How to Source Small Companies to Buy

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Colin Keeley: [00:00:00] Hello and welcome back. This is Colin Keeley here,

Brent Sanders: [00:00:02] No, I'm Brent Sanders.

Colin Keeley: [00:00:03] and we are two guys buying and building wonderful internet companies.

Brent Sanders: [00:00:07] Yes, indeed. And so today we're going to really talk about sourcing. One of the interesting parts of getting into this world of micro PE and just in general, what we're looking at are, deals. And so there are a bunch of different ways to find deals. And both of us are coming from more of a venture background, which is, I dunno, I've found this world to be a lot more welcoming and maybe it's because it's, I don't want to call it newer.

Buying businesses, nothing new, but I guess this very specific like B2B SAS, micro PE segment ,  there seems to be a little bit more community, a little bit more ,  I would say less sharp of an elbow ,  around getting deals. And when we were looking at, from a venture perspective, the fund we were part of was looking at series a deals.

And that was like the biggest thing. And so the economics around those deals are, most funds, most investors want to take like the lion's share of it because, without that, you're not going to have that big win. If you're gonna make a bet, it's gotta be a big bet. Everyone I'm sure has.

Their own strategy, but yeah, it seems this world, it's a little bit more friendly. People seem to want to syndicate more. So con what do you think.

Colin Keeley: [00:01:16] Yeah. So our former coworker, a very successful venture capitalist ,  told me very early on in my time in DC, like he had never seen a good deal from a fellow venture capitalists. Cause the best ones they show too is Sequoia or, a 16 Z or something like that. So you have to build relationships directly with entrepreneurs or like content or out, however you want to do it, build up your own brand.

And there's a good reason for that. When we were playing a series, a fund ,  with, aggressive ownership targets and $200 million to deploy, like you need sharp elbows, you have to put all this money, like as much money as you can basically, into these companies. And so any other VCs you bring into the L are basically going to crowd you out.

Yeah, I would say it is different in the earliest stages, like where a lot of these kind of celebrity rolling funds to some extent are playing where that is pretty collaborative. You have much smaller checks. I actually think it's way easier to get a really good returning fund in those, because you can sneak into the best deals you aren't that competitive.

Brent Sanders: [00:02:18] Yeah. If I remember we would aim to be one of the main checks, right? So you're trying to target what, 70%, 80% of what they're raising. If they'll let you do something like that. If a company will. We'll take that. You want to be the lead. You definitely don't want any super savvy investors to be involved.

From just an negotiation perspective of saying, Hey, this is the valuation we're going to go with. And, cause the negotiation starts so early on, right? This what are the terms that we're going to, we're going to offer you? And it's generally based on how many other people with.

Decent sized checkbooks are also involved in what their, what their bid and ask essentially. So it's like you don't, to the feedback that person gave you, it's you don't really want other people with ,  similar size checkbooks involved because they're going to quickly become your competitor when you go to ,  to low ball them.

Colin Keeley: [00:03:10] Yeah, I believe we actually took a hundred percent of a couple of series, a rounds that we did. I don't think there were even outside investors and some of them,

Brent Sanders: [00:03:17] That fits the profile of, the ,  the fund that we were part of. It's you want to, there's really no point. And I believe so far, those investments are actually looking really good. So I can't, while I'd like to think. And I think I say this a lot about our. Prior venture experience, I'd like to say, that's not the way to go about doing it because it seems very harsh or, very different from ,  I think how we're trying to position Vern ,  as founder friendly.

And, but it is, it's been working right for venture. And so I don't know if it's totally different or not, maybe just the general dynamic that in funding rounds, there's usually more than one investor, but yeah. Being the only one. And making it seem like, Hey, I'm the only one who's going to pull you out of this ,  this hole.

And then we're going to, we're going to help you elevate you to the next stage and the next stage and the next stage. That's definitely a good place to be negotiating from versus, having two equally size firms fighting one another over it, which ,  it's just a different negotiation,

Colin Keeley: [00:04:10] yeah, I don't fault anyone for playing the game on the field. I think the market dynamics just dictate that. I think they're playing the game. It is just the game that it is, why are people so friendly? And there's like micro P space. It's funny. I think it's because it's such like a early industry and there's just so much opportunity to go around that you don't, we are buying effectively a hundred percent of businesses.

So in theory, a competitor can't buy that business because we're buying it right. But. There's just so many of those software businesses out there that it's not like a big deal generally. And then a lot of people are focusing on like a niche to some extent, or they're smaller or bigger. So there's a lot of deal sharing that goes around like referral fees, finder's fees.

So you can make a good amount of money by being friendly and sharing good stuff that you see.

Brent Sanders: [00:04:55] Yeah. Yeah, that's great. The community aspect is nice. It seems like a lot of this stuff floats around on Twitter. I don't know if like places like hacker, what was it? At hacker rank thinking to the developer site, what was the place where we listed avocado originally? Like when we were doing releases ,  shoot.

What was that called? Hackers and hacker. Yeah. Yeah. Like places like that, where, you have companies popping up and then it's an interesting place to you follow up a year later and be like, okay ,  where did that go? Or, did that, when you stop hearing about it, it could be an interesting ,  place to source things.

I'm just curious ,  what are the best places to source online? Like how do you find this? So there's obviously referrals, which is, that's who, And then there's the, what you know, which is like, how do you dig this stuff out online?

Colin Keeley: [00:05:40] Yeah, so referrals are I think how we're going to see the best deals going forward in all likelihood we'll become known for this and people refer to us ,  but this. Sourcing is definitely been the most opaque part of the process. A lot of people are very happy to talk about like how they're structuring deals, how they're finding investors, and then you get to sourcing and they're like, Ooh, a proprietary hush.

So people are like, quiet about that, but. I'm happy being an open book. So I have been talking to all these folks and I'll basically just go through everything I've learned and all the notes I've taken. So the first deal we got a blink sale, we found a micro acquire, which is a marketplace. And I would say is probably the best one for these like smaller SAS deals.

There's others like flip a switch. Exits indeed makers is another one. It's. It is a lot of junk on these marketplaces, but there's some good stuff. And then multiples here are lower than brokers because it's unsophisticated sellers. But it is higher multiples ,  that you'd be paying here then just like outreach, just like a one-to-one to a creator or a founder.

After that is ,  brokers and intermediate intermediaries. So this is where they nicely package up your business for sale. These are quite a bit higher, multiple multiples, more buyers also pay a fee. So the best broker ,  here I would say is Effie international. I think their fee is like 15%. And these prices go higher and higher.

So it's harder for searches like search funders or independent sponsors like us to compete with these. A lot of these are bigger deals. It's almost always all cash and that's where like proper private equity funds are playing.

Brent Sanders: [00:07:20] Sense. So is it true? Would you say that like it's correctly, it's correct to characterize it, that if you're hitting these sorts of places, these are generally the things that have warts on them or don't meet the, they're not like the most premium things because that's already been filtered through this sort of ,  more legit PE world.

Colin Keeley: [00:07:41] It's a mix. So not always, especially as you get to the bigger stages, the best deals just get shopped around because they're trying to find the highest price. So that's when an investment banker is running a process and they're going to get a high price, a high, multiple, and that's not always a bad thing like this.

The equity is one of the best known. Buyout funds. It's quite a bit larger and they are known for paying pretty high prices, but it doesn't really matter if you like are confident that you have a playbook and can 10 X the business, a hundred extra business, whatever, like who cares. If you play five X, instead of one X, it doesn't really matter.

And so the best ,  the low, the lowest multiple, the best prices are outbound or also known as proprietary. So this could be. Like pretty informal ,  Hey, love your business. Would you ever consider selling or more formal, which is basically like an outbound drip campaign sales process. I B2B sales process with a super low conversion rate.

And so this is roughly, I'd say search founders spend like 80% of their time here doing this outbound sales and. Often, this looks like you pick a category, a theme, for example, like blink sale. You could look at all invoicing software and you basically make a market map and build out lists. And then you do outbound email with custom messages and you have to hire VAs or interns to do this because it's a lot of manual work.

Brent Sanders: [00:09:04] Yeah, we've done this for formulated. We just got done doing what you're cold. We've talked at length about cold emailing and I think we know how to do that. For different segments. For starting a businesses more than the venture side, that's always like the, one of the first things that we'll start doing is cold outreach and an outcome, but it seems like a, an extra hustle when it's.

It's somebody selling their business. It's not just getting a customer to sign up for a product or hop on a call for a demo. This is sell us your baby. And I would imagine, I used to get tons of emails for ,  the agency I ran in any business. I run out somehow get on a list and it'll be, some cold email about, Hey, we love what you guys do as they're doing.

We offer financing. Wouldn't you like some liquidity? Is it time to take a break, whatever messaging they try? I could only imagine that. The people that respond to those, want to talk for, at lengths and they've the potential for wasting time could be really high. That's my only, which is probably true.

That's my only concern about that approach is just you're going to talk to a lot of people that getting them to make that decisions is going to be pretty difficult.

Colin Keeley: [00:10:16] yeah, there's a big education component to it. So everyone thinks their baby is worth 10 X, a hundred X revenue, because that's what they see the news stories of venture capital raises at. And so it's, you have to educate them. That's not really what this market is, but. You're sending thousands of emails, whatever ,  you only really need a few to go all the way to a sale.

So you will get some kind of amazing deals that way, even if the conversion rate is pretty low and we haven't really started doing that yet, but at some point it's almost certainly worth it to put an intern, put a associate, put a VA, someone on it to just be building up that, sending out 20 emails a day or something like that.

Brent Sanders: [00:10:54] Yeah. Yeah, you gotta put it out there. Are there any other like cold methods? Like the referral is obviously in my mind that seems the best way to get a deal. And then everyone's getting a payday in a sense if it comes through, if it's like syndication, which is essentially something comes into us, it doesn't fit.

We hand it to a friend, they close the deal, some sort of referral fee may make sense for something like that. Versus, brokers seems like a great option too, because it's okay, what you're getting is going to be. Of a certain quality, like somebody is at least sees value to spend their time on it and knows it might be fit, but they're going to take such a big piece.

So it, but to your point, it's if your plans are to double a business who cares if you pay a little bit more,  it's not like the end of the world.

Colin Keeley: [00:11:40] Yep. One thing there is syndication means something specific here. So that's syndicating a deal is we commit to do the deal and then we raise equity to do that deal. So we are the ones doing it like a referral or like a scout program is what you meant. I think where that's like someone refers a deal to us and we pay out some percent as like a finder's fee.

Thank you for sending this deal.

Brent Sanders: [00:12:03] So syndicating is Hey, we're going to do the deal, but we're going to bring other people into, to put in equity.

Colin Keeley: [00:12:08] Yeah. Equity, debt, partners, that kind of thing. That's what an independent sponsor is.

Brent Sanders: [00:12:13] this is why you have, this is why you have the MBA. This is exactly why we have you here. This is great.

Colin Keeley: [00:12:18] Oh yeah. And my MBA took all these venture capital classes and they would divide us up, VCP lab. It's two separate classes. And now I realized I took all the wrong classes.

So I was trying to one last one we haven't touched on. So there's referral where people send us deals and then there's just like inbound direct inbound or like relationships. So building relationships directly with these bootstrappers is indie creators. These founders that is what we're doing, I think, with this podcast or what I'm doing with Twitter or blogging ,  I think I'm going to start going on more of a podcast tour.

So people know us know Vern and send us deals directly. And then we don't have to pay that binders fee. And then I've been playing around with the idea of starting a course ,  like a micro PE course, both for founders to sell their business. And for other folks like us to buy businesses, I just find this to be about the most opaque industry that I've ever really been a part of.

And I would like to be the people that are, we could be the people that like blow it open

Brent Sanders: [00:13:14] yeah.

Colin Keeley: [00:13:15] the kimono and it is a chance you're launching like a thousand competitors. But I think your deal flow will just, be worthwhile. Like I'd rather when I'm being the best stewards of a business, then getting the lowest price or, some version of that.

Brent Sanders: [00:13:28] To your point, I think we both see there's so much opportunity. There's not enough like the balance right now. At least it's there's plenty to go around for everybody. It's just, and furthermore, like just have a general mind state. If you look at the world from a stance of abundance, like you're going to get abundance, if there's enough for everybody and you look at things like that, it's just. That's the way to live your life versus Oh, there, you want to hoard everything cause there's scarcity and we need to get all the things. Maybe that is truly the capitalist way of going. And ,  but I think we'll see more abundance by looking at things with abundance.

I would love to see a course get out there. I'd love to see more tools out there for even on the tech side of Hey, how do you get, I think get your numbers in order. Cause that's probably one of the biggest barriers that. I've run into ,  less so in buying more so in selling is just making sure, once you decide you want to sell something, you have to start getting your books cleaned up.

So you're telling the correct story and you're showing the correct numbers and. Furthermore that they're accurate and that there's consistency around thing. Cause I think when you show up and you're like ,  the code base is, part of it's not here. And some of it, just being disorganized will ruin the process.

That to me is like number one thing as a, an, a, an owner. So I would love to like, Work on more tools more, and there is a lot out there for, Hey, are you thinking of selling your business? You've got to do these 10 things, but I do think understanding what happens in a deal, what are the agreements that you're likely going to sign?

What are the sticky points of those? What we ran through with blink sale, just like. Understanding liability, understanding what you're purchasing versus what you're not, and make putting that into plain English and understanding like what's reasonable and what's not, I think it would be a great just resource out there for both sides, both buyers and sellers.

Colin Keeley: [00:15:16] Yeah, people have done this in venture capital, maybe 20 years ago where this is this is what a friendly founder friendly term sheet looks like, and this is what it should be. And someone just has to come through private equity and be like, Hey, this is. This is standardized. This is what's fair to everyone.

There's no shady stuff in here. I just, it has to be done at some point. I don't know if we're the people do it or other people are going to do it, but it seems inevitable that things standardized.

Brent Sanders: [00:15:41] Yeah. We complained about this when it came to the process with the legal docs, which. We see safe notes and the ORIC guide, like you Stripe Atlas, you get the sort of Orrick ,  agreements that are just they're playing and they're straightforward. And it's yes, they're going to change, but this gets you out the door, which ,  is probably easier to do with a new company.

But  I guess as we do more, we should get more exposure to what are the differences between them. And yeah, maybe there is a big opportunity to create a standardized legal guide or, I think you were saying ,  there was somebody who was potentially trying to work on that or trying to build a way to transact faster.

But yeah, it's

Colin Keeley: [00:16:21] are working on it. It's unclear. It doesn't seem like anyone is very far along. It seems like mostly, like a web flow slide, a WordPress site. It's nothing like angel list or some equivalent yet.

Brent Sanders: [00:16:35] Yeah. Yeah, I think it's ,  It's a good place to play. If we're positioning ourselves as a brand and we're going to do this, it's that's definitely, education's one of the sort of pillars that I think we would want to fall on. I don't know if it has to be a course or if it's just resources  of course I feel like it, it puts a, almost a limiting factor in front of you where it's like, ah, I've got to get all these lessons versus let me just get one lesson down and publish it.

So that's what I would recommend if you're going to do it.

Colin Keeley: [00:17:02] some variation of like content or course, or however you want to package it all up.

Brent Sanders: [00:17:08] Yeah. Any other thoughts on sourcing? Like how do we, I guess one of the questions with all these different methods  is there one that you're looking at for Vern that's this is the one that we should tackle or is this we just, we have to in order to be competitive or to see deals, we've got to do all of these.

Colin Keeley: [00:17:25] My that's the one I'm highest on is I'm happy to just pay a referral fee. Keep building relationships with people, bigger, smaller, in adjacent spaces, focused on different niches ,  search funders that already, Found what they wanted to find and our CEO's and still see deal flow.

So if I were to guess where our next three deals come from, I would say they're probably referral for us. And over time, I think it would probably be a mix of outbound and inbound deals. And then I, yeah, I think we'll probably mostly steer clear of marketplaces and brokers. We just, realistically don't have the capital and a lot of those things are going to be bigger or picked over.

It's not really where we want to play.

Brent Sanders: [00:18:04] Yeah. Yeah. I can't. I looked at a bunch of marketplaces over the years and they just seem. I think you were saying there's a lot of stuff that just sits there and it you'd be surprised at how little transacts on them I'm talking about like things like empire flippers or some of these kind of goofy sites, a goofy is the right word, because it's I don't know who the businesses seem.

They're very vague. They don't want to tell you what they do or who they are. Exactly. And then, it's Oh, here are Shopify stats. And it's like how much do you spend to acquire these customers? It's just a lot of opacity.

Colin Keeley: [00:18:36] Yeah. If you actually buy one of these businesses, all your competitors also looked in-depth at your business and know basically everything about it.

Brent Sanders: [00:18:44] and also decided not to compete with you on it because they saw something. You clearly didn't, but Hey, that's the ,  that's the gamble

Colin Keeley: [00:18:51] Yeah. And then, especially in e-commerce, so like FBA, like all your customer acquisition techniques are known to the wider world and you'll just start being crunched down by it.

Brent Sanders: [00:19:02] It seems super. Yeah. The, especially the FBA world, that, that seems like a tough one where anybody can really come in and just snake your idea. We, I go back to my awesome Twitter thread that I did ,  about theme parks, scented candles. It's it doesn't take much to, to come in and see volume and just pop up a Shopify site and compete.

Colin Keeley: [00:19:24] This is ,  I think we covered most of the sourcing on the candle front. Have you thought of just picking a weird niche and being like a candle for X.

Brent Sanders: [00:19:32] Yes. So the monthly candle businesses is actually going great. So it ,  for what it is, it's not paying my mortgage, but ,  it's going really well. And so it's a monthly, that's the first like twist, but that's not really niche. So the first niche I think I want to go after is  scented candles for pets.

So basically dog lovers, cat lovers. And so I've been looking into this, there is some science behind it, but with anything pet related it's like skin deep. It's a little bit unclear. There is pet aroma therapy and it seems like pets. The only thing that's weird is like dogs can pick up on sense, like a hundred X, but you can, so we might ship you a candle that doesn't smell very strong to you, but might be strong for dog, but that's the first ,  Niche that I was thinking of going down and ,  yeah, I think we're going to try that within the year.

At some point I like pets.

Colin Keeley: [00:20:22] yeah. Selling, it says people love their pets. Like their kids just ,  I actually invested in this company loyal, that's like longevity for big dogs. And I just pulled some friends like, Hey, you're great day. And seven years to live. What would you pay to give it another year? And it's like an astronomically high number.

Brent Sanders: [00:20:39] It's just pulling on my heart strings, just thinking of a big dog with, tough ankles or bad knees. And it's Oh, you're a big boy. There, there is something mental to it. But yeah ,  that's the niche that I like this one I have to give full credit to my father-in-law for coming up with that when he's like, why don't you send dog sell dog candles?

It's like people are crazy about their dogs, which is true. So yeah, we're going to dabble in that. We're in the process of moving. The business over to Shopify, I had, of course, custom built a ,  a cart and I'm still going. Actually, I remember you and I talking about this maybe what, two years ago ,  when I was, you were like, why are you writing this website by scratching?

Cause they weren't doing subscriptions and. Furthermore, they S I still have to, in order to run the business, how it's supposed to, which is there's a cutoff date. We're using a system called recharge. I still have to write a bunch of API integrations. So much for low code in Shopify. It's not quite there, but I'm happy to do.

Shopify is awesome. Like we're, I brought a partner on and he's doing all the marketing and things like SMS follow-ups and email followups. And so our marketing game is definitely ,  getting upped in a major way.

Colin Keeley: [00:21:42] Nice. Yeah. Shopify is just so far ahead of everyone else where e-commerce,

Brent Sanders: [00:21:45] Yeah, it's the bomb.

Colin Keeley: [00:21:47] Anything else on your end?

Brent Sanders: [00:21:48] I think that's it. A update on blink sale things are trucking along. We need to ,  I want them to start. Sending out a newsletter. I want to start talking to our customers because I think the thing that we're getting ready to roll out is this new sort of overhaul of the front end, bringing this new look and feel.

And I want to find a good way to communicate with our customers. I think that's one of the things that ,  being active. Taking over this business and being a little more active for this first phase is just getting that out in front. And you did a great job with getting everybody's feedback of Hey, what do you think is annoying?

What was it, what's the most annoying thing about blink sale? And so getting something set up now where we can say, Hey, we heard you and we're starting to make changes because I actually pushed some changes this week where we. Rephase the invoices we, based on feedback that we're getting from our customers.

So I want them to feel heard and feel like they're, everyone has an opportunity to let us know what they think.

Colin Keeley: [00:22:40] Absolutely. I think people are going to be really excited for this new version. Okay.

Brent Sanders: [00:22:45] You too. Cool. I I think that's about it.

Colin Keeley: [00:22:47] Awesome. Take care, everyone.

Brent Sanders: [00:22:49] Thanks for listening.

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