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> Is it common to have to fork over all cash for these sized deals? Is it possible/acceptable to finance? What alternatives to seller financing have you seen? I

by kareemm 10y ago

> Is it common to have to fork over all cash for these sized deals? Is it possible/acceptable to finance? What alternatives to seller financing have you seen? I don't imagine it's possible to just waltz into your local bank and say hi guys I need $100K to buy a website! Bank loans, equity partners, seller financing, and cash are the options I've seen. Equity is harder for a deal this small. But bank loans are a definitely option. If you're in the US I think there are SBA loans that are available too.

dogma1138 10y ago
The problem with many small business loans is that they need to be guaranteed by "tangible" goods, e.g. land, building, machinery etc. Banks and other financing providers often also require an appraisal by a 3rd party. Unless you are buying an already established business it can be very hard to find good financing for things like software since there will be nothing for the bank to repossess and evaluating it's worth might not be easy.
- rstocker99 10y ago
  See my comment up the thread. It seems like that might be changing at least in Canada. I've heard similar things about SBA loans in the US though so perhaps similar changes are afoot in the US as well.
rstocker99 10y ago
(I'm one of the purchasers of Codetree) I had also thought that banks wouldn't be interested in lending in cases like this but surprisingly enough when we talked with our bank after we made the purchase they mentioned they'd be very interested in financing us if we were looking at buying other software businesses in the future. When I had talked with them a few years ago there was no way they'd have loaned money for a purchase like this because it has no tangible assets. They told us straight up that they understand the world is changing and they are now interested in making these types of loans. They get that small businesses owners today are just as likely to be software companies as they are to be restaurants. We're Canadian and our bank is TD.
- charlesdm 10y ago
  Question: Did you acquire the assets with a Canadian entity? I'm assuming so. Did you have any problems transferring the billing subscribers? I'm EU based, and one of the concerns I've had / I have is that some US based customers seem to be getting auto rejects by their credit card provider (i.e. Stripe) when billing. Not exactly sure how I discovered that -- I think some guy wrote about it on a SaaS forum somewhere.
  - kareemm 10y ago
    Yep, we acquired the assets with a Canadian entity. We had this problem with a previous business when we moved from a US Stripe account to a Canadian Stripe account (when we started the original business Stripe wasn't available in Canada). We were concerned about CC rejections, but shockingly didn't deal with a single one. In the past customers would just call up their CC provider and tell them to expect a recurring change from vendor_name and it ceased being an issue. One MAJOR problem we had was transferring subscriptions from the US Stripe Account to the Canadian account. Stripe used to do this service for you (it has for us twice, once when we moved from US ==> Canada, and once when we sold the Canadian assets to another US corp). But they don't anymore, and their documentation and process around this is WOEFULLY lacking. Probably have a blog post in us about the process.
ryandrake 10y ago
Thanks for the answer--it's very encouraging. Of course, I forgot the "find an equity partner" route. I could see approaching someone with money and an interest in technology but no time/talent to maintain the product. But even if you do that and negotiate an ownership share in whatever you're buying, you're more like employee #1 than a true partner. Did you guys each put up an equal amount of $ when you first started doing this?
- kareemm 10y ago
  Yep, we're all equal partners. Figured it's a lot easier that way. But I've seen a couple situations where one partner brings the asset and the other brings sweat and they've been quite fruitful. One in particular I'm thinking of turned a 120k arr business into a 1m arr (and growing) business. So it's possible.
RockyMcNuts 10y ago
could also finance via an earn-out with founder involved for a period of time IMO it's a good writeup on how a financial buyer dots the i's and crosses the t's on a deal but the main driver of a deal isn't that, it's just, can it be grown into a much bigger business, and what are the potential risks and rewards. Do the buyers love the business and are they willing to do whatever it takes to realize that potential? If the buyers aren't thinking like founders and are thinking like financial buyers worried about the last few percent, it's a recipe for problems. The risks are sufficiently large in taking over someone else's code and customers, that only reason to buy it is if you think you can make it worth multiples of what you're paying. As a seller, it might make sense to do an earn-out or retain a small equity stake and involvement with the right buyers, but being a minority partner without the type of protection VCs get (board seat, liquidation preference, pro-rata follow-on rights / anti-dilution) is a terrible position to be in, unless you are very sure of who you are dealing with, so typically not with this type of financial buyer.

by kareemm 10y ago

dogma1138 10y ago

The problem with many small business loans is that they need to be guaranteed by "tangible" goods, e.g. land, building, machinery etc. Banks and other financing providers often also require an appraisal by a 3rd party. Unless you are buying an already established business it can be very hard to find good financing for things like software since there will be nothing for the bank to repossess and evaluating it's worth might not be easy.

rstocker99 10y ago
See my comment up the thread. It seems like that might be changing at least in Canada. I've heard similar things about SBA loans in the US though so perhaps similar changes are afoot in the US as well.

rstocker99 10y ago

(I'm one of the purchasers of Codetree) I had also thought that banks wouldn't be interested in lending in cases like this but surprisingly enough when we talked with our bank after we made the purchase they mentioned they'd be very interested in financing us if we were looking at buying other software businesses in the future. When I had talked with them a few years ago there was no way they'd have loaned money for a purchase like this because it has no tangible assets. They told us straight up that they understand the world is changing and they are now interested in making these types of loans. They get that small businesses owners today are just as likely to be software companies as they are to be restaurants. We're Canadian and our bank is TD.

charlesdm 10y ago
Question: Did you acquire the assets with a Canadian entity? I'm assuming so. Did you have any problems transferring the billing subscribers? I'm EU based, and one of the concerns I've had / I have is that some US based customers seem to be getting auto rejects by their credit card provider (i.e. Stripe) when billing. Not exactly sure how I discovered that -- I think some guy wrote about it on a SaaS forum somewhere.
- kareemm 10y ago
  Yep, we acquired the assets with a Canadian entity. We had this problem with a previous business when we moved from a US Stripe account to a Canadian Stripe account (when we started the original business Stripe wasn't available in Canada). We were concerned about CC rejections, but shockingly didn't deal with a single one. In the past customers would just call up their CC provider and tell them to expect a recurring change from vendor_name and it ceased being an issue. One MAJOR problem we had was transferring subscriptions from the US Stripe Account to the Canadian account. Stripe used to do this service for you (it has for us twice, once when we moved from US ==> Canada, and once when we sold the Canadian assets to another US corp). But they don't anymore, and their documentation and process around this is WOEFULLY lacking. Probably have a blog post in us about the process.

ryandrake 10y ago

Thanks for the answer--it's very encouraging. Of course, I forgot the "find an equity partner" route. I could see approaching someone with money and an interest in technology but no time/talent to maintain the product. But even if you do that and negotiate an ownership share in whatever you're buying, you're more like employee #1 than a true partner. Did you guys each put up an equal amount of $ when you first started doing this?

kareemm 10y ago
Yep, we're all equal partners. Figured it's a lot easier that way. But I've seen a couple situations where one partner brings the asset and the other brings sweat and they've been quite fruitful. One in particular I'm thinking of turned a 120k arr business into a 1m arr (and growing) business. So it's possible.

RockyMcNuts 10y ago

could also finance via an earn-out with founder involved for a period of time IMO it's a good writeup on how a financial buyer dots the i's and crosses the t's on a deal but the main driver of a deal isn't that, it's just, can it be grown into a much bigger business, and what are the potential risks and rewards. Do the buyers love the business and are they willing to do whatever it takes to realize that potential? If the buyers aren't thinking like founders and are thinking like financial buyers worried about the last few percent, it's a recipe for problems. The risks are sufficiently large in taking over someone else's code and customers, that only reason to buy it is if you think you can make it worth multiples of what you're paying. As a seller, it might make sense to do an earn-out or retain a small equity stake and involvement with the right buyers, but being a minority partner without the type of protection VCs get (board seat, liquidation preference, pro-rata follow-on rights / anti-dilution) is a terrible position to be in, unless you are very sure of who you are dealing with, so typically not with this type of financial buyer.