Episode Transcript
Hello, it's Andrew from XO capital. And today I wanted to talk about negotiating a micro SAS acquisition. So, this is just the way that we do it. This is our style. You're probably going to develop your own over time. Feel free to steal or modify these as needed, but let's get tactical. So number one, price. If you buy something for a great price, it's probably going to be okay financially for you guys.
So. That's the number one thing we recommend is find a price that works for you and just stick to it. There's plenty of fish in the sea. If you don't get this one, you know, there's going to be something else that comes along. Of course, if you see a once in a generation opportunity or you're seeing something else that nobody else sees or whatever, feel free to deviate , but. Generally speaking, we find a price that works for us and it's just a financial decision. So, so make sure your your, your, your heart's not getting in the way and make sure this isn't an emotional decision. But yeah, we just pick a price and we stick to it. We try and shoot for a two year payback period. We try and pay between two to three X ARR. Sometimes less, less is good. Less is awesome. But if we pay more than that you know, it's going to be tough for that. That's a hard deal for us to say yes to. Generally speaking, the speed is fast. So if you're having a bunch of, bunch of, bunch of back and forth with a seller about price and this deal point and that deal point drop it, it's just probably not gonna work out. It's probably gonna be complicated. This might indicate actually that the seller is kind of a pain in the ass to work with and, and just, just kind of drop it. Our best deals are you. A couple back and forth about stuff. And then we go into diligence and that's really, it. We do not build fancy model models, justifying the difference between a 2.3 multiple and the 2.6 that they're asking for. If you find yourself having those conversations, I think you're already in trouble. So again, just pick a number, say, this is what works for us. You know, if it doesn't work for you totally understand. That's, that's literally like our go-to phrase when we are doing these over email. And, and, and initially, honestly, we try and get to a price before we even hop on a call with them because we want to at, at a high level, make sure that we're in the ballpark.
And then we try not to, when we go into diligence, use that as a weapon to bring the price down, we try and out of the gate say, this is what we think the business is worth. And then we try and stick to that price as we go through diligence. So tactically, we generally put two offers on the table. One is a lower price, so we'll do more cash up front or maybe no seller financing or all cash. And that one's like a lower overall price or a higher price option, which is less cash up front and more seller financing.
But of course the price at the entire price is higher. It's okay. If your initial offer is a little insulting relative to their asking price, oftentimes people that have never done this before, especially founders, that this is their first time going through something like this, which is most people. They are expecting a kind of tech crunch, like exit to a strategic at a 10 X valuation. When in reality it's most likely going to go for like two to three, maybe four. To someone like us, and that is often very difficult for these founders to get their heads wrapped around. And frankly, it's not your job to convince them what the market rate is. They're going to have to discover that on your own, right? You are not an impartial third party in this situation. And so your role in trying to educate this founder I mean, it's, it's it. It's just not going to end well, and it hasn't ended well for us when we try to educate somebody through this process. I mean, sometimes they'll ask us for opinions on certain things and we can give out, or we will, we will try to do our best to give out. Some helpful advice, but frankly, again, you're not an impartial third party in this transaction. And so you are actively trying to negotiate for a lower price. And so that's just something they're going to have to either go out and learn on their own. Or come to terms with, and oftentimes that happens, especially on acquire, right? You list something, you get we've sold stuff on acquire. So when you're, when you're selling something on acquire, you put it up, you put it up whatever it takes a week to get approved. And you'll initially get like a, an influx of people that are interested. Now generally speaking again from our side, as the buyers on acquire, we have to request access. Now they have this stupid thing where you have to sign the NDA or they have to sign it. And then auto site. It's all this like stupid stuff. That frankly, I hate that they put that in there. It just introduces a lot of friction and needlessly so again, from the, from the seller's perspective though, they're getting a bunch of requests, right?
So let's say they get between, like, let's say they get roughly 50 people that they think are interested. Okay. 40 of those are just want to see what the domain is to look at the website, to find out that this is not a good deal for them, or the websites sucks in a bad way. And there's nothing they want. They don't, they don't want to touch this thing with a 10 foot pole. The way that they lay out the listings and acquire is also like a little strange, and it's just very difficult to know what the hell the business does. So my very first thing, when I get access is just go to the domain, read the landing page, make sure I understand what they're trying to do or what the business is supposed to be doing. Right. Cause sometimes that's not clear from the landing page, especially in like a, like a vertical. That I know nothing about. But yeah. And so 40 of those 50 are just tire kickers that are never going to put in an offer. So for you as the seller to like follow up three times, which with each of the people that have requested access, like all of that stuff is useless. Generally speaking to people that are going to be putting in an offer in are going to a need a little bit of time.
Because again, they're probably like us looking at a bunch of these every week. And then B, they're going to come back and actively ask for more info or actively ask for a meeting, et cetera. If you're trying to gate keep data. Bef and, and need, or require us to go have a meeting before we can see your PNL. That's probably a, non-starter like, it does nothing for you to get us on the call for us to just say yeah. Hi, I'm Andrew. We just really need your P and L to like, look and make an offer. Can you just send that right? Like there, that doesn't need to be a meeting and a lot of times founders, for whatever reason, feel like they must get on a call with you before they release some of this information, which I think is stupid. It slows the deal down. And it doesn't, it's not, it's just not helpful for anybody. When we get farther down the line, or maybe even before we get an offer, we might want to get on a call with you to clarify certain things. But again, even that for deals that are like making less than 10 K of MRR, most of this, if not all of it can be done just over email.
Moving on to reputation. If you've done a couple deals, like let the let the seller know that's important to them that you can actually like close a deal. And you've done this before and you can get the thing done. So we've done 10 before we have a pretty good reputation with the acquire.com. Brokers now, so they know us, they know we've done a few deals and we, they know that our deals when we put something in is, is actually real. And so that's been helpful. Like, for example, when we got growth bar that was really helpful for the sellers to know that like, Hey, these guys are real, like the money's real, they've done a bunch of deals.
We know them. They're good people, et cetera. So if you've done it before, flaunt it and again, just keep it simple. I mean, some people love, love, love complexity. There's a lot of smart people in this industry and man, are they. Really loving these, these fancy Excel models, but we just like to keep it super simple. So even to the extent that founders or the sellers will keep any kind of equity, we don't do any of that. We keep it super clean. We just do a hundred percent. Acquisitions or nothing at all. Plenty of people deviate from this. We don't. One concepts that we came up with early on for particularly small. Acquisitions is the concept of a turnout. So I'm sure you're familiar with the concept of an earn-out. So if the business like, you know, hits certain milestones in growth, then the founders get like extra kickers and stuff. That's a typical earn-out. Turnout for a business that's like, let's say doing less than 10 K of MRR. It hasn't been around very long and churn is pretty high. What we will do is sometimes put in place a turnout. So. We'll have a lower overall purchase price, but if the MRR stays above a threshold, then they'll get like a, a bonus or something like that. That's a way for us to buy younger businesses and lower some of our risk. Not everybody agrees to this, but typically once you explain it to people and again, See above, after they've gone through 50 offers and realize that, you know, 46 of them are actually not interested in this thing at all. They start to become more amenable to structures like this. Number eight. Remember you're human. Just don't be an asshole. You know, it's, it's there's, you're just dealing with people. You're probably going to encounter some of these people. Again, just don't get a bad reputation. You can be firm and also be nice. And then it's also tempting to get into a bidding frenzy. I'm sure some of you were tempted. During the past couple of years in terms of like buying a house or something like that, I'm in LA. So we saw this all the time. It's very easy to get caught up in a bidding frenzy and just say the highest number to. To quote unquote, win. But this business might be in your life for the next couple of years. And seriously price is a huge determinant of how well an acquisition performs.
So that's sort of how we navigate the micro SAS negotiation. There's really nothing that fancy it's just really, really straightforward stuff. And people tend to respond. Pretty well to this, we definitely get a few middle fingers. That is, that is actually the most common outcome of after we make them an offer. They'll usually send like, you know, in, in so many words, like the middle finger emoji. And then again, once they realized that all of the buyers have, have evaporated after a couple of weeks, and they've heard from other people too, that the valuation is not going to be 10 X or even five X. It's going to be lower than that. Then they tend to come back and say like, okay, let's chat. And that's how we've got, I'd say around, maybe let's say six out of 10 of, of our deals have been through this kind of. Structure where we get in or the, or the, the thing's been sitting around for awhile. And we just say, this is, this is kind of what we're thinking in terms of offer. And then we take it from there. But that's it happy hunting.
