Use Cases
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“This is everyday for me, so I love talking about it,” says Carl Hargreaves about mergers and acquisitions.
As the Director of Corporate Development & Strategic Partnerships at WP Engine, Carl has worked on many acquisitions and partnerships, including brands like Flywheel, Perfect Dashboard, Block Lab, and recently, Delicious Brains.
Each company brings different combinations of technology, teams, customer bases, and more to the negotiating table — any one of which could be a huge motivator for WP Engine to want to partner with them.
But if you’re not dealing in mergers and acquisitions every day like Carl is, you might have a lot of questions about how to best position your business if you’re interested in selling.
In this episode of Growth Stage, Carl will dives into his experience running acquisitions of SMB software businesses, including:
- His thoughts on what makes a software company a good target for an acquisition by a brand.
- What factors beyond financials makes a target even more valuable.
- Common operational pitfalls founders should avoid that can make acquisitions more difficult.
- How you should think about building a sellable business.
- And more!
Full Interview: Audio Only
Full Interview: Video
3 Mergers and Acquisitions Insights From Carl Hargreaves
2 Main Reasons Brands Acquire Other Companies
While there may be any combination of features about a business that make it attractive to buyers, it usually boils down to two main reasons a buyer is looking to buy in the first place.
“I’d say there are two big buckets here: There are pure financial buyers, and then there are strategic buyers,” Carl explains.
Financial buyers operate more like holding companies and are often interested purely in potential cash flows from an acquisition.
Strategic buyers may have more complex reasons, such as three to five years strategic plans, entry into new markets, and entry into new product areas.
Knowing which kind you’re dealing with — or which kind you want to deal with — can be very helpful to your own financial plans.
Building a Flippable Business vs. Building a Great Business
Your motivations when building a business can also greatly affect how attractive your business is to buyers and how well a deal might go.
Building a flippable business can work, but those are often built by taking advantage of short-term trends. This leaves the sale of the business a lot more vulnerable to the market. You may have to sell while the trend is still hot, even if the market is down.
Building a business that’s great regardless of current trends can be a slightly longer game, but it’s a more stable game. If the market is down but you have a great business with a lasting concept, you can afford to wait out the market and sell when it’s more profitable.
How Bad Tax Management Can Hurt Profits When You Sell
Despite your best efforts to make a business look attractive based on net positives, there are some very important things to ensure you’re doing to avoid net negatives that can seriously cut into your profits from a sale.
Not doing due diligence on taxes and employee benefits — both of which can vary greatly by region — or having a lot of debt can raise the risk factor for the buyer, who then has to set aside more money to cover the issues. And that’s money that they’ll hold back from the deal.
Interested in learning more about how your SaaS, software, video game, or other digital goods business can partner with FastSpring and let us worry about the taxes? FastSpring provides an all-in-one payment platform for SaaS, software, and digital goods businesses, including VAT and sales tax management, payment localization, and consumer support. Sign up for a free trial or schedule a demo today.
Full Transcript From the Interview
David Vogelpohl
Hello, everyone, and welcome to the Growth Stage podcast by FastSpring, where we focus on how SaaS and digital product companies grow revenue, build meaningful products and increase the value of their business. My name is David Vogelpohl. I support the digital product community as part of my role at FastSpring. And I love to bring the best of the community to you here as co host on the Growth Stage Podcast. Today we’re going to be talking about a really interesting topic, I think, what brands look for when considering acquiring software companies. And in order to have that conversation, we have someone here with us today who knows quite a bit about that from WP Engine. I’d like to welcome Carl Hargreaves. Carl, welcome to Growth Stage.
Carl Hargreaves
Hey, David, thank you for having me. Happy to chat on this today.
David Vogelpohl
Excellent. Excellent. Carl. We’re going to talk more about your background in a minute, but I know you’re a fellow Texan. And I’ve been going with a cool places of Texas virtual background theme all summer. I know we’re kind of getting into fall now here in Texas. But can you guess the cool place in Texas that is my virtual background?
Carl Hargreaves
I feel like I’m gonna be wrong, I’m gonna guess. Krause Springs.
David Vogelpohl
Ooh, that’s a really nuanced guess It’s actually Spring Lake, which I’ve never been to, but I’ve always wanted to go I’ll have to chek that out maybe…
Carl Hargreaves
Where is that? I mean what part of the state?
David Vogelpohl
I think it’s in between, like Austin and San Antonio, I think it’s like one of those offshoots there so… clear water. So really cool. But hopefully I’ll get a chance to visit that next week or next summer. But for those watching and listening, what Carl is going to talk about today is Carl’s views on what makes a software company a good target for an acquisition. What factors beyond financials make a target even more valuable. What are those like it factors, common operational pitfalls that founders might find themselves in if they’re going through diligence and how to avoid those, and really also just fundamentally how you think about selling a sellable business. And, you know, Carl’s role at WP Engine focuses on this in a big part. And so I’m really looking forward to the insights you’re gonna bring today, Carl, but first, I’m going to ask you the question I asked every guest on Growth Stage, what was the first thing you bought online?
Carl Hargreaves
The first thing I remember buying online, so TBD if this is actually the first thing, but it was an organ, an electric organ like the musical instrument. So I bought it off Craigslist probably 16 years old. Probably around 50 bucks. It was clearly someone who just needed to get out of their garage. And yeah, I still remember picking up this thing. And just the experience because you’re a 16 year old kid you show up to this total strangers house who’s like in his 50s he takes you into his garage and like this is just so weird. But yeah, we played that organ in a few bands after that. And yeah, it had a good run.
David Vogelpohl
I wish I would have known about your electric organ skills. I totally would have had you do that here on the show today. Actutally been listened to a lot of Doors recently. They have a lot of that going on. Now that was something you found online and bought in person. Do you happen to remember the first time you entered a credit card for something online?
Carl Hargreaves
Oh, see, I was teenage years as all this was taking off. So it’s got to be CDs, vinyls, music, like that was all I was purchasing at that age.
David Vogelpohl
Excellent. Excellent. I’m glad you were buying music back in the day. I know a lot of people are doing file sharing. So that’s that’s very admirable of you, Carl. Well, enough about the first thing you bought online. Although I did find that riveting. Let’s jump into a little bit about your background. And then we’ll get into a little bit of the strategy discussions we talked about a minute ago. But could you briefly tell me about WP Engine and what your role is there?
Carl Hargreaves
Yeah. WP Engine, we’re the world’s most trusted platform for WordPress. So as probably most listeners know, WordPress is a content management system for building websites. It is far and away the most popular way to build a website 43% of the web runs on WordPress. Our company was founded 13 years ago, to really take a lot of the headaches away from operating a WordPress site at scale. And to this day, we still are the infrastructure, the security, the developer tools, the customer support that you’re going to need to build design power manager a WordPress site. So yeah, in brief, that’s, that’s the company myself, so I’m a director of corporate development and strategic partnerships. So what this means is I touch both mergers and acquisitions, and integrated technology partners. Today we’ll focus on the mergers and acquisitions side. But I also handle our integrations with things like CloudFlare, New Relic, and all the major cloud providers.
David Vogelpohl
Very interesting. And of course, I knew a lot of this going into this interview, because you and I have worked together when I was at WP Engine and had many adventures in some of these areas. And so I thought bringing you on would be really interesting to kind of get your point of view. Here at FastSpring we have a lot of up and coming technology software and SaaS companies that you know, think about their exit from time to time. And I figured some inside baseball might be helpful as folks think about that. So tell me about some of the acquisitions your team has led for WP Engine, like what were the obviously the public ones, but which ones were… what were they like? And what were some of the companies that were involved?
Carl Hargreaves
Yeah, yeah. So um, and just shout out here. I think David actually did the first acquisition WP Engine ever pulled off with a StudioPress and Genesis. So, you know, real recognizing real. But, yeah, for myself, most recent deal we did was Delicious Brains. So they were a suite of different developer focused plugins, the most popular being ACF, which I think it has over 2 million installs. Just looking at our user base, they really were that sweet spot of ideal customer profile. So we brought them aboard. It’s gotta be a little over a year ago. Prior to that, a lot of kind of like acquihire acquisitions where we’re acquiring a product, but then also bringing the team over and kind of forming a scrum team out of what used to be a startup. Because that, that just works really well. And it’s easy from an integration standpoint. There’s Perfect Dashboard and Poland. There was Frost and Brian Gardner, who now leads our developer relations team, and then Block Lab out of Australia. And then the largest acquisition we’ve done and the first one I worked on was Flywheel, they were actually kind of a more design focused, freelancer focused competitor of ours. And yeah, that’s, that’s where I cut my teeth on this stuff.
David Vogelpohl
Awesome. So for those like unfamiliar with the WordPress space, and some of these brands, I guess, it sounds like this is a collection of things like software companies, who have complementary technology that might fit well with your platform and go to market motion. You have acquihires, where the technology is interesting, but also very much so the people not that the people aren’t interesting and everything, but the lead might be that. And then you mentioned Flywheel, which you said was design and freelancer focused, but still in the managed WordPress space, right. And so it was more of a complementary customer bases instead of maybe the lead being complementary technology with maybe the exception of something like local, but is that a fair way to classify some of the acquisitions? You referenced?
Carl Hargreaves
Yup, definitely. All of them kind of have different motivators there. And, yeah, we’re kind of we take a look at a little bit of everything. So it’s kind of dependent on the opportunity and what we see in that opportunity.
David Vogelpohl
Excellent, excellent. It sounded like there were some some different scales there, too. You had like a larger org like Flywheel you had kind of mid, maybe mid size or smaller to mid size, orgs like Studiopress. And then you had kind of one and two person organizations in that mix. So it sounds like you’re kind of involved with acquisitions, at least on that side. You’re pretty broad range that fair?
Carl Hargreaves
Yeah, definitely. We don’t we don’t filter out companies based off their size. Like we are primarily interested in technology, talent, you know, especially if you’re doing something new unique, like, you know, that could be three people in a garage or that could be 100 people. So that’s, that’s not part of the criteria.
David Vogelpohl
Excellent. Excellent. So let’s dig a little bit into the process. Can you describe the process for buying and selling a business from a brand? I think, like a lot of people think about their exit baby, and they think about, I don’t know, maybe a future acquisition from a PE firm, or maybe they’re ambitious and think they might go public. But how does a brand think about it? What does that process look like?
Carl Hargreaves
Yeah, yeah.
David Vogelpohl
And how long should it take, by the way, just like, are we talking like, weeks, months, years, like,
Carl Hargreaves
No no no, great question. Great question. So typical time range anywhere from three months to six months, just to set expectations there. I’ve seen it go a little bit faster. I’ve seen it go a little bit slower. But business do not sell in a matter of weeks. You know, I’ve seen scenarios where founders have been looking to sell that fast because of cashflow issues, whatever it might be. In fact, the matter is like the amount of digging and diligence that needs to be done to actually close the transaction, it’s going to take at least eight weeks to do that. And then let me let me walk through the process a little bit here. So you know, the formal process doesn’t kick off, until you’ve signed some sort of confidentiality agreement with the potential acquirer ahead of that there may have been, you know, informal conversations about hey, would you ever be open to an acquisition or an investment, something along those lines, however, the process doesn’t really get going until parties are ready to share confidential financials confidential legal information, that sort of that sort of data. And the reason that is, is to put together a letter of intent, which is basically like an indicative offer, on what you would buy the company for, you’re going to need access to financials, you’re going to need to vet the technology and the operations a little bit. And that can’t really get going without entering confidentiality. Typically, that sort of preliminary diligence would be the technical name for it, it’s gonna run four to six weeks. If everything’s looking good, and the acquirer gets buy in at their company to make an offer, they will present you with basically a non binding letter of intent. And the reason I’m calling out the non binding piece is, you know, if you’ve, if you’ve ever put an offer on a house, you can, you should realize that the buyer will accept your offer, but they don’t have the you don’t have to move forward with the transaction. M&A works the same way. Where by our best estimate at this point in time, we want to move forward with transaction, but there’s still more work to do. And this additional work is called due diligence or confirmatory diligence. Here, we’re validating all the assumptions that we had to make in the initial business case to put together an offer. So this, like, this is a lot of digging deep into the financial and legal side. And they’re literally going to ask for bank statements. They’ll tie the bank statements to your financials to your like Stripe account, like make sure everything adds up and was represented correctly. And you know, if due diligence comes out clean, that’ll lead to finalized documents and closing of a transaction. Again, this last section normally takes around two months. But yeah, at a high level, that’s the simplest the process can run. They can get more complicated when there’s multiple potential buyers, etc. But that’s a brief overview of it.
David Vogelpohl
Okay, so that’s a really good rundown. So the process fundamentally kicks off, there’s some initial discussions, a nondisclosure agreement is signed, in order to get the information you need to do due diligence to validate the assumptions and guessing on your acquisition thesis or investment thesis are correct. Once there’s the non binding LOI, then that gives you basically kind of like an option period on a house where you can dig a little deeper, further validate that, and then finalize the deal. Is that a good overview of that process?
Carl Hargreaves
Yeah to keep going with the housing house analogy. It’s like you your offer has been accepted, but you haven’t done the inspection on the house yet. So you don’t know if there’s termites in the walls or what could be going on. So yeah, it gives you that period to really do a thorough inspection and confirm every all the assumptions you had to make ahead of that point in time.
David Vogelpohl
Excellent, excellent. I do want to back up one step real quick and ask you, how does the process start a lot of the time, like, what are the options? Like if I’m, if I own a business, and I’m thinking of selling it, like, am I am I sending you a message on LinkedIn? I’m not trying to fill up your LinkedIn box or anything, but how does how did these processes usually get started? How can business owners think about like how they’re going to go to market their business for sale?
Carl Hargreaves
Yeah, yeah. So that it can either be buyer initiated or seller initiated. A lot of times if it is seller initiated, they’ll actually use an advisor or a third party to put together an auction process for the business. So typically, what that looks like is you know, your advisor will put together some marketing materials, put together a long list of the companies that they think would be a good fit as a potential acquirer and then help you with that outreach effort and initial screening of candidates. From the brand perspective, it’s, it works a little bit differently. Like we’re constantly in conversations with different folks in the industry companies that we think are developing interesting technology or tapping into interesting parts of the market. And we’re talking to them about partnerships. We’re talking to them just to learn about what they’re doing. But really just like building those relationships and taking part in the ecosystem, and sometimes those those conversations lead to an acquisition offer. So yeah, that’s, that’s how I put it from from the buyer initiated process.
David Vogelpohl
Yeah, so like be present in the industry and community as you participate in and brands that are bigger than you that might be looking for acquisitions, you might meet them. That’s a really interesting observation on how that sometimes comes to be. I heard you also mention the advisor, which sounds like it’s good for maybe getting multiple buyers, which could improve your valuation. I’m guessing those advisors also help with preparing for diligence. I remember some of the acquisition journeys, you and I are on some of the people or that were involved with the orgs, we were acquiring were kind of, I don’t know, maybe surprised at some of the things they had to produce for diligence. But do you view advisors is helpful in preparing for that?
Carl Hargreaves
Yes. And it’s gonna be dependent on the scale of your business, because they, you know, they do not come cheaply. But if you’re a seven figure business, I definitely would say, you know, start start to look into that if you’re feeling like you want to kick off a process. Now, on the smaller side, like the acquihire side, things can be done a bit more informally. But yeah, I think depending on the scale, is when you should consider getting advisors involved.
David Vogelpohl
Sage advice. Okay, so earlier, we recapped some of the acquisitions that you had participated in and led at WP Engine. And I’m just curious, you know, we kind of categorize them a little bit. But what are like the high level main reasons why a brand would want to acquire a software or SaaS company, or just I guess any company for that matter?
Carl Hargreaves
Yeah. So I’d say there’s two big buckets here. There, there are pure financial buyers. And then there are strategic buyers. For financial buyers just to hit on it quickly. These folks operate kinda like holding companies. They typically have a space they like to play in, let’s say, I like veterinary businesses. And I’m just interested in scaling the size of veterinary businesses that I own. That comes down to literally does the expected future cash flows sum up to more than what I’m paying for the business today, just a pure financial exercise. On the other side of the house strategic buyers. This is really about acceleration of kind of three to five years strategic plans, entry into new markets, entry into new product areas, primarily is where you see a lot of this. So it is really more an exercise and understanding of the company’s direction, the company’s roadmap and saying, are there things out in the ecosystem that’s really going to add more fuel to the fire and allow us to accomplish this faster?
David Vogelpohl
I love that way of thinking about it, right? Like the pure financial buyers, I love the holding company example for that one. And then to hear you think talk about strategic buyers. Because I think a lot of times what people think about is well will my technology make their technology better? If I know, you know, one plus one does that equal three, like that’s the fundamental principle there. But you also called out things like new markets, new buyers. And so I think this is another area where people might not realize they have strength in their company, which is that if they have you know, large customer bases in a region where an acquiring company doesn’t have customers there, that can be a fast path to enter there. So it is more than just technology additions for strategic buyers. Is that how you look at it?
Carl Hargreaves
100%, especially like your your geographic example is perfect. So imagine my company wants to start operations in Latin America, we don’t have customer support in Spanish, we do not have sales in Spanish. We don’t even have like a presence in the market. If we can go out and find a company that’s already established in the market and is operating effectively. That deep takes a lot of risk out of the equation for us entering the market starting a team from scratch. So things like that are great areas for for M&A.
David Vogelpohl
Yeah, that’s a really good point. And it reminds me of the FastSpring acquisition because the again kind of getting back to the idea that there the WP Engine FastSpring platform, had kind of some core similarities, but then some unique differences. And so the this was I would guess, strategic. I’m guessing that’s almost all that you do. But what are some of the other factors that go into considering an acquisition of a I’m gonna throw a quote here, competitor, other than just the financials, other than just, you know, acquiring market share something like that?
Carl Hargreaves
Yeah. So typically, this is like gonna be the textbook answer for you, typically, and you describe it as the one plus one equals three sort of equation that people talk about with M&A. For a competitor, you’re going to make that work through cost synergies, because you’re acquiring a business that’s extremely similar to your own, you’re going to have areas of overlap areas of optimization that you’ll be able to lean into. So for example, do we have a vendor in common? Do I have better pricing with that vendor? Can you then inherit that pricing from me, that’s a cost synergy. Of course, you don’t need two CFOs you don’t need two of a lot of things. So you know, if there’s a founding team that’s going to leave, after the acquisition, that that can be an additional synergy. You know, there’s a lot of areas you can look at the efficiency of customer service and say, hey, we actually know how to do this more efficiently. Can we teach this other organization and then realize more synergies that way. With a competitor that’s kind of fertile ground to lean into for an acquisition. I think the other thing that’s really, when competitive acquisitions become even more interesting is when you identify what’s unique about that competitor. Are they selling to a different buyer? Does their go to market motion look a little different? Do they actually have some products you don’t have? And is there a way you can lean into that longer term, to actually make that one plus one equals three, like if I was, you know, if I was teaching someone how to do my job, I’d say make a base case. And on the base case, it’s just cost synergies and make the math work that way. What you actually want to achieve is that, but then also long term revenue synergies of expanding your market expanding your TAM.
David Vogelpohl
You know me Carl, I always love the growth story. So we have this notion of synergies with acquiring competitors. And we know that one of them is that we don’t have to double spend, I like the example of the founding team, you know, having an exit after the acquisition. You know, and I think as founders, I’m sure a lot of folks are anxious about their team during an acquisition. And I know some acquiring parties, you know, are better than others at retaining existing employees. We don’t have to get into all that, although I know, WP Engine has an excellent track record there. But what I, what I really get excited about is like when I when I think about, you know, if you have two orgs serving a market in a similar way, if you bring them together, you don’t have to have one team working on feature x and another team working on a similar version of feature x, you can just have one of those teams work on feature x, and the remaining team work on feature y. So I feel like a big part of that growth synergy thesis for a lot of folks is being able to get to the end faster. And I don’t know if you’ve experienced that often, or how you think about it from the kind of long term growth perspective.
Carl Hargreaves
The ideal scenario is you kind of take the best pieces of both organizations, and you lean into that. I think, especially as your like your your example was from the product and engineering perspective. And that’s definitely true, you can, you can discover things that you that the other party was doing that were great ideas that your team hasn’t, hadn’t come across yet. So that’s definitely true, but also go to market motions, you’ll find that like team structures are different. And actually, as you start breaking into like efficiency of marketing spend, they may like you know, the the acquiree or maybe the acquirer may be doing things in a much more efficient way. So it’s really about like taking the learnings from both organizations and like mind melding them to create, you know, something a bit better.
David Vogelpohl
Totally. Okay, so I’m curious then for like technology focused acquisitions as their company has x and that would be a good fit with us. What are some of the high level factors involved with those?
Carl Hargreaves
Yeah, so this goes back to fit on the company’s existing strategy. And I think this is from where I sit, we’re in the WordPress ecosystem. There are 10s of 1000s of plugins, there are 1000s of SaaS companies out there and our users leverage these products. So there’s so many areas we can move into. I think what’s critical is for us to maintain focus of what do we think are the best market opportunities? And what are the market opportunities we’re already leaning in towards, and using M&A as an accelerator for realizing those outcomes. So it is really, as I’m looking at different technology companies, it is really where do they slot into our plans for for a certain space? So a lot of it’s fit. You know, and you can’t, you can’t make that up. A little bit is serendipity, as far as like, okay, is there actual alignment in the the market opportunities these two companies are going after? So, yes, I think there is a big, there’s a factor here of timing and luck. And just like, things lining up, right that like it’s, it’s hard to manufacture. It just has to happen.
David Vogelpohl
Yeah, totally makes sense. I also liked how you kind of start with what’s our existing strategy and roadmap and thinking of acquisitions as a way to accelerate that. It also sounded like you touched on potentially opening up new opportunities, maybe something that wasn’t on your existing but starting with the existing. So it feels like if you have a software or SaaS company, understanding potential buyers, where it looks like their roadmap is headed and how you might fit in could be a good way to think about how what potential acquiring customers might might be in your future companies might be in your future. So I’ve had many acquisition adventures, even even beyond WP Engine. And I can remember from the past and diligence, stumbling across folks that hadn’t, you know, done their taxes, right, or something like that. Has, what are some of the other common pitfalls that you know, folks run into during diligence where they’re like, Oh, my goodness, I didn’t realize X?
Carl Hargreaves
Yeah, this is where the war stories start to come out. And you realize they’re all you know, they’re all unique. Like, there’s so many quirks.
David Vogelpohl
Of course, please names and companies. Leave that out. Yeah, love some war stories.
Carl Hargreaves
But really common. If you have gone out and you have raised debt, you have raised equity, being really familiar with the covenants of those debt agreements. And also like the term sheets, you’ve got from investors. A lot of times, founders won’t have taken the lens of what those agreements, what repercussions they could have on a potential acquisition. As far as kind of like there’s a there’s a loan actually, does the bank that made the loan actually need to approve the acquisition? Like that can happen. Does an investor get a right to be informed? Or do they actually have to consent for the transaction to happen? You see it. It can range depending on the terms, but really being familiar with what those terms are, is critical. And then aside from that, there are a lot of dependent on geography. Depending on what state you’re Incorporated in, what country you’re incorporated in where you’re doing business. There’s a lot of regional quirks. These typically have to do with taxes, as you just called out, but also benefits. So a lot of times, I think, as I was describing the process before, the acquirer won’t have an understanding of this when they were doing their initial assessment. And then as they’re digging in and really doing due diligence, they’ll start to realize like, oh, there’s actually significant additional costs because we have to pay out x benefits or x sales tax. And, frankly, that’s going to come off whatever the initial offer was, to keep the acquirer whole. So that’s definitely something to be aware of. Best way to get ahead of that is talk to people in your regional markets who have sold businesses, they’ll tell you, here’s what you got to watch out for. And then of course, if you’re already further along the process, there’s gonna be region specific counsel who will know this stuff in and out.
David Vogelpohl
So the way this plays out then would be something like you do diligence you do discover they have employees and X locations you discover they maybe haven’t been compliant regarding the way they pay them, and things like your share of it or income tax type. compliance. And that can cause a problem. And then you also mentioned things like sales and VAT tax, where again, you might discover as part of the process, maybe they’re not, that’s a sweet spot for me, because FastSpring is a merchant of record, we handle that for our customers.
Carl Hargreaves
Yep.
David Vogelpohl
But these are the kinds of things that pop up that you might not have realized. But when somebody’s going to go put up, you know, seven, eight figures or something like that, or more, they’re going to check and make sure is what you’re saying,
Carl Hargreaves
Oh, yeah, this stuff will get uncovered. And they’ll actually, typically, there’ll be a hold back, a certain amount of money will be held back to actually cover for anything that’s unforeseen. So if a year later we find out there was a bunch of VAT tax that wasn’t actually paid, we’ll actually have a pot of money that’s set aside to handle that sort of thing.
David Vogelpohl
Okay. And I’m guessing that pot gets bigger the more risk you see in the diligence?
Carl Hargreaves
Yes, yes, yes, exactly. Again, it’s something that gets negotiated. But yeah, that is one way to deal with risk.
David Vogelpohl
So we’ve talked about kind of building building a sellable business, a lot of this interview. And, you know, I’ve talked to founders that kind of approach it in different ways. I’ve talked to those who on day one, we’re building a sellable business. And I’ve talked to others who are really focused on building a great business, a great product, a great team, and they didn’t pay attention to all the nuances that would make their diligence perfect. Which version is the most viable?
Carl Hargreaves
What I would say is, is this, the best position you’re going to be in is if you build a great business, you will always have the option to sell. And you will then build in the ability to choose when you want to go out and sell. If you are building a business, just with the notion of hey, I’m gonna flip this in two years. I see that this, you know, there’s kind of a short term trend I’m going to take advantage of, you’re really, you know, at you’re really it depends on what the market does depends on your options. If you’ve built a great business, it doesn’t matter what the markets doing, you can wait out, you know, quirks in the market for a year or two, and then decide to sell your business later. It’s really building that optionality and from having a solid business would be the preferable path. It’s also a better gate, better stance to negotiate from knowing you can walk away from the table at any point in time.
David Vogelpohl
Excellent. I like that. So build a great business and you’ll always have always have options. I think that’s that’s really sound as folks think about, you know, how to structure their business and then really what they’re building it around. Okay, so last question, what are the top two or three things you recommend software, founders keep in mind when building a sellable business?
Carl Hargreaves
I think we we hit on the first one, like, best practice is, keep a long list of potential acquirers. If you see an acquisition as the ultimate exit for your business, make that long list early and start building connections, start understanding what those companies are up to. Because that’s A) the relationships are going to make an eventual deal easier to get done. If you have the report, and then B) like the understanding of what those companies are up to will actually inform a bit of the decisions you make about the products you build, and just how you build up your company. So I would always say keep a long list probably have like an A, B, and C tier of these are who I think could ultimately be interested, is best practice. Also, to your previous question, don’t put yourself in a position where you need to sell. That is a really weak start to a negotiation. Like, we’d hit on this also, M&A is very situational, like things really have to line up of, I need to be very have a lot conviction around my strategy to be making a big investment in a certain area. So timing on that is going to be very situational. So you’d rather be in a position where you can you can wait until until people come a’knockin’ and then lastly, I’d say as you’re making big decisions about your company, the type of products you’re going to build the the type of business models and ways you’re going to monetize. Consider the ultimate impact to enterprise value. So for example, you know services are valued at completely different multiples, than like a SaaS business. People who monetize in GMV are valued completely differently. You want to have an understanding of how taking your business in different directions is going to impact the ultimate outcome. And to the, to talk about the previous point of the long list, you also want to know if those businesses would be a good fit for people on the long list. Maybe they don’t touch businesses that go into services. So you’re really gonna limit your options if you go in a direction like that. So that would be my advice.
David Vogelpohl
Okay, I got it. So we’re gonna keep we’re going to start early and maintain a long list of potential acquires start to build those relationships, keep tabs on what they’re up to. We’re going to try not to get in a position where we need to sell. That makes a ton of sense. Obviously, you command a better valuation. And then I really liked how you pointed out that when you’re making big decisions. Think about how those decisions might support your own valuation in the long term, and then also how it might layer in to your kind of running list of potential acquirers sounds like a good operating system, at least from the high level. But this has been very informative though. I really appreciate you coming on and talking about talking about all this stuff, Carl.
Carl Hargreaves
Yeah, of course. It’s been fun. You know, this is this is everyday for me. So I love talking about it and you know, happy to come back and go on dive deeper sometime.
David Vogelpohl
Excellent. Well, I hope folks enjoy the inside look at how brands think about acquiring SAS and software companies. Thanks, everyone for joining today. If you’d like to learn more about what Carl is up to, you can visit WPengine.com. Thanks, everyone, for joining us on the Growth Stage podcast. If you’d like to learn more about FastSpring and how we can help you sell digital products globally, automatically stay tax compliant, and be ready for that diligence, and keep your focus on your products, visit fastspring.com. Thanks everyone!
