When I embarked upon the process of buying a company, I very quickly realized just how many options there are. Business marketplaces like BizBuySell, BizQuest, BusinessBroker.net, Flippa, Empire Flippers, and others offer virtually limitless business categories to choose from. The sheer breadth of options can be overwhelming if you haven’t taken the time to define exactly what kind of company you’re looking for.
For successful acquisition entrepreneurs, a set of investment criteria are essential to the process. You must have a well thought out, specific list of company attributes you’re looking for in a potential acquisition. A thorough list of criteria will help you narrow your search quickly and keep you implicitly organized throughout the process. Of course, the criteria are only as good as your discipline in sticking to them.
Types of companies
BizBuySell has 28 top-level categories for the companies
One of the first decisions you should make is the type of company you want to acquire. Casting too wide a net is not feasible and you’ll quickly find yourself burnt out.
The primary reason I want to buy a business is for freedom, both in how I spend my time and where I spend it. As a result, most businesses would not make good targets! That’s why I focus on internet businesses. If you’d prefer to stay in one place, then you have a much broader set of businesses you could
I could dedicate an entire post to the factors you should consider when picking a business type, but for now, we’ll focus on internet companies only. Specifically, we’ll compare software-as-a-service (SaaS) and e-commerce companies.
Software-as-a-Service (SaaS)
SaaS companies build and license specific software to customers who pay a recurring fee for access. Where traditional software is bought once and installed, SaaS relies on a recurring revenue model to maintain company operations and provide ongoing support.
B2B versus B2C
SaaS companies are typically categorized either as B2B or B2C. As the name implies B2B companies sell to businesses while B2C companies sell to individual consumers. Both models work well, but each has its own idiosyncrasies.
B2C
- Longer sales cycle – Businesses often take a longer time to make a buying decision. There may also be more decision makers involved in the process. Your product is likely one of many solutions the buyer is considering, so your product must have some killer features. Having persistent, patient sales people will make a difference here.
- Greater customer concentration – While a B2B company may have a million or more users, B2C companies typically serve a much smaller group of customers. This is good in that it’s fewer accounts to service but a challenge in that each account requires a higher level of service and comprises a larger percentage of your total customer base.
- More relationship based – In order to keep your smaller number of customers happy, they’ll likely expect a higher standard of service. Your sales team and customer support staff must be highly trained on the features of your product and keenly attuned to the needs of your customer. Remember, losing one customer hits your revenues a lot more when you’ve only got a handful of customers!
B2B
- Mo’ customers, mo’ problems – When your customers are individuals, you’ll likely have a LOT more people using your product. This is both a blessing and a curse. With more customers, no one customer makes up a large portion of your revenue. You can benefit from word of mouth as people who love your product tell their friends about it. More eyeballs on your software means more feedback about how to improve your product. Conversely, more customers also
means more potentially negative reviews and more people to make happy. - Mass marketing – B2B companies can target their marketing and sales efforts with surgical precision since their target customer base is more narrowly defined. B2C companies, however, typically have a much broader appeal and will, therefore, require marketing efforts aimed at a much wider portion of the population. This gets more eyeballs on your product but can make the marketing optimization process a bit more tricky.
- Shorter decision cycle, for both the purchase and cancellation – When a business decides to bring on a software provider, the decision is made slowly and with careful consideration. Businesses are much less likely to unsubscribe, especially if the software is heavily integrated into their business. When an individual is making a $10/month decision to subscribe to your product, the decision is typically a quick one. On the flip-side, if that customer isn’t happy with the service, they’ll also be quick to cancel. High customer churn is a fact of life in B2B businesses, but because you likely have a much higher number of customers and a faster onboarding process, these effects can offset each other.
Margins!
One of the first things you’ll notice looking at SaaS companies is their margins. These things are cash cows! Not so fast.
A well run, lean SaaS company can have net margins in excess of 70%. That said, this is likely a function of the founder wearing many hats. If you are not an engineer, you will likely have to outsource the maintenance and improvement of the product you’re buying. This may involve hiring full time engineers (which is VERY expensive) or contracting a remote team of developers in Poland or the Philippines.
If you’re not an SEO or digital marketing expert, you will probably contract out the marketing of your company. Marketing spend can balloon extremely quickly if you’re not careful. If you’re like me and don’t like sales, you’ll want to bring on a sales guru to find new customers. All of these things will eat into your margin, so you need to know where you’ll need to hire others before making the acquisition.
That said, a SaaS business can still achieve excellent margins if you’re able to manage costs effectively and achieve scale. Easier said than done.
Some assembly required
The main barrier to entry for would-be-SaaS entrepreneurs is the technical skill necessary to run the business. Typically, the seller will have been directly responsible for coding the product. They’ll know it down to its individual lines of code.
As an outsider, you’ll have to learn the code base to an extreme degree in order to hit the ground running. Accordingly, if you do not have a rigorous technical background in engineering or software development, you’ll likely find yourself at the bottom of a VERY steep learning curve.
There are certainly ways to expedite your learning process. Partner with someone who is a trained software engineer. Hire an outsourced team of coders from the Philippines or elsewhere to manage the code base. This approach certainly can work, but I wouldn’t recommend going that route with your first company or if you’ve never worked with your outsourced team before. There’s simply too much at stake.
E-Commerce
E-commerce companies sell a selection of physical or digital products via online (and possibly physical) sales channels. They may be resellers distributing a manufacturer’s products or operate their own brand.
Product sourcing
E-commerce companies need to have products to sell. It’s the owner’s responsibility to determine which products to sell and how to source them. This could mean locating manufacturers half way around the world.
The product sourcing and development process can be an arduous one. You’ve got to come up with product ideas first, then have a prototype made, then place your first order, then market the product, then sell it on your platform of choice.
Your e-commerce company will likely only succeed to the extent it can cultivate its own brand and consistently develop products that consumers want. Simply slapping a logo on a product no one wants or that everyone is already selling isn’t enough to succeed in today’s competitive market.
There are, of course, ways to expedite the process. You can source products on AliExpress, for example, and get Chinese manufactured goods with the click of a button. Of course, anyone can do this. That leads to the next point.
Low barriers to entry
With platforms like Shopify, AliExpress, Oberlo, WooCommerce, Amazon’s Seller Central, and countless others, it’s never been easier to set up a virtual storefront. As a result, there’s been a MASSIVE flood of new entrants to the space. Competition has increased exponentially.
Amazon’s rise
The changing landscape
While competition is ultimately good for the consumer, it’s made scaling an e-commerce business much more difficult. Stories about competitors using shady tactics to win the “buy box” on Amazon abound. Trademark and copyright infringement run rampant if unchecked. Fortunately, Amazon is working to curtail that, but people will always try to find ways to game the system.
Competition has rendered some business models all but obsolete. It used to be like shooting fish in a barrel to sell on Amazon by sourcing products from AliExpress. Now, there are so many people doing that that it’s nearly impossible to make any margin doing so. Many sellers got their start on Amazon using “retail arbitrage” where you scour the clearance racks at your local Wal-Mart or Target and resell the product on Amazon at full retail, pocketing the difference. Again, competition has made this much more difficult.
Today, retailers must cultivate a genuine brand that tells its own story to customers. Sellers must build legitimate, grown up businesses to compete. Ultimately, this makes online retail better, but it also makes it harder to start something from scratch, which is why buying an e-commerce business trumps starting one.
Platform dependence
As I alluded to above, the prevalence of online marketplaces has led more sellers to rely heavily on platform-generated sales. Heavy dependence on one or two sales channels outside their control exposes sellers to extreme platform risk. If Amazon, Google, Facebook, or any of the other platforms change their algorithms, you may find your sales down 70% overnight. For proof, just read this article. Particularly with Amazon FBA businesses, which frequently have more than 90% of their revenues flowing from Amazon, sellers must diligently monitor changes to the platforms and respond switfly.
It’s important to identify businesses that have several active sales channels. Just like in your personal finances, you never want to rely on one source of income.
Verdict
Deciding what kind of company to acquire ultimately comes down to your skillset and the resources available to you. For me, since I am not a professional programmer and I’ve never hired a remote development team, a SaaS company probably doesn’t make all that much sense. E-commerce is more accessible (for everyone, I acknowledge) for someone with my background. The e-commerce model also plays better to my personality. I’m not a salesman – think more COO type than CEO – the idea of long sales cycles is fairly intimidating.
That said, the recurring revenue of a SaaS business is extremely attractive. To the extent I see one with a minimal churn rate, I will pursue it. Finding a development team is something I’ll just bake into the due diligence process. In the absence of such an opportunity, I’ll focus instead on e-commerce businesses and continue to keep you updated as I progress!
Disclaimer: I am not a financial advisor or financial planner. All investments, allocations, investment ideas, and opinions presented in this blog are solely those of the author and should not be construed as investment advice. Please consult a financial professional to get advice tailored to your needs.
