Why This $2.5M SaaS Deal Could Be a Hidden Gem (or a Trap)

0:00Welcome to Acquisitions Anonymous, the internet's number one podcast about buying and selling small businesses. Today, we broke down a deal that is a SaaS business out of Florida in the real estate space. It is value priced, and there's a reason for that that you will find out in the episode. So hope you enjoy it. Bill and I had a great time. Here it is. We'll set Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % beers anymore. Thumbs down on just the plus inventory. Are you ready to take a leap into business ownership, but you don't know where to start?

0:32Well, look no further than Acquisition Lab, the premier resource for entrepreneurs seeking to buy their dream business. Founded by Harvard MBA and acquisition expert Walker Deibel, the lab is your fast track to success in the search diligence and acquisition process. With hands-on support, world-class resources, and a community of like-minded entrepreneurs, Acquisition Lab gives you the tools and confidence to navigate every step of the journey. And we're proud to call Walker and Chelsea, the lab's director, long-time friends of the podcast. They're passionate about helping entrepreneurs like you take the next big step.

1:03So don't wait to make your business ownership dream a reality. Visit acquisitionlab.com today to learn more and schedule your free consultation. And when you do, be sure to tell them the Acquisitions Anonymous podcast sent you. Acquisitions Anonymous, it's me, Michael, and my two-year-old son, Andrew. Andrew, Andrew, what do you think about this deal, buddy? Andrew, do you want to buy the deal or would you pay four times EBITDA or five times EBITDA? What do you think?

1:36All right. On that note... He has so many words usually and now he's shy. On that note, I brought a deal. Maybe Andrew will talk about it. Okay. All right. Michael's got a deal for the grown-ups to review. So thanks to Andrew for coming in. Here we go. Yeah. um it reminds me of the uh it reminds me of the the peak period when people were doing podcasts and getting themselves canceled and saturday night live did that fisher price uh podcast set skid did you ever see that no i hadn't seen the fisher price one it was so funny well it's like okay so you know people were going on podcasts and it was typically like you know some guy my age white guy saying stuff on a podcast he probably shouldn't peak cancel time yeah and uh so the commercial was that they did a fisher price uh podcast fake podcast setup so you could like have your own podcast but not get yourself in trouble like just like a play set for adults yeah podcast play set nice yeah so you should get that for your son he totally needs it uh so i just uh you will remember when we started this podcast you said bill your microphone is terrible and you bought me a new microphone um and that i'm now like three microphones later as you and i fell down the podcast audio rabbit hole together.

2:50But, uh, the, or I found the, we moved recently and I found the original microphone. So that is now a kid's toy. So my original blue Yeti, um, condenser microphone is now a kid's toy. Cause I'm just never going to use again. Realistically. The blue Yeti is shockingly a terrible, a terrible microphone for reputation. It's so popular and like everybody has them and there's it's so bad yeah um so anyway uh the i you know i was thinking you know baby comes in while we're recording the podcast do you guys do you remember that viral thing where the guy's on the news and like the kids come in comes in behind him in his home office and like the wife comes in and is like dragging the kids out and everything and we all thought that was like hilarious in i don't know 2015 or whenever that happened uh if that happened today nobody would think it was funny.

3:41That's just like normal real life. That happens on every Zoom call everyone's on. Do you think it got normalized when Elon started bringing his kids to the White House? That's where it felt like it pivoted. Before that, it felt like people expected to be more professional. Or was it before then? It was COVID. It was like when everybody was suddenly work from home and nobody had ever worked from home before and nobody had a dedicated space or like a, you know, professional setup and like people are in their sweatpants and they're trying to, you know, kids were coming in all the time. That was an insane time.

4:17I think that's when it got normalized for me. Yeah. There's some elements of COVID I really miss.

4:24A lot of it sucked, but it was, it, it was kind of beautiful because you simplified so much out of your life, you know, like just, you weren't, you weren't expected to do as many things in normal life and you spend more time with your family and and reading books and kind of you know it was kind of that element of it was kind of nice i think it's really funny you know of course all the terrible parts of covid but this is a proof of the way the human mind like time heals all wounds like the human mind just kind of like deletes all of the misery and you can look back on it and go in some ways it was kind of nice even though it was objectively horrible in a lot of other ways it yeah it's it is what it is well let me put you let me put you on this deal it is from our uh a current maybe former sponsor acquire.com we love those guys andrew and his team um so i ran across this because i think it's pretty interesting it is a sass business located in florida um and is actually a lot bigger than some of the other ones we see you know your typical sass business on acquires seems to be like forty thousand dollars arr you know and this one's actually pretty big i love this i love when you bring a sass deal michael it's my favorite ones you bring thank you thank you i'm sassy um i love it the uh so this business is in florida it is a residential real estate transaction management with e-sign compliance commissions and reporting um they are asking 2.5 million dollars 4.1 times profit and 1.8 times revenue.

5:56The annual growth rate is negative 17%. Uh-oh. I was excited for a minute. Hang on. Wait, what? You had me at what? Trailing 12 months revenue is$1.4 million and they profited$617 ,000. Last month they did$118 ,000 and profited$50 ,000. Okay. So it is a cloud-based platform that gives residential real estate brokerage as a unified workspace to manage every deal from contract to close. It combines transaction management, e-signature, compliance automation, commission accuracy, and clear reporting in one system. Operating for more than a decade with proven profitability, it replaces piecemeal solutions such as DocuSign, spreadsheets, and manual compliance checklists with a single connected workflow.

6:43It powers back office workflows for recognized brands across the U.S., reducing administrative risk and delivering real-time insight into brokerage performance. Built to support boutique teams and large firms alike, including national multi-office brokerages with high transaction volumes. It helps many organizations stay focused and organized, save hours each week, and operate with greater consistency and control. Healthy margins and predictable revenue are supported by long-term customer relationships. I'm going to skip kind of the capabilities here, compliance, document tracking, reporting, all that kind of stuff.

7:17Why they think it's worth what it's worth. So again, they're asking 4.1 times profit or 1.8 times revenue. They like the long-term customer contracts, predictable recurring revenue, strong margins, and operational stability for more than a decade. And then there's some other stuff here, charts and stuff that we don't have access to. They have 100 to 250 customers. So that should give us an idea kind of how big the typical contract is. Churn is 1 to 3 % downwards. So they're losing 1 to 3 % of their customers per month. Founded in 2015, team size is 2 to 20, and it's a B2B model with subscription.

8:01Built on semi-modern tech here, Java, AWS, and then they compete with a bunch of other firms. Brokerage Engine, AppFiles, DotLoop, BrokerMint, Skyslope. Growth opportunities. Hire a sales team and increase digital marketing. Is that just pre-filled in the template every time you saw business? The growth opportunities, hire a sales team, increase marketing? I mean, it's interesting. The selling reasoning here is starting a new venture. So it may be the case that the owner of this business was salesperson number one and also the only salesperson and has gotten burnout and that's causing the churn.

8:42But yeah, but before we get to that, But do we understand what this does? So it makes me understand it when it says it competes with Dotloop because my realtor used Dotloop when we bought our house. So it's like, you know, when you're buying, you got to put in an offer, you got to put together a contract, you got to amend the contract, you got to track whether you've done all your inspections, you've got to, you know, track whether you've been paid your commission, you know, all this stuff. And it seems like this is the subscriber, the customer here is the real estate office, the brokerage office.

9:14They subscribe. I did the math, Michael. It seems like the average customer is about$8 ,000 a year. I kind of took the median of the customer range, they said, 150 customers divided by 1.2 million of sales. So it's like$8 ,000 a year, median customer. And it's going to keep track of all of your agents. It's going to help them run their transactions. It's going to help you as a brokerage distribute all of your commissions, figure out what cut you take, et cetera, et cetera. Do e-sign. so like obviously huge market right tons like real estate is one of the hugest markets uh by transaction volume um tons of competition here why i like so much about this the only thing i don't like about it is that it's declining 17 a year which seems at odds with what they just said which is long-term customer contracts and stickiness what do you make of that Well, it's interesting, right?

10:11Real estate agents and to some extent brokerages are, you know, it's a huge like power law distribution, right? Like there's tens of thousands, hundreds of thousands of real estate agents in the United States, but the vast majority of deals get done by the top 5 % of them. it's also something that people seem to get into and like leave a lot in terms of a career like i've seen that before where i have a friend who for example was a real estate agent and a broker for like 15 years and next thing i knew they're like a flight attendant for united airlines like they're just like oh this sucks i'm gonna go i don't i don't care if i take a pay cut i'm gonna go do this other thing so i think there's some of that where there's just a bunch of natural churn in this market and you have to it acts kind of like a consumer business you have to be growing it all the time just to stay flat with recurring revenue.

11:01Yeah, that, you know, that reminds me of a business I had in the past called Tables Ready, and we sold software to individual restaurants, and they were the worst customers. I mean, they just went out of business all the time. So we would churn, like, you know, our software was not make or breaking their business. That was make or breaking their business was like good food, good location, etc. And they were going out of business for business reasons that we could not impact and had no control over. And so we just had this baseline level of churn that was brutal uh in that business and you're right you probably have it in realtors as well yeah uh and also interesting i just pulled up dot loop they're owned by zillow yeah they got acquired by zillow a couple years ago yeah they're like the kleenex of this like they're the one of the most popular yeah which is bad right because zillow in theory has a bunch of other ways to make money.

11:55And this is a point solution. So you're competing with somebody who's bundled into a bigger product with this kind of niche thing that may or may not be better than Dotloop, right? Right, but Zillow can give Dotloop away to keep realtors in the Zillow ecosystem if they have to. So that's tough. So what's interesting is I did the math. So they said they've got 1.4, if you go down to kind of their TTM, um it seemed like so they got minus 17 on revenue but if you multiply their last month times 12 it doesn't look like it's down that much um so i wonder if they have stabilized like i wonder if they churned a big customer or you know like some sort of one like they had a great year last year and now they've kind of renormalized i would really want to dig in and say hey maybe this is flatter than it looks and it's just down year over year because they lost a big customer.

12:50Yeah, that may be a good thing. I mean, I think you're right to be totally scared of a software business that's decreasing 17 % year over year. It's tough to pay four times profit for something like that that's shrinking that quick. Well, you know, I was going to say before you told me it was shrinking 17 % a year, this is a software business with a recurring revenue priced at 4x profit. That's pretty reasonable. I mean, we've seen much more insane asking prices on the show than that, but then you tell me it's shrinking 17 % and I understand it. Um, what do you make of the churn, Michael? Um, I think they said it's like one to 3 % a month.

13:29So like that's 1.3 % downwards churn rate. That's between, I'm not doing this right. That's between 30, you know, 12 and 36 % a year of churn, right? Is that normal for an app like this? Is that bad? Is that good? So that is an incomplete measure of the health of the business, in my opinion. The churn rate is fine as a data point. The stuff you really want to know is what is the gross revenue retention? What is the net revenue retention? What is the logo retention? What is the NPS? like those are the big numbers we should be trying to understand to understand the health of a sas business and um like this is just it's just not enough information to tell you i mean we know we know we should be worried about this because they're shrinking in revenue so that means their net revenue retention has to be negative but we don't have enough data here to really know okay is that bad is it horrible it's not good i'll tell you that but we don't know enough because they haven't given us enough enough data here maybe you get that if you're on the paid plan of acquired, which I'm not.

14:33So. Hey everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called CapitalPad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad is a marketplace for acquisition entrepreneurs. That is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in acquisition deals. So if you want to back somebody buying a small business, Capital Pad is the place to do it. And if you want to buy a business and need capital, you can go on Capital Pad to be introduced to investors.

15:17So the really great thing too, from the investor side is that Capital Pad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions all up front in black and white. Basically, Capital Pad professionalizes investing in small businesses, and the returns can be really, really good. I'm so stoked they exist. It's founded by my friend Travis, who is a phenomenal entrepreneur in his own right. So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out CapitalPad.com and tell them that Acquisitions Anonymous sent you.

16:01So at a baseline level, though, that means you need to be growing 3 % month over month just to stay flat. Yep. I mean, that seems hard. Yeah. Well, that's also normal, right? That's why you look at Salesforce, right? And Salesforce competes with hubspot and two of their clients uh let's say they each have a customer and they merge well they're gonna have to pick do they stay on hubspot or salesforce so there's this natural churn that happens in software no matter what people got a business all that kind of stuff it's you know as you said for real estate it's probably higher than average the typical real estate agent is going to be churning as a customer but to me this just smells like these guys haven't figured out how to sell their product and get new agents and new brokerages on board.

16:52That seems to be the fundamental problem. And I don't know why that is. That's the big question. Is it because the product sucks? Is it because the competitors are better? Is it because somebody else is giving it away? Is it because they're just not running any sort of marketing and sales? I just don't know. That would be where my head goes. The product can't be god-awful, right? Because while the churn is 1 % to 3 % a month, it's not 10 % a month. It's not 20%. So the product can't be terrible. So to me, I think you're right on it. They don't have an acquisition engine that is able to outgrow sort of the natural software level of churn.

17:31And they're in a huge TAM. So what a business like this has to have is a repeatable way to acquire customers, real estate agents. The nice thing is it's not like an enterprise sale, I don't think. You probably can get these people to kind of self-close, which means at whatever,$8 ,000 a year, I mean, it's$500 a month. Maybe they want to talk to somebody, but you should be able to self-close a software contract, I would think, at$500 a month. So that means it's advertising. That means it's SEO. That means it's word of mouth, you're probably not cold calling real estate agents to try to close them.

18:12So they need to figure out a way to do marketing at scale because you're not going to run out of real estate. There's tons of them out there, giant TAM. So you need to just always be in the market with your message. So as people kind of walk by your digital metaphorical billboard, they learn about you and convert at a rate that replaces your chart. And they seem to not have that right now. Yeah. I did just Google how big is their TAM. There are 360 ,000 real estate brokerage firms operating in the United States. That's all in the sentence. And that's, to your point earlier, Michael, what fraction of those go out of business and start up every year, right?

18:53Who knows? But a non-insignificant portion, right? So there's always new people coming in this market who are always going to need this software. yeah I mean this just feels like huge tam and you got to just dial in your there's some sort of marketing channel that can work for a business like this and my guess is they used it at some point and the founder has gotten tired and is ready to do something else uh you know it says it says they're not retiring it says they're going to a new venture um yeah to me it's just like oh this would be a great business if somebody could just figure out how to like actually build a repeatable, scalable sales engine?

19:32Because in theory, people want this thing, right? From the software perspective. So this has always been like one of my pipe dreams about business acquisition, because you can do all the diligence in the world on this business. But this deal ultimately hinges on your ability to get the acquisition engine going, right? And there is literally no way to like test that out. I mean, how cool would it be if you could get this business under LOI and go, I'm going to spend$10 ,000 to drive you leads and see if they convert at a CPA that makes sense. And if you could see that work, then you would have so much more confidence in buying this business.

20:12But nobody ever does that. They come out of pocket for$2.5 million and they go, okay, let's see if it works. Let's see if our core thesis on growing this business works. And I would just love to see some model kind of take root where you could test your growth hypothesis during a diligence period. And if it doesn't work to walk, and hey, if it didn't work, it didn't really hurt the business. Like, oh, I sent you some extra revenue? I'm not really that damaged if I'm a target. So I would just love to see that happen more often, but it doesn't. Do you think you could go to this seller and let's say you're an ambitious person and understands digital marketing and sales funnels.

20:54Go to the seller and say, hey, I will set up for you at cost a go-to-market engine, kind of like an agency would do. And we'll run it for six months and see if I can build you. We can start to grow this thing again faster than your churn is happening. And if I hit certain metrics, you agree to sell me the business at Y price a year from now. Do you think sellers would buy into that? I mean, in theory, right? sure but i just see like you grow this guy's business 50 and he's like yeah i'm not selling it to you right i mean like like how do you enforce that contract you know like he's gonna you're gonna have to peel a now performing business out of his hands i don't think you can write a contract strong enough you know to actually make that happen that's what i would worry about that you do all the work and he'd be like yeah i changed my mind right i mean thanks for doubling my ev um yeah thanks i'm not selling it to you for half of what it's worth yeah you know i i just i think most sellers would probably be like yeah no so i just don't think you can go that hard with it but i think you could come in and go like i'm gonna run some adwords campaigns and i'm gonna see if it works and i'm gonna measure the cac and i'm gonna see if we sign these guys up and if i can sign these guys up at a cac that makes sense i can assume the TAM is pretty bottomless here.

22:23And now I feel much more confident buying the business because I can keep running these AdWords campaigns or whatever. But if I can't, you know, my one, two, and three theses for how to grow this thing don't work even on the first dollar, which should be your most efficient dollar, that should give you a real pause on buying the business. Yeah. I mean, that's an interesting thing to do during diligence, like go run some AdWords campaigns and test out some of these marketing things to landing pages. And funnily, I think that you talk about it, you could probably even at your own cost just start running campaigns for this guy and just see what the click-through rate is, see what the leads are.

23:01Yeah, that's what I was thinking. You don't need him to pay for the ads. I mean, you're about to spend $2.5 million on a business. You're going to drop 30 grand of quality of earnings. You can't drop$10 ,000 on an ad campaign and see if it works. Yeah. Because if it doesn't work, you are screwed. Same way. Like, like if the, if the quality of earnings comes back and the numbers are fake, you're screwed. So you're paying 30 grand to, you know, avoid being screwed, buying a business that you don't want to buy. But people aren't willing to spend 10 grand in ad, ad campaigns to figure out, oh crap, I'm buying a business.

23:35I don't want to buy because I can't grow it. But nobody ever does that. Uh, it's interesting. You know, I, I was looking at, uh, you know, our friend Jesse Poogee, who's been on the podcast a few times. and he makes me so like happy and want to run through walls every time i talk to jesse yeah he's so great yeah i mean one thing you know people are doing a lot of quality of earnings and things when they're buying businesses now which i think is totally good insurance to do it feels like there's also opportunities for like the equivalent of that kind of diligence for business buyers to happen in sales or marketing and stuff like that and i think one of jesse's companies is a consulting company that like works with private equity firms to go in and do a marketing assessment for businesses they're going to buy and uh i think it's just it feels like that's a trend where quality of earnings for finance is a thing now but i think we're going to see more of it for other aspects of the business technology you know ops all that kind of stuff as well well i think so much of it diligence historically diligence has been about reducing risk of fraud, right?

24:41Like, or uncovering huge baskets of risk or liability, like, oh, crap, their IT is a mess, or oh, crap, their insurance is wrong, or oh, crap, their books are a mess, or accounting's not right, whatever. But diligence is not historically focused on proving the thesis, you know, pre-close. And so Jesse's company is called Aux Insights, and he's hired, like, some, I think, some ex-McKinsey people, and I've seen some of their reports. They're thorough. They're good. I mean, they're also expensive. They're five, six-figure reports. It's a commitment. But I'm just surprised people don't do more validate the thesis during diligence.

25:22It's all around removing risk. But if you remove all the risk of the world and you're just wrong about the thesis, you are still up a creek because now you own an illiquid asset that you have to run and that is not growing and is hard to resell because the growth thesis isn't working yeah all right so back to the deal uh this is just tough to swallow losing 20 percent a month 20 percent a year like that's i think where i am at unless unless you lost one big customer last year that's the only thing that would make it okay like if it's for 4.1 times profit and you feel pretty confident through price increases and sales you're going to keep it flat or get it growing like that's a screaming deal but with this kind of churn it's it's bad and um you know the big question is how do we fix that how do we stop the the knife from falling here well i just think something's going on right because their baseline churn per month is they said between one and three percent which is not far off from minus 17 a year so either they are bringing in no new customers which yes is a huge problem or something super normal happened.

26:33I would hope it's the latter, in which case you could maybe get comfortable with this business. It totally is. Totally is. All right. Well, cool. Good job by me finding this one. Good job by you finding this one. I like it. Love it. You know, we haven't done SaaS in a while, but if people go to our website, acquianon.com, there is a ton of SaaS in the back catalog. I feel like we're really good at doing SaaS the first one or 200 episodes. We haven't done as much recently. So we should do more SaaS. It's a great business model and people are very curious about it. Plus we get really sassy when we talk about them.

27:07Yes, Michael, you're very sassy. It's very great. All right. Well, thanks for being with us today on Acquisitions Anonymous. Happy New Year to everybody and we will see you on the next show.