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It's free to get started with no in-person visits and no minimum balance. Visit mercury.com to apply online in minutes. Mercury is a FinTech company, not an FDIC insured bank. Banking services provided through choice financial group and column NA members FDIC. Welcome back to another episode of Startup to the Rest of Us. I'm your host Rob Walling and in this episode I sit down with Aynar Volset to talk about his new book, The Definitive Guide to M&A for B2B SaaS between 2 and 20 million ARR. The entire book is available at discretioncapital.com/guide. You can read it online or as you hear Aynar and I band you around in the interview, he is looking into getting paperback copies printed as well. I believe they're going to be hard copies available at MicrCompt in Portland. If you are hearing this, I think this comes out maybe the week or two before Portland. Speaking of that, MicrCompt in Portland is sold out. You can get on the wait list at micrCompt.com/us in case any tickets open up. It's going to be an incredible event here in just a week or two after this episode goes live. In addition, MicrCompt mastermind matching is open. Masterminds have had a huge impact on my entrepreneurial journey and we have matched almost 1800 founders in 64 different countries into these peer groups. These are four or five person groups that are often hard to form and that's why we started offering matching based on a lot of factors like revenue, location, experience, etc. This isn't just AI, right? We have a human on our end looking at every single application. I've been part of two or three masterminds over the years, one of which has run for 15 plus years and they've had a huge impact on my journey. They are folks that you're going to go through the trenches with who can help you think through problems and be a sounding board. Applications are open until April 17th, just head to micrCompt masterminds.com. If you're curious about what goes into creating a great mastermind, you can check out our free playbook at micrCompt.com/guide. With that, let's talk to Ann Arvull set about his founders guide to selling your sass for what it's actually worth. Ann Arvull set, welcome back to the show. Thank you very much. Thanks for having me. So you are most widely known across the internet as one of the panelists on Startup for the Rest of Us Hot Take Tuesday episode. That's right. But some of your great fans. Yep, that's it. Some of your lesser contributions include co-founding tiny seed with me and being the founder of discretion capital, which we're going to chat about today and folks who listen to the show know the story there, but we'll get into it. And in addition, maybe this is another thing accolade that you're adding. You have written a book. You're following in my footsteps. So yeah, it's all the glory and riches that came your way because of this authorship stuff. And now the class is dying. This is this is the jam. I'm going to become an author of published successful author. It seems easy. It is so easy and so lucrative as everyone knows. That's what I hear. Everyone knows this. Yeah, yeah. You've written the definitive guide to M&A for B2B sass between two and twenty million dollars and just rolls off the time. It really does. Have we not workshopped? It's classic. But yeah, so you've written this book and we're going to have hard copies at microconf here in Portland in just a few weeks. Big question. Why? Why did you write this book? Why write it? Yeah. Why write a book? It's painful. I've done it. It is. It's actually told me significantly longer than I did. So actually what ended up what started up was it was one of my one of my partners, Dan Shapiro, who's like, dude, you should just write a book. Like you should write a book or guide or something because you've been doing this for nearly a decade now and like people don't know. And I was like, oh, yeah, I probably should. And like, look, it's sort of obvious. Like it's obviously like content marketing for discretion capital and like, you know, that's what it's the reason to write it and to spend all this time on it. But also it's like, it is true that like it's such a weird opaque market. This sort of two to twenty million of ARR and like even pretty sophisticated founders who may have even raised, you know, tens of millions of dollars or feel like they understand the space they operate in are sort of nubes when it comes to M&A. And so look, obviously, like I would prefer if you're doing, you know, eight, ten million of ARR or less or more, I prefer you come to us and at least talk to us and maybe become a client. But a fair few people are going to DIY this often just because somebody emails them and they or a strategic gets in touch and all of a sudden, you know, they find themselves in an M&A conversation. And quite often, like, it's startling really how often basically all this value gets created by these founders. You know, they sacrifice so much. You know, it's the reality is if you could build a five or ten or two, even two million ARR business, you could probably also go work for Facebook or Meta or whatever they're called now and make bank, but instead of you sort of sacrificed for that and you, you know, worked maybe work nights and weekends and took taking the smaller salary than you could. And now it's time to get paid, right? It's time to cash out and get liquid on this. And it's not unusual that I hear about situations where I'm like, okay, well, yeah, but you left like, you left like six to your 70 or 80% of the value of the company on the table because you didn't know what was going on here. Like, you didn't understand like the universe of buyers, what market pricing is like and like what things are worth in the market. And so, look, yeah, you should probably come talk to us, but even if you're not going to like at least read the read the guidance. So you'll get a sense for like these are the games that people play and this is where it's at. And this is what moves the middle in terms of price and what things are worth. And these are the kinds of buyers that are out there. And the discretion capital website, so folks know, discretion capital.com, it says M&A advisory for B2B SaaS between two and 20 million ARR don't settle for the buyers in your inbox. We routinely add 30 to 300% to initial offers for B2B SaaS founders selling between two and 20 million through a structured process targeting more than 100 strategic and private equity buyers. We create competitive tension that drives your price up. So this is different if then something like acquire.com or like a brokerage that has an email list of potential buyers where they say we have 20,000, 40,000 person email list and we sell websites, content sites and SaaS usually at an EBITDA multiple, right? Or an SDE multiple. Right? Isn't that profit? Let's just say multiple. You operate in this space that I really had almost no knowledge of before you and I connected and oh, I guess it was after the drip sales was probably 2017, 2018 and you told me oh, private equity is moving down market because that was the thing I always heard. Dude, when we were selling drip, I asked a founder who had sold and I said, did you get an advisor or investment banker or an M&A advisor, whatever to help you? And he said, oh no, for deals this small, like bankers don't come down below and he named a number $30 million or $50 million. I was like, well, then I guess I can't get a banker. But then suddenly I met you and I'm like, wait, what? You do this? So like, what happened there? Like, why did the market shift in the mid-20T? Okay, talk us through that idea. Yeah, that's, I don't exactly know when, but it certainly was like, you know, I've heard numbers 20 million in ARR, like we're talking about ARR numbers here, not sort of outcomes, 20, 50, certainly at like 10 million for the longest time. Like it did just weren't interested. Like it just wasn't worth their while for the bankers to do it because and the reason for that is the buyers weren't there. And so what happened is you sort of private equity moved down market. So prior to, certainly prior to 2010, like private equity wouldn't even touch anything subbed to certainly 10 million and like like you're you're acquaintance said, you know, maybe even 20 or 30 million. And so because of that, there wasn't really a very liquid market. And that combination of things meant like, okay, well, if I'm a banker, like it takes me as much time to sell a 5 million ARR business as it does and probably more because it's, you know, harder to find the buyers than a 50 million. So and it, you know, what am I going to get the highest fees on? 50 million one. So you ended up in this weird, I sort of like just kind of lucked into it actually. And really what happened was private equity moved down market to the point where they were buying at least tuck-ins to their portfolio company for one to two million. But really like no like proper investment bank boutique and even the lower end of the middle market would do deals that size. Versus that's what we started doing. Like I used to joke like, you know, discretion capital. When I started out as like discretion capital is the world's best investment bank between one and 10 million of ARR, which is what I used to cover when I just got started. And that was true because we were the only one really who's doing it. Like you ended up in a scenario where basically you either had to, like you either had to try to convince some of these beauty banks that yeah, yeah, I'm done.
definitely big enough. Please take me on and they would maybe do it as a favor at the higher end of the ARR range, but you'd still end up with, you know, yeah, you might get to talk to the partner before you sign the deal, but then you get handed off to some junior guy because it's the smallest deal they've done in 20 years, right? You're just doing it as a favor. So that was one end of it. And then the other side, you know, you had your like you mentioned a choir and some of these other more so generic, you're not just selling B2B SaaS, you selling info products and drop shipping websites and all this stuff. And those guys are, they're good, very good to very good at what they do. And like I sometimes talk to people who have businesses in that size and I'm like, look, you probably want to talk to one of these guys because I don't know how to get to the kinds of buyers that will buy things that are doing 500,000 ARR for example. But the flip side of that also is like typically those kinds of brokers aren't great at understanding like this is the universe of buyers that are buying 5 million ARR, 2 million ARR, 10 and 50 and 20 million ARR businesses. And so they sort of frame a mind that they go to market just isn't isn't right. And so you quite often end up in a scenario where, you know, if you picked the wrong kind of broker, like you still hey, I hired a broker, but one of the stories I tell the start of the book is like you end up with scenarios where like maybe you're broke or you're not going to get to the market. Like maybe your broker is pushing you to take an offer that is 50% of what it should be because you have the wrong kind of broker. So there's all sorts of issues to deal with. And tell me that the wrong kind of broker. What do you mean by that? Well, that's what I mean. I just like look, the fact of the matter is like in this revenue range, about 70% of the deals are done by private equity either directly like they are buying it because they want to use what's built it around it, which is basically what's called a platform acquisition or particularly commonly on on some of the smaller deals is like they already have a platform. They already have a portfolio company that might be massive like, you know, be sold one business to blackstone biggest private equity company in the world. They had taken this 1.3 billion public SaaS company private and now they bought like a 456 million are business that we were representing as a target. So you end up with these dealing with these enormous, you know, these enormous banks and things like that. And so that that's the challenge. If you're used to like you have a large list or like acquire.com is a good example, right. Blackstone is not going to sit on acquire.com and be like, oh, yeah, here's a let's just be the fee and connect that just not how blackstone operates. And so if you're not able as a banker or broker, if you're not able to put the deal, I mean, this is the most important thing. I think that a banker does is that it figures out understands the universe of buyers out there who owns what and like puts you in front of the people that will pay the most for the i the people who for whom you are the most valuable asset. And the fact is if you're just used to like blasting an email list and selling in for products and things, you're just not going to be able to do that effectively. I want to keep going with the thought because I have the as you're talking about it, I want to ask you in a second about how does this actually work. You're talking about you discretion doing outbound and having an auction process. And we're going to come upon the statement of aren't businesses sold not bought right there, but they're bought not sold and so I want to put a pin in that first. I want you to define you views the word tuck in the phrase tuck in twice. I know what it means. I bet a lot of people in our audience don't understand what that means. So in the private equity world, they're basically two kinds of purchases two reasons why private equity company will buy a SaaS company. One is what's called like a they will refer to as a platform. And this is like this is the thing that they want to build around so taking a step back is important to understand the incentives for these buyers right these buyers typically a private equity fund a buyout fund is looking to three to five extra investment in three to five years. They can do that if they can five X and three years are doing super well they can three X and five years are still doing pretty well and so fundamentally those are incentives. So for a platform purchase they're thinking to themselves we'll buy this asset and then we're going to be able to both grow it and maybe buy some other assets to tuck in to that larger platform in order to have an asset that we can sell for three to five X in three to five years. So those are the two kinds of businesses and so when you're operating in the space that we are it's kind of rare for like a two three four five million AR business to be considered like a platform. Maybe some of the smaller lower middle market private equity funds might do it and there are some specialized funds that definitely goes lowest to. So at the time you're going to need to be at like ten or maybe even fifteen or twenty to be considered a true platform so probably most of them end up being tuck ins to the larger platform portfolio companies that they already own it's like so this blackstone things a good example that the company was like an events sass company. That we were representing like they were handling you know scanning of business cards and things at physical events and they didn't have the larger billion dollar company didn't have this capability now they bought this sass that we were representing and like cross-olded against their entire customer base and so it was worth while for them to be doing it. The nice thing about this too is people to hear that we're tucking and I think small not great like you know just just a tuck in but actually tucking is often out compete like strategic bits because it's so valuable to them so like we kind of think of it as like almost the best of both worlds. The problem with dealing with like a strategic buyer and by that I mean like you know like a public company large one that wants to buy you that's what everyone wants like this is the whole like we bought not sold kind of thing right you just don't you just doing your own business. And here comes Google and they're like here's a billion dollars like just despite the fact of the matter is often these kind of deals fall apart they get retreated they're often personality driven it's like someone's promotion that's why you're getting acquired basically and if they get they leave or get fired or get promoted even then it could be dead in the water versus dealing with the private equities is easier in the sense that like these guys are deal makers like that's what they want to do. And so if you can have that combination of dealing with folks that are willing and able to act quickly and without bid strategic that's sort of the best of both worlds and so that's why like you can have five million are businesses selling for 15 times they are to an asset that maybe the private company bought for three X. So you know because it's strategic to them and so that's but that you need to know that like and you need to be able as a banker to to put the asset the company in front of the buyers at the right time and so and there's look I can get really geeky about this like is to the point where like look like when are they most likely to buy a talking well it's when they've had it for six to 12 months and you know whatever not when they've been holding it for five years and so that's like the whole time of the company and then you got to think about like which fund is owning this asset and where is that fund and its life cycle and there's there's it's not just like oh this would be a good fit it's like this would be a good fit and it fits in with like typically what are these guys life cycle whole times for all these assets. Everyone's talking about AI and marketing right now but AI without strategy just means generating more bad marketing faster. The real advantage comes when experienced marketers and designers know how to use AI as a force multiplier that's what conversion factory does they help SaaS companies build strong funnels run rapid experiments and use cutting edge AI workflows to scale what works they worked with more than 100 startups including several tiny seed companies book a call at conversion factory.co and mentioned this podcast for a thousand dollars off your first month and if you're at microconf US in Portland grab Corey Haynes in the hallway track to see how they can help you. And just to get folks an idea something I learned from reading the book which folks can get for free online discretion capital dot com slash guide but I believe you're also you're going to have like paperbacks and stuff available on Amazon hopefully hopefully yeah okay yeah. So if they want to print copy potentially that's a thing but for now something I was reading to the first few chapters and you talk about how with B2B SaaS between two and 20 million ARR that is growing at a certain minimum amount 70% of the deals are private equity and about 20% are strategic and then 10% was other and this is the opposite of what I understood as a software founder as a SaaS founder myself. When I talk to again when we were selling drip I talked to several founders who had sold because there was no one like you doing what you were doing and no bankers would talk to me because the deal was too small. And the founders that I talked to were like well you know who are all your competitors and go talk to them right so it's like of course as drip you know was like well I'm going to reach out to to HubSpot and the mail champ and you know what I mean and it did so happen that we got acquired by a strategic right it was lead pages it was another startup and it made sense it wasn't private equity but what I've learned is actually the A8. And it's actually the exception to the rule and it sounds like that is a recent thing that's over the last 10 years really that they've come come down further but if someone's not paying attention to private equity and they don't have the kind of system or like auction in place this is where we're going to get to but I thought an AR that startups were bought not sold right and why is that you come out really strong against that center yeah let's talk us through that. I think fundamentally I think that's a misalignment of incentives that mostly arises from the VC world that's what I think so if you think about it like what are the incentives and this is where you went into the scenario often where like your investors if you have them particularly if you have VC investors what are their incentives versus what are yours so often with VC investors like they are really only investing I mean tiny city's the exception here but they're only really investing because I think it can eventually be worth 20 billion dollars. Or more right that has to be the goal like you're not going to write a check unless you think there's a lot of money.
small but still a decent chance that this will happen. What is the fastest way to make sure that doesn't happen is doing M&A, right? So if you have a portfolio company as a venture capitalist and it's growing well and it's doing great and like all these things and then say they're at 10 million of ARR growing crazy fast, then you're going to be pretty much like, look, definitely don't run an auction process and sell now because then you're guaranteed not to get 20 billion dollars. Like the chance that you get to 20 billion might still even a 10 million might still just be 1%, but as a venture capitalist, that's what you make your money on. Like you make your money on these outlier, you know, basically founders being crazy enough or sort of ludicrous enough to be like, yeah, I'm definitely going to go public or sell for 20 billion dollars and I will take no less. Versus as a founder, most of the time, let's be honest, we would survive with 50 million cash both of us. You know what I mean? Like we would have to make some practices, but like we could make it work, you know what I mean? So that's the situation where like your incentives and your VC investors aren't aligned anymore. And so that's where it's like, don't talk to bankers, you know, don't think about selling and this is where that whole meme came from. It's like, oh yeah, businesses are startups are bought and not sold. And what they mean is like, look, the only kind of M&A that I am interested in is an venture capitalist is if a strategic comes to you and begs to buy it and is gagged for it and will pay a crazy price. That is the only kind of M&A of venture capitalist will care about. And so that's where that comes from. That's what they mean. Versus for you as a founder, particularly if you don't have any investors either, if you've been doing it for five, six, seven years and you're a 10 million and you're growing well and chances are, this is where all your money are. It's like like most chances are among your like net worth. It's majority is in this business now. You know, what do you want? Do you want to sell for 50 or 60 or 70 million in cash or do you want that two, three percent chance that you're going to IPO in another five, maybe 10 years? And so that's my reaction to it. It's like, it makes sense if what you're optimizing for is maximizing a still small chance that you're going to get an enormous outcome. But the actual lifestyle for most founders is not actually like most people would take 50, 50 chance of 50 million would be better than a two percent chance of 20 billion. And we hear these stories, right? Of it was an Instagram supposedly bought in a weekend because Zuckerberg really wanted it right? And for a billion dollars as an example and then WhatsApp, I believe was bought for 18 billion or something like that. And it's like, neither those companies were worth and I'm doing air quotes that money, but they were worth what, especially specifically Zuckerberg was willing to pay them, right? But the reason I can name two of them is because there have only been two in the past 10 years. I mean, there's a few more, but there are not hundreds or thousands of deals that happen like that. There are like six that we can all name, right? And that's great. If it happens, awesome. You know, fantastic. You know, do that. But but most of the time it doesn't actually relates back to an article. We wrote blog post article. We did like years ago now when we started out tiny sea, you know, we did that whole based on the patio Patrick McKenzie, patio 11 tweet, which was the iceberg of deals, right? This notion that like there's all these deals. And in fact, I think the math, if I remember correctly, now I was like only about 7% of actual acquisitions get any kind of like even tech mainstream tech press mentions. Yeah. Because a founder, like a tiny seed founder who sells their business, let's say two co founders, they sell for 15 million in cash or a single tiny seed founder sells for 25 or 35 million. That is generational wealth. But guess who doesn't give a crap about that tech crunch? Mashable venture. They get I mean, when you have a guy on like on this podcast that it sold for like hundreds of millions and like nobody knows the yes. Yeah. No pressure. Retired. Yeah. The last exit was at 600 million. It was fully bootstrapped him and his co founder. I mean, think of a Kevin with spectora who's now a tiny seed investor and mentor. He and his brother bootstrapped just the two of them. First exit was they sold a majority say at 90 million. And the next one was at like 150. It's like, but we never heard of them. Never heard of them. So there are so many more deals happen like this, right? That this is the big things really happen. And that's the that is the helpful part of your book. That's the helpful part of John Warlow's writings. I remember reading that being like, oh, this doesn't happen the way I thought it did. This is all the whole magic, the VC industrial complex. Very opaque. Yeah. No doubt. And so some folks might be wondering, you know, the difference between exit strategy, the book that Sharon I wrote and definitive guide to selling to be to be SaaS M&A. And a big thing is a you are focused solely on SaaS. Sharon, I talk about other business types. We also talk a lot about them, the mental side of it of thinking it through the before, the during the after. What do you do with the rest of your life? You know, it's it's very much a higher level picture. And in fact, I interviewed you. You're quoted in like seven of the chats, six or seven of the chapters talking about specific mechanics. And that's what your book focuses on is a lot like what an L.O.I. looks like and what you should look out for, right? It pains me to say this, but like you and you shouldn't. I really, but you could take this book and like you would run them do a much better job at DIY and your own M&A process. Like, you know, we just released chapter seven today. But I think the next one is chapter eight, which is the anatomy of an L.O.I. So it goes down to extremely nitty gritty detail about, okay, you have an L.O.I. But what do all these terms mean in this thing? Like, well, what where are the gotchas? Where are the, you know, the retreats hiding that kind of thing? So, so yeah, it's it's quite different. I want to ask about valuation drivers when you're selling in this price range. I remember you gave a talk and it was I don't think it was a microconf. Did you ever give this the growth is number one and churn is number two? You give it somewhere else. Let's saw you in a video. Yeah, I'm giving that a couple of times. Okay. And what I remember is look, once again, it's once you're in between that two and 20 million ARR range that like growth is usually is the number one driver evaluation and churn, I believe, was number two. And I don't remember what number three was. Yeah, well, there are obviously like the same business just that the bigger business is going to be higher multiple. Okay. So why is growth so important and churn so important? Why is it so important? Because I we see five c founders online who are like, Oh, I have eight percent churn. It's not that bad or 10 percent churn. And I got I got called being old school. Oh, yeah, no, Rob's dated. Rob has dated. Maybe when he grew drip, you know, you could have net negative churn. But like eight percent churn is the new normal. And I was like, you're you're out of your mind. That's not normal. That is a business that's on fire. Yeah, yeah. So so growth is definitely the thing that drives multiples more than anything else for sure. And really like why? Well, it boils down to this. I guess that 70 percent of buyers are private equity and what a private equity looking to do. They're looking at three to five X and three to five years. And if you have an F five million ARR business growing 100 percent year of a year, unless you have it, it has a ton of churn or you get up, then chances are you're probably going to maybe grow into three X just doing nothing else. And so like you would be want to pay more for an asset that's five million ARR growing 100 percent, then even a 10 million ARR business that's not growing. Because as most founders and hopefully listeners to this know, it's significantly harder to get a business growing that hasn't, you know, that stopped growing than it is to do anything else, like in this entire business, I think. And so that's why because they're looking to three to five X in three to five years. And the reason why churn is so important on a secondarily is think about, again, like private equity. And the reason I mentioned private equity so much is because the other players in the market also think about private equity and bought those guys are bidding, right? Like that's why if you're a strategic and you're in an auction process, you're not going to bid 100 X ARR just because you're going to figure out where's the market at and then bid slightly more even, you know, a little bit more than that. That's your incentive. And so everybody sort of thinks about that. And so the reason why churn is so important, particularly the private equity and thus, you know, by analogy becomes important to everyone else in the market is because if you're only only three to five X in your investment, it's important that you don't lose, you know, you can't lose money. Like that's all again, opposite of VCs. VCs care the most about increasing the small chance that they can get 10,000 times their money or a thousand times their money or a hundred times their money, versus private equity. They're like, if I can five X in three years, that's great, but I have to protect my downside. And churn is the downside. Churn is this like every buyer thinks this, they worry about it, you know, explicitly or not. They worry about if I buy this asset, give this founder all this money and he walks away in retires. And then the business falls apart like I don't want that. And churn is that risk, right? It's like if you have 8% monthly churn, you're going through your entire customer base in less than a year. And so then the risk becomes like, well, I mean, I hope the growth channels are working well and they aren't, you know, to do with just this particular founder special relationship. And that's why the business is what it is and all this stuff. So, so that's why like it's basically like growth makes it easier to sort of model out like, okay, this is how we 3X this asset or this business and then sell it. And churn is like, eight, also, obviously, sustains the churn story as we know at the grill story as we know. But also it's like, how do I protect my downside here? Like I can't go in front of the investment committee or whomever's making the decision to actually allocate the money and be like, yeah, yeah, yeah, like, yeah, I know we're going through like re-acquire our customers every year, but don't worry, you probably won't.
need to. It's not a good angle. I get this question on the podcast periodically and I actually got a very specific one, maybe a month or two ago and it was someone saying, "Why do so many people talk about ARR multiples and top level instead of profit?" And I think the guys questioned said like, "What SaaS company doing? Two million and making a million a year and net profit shouldn't that be more valuable than if you're at two million a year break even but you're growing it would have 50% 60% 70% a year versus a slow growth more profit." And I said, "No, it's not worth more." And counter intuitively and why is that? It's because the net margins on SaaS, at least until AI token started visioning us to go high, right? The gross margins even. And it's like 95%. And so the argument is always like, look, what are you doing here as the asset? Like, if I'm reinvesting all my profits so that I'm break even, then I'm doing that in order to grow faster so that I can at a later point optimize that piece and like, "Okay, if I can grow to 5 million a year and then switch that balance between growth and profit, then I'm going to remake the money fundamentally a lot faster." And then also like, some of this is just like, that's what the upstream market is valued at, right? Like, if you get to 100 million a year or businesses and all that stuff, they often think about it in terms of revenue multiples. And so often these acquisitions are made in order to accelerate the growth or increase the revenue and do all this stuff so that that multiple goes up for them. That's why fundamentally. Yeah, I'm going to tell a story and I'm allowed to tell it in public because I interviewed Kevin, co-founder of scraping bee on stage at Micrconfinist Temple. And the story is this, Kevin and Pierre started scraping bee and applied to tiny seed. And I think they had, we're doing maybe 2000 MRR at the time, very early stage. And they grew it to several million in an era. I believe the last public number was 5 million that they put that on Twitter so I can quote it. And then they exited for an eight figure cash sum. And it's the two of them and tiny seed. And it was all the very, obviously life changing outcome for them. But I asked Kevin on stage, I said, do you remember when it was just the two of you and you guys were doing more than a million ARR and ANR and I were like, you need to hire people because they were, because they were optimizing for like profit and for like, they didn't want to manage people. There were a bunch of reasons, but we were like, you're going to burn out. Number one, and number two, if you go to sell, let's say you hit two million, two and half, three million, nobody's going to want to buy you because everything relies on you. Right. And I asked Kevin specifically, I was like, would you do that again? You know, or would you change it? And I was actually waiting for him to say, no, it's fine. We did it. He said, no, we should have listened to you guys in the crowd. I was like, that's not what I expected. But that gives you an idea of like, yeah, that business is wildly profitable with only two of them. They had almost no other, it's in server expenses and stuff. Exactly. And it's also ties back into like the different kinds of buyers that you're reaching. If you're doing a SaaS business that's doing 250,000 ARR, the kinds of buyers of that are typically going to be operators, right? There are people who are like, I'll quit my job, but buy this thing, maybe get an SBA loan, do all these things, and then I'll run it. And like, I'll take my profit out of that, you know, salary. So, so the salary then profit is what comes out of it for me. That's what I care about versus like a bigger buyer, a strategic, a private equity company. It really anybody larger than that. They're going to look at it and be like, okay, so this company is like the two founders and like three contractors and bailing wire and duct tape. And like again, like what is my downside protection here? Like, you know, is this all going to fall apart after I buy it? And chances are, yeah, it will be like if you give a bunch of cash to two founders who are only like the whole business is run with contractors and you get a bunch of cash and say you can walk away, chances are the business does fall apart. So it's much more valuable to you as an acquirer. If those two founders have sat down and actually put like a team in place and like made themselves a little bit of a less of a key person risk for the acquirer. And that's why like it's, yeah, you might have been a lot more profitable when you were just the two of you and contractors, but you're worthless than when you're maybe break just breaking even because you have all this team around you that you're paying. I want to close this out with this question and it relates to a topic I've talked about on the podcast in the past. In fact, I had Ruben founder of Seinwell on to just discuss this idea of founders who run it over the top meaning. I'm going to give an example and throw out some numbers. You can correct me if my ranges are off, but I think Ruben and I specifically in that episode, it was four or five months ago. Myths founders tell themselves was one. One of them was I'll never sell. And I say everybody, everybody sells everybody sells. You know, you know, who doesn't sell base camp. They're the only one that hasn't, but everybody else sells. I didn't think Mailchimp was ever going to sell blah, blah, blah. I this my rant on here. But I think Ruben and I were talking through and I said, yeah, let's say you're at two million AR and you're growing 100%. 100% year over year. I think you can sell for between 10 and 20 million if your turn is good if your stuff's in line, right? That's a big range. You know, maybe it's 10 and 15, 12 and 20, whatever. You get the idea. And then let's say you get to three million ARR and your growth slows to 10% a year. Let's say you're at four million. You're twice as big and you're at 10% growth or zero, right? And I was saying, I think you're going to sell for one to two X. I think you get four to eight million. Okay. So suddenly you are doing double the revenue. You've grounded out another year or two. We all know that every dollar of time. And yet you're worth it's not not a little discount. It's not like, oh, I lost 20%. You like dropped eight figures. So I mean, I guess we understand why that is because growth is number one. And so once growth slows, that's the problem. But why is this so common? Why do you think founders do this so often? Because we see it. So it's a couple of different things. It's one fundamentally don't not understanding a that growth is the number one factor. This is too not realizing that's what the multiples are based on and what evaluations are based on. The second thing is they end up in a scenario where they convinced themselves that the increasing the ARR number is always going to be better. And like, you know, they're basically like, look, I have this number of mine. I just want to get to whatever number it can be three million, can be five million, can be 10 million. And they're just like, I just need to like, there's all this low hanging fruit around me. Like, I just want to go and pick this and then I'll sell. Be ready then. The problem is like, then you've squeezed out all the growth of the company. And the reason why it's so problematic, particularly, and it's because there's sort of this weird, it's the ones, I think the one place in sort of SaaS valuation where there's a discontinuity. And it's right around 20, 25% yearly growth. If you go above that, then higher growth is usually higher multiples. So there's a reasonable correlation there. If you go below it, it drops. So it can easily be like, you could sell a 35% growing ARR business probably for four times, maybe five, depends a little bit on everything else. Obviously, profits better, lower churns better. But if that's same business, like if you just let it run another year or two, growing it, that's lower rate because of pretty much all growth decays. Right. And so this is our friend Jason Cohen's point. You end up like, okay, now you have a bigger business, but it's growing 10% per year now. Like, maybe that the growth channel, the new acquisition customer channel is the same size. It's just, it's the smaller percentage of the larger business now. The kinds of buyer changes. And so like, the kinds of buyers that are looking to buy 10% or 0% or 15% ARR businesses are sort of the value buyers end of things. And basically what happens is the bigger growth firms and the folks that are buying tuck-ins and interesting and all that stuff, they just go away because they look at the growth and they're like, this is going to drag down our portfolio business. Like, it's much harder to turn around. And so you're then dealing with sort of extreme value buyers, you know, what I call steels in the in the guide and like turn around shops and things like that. And then the fact is, it's just like, yeah, you go from like four times, five times, maybe even six times to like, you're lucky to get 2x. And it's fundamentally because the kind of buyer changes. And our volset. Thanks so much for taking time to join me on the show today. As I mentioned earlier, discretioncapital.com/guide if folks want to read the full book. They want to keep up with you on Twitter. You are an AR. They may not want to do that. An AR for EINAR, V-O-L-L-S-E-T. We're laughing because if you don't like what post-Singer San Francisco Giants, you may want to not follow an AR. I got somebody today, I think was the, maybe was this yesterday, the point of not like, what was the response? It was like, the response was like, I hope that AI therapists or whatever get good enough that they can help you with your anger issues. I was like, I don't feel very angry, but okay. I went out of luck. Yeah. That's funny. And if folks want to reach out to you directly, if they have a SaaS that is growing seven figures and they're thinking, man, maybe I want to sell in a year or two even. I'm thinking about how to like get going. I'm growing, right? What's the best way for them to reach you? Yeah, I have to go to discretioncapital.com and there's a form there that all over the place that goes to my inbox and I'll get in touch or you can just email me at
[email protected]. Awesome, man. Thanks again for joining me. Thanks again to anarr for coming on the show today and again that URL is discretion at capital.com/guide. If you want to read the entire book online, thanks to you for listening this week and every week. This is right.
Rob Walling signing off from episode 827.
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