The Do's and Don'ts of Selling Your Company with Thomas Smale

Courtland Allen 7s

Hello everybody, this is Courtland Allen from indiehackers.com, where I talked to the founders of profitable internet businesses and I try to get a sense of how they got their businesses to where they are now, and what's going on behind the scenes so that all of us can learn from their example. Today I'm talking to Thomas Smale, the founder of FE International. Unlike most of the interviews that I do here, I think the story of what Thomas's business does, and how they do it is just as interesting as how he created it. FE International is a website brokerage or an M&A firm for internet businesses. So they help you buy and sell businesses online. In this episode, Thomas and I get into some of the nitty gritty behind how to determine exactly how much your business is worth and how to maximize the value of your business and prepare it for a sale to a potential buyer. This is also super interesting stuff, even if you're not necessarily in the position to sell your business any time soon. Primarily, just because it's fun to hear stories about people selling their businesses for hundreds of thousands, if not millions of dollars. On top of that, there are very few people on Earth who are more qualified to talk about this than Thomas. So without further ado, I present to you Thomas Smale. I'm here with Thomas Smale, the founder of FE International. Thomas, thanks for joining.

Thomas Smale 1m 17s

Thanks so much for having me on Courtland.

Courtland Allen 1m 19s

FE International is a website brokerage. Can you give us an overview of what that means exactly and what you guys are up to?

Thomas Smale 1m 26s

Yeah, sure, we primarily started out as a company that helped people buy and sell websites and then as time's gone on, we've become more of a traditional M&A firm. If you're familiar with M&A or mergers and acquisitions, then we're essentially work with people who own SaaS, e-commerce, or content-based businesses. Walk them through the process of valuing their company initially, work with them to increase the value and eventually sell. And then we do exactly the same thing on the buy side. We work with people who are looking to acquire companies and match them up with businesses we're representing and help them through that acquisition process. Work with both sides of the transaction and make deals happen.

Courtland Allen 2m 13s

When you say that you guys started off just helping people buy and sell companies, but you've become more like a traditional M&A firm, is the part where you actually help founders increase the value of their companies leading up to the sale is that the part that's more like a traditional M&A firm?

Thomas Smale 2m 28s

Yeah, we very much position ourselves as an M&A firm rather than a website brokerage specifically. I think the key points of differentiation, aside from just the semantics, are firstly, we very much are advisors. We're not just a transactional-based firm. We work with people, help them increase the value, and while we get paid the vast majority or all of our fee when the business actually sells, the process for a lot of people selling is multiple months or multiple years of preparation and time spent speaking, working with us until their at the stage where they can get there. The other side of things is like, a team as we've grown, the vast majority of people who work in transactional worlds at FE International, come from a background of investment banking, or high end consulting, or from accounting firms, or a legal background. We have the kind of team you'd expect to find in an M&A house, like a Baker Tilly or a Goldman Sachs, rather than the traditional business broker model, where it's a little bit more like selling real estate and you're dealing with a slightly different type of person who might be in that role. I'd say they are the two main points of differentiation. It's really just the team. Where our head count is only around 28, nearly 30 people at the moment, we provide the level of service you would hope to see in an investment bank with 10,000 employees.

Courtland Allen 3m 55s

You guys started in 2010 right?

Thomas Smale 3m 58s

Yeah, that's correct.

Courtland Allen 3m 59s

Five or six years ago, I'd never heard of you but today you guys have actually represented lots of people that I know personally, in selling their own businesses. So just to name a couple, Moritz Dausinger, who I had on the podcast a couple of weeks back, you guys helped him sell Mailparser. Patio11, one of the very first people that I interviewed for Indie Hackers, you guys helped him sell two of his businesses, both Bingo Card Creator and Appointment Reminder. I think it's safe to say that you guys are kind of a rocketship in terms of going from nothing to being the only name in M&A for online tech businesses that I even recognize. Can you give us some context of how fast you've grown and what your revenue numbers look like?

Thomas Smale 4m 36s

Yeah, so, we've pretty much started out in 2010 and the reason you may not have heard of us in 2010 and 2011 is we weren't primarily an advisory firm then. We were more like a coaching business. We bought and sold businesses for ourselves, and we had a book teaching people how to buy and sell online-based businesses. And off the back of that we worked with a lot of people who teaching them the process, from there, we pivoted into pure M&A, when people who learnt from us said, "Hey Thomas or hey guys, really like the course, but I'm trying to learn how to sell a business but it's not really my thing. Can you just do it for me?" We started, informally, and then more formally representing people who wanted to sell their business. While they might be quite happy to read a book on doing it, working with a reputable advisor, has a lot of advantages over trying to do it yourself, even if you technically understand the process. That was kind of the story behind it. In terms of since then, we've pretty much doubled most of our metrics every year since. We don't disclose our company revenue on an annual basis, but it's in the seven figure range. In terms of the number of deals we've done, in terms of transactions, over 100 million dollars in total deals now. At the moment we have a team of 28, and that's quite consistently growing. But yeah, revenue in the seven figure range, doubled pretty much year on year.

Courtland Allen 6m 13s

Yeah, that's huge. I mean, that's exponential growth. That's ridiculous. We're going to get into the story a little bit of FE International and some of your advice for people who are looking to buy and sell their companies, but I'm always interested in the story before the story, so to speak. Kind of your personal story as an entrepreneur. When did you first suspect that you wanted to be an entrepreneur and when did you start buying and selling businesses yourself?

Thomas Smale 6m 37s

I was always interested in the idea of running my own business. I'd had jobs when I was a kid before, so it wasn't like I was the cliche' I had a lemonade stand when I was 9 and have never done anything since. I did a business degree at university and or college. And as I was going through that I think I realized that I was always interested in business but the idea of going to work for big corporate company didn't really align with what I wanted to do. I figured, "Hey, why not start for myself and actually build something good." While I was at college doing an internship actually, at an investment bank, I think I was earning enough from the investment banking internship that I could start buying and selling things for myself. Like lots of people at college, making extra money was always a priority. Whether it's things like started out on places like ebay, just trying to flip small things and make a little bit more, and then transitioned into websites and domains at the time, where I realized you could buy a thing for $50 or $100. Now I don't have a technical background at all. I can't write one line of code, do have programmers and developers who work at FE International, but that's not my thing. I very much figured you could buy a website, make it look better, both in terms of like presentation and not just aesthetically, and then it sell it on for a profit. I started doing that with very small businesses. And we're talking like a $100 into $1000 and then continued going from there.

Courtland Allen 8m 20s

$100 or $1000 that you paid to buy the business or how much monthly or yearly revenue?

Thomas Smale 8m 25s

Yeah, exactly, so like say buy it for $100, sell it for $1000.

Courtland Allen 8m 29s

Where were you finding these websites?

Thomas Smale 8m 31s

Just various marketplaces, forums, various places on the internet where people would be selling. I was just buying them privately, making them look a little bit better, selling them on. And that's something that we've always consistently done, so we now have a separate fund that we run where we invest in primarily SaaS based companies and the acquisitions we're doing in that business with our money is still in the seven figure range. Come quite a long way since the days of putting a hundred dollars on the credit card or whatever it might be, but we've always invested in what we do. We're not an advisory firm that don't also buy and sell ourselves. The company's been based off the fact that we have the experience. I would never tell a client to do something that I wouldn't do myself, and I think that's part of the reason we've been so successful. There are lots of advisors, coaches, or whatever you want to call them out there, who tell people how to do things but never actually done it themselves. We very much been based off this is stuff we've done. I'm only teaching or talking to people about things that I've done myself and would do myself and would invest my money in. Don't think it makes much sense to work with an advisor who doesn't actually practice what they preach in terms of industry or business model, whatever that might be.

Courtland Allen 9m 51s

Yeah, I totally agree. I mean, not only does it make you more trust worthy to clients-- I mean, who's going to trust somebody who won't do what they're saying to do. Won't put their money where their mouth is, but at the same time, and this is sort of classic advice for business owners, you kind of want to stick to things that you know well and the easiest way to do that is by solving your own problem. In your situation, since you had experience buying and selling businesses, you were learning a lot more than somebody who, let's say, had none of that experience and just decided to start a website broker or an M&A firm. At what point during the process of you buying and selling your own websites did you decided that "Hey, I want to actually start helping other people do this and I want that to be my company?"

Thomas Smale 10m 29s

Yeah, so off the back of the book, so a lot of the idea of doing a book was born with buying and selling for yourself, particularly when you're college and don't have any money. There's a real limit to how much income you can make to pay rent and things like that if you are fet you have a hundred dollars, you turn it into a thousand. While like on paper as a percentage that's a fantastic return, in absolute terms it doesn't really get that far and it puts a lot of pressure on continuously doing transactions and turning businesses around in a week and as it scales it becomes more and more difficult. You can't say, buy a business for $10,000 and sell it for $100,000 in a week, whereas you can do that between say $100 and $1000. As it gets bigger, it gets exponentially harder. The start was really by accident and I teaching people how to do it. We were helping people learn how to do the process and then they came to us and said, "Hey, can you help us?" The real pivot and transitional point was in 2012 where my current business partner and CEO of FE International, Ismael joined the company. We went to college together. He went into investment banking after university. I set up FE International and then he came in and I got to a stage where I said, "Hey, Ismael I know about the online stuff. I'm quite entrepreneurial, we're making some money. I have a small team, but I don't know how to run a business. I don't really know the formal side of the advisory world." It gets to the M&A, which he had been working in and he had go to the stage in his career where, he wanted a little bit of a change. His background was very much billion dollar M&A deals, he joined in 2012 and the first thing, the first major change he made was, "Hey why are you messing around still doing thousand dollar deals when you've got people-- Thousand dollar deals for yourself when you've got people coming to you with six figure businesses and you charge them, say 15% to help them sell it. And that's actually what you're good at." From then on, we focused very much on the M&A side of things and kind of gradually became our main source of income. Whereas prior to that, I think I was that classic entrepreneur who kind of did a little bit of everything and even when I'd found something that was working well, wasn't really a massive focus for me.

Courtland Allen 12m 58s

One of the things that's intimidating about doing stuff like this, at least from an outsider's perspective, is that M&A deals, buying and selling businesses, it's pretty intimidating. It seems like a lot of paperwork, a lot of drudgery, and often times that drives founders away from a particular business ideal but on the flip side, that means there ends up tending to be slightly less innovation and the competition in the particular space so it could be often these drudgery type businesses are the best businesses to get into. A good example is my business, my employer Stripe, who is in the payment space. While today Stripe is like an extremely fun place to work with a ton of challenging problems for engineers and non engineers alike, in the early days of Stripe it was mostly just conversations with bankers, you know, and filling out paperwork. When you started FEI, what were some of the things that you had to learn to kind of get over that initial hump?

Thomas Smale 13m 48s

Lots of different things. When we started out, the service was a little bit more informal, it was very much kind of like we will help you with the process, whereas we're now very much a full service M&A firm. We do absolutely everything for people, other than answer questions that people have. We put together everything. We value the business for them. They're not really expected to do anything in the process other than answer our questions and answer buy questions that are kind of handled by our team and directly with buyers. There's lots of different things you have to learn as you go along. One of the biggest challenges working with small business owners particularly, is financials a lot of small business owner, or even big business owners, don't do a very good job of keeping track of their financials, so we still to this day, spend a lot of time with people helping them get their financials into order and kind of organizing P&Ls. This is one that comes with time as well, but I ask lots of different buyers ask lots of different questions but there's a lot of similarities. When we now work with a seller, we can ask them very early on the questions we know that are deal killers for the vast majority of buyers. There's been a lot of things we've just learned purely through the fact that we've done more and more deals and that really just comes with time. But you're right the advistory world isn't really the kind of industry that has a lot of innovation so one of the things we've done since day one, to make sure we kind of keep ahead and stay very different, last year we won and the year before actually, we won IDBA and IBBA set to the broker association for business brokers and M&A advisers in North America and while we're a very much an international company, as the name suggests, we do a lot of business in North America and that prize is given to the company that does the most deals in terms of volume in North America. In terms of volume, we're very high volume as far as M&A advisers or business brokers go. Part of the reason for that is we've used technology to our advantage so traditional M&A firms still do a lot of things by paper, by hand. They might be using things like fax, whereas we built our propriety CRM, which is similar to sales force in terms of what it's for. It's very much the same we use to manage our pipeline of leads to keep in contact with. Leads to allocate work internally, to keep track of our processes and SAPs and make sure things are very consistent. We learned very early on that you have to standardize these things, but you can also use technology to help manage those kinds of processes. That's something in any business could be applied, putting good systems in early on and leveraging technology to your advantage is a way to get ahead of competitors in a space. For example, like ours, where the traditional M&A advisors are still doing things the old school way they've been doing it for 20, 30 years. You can get ahead without really having to reinvent the wheel, just by making some simple improvements and leverage technology.

Courtland Allen 17m 17s

I think that's an excellent segue, kind of away from the story of FEI, and getting more into a discussion about buying and selling businesses, which I really want to talk about because I've got you on the podcast and obviously, you're an expert here, and this is a topic that most entrepreneurs don't know anything about. Ultimately, the people who end up selling and buying businesses are themselves, entrepreneurs, but the vast majority of businesses either die before they get to the point where they're viable to be sold, and of course there are lots of businesses that are doing well enough to be able to sell, but their owners, for one reason or another, don't want to sell. You're dealing with the sort arcane knowledge that not a lot of us have access to, so I'd love to pick your brain about a few things here. The first question I have for you is fairly broad, but actually before we even get into it, I want to make sure that listeners understand this conversation is relevant to them. In your opinion what is the smallest business worth selling?

Thomas Smale 18m 9s

That's a good question. For us, from an advisory perspective, we want businesses that make at least a thousand dollars MRR assuming they're SaaS. We have a minimum fee of $5000, so that basically means the deal that makes sense for us and makes sense to someone who's selling. You can certainly sell something that's smaller that that, but I'd say any smaller than that, if you don't have any traction, then you're very much selling a project and it's much more difficult to put a reliable valuation on it which is important for us on a standardized basis.

Courtland Allen 18m 44s

And let's say I have a business that's doing a $1000 in month recurring revenue, just sort of ball park, what kind of range would I be looking to get for that if I were to sell?

Thomas Smale 18m 54s

Yeah, so it depends on the cost base. Generally speaking, multiple ranges if you're profit or SDE...

Courtland Allen 19m 3s

And what is SDE?

Thomas Smale 19m 4s

SDE (Seller's Discretionary Earnings) is effectually the net profit of a business and then we add back, or exclude or effectively adjust and then the owner takes in the business or at any one time costs. The most common add back or adjustment is the owner salary. If you're paying yourself a thousand a month or ten thousand a month from the business, then that's very much standardized and the reason we do that is to take into account that different business owners have different needs and it wouldn't be fair for the person who had a smaller salary to have a business worth more than the business owner who takes a bigger salary if all the other variables are exactly the same. That's why it's standardized, so once you have your effectively SDE number, we then apply a multiple to that using a proprietary valuation tool we built, which looks at variables and past deals. The average small SaaS company, so I guess the caveat for that would be below a million dollars in ARR, is going to sell for somewhere in the region of three to six times annual SDE. To use an example of say making a thousand MRR. A lot of the small companies at that level we see have very little in the way of costs. So you might be making say, ten thousand a year in SDE, that business is probably going to be worth anywhere from 30 to 60,000 and then you could apply similar logic to say, $10,000 MRR, probably going to be in the 10X up. So, 300,000 to 600,000 range.

Courtland Allen 20m 43s

Okay, that makes a lot of sense and I think another question a lot of people listening may have is when is it worth selling my business? Because there's lots of variables to consider. You've got the health of the business, you got your passion for actually running it, whether or not you enjoy your job as a founder, there are market trends to consider, whether or not your particular industry is trending well and it has a rosy future. What do you say to people who come to you and ask whether or not now is a good time for them to sell their business?

Thomas Smale 21m 10s

Yeah, I would say to people about that, that it's very much a personal decision. One of the things we'll always do is help people put together a valuation for free. And like I say, right at the beginning of the interview, we're talking a little bit about what is an advisory firm and the role of that means giving someone something, in which case it's a valuation and then we work with them to establish when the best time for them to sell is. For some people it might be, "Hey look, we valued your business. It's worth one million dollars." And they say well I want two million dollars. We're not going to then just going to adjust the valuation and say alright, we'll try for two million dollars. We know what the market says and we don't obviously want to waste people's time or our own time on something that's not going to happen. But we'll say "Hey, here's some things you can go and work on and then come back." Right at the beginning you mentioned Moritz, who sold his business and was on the podcast recently. The conversations with him started many years before he finally decided to work with us and that's very common with a lot of our clients. When it's right to sell really depends, in Moritz's case for example, it was he had another project that he wanted to focus on and releasing some cash was important. For other people, it's maybe a family thing. Some people have kids and they decide, well actually, I want to spend some more time with my family now and that's a bigger priority. Other people, particularly those who have small businesses, they might be working full time jobs still. For them, it's "Hey, I've got a new job and I now no longer have the time to run this." A lot of clients we deal with, they'll sell their business so they can pay off their mortgage. Lots of different times. I never, or no one in our company, would ever advise someone on the right time for them to sell. It's really very much what do they want to achieve. And most people have a time based goal or a value based goal. It's hey I want a million dollars, I want two million dollar, ten million dollars, whatever that might be. Or I want to sell the business by the end of the year.

Courtland Allen 23m 23s

I'm sure you get, well let me ask you, do you get a lot of people who have only recently decided that they want to sell their business, so they haven't yet taken the time to get it in the best of shape?

Thomas Smale 23m 34s

Yeah, that happens a lot. One of the reasons is I do a lot of podcasts and a lot of speaking and publish a lot of content, I would say we would talk a little bit about how things have changed over the years. Definitely noticed in recent years, people are getting better educated. There's a lot more content, particularly from us out there, if you want to sell, and the kinds of things you need to be doing to repair. I do find that a lot of people, I guess particularly people who listen to podcasts like this, are actually trying to improve their knowledge so we have less people than we used to who just turn up with zero knowledge tool. I mean, I really does depend on the business. Some businesses are really well run and no advice from me is going to make any improvements to it and then there are other companies that just aren't sellable. We're always very honest with people. We put together a valuation. Sometimes it might be that actually we don't think this business can be sold or we're not the right set as an advisory firm. One of the reasons we have such a good reputation, this is very much been built on honesty and integrity. We're not going to tell someone we'll sell their business if we actually can't. It's quite honestly just a waste of everyone's time in that respect. We'll just be honest with people. There's no right or wrong way to do it. A lot of businesses that people think aren't sellable are actually very sellable. There's lots of, literally tens of thousands investors looking to buy profitable SaaS based businesses particularly. A company that someone might not think is very interesting themselves or they've given up on or haven't really spent much time on recently, doesn't mean there's not going to be someone who's not interested in acquiring it.

Courtland Allen 25m 19s

Are there any notable stories that come to mind for you or any examples of somebody who thought their business was in disarray and had no chance of really doing well but you guys were able to turn it around for them and sell for much higher than they thought?

Thomas Smale 25m 32s

Yes, to say in terms of disarray, say that might be slightly hyperbole in that respect. But I mean, without naming names, I can talk about some businesses. A good example would be say, Patio11 or Patrick McKenzie as I know him a little bit better. When he sold his first business with us which is Bingo Card Creator, I remember having the conversation with him and I can talk about this one because it's public knowledge. Whereas 95% of the deals we do are always confidential in terms of who the buyer was, who the seller was, what the business was. If you're someone like Patrick, is kind of unavoidable that people are going to figure out you sold. He was surprised that there was such liquid market for businesses at that level because for him it had been a little bit of an abandoned project, like it very much got him his start online and started building his reputation but as a business itself, it wasn't big enough to sustain himself and his family. So I think he was surprised that that business was sellable. It wasn't necessarily that we did anything in particular to change the business but we could bring buyer demand to the table and find people who were very interested in buying a business like that. I think it does surprise a lot of people the kind of buyers and people who would be interested in buying their business, even if to them it doesn't necessarily tick the boxes they need it to. I think that's probably the biggest lesson for people. We're not really the kind of firm that gets involved in just distressed asset sells where someone's business is declining and kind of burning 20,000 a month and then we help them turn it around and sell. We work with successful business owners who are probably already profitable and are looking to optimize that by making more profit, or quite honestly just running a very solid processing and getting the outcome that they thought wasn't possible, which is selling a company that would be challenging, particularly if you try and do it yourself. There's lots of pitfalls and challenges doing that, whereas when you've got tens of thousands of buyers on a mailing list in a CRM, who we speak to week in week out, very possible to sell businesses otherwise couldn't be done.

Courtland Allen 27m 52s

Yeah, you guys are a marketplace business, meaning you've got buyers on one side looking to buy businesses, you've got entrepreneurs and owners on the other side looking to sell the businesses that they've worked to create and I think traditionally, starting any sort of marketplace business where you've got two different types of customer segments is the most difficult business you could start. Because it means you have to understand two problems at once and then build out two different solutions. And then you have to deal with this chicken and egg problem where your platform isn't useful for buyers unless you have sellers and your platform isn't useful for sellers unless you have buyers. You have this kind of see saw effect where you're focusing on one side but then you have to focus on the other, et cetera. And I'm sure this is probably more of an issue for you guys in the early days than it is today, but how have you balanced growing both sides of this marketplace?

Thomas Smale 28m 41s

Yeah, very good question. It's a very good point. While I guess we're not a marketplace in the traditional sense, we still are a marketplace in that we have to match two parties. Going back to some of the things we're talking about earlier, we started out and still are buyers and sellers ourselves so we understand the problem on both sides and have been through the process on both sides so we could create a system and a process that didn't just work for sellers, also works well for buyers. Once you've done enough deals that kind of process continues to refine and improve with time. When we started out, the vast majority of our sellers came to us off the back of the book. So they were like, well this information is really good, these guys clearly know what they're doing, so I want to work with them. And in the same place that you find those sellers, buyers also find you from the same places and then from the sell side, particularly in the SaaS space, and I guess in lots of different industries that we operate within, word of mouth has been a very key driver of new business for us and that's partly because if you're going to sell your business, quite honestly, it's a really big decision and there's no marketing ploy or process or anything my marketing team can do to persuade someone to sell a business more so than a peer they know or respect recommending us. That's always been extremely powerful for us on that side of things. And it works exactly the same with buyers. When people hear the companies have been successfully sold I guess it's in testament to the quality of businesses we work with, when those companies are still thriving well past the time of the deal. A good example of that would be the Drip deal many of you will be familiar with Drip that we sold to Leadpages about a year ago. I was in Minneapolis visiting the Leadpages office, which now has the Drip team in there to celebrate the one year anniversary of that deal closing. Since the acquisition's gone through, the business is thriving, they've grown it, the team has expanded. I think from a buy perspective, a lot of people see the success other buyers have had in space and find you that way. And while we've grown 100% year on year, it's not like we've been growing say, 1000% every year, so we don't have any sort of marketing approach that brings in tens of thousands of new buyers or new sellers. We're not a business that can just turn on Facebook ads and suddenly you bring in a bunch of business. Word of mouth is a very reliable way of building a business but it is also quite slow but once it's going you build up a huge amount of momentum, which means that we get more and more businesses coming in every day and we don't have to do a huge amount to do that. The main challenge for us is educating people. That's the purpose of coming on podcasts like this and speaking to people. More and more people come in and they come in better prepared so their company is more sellable, they're worth more and we have to spend less time educating them on how the process works, what they need to do, what they need to think about, what they can do to make it worth more. That's always been our approach.

Courtland Allen 32m 9s

I think word of mouth is such a great growth channel for anybody, but especially for you guys, cause you're very much a trust based business. People coming to you probably don't know very much at all about how to sell a business and they're putting their baby in your hands, and so when they come to you off the back of a recommendation from a friend or by hearing that a company they trust used you guys and had a good outcome, that does so much of the leg work in terms of taking care of any objections they might have versus if they come to you via a Facebook ad or something else.

Thomas Smale 32m 43s

Yeah, absolutely and a lot of the businesses I see that have done really well. I mean, ultimately, if you have a good product or a good service, people will talk about it. Particularly entrepreneurs. I refer a huge amount of business to lots of different companies and lots of different people in my peer group just from businesses I looked at and like or even use internally. That's always a powerful way of doing it, assuming you have a good way of reaching those people in the first place, which I guess is always the challenge. The first few customers is difficult. From there you can very much just do a really good job of impressing people and then they'll want to work with you and they want to tell everyone about you. It's not like I call up every single client who sells business with us and say, "Hey, hope you had a good experience, can you go tell your friends about us." Because I mean, yes, there are some people who will do that, but ultimately, the best form of word of mouth is saying that I haven't had or my team hasn't had an influence over. The only influence has been the fact that they're really happy with the service we've provided. They think if they're selling they've got a really good deal or they feel like if they've been buying a business through us they feel like the process was good. They feel like the business they acquired was good and they feel like, not necessarily they got a good deal, but they feel like it was fair in the transaction.

Courtland Allen 34m 6s

Let's say I have a SaaS business and I'm thinking about selling, what are some of the most important things that I can do early on to start preparing my company to get a higher valuation than it might otherwise get?

Thomas Smale 34m 18s

Lots of different things you can look at. I would say the very first thing to do is get a valuation and figure out where you're at today. Cause unless you know where you're at right now, it's very difficult to figure out where you need to get to. I think having a very ambiguous target like, increase your value, doesn't really mean anything without any context. What is it worth now and then figure out where do you want to get it to, because the decisions you'll be making and the lengths that you will go to to get there will really depend from there. If you want to turn your business from a million dollar business into 1.2 million dollar business, the things you have to do to get there are a lot different from someone who wants to turn their million dollar business into a 10 million dollar business. There are some things in there that effect value and valuation that you can't really effect other than with patience. For example, the age of the business. There's nothing you can do, other than waiting for that business to be worth more. Then there are things like trends, what is the industry you're in doing. Again, once you've picked your industry and picked the space you're targeting, there's not a huge amount you can do to influence macrotrends in that business or that industry. For example, we've done a lot of businesses that or SaaS companies that target the real estate space. When the real estate market is going well, a lot of these businesses can do really well, but conversely, there are also products out there that would benefit from a recession in the real estate space. There's lots of different ways to do it in that respect, but you probably can't change your target market nor do I think that would be a sensible idea for the vast majority of people who are off the ground and running. Probably one of the most important things that can be done, particularly in a small business where you're doing a lot of the work yourself, is cutting down the amount of time you spend on the business. For argument's sake, you have a SaaS company and you're making 300,000 revenue and then 200,000 in SDE, but you're working 60 hours a week like the vast majority of entrepreneurs do, that business is going to be worth a lot less than that same business where the owner's working five to 10 hours a week. A lot of that is putting systems and processes in place, like I was talking about earlier that's worked really well for us over the years, put systems and processes in place that are repeatable. Hire people in the team. While lots of people have heard about us now, that's not nothing that I've done. It's very much the fact we've got a very good team who can continue to deliver on the systems and processes that myself and Ismael put in place. It's not like we're the ones doing all of the deals and all the work and it's the same in any company. It's really the founder or the CEO's job to kind of leverage the team they have to deliver the service or product if you have a SaaS company and you're not a service based business. Getting a team in place is really important and can help you increase valuation.

Courtland Allen 37m 24s

All else being equal, you think having employees will increase the value of your company.

Thomas Smale 37m 30s

Yes, absolutely. Particularly if that means you have to spend less time in it. I mean, we've seen particularly in SaaS, there are lots of companies where you can have one person managing, say 10,000 in MRR, working half and hour a day, but that is less common than someone who needs someone handling support tickets or whatever that might be to do more. Having a team in place is always a good thing, particularly if those same employees are willing to stay on with the business post sale. No one wants to buy a business where the owner's taking their entire team with them. They're like, hey I'm selling the business cause I'm bored of it. I've got this really great team but I'm keeping them for my next venture, do you want to buy my business? That's not a very compelling story. A lot of the time, from an advisor perspective, it's really helping people position their story a little bit better. It might be like well, yes, the fact that you have a business that you want to move on to and it's not one, it's fine, but taking the team with you is a terrible signal to a buyer, so we need to work on a way that the buyer doesn't feel like they're going to get screwed over when you leave the business. Maybe some of the team stay, ideally all of the team stay. But they're very much things that we can advise them once we've done finished valuation and figure out where people are at. And then there are the more common things everyone talks about in SaaS, so reducing churn rate. Every single buyer in the SaaS base, everyone on their criteria top three things they want, they want the business with low churn. While that doesn't mean a business with higher churn can't be sold, everybody wants business with low churn. Everybody wants a business that doesn't take a huge amount of time to run and everybody wants a business that's growing. Those are pretty universal things that every single buyer would have. The exceptions being buyers who are only looking for businesses that may be like distressed or declining and not really doing that well. But those tend to be the kind of buyers you don't find with advisors like us, because quite honestly as a buyer, you're not going to get a good deal, cause it's our job to maximize value for the seller. Those are the kind of people doing deals privately. I hear from a lot of people who have started doing a deal privately and kind of got messed around in the process and that's because if you are a buyer looking for deals like that, it doesn't make any sense to go through a broker when you can persuade people privately to deal with you.

Courtland Allen 40m 7s

You mentioned the importance of having a good story or at least not having a bad story. Are there any examples that you're able to share of a company that had a really good story that helped itself for more?

Thomas Smale 40m 19s

I touched very briefly on Drip. So Drip, for those of you who don't know, is an email marketing automation platform founded by primarily Rob Walling and Derek Reimer.

Courtland Allen 40m 33s

And for anybody who's never been, Rob Walling hosts Microconf. I was just there in March. It was an excellent conference and it's great for anybody who's running an internet business or thinking about it.

Thomas Smale 40m 42s

Yeah, that's right. Also has a podcast as well, various other things that he does. I think as that business was building, Rob was leveraging his knowledge and contacts in the space to help build the product and he was effectively building a product that people at the SaaS space that he knew so well, people loved the product. And while it's now used by a much wider range of people, he built a product that was great and Clay from Leadpages who primarily drove the acquisition from their stage, loved the product. And while from a buyer perspective, he obviously needed to tick a lot of boxes in terms of, is it financially viable to acquire, do the metrics make sense for us, does the deal make sense? Ultimately, having a really good product is one of those subjective money can't buy factors that if someone really likes it, they'll be more willing to maybe overlook some of the other factors that, if you were purely looking at a deal on a financial basis that might be a little bit challenging. Particularly for bigger deals where, a company like Leadpages, for example, have venture funding and they're very publicly known, they don't want to be seen to acquire businesses that are low quality and kind of people hate it and "Oh like, this product sucks, I don't like it." As an investor, that could be fine. Those businesses could be great. You're like, "Well, I've got a good deal on this, I picked it up for around market value, the customer's kind of like it at the moment, but there's a bunch of stuff I can do." If you're an unknown investor, or relatively anonymous, that's a really good opportunity. Someone like Leadpages, that's way too much of a risk. Having a good product is one of those things that can't really put a value on it as such. It's not like being a good product everyone loves means your worth x times more, but it does mean that people look at it and be like, "Well, I like this business, I want to buy it." Which is really what happened in the case of Drip and Leadpages. Clay liked the product, it was a good fit for what Leadpages have built. It was the perfect time for Rob and Derek to move on. They've got the business, not the biggest they possibly could have got to, but they got it to the size they had done with no outside funding or anything like that. And there does become a time in many businesses life cycle where it makes sense to hand it over or move on to someone who has, or a company specifically, that has more resources and maybe more experience to grow it to the next level. I always say there's in many companies, much like mine, there's a certain type of person who can get a business from zero to say 100,000 a year. That tends to the be the very entrepreneurial type person and then there's a different person who can get that business from a few hundred thousand a year to say, five or 10 million in revenue, and then there's often a different person that comes in between 10 million and 100 million and then 100 million and a billion. Again, talking about Leadpages, like very recently, I think Clay moved aside as CEO to bring someone else in who has more experience growing the business to the next level. It doesn't necessarily mean that Clay sucks or wasn't very good at his job, you just get to the stage where in every business, there's naturally a time where it makes sense to move on and hopefully that's a positive move for the company. And that could also mean in terms of an exit. It could mean, actually we're not going to bring in someone internally to do that, but if Rob could have hired a CEO, for example, and be like well, I want somebody who can take us to 10 million in revenue, in his case it made sense to go down the route of an exit. There are lots of different ways to approach a problem and the real way is to kind of get an accurate overview of where you are. If you don't know what your business is worth and what your options are, then you don't really have much choice. But if you think about these things in advance and plan them, like Rob always very consciously did from day one, then it's no coincidence that he had a successful exit a couple of years into the company.

Courtland Allen 44m 57s

How much work is involved on the founder's side, early on, of just determining and working with you guys to determine what the value is of their business if they're considering selling? Are we talking about weeks of work or a few hours or days?

Thomas Smale 45m 10s

Yeah, we're very conscious of a process of selling. Where in an advisory firm we try to do as much as possible. There's work involved on the founder's side once someone has committed to selling. I'd be lying if I said it's like two hours of work and the company sold. On the valuation side however, before there's been any formal commitment or kind of someone wants to get started, there's a trade off between making a valuation as accurate as possible and making it as easy as possible for the seller. In very simple terms, we tend to look at financials from the last 12 months. In a SaaS business we look at metrics, and there are so many tools out there these days like ProfitWell or Baremetrics, or whatever, that can pull in metrics from things like Stripe, without really need for any time or effort other than installing the app if you don't already, and then a selection of other questions. So, if you have all of your numbers in good order, then there's really not a huge amount of work. I would say less than an hour for almost everyone who wants to get a valuation from us and then from there, it does take more time, but there's no commitment until you're kind of comfortable with the valuation and ready to go.

Courtland Allen 46m 28s

Are there any common mistakes you see people make or numbers that they've left out or forgotten to track that makes it harder for them to get the valuation?

Thomas Smale 46m 37s

I see what a lot of people do tend to do when they hear that a business is valued off of multiple of profit primarily, is a lot of people, well less as the years have gone on, a lot of people start cutting costs in areas that aren't really a good idea to cut costs. For example, you might have a business with two customer support reps and you fire one of them, and then suddenly, yes your business is making more profit, but three to six months time it starts to have an effect on other metrics that will actually decrease the value of the business, like your churn might increase, or people don't quite love the product as much because response times are now a day slower on average. There are less people talking about the product and then there are less people kind of signing up and it starts to grow at a slower rate. I'd say trying to massage profit and make adjustments to make a business seem more profitable than it actually is, is quite common and that's something we always encourage people to avoid. The business you're running, even if you are thinking about selling, you want to have a 10 year goal in mind. You want to make sure every decision you make, is the business still going to be thriving in 10 years based on the decision you make. It's short termist thinking to make adjustments and kind of cut corners just for the sake of making your net income line, which then turns into your SDE, look better. I'd say in SaaS in particular, with the third party tools out there tracking metrics, most people do track those metrics. Doesn't necessarily mean they log in every day and be like "Oh, this is my churn rate, this is my MRR," cause they're not really that relevant in the day to day of a business. You might check them once a month, but they're very easy so set up. From a cost perspective, most people are pretty good at keeping track of what they spend. Where it can get a little bit tricky is if they're in multiple businesses and then we have to combine or figure out-- Let's say they have, to keep it simple, they have two SaaS products and they both share the same server and they pay $1000 a month for that server. We'd then have to figure out pro rata what's it going to cost to run one once the other one is gone. There are some considerations around that and that's why it's important to speak to us as early as possible because these are the kinds of things we'd pick up in our initial questioning and valuation, which may seem relatively minor, but as with a lot of these things, with a little bit of advanced preparation, you can put yourself in a much better position now rather than getting halfway through the sales process and being "Oh, suddenly we've got to move servers that the products on, or whatever that might be."

Courtland Allen 49m 31s

Wow, that part about people firing their customer support reps is horrible. But unrelated, another challenge, or I guess, source of anxiety that a lot of people have when they're thinking about selling their business, is about the code that they've written. Especially if they're a developer founder or even if they're not a developer. Maybe they have a lot of processes going on in their business that only they understand. If you're selling and you don't plan to continue working on the business, how important is it for you to ensure that things are in a state where a buyer can easily come through and pick up where you left off? Is that a problem that you see coming up often?

Thomas Smale 50m 6s

Definitely with solo founders, that's a very good point. Yes. I would say to people, document the code and write it down. Just keep track of what you've done. I would say particularly with solo founders, and rightfully so, from like very good developers, that've done a really good job building a product by themselves. They'll also be competent in their own abilities, but particularly with code, so it's very unlikely you're going to be the best person or the only person in the world who could have developed or programmed the product to the extent that it has been done. If some of those things are documented properly, you want to be at a stage where a competent developer can come in and understand the code you've written and being able to take it over. That doesn't necessarily mean they could have been the ones that came up with the idea and gone an MVP out they got some initial customers and then got it to where it is when you decide to sell, but they want to come into a reasonably mature product, be able to take it over and go from there. I think the key with that is just kind of keeping your ego in check and realizing it's actually a good thing if someone else can come in and kind of take over and do what you do. I learned this lesson many many years ago, where I thought at the beginning of the company, I was the best person at doing absolutely everything. And now, quite honestly, I have a team of 28 people, and I don't think I'm the best at anything. As an employer, that's a fantastic position to be in. I never sit at my desk, well I have to do everything. My team don't know what they're doing. Every person on the team is better at the vast majority of their job than I would be. And that's just an ego thing. It used to be that I thought I was the smartest person in the room all the time and that that was important. While I do think you do need to have that kind of hustle and kind of self confidence starting out to go from say, naught to 10,000, whether that's 10,000 customers, or 10,000 dollars, that's not what builds your multimillion dollar or billion dollar company. It's by building a team around you. And as a developer, even if you're a solo developer, that's just as simple as documenting your code. It doesn't mean you have to stop writing code yourself, but it does mean you have to document things and make sure that someone else can come in and understand it if necessary.

Courtland Allen 52m 28s

We're running low on time here, but I've got a few more questions if you got time, the first is, you mentioned earlier that a typical multiples for SaaS based businesses are in the 3-6X range, what is the biggest multiple that you've ever seen a SaaS business go for and what are some of the factors that contributed to them being able to sell for so much?

Thomas Smale 52m 48s

Can't really go into the specifics, but I've seen some deals where the multiples have been way beyond that and that would often be because they have quite high revenue but they're not particularly profitable. In that case, that could be because they're a particularly good industry or microindustry leading product, like something like Drip, for example, without disclosing the multiple, was beyond what we would see on average, then there are situations where a business might be very high growth, so they're investing into that growth and reinvesting consistently, meaning their bottom line product might not be that impressive but they're growing their revenue 20% month on month. In the VC world, a lot of people talk about SaaS valuations and people hear five, 10, 20 X revenue, and then they come to us and they say, "Oh why is it three to six times SDE?" And the real differentiator there is growth. Often the VC's investing in these huge valuations are doing so because a business is growing at a significant rate and if you're growth rate is say, 50% month on month, it makes sense to keep throwing money at that growth. Whereas if you're a more common client for us, might be in the 2 to 5% monthly growth range and at that level, it doesn't necessarily make sense to be losing money every month. Growth rate is important. I guess the product as well.

Courtland Allen 54m 17s

And it also seems like some of these factors apply a lot more to bigger businesses who are generating lots of revenue as opposed to businesses who are generating a relatively small amount of MRR.

Thomas Smale 54m 27s

Yeah, I think that's the other thing as well. It gets to a stage where if you're doing less than-- We tend to use about a million. There's no hard and fast rule. About a million in ARR or 100,000 in MRR. At that level you probably have to scale that. Buyers might be looking at selling off more than just the profit you are making because you are probably a significant player in whatever niche you're in, or you have the kind of scale-- Chances are if you make $100,000 a month in revenue, you have a team. At that stage it's a slightly different proposition than a solo founder SaaS company making $10,000 MRR, which is quite common for us to see as well.

Courtland Allen 55m 11s

One of the hardest things to do as a founder, I think is to focus on one particular thing. What are your goals with FE International on the long term and what are some of your most tempting distractions?

Thomas Smale 55m 23s

We have a lot of things that we're working on over the next five to 10 years. What are kind of key goal in terms of transactional size and company in general, is a billion dollars in total transactions. And like I said, we're over 100 million now. So well on the way, but there's a lot of work to do in the meantime. In terms of distractions, everything I do now-- I'm an entrepreneur at heart, but everything I do is through FE International. I don't have side businesses or do anything like that. Quite honestly, I've found that just by focusing in on one thing, which in my case is FE International, maybe other ventures that we start or acquire or whatever under FE International, don't do anything separately, and I found that by focusing on one thing, while it might be tempting to start 20 other projects doing different things, you could make a lot more and be a lot more successful just doing one thing really well than you can doing 20 things or five things to a reasonable level of competency. I'd say I've definitely got past the stage now where I have any personal distractions. My passion about what we do and our vision for the future so I don't have any reason to kind of be looking elsewhere at other things, and I think from my personal perspective my entrepreneurial curiosity gets largely helped by the fact that I look at lots of different companies on a daily basis and I get to work with business owners. There's always a new challenge. It's not like, while our service is very similar every time, there's always a new business to look at. There's always that interesting angle at looking at something new, learning about something new.

Courtland Allen 57m 5s

I think that's a great answer and it's also a great place to end the episode. Can you tell us where listeners can go to find out more about you and FE International online?

Thomas Smale 57m 13s

Yeah, so the best thing to do is go to our website, www.feinternational.com. On there, depending what you're looking to do, if you're just looking for content, if you go to our blog section or resource section, you see lots of content that we've put together and launched over the years that can teach you a lot more about lots of different things we've spoken about. Interested any of our new listings, you can go to the buyer site page and learn more about the businesses we have available at the moment. If you want to get a valuation, you can go to the seller site section and get in contact with us and we can do that. And then on the site as well, you'll find all our different social media channels of which we're active on many. Whatever your favorite channel is.

Courtland Allen 57m 58s

Thomas, thanks so much for coming on the podcast. It was a pleasure to have you.

Thomas Smale 58m 3s

Thanks so much Courtland, appreciate being on.

Courtland Allen 58m 7s

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