Podcast: How to Get Your Online Business Ready for Sale, an Interview with Thomas Smale
In this podcast, Thomas Smale discusses how to get your online business ready for sale. You'll learn about the kinds of buyers you should consider and how to best present your business to them.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called The Value Advantage™ that helps in exit planning, value building and financial management.
About the Guest
Today’s story is about a gentleman named Thomas Smale, Founder of FE International which is an M&A firm specializing in the sale of SaaS, e-commerce and content based businesses. Thomas started his career flipping online businesses. He would buy $50 to $100 websites, build them up, and then sell them for profit.
Thomas started realizing that there was a huge potential market for this and people started going to him and asking for advice. He built an instructional e-course and then ended up building FE International to where it is today with his business partner, Ismael Wrixen. They have done $100 million in transactions, over 500+ deals.
If you listen, you will learn:
- How to grow the value of your business to get more out of your sale
- The three categories of buyers
- The importance of building recurring revenue streams
- The value of making your business attractive to a wide range of buyers
- What your IP is worth in a sale
- Importance of proper exit planning
- The three key business models
Ryan:Welcome back to the Life After Business podcast. Today’s story is about a gentleman named Thomas Smale who owns FE International which is an online business brokerage firm. The reason this story is interesting is because Thomas started his career buying $50 to $100 websites, building them up, and then selling them for profits; flipping online businesses.
He started realizing that there was such a market for this that people started going to him and asking him for advice. He built an e-course and then ended up building FE International to where it is today with a business partner named Ismael Wrixen. They’ve done $100 million in transactions, above 500+ deals.
Thomas and I take his wisdom, his experience from the volume of transactions and the deals that he’s seen to shed light on what the top online businesses are doing to grow valuable companies and exit to the people that they want to. There’s three different key business models in the online space, and then there’s also three different categories of buyers out there. Mixing and matching these to maximize the value of the business and making sure that everybody wins is a great thing for anybody to know when they’re looking at the future of their business and where they want to go.
Without further ado, I hope you enjoy this episode. Welcome to Life After Business, the podcast, where I bring you all the information you need to exit your company and explore what life can be like on the other side. This is Ryan Tansom, your host. I hope you enjoy this episode.
This episode of Life After Business is sponsored by The Value Advantage. The Value Advantage is a platform delivered via peer groups and/or one on one, to help you build a valuable company that can thrive without you, while putting an exit plan in place so you have the option to sell when you want, to who you want, for how much you want.
You’re able to manage the business by the numbers, work in the business as much or as little as you want, and you fully understand how the business impacts your personal financials.
If you want to know more, check out the show notes or the website.
Thomas, how are you doing today?
Thomas:Hey Ryan, thank you so much for having me on.
Ryan:Really looking forward to the conversation today. You and I have been exposed in a lot of different Facebook groups and communities that I think have sparked my interest in the whole mergers and acquisitions and business brokerage space of the online community. For our listeners, can you just give us a little bit of a backdrop on your background and how you ended up starting FE?
Thomas:A little bit of my personal background, if we go way back to 2010 while I was still at college, I’m like many college students trying to find ways to make extra money, stumbled into the world of online business and websites. At that time, I was taking up a business degree, I always liked the idea of making money and business in general. I didn’t have a technical background, I’m not a designer, I’m not a developer, anything like that but I supposed [00:01:54] industry where you could buy, I guess, badly packaged businesses and improve them to increase the value.
I started out buying websites, $50, $100, increasing the value of them through better presentation or make slight improvements to the business and then I’ll resell them for profit. I did that for a little bit of time, got quite successful at that, then launched an ecourse teaching people how to buy and sell businesses for themselves, like very small businesses. The majority deals that I was doing, let’s say $100 into a $1,000 but those are big demands for that market.
Ryan:What kind of businesses are $50 to $100, what does that even look like?
Thomas:About then, it would’ve been slightly different market if we get back nearly eight years now but that would be template websites that you’re starting out, maybe a little bit of content on there. You can increase the value by, one thing I used to do was improve the package that was included. It’ll be like, “Hey buy this you get a year of free hosting, you get SEO guide, you get a marketing guide, I’ll give you a list of contacts. Here are some affiliate programs.” That kind of thing.
A lot of it wasn’t really doing anything to the business itself, it was packaging it to increase the value. That course did quite well. Got very popular, my first course so I guess I got lucky. Off the back of that course a lot of people, “Hey Thomas, this information is great. I really appreciate that you teach me how to sell or how to buy. But what if I don’t want to do it myself, can you just sell for me?” That is how I, I guess, accidentally pivoted into the world of M&A and brokerage. This was at the middle to the end of 2010.
From there that was when FE and its very first distribution was born. We started selling quite small sites to people and it really just snowballed from there. In 2012, my current business partner Ismael, who I went to college with, joined and he had left college and those many people who do a business degree do, had gone and worked in investment banking. He had a pretty successful career there, but I called him one day and said, “Hey Ismael, I’ve built this company, I’m great at that, great at buying and selling business but I don’t know how to run a company, don’t know how to hire people, I’m not good at managing the day to day. Why don’t you come work with me, let’s partner up and build something good.”
He joined to turn this into more of a formal M&A service where applying the knowledge he’d learned doing billion dollar transactions to $100,000 deals, million dollar deals. We continued growing from there, we opened an office. We started out in London and then we continued to grow. Since then, we’re very much just enabled continued doing bigger and bigger deal, hiring more and more people, opening more offices, we now have three in three different continents. Continued hiring, building our team, we’re now 28 people, come a long way in that time.
Context, where we’re at at the moment, we do over hundred deals a year, we’ve completed over $100 million in transactions. Last year and the year before, we won quite a few awards, the IBBA which is the Business Broker Association in North America. We won that Deal Makers of the Year award and top producer of the year which means we sold more businesses, verified businesses, that is. There’s lots of people that claimed to have sold but can’t necessarily prove it, sold more businesses than any other broker based in North America. Also, the most buyer value.
Ryan:That’s really cool.
Thomas:Yes, thank you so much. One of the things we won last year and that really helped us and on the year before and that’s helped different us in the space that’s still a little bit wild west, particularly, as it’s focused on online specific businesses rather than traditional offline businesses that have been bought and sold for hundreds of years or thousands of years.
Ryan:That’s crazy, your volume is just taking off because every time I see one of your publications or something out there, it said 60 and then it says 75 million. You guys are really kicking butt out there to hit over the 100 million mark.
Thomas:Yeah, absolutely. The advantages of building a team like we have, it’s the business, it’s not me, it’s not Ismael, we’ve got the whole team there who work on the deals and get them through.
Ryan:Your volume and the sheer amount of transactions that you see is why I’m excited to talk to you today because there’s a lot of things people do right and wrong. As you mentioned in your space, there’s a couple firms that do what you do but it is very, like you said wild, wild west versus in the twin cities here there’s a handful of business brokers that have been doing it forever. They’ve got the status quo, they post everything on their websites. I think you guys are actually pushing them to even fine tune their models because of how professional you guys have become, I think it’s pretty cool.
If we can dive into your knowledge on what you see that people who do right or wrong, you had talked about you started in value creation, what are the things that you see people do better, the top ways that they can create value in these online businesses?
Thomas:I think the first thing that’s important to do, maybe this is a bit of an obvious answer but it’s actually figure out what you’re worth at the moment and increasing the value, how much do you want to increase it by because there are lots of different things you can do. Some of them might involve a fundamental change of business model, some of them might not.
A lot of the time my conversations to people are, “Your business is great. You’re doing really well. Here are the couple of things you should focus on. By the way, you’re going to increase the value of your business just by increasing the top line and also the bottom line profitability. Let’s speak again in 12 months.” In other businesses, it may be that they are quite a long way away from where they want to get to or increase the value so they need to do something completely different.
Quite a common one in there is, this really applies to any business model, online, offline, whatever it might be, is building in recurring revenue into the business. Some businesses seek out more than others. We sell a lot of SaaS software businesses with a recurring subscription, those are always by their nature recurring revenue. But often with service based businesses, for example, they might be a one time sale and there are ways you can transition that into maybe having a monthly contract instead or a base retainer. Building recurring revenue streams is always a good way to increase value from a buyer perspective.
Ryan:Before you keep going, I’m sure you got a bigger list, one question I got for you is how many owners know how much their business is worth when they come talk to you?
Thomas:If we go back seven years, when I started, almost no one. The vast majority of people didn’t really have a clue. These days, we’ve put a lot of my time and a lot Ismael’s time spent on podcasts like this, going to events, speaking on stages, publishing content, whether that’s written, audio, video or whatever that might be, educating people about valuation. We’ve offered people free valuation since day one of the company, people are definitely getting more educated than they have been.
I’d say the majority of people we deal with now, assuming that they know their numbers, most people have a ballpark idea of what they’re worth, plus or minus 50%. It’s quite rare for someone to come in and think, let’s say almost never the people come in and think that business is worth less than we think it’s worth. It’s quite rare for someone to come in and think their businesses is worth substantially more. They think their million dollar business is worth 10.
My gut feeling would be plus or minus 50% for people who have the business that’s at least profitable and would be sellable. You get a lot of people who aren’t really making anything and have unrealistic expectations. That’s only our target market, I don’t have enough conversations for these people today.
Ryan:What I think is really cool about the online businesses that I have found very much unique compared to the traditional main street up and down middle market is that a lot of them are built to sell or they’ve got the intentions in mind and they’re doing things a little bit differently because of the education companies and people like you are doing around that, versus the main street where this is a lot of people that they just don’t know.
It takes a lot more time and due diligence to find a valuation in the mainstream market than it is to do it on an online business because I think I talked to one of your brokers and he only meets one out of every three people he works with, in person, which is crazy.
Thomas:Yeah, absolutely. We try to meet as many people as we can, but the nature of the industry, one of the advantages of an online business is that you can theoretically, most of the time at least, run it from anywhere in the world. We’ll travel probably 40 weeks a year and we do a lot of events, it’s still difficult to me.
Ryan:Let’s keep going into the value creation, drivers that you have, recurring revenue is one of them. I think everybody yearns after that because of how ridiculously amazing it is even from an operational standpoint. What are some of the other things that people are doing, right before you and I jumped on the call, you were talking about as a real business starts to form out of this online world is they close to half a million and then you’re growing, you’re getting more of an infrastructure. What else are people doing besides growing the top line and the bottom line and recurring revenue that you see that is really, really working well?
Thomas:We do a real range of businesses. One of the things I see quite commonly, in particular with smaller businesses, as they’ve begun to grow is the most successful and the most valuable companies in terms of multiple, at least. They are extremely process driven and system driven with what they do. That is completely not on the line on business model, any business model, you can build a system and process or systems and processes around what you do.
That could be everything based on the tasks as an owner you do everyday to systemizing things for your team and employees, those things go hand in hand if you took a job of documenting your processes and when a new employee comes in and joins the team, you can train them much quicker, they’re going to be much more successful. If you, particularly with technical businesses, an online business in general often has lots of ways you can automate through the use of software products or if you hire a developer or if you’re a developer yourself, you can often build things in that are going to help automate processes.
Ryan:What are some of the examples, maybe an example of a process that someone can systematize because I think there’s also the flashy objects where there’s so many tools and resources out there these days that you can totally distract yourself of putting too many into place. Is there certain inside of the business operational process that you see that worked really well to systematize and what might be a good example of how someone changed it?
Thomas:You make a good point, there is also over processing and over systemizing things. We have this problem where we had probably 50 different subscriptions for different products on a monthly basis which on their own might be useful products. When you combine them, it gets very complicated in their day-to-day. Some of the better systems and processes I’ve seen is where people have built out teams that follow the same process on a consistent basis.
One of the most common ones that we see is with content based businesses, these would usually be business that rely on traffic from Google or search engines, that generally can be ad based or affiliate based sites. But this can also happen for software companies, ecommerce businesses as well. Seen some pretty interesting approaches to content marketing where using something like Trello, for example, you can create an entire calendar of content well in advance of what you want to publish it.
You can build processes for your team or freelancers or contractors or whoever you’re using to go in put together the content, how to research the content, how to write the content, what style to use. All the way to when it should be published, how it should be formatted, how it should then be distributed. These things will tie in with everything else in the businesses and how does that tie in with your social media, what should you do when a new blog post goes out, should people get emailed, should they go out on your Twitter account, does email go before Twitter.
These are all the things that as a business owner you should test yourself, figure out what works, test different processes and then put a process in place that people can follow but without making it too prescriptive. You don’t want to be saying it cannot be in any way iterated and no initiative can be used. But I’ve seen some systems and teams that people, particularly the owner, has had very little input in content just because they’ve created such good system.
They involve a monthly review of the four or five topics they can upload about this month or the $100 tools they’re going to publish about different products they can review as an affiliate. It’s a common one I’ve seen and there are tools out there like Trello that you can use for free. That’s got lots of different integrations. That’s one thing, I guess.
Ryan:I think it’s a good example because that’s one of the easiest way. In my business, we adhere to the value builder system or there’s other value creation methodologies that systemization ties into the hub and spoke which everything relying in you is so common and so many businesses where you can’t do everything. It’s not transferable if you’re not doing that.
Thomas:One of the things we’re talking about having too many products and too many systems. One thing we try and do is lift our products that have integrations, particularly the bigger well known product, we’ll often integrate with lots of others. Even if you have, say, 20 different subscriptions, you don’t necessarily have to login to 20 different accounts. It can all be in one place. It’s one thing to consider particularly as you scale and become more of a consideration once we go above 20 people.
We found that we, even internally, have different teams using different products, processes, SaaS services or whatever that might be. We’ve tried to consolidate it as we grow, it doesn’t get too messy. But then the things become more of an issue as you scale. When it’s just you going to hire your first two people, the considerations are slightly different. But the earlier you think about it, I definitely wish when I started out I put more thought into what we’re going to use than just signing up, trying to think what looked good.
Ryan:It’s so funny because I love this world that you talk about because I’m very much a flashy guy, I’ll sign up for everything and then use half the stuff as I’m trying to over automate stuff. But coming from the midmarket space for our old business, it’s so the opposite where you have to go through this huge, which is why they are so antiquated because they have to go to this huge approval process to have any new product. You can’t be as nimble.
I think, to your point, premeditate some of the stuff that’s important, but being able to change on the fly to get the better product for the right process is also extremely convenient.
Thomas:Absolutely. Definitely one of the things that’s attracting more and more people toward online business as well. Those who come from an offline background have seen the frustrations and the negatives. They look at an online business as an assignment that ticks a lot of boxes that the offline doesn’t necessarily do.
Ryan:I was shown by one of my clients, who does the extra planning value building with us, a bunch of your listings. It might spin off into a good conversation because I was showing him the pre tax profit on some of these businesses in correlation to the top gross revenue. I’m just like, “Look at this. I looked at one of your business, I think it was $800,000 in revenue and $500,000 in pretax profit. I just looked at one of my other clients who’s got 110 employees, 30,000 square foot building, 40 cars, all this infrastructure and here is someone online that’s got a very, very mature business that’s doing the same amount of EBITDA. Why would you want that risk when this is available?”
Thomas:That’s definitely one of the things that people like is that the profitability particularly in the smaller business where you don’t necessarily have to have a huge team to be able to have a huge amount of output which is primarily down to the fact that so many products out there that help you scale these things without the need to manually do many things in online business, assuming you set appropriately to make it so much profitable without the need for 100 employees.
Ryan:I think if we continue down the value driver conversation, but maybe we take a different approach to it. The buyers that are coming in, because they’re looking for specific things, and I think that is the same thing that these business owners should be doing because you want to marry those two up so everybody wins. What are the buyers looking for when they’re looking through your listings, they’re looking for a business, what are the things that really are attractive where they’ll pay more money for it?
Thomas:It may be a slightly tricky answer, but it really depends. Everyone has something different they’re looking for and different needs or wants they’re trying to fulfill, there’s not one thing. Not everybody is necessarily looking for a business that’s extremely profitable. Most people are looking for a business that’s growing, looking for a business that’s profitable, looking for a business that’s in an evergreen space, looking for a business that has recurring revenue, looking for a business where the owner spends two hours a week. I guess they would be on the wishlist of the majority people.
We have a pretty deep network now of people looking for all sorts of different things. Some people like buying companies that aren’t growing because they have a marketing background and they see the opportunity where the current owner didn’t or didn’t have the resources to do. There is a real range of needs and wants out there, there’s not necessarily a right or wrong way to run your business.
Ultimately I would say to people, when you’re selling, you only need one buyer. It’s not like you’re trying to build a business with 10,000 people. That’s not necessarily what you need to do or achieve. You can take all of those standard boxes that most people want, assuming it has strong fundamentals and it’s profitable, if someone is going to like that business, hopefully multiple people.
Ryan:I think it’s a good answer that you have because I do agree that it depends because you want to have the buyer that’s ideal for the business you bought. If you’re a business owner and you’re growing one of these business, recurring revenue, systemizing your operation, what are other things, that way you can enjoy the business at the same time, knowing or having some idea who the ultimate buyer might be could change how you build that business. If you’re a business owner, how do you marry those two things up knowing hopefully who you’re going to sell to or what type of buyer and what you’re doing today?
Thomas:I think the key there, going back to what we talked about earlier about knowing the value is also knowing what you would like to achieve and then that will potentially dictate the kind of buyer you’re going to be open to as well. There are some businesses and some strategies that are going to more suitable to a strategic buyer, they’re only going to be relevant to somebody who already knows your industry and what to buy in that space.
My approach with exit planning for clients is work on your business so it is attractive to a wide range of buyers as possible so you have the highest possibility of sale. Rather than, I know a lot of people prefer this approach, building a business with three to five buyers in mind which can work well, I hear a lot of people who’ve had successful exits using that approach.
Our current success rate for deals you take on is around 95%. If you want a very high certainty of selling your business, then you want to do the basics and be in a position where as many people as possible want to buy that business. Taking to account that ultimately, you do need one or two people but you want ultimately a business that someone is going to be motivated to buy. Strategic buyers, for example, tend to be interested in slightly different deal structures and the financial buyer must be interested to them.
Quite often in strategic sales, the acquirer wants to keep the seller or the sellers on wholesale as employees. A lot of the deals we do, the person who owns the business wants to leave and though you should be transitioned within 30-90 days but that does tend to require a financial buyer who’s ultimately looking at the profitability of the business, to grow for the business, the longevity of it, rather than a strategic buyer who’s often looking at the value of the entrepreneur or the business owner.
Another thing is like the value of the customers, what the customer’s worth to them, what’s the IP worth, what’s the IP worth to them. Will they grow their business and this business by combining the two? Lots of different considerations out there. The key is really figuring out where do you want to get it to, because that really does dictate what you need to be doing.
Ryan:No, I think that’s a very good point. I want to peel your comment about the strategic buyer. You talked about IP and most of the businesses are valued on a multiple seller discretion or earnings or EBITA or pre-tax, whatever it might be, hovering between three, four, five times multiple. When you have IP and a strategic sale, I know a lot of stuff goes through the window in negotiation because if you’re the seller, you can figure out what it’s worth to that strategic buyer. How do you guys handle that when you’re doing these deals? Is there certain ways that you value IP or value the strategy for the strategic buyer?
Thomas:My general rule of thumb is the IP isn’t really worth anything and it’s already baked into the value based on what the business is already making. The trouble of IP and the big challenge of IP is a lot of people think because they spend 12 years building something 10 hours a day, that that IP is valuable. Whereas the buyers, they usually don’t care if you spent 12 years in it or 12 minutes on it if it’s a good product. A lot of SaaS businesses we see which tend to be the ones to actually have the IP versus the content or ecommerce business which tend to be usually built on someone else’s platform effectively.
It doesn’t really matter how long that product took to build, often the most simple products and services are the most effective. IP is very difficult to value on its own so I always say that the value is really baked in by what does the market think, the people actually paying for this product. If they are, then your IP is valuable.
From a buyer perspective, do you have a strategic buyer, they may look at it as hey, what’s it going to cost us to replicate this product? The challenge with that approach is if your business is already profitable, then chances are a multiple of profit is going to be more to you than what they value the IP at. Let’s say, for argument sake, you’re making $100,000 a year and we use a 4 time multiple, just like a fair average to a full $100,000 business. Your IP would have to be worth more than $400,000 or cost the buyer more than $400,000 to replicate and that $400,000 particularly in 2017 goes quite a long way with developers. You can get a lot billed for that. Even when you take the opportunity cost and the time it’s going to take,often the financial buyer’s willing to pay a lot more than the strategic buyer. He’s only really interested in one thing.
IP is ultimately difficult to value, I usually say it’s baked into what is there already. There’d be more buyers interested in buying something unique. But at the same time, there’s also a lot of buyers who want something that’s relatively simple, built off of a well-known framework. The content website is basically an example, buyers like a business is built on a platform like WordPress because there are tens of thousands of people who know how to use WordPress. It’s quite simple to run and in that case having your own unique platform you’ve built doesn’t necessarily increase the value at all.
Ryan:Could actually be a detriment to the value.
Thomas:Precisely. Generally speaking, IP is not really worth anything. It’s baked into the value of whatever your customer’s already generating. With the exception of, which is not really saying we deal with if it’s a true IP sale where you have a patent and target market is say five public companies in that space, but that’s a little bit different from what we usually do. Not really saying I know a huge amount about.
Ryan:I like how you articulated that to be honest, Thomas. Because the IP is what allowed to create that cash flow. Like you said, it’s baked in, it’s what allowed you to have a business.
Thomas:Exactly. That’s generally quite an unpopular answer, a lot of people be like, hey, Thomas, that’s bullshit. I did an MBA and I spent five years building this, it’s worth millions.
Ryan:Oh, isn’t that so funny? It’s like in the mid-market mainstream businesses are like, “Oh my gosh. You have no idea, Dude. I started out of my garage and I was driving a piece of crap car.” It’s like, “Dude, no one cares.” No one cares how you started the business and how long it took you and you mortgaged your house. I want to know what did you do the last three years in profit.
Thomas:Story is somewhat important, but when it comes to selling a company, you want to get on with the person you’re buying the business from and vice versa if it’s a sale you want to get on with the buyer. The story is important but also as a business owner, it’s important to realize that like you say, often no one really cares that you spent two years eating ramen noodles from your bedroom, making no money, which is I guess the non-sexy part of entrepreneurship. No one really talks about it but every entrepreneur has been there and done it. Just doesn’t get talked about. But it doesn’t mean no one really cares.
Ryan:That is what gives you the war scars, it makes you a better person.
Thomas:Yeah, exactly. Generally, that crowd tend to be the kind who are selling the entrepreneurship dream to people who are getting into it and they’ll push past the stuff that’s actually difficult in the beginning. Where people want to take the shortcut but it’s the same with business buyers as well. They don’t really care about what happened before, they just want the end result which is I guess a profitable business.
Ryan:Aside from recurring revenues, systemization, and some of these. It’s interesting because you guys, that’s a pretty quick time frame, the 30 days, the 60 days for a seller to back out after everything. That proves the systemization. What are the things that people are doing well to either make that a clean cut or getting more value for their businesses, other things that you’ve seen as a common trait?
Thomas:I think one, I guess, fundamental approach that you should have if you want to sell a company or build a company long-term, and ultimately everything involved in exit planning should be something that makes your business better on a day to day basis. If you’re doing exit planning wrong, it’s where you’re making decisions that are detrimental to the business or you personally because you feel like it’s going to make the business worth more.
Proper exit planning should be increasing the value of your business through growth generally. I guess, in relation to that, one of the things that’s important is making long-term decisions. A lot of people think if they’re going to increase the value of their company, what they need to do is cut the net profit, cut all the cost, fire all their staff, stop paying for their subscriptions, and that tends to be quite short sighted view.
Those who tend to do better and actually build a truly valuable company, are one thinking about getting the company to where it needs to be in 3 years time, 5 years time or 10 years time and that involves a completely different decision in the day to day versus how do I make the business make as much net profit in the next 90 days. Which is one of the challenges, that creates a challenge for the buyers in the market because you need to figure out, when you’re looking at a business to buy, has that seller been thinking for the long term and putting things in place that are going to make that business thrive in 5, 10 years time, or have they been cutting corners building a business that’s sellable, but in 6 months time is going to be nothing or decline.
That does create a challenge, because you have to figure out if you’re dealing with someone who has thought for the long term. And while they may have thinking about selling in the back of their mind, ultimately, they’ve been making decisions that are good for the long term of the company.
That’s really something that increases the value as well. They’ve been consistently investing in good people, they’ve been consistently investing in good content, good technology, all of those things tie in to make a successful business. They’re not specific things as such, there’s no hard and fast strategy that’s going to work because it really does depend on the business. But just thinking long-term is important.
Ryan:I always talk about having a foot in the monthly annual cash flow bucket and then a foot in the value creation bucket because I see a lot where whether it’s lacking the investment in staff or a lot of the customers that I work with, they don’t want to hire a president who might cause them over six figures but the reality is that, $100,000, $120,000 which is $10,000 a month might actually cost them a multiplier, an entire percent on their overall company value because there’s not a management team in place. The short cash flow is important but it’s also, like you said, value creation.
Thomas:Yeah. Absolutely. That’s a good way to look at it.
Ryan:You guys work with a lot of different industry types too, different types of online businesses. Can you give us a rundown of the different types and then are there certain specific business that you see that are more profitable for the business owner and more valuable when they sell?
Thomas:We break down our target market into three key business models and then within those business models, I guess there’s sub business models or some businesses that might overlap to maybe three models. We primarily fix on SaaS companies, ecommerce companies and content based companies and then like a real mixture within those different industries.
In terms of what’s most desirable and what does best, quite honestly we have a real range and variety of buyers who are looking for all different sorts of businesses. I wouldn’t necessarily say there’s a popular business model or an unpopular business model as such, particularly if you’ve done the fundamentals right. I’ve been quite conscious as we’ve talked about things that anybody can do in any business. You don’t have to be a developer, you don’t have to be an MBA, you don’t have to be a great marketer to do all of these things. They’re basic things which might seem boring, they’re not growth hacks or anything like that but they do work. Often like the most obvious done well, are the things that are really going to benefit in the long run.
In terms of evaluation, the businesses we see achieve the most, almost always, SaaS companies and that’s really down to the fact that they have that recurring revenue element we spoke about right at the beginning. Buyers like the predictability of the business that has recurring revenue.
My view on that has always been the reason people like that is if they take over the business tomorrow, even if they suck at marketing and suck at operations, assuming the business has been fundamentally built right, that business is not going to go to zero. It’s going to continue making money. The risk of losing your money is very low. Like an ecommerce business for example, if you ran out of stock, you’re not going to make any money, fact. You physically can’t.
SaaS businesses are always popular in that respect. Going back to the IP thing as well, I know I said the IP is not worth anything on its own in general terms. But often if you’ve got a SaaS product, it’s probably something quite unique, in that respect it’s quite defensible, and buyers like that.
Ryan:It protects the recurring revenue that you got built.
Ryan:Is there some things that you’ve seen, Thomas, that ecommerce or content marketing companies have done to build recurring revenue into their business?
Thomas:Yes. Ecommerce, quite popular that we’ve seen recently is subscription boxes. Charge $50 a month, $100 a month for whatever that might be and send people a box of products in industry x, whatever that might be, on a monthly basis. I guess you could also look at a model like Gillette or Dollar Shave Club where they make all their money, they sell you something initially, commercial hardware or software and then there’s a recurring element in there.
With ecommerce for example, you could charge people for maintenance, extended warranties, the quite common things you see, insurance. It could well be that you actually have a product and then you’ve got a back end club. People who love your products and use your product then pay for a membership. If you look at the much bigger companies out there, Amazon is a great example. They sell physical products but they have 80 million subscribers, Primers and Prime.
Ryan:Taken over the world.
Thomas:Yeah, exactly. I’ve seen not every business can launch Amazon Prime and be ignorant to think you can because ultimately people aren’t going to pay $50 a year or whatever Amazon Prime is these days to buy probably once a year from you but there are still ways you can put things in there.
For example, the other day, I was thinking to buy some cat food and there were lots of different companies out there these days that offer subscribe and save services. It might be say $50 to buy the product or if I sign up for a monthly subscription, it would be a $40 a month.
Think about ways you can incentivize people. It does depend on the product you’re selling in an ecommerce business. Some are more suitable like cat food for example, is a great one. I want to buy that every single month, and I don’t want to have to worry about it. I just want it to get delivered.
Signing up for some of that makes a lot of sense. Some products, that doesn’t make sense. You might need to look at it in a slightly different way or in some businesses, like we spoke about right in the beginning, you might not be able to build recurring revenue, it might make more sense just to keep doing what you’re doing and do it really well rather than worrying about building recurring revenue that doesn’t really makes sense.
Content based businesses. Content really varies, so it can be business that rely on ad revenue, affiliate income, lead generation income, lots of different things in there. One thing you can do is look for affiliate programs, or products that are sold on a subscription basis and then look for ones who would pay you a monthly rev share on that. That really will involve some research but almost every industry these days has some sort of product in their industry that’s sold on a monthly recurring basis.
Another thing with content is, the most common recurring revenue in that space, like a membership site, similar to ecommerce businesses, you can build a group of people who are really interested in whatever topic you’re talking about and then sell them a monthly or an annual membership plan, maybe so that they get access to premium content. It’s a traditional membership site model.
That’s why when we go right back to the beginning, I was talking about figuring out where you want to get to because almost every business can pivot into having recurring revenue, but it doesn’t necessarily make sense for everybody, it really depends on your time horizon. You need to think about these things altogether rather than independently.
Ryan:Really having your customer in mind too, so that way you can make sure that it makes sense for them too, because I think there is a lot of different ways that you can reframe how you’re delivering a product and service. Make sure your customer’s willing to buy that.
Thomas:Yeah, exactly. If you’re selling a trampoline, no one wants a new color trampoline every week, but when it comes to clothing or food or anything like that, all of these things work really well on a subscription basis. Because people are lazy and creatures of habit, and want the same thing over and over again.
Ryan:Have you seen any success of people combining some of these business models as long as they’ve got their same target audience and target customers, have an ecommerce business that you also can combine with a content around that? So that way, you could maybe create a membership site and content that is complementary to your product or service?
Thomas:Yes. I’ve definitely seen products where someone has sold an ecommerce, they’ve had an ecommerce platform and they sold a physical product. And then on the back end they have a membership site. Or perhaps a software product. Quite often hardware or software go hand in hand, so you can sell some of the physical product and then on the back end they get access to the actual software, so you can sell a physical product and then say $19 a month to get access to the app, or you get access to the web app or whatever that might be.
That’s quite common to see in the content space. You quite often see as hey, you’re signed up to a website that talks about cats. You like cats, you’re signed up to their daily or monthly cat newsletter. You’re in a membership site where you learn a lot about how to look after them, what to feed them and things like that. Off the back of that, you can sell physical products to them. Quite often, you could do a combination and you really should do a combination.
If you have a content based business, affiliate programs could be so powerful to test the business model. One thing that you could do with the content based business, if you’re promoting say the Amazon Affiliate Program, promote that to your readers or users or listeners or whatever they might be or whatever medium you’re using. See what they buy on Amazon, which is very easy to do. And then create and launch your product they desire.
It may well be there’s a particular product that they were buying consistently. Or it may even be something very simple like you could create a book on the topic that you’re writing about. List it on Amazon using CreateSpace which is selling the text. 20 minutes to do, once you read the content that is. And then straight away you have a physical product that you can sell. Tons of different ways you can do it.
Back to what you said, you need to know your audience, but there are ways you could test knowing your audience with things like affiliate programs. See what they’re buying already, test their buying habits, and also test things a lot.
Ryan:You hit on a bunch of good points and I truly believe that you have to start doing this stuff to be defensive against the Amazons of the world because you have to create raving fans and die-hards for your brand based on whatever their interests are. I got a couple buddies that are in the ecommerce space.
One of the companies is called Fruit Share, he does a subscription where it’s like a two-day delivery from picking to doorstep of fruit. You can do the subscription box but then you got the Amazon, Whole Foods in the whole world. Takes a little bit of a notice and he goes, “Oh, crap. Now what?” But if you can combine that ecommerce subscription with potentially a whole membership site, where it’s all about healthy living and eating and you got blenders and all this other stuff that you could wrap around it, now you’ve got die-hards that are not just buying fruit from you.
Thomas:Yeah, exactly. Tons of different ways you can do it. I agree, if you want to be competitive long term, particularly in the ecommerce space, you need to differentiate yourself from someone like Amazon and figure out how can you get loyal, die-hard fans.
I guess one of the advantages of running an online business with the usual lack of overhead that we’re talking about, you can build a profitable business for one person or maybe a couple without the need to be Amazon scale or anywhere near it. You can make a lot of money. You need to make $500,000 a year in revenue. Make 50% margins and that’s quite a nice living. For people living in most places in the world, I wouldn’t suggest moving to Boston. There are lots of other places you can live.
Ryan:Three months in, you already have a little regret. As you were talking about building these raving fans and your brands, I think that ties back into one of your original points about every buyer’s different. It’s because if I’m not super interested in this specific topic around this stuff, you don’t necessarily want to dive head first into that industry because just of the nature of the interest. I think that’s a good segway into you mentioned financial buyers, you mentioned strategic buyers. Give us the spectrum of the different types of buyers, where are they coming from and then how do you guys go about finding them?
Thomas:I used to categorize buyers into three main categories. Two, we’ve actually just spoken about. Financial buyers, their primary focus is on the underlying financials and profitability of the company and the longevity.
Then those strategic buyers who are still interested in that but they’re probably most interested in how it will benefit or combine with their existing business or businesses.And then maybe some other things like the value of the IP we spoke about, the email list, the customer base, various other things in there, depending on the buyer. Some strategic buyers as well might actually not really bother what they have already, they might be interested in a specific business model where they can apply a process they’ve created.
For example, the content creation process, if you have a good content creation process and team, you could buy any business that relies on new content, regardless of the niche industry or monetization model and you could probably grow that business just by rolling out the process.
Strategic buyers can be in all different walks of life and approaches. And then we have buyers who tend to be smaller investors or hobbyists who are looking for a hobby, they’re looking for additional income, maybe they’ve retired and they just want something to do. Maybe they are working full time and eventually they would like to quit that job, maybe they just move somewhere and they can’t get a job and they want to run a business.
That group tends to be more interested in whether they actually like the business. Financial buyers tend to be more interested in the financials. Strategic is more interested in how much of a good fit is it for their existing models. Whereas the individual buyers tend to be more interested in do they like the business? Do they like the owner? Do they want to run it? Those might be less concerned about the underlying financials, more worried about does it look like a good business, do they enjoy it?
That’s the three main categories and then there’s overlap between those. Not every hobbyist is not a financial buyer, some people are strategic or is a hobbyist, other people are investors but only in a strategic way. Lots of different types of buyers within there. In terms of how we find them, we’ve been in business for seven years, which I guess in the online world is quite a long time. In that time, we’ve completed well over 500 transactions.
Every time we do a deal, there’s, I guess the network. People tell their friends like, “Hey, I sold my company.” Often, entrepreneurs, in fact, almost every entrepreneur I know hangs around or at least speaks to other entrepreneurs. Word does spread quite quickly, both in terms of sellers and also buyers. Word of mouth is a big one for us.
We do a lot of content marketing, whether that’s like podcasts like this again, blog posts, speaking to reach a wide range of people. We got a lot of people organically seen us or heard us or read about us in that way. We also advertise businesses we’re selling on an anonymous basis, on various platforms out there where people are actively looking for businesses for sale.
Over time, we’ll nurture them into someone who’s ready to buy. Often, you find with third party platforms, people are looking to buy in there. They usually fall into two camps. They’re either sharks and they’re looking for a really good deal that can come along every now and then from relatively naive sellers who try to do it themselves, or people who are just window shopping. They like the idea of buying a business but they’re probably not going to pull the trigger for a while. That’s where we’ve invested a lot into content, so we can help people who want to buy. We have a lot of people who’ve been on our list for many years and then two years later, they’ll buy a business.
Ryan:You got some great content. I just got to give you props because I even read your 90-paged PDF on how to buy an online business. It’s just fantastic information regardless of what industry or anything like that. You guys have really pumped out some very quality stuff.
Thomas:I’m glad to hear it. Thanks for the compliment.
Ryan:As we’re wrapping up here, Thomas, what is the best way for our listeners to get in touch with you?
Thomas:Lots of different ways. If anyone has a specific question for me or they just want an off the record opinion, I’m always happy to talk. You might direct the email to [email protected]. You can find us on all the main social platforms. Twitter, Facebook, LinkedIn, Instagram. We’re always active or someone in the team is always active and around.
If you’re looking for content, then our blog is usually a good place to look. Content, either regularly updated on there or a lot we’ve written in the past. You can segment it by what you’re interested in as well. Do you want to buy a business, sell a business, grow a business. There’s a real range in there.
Like you mentioned, we’ve got some ebooks, which are worth a read if you’re in that research phase and you’re not necessarily at the stage where you want to chat to us.
Ryan:If there’s one thing that you want to highlight, because we talked about a lot of different things, one thing you want to highlight or leave our listeners with, what do you think it would be?
Thomas:I think the main thing for business owners is figure out what you want to achieve on where you get to. There’s a lot of advice out there. Some of it is very good, some of it is not so good. But it’s all going to be very personal to you. There’s no right or wrong answer. You need to figure out what you want to achieve in your business.
Some people like working 60 hours a week and they have no interest in putting systems and processes in place. That’s like other people have a particular number they want to reach, or valuation goal, or a time base goal. Figure out what that is, how realistic it is, and then build a strategy around that because there’s certainly multiple ways to achieve your goal.
Ryan:Thank you so much for coming on the show, Thomas. You gave awesome advice and I look forward to talking to you soon.
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.