I bought a tiny business

I bought a business. A really small business (https://tryhexadecimal.com). I had two primary goals in acquiring this business: first, I wanted to get a better feel for the buy side process of acquisitions. I have recently had the chance to see the sell side (albeit at a much larger scale than this micro-acquisition). Second, I wanted a starting point from which I could focus my efforts on product marketing and growth, without toiling away writing code behind a closed door like I had done for previous side projects.

There were a few guidelines I had when looking for prospective businesses:

There had to be more than 5 paying customers.

There had to be relatively low churn (<5% month/month)

The tech needed to be cleanly built and well maintained. tech stack was not a primary concern, but priority was given to tooling that I am already familiar with. I work full time and did not want a disaster of a codebase to suck all my free time.

The price had to be below $20,000 USD. An amount that enabled me to make a fast, all cash purchase. I was not interested in using debt.

I only looked at asset purchases. This is the simplest approach to an acquisition. However, this approach is typically less tax beneficial to the seller. Asset purchases allow you to avoid any unforeseen liabilities a company may have (debt, legal etc.). You will usually want to have some corporate entity prepared ahead of time. In my case, I was going to roll the assets up under my consulting agency’s LLC where I operate a few other tiny projects.

Tangible opportunity for improvement. In other words, there needed to be some feature set or market opportunity that hadn’t been attempted before with the product.

Most half-decent micro-SaaS acquisitions happen faster than you can make an offer. There were several times where I found a listing of interest only to reach out and be told the company had already sold. Even on decent sites like Microacquire, the majority of startups listed for sale are junk. So whenever something well built, with real revenue comes along you need to act quickly. Knowing speed was a competitive advantage for me as a buyer forced me down market to play in cash-only acquisition territory.

The hunt began in December following a massive stock and bitcoin run-up that made me hesitant to keep pumping money into inflated public assets. There are a few dozen sites to browse when taking the leap into purchasing a business, but for my purposes of wanting something small and tech focused I really only focused on using Microacquire. Frankly, if you are looking for larger businesses (ones that can replace the day job), you should consider hunting for acquisition targets off market. A great book on this topic is Harvard Business Review’s Guide to Buying a Small Business.

One thing that was quickly obvious is that most companies selling in the sub-$20k range are garbage. Sites were being listed with $0 in revenue and no functioning software, sites that did have functioning applications behind them looked and felt like they had been cobbled together in a two week school project. I was not looking to rebuild from scratch, the foundations were critical.

After passing on about 30-40 companies I had reached out to, I landed upon Hexadecimal. The site was about 1.5 years old (far older than most of the cash grab projects in this price range that often had been built in the last 60-90 days), it had 9 paying customers (!!) and had a full functioning product on the surface (more on the due diligence later).

I have not experienced the same feeling of urgency and excitement reaching out to a total stranger since I met my wife on Hinge several years ago. I was very cautious how I approached messaging this founder. It was clear they had put a ton of time into the project up to this point. When you approach a prospective seller, you need to be conscious of the emotional aspect of selling. There are two very powerful behavioral biases at play when approaching a potential acquisition target: first, the halo effect. The halo effect is the tendency to overvalue the first impression of meeting a person. More bluntly, you get one shot at a first impression. The second to be aware of is the endowment effect. The endowment effect is a behavioral economics finding that people tend to overvalue items which they already own. The price people are willing to accept for selling an item is often far higher than what they are willing to pay for that same item. Keeping both of these in mind when approaching and negotiating with a seller will make or break your deal.

Hexadecimal’s founder was quick to reply to my short note on Microacquire and within a few hours I sent a follow up email with a verbal offer. Prepare ahead of time and have your budget in order, this way you can strike quickly. For those looking at larger acquisition targets, this may mean having soft commitments from LPs or lenders ahead of time. Even though the buyer wanted about 6-7x EBITDA for the business (about twice the multiple you would want to consider in a larger acquisition), I did not bother negotiating down the price that the buyer had requested and instead tacked on service expectations post-closing. In my eyes, paying more cash up front for improved product stability was a no-brainer.

I provided a list of about 15 diligence and closing expectations. The seller verbally agreed within 24 hours. At this point, I needed to get everything written in the form of an LOI. Next week I will discuss the LOI structure and diligence process.

I am starting a substack if you want to follow the journey of my growth from acquisition to close to growing MRR: https://launchfirst.substack.com/