Luke Havard’s $1M – $100M Software Companies Acquisitions Secrets

Learn how Luke Havard's $1M - $100M Software Companies Acquisitions in this interview where he reveals all his secrets. Don't miss out.

Jakub                                    All right, so thank you very much, Luke, for joining me and we’ll wait for a while for other people to join the live stream. But meanwhile, for records, I will just introduce you a little. So Luke Harvard is an experienced founder, investor, and advisor helping the founders of high growth SaaS and eCommerce businesses to prepare value and sell their businesses for the best possible terms. Was it a good introduction?

Luke Havard:                     Yeah. For the best possible price, and terms.

Jakub                                    All right. So Luke, tell me, how did you get into this business? Because you’re not technically a founder, but you deal with a lot of founders from day to day basis. So tell me how did you get into this business because I think this can be pretty interesting.

Luke Havard:                     Yeah. So technically, I’m not the founder of this business but I’ve been involved in lots of different types of businesses. I’ve started my own businesses, I have been a founder, granted … it wasn’t in SaaS businesses or eCommerce, but I’ve been involved in a lot of different types of businesses. I’ve been involved in consulting businesses, agency businesses, and marketing agencies. Being involved in the consulting business, what happened was, I was consulted with a lot of different businesses, and so I saw the whole spectrum of businesses from product to agency consulting, marketing, software, and you learn a lot by being involved in lots of different types of businesses. I have been involved in online businesses and offline, and both types as well. That really taught me a lot about how businesses work, what is important to a business being successful and what can be a detriment to a business, and how businesses fail.

Luke Havard:                     So what happened was, when I was consulting with businesses along the way, I felt like you know what, there’s been occasions where I’ve made businesses a lot of money, and I was getting paid a fee. That was nice, but I saw them making a lot more, so it came to the point where I wanted a piece of that upside that I created. So what I did is I ended up investing in some of those businesses. So instead of being paid a fee, I said, “You can either give me equity or you can let me invest into the company so that instead of having to just take the fee, and watch you create all the upside, we share in the risk and the reward. So if I don’t help you create value, then I shouldn’t get paid.” I never didn’t help people create value, so I was fairly confident in my ability to create more value so I said, “Hey, and if I do create the value, then surely it would be only fair that I share in a little piece of that upside.

Luke Havard:                     So I kind of got into Investing through equity investing, and then I’ve put in money to deals as well as an angel investor, I suppose you could call it that way. Then along that journey, I created a private equity principle, private equity fund which essentially was going out and buying up companies. It started with smaller companies then it went into trying to buy up very, very large companies. We’re talking hospital groups, things like that. You know in other countries so I went there and did that and had some problems doing that and learned the hard way that you can do it on a smaller scale, and if you have problems, they’re smaller problems. If you do on a big scale, it can destroy your life almost, and make you bankrupt very quickly.

Luke Havard:                     I learned the hard way of doing that. But along the way, I was still working in advising a lot of SaaS companies and E-Commerce companies, things of that nature. I was also working as a partner with a business brokerage because I understood from both sides of the table how to be a founder, and how to run companies and work with founders, but also how to buy companies. I understood what it was like as an investor. That’s a really big thing, and there’s a really big misconception in the marketplace, especially for founders, they really don’t understand the psychology of the investors, the buyers of businesses.

Luke Havard:                     A lot of the times especially when you talk to SaaS founders, they don’t talk about what’s going to happen when they sell the business, they’re not talking about the exit, they’re not thinking about it. For me, that’s a fundamental question you should be asking yourself all the time, “Why am I building this business? For what purpose? To what end?” The first purpose should be that you’re solving a big problem, and you’re meeting a need in the marketplace. But what’s going to happen, what’s the end result of you starting a business game. So I can carry on talking about this subject now or you can ask me some more questions first-

Jakub:                                  I have a few notes from what you just said. I want to step back a little to the time when you were an investor because I know that a lot of investors just have money, and they want to put it somewhere. But as you said, you are actually helping these startups to make money, and to become successful. Can you tell me a little bit more about, how do you decide? What startup did you invest in? What questions do you ask the founders? How do you actually evaluate the opportunity for you, and for them?

Luke Havard:                     Good question. You got to be looking at the business … from my perspective, when I was doing it because it wasn’t just purely about money I could put in. I could put in my own money at some points depending on the size of the deal, but oftentimes, I was thinking that actually putting in money is not the solution that you require. Money is just one option, but what they really needed was your strategy, they needed advisory, they needed access to the network, they needed access to more customers, they needed better ideas and vision. There were loads of things they needed, they needed help to run the business. A lot of founders as I speak to are really good visionaries and productive guys but have no clue about marketing or anything.

Luke Havard:                     That’s not their fault, that’s just not their strength. So oftentimes I was looking at the business thinking, how much time and energy will I put in, and what will be the return on that time and energy because if you have a lot of money, then time is your strongest currency. If you don’t have a lot of money then time can be … if you have a lot of time, but not so much money then obviously money needs to be the currency that you’re able to get any return on.

Luke Havard:                     So for me it was … at first saying, “Okay, if I’m going to put my time and energy into this, I can bring some money to the table if it’s necessary, but what is it that I need to do? How much time is it going to take? How quickly can I actually add value to this business and actually get a return for all of us?” Because I wasn’t so concerned if I couldn’t really add value then I said, “I don’t want anything in return, I want to be on performance.” I should be judged fairly for my performance. If I create great value, then I want to return on that performance I’ve created, but if I don’t create any value, then okay, I want it to be quick. I want to know quickly that I can’t add value to this business. So I would always be looking at who are the founders? What real strengths do they bring, and what weaknesses they have. Do my strengths complement their weaknesses? So can I fill their holes?

Jakub:                                    Okay. So you’re saying that a lot of founders are great productive guys, but they have no idea how to run a business. It makes me want to ask a question like in which stage do you invest? Is it series A because I believe that in series A, you actually need to know how to run a business as a founder. So are you more like early stage investor?

Luke Havard:                     So at this point just to make just to be clear-

Jakub                                    When you were investing.

Luke Havard:                     So when I was more investing? That’s a good question. I think I was probably … I wasn’t series A for sure, I was more in an angel stage – so seed. But really what I was looking for is, I was looking for the stage where they definitely had traction and when they have proof of concept. There were definitely people buying what they were selling. It wasn’t just a quick show, and people were actually sticking. So I wanted to see that there were real evidence and validation of the product and the service, and this was something and that they could really run as a business. Ultimately, people don’t need to be genius marketers or incredible hires of people, they really just need to show that. You know what, I can create an idea, and I can create a minimal viable product, and I can get people interested enough to actually give me some money and commit to buying my product for a certain amount of time.

Luke Havard:                     If you can sell the idea before you make it, which I think is the lean startup concept, then that’s a great place to be. So there were quite a few people with whom I was working with, at some point back in 2015 where they all had these incredible ideas, and they had these amazing products or services, and I was just coming in as the strategy guy and saying, “Hey you all, this is where we need to get to and let me help you create this journey.” So I would bring in like the marketing teams, I bring in contacts, joint venture partnerships, so if there’s a customer base over here, and someone’s got a great product or service, but they you don’t currently provide this product or service then I would introduce the two parties, and you can accelerate that growth exponentially.

Luke Havard:                     If you have 100 thousand potential users over here, and you can get an introduction and someone’s going to agree to do a promotion together with you for maybe a percentage of the profits. So that way you’re not risking marketing spends or ads spend or anything else. You’re just using your service and their resource and database to actually create traction in a bigger way.

Luke Havard:                     So obviously, when you do that sort of thing … or even when I brought in marketing teams, you could run Facebook ads, or Google PPC ads, or whatever the case may be, they want to see something they want to say, “Okay, well, what are we doing here? What is it you have? Do you have customers? Do you have customers who pay? Do you have people who are subscribed? Are they staying for more than three or four months? What is it you actually got?” So I was looking for those types of things. I was looking for a real problem that they were stuck on. For me, it was always about, like I said, helping somebody to make it past the stage where they’ve got stuck. So if someone’s not stuck, and they can do it themselves, then I don’t need to be involved, but oftentimes people are stuck, and they just need to be honest with themselves and admit that this is where I’m at.

Jakub                                    Yeah. I think I was actually talking about similar thinking in the last interview, that a lot of people just fall in love with a solution for example, with the technology, you can see it in January 2018 with the blockchain there is so many useless project that was built on blockchain because somebody saw a huge opportunity to that and said, “Let’s do an ICO and we will get millions of dollars.” Then they were creating these products that weren’t actually solving a real problem. I see it’s often … I was doing it as well, that I just fell in love with some idea but I didn’t fall in love with the problem, that was the main issue. I spent so much time and money and effort into building something and didn’t find a product market fit in the end because people didn’t need it.

All right so the last question is about the investing, would you prefer a company with 1 million users and no paying customers, or a company that generates one minute million dollars, but have like 20 users.

Luke Havard:                     Good question.

Jakub                                    I know it’s quite difficult to answer because you need to know other metrics such as growth and traction, but what would be the first thing that comes to your mind when you hear this question?

Luke Havard:                     Personally, I’d go for the 1 million paying customers. You can make 1 million with 20 paying customers. I think with at least my set of skills and other people I know I could probably get 100 of those customers.

Jakub                                    I mean, but after … Facebook has a million users, and they invested back into the traction, and then they made to billions, but yeah-

Luke Havard:                     That’s true, but we’re not deciding whether or not this company that’s got a million users at Facebook. I mean, of course, if we had both of them right now with all of the metrics laid out, I might give you a very different answer, but on face value … this is what investors will probably look at quite often times. You know of course I talk to people all the time, and they’re like, “I’ve got a billion dollar idea.” I’m like, “Where’s the money? Show me your money” and they got nothing, and I’m like, “Wow, come back when you’ve made some money.”

Jakub                                    But they have a valuation of similar like Goofy had $900 million evaluation and they didn’t make a single penny.

Luke Havard:                     No, I agree. I think that comes down to when someone gives you an evaluation like that, but they only get valuations when they got venture funding already. There’s a very big difference if someone believes in you enough to give you 50 million venture funding or whatever the case may be, but it’s a great example. I don’t know what it’s at right now is 100 billion in valuation, I might be wrong. I don’t check on it all the time so if I’m wrong don’t throw hate comments at me because I’ll come after you. But the thing is that’s the key right there. Uber is not even that profitable, is it? It’s really not that profitable in relation to its valuation, but the key thing is that someone thinks it’s valuable.

Luke Havard:                     I don’t disagree that it’s very valuable because it’s got this amazing infrastructure, and it’s got this huge global reach, but ultimately, when I think you’re first starting out unless you are an Uber and those companies … let’s remember, everyone likes to quote Uber … Facebook, that’s another name, another big brand. Everyone likes to quote these big brands, but what are they quoting? They’re actually quoting unicorns. So do you know how many companies are out there who have millions of potential users, but they’re not paid. Users? There are probably hundreds of thousands of companies out there that have millions or hundreds or thousands of users, they’re not paid, who cares?

Luke Havard:                     The only thing that really matters is whether or not that thing is really worth something in the eyes of people who are going to give you real money. So if it’s worth something in the eyes of venture funds, who will give you 50 million or 100 million, whatever they’re saying they’re going to give you, now we’re talking. If you can actually monetize those users, then absolutely, it’s very valuable. But how many of those users can you really monetize? I mean, unless you’ve got a Facebook … unless you’ve got a monetization strategy, like Facebook, where they can run ads to it, I don’t know what’s it worth.

Luke Havard:                     It’s very difficult to decide. So I totally agree, I’m dealing with people who’ve got these companies. We can talk more about this, we’re helping to sell software as a service company for a lot of money. We’re looking at some right now that could be worth 100 million, but the point is, there’s a reason why because they’ve got metrics to back up that valuation, and they’ve got … some of them have got a lot of users, and not necessarily all paid users, but they’ve got some traction. I think that’s the key thing for everyone to remember, if you’re listening, you’re not Facebook until you’re Facebook. Let’s get our head out of the clouds and back to Planet Earth unless you have something really, really special. Facebook had an incredible market reach where no one had what they had when they got that type of valuation. Same as Uber right now. These are abnormal, they’re not normal, they’re not the norm, no one else is. It’s not like there are hundreds or thousands of companies that-

Jakub                                    I look at the model basically, do you kind of duplicate the success? Model, yes, but the success, no.

Luke Havard:                     Exactly. They got the first move, they … I mean, you could say all these, there’s my space, and there are all these other things like Facebook out there at the time, but they just had this different advantage. There’s a number of things they had. They had people like Peter Thiel behind them, they had all these other investors who were backing them. They had this kind of network effect that got them just to kind of spread like a spider web everywhere. They were in everything, they had this reach. They just had some brilliant people on board. So it’s a very different question to ask, but I totally get your question. You kind of stuck with me there a little bit, but I still prefer on face value, If I had just 20 users, and they were worth like a million to me in. I’d be like, “If I could just do get that to 100 to 1000 to 10,000.”

Jakub                                    All right. Thank you very much for a thorough answer. Anyway, our majority of members are SaaS founders and marketing agency owners. What would be your number one question for … number one advice for a SaaS founder in an early stage company? Well, because you’re dealing with a lot of SaaS founders in your current business, and what do you see that they are making the mistakes, which areas most often?

Luke Havard:                     Good question. It’s not a simple question to answer, I’ll try and be concise. I think like I said earlier, stop thinking just like a founder and start thinking more like the person who might want to buy you one day because the big mistake I see everyone making is that they’re just building and they’re just focused purely on the scale. So everyone I talked to is like, “Yeah, we’re just scaling, we’re going to raise more money, we’re going to scale.” and I say, “For what? What are you scaling for? Why? When’s the end goal?” “No, we haven’t got an end goal. Or it might be, ” We are just scaling until we get a million in a month in revenue.” Whatever the case may be, and for some people that might be, “I just want to get to $1,000 a month, I want to get the $10,000 a month or whatever.” But the thing that they’re all missing is, “Okay, so what happens when you get to that? What are you going to do?” Then they’d say, “Oh, when I get to that I sell.” Then I say, “Why?” They have no answer. They don’t even know why they’re doing it.

Luke Havard:                     So it sounds like a very simple question, but it really is a complex question. You need to build this business for a reason. You’re first solving a problem, but I always believe businesses are built better when they’re built to sell because you actually have a purpose, and a strategy about why you’re building this thing, and you build it better.

Luke Havard:                     For example, I think most people, once they build it, they don’t really know where they’re going, they don’t know the end result, and they don’t know the end goal. So they don’t think about the things they’re building, they don’t think about why they’re doing these things, and they might think about just the short term success instead of the long term gain. So if you think more like somebody who might buy your company one day, you start to think about what’s really valuable. So intellectual property is super valuable, and it can make your company way more valuable. I think with software as a service, especially, people typically only focus on revenue growth, and they don’t focus on either dollar or profit, I think you should focus on doing that as well as if you can.

Luke Havard:                     The other thing to think about is that you know, the one thing that makes SaaS really valuable for me at least and what we’re seeing is growth. So revenue plus growth, and trying to keep the churn as low as possible so really focus, focus, focus, on customer service and providing the utmost value so that customers stick as long as possible, need to get that attrition rate down, need to do whatever you can to figure out what’s hurting your customer lifetime value, and get the customer lifetime value up, and get the churn down. So what we’re seeing is … I’ll give you some metrics now if you want, or I can wait till late question, you’re cool?

Jakub                                    You can continue. Yeah.

Luke Havard:                     So, if you want to know what makes the difference in terms of the value of software business is quite interesting. So it all comes on size – big is beautiful. In the natural world, everyone thinks for some reason … I mean not me personally, I’m married to a Latina woman, so I like curvy, but most people think that skinny, and small things are the best things. It’s crazy, but what you’ll find is in the business world, big is beautiful, so the bigger something is, the more value it is. What I mean by that is, so let’s say you’ve got a company that is doing less than a million turnover in revenue, is considered small. So under a million, the multiples could be quite different to over a million.

Luke Havard:                     To give you an example, so if it’s under a million, it depends on … you’ll be probably valued on your profits. So if you’re a SaaS, and you want to sell, and you are under like a million in turnover, you’ll be valued on a multiple of your profit. Let’s say you had $100,000 in profit, you’ll probably get anywhere between 2x or a 4x, four times on that profit. You might get more, it just depends, again it depends on the growth if your growth is … if it’s under say 40% or 50% year-on-year growth, you wouldn’t be like really slow growth, but you’re not going to be said of fast growth. 50% year-on-year or more is considered fast, and that will also potentially add more value to your multiple. Now when you go over a million, what can happen is people start valuing that company on a multiple of the profit and depending on your growth, they will start doing valuations on your revenue.

Luke Havard:                     So what will happen is they might … a good example of someone we were talking to you recently. If you’ve got over, say 100% year-on-year growth, and these people had like a lot over 100 I’m not going to say that, in case they listening, but a lot and they had a million in revenue, recurring revenue, and their churn was quite low. It was like, I’m going to say like 2% a month or something-

Jakub                                    Wow, It’s really nice.

Luke Havard:                     Ideally though, and this is B2B, this is another thing B2B is more valuable than B2C typically because businesses tend to churn less than consumers. So consumers, if you’re dealing with consumers, what’s going to happen is-

Jakub                                    They are more emotional than businesses.

Luke Havard:                     Yeah. If someone signs up for just a Netflix subscription, they might cancel the next month, it doesn’t happen again I don’t think as much as that because I’m a user myself, and I was subscribed for two years, and I forgot. I used the free trial and totally forgot, Spotify and all these things, you just forget. But the reality is when you’re a business if you create a really sticky product, and it’s something that’s got to be integrated into the business, like an email CRM, some kind of CRM like HubSpot, and you’re a bigger business, and it’s got your email, it’s got everything in there, and it’s got call functionality.

Jakub                                    Yeah. So, of course, I agree to this, you just cannot leave.

Luke Havard:                     Yeah. The more it’s integrated, the more you make it really, really difficult to migrate out of it, the less likely you’re going to churn, and the more value you’re going to create, so-

Jakub                                    At the same time, you should make your product as easy as possible to migrate into-

Luke Havard:                     Exactly. Everything should be easy, everything should be difficult in any way out. Easy in difficult out. So going back to what I was saying. So if you’ve got B2B customers, and you’ve got over 100% year-on-year growth, or over 50, but 100 plus is even better, really low churn … when we say really low churn.

Luke Havard:                     We’ve got investors who say, “I want 1% churn per month or less?” For B2B, I’m not saying that’s attainable for most people, but that’s what they’re looking for, and then they want 100% year-on-year growth and a million plus in revenue… we’re talking to people right now, I said I’ll give that company between an 8x or 12x era, but that’s not normal because more oftentimes what we’re finding is slower growth, maybe it could be a million in a row but it’s 30-40% year-on-year growth, churn might be quite high, it might be 20% or 30% year-on-year more, you’re probably going to get a multiple on your either down or your profit, and multiple could be anywhere between a two or even up to a six which is still not too bad at all because trust me, on an eCommerce, the multiple will be probably between a three, 2x and 3x, from profits.

Jakub                                    All right, I’m afraid that we are way too technical here which might be a little bit difficult for people who are just joining, anyway thank you very much for this support through answering, again and people who are watching please feel free to leave your questions in the comment section, so you can ask and we will answer them live. Anyway, Luke, you mentioned multiple times, exit strategies for SaaS founders, or SaaS companies. What would you say that they’re the most, most usual and most common exit strategies our SaaS founders should think about while they are building their company to sell.

Luke Havard:                     Yeah, I think-

Jakub:                                    Acquisition by bigger company together with-

Luke Havard:                     I’m yet to this, so I’ll give you an example, there are different buyers, and the value of a company will mean more to different buyers. So there are people … if you’re a small SaaS, maybe under a million turnover, you may be, you’ll be bought by an individual. Someone who is an entrepreneur or someone who wants to be an entrepreneur, or there’re entrepreneurs and they want to leave corporate, and they want to jump into entrepreneurship so they might want to buy you. If you’re in the US there, they can use an SBA loan or they may have some money in their bank or they might use the triple F’s, which is friends, family, and fools. If you’re bigger … and again, it doesn’t necessarily mean that you have to be bigger in order to get bigger investors, but we have like I’m working on deals where they are just under half a million in turnover, or in … sorry, in the sales price.

Luke Havard:                     There are some smaller private equity funds. So let me give you an example for those who are not familiar with the terminology. Private equity, they’re similar to venture capitalists, it’s that usually they buy out deals, they buy companies rather than invest in them. They do invest too, but typically they’re buyout merchants. So when you’ve got private equity, what you have is there a group of investors, professional investors like I was, and they build a fund, and so it’s other people’s money, and it could be anything from 5 million to … We have private equity with a billion plus under management, and they will come and they will have like a shopping list.

Luke Havard:                     They know what they’re looking to buy, they are probably experts in that area, and they will look to buy a business with certain criteria is hence why I’m saying they’re looking for certain growth metrics. They’re looking for churn and revenue and EBIT sometimes. Some of them don’t care about profit at all, some do. Private equity does usually want to see some profit. Even if it’s just a little bit, they want to see that you’re profitable.

Luke Havard:                     So what happens if you’ve got the next group you might have is another bigger buyer. So you may have another business and they want to buy as acquisition as you mentioned, so they want to buy your company to put it into their company. So they might want to buy some of the technology you have, they might want to buy your customer list, they might want to buy the product and the intellectual property. So you’ve got these different types of buyers individual, private equity, and strategic buyer, and they could be again … it could be another relatively small software company, but maybe bigger than yours. It could be a giant company like Facebook, or Google, or Uber, or whoever, It just depends. They do buy a lot, I’m telling you, I know for a firsthand, I know the guys who work with Google, and they’re buying like five or six companies a month at the moment.

Luke Havard:                     But you won’t probably hear about half of them, they are very insane with Facebook. They’re just buying up stuff like it’s going out of fashion, and you’ll never hear about it because it’s not that cool. Maybe you got the odd ones like your WhatsApp, some things like that, that you hear about, but oftentimes they’re buying companies you’ve never heard of, they’re just small minnows in the grand scheme of things. So this is what happens, and what you need to do is always be thinking, “Who could potentially be my idea buyer? First you want to build your company to solve a problem and serve customers, and of course, you want to make money from it. But secondly, you want to say, “Who would be the perfect acquirer of my company? Who’s going to look at my company and say, “Wow, that would fit perfectly in our portfolio.” Or, “That would really add value to our existing customers.”

Luke Havard:                     So Facebook for me the reason … there could be a number of reasons why they bought WhatsApp, but probably I’d say, because of the users, because they had just these really cool technologies. While I’m not saying that Facebook copied WhatsApp in terms of their calling functionality, but maybe they did. Maybe they copied the messenger sort of float, but they saw something they liked, and they thought it was worth it. I think it was worth 2 billion to them or something, I think that’s what they paid for it, I’m not sure.

Jakub                                    Yes, something like this.

Luke Havard:                     Yeah. So that’s what you’ve got to think of, even if you’ve got a small software company. Like I know for a fact if it’s the right type of deal, we could get anything from four or seven times your profit, or we could get anything from 4 or even 15 times your ARR. We’re dealing with companies right now where they may have … I spoke to someone who had … it was like 11 million ARR, and we might be able to get them 10 times. So that’s 100 million dollars plus deal, right?

Jakub                                    Do all these founders … excuse me, all these companies who you deal with, the companies you are going to sell, do they actually start the business with purpose of selling it because when I talk to some founders or even I, when I was thinking about my exit strategy for my startup, I was like, it’s like ending, It’s like thinking about the breakup when you are on your first date. Maybe it’s ego, maybe it’s those founders who are way too romantic about their business, but do actually all the companies, think about their exit strategy once while they’re building it from the start? Like you are dealing with these companies.

Luke Havard:                     Virtually, no one. So that’s why I think for some people, they may be like, “This guy’s crazy, I don’t even have any intention of selling my company.” But that’s why I think people should start thinking about it because the likelihood is, when it comes, they will be completely unprepared.

Luke Havard:                     I’m dealing with people all the time they’ve got great businesses, but they’re missing certain things that they should have done, and now it’s not as valuable as they hope it would be, and they want me to make it more valuable, and I’m like, “You need to go away for six months and do x, y, and z to make it more valuable.” You want me to know you, “But look, we can just list it, we can price it this.” and I’m like, “It’s not worth this. It’s worth much less.” They want it they want to sell it for 6.5 times their profit, and it’s actually worth more like four times their profit. They want me to be a magician, and magically make it more valuable, and it can’t, it’s not ready to be that valuable because of certain things they’re missing.

Luke Havard:                     So I think really when you start thinking like this … and then here’s the thing, this works actually for any type of business, but it works especially well for software companies. So you can do this for any company like an offline company, exactly the same. In fact, most companies in the world will never be as valuable as software companies, never, they just can’t be. But one thing-

Jakub                                    Why? Because of the margins?

Luke Havard:                     Yeah, the margins, because of the recurring revenue. So that’s another thing people say to me, “I’ve got a SaaS company, but then I check in, it’s only like 20% recurring.” I’m like, “Oh, hey, how can you call it … yeah, it’s a SaaS but it’s not recurring traditionally.” They’re doing one-time sales or stuff, they’re doing like, “Hey, get this special discount right now, and you can get lifetime value or lifetime access.” and you’re like, “Wow, that’s not a SaaS, is it?” You’re selling big chunks of it, and you can’t upsell those customers unless you’ve got something else to sell them. So the point is, I think people … what happens with an offline company, for example, if you got a bakery unless you can get someone on to a subscription of bread, it’s not recurring revenue. It’s just a one time sale, and you don’t know how many times these people will come back.

Luke Havard:                     Gym could be a good subscription company, so if you got a gym … gyms can be… but you know what, here’s some little secret, with a lot of these companies, offline companies. I know about the whole spectrum of the industry, by the way, so it’s not quite sad, I can’t tell you everything about different types of industry valuations. But if you got a gym, I’ve heard this story, it’s the same as McDonald’s. They don’t actually make most of their money in big gym chains off the gym, they make it off the real estate.

Jakub                                    Yeah, that’s true.

Luke Havard:                     Yeah. So what they do is they go, “Okay, we’re not going to own all of these and operate them, we’ll franchise it.” Firstly, they get a fee from the franchisees, and they may get 50 thousand a year, or 50 thousand off from the franchiser, franchisee and then they go, “Let’s buy the real estate on a loan or something,” and then get the franchise to pay the rent. So they have guaranteed subscription rental income. Now the gym owner, hopefully, they can get a good subscription of people, and they keep paying every month or once a year. But I hear most times people are … it’s really hard to get people to stay in gyms. So that’s an example of … what sort of most you’re going to pay for a gym? Not much, really not much, especially if it doesn’t own the real estate.

Luke Havard:                     So when you come to a software company, a software company can be worth a lot of money. If you’ve got a really solid subscription of users, and that user base stays for a long time. You can just keep monthly growing more users, and you’re just growing like this. We’ve got people who we’re talking to with 500% year-on-year growth, 800%, 1200% year-on-year growth. They’ve got like 2 million, 5 million, 10 million in revenue. Those guys are worth a fortune, and they’re going to be worth a lot of money.

Jakub:                                    I want to jump back a little because you said, the software as a service company isn’t the company who does the lifetime deals and LTV’s. They give access for a huge discount for a lifetime for-

Luke Havard:                     I mean they can do like a one year sort of thing. Maybe to get people on, but they got to be very careful because when it comes around to subscription those people might accidentally forget and just keep on … you can take the payment again but sometimes they make so, “Hang on a minute, I don’t want to pay for another year.” They just cancel, and you lose them.

Jakub                                    I understand. I want to talk about because we are actually helping SaaS founders to create a lifetime deals with PitchGround. One of the reasons why they do it is because they just don’t want to have seed investor yet. So it’s seed money for them. So they’re not giving up equity. They have like … they will get quite a nice amount of money for a founder, and they can spend it on more development and more of a position. So it’s not like main growth engine for a company. I think it makes sense. But yeah, there are a lot of SaaS businesses who are just working only a lifetime deals and I think it’s going to help.

Luke Havard:                     Yeah. No, I agree on that, because I’m not like knocking the kind to get some seed money, that’s a good idea. As long as you’re not doing it like for as a long term strategy, because there are companies that I’ve spoken to and they have now got a recurring revenue generator like an element when we look at their breakdown of yearly revenue. So what you do when you just value a normal SaaS like a small one, for example, it will be valued typically on seller discretionary earnings. So that means your salary and things that we can add back into, we take anything you take, like salary, and put it back into the business, and then we multiply that, and that’s where we come to a valuation.

Luke Havard:                     Try not to be too technical with … but then if you’ve got a bigger one, and it’s got a bit of profit, either that, just call it profit, for argument’s sake. One thing we see is they may have like a few different things on their websites, and they might have a monthly subscription. That’s cool, that’s SaaS, that’s recurring revenue, and then they’ve got one of our yearly subscriptions, and that’s okay, that’s good, as long as it people keep subscribing every year, then they’ve got this one time offer as well.

Luke Havard:                     So they’re trying to make it really valuable to do the one time offer but the problem is they’re only going to get that payment once, and those people keep getting the service for the rest of their life. So that’s when it becomes very confusing because they’re like, “Yeah I make 500k in revenue a year, or 500k recurring revenue year and then you check and see I don’t … you make 200k recurring revenue, you got 300k that’s on a one-time lifetime payment, and it still-

Jakub :                                   I think it all boils down to thinking in short term metrics, but these founders, they don’t understand how to increase the lifetime value of the customer so they may be just want to make a quick buck so they offer, and still keep offering like a lifetime deal, with no monthly bills also inside. All right. We have a question here, how long have had these companies been around on average, those growth numbers are mind funding. I think someone is talking about the companies with 800% growth, and how long have they been around?

Luke Havard:                     It Depends. I’m looking at companies that are …it depends. We really suggest that find the dealer with … they the need to be at least two years old. Two years old because investors going to look for that kind of longevity, they want to see that, “Hey, well, how long have you been around for? If you’re six months and you’re trying to come to me, it’s unlikely you’re going to sell your business you may be looking for venture funding instead of to exit. So in answer to his question, these companies, some of them are just been around two to three years they’re not that old.

Jakub                                    So these companies are coming to you that they want to sell.

Luke Havard:                     It depends. Sometimes we’ve reached out to them for our buyers. So we’ve got two different arms as well. We’ve got people buyers who come to us and say I’m going to pay you a retainer to go find me a deal, and we work on the buyer side, another time foreigners come to us and we’ll work on the seller side. But it’s a different thing, separate. So if we’re working for the seller, they could be … which is more common, they could be any age, they could be two years old, they could be 10 years old. I’ve dealt with companies that have been around since 2004, man. The original Silicon Valley companies, I’m telling … I’m serious, I was talking to a guy and he’s like, “Yeah, I’ve been around since 2004.” I’m like, “Wow.”

Jakub:                                    So four years after dot-com bubble. That’s crazy.

Luke Havard:                     I’ve seen people who’ve been around longer, I mean 1999, must be crazy. I mean there are these people who I know, who have been around since SaaS was like… even the term was invented, honestly. But then there’re people I’m dealing with who are just two years old, three years old. there’s a lot of people who were around from different kind of different things.

Jakub                                    All right. Thank you very much. I see that we didn’t have any other question. Pedram was asking a question if you’re seeing how the company is getting customers before investing in them, what is their customer acquisition strategy? Does it really matter to you?

Luke Havard:                     Ask the question again.

Jakub                                    If you are selling a company for someone, do you actually check how they are getting customers? What are the channels? Or what are their marketing strategies?

Luke Havard:                     Yeah, we check everything. If I’m selling the company for someone, we check everything, we go through … here’s the kind of checklist, how long, how old is the company? Is it venture funded? Yes or no? It’s sometimes easier if it’s not.

Jakub                                    Why?

Luke Havard:                     Because if it’s backed by VCs, VCs want it to be more valid. So what happens is … Good example, normal company trying to make … I’ll make it up metrics here. So a million in turnover, and it had some VC funding. VCs often want 10 times on their money. It’s always every time I speak to the company founders they say, “My VC says I need to get 10x.” “Like 10 times your profit” and they are like “no, 10 times my revenue”. So every time … I’m not joking, so let’s say the company’s got 3 million in revenue, they want 30 million from it straightaway. You haven’t got any profit yet, doesn’t matter. Now I can have the same company, it’s 3 million in revenue, and it hasn’t got venture funding, but it’s got a little bit of profit, like half a million, we could get six times for that.

Luke Havard:                     So a very different metrics. So when we look at those numbers, how old is the company? Is it venture funded? What’s your annual revenue? What’s your profit margin? What’s your growth, year-on-year growth? What’s your churn? What’s web traffic? How do you get visitors? How do you get users? Do you pay for ads? Do you get organic? Have you got great SEO? Do you do blogging? Do you have partnerships? Do you do conferences? There are so many million different questions in terms of that. Then we say, what’s the team Like? Maybe they have talent, do you have people that are virtual? Do you have offices? Do you pay for offices? Do you have everyone dotted around the world? Are they contractors or are they employees? Are they valuable? Because that’s another thing, people might buy a company even, and factor in the value of the people in the company.

Jakub:                                    So I heard that big guys such as Oracle and really big companies are doing this. They just buy the startup and they’re not actually interested in the product-

Luke Havard:                     No , they don’t care…

Jakub:                                    They are just interested in the development team. Because if you really do the math and you know that hiring a good developer in San Francisco will cost you like six figures. It’s crazy. So you’re actually for paying seven-figure for multiple developers.

Luke Havard:                     Yeah. If you’ve got the developers somewhere in Eastern Europe or in the Philippines or somewhere, and they are happy to work on a less than Silicon Valley rates then already you’ve spent a million on it, but you’ve got 10 of developers of the whole worth, and you’ve already got your money back straight away. If it has profit as well and a great product, you’re winning all day long. They’re going to want to look at your competition. What’s the obstacles to get into your market? How can everyone … have you got something truly unique? What are the barriers to entry? If you’ve got barriers that make you unique, like moats, now you’ve got something really interesting. Then we ask, what’s your exit? What’s your multiple? What’s your valuation? What are you looking for? I speak to so many that go, “I want 10x, I want 15x, I want 20x.” I’m like, “Okay.” So then I have to … sometimes they’re right. Sometimes they know they’re worth a lot and they are other times, they need to be brought back down to reality.

Luke Havard:                     So that’s what we ask. So I hope that answered the question for the person asking, we ask a lot of questions and we help find … so one thing for anyone listening to this is, we can help before you’re even ready to sell and I think it’s better to be prepared so that you build the company in the right way. Then when you are ready to sell obviously we can help to make sure that we prepare the business, we value the business, we find the right buyers, and we help negotiate the-

Jakub                                    Look, we have last few minutes, and I jumped into you talking because we have a 90-second pitch at the end of every interview where you can pitch your business and talk to the founders here, and talk to our members in the group. So, we are ready when you’re ready.

Luke Havard:                     Cool.

Jakub                                    All right, so I’m starting the stopwatch now.

Luke Havard:                     Okay. So I think this is an idea for founders if they are looking for an exit. There’s a couple of things, maybe they’re looking to raise capital right now, and maybe they’re kind of already growing quite well, maybe they’re looking for a series A. They should come and talk to us. We’ve got access to some of the biggest investors in the world, and the thing is, if you go into raising capital, or you go and try and sell your company on your own, I guarantee that 99% of the time you’re going to have real problems. It’s very, very difficult. So wouldn’t you go to a dentist or would you try and pull your own teeth out? You’d go to an expert, a dentist and get them to do it, so come to experts. The same thing when you’re selling your company, you’re dealing with expert negotiators in the private equity groups and big strategic buyers. They have whole teams that do this all day long.

Luke Havard:                     So you don’t want to be going into there trying to do this on your own. You need people who understand what they’re asking for and to help you navigate this entire process. So when it comes to selling your business, you need someone who knows how to value it, how to prepare it, how to find the right buyers and how to actually sell it and get the best multiple prices for your business sake. So that’s what we do.

Jakub                                    All right. You did it in one minute and 15 seconds. Awesome job. All right, Luke Harvard. It sounds so posh.

Luke Havard:                     Well, that’s because I’m a posh guy obviously.

Jakub                                    Say your last name or no, say your full name. In a posh way, where you get … you can say it

Luke Havard:                     You want me to say it again? Luke Havard.

Jakub                                    Harvard. Okay, All right, thank you very much, Luke, for your time. It was an incredible interview, you have shared so much value here. I’d be very happy if you stay an active member of our community, because we have a lot of people interested in this type of topic, in this topic of buying and selling companies and basically, I think you can just answer a lot of questions about the SaaS products, and about the marketing strategies and so on. So feel free to like reply and network with other people. Thanks again for joining, and I hope we will see each other again soon.

Luke Havard:                     Yeah, thanks for having me. See you guys.

Jakub                                    Thank you. Bye.

Got any questions for Jakub or Luke? Leave it in the comment below and will more than happy to get them to answer your question.

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Udit Goenka
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