Acquisitions Anonymous - #1 for business buying, selling and operating - Would You Buy This $1.6M Customer Loyalty SaaS Business?

Episode Date: February 24, 2025

We analyze a $1.6M customer loyalty SaaS business for sale, uncovering a major revenue concentration risk and industry challenges—would you buy it?Business Listing - 📢 Sponsors:Capital Pad – The marketplace for acquisition entrepreneurs. Whether you need capital to buy a business or want to invest in small business acquisitions, Capital Pad makes it easy. Check them out at capitalpad.com.Hire With Near – Struggling to find top-tier talent? Hire high-quality Latin American candidates with HireWithNear and get a 5% discount on your first hire. Visit hirewithnear.com/aapod to learn more.🌐 Stay Connected with Acquisitions Anonymous:📢 Website: https://www.acquanon.com/🐦 Twitter: https://twitter.com/acquanon📩 Subscribe to our Newsletter for more deals like this: https://www.acquanon.com/newsletter🔔 Subscribe to Acquisitions Anonymous on YouTube: https://www.youtube.com/@AcquisitionsAnonymousPodcast?sub_confirmation=1🎧 Listen on your favorite podcast platforms: https://www.acquanon.com/episodesIn this episode, we analyze a customer loyalty SaaS business listed for $1.6M with $275K in cash flow. It seems promising until we dig into the details—revealing a massive customer concentration risk and major headwinds in the industry. Is this business really worth its price tag, or is it a ticking time bomb? Tune in to hear our take!Key Highlights:- Business Breakdown: A 16-year-old SaaS company offering text-based loyalty programs.- Recurring Revenue: $372K in annual recurring revenue with an anchor client under contract through 2031.- Massive Red Flag: 35% of revenue comes from a single restaurant chain.- Industry Shift: Major POS systems (Square, Toast, Clover) now offer built-in loyalty programs, making third-party solutions obsolete.- Valuation Concerns: Priced at 6x cash flow, but how sustainable is this business in a rapidly evolving market?Long-Term Viability: Would you risk buying a business that could become irrelevant in just a few years?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]

I like that they pointed out here that this is a good opportunity for someone with a great sales background. It makes it really easy to kind of track customer behavior, you know, tie them to credit card numbers, all that kind of stuff. It makes it really easy to do that. So, so Acquisition Anonymous. Hello, another episode of Acquisition Anonymous. We don't have 100% beard anymore. Thumbs downing on just the plus inventory alone. Acquisitions Anonymous, Internet's number one podcast about buying, selling, and invest.

in small businesses today. Heather brought a deal that was a software app that was priced at about six times free cash flow. It was not terrible until we figured out why it was terrible. So here's the episode. I hope you enjoy it. Hey, everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called CapitalPad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad is a marketplace for acquisition entrepreneurs. That is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in acquisition deals.

So if you want to back somebody buying a small business, CapitalPad is a place to do it. And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors. So the really great thing, too, from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions all up front in black and white. Basically, CapitalPad professionalizes investing in small businesses, and the returns can be really, really good.

I'm so stoked that they exist. It's founded by my friend Travis, who is a phenomenal entrepreneur in his own right. So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out Capitalpad.com and tell them that Acquisitions Anonymous sent you. Heather, what's going on to California today? It's going to rain, which is rare. I know. I know. It's going to rain.

We're all frightened and we probably can't drive now. So, you know, that's typical for us. I got a sweater on so you can tell. When people ask, they ask, what is the most hardcore able to get through any weather possible group of people in the United States? You know what I tell them? Not Southern California. Exactly.

Not here for sure. We literally can't handle anything. It's like it's too hot. If it gets too cold, if it rains, we are devastated. That's what happens when you do. And there's perfect weather. Yeah, that's right. So you brought a deal.

Do you want me to read this? Yeah. Let's see what you think. All right. Okay, so this is Biz by Sell. It's a 16-year-old customer loyalty SaaS, seven-year contract valued at $1.8 million off of Quietlight. And it's located in California and is relocatable. Interesting.

How'd you get this? Biz by sell. And it's always set to California for me because I'm here, I guess. Or maybe that's where I searched before. But it was one of the new listings that popped up. That's how I found it. Nice. Okay.

So they are asking $1.6 million in cash flow is $275,000. Gross revenue is $397,000. So cash flows $275 on $397,000, basically $400,000 in revenue. Eva does the same as cash flow, has no inventory, and it was established in 2008. So headlines here are $372,000 in recurring revenue, $25,000 customer lifetime value, and $327 average revenue, I guess, per customer. Founded in 2008, this SaaS helps businesses offer reward programs to their customers through text messaging and loyalty programs.

The platform connects directly with major point-of-sale systems, automatically tracking customer spending and sending rewards. The infrastructure has been battle-tested over two decades and has managed millions of customer interactions. The business generates $372,000 in annual recurring revenue. Clients stay an average of six and a half a year. and have a lifetime value of $25,000. The company averaged 3.54% monthly churn.

The company's anchor client, a growing restaurant chain, what? Currently contributes $11,621 a monthly revenue and is secured under contract through 2031. This restaurant chain plans to expand by 10 locations annually generating $587 a monthly revenue for each location. The guaranteed payments from this contract alone are worth $1.7.8,000, million in net present value using a 12% discount rate. The business runs efficiently, needing

only 20 hours per week to manage. Each customer pays an average of $327 monthly, with text messaging services bringing in $500 per month for some clients. The system is fully built and requires a minimal ongoing development. Growth opportunities are straightforward, build a sales function, expand the text messaging service, which needs no technical integration and partner with more POS providers. A previous postcard marketing campaign successfully brought in several multi-location clients showing the potential of direct marketing. This is ideal for a buyer with a sales background looking to acquire a proven platform with loyal customers. The founders will provide comprehensive transition support, including ongoing technical assistance from their development team.

Enterprise integration ready, low operating costs. It is based from somebody's home, and the owners will provide 30 days of transition support, and the owners would like to focus on other businesses and is currently home-based. So Heather, what do these guys do exactly? Like, who are their customers? It seems like it's the software. that runs a loyalty program for retail businesses. I mean, they're pointing out a restaurant as their biggest client. So I'm imagining it's some kind of, you know, it works best for retail businesses.

I'm not sure how they get seven-year contracts. And I'm not sure how I have to get my calculator going to figure out the customer lifetime value and sort of how they're saying that one contract ends up being worth $1.7 million. But it sounds like, you know, they've got a nice little platform for reward, programs and I like I like that they pointed out here that this is a good opportunity for someone with a great sales background. So I think that's that's nice that they're pointing out like what kind of buyer this might be suited towards. But do you think I got that right? I think so. Yeah,

I think that's right. I'm a customer of platforms like this. Okay. So a lot of them like one of the businesses I'm involved in just went through and put together a loyalty program. And we ended up going through our point of sale system. Mm-hmm. The point-of-sales, the point-of-sale systems have started to add these to their platforms. They're not separate anymore. So this is like an independent platform that you would sort of try to integrate to your point-of-sale. And you're saying the point-of-sale systems are sort of, they brought it under the same roof

in-house and they're offering it to their clients for a little add-on fee. Correct. Yeah, you want this, you want this as a consumer. You'd like it to be integrated with your point-of-sale. sale because then it makes it really easy to kind of track customer behavior, you know, tie them to credit card numbers, all that kind of stuff. It makes it really easy to do that. And then it shows up in a single dashboard, which is also very slick for you as kind of the ad.

And cost wise, was it about the same? Like, did you compare your point of sales version to something like this? Well, we use Square in that one. Okay. Like Square just has it as part of the thing. I think we pay you pay whatever. It's like $20 a month extra. So it's cheaper.

So it's like it's integrated and it's cheaper. So that's the competition for this kind of business probably. Yeah. I think this is getting, I think this is all getting bundled into at the low end. I mean, that's what's happening as you go around like every point of sale system is either like stripe, not stripe. They're square or clover kind of for generic point of sale. at the low end. And then there's the industry-specific ones like Toast for restaurant.

Toast has one they include as well. And then I think Toast also has third party that plugs in as well for loyalty. But they try to push you to their loyalty program. Oh, so they offer both. So their platforms sort of open and you can use another solution that is integrated or there's. That's cool. But it sounds like this is a pretty crowded space then. It's a crowded space, but a big space, right?

Yeah. Like you have every retailer trying to do loyalty and stuff. It's a natural, like, you know, growth way to, you know, get more spend out of your existing customers, right? And market to them. So it's, I would say it's a crowded space, but it's like a big space. Like, everybody wants to do this. Right. So when they say $25,000 customer lifetime value, that's per.

It can't be the consumer themselves. That's the customer is the, is the retail business. When you, yeah, so that's computed in SaaS land. And this is a great opportunity for me to quote it incorrectly and for people to hate on me. But like, nice work software boy. But basically when you look at your, you look at all of your, your ARR customers, right, and your recurring revenue customers. And you say, okay, on average.

How long does the customer stay around and how much do they pay? The LTV is lifetime value, right? And that tends to be $25,472 when you do the math of their recurring revenue base. Okay. All right. And so how did they get to this 1.7? Where is that? Where they said they have one contract with the restaurant chain that's growing. There it is.

So they think that the guaranteed payments from this contract are 1.78 million. in net present value using a 12% discount rate. So help me, let's try to figure out this math. How did they get there? So what they did is they took the total payments for the remainder of the contract, and then they discounted that based on a 12% discount rate using the net present value formula that you can find inside of your Excel spreadsheet. Or if you were old like me, an HP12C.

Anybody that old? Yeah. In Excel, you know, you just, well, first thing you do is you go, if you don't use it that often, you go Google, how do I compute net present value in Excel? And then you open it up and the first link shows you how to do it and you go put that into, you go put that in Excel. But basically, like you assume a 12% cost of capital, so a 12% discount rate. And the formula will tell you, okay, if I have payments that are monthly over the next seven years to this one client, then that, those, if somebody were to value the cost capital at 12%, then how much would I pay for that in terms of a net present value?

Okay. And that's 1.78 million. So they're asking a million $650 for this business, which I figured was about six times cash flow, the 275 and about 4.4 times ARR, which seems low as an ARR multiple. And it's suspiciously close to this 1.78 value of this contract. So it's almost like they're trying to sell the business. for a discounted even below the value of this one contract. What do you make of that?

Well, here's the big problem. It talks about the company's anchor client, a growing restaurant chain, currently contributes $11,621 per month. If you multiply that out, that's $139,000 per year. The business does $397,000 in gross revenue. That means $140,000. of the 400,000 they take in each year comes from one customer. One customer. Big concentration.

Yep. Yeah. So usually I ask, you have your HP calculator. I usually ask Bill D.A., my calculator. Yes. That's 35% of revenue comes from one client. Yeah. Yeah.

So that's too high. And when a bank looks at it, when a lender looks at it, their threshold for too high of a customer concentration is usually 20%. percent. So 35 is way up there. It would make it very difficult to get a loan. And when the cash flow isn't very big in the first place and then you add on a concentration like that, it really, I think it makes it pretty tough. You're really, most of your business is tied up in one customer. And that's not something that feels very safe, especially when it's a restaurant business. I hate to say. Yeah. It's not like these guys are like selling CPA services or something that's durable. It doesn't go out of business.

No. It's a restaurant chain. Yeah. It doesn't never go out of business. What could go wrong? Right. And that's why I was kind of wondering, this lifetime value over whatever they said, eight years or seven years, whatever it is. You know, the business might not even be around that long, the restaurant. No. TGI Fridays went bankrupt.

Like, how so. I hated that case. So I'm not surprised. I mean, it's totally fascinating how TGI Fridays has gone bankrupt and Chili's is absolutely killing it. That is strange to me, but not to you, but to me. Yeah. There was a funny article, you know, because I'm a YouTuber now. Yeah.

I was looking for YouTube ideas. And one of the things that came up was McDonald's Q4 sales were really bad. Like they went down a couple percentage points. And I went to go figure out, like, I was like, what's happening here? and like I started to read comments and then there's an account that's one of my favorites on on Twitter called McFranchisee. It's McDonald's Twitter account, the guy who has franchises. So his thing with Q4 being bad for McDonald's was they had either a Listeria or an E. coli outbreak

and their onions from one of their minority suppliers. Yeah, yeah. And that caused people to not go to McDonald's. I didn't know about it, but he said that was a big deal. I did remember seeing that in the news. Yep, they did. Because at first they thought it was the meat and then they realized it was the onions. Right.

Yeah. So there's that, there's that activity there. But one of the comments, then I went to Reddit, which is the other place where I figure out what's going on. And one of the comments on Reddit was the person there, people there were talking about how, why would you spend so much money at McDonald's? If you could go to Chili's, spend about the same amount of money and have a nice sit-down meal and in a good restaurant. And so whatever Chili's is doing is totally working, just from everything standpoint. For the price point, you get a better experience, right? Makes sense.

Yeah. I mean, it's hard to beat. It's hard not to beat McDonald's. For experience, yes, for sure. Or anything, actually. All right. So this is a, I mean, do we think this business only serves restaurants? I mean, can you have a loyalty program software that kind of works in other kinds of

businesses or do you think it's mostly quick serve restaurants? Hey Michael here and for just a few seconds, I want to tell you about my company Mir. Before 2020, I thought what a lot of people do, that hiring global talent wasn't something I could do and it wasn't serious enough for my small business. And I also assumed it was just call centers and low level employees. But then I started a company with my colleagues, Franco and Hayden, and realized it had been taking too small. There's incredibly high-level talent all over the globe. And for those jobs that are hard to hire for like accountants or CPAs, there's suddenly no shortage of top-tier candidates when you search well everywhere. And I saw a need for international talent and a bunch of my companies, and that's where I started

NIR. So they can help you too. They can make you a list of high-quality Latin American candidates for any role and then deal with all the red tape of hiring them. So go to Hirewithnear.com slash AAPod to get 5% discount on your first hire. That's hire withnear.com slash AAPod for a 5% discount on your first hire. Tell them we sit in you. I would guess that this whole thing is totally optimized for one or two customers.

Yeah. This feels like a consulting business that somebody has packaged up and, you know, bless their heart here at Quiet Light. I wish I had the gumption these guys too. And I said this is a SaaS business. In reality, this guy or gal running this business out of their house has one customer and a bunch of little customers. And like, yeah, I think this is this is not a SaaS business.

This is a consulting business. Right. And they say they're only working 20 hours per week. So they're probably doing something else, the other 20 hours or more. That's because they don't have four customers. Well, right. They're not trying to get more customers either. You know, that's, I guess, the other side of it. They're not out there pounding the pavement. And that's why they're saying a salesperson could buy this and do better. But yeah, it sounds like it's a side hustle almost for somebody. And they're trying to sell it as a business. And to your point, it's it's a pretty competitive space. And you're going up against the. point of sales systems, which is a pretty losing, big losing proposition sounds like to me. Who, I mean, who in their right mind is starting a restaurant and going to use something that's not optimized modern technology for restaurants? Like, you know, that's toast, square is good with restaurants, and there's a handful of other ones that are totally focused.

They have all this integrated. Stuff just works. Like, who's buying 16-year-old technology like this way? Like, there's just such massive head. wins for this business, which I understand why they're selling it. Yeah. And speaking of 16-year-old technology, I think that's an interesting point. Technology is changing so quickly. And even the way we build the software now isn't so much about coding and hard-coding things. It's, you know, you've got all these platforms where you can

sort of do no-code and other ways of getting at the same result. So if you're a consultant, it feels like it would be easier than ever to build this yourself, you know, rather than buy it. It is interesting to watch. There are a bunch of groups that are spinning up AI-centric dev shops to just go and attack existing, like, what's in the industry called CRUD apps, like create whatever, update and delete, like just basic, your basic SaaS app, like going in and just trying to go and steal all that recurring revenue from businesses by just recreating. it from AI folks. And the time frame to recreate it now is tiny versus what it took, you know, originally to build it, right? A million percent.

Yeah. Yeah, there is, I mean, there is a future in which somebody takes Figma drawings of their application and records a loom of exactly what they want as a user. Yeah. And 45 seconds later outspits an application that. runs on your phone and is ready to go and has a database deployed. Like that is coming. Right.

No programming required, you know. So it's all about the design and the subject matter expertise now and not about the investment in coding and building from the developer side, right? That's the thesis. That's the thesis. People are trying to. Yeah. You know, there have been hundreds, if not thousands of groundbreaking technologies that are

going to change everything right now come out of Silicon Valley. And then a decade later, you're like, wait, we're still driving these cars. Like, what are you guys talking about? Like, I thought we were supposed to get self-driving cars in 2014. Why am I pressing the brake pedal? Like, this is not right. It's hard to predict the future at any time, but probably even more difficult now. But I guess my sense is I would be very reluctant to buy anything that's supposed to be

SaaS right now. I just, I think my working theory. is a lot of these little businesses are going to come to the market right now because of what you just said, the fact that there's really no moat anymore. Yeah. I mean, the thing I'm more scared about here is it is just a matter of time until this exact offering, it should be part of it. It should come with your point of sales system. Why is it a separate thing? It makes no sense what's her.

I'm more scared of that than I am the technology disruption here because like I think you look at once technology like this, gets adopted and it gets put into the use and customers. Like it doesn't, it takes a long time to get pulled out, right? Like there's people, like one of the stories I like to talk about is USAA, who's big insurance, you know, and auto insurance like here in San Antonio, like, the rumor was like 10 years ago, they still had like 400 people working on mainframes doing COBOL. Like that's how they're the background of all.

So like this stuff just stays. around for longer than people expect. Yeah. Because, and the reason for that is because when you have something like this that works and it's installed in that restaurant chain, the last thing those guys want to do is rip it all out and just potentially disrupt the whole business to save 20% or 30% in SaaS revenue. Right.

So the legacy systems will be there for quite a while. That's what you're saying. Yeah, a lot of these systems will live us for a long time. You know, I am more worried about the customer concentration with this one. and the fact that it's going to take me five or six years to get my money back. And I hope that restaurant chain doesn't go out of business or have a McDonald's eco-lis thing happen. Like, look with that.

And you probably can't grow. Like, to your point, you can keep the customers you have for the reasons you just said, but how are you going to sell new customers when there's better stuff? Right. Or the point of sale or where. Yeah. So you can't really grow. You've got to hold on to the customers you've got.

Maybe that's the easy part. But, you know, are they going to. to even be around and you've you know you've paid six times cash flow that's what they're asking anyway here um yeah that's six years what's the world going to be like in six years i don't want to try to predict that so here's a fun one would you consider this business if there wasn't the horrible customer concentration let's say they know customers more than five percent of their business would you consider it then still probably not at six x cash flow you know i i would maybe at 4x because even if it trails off over four years, there's a kind of a scenario there where you

still make money. You know, there's the leading edge and the bleeding edge. This is maybe like the bleeding edge and there's still a thesis there where I think you can, at the right multiple, you could still make money, but not at 6x, I don't think. I mean, one thing that people in SaaS do all the time is buy SaaS businesses and then raise the prices. I don't think you can do that here because they sign long-term contracts with these folks. Oh, that's right.

The other side, the downside of long-term contracts. Correct. Yeah. Correct. I do have a rant. Oh, I do have a rant. Oh, please.

I've been wanting to do. Oh, my goodness. Come on. So there are all these neckbeards, by the way, that want to do, have this dream of software where you pay once up front and then you own the SaaS app and you get to use it forever. And like people are starting to do this as business models, like where it's like, okay, you pay us $500 and this SaaS app is free forever for life. Oh, like it's a lifetime subscription, if you will.

It's a lifetime subscription, but it's a SaaS app. Like it has to, it only works if the people who sold it to you keep it running for some period of time. And like it is the dumbest. It's the dumbest like, are you guys from planet Mars like idea I've ever heard? Because the problem is what you give somebody all your money. Like, the threat of you leaving is what makes them keep it running and keep it going and evolving the thing. But when you give all the money up front, suddenly every incentive somebody has to keep up and keep giving you good service like disappears.

And it is just the dumbest idea I've ever seen in my whole life. And I know people are doing it. I mean, what's the price point when they have to buy it like that? It's pretty expensive then. There's like there's an example that I've seen recently that's like from the base camp guys. guys. Okay. They're pretty amongst the neck beard community.

They're pretty highly, highly considered. And basically they've said, okay, like you use this community software. I think it's campfire is what they're doing. And it's like, okay, you pay us up front like $1,000 and you get to use it forever. And it's just like, well, how do I know you're going to care about this three years from now when I standardize my whole business on it? Like you don't. Yeah.

You just have to trust they're nice guys. Well, that's kind of like one of the comments in here saying it needed minimal development. I mean, let's see, yeah, requires minimal ongoing development. I never believe that one. I hope nobody does, because that's not true. If you're going to keep your customer, like you said, you need to keep developing. However, they kind of did that with this long-term contract. They kind of did something similar to what you said, other than they didn't pay up front that they did sign away their lives for a long-term contract. And that does create a little less of an incentive for them to continue to develop the app. So. All right. Well, I hate it.

Yeah, I think I picked a bad one. Sorry. No, it makes it. Well, I like this deal because, I mean, I've talked about every episode needs to be a story. And like, we found the plot twist. The plot twist was they only really have one big customer. Yeah. And like if that one goes away, you're absolutely screwed.

So Cliff Hager. Thumbs down. Fuffs down. All right. Well, cool. It's a great episode, Heather. Happy you. So the other dudes weren't here.

but they were busy applying beard, their beard cream and making money. I should try to do that too. All right, everybody. We'll see you next week.