Ideas and Validation August 13, 2020

We buy small SaaS apps and we open-sourced how we evaluate our purchases, feedback more than welcome! 😅

Ben Church 🤞 @bnchrch

Hey IH Family 👋

I've been buying small SaaS apps as a side hustle for the past year with my partner Riley.

Throughout we've been writing down our own internal due-diligence on each potential deal.

Mostly in Notion.

Its been a useful tool, forcing us to be more critical and check our biases and blind spots and all that.

Anyway this morning I thought it would be nice to open the books on one of them to get some feedback on how I evaluate a deal initially and ways I could improve.

Here's the link to one of our due diligence documents from last month, Its a breakdown on a Shopify Gift App selling for $25k at ~2.5ARR.

Comments are open!

https://www.notion.so/bnchrch/Shopify-Gift-App-6f09dac4a7ac4ab38fcd04d102d880aa

Enjoy!

  1. 2

    @bnchrch - Overall, seems like you covered most of the bases.

    But, I have some thoughts I'd like to share.

    Costs
    I'm curious as to why you make no mention of trying to understand overhead/costs.

    Most website / software deals I've seen presented are based on a multiple of monthly or yearly Profit (not revenue). Yet, I don't see anywhere in your write-up that looks to understand what the monthly expenses there are.

    Expenses like: Dev time, support time, any software costs they have to subscribe to or buy to develop or support their app, etc.

    With the app's total earnings, it equates to an average of $322/month in earnings over 9 months.

    But, is that net income (gross sales minus Shopify costs)? If so, do you know why they wouldn't show you a Gross Revenue chart so you could compare that to an Earnings chart?

    Even if you don't consider any other monthly expenses, at $25k selling, that's 77x average monthly earnings (not even monthly profit). If you look at the last 3 months, it's closer to a 34x multiple of earnings.

    I haven't purchased any websites or software yet, but the multiples I've seen are 18x-35x monthly profit.

    So, it would be good to better understand other expenses so you can get a truer look at profit.

    Revenue Growth
    If you look at July ($518 as of Jul 16), you could forecast that earnings in July would be $1003 -- which higher than June. So there still is growth.

    Growth is obviously due to compound growth, since it's a subscription product.

    Still curious to see a gross revenue chart.

    Your Follow-up Questions
    I think the seller won't know the answer to some of the follow-up questions.

    If they're selling through the Shopify App store, they don't/won't likely have visibility into things like where growth came from, unless their customers proactively emailed them to tell them. I've sold software on the WooCommerce App Store before, and they never showed any helpful customer-acquisition related information.

    They may not know who they lost customers to -- customers just leave, and very rarely, if ever, tell you where they're going. They may tell you why, if there's a facility to provide that type of feedback.

    Support / Reviews
    I don't understand why the Seller hasn't been more active in the Reviews. There are 9 reviews, and the Seller has only replied to two of them. Seems like they don't care?

    It's not that hard to reply to reviews, even the good ones. And with only 9 reviews -- well, there really isn't any good excuse that I can think of to not reply to all of them.

    Looks like the Seller uses a support ticket software to handle support. I'd ask for a screen share session where they show you their ticket system, and some live examples of support tickets & customer inquiries.

    Other
    Their website looks ok, but a few things bug me.

    1. Footer still says 2019
    2. None of the links in the footer work -- not even the Contact link. Seems sketchy.
    3. I'd also ask for a screen share of their live Shopify account, and see if they can explain the numbers to you

    FYI & Separately: You may want to join us in the Website Investing IH Group, managed by @Dealsflow

    Would love to hear your thoughts.

    1. 1

      Mike thank you so much for this! There's so much to cover here I don't think I'll be able to cover this all so please forgive me for cherry-picking a bit 😅

      I think you're bang on with your question about costs. This was a due diligence document that was created prior to having any meaningful interaction with the owner. Which is why I don't know what the support time is either.

      If we had pursued further we could've dived deeper into these numbers. I'd be shocked if this app was running an overhead over $150/month though. There's not much infrastructure to it that I can see. However who knows 🤷‍♀️

      The reviews things were also perplexing. It seemed like he left alot of the table. It would be an easy thing for us to address and also a great talking point in negotiations.

      Anyway Mike I'd love to chat more in-depth with you sometime! If you ever want to have a 1:1 call I'm very open to it. ben@calmcapital.co

  2. 2

    Hi Ben! This was insightful!

    When you talk about writing guest posts on blogs and newsletters, what's your usual approach?

    1. 1

      Good question! I find most people are looking for content on their blogs. So I try to identify which blogs are already publishing related content and reach out with a few example headlines of articles I'd write. Virtually no one turns down free content!

  3. 1

    Hey Ben - this is really cool that you did this. Two Q’s.

    1. You are still evaluating the deal or you passed or you moved forward?
    2. Based on number of customers and their pricing, shouldn’t their current MRR be around $2k? Which would mean their ARR is around $25k?
  4. 1

    hey Ben, I'm preparing to do some of this myself by having killer media buyers and marketers evaluate the business, identify whether or not they could grow and steady monthly profits, then flip the biz in a few months. Would love to see if you could use any help on the marketing/ad side of this hustle. A few guys I know are retiring with a single deal using this model.

  5. 1

    Very interesting, Ben. Thank you very much for sharing and open-sourcing this! What are your favorite sources to look for new deals?

  6. 1

    Ben,
    This was really great. The analysis and metrics clearly laid out are really insightful.

    What would it take for someone to replicate the product?
    Not a lot. Its a simple product.

    Another important metrics is churn probability (what I call it). If someone built a cheaper/better product would customers jump ship? For example I could theoritically built a better version of indiehacker.com in half an year but what is stopping customers from jumping. They have karma and their post history etc that they spent lot of effort in building. Unless the other product is very superior, they won't jump ship.
    In contrast an adblocker addon for chrome (even though it may have high userbase) has a high churn probability coz there is nothing much other than product quality and price that is preventing a churn

    Are you publishing a collection of such posts somewhere? I would like to read and subscribe to them

    1. 1

      Thats a good question! This makes me think I should add a section around "stickiness" of a product.

      To me it factors in for sure. However I do believe there are more opportunities out there than people with the ability to chase them. Sure someone could build a competitor. But will they? Seems like a guessing game a lot of the time.

      I actually just created a public master notion document for this. It even has a Mailchimp embed if you want to subscribe! https://www.notion.so/bnchrch/cashflow-vc-6653637588744dc0b2e8e9425f038d77

      1. 1

        Thanks, I have subscribed

  7. 1

    Ben, slightly off topic but, I'd love to hop on a call with yourself and your partner. I'm the founder of https://consultily.com & https://contentago.com and I'm actually fully booked so, this isn't a sales call at all, would love to just have an open chat about any ideas I may have for your acquisitions. I just love to offer advice where I can. Let me know if you are open to it.

    1. 2

      Rhys! I would love to hop on a call with you. (I've already been internet stalking you for a bit).

      Want to send an email over to ben@calmcapital.co and we can set up a time?

      1. 1

        Just sent you over an email!

  8. 1

    Hey Ben this was great. How did you get started, was it just your own personal capital?

    1. 1

      Yeah, currently our deals are self funded! I'm a bit of a capitalism geek, so I try and live modestly so I can play around with ideas like this!

      1. 1

        thanks rad. Definitely want to get into that. Do you have any success stories so far or is it too soon?

        1. 1

          Still too soon to tell with SaaS.

          However, our brewery investment has done well! 😅

  9. 1

    As a tangent to this, definitely a lot of opportunity for acquisitions within the Shopify App Store.

    1. 1

      Tons its crazy. I also think the marketplaces for apps like Bubble have a lot of opportunity for developers looking to build new products and plugins.

  10. 1

    Thanks so much for sharing @bnchrch! This was super interesting to read.

    Another quick idea for marketing: Write case studies from store owners who've added the app and immediately increased their sales.

    Looking forward to reading if you moved forward with the deal.

  11. 0

    I hate to be that guy, but making a document public has nothing to do with open source. Same goes for code only because it is public on github doesn't automatically mean you are allowed to copy it and use it in your own code. It has to have an open source license.

    1. 2

      I disagree. Open source just means the source is open. I don't think you need a particular license, it's not free software.

      1. 1

        there is a definition https://opensource.org/osd

        you can't disagree with a definition, well some can https://www.youtube.com/watch?v=S4E2ZuPCBG0

    2. 1

      I don't think you hate to be that guy 😛

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