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Building a Portfolio of SaaS Businesses…the right way
Kevin started his online venture with a $300 content site about Tattoos. Today he runs a portfolio of SaaS businesses on behalf of investors and himself. In this interview Kevin shares insights on how to build a portfolio business and set it up to exit one or more of the assets cleanly.
He also shares his process for making investment decisions and comparing one opportunity against another. He does what he can to not play favorites because he likes the owner or the business, and let’s the stats lead the way to investment decisions.
If you want to be an investor and not a buyer, Kevin’s firm delivers 15-20% return on investment to investors!
- Learn how to set up a portfolio with a clean exit on any of the assets if desired.
- Discover why Kevin buys SaaS businesses over any other.
- Managing workload on each business is handled with a proven, trackable system
- Hear Kevin’s thoughts on his acquisition model and process.
- The sites he likes the most are not always the best investments
- You can earn 15-20% ROI investing in Webfolio Management
- Kevin coaches others on building and managing SaaS companies.
Mark: Hi Joe how are you?
Joe: Doing great Mark, how about yourself?
Mark: I’m doing well. It’s been really busy at Quiet Light the past few weeks. This has been one of the busiest first quarters I can remember.
Joe: I know, good problems, good problems.
Mark: Definitely good problems. So you talked to Kevin Petersen, you and I both know Kevin from Rhodium group, and if people aren’t familiar with Rhodium, feel free to reach out to us. It’s really an awesome group of entrepreneurs who are interested in the buying and selling process of online businesses. He gave a presentation a few years ago at Rhodium, is that right?
Joe: He did. Kevin and I got reconnected last October at Rhodium and we talked about his business now which is building a portfolio of SaaS companies. It’s called WebFolio Management and he takes other people’s money and his own money and buy SaaS companies and manages them, for them, and instead of people investing their own money and managing the business themselves. It’s a good portfolio for people to look at investing. And some of his processes can be applied to anyone buying multiple businesses or a single business. And some of them are really, really critical. One allows you to measure different businesses against each other without emotions, you know, fall in love with the product if you look at the statistics. There’ll be a link in the show notes available to a sample template tool for that, and the other thing he does which is really critical Mark is clean financials for each individual SaaS business that they purchase. They segment them out; they have work orders for each. Well anytime he wants to exit, it’s cleaned, and he talks in detail about how to do that which is really, really important.
Mark: Awesome! This idea of building a portfolio business is something I hear buyers ask about frequently. A lot of people want to know how to go about doing that, what are not as feasible, and I think you and I have only seen this really pop up last two or three years where we’re seeing more and more of this portfolio businesses like Kevin’s pop up.
Joe: Yeah I’ve seen it a few times and the once that I’ve seen, generally, are really hard to exit one of the assets of the portfolio because everything is [inaudible 0:02:50], and that’s challenge right? You’ll really going to sell it all or you’re going to try to sell one asset and it’s really hard on the books when you do that. You know that one of the five pillars of maximum value is clean financials. We got it five now, right planning is the fifth one.
Mark: Yeah you keep putting that one in, I’m not sure if I’m adopting it fully but we’ll go with it.
Joe: Come on you make more money when you’d be playing your exit and when you wake up and say “Damn..”
Mark: It’s totally important; I’m just giving you a grief.
Joe: I know, my job is to take grief from you now.
Mark: I’m being a jackass.
Joe: There you go, that’s two shows in a row. Alright so, it’s a great process that he has and it’s really important that if you’re going to build a portfolio site is that you follow this because it allows you to say “Okay I’m done with this so let’s move on”, get some capital with very few headaches. So, I really like it a lot.
Mark: Awesome! Let’s get into it.
Joe: Kevin Petersen, welcome to the Quiet Light Podcast! How are you?
Kevin: Thanks Joe! Good to be here.
Joe: Good to see you man! Hey listen, I mentioned it before but we’ve got into this habit. We don’t do fancy introductions. We love people like you, experts in their field to tell us your background instead of us telling folks all about you and reading from LinkedIn profile. So, for those seeing audience, can you give everybody a little bit of background on yourself, what your history’s like, and what you do today.
Kevin: Sure, so I’m operating WebFolio Management, and it’s a private equity firm that is buying small software companies. When I say small software companies it’s kind of a fancy of just saying SaaS. We’re working with developers around the world toward bringing new products to market and you know, once they’re past the point of proof of concept then that’s the time where we get involved. My background is marketing. I’ve been doing marketing for 25 years and I launched WebFolio about four year ago, when I discovered this thriving secondary market for all my businesses.
Joe: Excellent! So for WebFolio Management, do you have a broader thesis or plan on terms of your approach to buying these businesses?
Kevin: Yes, so four year ago, when I discovered this marketplace, I was willing to look at just about anything. There was a period of time that where I had Shiny Penny Syndrome and I was looking at everything. [inaudible 0:05:10] ecom, some Saas, but it was really an opportunity for me to look at several different business bottles, kind of gain an understanding of how traffic flows to your business, how money flows to your business, what are the leverage that you can pull to influence the directional business and growth. Then over the past three years, we really refined our model to really hone you on just SaaS. There were pros and cons for each type of business or each business model. SaaS is right for us because we’re placing investor money and it’s a lot easier to build the story or tell a story rather than the SaaS business that has recurring revenue and some stable history of earning. SaaS businesses are typically businesses that you can model. You can model the path, you can model the feature, you can execute a plan or build a plan around growth and execute a plan based on what you know about the audience profile and how traffic and earnings are falling to the business. You can do that in such a way that, it’s a little more challenging on an ecommerce business or content site. So, I have nothing against ecommerce or content sites, I would feel comfortable putting my own money into your content site but it’s a little more.. The risk profile is a little different for investors.
Joe: Well, that’s good that you picked your path and you’re sticking to it, so there’s plenty of investors to buy SaaS products. It’s a great niche. I know that when I list the SaaS business, it’s the multiples always higher and it’s B2B recurring revenues and the buyers come out of the wood work, so it’s a good space to be in. Can you tell those folks listening, how you get started with this? I know you say you started four years ago but did you put your own money in? Did you have somebody approach you and say “Hey look, I love what you do, I want to give you a whole bunch of money”. How did you get started? Did somebody else want to try to get involved?
Kevin: Yes, so WebFolio started over a lunch conversation with a colleague of mine. Dell Entrepreneur, it’s not uncommon for me to meet with the Dell Entrepreneurs on a pretty regular basis and talk about different ideas that we have. It’s an opportunity for us to poke holes in each other’s ideas. There’s never shortage of ideas in the world, not all of them are worth executing. Even there’s worth executing not all of those are easy to execute. [inaudible 0:07:44] certainly consideration. So four years ago I was having lunch with a colleague and we’re talking about building a model where we were, what we’re proposing to do is launch basically an appraisal company for web based businesses. That time we really didn’t have much of like most people, we didn’t really have any awareness of the space. We didn’t realize that there was a thriving secondary market for web based businesses. It wasn’t until we have this lunch and we kick our own ideas around, you know, how could we appraise, do appraisals for online businesses and help sellers prep for sale. We were already talking a lot of details about brokerage per se, but we’re talking about just the appraisal piece. Appraising businesses and coaching sellers, and once we started researching that concept, that’s when we stumbled upon this space and realized that, wow these transactions are occurring all the time. There’s a community that’s looking at these businesses and the deals, and funding the deals, and brokering the deals. So that’s how we started. The very first website that I purchased for myself was actually a tattoo blog that I bought on Flippa. Their business was starting out for about 300 dollars a month, pure AdSense revenue.
Joe: They’re expensive.
Kevin: That’s right, I paid about 900 dollars for it, so I was excited. It was based for like 3 months.
Joe: That’s a great multiple
Kevin: Yeah, exactly.
Joe: How long before it started stop getting traffic and went out of the business?
Kevin: Well it was quite the opposite. So the thing was, I looked at that business and I was like “Hey! I’d be willing to invest it to my education, I wanted to start somewhere.” I don’t have any tattoos but I liked the blog. The blog was actually pretty cool. When I took it over, the first thing I did was, I hired a developer to make it mobile friendly. It sounds strange today but just four years ago, most websites were not mobile friendly.
Kevin: That transition, that evolution has really only occurred within the past couple of years. For now, it’s the norm, it’s a get it. But just four or five years ago, that was a little strange. I paid the developer 300 dollars to make it mobile friendly, make some changes to the site, and then I started writing the blogs myself even though I don’t have any tattoos. But I understood, and partly based on my marketing background, I understood the relevance is everything when you’re driving traffic. So I started writing blog post in tying tattoo designs to holidays. So like if Halloween was coming up, I’d write a “Cheers to history of Halloween! Here are a bunch of Halloween related tattoos!” Traffic shot up and revenue went up. At this site that I had invested a total of 1200 dollars, it was quickly earning about 750 dollars a month in AdSense revenue.
Joe: Wow, fantastic!
Kevin: Yeah, for me the light when on and I was like “Hey, if I can do that at one site, what if I add ten, or what if I add a hundred? I should buy them all!” Then what happens overtime, and I know a lot of people, a lot of my colleague used to experience this as well where overtime you’ll realize that actually running a 10,000 dollar site is not ten times harder than running a 1,000 dollar site.
Joe: That’s correct.
Kevin: And running a million dollar site is not..
Joe: It’s often, you hear, because you get the sytems and procedures in place, and it’s less work often.
Kevin: That’s exactly right, so for the past four years I’ve been stair stepping WebFolio. The acquisition targets have been getting larger and larger, and it’s all about efficiency of scale. Just like you said, now we’re taking another step forward where we’re realizing that there’s actually a threshold where businesses are throwing off enough cash so you could really invest in traditional infrastructure right? Traditional sales and marketing people, tactics, and more runways. You can really have some capex that drives growth.
Joe: So you went from .25 multiple by the way, I did the math on it, when you add in the developer. And now you’re focused on SaaS. Are you comfortable with how many you’ve done from zero to how many in your portfolio now, that you operate?
Kevin: There’s about a dozen.
Joe: About a dozen, okay and that’s not too bad of a growth. That’s manageable over four years I guess that’s a quarter or so.
Kevin: Yeah and this counts some very small, micro business, just like the tattoo blog that I purchased in the early days. There are some that never earned a dime or only earned a dime. We’ve been stair stepping the business and narrowing our focus.
Joe: And your focus is now SaaS, you’ve gone from tattoos to softwares, to sources, with the dates, it’s an interesting transition. Tell me about the remote staff or in house staff. You’ve got a dozen businesses, do you got the same people all working on it or how’s it working?
Kevin: Yes so it’s a little bit of a thrive. There’s some growth through acquisition where we retained talent where it makes sense to do so and we’re attaining some mind share. We tried to attain some resident experts wherever possible, but we also, at the same time, centralize as much as we can as well. We’ve got a dev team in the Ukraine, we’ve got service people in the Philippines, and we have sales staff in Canada. Like I said, I’ve been doing marketing for 20 somewhat years and my marketing team here in the US is still heavy lifting on the marketing site.
Joe: Okay, for as the process of buying something, what do you do when you look at a site? What is your process in terms of betting aside and what kind of deal structure you’re looking at? You’ve bought many now, [inaudible 0:13:58]
Kevin: That’s an interesting piece that I really wanted to share which is, I’ve had a few coaching clients over the years. One of the areas that I’ve really focused on with new people on the space, who are just getting started, or maybe they bought one or two. I’ve had one or two acquisitions and they’re still kind of finding their direction. One of the things that I really focused on with people is, you have to have a very clearly defined direction or very clearly defined criteria for what makes a good deal for you. Because especially for entrepreneurs, you know we all have Shiny Penny Syndrome with some extent, right? It’s very easy to look at every deal that comes through is a great deal and it’s not just the case right? Not even good deals, not every good deal is right for everyone right?
Joe: So what’s the first thing you look at? A lot of folks will just say, the first thing I look at is multiple, which I think is a mistake in many ways. What’s the first thing you look at? Obviously SaaS, second thing I guess?
Kevin: Yes, we actually have an acquisition scoring model, and I would encourage everybody to do this even if you’re building an acquisition scoring model that is based on just like five criteria, or eight criteria or something. Ours is like 20 or 23 criteria that we run every acquisition target through. Part of that process is taking emotion out of it, applying some metrics to it, applying a pretty little science behind it so that we can kind of get a way of ourselves, so we are our own worst enemy, right? The idea is that when we run something through the scoring model, it’s going to produce a score for that acquisition target and it’s a way for us to assess one opportunity against another. By applying some methodology there, we do occasionally surprise ourselves, where we’ll say, wow that’s one opportunity that we really love emotionally. It’s like scoring as well; it’s something else that we walked away from. Why is that? Like it’s back to just defining criteria for what you’re looking for and what you’re comfortable with. First, the conversations starts at B2B SaaS. So is it B2B SaaS? We will look at some B2B B2C blend or look at some SaaS service blend. The conversations always starts with, is it B2B SaaS, is there a recurring revenue component, has it been in business for at least x number of months or years, right? Then from there we look at other things like, what does the marketplace look like, are there lot of competitors, what’s the barrier to entry for new competitors. I’m not going to give you all the details of our scoring model but anybody can do this, right? Anybody who’s looking at buying businesses can produce at least, even if you’re just doing on an excel sheet, and you have seven criteria that are really important to you. Figure out what the most important criteria are, and document it, and run every single opportunity against that model to say, you might, “Do I just love it or is it actually right for me?”. Because there’s a difference. For me, even today, I look at businesses all the time or I really love the business model. And I have a lot of respect for the founders or the sellers. I’m like “Wow that’s a great idea!”, I can see why that is doing well, I can see why that’s making money. I can see why that’s a good opportunity for someone. It’s not right for me but it’s a good model, it’s a good business.
Joe: Okay thanks. Getting emotions out of the way use math and logics, your scoring model and the right ones will rise to the surface. How many of you look at on the monthly or quarterly basis?
Kevin: I get emails from brokers and developers in our network almost every day, and I probably look at two or three per week that are interesting to some extent. We probably get two or three per month and really look under the hood on maybe one or two a month in total.
Joe: So not many of them, probably 30 or 40 a year. Tell me about, what let you building a portfolio of businesses here, really, at some point or another, every time I see somebody that does what you’re doing, at some point or another I think, okay it this one is no longer an exact fit for our model or let’s make sure enough that we want to take it off the table and get some equity, get some cash for it. Do you set up separate LLC’s or corporations for each purchase that you make? Or do you co-mingle the funds?
Kevin: Depends on the situation. When I started four years ago, my vision was, there would be a separate LLC for each fund and there would be, maybe two, three, or four assets in each fund. What I’m finding overtime is that we really are spending off at separate LLC for each entity. Especially because our businesses are getting bigger. If you got three businesses, that have, related space or i a single vertical that are relatively small, then putting them into a single LCC is not that big deal. But at some point if you really want to package things for eventual sale, that’s something else I wrote over the years, the money’s in the exit right?
Joe: It is!
Kevin: If you really want to package things for sale you need to think about to sale on the day of your acquisition. Don’t wait a year or two years, or five years to get your books in order and package it up for sale. You really need to be thinking about the exit on the day that you buy it.
Joe: It’s almost the least fun thing to think about, right? In terms of getting your financials in good shape. But like you’ve said, the money is in the exit, and the better job that you do at managing that separate LLC, the easier it’s going to be upon the exit. Because when you go to a broker, and say “Give me a profit loss statement for the last 36 months for the monthly view [inaudible 0:20:18] sell. Easy to run, if you co-mingle with others and you’re only selling one, for everybody will think, it’s really difficult to separate them out, because of your co-mingling expenses, and staff and things at that nature. And the buyers lose some confidence in the accuracy, the financials and that’ll pull the [inaudible 0:20:38] down because it brings the risk.
Kevin: Yeah that’s right, another logistical piece that allowed to that is, we call that as our W statement or work documents. When we have resources on our team that are managing projects for multiple assets, there’s no budget that gets approved and invoices don’t get paid until there’s a statement or work document for that project for that asset. So that way, we’ve got a paper trail on expenses that tie a single worker’s time to fractional allocation by asset.
Joe: That makes sense. The absolute right way to do it. Basically, you’re having a remote contractor, somebody that might be consistent in working in finding different project. Maybe they’re an employee but they’re billing each B2B SaaS company for the work that they give.
Kevin: Yes that’s exactly right. In large companies, they often referred to those as a glide right? In the accounting world. There really is a glide from one group with an organization to another or one entity. If you got a huge clock and [inaudible 0:22:00] that has multiple brands, they may glide funds back and forth between entities that are wholey owned by one umbrella. Again, I know I’m getting into the weeds a little bit but, it just makes sense when you add them in. For me, at the end of the day, becomes down to sort of defending those expenses at time of sale, right? So that when somebody’s looking and are like, “Hey this one person is being paid for seven different projects. How does that work?” And somebody who really digs deep then one can say “Here are the projects they worked on”. And we approve the hours and the project and forecast our ROI or KPI’s or whatever before the work began, and “this is what we did, and this is what happened”.
Joe: And every seller should expect the buyer to dig deep. Whether it’s half a million, a million, two million, five million, they’ve worked hard for that money. They may hire somebody like Centurica to do the due diligence.
Kevin: Yeah exactly. I do.
Joe: A lot of clients do think it’s a smart choice. I love the scoring model, fantastic. Great advise. Statement of work when you got multiple people working on different projects or one person working on multiple projects. And the separate LLC’s more important than anything else guys. Separate LLC’s for each entity within the portfolio. Let’s talk about deal structure because everybody’s probably wondering how you do this. When you make an offer on something, talk fictitious numbers, what is it’s typical deal structure, if there is such a thing with you.
Kevin: There are probably a few typical scenarios and to me it always starts with the seller’s goal. It’s very important to understand what the seller is trying to get out of the deal before you even start the conversation. If you understand their motivation then you can craft a winning LOI because you are answering their pain points. It doesn’t mean that you are giving up, you know, you’re not giving up the farm, you don’t want to shoot yourself on the foot on the foot right? If you at least know that you are answering some of the seller’s key objectives, it’s a lot easier to get a winning bet in. So what I mean by that is like if there are multiple partners on the seller’s side, you need to understand like who’s looking for cash? Who just wants out? Who might want to stay with the business? Is there anyone who wants to stay on and retain [inaudible 0:24:31] you need to understand the dynamic there as well. Every seller is different, every business is different, there are some sellers where they’re like, oh man, I can carry a [inaudible 0:24:45] or I can’t carry it out, I need the cash or I don’t need the cash. This is super urgent or it’s not so urgent right? There are some sellers who are emotionally attached to their businesses, there are others who are completely not [inaudible 0:24:59] it’s just a commodity for them, they’re like “hey, i have this idea..” I’ve heard a story, this is a real example, I can’t tell you the business but, real example was a seller said, “You know, I had this idea and I’m a developer, so I started this thing and my goal is if I could get to 6,000 dollars a month in income I would be thrilled. Then 12 months later I had 6,000 a month in income and I couldn’t believe it! The business is awesome, I never expected it to go this far, I also recognized I’m not the guy to take it to the next step so I’m ready to sell it!”
Joe: It really happens and for those that haven’t made those types of purchases, those people are out there.
Joe: If not their skill set and they’re not enjoying it anymore which is strange right? “My goal is 6,000 a month now I’m making 60, you know what, and it’s no fun. I want out.” All the time. You trying to really hone in on what the seller’s goals are, what their pain points are, and seeing if you can meet those pain points. I would imagine that just based upon our conversations here, and meeting a lot at Rhodium a couple of times, you do the best that you can to make a good impression and have them like you and feel good about you and trust you as well.
Kevin: Yeah, that actually matters. That matters more than most buyers realize. I have won a couple deals where the sellers took our offer over a higher priced offer because, not because they liked me, probably a piece of that but it’s more than that. One lead advantage is that we have them pre-structured. It’s easy for me to sell to a seller based on our infrastructure, and what I mean about that is, we can share a vision for growth at the time of the seller call, and that actually carries a lot of weight. I hadn’t really articulated that before but that’s actually an important point for buyers in your network. If you’ve actually done a little bit of homework about how you would grow that grand, what are you going to do to take it to the next level? If you can articulate that during the seller call, you’re much more likely to get picked if there are multiple offers. And the reason is sellers whether they’re really emotionally attached to their brand or not, they all want to see the brand they will post the sale. I didn’t say all but there are few rare exceptions where the seller is like, “I just want out and I just want to be done with it, I don’t care what happens to it” but in my experience it’s unusual. Most sellers, even though they’re selling, they want to see the brand they will post sale. You can go into that seller call, you need to be a little careful with this, you don’t want to give them a lot of new ideas and talk them into keeping their business and executing your plan right? But if you can at least go into the seller call and say “hey, I really love whatever you’ve done so far, it’s really cool. Because of my infrastructure and my background and some of the people on my team, we can take it to the next level. We have some ideas, and here’s one of the ideas that we would.. And have you ever thought about this, have you ever tried that..” The more you can have that conversation on the seller call, the more likely you are to make an impression on the seller that says “hey these guys actually care about the brand, it’s not just the transaction and they have a vision for where to take it next, they could just come on execution. These guys have some level of infrastructure, and experience, and resources that I don’t have and they can take it to the next level and I want to see that happen.”
Joe: Yeah I find it’s critically important when you have that type of conversation with the seller because even though they’re selling, even though they’re emotionally done and ready to move on to their next adventure, they want to look back and point to and say “you know what, I sold that. Look how well it’s doing.” This might be stating the obvious but I’m going to ask you, how important is your LinkedIn profile? How important is the WebFolio Management website to these calls? Because people, I’ll tell you what, I always share that detail for a conference call, the seller gets to look at the LinkedIn profile things are that [inaudible 0:29:17] Do you find people do some research on you prior to the call with them as well.
Kevin: They absolutely do. The surprising piece, the LinkedIn piece doesn’t really surprise me, and I’ll just be fully transparent. Our WebFoliio site, it has taken a lot of time and thought to get it to where it is today, it was kind of painful determining what the right messaging is for our own website. That’s sounds ridiculous because we’re buying businesses but what you’re saying is absolutely true that it’s actually critically important to have your profile online, but wherever that lives, conveying the message that you want to convey.
Joe: That wraps up your initial thesis with the plan, you’re putting a message out there, and you want to look at those details as well. I’ve actually had guys coming to me that are selling their businesses and when the email comes through your Gmail sometimes it has the photo there where they’re at the beach topless with beer in their hand, and you’re selling a multi-million dollar business. I mean, good for them right? Most people want to live their lifestyle but when you’re selling a multi-million dollar business, put a shirt on.
Kevin: Yes I’ve been surprised at how many people I have met with who have said they’ve listened at Podcasts that I’ve been on. That has been the one surprise for me. I’m not surprised when someone said that they’ve seen my LinkedIn profile, or they actually sent me a LinkedIn request before our seller call but I’ve been surprised how many calls I’ve been on where they’re like “oh yeah I heard you on this Podcast two years ago or three years ago.” I just was on a call two days ago, somebody said they have heard the Podcast from four years ago. I was like wow!
Joe: People listen to Podcast [inaudible 0:31:05] Oh hey listen, we’ve got the idea of having a thesis and a plan, rocking that backup in your personal LinkedIn profile, things with that nature. Deal structure, really, there is a, depending upon the deal, focus on what the pain points are for the seller. Be likeable and you’re going to get a better deal, I think you’re right. I’ve seen people get better deals because the seller likes them more. They connected with them and they said, taking care of the customers and the remote staff are my top priority. I’ve seen somebody beaded all cash deals at the same price in that scenario where the seller took up several hundred thousand dollars seller notes, over an all cash deal at the same full cash price. And then, a lot of details in there. The one thing that we didn’t talk about much and we’re kind of running short on time but I want to touch on it, you mentioned Chris at Centurica, where you said you used them, you even say Chris Yates. So when you do due diligence, you’ve probably got your own team but you also hired out two guys, Chris Yates at Centurica for their due diligence process?
Kevin: Yeah we absolutely do and technically we bring Centurica in after we’ve done our own due diligence. When we reached the point when were pretty comfortable with what we’ve seen, and typically after were passed LOI’s, so for us it’s like we do our own assessment and we run a business through our scoring model, we determine if it’s something we really want to pursue then we get LOI, and then we do some high level due diligence. Then before we get into a deep dive, that’s when I used to bring in Centurica to take a look at it, and what we’re looking for from Centurica for us anyway is we’re looking to them to find things that we might have missed. There’s another dynamic there too since they are a third party, a lot of times sellers are more likely to open up to a third party and do screen shares on their bank accounts in safe way, than they would with the direct buyer. So having a third party actually makes a difference, and so we bring them in a dept point to take a look in and then will forward back to us to say, you need to see in the reports. I’m sure a lot of your listeners have seen their reports but, they send their report back and then from there you can kind of pick through and say, they caught this, we also caught that and we’re not that concerned about it. Although they caught this and we didn’t catch that, there’s something we need to follow up the seller on and see if that’s a thing right? Is that a deal breaker or not. That’s what it’s all about right? You’re looking for the deal breakers.
Joe: I think that’s a great idea to use. I don’t care if it’s an experienced buyer or novice buyer; I want them all to use some of my crust because it gives you that second set of eyes. And the reports, for anybody, for any seller, don’t be afraid of them. Because generally they are going to be ugly. But what it does, I’ve never had a deal fall apart because of Centurica, third party review. It might have fallen apart [inaudible 0:34:12] together but not because of that. What the reports really do, I think for buyers, is also; paint the picture of what’s wrong with the business, which in turn paints the picture for past or growth when you fix them.
Kevin: Yes, that’s right. So for us to bringing in, you know, we’re pulling investor capitals so I wouldn’t execute a deal without getting a third party review because I need to be able to go to my investors and say “hey it’s not just us thinking this is a good idea, here’s a third party report that found X Y and Z”. So for us it’s just part of the process when you check a box.
Joe: So real quickly, before you wrap up investor money, are you taking money from investors? From anybody listening that may not have the [inaudible 0:34:56] buy a 300,000 or 400,000 dollars site, but may have 25,000 50,000 or 100,000 dollars laying around, are you taking investors like that to build a bigger portfolio?
Kevin: Yes we are. There’s an interesting dynamic there too which is, it appears that all of the coaching clients I’ve had over the years have ended up being investors like, they contracted me to do some coaching for them to teach them about this space, and then once we’re at session six they’re like, hey you know what there’s a lot more to this than I thought there was, not just invest with you and not buy a site on my own because what I’ve learned from this coaching process is that, I don’t actually want to operate these businesses. I just want to invest, I want a passive income, I want to be in the space, but I’m not prepared to run one of these full time.
Joe: What kind of return on investment is someone earning when they invest with you?
Kevin: Typically, I’m just going to give some round numbers, it’s in like 15% to 20% annual.
Joe: That’s incredible, really.
Kevin: Yeah it makes sense on B2B SaaS. A lot of these B2B SaaS businesses at the time that we buy them; they’re running between 60% and 75% at margin which is insane. There’s always some seller discretionary that could be applied in there and for us, we’re willing to squeeze margins in order to favor growth, so we do invest in the growth. So I tell investors upfront that with the businesses that were running 72% margin today, we’re not going to be able to maintain that but if we double the topline and the net margin takes a 15% haircut, and to buy that growth to win. The point is, in the B2B SaaS there’s typically some pre-casual there that you can use to grow the business and still deliver very favorable returns.
Joe: We’ll put your contact information in the show notes so that, anybody listening that wants to be an investor you can reach out, maybe for the coaching as well, or any other aspects of it. Any last thoughts, any last advise for anybody that is looking to build a portfolio of online businesses? Don’t do it, just invest instead.
Kevin: Yeah exactly. If you’re going to jump in, be deliberate, take your time, as they say in real estate there’s always another property. And even in real estate, there’s always under review property. Not every deal is the right deal so take your time and find the right one. I’ve said this a million times in the past three years that our brand is deliberate. That’s the word we use to describe how we operate.
Joe: I like it. Kevin, thank you so much for your time today, I appreciate it. I think a lot of folks are going to enjoy this and I’ll see you on October at the next Rhodium event I think, right?
Kevin: Perfect! Yes, excellent. Thanks Joe!
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