How To Acquire a SaaS Company With Little Or No Money

Hey guys, welcome back to another video here at the SaaS District channel. So one question I got recently from one of our followers at the SaaS District channel is that they asked me, how can I acquire a SaaS company with very little down or zero down payment to acquire my first company? And I decided to make this video to help you guys, you know, go out there, look at deals yourself, feel confident in acquiring your very first 7-figure SaaS company yourselves and learn how to operate it, even if you know very little and you have very little down money that most people think they need to buy their first company. Hey guys, so welcome back to another video here at the SaaS District channel. So like I mentioned, we're going to be talking about 4 different ways today on how you can acquire your own SaaS company for very little down or actually zero down depending on how you structure it. Now the important thing to consider when you're looking to do a deal with a seller and you're looking to buy their business is it comes down, it all comes down to structure. How do you structure the offer? How do you structure the valuation and how do you structure the deal to make it favorable, favorable for all people involved? People think you need all the cash upfront when you're talking about the valuation. So let's say you're buying a— let's use this as an example across this entire kind of 4 different ways. So let's say you're buying a company for $1 million. Okay? Most people think you need $1 million down in cash in order to buy that business. But the truth is there's different creative ways you can get into To help kind of leverage and make that deal without using that full million dollars upfront. Okay? So let's get into the first one. Number 1, that is the traditional kind of financing options out there. Okay? So there's 2 that I really like to use and I highly recommend. So if you're based in the US, the biggest one that I would look at is what we call— it's called the SBA. So the SBA loan, if you're going down that route, you get actually really good terms. Of when you do that acquisition. And with that, you typically only need about 10% of the actual complete value of the company. So if you go down the SBA route, you're getting financing for the entire, let's say, $900K. So if you're buying a million-dollar company, you only need $100,000. So if you have $100,000 in your account, 10% of the deal, you can actually go out and buy a 7-figure company. You don't need the full million dollars upfront. Okay, if you're based in Canada, there's actually something very similar as the SBA, which they call the BDC loan. With that, you do need a little bit more, you know, capital upfront that you need to invest. I believe they need somewhere between, you know, 20% to 25% down payment, so you're talking about $200,000 to $250,000 upfront. But there's other ways you can also adjust that amount based, which I'll talk about in a minute here. Now, so you just— so that's one way, that's the traditional way. The good thing about that is, you know, you're spreading out those payments. The amortization is usually, you know, anywhere between 7 years, 10 years, or even 15 years where you can pay that back over time and you can use that cash flow to keep growing your SaaS company. Now, the only thing with when you're going down that route, the banks will obviously need a lot more history. There's a lot more due diligence they require. They're going to need a lot more documents and details. And the company generally needs some kind of history. They need at least 3 years to be in business before they'll even consider it. And they want to see all official bank statements to make sure it's a real legit company. But if you can go down that route, it's a good option to consider. The only thing with an SBA loan to consider, guys, it's there is a personal guarantee across it. So if the company defaults or fails, they will come after your personal assets. Whereas with BDC, I know specifically they don't have a personal guarantee. On that. All right, so that's the first one, looking at traditional financing, SBA, BDC loan, uh, with anywhere between 10% to 25% down. Number 2, so the second way you can actually go out and do an acquisition is through a creative way which we call an earnout structure. So with this, what you're doing is you're actually trying to pay out the company in the valuation based on how the company does and based off the the profits that it generates over time. So let me give you an example. So let's say you're buying a million-dollar company. That's what you value at today. But maybe you say, look, I think the company today is worth a million dollars. And the seller is saying, you know, I think it's actually worth $2 million because if you do this, this, and this, it's going to grow. And, uh, you know, that's what I think it's actually worth. But right now it's probably only worth a million. So what you can say is, look, if you know what you're doing and you know you'll confidently be able to take it over there, take over the plate of managing the company, and effectively know how to grow it is, look, I'm going to offer you $2 million over the next 3 years, 4 years, 5 years. And rather than getting $1 million today, you're going to get payments. Let's say call them quarterly payments for the next 3 years until you hit that threshold. As the company grows, you know, you can, you can structure it different ways. You can do 50/50, you can do 70/30, you can do, you know, 100% until, you know, the first $2 million. And so there's all kinds of ways that you can structure it. But the point is, You're not paying anything upfront. You're going to grow the company. You're going to take over the management. You're going to put your sweat equity, your time, your efforts to grow it and then own the company. And over time, as the company grows, the seller is going to reap most or a lot of the benefits and get a lot more than if they were constantly involved and trying to grow it themselves. Okay? So that's another way. I mean, that takes a little bit of negotiating. That comes down to your skills of how you structure it and how you speak to the seller. But that's been done several times where people say, Look, I'm not going to give you $1 million. I don't have that upfront. I will happily take over. I know how to operate your company. I'll even pay you $2 million. I'm going to pay to you over the next 3 years as long as we continue to grow it. And I'll, I'll invest some capital, I'll invest our team into this and we'll grow it and pay it out to you over that time period. Okay? So that's number 2, using an earnout component on how you structure the deal. The 3rd way in which you can finance a company with very little down or acquire the company Is very similar to an earnout, but what we call seller financing. So there's the one option where you go to the bank, you ask them for financing, and you're using debt to pay back the loan. The second one is you're using the equity, the cash flow of the business, and you're paying it back directly to the seller. The third way is called seller financing. So what that is, is basically the seller now becomes the bank, okay? Or we call it a seller note or seller financing. And We've seen it before where you can do a complete 100% seller financing. So let's use the same example. You're buying a company for $1 million. With the earnout component, which I talked about in the second one, that's based on performance, right? So if the company tanks in half, let's say over the next couple of months, you obviously can't pay back what you initially said of that $2 million. So probably they're going to get half a million. But in this case, you're being— you're giving a fixed amount. So It's going to be financed with some kind of interest payment, let's say 10%, and you're going to pay it over the next 3 years. And you're going to use the cash flow to pay it back. Now, so let's say that's $1 million, you're paying it over the next 3 years at 10%. So now you're paying amortized, let's call it just over $1.1, $1.2 million. You spread that out over the next 3 years and you're going to pay that on a monthly basis to the seller for as long as the company exists. With debt, remember, debt always gets paid first. Okay, so they get paid first before any of the equity is distributed out to the equity holders, which would be yourself. Okay, so that's one way you can try and negotiate is like, look, you're going to get a fixed payment maybe of $1.2 million over the next 3 years spread out in monthly payments. So 36 months, you're going to get interest on that and you're going to get guaranteed to get paid back first. You know, this really depends on how you do it. They probably will want some kind of guarantee. So let's say you're not able to make those payments on a monthly basis, they have something to come after, right? So you can't just say, hey, sorry, I can't pay it. You're going to have to pay that out of your pocket, or there's going to have to be some kind of personal guarantee or another business that will have to pay for it. So there's that risk factor that you have to be able to give that confidence to the seller that you'll be able to pay it and they'll get paid every single month. All right. But that is another way you can also finance a business using the seller to finance the loan basically. And the 4th way guys is there's also another thing called revenue-based financing, or I don't know if you guys have heard that term before where they use the revenues, because this is very popular now with SaaS companies. There's many companies out there that I recommend you suggest. One is actually run by my friend Nathan Latka at founderpath.com. And what they do is they'll analyze the company and they'll typically give you financing based on the history of the company. So, and they'll give it to you pretty quickly. I think it's like less than 72 hours, you'll get a decision. You bring the company to them. Let's say it's doing, you know, $400K a year in ARR. Maybe they'll give you, you know, $300K, $200K, $500K. I don't know what the amount to finance the deal. Okay. And the remainder you'll have to figure out. You can combine that with seller equity, earnout component, and other loans as well. But there is a component of that, let's say 20, 30% of the entire million dollars that you can use using those options out there. And that's only paid as the revenue is generated by the SaaS company. So what they do is they take all your clients, the revenue they get paid on a monthly basis, and then you pay it back whenever you get it paid. So when you get paid, you pay them, but that's fine. You know, it's a fair deal. And at the end of it, I think their interest is somewhere around like 12 or 10 to 15%. And you know, that makes it a lot easier. So you don't have to go through all the hoops there. It's a pretty quick decision. Within 72 hours you get a loan and you can go out and buy a company. All right. So those are 4 ways you guys can get creative. Obviously it's very hard to get, you know, all 100% in one or the other. But the good thing is now you kind of have the toolset to go out there and negotiate. And you can mix and match it. All right, so that's where the creativity comes into place. You can say, look, we're going to do, you know, 30% earnout part of it. We're going to do, you know, 40% seller financing. And then maybe the other 30% is going to be through some revenue financing. Or are you going to do, you know, get some kind of loan for it? So, you know, that's the idea is like you have these kind of tools and ways of how to structure the deal. Now by combining them, you can find a way to get a company for zero down, if not very, very little down. And now you own a 7-figure SaaS company. Let me know, guys, if you guys are— if this is something you guys are interested in, if you guys enjoyed this video, make sure to subscribe, like this video. And if you guys are looking to structure a deal right now, you have a deal on the table, a SaaS company you're looking at, come talk to us at horizoncapital.com. Send us a message on our contact form, or you can email me directly, akeel@horizoncapital.com. We work with buyers who are looking to do acquisitions. We provide consulting and advisory. Happy to work with you. Happy to structure that, help you structure that deal and work with you to get your first SaaS company. All right. Thanks again, guys. And we'll see you guys on the next video.