Transcription

• Speaker #0

  Welcome to Indie Board Session, the podcast where Indie SaaS founders break through the isolation of going solo. I'm Pascal, founder of Noosa Labs, here to be your sparring partner, along with a team of investors, growth experts, and industry-leading founders. In each episode, we give real founders a platform to pitch their vision, tackle their toughest challenges, and tap into the kind of advice that usually comes from a dedicated board of advisors. From refining product strategy to nailing growth and planning exits, you'll get insights you can put into action right away. If you're serious about scaling your stats and learning from others in the trenches, you've come to the right place. Subscribe now and don't miss an episode of Indie Board Session, your front row seat to expert advice. This episode of Indie Board Session, we're going to focus on the micro-SaaS M&A market. Our goal is to help you understand how buyers and brokers view the market, what has changed in the past couple of years, and how you should think about it if you're considering selling. For this episode, I'm joined by John Hedstock, who sold a bootstrap SaaS business and still owns a couple ones, but also is an M&A broker at quite light. I hope you'll enjoy this podcast. And welcome, John, to a podcast.

• Speaker #1

  Thanks for having me. Happy to be here.

• Speaker #0

  Yes. So how did you end up becoming a broker for Quietlight four years ago?

• Speaker #1

  I was invited to be a part of Quietlight after I sold my main SaaS company, which was called ZoomShift. And I sold that in 2020, took a little bit of time off and was kind of pursuing other ideas at the time. Quietlight was going through a major growth phase at this time period. This would have been right around COVID. And what happened after COVID is lots of companies saw a major increase in sales, e-commerce companies in particular. Everything was moving online and rapidly. And so there was a lot of activity in buying up these small stores, Amazon stores. Microsas was also part of that movement. Acquire.com was coming online. All those kinds of things were happening. So there was a big boom in the market and Quietlight was expanding. They had more... influx of people that were wanting to sell their businesses and they could take on at that point. And so I got invited on. And usually what happens is at Quietlight is they invite a couple people at a time, cohorts in, and then they train them up. And then as an advisor there, we just were in charge of following our deals from the start to the end. And we help people with going to market, thinking about how buyers are going to perceive their business, helping avoid pitfalls. And so I some of that experience myself by selling a business. And then I bought a couple other small apps, well, kind of in a short period of time there as well, and had some learnings from the buy side as well. So that was about four years ago, three years ago, roughly kind of timeframe. I'm terrible with dates, but that's roughly like when that was all happening.

• Speaker #0

  Cool. So how has the SaaS micro acquisition market changed since this period of 2021, 2022? What feels most different when you're trying to sell a business today as a SaaS owner?

• Speaker #1

  Yeah, that's a good question. I think from my perspective, the biggest thing I've seen change is the velocity of deals overall. And so what I mean by that is 21, 22, lots of deals selling very quickly, higher multiples. I think a lot of undisciplined buying at that time period. If I'm honest, I think a lot of it was just there was a lot of money. People had extra money at that time to kind of take more risk and more chances, partially due to interest rates. And, you know, just things were riding high at that point, I think, for a lot of a lot of people. And so the velocity, the valuations, the expectations on that side were I feel like people were having their first lessons in acquiring a SaaS business, a small SaaS business. Since then, I think... There are still people that fit that category who are looking for smaller businesses. And while we're talking about micro SaaS here, I'm talking about kind of that window of call it five to seven figure deals. At the higher end, it would be like seven figure deals. But kind of in that range of you're spending $50,000, a couple hundred thousand, the velocity at which those were selling was very high and the multiples were higher. And then since then, I would say the velocity is still relatively high. But because the multiples have come down and there's been a little bit more of a correction on that side. It's the velocity at which you're selling those businesses is a little bit slower because sellers understand that or they're going to market and feeling that. And they're like, well, we have our mindset on selling at a five or six times multiple, whether that's on ARR, if they think that in those terms, or they're thinking about selling off of profitability and profit. Either way, those I think more savvy buyers are people have gone through the mistakes or people have gone through that. gone a little over their skis or whatever it is, there's less cash available. I think because of that, there's a little bit more discipline behind some of the buying patterns. And so therefore, things are just taking a little bit longer. So that's my take on it. I think overall, that's what I've been seeing on the micro level. On the macro, if you look at like the larger deals, those are still, I would say kind of in the same spot, but at a different level where it's like you have people are really looking for. excellent businesses there in terms of retention, SaaS businesses in terms of retention and growth. And those are kind of getting all the attention. And then the stuff that's below that is just not super appealing. Again, I think I'm partially just due to people need to get a return on this investment and they have to be careful about what they're investing in. So less disciplined, higher multiples, 2021, 2022. Now lower multiples, more disciplined, less cash flow. or less cash available to kind of do deals and less financing options. Because, you know, Bupos, who you've used, Bupos is gone. So that was a nice financing option for, nice is kind of relative term. I'd be curious to hear your experience. But like, that was an option and an alternative to a traditional SBA loan or something along those lines to get deals done that are a little bit more, a little bit larger than you could just support with cash.

• Speaker #0

  Yeah. And if you look at your mandates over the past year, what pattern do you see in which deals actually close versus which ones stall?

• Speaker #1

  The ones that actually close, there's a few factors. One is the seller actually has to want to sell their business and is receptive to what the market will bear. That's the first components that need to be there. And then two, there needs to be financing availability or a willingness to work with buyers on terms. So those kind of go hand in hand a little bit in terms of expectations about what the market can bear, as well as what financing options are even available. And so in my early talking, consulting with somebody, a lot of it is just setting those expectations right from the start. Like, hey, if you're selling your business, you need to think about this from the buyer's perspective. It's great if you heard on Twitter, X, LinkedIn, whatever, that somebody got XYZ multiple. But what you don't understand about that is, one, the terms of the deal. So you have no idea how much of that was actually cash versus equity versus seller financing versus earn out. You don't know anything about those. You don't know what this is a multiple of, if it was net profit, if it was EBITDA, if it was, you know, what are we talking about there in terms of the multiple of? And then, you know, how is this deal financed? Was this? You know, something where somebody had institutional capital already raised and committed and where we're looking to acquire this type of business. You also don't know anything about the health of that business either. Like you don't know anything about their metrics, really. Maybe you might know some of their growth metrics or some of their top line metrics if they share those publicly. But a lot of what really matters to buyers is like the retention and the customer concentration and the channel concentration. And the platform risks and all these other kinds of things that you might not even think about when evaluating your own business. So yeah, I would say those things have to be there though. The seller needs to want to sell their business and then they also have to be receptive to what the market can bear. If they're open to those things, those deals most of the time will get closed one way or another, unless they get hung up in really silly things like a fight between legal or you know, financing falls through.

• Speaker #0

  And so for a typical bootstrap doing low to mid six figures per year, who is actually buying right now beyond new startups?

• Speaker #1

  So it'd be people like myself, you know, people who, smaller holding company, people like yourself, right? So people who are looking for cashflow to buy cashflow. And then if it's mid six figures in terms of the actual net profit that the business can make, I think there's a lot of people coming from corporate who are saying, hey, I'm looking to do something else. And they see SaaS as an alternative to what they've been doing, whether they're a product manager, maybe they're an engineer, maybe they have some marketing experience. So there's a lot of people who are just looking for one single deal, which would be kind of the major difference between somebody like yourself or myself, who's kind of more of a holding company mentality. And those typical buyers are looking to replace their... their salaries, as well as to potentially flip the business in three to five years. But they're not really talking about that. That's not really a major part of their plan right from the get-go. It's more, how do I get out of my current situation and then kind of reevaluate from there?

• Speaker #0

  Yeah, and it can be tricky because if you don't do it very often, it can lead to bad scenarios as well. How are buyers financing acquisitions today at different deal sizes? you We use Bupos before, you mentioned that. We use Bupos for, I think, four or five of our acquisitions. Four. I mean, the rates were high, but they answered quickly. And they were, yeah, we would not be in business without Bupos. I have only good things to say about them, both as people and also as a partner. We always paid our debt. We still pay them for two of our businesses. And they force us to be disciplined because when you have a debt that is very expensive and your business is either not growing or declining, I can tell you that you look at things very differently even when you don't have that discipline. But when you look at things from your standpoint, now that Bupos is gone, what are people using as pockets of funds? to fund the different deal sizes?

• Speaker #1

  Yeah, so over a half a million, so I would break this into two thresholds. Over half a million financing options are pretty poor. I actually miss Bupos as well. I think that they were a great option for folks like yourself. If I was acquiring, actively acquiring, I think that would make a lot of sense to have a financer like them. The alternative to that is SBA here in the US. which allows you to put down maybe 10% as the normal, put down 10% and then finance the rest through a government backed loan. And so it can be somewhat limited in terms of the total valuation of the deal because it's based on the cashflow of the business that shows up on the tax returns. But it's an amazing way to get deals done that are higher six figures to seven figure deals. It's fantastic. And there's a large, large buyer pool for them, like thousands of people who are willing and ready to use loans like that to do these acquisitions. Under half a million, it's a mix of usually high earning individuals who have some sort of nest egg. It's pretty common for me to see people who have saved two, three, four hundred thousand in that ballpark and they can put that to work. And so... They might put down two or 300,000 to get a deal done at 500,000 and do the rest of the financing or earn out or equity role, however you want to do that. Some people do have the cash to do acquisitions, you know, six or even seven figure acquisitions. People can do that on a cash basis, but the pool is smaller and the buyers are typically a lot more disciplined there. But I have seen more buyers that will essentially get. a group of people together and they'll say, hey, we're going to do some acquisitions. We're going to raise a small fund for ourselves to do it. And they might raise a couple million and they'll go out and try to get deals done. I mean, I just got off a call with a buyer yesterday who's doing just that. And they came from real estate. So people are looking to divest or not divest, but diversify kind of what they're invested in. And this is one of those areas where people are just looking to to put cash to work. I think, honestly, some of them will get over their skis or get a little bit over their heads in terms of like operating these businesses, because if they don't have experience in it, it could be kind of a bad situation. But there are always new buyers who are kind of, you know, trying to do new things and figure it out. Some of them will be very successful.

• Speaker #0

  And you mentioned earlier discipline. What discipline do you like when you say people are more disciplined? In what ways are they more disciplined? Like, is it different metrics that they're looking at or prices they're willing to pay? Like, how does the discipline manifest itself, I would say?

• Speaker #1

  So when I look at a deal, I think about what are the returns I'm going to receive from this over the next few years. And it depends on your time horizon a little bit, but ultimately you have to really think about what have been the historical financials? What is the future of the business even look like if we take out any major levers of change? There are things that you're going to want to do when you take over the business to try to improve the overall returns. That could be marketing related. That could be product related. That could be pricing related, new channels. But all that's super hypothetical. So you have to look at it through the lens of if things go basically the same as they've been going the last, hopefully you have a few years of data. What will my returns look like? Because I think it's easy to get emotional about deals. But I think as you move up in the how much you're spending on it to or 300,000 or 400,000, you have to be a lot more disciplined as a buyer. Or if you're using other people's money, you really need to you. They're going to require you to be disciplined. So they're going to require some level of due diligence before they hand you a check to do it, whether that's a bank, whether that's, you know, just friends and family. I think that there will always be a pool of buyers who are very undisciplined because they just don't know what they don't know. But I think that that group of people will learn. And then when they go back to do more deals, it'll be a little bit under a stricter mindset. Yeah. So in short, basically it. a lot of it really gets down to how much capital is even available out there, how liquid people are and how comfortable they are with being able to take swings like this. And so that, I think, is what is enforcing the discipline. It's not just like, it's the fact that there was more cash available in 21 and 22. I think that's really what it gets down to. But for me personally, when I'm looking at a deal, if I was actually personally looking at a deal, I really need to understand, one, what are my returns going to look like if things go the exact same, worse, better? I'm playing out basically those three scenarios, but really focused on the middle because that's most likely what's going to happen. And then two, why is the seller selling? Like, what is really the undertone and the underlying motivation? Those are the two most important things to me is understanding really what my returns could look like. And then... the motivation of the seller. If I can kind of figure those things out and get comfortable with those things, then it's usually a lot better feeling for an acquisition. But there's a lot of factors, a lot of factors in that because you look at it and I mean, we're talking about, it's not just the numbers, it's also like the future of the business in terms of how easy it could be replicated with AI. What other challenges they might see in terms of a platform, you know, are they violating any terms of service or any sort of things that. might be coming down the pike that they just aren't, they're not saying to you. Yeah, sorry, I cut you off there.

• Speaker #0

  No, I mean, it's great. Actually, you've seen business and it goes back to the second part, which is how buyers really think about risk. And so we're going to start where you just finished, which is you've seen businesses wiped out by platform risk. What are the classic platform risk patterns founders should be worried of? when it comes to selling their business?

• Speaker #1

  Platform risk was not the top of mind for me when I first started this, looking at businesses. But now it's one of the main considerations because I've seen businesses go from 20 or 30,000 a month to zero. I've seen several situations like that where we were preparing to go to market. I mean, I think you've even have a personal anecdote here, but I've seen enough scenarios like that where from a platform perspective, and just to highlight what... we're talking about here would be like, let's say you built a tool around Amazon and you're trying to help people optimize their pricing strategy or something along those lines. And then all of a sudden Amazon kills the pipe for which you're scraping their listings or doing something along those lines. They kill that and you, or their terms of service change or whatever happens and you get a cease and desist and it's over. It's game over. So I look at those types of things where Breaches of terms of service are the most critical. I've seen that with like LinkedIn tools. A couple of them got crushed. The second one would be platform risk in terms of customer acquisition. So as an example, let's say you are integrated directly with QuickBooks and you're getting majority of your signups from QuickBooks. How quickly could that change in terms of if they change their algorithm for how things are ranking? Similar story if you're doing this with SEO, but basically where you're subject to an algorithm is some... some sort of platform risk. And now, of course, what you could say is like, well, every single business has platform risk then. And that I think is true. But to what degree is like the one that the highest would be like the terms of service one, the secondary one would be like kind of gray hat. You know, you know, it's probably not what you should be doing, but you're doing it. And that's not as big of risk. And then like the lower level risks are just ones that I think everybody kind of has because we're all in, we have distribution risk, which is like. Google, Meta, but to what degree, to what extent? And yeah, so that's how I think about platform risk as a whole. It's usually around the platforms that people are integrated with and what are their terms and how are they using the platform? And could this be either killed by them offering the same service or terms of service, you know, just killing them?

• Speaker #0

  And speaking of distribution, I mean, I think that AI also... changes some of the things, because if you think about it, one of my concerns with AI is that if you're ranking number eight on Google, you might have some traffic in high keywords, in high volume keywords. But with AI, you might not be even mentioned for similar questions. And so that traffic goes away. Obviously, if you're number in the top three, typically, you're going to be mentioned by AI. I mean, not always, but oftentimes. But if you're number eight or even in a... you're probably not going to be mentioned, even if you're on a high volume type of query. So that can completely change your traffic equation. And in terms of customer concentration risk or platform risk, can you give an example where customer concentration, especially, took a deal from great to barely sellable?

• Speaker #1

  Yeah, I'm working on a deal where we had... really strong margins, really strong profits. We're talking about over 2 million in profits. But there were two customers that were essentially a majority of that. And so I think total customer base was under, call it two dozen, under something along those lines. And so you go from a business that looks like it's going to be valued at 10 to 15 million, it's fast growing, could probably support a 5X. the going from that to like a 2x because of how concentrated the revenues are. So it's a very it's a it's a the way I look at it is it is a very big risk. And to the degree that somebody is willing to discount it is kind of up to each individual buyer. But when I look at a business with high customer concentration, that is a big kind of red flag to me. It's something that usually I'm going to want to bake some sort of an earn out to. I'm going to want to bake something else to it, tie something else to it, because that doesn't transfer over well, then it could basically half the business if it's as bad as this other one was. So customer concentration risk is something very, it's one of the first things I look at if the business is, you know, has under a couple hundred customers. So I really want to understand what's the makeup of those customers.

• Speaker #0

  you Are there categories where buyers are more hesitant now because of AI or, you know, things they assume will get commoditized or built in?

• Speaker #1

  Yeah, I mean, the number one thing that I've heard, and it's something I think about myself when I'm looking at deals, is anything that is based kind of around this premise of just building on a tool and a platform. So it's building an additional kind of workflow tool into, let's just say, Atlassian or... um zendesk or intercom add-ons those types of things are just becoming a real easy target for you know shopify apps i guess fits in those two easy targets for somebody to say let's vibe code something let's undercut price let's just get the reviews out there this has always been the case it's just we have better tooling for it so you can go from it might take you a few months to do this to might take you a couple weeks those are probably the biggest risk right now that i've that i've seen in terms of buyers saying this is probably a build versus buy scenario it makes more sense i think basic basic crud tools ai kind of wrapper tools unless you have a lot of distribution could be pretty much commoditized at this point in terms of how people think about buy versus build those would be the the two main categories in my mind so and even for myself i don't know if you do this too when i'm looking at deals whether that's an acquirer or flippa or quiet light or Wherever you're finding your SaaS deals, if I see AI as like the first thing that they're talking about, I kind of dismiss it almost immediately. Um, because my immediate reaction is, oh, they probably, what they mean by that is they're just using the LLM as a, you know, they're just calling LLMs and that's something that it's a wrapper and it's not very defensible and it's going to be something that could be, could go to zero very easily. So I personally love to play and build and do those types of tools. like I built this little tool yesterday because my... A sister sent me over a list of her son's basketball games, and it was a PDF. And I was like, oh, I got to figure out when these games are. OK. And so I built a little tool that just ingests a PDF or a photo or whatever of the schedule and creates the scheduling links, like the ICS file. So I think that those are super fun and easy to build. But if I feel like anything kind of has that rapper-esque as its main premise is really tough for me to get excited about it. What's more interesting to me are like these really old apps where they've just been around for a long time. And because of that, they have a lot of distribution, meaning they're getting a lot of search traffic or they're getting, you know, recommended. Those ones are a lot more interesting to me, even if the numbers aren't as impressive in terms of growth. And I think a lot of buyers. probably feel the same way at this point. They're looking for things that are stable, things that are longstanding versus, hey, you've got a lot of growth over, you know, six months to a year. That's not as impressive to me, actually. Like that to me is a warning and something that I would want to stay away from. And I think a lot of buyers feel the same way. I don't know how you feel about that, but that's kind of how I feel about it.

• Speaker #0

  Yeah. I mean, I feel that you're basically in a market that is shifting too quickly. And I feel that The founder is always going to be quicker at making these changes because he has thought of the idea, he knows the idea, he knows the space, he lives and breathes it. And that's not where we bring the most value. We bring the most value because of the long-term game that we're playing, by our go-to-market expertise, by other things, not by being quicker than some indie developer that has built a cool app that's growing very quickly. In a market where customer expectations are rising exponentially, that's the hard part is to match the customer expectations. And in terms of when you turn down a mandate, what are the most common reasons? Like what's truly fatal versus what a founder can fix in six to 12 months?

• Speaker #1

  If I turn something down, it's usually because it's not ready to be transferred over. There's a couple of things that could be a factor there. I mean, the main things would be the churn is just too high. I don't think that we're going to find buyers that are going to be willing to pay for what you're looking for. Or the profitability is really trash right now. You need to work on that because whether that is rising in terms of your cost of goods sold on the server side or if it's just operation expenses. So we need to show better profitability for at least a couple of months before going to market. The harder ones to kind of address, and sometimes I've let it slide, but it's come back to bite me in due diligence, is technical and how that will be perceived during due diligence. So I have another one coming up where it's like it's a pretty antiquated system. In one sense, it's good because they have pretty low rates because they're using a license that's like allows them to be grandfathered in. On the other hand, the actual system... is antiquated technology definitely will need to be replaced at some point. The way I look at that is most likely like a six-figure endeavor over the course of a couple of years, maybe five figures now with the help of AI and the right developers and stuff, but still not an easy chore. And so I have to price that in. So basically I price that into the way that I value the business. And then I say, savvy buyers are going to see this. And if we don't say this, we might get a buyer under offer. But we're probably going to see that either get retraded during due diligence or just altogether fall apart. And I've seen that happen where it's like the code base is just not, this is not manageable and somebody's going to have to rewrite this. And because of that, they're going to expect a discount or just walk away. So those would be the main factors. The customer concentration risk would be more about what is your relationship with this customer? What are the contracts look like? If you have any in place, are they transferable?

• Speaker #0

  Those are kind of the considerations when I'm looking at a deal that would make me say, oh, I don't think you're ready to sell or I don't think we should do this. If it's too young, I've never done really well with businesses that are under a year old. People have come to me and been like, hey, I just want to move on because I have another shiny object. And I just say, look, I don't think we're going to. How can we give you a multiple on earnings or revenue when there is no you don't even have a year of revenue? Like, how do we do this? You know, like, so those are always really challenging to me. But there are caveats to this, which are, hey, I can't we can't do this anymore because of the found like the founder reason or the seller reason is good enough to overcome that. You know, this other case of this one I was talking about with the antiquated technology. It's saying he's going through a divorce. It's like, OK, I understand. The reasoning here and why it doesn't make sense for you to operate the business for the next three to six months. You want to get this done. You want to be able to get a new place, move and move on with your life. This and that. OK, that makes sense. Another one could be, hey, we're having major co-founder issues. We don't get along at all. We just want to be done. Don't really care. We need to be out of this. So they can be overcome. But a lot of the time when people are coming to me, it's because they're trying to say, like, how do we maximize our value? A lot of the times the answer is like, wait, it's not, you know, or do these things. And I've worked with people before where we've said, hey, you know, like, your churn's too high. Let's work on that for the next few months. And then they come back and it's improved. And you're like, this feels a lot better. This is going to be received a lot better. And the trends actually matter here because the trends are kind of everything in terms of, like, if the churn is improving. Like even if that number is relatively high, just knowing that there is a path down is fantastic. So long story short, like I think that the biggest things that I stay clear of are super young businesses or the trends have totally turned on them. And it's a falling knife scenario or, you know, profitability is just there's no real path there. or the platform risk, the customer concentration risk, whatever it is. Those are the main kind of things that I'm looking at now. So I'm just not wasting my time or their time. But I will, yeah, I will work with a lot of people who it's like, they're willing to sell. Again, it gets under their motivation and what they're willing to do. And if they're willing to sell and they're open to what the market can bear, then I'm usually willing to work with them and find a path forward.

• Speaker #1

  So if a founder... If I summarize, if a founder wants to maximize their exit in one or two years, the three risk levers they should work on first are around customer concentration, removing the big risks. So it's basically paying attention to revenue concentration, paying attention to churn and profitability, and having some financials that allow people to see some trend line.

• Speaker #0

  Yes. And out of all those, if I had to just focus on one, if there was only one thing I was going to focus on, it would be retention, like 100%. It would be how can you show that this business, because that is the beauty of SaaS over all other business models, which is it's attractive because there's recurring revenue. And so to the degree that it recurs is the degree that it's interesting and can support a higher multiple. Because those returns compound if you're able to build on the previous month. The problem that people get to, and I think Jason Cohen wrote a nice article about this, was just about the plateaus that everybody kind of hits given churn. That will be a problem. Churn is a problem for every business, for every SaaS business. But to the extent that your churn is a problem, it can be calculated. You can see where the business will tap out in terms of total, you know, revenue that you can actually get based on you just can't like you can't not outrun it, essentially. So, yeah, that to me would be the one thing I would be like, all right, if you can solve for that, even if like you have high customer concentration, but you can show that this company's been with you for like five years, six years. OK, I feel a lot better about that. So retention, and then, yeah, in terms of preparing for market profitability, because in this micro SaaS world, it's almost always profitability. I've, it's very rare that you're going to see multiples be derived from ARR. And the reason for that is because like ARR multiples eventually become. profit multiples. And the only reason you see ARR multiples is when the retention is really high and you have the compounding effect. And so I think that can be a little confusing to a seller who's like, oh, I thought like, I heard somebody on microacquire, sorry, acquire.com or whoever, I heard they sold for like five times ARR. And you're like, what was their profitability? Oh, it was 90% because it was all profit basically. Oh, okay. So it was like basically a profit multiple and So we're still kind of talking about profit multiples at the end of the day. But yeah, retention, the stickiness of the business, anything you can do to improve that is going to be, or not even only just improve that, but also understand it. So maybe you can improve it with certain cohorts of the business. Let's say you run a business that's like, there's a bunch of different customer personas that you serve. And the lower plans, like all lower plans, do just have worse churn. Okay, well, that's fine. Understand that and break that out. Like, find a way to break this out so you can say to a buyer, our churn for this segment kind of sucks. We know that. But it does add to the bottom line. And they're not the worst to serve. Pretty self-serve. But generally speaking, the lower the pay, like, they're usually the worst to client. But then you say, but we have this segment over here. then actually churn's great. It's low. Retention's high. That is the story you use. You don't, I mean, the blended churn rate on a larger customer base kind of can kill how a business is perceived. If the business is saying like, oh, we have 6% monthly churn or whatever, it's like, well, maybe there's a segment in there that's like 0% churn. And it's a story and a customer base that you can kind of focus on for the next couple of years. So I think, and actually the tooling around this, this is, I don't know, I might build this, but it's, it's also just something that like, just for clients that I would work with the tooling here kind of sucks. If I'm honest, like chart mogul is probably the best at this, but it's still not fantastic. Like what I would like to see as an advisor is every plan and then the retention and the churn for every plan and their trends over time. That's what I want to see. You can't, you can get that in chart mogul. you can kind of like export stuff out, build your own reports, all this kind of stuff. You can't do that with ProfitWell. You can't do that. I don't think you, I don't know if maybe Barometrics says this. I haven't looked at them in a long time, but it's like, that's really, if you're going to sell and the things that you really want to care about is like those things. What are the trends of those cohorts? And by cohorts, I mean, I'm sorry, segments. Cohorts is more like when people sign up. What are the segments and how are those trending in terms of growth, retention? That's all I care about because that is a narrative that really matters. And is one that if you understand that as a founder or as an operator can be super insightful in terms of what you focus on for two years.

• Speaker #1

  Yeah, very good. Very well said. I think that retention is indeed something that is overlooked because it's less sexy. But it means fixing a lot of things, including sometimes the core value proposition for a product.

• Speaker #0

  Yeah, I was working, I'm working with a client where it's like, when we stripped out the people who are kind of more tire kickers, or they were using the business in a certain way, a very specific purpose, it was a different type of purpose. That segment was dragging down the retention a lot. And it was a small segment. And then you look at the rest of it, and it's like, oh, the rest of it had gross revenue retention 90%. But that particular one was like 50%. It was like crushing the retention. So I think that this is something where every single SaaS business probably has some level of this. In general, the people that pay you more have higher, better retention. But to the degree that you understand and know this and then can kind of operate your business around this really does affect the multiple and how the business is perceived. Because again, putting on the buyer hat, if I know, if I look at the forecast for the next three years. And I can kind of guarantee that, or not guarantee, but the retention is so strong that that's going to be very high. That reduces the risk, which improves the overall multiple that I'm willing to pay. And this, yeah, again, the two factors there are really the growth and the retention. Those are like the two things.

• Speaker #1

  And so let's talk about, to finally finish our call, I wanted to discuss about buyer motivation. Sometimes founders sell because they have a number in mind in terms of how much... cash we're going to get. Sometimes it's other reasons, but I mean, sometimes they have life circumstances, like they're going through a divorce. From the deals you've worked on, what are the most honest, common reasons bootstrap founders decide to sell? Other than life circumstances like divorce, obviously retirement, stuff like that.

• Speaker #0

  So the one I also like is if it's a talented team, they have something else that they're more excited about. The thing that needs to be there is they actually have to have they actually have to kind of proven they're pretty talented team, like in terms of their engineer engineering prowess. So a premise that I would use and thought about a little bit from like a thesis perspective is. hacker, talented hacker, great at spinning up solid solutions to problems, but didn't intend to really run this business, is not attracted by this business and has much better opportunities either working full time for another company, like a venture, you know, back startup, or wants to play in a different category altogether. I see this all the time now because people are like, I want to be an AI. I do not want to be in boring business. So that to me is a valid reason that I would lean into and like listen for. And I think it's an interesting thesis beyond, you know, just the other ones that you mentioned. But I think that one is probably the most, if I'm looking at it, and I've seen deals like this before, that's a case that I really like a lot.

• Speaker #1

  Yeah. And we've seen founders willing to sell for 1x ARR just to go do AI.

• Speaker #0

  Exactly. Yeah.

• Speaker #1

  What do you think they're getting right? And where, what do you think that they might be underestimating?

• Speaker #0

  The buyers? I'm sorry, the sellers?

• Speaker #1

  The sellers, yes.

• Speaker #0

  I think the sellers who do that understand that the value of their time is the most important thing. And so selling at a 1x, which might not make any sense to you as a holding company owner, is a really good decision because they don't have to worry about it at all moving forward. They don't have to think about trying to maximize the value of the business. So I think that's good. I think that most, I think those, even those situations. They can still probably get a better deal if they position the business well and then offer some good transition. But I think that in terms of what they've got right, it's probably just a matter of priority and understanding and self-awareness where they're not going to waste a bunch of time keeping this dead weight and in their minds dead weight, even though it's cash flow, but keeping something that's taking mental energy for them and letting themselves free up. to focus on the other thing. That's something I don't do very well, to be honest, and why I'm probably better suited to be an advisor broker or a holding company owner than a founder that's just focused on one big idea, whether it's bootstrapped or venture-backed. It's something that I struggle with. And some people are very self-aware though and very talented and they have a lot of options and they've realized like, out of all these options, this one is the best for me. And so therefore I'm cutting everything else off. So I think that there's a lot of self-awareness that goes into it. And then realizing that it's not worth the extra money to try to, you know, optimize on price or something like that, optimize really for a quick sale. I had a, I was working with a guy recently and he had made the decision to sell, I think in 22 or 23. And we didn't close that deal until what was it, you know, a couple of weeks ago. And so. took up mental energy for a couple of years. And, and I talked to him about it. And he was like, I mean, I can't believe you know, when we got closer to the closing, he's like, I can't believe that this is finally going to be off my mind when I'd made the decision over two years ago to get rid of this thing. And I just didn't take the steps necessary to do it. He's like, I can't believe that this is a possibility. And so I think just having that Taking decisive action is actually, I think, really good. I think the only downside there would be, yeah, you might be leaving some money on the table, which, again, it's relative. I mean, if that's not the most important thing to you, then I don't know if that's really that big of a downside.

• Speaker #1

  Yeah, and cash flow is nice. But when you think about, like, if you're going to raise money for your AI startup, then in a way, I mean, the cash flow, you don't need it that much. you and and And you're, because the VC is providing, giving you way more money to pay for your team and everything or yourself than the cashflow ever would. I mean, unless you're, you're talking about a million dollar ARR business and that's kind of a different discussion.

• Speaker #0

  No, but in this micro kind of idea where like, what's the, if you're chasing a bigger idea, what's that extra hundred thousand going to do for you if you're successful? Right? Like it doesn't really, you know what I'm saying? And so it's like, It is kind of optimizing for the things that really matter. I've seen it before. You know, I could even do it myself where it's like, if I was going to sell the business, maybe potentially I might even sell it for a valuation that I don't feel like, like maybe I could have squeaked out more, but I'm just optimizing more to, for a quicker sale. If there were things that I wanted to divest, right? To just simplify the process and to not have to like, and just to have a more likely, like a higher likelihood to close. Like the higher you push the valuation, the higher you push. The more you push, the more likely you're going to have friction that causes a deal to close or fall apart, I should say. And so even thinking as a seller in the future on some of these micro SaaS businesses that I own, if they become too distracting, like I'll probably offload them at a valuation I know is like a little below market because I'm not trying to optimize for every dollar. I'm trying to optimize for like brain space and attention.

• Speaker #1

  So if you were in a founder's shoes with a small... and profitable SaaS, what signals would tell you that it's time to explore selling versus reinvesting and pushing harder to grow it more?

• Speaker #0

  I think you have to figure out the values, what you value right now and what is most important over the next couple of years to you. So if you need to solidify a nest egg of some sort so that it opens up the ability to work on something else that you're more excited by, I think then great. if you're looking for just a relief from the business, I don't think that's the best solution. I think the best thing you can do is find some help, like find, even if it costs you profitability for a while, find a way to remove yourself from the business, take some time off, take some away, spend some time away, and then come back to it afresh. So I actually think that most people probably do not need to sell when they're like starting to go through those feelings of burnout i think they most likely need just a break but if they come back from that break and they say this is really not what i want and i actually would prefer to have the money versus the the risk of owning a business and uh the ups and downs and all that then i think it's worth going to market and and or talking to advisor whatever it is and considering selling or if you're like the other scenario where i actually think this would really make a lot of sense to sell retention is going really well growth is going really well and you're not super excited about the business you actually just want would prefer the cash to go pursue something else it's you sell the business when you don't need to sell the business kind of thing um is really the is really probably the the core under like underlying insight is like that's the ideal time to sell is when you don't need to sell uh and when things are going well i've I tend to find that most of the people I work with are unfortunately on the downhill side of that, where they're like, oh, I should have sold like a year ago. Like, I should have sold two years ago.

• Speaker #1

  Yeah. One thing that I've seen and what we tend to look for is a situation where the founders realize that they're a detriment to the growth of a business.

• Speaker #0

  Yeah.

• Speaker #1

  where the skill set that they have are not the most important to go from... let's just say 200 to 500K ARR, whereas not a lot of people could have gone in this business that they have from zero to 200K. And I think that's really important to realize that. Some founders realize that they've been really good at doing SEO and doing whatever, but now that they have to do optimization for onboarding and they have to think about enterprise plans, they have to do X, Y, and Z, and they're like, I mean, this is not fun for me. I mean, I like coding. I like adding features. I like doing the programmatic stuff, programmatic SEO. Like the rest is just not my thing. And I've hired my nephew and he's bad. I mean, he hasn't closed any deals in a year. Like I would, maybe I might be better off selling. That's something that I would add to that. Yeah.

• Speaker #0

  Yeah, absolutely. I've seen that story. a lot of times to you. What I'd recommend to that person who's going through that right now, though, is instead of immediately going for the exit, is to say, is there a way, because every business has problems like this and every business that goes through growing pains, every business has crap. Like there's business, there's stuff that sucks about every business. And so you have to, if you have something that's working, like unless you just cannot get there emotionally or or you can't get the help and you can't figure it out, there's usually a way to still own the business without it, without having to be, you know, strong in all those areas. I think the challenge is that this size, you don't necessarily have enough cash to hire really great talent. And then because of that, you've, you've kind of like been stuck into a job, right? And so if that's the way you're feeling and you're kind of like really stuck, then yeah, absolutely. sell and move on and do what you enjoy doing, especially if you value your time highly and would prefer to do something else. But a lot of times there are solves for it. It's just, it's going to take work. It's going to take effort and anything that's worth doing does. So it's like, pick what kind of hard you want. I mean, starting over from zero is hard too. That's really hard too.

• Speaker #1

  Thank you very much. That's very, very useful. I encourage you to for you reach out to John or us if you're looking, exploring the sale, depending on, or both. And thank you. Thank you very much.

• Speaker #0

  Yeah, it's great spending some time together.

• Speaker #1

  Absolutely. And happy holidays.

• Speaker #0

  All right, you too.

• Speaker #1

  Thanks. And that's a wrap on today's Indie Board Session. Thanks for tuning in. If you enjoyed the episode, I'd really appreciate it if you could leave us a five-star rating or a five-star review on Apple Podcasts or Spotify. It helps us reach more Indie SaaS founders just like you. And if you're considering selling your SaaS, I'd love to hear from you. Drop me a DM on LinkedIn, on X, on Blue Sky, or check out Noosa Labs website at noosalabs.com. Until next time, keep building, keep scaling, and we'll see you in the next episode of Indie Board Session.