Fortune Favors the Fast: Reflections after closing our first SaaS acquisition

Our Kumo origin story, and notes on what we learned from our first acquisition

Mar 21, 2022

Welcome to the Kumo Origin Series, where our founders share stories and lessons learned from buying, operating, and selling businesses — and how it all comes together into their vision for building Kumo.

At Kumo, we have the unique experience of having been on both the buyer and the seller side of a business, which gave us insight into both sides of the funnel.

A little bit about us: our team bootstrapped a SaaS for Amazon Sellers in 2015, and sold it in 2021. We used the proceeds from this to fund our search & finance our deal. Our primary strengths are in software, and though we are based in Los Angeles, geographical specificity isn’t a priority for us (since most software can be built and run from anywhere.)

First, some quick details on our acquisition:

What we purchased: SaaS financial data platform with recurring revenue via monthly & annual subscriptions. $500k ARR, $350k SDE. We’ll call this one TheOneWeClosedLLC.
Location: Remote company, with 2 remote part-time contractors in the US, and 2 part-time contractors in the Philippines.
Deal size: $1.4M. $1.3M upfront, $0.1M held back for 90 day transition.

1. Finding our deal

We focused our search on SaaS business listed for sale on the major marketplaces, and ultimately purchased TheOneWeClosedLLC via MicroAcquire (we’re big fans of MicroAcquire because we had sold our previous business via a MicroAcquire listing.)

Why didn’t we work with a broker? While we were selling our previous SaaS business, we listed on major marketplaces, but also worked with several brokerages to match us with buyers. Ultimately, we felt that the brokers we worked with failed to deliver suitable buyers that had the technical expertise required to steward our company well. While this was a narrow experience, it was enough of an experiment to attempt our search without the help of brokers.

2. Structuring our deal

We purchased TheOneWeClosedLLC for $1.4M cash, with $1.3M upfront, and $0.1M after a 90 day transition.

Our offer was aggressive. Thankfully, we were able to close quickly — and that made a difference, as the seller received several higher offers during our due diligence; but our promise to close in 14 days with cash on hand was compelling enough for the seller to seal the deal.

3. Transitioning ownership

We flew in to see the seller in person to close the deal. We completed the transfer of funds, signed the closing documents, and transferred over ownership of the key accounts (Stripe, AWS, Google Workspace, Notion, Admin Interface, etc).

After closing, the Seller took a week to meet with each employee individually to update them on the news, and to setup introductory calls. We spent the following week meeting with each employee, setting up payroll to ensure continuity of pay, and scheduling weekly syncs to answer any of their questions during the transition.

We had worked out a structure that weaned off the Seller’s engagement over 90 days:

Days 0-30: Available Monday-Friday, during business hours for any questions or handling client questions that we weren’t up to speed on yet

Days 31-60: Available every Monday morning for a weekly sync to answer any questions we had documented throughout the week, and available on Slack for any high priority questions to respond within 24 hours.

Days 61-90: Available only on Monday mornings for a weekly sync to review any questions we had documented throughout the week, with no expectation to answer any questions on other days.

After 90 days, we reviewed final closing thoughts with the Seller over videochat, wired the remaining amount after reconciling expenses, and removed his access to any remaining tools/software like Slack/Gmail/etc.

4. Where we are now

After our 90 day transition, we completed a UI design refresh that the Seller had initiated with his team prior to selling. We took 30 days to finish ironing out bugs and issues after rolling out the new UI, and are now focused on user growth. Previous seller grew business purely through organic marketing and SEO, so lots of opportunity for paid ads, and event marketing. We’re not beholden to any investors, and thus don’t need to hit a high IRR, so we’re happy to take a slow pace and grow this company over the long haul.

We bought a company that’s been organized and structured well to operate without full-time owner presence, so we plan on continuing to keep a limited daily presence.

We’re at a position now where we can probably focus on target #2, so may be back to the search but with maybe a higher bar for pulling the trigger.

5. A couple of lessons we learned along the way:

1) Fortune Favors the Fast:

When buying, once you’ve found a target that meets your requirements, move quickly and make sure you communicate the intent to move quickly.

Early in our search, we came across a deal we loved — we’ll call this TheOneThatGotAwayInc. Financials were solid, our team was very familiar with the tech stack (Ruby on Rails), and we liked the founder. He had built a great business, had clear other priorities leading him away from the project, and he seemed eager to work with us. This deal matched everything we were looking for, but it almost felt too good to be true: this was so early in our search, that we felt like we needed to create some space for us to come up with other options before doubling down on a purchase.

We took a week to get him an LOI, and we were too slow. In that time, another party had sent over an LOI, with a strong intent to close in less than 30 days.

When we found TheOneWeClosedLLC, we were aggressive. We sent over an LOI, with intent to close in 30 days. We closed in 14 days. Even in that time though, the seller received multiple offers (with most offering a higher valuation) — but the seller chose to stick with us, because none of the other offers came close to offering a swift and easy close, and we were the only offer that had funds in hand.

We flew to meet the seller in person on the day of closing to sign purchase agreements, transfer funds, and transfer owner accounts in person.

2) Signals from Seller Personality:

When we sold our previous SaaS company, we went under several LOIs with potential buyers. In hindsight, those we engaged with fell into two camps:

(a) Folks we trusted were dealing with us in good faith, and that we trusted would steward our product and people well, and

(b) Folks we couldn’t read well, and gave us pause on whether they would steward our product and people as well as we hoped.

We realized that this revealed a lot more about us as Sellers, rather than providing a rubric to evaluate our potential buyers. We cared a lot about the product and team we had built, and so we wanted to sell to a Buyer that would care about the business and people in a way that would benefit all, especially our employees that would stay on post-acquisition.

As Buyers, we tried to find a Seller that cared about their business and people well. Of course, we had a fairly rigorous financial and technical due diligence — but perhaps the most important gauge for us was whether our read of the Seller gave us signals on how he had built and led his organization. With TheOneWeClosedLLC, we knew we had found a Seller who had operated with integrity with his clients and his employees, and it made the transition of ownership pleasant and relatively smooth.

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We’re sure there are other lessons we’ll realize as we continue in this journey of buying, operating, and selling businesses.

For now, our painful experience with buying and selling businesses has energized our team to do something about it: build software to make deal sourcing better.

Subscribe to our Substack to get insights on deal sourcing and updates on product features, or sign up for our closed beta (coming soon!) at withkumo.com. All images in post are sourced via Icons8.

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