Hello everybody, this is Cortland Allen from IndieHackers.com, where I talk 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 Smail, the founder of Effie International.
Unlike most of the interviews that I do here, I think the story of what Thomas' business
does and how they do it is just as interesting as how he created it.
Effie 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 all super interesting stuff, even if you're not necessarily in a position to
sell your business anytime 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 Smail.
I'm here with Thomas Smail, the founder of Effie International.
Thomas, thanks for joining.
Thanks so much for having me on, Colin.
So Effie International is a website brokerage.
Can you give us an overview of what that means exactly and what you guys are up to?
Yeah, sure.
So 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.
So if you're familiar with M&A or mergers and acquisitions, then we effectively work
with people who own SaaS e-commerce or content-based businesses and walk them through the process
of valuing their company initially, work with them to increase the value and eventually
sell and then we'll do exactly the same thing on the buy side.
So working with people who are looking to acquire companies and match them up with businesses
we're representing and help them through that acquisition process.
So work with both sides of the transaction and make deals happen.
So when you say that you guys started off just helping people buy and sell companies,
that 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?
Yeah, so we very much position ourselves as an M&A firm rather than a website broker 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.
How could 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 and working with us
until they're at the stage where they can get there.
The other side of things is like our team as we've grown, the vast majority of people
who work in transactional worlds at F 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 we'd expect to find in a M&A house like a Baker Tilly or 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're the two main points of differentiation is really just the team.
While our head counts 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.
You guys started in 2010, right?
Yeah, that's correct.
I think 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 and
selling their own businesses.
So just to name a couple, Mort Stausinger, who I had on the podcast a couple weeks back,
you guys helped him sell mail parser, Padio 11, one of the very first people that I interviewed
for IndieHackers.
You guys helped him sell two of his businesses, both bingo card creator and appointment reminder.
So I think it's safe to say that you guys are kind of a rocket ship in terms of going
from nothing to being the only name and 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?
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.
So 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 are teaching them the process.
From there, we pivoted into pure M&A when people who learned from us said, hey, Thomas,
or hey, guys, I 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?
So 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.
So 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
in total deals now.
And like I mentioned, 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.
Yeah, that's huge.
I mean, that's exponential growth, that's ridiculous.
So 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?
Yes, I think I was always interested in the idea of running my own business.
I mean, I'd had jobs when I was a kid before, so it wasn't like I was, the cliche had a
lemonade stand when I was nine, and I've never done anything since.
So I did a business degree at university, and when I was going to 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 a big corporate company didn't really align with what I wanted
to do.
So I figured, hey, why not start selling for myself and actually build something good?
So 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, and I think, like, lots of people at college making extra money was
always a priority.
So whether it was 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 something for $50 or $100, and 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 sell it on for a profit.
So started doing that with very small businesses, and we're talking like $100 into $1,000, and
then continued going from there.
$100 or $1,000 that you paid to buy the business, or how much monthly or yearly revenue?
Yeah, exactly.
So like, say, buy it for $100, sell it for $1,000.
Where were you finding these websites?
So 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 then they're saying 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 own money are still in the seven-figure range.
So come quite a long way since the days of putting $100 on the credit card or whatever
it might be, but we've always invested in what we do.
So 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've very much been based off, this is stuff we've done, so I'm only teaching or talking
to people about things that I've done myself and would do myself and would invest my own
money in.
I 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.
Yeah, I totally agree.
Not only does it make you more trustworthy to the clients, who's going to trust somebody
who won't do what they're saying to do, who 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.
So 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 decide
that, hey, I want to actually start helping other people do this, and I want that to be
my company?
Yeah, so I think off the back of the book.
So I like the idea of doing a book, because the problem with buying and selling for yourself,
particularly when you're at 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, that you have $100,
you turn it into $1,000, while 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 round 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 $1,000.
So as it gets bigger, it gets exponentially harder.
So to be honest, the start was really by accident, it was always 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 F&S, Israel, joined the company.
So 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 the stage where I was like, chaos, man, I know about
this.
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.
So I guess the M&A, which he'd been working in.
And he had got 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.
So he joined in 2012.
And the first thing, the first major change he made was, hey, why are you messing around?
Still doing $1,000 deals when you've got people, $1,000 deals yourself, and you've got people
coming to you with six-figure businesses.
And you can charge them, say, 15% to help them sell it.
That's actually what you're good at.
So 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 found something that was working well, wasn't really a massive focus for me.
I think 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, is pretty intimidating.
I mean, it seems like a lot of paperwork, a lot of drudgery.
And oftentimes, 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
in the competition in a particular space.
So it can be often these drudgery-type businesses are the best businesses to get into.
So a good example is my employer, Stripe, who is in the payment space.
And while today, Stripe is an extremely fun place to work with a ton of challenging problems
for engineers, non-engineers alike, in the early days of Stripe, it was mostly just conversations
with bankers 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?
Lots of different things.
When we started out, the service was a little bit more informal, so 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, so we do absolutely everything for people, other than answer questions that people
have.
But 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 buyer questions that are kind of handled by our team and like directly with
buyers.
So I mean, 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 owners, 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, help them get their financials
into order and kind of organizing P&Ls.
There's also a lot of things, this is something that comes with time as well.
Buyers ask lots of different buyers, lots of different questions, but there's a lot
of similarities.
So 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 has 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 advisory 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, and we, so last year we won, and the year before actually, we won
IBBA, and IBBA is effectively the broker association for business brokers and M&A advisors in North
America.
And while we're 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.
So in terms of volume, we're very high volume as far as M&A advisors or business brokers
go.
And 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 like kind of by paper, by hand, they
might be using things like fax, whereas we've built out our own proprietary CRM, which is
I guess similar to Salesforce in terms of like what it's what it's for is very much
saying we used to manage our pipeline of leads to keep in contact with leads to allocate
work internally to keep track of our processes and SOPs and make sure things are very consistent.
So we learned very early on that you have to standardize these things, but you can also
use technology to help manage various kind of processes.
So that's something I think in any business can be applied, putting good systems in early
on and leveraging technology to advantage is a way to get ahead of competitors in a
space, for example, like ours, where the traditional M&A advisor is still doing things, the old
school way they've been doing it for 20, 30 years, so you can get ahead without really
having to reinvent the wheel just by making some kind of simple improvements and leverage
technology.
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.
So you're dealing with the sort of 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.
So in your opinion, what is the smallest business worth selling?
That's a good question. So for us, from an advisory perspective, we want businesses that
make at least $1,000 MRR, assuming they're SaaS.
We have a minimum fee of $5,000, so that basically means a deal that makes sense for us and makes
sense for someone who's selling.
You can certainly sell something that's smaller than 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 any sort of reliable valuation on it, which is important
for us on a standardized basis.
Let's say I have a business that's doing $1,000 in monthly recurring revenue to sort of ballpark.
What kind of range would I be looking to get for that if I were to sell?
Yes, it depends on the cost base.
Generally speaking, are multiple ranges of your profit or SDE.
And what is SD?
So SDE is effectively the net profit of a business, and then we add back or exclude
or effectively adjust anything the owner takes in the business or any one-time costs.
So the most common add back or adjustment is the owner salary.
So if you're paying yourself $1,000 a month or $10,000 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.
So that's why it's standardized.
So once you have your SDE number, we then apply a multiple to that using a proprietary
valuation tool we built, which looks at variables from past deals, the average small SaaS company,
so I guess the caveat for that would be below $1 million in ARR, it's going to sell for
somewhere in the region of three to six times annual SDE.
So using the example of saying making $1,000 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, $10,000 a year in SDE.
That business is probably going to be worth anywhere from $30,000 to $60,000.
And then you could apply similar logic to, say, $10,000 MRR, which is probably going
to be in the kind of 10x that, so $300,000 to $600,000 range.
Okay, that makes a lot of sense.
And I think another question that 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've 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 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?
Yeah, so I always say to people about that, that it's very much a personal decision.
So one of the things we'll always do is help people put together a valuation free.
And like I said, right at the beginning of the interview, we were talking a little bit
about like, what is an advisory firm?
And a lot 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 it.
So for some people, it might be, hey, look, we value your business, it's worth $1 million.
And they say, well, I want $2 million.
So we're not then just going to adjust the valuation and say, all right, we'll, we'll
try for $2 million, because we know what the market, we know what the market says, and
we don't quite honestly 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 in, work on, and then come back.
So right at the beginning, you mentioned Maritz, 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.
So when his right to sell really depends on Maritz'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 smaller businesses, they might be working
full time job still.
For them, it's, hey, I've got, I've got a new job and I now no longer have the time
to run this.
A lot of clients we deal with is they'll sell their business so they can pay off their mortgage.
So there's lots of different times I never known in our company would ever advise someone
on the right time for them to sell.
It's really very much what do they want, what do they want to achieve.
Most people have a time-based goal or a value-based goal.
So it's, hey, I want a million dollars, I want $2 million, $10 million, whatever that
might be, or I want to sell the business by the end of the year.
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?
Yeah, that happens a lot.
I mean, one of the reasons is to do a lot of podcasts and a lot of speaking and publish
a lot of content.
I would say we were talking a little bit about how things have changed over the years.
Only 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
kind of things you need to be doing to repair.
So I do find that a lot of people, I guess particularly people who listen to a podcast
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 at all.
I mean, it really does depend on the business.
Some businesses are really well-run and no advice to me is going to make any improvements
to it.
And then there are other companies that just aren't sellable, but we're always very honest
with people.
So 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 fit as an advisory firm.
And one of the reasons we have such a good reputation is it's 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, because
it's quite honestly just a waste of everyone's time in that respect.
We'll just be honest with people.
There's no, I guess 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 of investors looking to buy profitable SaaS
based businesses particularly, so a company that someone might not think is very interested
in themselves or they've given up on or haven't really spent much time on recently.
It doesn't mean there's not going to be someone who's not interested in acquiring it.
Are there any notable stories that come to mind for you?
Are any examples of somebody who thought their business was in disarray and had no chance
of really doing well, but you guys are able to turn it around for them and sell for much
higher than they thought?
Yes, I'd say in terms of disarray, I'd say that might be slightly hyperbole in that respect.
But, I mean, without naming names, I can talk about some businesses.
I mean, a good example would be, you said Patio Levin or Patrick McKenzie as I know
him a lot 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, it's kind of unavoidable that people are going to figure
out who you sold.
He was surprised that there was such a 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.
So 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.
So 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.
So I think that's probably the biggest lesson for people.
We're not really the kind of firm that gets involved in just stressed asset sales where
someone's business is declining and 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 process
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 main listing of CRM, who we've speak to week in, week out, very possible
to sell businesses that otherwise couldn't be done.
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.
So you have this kind of seesaw effect where you're focusing on one side, you have to focus
on the other, etc.
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?
Yeah, that's a 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.
So going back to some of the things we were 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, it 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, over time, 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 appear they know or respect recommending us.
So that's always been extremely powerful for us on that side of things.
And it works exactly the same with buyers.
When people hear that companies have been successfully sold, I guess it's then testament
to the quality of businesses we work with when those companies are still thriving well
past the time of the deal.
So a good example of that would be the drip deal for many of you be familiar with drip
that we sold to lead pages about a year ago.
So I was in Minneapolis visiting the lead pages office, which now has the drip team
in there to celebrate the one year anniversary of that deal closing.
Since acquisitions gone through, the businesses thriving, they've grown it, the team has expanded.
So I think from a buyer perspective, a lot of people see the success that other buyers
have had in the space and find you that way.
And we've grown, 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 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 business coming in every day.
We don't have to do a huge amount to do that.
The main challenge for us is educating people.
The purpose of coming on podcasts like this and speaking to people is that more and more
people come in and they've they come in better prepared.
So their company is more sellable, they're worth more, and we have to spend less time
kind of 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.
So that's always been been our approach.
Yeah, I think word of mouth is such a great growth channel for anybody, but especially
for you guys, because 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 a lot, I mean, 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 that they trust use you guys, not a good outcome, that does so much of the
legwork in terms of taking care of any objections they might have versus if they come to you
via like a Facebook ad or something else.
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 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 some businesses I've kind of like looked at and like, or even
using internally.
So 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 on the,
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.
So 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?
Yes, there's lots of different things you can look at.
So I'd say the very first thing to do is get evaluation and figure out where you're at
today.
Because unless you know where you're at right now, it's very difficult to figure out where
you need to get to.
And I think having a very ambiguous target, like increase your value, doesn't really
mean anything without any context.
So what is it worth now?
And then figure out where do you want to get it to?
Because the decisions that you'll be making and the lengths that you will go to to get
there will really depend from there.
So if you want to turn your business from a million dollar business into a $1.2 million
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 business.
So there are some things in there that affect value and valuation that you can't really
affect, other than with patience.
So 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.
So 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 the macro trends in that business or that
industry.
So for example, we've done a lot of businesses 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.
So 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'd be a sensible
idea for the vast majority of people who are kind of 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 a business.
So say 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.
So 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.
So while lots of people have heard about us now, that's nothing that I've done so much.
In 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.
So getting a team in place is really important and can help you increase valuation.
But all else being equal, you think having employees will increase the value of your
company.
Yes, absolutely.
Particularly if that means you have to spend less time in it.
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 an hour a day.
But that is less common than someone who needs someone handling support tickets or whatever
that might be to do more.
So 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.
So 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 because 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.
So a lot of the time from an advisor perspective, it's really helping people position their
story a little bit better.
So it might be like, well, yes, the fact you have a business that you want to move on to
and it's not this one is fine, but taking the team with you is a terrible signal to
a buyer.
So we need to work in 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 teams stay, ideally all of the team stay, but there are very much
things that we can advise on once we've done the initial evaluation and figure out where
people are at.
And then there are the more common things that everyone talks about in SaaS, so reducing
churn rate.
Every single buyer in the SaaS space, everyone on their criteria, top three things they want,
they want a business with low churn.
So while that doesn't mean a business with higher churn can't be sold, everybody wants
a 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
as a buyer, you're not going to get a good deal because it's our job to maximize value
for the seller.
Those are the kind of people doing deals privately.
So 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.
So 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 and more?
So I touched very briefly on Drip.
So Drip is, for those of you who don't know, is an email marketing automation platform
founded by primarily Rob Walling and Derek Rima.
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.
Yeah, that's right.
Us has a podcast as well, various other things that he does.
So I think as that business was building, Rob was leveraging his knowledge and contacts
in the space to help build a 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 Lead Pages, who primarily drove the acquisition from their stage, loves the
product.
And while from a buyer perspective, you obviously need to tick a lot of boxes in terms of, like,
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 companies like Lead
Pages, 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 are like, oh, this product sucks, I don't like it.
As an investor, that could be fine, those businesses could be great, like, well, I've
got a good deal on this, I picked it up for around market value, the customers 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 Lead Pages, that's way too much of a risk.
So 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 that everyone loves means you're worth X times more, but
it does mean that people will 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 Lead Pages.
Play liked the product, it was a good fit for what Lead Pages are built, it was the
perfect time for Rob and Derek to move on.
They got the business to, 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 or maybe more experience
to grow it to the next level.
So I always say there's, in many companies, much like with mine, there's a kind of certain
type of person who can get a business from zero to say 100,000 a year, that tends to
be the very entrepreneurial type person, and then there's a different person who can get
that business from a few 100,000 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.
So again, talking about Lead Pages 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, so it doesn't
necessarily mean that Clay sucks or wasn't very good at his job, he just gets 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, because
Rob could have hired a CEO, for example, and be like, well, I want someone who can take
us to 10 million in revenue.
In his case, it made sense to go down the route of an exit.
So 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.
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?
Yeah, so we're very conscious of a process for selling, like while we're in a value
firm, we try and do as much as possible, there's work involved on the founder's side, once
someone is committed to selling.
So I'd be lying if I said, oh, it's like two hours of work in the company sold.
On the valuation side, however, before there's been any formal commitment or kind of someone
wants to get started with a conscious to the trade off between making a valuation as accurate
as possible and making it as easy as possible for the seller.
So in very simple terms, we tend to look at financials from the last 12 months in a SaaS
business.
We'll look at metrics.
And there are so many tools out there these days, like ProfitWell or BearMetrics or whatever
that can pull in metrics from things like Stripe without really the need for any time
or effort other than installing the app if you don't already use it, 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.
It takes 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.
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 an evaluation?
I say what a lot of people do tend to do when they hear that a business is valued off a
multiple of profit primarily, there's 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.
So 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 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.
So 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.
So I'd say trying to massage profit and make adjustments to make a business seem more profitable
than it actually is.
It's quite common, and that's something I always encourage people to avoid.
You want to run the business you're running, even if you are thinking about selling, you
want to have a 10-year goal in mind, so 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 very short term is 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 say in SaaS particularly, with the third-party tools out there for tracking metrics, most
people do track those metrics.
It doesn't necessarily mean they log in every day and be like, oh, this is my churn rate,
this is my MRR, because they're not really that relevant in the day-to-day of the business.
You might check them once a month, but they're very easy to 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, just keep it simple, they have two SaaS products, and they both
share the same server, and they pay $1,000 a month for that server, we 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 kind of things we 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 like, oh, suddenly
we've got a new service that the products on, or whatever that might be.
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?
Definitely with solo founders, it's a very good point, yes.
So I would say to people, document your code and write it down.
Just keep track of what you've done.
I mean, I would say particularly with solo founders, quite often, rightfully so, from
like very good developers, I've done a really good job building a product by themselves
so that they'll obviously be like confident in their own abilities.
But particularly with code, 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.
So as long as things are documented properly, you want to be at the stage where a confident
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
got an MVP out there, got some initial customers, and then got it to where it is when you decide
to sell.
But they want to come into the reasonably mature product, be able to take it over and
go from there.
So 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, many years ago, where I thought at the beginning of the
company, I was the best person at doing absolutely everything.
And now, quantity, I have a team of 28 people, and I don't think I'm the best at anything.
And as an employer, that's the fantastic position to be in.
I never sit at my desk like, well, I have to do everything.
My team don't know what they're doing.
Every person in 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.
And while I think you do need to have that kind of hustling, kind of self-confidence
starting out to go from, say, 0 to 10,000, whether that's 10,000 customers or $10,000,
that's not what builds you a multi-million dollar or like 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.
So we're running low on time here, but I've got a few more questions if you've got time.
First is, you mentioned earlier that typical multiples for SaaS-based businesses are in
the 3 to 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?
So I can't really go into the specifics, but I've seen some deals where the multiples have
been kind of way beyond that.
And that would often be because they have quite a high revenue, but they're not particularly
profitable.
In that case, that could be because they're a particularly good industry or micro industry
leading product, like something like Drip, for example, without disclosing a 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 that their bottom line profit might
not be that impressive, but they're growing their revenue 20% month on month.
So in the VC world, a lot of people talk about SaaS valuations and people hear 5, 10, 20x
revenue, and then they come to us and they say, well, why is it 3 to 6x SDE?
And the real differentiator there is growth.
Often the VCs investing at these huge valuations are doing so because a business is growing
at a significant rate.
And if your 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, it 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.
So growth rate is important, I guess, the product as well.
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.
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 something
else 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.
But chances are, if you're making $100,000 a month in revenue, you have a team.
So 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.
One of the hardest things to do as a founder, I think is to focus on one particular thing.
What are your goals with Effie International in the long term?
And what are some of your most tempting distractions?
So 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 billion dollars
in total transactions, and like I said, we're over 100 million now, so we're well on the
way.
But there's a lot of work to do in the meantime.
In terms of distractions, everything I do now, like I'm an entrepreneur at heart, everything
I do is through Effie International, I don't have side businesses or do anything like that.
Co-honesty, I found that just by focusing on one thing, which in my case is Effie International,
maybe other ventures that we start or acquire or whatever under Effie 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 can 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.
So I'd say I've definitely got past the stage now where I have any personal distractions,
made passionate about what we do, and I like vision for the future, so I don't have any
reason to kind of be looking elsewhere at other things.
I think from a 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.
This is 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.
So there's always that kind of interesting angle of looking at something new, learning
about something new.
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?
Yeah.
So the best thing to do, go to our website, www.feinternational.com, all in 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 in any of our
new listings, you can go to the Buy a Site page and learn more about the businesses we
have available at the moment.
If you want to get an evaluation, 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 of our different social media channels
of which are active on many.
So whatever your favorite channel is.
Thomas, thanks so much for coming on the podcast.
It was a pleasure to have you.
Thanks so much, Colin.
I appreciate it being on.
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