Acquisitions Anonymous - #1 for business buying, selling and operating - To SaaS or not to SaaS, that is the question? - Acquisitions Anonymous 280

Episode Date: March 15, 2024

In this episode of Acquisitions Anonymous, Mills and Michael delve into a SaaS startup in Delaware specializing in data enrichment solutions for B2B sales and marketing teams. They discuss the company's impressive revenue and growth rates, dissecting its business model and potential labor arbitrage strategies. The hosts explore various scenarios, including leveraging existing hold co resources and flexible deal structures, while acknowledging the uncertainties surrounding the business. They highlight the competitive landscape and the favorable position of the seller, who likely did not raise significant capital to reach their current revenue levels, making it an intriguing opportunity for micro private equity investors seeking high-growth ventures.Check out the listing here: https://app.acquire.com/startup/9x8WBCZCsiOmINfUouRULv6zAov2/lvdlb7n76tUdj53uW3hWAcquire.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: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.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]

Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mill Snell, one of your co-host, joined this week by Michael Girdley. We talk about a, what I would say is a wannabe SaaS business. It is a probably amalgamation or conglomeration of services, tech enabled, and we think it is an arbitrage, a labor arbitrage play. But it's B2B, it's sales. They say they have recurring revenue. It's over 100%, 107% year-over-year growth rate, 50% percent. 50% percent. net margins. It checks a freaking lot of boxes. We talk about what this business might actually be doing. Who would buy something like this? And then we just had to make some inferred guesses. If we peek behind the curtain and we see certain things, what would we like? What would we love? What would we absolutely hate and would make us run away? And you hear Michael talk about his beard. So it's a fantastic episode all the way around. Hope you enjoy it. 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. Mills, do you feel like we're having a beard off today? I would not have used that phrase, but if you feel like we're having a beard off, then I'm so glad.

It's a beard competition as to who has the coolest beard. Mine is tricolor. I have gray, red, and brown. So bow down before the panoply of colors coming from my beard. You've got me beat there. I don't have any gray. Oh, good times. All right, well, it's just you and I.

By the way, I've gotten a lot of compliments recently about our episodes. The QuickBooks one. People love that. I got multiple texts from people saying how good it was. I think somebody responded to at Twitter and said they looked at it. They got the NDA and they said that some of the things that we were speculating about were right. I'm sure there were things that we were speculating about that were wrong, too. But all they said was you were right.

there's a lot of churn or something like that. It is interesting how often we're right, like routine. When people come back later, they're like, yeah, 90% of what you said was right. And either that's a testament to we're right a lot or, I don't know. When we're wrong, people are just quiet about it. I mean, I feel usually when you're wrong, people were really loud. Like, yeah, right, you know. It is interesting how nice social media is for me.

I appreciate it. All right, so I brought another Acquire.com deal today. which, man, as much as Andrew Gatsacki pushed out some of our recent episodes makes me want to do more Acquire.com deal. Some of these have been really interesting. I don't know what this one's about. You're going to surprise me with it,

but some of them have been really different, really intriguing. Well, let me tell you about this one. This one is located in Delaware. It is a SaaS startup for sale, and they say they help B2B sales and marketing teams increase revenue through custom data solutions. The asking price is $8.75 million and they want to sell it for 4.6 times profit or 2.4 times revenue. They are asking this price based on current multiples are technology platform team, IP, and growth rates. So in the last 12 months, they've done 3.6 million

in revenue and 1.9 million in the last 12 months' profit. Last month revenue was $418,000 with $252,000 in profit. So clearly accelerating in terms of growth. Because what of the, 418,000 times 12 is like closer to 5 million than the trailing last 12 months revenue, which is 3.6 million. So an indication that they're growing quickly. The service offers data enrichment solutions targeted towards B2B sales and marketing teams aiming to improve prospecting efforts and CRM data accuracy through account and contact research. Founded in 2017, they have a team of 21 to 100 people in the B2B business model segment. They list a bunch of stuff here in the tech stack. Oh my gosh, that tech stack. What do you think their monthly software subscription? These are like, I really don't know.

Well, let's let's maybe pause here. Do we understand what these guys do? I think the keyword, and this is way more in your wheelhouse than mine, but do you think data enrichment solutions is like the crux of this one sentence description. So yeah, there's this whole industry of people who when you're doing B2B sales, so meaning you call other people to try to sell them stuff, they are people that go in and do what's called enrichment, which is basically like, okay, I want to sell into, pick a random company, Gurdly Enterprises, if you thought they would be a good customer. And you go in and you want to get the name of the CEO, the CFO, contact information,

how long they've been there, all that kind of stuff. And then there are people who approach that problem with different types of solutions. You have databases like Zoom Info is one where you pay to basically, they have a universal database of this stuff. And then it looks like there's some of these other ones. Task Us is one where I think it's mainly on demand. Well, Task Us is a big tasking, like a BPO business process outsourcing type group. They're located here in San Antonio. So everything in between where you like pay somebody to go do research for you. So there's this whole industry of people that will basically figure out different ways to arm your Salesforce to go out and do outreach to prospect the type of customers you want to have.

It's interesting that they say they have between 21 and 100. I know that's just like probably a preset field, but between 21 and 100 employees, based on their margins, I mean, it's 50% net margins. Yeah. This is not a people-centric kind of data mining

operation, right? Potentially. Maybe some more of the maybe some more of the details here will tell us how it works in particular in what their approach is. Because there's like Zoom info is a database, or

you can like go pay people on Upwork, right, to go populate your CRM with information and everything in between. So it's not really clear what they, when they say here, it is a service. What does that actually mean in practice? So let me do this before we keep trying to guess. Oh, here, maybe this talks about it.

Gaming to improve prospecting efforts and CRM data accuracy through account and contact research. So these guys may be doing, just more bespoke type enrichment. And then this technology platform just makes it really easy for them to put their information into your CRM when you're a client. All right. Growth opportunities, focus on SEO, new product features, social media marketing,

increased content marketing. Man, it's just pretty much the same thing. Higher sales team and increased pricing. Okay, check. Key assets, customers, brand, marketing materials, inventory, domain, social media accounts, website, trademarks, code base, intellectual property, trade names, international team, outsourced operations center. Okay, so I think we're digging into what's going on here.

Like this most likely is kind of on that bespoke side of things that is much more like a digital agency with some software involved to make it more efficient where they have trained captive people who are employees or contractors of their company. They are located somewhere in Bangladesh, Pakistan, Thailand, something like that. And their job is to do data enrichment

for clients, right? And basically it feels like a bit of labor arbitrage here. So I'm thinking, like, if I'm a B2B business and I repaint the lines in the parking lot, and I want to get in touch with, you know, the right person at Target and Walmart and CVS and Walgreens or something like that, I can spend all my time,

you know, Googling and trying to find it, but I'm probably going to end up on Zoom info. I know when I've looked for this type of thing before, it redirects me to Zoom info. And it's like, yeah, this is the director of facilities or procurement or whatever, but it sits behind a paywall. So this company probably is a subscription, you think, Michael.

Is that how most of these are, their pricing model works? There's different varieties of it. You have people that will do one-time enrichment for you, of your CRM? What would be your favorite? If you sign the NDA on this and they say our pricing structure

is fill in the blank, what would you be most excited about? I would be absolutely the most excited if we dug into this and discovered that they have picked a couple of vertical niches or categories and built the universal absolutely best database

around each of those things and they are now selling it to potential clients. So in your case, let's say that they wanted to have all of the roofing contractors in the United States or all the fuel haulers in the United States. And they have the best database around that niche. That would make me the most excited because that's IP and not people. The second most excited is what I suspect this is, is this is actually just labor arbitrage where they have a set of business processes they've created and they know how to do. do this type of data enrichment and prospecting, but it's all manual.

And they do it all through some sort of team that they've created offshore that's relatively unique with a set of kind of, not necessarily intellectual property there, but like business processes that they know and have created and have that kind of enterprise level knowledge. That would be down below. But since you ask what my, since we're dreaming, my dream is my dream is a unique database. That's a great point because you think, okay, if I'm just going to potential customers and saying, hey, pay us, you know, $100 for something that we only have, you know, $50 of total cost in, that's a very different value proposition than pay us $100 and we have access to the best possible database for, you know, chiropractors or, you know, like we've talked about dental software recently or facilities, you know, maintenance. professionals or property managers or whatever, all of a sudden, you're going, wow, you know every

person who is in charge of facilities at data centers, that's really, really valuable information. You know how long they've been there, you know, their email address and maybe their office line. Yeah, so this is one of those ones that really smells like signing the NDA. It would be really helpful to truly understand this business because it could be very binary, right, in terms of what's going on with this. It could be just a standard labor arbitrage play, like I talked about,

where they have an overseas team and you're working from there. Or it could be something more sophisticated where there's like real defensible IP. If it's the latter, that sounds pretty exciting to me. They're definitely pricing it at a fair price. It's pretty the highway, 4.6 times profit, but they're growing quickly.

So, you know, the challenge, obviously, with labor arbitraise businesses is they keep getting harder, the bigger you get, right? Because you keep having to hire more people. And to grow 10% year over year or 50% year over year, eventually hiring 50% becomes a lot, a lot of people, which would worry me about, you know, this if it's just labor arbitrage play.

Do you think that just given this margin profile, whether or not it's sustainable, I think the biggest question, you sign the NDA and you want to see, what's the customer mix? you know, how many customers, what's the lifetime value of these folks and how quickly are they churning? That's make or break to me. Like if they are, I don't know, but it could go both ways.

What if they're, what if they have amazing lifetime value, lifetime customer value? And they're terrible at customer acquisition. Like they cannot figure out how to add more people to their customer base, but they hold on to them forever. The other side of the coin is we're really, really freakishly good at finding customers, but they churn out. three months. For sure. And then size of those customers as well, I'd be really interested to understand,

are you selling into the middle market? Are you selling into SMBs? Are you selling into micros? I mean, what you see here is classically, you know, sub 30, sub 50 employee companies are horrific as customers. They act like consumers from a churn perspective. You know, are you selling into the mid-market? Do you selling into the enterprise?

You know, and then I think also to elaborate on your point, pricing model becomes interesting. They do talk here that the business has 3.4 million in annual recurring revenue. If this is truly recurring revenue rather than kind of one-time project work to do enrichment, that's much more exciting, right? Imagine this is a scenario where, you know,

a B2B software company who is selling into the dental practice world, right? They pay you per month to log into their CRM on the back end and do, you know, to go through their lead list, right, and enrich those things. And that just happens every month, right? It's a cost of doing business for them, as opposed to a one-time project where they're licensing your database.

Like, I would like that as well, right, where it's just an annual recurring subscription, because that compounds over time. You're not having to kill what you eat, you know, every single month when you're trying to build up your revenue base. They also, we only were looking at kind of full year versus run rate, but all the way down at the bottom

said the annual growth rate was 107%. So that provides... I've heard that's okay. Yeah. I've heard that's not bad. Yes. Yeah. I don't know why they didn't put this,

but they have somewhere between 10 and 100 customers is what that says. It could be 11 or it could be 97. I feel like the bands are kind of wide here. But I'm really interested. I want to know more about what they actually do. I'm just dying to know. Yeah. Let's say, okay, on average between 10 and 100,

let's say they're going to be at 40 customers over 3.4 million in revenue. So 3, 4, 1, 2, 3, 1, 2, 3. So 3.4 million divided by 40 is 85,000 a year if they have 40 customers, annual spend with them. And look, I think

this is one thing about doing labor arbitrage businesses, right, these labor arbitrage businesses where you're selling the service in the U.S. and you're acting as an intermediary to an offshore services provider who, you know, you're basically paying a few dollars an hour. If you go in Upwork, by the way, I don't know if you've ever done this. Have you gone on Upwork and tried to hire somebody offshore to do lead generation for you or list building or list enrichment? No, never. I mean, I'm familiar with the concept. And I've looked at Upward. but I've never needed that.

Yeah, so there's an entire industry of people in Indonesia and all these places that you can pay basically three or four dollars an hour, and they're happy to get it because just that's really good money. For over there, it's kind of like people freak out when an American company pays somebody in the Philippines $5 an hour, and then you look at what the average payroll is in the Philippines.

You're like, oh, actually, that's a really good salary. You're not exploiting anyone. But am I getting canceled for this? I definitely am, right? Nobody wants to cancel a wait list. So it's fine. They're all busy yelling at MS. They've already canceled you.

Yeah, I already got killed. They don't care what I got to say. But it is not out of line for these type of labor arbitrage businesses to do this sort of profit margin, right? And again, these guys are doing 3.6 million gross revenue on 1.9 million in profit. So then I think it begs the question, why is it so cheap? Is it because it's so fragile? my suspicion is is that it's more of an agency

and less of a SaaS business. Yeah, which would make sense. Then you're talking about, they're asking, what was it, between three and a half and four times? Profit. They're asking 4.6 times AARR. No, 4.6 times profit

and 2.4 times revenue, which are kind of, that's closer. The 2.4 times revenue is closer to software multiples, right? So let's say you sign the NDA, you get the info on this, and it is labor arbitrage, and they're very firm on their asking price, but they're willing to offer some kind of flexible terms. Is there a scenario

where you would say I can align our risk-reward incentives, our risk-reward dynamics enough that you look at this seriously? I would never do a deal like this, just me personally. I would never get, I don't think there's any scenario where I can feel comfortable, even if they said we've had zero churn since 2017. I can't imagine it. But is there a scenario where you would? I mean, this is definitely one where if you had outside money combining it with your own and you wanted to do kind of a higher, higher beta, you know, higher variance outcome here,

which look, at this price and this growth rate, if you keep growing at 100% a year over year for the next five years, the thing gets pretty freaking big, pretty fast. And the purchase price was irrelevant a long time ago. Absolutely. Yeah, it's my pet line that only I seem to like, which is every deal underwrites if it goes up by 50% in revenue every single year for the next decade. That's the, that's the Dell Technologies thesis, by the way. It's like, it doesn't matter what price you're paying if it grows 50% per year for a decade.

So, you know, if you had capital here that was more speculative and was playing kind of that growthy story, that would be interesting in something. to potentially do. You know, I think where your reluctance is is probably where my reluctance is as well is this, you know, the first rule of buying a small business is don't lose your money.

And this seems like it could potentially be a way to lose your money. But, you know, of course they call it, they call it SaaS. I'm just looking at the header here, SaaS startup. Correct. You know,

I think it probably checks the box for a certain group of people who have capital to deploy into things like this. And it's kind of catchy enough, buzzwordy enough that, you know, I think people would overlook the wards. You know, the risk. I mean, it's just the risks associated with this level of, not even the level of growth continuing, just this level of profitability continuing, I think is, I would have a lot of questions about how sustainable. There are a lot of people that have made a lot of money doing labor arbitrage like this.

I mean, just entire fortunes have been made. But look, I think this is a good fit, not necessarily for an individual buyer. If you are a micro-private equity style buyer who wants to grow it and then flip it over three to five years, I like this aspect of it, right? You've built up some IP, you've built up a good brand name, you're not starting from zero, You've clearly demonstrated profitability, and it has, you know, it's accelerating from everything we can tell in terms of its growth. So based on all that, and you're targeting like a huge market, like sales data enrichment

is just an enormous market. And it has the benefit of being close to sales, which is close to new revenue, as opposed to the opposite, which is being close to being a cost center. Like, those are all positives. So I think that's the right play here. I think that's who buys this as a micro-private equity group who wants to run it up and flip it to somebody else. Could you imagine a scenario where somebody has like a hold co and they need this type of

service and they have, you know, a dozen companies and they go, okay, it cash flows itself and then we could fold our, you know, our enrichment spend or some of our marketing spend into it? potentially i am not a as big of a believer of i mean synergy is the accurate accurate word you're like insourcing you know yeah i'm not as big of a believer in that stuff i mean i know there's people who think that you're going to get economies of scale by bringing in things to your platform and and do that you mean for me what what i've realized is okay like we're going to start an offshore growing company, right? So we started near and like internally, like other businesses I own as a percentage of near revenue is really small. And that's just, you know, that's just the way it works

in general because if you do it right, you end up having your hold co. Like, you don't want to force your hold code to buy internally because that's just a great way to have inefficiency. Like I tell everybody like, look, I want you just make money. And if that means you buy internally, that's great. If you don't buy internally, that's fine, right? Because I'd rather make money. It's rich versus king, right? I'd rather be rich. And a lot of that synergy stuff just is you trying to be king. And I think it's one of those that works. It looks good on paper in practice just doesn't end up happening. I think it's trickier with things like this. The instances where I've seen it work well is a property manager who in-houses a certain, like a certain

facet of property maintenance or know a guy who manages a bunch of Airbnbs and bought a laundromat because he was spending so much money on, you know, linens and laundry service and stuff like that. Just looking at your, you know, your income statement or your P&L and saying, where do I spend a ton of money and think I could probably do it better than this dispersed model. This, I think, would be really tough because even at an average of maybe $8,000 a month per customer, you're not talking about a huge line item for any one company, any one of these customers in their company. So yeah, I'm with you. I think that would be a stretch. Look, I think this is a cool one to double click on. I don't dislike it. I think there's just

some stuff, some fundamental questions about the business. I would want to understand before I get gushing over it. But look, when things are kind of confusing and potentially are a bit of a mystery. I think it creates a really interesting opportunity to dig in and there to be something potentially interesting here. So I like the space. Like I like how fast this space is growing. I like how profitable this business is. You know, the seller says they're selling because they want to do a lifestyle change, which, you know, I can, I can recommend that. Eight and a half million dollars can give you a real big lifestyle change. And so potentially there's some technology involved here. So I think those are all, you know, all reasons to double click on this one. It looks like 54 other buyers are in

active conversations. So that's all that's tough to like. One thing that we haven't talked about, Michael, maybe in kind of a closing note, is it strikes me that this type of business would not, they said that they're bootstrapped, but they would not have had to have raised very much capital in my imagination to get to this point.

To me, that changes the dynamics when you think about this seller and their optionality around exit. if this was something that was very capital intensive to get to that kind of like minimum viable product or this level of revenue and they've got you know this hurdle rate hanging over them like a gillity you know it's like well we actually have to sell for this amount or i mean they probably wouldn't sell it this size if they had spent a bunch of money a bunch of investor capital to grow yeah i look at that as kind of favorable in this case like they probably don't have a huge guillotine hanging over their neck.

Yeah. Well, look, that's, if you're micro-private equity, that's another way to make a deal work here, right? So let's just say for a round number's sake, you're going to pay $9 million for the thing. They have 8.75 lists. For $9 million, if you ask the seller to roll over into the new company and retain, say, a third of the company, that's $3 million there. with the size of profit that you currently have here, 1.9 million, you could envision borrowing two to four million maybe. So then you and as the investors

only need to come up with a few million dollars. So that can really juice your returns there as a potential buyer if you were to ask the seller to roll over. And to your point, it becomes much easier for them to say yes to that because they don't have a bunch of, you know, invest in capital that they need to return, right?

It's all profit and they're just doubling down on that, which I like. Yeah, yeah. Well, good. That was a good one. Thanks for bringing a phone. All right. Yeah. I want to be SaaS company.

I think that's the headline. Yeah. Is this a SaaS company or is it not? You be the judge. Hashtag beard off. Hashtag Gerli is still losing. All right. We'll see you guys next week.

Bye.