Life Cycles of a Business – Michael Frew

Michael Frew:
When you’re in a large organization, right, you’re so specialized that you don’t see the big picture. You don’t see the whole business lifecycle. You don’t see the customer acquisition life cycle. First thing I would recommend to viewers and listeners is just learn and take as many courses as you can about that. But what I typically find, so in my niche, I look for software and SaaS companies, and that group is very interested in the entrepreneurship journey. And once you get to the point where there’s like an inflection point where customer issues start to become a problem, scalability becomes a problem, and you’re not doing the entrepreneurship part anymore. You’re not working on the engineering, which is what they love. And that’s when you start to see them thinking about selling.

Dana Robinson:
Exit Plan is a podcast for business owners and those who want to be business owners. I’m always in search of the lesser known stories of entrepreneurship. In the exit Plan podcast, you’ll hear stories from startup to sale and hear from the professionals who helped business owners achieve their exit. Hosted by me, author and private equity manager Dana Robinson, along with my co hosts and guests, you’ll hear real stories, tips and tools that will help you plan for the exit you want, whether you are still working at a day job or running a business. Let’s get started with this episode of the Exit Plan podcast. Hey, everybody, it’s Dana Robinson coming to you on the Exit Plan podcast. I’ve got a fantastic guest talking about a subject I don’t know that I’ve ever addressed in the exit plan or in the old opt out podcast days. Michael Frue, thank you for coming on the podcast.

Michael Frew:
Hey, Dana, great to be here. Thanks for having me.

Dana Robinson:
Absolutely. I’m excited to hear about your journey personally. And also, I love what you said earlier to me offline was, you want to talk to your avatar is you 15 years ago. And I love that because most of the reason I do this is I’m curious and I want to learn from other people now what I don’t know, I don’t know. But also, you know, on publishing it, because I really want to get to the person that I wish I had this information myself ten or 15 or 20 or 30 years ago. So thank you. I think that’s a great give back and let’s dig in. Let me just start this way so that if anyone’s listening wants to know, what are we going to hear about? Michael Frue has experienced startup but also buy and grow technology companies.

Dana Robinson:
And if anyone’s listened to me, long enough on this podcast, we’re on like the 150th episode. I’ve done the startup thing and it’s incredibly painful and a bunch of those don’t make it to fruition. And over the last five years, I’ve gone to the private equity side where we buy functioning businesses and we grow them and then we try and optimize them and either, you know, make money, exit, recap or whatever. The opportunity is so much better and but never done it in technology. So I’m excited to learn your playbook, and if you’re interested in how you buy a technology business, SaaS the mechanics of that, we’re going to get into all of that today with Michael.

Michael Frew:
Yeah, I think you hit the meat right there in the beginning with the difference between trying to start your business yourself and as we all know, the failure rate and the challenge, like you said of, I remember sleeping under desks at startups and everything, and then you switch over to private equity side for yourself. For me, I started acquiring businesses that were also successful, had cash flow, had customers. It’s a whole different world. You kind of skip the line a little bit of all the challenging parts, and we just go and iterate and operate on the things that are already working. That’s a completely different mindset that I just didn’t have as an engineer in my past. So, yeah, I’m excited to talk about that.

Dana Robinson:
Awesome. Well, we’ll get to the how to, but I like to get everybody’s personal journey, the ups, the downs, the good, the bad, and the ugly, if I can. So let’s start you out from when you kicked into the entrepreneur journey on your path.

Michael Frew:
Sure. Just frame of reference. So I’m in kind of my later forties. So let’s start with the beginning of the career. Was an engineer, developer, it consultant, probably like a lot of your listeners. And it’s a pretty typical engineering path, right? You’re doing coding when you’re younger and you start getting pushed into management. And for me, like many engineers, many developers, many tech entrepreneurs, there’s something that’s missing. It’s really important to work in corporate, at least in corporate America.

Michael Frew:
For me, I’m not one of those people that says, you know, leave when you’re 21 and go try and start your business. You do learn a tremendous amount of things, but at some point you do start to notice that, okay, this probably isn’t where I want to end up in the next 30 or 40 years. When you’re in technology, there is a certain level of ageism. It’s actually quite encouraged and it’s theoretically illegal, but not well practiced. And you do see a lot of engineers, as they get to my age, start getting pushed out of corporate America. So you do start realizing that you need a plan. And a lot of us, we’re always trying to start up a side hustle. That’s a pretty popular topic all over social media.

Michael Frew:
And the thing that isn’t talked about quite as much, and it took me almost 20 years to find it while I was doing this journey, was that you can actually acquire these businesses or acquire projects that you can turn into companies. So I started with kind of a 20 year career of development consulting and took a bit of a sabbatical. And I had multiple times during that 20 year career where I just, I just quit my job, right, and I called them kind of like quarter life crises. And so I kept having these every five years. One time I went back and got an MBA and I go back into technology because tech has that golden handcuff problem. It’s really hard to just say, I’m going to leave engineering and go open a yoga studio. The pay is just not going to be the same. So kept coming back into technology, but I just knew something about me working for somebody else and not running projects that I really enjoyed wasn’t quite right.

Michael Frew:
So once I had done a few of these quarter life crises, it took a little bit of a sabbatical at 20 years to step back and just say, so what’s next? And that’s where I stumbled on acquiring businesses. And I started with a small one, just a five figure acquisition, just to see if this was something that I would be interested in. I had spent time taking courses and how do you run online companies? Obviously, it spent 20 years doing the tech side, and I found from that small business, this was just a fantastic direction for me to pivot and do the rest of my career. So from there, moved up to six and seven figure acquisitions and kind of learning the process of how that works. It is a little bit different in the online world versus the brick and mortar offline world in many ways, I would say it’s a lot easier. It’s a little bit of an easier path for people to move into for owning a business and using that as a wealth creation tool. So, yeah, that’s kind of the path. And now I’ve been doing this for about ten years with acquiring companies.

Michael Frew:
I absolutely love to operate them, and when the time is right, I look to sell them.

Dana Robinson:
So I like the little stories because they’re attainable. And I’ve, and I’ve had some of those, you know, like buying a business for 40 or $50,000 that you can later sell for some hundreds of thousands of dollars is. Should be, you know, if you’re not burning the money while you’re running that business, should be a life changing move that lets you bring more chips to the table. Right. So did you find that was your. Was, was the sub six figure acquisition something that gave you at the table something you could sell and level up to the next thing?

Michael Frew:
Yeah, absolutely. I was fortunate. I worked in cybersecurity as a consultant, and that’s a pretty lucrative area to work in. So I had some cash that I was looking to deploy. And just like you said, if you’re using the cash flow to do the next acquisitions, you can really start rolling that up. And that’s how you can relatively quickly get into looking at six and seven figure businesses. Things have changed in the last decade. It was, when I started, it was a bit of the Wild west in online businesses.

Michael Frew:
There wasn’t really a way to get financing. Now we even have the SBA in the United States is financing online businesses. So that’s really changed. So you can buy larger companies. That is very normal in the off market, offline world. That just wasn’t there before. So now I think people can take just a five figure amount of money and be able to buy a good six figure business, maybe replace your income and start using that as kind of your next career step.

Dana Robinson:
Yeah, the. Well, I don’t know if you want or can talk about this, the first or second deal, but I think they’re always instructive. When you took take over, like, whether it’s hypothetical or the real thing, take over business, you give somebody some money, whether it’s 20 grand or 50 grand, you own this asset. Now. It’s got customers. Talk through that journey, because I think that’s the starting point that I always think we’ll learn what you learned from that. But, like, you got this business then, and you’re like, okay, how’d you figure out what to do? And what did you do?

Michael Frew:
Right. Yeah. That goes to a lot of the benefits of working in corporate America, because you’ve got some marketing experience, you’ve got some engineering experience. So, you know, okay, this is baseline how businesses work. And that first acquisition, you learn really quick, do I like working with business to business customers? Right. So me, it was engineers that are inside of other companies, or do I like working business to consumer where you’re selling to that market. And so those smaller acquisitions are really good opportunities to kind of figure that out. What are you interested in working in? And I always encourage everyone to look at the niches and your specialties that you’ve had in the past and look to acquire online businesses that can leverage those kind of niche skills.

Michael Frew:
So if you haven’t really run a software project, I would recommend maybe not looking at buying a SaaS or a software business and looking at something that’s in marketing or content that would be more relevant to what you’ve done in the past. So that’s what’s nice about online business is there’s so many different niches that you can kind of move yourself into. And we’re kind of talking around a question that people have. Should I buy a starter business first or should I deploy all my money right away and buy that large business? I can make an argument both ways. Obviously, I did the starter business first to make sure I enjoyed it. I knew right away, okay, this is fantastic. Let me deploy more capital and buy a larger business. And some people, they already know right away, hey, this is exactly what I want to do.

Michael Frew:
I’m going to put all my capital into that first business. But yeah, starting with something that’s a five figure acquisition, it’s a really good way. If that’s how you can ramp up, it’s a great way to stair step your way up. And I would say a lot of this is very much like real estate. Thinking of assets in the same way where you kind of start with that single family home and you kind of move to multifamily home and you’re just always leveraging up over time. And if you look at this as a wealth building tool, you’re looking at decades of time, you know, that really starts to make a difference.

Dana Robinson:
You’re buying a business, what are the knobs and levers? I mean, you know, because you can’t, you, I just can’t believe that in corporate America you were able to get the breadth of knowledge about how do I optimize for, you know, the, how do I open the funnels for this? How do I market, how do I convert, how do I sustain the longer, you know, lifetime value, you know, how do I run dashboards with KPI’s? Like the, you know, I’m interested in like a little bit more detail around the mechanics. What did, what do you do to fix a business? Because you have to fix it to make more, right? You can’t just buy this thing and it magically throws off money because most people are selling a business if it was magic and throw off money so they could just go hang out on the, on the lake. Yep. They wouldn’t sell it to you, or at least not for the price you want. So you’re going to fix it. Talk, you know, can you talk to what, what does Michael frue do to fix?

Michael Frew:
Yeah, that’s the challenge when you’re in a large organization, right. You’re so specialized that you don’t see the big picture. You don’t see the whole business lifecycle. You don’t see the customer acquisition lifecycle. So first thing I would recommend to viewers and listeners is just learn and take as many courses as you can about that for online businesses. But for me, what I typically find, so in my niche, I look for software and SaaS companies. I’m looking for businesses that have been owned by or started probably by one entrepreneur or maybe a partner. Usually there’s probably an engineer and then maybe a marketing person that’s kind of a good partnership.

Michael Frew:
And that group is very interested in the entrepreneurship journey. And once you get to the point where there’s like an inflection point where customer issues start to become a problem, scalability. Scalability becomes a problem. And you’re not doing the entrepreneurship part anymore. You’re not working on the engineering, which is what they love. And that’s when you start to see them thinking about selling. And we see these changes in the market. A couple years ago, it was NFts.

Michael Frew:
Now all of a sudden, the last year, it’s AI. Everybody wants to jump into the new thing, so they look to sell their business, and that’s about where I show up. And so what you find in those types of businesses, there’s two things that you really can push the lever on, and one is how do you make it scalable for future customers? So we work on the infrastructure on that piece. Where is the business starting to break, and then how do we apply some gasoline to it and do the marketing? So you’re really trying to get that outside marketing piece, bring more customers in, but also be able to scale with the size that you have right now. Those are the two things that I concentrate on in that first year with kind of a side plan to nothing, not let the customers know that anything has really changed. You really don’t want all of them to notice something happened. So first rule of my acquisition is just don’t break anything. Don’t try and push out features right away.

Michael Frew:
And I know there’s other acquisition entrepreneurs that handle it differently. Right away they want to double the business in six months. I’m a little bit different because software companies are a little bit more complex than maybe a content site or an Amazon ecommerce site. So for me, it’s really don’t break the business right away. Watch what’s going on, plan and prepare for scale, and then start putting the marketing in there.

Dana Robinson:
Interesting. I like that. So do you think the way I think of most of the SaaS and software businesses that I’ve invested in or that I’ve seen, they’re always reproducting. So it’s like they’re always on a product improvement path and almost, I guess the reason is, as you say, they’re either excited as marketers about the product and always want new features and functions, or they’re the engineers and they thrive on, look at this cool thing that our product can do. And you’re saying, look, when you buy it, you need it to just function as it is. You’re not going to do anything that’s going to improve it, but you’re going to be sure it doesn’t break.

Michael Frew:
Yep. Yeah, just, and yeah, you do have to kind of set the expectation that I’m going to carry forward the mission that you wanted in the first place. And I think that’s a good selling point for buyers to say to the sellers, typically for a seller, this is their baby. This is something that they really value. They do care about their customers. They don’t really want to send it to a buyer that’s just going to outsource it or even possibly shut it down. So once you kind of explain that, that, like, I want to continue your mission. So the first thing I have to do is kind of observe what’s going on and understand the cadence of the business, which means I’m not going to do a lot of changes right away, and I’m going to listen to customers and see, you know, those feature requests, they always come in.

Michael Frew:
You track that. The seller usually can tell you, here’s the next ten things I would do. And you start building on that and you’ll find, you know, it sounds like a long time when you say one year, but you find as you start, you know, planning those features out after six months, you start putting them in after a year. But then you’re comfortable with the infrastructure, you’re comfortable with. If there’s an emergency that you can deal with it. That makes it a lot easier on my team. Make sure that it’s not disruptive for customers. So, yeah, I’m a little bit more of a kind of a softer acquire.

Michael Frew:
Instead of going in there with my ten step plan of how are we going to change this all tomorrow and then sell it in 60 days.

Dana Robinson:
Right now, what’s the optimum size? I’m thinking of like people that I know would like to start a business, like to own a business, and they need to step into something where they’re not the programmer in your scenario, the partners, which is, you’re so right about an aggressive salesperson or marketer and a developer, usually who you’ve got, they’re leaving to go do the next trendy thing, right? They’re taking a little bit of money off the table. They’re licking their wounds in most cases to be like, wow, we spent $300,000 on this thing and we’re selling it for 60 grandd. They’re not going to work for you for free, are they? And how do you handle the support of the technology and the sort of the free human labor that they’ve been investing?

Michael Frew:
Yeah, it’s a challenge. So if a seller has really planned this out well, they’ll actually have someone in the pipeline to be able to take over their role at the size of business. So I’m usually looking at sub $5 million businesses run by one or two people. Many times the sellers probably aren’t educated well enough to know that that’s how they should position the business. So a buyer like myself has to come in and say, you’re right, I have to replace you. You have a cost which you haven’t really factored into the sale price that you’ve got here. I might have to replace you with two people because you’ve been doing the marketing and the engineering, and we probably need two people for that. So there’s always a bit of a conversation there of like, this is going to affect your sale price.

Michael Frew:
It’s not worth as much as it is when you are the operator. So that’s the ideal situation. Many times you are bringing in a new team. I have had a few cases where the seller says, for this fixed rate, I’ll continue working on it, but really my goal over the next year, I want to be doing something else. I’ll help you while we train someone, it’ll be this hourly rate. A lot of times we put that into the purchase agreement. That works really well too. But if I could advise any software engineers that have a business, if you have a transition plan with someone else that can take over your role.

Michael Frew:
That’s really, really helpful for your sale value.

Dana Robinson:
Right. Right. I guess that’s, there’s the two sides of the coin. If you’re listening to this and you’re looking to buy, there’s an opportunity. If a seller is just like, I’m bored, I want out. And they have no succession plan, they have no ability to replace themselves. The value then is it’s yours as the buyer to seize hold of that. And one solution, I like Michael’s solution.

Dana Robinson:
You just say, hey, I’m going to relieve you of leadership, but not of some responsibilities. So here’s, I need you 10 hours a week for a year, and you can go start your AI crypto startup, and, you know, but you got to support this product. But you’re right. If someone’s here who’s got a business that they’re trying to build, the sooner you can replace yourself, the sooner you create real value for yourself when you sell, because then an investor like Michael can come in and you probably pay a premium when you say, oh, all the humans are in place, and you don’t even need perfect humans. You need to just know for a year, while you’re not breaking it, that they’ll do their job right.

Michael Frew:
Yep. Yeah. Because people on my team can help, and this is, you were kind of touching on it a little bit. This is a huge opportunity for other developers that maybe are looking to leave the w two world and have their own business. If you are an engineer yourself and you can acquire a tech SaaS or software business and replace that founder, well, that’s fantastic. So you’re kind of getting the business a little bit of a discount. You don’t have to hire anybody else to do it, and you might be trading your $150,000 a year annual salary for a business that makes 150,000 in cash flow. That’s, I think, one of the best opportunities.

Michael Frew:
I am, unfortunately, a bit older where I haven’t been doing the engineering and development for a while now, and I can’t do that anymore. I always have to hire somebody else. But, boy, if you’ve got a little cash, and I always say save for it a little bit, like you would say for your first house, and you can find a business where you go in there and you can almost replace your salary, that’s a fantastic opportunity for engineers.

Dana Robinson:
I love that. So I want to talk more about each of the different companies, because I’ve been trying to force you down to the smallest of your, you know, the entry point, because I think. I think that’s instructive. Where have you found the deals? I mean, the offline traditional businesses, biz buy sell, a bunch of brokerage houses that are banking deals will have listings that you can get on their email distros. But for SaaS, is there one main place or is there a bunch of places to go hunting for the deals?

Michael Frew:
Yeah, you kind of, you hit on it in the beginning. Right there you have marketplaces kind of like biz buy sell. And so in the online world, it’s places like Flippa and acquire.com. and then you do have online business brokers. And so Fe International has been a great one for SaaS and software, quite like brokerages out there. Empire Flippers is fantastic for Amazon sites. So each online brokerage kind of has its own specialty. Then there’s marketplaces that have a little bit of everything, but also a little bit more caution as a buyer.

Michael Frew:
And so it very much mirrors and mimics the offline world. So as this industry has matured, you are correct, there are brokers. You can sign up for the same type of listings where you’re getting every new business that shows up. You’re going to get either early access, if you’ve already said, hey, this is specifically what I’m looking for, you’ve vetted yourself as a buyer where they know you have funds, so you can get it maybe a couple weeks early or you just get the general listings. So again, I absolutely love seeing this industry mature from having started this ten years ago when I. You were just really just trying to figure this all out yourself. Yeah, a lot of people are moving into it, seeing this as an investable asset class going forward. So you are seeing a lot more online brokers, more marketplaces to go and find these businesses.

Dana Robinson:
Yeah. And I guess the size, when we go back to my question about what’s the ideal target, I guess it varies depending on how much money you have. And we’ll talk about money and deal structure in a second. But the, you’re under the normal size for venture based investment, or like if VC is coming in and you’ve got the trajectory, then you can continue to just fundraise in price rounds. And if you’re already generating positive EBITDa, then you can sell private equity. But if you’re, you know, if you’re 5 million or less in revenue, you’re probably not. What do you, what are you putting 10% to the bottom and just burn and everything else to run the business? Right?

Michael Frew:
Yeah. So that’s why it’s such a sweet spot in this area because we don’t have what I would call like the professional PE that comes in and you know, these guys, you know, you’re bringing in the big guns. We’re in that perfect spot of the business lifecycle where you start from zero to one, which is the entrepreneur. They have the idea, they get those first few hundred customers, turn it over to someone like me. So then I’m going to be an operator, take it one to ten, and my goal is maybe to sell it to the PE funds on the top end there. And so that’s, it’s just a really nice niche spot in there. It allows us to be highly scalable, leverage our headcount really well, and it’s just a spot that I really enjoy.

Dana Robinson:
I like that. Now, a lot of people listen to this that haven’t bought a business before. Maybe they have and they just paid cash. I’ve never sold a business without deal structure and I’ve never bought a business without deal structure. There’s always some components of seller carry, seller role and seller hold back that in any given deal, the cash required to close out of pocket is somewhere around half of the asking price. And in many cases you can borrow that from a third party. If the deal is debt free, they become the debt provider. Have you talked about any of the deal structure and any big wins or ideas that people can take home?

Michael Frew:
Yeah, again, different. Ten years ago I had to buy all cash for my first six figure business because there wasn’t any financing out there. And that’s fantastic because the ROI is pretty good right away, but I have definitely changed and gotten more as the opportunities have gotten more advanced. Last acquisition about 18 months ago, you’re really starting to layer in different pieces of, exactly like you said, seller financing. A little bit of a holdback financing from two different companies. One was debt, one was rolling forward some monthly revenue of a different business. There’s so many ways that you can structure it now, which is really fantastic. So like you’re indicating, if you’re just rolling in with the 10%, 20%, you can find ways to make up that other 80%, whether a little bit from the seller, whether it’s a little bit from a third party, and make it probably a larger acquisition than you realize.

Michael Frew:
Now, software SaaS, online businesses, our multiples are a lot lower than you’ll usually see out in the offline world because there’s a little bit more risk since there’s not much of an asset to sell if everything goes bad. The good news is if you set up your debt structure and how your package is going to work. You can pay that off pretty quickly and then start making that revenue as income pretty quickly in a couple years. It’s a little bit different than looking and saying, okay, it’s gonna take me ten years to pay this loan off, and I’m never gonna actually get any cash flow from it unless the business grows. Ours can be a little bit quicker, but, you know, you’re trading off a little bit that higher risk.

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Dana Robinson:
So, for people who are thinking, how do I get into this business? They. They don’t necessarily need to shop for the exact amount of money they have placed aside to do the deal. Yeah.

Michael Frew:
Don’t be scared. If it says, you know, it’s a million dollar business, well, it’s probably worth 800,000. They’ve already inflated a little bit and we can come up with 650. Right. So if you can come up with friends and family of 150, you might be able to pull off, you know, a business that throws off a couple hundred thousand dollars in income a year.

Dana Robinson:
Right, right. So the friends and family is a way of basically reaching out to your network and saying, hey, if you would like some equity in this business, or the rich aunt who says, I’ll just loan you the money, I need interest, give me 9% or whatever, you might beat the market and still make a family member happy on the interest rate and give them the security of being a creditor.

Michael Frew:
Exactly.

Dana Robinson:
Have you done acquisitions that add to existing businesses, like roll up style or strategic, where you’re saying, you know what, this could grow quicker if we bolted this other business with the one that we already own?

Michael Frew:
Yeah, I have looked for it and I’ve never quite been successful. So what I like to acquire are businesses that are typically on the same software stack, but even on the outside, the customers don’t realize they’re kind of the same thing. Right. So one’s an appointment reminder service, the other is IP proxy service, but in the back end it’s all the same software stack. So it’s the same people in that way, I’m kind of leveraging and maybe putting everything together as kind of a strategic investment. But I have not been successful to find on a brokerage or a marketplace, a business that, oh my gosh, this is exactly like it’s my competitor. This is perfect. Let’s buy this and we’ll just roll it together because there’s a little bit of chance waiting for that to happen.

Michael Frew:
But if it did pop up, that would be fantastic. Many SaaS companies are pretty unique where it’s going to be different than if you’re looking at maybe a pool cleaning service where you can just roll those up in a whole neighborhood h vac and those kinds of things. It is a little bit more because you’re on a global marketplace, so it kind of evens out a little bit fewer of the same exact businesses. So I’m saying, yes, I’m looking for it, but really haven’t quite pulled it off yet.

Dana Robinson:
Yeah, no, I appreciate that. That’s a good contrast to why there’s so much private equity activity in what we call the buy build strategy where you buy and you build enough by rolling roll ups with additional acquisitions. Because all, you know, many plumbing businesses can be combined into one platform in many H VAC electrical landscape is what we’re doing. So these are rollable or roll up opportunities that I guess I hadn’t really thought about that. SaaS, most people have a unique proposition when they build their SaaS and they might be competing, but it’s not that common where you can go, look, there’s 30 people doing the same thing. I’m going to go buy three and have critical mass yourself once you buy this business and grow organically.

Michael Frew:
Yeah, I’m trying to think of even mine one of them. It’s a deployment platform for a certain software language to find that same competitor. Well, then it’s a challenge. Everybody’s deployed on different infrastructure. How would we combine it, you know, other than maybe tying together the marketing so it can be a little bit more challenging in the, in the online world. But there are people in my community that do those things really well. It’s just not quite my specialty just yet.

Dana Robinson:
Got it. That’s great. Talk a little bit more about these bigger deals as you grew the business. You know, I pick, picked your brain on the small beginning stuff. You managed to grow something. I’m interested in the, you know, big, bigger deals, what they are and how you got them done. And then I, it sounds like you have created what I’ll call a platform in the sense of common staff that can be deployed on new acquisitions. So talk through some of the bigger acquisitions.

Michael Frew:
Yeah, it’s always important to talk about the things that didn’t go well. That’s where you learn the most. And so I think my first seven figure acquisition, it was the wrong acquisition for me. I had done a few six figure acquisitions. I thought, like everyone, oh, this is, you know, I can do this. And it was parallel to what I was doing. It was more of an e commerce business that had a software element. And so it was a great lesson to stay a little bit into the niche that I’m really an expert in and leave e commerce for other people that are experts at e commerce.

Michael Frew:
And that’s where you learn the most. So that acquisition is the only one that I’ve ever had to sell because I just wasn’t the right operator for it. So fortunately, that has really influenced my acquisitions from then. So however much I feel like I lost from that, I’ve gained by not making the mistake again with a bigger business. So you’re exactly right. If you’re using the cash flow from the businesses to start to stockpile. You get your name out there with the brokers and so they trust you as a buyer that can close and have the funds available. The next thing kind of got into was I started working with a group that used to be called Empire Flippers Capital, but now it’s Web street.

Michael Frew:
So it allows for passive investing in these kind of SaaS software, online business space where I’m the operator. We have accredited investors who are putting money in. That allows me to raise that money and go out and acquire businesses as well. So as you kind of do this longer, you can mature that way as well to get bigger businesses. So always keep in that cash flow stockpile for exactly what you’re looking for. My niche is so narrow that when I see a business, I know I have to get it right away because they only show up once at maybe one or two a year. So you have to move pretty quick. I know one business ruined my Bora Bora vacation because it showed up right in the middle.

Michael Frew:
And I told my wife, I was like, this is really going to mess everything up because we need to move on this. And we’re sitting out here, there’s barely any Internet. And so, yeah, as you get more experience and practice and you can get more of a cash balance, get more in the industry, it makes it easier to do the larger deals.

Dana Robinson:
Right. So I guess to the de risking question, which is back to the like, do you start small? There’s a chance that you could buy business, deploy o between debt and your equity, half a million dollars, buy business and realize you’re not really good at this. And I guess for you, like the story of licking your wounds was you still were able to sell that e comm business when you realized it wasn’t your, your cup of tea. But, you know, when you do that, you’re typically taking a hit as well because you haven’t done the thing that you intended to do by scaling that in order to sell it.

Michael Frew:
So you get, yeah, it’s not only just a financial hit, but the time. So it was here we have other businesses that are shooting to the moon, but we can’t spend time on them because we’re trying to fix this problem that I acquired that wasn’t the right fit of. So I think for the whole team, it was very frustrating. So, yeah, and a fantastic learning experience.

Dana Robinson:
I love that. So you mentioned your team again, because I’m interested in this. We, in most of the business, the sort of brick and mortar businesses you hit an inflection point in size where you have the ability to buy more small branches because you have a CFO, a CTO, you know, someone handling security marketing, you have your C suite. We tend to refer to that as a platform. Is that what you’ve built that enables you to kind of like, come in and be a buyer? And they don’t. It’s not really a roll up, though. I mean, these are disparate businesses, but your team is diverse enough to cover it. Talk about that and how you built.

Michael Frew:
Yeah, so it’s almost, I imagine in my mind, a little inverse where. So my portfolio team is really on the engineering side. So we can acquire these businesses, kind of add it to the group and say, okay, this is just our fifth project here. They’re all based on Ruby, or they’re, you know, it’s going to be a different language, but it’s very similar. So we’re building it that way. One thing that’s really fantastic, as you know about software businesses, is how they can scale without really increasing headcount. If you’ve got a business that can acquire new customers and maybe a little bit of work in the front end to get them onboarded, but once they’re onboarded, it’s like joining a gym. You know, you never, sometimes they don’t even go to the gym and you just keep paying.

Michael Frew:
So that, that’s fantastic, because even if you get a thousand new customers, you don’t have to really increase your headcount. So if you can find that where you build out that portfolio of your tech team, and you’ve got a couple of the marketers on the front end that are helping with advertising and everything like that, but from there you can start really bringing things in. So I see it almost as reverse, where we don’t have as many of like the c star level, but a lot more on the engineering level.

Dana Robinson:
Interesting. And talking about the marketing, because I feel like a lot of, there’s so many marketing agencies and they’re all niche and specialty, or they’re big behemoths to claim to do everything, and they seem like just a black hole that you throw money into. No offense to my friends that own agencies, because I’m sure they’re doing great. But when you take over a business that’s doing 100 grand a month in revenue, you don’t have a lot of, if you’re allocating 6% of revenue to marketing on $100,000 a month business, you can’t get much for $6,000.

Michael Frew:
Right?

Dana Robinson:
Yeah, for the marketing side.

Michael Frew:
Well, what’s the nice thing about having an engineering team and buying development tools and services is we hang out where our customers hang out just to solve our own problems. So in many ways it’s almost product led and it’s word of mouth. But you’re right with agencies. The next challenge that I have encountered is businesses of that size that you described that are very technical. There aren’t marketing agencies that can sit down and churn out content or tweets about technical things. I have constantly thought that maybe that’s the marketing agency that I should create to solve my own problem. Because really, in the end, the people that need to be writing all of the content and all of the marketing pieces are the same engineers that are solving problems for customers and building, building the features. And that’s a challenge for businesses at our size.

Michael Frew:
And I can’t really say I’ve actually solved it, but it is something to keep in mind if you are looking at this, that, you know, a marketing agency is fantastic if they need to put out a lot of content about how to go camping or about how air conditioners and h vac all works, when it’s really deep down of how do firewalls work for this certain database, that person isn’t at that marketing agency that’s going to write that article. So it is a bit of a challenge. Yeah. Like I said, I haven’t quite solved it, but just something for your listeners to be aware of. That’s true.

Dana Robinson:
I mean, this does go to a point that a lot of people don’t realize that in the b two b world, conferences are probably a bigger investment than buying, than what we’ll call customer acquisition costs in the traditional consumer sense. So you’re, when you’re in any b two B specialty, there’s going to be multiple conferences that you can show up at where you, you’re with your people and where your people view you as a collaborator and not necessarily, you know, with a target on their back as you know, you’re there to sell them. So a little bit different approach where, you know, you need an agency when you get to a certain scale, probably still when you’re, when you’re b two b, but maybe at your size, you’re avoiding the pain of normal b two c or d two c kind of agency and funnel building.

Michael Frew:
Yeah, definitely tried it before. Not successful. So it’s. So in the end, my answer is it’s self generated. We’re really doing our own agency work for that. Yep. Yeah.

Dana Robinson:
I love it. Hey, when we first teed up this podcast interview, I had a mention in an email of an eight step framework for finding, financing and acquiring online businesses. I want you to send that to me. We can put it into the show notes, but I. We have enough time if you can talk through the framework for finding financing, acquiring online businesses, because that’s your specialty and you’re on my podcast.

Michael Frew:
Yeah, no, that’s great. The first thing I always lead with is think of it a lot like acquiring real estate. The steps are very, very similar. First thing I always have everybody sit down and think about is what is that niche? We’ve talked a lot of times already on this podcast of when I go outside of my niche and that’s a mistake and what my specialty is and how we build inside of there. So what is the experience that you’ve had in the past? Where have you worked in corporate or entrepreneurial that you think you’d like to move forward? And I know mindset is one of the things people never want to talk about it. And I’m so guilty of this, too. If I buy a book, I skip the mindset chapter, usually chapter one, right. Because I’m looking for how do I get moving? I bought the book, right.

Michael Frew:
I’m committed to this. I don’t need the mindset part. But it is important to make sure that you’re, you know, you’re not just saying, I’m going to go buy an online business so I can do it on the beach. You want to be in something that you have at least a little bit of expertise in. So that’s kind of that first step. The next thing, and it’s usually the second question I always get was, how am I going to pay for this? How do you do financing for these kind of things? So I walk a little bit through of what’s going on in the world today, as updated as possible of doing that financing. And then you really start doing, you know, step number three is going to be how are you going to find these businesses? We talked a little bit about that. Marketplaces and brokers and how are you going to talk to the sellers? That seller conversation, especially with a business that has a lot of interest, you really are selling yourself to the seller.

Michael Frew:
The seller has to believe that you are the right people or team to take their baby and move it forward. That’s actually a lot more important conversation than I think a lot of acquirers exercise, at least in my space. And you can almost, I’ve had a couple instances on seller calls where they’ve said, listen, I’ve heard you on a podcast, and I feel like you’re the right person to own this business. How do we solve all these other, you know, the 50 other problems to get forward? So that’s an important piece. And then from there, it’s a lot of the steps that you would, you would have in real estate.

Dana Robinson:
Right.

Michael Frew:
You’re looking at due diligence. You’re looking at, how are you doing? Legal documentation. How are you doing, Lois? What is the APA going to look like on the asset purchase agreement? How does the closing work? How do you do the transition and the knowledge transfer steps? So those are all a lot easier. You know, it’s just processes you have to get through. There’s timelines for each one, but all those steps are pretty much going to be exactly the same for each business. There’s a little bit of your personality in the seller part, but a lot of it is just, if you can hit these steps, do it enough times, you’re going to get the right business. So, yeah, I kind of broke it down, really. It’s very similar to real estate.

Michael Frew:
This is how you acquire the asset. This is what’s unique about online business and what you may see that’s different from the online world or from the offline world. So, yeah, hopefully that helps people just to have it in their mind and what this is going to look like.

Dana Robinson:
Great, great. I think that’s great. And we’ll put, if you have that in a PDF, we’ll put it in the show notes and let people have it. It sounds like I’ve had a lot of people ask me this question, well, where do I start? So that’s a fantastic starting point. The first half, though, it sounds like, is where the real art is. And I’ll say the art of acquisition is.

Michael Frew:
A relationship. Yeah. You’re building a relationship with that seller because you’re going to have to be working together for a while. So you want to. I do two things when I look at a business the first time. One is, would I wake up wanting to run this? And if I’m happy with that, do I like the seller? Can we work together? Before I even look at p and L and what the finances are, I want to know those two things because you’re right, it’s that relationship in the beginning. And so I found, as I’ve gone to cocktail parties or hung out a bar, people have the same four questions all the time. And it is kind of those first four steps of you know, how do I finance this? What should I be doing? You mentioned something earlier.

Michael Frew:
A lot of people don’t believe good businesses are for sale because they say, well, if somebody’s got a really great business, why would they ever sell it? So I put together kind of like, it’s a quick video course, and it’s those four questions that I always get asked every time. And I got kind of tired of answering them, so I threw that up on the website, too. It’s completely free, and it’s just me rambling on about those four things. But hopefully that helps as well. And it is that first half of the framework of this is the personality part.

Dana Robinson:
Yeah.

Michael Frew:
Yeah.

Dana Robinson:
I think that is really important. I mean, whether it’s a deal that has multiple buyers or deal. I mean, I’ve had many deals where a seller, I’ve just found a seller, and I’m like, I’d like to buy this business. And they’re like, well, I, like, sell it to somebody. I’m not sure if it’s you. And, you know, that’s a dance of some coffee and some empathy and some listening and some soft skills. Another thing I’ve heard people like you say, and then I’ve had people ask me the question that we all say, well, you’ll know the price is right if the numbers work, which is easy for us to say if we’ve bought and sold businesses. The same with real estate.

Dana Robinson:
When people are like, well, how do you know fourplex is a good deal? I’m like, well, if the numbers work, you know, you just do this. And have you found, you know, do you, have you found any easy tools, good books or resources for people to get their head around, what does that even mean? Because again, if you’re. If you’re going from a one person business and trying to, like, grow that business or buy other businesses, you’re going from w two to self employed, there’s probably a knowledge gap in how to read a p and L, how to analyze this, what, what the balance sheet even means, some of that stuff.

Michael Frew:
Yeah. I think what we’re kind of tiptoeing around is just financial literacy in this m and a space. And it is a little bit difficult at first, but there are courses. There are, you know, even just trying to follow what I’m putting out there of where I’m just trying to say, here’s all my mistakes. Here’s the things that I’ve noticed as a buyer as well as a seller to get that financial literacy so that you do recognize, oh, this is a good business opportunity based on the numbers, or this is massively overvalued. It would take me 50 years to get my money back pre tax, but people are still trying to sell it that way because a lot of times you have to talk them down. If you think about the software world, there’s the rest of the world, and then there’s the Silicon Valley software. And so when someone from Silicon Valley is trying to sell their business, they think they’re selling it to a Silicon Valley world.

Michael Frew:
And so valuations are completely different how they value the company. So there’s a bit of an education process that might have to happen. And to do that, you need that financial literacy to explain why is this not worth maybe what you think it is? Because you’re in a different world over there. So as much as you can get yourself as deep as possible into this community, I always say, you know, join a group that teaches you how to acquire businesses, whether it’s offline or online. You start to learn all the terminology, you get that financial literacy, and you get a cohort of people that can help you to answer those questions that you just don’t have. It’s a great investment because this is something you don’t want to be doing tomorrow. Plan this out and make sure you’ve got that education. It’s always going to be nervous the first time, it’s going to be nervous the 6th time.

Michael Frew:
So the more you can know about the community and how the conversation goes, really helps you with understanding when you see a good deal and when maybe something needs a little bit of tweaking to make it a good deal.

Dana Robinson:
Yeah, I love that. I think the. Maybe for those that haven’t been through this process, it’s not like going shopping. I’m wearing a black shirt. If you’re watching the video, it’s not like saying I need a black collared shirt. And you go to the mall and in one swoop you hit five stores and you walk out with at least one black collared shirt. With real estate, for those that have invested, you don’t know if there’s an opportunity until you’ve got daily notifications from the MLS of every two to four plex in the zip code you care about for a year. Right.

Dana Robinson:
And you’ve got to go look at them and kick the tires and say, oh, it’s not, I don’t think so. You know, and you build an instinct, I guess, while you’re, while you’re sort of on the hunt with businesses, it’s the same, I think, as you say. If your first question is mindset, what’s the thing I think I’m capable of that fits my skills, my appetite, my relationships, my non economic currencies. Once you have that, you probably have to look at all these websites you’re talking about and email submission forms and ask questions and look at their financials. And it takes a long time to be sure you’re not buying a pig with makeup.

Michael Frew:
Maybe you have to feel that cadence of how businesses come out. Right. If it’s your first week and you think you found the first business, you may find the next week you found the same perfect business. And that’s just the cadence. And it turns out they maybe weren’t that great. So even just observing it over time of, okay, so one of these is going to come up for sale every two days. There’s a reason people are passing on it. I need to learn why.

Michael Frew:
Why aren’t the professional buyers buying this business? And so, yeah, just learning that cadence and being out there for a while, really valuable.

Dana Robinson:
And do you find that the sellers are forthcoming? Pretty easy signing NDA and they’re pretty much, if they’re trying to sell, they’re happy to just say, like, here’s my packet, here’s a deck, here’s my financials, you know, let me know what else you want.

Michael Frew:
Yeah. Depends a little bit on where they come from. If they’re coming through a broker, they’re already been educated on, what is this process going to look like? A lot of stuff’s already put together that’s incredibly easy. And buyers love that. If it’s coming from a marketplace where the seller’s just listing it there, that’s where you do have to do a little bit of education of. Okay, at this stage, maybe pre Loi, I shouldn’t have access to this, but I do kind of need this information to even make an Loi offer. And so you do have to sometimes do a little education if it’s a first time sale without anybody else guiding them, any third party guiding them, and that’s perfectly fine. It’s just, you know, it’s going to be a little bit of extra work with no real guarantee at the end that it’s going to work out.

Dana Robinson:
Right. You talked about joining a group, mastermind, sort of networking. Do you, do you head anything up? Do you have any recommendations on if people like, I want to be around other smart people looking to buy businesses and collaborate and maybe be mentored or what have you? Recommendations?

Michael Frew:
Yeah. So a group I’ve been with for the decades since literally the day I started looking. It’s called rhodium. It was originally called Rhodium Weekend, but I think it’s been pulled back to just the name Rhodium. It’s run by a guy named Chris, and so he curates a group of online acquirers and sellers. But then, you know, if you think about it, acquisitions and sales, it’s just a phase of the business. Most of the time, we are still operators, right, because somewhere in between, we spend years doing the operations, so we tackle all three. But there is more of an emphasis on the acquisitions and the sales.

Michael Frew:
A lot of brokers that are out there are in this group. I have found that to be the absolute best place to go. I also really like the acquisition labs. That’s Walker Deibel’s group there. And I get to learn a lot more about how things work on the offline world. But all the terminology and the financial literacy is about the same. I really enjoyed that group of people to kind of ask me questions. Hey, have you thought of it this way? In that way? So even just joining two like that, that’s plenty of information for me.

Michael Frew:
And, you know, you get a college level education in about six months just listening to what people are asking.

Dana Robinson:
Yeah. Yeah, I think that’s that where you start to learn what you don’t know, you don’t know. And then you fill in the blanks between those markers and then any lessons from the transactions. Lawyers over lawyering, under lawyering, accountants that are the wrong person for the job. You know, how you review diligence. This other half of your eight questions is more the mechanics of getting a deal done. And that’s where a lot of newbies might fail, spend too much, not get the right advice.

Michael Frew:
Yeah, legal is obviously important. As we all know, lawyers will continue to redline things to death. So you do have to have, actually, a relationship with the seller to say, all right, at some point, we have to call this group off. We’re comfortable with what’s in there right now. That’s been kind of. And again, that goes back to that. Those first couple seller calls like, are we going to work together in this relationship? Do we like each other? How do we make it work for both of us? And so that that relationship is really important. There is a bit of a professional team around doing some of the due diligence, whether, especially if you’re buying the corporation instead of the asset.

Michael Frew:
Almost all software businesses are sold as assets in my size. You are not buying the corporation. But there are some cases I have had to buy the business or actually the company. So, yeah, a little bit deeper due diligence team for that. And finally, you mentioned the accountant. If you can find one that actually is an expert in doing online business, that’s kind of hard to find. It took me quite some time, but I found it in one of those two masterminds, which is the whole benefit of being there, of having people that are really specialized in these types of businesses, because our accounting is just. It’s very different than brick and mortar.

Michael Frew:
So having a CPA that can kind of look over these things and, you know, maybe call out some b’s if I’m overlooking something. So, yeah, having that team just on standby, not something you really need to pay monthly, but just even just throw a retainer and say, hey, in six months, I might need you really fast. Just give me a little time at that moment.

Dana Robinson:
Right. And do you find that on the accounting due diligence side, are you stepping into businesses that have not really done good accounting, where you have to really remodel things? For example, most businesses don’t, you know, in a startup, they might not be amortizing the customer acquisition costs and they also might not be realizing income over the right time period. So there’s. There’s some re accounting that could be done that will help you understand the value in your hands.

Michael Frew:
Yep. I have never actually seen a business for sale that did both of those successfully, because it is. It’s coming from a one person or small, especially if it hasn’t gone through a broker first. You really are saying, okay, I need you to break a lot of this stuff out. It’s all in PayPal or stripe or, you know, it’s in your accounting software. And you’re kind of saying like, you need to go here, click that. And that’s how to break this all out. So that is a challenge of the educational process.

Michael Frew:
Yes. But it is nice when that does go through a broker. And a lot of that stuff is already done. Yeah, but getting small businesses, you know, accounting is always tough. People are running personal things through there. Hopefully the business is actually incorporated. It’s using business credit cards and they’re using business accounts. But, you know, sometimes you find good businesses where someone didn’t realize it would grow.

Michael Frew:
It’s in their personal account, it’s mixed in with their airline miles, and it’s in their personal Google account. And so this is on that business lifecycle we were talking earlier. This is my job where I have to fix all that before I look to maybe sell it to you later on. And you can thank me for fixing all that at the time.

Dana Robinson:
Yeah, that’s fantastic. Well, as we come toward the end of our podcast, I’m always curious if I’ve talked too much and missed something important that you, that you know, that, that our audience might not know. That’s kind of in your wheelhouse, your expertise. You could talk about about 100 different things with what you’ve done. Anything you think of that’s parting shot and the advice to the, to the listener.

Michael Frew:
Yeah, I’ll hit two things here. So on the buy side, the reason I’m out doing these podcasts is I’m not really selling anything. I’m just trying to talk to myself ten years ago, because if I had known ten years ago that this was a career, 1015 years ago, I would have saved money different. I would have tried to be in different departments in my corporations to learn more about marketing and accounting and just to be aware that you don’t have to start a business yourself. There’s so much out there about trying to be the hustle entrepreneur that you could actually acquire it instead and kind of skip that part of the journey. So just getting that knowledge out there is paramount for me. And then on the seller side, as a buyer, I continue to see people that I feel a kinship with, which are other developers and engineers and they bring their business for sale and it’s not prepared. It’s not, it’s a house that’s not staged.

Michael Frew:
And everyone knows, you know, you stage your house, you clean it, you make sure things are looking like they’re working when people show up and that just isn’t happening in this for a lot of these sellers. And I know that they’re losing hundreds of thousands of dollars on their sale because of that. So there are things you can do six, three to even twelve months before the business is looking to be sold that can make it so much more valuable and get you so much more money at closing and get better terms so you don’t end up on this two year earnout process. So both of those just continue to look for that education. I’m trying to put that out as much as I can on my website and YouTube. I definitely don’t have that problem where a lot of people can’t figure out what content to talk about. I was like, I have so many things to share that I’ve learned. It’s just, how do I get it all out there?

Dana Robinson:
Love it. So easiest way to get to your content.

Michael Frew:
Just Michael frew.com and then on YouTube. I think my handle is Michael through. So nice and easy when you got a unique last name.

Dana Robinson:
Absolutely easy. First name m I c h a e l. Last name f r e w. Like crew with an F. Yep. Michael, thanks for coming on the podcast today, and I hope it helps the listeners. Everyone else remember, hit me up with questions or comments at hello@danarobinson.com. thanks, michael.

Michael Frew:
Thank you.

Dana Robinson:
Thanks for joining me on this episode of the Exit Plan podcast. I’d love to hear from you. Feel free to hit me up with questions or comments by emailing me at hello@danarobinson.com. or leave comments and questions by calling 858-252-7785 call 858-252-7785 and leave a message.