RMRB 33: What It Takes to Run a SaaS Business

Jake spoke with Michael about SaaS business in the finance niche. His Java application aims to help business owners transfer data between two popular business tools and earns revenue from monthly subscription fees. The growing business is in a well carved out niche and requires minimal work to run.

Find more businesses like this one on our marketplace: http://bit.ly/2uudREl

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Speaker 1:           What if you could cut through the noise in the online business world and learn from someone who has built a real business. We verified the numbers and combed through the P&L. This is not only a real business, but a real asset that people want to buy. We’re going to pull the curtain back and give you the insights this entrepreneur has discovered that you can use to level-up your knowledge, whether you’re looking to buy a business or looking for inspiration to take your current business to the next level.

                                Hey, listeners, welcome back to the Real Money Real Business podcast. This week. I spoke with [Michael 00:00:39] about his SaaS business in the finance niche. His business is making over $2,000 every single month in monthly subscription fees and the service aims to help business owners transfer data between two popular business tools. Michael, thank you for taking the time to come on here today. How are you doing?

Michael:               I’m really great. Thank you. Thanks for having me. It’s really great that you guys do these interviews and I’m excited to be on one of them.

Speaker 1:           Yeah, it’s my pleasure. You have a very unique business, your SaaS product here. I’m definitely excited to discuss it with you, but before we dive into the questions that I have, I want to go ahead and run through a little quick summary of the business. Again, it was built in May of 2016, has a monthly revenue of $2,283, expenses of $467, to make for a net profit of $1,815 which is generated on a six month average. Included in sale of this business are the domain and all site content and files, AWS account and code base, social media accounts, and other business accounts. Michael, can you tell us a little bit about your background in building and running online businesses?

Michael:               Yeah, for sure. I used to run a traditional business for about 11 years and it was, I guess what you’d call essentially a lifestyle business, but it wasn’t very much of a lifestyle. And after about 11 years of running this business it was … I’m in Australian, it was across two states of Australia. We were employing about 30 full time staff. I just sort of, it wasn’t quite woke up one day, but woke up one day and just went, this is crazy, I’m just sort of running on a treadmill. And about a year earlier I’d rekindled with a very old school friend and we were just chatting, and he was in the [inaudible 00:02:06], and we went, why don’t we do some … get into the online stuff. Digital is pretty interesting to both of us. Why don’t we start doing some online things?

                                And that’s probably about seven years ago already. And ever since then we’ve started a few businesses, sold a few businesses, shut down a few businesses, and kept running a few businesses. And I guess this particular business actually came, and in fact all of our businesses, have more or less been born out of a need that we had to solve a problem that we have. And this particular one was just, it was a sort of scratch your head one that was just sucking up time for us. And we figured, well, if we can solve this for ourselves, there’s probably tens of thousands, hundreds of thousands, perhaps maybe even over a million people that actually have the same problem that we have. So why not see if we can turn it, like we’ve done with our other ideas, into a business in and of itself.

                                And as we were looking at this one, we went, it needs to be pretty light hands on. It should just be one of those things where it’s recurring, we want our customers to login once, set it up, and never have to log in again. And then just keep getting billed once a month. We actually, when we originally priced it we just went, it’s typical sort of SaaS margins. The gross profits are probably quite close to 100% for every new sign up. We just sort of went, let’s price it at a figure where someone won’t even think about if it’s a credit card every month. And so, yeah, and that’s where we ended up.

Speaker 1:           You mention that the margins are pretty much 100% there. So you have expenses of $467 a month on average, so where do those expenses go?

Michael:               Yeah, sorry, to be fair, so it is SaaS, we bill people’s credit cards, so some of the expenses go to the credit card processing fee. And then we’ve got, it’s not a fixed cost, but we’ve got server costs. And that’s essentially where the money goes. And that’s why I say close to a 100% to add a new customer because the difference between us having 1,000 customers and 10,000 customers is sort of negligible. It’s server costs. So certainly to add another customer you wouldn’t even know, in terms of costs going up, because that’s the benefit of having cloud and plenty of relatively cheaply priced, almost free, tiers of AWS accounts and that sort of thing. So that’s why I say, typical SaaS, effort goes in at the start when you build it, it goes in at the start when you first spin up new servers and database, and that’s it.

Speaker 1:           So with it being so easy to run, add new customers, it doesn’t put any strain on you, regardless of how many additional customers there are, so why have you decided to sell the business today?

Michael:               All right, so to be fair, it does put a little bit of strain on me. So I run with my partner two other sort of significantly larger businesses. And this one I probably spend … Well I allocate three blocks of one hour a week to it. So it’s every Monday, Wednesday, and Friday at 4:00 PM until 5:00 PM I allocate to do support tickets. And so the truth is it’s never full hours but it’s more, I just figure that I should probably be, if someone responds back to me, probably be responding within two days. So that’s why I set it every couple of days during the week. And there is a bit of support, I reckon it’s somewhere between one to two hours a week of actual responses and doing things.

                                And the reason we’re selling is we had this idea when we started it back in 2016 that well, my partner was meant to market and grow it, and we’re both just being actually too busy to do it. And we just went like, we sort of need to really double down, triple down on our other businesses. And we just said, let’s get rid of any other distractions. And it was an easier call for him because he really hasn’t put any effort into it. It was one of those things where I just went, but I put all the effort into this one. He went, yeah. But we’re both committed to our other businesses. They’re bigger. And even the two hours a year allocating all week, it’s better in the other ones.

Speaker 1:           When you look at the numbers, going over the last year, every single month, for the most part, is growing. So how are people finding you online? What’s your strategy?

Michael:               I looked at [inaudible 00:05:58]. I went, oh, look at that, it’s growing sort of 100% year on year. And we really haven’t done much. And that’s sort of indicative, and part of me looks at it and goes, what are we doing, why aren’t we marketing this thing? We should be getting it up to easily $10,000 a month in revenue. And obviously the profit shifts significantly up with that too. And the truth is we tried a few things, when we launched it and we were excited we tried a few things. We tried emailing accountants and we tried a bit of just social posting and more or less, besides maybe every six months, my partner will go, I’m going to turn on some ads for two weeks but not really thinking about it, we just haven’t done much.

                                But to the question of how people are finding us. I think early on we responded to a few queries in forums, in [Cora 00:06:43] and that sort of thing. Because obviously we were having this problem and originally when we were having this problem, this business [inaudible 00:06:51], I spent a lot of time researching trying to find the solution. So I came across all these forums of people saying, how do you do this? How’s everyone else solving this? And realized that, just … So once we launched, I just responded to a few of those articles and said, well, hey, check this out. It’s really specific. It does this, it does not do that. Don’t sign up if you want that, but do sign up if you need this. And it really solves a problem.

                                And my partner, we actually had, when my second child was born, I didn’t answer support tickets for five days. And lo and behold, our AWS server had a critical failure. And so for three days the system was more or less offline. And whilst that sounds bad, maybe I shouldn’t be mentioning any of this, what was really interesting after the fact, which my partner pointed out, is that you got all these angry messages from customers saying it’s not syncing. [inaudible 00:07:36], automatically kicks back in and does everything. But what’s really interesting is that, even though we don’t do anything proactive to communicate, excite, do whatever, the customers really, really need this tool. They can’t live without it. And for us it was actually sort of unique. In our other two businesses, two startups, we’re really trying to … Like we have sales teams, we’ve got real significant sales processes where people are trying to push this product or these other products. And with this business it just solves a problem that people have. And so they need the solution. So they’re stumbling across it, they’re signing up, and they’re staying for a long time.

Speaker 1:           So it solves a problem and people sign up and they stay. Does that mean that you make money on a subscription?

Michael:               Yeah. So it’s totally SaaS model. So it’s $9 U.S. a month and it just, every month just bills people. We built it with a free trial to start with. It turned out, it wasn’t really on purpose, but it was a stroke of genius model for the trial. It’s technically unlimited, except if you fit into the category of what was going to be at one of our ideal customers. We used to see them converting from trial to paid within about half an hour.

Speaker 1:           And when you look at the business as it currently stands, so you mentioned replying to support tickets. Is that the only thing you have to do for the business?

Michael:               I’ll tell you what, I’ll talk about my last four weeks. About four weeks ago we had an email from … So it’s built with some other third party plug-in tools, we’ve sort of followed that motto, if someone else has built in and gives out for free. So we use our, like for logins, if any of the listeners know, we use a third party called Auth0. So we’ve essentially outsource login security and authentication to a third party platform. And they sent out an email saying we’re depreciating this version of some of the codes so we need to … so please upgrade to the next version. So in that instance, I actually jumped on Upwork, found a developer that specialized in Auth0 and our stack, which is Node.js, and booked someone in. So I probably spent an extra hour finding the person and probably another giving them access. So that was a bit of extra time.

                                And just at the start of this week, we actually had a really interesting call, haven’t had it before, don’t know if we’d had these again. But we had came through, the support desk, we had a inbound email from a large digital agency in New Zealand, of all places. And they reached out saying, we’re building a sort of one stop solution for businesses to get them e-commerce stores and we want to package your product into it. We’ve got 3,000 customers at the moment, can we do this? And so that was the one time I jumped on a call with a potential customer and we probably spoke on the phone for about 45 minutes.

Speaker 1:           So that deal then is a potential opportunity. What does that look like in terms of pipeline? What are you thinking as to how long that deal will take and how likely do you think it is?

Michael:               I was pretty shocked and it was one of those things where it was inbound, so it wasn’t even outbound. It was never a mark that I’d thought about targeting. I reckon, it’s a large company out of New Zealand. I would say it’s probably somewhere between four to eight months. The cycle to get a deal like that closed. He actually said, all right, start talking next one. Not saying I would, by any means, but it was more indicative when you go, oh Wow, the opportunity is … This is just one company in a tiny country. A lot of our customers end up being, or a lot of support tickets end up being from customers who’ve put this on their business and then they’re accounts who actually got in touch with us.

                                And so we look at it like, the world of accounting is huge. So there’s so many opportunities for, either to drive sort of more inbound inquiries like this one out of New Zealand, or to actually even do a bit more strategic outbound. Because it’s sort of funny, at $9 a month, I look at it and go, this is self sign up stuff. This is certainly not sales call close. But if you can contact organizations that may have 100 customers or more, then it may well be worth investing into outbound email strategies that can talk to groups or accounts or other significant groups. I just think that there’s a hell of a lot of opportunity. It’s just totally not in my headspace. And I guess to a large degree I’ve mentally moved on.

Speaker 1:           You had mentioned finding developers for the business. Do you know if they are willing to continue working with the business when a new owner takes over and how often does the software need updating?

Michael:               Yeah, I would say software updating, in terms of the last question, is probably, I reckon every six months we get an email saying this version is being depreciated, please upgrade. So I would say at minimum every six months you’ve probably got two or three hours of developer work. There’s certainly, we’ve sort of kept a list from the support desk of all inquiries for features or extensions or add-ons. So there’s certainly opportunity if you wanted to develop more. I think the market can open horizontally quite significantly. Because essentially what our tool does is it connects two platforms together. But what there is is those two platforms each have similar platforms on both sides. So there’s this opportunity to extend it horizontally quite significantly.

                                So why am I telling you this? I guess if you are a Node.js developer, or have access to some Node.js developers, or are comfortable jumping on Upwork or something similar to find Node.js developers, you could certainly keep it busy with developers that are essentially developing for strategic reasons rather than maintenance. But if it’s just the maintenance stuff, you’re talking about two or three hours every six months. Would people come across? There’d be no reason not to. But it’s also, it’s not complicated, it’s well documented code base. And when we need updates we’ll search for someone highly specific rather than going back to necessarily the same person every time.

Speaker 1:           Hey listeners, do you want to find a business that is just right for you? Head on over to Empire Flippers and have a look at our marketplace where you can see you real businesses making real money just like the one we’re looking at today. In fact, don’t miss out. Head over now, share your email address, and we’ll send you hot, fresh, new listings of successful businesses every week to your inbox. Now, back to the interview.

                                So you’ve touched on quite a few potential opportunities for this business. Others you want to bring up on this call?

Michael:               No, I mean that’s probably the main ones, is the horizontal integrations with other platforms, certainly some partnership like this one I mentioned earlier. There’s so much room. I mean we’ve put in so little effort and we see it growing and we see customers returning, it’s obvious that there’s opportunity there. It needs sort of the right person who is looking for the next thing, I think, really to come and take it and really sort of 10x it, 100x it.

Speaker 1:           Do you feel like there are any potential risks associated with this business that a new owner should be aware of?

Michael:               There’s always risks and I think fundamentally we’re an API connector. We connect two APIs together. And fundamentally I guess people can shut down APIs. I think the risk of that happening is somewhere below 1%, but anything’s possible. Competitors can obviously pop up, but I think before Facebook we had MySpace. So I think it’s got a good runway, it’s got quite a bit of SEO just because of its age, and probably those forum posts. The market opportunity is huge. It’s a simple tool. So it’s not overly complex. I look at it as a pretty safe bet.

Speaker 1:           Would you commit to a non-compete?

Michael:               Yeah, of course. No problem with a non-compete at all.

Speaker 1:           And how much support are you willing to offer a new owner during the transition period?

Michael:               I actually think it’s a super easy one to learn and so I’d be happy to agree to a set number of hours. But when we say a set number of hours, I don’t think anyone could possibly find more than eight to 10 hours of questions and help that they need. For me, I just don’t know how they can find anything else to ask or learn. But certainly over 30 days. And we’re also just a Skype message away. Certainly not 24/7, but over the next six months it wouldn’t be a problem just to reach out and say how have you dealt with this or have you dealt with that?

Speaker 1:           Are you open to negotiating on something like an earn-out?

Michael:               I don’t love earn-outs because the plan with this, and certainly I think the price is relatively well. I don’t love it earn-outs but if the deal is right then we’d look at it. But I sort of have this view of once someone else takes over it, if there’s an earn-out involved then you can’t change anything because that risks the earn-out. And I think the new owners should be taking this and growing this as opposed to just leaving it static.

Speaker 1:           Michael, thank you very much for taking the time with me today. My final question for you is, so pretend you’re looking at this from the perspective of a potential buyer. What about this business makes you think it’s a business worth buying?

Michael:               I think it’s got all those hallmarks of something that’s ready to explode. It’s SaaS, so it’s recurring revenue. It’s a growing revenue base. It’s a tool that people need rather than a nice to have. It’s got a market that is growing. The people who use the tools that they’re saying it integrates is just growing exponentially. And we just haven’t exploited the opportunities to get customers enough yet.

Speaker 1:           And there’s that potential deal with that New Zealand company to package it in for their 3,000 plus customers.

Michael:               Yeah, well of course there’s that deal and there’s probably 1,000 other deals out there lined up.

Speaker 1:           Michael, thank you very much for taking the time to meet with me today. I really appreciate it.

Michael:               My pleasure and thanks for chatting. I actually love talking about this business. I wish I could divulge more with names, but hopefully depositors put some money in and I’ll say the details.

Speaker 1:           You’ve just learned how this business works and I want to give you the opportunity to learn more about what you can do to buy real online businesses just like this one. If you want to find out more about businesses making real money, head over to empireflippers.com and sign up for our mailing list. There is an entire world of people quietly investing their money into online businesses and seeing great returns. Now, we want to help you do the same thing.