October 25, 2018
The industry has seen a tremendous amount of growth in the past few years, with larger and larger deals being closed.
This has led to an increase in both the volume and size of deals being done.
We wanted to take this episode to look at some of the similarities and the differences between 6, 7, and 8-figure deals being done.
There are some interesting break-points we wanted to touch on, and so we’ve broken it down into the following ranges:
We’ll look at the types of buyers in each range, what to look for, and what to look out for on both the buy and sell side.
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Alright, let’s dig in…
We’re going to look at the similarities and differences in deals done across the following ranges:
Ace Chapman: No matter how great you are at growing something, if the whole market is shrinking, it can be tough to make a business work.
Speaker 2: Buying and selling businesses just got a lot easier. Welcome to the Web Equity Show where thousands of successful entrepreneurs go to learn about buying, growing, and selling online businesses. Your hosts, Justin Cooke and Ace Chapman share their real life advice, examples and to expert interviews to help you build and grow your own online portfolio. Now to your hosts, Justin an Ace.
Justin Cooke: Welcome to the Web Equity Show. I’m your host, Justin Cooke, and I’m here with my co-host, Ace Chapman. What’s going on buddy?
Ace Chapman: What is up sir, good to be here?
Justin Cooke: Yeah, man. Good to have you on. We’re comparing six, seven and eight figure deals. We’re going to talk about some of the differences and the similarities between those different price points. We’ve got a lot to cover today.
Ace Chapman: Yeah. We’ve broken them up into a few different categories just to make it easier to define what happens when you’re trying to do a deal or sell a business in each of the categories. So the first one that we feel like is unique is a 100000 to 300000 and we’ll go into detail on that and then we’ve got 300000 to a million and then we broke out a million to 5 million which, this is kind of the first couple of years where we’ve been buying several deals in that range.
Where we’ve done fewer deals is the 5 million to $10 million range and I know a place that both of us are aiming to get our first deal done. Justin is that 10 million plus range?
Justin Cooke: That’s right man. We’re going to be working on that this year and next. We’ve noticed some really interesting kind of differences at each of those break points, particularly when we’re talking like the 300 to a million and the one to 5 million, and we’re going to kind of mention each of those as we kind of get into this episode.
Ace Chapman: Some of the things you want to look at here are, who are the buyers and sellers? What are the characteristics of the buyers and sellers? Because they change quite a bit as you go through these different categories.
We also want to talk about what to expect when you’re doing due diligence. You can’t go into those smaller deals expecting that you’re going to get the professional financials that you’ll get when you’re looking at 10 million plus deal.
And then some of the things to avoid and look for, if you know what you want out of a business, then there may be one of these categories that you need to just not even consider and look at. So what’s the point of order when you’re looking at these different categories?
Justin Cooke: Yeah man. And just to reiterate, you and I both have the most experience in the six to seven figure range. We’re moving it on to high seven figures, but in the eight figures were mostly relying on peers, other people we work with, other people we know that have owned businesses that have sold for 10 million plus, where we kind of basing kind of our talk about that experience and not actually doing those deals because we’re just not there yet. I know we’re looking to crack the 10 million barrier in a 2018, 2019 so we’ll definitely let our listeners know when that happens.
All right buddy, before we get into it, let’s do our listener love section and I’ve got some sad news, there’s no new five star reviews, man! We’ve got nothing from iTunes. But if our listeners are interested, definitely head over to iTunes. Give us a five star review and we’d love to give you a shot on the show.
Ace Chapman: Nobody loves us, Justin. We need some love guys.
Justin Cooke: Yeah, spread the love guys. All right man. Let’s get into it.
All right, Ace, we’re talking comparing six, seven and eight figure deals and we’re going to start off in the $100000 to $300000 range. So first off, let’s talk about who some of the sellers in that range might be.
I mean most commonly from our perspective, they happen to be first time sellers and they range from first time sellers to the more sophisticated batch sellers. What I mean by batch sellers, these are people that maybe they sell a couple of these deals who are from two to five of these deals a year and they’re constantly have a pipeline of maybe 10 to 12 of these businesses that they’re working on and they range from a hundred to $300000 valuation.
So there are people, when it’s their baby, when they’re selling their baby they’ve worked on for three years, they have no other kinds of prospects or no other businesses going and they’re selling their baby for $250000. It’s a much different experience than when someone’s selling a business that’s one of four.
They plan on selling in that price range that year. So from a biased perspective, it really matters whether you’re dealing with someone selling their baby or they are selling with one of their kind of batch listings of the year.
All right, so let’s talk buyers. This range really from first time buyers to lower end professional portfolio buyers. This could be anything from all the money they put together and saved up to buy the business to someone that they’re just willing to spend a portion of their overall budget on this and they’re looking to buy other businesses as well.
Typically, though, the buyers in this range, hundred to 300000 are cash buyers. They’re not doing a whole lot of seller financing. They’re definitely not getting outside financing. That’s just not typical for these deals.
When it comes to the financials on these deals, just don’t expect much. You’re likely to get 12 months of statements, and this may be, depends on the monetization method. You’re going to get 12 months of kind of proof of income and you should definitely match those to bank statements or any other third party statements so you can match the two just for verification purposes.
You’d be really lucky to get tax returns here. That’s just not typical at all from any of the deals that we’ve done. Typically if you are waiting for tax returns or are looking for tax returns, it’d be really hard as a buyer to get a deal done because these deals are going pretty quickly and you’re going to have to wait around for one that actually does. So that’s just, you’re not going to see that very often.
When it comes to what to look for, for these types of businesses, I mean it really depends on kind of your skill sets and interests, but one of the things I look for are businesses that have had some love and I’m doing the love in air quotes. These are businesses that were built not to flip, not to sell. They weren’t built as batches. They were built by someone putting their love and attention into it with no intention of actually selling it in the long term.
The reason I like these businesses, they generally belt better. There’s more heart and soul into the business and so if they do have a customer base or a following, it’s generally a more passionate customer base or following and those are the types of businesses that are interesting to me because they’ve got some people’s attention.
The things I’d want to avoid in this kind of range are the fad type businesses. Any business that has some sketchy SEO going on on it. I mean single source sites that have either moderate or high risk in those areas. So, if it’s really tied to a particular traffic source or particular monetization source and the way it’s making that money or earning that traffic is a little dodgy, anything from somewhat dodgy to heavily dodgy. Those are the types of businesses I would avoid.
I mean overall of the ranges we’re going to talk about today, this hundred to $300000 is probably the highest risk of the bunch, but these are still definitely much more salt than a smaller four or a low five figure side. Those would be much more risky in much more early stage than a hundred to $300000 business.
The benefit of a hundred to $300000 business is that it can generally provide job replacing income, but you’re not likely to get the earnings that are going to allow you to scale up a team. So you’re likely to be working on this business yourself. You’re going to be putting in some sweat equity.
So if you looking for something that’s much more passive, this hundred to $300000 range is not likely to be it. And you can get a fair or decent amount of earnings out of this and some growth out of it as well. But just plan on putting some hours on the business.
Ace Chapman: Yeah, I love this range when I’m talking to clients for that person that just wants to replace their income. If you recall going all the way back to back in the day to reach that point that, and you had the four quadrants, the E and the S and B and I, and this is what I would consider that S quadrant of the person who’s looking to get from employment to self employment, control their hours, control where they can work from anywhere in the world.
For a lot of people, they kind of underestimate what or overestimate what they need income wise in order to make that happen. And for the average person, these deals are perfect. But for some people they want to move to that 300000 to million range. And things do get really interesting there because it’s a totally different type of deal when it comes to the sellers and the buyers.
For sellers, a lot of times these are still first time sellers, but in a lot of cases they may have several businesses where they’re selling one of those businesses. In some cases they may even have a BA who’s helping to run the business, but it be a surprise that the number of 300000 to million dollar businesses that are kind of one man, max two men shows. It’s really impressive.
Part of the, one of the downsides of the sellers in these deals is that in some cases they kind of lurked their way in, you might say or just kind of bumbled their way into the deal, figuring out step by step, day by day, testing things and in some cases they may be less experienced, but they may really be involved in every aspect of the business.
They haven’t created that team or the systems and processes. That’s what I find when I’m looking at a lot of these deals and what that causes in some cases is a lot of high stress.
The one plus as we move to the buyer side is that when you get to that size a deal, that stress means that they’re a little bit more of a motivated seller. When you’re comparing this to the hundred to $300000 range and you’ve got somebody that is running that business and a lot of cases may be pretty passive, there’s not a ton of stress or like, “Hey dude, either you’re going to give me my money or you’re not, and I’m not going to sell it to you.” I like, we’re in the business, that kind of thing.
So when you get to this 300 to a million dollar range, financials are a little bit more motivated and a lot of cases they will take a part cash or they will take some seller financing to get the deal done. For the buyer, you can bring in a certain amount of cash, make a down payment, not have to worry about SBA and a lot of the other types of finances.
The other upsides of these deals is that their financials are going to be a lot cleaner than the smaller deals because in most cases, like we talked about, the people that are running a business as a hundred and $300000 business, this is really kind of their job. It’s really personal, they’re paying for all cost, all their expenses most of the time out of the business by virtues. It’s just totally, it kind of combined with their personal finances.
When you get to this 300000 to million dollar range, they’ve moved into hiring a bookkeeper. Typically, they’ve realized, “Okay, I need to get somebody to get a handle on these financials.” You’re able to verify earnings with bank statements, merchants, saving accounts, all of those kinds of things.
The tax returns, I don’t really still see even at this point. It’s possible, but I just, I mean I would say one out of, man probably a hundred even in this range of deals really have those tax returns that are said, where the gap is schedule C and it’s totally separated and all of that.
Now here’s some of the things to look for. What I like and obviously you guys have listened to some of the older podcasts episodes where I talked about the importance of diversification. That’s something that you want and if you going to pay $1 million for a deal, either you want that deal to be fitting into your diversified portfolio that you’ve already created or you want some diversification of income within the business itself.
So that if one source of traffic or one source of revenue for the business goes to zero, you’re not dealing with losing $1 million because hey, who wants to lose $1 million? So that’s a key there.
The other thing is that there could be a lot of opportunity. When you look at the growth, it’s a little bit easier to find those arbitrage opportunities or those unique businesses that are just going to pay the bills when you’re in that $100000 $300000 range.
Usually when a business hits a million, it’s because there’s some potential there. And if you’ve got a seller that isn’t very experienced and then you’re bringing to the table some level of experience and in a lot of cases, you can see kind of this blue ocean of opportunities that aren’t being tapped into.
And there’s nothing better than getting into a deal that has some untapped monetization strategies or untapped market that could be advertised to. So all of those things are things to look for.
Things that you 100% want to avoid on these deals. If you cannot independently verify the income, stay away from these deals because this is too much money to go in and just kind of have a hunch that everything looks the way that it’s supposed to.
The other thing to watch out for in these deals is the hidden expenses. It’s easy if you’re not very, very familiar with a business model and all the expenses that it takes for that business model to work.
And unlike, it’s easy for a seller to tell you, “Hey, here are the financials,” but then they have taken out a lot of the expenses because you don’t know what to look for there. So be sure, as Justin said before, we don’t want to bought those lipstick on a pig deals where somebody is trying to dress up a terrible deal.
Overall when it comes to this category of deals, most of the time they’re going to be very solid businesses. They’re using, there are be primed for growth if you have the skill set, and this is an important one. Don’t get into these deals like the hundred to $300000 deal and just think, “Oh, I just want a job. I’m going to figure this out on the job training kind of thing.” You want to come in with some expertise.
Typically, it’s great if you’ve got a partner that has the expertise and in a lot of cases, these deals because you can’t afford to pay a couple of salaries, then you can afford to have a partner where both of you guys are working, you’re going to split up some of those duties so that you don’t get overwhelmed and are unable to take care of some of those untapped opportunities.
So what other side of that is that you can go out and hire people to take over roles as you grow, you’ve got the money there to be able to do that.
Justin Cooke: Yeah. What I really like about the 300000 to million dollar range is this is kind of the last bit we’re going talk about, that’s like a little less buttoned up, right? I mean you’re going to have some motivated sellers, some nervous sellers. I mean there’s a lot of interesting stuff that’s going on because these are businesses that haven’t really been scaled yet, right?
I mean they’ve been proven in terms that they’re definitely job replacement income, their job replacement income plus, but they haven’t been proven in terms of scaled up. So you’re going to be able to replace your income, you’re going to have some additional cash to invest in the business and to really use that cash to grow the business, assuming you put most of the money into the business to purchase it.
You’re also going to be doing some hiring, so you’re going to be kind of building up and building out the team for this business. So those first couple of hires are really crucial. This is, it’s kind of fun stage of the business where it hasn’t really, nothing is totally set and established, processes are still a little wonky.
And like me personally, I really like this range because that’s just an area I’m really good at. And so this is fun for me as I take these wonky processes and get the first couple of hires in place to start building up the business. And I think, I just think there’s a lot of opportunity in deals in this range.
All right man, we’ve done the 300000 to $1 million range. Let’s talk 1 million to 5 million. And generally in this range the sellers are going to be, sometimes they’re solo first timers, so this might be their first actual exit, sometimes is partners and then sometimes you’ll have the buying flippers.
So the buying flippers would be the people that bought at let’s say $600000 and they work here at the last two or three years and they’re now looking for a $3 million exit. Now they built the business up. They may have hired a couple of people, firmed up those processes from the last section and are now looking to sell the business.
You’ll also sometimes get some of the smaller private equity firm liquidations. So maybe it’s one of the businesses that just didn’t kind of pan out for them or those looking to cash up to grow up some of the other businesses there they purchased or are looking to acquire.
Now what’s cool about this range is now you’re talking about some, for some, like solo first time founders and partners, this could be effectively life changing money and then for others this is kind of just business as usual. So it’s really good for buyers to know who you’re dealing with here.
So if it’s a private equity firm looking to liquidate, they just, it’s not as big of a deal to them. It’s not even going to be as emotional. Whereas if it’s a first time founder, it’s a couple of partners, it’s going to be much more emotional for them as well. The buying flippers, it kind of just depends on how many times they’ve done this before, but it’s, they’re going to be typically be a bit more professional about the deal.
On the buy side, you’re generally dealing with professionals in this range and they usually have some experience. It may be kind of offline acquisitions. It may be some online deals they’ve already done. They’re generally going to be looking forward to purchase.
They’re going to have a blend of cash. They’re probably going to require some sort of financing and this is the area where we really start to look for outside financing. A lot of times it’s SBA or other outside financing, but they’re looking for leverage to buy in this 1 to $5 million range.
Again, you’re going to have even cleaner financials typically. These books are generally bookkeeper-account reviewed. You’re going to have multiyear profit and losses. You are more likely to have tax returns in this kind of range, although they may not match the business exactly. And most buyers and sellers understand why that isn’t and why that’s the case.
So tax returns may not line up exactly, but you’re likely to have them over the last couple of years. And this is kind of a spot to where typically these businesses aren’t 14 months old. So you can look for year over year kind of returns and growth, and start to track over the last two or three years how they’ve been doing and they’re a bit more established.
Now things to look for in this range. You want to look at the market. So how big is the market and how much room does this business have for growth? I like to look for businesses that have larger competitors. If you’re buying a $3 million business in the space, I like to look for competitors who are 10, 15, $20 million businesses to go after, right?
What are they doing right? What are they doing wrong? How can you improve your business to match up to theirs. And then it’s also good for you as a buyer, as an acquirer to have a skillset that’s well used in this acquisition. So, are you a paid traffic expert? Do you have SEO skills? Are you bringing those resources, those skills to the table? And are you putting them in to this business?
So that can really kind of help fuel the fire of growth for this acquisition if you’re looking to grow it out. You’ll typically want the contractors or the teams that are working in this business and their typically well-being in a business this size.
You’re going to want them to come with the business and so that might be tricky to navigate a little bit with the seller to make sure that they end up staying around. There may be some cash outlay you may have to do to keep them around at least for a while so that you can kind of leverage their knowledge and expertise and mind-share when you buy the business.
Things to avoid in this range, the 1 to $5 million range, you’re going to want to avoid longterm declines. You want to look for industries that are in trouble, that aren’t doing well and you want to think over the next five to 10 years, where’s this industry going? Where’s this niche going and is this going to continue to grow? Can I ride the wave, so to speak?
I would like to avoid one man bands. The problem with a one man band on a 1 to $5 million acquisition is that you’re going to need to be hiring for this business as you scale and as you grow, you need to be hiring most likely. So it’s great to start with a team already, right? So they’ve got a few contractors, a few employees are already in place. It’s great to kind of start off with that base.
Also, if you’re buying a business that’s say 3, $4 million and it’s a one man band, it may be much more difficult to take what’s in that seller’s head and apply it to the business because if they don’t have processes in place, they don’t have teams in place, the transition might be much more difficult with that business. Typically, that won’t be the case. You’re not going to have one man band in the space, but if you do, that would be kind of a warning sign for me to probably avoid.
Overall I’d say in this space you’re going to get some really solid businesses. There are already going to have some level of diversification of traffic, of earnings already going on and they’re going to have a couple of employees or contractors.
One of the things that should be required for you to really grow this business out even further is leadership because you’re typically taking over a team and that team may be just a couple of people or might be two people and two or three VAs. It may be a dozen people, but one of the things that it still requires is your leadership, so it’s helpful if you already have some management skills.
If you vibe well with the team that you’re taking over on. If you don’t, hopefully you have a team of your own that you can put in place that can run this that you’ve worked with previously. So those are the things I look for in the 1 to 5 million range.
Ace Chapman: Yeah, it’s so funny Justin, as I think about some of the deals and even some of the deals we’ve done with you guys in that range this year, and when you think back just 20, 30 years ago, the idea that you could have so many people that are starting a business that’s really just them, and they can bill something that’s 3, $4 million is so noble. It’s just, it’s really incredible that this whole thing even exists.
And then as we move into the 5 million to $10 million range, I think about, done two deals in that range and one of the cases, there is, we ended up buying the business because the owner was not involved at all in the business, but he did have this team of VAs. And so even just the concept that you could have a team of VAs running a high seven figure million dollar business it’s just absolutely incredible. So it’s exciting to talk through this.
Now when it comes to business range 5 million to $10 million, in most cases you are going to be dealing with sellers who are professionals. They know their business inside and out. It is very tough to get to that range on a fluke.
So some of the things that that seller has already done, they found the right product market fit. They’ve already started to build teams or market and do what’s necessary to scale the business. They’ve got assistants in place, contractors in place. Those people are familiar with the business and in a lot of cases all care a lot about the business because they’re getting paid well to do the work that’s necessary to keep that business running.
One of the tougher things is, when you’re dealing with a smaller business, and they do have a contractor, and you buy the business and maybe you don’t have a relationship with that contractor, it’s not like you’re coming in and saying, “Hey, we’re giving you all of this business.”
For most part, people that have those smaller businesses are trying to negotiate tooth and nail to save money. And so you don’t have that kind of clout which can help you get things done and carry those things over.
When it comes to the buyers in a lot of cases, just as with the case with us, when we do deals in this range, we’re doing it as an investment group. Sometimes people may do it just with some other partners, but again, most of the time the buyers are kind of come in and they have to be professional.
In both cases, when we did deals in this range, they did full background checks on me. They did very in-depth analysis and some of the things that they came out like, wow. They really went all the way back because they want to know who you are. They want to know that if you start doing due diligence and you’re taking up all their time and it’s a big investment to get these deals done just to get to the LOI level.
And so they don’t have time to waste with somebody who’s not, doesn’t know what they’re doing, who’s going to have some outrageous expectation and come in with, “Oh, I want to pay half a million down and then the rest of it will earn out over 20 years.” So they want to figure out all of that on the front end and then they want to make sure that you’ve got the skill sets to be able to continue growing that business.
Nobody wants to build a $10 million business and sell it to somebody who crashes it, even if they do get a good amount of money upfront. So the business professionals are coming into those deals looking to apply their business savvy and that skill set to continue to grow the business.
When it comes to the financials, this is where things do get a lot easier. Even in the under $5 million range, you wouldn’t bet the number of people that just, you get to their finances like whoa, you’re running the business based off of this.
When you get closer to the $10 million range, they 100% have not only a bookkeeper, they’re also have an accountant who’s figuring out strategies to save on taxes, et cetera. And if you’re a buyer, you want to bring in your own professionals as well. These deals are too large to kind of wing it and use your lower level accounting skills to read the financials and statements and tax returns and et cetera.
You also, it’s funny, we’re going, we’re doing our audit process for this year and I was looking back over some of the contracts from last year. One of the deals that we did in this range, it literally had a 65 page contract. So when you compare that to even just a little slightly smaller deal, you get a deal, we did a deal that was $3 million and that deal had maybe an eight page contract.
So things just get real serious real quick when you get into these deals and one calls in those 65 pages, if it’s not in your favor, you could really hurt you in the long term. I’ll do our own contracts or read contracts all day long for under a million dollar deals. I will not do that for a $10 million deal.
Some of the things that you want to look for if you’re a buyer, you want solid teams, you want management in place. You don’t want to have to step in and start running this business from day one. I like to find a business where they’ve got everybody in place and we’re going to be able to take over that team. There are some special cases where that hasn’t been the rule but for the most part, that’s what you want.
And then you want something that’s in a growing industry and everything depends on the deal that you structure, but it’s powerful when you can ride the wave of an industry that’s growing.
Things to avoid when it comes to these deals is declining industries. No matter how great you are at growing something, if the whole market is shrinking, it can be tough to make a business work and I taught at the beginning of this category about all the amazing things that are possible because of the internet and how cool it is that we can do these deals, but at the same time it’s also a space that’s changing.
So you got to think out 5 years, 10 years, 20 years, what is this industry going to look like? And then you want to start working and building the business in a way that it’s going to be able to ride the waves of those changes. You absolutely want SLPs. I have been very surprised at the number of businesses that are in this race that don’t have SLPs despite having taken place.
But that’s when it becomes really important that get the team because they are really the people that understand the SLPs, even though they haven’t been mapped out. I like to look for sellers that are willing to stick through it in a transition period. The crazy thing is that with these larger deals, it’s more likely that either they have some other huge project that they’re working on that they’re going to get seven figures cash upfront.
And when somebody gets that amount of money they’re just not quite as motivated in some cases. So it’s interesting, just to mention in that hundred to $300000 range, how if you can have a project that has a little love in it, you get certain benefits in the business, but you also get somebody who really cares about that business and getting these guys who have really poured everything into getting the business to $10 million, sometimes once that check is written, they’re like, “Okay, I’ve poured everything into this. I am ready to beat out.”
So overall when it comes to these businesses, I am a big fan of trying to find a business that I can scale up. These businesses are usually great candidates because you’ve got enough cashflow to not only scale the business itself, but you can scale through using that business cashflow to buy other businesses and get those acquisitions in place and so it makes it a powerful thing to kind of build this portfolio using gate as the center of the hub, to as in the key acquisition for the whole portfolio.
Justin Cooke: Yeah, and there’s like 5 million to $10 million range. We’re definitely in the professional acquisition territory. You mentioned having solid teams in kind of management in place.
This is an interesting phase and we’ll talk about the interesting like the 5 to 10 million, 10 million plus, but five to 10 million means they’re scaling, but it’s very likely that the founder or the original kind of partners are entrepreneurs that’s involved in this business, has put teams in place, they have employees, they may have management structure, but they’re still involved in the business. They haven’t fully extricated themselves from the business, so they’re still involved. So there’s really some value in trying to keep them around.
And you can do that through letting them retain some equity. Maybe you have a plan to sell them in the next couple of years or whatever. And if you can sell them on that plan there, it shouldn’t retain some equity and staying on as an advisor or doing potentially a longer earn out or tying some cash to them staying and being involved with the business for some period of time.
I may want to do that with definitely, with the management team as well. So, one thing that’s interesting is that Empire Flippers is kind of gone through this transition. That’s been something we’ve been kind of going through this range ourselves as a company and then heading into the 10 million plus range, which we’re going to talk about right now.
So again, we haven’t yet done the 10 million plus dollar deals, although some of our friends have and we’ve worked with some people that have as well, and we’re in that space as a company right now ourselves. So we can talk to it specifically from the position of that entrepreneur or a potential seller.
So let’s talk about the sellers. What do they look like? I think this isn’t a requirement and it’s not always the case, but often they’ll be higher visibility entrepreneurs or partners. So you’ll see people that already have some name, some brand in their industry.
Sometimes, I think it’s less likely, but they’re going to be just kind of some quiet company making money in the background. But quite often at least maybe not the founders themselves, but the company is going to have a brand and be established in the industry and they’re going to have some clout in their space.
The buyers are typically group investors. You’re going to have some smaller private equity firms and some investment banks. So they’re looking down to this range. This is kind of like the beginning of where they start to really play. So $10 million plus acquisition; 10, 15 $20 million deal. Those are the ones they are looking for, and they’re kind of reaching out for.
What happens a lot is you’ll, once you’ve built a business this level, you’ll get a lot of them reaching out to you and they have business analysts just basically hammering you, cold contacting you, cold calling you, cold emailing you to kind of make those introductions for themselves. They’re doing legion, so they can potentially acquire you or invest in you later.
In terms of financials, these are new well documented financials. They’ve got their shit together. In terms of the numbers, there’s typically been reviewed by accountants, they have multi-year tax returns. Obviously you’re going to look for discrepancies amongst all of these. Also, these businesses would be in a better position for outside financing or for lending or for raising money for the acquisition. They’re just in a better position for that.
Some of the things to look out for in this range are competition. So again, I talked about this earlier, but I like to look for competitors that are larger, right? If you’re looking at a $20 million acquisition, is there a 50, $60 million business in that space?
If you’re the market leader of that business, you’re looking to acquire as the market leader, what separates them from their competition, right? Like how big is their moat? What’s their defensibility in the market? How much of a lead do they have on their competitors and how quickly are they gaining?
Those are things I want to know. I want to know what the competition is doing better or worse than them so that I can get some sense of that going into the purchase. And then you want to look for ways to expand the moat, right? Like how can you even better separate yourself from the competition?
And this may be creating a professional advisory board, right? Like letting certain people in the in-club, certain companies in the out-club. Finding ways to separate yourself from competition, that can be effective.
And then you also want to look for competitors in the space that you could potentially acquire for hire or quicker growth. So are the competitors in the space acquirable? Would they be a good fit if you bought this business? Could you then start swallowing up the smaller competitors to add to the business and some industries that’s not possible, in some industries it is. So I’d want to know if that’s possible and if I have additional cash behind it, that may be a good growth opportunity.
What to avoid in the 10 million plus space. Avoid poor management teams or teams that don’t have their processes well documented. At this point, they should be well in the scaling. They should be, the business should be kind of humming along and if they don’t have a strong management team in place, they don’t have their process well documented, that’s a red flag.
You want to also avoid businesses that are too reliant on third parties. A lot of times businesses find a lot of success piggybacking on the back of larger companies, whether that company is HubSpot or Amazon or whatever, but what they’re doing is they’re piggybacking in those companies in ways that it’s not beneficial to the company.
Maybe they’ve allowed it up to a certain point, but as that company continues to grow, they’re going to find that either they shut them off by offering that service themselves or they change course in the way they want to go and that business is a lot less valuable, a lot less interesting as a partner or whatever.
So you can, if you’re too reliant on a larger company, you’re piggybacking on, this can be a problem for these types of companies because they’re now big enough where they’re on the radar and those companies know who they are, have a sense of who they are.
So overall, $10 million plus acquisition, this is likely to be a crown jewel in your portfolio. So this will be a major player in your portfolio. Often it is kind of the major company. And then we’ve added on services or companies around that company. You can use this as the centerpiece and just build around it.
This business should have a fairly good size moat to give yourself a fighting chance against stiff competition. If the businesses were 10 million or more, it is very, very likely that you’re going to have competition. Other entrepreneurs and companies are aware generally of where businesses are at and if they see you doing that well, they’re going to come after you. So make sure you have something that is defensible that separates you from your competitors.
Ace Chapman: Yeah. When it comes to those deals, you are entering a category where literally in some cases you could end up with $1 billion company as a competitor, so that’s something to keep in mind.
Justin Cooke: All right. That’s it for this episode. If you dig it, please head over to webequityshow.com and leave us a comment to let us know what you think. You can also drop us a review on iTunes and we’ll really appreciate it and give you a shot on the next show.
Next week we’ll be looking at where you can find seven and eight figure deals and what you should be looking for. All right, we’ll see you next time.
Ace Chapman: See you next week.
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