MicroConf On Air
MicroConf Recap: Quiet Light Brokerage Answers Audience Questions
Wed Jun 14 2023Description
QuietLite brokers answer audience questions about buying and selling technology companies at Microconf Denver in 2023. They discuss the four pillars of businesses: risk, growth opportunity, transferability, and documentation. Considerations for staying independent or accepting investment are explored, along with the importance of clear terms in strategic partnerships. Tech stack, documentation, and financials play a crucial role in business value. Factors affecting business value include patents, multi-year contracts, clean documentation and financials, revenue growth, and growth trajectory. Acquisition thresholds, deal structures, and exit paths are also discussed.
Insights
Strategic Partnerships Require Clear Terms
When considering partnerships, it is important to have clear terms to avoid distractions.
Tech Stack Importance Varies
The importance of the tech stack depends on the size and goals of the company.
Documentation and Financials Are Crucial
Clean documentation and financials are crucial when selling a business.
Patents Add Value but Rarely Solely Determine Price
Having a patent adds value to a business, but it is rare for someone to offer a large sum of money solely based on a patent.
Revenue Growth Trumps Specific Milestones
Revenue growth is more important than reaching specific revenue milestones like $1 million ARR.
Growth Trajectory Matters More Than Revenue Number
The growth trajectory of a business is often more important than its revenue number.
Buyers Have Different Preferences at Different Revenue Levels
Buyers at different revenue levels have different preferences, and competition levels affect multiples.
Acquisition Thresholds Depend on Business Size
Buyers have thresholds for acquisitions based on the size of the business.
Asset Sales and Stock Sales Have Advantages
Asset sales are more common and advantageous for smaller deals, while stock sales are more beneficial for larger companies.
Micro Private Equity for Mid-Level Businesses
Micro private equity may be worth considering for mid-level businesses.
Chapters
- Buying and Selling Technology Companies
- Considerations for Staying Independent or Accepting Investment
- Tech Stack, Documentation, and Financials
- Factors Affecting Business Value and Sales Process
- Acquisition Thresholds, Deal Structures, and Exit Paths
Buying and Selling Technology Companies
00:08 - 08:13
- QuietLite brokers answer audience questions about buying and selling technology companies at Microconf Denver in 2023.
- The brokers have participated in many exits from both sides, helping sellers and buyers.
- They break down businesses into four pillars: risk, growth opportunity, transferability, and documentation.
- An attendee shares their situation of running a traditional agency business and building a SaaS platform for interpretation jobs.
- They have been contacted by a language school interested in working with them and potentially taking over the business in the future.
- The attendee is considering whether to proceed with a small investment from the language school and eventually be acquired.
- The brokers provide initial feedback and suggest evaluating the terms of the partnership before making a decision.
Considerations for Staying Independent or Accepting Investment
07:43 - 15:06
- When considering whether to stay independent or accept a minority investment, it depends on the specific details and valuation.
- Understanding the potential partner's intentions and deal structure is crucial before making a decision.
- Strategic partnerships can be distracting without clear terms or an informal letter of intent.
- Negotiating who gets unearned revenue in SaaS business sales depends on factors like contract value and customer distribution.
- Monthly plans are generally preferred over lifetime plans when selling a SaaS business.
- The balance between market size and tech quality varies depending on the goal of becoming a billion-dollar company.
Tech Stack, Documentation, and Financials
14:38 - 21:47
- The importance of the tech stack depends on the size and goals of the company
- In a stock sale, tech considerations are more important as they carry forward to the new owner
- Dependencies on third parties can impact the value of a business
- Documentation such as contracts, terms of service, and accounting systems like QuickBooks are important for due diligence
- Financial reports and custom metrics may be required for due diligence
- Using tools like SaaS Grid can help build out key metrics for contracts
- Clean books become more important as the business grows
- Patents have value if they are utilized to generate revenue and create a competitive advantage
Factors Affecting Business Value and Sales Process
21:19 - 28:33
- Having a patent adds value to a business if it is utilized and generates revenue.
- Patents can create a competitive advantage and reduce risk for a business.
- However, it is rare for someone to offer a large sum of money solely based on a patent.
- Multi-year contracts can increase the value of a business, especially in industries with government contracts.
- Clean documentation and financials are crucial when selling a business as an asset sale or stock sale.
- Revenue growth is more important than reaching specific revenue milestones like $1 million ARR.
- Private equity buyers typically look for businesses with around $1 million in profit (SD or EBITDA).
- The growth trajectory of the business is often more important than its revenue number.
- A strong growth rate is generally considered to be around 30-40% year-to-year or higher.
- Buyers at different revenue levels have different preferences and competition levels affect multiples.
Acquisition Thresholds, Deal Structures, and Exit Paths
28:06 - 31:57
- Buyers have thresholds for acquisitions based on the size of the business
- Private equity firms require a sufficient size to cover fixed costs
- Multiples increase at different revenue levels (e.g. 1 million, 2 million, 5 million)
- Situational factors like trends and churn impact the value of a business
- Choosing between LLC and C Corp depends on exit path and buyer preferences
- C Corp with QSBS can increase the material value of the deal
- Asset sales are more common and advantageous for smaller deals
- Stock sales are more beneficial for larger companies ($30-50 million)
- Micro private equity may be worth considering for mid-level businesses