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Comment by awhitby | Hacker News Reader

You're missing something. From the post:

> I don’t draw a salary, so the total amount I earned from TinyPilot in 2023 was $236k.

and

> Result: I worked 35-40 hours per week, a reduction from previous years, and traveled more than any previous year.

This is a person who is effectively full-time CEO of this business and whose market salary is likely at least $236k. If they sold the business, the new owners would have to pay someone else to put in those 35 hours.

Maybe the new owner could employ a less-skilled manager and pay them less, or maybe there's still lots of potential growth or room to cut costs, but that's all quite speculative: right now the business has a profit, and therefore a valuation, closer to zero.

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> right now the business has a profit, and therefore a valuation, closer to zero

You’re thinking of this like an engineer rather than a business person.

1. When selling a business like this, the $236k would be called SDI or SDE (seller discretionary income/earnings).

2. The buyer determines what, if any, of that SDE will need to go to paying someone to do what the seller does. These duties could be assumed by the buyer, they could be assumed by existing people the buyer employees, the tasks could be reduced or eliminated, etc.

3. Based on 2, the buyer will typically adjust the earnings multiple that they are willing to buy at.

4. For complex businesses that need someone doing one or more specific roles, the listing agency for the business, if good, will encourage the seller to fill certain roles to improve the overall salability of the business and multiple of earnings that it will be sold at.

5. Without really looking into the business, I’m almost certain that it can be sold for much closer to $1m (or more!) than to your suggestion of (edit) closer to $0.

GP does not suggest a valuation of zero. GP says that the profit and valuation is closer to zero. It is not crystal clear if this means "closer to zero than it is to $236k" or "closer to zero than $236k is" (i.e., less than $236k). The second is undoubtedly true.

The first may also be true, but would depend on the cost at which the labor can be outsourced reliably, and what oversight would need to be done of these outsourced activities.

Fair enough. I changed my comment to “closer to $0”.

I still think that even talking about or towards $0 is bizarre. Saying something like “less than $236k” would have been much more meaningful if op meant either thing you said.

The other poster is right, if you told someone who knows about business valuations about this conversation they'd be confused and bemused.

Easiest place to start is valuations arent capped at one year of profit, or last years profit...the silly mistake is the one year thing, the more advanced mistake is looking at profit instead of cash flow.

He's thinking about it like a business person who is looking at buying a business. It's worth close to zero. In it's current state this business is not an asset, it's a organization doing stuff.

Breaking it out into SDE + adjustment is what the comment already does, albeit without using that terminology.

One cannot hire a person who can do all the things this owner does. The person is a smart former google engineer. These people don't grow on trees. It would take a few people to do a bad approximation of what he does. The adjustment to SDE is going to be 100's of k and you get to 0 cash thrown off.

> It's worth close to zero.

Serious question… have you bought a business before?

It’s what I do.

This business is not worth close to zero, and the stuff that the current owner does (even if he’s some miracle worker, which xooglers aren’t guaranteed to be) can be handled any number of ways that cost less than $236k by some buyer. This may not mean you or the person that I replied to, but you two most likely aren’t a part (and certainly not a significant part) of the market of buyers for businesses like this.

I can’t tell if you’re circle jerking the owner, xooglers, or the (limiting) engineering way of thinking about businesses.

Yes. Lots of them.

Who is the buyer? The logical buyer of this hardware business doing $1m per year and can backfill all the things this guy does at some low enough number that this business generates cash. And then, enough cash that it's worthwhile to go through diligence and paper up a deal and take on the risk that there isn't skeletons in the closet.

> Who is the buyer?

Realistically, the best buyer would be someone who has deep connections in a market that the current owner hasn’t penetrated that could 5x the volume almost instantly.

They would hem and haw about whatever small multiple the seller is asking for, and then laugh all the way to the bank after close.

I’ve seen this happen many, many times.

> And then, enough cash that it's worthwhile to go through diligence and paper up a deal and take on the risk that there isn't skeletons in the closet

For a business of this relatively small size, an agency would likely be used, and they would do all of this scutwork, and their fee is paid by the seller. Which agency or agencies have you used (if any)?

> Realistically, the best buyer would be someone who has deep connections in a market that the current owner hasn’t penetrated that could 5x the volume almost instantly.

This is a nice theory. And it could be true, and it does happen, but it's more than likely not.

You must be using better M&A brokerages/bankers than I ever have. None of them do actual diligence, they are selling the business...They are actively making the business look different to what it is. They certainly don't take on any risk (they are not a party to the agreement in any way) and they certainly don't obviate the need to use and pay a lawyer (and most small deals are each person pays their own costs).

With respect, are you actually buying businesses? Or just doing contracted technical DD? It feels like you are missing a good chunk of the picture here. The default take on the value of this business by a lot of folks buying businesses is going to be "close to zero". I mean, to be fair, I have not ever bought a hardware business so I'm a little out of my depth here... but.. not miles out.

> This is a nice theory. It could be true, it's likely not.

I’ve done it / do it with taking products and services to certain East Asian markets. And sometimes scaled quickly at much more than 5x of the original revenue.

> You must be using better M&A brokerages/bankers than I ever have.

FEI is one such broker, and know people on both sides of transactions done through them that are happy. I haven’t used them personally, but that’s one example.

They definitely do due diligence.

> With respect, are you actually buying businesses? Or just doing contracted technical DD? It feels like you are missing a good chunk of the picture here.

Funny, I was about to ask/say the same thing.

Yes, I buy businesses. No, I don’t do technical DD contract or otherwise (frankly, I’m not tech savvy enough to do that on my own — I can sniff out some bad code, but I let the pros do what they do).

I/we are on HN reply delay to prevent “flame wars”, even though I don’t think we are flaming. As such, I will stop here.

If you are what you actually say you are, I wish you luck and all the success in the world. That said, I stand by everything I have said above.

I did almost say ~ "it's possible we just see very different deals and it colors the perspective".

I never deal with asia. Maybe everything I'm saying is off base given it's hardware and asia is a thing in that realm.

I'd just like to say that I very much appreciated reading both of your responses, and commend you both for firmly but politely and reasonably disagreeing.

Second that. Good to see a polite but firm discussion in the comments. Also very interesting topic, would love to be a fly-in-the-wall in a meeting between these two.

You should write something about what you do too. Buying businesses sounds interesting, can you expand on this?

There are lots of books written about buying businesses. I'll give some insight - it's like turning over stones. You turn over a lot before you find anything.

> I'll give some insight - it's like turning over stones. You turn over a lot before you find anything.

Priceless and totally agree.

The deal flow can be streamlined somewhat, but you’re still turning over a lot of stones.

> You should write something about what you do too.

I think most of what one needs to know is already out there. The key is being adaptable to the current environment and being aware of one’s value add (skill set, network, etc.).

The problem with writing specifics about what I do is that it invites competitors and/or haters (e.g., review bombers or DDoSers). Some parts of my businesses have enough moat such that I don’t care, but other parts definitely do not. It’s not something I want to spend additional brain cycles on.

> Buying businesses sounds interesting, can you expand on this?

It’s largely not. It’s financially comfortable, and it’s nice being your own boss / leading your own team if that’s what you’re into (I am), but I’ve done more interesting work while working for “The Man”. A lot of what I do is just streamline a system that was inefficiently run/managed.

What I do is very similar to what Andrew Wilkinson of TinyCo has done, except I am about 10 years back on his timeline, and I’m not sure I will end up going public. I recommend looking for interviews and podcasts with Andrew — I have found them to be super interesting.

In relatively vague terms, I started a web dev agency, and then used that cash flow to start buying businesses that generate additional cash flow. Rinse and repeat. This is exactly what Andrew did. Note that I didn’t learn about Andrew until last year, so I was happy to see someone taking a similar path and scaling to a holding co worth over half a billion.

Some things that I think folks don’t do well when buying and/or valuing businesses (both buyers and sellers):

- Keep an active deal flow pipeline, ideally one that is not widely tapped. This usually entails talking to people… lots of people. For example, finding solid businesses on FEI is possible, but they will be very competitively priced, and it will be prudent to have some sort of pocket growth “hack” in mind if you want to make it pay off handsomely. On the other hand, targeting some “mom and pops” that have little or no idea about SEO and SEM can present some soft deals.

- Figure out ways that one party can scale that others can’t. This is the type of “growth hack” that I mentioned above. I know one guy who has one main move. He looks for businesses in which he already buys some of their inputs at a huge volume discount that smaller businesses can’t access (supplements are an example of this… I don’t recommend getting into supplements unless you are already eyeballs deep in that world). Another example is having access to markets or distribution that the businesses you are targeting to buy don’t have. One area I target (when relevant) that many others don’t is East Asian markets. Another area I target is just increasing prices (usually via segmentation). So many businesses charge way less than the market will bear.

- Learn how to negotiate, including how to say no. Many people just lay down and leave a ton of money on the table. You don’t have to be an asshole about it, but it’s prudent to be aware of what the value is for both the buyer and the seller, and it’s not uncommon for the buyer to have significant upside potential.

- As someone else said, you’re basically turning over a lot of rocks. There are a lot of people trying to bamboozle you, and there are a lot of solid businesses that don’t really offer a growth opportunity that you can efficiently maximize. When you find something that fits, it’s often a no-brainer.

Let me know if you have any other questions. I will be happy to answer.

I will add as a caveat that I can only give you perspective from my limited experiences — there are myriad ways to buy and sell businesses profitably, and my path is only one of them.

What is your take on ecommerce businesses that generate most revenue from a single platform, e.g. Amazon or Shein or TikTok?

It seems like a lot of concentrated risk, and scaling is a challenge, considering the number of Amazon roll-ups that were on fire 2020-2021 and are now on the ropes (See "Amazon aggregators fall on tough times", https://www.axios.com/2023/09/05/amazon-aggregators-tough-ti...)

> What is your take on ecommerce businesses that generate most revenue from a single platform, e.g. Amazon or Shein or TikTok?

It’s not something I do due to the “concentrated risk” you mentioned. Scaling can be done, sometimes quite easily and effectively (e.g., Amazon ads can be quite efficient at scaling).

In general, I try to avoid or minimize exposure to capricious single points of failure, especially in sales/marketing, production, and/or distribution. I consider most large tech companies to fall into the capricious category unless I have someone on the inside who can make things right for me. This access to insiders is not as robust as I would like, but I’m working on it.

All that said, I know plenty of quite successful business owners who have gone all in on a single platform like Amazon or YT.

Regarding the roll ups, i think many of the businesses were bought at unreasonably high values. The linked article refers to this.

Covid changed many markets, in some ways permanent, and in other ways temporary. I was passing a lot on what I considered unreasonable prices for certain businesses. I could have played hot potato, but there was no reason to do so.

Idk, optimizing inefficient systems sounds a lot more interesting to me than working for the man, as you put it. Thanks for writing this out. It seems very difficult to get into. I'll reread this a couple times.

> Idk, optimizing inefficient systems sounds a lot more interesting to me

Yeah, I guess I’m being somewhat disingenuous. I like optimizing systems, but I’m aware that it’s not everyone’s cup of tea.

You learn that very quickly at cocktail parties when people ask you what you do, ask for more than the headline answer, and then have their eyes glaze over when you get into the details.

> than working for the man, as you put it.

As a nerd/geek, and I fall into that category, working in a good skunk works type of place is pretty damn fun. It usually doesn’t pay well compared to most tech jobs, it’s often not that prestigious, but damn… it can sometimes tickle the brain like no other.

One potentially bad part of it is that most skunk works are funded in some way by the DoD, so some folks may object to that.

> Thanks for writing this out.

My pleasure.

> It seems very difficult to get into.

Hmm… my first instinct is to say that it’s not, but I might be short-selling my skills, network, and (frankly) privilege if I say that.

I think it’s open to far larger group than is actively trying to participate in it.

I think the main keys are:

- Understand fundamentals of business. I have been around this my whole life, so it came quite naturally to me. That said, it’s learnable, and a lot of things fall into the common sense or empathy categories.

- Be good at contracting and hiring/firing. There are a lot of bozos in the workforce, but there are also plenty of hidden gems.

- Be good at marketing/sales. Although it’s possible, I think it’s tough to hide behind a screen and also scale.

- Talk to your customers. PG beats this drum, and there’s a good reason. Note customers here are customers of any business you own as well as business you want to buy or entities you want to sell a business to.

- Start small, but do things that scale. People think you need a lot of money to start doing this. You don’t. If you do really well, you don’t have to ask around much before relatively large sums of money start finding you. I currently prefer to self-fund, but I’m thinking about transitioning to some sort of dividend growth entity — I think that they will be en vogue in certain circles over the next 10 years or so.

It seems like you enjoy talking about this - is there an email I could reach you at to have a longer conversation at some point down the line? I'm really interested in just about everything pertaining to your experience. If you'd rather not post yours, you could email me directly at [redacted].

Quite difficult to be like you. In any case, much obliged to you, sir!

I have a feeling a lot of the lessons you learned could also apply to developers who want to be better at freelancing (my case). But I don't know if there is a way to pass down that knowledge while you also get something out of it.

For what is worth, I appreciated your comments in this thread.

For freelancers who want to improve (it was my case years ago), the best book is "The Secrets of Consulting", by Gerald Weinberg.

https://www.goodreads.com/book/show/566213.The_Secrets_of_Co...

Thank you for making me aware of this author. I see he has several books on topics I find valuable.

I am glad I was able to help you.

If you like "The Secrets of Consulting", the next one for you should be "Exploring requirements: quality before design", by Gause & Weinberg. What an eye opener it was for me!

Noted.

I read the book 'Built to Sell'[0] recently. It's written for founders, but gives you insight into how buyers think and what they are looking for.

[0] https://builttosell.com/

> (even if he’s some miracle worker, which xooglers aren’t guaranteed to be)

> I can’t tell if you’re circle jerking the owner, xooglers, or the (limiting) engineering way of thinking about businesses.

I don't know why you're being so unnecessarily demeaning about ex-Google people or trying to downplay the accomplishments of the person who wrote the blog post. There's no need to call it "circle jerking" if someone acknowledges that the founder of a successful business has accomplished a lot, well above and beyond what an average engineer can pull off.

> I don't know why you're being so unnecessarily demeaning about ex-Google people or trying to downplay the accomplishments of the person who wrote the blog post.

Fair comment, and I thought about changing it. I didn’t for reasons listed below:

- The comment was mainly directed at xooglers, specifically the mindset some folks have towards them. Googlers and xooglers were something to behold in the “don’t be evil” days. That reputation has decreased substantially since, imho (I’m guessing directly or indirectly due to structural changes in the org). This is not to say that there aren’t some super impressive googlers and xooglers (there are), but the hit rate is much lower than it once was. If the op had just said “a smart engineer”, I wouldn’t have commented on it — I imagine the dude is plenty smart, although I doubt that it makes his efforts difficult to replace (see below).

- In general, I try to take the air out of reputation virtue signals that I think may not be warranted. Google, googlers, and xooglers are now in this category. Other groups in this category are groups like Harvard grads, Stanford grads, MBAs, PhDs, name brand consulting firms, name brand IB firms, etc. Note that I am a member of several groups that sometimes send these virtue signals (I try my best not to), so I’m dog fooding my own criticism every day.

- I don’t know the engineer who owns the business, but I find it unlikely that he does things that both must be done and must be done at a (relatively high) labor price that the owner could command in the market. I expect neither are true. The “circle jerk” comment was a reference to me thinking that the person I was replying to was putting far too much weight on something that has (imho) much less impact on the profitability and ultimately the price of the business. I’m OK disagreeing on this point — different strokes for different folks, and that’s why the market price talks.

These people actually do grow on a tree called Google. All the Google layoffs means there are more smart former google engineers than ever currently available for hire. More importantly, doesn't have to be a former google engineer, any smart engineer can do what he currently does, google didn't teach him anything special they just hire smart engineers when they find them.

There’s a reason they were laid off. I find this mind boggling, I’ve met so many mediocre and low performers that are still highly sought after by simple virtue of having done nothing at faang or Stanford. It’s basically the software engineering professions McKinsey. Everything they touch is a huge money sink with no real added value and probably long term damaging to society and yet somehow they all keep climbing the ladder. All while other actually high value people are just lost in the noise.

I agree with you overall. But the reason someone is laid off mostly likely has no bearing on ability or actions. Not having the ability to influence layoff decisions doesn't mean you were a bad engineer or providing more value than others

I have no particular advantage in this space and don’t even own a TinyPilot. I think it’s worth $250K to me, and think it’s worth much more than that to someone who can create additional value by virtue of having some advantage relevant to the business (existing manufacturing, fulfillment, service, etc ops).

If you are valuing a business on SDE the multiple is usually 2.4-3. So this business as it is today would be worth more like 566-708. The beauty of building a business is that as the bottom line goes up your business is worth more, but it ALSO fetches a higher multiple. So a business with a bottom line of $1M will get 5-7 times earnings (note: not SDE), whereas a small business gets a lower multiple based on SDE.

Valuing a profit-generating business that's making $1m in revenue as zero is reductive.

Valuation of business isn't necessarily determined by profits (perhaps for commodity businesses), It's just one of the metric. This is a business that has strong operations, product, assets, and IP, honestly quite surprised with this take.

Also, a nit fwiw, you automatically assumed the entire profit of the business is the market salary for the person running this business

I don't really disagree. It's a naive analysis, but ignoring the opportunity cost of the time the owners put into a business, which I was replying to, is even more naive, and yet an extremely common mistake small business people make.

We don't know that it is profit-generating, since the author doesn't take a salary. As for the assumption that the profit would be soaked up by the market salary for the founder, the fact that he's a former Google engineer or whatever is a pretty decent indication that this is true.

I would agree that most people would take some job flexibility/autonomy in lieu of part of their bigco salary, but my guess is that this particular Xoogler would be making well more than $236k (including stock) if he had stayed at Google.

EDIT: that doesn't mean he should have stayed at Google, just that his market salary would very likely soak up all of the profits this year. If he can keep up the growth (and ramp down his hours), then it would be clearer that the enterprise could throw of cash even after paying for all the labor.

That’s the thing though, it’s a Google engineer’s market salary, and likely the author’s as well. But the OP was drawing the conclusion that whoever’s running the business has to be paid the same amount, that’s what I wanted to address.

> I would agree that most people would take some job flexibility/autonomy in lieu of part of their bigco salary

This is one of the point the author has repeatedly stressed the importance of and I very much agree as well. The chance to chart your own journey and the excitement a business could bring is anyday more valuable than the predictable path of employment for many (including myself)

He did pay himself a salary in 2023. See the P&L included in TFA.

The article says:

> I don’t draw a salary, so the total amount I earned from TinyPilot in 2023 was $236k

I assume the salary line is for other people's salary.

The point is it isn't profit generating by any reasonable definition of profit and doesn't have some obvious path to get there.

Taking into account all the things you mention, many reasonable people who spend time buying and selling businesses all day would value this business at zero.

The nit is generous - 236k is not going to cover the iq points and hard work required to do the role of this owner.

> Also, a nit fwiw, you automatically assumed the entire profit of the business is the market salary for the person running this business

Not really a big assumption given that the person is capable of operating an entire software and hardware business by themself.

It’s more complicated than that, though: The salary someone receives from a company isn’t 100% passed through untouched. To pay everything from taxes to benefits, the most they could realistically expect to take in equivalent compensation would be closer to $150K (approximate), which is actually below market rate just about anywhere for someone with these qualifications.

That is true, and you would assume that if he sold he would either work retained and draw a salary or hire someone at a fair cost.

I think the company is too early to realistically sell - but I don't think the value today is zero - it's likely worth at least 2x revenue today given growth potential.

Look at lantronix (nasdaq:ltrx) - the company that makes the "spider" product line - the original strap-on oob/ipmi. Worth $160M while doing $120M of revenue and losing $9M/year.

I am disappointed that NASDAQ and US securities regulators allows companies without audited profits to go public. "Worth" 160M? Not to me.

Valuations for vc’s acquiring is very different than private equity firms acquiring a business like this.

If you build something that makes 100k/y it can sell for 7-15x or that.

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