💣 Issue #3 - DD Hacks & B2B Acquisition Methods
Welcome back! As we step into the 3rd issue, you’ll notice we’ve relabeled the sections and broadened the scope of the first section beyond deal tear-downs to better serve those interested in the acquisition / investing aspects of Micro SaaS.
The newsletter now looks a little something like this (links will jump you to the respective section):
🎯 ACQUIRE — Deal Tear Downs, Due Diligence Tactics / Hacks, Template Investor Financial Models, etc.
⚙️ OPERATE — Template SaaS Financial Models, Go-to-Market (GTM) Playbooks & Frameworks, Tools and Tactics, etc.
🧐 MUSINGS - Learning Lessons, Observations, Wins & Losses
Also, per some (always appreciated) feedback re optimal timing - after this issue, you can expect the newsletter to hit your inbox every other Sunday morning.
Go get ‘em this week.
🎯 ACQUIRE
// Due Diligence Learning & Tactics
Due Diligence (DD) is a beast of a topic. In the context of Micro SaaS, DD is typically conducted over a matter of weeks (vs months) with little / no budget for 3rd party support (e.g. Quality of Earnings) - thus, the exercise rewards resourcefulness and a clear sense of priority.
Here is a very robust collection of Due Diligence Checklists to give you a better sense of how diligence is organized, the topics covered, etc., though before building your exhaustive checklist, these macro questions should generally direct your efforts:
What are the most important assumptions in my thesis (aka game plan to create value) and what information will help me build/lose confidence in executing on those assumptions?
What potential unforeseen curveballs (aka landmines) could blow this whole thing up, and what info will help me build/lose confidence here?
Where / how can I gather critical information on my own / the cheap?
If we take the traditional punch list route, here is some OG wisdom (most of which was made famous via HBR’s Guide to Buying a Small Business) for a jump start:
Is the business enduringly profitable? — look for stable gross and net profit margin MoM. Beware of seasonality and other outliers in revenues and/or costs in a given period
Does the business have a strong reputation? — Capterra and G2 are your best friend…
Is there key customer / employee / partner risk? — If a single customer(s) accounts for 20%+ of total revenue (aka customer concentration), you’d be a sad puppy if they churn right after you acquire the business
“Follow a dollar through the business” — This is from Walker Deibel’s, Buy Then Build, and one of the simplest methods I’ve encountered for understanding a business without falling down a rabbit hole
In the spirit of being resourceful and maintaining priority, here are a few tactics that have helped me a lot:
“Put first things first” — I know this sounds obvious, but start with the most mission-critical elements, and only invest more time in the diligence process as you build conviction in the deal
Buy the product! — Most SaaS products are billed on a monthly basis, priced under $250 / mth. Nothing speaks to the customer experience…like the customer experience. This is likely the most insight per dollar you’ll find during DD.
Seller replacement costs — many sellers boast about how little time they spend on managing the business and they’ll ‘add-back’ their salary on the P&L to convey Seller’s Discretionary Earnings (SDE), which can muddy your view on margins and status quo operational costs. If a Seller is writing code or responding to service tickets, you need to consider the cost to replace those contributions and how that impacts your valuation. As a quick example, if the Seller is doing $50k of development work per year and the business boasts $150k of net income, that number is closer to $100k after you account for the unstated $50k in costs. This change has an exponential effect on business value, given the use of multiples. To continue with this example, if we were using a 3x EBITDA multiple, this business just went from $450k ($150 net income or EBITDA*3) to $300k ($100k net income or EBITDA*3)
⚙️ OPERATE
RESOURCE: Frameworks That Govern B2B Marketing & Sales
APPLICATION: Consider your most successful customer acquisitions and see if you can map that buyer profile / set of behaviors and conditions to one of the methodologies described below. Once clear on the methodology, audit your sales process and see if there are optimizations available…
“Transactional Sales (TRX): A price/shipment-based sales methodology where the client prefers to have as little human involvement (preferably none) as possible. Think of buying something on Amazon. Price, simplicity, and speed of purchase are key decision factors.
Solution Sales: The client understands the problem very well and identified two to three options. The client is looking for a seller to answer a few pointed questions, one of which can be the decisive differences over competitors. When a company invested in a unique feature, feature selling is a must!
Consultative Sales: The client realizes they have a problem but does not understand the full impact the problem has on the business. Through a series of diagnostic questions, the seller establishes value across the organization and develops a sense of urgency to free up more budget and/or prioritize the budget.
Strategic Sales: Client does not realize they have a problem, and a seller – a true expert in this field – provokes a senior executive by reframing the problem or highlighting an immediate opportunity. The key is to get an executive buy-in early on, and to work with the client to identify the impact it can have on their business.
Product Led Growth [Ref. 12]: This is a B2C like methodology that can be used with a high-quality product and/or service experience in B2B. It encourages customers to contribute to marketing the product by using their own social networks to share and amplify the product. A basic example of this is giving a free month of service to an existing user if two of their friends sign up as well. The Product Led Growth (“PLG”) methodology applies to a business that is based on a high amount of deals per month with a low contract value. Key to this methodology is to have a high-quality product, and it further helps to have a very unique feature. Products such as Slack, Zoom, and recently Superhuman, are experiencing the benefits of this methodology. The downside is that this requires the momentum of 100,000s of users which doesn’t apply to most B2B applications and platforms.”
🧐 Musings
Who is on your personal board of directors?
I thought this was an amazing question and concept when I stumbled upon it many years ago. As we’ve all heard, you’re the average of the few individuals you spend the most time with and I was pretty disciplined re maintaining relationships with ~5 individuals whom I admired for their level of success, their intellect, etc.
Upon jumping into the micro SaaS acquisition game full-time, I renewed my enthusiasm for this concept.
If there was a table with 5 seats around it, what domains of expertise would be ideal for Skaling Ventures? Perhaps M&A Legal Advisory, Product Management, etc.
From there, you can seek out the best and brightest in each domain / craft / field and simply start consuming their content.
Study the masters. Maybe build a relationship with them over time, but that’s not totally necessary to ‘fill the seat’.
Perhaps identifying the seat is damn near as valuable as filling it…