Deven Soni, the Co-Founder of Kingmakers explains how the acquisitions of small-cap business is going now, who can expect to get acquired and what are the major problems associated with it. He also gives a brief overview of the M&A field and gives his opinion on where the market will go.
Deven's LinkedIn: https://www.linkedin.com/in/dsoni/
For those who want to see ideas turning into fundable companies - Student Startup Battle: https://www.eventbrite.com/e/student-startup-battle-tickets-105973058270?aff=ebdssbonlinesearch
Alright, this is fun. Reason. Redo and today's a guest speaker. We have dev and Sony Co, founder and kinks makers and investment fund and accelerator for business buyers and they said that. We'll talk about that.
What kind of companies will get acquired during these funds.
I mean, who can expect to get acquired during that has been and general admin, eight questions because Devon is focused on small cap firms, they should be applicable to our listeners.
So Devon, unless he called by, you giving us some beggar on yourself and on team makers. Sure. Thanks for having me.
I grew up in the San Francisco Bay area and,
ever since I was a little kid,
I kinda was really into finance for some reason,
studied finance and undergrad it and eventually kind of went into investment banking for shove after college.
Help companies like Google and Amazon and Microsoft do and acquire Sophie businesses and really enjoy the side. But I also kind of realized that I wanted to build closer relationship with the businesses.
So eventually moved over to a few roles in private equity,
which is basically acquiring six and more proper,
larger firms as well,
as kind of buying out entire companies sacks for several years in their technology, private equity group.
Over time, I just realized, I think I enjoyed working with smaller businesses. They were a little more dynamic. I think you can develop closer relations with the owners in the North more so than the, you know, the VP of finance or something.
So really decided I kinda want to do something smaller at the same time saw much more sort of value. Since I've always heard about investors, electronic value and small businesses.
So, a lot of times we pay twenty to thirty times revenue for a company, and we're investing in them. And I just felt that was really expensive sort of realizing that small cap side.
Things could be a lot cheaper where you could buy businesses for investment businesses for two or three times profit. So, that really just spoke to me that.
So back in kind of twenty fourteen or so started a private equity fund called wired investors. And what I did was.
By kinda small cap technology businesses so, you know, software as a service advertising, driven media, things like that.
So, usually, we focused on companies that were one to five million dollars in purchase price. Usually sort of half million dollars but, you know, two million dollars in profit.
And between twenty, forty and twenty, eighteen, we bought almost twenty companies, and there's a time so last systems, which I can get into. But kinda about twenty companies had a good amount of success.
And I think since then we realized, as we got really good at finding companies really good at analyzing company's growing them, but what was difficult actually, was actually kinda managing the day to day so many small companies to capture something right?
It's like there's always something going wrong and you spend all I understand that. So we launched makers to kind of almost invert our model where we said, we're really good at finding companies and growing them. So why don't we actually open that up?
Amazon Web services opened up their infrastructure for small businesses to use and that sort of became a business we thought well,
why don't we open up our,
our infrastructure as we launched he makers and we can make it does,
is basically helps people that want to buy businesses actually use the infrastructure of a established private equity firm to do it.
So it's from sourcing deals to due diligence to analyzing additional evaluation to doing the legal or the accounting side. That's kind of all the preclose stuff. And then.
You know, afterwards there's a whole host of how do you take over the business? How do you answer the contracts? How do you, you know, what are the best to grow the business?
So, all the things we open up and, you know, our model is really to invest in companies and take a minority stake where the majority owner or someone wants to run the data business.
They just want some support, almost like a, so like, chief marketing officer box and it's really kinda what can makers started out as we've that we've done, you know, fourteen transactions and we started tracking twenty teams. We've had a good amount of success.
Nice. That's real. Great. And congrats, Congress on that early traction. That's really cool. So, let's start with this with sourcing those deals.
So you said multiple times that you realize that you are good, find those business and I am curious how exactly teach you find them.
So, was it,
you had some bot that was scraping CrunchBase and based on some feud analytics like,
I know monthly growth over the Web site visits,
or something like that you were deciding if you wanted to take a look at,
or was it some different way that you found those companies.
Yeah, there's definitely a lot of kinda automation technology involved where I think what we would really do is start with the theme. So, let's say that we really marketing technology.
Software or pet blogs or something like that. Right just pick a category.
What we would really do is find a couple of businesses in that category figure out some common characteristics in terms of search terms backlinks, things like that that had characteristics of other businesses.
And then we would sort of use various available tools, privately available and we built to really kind of scrape the web two point to find similar businesses.
Then we would sort of reverse engineer and say, look how big are these companies you know, of the size that are relevant to us? What's the traffic? What's the target revenue per visitor and multiply that? And is that revenue? Big enough?
Then, we wouldn't have a team force team that would basically go out and try to find the contact information and details of the owners.
And then we would, we kind of build our own, you know, around our customer relationship management tool, using phone email, social media, all that stuff. So we started being really strategic, and we realized really quickly, no matter what you do.
It's a numbers game, so that the higher the numbers that are, you can do right right? Those sure. And let's get back a little bit more basic. So, what's the definition of a small cap company?
So, what's the range of the revenue that you have to have to qualify even as a small cap. Cal. It's interesting. Because I think definitely she we use is very different from the definition. That sort of like the Bureau of labor probably uses the bureau labor.
Like, if you're looking at America with a small business of business and things, like less than fifty million dollars a year in revenue, or has less than five hundred employees. That's great.
But I think that that notion is from nineteen seventy, when you had these giant companies, mom and pops and nothing in between. Whereas now with technology, you can have very profitable one, five person businesses.
And with the really great margin, so, you know, for us, we kinda look at companies that are sort of ten million dollars in revenue and below.
what's too small for us is something that makes maybe less than five hundred thousand dollars in earnings,
five hundred thousand to maybe five million earnings,
or even dot and one to ten million of revenue is sort of that sweet spot where we spend our time,
but I think if you talk to someone in the government most definitely most.
The government always has a different opinion on that stuff,
but my next question would be,
what happens after the acquisition and by the way,
after this few more questions we'll get to the current situation to the domican,
what happens now in this field but right now I'm curious what happens so,
after you buy this company,
and you're taking minority minorities taking it,
and you give a majority stake to someone who wants to run day to day business operation's right?
What happens then, does the old team stave their work day old team? It's let go or what happens. Absolutely.
So, I would say in the vast majority of businesses, we buy a lot of people stick around the owner.
In most cases, once a fresh start, they're tired of the business they want to go do something else. That's usually why they've agreed to sell. So we'll keep the owner on for a month between one to three months to really transition the business out. In most cases.
We've done this so many times recently, even for, like, two weeks and then there are some tenants pick up the phone if something breaks or we can't find the key to the bathroom or something. Right?
the rest of the team,
a customer support team those people almost always stick around and usually they have a job it up the owners.
It, it doesn't really change the address. We don't show up as later. We don't change too much, right away.
We try to keep things pretty simple and, you know, I think we give everyone a fair shot to, to see if
they're the right fit culturally for our organization and for the right role and the org chart. But most people can stick around, at least, for a long period of time.
And are you buying those companies generally in some specific fields or are you like, generalist acquire?
Well, you know, I think the, the simplest way that we've defined, what we do is we like, bind companies that can be grown your digital marketing.
If you drill down on that, there's two areas that we spend a lot of time on one is still kind of that niche of kind of technology, which was software information products, paid media things like that is one category.
We spend a lot of attention, and the second is very different, but it's, you know, it is residential services so think plumbing, air, conditioning, repair, roofing.
And again, these are things where you generally have an ability to service a client. All you need to do is have them call you or shoot you a note. So what we're really trying to do is optimize that and usually just by doing that. We can have a lot of success with the business. So those are two categories.
We spend most of our time on right now, as we got really get a digital and that's why, we moved onto. Hey, let's try something else I think, over next couple years as we get really good at home services, we may say, let's try something else. Right, right?
Yeah, I mean, open mind this in this field is really cool. So so.
Let's go and talk about how you grow those businesses. So you said that's usually acquired. Those can be grown, basically, through digital marketing and how exactly does it happen.
So, once you record the company, then you put, like, Diana, ten thousand dollars into Google ads, right away or what's the next step? Of course. Yeah.
So, I think one of the things that we learned quickly, really early on is that you don't want to change too much too quickly. Because especially if your team members, you don't know some of these weird things that were there that you thought was a flaw.
That is actually keeping the whole thing stable so we don't change that to accept you quickly. The first thing we usually do is really focus on, you know, conversion, optimization and improvement of the most successful channels they already have.
So, if a company is getting all their traffic from paid Facebook ads, or it could be from Yelp to home services business, let's really try to drill on that channel and make that better. So it could be improving the creative. It could be getting better analytics.
It could be simply it's often just spending more money because when people are already sell the business, they often start under investing in in media. So if we say, hey, look, there's actually an opportunity profitable.
Increase your spend by fifty percent on this channel is already working. Really? Well, that's actually the first thing we do then second thing we do is look at what's the actual kind of right pricing for our products.
Oftentimes again, if customers have people oncoming for a long time, they often haven't and haven't been updating prices properly. So that's an easy one that we all can do.
And then we start looking at new channels and say, look at, can we add a referral program or can we activate existing customers? We start using the mailing list. Can we add any advertising channel? We
partner with the lead generation provider affiliate.
Like, those are all things that we add a little later, but usually we get a lot of success, just been really drilling down into what's working best for syncing. Right right. That does make sense.
And here, I think we've covered all the major basics of how works. So, let's talk about the current virus now what do you see going on in the M, a fields?
What's going on especially in the small cap businesses? Yeah, no, that's a great question.
You know, I think our prediction was when things started hitting the fan in February March, that there's gonna be a lot of people that are really eager to sell their business because they just wanna be out. And I think what actually happened. That sort of happened.
Right and let me let me segment it into two kinds of businesses. Right there's kinds of businesses that.
Did really well, because of covet, right? If you have a janitorial services se masks, your prepper E, commerce groceries, all these categories took off, because there's a whole new world right?
And then there's a whole nother set of categories that just, like, shut down, you know, restaurants, bars, daycares, online tickets, sales, live events. Right? So, it's really funny.
What actually happened is that the companies that have a lot of stuff really quickly, and because of that, there's actually a disconnect often between what the the seller thinks. So this is where you're going really quickly.
You wanna say, hey, you think this is going to go on forever and you want to based on that whereas buyers sort of saying, hey, I want to look at your twenty, nineteen numbers. That's what I want to pay. Right?
So is often a disconnect and because of that, there's some slowness in these transactions because there's a disconnect between buyers and sellers and and value and it's sort of the same thing on the same same story.
But a different chapter with respect to kind of the business that really got slammed and if someone says, oh, I made a million dollars into your team, but I'm making zero revenue right now.
What you're going to tell a buyer is, oh, things are going to come back and be right back to normal you should pay two thousand nineteen and the person who has the money is saying, hey, this is not there's nothing here which, which they buying. Right?
So, again, there's a disconnect on prices so the problem is really price discovery, because it's really hard for people to come to the right price.
So, oftentimes people just kinda frozen and for the first, two, three months, I'm kinda thing just froze. There wasn't a lot of transaction activity.
You know, also the banks that often finances deals were very slow, because they were inundated with patient protection and other programs that they were doing. So they weren't really funding. So, things were pretty slow.
I think, however, as kind of May June, July and August has hit, you know, I think that there's a few things that are happening.
One people are getting more attracted to the returns of owning a business because logical took their money out of the stock market. Because they thought it was gonna crash or and they want to
diversify more. They want to do something more recession resistant.
So they want to buy a business, a second home and want to buy an online business because they can run it anywhere. And they realize that whether I live on the farm than in downtown, San Francisco.
So I think there's more now, there's a lot there's a good amount of demand for buyers to want to buy businesses.
But I think the sellers still have this issue because, you know, one business that froze no one wants to buy until they come back. And the business grew dramatically. They don't want to pay the prices. So there's fewer deals available.
But there's actually kinda more demand to sell. So you actually have a strong business and you're, you're thinking about selling now is actually a pretty good time to be a seller. The one thing I'll add to that is there's a distressed situation.
There's a plumbing company,
and the owner is it the aging and high risk of sort of getting older,
because they're elderly or whatever,
and they need to sell the business those businesses are still for sale and oftentimes,
those are kind of the best values because they just distressed sales in any market distressed or motivated sellers are often like,
I made the money.
I don't want to be income coming out of here. We just want to be done and those are often deals. That can be pretty interesting in in any category. I was a lot heavier adding color to be, right? Yeah.
Distress sales are the most fun and the most profitable usually for the buyer with speaking about buying, and, you know, being a good time for sellers. Right now, what's your advice to founders who are considering the sale right now?
So, let's see small small cap business tech company? No, like ten, fifteen people and the team. What's your advice to them? How can they send out from the crowd of tons and tons of other sellers right now?
And I actually find that, you know, somewhere at least good deal.
Yeah, absolutely I mean, you know, maybe to rephrase that question, I'll say, like, what are, what are buyers looking for today, right? And what can you do to position your company in that way?
So, you know, I think with what buyers are looking for, are companies that have, you know, kind of done, you know, okay. To well really well in this market.
So, if your company is following up equip and trunk, forty percent, not find the time to sort of be wanting to sell, but if you've kinda even stayed stable, you didn't drop five, ten percent of your, in fact, ten percent. That's fantastic.
Because I think obviously, the economy change, so the more you can do to focus on really focused on
kind of revenue and profits right now.
So the more you can do to change your PNL to be as close to those possible. And that means cutting costs that are being used, you know, getting them to the office that no one's in anymore. All these things.
If you can say, hey, Here's my new cost base for the business, you know, getting things. Right? But if people pay five times earnings for a business, and you're paying five thousand dollars a month, extra for software stuff that you don't need, that's like three hundred thousand dollars of value.
You're leaving on the table by spending a lot of money for big business. So really focused on cleaning a p now, and then waiting one to three months to show that you don't really need those costs. That's, I think a really big thing to do.
The second thing is really making sure that your business is.
Can be run without the core founder, especially if that kinda founder is not gonna be sticking with the business.
So, the more responsibility you can give to your general manager, your operations team, your developers so that you're not sitting there working eighty hours a week during the business because people want to buy investments. They don't wanna buy jobs. Right?
And I think that's another thing that the more you, the better the third thing, I think is really just kinda being proactive about thinking about who the right buyers for your business, and then finding the right time and way to reach out to them.
Like, you know, we sold a company a couple of weeks ago, and we sold it directly to a private equity firm, but we just said, hey, here's the kinda business we have. Let's figure out what we just thought we weren't growing anymore to sell. So.
We just kind of identified potential buyers to pull that into their form and, you know, six weeks later, we had a check from them and we sold the business. So don't don't be, like, don't feel the need.
I think in many situations, you know, business brokers can be really, really helpful if you've a complicated situation of, you know, this is your first rodeo, et cetera.
But if it's like a pretty straightforward business,
if it's a technology business that,
a few million dollars or a few hundred thousand dollars in size, and you're,
I would just say, clean it up,
put together a one or two pager without any confidential information and send it to potential buyers usually you might get somebody to think like I said,
it's pretty much a seller's market right now for good businesses, because many of them are not the businesses right now,
Yeah. A lot of them definitely suffered. So, good timing. Next question would be, how do you actually find those buyers? So you said multiple times, like, you reached out to potential buyers and the question is, how do you know that that's a potential buyer.
Yeah, I think I just use Google, right? Like Google, you know, and it's, you know, usually there's two types of transactions that get done here. Right?
One is a financial transaction, which is, I'm making this as an investment right? Because I think this business will make more money than it made last year.
And in those situations,
usually the buyers are private equity firms,
or family offices or individual buyers,
and often even just searching LinkedIn to say,
sell I buy software businesses or solid or semi software company.
And usually these companies will be advertising or, you know, trying to do, like, crazy to find deals that are off market. So it's not gonna take you a lot of work to find a seller. You know, I buy media companies or media companies or whatever.
It is right just like, do searches for things like that, or, you know, private equity, small cap, private equity, or inside your business. And usually you'll find a list of companies. You look at their portfolio.
And if there's something that's kind of similar or adjacent to you, it could be a really good fit. Usually these companies that many many firms have a lot of capital that I need to spend and are always looking at opportunities. Don't be shy to reach out.
Usually, especially for buyers, businesses will get back really quickly and let, you know, really quickly if it's a fit or not. Right?
The model is really similar to search for your investors, so just do the same. So, but just different searches. So we're moving onto the last question here and it's a call to action.
What's the one specific thing that you would like to do? As soon as the episode is over.
Yeah, well, you know, I think one of the things that I do, I, I, you know, we're here because we think that people should really think about buying businesses. It's a great investment. You know, we think that there's a lot of great businesses out there that are being run by people that aren't in love with them and aren't growing them.
So, I think, you know, one thing you can certainly do is just really go to kind of businesses insight.
And see, if there's something that you can do to grow your business, whether it's a startup or a regular company, I think there's lots of opportunities out there for people that want to get their hands dirty and kind of do something. Interesting. Perfect, perfect.
That's if you do have money, if you do have a try power, my personal advice would be search more for investments, because I'm more in the early stage side.
So not on the business buyers acquisition side. So my advice would be for you listeners, go to the stripping of this episode. First of all, I'm gonna leave the link to game makers. So, maybe you'll find some good fit.
There may be or and consider selling your company. And also, I will link a link to our YouTube recording of this conversation. That's the second time that we're doing a audio plus video.
So, if you haven't seen the previous one, it's time to check it out and yeah. Just go to the description that says that there should be something else if I remember to include or open up here and have a great day. Everyone.