Wednesday, August 31, 2022
The Micro-SaaS Acquisition Playbook
From door-to-door sales in Dallas, to bootstrapping a business to $300k ARR, buying a business for $280k, and the path to scale it to $1M in revenue - This is Spencer Scott!
Today’s guest has bootstrapped 2 companies to a combined ~$500,000 per year in ARR and multiple millions in equity value.
Oh…and he’s doing it by himself!
Today you’ll learn how to acquire and grow a SaaS business to millions in value with none of your own capital.
Make sure to follow him on Twitter at @akaSpencerScott
Let’s get after it!
On Today's Experts Session, we explore:
- Who is Spencer Scott? From door-to-door sales in Dallas, to bootstrapping a business to $300k ARR, buying a business for $280k, and the path to scale it to $1M in revenue - This is Spencer Scott!
- Case Study - Acquiring Median And Growing It $1M Per Year: How Spencer acquired a business that generates him $170,000 per year in revenue, with none of his own money and his path to $1M per year.
- The Micro Private Equity Playbook That Anyone Can Use: How to find, diligence, acquire and grow your own SaaS business with none of your own money.
- Business Opportunities: Here are 3 business ideas that could quickly reach a $1M+ value with minimal investment.
- To Build Wealth - Find Your Leverage and Maximize It: To build wealth, understand your leverage, and capitalize on it. If you have no leverage, here’s how you can get it.
Guest: Spencer Scott, President at Median (Follow him on Twitter at @akaSpencerScott)
Video Length: 50 Minutes
2014 to 2017 - Becoming A Sales Expert: Like most of us, it took Spencer a bit to find his groove. He worked as a manager for Target, then as an underwriter for a mortgage company. He started doing software sales for a large telecom company. This is where he found his groove. A bit of brute force and lots of skills made him one of the top sales reps at the company.
2017 to today - Founding Loup And Generating $300,000 ARR:
Spencer was subsequently recruited away from that company by Vonage. He continued to crush it in sales, but suddenly he had to scratch the proverbial entrepreneurial itch. He founded Loup, which has helped over 100 MSP’s increase sales via CRM integrations. Spencer did this without knowing how to code by leveraging his knowledge of telecom to provide a niche product to a niche market.
2020 to today - Buying Median & Bootstrapping To $1M ARR:
When Covid hit, he saw how much money was flying around. He decided to expand his portfolio. He found Median, a “co-browsing” solution for sale on www.microacquire.com. The company had a proven product, evidenced by signing two enterprise-level deals at a million bucks each. The company was also revenue positive with a $75k ARR. Spencer was able to raise the capital to purchase the company, and he focused on doing what he does best sales. He’s quickly grown the company to $175,00 in annual revenue and is pressing on until he hits the $1M ARR goalpost.
Here’s the story of how Spencer acquired a software business that generates over $175,000 per year without using any of his own money and his plans to scale it to $1M per year.
Let’s dig in!
First, what is Median?
Median is a co-browsing software company. It helps support teams at software companies solve customer problems faster by adding screen-share to the website.
How did Spencer find Median? Spencer was reading indie hackers, a startup news site, and heard about selling their “no-code” software application for $20,000.
…here’s the catch. The company had no customers.
Spencer wanted in. He looked up where the company was sold and discovered MicroAcquire - a platform to buy and sell startups.
He subscribed. Every week or so, he’d get an email with a new company for sale.
One day…he saw the Subject Line: “Call Center Software For Sale.”
Jackpot! Spencer had spent the last few years in the call center space. He knew it well.
He reached out via MicroAcquire and was speaking with the owner within a matter of days.
What did the deal look like?
So you may be wondering, “how did he buy a software business with none of his own money” - let’s explore that here.
First, let’s look at the numbers…
The key point is that the company was already generating positive cash flow. There is very minimal burn, which means that the monthly profits generated from recurring contracts could support the financing payments of $3,700 per month.
Structuring the deal this way allowed Spencer to do what he does best: Prospect and close new business. When you get more reps in your core competency, you drastically increase the odds of success.
But I Don’t Know How To (Insert Your Excuse Here)
Do not let a lack of technical skills torpedo a deal that fits all the other criteria. For example, in Spencer’s case, he did not know how to code. Most people wouldn’t even look at a tech-heavy offering like Median because of this. That would have been a mistake. We live in a different world than three years ago regarding third-party talent. People like to call the changes in the labor market the “Great Resignation.” That is incorrect. It should be called the “Freelance Revolution.” Unbelievable talent in every vector has decoupled from traditional work environments. This previously unavailable human capital can now be contracted at short-term rates for almost any task. Spencer was able to hire elite tech talent to vet the code, fix issues, and expand the platform. Now that we have taken away the biggest excuse most people have let’s look at another stumbling block. Getting the money to close the deal.
Financing The Acquisition:
Spencer had a friend he had done some deals with in real estate who was liquid and trusted his judgment. His buddy cut a check for the whole amount with a ten-year term at 10%. The key part was that Spencer could still refinance with an SBA loan at 6% over 20 years if Median failed (see step 3 below). He wanted to make sure he had a way to pay his friend back no matter what. Also, if the business succeeded and grew as an asset, he could leverage it to get a loan at better terms to pay off the loan. Going from zero to $280,000 was the hard part. After that, Spencer had options because he had an asset he could leverage.
Why was Median the right company to buy?
- It had product-Market-fit: Median allows someone to see a user's desktop without clicking a link or joining a meeting. Extra steps create friction, and friction is the bane of customer service. Your brand will suffer if fixing inevitable onboarding problems is a pain in the ass. Median’s co-browsing solves these issues and is a no-brainer for a market always looking to improve the customer experience. Even better, people were already paying for the solution.
- It had recurring revenue: One thing that makes SaaS such an attractive model is continuity. Scaling customers does not increase production costs because fulfillment is digital. Median already had enterprise-level customers paying yearly licensing fees resulting in predictable (and dependable) revenue for the business. Given that it was a proven product, he did not have to deal with market or technical risk. It is a great recipe for scaling fast.
- It could “float”: The company was revenue positive, and Spencer could procure capital at terms where servicing the debt would not push the balance sheet negative. Even with the deal, out of the box, the company would still have positive cash flow. This allowed Spencer to operate from a position of strength and focus on growing revenue correctly. Entrepreneurship is a lot like Vegas. Scared money does not win. This situation allowed him to develop the systems to scale the solution and build a business around it.
How does Spencer Plan To Grow It?
There are many ways to grow a business. But if you don’t want to spend a lot of money…there’s a very powerful customer acquisition process that every B2B SaaS company I know uses…
You open up your laptop and send an email! I know…it’s mind-blowing.
Spencer has mastered the art of outbound prospecting, and he shares his step-by-step process in the playbook section below (check it out!).
Spencer documented everything here if you want more detail from the man himself!
How Anyone Can Acquire A Micro-SaaS Business
So, you want to replicate Spencer's success?! Here’s the playbook you can use to source, diligence, acquire and grow a SaaS business.
Here’s The playbook:
Step 1: Set Up Your Criteria - Spencer does not recommend buying companies on future earnings. Two guiding principles will provide guardrails for your acquisition. First, you are limited by your financing. Look at these SaaS acquisitions just like you would a real estate purchase. Use the loan you can reasonably secure (either SBA or a private lender) as the max purchase price. Second, the deal must be cash flow positive from the jump. Don’t bank on future earnings or valuations. If it doesn’t float, it's not your ship. Keep looking.
Step 2: Sourcing Off Market Opportunities - Some take the position that if you already know about a deal, it is already too late. Websites like microacquire.com can be a great resource for those looking to dip their toe into the Saas business, but what if you like the thrill of the hunt? Spencer has a simple but effective strategy to narrow the search. First, look in a niche you are familiar with. If you know the market, you can better evaluate its tools.
So check out marketplaces offered by Google Chrome Extensions, Shopify, Salesforce, and Hubspot… you’ll find that most prominent tech companies offer marketplaces of plug-ins and services.
Here’s a quick trick to find companies that might be willing to sell - look for apps with some reviews but recently have experienced bad customer service reviews. Many developers can get to the ten-yard line but are exhausted by the drive that got them there. Offer them some quick cash to take their former dream off their hands. Listen to the signals. Fix the back end and scale from there.
Step 3: Do Your Diligence - Don’t know how to code but want to buy a SaaS company? No problem. Hire a freelancer from Upwork or a similar program to kick the tires on the technical stuff. In the case of Median, high-ticket licensing agreements were already in place. That means that more than one business had done its due diligence and decided to invest in the product. In business, the right move is often to ignore what everyone else is doing, but this is one of the times it's good to be part of the herd. If you combine your due diligence with a product others have already vetted, you will be in good shape. Once you feel good about the code, verify the revenue and customers are real with reference calls and document inspection when applicable. Qualify everything and use an escrow service when paying. There is an entire ecosystem of people who take advantage of handshake deals. Avoid it.
Step 3: Finance and Take The Keys - There are two main paths to get the capital you need. An SBA loan can get you there but remember that all the SBA does is approve you, and third-party lenders fund and service the loan. To be eligible for an SBA loan, businesses must 1) Operate for profit, 2) Be engaged in, or propose to do business in, the U.S. or its territories, 3) Have reasonable owner equity to invest, and 4) use alternative financial resources, including personal assets, before seeking financial assistance. Besides having your data sold and forever being subjected to finance prospecting, ensure that your corporate structure is in place so that if things go south, it is only the business that tanks. The other avenue is private lenders. Friends, family, and prior business acquaintances can get their heads around micro acquisitions. Be stingy with equity deals, however. Focus on wherever you can get the best terms possible because debt service is a key factor in your ability to cash flow. If it doesn't have cash flow, don’t buy it.
Step 4: Get Familiar Quickly - The great thing about buying a workable SaaS product is a large portion of the product market fit research has been done for you. Reach out to the existing user base. Position yourself as new ownership in an email campaign. Chances are you will get a punch list of problems to look at. In addition, ramping up the communication can revitalize interest from your current customers. You will discover which features they like or hate. Survey the group to get an idea of what additions they want to see. Doing this legwork will focus the ensuing dev work and lower your costs for product improvements.
Step 5: Grow, Grow, Grow - You’ve acquired the asset and worked out the kinks. Now it is time to grow the user base, which will increase your company's valuation. Use platforms like builtwith.com to identify target companies for your offering. Scrape the names and contact information of the decision makers for your prospects using Apollo.io. Customize and automate your email outreach by building campaigns in Mixmax. Deploy this framework 100 times a day. If you follow this Rule of 100, you will get all the feedback you need to optimize your emails for open rates and conversions. Success will breed success. Once you establish a baseline response rate, focus on leveling up your email content and A/B testing. Brute force the game, and you will grow.
Key Principles To Remember:
- It Must Float: Positive cash flow out of the box, or the deal is not for you. This means that your financing terms determine the business you can buy. Under this model, future earnings and income multipliers are irrelevant. Simplify your game.
- SaaS Only: Recurring revenue software is the best business model ever. Not only can you build it once and sell it thousands of times, but your customers continue to pay you every month. This sticky recurring revenue dramatically increases the company's value when it comes time to sell the business.
- Make Sure The Market Is Big Enough: When choosing a company to buy, make sure the opportunity is large enough. Allow yourself to sell this product thousands of times. If the market is too small, it will be hard to generate meaningful revenue.
Opportunity 1: BigAssBeds.com
Context: So, here’s the context. Spencer is 6ft 8 inches. When he got married, he went from having a king-sized bed all to himself to half the of a king-sized bed (aka a Twin XL). They don’t make beds bigger than a king because the old spring mattresses couldn’t fit through doors…but if they are made with foam (Casper style), they can ship much smaller. 1% of men in the US are over 6ft 4 - that’s 3.2M people who might want a bigger bed.
Idea: A bed that is larger than a king bed - we’ll call it the “ Emperor” bed.
How To Build it: I would do some heavy customer validation on this one - identify groups of your ideal customers and ask them if they’d buy it…literally ask them, “will you pay today for an emperor-sized bed.” Product businesses are incredibly capital-intensive, so the more validation and upfront payments, the better.
Opportunity 2: MissedYa.com
Context: The industry standard for SaaS conversions from website visitors is approximately 3%. What if that number could be pushed to 4% or 5% for B2B?
Idea: Integrate IP tracking tools with sales intelligence software to automatically send an email follow-up sequence to the decision makers at companies that visit your website. Similar to an “abandoned cart” sequence in Ecom. Think of it as an automated prospecting machine.
How To Build it: There would be three steps to do this.
- IP Tracking: First, you must integrate an IP address tracking tool like www.clearbit.com into your website. This allows you to identify which companies are looking at your site that would otherwise just look like anonymous traffic on your analytics.
- Sales Intelligence: You would then filter those companies through a program like www.apollo.io to give you the emails of relevant decision-makers at the company.
- Email Automation: Once you have that information, the next step is to trigger a simple follow-up sequence from an email provider such as Sendgrid. Consider the long-tail consequences of such a strategy. Not only would you get return traffic from original visitors, but the email campaign would inevitably trigger interest among other influencers in the company for your niche. Even if you could push conversion up by .5%, it would have a substantial long-term impact. This would be a no-brainer for a company as it makes maxes out current traffic without increasing ad spend.
Opportunity 3: Personalized Landing Pages For Outbound Sales
Context: Most email marketing revolves around sending a marketing message with a call to action directing the recipient to click on a link that is the same for everyone. We can personalize emails. Why not a demo, proposal, or offering?
Idea: This software would help salespeople using outbound email techniques increase response rates by sending customized demo booking links and landing pages.
How To Build it: Most SaaS companies don’t need to do sales because people sign up for free. It becomes an easy sell if you can increase conversions through effective automation with your existing tools. The concept is relatively simple. Just like when you send an email broadcast with tags like <first name>, you can do the same with a dynamic webpage. Create an embed code as part of the link that you send in your email campaign. The website the link drives to automatically updates dynamically to the information from the link. The software solution would take out doing this manually and require no coding. We know this idea works because Spencer has already created it!
How Spencer Builds Wealth:
- Median <https://www.hellomedian.com/> is a co-browsing SaaS company Spencer acquired in 2020 for $280,000. The company is now doing over $170,000 in revenue. Based on average SaaS multiples in 2022 (6-8x revenue), the business could be worth between $1M and $1.4M if he sold it today.
- Loup <https://www.loupdb.com/> Helps over 100 communications customers increase sales via CRM integrations. Using a similar calculation from above (6-8x revenue multiples), the business could be worth between $1.8M and $2.4M if he sold it today. Pretty epic!
- Real Estate: Spencer owns and operates several single-family home rentals throughout the Dallas area. These properties continue to increase in value as tenants cover financing costs.
To Get Rich - Find Your Leverage and Maximize It:
Here’s a key principle that, once you understand it, will unlock a world of opportunities for you. Not all revenue is equal. I mean that different business models have different leverage - and that leverage is valued differently.
Jack Butcher’s Diagram of Digital Leverage
- If You’re A W2 Employee - If you work for the man and want a more traditional method of wealth building, the old stand-by of real estate is a good choice. You can still use some of the same principles above, especially the ‘float’ principle. Don’t just try and cash flow to break even. Things break in the real world, and you must fix them. Positive cash flow is a hedge against these risks, as well as creating capital for yourself. Equity and appreciation can be leveraged to buy another property. Wash. Rinse. Repeat.
- If You’re An Entrepreneur - Double down on your business at the point of highest leverage. What do I mean by this? Well, let’s compare the revenues.
Let’s compare $5,000 per month in revenue.
- Real Estate - $5,000/month in revenue from real estate is great! But don’t forget to pay the mortgage, insurance, and maintenance costs. You’ll probably sneak out monthly with $1,000 or less in take-home profit. The real win with real estate is long-term appreciation. Growing at 3-5% per year would be GREAT! After 10 years, your asset may have appreciated ~20-30%. Not too shabby.
- SaaS - $5,000/month in recurring software is a little different. A good benchmark for operating margin in SaaS is 75%. So most of the capital can be reinvested into growth. But because of the recurring revenue, it's not uncommon to see acquisition prices that range between 5x and 8x revenue. So a company with $5,000 in monthly revenue ($60,000 per year) could sell for $480,000. Every $1 you add in top-line revenue could be worth 8x that when you sell it!
I hope this was insightful! I know I had fun learning from Spencer. See you next week!