How I bought a business for $0
Hi—Dan here. We're continuing Justin Mares's column on side businesses today! You can read previous editions here.
Before starting Kettle & Fire, I had a previous life in the SaaS world. I ran growth for a team (Exceptional Cloud Services) that bought small SaaS apps and grew them. We later sold the bundle of businesses to Rackspace for 8 figures, in early 2013.
When I left Rackspace after the acquisition and went out on my own, I wanted to replicate the model we’d seen so much success with at Exceptional. I wanted to buy and grow my own SaaS business.
My partner Ryan and I were on the lookout for a business that fulfilled one of the side hustle criteria I’ve written about before. A strong potential acquisition had to:
- Solve a problem someone is already aware of,
- In a niche where customers are already paying,
- Where the product does not require a lot of maintenance or hand-holding,
- And is profitable or has a no-brainer path to profitability
In early 2016, we stumbled across Notify: a simple Shopify plugin that would pop up at the bottom of a website, displaying a purchase another customer had recently made.
Once I saw it in action, I immediately installed it on Kettle & Fire and saw a 40% lift in conversion… and $1,400 in extra sales (this was 2016… K&F was a lot smaller then 🙃).
If it helped my site this much, how many others see a similar sales lift? We had a strong hunch that we could buy Notify, add a few features, put some marketing behind it and grow it quite a bit.
On February 1, we fired off this email:
Buying an app, no matter how small, is a lot of work. I’d tried to purchase other software businesses in the past and understood how hard it was to come to an agreement. The process involves a good bit of legal spend and can fall apart at the drop of a hat: lessons learned after spending $10k on legal for a failed acquisition 12 months prior 🤦.
We first wanted to see how serious Notify’s owner, Scott, was about selling. We emailed him and grabbed dinner just one week after our first email exchange.
During dinner, Ryan and I expressed our admiration for what Scott had accomplished—which was truly impressive. We covered our backgrounds, and shared the many ideas we had for the product that could take it to the next level.
Dinner went swimmingly and we learned a LOT about the product. Within a day or two, we followed up with super early diligence questions:
After taking four days to review the numbers he sent over, we responded with a Letter of Intent: a legal but non-binding letter showing we were serious about buying the business. An LOI also serves to ensure that both parties are aligned on high-level terms: what we’d pay, when those payments would hit, etc.
Actually buying the business
Let’s pause here for a second to address some common misconceptions.
First, it may feel like you’re listening to Uncle Warren Buffett espousing the benefits and strong returns that come from buying a railroad. Thanks Warren, but how the hell does this apply to me?
The truth is, you don’t need a lot (or any) money to buy many of these small businesses. Many small businesses you can actually buy for $0 up front, if you negotiate it properly and find a motivated seller. Where revenue is less than $20K per month, many of the businesses you’re looking at aren’t businesses at all: they’re jobs. And if you find an owner (like we did) who wants to quit his job, you can make a deal happen. You’ll get what you want (a revenue-generating business), the seller gets what he wants (his time back and money for his efforts), and everybody wins.
While negotiating this acquisition, I kept in mind something one of my mentors shared when buying assets. Assuming you’re not in crazy hot competition for something, it often pays to approach deals in a certain way: “my price, your terms OR your price, my terms.”
Let’s say we wanted to buy an app for $1M, and wanted to pay for it over 1-2 years with monthly cash payments. Our lovely seller wants to sell for $1.5M.
In a scenario like this, we’d put in an offer of $1M cash, up-front (his terms, our price) and see if that gets it done. Alternatively, if the seller was firm on price but didn’t care as much about cash right now, we’d offer $1.5M paid out over 1-2 years in monthly cash payments. His price, our terms.
In this case, we ended up going with the other option for the Notify deal: the price the owner wanted for the company, on our terms.
Scott, Notify’s owner, wanted a high (but fair) price, and wanted to have a piece of the upside going forward. We landed on a structure that would reach his goals and allow us to buy the business for literally $0.
Here’s how (note: numbers are not actuals):
- We agreed on an overall value of the business: call it $500K.
- We then discussed how much ownership Scott wanted to maintain in the entity going forward. Let’s say we landed at 20%: we then subtracted that ownership from the total purchase price, and had to figure out how to come up with $400K to buy 80% of the business.
- As I said earlier: he chose the price, we chose the terms. Our terms were that we’d buy the business via a series of monthly payments over the next 20 months. So, in our example $400K required purchase amount, we’d pay $20K/mo to buy the business.
- Here’s the kicker: we structured the deal so that payments would begin 60 days after close. Because the business was already doing more than our monthly payments to the seller, as long as the business didn’t implode (it didn’t 😅), we’d be able to buy the business with its own revenue. $0 out of our own pockets.
Once the price and terms were baked into the LOI (and the seller signed), we moved into deeper diligence. Just 23 days after our first email to Scott 🏎️!
We asked him to complete a questionnaire about Notify’s growth, revenue, tools used, etc., as well as give us all the logins related to the business. Over the next two weeks, as we dug into the info he sent us, we worked with a lawyer to pull together an Asset Purchase Agreement (APA)—the document that would make the sale official.
Fast forward to closing day: March 10, 2016. We received a signed APA, and became owners of a business that was generating cash!
Several years later, Notify has become Fomo: a software business that does $1M+ each year.
Though buying a small SaaS business is more competitive now, there are still a ton of opportunities to buy small assets and scale them on the side. If I were to run this strategy again, I’d focus on a few areas:
- Buying land and putting it on Hipcamp and other camping rental sites (as I discussed in my last newsletter, please God someone reach out to me and help me do this).
- Buying up small apps in the Google Chrome or Mac app store.
- Buying assets on rapidly growing platforms. Could you buy out a Fortnite skins developer? A creator on Roblox? A top theme developer on Webflow or Shopify? A tool on Figma?
- Buying small software businesses in industries tech doesn’t traditionally touch. In my world of CPG (consumer packaged goods) and food, there are a ton of small software opportunities where a strong operator could buy an asset, tune it up, and do quite well.
Note – this post originally appeared on Justin's newsletter The Next Brand.
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why would the seller agree in the first place if revenue is already more and you are just paying a certain percentage back to him, what's the catch here
@mittal.pratham0910 Probably because if the company did implode, that you are on the hook for the remaining payments - the seller is effectively de-risked slightly (although still exposed to you defaulting) and also doesn't have to take operational/execution risk (i.e. they'd like to exit out of the business).