One micro-angel's trash is another's come-up

Are 'Open to Offer' deals that don't have an asking price a waste of time?

Microangels have some pretty polarizing opinions about businesses listed as ‘open for offers.’

In fact, most aren’t reacting so well to these listings. The general consensus is that haggling sucks when it comes to investing in Micro-SaaS.

Investors want to have access to metrics that help them decide whether to make an offer as they scroll through deals.

I empathize with the inconvenience, but that’s all it is.

It’s true, you need as much information as you can to make a decision. It’s natural to expect someone looking to sell their product to be able to answer questions about the state of the product, the unit economics, marketing funnels, and so on.

Specifically, you want them to answer questions that help you reach a decision to invest/buy.

Generally, most of us have an idea of what we’re looking for in a deal. But each micro-angel has a different style, and all want as much information as possible when browsing through deals.

A seller who asks buyers to ‘Make an Offer’ for their business is making a conscious choice to relinquish control over the starting price. They’re giving up the price anchoring in your favour.

I can understand the initial reaction to ‘make an offer’ listings. If a product is listed without a price, it instantly spells complicated order for a potential buyer because that buyer has to determine that price to offer and then prepare to defend it.

That’s how most microangels seem to react, and I just don’t understand why.

Sure. It sucks to go through deals with completely made up terms.

Yep. It’s more work to have to actually talk to the person selling their business. It can even be a grind provided volume across several marketplaces.

There’s no two ways around it — it takes more time.

But, like, seriously…

Are you kidding me?

Buying a business isn’t like buying something on Amazon. You can only be so transactional about it.

Marketplaces like MicroAcquire manage to attract interesting and diverse deal flow because they’re founder/seller-first.

In the case of micro acquisitions, sellers tend to be developers who have managed to create something valuable/profitable all on their own.

They don’t have the pedigree, experience or time/patience to be meticulous about their reporting. Some shoot completely from the hip, and to me, that is a massive advantage as a micro-angel.

Story time:

One of my favourite humans to follow on Twitter is self-made real estate investor/developer Nick Huber. The man’s a machine.

He started his real estate career by making a deliberate choice: to focus on a class of properties that would produce high margins, without having to deal with people (as a landlord must do), with strong cash-on-cash returns on his investments.

Pretty much any real estate investor’s goal.

When he looked at the market, he found typical commercial properties trading at 6- to 12-cap¹ valuations, with returns that made him wonder if he’d be better off investing in the stock market instead (he would).

To get his desired returns, he needed to be buying a different kind of property and orchestrate a high return based on the nature and archetype of the properties he would typically go buy and make offers on.

Ultimately, the choice was made to focus on self-storage properties for the simplicity of their operations. It was possible to increase the value of a self-storage business by optimizing its operations using technology and software.

Stuff like automatic billing, keyless access, automated surveillance recording, and so on.

As people zigged, Nick zagged:

To command larger cash on cash returns, he needed to buy properties below their market value and then boost his cashflow by optimizing costs and increasing rents. But everybody else was trying to do that too.

So Nick decided to focus on properties that most other investors don’t want to or can’t touch, which by design ensured he would command very high returns by executing a predictable playbook to optimize self-storage operations using technology.

The majority of self-storage locations today are fully-automated. But not all of them. It’s a big pie. Nick has proven to be an astute investor when it comes to sourcing and securing these hard-to-find deals.

His approach is look for the mom and pop shops. Self-storage businesses that still run on paper. Smaller ones that go under the radar or aren’t even listed online.

They are profitable and are operated by an owner-manager that has likely been there since the start. And yet the property throws out fabulous free cashflows every year. Those were (and still are) his target.

So he’d put in the work. He’d get on airplanes. He’d drive to The Middle of Nowhere.

And he’d find the deals. And he’d close ‘em. Fabulous deals.

The point I’m trying to make is that there’s obviously a lot of pain and patience involved in filtering Micro-SaaS opportunities one by one.

It takes a lot of energy and time, which you may be unwilling to invest additional to your capital.

But in my opinion, that is exactly what separates those microangels who throw darts and those who are deliberate about what they’re looking for.

It’s the same thing which marks the difference between Nick and other real estate developers. Yeah it’s a lot of hustling, but you know it’s worth it, and it’s a niche worth focusing on because most other investors aren’t wiling to put in the work.

In fact, the point is proven by simply looking at Nick Huber’s Twitter. He’s giving all of his secrets away. Wouldn’t you expect at least some level of apprehension that giving away all this information might result in more competition?

I’d argue — beyond the simple truth that his niche is, in fact, super competitive - that he intrinsically knows that a tiny fraction of his readers will not only take action, but do so at the level of commitment that he is. It’s become a competitive moat.

Above and beyond the utilitarian benefits of looking at these deals, consider this:

MicroAcquire is a working concept because it gives indie makers the ability to exit without having to go through a broker. That is its value proposition. No brokers. No fees. Just serious buyers.

As serious buyers, it’s natural to expect serious preparation on the part of the seller, but it goes against the nature of the types of most individuals who would list on MicroAcquire to begin with.

It’s not uncommon for ‘make an offer’ listings to be describing a product that hasn’t quite found its stride. In some cases, the owner of the product may not be well-equipped to provide you the information you need.

It’s in your best interest to take advantage of these listings because other investors are skipping over them. They could be diamonds in the rough, and you’d disqualify them merely because there is no set asking price.

In a recent negotiation which I’ll be sharing, I managed to secure a deal to acquire a profitable and growing $75K ARR B2B SaaS.

The product was originally listed as ‘Make an Offer.’ I didn’t quite care, since the business fit into my initial criteria. I ended up adding the product to my watch list and submitting a request for more information to the seller, namely:

• Learn more about the actual product itself

• Some unit economics (ARPU, LTV, CAC)

• Profitability on the $75K ARR

• Whether there was any net revenue growth every month

• How secure the source of demand generation was

• What the technology stack is

• What the support burden is & typical ticket

I checked into my watch list a few days later and noticed the seller had put up a $350K asking price for the product.

Also, I received an answer to my request for info: a .CSV file of payouts since founding, a spreadsheet of costs and some Google Analytics screenshots.

I took the CSV, imported it into Google Sheets, built a few pivot tables and filters, and compiled the info I needed.

Additional to the information shared with the seller, I made a few remarkable discoveries hacking through the data:

• The product does one thing really simply & well

• ARPU in the $15 range, LTV in the $200 range and growing

• The seller claimed $16K in profits annually, but on an SDE² basis the product actually clears $65K in profits annually. Not too shabby.

• MRR grows linearly from a steady stream of trials, at a rate of about +$210 per month, after churn. Nice.

• 80% of the traffic is organic, 20% is direct. Good with that.

• Tech stack is Node + React. That’s my jam.

• 1-2 support tickets per week, usually sent to Knowledgebase

• Some evidence of paid acquisition for as little as $35 CPA, but the owner does not have any marketing experience to scale with

Welp, this is an awesome product. My reactions were obvious:

• Customers are staying on an average of 13+ months and growing,

• Profits are strong, and meaningful

• MRR is growing on autopilot from a dependable source of traffic

• The stack is something I can maintain or work on

• It’s a low maintenance product

• The early success in paid acquisition indicates a path to buying MRR — especially if payback is as little as 2 months ($35 CPA / $15 ARPU)

I wanted in. In fact, I was surprised nobody else had scooped this up yet.

Then I looked at the price again.

$350,000

At $350K, no wonder nobody was touching this. Especially if the seller was telling other buyers he was only clearing $16K annually, which was inaccurate.

I jumped at the chance and wrote up an LOI to acquire the business for $180,000, which worked out to a respectable 2.75x multiple on the $65K he was actually clearing every year.

Initially, he balked. I realized that winning this deal meant spending an extra fair bit of patience going through the motions of defending my offer and justifying why it was, in fact, quite a respectable number.

First, granted the profit margin he was claiming, $180,000 was an incredible offer for a product clearing only $16K per year (11.25x). I made sure he understood that even if the profit he claimed was true, the odds of him ever commanding a 11.25x multiple were certifiably zero.

Luckily, he was off on his calculations, and his business actually profited quite a lot more than he thought it did.

On a meet-and-greet Zoom call, I explained that the income he was paying himself didn’t qualify as costs he could attribute to operating the business.

If he was paying a support person, that’d be different, but owner compensation should be added back into the earnings in cases of owner-operator companies like this one.

You might expect a dine-and-dash situation here from the buyer, especially after learning his profits are actually 4x higher than he originally thought they are.

Instead, a relationship blossomed. And an LOI was signed.

Upon completing some diligence on the spreadsheets side and qualifying his revenue, I discovered that his top-line ARR was actually closer to $60K and his profits were closer to $55K per year.

I was still interested since the fundamentals were the same, but I explained I needed to adjust my offer to reflect the true ARR of the business.

I promised to maintain my multiple. So we settled on $150,000.

The deal is still very much in progress, so I’ll hold the rest for a future post describing the deal in greater detail.

My goal was to demonstrate that ‘make an offer’ listings often tell a much more complete story once you take the time to meet the seller.

It’s a necessary cost to operating in this slice of the market, and in my opinion, it’s one of the more fun reasons to interact.

Business is about human relationships.

People - not products - are what comprise companies, and customers buy from companies. If you take the time to take the time, you’ll increase your odds of exposing yourself to a fantastic deal.

1. 12-cap refers to a 12% cap-rate. Cap rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. Different from cash on cash returns, which is the same calculation with net income (how much lands in your pocket every year vs. your investment)

2. SDE based valuations are pretty typical nowadays, especially at FE International, an established and super professional broker in the space. The idea is to simply add back any compensation taken by the owner over the year, as it doesn’t qualify as a cost that is required to operate the business. It gives a better picture of what the actual free cashflows are, and in many cases, it’s a more accurate way to value the company.