I am wrapping up 6 months of my search ( www.guddigrowth.com ) this week, and I sent the quarterly update to my investors. My focus has been on identifying and evaluating B2B SaaS and tech-enabled service businesses within the USD 5-30M revenue range. The update email was long, and but I wanted to share some reflections below. Let me know what you think.
- The competition for businesses with over $2M EBITDA has been fierce, and I’ve often been outbid. As I gain confidence and become less conservative in my modeling, I’m making higher bids. However, there’s definitely less competition for businesses under $2M EBITDA.
- On the flip side, I’ve noticed advantages in acquiring larger companies. They typically have established middle management, mature products, and strong customer retention. While we may need to bid higher, the associated risks tend to be lower. As Warren Buffett himself said "It's better to buy a wonderful company at a fair price than a fair company at a wonderful price".
- As I pursue the acquisition of software and tech-enabled services businesses, I've observed that nearly all potential sellers I encounter are sophisticated enough to have bankers and brokers representing them. If a seller does not have representation, it is likely they are not actively looking to sell.
- Successfully acquiring a company through the search fund model requires several elements to align at the right time. My outreach to sellers must occur when they are at an inflection point in their personal or professional lives. I need to be mindful not to reach out too early, as they may not be considering a sale. Conversely, I must avoid contacting them too late, when they may be in a rush to exit and primarily focused on valuation. I’ve also noticed that overly eager sellers often have underlying issues, such as declining business performance or other challenges like lawsuits or loan defaults.
- Maintaining a focused investment thesis is critical. I’ve realized that most brokers and sellers who understand the search fund model tend not to view me as a serious buyer unless the company operates within the automotive, industrial automation, or hardware sectors. Additionally, my experience in leveraging AI for sales and marketing tends to pique the interest of brokers and sellers. Many of these business owners have built their companies with minimal sales and marketing efforts, so they appreciate discussions about how AI can drive growth.
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