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Comment by ryandrake | Hacker News Reader

It's great to read the details about what it takes to buy a small business. Thanks for posting this and being so open about what went into the negotiation. I always thought (if I were to one day run into money) buying an already-running business would be a better, less risky path towards entrepreneurship than starting with a blank text editor!

A few questions:

Is it common to have to fork over all cash for these sized deals? Is it possible/acceptable to finance? What alternatives to seller financing have you seen? I don't imagine it's possible to just waltz into your local bank and say hi guys I need $100K to buy a website!

I'd be interested in learning more about finding these deals. You found this one through FE. Are there other common places to find tech listings? Do you ever approach companies that you like but aren't actively looking to sell? I'd love to see a play by play of how one of those conversations go.

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kareemm has already answered the questions about financing but I actually think your second question about "where to find these deals" is really the more interesting and important question. The obvious answer is places like FE where we found Codetree but that was a total fluke and it's not the right way to approach it.

The truth of the matter is that many business are for sale if you ask. The right approach is to think about the type of business you want to buy, build a list of all of the ones that fit and to cold email them and see if they'd be interested in selling. Basically the same approach you'd take if you were trying to sell B2B software i.e. Predictable Revenue style.

I can already hear people saying, "No way people don't do that" or "That would never work" but it does and people do. In fact we know a number of people that bought their businesses using that approach and it is exactly what we were about to start doing before Codetree fell in our laps. It's also the way that a lot of PE, VC and search fund deals get done.

Exactly this. I want to present my business as being available for sale. However, it is difficult to start this dialog on HN because people seem to find it spamming to bring the subject up. HN could be more hospitable to finding these types of deals. Maybe a new section?

For sure. As a seller I think services like FE make a lot of sense. They have relationships with a lot of potential buyers to put your business in front of. Unless you're well connected it's going to be a lot harder to drum up buyers on your own. As a seller what you want is an auction where multiple buyers are competing to buy your business.

As a buyer that's the last thing you want because it drives the price up. See point 6: http://www.berkshirehathaway.com/2000ar/acq.html.

I'd bet cold-E-mailing could actually work, but how do you find comps to guesstimate the cost of the business if it's not for sale and not much is known about it. I could imagine E-mailing CLOSELY_HELD_SMALL_PROJECT I think I could run better and getting back, "Sure, I'll sell. We generate $5M in FCF and I'd take 3X that!". Me: Uhhhhh, aww shit.

Do your due diligence with financial statements. Any business will file taxes and any corporation will additionally have income statements, balance sheets, etc.

To clarify, I'm asking what are some clever ways to ballpark what a company's financials might be, to pre-screen out ones out of my league before I even contact them. Most companies don't publish anything about their finances at all.

Unfortunately, I don't think you're going to find a good way to ballpark their financials without them supplying them. It's common in the cold email to say something like, "Our sweet spot is companies with an EBIT of $X-$Y". So the person you're contacting knows if they are too big or too small.

For deals of this size you can also look for smoke signals e.g. you're looking to buy something for 200k-300k in EBIT and you go to their about page and find 50 employees you're probably barking up the wrong tree.

It's also worth pointing out that you're looking for one person to say yes. If you hit on folks that aren't a fit and never email you back or laugh you away so what. That's the nature of the game. You just need one.

Remember that an offer to buy is also a sales pitch, after a fashion. Unsolicited offers start to come in almost as soon as you feel like you have room to breathe.

No different than doing B2B sales and emailing a prospect that is 10x bigger than you expected and only buys IBM and Oracle. A failure to penetrate a single prospect just means you move on to the next one.

> Is it common to have to fork over all cash for these sized deals? Is it possible/acceptable to finance? What alternatives to seller financing have you seen? I don't imagine it's possible to just waltz into your local bank and say hi guys I need $100K to buy a website!

I've discussed this with my local Belgian bank (well, not $100k, closer to $1-1.5m), and they'd be happy to do it if I put up 25-30% of the capital. So should definitely be doable. The issue is finding a good and viable asset that won't deteriorate. Usually there's a reason why people sell.

The reason might be that the owner gets bored with the business? Maybe the owner liked the getting started part, but doesn't enjoy all the analytics and marketing stuff that's necessary to grow the business to it's full potential?

Absolutely. But buying an asset can be quite hard, especially if you're at least trying to align it with your personal skill set. For example, I've probably looked through 30-40 prospectuses and have only once found something moderately interesting.

See my comment above on the alternative approach. The short answer is to approach the problem the other way. Build a list of businesses you'd buy and start emailing.

Bank loans, equity partners, seller financing, and cash are the options I've seen. Equity is harder for a deal this small. But bank loans are a definitely option. If you're in the US I think there are SBA loans that are available too.

The problem with many small business loans is that they need to be guaranteed by "tangible" goods, e.g. land, building, machinery etc. Banks and other financing providers often also require an appraisal by a 3rd party.

Unless you are buying an already established business it can be very hard to find good financing for things like software since there will be nothing for the bank to repossess and evaluating it's worth might not be easy.

See my comment up the thread. It seems like that might be changing at least in Canada. I've heard similar things about SBA loans in the US though so perhaps similar changes are afoot in the US as well.

(I'm one of the purchasers of Codetree) I had also thought that banks wouldn't be interested in lending in cases like this but surprisingly enough when we talked with our bank after we made the purchase they mentioned they'd be very interested in financing us if we were looking at buying other software businesses in the future. When I had talked with them a few years ago there was no way they'd have loaned money for a purchase like this because it has no tangible assets. They told us straight up that they understand the world is changing and they are now interested in making these types of loans. They get that small businesses owners today are just as likely to be software companies as they are to be restaurants. We're Canadian and our bank is TD.

Question: Did you acquire the assets with a Canadian entity? I'm assuming so. Did you have any problems transferring the billing subscribers? I'm EU based, and one of the concerns I've had / I have is that some US based customers seem to be getting auto rejects by their credit card provider (i.e. Stripe) when billing. Not exactly sure how I discovered that -- I think some guy wrote about it on a SaaS forum somewhere.

Yep, we acquired the assets with a Canadian entity.

We had this problem with a previous business when we moved from a US Stripe account to a Canadian Stripe account (when we started the original business Stripe wasn't available in Canada).

We were concerned about CC rejections, but shockingly didn't deal with a single one. In the past customers would just call up their CC provider and tell them to expect a recurring change from vendor_name and it ceased being an issue.

One MAJOR problem we had was transferring subscriptions from the US Stripe Account to the Canadian account. Stripe used to do this service for you (it has for us twice, once when we moved from US ==> Canada, and once when we sold the Canadian assets to another US corp). But they don't anymore, and their documentation and process around this is WOEFULLY lacking. Probably have a blog post in us about the process.

Thanks for the answer--it's very encouraging. Of course, I forgot the "find an equity partner" route. I could see approaching someone with money and an interest in technology but no time/talent to maintain the product. But even if you do that and negotiate an ownership share in whatever you're buying, you're more like employee #1 than a true partner. Did you guys each put up an equal amount of $ when you first started doing this?

Yep, we're all equal partners. Figured it's a lot easier that way.

But I've seen a couple situations where one partner brings the asset and the other brings sweat and they've been quite fruitful. One in particular I'm thinking of turned a 120k arr business into a 1m arr (and growing) business. So it's possible.

could also finance via an earn-out with founder involved for a period of time

IMO it's a good writeup on how a financial buyer dots the i's and crosses the t's on a deal but the main driver of a deal isn't that, it's just, can it be grown into a much bigger business, and what are the potential risks and rewards.

Do the buyers love the business and are they willing to do whatever it takes to realize that potential? If the buyers aren't thinking like founders and are thinking like financial buyers worried about the last few percent, it's a recipe for problems.

The risks are sufficiently large in taking over someone else's code and customers, that only reason to buy it is if you think you can make it worth multiples of what you're paying.

As a seller, it might make sense to do an earn-out or retain a small equity stake and involvement with the right buyers, but being a minority partner without the type of protection VCs get (board seat, liquidation preference, pro-rata follow-on rights / anti-dilution) is a terrible position to be in, unless you are very sure of who you are dealing with, so typically not with this type of financial buyer.

I know someone that recently bought a business that was for sale for 100k for something like 10k and x% revenue for 2 years. Basically if revenue was constant the cost ended up at 100k. If it dropped it would be less.

Kind of a neat way to not need all the money up front, and make the owner shows you his business is not on the decline.

There are lot of similar type formulas. For larger deals you'd have some form of vender (seller) financing which is what the above really is. It's a type of loan from the seller. For smaller deals that are reasonably competitive you're going to probably have to do an all cash offer.

If you think you're in a good negotiating position or if you've got concerns about the business then a vender take back or an earn out or both should definitely be on the table. It never hurts to ask ;).

That's why "cash in hand" was one of their selling points.

If the buyers had to get loans, sell other assets, etc to make it happen, it would introduce risk - in delay, extra negotiations or even total failure - for the seller.

Having your financing together is going to give you a leg up in a competitive deal for sure. Of course not all deals are competitive so it might not matter. In some cases your bank will give you a letter saying they are willing to lend you $X under reasonable circumstances which might help you get in the door with with sellers by convincing them you can close even if you don't actually have the cash upfront.

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