Host: It's no secret that SaaS businesses are expensive. Valuations are turns higher than the 3x or 4x you see for traditional businesses, and because of this, a lot of searchers skip the category altogether. But there's a reason for these premiums. There's lots to love about SaaS, including recurring revenue, of course, and great industry tailwinds, among other strengths discussed in this interview. Thomas Smale has been brokering SaaS deals since well before it was the competitive category that it is today. In 2022, Thomas founded FE International, one of the leading M and a firms for SaaS businesses and he does an excellent job here breaking down how a first time individual acquisition entrepreneur like you can get a toehold in the Sexy World of SaaS. Please enjoy this interview with Thomas Smail of FE International. 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. August Felker is a two time successful searcher, first with a traditional search fund. The second time around he did a self funded search. Today, August runs Oberle Risk Strategies, an insurance firm with a dedicated practice group for searchers and acquisition entrepreneurs like you. If you've got a business under loi, Oberle will provide complimentary due diligence on that business's insurance and benefits program. A great no risk way to get to know August and team. They love helping searchers. They've worked with hundreds. Oberle is a specialty insurance brokerage for searchers by a former searcher. Check out oberle-risk.com O B E R L E- risk.com, link in the show notes Thomas Smail. Thank you for joining me today on Acquiring Minds.

Guest: Hey Will, thanks for having me on.

Host: Thomas, you're the founder and CEO of FE International. Fe, as it's often called, is a broker of digital businesses. It's been around for 12 years, quite a long time in Internet years, and in that time has sold over a billion dollars in digital businesses on behalf of clients. So Thomas, you've been involved in countless acquisitions of E commerce businesses, content and affiliate businesses, and SaaS businesses, and today we're going to focus on the latter of those SaaS. I want to treat this conversation as a Primer on buying SaaS businesses from the perspective of an individual acquisition entrepreneur who's really the acquiring minds audience. SaaS is often touted as among the most enviable business models around. So we're going to get into why that Is. But before all of that, let's do an intro. Thomas, if you would, a quick bio on yourself and on fe.

[3:03] Guest: Sure. Well, yeah, thanks so much for the introduction. So I founded FE International in 2010. I, at the time was at college. I just graduated that year. And for those of you who remember, it was not a particularly good year to graduate. From an economic perspective, there weren't that many jobs. Lots of investment banks, which was kind of the industry I was looking to go into, were rescinding job offers for graduates. So I thought I would go and I guess essentially have a go at launching a business and see how that that went. I've been spending a couple of years at college buying and selling domain names, websites. So I decided to get into, I guess you call it like technology industry, like learning a little bit how it worked. But as a student, I didn't really have any money. So I was buying and selling websites for $100, put it on a credit card, and then at the end of the month I would sell it for $500 and then pay off the credit card and do the same again. Back then, obviously, it was a very different business to what it is now. But what I found is that I guess the concept of buying and selling and negotiating doesn't really change as deals get bigger. It just gets slightly more complex, slightly more formalized. So in the year I graduated or in the month I graduated, I published a course or like a book on how to buy and sell websites. And it was really just my experience kind of turning $100 into 500, turning 500 into 2000 wasn't really making a huge amount of the time. But I think particularly given the economic conditions at the time, there was a lot of interest in kind of buying and selling. People wanted to learn about it. Um, so that's what I was doing. So I published the book. And I thought at the time, I remember I was selling it for $97. And I was 97, of course, $97. And I was. I was 22 years old at the time, didn't come from a family money, really have any money myself. So I was kind of $97 and I might sell three a day. And at the time, that was a huge amount of money living in the uk. So I thought I was going to make all my money. My whole career would be selling books and courses essentially. But what happened, like, long story short, is people would read my book and say, hey, Thomas, actually I have this technology business which is making $10,000 a month or whatever. It might be. I read your book. It seems like you know what you're doing. Can you help me sell my business? And back then if you wanted to find a business broker or an M and a firm for a tech business, it's worth 500,000, 5 million, 20 million. There wasn't really anyone that existed. You could go to an investment bank if you had a company like Goldman Sachs, Morgan Stanley, JP Morgan, whatever it be, if you had a hundred million dollar business, but below that there was no one. So that was I guess the short story on how I stumbled into the space. And then I spent a couple more years between 2010 and 2012, the first two years of FE, doing a little bit of everything. And then in 2012 we didn't necessarily pivot as such, but we went entirely focused on M and A. We stopped selling courses, we did a bit coaching at the time, you name it, we had probably tried it. And then since then we've really just been highly focused on M and A. Like you said, we primarily focus on SaaS, E commerce and content based businesses. But a lot of businesses that will fall under the guess the technology, technology kind of general descriptor and it's really just compounded from there. The industry's grown. We spent very many years publishing a lot of content, been interviewed on many podcasts, spoken at lots of events. I guess as people sell businesses, they also talk about it. So we're fortunate that if a client has a good experience, they will not necessarily go around telling everyone how amazing we are, but they'll go around telling everyone how amazing they are with the business they created and they, they sold. And then I guess more people interested in the industry. And over time you mentioned we've done over $1 billion in deals, worked with over 1200 sellers. That starts to build as quite a lot of people out there who are talking about the industry. So it's really just compounded from there. And now we have a team, over 100 people across everything we do. We have diversified a little bit outside of just M and A. Most of our team either New York, London, Miami or San Francisco. We have some remote as well. We're now at the stage where if you have a SaaS business to sell, for example, you call us. Whereas 10 years ago, firstly SaaS wasn't really a thing and there wasn't really anyone you could call if you had a business worth $1 million, $10 million or whatever it might be.

[7:59] Host: And two follow up questions. So yeah, in terms of where you are in the market, $1 million, $10 million SaaS businesses, is that kind of your range? $10 million enterprise value down to one or half a million?

Guest: No, that's just an example. We're going up to 100 million. I'd say generally most of our deal flow is below 50. So in the SaaS base, up to 50, we would work on larger deals as well. But it's not like we're selling 20, $80 million companies a year and then we go a little bit smaller than that. Generally, we don't go much below a million for a SaaS business, but occasionally you'll find us representing something a little bit smaller than that. So I say 1 to 50 is probably our, our average deal size at this stage, particularly for sas.

Host: Okay. And when you said you diversified outside of M and A, what, into what?

Guest: So one of the things we've done like since we founded the business is I've always, well, founded the business buying, selling businesses myself. So that's what my business partner and I have kind of continued to do on the side. So sometimes we've done that. We generally buy one business a year. And I guess as we've grown, years ago it would be we're buying, we're buying a $500 business. Now we're buying substantially larger businesses, running them on side. Sometimes we work with investors, sometimes we do it ourselves. Sometimes it might, might be a past client, someone who sold a business, they've made $20 million, and they want to kind of deploy some of that capital. Yes, that's part of how we've been, I guess, diversifying or making sure we can offer more to people. We generally run it as a separate business, but at least in my mind, it's all kind of under the same similar kind of umbrella.

[9:43] Host: And you're still doing the, the one acquisition a year cadence?

Guest: Yep, we, we do about 1, 1 per year. It's just, I guess the average size each year is, is growing. So it's well beyond that $500. Now.

Host: I want to circle back to something you said at the very top in the story of Fe International. You actually had this posted on LinkedIn this week or recently. You were asking people about their career pivots, and you said of yourself, I pivoted from teaching people how to sell their businesses to, to selling their businesses for them. And you just explained to us how that was the evolution for kind of how Ivy International came to be. I'm just curious, is there some bigger insight there that you know? Because a lot of people in the online world want to teach, they want to do courses. You just, you know that that whole world just is is growing and their courses are proliferating. And one of the first ways people become entrepreneurs often if they want to be digital entrepreneurs, is by teaching something just like you. Selling a book, selling a that trend is only intensified in the 12 years since you did it. But you chose to get away from actually doing the teaching and just do the work itself. People would read your book and they would pay for the education that you were providing, but still just not want to do it themselves. I just wonder if there's an insight to be had there. Is there always more money in doing the thing rather than educating people how to do the thing? Wouldn't it be great to have experts at your back when buying a business? People to help you polish up your pitch and processes as you go to market as a searcher, then help you evaluate opportunities once you get some deal flow. Such experts exist buy side advisors, but they'll cost you to the tune of tens of thousands, even hundreds of thousands of dollars. But another option exists, the Acquisition Lab. The lab is a do it with you buy side advisory service, not do it for you. Founded by Walker Deibel, author of Buy Then Build, the Lab represents Walker's vision for what is most needed to make a searcher successful and available at an accessible price. It's cohort based and you will come out the other side of your cohort prepared to go to market as a savvy searcher with a tight message and process so brokers take you seriously. Pre approved for a loan and with an entire community at your disposal to help you along the journey to buying a business. To learn More, check out acquisitionlab.com, link in the show notes.

[12:14] Guest: I think firstly maybe overthinking the sophistication of the decision I made. At the time I was not necessarily a kid, but I was just opportunistically trying to find the thing that would make me the most money. And to my or like I build a business around quantity to my previous point as an acquirer, if you're willing to put the work in then that creates opportunities other people are not willing to do. So I think with a service like see I run a service business. We represent lots of different types of businesses. One of the big opportunities within a service business I think one of the things Fes done really well since we were founded. So always willing to put the work in, always available. Not necessarily. You can call our office at 11pm on a Sunday and Someone's going to be sat at their desk and pick up the phone. But we're generally very good at being available. We're very consistent, very reliable. And in a service business that goes like a very long, a very long way. So I don't necessarily know if there's a lesson to be learned in that, but I think as an acquirer you need to think about like what you actually, what are you like, good at? What you're good at might be working hard, being available, being reliable. And I think a lot of people, particularly over like a 12 year time span, not the smartest person in the world, didn't really know that much about the industry coming into it. But if you consistently work hard and you're always available and you kind of do what you say you're going to do, then over time people will start to talk about you. You don't necessarily have to do that. I think it's if you are a naturally reliable and hard working person. I think a lot of people don't realize how many people out there are not hardworking and reliable. So often you can get ahead just by being yourself and doing a good job. So I think a lot of people kind of get obsessed over different business models, whatever they like to buy. Yes, I think there are pros and cons of lots of different business models. But sometimes like a boring service business can work quite well if you're willing to kind of put the work in. So maybe, maybe that's really the lesson. It's kind of find something that works for your kind of skill set, personality, particularly if you're an individual acquirer and do that. I never suggest to people buying something you have zero understanding of either conceptually or technically. That doesn't mean you need to be able to do physically every element of operating a business you acquire. I think it's important to at least have a working understanding or have a propensity to learn or kind of find someone who can teach you how it works.

Host: Great. Well, in that answer you've really segued us nicely into obsessing about a particular business model which is going to be the meat of this interview, which is SaaS.

[15:10] Guest: SaaS.

Host: Software as a service I'm sure folks know is essentially just today it's just software, the software business. But the SaaS SaaS acronym is kind of a holdover from when software wasn't all delivered in the cloud. And you know, 12 years ago when you got started, SaaS was the term, probably existed, but it certainly wasn't the norm. Or as popular or as hot as it is today. Give us a quick history lesson, if you will, on, on, on the evolution of SaaS as you've observed it over the last 10 or so years.

Guest: Yeah, so I think as you rightly say, like in 2010, I mean I'm sure SaaS did exist, but if you ask people in the industry, no one was doing SaaS or talking about SaaS. Almost all software was downloadable desktop software. That was basically the vast majority of the industry. Cloud based was not necessarily completely uncommon, but generally the most common thing you would have is you'd have a desktop download and then the only cloud element would be some sort of like piracy verifier to make sure you haven't kind of stolen the product or downloaded it from somewhere you shouldn't. And then that started to really like pivot and transition over the last 12 years. And to your point, now we actually do sometimes sell downloadable software still. So it does exist, but it's way, way less common. Things like for example, like WordPress plugins, technically we would generically describe it as SaaS but generally WordPress plugins just have a one time license fee so they're probably closest in their dynamic to kind of the software businesses of old. Yes, There are some WordPress plugins you might pay for on a subscription, but that's not the, the most common type of plugin. Most of them might be 47, 97, whatever it might be, and then maybe pay a backend subscription for support. So that's kind of really how the industry developed is you'd pay a one time license and then sometimes you'd pay either for updates or you'd pay additional for support on a subscription. And then the whole industry really pivoted to entirely cloud based. The vast majority of lower end software or SaaS now is a subscription which includes your support, includes access to the product, includes updates and then I think as you go more B2B, more enterprises software, it's quite common to pay for professional services and support separately, but that's generally because the integration of a software product, let's say you have a team of 200 people, it's much more complex than you and I signing up for a new project management tool or whatever, probably don't require a huge amount of thought or service to integrate that. Whereas if you're switching from an existing solution in a bigger company it can be much, much more complex. Sure, sure, yeah. So that's really how the industry's changed. And yes, you can certainly find products out there. Now, which is still a, a one time payment. I think most people, even though SaaS is really referring to the kind of cloud element, so it doesn't necessarily have to be a recurring subscription almost all the time. When people are talking about SaaS, they're talking about a recurring subscription business, usually monthly or sometimes annually. Right.

[18:46] Host: And that point is probably what makes it the most attractive element of it is the recurring nature of the software. So whereas, you know, buying something once versus having a monthly recurring revenue, everybody in the acquiring minds world just appreciates the value of recurring revenue and business valuation and type of business you might want to buy. So that one speaks for itself. But are there other, what other pros? What other, you know, positive attributes of SaaS are there that make it such a desirable kind of category and a hot category?

Guest: Yeah, so I think one of them is really that in a software business, and this does not apply to all software businesses, but in a good software business, particularly if you're selling to businesses, the switching cost is relatively high. So if you're selling to individuals, it's a little bit different. So if I'm just selling a product to you, or just to me, if you want to cancel at the end of the month, it probably doesn't really cause any disruption to your business. Where if you have, like I said, like 100 people using a software product, whatever that might be, it might be Zoom is, I guess, a good example that everyone knows about at the moment. If I said, and we, we actually don't really use Zoom that much internally, we use a different product. But if I said to my team, hey, we're all moving to Zoom next month, there's actually a huge amount of work that goes into moving because it's all of our kind of automated sequences, email signatures, all of these things that link to Vonage, which is the system we use at the moment, suddenly have to move to Zoom, then we have to figure out security settings, loads and loads of different things. So the cost to us for switching, even if the product might be cheaper or even better, is quite significant. So yes, you have the recurring element, which is great, but you also have the fact that a good software product should generally have relatively low churn because there's high switching costs. So I think that's what makes it attractive as well. Like yes, you have a recurring element, but the way I kind of think about it is as an acquirer, or maybe this is my British risk averse nature. But your number one priority, or at least one of your number one priorities is capital. Preservation, you do not necessarily need to triple a business for it to be successful, but if you run it to zero, you've definitely failed. You can, you can live with a small amount of decline, but you can't run a business to zero. So I think fundamentally one of the best things about SaaS business, assuming the product does not become obsolete, which is very rare, I can think of very few examples where that happens. Even if I think about it in really simple terms, if you buy a SaaS business and you are terrible at marketing, you fail at marketing, you never acquire one more customer, ever, that business will still be making some money. And in some cases the business could still grow because you could have expansion revenue which outpaces cancellations. So your downside is much, much kind of more hedge than it would be in a, say an E commerce business where you're selling products. It could be a really popular product for a year and then suddenly people stop buying it and you're back at, you're back at zero. And then I think there's like various other elements. I think similar to my point about service business, a lot of people don't want to run a service business because maybe, maybe this is not a common opinion in the current kind of job climate. But yes, you actually have to work hard. Your hours are generally correlated to success. Yes, there are definitely some exceptions. Yes, maybe you could be way smarter than me and be more successful with less hours. I'm sure there are some, many examples of people who are. But generally hours to an extent and work ethic correlates to success. In software, it's a little bit different. It's more your technical expertise. So either you need to be able to write code yourself or you need to be good at managing and finding developers and running them, kind of managing them in an efficient way. So I think part of it is people like SaaS businesses because they have a bit of a moat. Just naturally you can't just, you can spin up a service business overnight. If you decided tomorrow you wanted to go launch an M and A business, you could technically roll out a website and say you do M and A. And if you got a client you could theoretically run some of that process. Whereas if you say, oh, I have a SaaS business, you try create a new version of Zoom which is bigger, better, cheaper, whatever it might be, and you try roll that out tomorrow, it's physically impossible. So you also have that kind of technology moat. Again, that really varies depending on the kind of type of product you're buying. But I think A lot of people like it for that reason, I think as well, they've got a more. The thing that's really made SaaS popular over the last 10 years or so is really just that a lot of the big companies you hear about, companies getting funding, companies having exits, are now in the SaaS space. So if you say to someone, I have a SaaS business, so say, you say that to 100 random people, way more people are going to know what that is versus 10 years ago. You said that 10 years ago maybe two people would know what it is. But now almost anyone conceptually understands what SaaS is if you give them some examples, like Zoom. Because almost everyone in the world, even my parents, who don't really know how to use technology now know how to use Zoom. So people will just kind of understand.

[24:39] Host: Sure. This point about moats, I actually want to chew on that a little bit with you because actually, Dom Wells made this point when he was sitting in your chair a couple months ago that in fact he felt that like, SaaS doesn't have the moat that it might appear to. And if you kind of look through the various categories of software out there, project management, let's take as an example, or CRM is another good one. Like there are just countless products in many of these categories. And sure, there is a moat there because there's, you know, a, you know, hundreds of developer hours that go into building a good, a good product. But, you know, to your point about the service business, just, you know, hanging a shingle to open an M and a practice, there would still be hundreds of hours of expertise that I would have to develop. Maybe not hundreds, but many hours of expertise that I'd have to develop to, To. To actually perform the service for the client. So there is still sort of an expertise moat in both cases. So I just thought it was an interesting point he made because I had thought of SAS as being a. That SaaS business is being a little bit better protected than in fact he did. And we were having a podcast using, I'm using Riverside to record this. As I was with him and he was like, you know, if Riverside's $9 a month and you could probably find 10 other products out there that are similarly priced that, you know, have pretty much similar bells and whistles and really take. Takeaway would just be that SaaS is just really competitive, it's not maybe as desirable as it was five years ago when there were. I think also what happened in the last 10 years is that there were just a lot of opportunities Business processes, consumer processes, industries that had yet to sassify. And these entrepreneurs now have gone out and all kind of conquered that territory. And it's hard to find anything that does not already have a SaaS product attached to it. And so there was kind of a, kind of a land grab that occurred over the last 10 years that if you were first or second in a market, you know, could have been great, but now, now kind of there's blood everywhere. If you, if you want to get into, if you want to get into SaaS. Any thoughts on that kind of ramble?

Guest: Yeah, I'm not sure. I'm not sure if I really agree with that to be honest. I mean, I think any bit. So I guess my point about SaaS versus service. Business is a moat in SaaS is generally the technology in service, it is expertise, reputation, experience. There are lots of things that go into that. So if you wanted to compete with FE International tomorrow, yes, you could spin up a website, but you physically can't buy, regardless how much money you have, you can't buy 12 years of experience. I guess you could hire people with 12 years experience. You can't buy 12 years of reputation. Whereas in a technology business you can always build a better product. And if it's better, it doesn't really matter how old it is. No one really cares. I guess the nature of technology is people are always expecting it to improve. I think the way I look at it philosophically is think about the number of buyers coming into the market and industry. There are still so many companies out there, big and small, that still use, they don't use software for anything, I think, particularly living in the US So I moved to the, as we were talking about before we started the recording, I moved to the suburbs a couple of years ago and we have at my house have various like service providers that come and provide things for like someone doing the pool, someone doing our yard or whatever. None of them use any sort of technology. Our yard guy gets paid by check and he uses text messages. So there's, I think there's still a vast number of industries which haven't moved to software or the cloud at all. So if you're building one of those businesses, yes, it's becoming more and more competitive, but there are also still tons of companies, tons of people who have not kind of fully embraced software and cloud. And to my point about switching costs, assuming you have the right kind of product or whatever. Like with my yard guy, for example, I've never spoken to him about it, but I'm Assuming he's like, well, my clients reply to text messages and happily pay me by check, so why would I change? Exactly. Say once you're on a SaaS product, unless it's with your podcast, for example, yes, you might be able to find something cheaper than Riverside, but are you really going to bother switching a platform that you know and I'm assuming you like for $10 a month, in almost no businesses do they make that kind of decision to change was $10. Individual consumers definitely do. She'd look at like products like Netflix, for example, laying off people at the moment because subscriber numbers are down. Yes, people absolutely do cancel. If you increase the cost of a subscription from I don't know how much Netflix is $25 to $30 a month. Yes. There's a huge number of people out there, like, I absolutely can't afford five more dollars. Been in software, if you're in the right industry, at least what I'd consider the right industry shouldn't be losing clients over $5 a month. So, yes, it's competitive, but I don't necessarily think that should prevent you entering an industry. There are numerous examples of companies that have kind of entered software space years after others and kind of improved on it. But like years ago, for example, I think when I started fe, everyone uses Skype for video calls, podcasts, it was always Skype. It was a Skype video call. And then Skype got acquired by Microsoft and it's now terrible. Basically no one uses Skype. It's almost completely unusual product. No one uses it. But years ago you would have. If we had this podcast 12 years ago, like Thomas, why would you bother launching, saying that compete for Skype. Skype is so good. Skype is owned. I don't think it was owned by Microsoft then, but Skype is owned by Microsoft or a big company, we would probably say, well, yeah, it actually would be difficult to compete with Skype.

[30:50] Host: Right.

Guest: But now you have almost no one uses it. People use for podcasts, for example, it's Riverside or Zoom or they're probably the two main ones I come across. So I think there's always, there's always new opportunities. I mean, that doesn't mean it'll be easy, but I don't think competition is necessarily a bad sign. Competition really just shows you hopefully that other people have spotted an opportunity. And to your point about how is FE growing? Yes, part of it is we are just getting better as a company, but part of it is also the industry. I spotted a. Well, I think I Spotted a good industry 12 years ago, which has grown. If you're in the right industry and do a good job, your business should grow as well.

Host: Excellent. Let's talk a little bit about cons of SaaS. What are some of the drawbacks?

Guest: Well, I think all those same points also reverse. So technology is a moat, but technology is also very difficult. If you don't know anything about tech, you're reliant on third party developers. Maybe you have to hire a developer in house, maybe you have to use freelancers, maybe you have to use an agency. Maybe you need to find a business partner or some sort of equity partner who does know how tech works and can write, write code. So like while it's a positive, it can also be a negative. Like things break. It's the nature of software. There's no such thing as a passive software acquisition. Almost any software, regardless of how stable is, will at times break if you do nothing with it. So you constantly need to have, you'll forever have some form of overhead, whether it's yourself who knows how to write code or a team of developers who need to be available. If something breaks and the nature of technology it doesn't have, it can break at any time. It's not like a service business. If you say, hey, I work nine till six Monday to Friday and my yard guy says, well the only time you can cut Your grass is 4pm Friday. That's the time you take. There's no situation where I would ever be calling him at 11pm on a Sunday and being like, hey, can you come cut my grass? Because it's clearly not how it works. But in software, software can break at any time. That is part of it. You kind of have to be aware that if you're buying a business, I think this is something that I think people hear and they understand. Well, they think they understand. We don't truly understand the responsibility of owning a business until you actually own one, which is if something happens at 11pm on a Sunday, which it will, you have to fix it. You have to be available. Yes, you can hire a team, yes, you can delegate, outsource, hire a CEO, hire a manager or whatever. But I can assure you that's going to be keeping you up at night and you're going to be making sure that that gets done. So that's definitely the pros. Also cons, if you pick a business which is either high churn or targeting, I say, look, I describe like a lower end demographic, a more price sensitive demographic, then I think you're Much more susceptible to new competition. So if you have a product with a good technological moat, high switching costs, then even if a better product comes along which is cheaper than yours, people will not necessarily switch. If you're a targeting either consumers or lower end businesses, they might, they might switch for $5 a month, they might even switch for less than that. So you have to kind of all of the advantages are also disadvantages and I guess with the recurring nature, I don't really know if this is really a disadvantage as such the recurring nature if you're just selling monthly subscriptions there's never going to be unlike in e commerce for example, there's never going to be a day or a month where you suddenly quadruple your sales. You don't suddenly go from kind of making 100,000 mrr to 400,000 in a month. Theoretically it's possible, but it's highly unlikely. Whereas in an e commerce business, let's say it's Christmas or Thanksgiving around Black Friday, around that time of year, all sorts of other religious holidays, holidays, whatever it might be, there's always a possibility you can make $10 million in a day if your product goes viral on TikTok or Instagram or whatever it might be. So it doesn't necessarily make SaaS bad, but I think with SaaS it's much harder to have. It's less common to see exponential growth than it might be in e commerce but it's much more common to see consistent growth which continues for not forever but for four years.

[35:34] Host: And what about the valuation of SaaS businesses, the price to get into to SaaS it's got to reputation for being quite expensive. It can be hard to get an SBA loan on on SAS because the valuation is so high the let the debt won't support it. Can you speak to that?

Guest: It's definitely true. We generally find the var I wouldn't necessarily say all I wouldn't want to put people off but I say almost all of the SaaS deals we do are not people using SBA loans. People have found other ways to fund them because firstly to your point earlier about more qualified buyers ahead of not necessarily less qualified buyers, but buyers who do not necessarily immediately have access to capital. The reality is if you're working with any M and a firm, business broker, investment bank, whatever you want to call it, you're always going to have priority if you have cash on hand or have the ability to raise capital without relying on the sba. Sba. Don't get me wrong, SBA is A fantastic program. As a Brit living in the us I don't qualify for an SBA loan. If I did, I would also want to use an SBA loan to buy a business. So I completely understand the appeal of it, but it is just being government backed and being with banks, it can be slow, particularly versus someone who has cash. So I think that one of the things you need to accept if you want to acquire a SaaS business is you generally will have to pay a high multiple. I think that's kind of unavoidable. And if you're to your point earlier about sophisticated buyers passing, if you're not paying a high multiple, then you probably need to accept that some of the things on your checklist of things you might want probably won't be there. So the most common one will be lack of growth. For SaaS businesses not growing and it's relatively flat, then you probably don't have to pay 10 times EBITDA, which in almost all cases is untenable. With a SBA loan, maybe you're paying five times, which is not necessarily always tenable, but certainly could be. So that's certainly a way to look at it as well. Like you have to accept kind of trade offs. If you want to use an SBA loan to buy SaaS business, then probably the only way you're going to be competitive is buying a business that other people don't want to buy because it doesn't necessarily check all their boxes. You're not going to be able to buy. I guess I'm not trying to turn people off, but reality is you're not going to be able to buy a SaaS business that's been doubling every single year for the last five years, has a management team in place, has churn 0.5%, the product has a fantastic reputation, highly unlikely you're going to be able to buy that business for five times and use an SBA loan, it's going to get bought by someone else. So I'd say where we do see SBA loans for SaaS deals are generally business which are not necessarily older, but they're generally going to be slower growth. So it's definitely possible. But I think you really just need to accept the, the reality that really, and this is a little bit different from a lot of people that we deal with who are coming in to buy business, might have had a background in real estate or same with real estate. The value is kind of a bit of a cliche saying, but like the value, your profit is almost kind of made at your buy price, how will you do on what you're acquiring for? Because you can't really. Yes, arguably over time the value of land should, should increase. But the only real thing you can do to move the needle on income if it's a rental property is either improve the property physically, I guess increase prices if the previous owner has not been charging the right amount of rent. You can't physically expand the land, you can't double market rents in the the city you happen to be in or anything like that. Whereas with a business, the reality is you can quadruple a business if you do a good job with it. So I think if you're going to make a acquisition, so particularly in the current market where like SAS is hot, if you want to buy a SaaS business, you probably have to accept you're going to be paying more than you are comfortable with. Or you might originally be comfortable with. If you can double the business in a year, does it really matter what you paid? I would always say no. If you have no idea what you're doing and you have no plan for growing it, then I would never suggest while buying any business. But you definitely shouldn't be buying a SaaS business at a premium multiple with an SBA loan if you don't at least have some kind of plan of what you might do. Great.

[40:25] Host: And that would be a pretty stark contrast with E commerce. I mean, the learning curve for e commerce is way less steep, let's say. I don't really know. I've never done anything with e commerce other than buy buy stuff myself. It's learnable much more quickly. Is that a fair. We're generalizing very broadly here, but fair,

Guest: I'd probably say no actually. Really, I think e commerce at a small scale, yes. If you just want to learn how to sell a product on ebay or Etsy or Amazon Shopify, relatively simple. So if I just want to sell mugs, you can find a supply for mugs and you can sell 100 mugs a month. I think where e commerce gets complex and we actually see quite a lot of deal flow as a business gets to a certain size and it gets really complex and people can't figure out how to grow it further, that might be at say 1 to 10 million revenue. I'd say where that generally comes in because you get all this additional complexity that you don't have selling 100 mugs a month. If you're selling 100,000 mugs a month, then you add all this complexity that you don't have a smaller scale. So logistics, you have to have a warehouse, maybe you have to have multiple warehouses, maybe you need multiple suppliers. The, the flip side of it with SaaS is, and one of the best things about SAS is technically, and there are some limits, but it's technically infinitely scalable. If you add a million users or 10 users, the products should still work again with some technical limitations in there. Whereas shipping a million mugs versus 10 mugs is a completely different complexity. So I think maybe the initial learning curve is lower with E commerce but I definitely don't think if you're operating say a $10 million a year e commerce business versus a say $2 million a year SaaS business, which is probably going to be making a similar level of EBITDA based on average margins. Off top of my head, I don't necessarily think the SaaS business is easier or sorry, harder to run than the E commerce business. They are different. So SaaS kind of really have to be good at understanding tech I'd say is the main part. E Commerce, a lot more of it is marketing. If you're not very good at marketing, probably not going to be able to run an E commerce business. And logistics, which can get extremely complex, not impossible, it can get very, very difficult to scale beyond a certain size. Whereas SaaS is generally not the case. I mean again I'm generalizing, but that's just my experience of what I've seen of businesses which kind of hit that kind of revenue level

[43:09] Host: for SaaS businesses again and talking about how competitive the market is and if a desirable business is going to go to somebody who has access, quick, quick to close access to funds in the offline world in traditional businesses, which a lot of my audience is looking at, there's kind of a rule of thumb that if you're looking at businesses that are doing a million or more in ebitda then they're going to be, those are also going to going to attract the attention of private equity. So at that tier you're going to be competing with heavier hitters, you know, deeper pockets, et cetera, et cetera. And so you kind of, the strategy would be to go a little bit low below that. So you know, 500,000 to a million dollars in EBITDA is too small for private equity. So at that level you're competing with other acquisition entrepreneurs like you maybe you know, competitors doing bolt ons and tuck ins. So it's this kind of threshold that people talk about and think about in terms of the sweet spot you should target for an EBITDAS business. Business is EBITDA. Does such a threshold exist in the world of SaaS? Is there an analog here?

Guest: To an extent. When we speak to thousands of private equity, we're constantly doing outreach to private equity firms to show them deals, get them in our network, introduce ourselves, whatever it might be. And we also get a huge amount of inbound from private equity firms trying to buy businesses. I would say firstly, if you downloaded a random sample of 100 of them and looked at their criteria, there would be some correlation. But they're not. It's not. Private equity is only looking for businesses with more than a million EBITDA. You might find some who are only looking for 25 million EBITDA, some who are at 5, some who are at 2, some who are at 1, some who are at 500,000, some don't actually care at all. They're just interested in revenue because they're going to do it as a tuck in acquisition to other businesses in their portfolio. So that would be my, I guess initial answer, but I mean it is definitely true that I'd say a million and above ebitda. To your point, you more commonly going to be competing against a private equity firm. So say generally when the valuation goes above about 10 million because at that level there's no SBA buyers because you can't get an SBA loan at that level. So it's either going to be a strategic buyer, a private equity firm or someone who has access to a large amount of capital. And it's highly unlikely to be an individual at that level buying for the first time. Just because if you're going to be buying at that level for the first time, it would probably make more sense for it to be part of the strategic portfolio or whatever that might be. Or maybe you would have started with saying a little bit smaller or if they are buying at that level as an individual, chances are there's a reason why they're doing that. Maybe they had a $50 million exit and they want to go buy business for $10 million. That would make sense. So I would say as businesses get bigger, there's definitely correlation with the number of private equity firms you will be competing with. But there's not necessarily a hard and fast rule. I'd say similar to FE is an M and a firm creating a space for itself doing smaller deals than a traditional bank will do. There are also private equity firms who are kind of continuously coming down market to find deal flow. So if you're buying a business of $5 million is usually about the biggest you can buy with an SBA loan. Approximately you're probably still going to be competing with some quite sophisticated buyers and then say maybe if you get to say a million dollars valuation, highly unlikely you're going to be competing with a private equity firm. But that doesn't mean you're not going to be competing with something that looks very similar to a private equity firm. So a group of kind of business partners who have built up a portfolio and they're doing a little bit of a roll up strategy. Yeah, so I guess that would be the way of looking at it. But there's definitely no hard and fast rule of when private equity firms are buying or not buying.

[47:33] Host: Well, it sounds like if I want to get a toehold in SaaS and become a buyer of SaaS businesses, my best chance is to buy something pretty small. Unless I'm an already wealthy person or already have access to capital. But if I'm a loan acquisition entrepreneur and I'm just really drawn to SaaS, the economics of SaaS in the future of SaaS, I'm unlikely to do a big two or three or four million dollars deal as my first go. Something smaller I'll probably be able to tackle just because of how competitive the market is. Fair general, I would say.

[48:06] Guest: So I guess from obviously I'm biased because I CEO of FE International. I think we're very good at selling businesses. We have an extremely high success rate. We sell almost every business we take on. So yes, if you're acquiring a business that we are representing, chances are if you want to buy anything beyond a certain size in SaaS, you're not going to be competitive using an SBA loan. That doesn't necessarily mean you shouldn't try. It's going to be much harder. There may well be opportunities elsewhere. Like generally the general correlation is the worse the M and a firm or the business broker, the more likely A and I don't mean to be offensive George, it's a less qualified buyer. So someone using SBA loan versus cash on hand has bought 10 businesses before is gonna get an opportunity to acquire a business. But then with that, I mean there's always a flip side. The, the likely scenario is that a business represented by like a lower tier or a kind of M and a firm who just popped up overnight, chances are the business they're representing going to be lower quality as well. So I think you just need to accept that if you are going to use an SBA loan and you want to buy SaaS business, you're not going to be able to check all your boxes of ideals. And that really goes for any acquirer. I'd say almost all the acquirers we work with most take a while. First time acquirers take a while to figure out what they want to acquire. And most of them quite significantly change and usually reduce their criteria over time because we get a huge amount of outreach from people who are like, hey, I'm this person. Here's my criteria of 25 things. Don't actually have the money. I'm going to use a loan to buy this business. And it's like, well, yes, everybody out there is looking to buy a business with these 25 things. Not necessarily that doesn't exist, but if it does exist, there's going to be literally hundreds of buyers making offers. So I think as an acquirer, to be competitive, you really just have to be a little bit flexible and kind of back yourself to do a good job of the business rather than sitting around waiting for the perfect business to come along. Because highly unlikely, are you going to be the only one that think it's, thinks it's the perfect business so it'll be competitive. So for example, I'm just thinking we marketed a business the other day, extremely high growth and we had I think something like 10 bids within two days. It was crazy number of offers. So if you were trying to compete with an SBA loan, you would have literally zero chance of winning that deal. And the end bid ended up going not necessarily above our valuable well, went well above our initial indication with the seller of what we thought it might sell for just because it was so popular and business just checked so many boxes for acquirers like hotspace, growing low, churn, great tech, all of those kind of things. And if you looked at, if you're a buyer kind of learning about buying businesses and you were looking at what the buyer is going to end up paying for this business. Almost everyone would say in living, I say it's an MBA class, almost everyone would say, oh, it's a stupid deal, numbers don't make sense, can't service any debt. But the reality is this acquirer has a portfolio of businesses. They've completed multiple acquisitions, they don't really care because they know they can grow it.

[51:40] Host: There's kind of a mini Trend of micro SaaS both launching a micro SaaS from scratch, but also a few acquirers out there buying micro SaaS businesses. So these are tiny businesses, but SaaS businesses maybe doing, I don't know, $50,000 a year. In ARR less you probably these businesses are probably too small for you for them to even cross your desk. But there is some market for them. And of course microacquire kind of a do it yourself platform to sell your micro SaaS. Really that's probably where the name came from, selling little micro digital businesses. Any thoughts on that as a first step for a first time entrepreneur? For first time acquisition entrepreneur?

Guest: Yeah. So I mean firstly FE has been representing I guess micro SaaS before the word micro SaaS even really got coined. I think a lot of people think they were kind of the first to come up with their first start acquiring at that level. But we've been doing them since day one of fe. I think as FE has grown and we've become more sophisticated in our service, our average deal size has increased, which does mean that the lower end deals we do far less of now. So it's quite rare that you'll find us representing a 50,000 ARR dollar business. To your point, I think in almost all cases it makes sense to buy something small to start with. Depending on your goals and your financial position. I think if you're young and you have no money and you're just starting out, it makes sense to do that. If you're a little bit older and you have years of experience, you have access to some capital, maybe have like good salary or whatever it might be, you have a wife or a husband, you have kids and a mortgage, then you probably need to buy something more substantial if you're actually going to make the jump to quitting your job or whatever it might be to own a business. So I think in those cases it doesn't necessarily make sense to buy something small. The other thing with buying something small there are definitely pros and cons. We could do a whole nother podcast just talking about the the pros and cons. The other challenge of buying saying small is I think it doesn't really give you the reality of running a business because I think at least in my mind, where running a business gets hard, where I found it really difficult personally, we grew, not quickly, but we grew to 10 million revenue. And I thought all those stages like relatively easy to figure out as you go. Once we got above $10 million revenue. But yes, we're still growing. I find it significantly more challenging. The kind of things you're doing day to day are just completely different. It's all about team growth, team management, processes, systems, culture, compensation. Particularly in the current market, it gets really difficult. Whereas early on it's a Little bit more about like can you do marketing, do you have product market fit? Is your product breaking? So some of the things you'll learn buying a micro SaaS could be helpful but not necessarily reflective of what it might be like buying say a $5 million SaaS business or E commerce business, whatever you end up buying. Because chances are at that level there's a team. You have to start managing people and that's really a completely different skill set. And that's often where not necessarily older, but people who come from a more corporate background and maybe they've managed people in the past, they're generally going to do much better. Better with a bigger business where they have to manage people because they've probably done that before. And if they earn enough to kind of qualify for an SBA loan that's big enough and they have the down payment, that probably makes more sense to do. Whereas buying a really small business where they have to figure everything out for themselves, maybe that doesn't make any sense. Yeah. So definite pros and cons. I really think it depends on your like risk tolerance and the percentage return you can have with a micro business. Could be not always, but could be higher than. Could be higher than a much bigger business. But that doesn't necessarily mean it's better. If you turn this is what Fe did for many years, turn $50,000 into $200,000. Yes, that's fantastic as a kind of percentage return. But in absolute terms, if you have kids and a mortgage and you live in the Bay Area like you and I do, that doesn't really go very far. So it's all relative. All depends on your personal situation.

[56:13] Host: I think Thomas, from your pool of buyers, buyers who actually buy, not tire kickers or people on your list, do you see many that are first time acquirers and are leaving a doing, are doing a career pivot, they're whatever, doing something else, have a 9 to 5 and they've decided they want to be an entrepreneur and they buy a business as their pathway to do so. How common is that in your world?

Guest: All the time. So we do over 100. So we're generally doing two to three transactions a week, sometimes more, sometimes less, but we're doing hundreds per year or well over 100 per year. I don't off the top of my head know how many of them are first time requirers, but it's definitely into the double digits percentage wise. And then we have quite a few as well who then keep doing it. So they buy one and then by the end of the year they've acquired four, maybe they team up, some friends or investors they know or whatever it might be and they, they keep doing it. Yes, it's definitely common. It's not like it's impossible for you to do it, but it's just relatively uncommon on the bigger deals. But there's always room for first time buyers, particularly those who I guess are somewhat flexible with criteria, easy to get on with. I think often people misguidedly believe that the most important thing when acquiring a business is the price or the valuation. Yes, it is an important factor, but sellers will often go with a buyer that they like the most and the one they think might do the best job running a business. And that isn't necessarily correlated with how many businesses they bought in the past. Sometimes the seller will look at an acquirer who's bought five businesses and say, yeah, these guys have a bunch of money, they've undoubtedly done a bunch of acquisitions. But like, I don't really like what they've done with the businesses. I was looking up recent reviews and people are saying the support sucks, so maybe they're going to like fire people or whatever. Whereas as a first time acquirer, I guess that variable is never in play because you've never done it before. So I think putting the effort in, if you are a first time acquirer, putting in the effort to make sure that the seller likes you is important. If you're, you think you're being really spot trying to negotiate really like clever terms, then chances are it's not going to work if you don't have any sort of track record because the sellers just can say, well no, this bigger firm is offering me simple terms. They can close faster, they have the capital, kind of like them, they see professional. I think a lot of first time requirers make the mistake of being way too complex. Like here's my LOI, it's 21 pages long and we're going to pay you out in these different seven ways.

[59:14] Host: Thomas, of the folks who do buy, who are not funds or sophisticated buyers who have already done this again and again and again. So first time buyers, but those who get across the finish line, is there any common mistake that you see them make either before acquisition or post acquisition to the extent that you keep track of how it goes?

Guest: Yeah, I think. And again, and I've kind of already spoken about this point earlier when I was giving like a different example, the most common reason for failure and this is particularly common with, well, any size of business, any business model is always not doing the work 100% of the time, don't bother doing the training properly. Haven't really done a good handover with the seller. And this is quite common with any kind of acquirer. Believe they are smarter than the seller. So they'll say, oh well, the seller's taking 40 hours a week to do this. But actually I think I can do it in 20 because I have an MBA. They didn't even graduate college. That's really common. That kind of like arrogance or ego. I think there's a lot of skills required to run a business which you can't necessarily tell just by like looking at someone or like looking at their resume doesn't necessarily tell you the full story. To my point earlier about like turning up every day, that's not correlated at all to education. So yeah, I'd say that's probably the most common thing. Like buyers who believe they're really smart and don't necessarily need to do the work or believe that a business will continue to do well by doing so. A lot of people think you can do a little bit less work and the business will still be approximately the same. But there are quite a few businesses which can do substantially worse if you're doing a little bit less than the previous owner was. Was doing. Particularly if you're coming into it for the first time, you don't really understand the space. You don't really know what trends to be looking at or spotting or anything like that. So yeah, I think that's one way to look at it. But I mean there's, I mean there are other reasons why acquisitions may fail. In my experience, we don't see it very often just because we spend a lot of time on buyer qualification, making sure people are a good fit. Our business model is not, and this is a valid business broker or M and a model, particularly in the traditional offline world. There are a lot out there who basically only sell businesses to buyers who are using SBA loans. And part of their entire business is kind of the sales pitch and kind of getting a buyer through the SBA process. They don't really care how well you're doing with the business post sale or how much of a fit it is for you upfront. Because their whole process is loans, whereas because we're not doing that, we don't want people to go through a process. I also think a part of that kind of just thinking about that a bit deeper is because FE was not quite a first mover. I'd be lying to say we were literally the first people to ever sell SAS businesses. Because we're a relatively early first mover, reputation was essential. There was no reason, no incentive for us to ever be in a situation where someone buys a business and runs it into the ground. So yes, sometimes that's outside of our control, but we're not in a big enough industry where we can get away with doing. That we relied on. There was been that kind of snowball and compounding effective positive experiences, someone buying a business, doing well with it, the factory in the middle is like a bonus for us. But the real incentive is the industry growing because people are successful in the space. But I think, and this is correlated, I think with really like anything in life, particularly in the kind of working world, success is almost always correlated with work ethic. And again, I know that's not always necessarily a popular opinion and it's exactly the same when it comes to buying a business. If you buy a business you don't put the work in, then you're not going to succeed. Yes, there are some examples where you can, but chances are that's not going to be the, not going to be the case.

[1:03:35] Host: The fact that you, you keep making this point tells me that there's probably a lot of people who come looking for online businesses because online businesses have a reputation for being passive or potentially passive or semi passive. And whereas in the traditional business world you don't, you don't hear that nobody thinks they're going to buy that plumbing business and have it be passive.

Guest: Yeah, they definitely can't. I mean, they can be passive to an extent. We definitely see businesses where an owner literally works two hours a week. It might be hard to believe that actually work two hours a week. The business is really relatively flat and stable. But to my point, in that scenario, often someone might come in and say, okay, well they're running it in two hours a week. I'm going to come in and just do one hour. But it might be that in that one hour extra the seller was spending, they were, I know, checking for bugs or checking for support tickets or whatever it might be that you're now not doing. So generally it's doing less than the seller. That doesn't necessarily mean every business you acquire you have to work full time. That's not the reality at all. But if you're doing less than the previous owner, in general, I think you're not going to be successful, particularly if you think you're smarter than the previous owner. I think generally people underestimate what it takes to be a successful Entrepreneur and build any business really

Host: talking about how software is competitive and it's always evolving. So like a particular product, a product within a particular category. Two things first. Well, I'll just make this two separate questions. First question is you said earlier that you really have not seen or maybe very, very rarely a SaaS product just become obsolete. So it's not going to, it's unlikely to go to zero. Unlike maybe E Commerce or other businesses. When I look at SaaS listings online though, I will see, I will see some software, some SaaS software products that are clearly very long in the tooth and are just desperate. I mean they're just competitors are going to come in and eat their lunch. There's got to be something more than just mere maintenance to breathe new life into them. So kind of square, maybe I misunderstood you or but kind of square that circle for me because I'll run away from a lot of SaaS listings I see online because the product seems so outdated and it's just going to need a complete overhaul to remain competitive. And yes, its revenue is not going to drop to zero tomorrow, but it's going to bleed away over the next three to five years probably.

[1:06:16] Guest: I mean sometimes that is the to my point earlier that's the opportunity because a lot of people will look at that business and say oh I don't want to put the work into modernize or improve the product. There's a particularly businesses that are available to buy at the kind of multiple you can acquire with an SBA loan. Yes, it is reasonably common. Those businesses need a little bit of an overhaul but that can really, I mean overhaul can be mean lots of different things. Do you need to complete and I'm not a developer so I might kind of not explain this very well but like you need to completely rebuild the back end of the product. Do you need to completely rebuild the user interface? If you need to completely rebuild and re engineer the whole thing and move on to completely different platform, yes, you probably shouldn't buy that business. But in a lot of cases old software products, maybe you can improve it quite significantly just by revamping the ui. Yeah, maybe user interface, maybe you can just improve the website itself. I'm not necessarily a big believer that the particularly in B2B SaaS that the kind of website necessarily matters that much but sometimes it can do so. Yes and that's the difficulty if you're not technical, you don't always necessarily know what it might take to turn that business around from a technical perspective. And even if you are it might be very difficult to estimate how long it's going to take. It might be like well the owner estimates 100 hours of work to rebuild X that's now going to be obsolete. It might actually take 500. Yeah, very similar to my real estate example. If you're not a builder, you don't work in construction. How long does it take to do X? I personally would have no clue. I'd just be guessing and relying on their estimate. It's no different with developers but say, I mean often that's where the opportunities lie. If you're willing to put in, yeah like 95% of acquirers will pass on the business that needs a rebuild. So if you're the one who is willing to do that work, maybe you can create a. Most sellers are obviously aware that that's the case. You're more likely to be able to have find a seller who's amenable to a reasonable deal structure but deal structure which might incentivize them to kind of help you improve the product. So yes, that product is going to require more work, probably more investment into tech or whatever that might be but it may well be you can acquire it for a low multiple. So there's always going to be, there's always trade offs when you're acquiring particularly if, if you're multiple or price sensitive

Host: related point. One of the things that you see usually more ambitious searchers, often maybe a traditional search fund look for in the software world is taking an on premises software product and taking it to the cloud. And so for folks what that means is going back to Thomas's definition of SaaS or the evolution of SaaS at the top of the interview. Software that is still kind of installed locally the way software used to be and has never been refactored into a software product that's served from the cloud and there can be incredible value to be created there. So any thoughts on that? Do you see on Prem to SaaS theses from buyers coming through your doors very often?

[1:09:42] Guest: Yep, definitely seen it before. We have quite a lot of buyers who might. Their unique selling point as an acquirer is the fact that they might be a development agency that has access to capital. So they might only look for projects like that which are again the ones that are going to be passed on by almost all sellers. So almost all buyers because they want to take it over and they don't want to have to do much to tech. In this case there are various firms out there who are more than willing to do that kind of work. So for example, with like Atlassian apps, if you're familiar with the platform Atlassian, sure, they recently, I don't remember when they changed policy, but quite recently used to be able to get kind of on premise and kind of non cloud based apps of them but they're making that version of their product obsolete I think over the next couple of years. So every app on the platform is having to pivot to server based or cloud. There's not going to be an optionality to do it any other way beyond that date. So in the Atlassian space, for example, there are definitely acquirers who are going around and that's their kind of thesis or that's their game plan when they take over a business. I would say if you are a first time acquirer and you're not technical, my immediate reaction is it'd probably be a really bad idea to acquire a business with a loan, an SBA loan where your sole game plan is to completely pivot the the business model. I would say that's probably more of a advanced strategy. Again, maybe that's my cautious nature. The various people who would argue against me and say no, no, that's where all the opportunity is. But if you're not a developer, you're a first time buyer and you're taking out a loan, I would definitely not suggest buying a on prem software business and pivoting it to SaaS. But there are many people that do, many people that are successful. But that would not be my personal recommendation.

Host: Great. Proprietary outreach is something again that you see searchers doing where they're sending out cold emails, looking to engage an owner of a business and possibly buy that owner's business. Is that something that particularly in a market as hot and competitive as SaaS, is that something, is that a technique that you think could work for folks?

[1:12:06] Guest: It definitely could work. I think a lot of people do outreach really badly though because we get a lot of like search outreach. I think a lot of people. I'm not entirely sure why this is. I haven't really put much thought into the psychology behind it. We get a lot of what I would describe as like ego driven outreach. So people will do their outreach.

Host: What does that mean?

Guest: And like, I don't know, they'll send you like a one pager and three quarters. It will be like their bio and it will have things like almost like I'm married, so I don't know really how this stuff works. But like a dating profile, they kind of like, I like walking my dog, I enjoy reading books, I Live with my wife or husband in San Francisco. They'll just give you like a pointless bio of stuff that sellers don't really care about. Maybe they're trying to like, build a relationship with the. The seller. Maybe the seller. Oh, wow. I also like dogs and walking and I also live in the, the Bay Area or whatever it might be. I think a lot. Most sellers aren't really interested in that kind of outreach. They want to know why you're the one that should be buying their. Their business and if, if your business or so their business checks some of the boxes you're. You're looking for. So I think sellers care about more about in general, this is not everyone, but most of them continuing their legacy, building their business, retaining their team much more than they care about the fact you have an MBA or you like dogs or you live in the Bay Area. Like, people don't really care about that. So I don't know where this like, trend has come from, but I've definitely seen a lot of search outreach where it's really just focused on them as the acquirer. And why that while they're amazing, to my point around why a lot of. I think sometimes a lot of buyers think they're smarter than the seller. It's like they're kind of outlining all their professional qualifications. The seller might say that's not necessarily attractive to a seller. But if, if I asked a seller, If I surveyed 1200 of the sellers we've worked with, so all of the sellers we've ever worked with and said, what were the 10 most important things for you when deciding which buyer to go with? I would say something like level of education probably would get named by almost none of them. Yeah, I think a lot of buyers think that's important. Maybe that's a. In their mind, they're usp, they have an mba, they went to a fancy school or whatever that that might be. So I think if you are going to do outreach, yes, it can be effective, but you really have to focus on what you're going to do for the business and why you're uniquely positioned to do that rather than why you as a person are great. That's not really going to. Unless you get really lucky. Yes. Maybe you email a seller who happens to live in the same place, happens to have gone to the same college and happens to work to the same company you did or you do now years ago. So yes, that can happen, but that's way less likely. People really care about sellers care about playing up to their ego and why you think they've done a great job rather than kind of playing your own ego. So that's, I think, why. And that's not just outreach for acquiring businesses. I think that's where outreach in general goes wrong. People spend their entire time just talking about how amazing they are, what they're selling, and they don't put any effort into kind of learning about what they're pitching and why they're a good fit.

[1:15:43] Host: Thomas, I want to ask you the kind of standard market snapshot moment in time question about SaaS. And then I want to close it out with sneaking in a couple of E commerce questions because you also obviously do a lot of E commerce work. So on the market snapshot question, so what are you seeing in terms of multiples and valuations given all that's going on in the the macroeconomic climate?

Guest: I think surprisingly steady all levels, particularly the deals below $5 million for example, where they're generally not private equity funds buying those businesses, those multiples have not changed at all. Like I said, we had a business the other day, loads of bids went well over. Our kind of internal asking price was really popular. Whereas a lot of people would think, oh, the market's bad, multiples must have gone down. Not really the case at that end of the market. At the higher end, I definitely think there's a few funds out there who started to pull back or change their criteria a bit. But what that might mean is that previously there was a thousand potential acquirers for a business. Now there might be 750 for that same business. That doesn't mean it won't sell. It might mean you get slightly less bids. But there's still many firms out there who are still private equity firms who are still actively deploying capital. So we haven't really noticed a pullback in multiples. I think where that is happening is like the public markets. Much bigger acquisitions, like in the billion dollar range. Yeah, they are changing a little bit, but they're also generally going to be more correlated to things like interest rates. Whereas if you are a fund and you have LP capital and you're buying businesses with cash, I mean it does matter to an extent. But what the kind of Fed rate is doesn't really affect you and your acquisitions. Whereas much larger acquisitions which are more likely to be leveraged with debt. Similar to your point about can you buy a business with an SBA loan at a 10 times multiple? Probably not because you can't service the debt. It's exactly the same as you get to much larger acquisitions as well. So I say so far, not really. Do I have a crystal ball what's going to happen in the next year? No, but also as a firm where I personally sleep well at night, we're diversified. We work on lots of different business models. We have clients all over the world, team all over the world. So we're not. If B2B SaaS above $10 million valuations come down in the U.S. yes, that would affect us a little bit, but doesn't really affect us as a business as a whole because we're still doing lots of other deals as well.

[1:18:29] Host: And your answer to that question was with respect to SaaS, correct? Because now I want to ask you about E Commerce multiples or was that everything?

Guest: I guess I was talking about everything really. Some E Commerce has changed a little bit because there was over the last few years quite a few. I think they coined the term aggregators for themselves, but essentially private equity firms with a fancy name which sounded different from private equity, raised a lot of capital and were doing maybe what I would describe as stupid deals from multiple perspective, but they were generally not happening through advisory firms. They were so desperate to deploy capital they would generally be reaching out to sellers directly, persuading them to sell without hiring an advisor. Generally, once if deals came to us, they're going to be slightly more rational in their approach. So I'd say again, hasn't really affected us because we weren't really doing those crazy deals in the first place. We've always been kind of quite steady. Multiples gradually increase every year. Have done for the last 12 years. I expect that to continue to. Got that. But yeah, E Commerce has probably been affected the most from that perspective. So maybe there are now some more opportunities as an acquirer in E Commerce. But again, if you're looking to buy a business similar to real estate, you shouldn't be having a one to three year view. You need to have a minimum 10 year view on what you think is going to happen to the business and the industry. So you think you have to be a lot more bullish and just oh, I can get a really good deal on an E Commerce business, I should buy it. That's not necessarily the right thing to do if you're a developer and you know how to build good software products.

Host: Something you said earlier about a difference between e commerce and SaaS is how E Commerce you can have these incredible spikes in revenue around whatever a promotion, a shopping holiday in a particular country or what have you. You can just see an E commerc sell through just explode very very quickly. That also I think indicates how why E commerce businesses can grow to the size that they do sometimes very very quickly. So not just necessarily spikes around a holiday but just a lot of growth really, really quickly. So for example FE is currently selling a business, a hand tools e commerce business. That business does $9 million in sales and was launched in 2020. So it's a two year old business doing $9 million in sales. And you just, you see this in E commerce a lot where a business is doing millions of dollars in sales and it was just founded like yesterday like somebody you know during the pandemic decided to spin up an E commerce store and all of a sudden it's doing $10 million two years later. How should I feel about those businesses?

[1:21:35] Guest: Well firstly it's if you look at again you survey, I don't know, 100 people who've launched an e commerce business and 100 people have launched a SaaS business, you will find more people who got to a million dollars revenue and again arbitrary number, but a million dollars revenue in E commerce in a year they did in SaaS. In SaaS there'll be almost no one and in E commerce there'll be a reasonable number because you can, I guess the nature of like the trends and things like that. You can go from zero to 100 or zero to a million in this context quite quickly. I think the real thing to think about in that case is yes it's got to that level but how sustainable is it on an ongoing basis and are you able to achieve that your yourself or can you continue to operate it? Do you think it's sustainable? And if it's a relatively young business, so generally speaking that's where the more experienced acquirers are more likely to be the buyer because they might be very confident in their ability to. So the business you're describing relies quite a lot on paid traffic. Maybe they have a lot of experience running paid ad campaigns. So they're very confident. Maybe they can reduce ad spend and increase profitability because they know they've done it before. As a first time acquirer you probably don't have that data or that experience. It's much harder to make that decision so you might be more likely to pass. So I think similar to acquiring a, say a SaaS business that requires a lot of technical changes to get to where it needs to be, similar to relatively young businesses, you really need to know what you're looking at to make a decision on acquiring that kind of business. But doesn't necessarily mean it's a, a bad thing. Like buying a business. Like old is not necessarily good and young is not necessarily bad. Really depends. Some people would say, well, the young business is better because it's still got more untapped opportunities. And you can kind of argue, I think the ongoing trend we probably noticed in this interview is like you can kind of make arguments for either side at any, any time. And the pros and cons of being a pro can also be a con, depending who's looking at it.

Host: Let's end on that note of the subjectivity of all of this. Thomas, what would you like my audience to do? Should they go to FE International and subscribe to listings? Is there a call to action here for you?

[1:24:10] Guest: Sure, yeah. I mean if you're looking to buy a business, go to the FE website. We segment people by business model generally. But you can also inquire on all business models. If you are actively looking to buy business, I would encourage you to inquire and speak to my team. We'll get your criteria on file, get an idea what you're looking for and then we can start sending you new businesses. And I think if you listen to some of the things we've spoken about today, I think that puts you ahead of 98% of searchers who don't really put the effort into kind of learn at all. They just think they're going to do it their their own way. So if you've listened to this podcast and you found us in the first place, then you're already ahead of quite a lot of people from the fact you've done that. So just start looking. I'll also say as an acquirer you should never feel rushed into making your first acquisition. That doesn't mean you should procrastinate for five years looking. I say it's very common for first time acquirers to spend say a year looking or like browsing and then making a decision or not necessarily making a decision on a particular business but figuring out what their criteria should be. So maybe you start out looking for an E commerce business and you decide, hey, actually you should buy a SaaS business. Or maybe you start looking for a SaaS business and say actually no, I'm going to buy a service business. There's no right or wrong answer. There's no business model you should buy or shouldn't buy. I would encourage you to start relatively broad and then get narrower with your criteria once you figure out what you like and what you don't like and

Host: Are you on Twitter, Thomas, or should people connect with you on LinkedIn personally?

Guest: Yep. Twitter, Twitter and LinkedIn active on. On both. You can find me in some other platforms as well, but say I'm like daily active on LinkedIn and Twitter. Great.

Host: And it's Thomas Smale, pronounced spelled S M A L E. Of course, all this will be in the show notes as well.

Guest: Yeah, exactly.

Host: Thomas, thanks for giving me so much of your time. Fascinating conversation. Really appreciate it.

Guest: Cool. Thank. Thanks, Bill. Appreciate it.