Host: Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs. And on this podcast I talk to the people who do it. Today's episode is a little different. Instead of hearing the story of an acquisition, we we're talking to someone whose business is analyzing potential acquisitions for his clients. Ahmed Raza founded Rapid Diligence, which is a due diligence service for online businesses. So you want to buy an online business and you need help with due diligencing. That site or SaaS or E commerce or whatever it is, you go to Rapid Diligence. Ahmed crushed it this conversation. He does not miss a beat talking about this stuff. All the pros and cons, all the pitfalls related to each of SaaS and E commerce and content, we go through each of those categories of online businesses. So if you're interested in buying an online business, as I am, you're going to want to listen to this conversation front to back. Here he is, Ahmed Raza of Rapid Diligence. Ahmed Raza, thank you for joining me today on Acquiring Minds.

Guest: Hey, thanks for having me.

Host: You started and run Rapid Diligence, which is a due diligence service and firm for investors and acquisition entrepreneurs who buy websites and other digital businesses, e commerce SaaS. You've been an investor yourself, an acquisition entrepreneur yourself. You're a pure entrepreneur. Obviously you've started Rapid Diligence. So you see this world from your own experience as well as now being an expert on diligence itself. So we're going to have you tell us for the various categories of digital businesses that are out there. SaaS, E commerce, content, what are some of the things that you really look for and that people who might not hire a diligence company, what they should look for is like the priority items on when they're doing their own due diligence. Before we launch into that, why don't you just give us a minute or two on your own history and the history of rapid diligence?

Guest: Yeah, sure, absolutely. So I would say I got into this space about eight years ago or so. It was kind of due to my own financial necessity. So I was looking for, for a separate source of income and I ended up buying an online business, which was actually a software business. Obviously this was my first time kind of buying any sort of business. So it was a lot of learning, kind of on the fly. But I did that for about two years or so, operated it, and then ended up selling that almost two years later. And I really liked the model. I liked that everything was obviously online, so that really appealed to me. So I started talking to a couple of investors and they're like, hey, can you do this again? And I was like, sure. Ended up doing it with a few investors, kind of as one off investments. And I thought to myself, okay then now how can we scale this a little further? And so I ended up starting a small cap private equity fund called SiteVestment and ran that for about two years or so. And after exiting that fund, I went more into the consulting route where I was helping PE funds mostly focused on E commerce and SaaS acquisitions. I was helping them with their due diligence process. So a lot of it was just coming in, building out their due diligence process and then, you know, kind of continuing to operate that. So after doing that for a couple of years, you know, I kind of wanted to do my own thing and I found a lot of gratification in helping people get into this space. So I figured I'd kind of turn it into a business, help people while also making money off of it at the same time. So I started rapid diligence about two and a half years ago or so. And since then we've been helping, as you mentioned, individuals, funds like one off entrepreneurs, whatever it may be. We've been helping them with mostly online business acquisitions that have focused on SaaS, E commerce content and kind of really anything else in the online business world.

[4:04] Host: And are a lot of your customers coming to you having found businesses to buy on Microacquire or Flippa or some of the, or any of the big online brokerages like Quiet Light and Empire Flippers? Is that really kind of the source of a lot of the deals that you're seeing?

Guest: Yes, I would say about 70, 60, 70% of our clients, whether they're funds or individuals, come to us and they're usually under LOI already. So they have a business they're looking at and they're like, hey, we just need your help with due diligence on this. So for that we, you know, we do operational, technical, financial and we'll kind of dig a little bit more into that. But these are, that's about 70% of our clients and the remaining 30%, they're usually first time buyers and they've been looking for a business for about the last couple of years, the last couple of months, and they really need a little more help. So these people typically don't have a business under loi, so we help them kind of throughout that process. And that's something kind of a bit unique that we do. And we call it our start to finish plan. So that includes helping them find a business according to their criteria, search for that business, you know, preliminary vetting, deep dive, due diligence, and then also negotiating on their behalf, helping with migration, closing and post sales support. So it essentially makes us kind of, you know, helps us be there for that entire process from start to finish, which is, you know, which is really useful for most of these first time buyers which will then after that they'll usually do this one more time and then they'll become kind of repeat buyers off of our individual services. But that's roughly what the breakdown looks like.

Host: That profile of buyer sounds like somebody who's got money and doesn't really know the space and wants you to. It's kind of just saying like Ahmed, go find me a business to buy and take me through the process. But basically you're out there sourcing the deal. You're going to diligence, you're basically going to do everything and you become kind of their investment, their investment deal sourcer and kind of doing everything for them and their passively in the background. Am I understanding that correctly or are these entrepreneurs who themselves really want to get involved in the business, they just want you to do the first deal kind of for them?

[6:09] Guest: Yeah, it's a little bit of both. So it's really interesting because we'll have some of our clients that are on that start to finish plan that are super passive. Right. They kind of want us to go in and do everything for them and obviously that's totally fine. And we do that and then we have some that are more interested in learning that process. So it's a healthy mix of both. And I think one of the biggest, the best feedback I've gotten about this is that we almost serve as kind of like their representative, right, Like a buyer's agent to represent their needs throughout that process. So again, a gratifying process. But it's also, we've seen a lot of success with it because of that, because they feel like there's someone there for that entire journey versus trying to, you know, source out to like six, seven different companies for different parts of that process.

Host: Very cool. Okay, well let's dive into some of these, these items that you really look for. And people really need to make sure they diligence like the top items. So let's take each category in turn. We'll go e commerce, then SaaS, then content. So I come to you And I've got an E commerce deal, an E commerce business I want to buy. What are the top three things you tell me I need to be super careful with and make sure are just tight?

Guest: Yeah, it's a really good question. So I would say we break it down into about four different categories. Right. And I think looking at it in that perspective helps kind of understand the differences of these categories and their importance and I'll kind of run through them really quickly. The first I'll talk about is like existential, right. Of the E commerce business. And when I say that, what I really mean is, you know, what, what product defendability is there? And that's something we've started to really become a lot more critical of in these last few years, in these last couple of years as Amazon's become larger and larger. Because we are not, you know, personally I'm not a huge fan of like these dropshipping businesses because again, maybe they worked over the last 10, 15 years, but a lot of them don't work as today and I certainly don't think they're going to work very well in the next five years. So the question is the products on the website, on the E commerce website, are you just drop shipping products, Are you just a retailer or are you creating your own private label products? Right. And if it's the first two, what defendability is there for your product or for your business versus Amazon? Right. Because most of the times, unless it's a specialty product, they will be on Amazon and Amazon's likely going to cut you on price and they're almost certainly going to beat you on delivery and shipping. So we need to first figure out like existentially, is this business solid and is it going to be around for the next five to ten years or so?

Host: Can I just interrupt really quick? Sure. So when you say Amazon is likely to compete, you mean Amazon itself is likely to look at lucrative high traffic product categories, consumer product categories, and launch their own Amazon Basics product. Are you just saying the universe of other competitors are out there, are going to compete against you on Amazon or both?

Guest: Yeah, a little bit of both. But essentially like, hey, is this product, if you're selling like, you know, these shoes, right? Can I find these shoes on Amazon and get them in a day and a half or two days on my porch, Right. Whether that's through Amazon Basics or through a private seller, the question is can I get it for cheaper and can I get it more reliable for cheaper and quicker from Amazon? And if the answer consistently is yes for Most of the products on your business, it's a good bet that's not gonna be around for the long haul.

[9:24] Host: Cool. Okay, please continue.

Guest: Awesome. Yeah. And then we kind of look more into website traffic, right? So one of the things we look at there, is there a diversified source of traffic, right? So if they're doing organic traffic, how competitive is that organic space? But also if they're doing paid ads, like especially for e commerce businesses, how much is that eating into your margins? Right? And that's important because if you're getting a really great deal on paid ads, but your margins are very low on your e commerce products, at some point, if a competitor comes in and drives those costs per click up, are you still going to be able to survive as a business? And similar with SEO, how competitive is the organic search space for this particular niche? So we really look at traffic after that and then after that we'll go more into financials as well. So, you know, does the business have healthy margins? Does it, how does it compare to other e commerce businesses in this space? Looking at revenue trends, valuation and all of that good stuff and then moving more into that operational side of things where, you know, the question is, especially for a lot of our clients that are looking to buy truly online businesses, is that can I really run this business from anywhere in the world? Right? So if you are a private label product provider and you have a warehouse, can this warehouse be run from anywhere in the world? But also like what supplier issues are you going to face, right? Like are there going to be problems with the existing suppliers? If you're looking to scale this business

Host: so everyone comes and that's something that you can you have the expertise to go in and look at a business and identify and answer?

Guest: Yeah, absolutely. Because we do chat with these suppliers and we try to have get an understanding of their kind of their capacity, right? Like where are they located, how much product can they produce at maximum capacity? And the reason this is overlooked a bit and it's important is because if you're buying a business particularly to 4x that revenue in the next two years with marketing alone, if that supplier does not have the capacity to 4x their product, your growth is futile, right? Because sure, you'll get these orders, but you can't fulfill the order. So that's why these things become especially important and we do focus on them on a case by case basis as well. So it's like if we find, if we have a client who is one of their top priorities is growth and hyper growth, then we look at all of the pain points of growth and whether they're being addressed versus if it's more of, hey, I just want something that'll kind of bring me income into retirement for the next 10 years. Then our focus is a lot different. But we'll still look into these. But we'll have different areas that we'll focus on then.

Host: Excellent. Sure. So you're looking at not only the business itself, the intrinsic kind of defensibility growth potential of the business itself, but what that owner, your client, wants to do with that business. If they're less ambitious with it, then it doesn't need to have may be quite as tight. Just the characteristics of what you look at are a little different. One thing that you see a lot on E commerce sims and listings is that if a product is just being sold on Amazon, oh, the opportunity here is just to add another revenue channel in the form of another sales channel in the form of a Shopify store and vice versa. There's two or three or four primary ways that E commerce products are sold on Amazon. On an independent website, usually often driven by Shopify and then I guess walmart.com and couple of the other second and third contenders to Amazon. When you see a listing like that, an E commerce listing, that's like, oh, just turn on these other channels. The existing owner hasn't done that. How do you respond to that?

[12:55] Guest: Yeah, I think that's a great question. And one of the things is like, why haven't they done it? Right? And I know the response is usually, oh, we haven't had time and stuff, but usually what happens, at least I would say in at least half of the cases is they've tried, but it doesn't work. Right? So for example, one of the things we talked about a little bit earlier were margins, right? So it's like, how healthy are those margins? Obviously when you start doing stuff like fba, right? So fulfillment by Amazon, those margins get eaten into quite a bit more, right? So for a lot of these businesses where if your margin is like $20, $10 per product on your E commerce site, that's not going to always convert so well on Amazon. So a lot of the times it's not a simple matter of just turning it on. It's also understanding how these work cross platform, right? Because with E commerce, a lot of it to drive traffic to your website, it's about, you know, SEO, like how you're ranking in Google paid ads for Amazon, it's a whole different thing, right? It's how well your Ratings are how you're ranking on Amazon's platform too. And while the two have similarities, they're not always entirely equal. So it's incredibly important to really assess what that opportunity looks like instead of just saying, hey, you know, you can also put this product on Amazon, but again, there's other stuff that goes into it. You sometimes need to bid on those keywords. You end up competing with other people on Amazon selling that exact same product. So I would say, like, yes, there is usually more opportunity, but it's a little bit more involved and a little bit more complicated than I think some sellers might want you to think.

Host: So if you see a listing like this, an E commerce business for sale, that's say just on Amazon, just on. Well, sure, let's take that as the first case. Just on Amazon. And the listing says, yeah, just turn on Shopify. And, and here's your new channel. You would diligence that like, okay, well how set up are they to quickly drive or how long would it take to drive a significant amount of traffic to their domain, where the Shopify store is, how's their SEO profile, if it exists at all, et cetera. So you'd really look at that flip side. If the E commerce business that's for sale is only on their own domain, probably driven by Shopify and the listing says, hey, just turn on Amazon, then what you would do doing your diligence is go to Amazon and look at that category, how crowded it is, what the cost per click is on some of the ads for that category, what the ratings profile is for some of the competing products, things like that.

[15:22] Guest: Exactly. Yeah, that's exactly right.

Host: Great. This is awesome. Amit, let's move to SaaS. So now I come to you. I have a SaaS company I want to buy. How do we diligence this?

Guest: Sure. Yeah. So we'll kind of break it into similar pieces, right? So one of my favorite ones you'll hear me talk about a lot is existential, right? And this applies a lot to E commerce, but it also somewhat applies to SaaS, but I think in a different sense. So one of the things we really look at with SaaS is like how sticky is this product and notably how quickly can this product drive value for someone using it for the first time or switching from a competitor and also how difficult is it to switch off of it? Right? So these are things like SaaS, PE funds or PE funds acquiring SaaS businesses. They look at a lot, right? Like the stickiness. So first we look at that, we look at what value it's driving, if that value is justified based on the price and just those things. Right. Kind of like that existential component of it. And then we'll kind of move more into like the marketing website traffic which is pretty similar to E commerce. I think with SaaS we'll see a lot more referral based businesses. So we've looked at a few where like 90% of the traffic is coming from referral businesses or from other websites. And these are usually like review sites or some SaaS owners will kind of partnership with forums that are targeted toward that niche. Right. And then those forums or those blogs will drive more of that traffic. So we see a lot more of that with SaaS just because again you need to get that user once and hopefully you continue to generate revenue off of them for a long time. So what we really try to understand at that point is like how long have those partnerships been around and how much of of the revenue is generated from that single partnership. Right. Because that'll help you understand your exposure to like hey, if this falls through, does your business still continue to exist? So that's kind of the two things. And then number three, similar to E commerce, we'll look at financial. This is somewhat specific to SaaS where you know, obviously we start looking at churn, we'll start looking at retention, the lifetime value. But one thing we also look at is how is the business, how are the businesses financials impacted in terms of their cost based on growth? Right. So obviously SaaS is great because even as you acquire more users, a good SaaS business should not linearly increase in cost per user. Right. Because you should be able to aggregate that. So that's something we look at as well. And then of course one of the most important pieces is technical. And I think this is kind of where we have a bit of a unique advantage where whenever we do a technical breakdown, someone on the rapid dodrence team, usually someone with a senior software engineer title, will then go through the code. They'll do tech stack analysis. And this is both looking at the actual code base and ensuring that there's good architecture integrity, good code integrity, but also really good processes in place. So are they using proper version control? Are they doing proper production rollouts, Are they rolling back properly if there's an issue, what is that process like? And we can also talk a little bit more about why those are important and why we focus on that. But a lot of it has to do with the fact that when you're buying this business, what that, what the owner or the existing developer has in their mind, that's not always going to translate to a new developer or to you. So the one thing we can rely on though is good processes, right, because we've seen SaaS owners and usually these are the solo developers, they'll be making changes into production, which is kind of the live environment on the fly. But if someone takes over, they're not going to be able to do that because they don't have that detailed analysis or understanding of the product that this owner does. And that's likely going to lead to more issues. So that's why we focus a lot on those processes because if they're in place, then no matter who takes over, those processes should be kind of like the fail safe there in case something goes wrong.

[19:12] Host: So if I bring you a SaaS and it's by an indie hacker and there's just a production environment, there's no dev development environment or staging environment. This for people who are not software fluent, that just means like where you basically implement the changes to the software code base or add a new feature and you test it before you actually push it live to your users. So if I bring you a SaaS and there's just a production environment, you say to me, well, this is a giant risk. You're going to have to, once you acquire the business, you're going to have to invest in building out a staging or testing environment. So you need to negotiate a lower price. Or do you say just walk or. It just depends. I guess it probably just depends on the complexity of the software and a lot of different variables. But that's an instance of you helping me negotiate. I would then be able to go back to the seller and be like, look man, you don't even have to a like a staging environment here. We have to. That's going to be really expensive for me to implement once I take ownership. We're going to have to reduce the price basically.

Guest: Yeah, exactly. And a lot of that is based on, like you said, like the complexity of the software obviously as you're looking at smaller SaaS businesses, right? So if we're looking at anything under 100k, at least three out of four of these things are typically missing. Right. And we just have to be clear what the risks are there and what the costs will be. But if you're looking at a SaaS business that's like 5 million plus with a team of developers, this should all be in place. One, it depends on the size as well as the complexity, but also the architecture As a quick example, if you're using Firebase for hosting and database and stuff, and you have only a production environment, it's relatively easy, cheap and free. I think it's actually free for the most initial part to then set up a staging environment for Firebase and just mimic your production environment. But if you're using something else, like some AWS components, that might be a lot more difficult. We'll also look, look into that and be like, hey, yeah, they don't have a staging, but you're looking at a business worth 50k. Most of the time. There's not a staging environment. You can do X, Y and Z after you buy it, to go and implement that relatively easily for like 500 bucks or 100 bucks. And if you want, you can negotiate that with the seller and kind of bring down the price for that much or just kind of let it be and just know that that's your cost and your risk going into this.

[21:28] Host: What do you look at for content businesses? The obvious one, of course, being SEO. I'm putting words in your mouth. Go ahead. Sure.

Guest: Yeah. So obviously, again, like you said, SEO is important, but one of the things we've kind of like with E commerce, how we've started focusing on like the defendability of products, we've also started focusing on the defendability of the content. Like, as in, are you providing real value to the, to the, to the users, to your readers, right. As this business. And the reason that's important and Google and other search engines have started to place more importance on this is because if you're providing true value to your users, they're likely to come back. Right? They're likely to continue consuming your content. And if, I don't know if you've looked at content sites a lot over the last couple of years, but three, four years ago, we saw a bunch of these top 10 sites, and they top 10 reviewed everything from electronics to apparel, whatever it was, and there wasn't real meaningful content on them. They would just take what was from Amazon, they would rewrite it, and they would just throw them there. And it was more about quantity over quality. First we look at that and we ensure that that's in good standing. But then we also look at what you're spending for this content and what you're spending for backlink. Because a lot of times what we've seen is that someone will start a content business two years ago and they've spent almost as much. You know, their revenue is almost equal to their expenses in terms of like the amount they're spending on content, but also the amount they're spending on backlinking. So the challenge there is understanding, hey, once we wean off of this cost, is that content going to be evergreen? Right. And obviously that depends on what they've put out there, the niche and stuff. But that's a lot of what we look at for content businesses.

Host: And how do you decide if content is evergreen or or not?

Guest: I think it's on a case by case basis. Right. So for example, a business or a content website that reviews the latest tech gadgets, that content is a lot less evergreen than a gardening website that just tells you how to plant pumpkin seeds. Right. That was the same like 50 years ago that it is today, for the most part. But a tech site, you know, obviously that content becomes stale a lot quicker as new gadgets get released, as new cars get released, new software products and stuff like that.

Host: And for content businesses, basically, when we say content business, do we mean pretty more specifically businesses that are just talking about a product category and reviewing products in that category typically, or do you also see content businesses that are just maybe like a news website or a local news website or something like that?

[24:00] Guest: Yeah, that's a great question. And we've seen a little bit of both. I think for the most part when I talk about content businesses, I would say 80% of the ones we see are reviewing products or they're reviewing some sort of software. They're typically in that product space and then 20% are kind of the catch all where it's like news or just funny stuff, pranks, whatever it may be, everything else. But the premise for the most part stays the same because they all either generate revenue through some sort of affiliate links or some sort of advertising. So. And they generate value for their readers by providing content worth reading.

Host: Right.

Guest: So I think for the most part that premise is roughly the same.

Host: Same with the affiliate based content businesses, which as you said, is probably 80% of the content businesses available for purchase out there. They've always struck me as very brittle businesses for two primary reasons. First of all, much of the affiliate revenue that these businesses are generating often is based on Amazon. I'm reviewing a product on my website and then I'm sending the reader to Amazon to buy that product. And, and this is all very basic information for people who know this world, but for people who don't. What happened last year was Amazon pays you a certain percentage of the sale. So say Ahmed comes to my website, I've reviewed some product, he clicks through, goes to Amazon buys this product, the product costs $100 and Amazon pays me, the website owner in the middle who reviewed the product, whatever, $5, $6, some single digit percentage of the sale. Amazon can set those prices, those commissions arbitrarily. And there was a huge disruption in this world last year when Amazon just halved the commissions it was paying for a bunch of the different categories. Every product category has a different commission that Amazon has chosen to pay based on whatever internal machinations go on at Amazon. So all of a sudden these website owners who were generating, I don't know, 7 or 8% or maybe 5% from their sales that they delivered to Amazon were making 2%, 3%. So overnight their revenue halves, it's a terrifying prospect. I mean, that's the ultimate example of customer concentration. You're just totally reliant on Amazon's whims and what they choose, essentially they're choosing what they want to pay you. Okay, so that strikes me as giant vulnerability number one. The other one is so on the one hand I'm putting all my eggs in the Amazon basket. On the other it's the Google basket. Because so many of these sites are generating their traffic, their readership through SEO. And of course SEO is essentially Google is the monopoly. So they're trying to get their content ranked and Google, and Google is notoriously always changing its algorithm. Oftentimes the algorithm changes are quite small, but there can be very large algorithm changes that can just completely devastate your traffic because you wake up one morning and you were ranking number two and three for all these different terms that are related to your website and, and tomorrow you're ranked number 13 or you've fallen out of the Google rankings altogether or what have you. Both of these prospects have always made me, have always really spooked me away from this category of business. Disabuse me, tell me that it's okay. And why are these types of businesses so popular given these screaming vulnerabilities?

[27:26] Guest: Sure. Firstly, yeah, I remember the day that happened where they cut those overnight and it was not a fun next day for anybody. I know brokerages were scrambling to reprice websites. We were in the middle of Lois for a couple businesses that needed to be kind of reevaluated. So it wasn't a fun day. And I do wholeheartedly agree that there's a lot of vulnerability in that sense. What I'll say is that the reason they're so popular is one, because they're just easy. Right? Because with an E commerce business you deal with Suppliers, customers, customer support, et cetera. With an affiliate business, you put out content and, and once you put it out and it drives traffic and Amazon deals with everything else or whatever affiliate you're using, right? So one, they're easy, they're really easy to build processes around. And they're kind of like the quintessential online business in the sense that you do it from your laptop, you have a few people publishing content, you just look over the metric and you're good to go, right? You're Beatside with the margarita. It's very much so an idealistic business in that sense. Right? Now, obviously there's huge, huge vulnerabilities like you mentioned. And I would say that in my mind I look at it as levels of affiliate businesses. So on level one, we have the affiliate businesses that deal exclusively with Amazon, right? And those are typically your first. On your level one, there's a lot of vulnerability there because again, Amazon has and can change those overnight. Then you have level two where a lot of this is well diversified, right? So people will start using Google AdSense, so they'll start putting ads as well as affiliate links, but they'll also start using other affiliate software, usually private software, other, you know, just to have like drive that, that traffic to maybe 7, 8, 9, 10 sources instead of one, you know, conglomerate big source. That's Amazon. So I would say that's level two. And then you have level three where I see people come in, they'll buy these affiliate websites and usually they'll be like level two or level one affiliate websites. And then they'll actually buy e commerce sites that are in that same niche and they'll drive that affiliate traffic primarily to their e commerce site or to other affiliates as well. It'll be a good mixed bag, but in that bringing in so much traffic to that e commerce site that it justifies the cost of purchase. And that's kind of like where, where these eco. Where these affiliate websites become super attractive. Because, you know, I think one of the coolest things in the world is having. And one of the most powerful things in the world is having attention, right? It's why people become creators. It's why, it's why people start podcasts, right? Because you have that attention, you have those eyes, and in those affiliate sites you have a ton of attention and you have a ton of eyes that once, once. And if you decide to then translate that intention into something monetary, it becomes something pretty amazing. I would say that's the reason people still go after them. But also a Lot of people have mitigated these risks with Amazon, with Google and they kind of take it to a point where it's more of an acceptable risk, whereas it's no longer an existential risk.

[30:24] Host: I think I mischaracterized when I was describing the affiliate model because you're absolutely right. Amazon isn't the only in town. It's what a lot of people use. But there are other places to get affiliate deals. So you're not beholden to Amazon. I would say in the SEO side with Google, there really is only one game in town. So SEO and Google are kind of synonymous. What you just described about assembling buying a content website as a source of traffic for an e commerce business that you also buy is very interesting. One of my earlier guests, Paul Laemmle, he acquired, he got some investors and acquired a nice portfolio of websites that were generating a good amount of money on their own in their own right. But his longer term vision was to do something similar to what you just described, which is he has millions of or half a million eyeballs a month coming to this portfolio of websites and so he's got the attention. And so now they were going to start coming up with products that they launched to this audience. So I don't know that they were going to go out and acquire existing e commerce products, although I'm sure they're considering that or will consider that. But they were thinking that they would just launch their own products. But the point is the acquisition of these content sites, it's basically attention that pays for itself because the business are already profitable businesses in their own right just on an affiliate model. But if you slowly but surely divert that attention to your own products, your margins just take off. Very interesting. Please go ahead.

Guest: Yeah, no, that's exactly right. And I think like, like you said, like I've had clients come in and they'll do that with not just e commerce sites but they'll build out entire social platforms. Right. So this works well if your affiliate site is something related to traveling. So I looked at one that was like they reviewed travel places and stuff and then they built out an entire social platform for travelers to connect on based on this affiliate site alone. So that site itself, just a part of the traffic that was going to it. I think they put like a basic banner in a few parts of the website that was Dr. Tons of traffic to this social platform which then they kind of converted into a SaaS business. So it was a really cool like, you know, linking of businesses. And yeah, that's that's why I think the right affiliate business, there's, there's just a ton of potential. But I do wholeheartedly agree that the wrong affiliate business, there's just way too much vulnerability.

Host: You know, when I hear that story, like it sounds awesome in theory and kind of like, you know, just moving the chess pieces around and really fun, but it also, it's kind of like, it seems like you could really fall on your face with that strategy because you're investing a lot to acquire this business, to essentially use the audience of that business, advertise this other thing, in this case a social network. And so I just wonder, it's like why, if I'm trying to build a travel social network, I can place smaller bets in the form of advertising on sites that I don't own. And then just because some of that advertising is going to work, some is not going to work. And so good thing I didn't buy the business where I advertise where it wasn't working. And then I can see which websites that I'm advertising with are sending me traffic that is converting and people are joining my social network via this website and either acquire that website at that point or probably more affordably just continue to advertise on that website and then I don't have to actually acquire the entire business. So I don't know if you can answer that, but that strikes me as kind of like maybe the more conservative and maybe the better way to go about it. Yeah.

[33:58] Guest: And I'd say mostly what happens is it's not an all in type situation. Right. So typically they'll place a banner here, they'll place a link here, but like 95%, if not all of it of that revenue is still intact based on the reviews they're doing. Right. So it's kind of like their missed opportunity really is someone else's banner that could have been there that would have paid them per click. Right. That's really the risk there. And so they take it as like, okay, this is an acceptable risk. But on the flip side, a lot of, of times it's a user first type experience with these social networks or whatever they're building where they want to first build this platform for a year, bring in users, drive value before charging for anything. In that case, that advertising fees is going to add up quite a bit over that first year that they advertise on this other website. That's typically why they'll go for their own platforms. It's cheaper in that sense. And really the only Risk is that opportunity cost of another advertiser being on their way.

Host: Website makes sense. Makes sense. Well, Ahmed, we're getting toward the end here. I feel like if you're technical enough, SaaS is the one is the best, right? I mean, everyone loves recurring revenue. Am I wrong about that? Tell me, of the three categories of digital businesses, your own opinion or does it just depend so much within each deal that like a great e commerce company can crush, like a middling SaaS company or whatever?

Guest: Yeah, no, as with most things, I think it's very deal specific. If I had a personal favorite, obviously I've looked into a lot of these. I also have a technical background. I really do like SaaS businesses. But I will say there's a caveat with those. And the problem with SaaS businesses is that when you look at businesses that are too small, and I would say that when I say too small, I would say like under 2,300k purchase price, I think you have a bit of a risk with, with development costs. Right. So most of the times with an affiliate site, nothing's going to go drastically wrong that you would have to end up paying someone a couple thousand dollars to fix. But with SaaS businesses, especially if you're. If it's using some sort of antiquated platform or antiquated programming language, and even if it's not, if it's just using React or JavaScript, developers for that are quite costly. Right. So if your SaaS business is bringing in like it's a small business, it's bringing in like you know, $2,000 in profit per month. Month. And then something goes wrong on the architecture side or on the code base side, that can be really costly to fix. Even if you are like, I'm a developer, but I probably couldn't fix a complicated react issue. I just haven't done react enough.

[36:33] Host: Right.

Guest: So I would say there's a lot of benefits to SaaS, but that's the one downside that I've seen a few times and that I'm most wary of because that itself could set you back a couple months in profit. Whereas with the E commerce site, virtually all of them, or most of them are built on Shopify or existing platforms now or an affiliate site, most of them built on WordPress. You're not going to run into those same technical issues that you would with the SaaS business. Overall, I'd say definitely a solid business model, definitely something to look after, but it has that little bit of risk that makes it a bit difficult to navigate in the smaller deals circling back

Host: to the top of the call. Understanding the technical risk with the SaaS is diligence able. That's what rapid diligence would do. So you could. If I brought you a smaller SaaS deal, I guess what I'm trying to ask is like you can learn ahead of time if there's a lot of technical risk in a SaaS. Right? It's not. I mean, that would be the key part of the due diligence.

Guest: Absolutely, yeah. And we've actually, again, we've dealt with SaaS businesses in the multimillions and up to 100 million and we've dealt with them. Right now I'm actually looking at one that's under 70K. Right. So there's this big gap, but it's absolutely able to be diligent. I think the problem is similar in the sense that to do diligence on this, it's not cheap either. Right. It's at least a couple thousand dollars to just have a senior software engineer, someone with a lot of technical background go in there and look at everything. And if you're buying a 50k business, do you want to drop 2, $3,000 on that alone? And a lot of times buyers will say, no, it's okay, I'm okay. You know, I'll take that risk. And then that becomes a present risk. It's a bit of a situation where you have to go and just accept those costs or if you have enough of a background, do it yourself. It can be mitigated. It's a little bit expensive to mitigate at times.

Host: You're making a big contrast between buying a micro business and a larger business where the deal justifies more cost and due diligence, among other things. What do you make of the rise of micro businesses? Online micro business businesses and platforms like Microacquire that have really ignited excitement around buying micro businesses as side hustles or as proper businesses.

Guest: I personally think it's awesome. Right. So I think it's great because that's how I got into the space. And again, eight years ago, I think the business I bought was like 40, 50,000. So the space was completely different. Eight years ago this was common. Right now those are essentially micro businesses. But I personally think it's a great thing. I think that there are a lot of entrepreneurs that start businesses, but I think there can equally be as many entrepreneurs that buy businesses and build them. Right. Because everyone has their own strengths. So for some people it's scratch to 100k and for some people it's 100k to a million. Right. So I personally, again, I think it's a great thing and I think it also allows more and more people to enter this space, especially where the traditional businesses like platforms like Empire Flippers, like Fei, especially Empire Flippers, Flippers like, you know, seven, eight years ago, they were selling much, much smaller businesses than they are today. And the businesses on there today are not really accessible for the most part by your everyday person looking to maybe spend 30, $40,000. So platforms like Microacquire and to some degree Flippa have kind of continued to bring these, these businesses and these deals into the space for more people to get into and get comfortable. Right, get comfortable buying their first business and, and then using that as leverage to then go and buy a couple more.

[40:15] Host: Great. And last question, what are you seeing out there for prices? Everyone complains that prices multiples have gotten really, really high for digital businesses for a lot of obvious reasons. Covid, the tailwinds of COVID at least for E commerce, was a big tailwind. People are working from home, people are reevaluating their lives. They don't want to go and have a boss anymore. So buying a business is a way to become an entrepreneur. And on and on and on. The rise of platforms like Microacquire, like you said, it's bringing more people in, but that does push up prices. What's your take?

Guest: Yeah, no, prices right now are definitely high. I mean, there's no denying that, right. Whether that's justified or not, I don't know. Personally, I know right now, especially in the last couple of months, in the last year, we've had a hard time closing on deals similar to the real estate market where we've had a hard time closing on some deals at market price, at listing price. So again, that's just because there were so many offers, right? So like we've had people come in, if it's a really great SaaS business, they will make above listing price offers, right? Which is something that was not very common like three, four years ago. So again, it sucks for first time buyers to be completely candid because you know you're coming in, you have a hard budget or 50 grand, 100 grand. And it's difficult to acquire a good business because they keep getting snagged up by either institutional buyers or portfolio buyers. So, you know, it does suck in that regard. But again, I think more and more people, especially with COVID that accelerated this, are seeing, like you said, the benefits of just having an online business, right. Like you don't have. You can be anywhere in the world and you can run this business. And a lot of people didn't see how that was possible pre Covid, but they also couldn't fathom the idea that entire multinational corporations would be working from home. Right. So we did that. And now this seems like, this seems like not that big of a stretch. So again, you know, it is, it has a pros and cons, obviously. Great for sellers, great for brokers, but it's not as good for first time buyers because it again limits their entry into the space.

[42:26] Host: I heard an interesting take just earlier this morning from somebody about the multiples on SaaS companies. So they're high. That's basically how pricing is. And when you're acquiring a business, what multiple of profit are you paying for that business? And so everyone will complain about the high multiples. And SaaS, that's very appealing for all the reasons we're talking about. And then when you compare it to like a small, an SMB, like a sweaty business, let's call it like a plumbing company, which I talk to a lot of people who acquire businesses like that. The multiple that you pay on the profit of a plumbing company, for example, is a lot, lot less, right? So effectively you're buying revenue for a much cheaper price than with sas. Of course, with a plumbing company, it's local, there's a ceiling to how big it can get. All the obvious things that, that our audience probably understands. And so that's driving a lot of people to be interested in buying a sweaty offline plumbing type business, a trades business. His point was that even if the premium that you're seeing on SaaS multiples, even today, as high as they've gotten, still make it much more worth it. Because a smoothly running SaaS business with sticky revenue, sticky recurring revenue, is just so powerful compared to. Let's just keep using plumbing example plumbing company as an example. A plumbing company where the people problems are in order of magnitude, there are an order of magnitude more of them. You have to work much more in the business. Unless you make enough money that you can put in a GP that you really, really trust, you really have to work much more in the business than with a SaaS business. So yeah, his point was like, hey, I'd rather buy a SaaS at 6x7x than a plumbing company at 2.5x. Any reaction to that?

Guest: No, I understand and I wholeheartedly agree. Look, I think there are great offline opportunities out there, but one of the things you hear a lot Is that the one thing you don't want to do when buying a business is buying a job, Right. And I'm not saying that, you know, people that buy plumbing companies or local plumbing businesses are buying jobs, but it is more of a job than a well run plumbing business is more of a job typically than a well run SaaS business. Right? So I am of the belief that, you know, you buy a business to free up your time, right? You do it so that you have this ultimately my goal at least. And a lot of our clients, their goals are like passive income or relatively passive, right? You're putting in five, six, seven hours a week and you're bringing in this consistent revenue that, that you can do from anywhere in the world. That's freedom. And that to me is like the goal of buying businesses. But again, for some people, it's not about that. It's just, hey, I want to do something where I don't have a boss, right? And I can get a return on my investment quickly because then I can go deploy it in other places. In that case, an offline business, a small business, something local makes a lot more sense because you're not going to get a return on that SaaS business for quite some time. Right? So I think again, there's pros and cons and there's different buyer profiles that fit each. But the reaction to what you said to me, for myself, it makes complete sense because again, that's always been my goal and so that aligns a lot better with my goals than something local.

[45:50] Host: Ahmed, this was great. You crushed it. You were a font of information about this stuff. I want to go out and buy my sass right now. I'm going to hop on a micro requirement when we get off the phone. Thank you very much for doing this. I know know I'm going to want to have you back on, so I, I hope you'll be open to that. And thanks again for making the time.

Guest: Yeah, absolutely. Thanks so much for having.