Founder’s Roadmap to a Profitable Exit in 2025 | Acquire Live Panel

Hello everyone, welcome. My name is Eric Weiss. Happy to moderate today with the illustrious panel here. This is the ExitReady panel where we're going to give you a 360 view of the acquisition process from technical transfer to legal and financial challenges with a lot of war stories thrown in. Let's do like a 15 second intro with a hidden talent thrown on the end for good measure. How about that?

Oh man, I gotta go first. Andrew Gazdecki, CEO at Acquire. I think my hidden talent, I'm actually, I was a top 100 player for Madden. I don't know if anybody plays that. There's a reason behind that. It was in between companies. I had way too much free time on my hand and I was like number 99 for like a day. That's my claim to fame.

We're doing hidden talent. Okay.

And you know, 15 second about you, your background, of course. Yeah, that sort of thing.

Hey everybody, I'm Brian Cross, I'm the CFO here at Acquire. I'm also fractional cfo. I've helped dozens of startups either get ready for just to operate or get through the acquisition. My hidden talent, I'm actually a big wave surfer. So around the Bay Area, up north I go chasing the fun stuff.

Scott Weavel at Webel Law. I'm an M and A attorney and my hidden talent, I think that would surprise people. As for a preppy, relatively preppy M and A attorney, I'm a super outdoors guy. I like to ice, climb, backcountry ski, I've climbed Denali. So I love pretty much everything, everything outdoors.

Hey everyone, My name is Rainier Nanquil. I'm an M and A advisor, have been an advisor and broker for over a decade. My hidden talent is I love horseback riding and I can go really, really fast and I can do a bunch of cool tricks.

My name is Dave Morton. I'm VP of engineering at Acquire. This is my second company with Andrew Gazdecki. I'm excited to be here. Let's see hidden talent, I'm an ice hockey player. I was in Tempe, Arizona last weekend in an ice hockey tournament. I play twice a week. So hidden talent is hitting the puck at the net, hitting people too.

Nice. And last but not least again, I'm Eric Weiss, CEO of Chaos to Clarity, host of the Chaos to Clarity podcast, former cto, co founder, angel investor. But for the last decade or so I've been an executive coach working with tech founders, helping them become better leaders, build better products, raise money and achieve their dream. Exit. I'm also a community organizer here in San Diego. So I'm on the board of directors, San Diego Startup Week, San Diego Design Week, and TechCon SoCal. So really trying to build the ecosystem here and hidden talent. Once upon a time, I was lead guitarist for a heavy metal band. Right on. So let's dive into it. One thing I have to do first, I have to apologize to the panel. So when I saw that it was mostly buyers here, this was originally sort of a founder focused panel. So I've rewritten all the questions and so I hope nobody planned to give a rehearsed answer, but this will be fun. And I'd also ask too. I love war stories. And so when I ask a question, obviously there may be some kind of high level answer, but if you can come up with any kind of fun anecdote or terrifying war story, throw that in for color. But first, let's lob a softball over to Gaz here. What was the biggest lesson you learned from selling any of your businesses? And what would you do differently?

I think just how hard it is to find the buyer I think was really surprising. When I was building my first company, Business Apps. Oh, I know another one. Every software company is worth 10x revenue. I actually believe that. And so in my head I had this imaginary net worth. I see some people laughing and we actually work with founders every day where we have to battle this notion where if you have XYZ and recurring revenue, just multiply that by 10 and that's your valuation. But yeah, I would grow the business just thinking in my head, like, it felt great. You know, you get the 4 million in your current revenue. Like, I'm worth $40 million. Like, oh my God. So obviously I think being more in tune with the acquisition process, what are companies being bought and sold for? And then eventually I sold to a private equity firm and I had no idea what private equity did. I think having a better understanding of why they buy companies and how to better position my company for sale, if I could go back, I would do those things. So, yeah, that's, that's what I learned. Solid 10x. And you got to do a lot of work to find the buyer.

Right on. All right, Brian is our CFO@acquire.com. what financial indicators should buyers focus on in today's M and A market?

So I've got my favorites, but we've got a bunch here. At its core, a business is a money making asset. So you're looking at revenue, you're looking at margin, you're Looking at profit, we call it seller discretionary earnings. Once you get into a recast, I'm curious, who likes revenue more than profit? Show of hands. Who likes profit more than revenue? You guys are right in line with the market. A few years ago, people would buy revenue blindly when valuations were really high and you could make your return just by any revenue increase. Today, with higher cost of capital, it's much more important that the company is throwing off money.

Quick follow up. So, you know, I come from the SaaS world where profit is not really something we're super concerned about. It's usually about revenue and growth. Yeah, I think, I don't know, at least my experience. So what do you think? You know, how do you think founders should be looking at it today? Should we be getting away from this mindset of sort of growth at all cost?

Absolutely. Yeah. You do touch on a great point that revenue growth may be more important than revenue. If you have a few years of stunning triple digit revenue growth that can really help to boost your valuation to the top quartile of whatever the multiple range you're looking at is.

All right, let's move on to Scott, our legal counsel. What are the biggest legal pitfalls founders face in an acquisition and how can they avoid them?

Okay, so this is still sell side, right, for founders?

Well, it's all through the acquisition process, but I'm going to bounce back and.

Forth and you know, I was mentioning up here, just like Andrew said, I think a dual perspective is important. I think if you're a buyer, you need to understand the seller's perspective and vice versa. The seller perceives less risk than the buyer because they're comfortable operating that business. Right. But I think for me the risk that our sell side founder generally faces in a sell process is first competition risk. You want to make sure that whoever your counterparty is, if you're sharing confidential information with them, particularly sensitive, competitively sensitive information that they can close, I think that's, that's number one. I think the next risk you get to sort of as you go down the line of the process probably is your risk to get to closing. I think anything you can do to eliminate friction and move the process along, including being very, very organized for diligence, is helpful there. I'll add another caveat there that I think the founder seller needs to preserve confidentiality. We had a deal this past week where our seller told all his employees he was selling about a month before closing. Two days before signing, he got an employment. Employment lawsuit. Because I think that Employee heard that he was selling and wanted to go ahead and take advantage of the opportunity. So that's something you need to be very, very careful of as a seller, because most of our confidentiality leaks actually tend to originate with the seller, despite what. Despite what you may think. But I think probably what we're really talking about here is the seller's main legal concern is making sure they earn that purchase price and are able to keep it. So on the earning front, you need to be very, very careful with earnouts. Generally speaking, in the middle market, we're starting to see earnouts become less and less favorable. And what I mean by that is we're seeing more rollover equity and seller notes as opposed to earnouts. Because I think there's a pretty wide acceptance of the fact that earnouts just aren't workable. They disadvantage sellers and any protections, really, sellers can build into the earn out via operating covenants and things like that. They're just too much litigation risk for the buyer. So that's on the earn out front. Same thing with rollover equity. You got to be very, very careful in negotiating the terms of the operating agreement that comes with that rollover equity. I think those are the two big pieces on contingent consideration, sort of making sure you earn the purchase price. But I think with keeping whatever cash at closing, you got to be very, very careful within indemnification provisions, your reps and warranties, that those sort of are designed to stand behind because you can get in situations where if certain reps are over broad, you're just inviting yourself to litigation over almost anything. And for sure, if the deal is large enough, like, you know, nobody's sweating at paying a couple hundred thousand dollars for lawyers to engage in litigation. So I've seen it happen and it's not good. So I think you need to be very, very careful about all this, all those details.

Right. That was a ton of information packed into that. Thank you. And I appreciate the the war story too. I love it. So, Rainier, you're our M and A advisor here. So first off, just tell us real quick, what role does the advisor play in the transaction on both the buyer and the seller side?

Yeah, that's a great question. So a lot of people ask like, oh, what's the role of an advisor? Why can't I just sell direct to a buyer? And it's so for an advisor, our goal is to get you the best price, the best terms, the best deal outcome with the least amount of headache. And some real stories that I see all the Time is a seller they try to sell to like let's say a private equity buyer off market and they get promised a really nice deal and all these nice terms as the transaction goes on, they find things through due diligence and they go through what's called a retrade, where the pricing changes, where the expectations change. And then let's say they blow out of the deal. And then you go to an M and A advisor, we coach them, showing them how to properly again, clean up the books and financials, how to create a market, how to find multiple buyers, getting the best price and the best terms. And the best transaction often comes from creating a market. So if you have one buyer, that buyer has the ability to drag the deal on longer. They can negotiate pretty hard against you versus a real story. We've had a deal that was a seven figure deal. We had 14 offers right off the bat. Three of them were all cash. Very high cash offers. Just the best scenario that you can think of. And when that buyer that wins the deal knows that there's backup buyers ready to step in if they play any games, try to go for a retrade, that's where the seller has the ability to stand firm on their expectations for the ideal outcome. So really, again, the M and A advisor is to go to bat for you and try to get you the highest price, the best terms. And think of it as the M and A advisor has hundreds of deals under their belt where they have the experience to know how a lot of scenarios play out. It's like that saying, it's like everyone has a plan until you get punched in the face. So as an M and A advisor, we've seen tons of scenarios where a deal can go sideways. And the biggest value that we bring to the table is to avoid these pitfalls before they get there.

Fantastic. Yeah, thank you for that. So we'll pass it over to Dave, our technical leader here. So this is both for the buyer and the seller side. What should the, the CTO or the technical lead be focused on during the acquisition to minimize disruption to customers and employees?

Yeah, I mean really keeping the business running and humming is number one, the most important thing. And then if you're going through due diligence, the technical founder or not the technical founder, but the technical lead should really assist in the due diligence process. I remember we did due diligence gas for business apps and it's a full time job for everybody at the company, but really for the technical people.

Right.

Especially if it's a Bigger company, they're going to want full diligence on all the software, all the infrastructure, all the licensing for all the software. And so it's really to be an asset there to help the asset go, the acquisition go through, and then to continue to service and run your company. Right. You want to continue to grow it. You want to continue to make sure your customers are happy until that acquisition closes. Because until it actually closes, I'm sure Scott knows it's never closed until it actually closed. So maintain the current business, keep it running, and be an asset during the acquisition and in due diligence to fill out the needs.

Right on. And so give me a war story about a time a transition went spectacularly.

Wrong, man, spectacularly wrong. I mean, a lot of times, especially in the older days, I think now, and you probably know that the licensing has kind of been sorted out. With software, there's a lot of great MIT licenses that are open source, but in the old days, the old days, you had to buy the software and have the license on hand. And so I've seen acquisitions happen where the licensing wasn't done or it was under a bad license. And so then the buyer or the company that's buying you, they want to know, what does it cost to rip it out, what does it cost to build it ourselves, because we don't like the licensing terms. So I think a lot of that has been sorted out because a lot of open source software now use good licensing, but in the past, it was a real problem with making sure that software was licensed correctly.

Fantastic. All right, so I'm going to pass it back this way so I don't make you do musical chairs with a microphone here. And by the way, thank you all for magically sitting exactly how I have you all written down in the notes here. That makes my life a lot easier, too. So, Rainier, what are some creative deal structures that we can consider beyond a simple cash buyout?

Yeah, so getting creative with the deal structure is very important. As Andrew had said earlier, the reality is not a lot of deals go all cash. And so the first step is to really understand what the seller's motivations are, understand why they're selling, and understand what's important to them. It's always good to ask what is your ideal transaction? They'll tell you if it's prioritizing cash or transition of their team, or if it's timing. Again, a lot of, you know, there's different reasons a person can sell and it could be an emergency and they need cash because of taxes, personal problems, whatever. And so understanding what their motivations are is really helpful to get creative with deal structure. If you know that price is important, or if it's cash up front, or if it's timing and speed of a deal, you want to be able to put that in your offer. And then the other thing too, and I've seen this work out well for a lot of buyers, is they give different scenarios of offers. Here's an offer where it's high cash and we can move very quickly. If it's the dollar amount that you're more concerned about, we can get more creative with seller financing, performance based earnout, a little bit of retained equity. So if you can have two or three different offer scenarios and then kind of get feedback from the seller of what's more important to them, you can get a clear idea of, let's say 50% cash up front and, and then let's say some seller financing for a year or two and then even a little bit of retained equity. And the main thing here is making it a win win situation for the seller and for the buyer so that everyone is happy. And as Andrea said, no one likes doing a deal if the person isn't easy to work with. And if both sides feel very comfortable with each other and have that level of trust, you can get as creative as needed. And I've seen the most creative deals with little to no cash up front as well as the traditional deals with high cash up front.

So, Ranier, in my experience, the thing that tends to make this go off the rails is when the seller gets stuck on a number. So I'd love to hear some war stories where somebody you advised got stuck on a number, they didn't listen to your advice, and then everything went to hell in a handbasket.

Yeah, getting stuck on the number. And I understand it, the seller has this magical number. It's usually like a round number, it's like a million. It's just like a random number that. And what also happens is someone influenced them. Let's say it's an attorney or a financial advisor. They say, hey, this is what it's worth. Or maybe a buyer had an unsolicited offer years prior and said, hey, I'll buy it for this. And years later they're still stuck on that number. And the main thing here again is to really understand if you're a seller, what is most important to you. Is it that dollar amount? And if it is a high dollar amount, are you okay with the majority of that transaction being seller Financing or performance based earnout or a little bit of retained equity. Because a lot of buyers they're going to put a discount to if it's majority all cash. And that could be a 20 or 30% difference from a creative deal structure versus an all cash transaction. So one war story is one private equity buyer ended up promising this loi that was all cash. Months later they find some things in due diligence that don't add up and then they go after a retrade and the seller is like, hey, I need to close within this time frame. I need to close as soon as possible. The deal is about to blow up. I remember getting a call at like Friday night or Saturday night. And for M and A advisors and anyone doing deals, time kills deals. And so if I don't pick up the phone and try to get creative here, the deal could blow up and then you have to restart this process, which could take many, many months. But we ended up getting really creative where the seller just needed a specific dollar amount to pay some debts that were coming due. And so the buyer was willing to pay that hurdle of whatever that dollar amount was and then getting creative to come up with some seller financing, some performance based earnout and even a profit share where the seller could participate in some of the future growth post sale. So there again you could get as creative as possible, but just really get an understanding of why the seller is stuck on a specific number. Because there's truly something about it. Maybe there's something that they need to pay off. Something in the background is going on and you just need to dig in and ask a little bit more questions. And it's really important to get on a personal level and build that trust. Because once the buyer and seller feel like they really understand each other and no one's trying to get the upper hand or go tit for tat on the negotiations, that's when you can really come up with a win win situation for both sides.

Awesome. Thank you. Scott, over to you. What legal questions should buyers ask to identify any potential risk or liability?

You know, I think we, we typically send all our, all our sellers a questionnaire. That would typically be what you would see in an initial due diligence call. But I think you obviously want to ask them, you know, their history running the business, when they acquired the business, you want to ask them about litigation. One of the things that we ask very upfront is about any debt because very quickly you can find out if the seller realizes that the debt is going to take out most of the purchase price. Maybe everything you're doing from that point on is a waste of time. Time. I've definitely seen deals killed, killed by that. I think generally speaking, at the end of any of those calls, I mean, you're going to have a specific list of questions with your business metrics and some of your legal metrics, depending on the industry. But at the end of that call, you ask, what else should I have asked you? Or what would you have asked if you were in my shoes? And we've definitely seen that yield really, really good responses. And in general, we like to do diligent calls. You know, definitely you don't want to make it seem like a trial or anything like that, but it's a friendly conversation because. Cause if you get them on friendly terms, that's great for rapport that you need going forward, post closing anyway. But you're going to get more candid answers and that's really what you're going for.

Any anecdotes of maybe something that was missed or a question that wasn't asked that either killed the deal late or turned into 11 after the sale?

Yeah, for sure. I think we see a lot of buyers that are financial wizards, but maybe are not super experienced operators, particularly with respect to sales. And we've done some businesses where sort of the ambiance of the business and the presentation and professionalism and polish of the personnel has been key to driving revenue. And our buyers have overlooked that and it's really. It's basically tanked some really, really solid businesses.

All right, awesome. All right, let's go back over to Brian. What are the most common financial red flags that buyers should look at out for?

So red flags come in. We talked about a bunch of them with gas, but the ones that I see from the financial perspective are really inconsistencies. So when you go through the listing process, you get this long questionnaire like, okay, let's just get through this. I know my business. I can do this in one sitting, actually. Go pull the number. What you're doing at the beginning is you're setting traps for yourself if you don't bring the real numbers forward. When you're in there, take a screen grab, take an export, save it into a folder. When you come back around later in due diligence, and people start prying into the numbers that you've told them prior, you'll build a ton of credibility by answering quickly and precisely with exactly what's actually going on. So really it's that the other thing that will derail A deal is undisclosed liabilities, like you're talking about debt. We had one founder, bless him, very young guy, very successful. Nobody told him that he was supposed to pay taxes ever. And after a few years of a successful business, he comes to the finish line at this acquisition. It comes out, it's going to eat up all of his proceeds and then some. And it just turned into an absolute catastrophe. So pay your taxes. Sorry.

As if it needs to be said. Everyone pay your tax. Gaz, back over to you. It's been a long road all the way down back here. So what are signals that buyers should look out for to make an ideal acquisition target?

What would be an example of like a signal? Are you talking about like buyer interest size? It could be profitability of the business.

I guess, things that aren't sort of obvious on the listing on acquire.com, right, as they start to have the conversations, as they start to dig in, what are the signals that there is, you know, that there's growth upside here, that this is a really good opportunity.

I think you're going to want to talk obviously to the seller first and really understand why they're selling just beyond. I'm looking to move on from the business or, you know, what are they looking to move on and go do, or they're burnt out. What about the businesses burning them out or just getting more specific on why they're looking to sell the business? I think can. Can uncover a lot. And then another one could just be doing research online about the business. So looking up customer reviews, what are customers saying about what they love about the business and what do they not love about the business? I think that usually can uncover quite a bit.

Okay, so kind of digging into the social sentiment and things like that as well. What about. I mean, so, you know, I think a lot of the buyers here are probably looking for that diamond in a rough. So either a deal that maybe others have looked over or maybe haven't seen yet. What are the things that kind of signal that there's maybe an opportunity that isn't so obvious?

I think it's going to depend on the buyer's skill set. I see a lot of opportunities where maybe there's one marketing channel that stood up really well, but other channels aren't stood up at all. I think that's a huge opportunity. Maybe there's no repeatable or consistent sales strategy and the potential buyer's really good at sales. I think those are huge opportunities. Or just looking at the product roadmap, maybe there's customers that have been literally saying we would triple our prices with this company or a new segment of customers would be dying to use the product if it had X, Y and Z. I think all of those things can uncover huge opportunities.

So do you think that it's important for the buyer to have some sort of skill or domain expertise that they're bringing to the table that a sort of, you know, a hands off buyer may not be able to bring?

Yeah, I, I personally do. I think just the concept of owning a passive or hands off business just doesn't exist. I think that's something you'll read on social media like 0% cash down, 100% seller financing and then you go take vacations 247 and the business spits off cash. People really say that stuff. So I do, I think you don't necessarily need to be an expert. Like you don't need to be a expert product developer or expert marketer, but you at least need to know how to wrap your head around the business or at least have the bare minimum motivation to dive into customer support requests or pick up essentially what the existing owner is doing.

So you're saying I shouldn't just buy a dry cleaning business and then screw off the Tahiti?

No, I do not like that marketing. I've seen way too much of it. Great businesses to buy, but just expect to essentially having to do some form of work.

Yeah, excellent. So what factors. I know you kind of talked about this a bit before, but what factors typically derail a deal and what can buyers and founders do to avoid them? And again, as always, like I'd love for you to kind of bring from your experience again, what were the deals that seem promising, that should have gone the right way but then were torpedoed for one reason or another?

One that comes to mind right off the bat. And this has been some deals where I'm like really excited about the sellers too. It's typically just financing where maybe they have a secured bank loan and then as they get further down in the process something goes wrong with that or they just over exaggerate how financing is secured. There's one acquisition where we went pretty deep with a different buyer and they had pretty high confidence that they had secure financing through investors. And it turned out they were essentially fundraising in the background. Those are easily avoidable as well. You can just ask potential buyers up front, how are you financing this acquisition? Offering to see some sort of proof of funds can save a lot of time and then other ones, you know, I think having large customers drop out during the process, we recently had an acquisition. It didn't necessarily derail the acquisition, but it is a pausing moment where typically you'll see a retrade. And you can go either direction on that. You can accept the retrader, you can stand firm. So those are the two main ones.

All right, so now, before I kind of dive into the last segue down the line here, I really want to dig into some war stories just because I think it's super fun. So I want all of you to kind of go through your memory banks and think about one deal that you advise or that you help process. That again, seemed promising at first, but went off the rails because obviously that's what everybody here is sort of concerned about. They're looking for opportunity, but we're trying to uncover the risk and the sort of unknown. Unknowns. And so maybe. Andrew, we'll start with you just before we go all the way down and back again. But, you know, without naming names, obviously keeping things confidential, can you think of kind of a wild or a funny anecdote of a. Of a deal that went south?

Oh, man. I mean, there's. There's a lot. The one that Brian mentioned that really happened. I was advising on that deal. That was just a bummer all around. The way it happened was if you finance a deal with SBA financing, they do tax background checks, and so you actually cannot take out an SBA loan and buy a business if they have not paid taxes. So that one was unfortunate. It was never disclosed to us during the process. At that moment, we found out I've been a part of transactions where the deal falls apart because the business essentially misses a margin percentage by maybe two points. And that's enough for the buyer to pause and say, if the whole model falls apart, you know, we can't move forward at this price. And then I think kind of the. The main reason I hate to seal see deals fall apart is when just the buyer and seller just start to hate each other. I think that's just so avoidable. But it's way more common than I think anyone would expect. I see it more than I would like to. And sometimes it's over just really ticky, tacky things where, you know, we meet too often or they're asking questions that are so obvious, stuff like that. So all that could be avoidable. But those are. Those are some bad stories.

Yeah. Somebody had a comment in the audience earlier that is sort of like a dating process. Even though I guess divorce is sort of inevitable in the future, you want it to be a good experience, right?

Yeah. 100%.

Yeah. All right, Right on. Let's move on. Any wild and crazy explosions?

Yeah, this one actually got through the one that I remember. So I was helping the acquirer integrate a roll up play and they bought a company for cash, quick close, ready to go. And somehow either missed or did not realize how important it was that the product was built on a programming language that the founder had written to make this product. It was the only instance of this language in existence and the founder was gone. He was one of those, I'm out, no, I won't help you ever again. And it was an absolute just bound up train wreck trying to get. We had to train people on a new language in order to get it off the language and into the new. A new infrastructure. So that one drug on complete rewrite.

That sounds fun. Scott.

I don't think I have anything quite that crazy, but we were representing a seller sort of middle of last year and we were able to negotiate for 30% higher purchase price. It had a 20% seller note. We got that flipped into a 10% escrow. So great, great concessions. My seller in this instance basically saw that as enthusiasm and weakness and wanted to keep pushing the buyer more and more and more. And obviously that doesn't tend to work out and we lost that deal. But I think the lesson there is just one sided deals don't get done to. The deal has to work for both parties. Now each party can have a set of core issues that they're inflexible around, but if you push from your side to optimize each issue, you're just not going to get to a closing.

Yeah.

So I'm reminded of a deal we did last year and this SaaS deal hit all the fundamentals for being a great listing year over year growth, high profit margins over three years in the business, diversified customer base, hit all of these fundamentals. And I thought this is gonna be a slam dunk. This is gonna be a quick close. And anyone that's done deals knows there's no such thing as a slam dunk or layup of a deal. There's always something that goes on. Long story short, we go to market, we get 100 NDAs within the first 24 hours. We end up getting 14 offers. And this is the part where you have to be very careful to try to get the best price and terms and try to get buyers to step up and clean up their offers. Out of the 14, there were about five buyers that were head to head really competitive, ready to close. And the difficult part here is educating the seller to understand the pros and cons of each offer as well as the pros and cons of each buyer profile. Because there's independent operators, there's private equity portfolio buyers, there's different types of buyers, and you really have to get a firm understanding of probability of close. So with these 14 different buyers, there's all these different high price, low price, high cash up front. And we made the decision, which was a very difficult decision, to find the winning buyer. And having a conversation with the 13 other buyers is not an easy task. Telling them, hey, your offer didn't win, and you know, let's keep the relationship and keep this bridge open in case anything happens. Long story short, not only did the first buyer blow out of the deal, everything on paper looked good. They were ready to fund, they had proof of funds, they had the experience. They just got cold feet for moving too quickly. And so we had to go to the second buyer. Second buyer was ready to move. That deal fell out because their financing got caught up with just bad timing. So now we're in a position where this deal was hot and ready to close, but two buyers have popped out of the deal. And now some of these buyers are thinking, okay, well, something wrong with the business? Did something come up in due diligence that these two other buyers popped out of? So having to explain that to another backup buyer is a very sensitive task. Long story short, I was able to walk the third buyer through. Okay, here's the playbook. Here's exactly where you need to be at. Here's the financing ready to go. Here's the value add, and here's how we can uncover some value. And here's how to grow the business. And here's how to talk to the seller to show that you're going to take care of this business which, which is her baby, and that you have these plans and you have the care to take this to the next level. So, long story short, we were able to make it a win win situation. But the moral of the story, what I'm trying to say with this deal, is always treat every buyer as if you may need to re approach them later on. That first buyer that you select, hopefully it closes and there's a high probability of close, but you never know. Don't ever count your chickens. There's no such thing as a layup of a deal in M and A. So keep those relationships intact because that second or third backup buyer you may need to approach and you want to have that relationship where they're ready to go and they're excited to still step into the deal, and they're not pissed off that you didn't select them in the first place.

All right, I remember one deal during due diligence, the buyer asks the seller for access to the source code, and the seller delivers it as a zip file. And then the buyer says, well, is there like a repo for it or anything? And the seller says, nope, there's no repo for it.

This is the code.

And it's kind of like. It's pretty shady, right? Either if you don't develop using any source code control, that's kind of weird, or it's kind of they've bought the software from somewhere else and they're just packaging it up and not having any sort of history about who's worked on it, how old it is, or at least to validate the claims of the seller. And so obviously, that deal didn't go through and kind of fell flat. But the seller contended that they never used source code control. I didn't buy it, but I thought that was really funny.

My mind's kind of blown by that.

You asked for ridiculous.

That is wild. Okay. It's like, never worked on a team before. Yeah. Awesome. Well, so let's get back into the questions. So, Dave, for you. So what are some technical red flags that buyers should be looking out for when evaluating a company?

Yeah, I mean, the source code, I think Andrew touched on a lot of them. I mean, I think that all of us that are in software know you look for good documentation, good best practices. When you start digging into things, people have good answers and things are well architected. And so I think as you go through the process, seeing how people speak about their software and their architecture, how quickly they can describe it, or even if it isn't the founder themselves, the people on their team. And so I always look at the ways people speak about what they've built, and if they can do it intelligently, I think that's a great sign. If they have great documentation and they have good best practices, I think those are all good things to help facilitate the transactions. And in terms of red flags, you know, sloppy security, you know, carelessness in the code, those are kind of like the biggest red flags that I see. You like to see a process that's well defined, well documented, and easy to transfer.

I know a lot of the buyers here are probably, you know, maybe a solo investor. They may not be acquiring them or accumulating them into a team. But when you have to bring two teams together from a leadership perspective, what are the things that you think are most important?

Yeah, I mean, really cohesion, I think, like if you have to bring two teams together and they're going to work together, I think that making sure that the skills overlap and that the team gets along, I think that's important. If you're actually bringing infrastructure together, I think that's a whole beast in and of itself. You know, bringing maybe your servers from one infrastructure to another, you know, being careful when you do that. But I think making sure the team's cohesive, you have the right skill sets and then everyone's going to stay on.

Right.

Like you might be trying to bring two teams together and people think, I didn't sign up for this. And so, you know, really at the end of the day, making sure you have the team that you need to move your product forward, I think is most important.

Right on. And as we start to kind of round out the panel, what's some advice that, you know, you wish you would have gotten earlier in your career going through some of these acquisitions?

Yeah, I mean, as I've gone through my career in technology, I really do feel like that anybody can program and anybody can understand the technical aspects of development today, especially with the large language learning models and ChatGPT. Like, I think that the amount of information and knowledge that's on the Internet now, if you're not technical, like, I promise you, you can do it, you can figure it out. The information is out there, don't be intimidated by it. And my advice to everyone is just that it sounds complicated, but boy, these days it really isn't. And you have more help than you've ever had before.

Right on. Yeah. So as we again kind of round this out here. So Ranier, what advice would you give to buyers to make the acquisition as seamless as possible?

My biggest advice for buyers is to manage expectations. So if you have clear cut deadlines and you have clear communication, just try to avoid surprises. Surprises kill deals. So anything that you have a question about, just keep in constant communication with the seller every week. Go through the action items of each week, and then also for both sides just to have that empathy to be able to put yourself on the other side's shoes. Just like, you know, going tit for tat on every single deal item, that's one quick way to blow up the deal, especially if you're asking too much from one side. So again, the goal is to walk away with a win Win scenario. And to do that, really have empathy to understand what the buyer is looking for, why they're looking to acquire your business, why the seller is selling, who their ideal seller profile, who their ideal buyer profile looks like. And then again, just managing expectations throughout the entire process. And don't celebrate until the deal is done. Anything can happen. Time kills deals. Don't drag it out and it ain't over until it's signed and closed and officially the money hits the bank account.

One thing I'll mention. So obviously there's a theme here around relationships, right. And about building a good relationship with, with the other side. One thing that I've seen a lot in my experience managing largely engineering product teams, so you are in a negotiation with the previous owners of the company, but you now have to manage and lead the team that remains. And they're watching you through this process. So if they see you as somebody who's an adversary, if they see you as frankly a jerk, they're gonna remember that. Right? And so you're gonna end up losing a lot of the talent that makes the company run. So you're not just in this relationship or in this engagement with the seller, but with the team that is going to run the business and be with you for the long term. So, Scott. Yeah. Let's move back to you. So we talked about negotiation strategies here. Again with this sort of theme of building good relationship. How can a buyer or seller be firm and strong in their negotiations, but also again, not. Not blow up the deal?

Yeah, sure. I think some of the best, particularly buy side negotiators that I've seen are just absolutely show immense respect for what the seller has built with their business. And if you show that respect first before conveying your concerns and the risk you perceive, it's, it's taken much, much better, I think by the sellers. And I would say that almost every deal I've done is, involves some degree of trust between the buyer and the seller. I saw one transaction get done a couple years ago where the parties seem to intensely dislike each other. I was going to cite that as a success story, but then a little bit, I think late last year we got a million dollar indemnification claim on that deal. So the message is particularly down market where we don't have SEC filings, we don't have GAAP audited financial statements there absolutely has to be trusted.

And Brian, so for you. So let's pivot a little bit. You know, we do have some founders in the audience here. In fact, I know Some of them that are here are maybe looking at an exit quite a ways down the road. What are some of the things that founders should be doing proactively now? You know, best practices to ensure that by the time they're ready to exit, they're not doing this crazy scramble trying to get their ducks in a row?

Sure. So most of the things that your potential acquirer will want from your business, you're actually going to want them too. So doing things like keeping clean books actually turns out to be pretty useful information in running your business. It also, there's a dread that comes with the shoebox full of receipts. That is really nice. When it's all cleared up and ready to go, the other things you can do are focus on paying down debt. It is going to be your problem even after you sell. So start with your highest interest, most expensive debt first, and of course, focus on investing in your highest margin, products and operational efficiency. So anywhere you can delegate or automate, you should be doing that for yourself. The buyer's gonna like that too.

Right on. All right, so for Gaz, how many people here pay attention to Gaz on social media? A few. Okay, so Gaz is famous for what I call the founder haikus, these really short little quips that seem incredibly obvious on the surface, but. But 99% of founders just don't actually do them and really need to learn from them. So I just want you to kind of go through your mind and give me, like a few of the best or the most impactful founder haikus that have resonated with the audience over time.

I don't know, anything around, like, startups are hard does really well.

Not gonna lie.

I think when I think of my career and what has made it somewhat successful, I think just sticking with it, you know, when you're building anything, there's so many times where you just want to give up, where it truly just does suck. I've had so many crazy things happen. Like there was a period at Business Apps where Apple literally tried to shut our company down. This guy asked me, you know, basically, what do I want to get out of the company? Mean, like, we're done, how much cash you want to pull out? So I think another one would just be like, blind optimism as well, where, you know, you just, you're going to keep trying to make things work, even though it feels like nothing literally is working. So there's two. I don't want to give you three.

I'll give you one. So as somebody who's, who's tried Very hard to build an audience over the years. I would always see you in the feed and it'd be something like, good morning. Build something cool today. And people, whoa. Fire. Everything's amazing. Thank you so much.

That'd be a great tweet. I think, you know, just thinking about, like, social media content, I think you got to enjoy what you do. I think entrepreneurs are a rare breed where if you don't love what you're doing, like, it almost feels pointless. Like, you would rather just everything crash and burn than continue to do something that you don't like to do, because that's not what you signed up for as an entrepreneur. And I relate that to content as well, because I think to make content, you need to enjoy it. If you don't enjoy it, you're not going to be consistent with it. If you're not consistent with it, you're not gonna be good at it. So I think whatever you're thinking about doing, whether that's buying a business or you're currently, you know, operating a business and you're thinking about maybe selling it, I think just asking yourself, like, do I wake up every morning get super psyched about what I'm doing? Because the best moments in my career are when I wake up just super fired up. It's like a Christmas morning feeling where you. And to, like, achieve that in life, where you were one of the rare individuals that enjoys work and you don't wake up absolutely hating what you do. You need to understand what that is and do everything, in my opinion, to get yourself into that place. Because when it's, you know, when you're having fun like that, that's when you're going to do your best work and achieve the most.

I think there's something to be said too. There's a lot of times where I think people just need that motivation just to stick with it one more day, even when things are looking pretty dower. And I, I get. I see a lot of the responses for that stuff where it's just like, thank you. That's exactly what. When I needed today. So I think your consistency in giving that message is helping the founders with their consistency and sticking with it. So I appreciate it.

I mean, a lot of times when I write stuff like that, sometimes it's. For me, I'm just like, hey, just keep going. You know, like, yeah, hey. And to me, it does help. And those are my favorite responses when, you know, not to be cheesy, but someone says, like, hey, I need to hear this today, or you know, at least some people are going to read on it and say, like, hey, that's kind of corny. Well, which I respect. It is. But then there's people that will read that and reply with what you just said, and I think that's cool. I think as entrepreneurs, you have good days, you have bad days, and I think figuring out ways to make every day a good day is how you keep going.

Excellent. Awesome. Well, thank you all so much for the panel. First, let's give a round of applause to everybody. Thank you so much for all of your wisdom. Now let's open it up to Q and A right here.

Do you have a sense of what.

Percentage of Lois on acquired ultimately get.

To the finish line?

So the question is what percentage of Lois on acquire ultimately get to the finish line?

I have a guess. Brian, you might have the exact number, but I'd say probably between like 30 to 50%. Definitely not 100%. I wish it was. But they can follow up for a number of reasons. Maybe they're, you know, lowball offers. Maybe they have a ton of terms stuffed into them. Those are Obviously the main two, but then once they go under LOI, the number gets higher. So these are unaccepted LOIs ones that are just sent and issued. I'd say the number once accepted is going to be between 60 to 70%, and they can fall out for a range of reasons. Something discovered during due diligence, buyer and seller don't get along. A potential retrade, and the seller doesn't agree with it. About 60 to 70 once accepted, I think. Am I close? Yeah, he's a numbers guy.

Other questions over here. If I can try to reframe the question, I guess. Is it having sort of a preliminary ROI before you invest a lot into it? Yeah, before having something a little more concrete.

Yeah, I could take that one. So what you can see sometimes is an indication of interest. So an IOI is sort of like a pre LOI where it generally outlines. Okay, here's how we're valuing the business. Here's a rough range of how we're thinking about making an offer as well as valuation. We don't have enough information. We haven't done enough due diligence to get a closer and tighter range. But here's what we're thinking. And really what's important is before sending an loi, I highly advise that you jump on a buyer seller intro call. So again, as a buyer, you get a firm understanding of why the seller is selling, what they're looking for in an ideal buyer profile, as well as what their dream transaction looks like. And from there, you can have a better idea of tightening out your terms as well as making an offer that the seller doesn't just scoff at and doesn't make a response to.

Right on. Oh, hey, now we got a bunch. Let's see, lady in green over here. So you're asking how many buyer calls are sellers engaging in on average?

Yeah, well, first, that's great feedback. Thank you for that. So to clarify that number, that would be total NDAs signed by buyers. So that's not necessarily management calls where it's scheduled or meeting. I'd say there's probably like a 20% conversion rate between NDA sign that actually lead to management calls. If you see, you know, 100 NDA sign, that could be 10, 15 buyer calls, 20 calls.

Okay, right up here in front. How important is it to the deal? Why the buyer? So the motivation of the buyer?

Yeah, I think it's going to depend on the seller. Does anyone else want to chime in on this one? But the first thing that comes to mind is depends on the seller. You know, I meet with founders that literally just want to sell the business to the highest price they could possibly find. They don't care why you're buying it. Then I meet a lot that want to see their legacy continued on and the business is more cared for. So I think it's going to be more seller to seller basis. But for me personally, I tend to side with whatever is important to the founder.

One thing that I've seen really well with special lot of private equity, private equity companies that do a lot of deals and compete on a lot of deals is they'll have a track record of deals that have gone well and many deal stories and references that they can talk to other. The seller could talk to other founders that they've worked with just to show that they're a great partner that they're holding for the long term. They're not going to just acquire, rip out the business and then try to sell it quickly because again, it's the legacy and reputation that the seller wants to see that business grow and go beyond for many, many years. And so if you're a buyer and you're just saying, hey, look, I've got the highest price, I want to buy it, and you don't really give that much background information of some other deals that you've done, the seller may go to another buyer that has a lower offer and lower price because they've Gotten to know them on a personal level. They've shown their track record of deals, shared deal stories, and then say, hey, look, you can even talk to a couple of these founders that I've worked with and you can hear directly from them.

Okay, in the back, in the blue.

Is it fair to ask the buyer.

If it's a smaller size deal, let's see.

Potentially stalling negotiations with other buyers.

Well, I'll give a preliminary answer. I think on this one I think it is fair. Generally speaking, I view good faith deposits as a creature of business. Brokers coming out of real estate, and that's something you see in real estate transactions. The issue that I have as a lawyer is we're going to get heavily involved in negotiating when that deposit is refundable. For instance, if you put down a LOI and the diligence doesn't pan out, you should get your deposit back. If you put down an LOI and that buyer is real, real slow with their diligence request list and you decide to whatever exclusivity expires and you decide to move a different way, then obviously the deposit should come back. Right. So I think you really don't want to get bogged down in that negotiation that early in the process. But absolutely am sensitive to your concern that, you know, you're wasting time potentially with someone who's not really ready to move forward. I don't know if anybody wants to add more from a business perspective.

Yeah. Just one thing to consider is the credibility of the buyer. It's going to be a negotiating thing and if a big, if you're talking to a big whale, you may offend them inadvertently.

That was great.

Excellent. Here in the black. Yeah. Because what sale price has the highest transaction volume on the platform.

Yeah, I got that. So we started Microacquire and the original play was a high volume, tiny company play and we still see a lot of volume in that sector. So as you get bigger, the deals get less frequent going up into the 7, 8 figures. But there's a lot of volume around 100k and below and then it slowly trickles down as you go higher. Which I think is also representative of the whole startup ecosystem. There's a lot more tiny startups than there are publicly traded companies.

In the back. Common errors that you see first time buyers making.

I think just underestimating the difficulty of operating the business. Meaning on paper it looks very simple and you know, they could just jump in and take things over. And I think overestimating that happens quite a bit. I Also think overestimating code quality is something I commonly see as well, meaning just assuming that there's no bugs to the code base, everything is easily transferable, and then when you dive in there, you know, it can be the opposite. So I guess, put another way, just kind of expecting things to typically be harder or not as polished up as when you read the SIM or when you go over the listing. I think when you kind of pull back the curtains on the product or even the marketing or customer feedback, there tends to be more bruises more often than not. And I think having buyers that are, you know, surprised by that is typically a reflection of acquisition experience. Anybody want to add?

Yeah, yeah. Along those lines, some buyers I'll see occasionally. The spray and pray. Where to Gaz's point, there's a lot of detail that's not obvious from the listing. And if you start 10 conversations, 20 conversations on a day, you're unlike, you're gonna spread yourself so thin that you can't really make sense of any of them. So to really take your time, you know, be methodical, figure out what you want, what's really important to you about the acquisition, and make sure you cover all those beats one at a time.

Do one more and I'll give it to you. Just based on what Brian said, I thought about just understanding how small this community is. Like when you spray and pray 10 different offers that can ruin your reputation. And then different sellers, they do talk. And so we'll see this happen. And then we'll also give recommendations to sellers based on what we're seeing. So just not being thoughtful on, you know, how you're interacting with every seller, I think is another mistake.

I see.

Yeah, I was going to say on the technical due diligence side, just not doing enough work up front to truly understand how to run it from a technical perspective. People that don't usually run software businesses don't realize that it takes maintenance. Over time, certain services you're using shut down. They get upgraded. And so if you think you're going to buy this asset and sort of shove it in the closet and make money, that may not be the case. And so. Or if something goes wrong. And so when you inherit a software business, you need to understand all aspects of the software, the infrastructure, just in case something goes wrong so you can restart this thing, keep it going if there's maintenance that needs to be done, if a service you're using needs to be replaced. And so some of the mistakes I see is just not fully grokking the entire Ecosystem of what you're getting and then running into trouble down the road.

Great use of the word grok in context.

It's changed over time.

One thing I'll add to that too, because again, I've been around the block a few times is buyers or even investors, because I work more with VCs than I do with acquisitions, but not looking enough at what assets were developed in house versus outsourced. So a lot of founders, especially solo founders, will outsource a lot of development, a lot of design, a lot of marketing, and they don't really build that expertise in house. And then when they go to try to sell it, they don't know. But the buyer is often naive to the poor quality and maintainability of those assets and the ability to continue to maintain and grow. Because any third party outsource relationship, it's transactional. They're not really looking at something that they have to maintain long term. And so I would look at anything sort of past, let's say a million to 2 million in ARR. You want to see that they're really starting to build the leadership and the expertise in house and using outsourcing as a sort of a way to flex or grow with demand as they continue to build up their internal team. So with that, any other questions? Yes. Okay, so question is how to manage unsolicited offers in hot industry as well as essentially how to find a good industry fit as a buyer. Yeah. Realistic valuation points in different industries.

Yeah, yeah, I'll take the first one. In terms of unsolicited offers, again, both buy side and sell side, you want to keep that bridge open. You never know. Even if you're not in a position or even thinking about selling, just say, hey, thanks for the offer. I'll keep you top of mind if anything changes down the road. And if you want to jump on a call and see a little bit about why they're interested in the business or how they're coming up with valuation, hear directly from them. And if you want to continue that conversation, great. If not, just table it. And then if anything comes up in the future, you can think of them as top of mind. And then in terms of valuation, it's a combination of a science and an art. So you're looking at comparables in the market, you're looking at business fundamentals, year over year growth, profit margin, intellectual property, all of these different things. It's a science and an art. Ultimately, your business is worth what someone else is willing to pay for it. And so a lot of that is creating a market, getting other buyers. And if a buyer comes up to you with an offer, one really good question is, hey, walk me through your evaluation methodology. How did you come up with this price? And tell me about other deals that you've done and how you valued those businesses as well.

Yeah, just two more cents on that. It absolutely does happen. You get crazy valuations coming through, just not frequently. So you think about Instagram or Yammer or Everybody's got a favorite story. It's like getting struck by lightning. It's highly visible, it's worth talking about. And it really doesn't happen to everyone. Right? So when you get a group of 100 startups or a thousand startups, the chance of any one of them having that outcome, it's out there. And that's where strategic buyers come in. If you get the right spot at the right time and someone's in a rush and has a ton of money, but overall, in general, you're more likely to be towards the middle of the pack than, you know, everyone can't be the top 1%.

All right, we have time for one last question right here in the front. Any advice on how to get lenders on such short notice?

Unfortunately, no. But if anyone has advice, let me know. I'll walk you through. Just basically what I've seen in the financing space for these types of acquisitions. We used to have a pretty reliable financing partnership, but they actually went under and they're no longer financing. SBA requires typically at least three months, but I like to say six. So if you're looking for fast financing that will pay above, you know, market multiples, you're probably looking at a private investor that would invest alongside you. But again, if you find anybody, let me know because we've kind of scoured the market in terms of, you know, what financing options are available. And unfortunately for lower middle market deals, it's just, it's tough. There's not a lot of financing available aside from SBA financing. And again, that's going to take time. And they're very specific on the valuation at which they'll, they'll lend. Does anybody have anything else on that? Oh, seller financing. Yeah. Yeah, there you go.

There are some SBA non bank lenders that tend to be a little bit more aggressive than the bank lenders. So it's particularly hard if you're in the SBA space to compete because particularly with SaaS, companies that trade at multiples higher than generally what the SBA is willing to pay. So unfortunately, what I've seen the solution in that space is to go with a non bank lender. They charge higher interest rates as well as come with a pretty big down payment.

All right. With that, we are at a wrap. Thank you all so much. Let's give another round of applause to our panel. Appreciate it. And I imagine we're going to take a quick break before our next session.