Ask HN: How to pursue acquisition?
I run a one-person company in the cloud / ops space and over the past year have gone from $0 to $200k in annual recurring revenue. I have not taken any funding. The major cloud providers (aws, google, azure) are starting to expand to my product space, however, and I'm increasing concerned with my long-term prospects.
I think it might make sense to pursue acquisition/aqui-hire, while my product and expertise can still add value to these cloud providers. I would really appreciate advice from the HN community on how to achieve the best possible outcome, including how to proactively pursue acquisition/aqui-hire at a large company. Thanks!
78 comments
[ 3.7 ms ] story [ 128 ms ] threadIf you ask at the Indiehackers forums someone will know which company I mean.
https://feinternational.com/
The key people to target are lower level engineers, program managers as well as the VPs in charge of their respective cloud platforms.
They may not be using their official email address to login at facebook
I think there is a lot of potential in this space for a new platform. I think it’s an actual good potential use of social scoring to encourage a solid community.
quietlightbrokerage/FEinternational.com/empireflippers.com all share the same buyer list FYI
I would suggest reaching out to each and finding out who you are comfortable with.
I would also suggest taking a look at: centurica.com/website-buyers-report
This will give you a sense of the multiple on SDE you are likely to get. Lots of credit available to buyers right now so its a great time to sell, specifically saas.
Good luck
Also wanted to clarify that we do not literally share buyer lists with others in the space. I expect there is some crossover, particularly from regular industry commentators but not as much as you might think. Our on and offline presence is on a completely different scale to the others.
At FE we have over 30,000 investors in our network and not that many overlap with other firms in the industry as we only specialize in SaaS, e-commerce and content businesses, so have a highly targeted audience. Our buyers like working with us because we are well-known for only listing high quality, vetted businesses and follow a very consistent process each time. Serious buyers like a predictable process and that's what we provide.
The product owners in the most related area would be in a position to consider your idea and advocate in the best way internally if it makes sense. If you have a call or meeting, prepare yourself about what things you might like to keep confidential until things progress a bit, in case they do not.
The best sellers of startups are actually investors themselves. Some of them are very good at selling portfolio companies into bigger organizations. They have the contacts, relationships, and favored position as semi-third party negotiators. They've often worked at these companies themselves and know how to get them feeling the FOMO.
You might want to find some investors that have recently sold companies to your target companies and see if they want to invest in yours. Many investors say they don't like "flipping" companies but the reality is that some of them very clearly do.
Just a personal suggestion, don't use a company like Flippa. You risk completely destroying the value of your property.
Best of luck.
The only downside with going the broker route in general is looking like someone who isn’t wanted. Some will perceive you as having a lack of bizdev/PR skills, being in an unsexy/dying space, etc. You won’t get the big revenue multiple price that you would if tech companies were fighting for you.
Also start getting your financial and technical affairs in order yesterday. There will be a ton of due diligence whatever route you go and the better prepared you are, the smoother it will go. Retain an attorney as well.
Good luck. Happy to answer questions privately via email.
Completely agree regarding getting financial and technical affairs in order. However and wherever you try to sell, this element is essential. Expect a broker/M&A firm to do a lot of the legal legwork for you but you still need a reliable and practical attorney.
1. Only engage in acquisition talks if you're very serious. They consume a lot of time - negotiating will become your new job. The view is don't talk to Corp Dev unless you're serious [1] (this is very true) 2. Really you should sell when you don't want to sell [2]. Firesales will produce a minimal $ outcome. The upside is it's a complete package - a sale is still a sale (successful entrepreneur/exit), you're getting something for the business, it's a good resume story especially if you're a first-time founder. You'll also get a good job at the acquirers business 3. The market price isn't based on some X of your ARR, it's whatever someone is willing to pay you, so $200k ARR sounds great (congrats btw), but it's what you're worth to them. 4. Asset sale vs stock sale - generally businesses want your assets not your stock, whereas the tax for you (assuming you owned you stock >1 year) will be less via a stock sale, you'd be double-taxed from an asset sale so really try against this way [3] 5. Tax is a big consideration. In CA, long term capital gains is ~30% vs ordinary income ~50% 6. Form & timing of consideration - form: cash vs equity - cash is king, but any public company stock should be seen as liquid (blue chips you mentioned would be great stock for consideration). Also timing of the purchase price is huge. Typically they'll try to defer it over a long period of time (2-4 years) as an earn-out to incentivize you to stay there. Earn-outs might also have milestones you need to hit in order to get the payouts too. 7. Costs of selling. You'll need a lawyer and maybe a CPA and you'll generally pay their bill, so this could easily hit > $50k (if the negations fall through you'll owe whatever work your lawyer has done to date too) 8. Negotiations are all about leverage. If you're selling your company then they will hold a lot of the leverage, so be aware when you're agreeing to the letter of intent that after that moment, normally clauses/ points will only get worse for you. What you have going for you though but the sounds of things is that you don't need to sell, you're just thinking of selling - ie, you're revenue creating, hopefully profitable, so it's not like you'll run out of cash during the process. Always aim for a 30 day close to minimize the drag on of the deal.
Assuming you do want to sell, then avenues to go down could be: 1. Do you have any large customers? Large customers might be a good source of potential suitor, they already like your product (they pay for it), you have relationships with them. Always frame it as looking at deeper partnership opportunities (this is what businesses call it when they're skirting around the word "acquisition") 2. The team that do M&A in a business are called Corporate Development, so LinkedIn for these guys at all the big potential suitors you can think of, set up coffee (they might be interested because that is literally all their job is - you're doing half their legwork for them). 3. Who are your competitors? Search them on on Crunchbase for any sales and see what companies are buying. 4. You haven't raised any capital but do you have any VC links? These guys can offer invaluable advice, even if they're not interested in funding you / you aren't looking to raise they normally have some great angles for you so you should hit them up - they are also (a good one) some of the most well connected people, so can put out feelers for you/ makes intros. You never kno...
1. Only engage in acquisition talks if you're very serious. They consume a lot of time - negotiating will become your new job. The view is don't talk to Corp Dev unless you're serious [1] (this is very true)
2. Really you should sell when you don't want to sell [2]. Firesales will produce a minimal $ outcome. The upside is it's a complete package - a sale is still a sale (successful entrepreneur/exit), you're getting something for the business, it's a good resume story especially if you're a first-time founder. You'll also get a good job at the acquirers business
3. The market price isn't based on some X of your ARR, it's whatever someone is willing to pay you, so $200k ARR sounds great (congrats btw), but it's what you're worth to them.
4. Asset sale vs stock sale - generally businesses want your assets not your stock, whereas the tax for you (assuming you owned you stock >1 year) will be less via a stock sale, you'd be double-taxed from an asset sale so really try against this way [3]
5. Tax is a big consideration. In CA, long term capital gains is ~30% vs ordinary income ~50%
6. Form & timing of consideration - form: cash vs equity - cash is king, but any public company stock should be seen as liquid (blue chips you mentioned would be great stock for consideration). Also timing of the purchase price is huge. Typically they'll try to defer it over a long period of time (2-4 years) as an earn-out to incentivize you to stay there. Earn-outs might also have milestones you need to hit in order to get the payouts too.
7. Costs of selling. You'll need a lawyer and maybe a CPA and you'll generally pay their bill, so this could easily hit > $50k (if the negations fall through you'll owe whatever work your lawyer has done to date too)
8. Negotiations are all about leverage. If you're selling your company then they will hold a lot of the leverage, so be aware when you're agreeing to the letter of intent that after that moment, normally clauses/ points will only get worse for you. What you have going for you though but the sounds of things is that you don't need to sell, you're just thinking of selling - ie, you're revenue creating, hopefully profitable, so it's not like you'll run out of cash during the process. Always aim for a 30 day close to minimize the drag on of the deal.
Assuming you do want to sell, then avenues to go down could be:
1. Do you have any large customers? Large customers might be a good source of potential suitor, they already like your product (they pay for it), you have relationships with them. Always frame it as looking at deeper partnership opportunities (this is what businesses call it when they're skirting around the word "acquisition")
2. The team that do M&A in a business are called Corporate Development, so LinkedIn for these guys at all the big potential suitors you can think of, set up coffee (they might be interested because that is literally all their job is - you're doing half their legwork for them).
3. Who are your competitors? Search them on on Crunchbase for any sales and see what companies are buying.
4. You haven't raised any capital but do you have any VC links? These guys can offer invaluable advice, even if they're not interested in funding you / you aren't looking to raise they normally have some great angles for you so you should hit them up - they are also (a good one) some of the most well connected people, so can put out feelers for you/ makes intros. You never know, they might persuade you to take their money to take on aws etc...
In the case of a strategic buyer — like the big cloud companies you've described as possible acquirers — they're highly unlikely to care about your revenue, customers you have, or the tech you've build. They're much more likely to care about you as you've proven you can build something and understand the market at least enough to get people to pay you. The old rule of thumb in acquihires was $1M per engineer. That moves around, but is likely a good mental guide post.
I'd be deeply skeptical of hiring any banker to represent you. Frankly, it's a mark against any acquihire target we may consider — and I've heard the same from the heads of corp dev at all the big cloud providers. And I'd be even more deeply skeptical of any banker that would take you on. If you had $20M–$200M in recurring revenues and were growing 20% YoY, that's when you start to get in the hire-a-banker-to-broker-a-sale range. And, even then, it's much more likely to be driven by the acquirer than the company looking to be acquired.
Finally, if you've built a business with reliable cash flows and steady growth, the most likely place that you'd actually be able to sell it and keep it running is to a small private equity (PE) firm. There are a number of PE firms that have sprung up to buy up small "lifestyle" SaaS companies. Some of the smallest ones are started as "search funds" to go find a small business and help it grow. Start talking publicly about your revenue and growth rates and they'll inevitably come knocking on your door. Again, always better for them to call you than for you to call them.
Depending on your churn and growth rates I've seen PE firms offer 1x – 10x revenue for small SaaS companies recently. That's a big range, but, taking the mid-point (5x), and taking your $200k in sales, you're again around $1M — same as the rule of thumb above.
Congratulations on building something real that people are willing to pay for. Good luck!
I think an acquihire would be better for you.
That being said - Rackspace might be a good fit.
I may be able to add a perspective here since I've worked on both sides of the table, in Corp Dev (before) and as a founder (today).
If you want to find an exit for your company, then it's "just" another sales process. That means you need to define your process, set a timeline, and create urgency among potential buyers. That means filling your pipeline with lots of prospects. In a way, it's like fundraising - you're trying to sell (a part of) your company.
Key is that you have a large top of the funnel - more people will say "no" than "yes". And for the ones that say "yes", you want to make sure that you have leverage, i.e. more than one offer.
Here's the rough process that I would pursue if I were in your shoes:
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- create a long list of companies that may be a good fit / home for your product (20+ companies)
- find their CEOs and their emails (e.g. via a freelancer on Upwork)
- get a warm intro (best), otherwise reach out cold
- prepare a general pitch (market changes, need for your product, etc.)
- do you homework to understand how your product would fit into their portfolio
==============
The first contact should only be about the potential opportunity - "xyz thought what I'm doing may be a good fit for your company. If I sent you a short deck, would you spend a few minutes looking at it?" ----> if yes, send and propose a 30 min chat
Do this for as many good potential buyers as possible, all within a few days. Schedule the coffee / call for the week after. Prepare that deck that you can send if somebody is open to talk / meet.
in the deck:
=============
- describe a big change in the market that has created a need for YOUR product
- make sure you nail the "why now?"
- explain your product's secret sauce and why it's unique
- show your traction, customer logos
- explain your economics (e.g. "ASP $18K / year")
- show what the business can look like if you join forces
- put a price on it
============
Keep this deck small. 6-8 pages max.
Make sure you communicate that you're looking to find a buyer within the next 6-8 weeks (urgency), and that you're talking to a few good companies (fear of missing out).
If you feel there's a fit, and the other side believes that too, work with the CEO to identify & involve the stakeholders on their end (e.g. VP of Product, VP of Engineering). Make sure that happens as a follow-up within the next week of your chat / coffee with the CEO.
If they all decide it's a fit - agree on the process and timeline it will take to close. They'll need to get approval from their board, etc. to get this through. So much can go wrong here. People go on vacation. There's an important release. The quarter is ending, and they missed their quarter. That's why you need many potential parties in your deal.
So:
first contact --> call / meeting --> get ok from stakeholders --> come to decision "is this a fit"? --> agree on closing steps
Reg. the price - there are few well-known small PE buyers out there that will pay your 1x revenue regardless of what your business is. Take that as the bottom of the valuation. To get something that's higher - you'll need competing parties for the deal.
But I doubt that anybody will buy you for the revenue. $200K is too little for any company to matter, regardless of small / big. So the important part is to communicate the potential, and your value-add as an individual contributor for say the next 12-24 months. But you don't know until you try and ask :-)
Hope this helps. and then look at https://www...
One thing to add is that for each company you should reach out to MANY people. CEO is a key target and the prototypical person to be involved, it's just that depending on the culture, structure, and personal preferences the best person to get involved is different at each firm.
So do research on the Founders, the Board, major investors, CEO and other C-level execs, head of Biz Dev, head of Corp Dev, head of Product Management, and all of the biz dev and corp dev teams. Reach out to them through your network or directly but blanket the organization if you're going in cold or don't here back from a referral to the CEO within a few days.
That being said, the businesses mostly being sold are either dropshipping, content with ad/affiliate rev. or the occasional SaaS, usually in a tidy package. It sounds like you might fit in thst last category, but your space might be too complicated for an easy sale. Usually people there are buying businesses without staff and take them over after a brief handoff. So if the business knowledge is key, it might not be valued appropiately there.
You could always split the difference and target 5-10 companies you think might want to buy you. Get a person on the phone if possible and let them know you are preparing to sell your business "in the coming months" and plan to be listed on FE International. Simply ask them if they would like to be notified when the sale is on.
Now you might hear crickets, they might say "ok" or they might decide to buy you right away. No matter the outcome, you will be in a better position to gauge the interest level if you try to sell.
If you don't want to run your company anymore, selling the company might be more trouble than it's worth. You won't get THAT much cash for it, and you might end up at a engineering job that doesn't suit you, with golden handcuffs so you don't leave. That's the risk. After you're done working at the acquiring company, you'll just be another engineer, with a nice extra line on your resume most engineers don't have.
On the other hand, at the acquiring company you could find a business cofounder and if you want to, start another company, with more cash in your pocket, and more credibility with investors. That's the upside! But you'll be assuming that you're going to have a better idea in the future than the one your currently have.
Anyway this is all hypothetical. If you want corp dev people to find you, you need visibility in the marketplace. That means SEO, blog articles, etc.
> But you'll be assuming that you're going to have a better idea in the future than the one your currently have.
"Ideas are cheap, execution is everything."
Besides, Yahoo bought Viaweb for about $50MM, and Shopify is a billion dollar company of its own. If $10MM or $50MM isn't successful, then I'll be happy to fail.
If you're not naturally a sales-y networker/glad-handler/negotiator, if you have a trusted friend/colleague who is, you might want to bring them in as an advisor/junior-partner, incentivized to find & close a deal. Of course, this may not be natural for a solo builder like yourself, and includes some danger of bringing in a value-subtractor. But, someone with the right incentives, industry knowledge, & negotiating prowess could pay for their 'commission' many times over.