Episode Transcript
Hello, it's Andrew from XO capital. And this week I wanted to talk a little bit about finding your ideal acquisition profile. I call it a buy box, but it's basically the parameters that you use to filter and look for deals to go by. So this post is for people looking to buy their first company. If you're an entrepreneur and you already have a successful company, you might use this to think about how to buy a bolt-on. Or if you want to go and sit in the operator's seat yourself, you could buy a business and go and run it yourself, or do what we do. So EXOS current buy box, we're looking for 10,000 to 30,000 in recurring monthly revenue. We only do B2B SAS. 80 plus percent gross margins, more on that in a bit 50 plus customers. So low comp. Customer concentration product led growth as opposed to a more sales led motion. Think of this as you know, the click through action and then top, right. Is it log in or sign up or is it book a call? Booking a call might be a sales led motion, whereas just sign up would be a product led growth motion. Limited platform risk. So there's all kinds of platform are at risk. For example, even if you have a hundred percent direct traffic from Google, guess what? You have Google platform risk. And then I'll talk a little bit about different tech stack. So we buy ideally no JS and react tech stacks. We deviate from that a little bit. And there are certain cases where we will deviate from that completely like in our most recent acquisition with growth bar. But we'll get into that in a second. Price price is the easiest one to start with. How much can you afford and how much risk do you want to take? If you're trying to buy your first acquisition, you should do. I think what I did, which is we bought something for super cheap. So it was 25,000 a month, or, sorry, it was 25,000 and total purchase price.
It was making $550 a month. And split three ways. It was a relatively small amount of money that I felt comfortable losing, learning how to buy and operate something. Our most recent acquisition was just under a million. So high six figures. It took us three years to bridge the gap between 25,000 and several hundred thousand. So we stepped up slowly. You could also, alternatively go bigger first. I think if I could do X over again, I would take my time and try and buy something a little bit bigger. Ideally something that's making between $405,000 a year so that I could hire at least one full-time operator and at least one full-time engineer dedicated to just that one business. So 400 to 500,000, again, I'm in, I'm in the U S I'm in, I'm in Los Angeles. It's pretty expensive to find local talent here. Of course, if you were doing if you were trying to build a remote team, you might be able to get one to three engineers depending on where you hire them. Our engineers are all out of south America at the moment that wasn't what we originally had started with, but we've found really great engineers out of south America.
And so that's where we'll continue to hire, but I would like eventually all the operations to be US-based and ideally one. One day on the same office. I just think one, that would be fun for me. And two, there's all kinds of cool stuff that happens when you're in the same room together. So if a company makes 500,000 revenue, again, let's assume 80% gross margins it's usually actually are functionally lower than that, but that leaves roughly 400,000 leftover. So 300,000 after you pay a hundred thousand for an operator, you might have to pay more. If you want somebody that's done it before, which is what. I wish we could do is just go and buy something. Find somebody that's already run a business like this and grown it. And just go hire them and pay whatever they ask for, because it will be worth it. So in this example, though, just around number a hundred K for an operator, a hundred K for one to three engineers, again, depending on where you hire them. So we're at 200,000 left. And we're looking likely a hundred thousand and growth experiments. So think agencies, content tools, et cetera, whatever, whatever you can think of. We've got just some budget to play with and roughly a hundred thousand left, like maybe some buffer, but. And my experience again, even if it was making $500,000 in revenue at 80% gross margins, there probably wouldn't be a hundred thousand dollars leftover for you to just take home at the end of the year. And again, this leaves you generally speaking with roughly $0 as the owner. I've sent this before and I'll say it again. Most of the time, there's actually no cash leftover for you at the end of the month or at the end of the year, when you're trying to grow some of these smaller businesses. Now you could stack a few of these and maybe start to get some, some profit. That's what we're starting to do.
And we're roughly in this, in this range right here, too. But generally speaking again, you are going to see most of the money when you actually do the sale. So if you're hoping for mailbox money, unless you get something that, that really starts to grow and take off and you don't have to increase costs because of that expect not to really make any, any kind of money with the profit leftover from on a monthly basis or even an annual basis, it'll mostly come from the sale.
Skills match. It might be a great business, but it may not be the right business for you. It might not be the right business for your current team to operate and grow. Right now, we've passed on a bunch of deals that I think were great, but I had a lower degree of confidence that our current team could execute on. Keep in mind, these deals are typically small. So again, with enough revenue, you can hire the skills that you need to appropriately run the business. But we currently operate on shared services and acquiring a dedicated staff member just for one relatively small business is expensive for us and doesn't give us a lot of leverage.
So we steer clear of doing that. For now. Be particularly cautious when you're buying a vertical enterprise SAS company. It's just been a little bit of a headache and a little bit more work than you would expect when you have to go and learn about a brand new industry. If you're hopping on a call with your prospects and they know more about the industry than you do, that's a little unsettling for them. You know, Danny and I went through this a little bit when we watched work or when we bought and doubled work clout Danny much more so than, than me. Because to a certain extent, a lot of times, you know, all tech tastes like chicken. I don't know if all software tastes like chicken, like Robert Smith from Vista has said before, but I do see how that could be true if you get to hire the right skills and hire dedicated staff to work just on that business. And you get to kind of step back and operate or just guide as an investor. I could see that, but when you're operating the business, that's certainly not the case. So we didn't know anything and work clouds case about the manufacturing space or manufacturing inspections. It, it turned out not to be too complicated, but it was deeper than we expected. And one of the tough things is that you just don't have any feel for what kind of product decisions should be made based on some kind of feedback.
Right? A lot of people say, well, just listen to your customers and build what they ask for. In the case of vertical enterprise SAS, if you only have five customers, And two of them are, are most of your revenue. Let's say listening to them My just ensure that you're actually building something that they they want and it's not actually transferable to other people. So just be careful listening to your customers in vertical enterprise SAS and wait to make any significant product decisions until you've learned a little bit more about what that industry is like and get your head around what running that business in that vertical actually is.
On the engineering from when a business doesn't come with a team or a contractor, we have to buy based on the technology stack. We don't have to, but we generally like to, or at least as close to our preferred technology stack as possible. That makes sure our developers don't have to learn new languages and new frameworks every time they context switch or, or start to work on a new application. We just also don't want to be adding marginal costs. Every time we have a marginal acquisition, that's just not going to work with a shared services model.
Marketing customer match. Something that I think is, is really overlooked is do you actually like the market that you're operating in? Are you really sure that you like the market? I think some people are naturally curious and they can kind of get themselves into it for a little while. And I think that that might be an okay way to run for a couple of years, but the absolute number, one reason that founders say that they sell is because they're tired. They didn't push that rock up the hill, as far as they thought they would. They thought they were perhaps on some kind of venture track. And it turns out that it's a much smaller business that might not mean it's a bad business. Just something that's growing at a slower pace than venture is willing to currently invest in. They get fatigued and give up. And I think part of that is because they just really don't care about the market. A similar exercise for the actual customers in the market segment. So you may not brush up against the market itself very much, or the market segment very much, but you certainly will brush up against your own customers as specifically the job title of the people that are buying your software. So you are gonna have to interact with these people and. I don't think that you need to say that you could go on a road trip with them and have a great time, or would absolutely love grabbing a beer with them after work, but it does help. Definitely. If you actually like these people. You are going to be spending a pretty decent amount of time, learning about them, trying to think like them, et cetera. And if you just fundamentally don't like them. It's, it's a, it's an uphill battle.
This concept, I think is more of a longevity question. So how do you. Prevent burnout yourself. And I think part of that is really just enjoying the people that you work with and more importantly, the people that you work for. So in this case, your customers. Another good question or something to think about is the channel. So what channels currently working for the acquisition, we try and buy one channel. That's working. I don't care if it's paid or owned or earned, et cetera. I just want one channel to be working so that I don't have to go and discover a channel that works that could be paid ads. We bought products that grow through paid ads and that's been totally fine. I didn't have to go and figure out what ads work, what ads don't work and fiddle with that for several months and do a bunch of AB tests. I can just. Buy it and get in the Google ads account and see what's already working great. And maybe we ramp up ad spend. Awesome. Another one is direct traffic via Google, just, you know, Double-check and make sure that the sources that Google is siding are actually yours and make sure that's all above the board. And your traffic. Isn't going to drop off a cliff when you buy this thing. For whatever reason, just be very careful because Google is platform risk, even though nobody really thinks of it that way. Ask all the people that had content businesses after one of these major. Google, you know, search engine, algorithm updates, and, and some, some businesses just got decimated overnight. So you absolutely do have platform rescue, even though everybody seems to think that. 100% organic traffic through Google is kind of unbeatable. It is until it isn't.
So in this, I also created a little worksheet to discover your own buy box. So just some price considerations, risk tolerance, operational costs, skills match, a technology match. Market match and customer match. If you want to go through this, I think it will help you identify your buy box. Again, ours is pretty straightforward. You could just copy ours and maybe just change the recurring revenue amount if you are bigger than us, or if you're smaller than us. But this is, this is roughly a nice buy box for us now.
And we're pretty comfortable taking a look at these businesses that meet this criteria and quickly giving a yes or no. If you like this one, I would appreciate it. If you could share it with a friend and feel free to let me know what I should cover next. See you next time.
