Ryan Kulp of Fork Equity and MicroAcquisitions.com joined the Flippa community for a talk on the 8 things that he wished he’d known before his first acquisition on June 11th, 2020. He took us through some incredibly helpful tips for anyone looking to enter the world of digital business acquisition and answered a few questions from the audience along the way in this fun and informative webinar.
Here are the questions that we didn’t get to during the webinar:
Have you considered Tiny’s business model, where you hire a CEO and let them do their thing?
Small companies don’t need a CEO. They just need the “jobs to be done” to be… done. A single marketer could 5x an acquisition, no manager needed. Hiring a CEO has benefits, for sure. The business is more modular and thus easier to sell later. But we opt for a centralized team with a shared consumption model. So, one engineer will work on a few projects, each part-time. This is not only a leaner expense structure, it also allows us to increase or decrease the type of labor being invested into any given project on a week to week basis. If we hired a CEO, or a CTO, or a CMO at each project, we’d be paying for extra management and tech and marketing we might not need.
What are the three most important points you are looking for before you acquire a site?
- Will this website need to exist in 5 years or does it capitalize on a trend?
- Was the seller first to market or a knock-off clone?
- Is monthly churn (SaaS-only metric) below 10%?
You buy a business hoping you can do better than the current operator. How have you done it before with your acquisitions?
What you want to do is find a seller whose skills are almost the opposite of your own. So if they are a great developer, but you’re a great marketer, the deal is already massively de-risked. Because if they’re making $X per month with poor or non-existent marketing, your mere presence will likely lead to growth. So far this is exactly how we’ve found deals… sellers were always engineers, never marketers.
Could you recommend some links for the model of evaluation?
There are unlimited strategies for deal valuations, but for starters you should consider the industry. SaaS multiples are different from ecommerce, which are different from niche affiliate content sites. In our Micro Acquisitions course we provide several models and real-life valuations to help students synthesize the best strategy for their dealflow.
Any books to share?
For small business mergers & acquisitions expertise I recommend Buy, Then Build by Walker Deibel.
How do you do due diligence for pre-revenue software products?
I’m not sure how diligence would change based on the absence of revenue, so this answer will summarize how I’d approach a valuation. Simply put, I’d itemize the “components” of the product and sum their total. For example, approximately how many development hours went into building the software? Subtract the hours that were wasted on poor features, refactors, pivots, etc. Then assign a monetary value to each of the active users. You can define “active user” however you’d like… frequency of login, actual usage, net promoter score, etc. Personally I expect pre-revenue products to have traction, regardless of revenue. I would never buy a product with no revenue or users.
Would you consider buying (now or when you just started buying businesses) a business that requires a knowledge you don’t have? For instance, I know Django, and there is an interesting business that is built with Ruby on Rails.
We’ve bought 3 products that were built in PHP, then quickly rebuilt them from scratch in Ruby/Rails. I’ve made offers to companies that were built in Java and Python/Django, but those offers were rejected. When we discover a business we’re interested in, but don’t have the native skillset, we model out “build vs buy” metrics and typically it’s worth sticking a few developers on a 2-3 month rebuild assignment. All this said, I do heavily slant towards software already developed in Ruby. Even if a rebuild is “easy” or inexpensive, I prefer to hit the ground running post-purchase vs start over from scratch.
I want to invest through Fork Equity, but one of the requirements on your website asks about “investment experience”. Can you please elaborate on this qualification criteria ? What if I don’t have any prior investment experience in SaaS or online products. Can I still invest?
Thanks for your interest. Previous experience could be managing a personal stock portfolio, or making angel investments in small companies via “friend/family” rounds. While this is not required, typically those who have participated in these kinds of projects in the past are able to move faster and be more helpful in post-acquisition operations. And anecdotally, someone who has never made investments in the past is likely to wear down our small team with too-frequent admin requests and micro-management.
What is the typical financing structure for one of your acquisitions (equity / debt / rollover equity) and who do you normally exit your investments to?
We’ve used debt, equity, and earnouts. There is no “best” strategy. In one of our deals we offered cash up front, but the founder’s accountant determined it would be advantageous to receive payouts over time. Huge win for us (to keep the cash on-hand) and a win for them too. The increasing ease of cross-border deals further underscores the prescriptive nature of financing terms on a deal by deal basis. As for exits, we don’t keep a list of “target buyers” or anything like that. In each of our deals we model what success looks like in a traditional exit scenario (someone buys the company) as well as a “hold forever and dividend” scenario. Personally I don’t care if someone buys our companies — we dividend cash on a monthly basis to ourselves and investors.
Ryan’s thoughts on risk minimization. Buying that first business puts all the eggs in that one basket. What key considerations in his mind to not ‘lose it all’ on the first outing?
Buying your first business does not mean putting all your eggs in one basket, if you start small. But size aside, the mere act of acquiring something that already works is the ultimate de-risking strategy. Of course you should learn marketing, sales, customer service, and so on. But even if you knew none of this: if tomorrow you became CEO of Apple, the company would still be fine. Hence the [beautiful] safety net of micro acquisitions.