think that's the case right now. It's really hard to find something that has a moat. This one doesn't seem to have one. And that does, you know, how can you pay 6.4 years worth of profit for something where it's really hard to see what it would look like 24 months from now? Yep. And so like I said, I'm pretty sure this is new oaks.ai. I mean, it looks cool. It's a nice widget. You can book a demo meeting right here in the chat bot. They have, of course, you know, it's between free and $99 a month. It's white labelable if you're an agency. So this kind of feels like it. You can use different LLMs. I mean, it looks like cool software. And I don't

see anything wrong with it. I just worry that this is getting attacked from all sides. you're going to get eaten by the customer service platforms like the like gorgeous like intercom like all these ones that have widgets on the site are ready for customer service chat they're going to launch this as a feature and they're going to launch integration with the calendar apps and then the calendar apps are going to come at you also in launch chat yeah and why didn't they sell to uh calandly you know it is kind of you know calendarly didn't buy it right exactly cheaper to build and i think that's what is with these software products, it's a great revenue source for a short period of time for a founder without leverage if they can build it at a certain cost. But to come along and buy it at a

multiple of earnings is really a tough sell. Well, I think that's the challenge. And it's unfortunately Michael's not here because I'm sure he'd have thoughts. But I think this is a challenge in a lot of technology is that it's very hard to establish modes because building software is incrementally getting cheaper and cheaper and cheaper. And distribution really is the key advantage in software, right? How many millions of installed users do you have? That's why Google and Facebook and Apple, they just have app stores. They wait to see what developers build that gets popular, and then they just build it into the OS and the next release. And so those moats are very, very hard to assail. And everybody that doesn't have one of those modes is just kind of slugging it out in a total free-for-all

until one of the big tech guys with a moat decides to subsume their business. So I think that the places you want to be in tech are more complicated. So like stuff that has to be really custom for like a nichey audience, stuff with a longer sales cycle, you know, stuff that it's just not worth it for Google to do or even calendarly a two, you know, three billion dollar company. They they have distribution. Like they can build this. So I just, I worry a lot.

here that these guys it's going to it's got six years to get your money back at six xebidda makes me nervous yeah yeah so like what you're saying is something with mass appeal is really hard to have a moat around but something that's really nichey like maybe serving a very specific vertical or you know very specific process that might be appealing uh to buy you know for a small buyer to buy a software in that sort of world that's not that google wouldn't be interested in uh or the big companies wouldn't be interested in, which it makes a lot of sense to me. And even then, I think I would be worried about as a buyer, how do you keep up, how do you keep the software developing along as quickly as things are changing?

You know, I've looked at some deals before where we've had a technology diligence expert come in. In fact, we wouldn't, you know, the last bank I was at, we wouldn't lend on software without one of these reports. Because you have to bring someone in to really analyze the software itself, the roadmap for the software. But a lot of times what would come back is, you know, what's in your cash flow model, you haven't built enough in yet for development costs, for further development costs. Like you're basically R&D for something like this is the same as maintenance CAPEX in a business that has a lot of equipment and machinery. So it's kind of like another cost.

So that you look at that $768,000, whatever it is of profit, you're going to have to keep developing this if it's going to stay alive. So you're probably going to have an added cost every year to keep it going. Well, and this is AI, so your developers are not going to be cheap. Right. Right. And in demand. They're going to be in demand.

So how are you going to find them? Yeah. Yeah. I think the thing that's a little bit tough is, I don't have a good word for this, but this is an example to me of software that is basically cobble a bunch of APIs together and wrap some UI on top. So what they've basically done is used Calendley's API. And they've used chat GPT's API, right, chat API.

And they've just basically wrapped it in a little bit of JavaScript so you can embed it on your site. Right. So chat GPT has a conversation with you. And then it figures out when to fire the call to the county API. You get an appointment. That type of stuff that's so easy to replicate. Right. Because, I mean, like you can build it.

And people do. They build these types of products at hackathons in a weekend. Right. So then distribution becomes the entire thing. And how you get it out and how do you keep from, you're always getting all these little ankle biters who instead of you're trying to charge $39 a month, they'll charge $9 a month. Right. But they're also probably not good at advertising and distribution and all that stuff. So you've got to all these consumer kind of self-serve SaaS, you can sign up.

They always end up going upmarket and trying to do B2B and bigger deals because those are harder for the harder place for the ankle biters to chase them, building customized solutions, building custom models for Verizon. and if Verizon wants to do this at scale. Bank of America wants to book appointments with mortgage bankers at scale. Like that's where this thing has to go, I think, in order for it to be defensible to get good B-to-B partnerships. Otherwise, all the big platforms. I mean, Google has their own LLM. And if you watch Google I.O, you've seen it doing phone calls to small businesses

scheduling appointments, like with AI on both ends. So, I mean, it's everybody's coming for this. Like, I think it's kind of like one of those obvious frictions. like scheduling appointments using AI, everybody's coming for it. I think it's going to be really hard to fend off competition here. Yeah. And to your point, B2B software sales is a very long sales cycle, very long. I mean, big companies don't change software easy.

It takes a long, long time and you have to get embedded into their entire process to even get a sale. I've actually looked at companies that sold software like that. And some of them had a three-year sales. cycle. That's the pipeline, three years. Yeah. But that's the moat, right? If you can sell in that way. Yes, right. Exactly. If you've already done that. So is this business transactable? I mean, I definitely think it's transactable, right? Someone will buy this. Yeah. Yeah. I mean, I think it looks like good software and maybe the right kind of buyer that has another way, you know, can integrate it into something else they're working on might buy it. I don't know that they would pay six, you know,

more than six times earnings for it. And I think the seller has to probably have some skin in the game. Seller probably doesn't get to cash out very much at this point. Yeah. Yeah, I think you read one to two X profit, you know, and above that, probably some earn out. Yeah. To do it with a with that. So there's the problem.

Like if this were the deal size here was $400,000, you know, on $100,000 of MRR. Like you might somebody. might do it with cash, et cetera. But this is a $5 million purchase. You know, you're an individual. You're probably going to use a loan. And that's a 10-year SBA loan. And that's just terrifying. Right. And a 10-year SBA loan is only going to cash flow at about 3.75 times earnings. So if you're going to pay six, you have to come up with the rest in equity. And then you look at your return on equity and you go, no. So that's not easy. So I feel like that, what you just mentioned right there, Heather, I feel like that's like an index that because there's a math formula.

That index should be reported on somebody's website over time, right? There's a math formula based on interest rates that you can figure out what's the highest multiple you can pay with 10% equity and today's interest rates. What is the highest multiple you can pay in cash flow? What are your assumptions behind saying the number is 3.75 today? Well, so I am in a DSCR or a debt service coverage ratio model all day on all kinds of deals. And so basically doing so many of them, you just go, okay, this is, this is, you can see the math. This is, we can play around with the purchase price and the equity and that's what it comes out to.

So in the low interest rate environment, we were at more of like a four, even 4.25, you could afford 4.25 turns of EBIDA or adjusted EBITDA in SBA. debt with that structure. But with higher rates, we're down to about 3.75. And it basically is just it's just kind of the inverse of the debt coverage ratio that the banks want to see. They want to see at least a 1.3 to a 1.5. And if you play around with the DSCR model, you're going to see that your maximum leverage is going to end up at around 3.75 most of the time, depending on seller note terms. But it's good to have that rule of thumb in your head when you're looking at deals because, you know, you may see something that you want to pay 6x for, but you got to then think

that through. I'm not going to be able to pay for more than 3.75 in debt. So, you know, does the rest of it make sense? So to be clear, do you get 3.75 turns of debt and the rest has got to be equity? Three point seven five turns of SBA debt. Of SBA debt. Okay. So if you're going to pay 4x, you're going to pay 0.25 in equity and 3.75 in debt. You're going to pay 4.75. You're going to pay 1.75. You're going to pay one XSDE and equity and the rest in debt and so on and so forth. Exactly. I think there's a really interesting and salient example of why interest rates affect multiples and valuations because acquirers, by and large, are using debt.

Most businesses are acquired with debt, all up and down from small business transactions all the way up to large LBOs, right? All acquisitions are financed with debt and debt has interest rates and debt service coverage ratios. So as interest rates go up, you can tolerate less leverage on a deal. Right. As interest rates go down, you can tolerate more leverage on a deal and still make your debt payments, your interest coverage, your interest payments.

And by and large, buyers as a group don't really change how much equity they want to put in as far as kind of a multiple, right? So when more debt is available, it inflates multiples because you've got to kind of fixed amount of equity and then we can take more debt and so it inflates multiples. When interest rates are higher, less debt is available. So multiples have to come down. But what's interesting about what really has changed in the SBA size market is the multiples were already pretty low.

You know, usually you're talking three to four is what your multiple is on, you know, a non-SAS kind of small deal. And they're already so low that you won't have very many sellers that want to go much lower than that. So what has happened with the higher interest rate environment is most sellers are negotiating with the seller note. So they'll give a bigger note. They'll give better terms. If the deal has some challenges to it or hair on it, as we say, that that's where they generally have been negotiating. And that works too if the terms of the seller note are really favorable to the buyer. But it has been interesting. Definitely affects things, especially when rates went up as fast as they did.

That was that was kind of a shock to the system. Okay. So I think this is probably will trade. I mean, it's cool software. If you're a software entrepreneur and you feel like you could add features and you kind of understand how to try to build a little mode around this thing, I don't hate it. I just don't, I think it's going to be tough at six, six and a half times even die, especially if you use a loan. Does this trade at all with a loan, Heather?

I mean, or is anybody going to lend? I don't think so. I think most lenders will have. the same kind of concerns about the future of this business. And the recent pricing change makes it really tough to finance. Okay. Now, so I'm trying to figure out how to ask this question, because I don't mean to say that lenders don't always do their diligence. But it has been my experience that I'm speaking with one of the smarter lenders out there right now. Thank you. Thank you.

And I have witnessed a lot of deals get done where, and I'm simply flying here, they basically just shop around until they find a bank that's not smart enough, right? Yes. Okay. So like, could this deal still get done? Because like what we've articulated on this podcast, the threats to this business require you to understand the idea of commoditize your complement and the product roadmaps of all the big tech giants. Like, this is semi-advanced, you know, tech software industry strategy to get that this thing's probably

going to be under pressure. Is every bank really going to get that? Or are there going to be some fraction of banks out there that go, hey, we like SaaS. Hey, it's recurring. Hey, you know, cool product. We really like it. We could see using it to book appointments in our business. I kind of get it.

Let's do it. You are, this is such an important question. And I have strong feelings. So I'm going to try to tone them down a little bit. But yeah, I think unfortunately you have a lot of, we call it in banking the greater fool theory. You know, there's always a greater fool out there. When banks say no to a deal and they find out another bank did it and they're like shaking their head, why would you do that? You know, banks aren't always right about when they say no, too.

I mean, they're wrong, you know, in both cases sometimes. But yeah, I think it's really important not to take a bank giving you a loan as a indication that this is a good deal. because there are plenty of banks who will not understand the industry or will not understand sort of the subtleties and skip over that and just make the loan. And that does not mean you should do it. So you do always do your own diligence, surround yourself with a really good deal team because the lenders are just people too. And they don't have the depth of experience in a lot of these industries that would kind of be required to make a better decision on some of these. Yeah, like a SaaS lender would probably have good context for this. You know, you go to a bank that just got into SBA loans and they're just trying to originate volume.

And they'll probably make this law. Right. Exactly. And SBA is a very competitive field. It's a good thing in a lot of ways that we have so many SBA banks competing. But it's a bad thing in other ways because that competition sometimes leads to bad decisions. Okay. So what you're saying is if you want to buy a questionable business, shop around until you find a bank that will do it.

But don't maybe you don't want to do that because you are signing a personal guarantee. So that is the problem right there. Yeah. Yeah. Yeah. I guess if you feel really convicted on a business and you can't find a bank to finance it, that should tell you something. Yeah.

If everybody says no, there is a, yeah, with as many banks as we have to choose from, and everybody says no, that should tell you something for sure. On the flip side, though, if you're really convicted of bad business and you do find a bank to do it, that doesn't necessarily tell you it's a good business. Right. So you can't out. deal advisors. Yeah, have other deal advisors around you that, you know, and this is my other pitch for value ad investors. If you, you know, this is something I disagree with a lot of banks on. A lot of banks

prefer a deal that doesn't have any investor equity. They think it's a better deal if the personal guarantor brings in all the equity. I completely disagree if the investors are value at. So if you, if you're bringing in people on your cap table who have experience in the industry that you're buying in, and they're going to be engaged with you, they de-risk a deal. Let's face it, they help you. They will look at a deal. And if the investors who have experience might say no a bunch of times, that's also an indication to you that this might not be a good deal

if they won't even put money in. So I think, you know, surrounding yourself with good potential value at investors is also a way to kind of learn whether the deal you're looking at is good or not. Agree. The more smart money you can get around the table, the better off you're going to be. Absolutely. All right. Well, let's wrap this one up. Thanks for listening to this episode of Acquisitions Anonymous. If you liked this one on SaaS, we have a whole bunch more on our website, which is ACQUAnon.com. We have just spent a bunch of time to catalog almost 350 back episodes by industry. So this one will be on there and it'll be tagged SaaS.

So if you want to learn about other SaaS deals, you can go on our website and just click SaaS and listen to 80 episodes of Acquisitions Anonymous just about SaaS. So that's ACQU Anon.com. We also have our newsletter on there. So give us your email address. We're going to email you when new episodes come out. We also do a couple of deal writeups occasionally. We would love to be in touch with you that way or find us on Twitter at ACQU and

Anon. Or you can find me and Heather and Michael and Mills on Twitter slash X as well. Thanks for listening. I hope you enjoy this episode. We'll see you next time.