HOW TO SOURCE SMALL COMPANIES TO BUY

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Colin and Brent discuss the different places to find businesses to buy and the pros and cons of each.

https://www.vernehq.com/post/how-to-source-small-companies-to-buy

Colin Keeley: [00:04:10] yeah, I don't fault anyone for playing the game on the field. I think the market dynamics just dictate that. I think they're playing the game. It is just the game that it is, why are people so friendly? And there's like micro P space. It's funny. I think it's because it's such like a early industry and there's just so much opportunity to go around that you don't, we are buying effectively a hundred percent of businesses.

So in theory, a competitor can't buy that business because we're buying it right. But. There's just so many of those software businesses out there that it's not like a big deal generally. And then a lot of people are focusing on like a niche to some extent, or they're smaller or bigger. So there's a lot of deal sharing that goes around like referral fees, finder's fees.

So you can make a good amount of money by being friendly and sharing good stuff that you see.

Brent Sanders: [00:04:55] Yeah. Yeah, that's great. The community aspect is nice. It seems like a lot of this stuff floats around on Twitter. I don't know if like places like hacker, what was it? At hacker rank thinking to the developer site, what was the place where we listed avocado originally? Like when we were doing releases , shoot.

What was that called? Hackers and hacker. Yeah. Yeah. Like places like that, where, you have companies popping up and then it's an interesting place to you follow up a year later and be like, okay , where did that go? Or, did that, when you stop hearing about it, it could be an interesting , place to source things.

I'm just curious , what are the best places to source online? Like how do you find this? So there's obviously referrals, which is, that's who, And then there's the, what you know, which is like, how do you dig this stuff out online?

Colin Keeley: [00:05:40] Yeah, so referrals are I think how we're going to see the best deals going forward in all likelihood we'll become known for this and people refer to us , but this. Sourcing is definitely been the most opaque part of the process. A lot of people are very happy to talk about like how they're structuring deals, how they're finding investors, and then you get to sourcing and they're like, Ooh, a proprietary hush.

So people are like, quiet about that, but. I'm happy being an open book. So I have been talking to all these folks and I'll basically just go through everything I've learned and all the notes I've taken. So the first deal we got a blink sale, we found a micro acquire, which is a marketplace. And I would say is probably the best one for these like smaller SAS deals.

There's others like flip a switch. Exits indeed makers is another one. It's. It is a lot of junk on these marketplaces, but there's some good stuff. And then multiples here are lower than brokers because it's unsophisticated sellers. But it is higher multiples , that you'd be paying here then just like outreach, just like a one-to-one to a creator or a founder.

After that is , brokers and intermediate intermediaries. So this is where they nicely package up your business for sale. These are quite a bit higher, multiple multiples, more buyers also pay a fee. So the best broker , here I would say is Effie international. I think their fee is like 15%. And these prices go higher and higher.

So it's harder for searches like search funders or independent sponsors like us to compete with these. A lot of these are bigger deals. It's almost always all cash and that's where like proper private equity funds are playing.

Brent Sanders: [00:07:20] Sense. So is it true? Would you say that like it's correctly, it's correct to characterize it, that if you're hitting these sorts of places, these are generally the things that have warts on them or don't meet the, they're not like the most premium things because that's already been filtered through this sort of , more legit PE world.

Colin Keeley: [00:07:41] It's a mix. So not always, especially as you get to the bigger stages, the best deals just get shopped around because they're trying to find the highest price. So that's when an investment banker is running a process and they're going to get a high price, a high, multiple, and that's not always a bad thing like this.

The equity is one of the best known. Buyout funds. It's quite a bit larger and they are known for paying pretty high prices, but it doesn't really matter if you like are confident that you have a playbook and can 10 X the business, a hundred extra business, whatever, like who cares. If you play five X, instead of one X, it doesn't really matter.

And so the best , the low, the lowest multiple, the best prices are outbound or also known as proprietary. So this could be. Like pretty informal , Hey, love your business. Would you ever consider selling or more formal, which is basically like an outbound drip campaign sales process. I B2B sales process with a super low conversion rate.

And so this is roughly, I'd say search founders spend like 80% of their time here doing this outbound sales and. Often, this looks like you pick a category, a theme, for example, like blink sale. You could look at all invoicing software and you basically make a market map and build out lists. And then you do outbound email with custom messages and you have to hire VAs or interns to do this because it's a lot of manual work.

Brent Sanders: [00:09:04] Yeah, we've done this for formulated. We just got done doing what you're cold. We've talked at length about cold emailing and I think we know how to do that. For different segments. For starting a businesses more than the venture side, that's always like the, one of the first things that we'll start doing is cold outreach and an outcome, but it seems like a, an extra hustle when it's.

It's somebody selling their business. It's not just getting a customer to sign up for a product or hop on a call for a demo. This is sell us your baby. And I would imagine, I used to get tons of emails for , the agency I ran in any business. I run out somehow get on a list and it'll be, some cold email about, Hey, we love what you guys do as they're doing.

We offer financing. Wouldn't you like some liquidity? Is it time to take a break, whatever messaging they try? I could only imagine that. The people that respond to those, want to talk for, at lengths and they've the potential for wasting time could be really high. That's my only, which is probably true.

That's my only concern about that approach is just you're going to talk to a lot of people that getting them to make that decisions is going to be pretty difficult.

Colin Keeley: [00:10:16] yeah, there's a big education component to it. So everyone thinks their baby is worth 10 X, a hundred X revenue, because that's what they see the news stories of venture capital raises at. And so it's, you have to educate them. That's not really what this market is, but. You're sending thousands of emails, whatever , you only really need a few to go all the way to a sale.

So you will get some kind of amazing deals that way, even if the conversion rate is pretty low and we haven't really started doing that yet, but at some point it's almost certainly worth it to put an intern, put a associate, put a VA, someone on it to just be building up that, sending out 20 emails a day or something like that.



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