Ep 195: Why Saas Due Diligence Is Specialized & What You Need To Check with Pierre-Alexandre Heurtebize

Why do investors find the SaaS Business Model attractive?

It has high-profit margins, low maintenance, is scalable, and you have long-term client relationships. 

For today’s podcast, I have invited Pierre-Alexandre Heurtebize to share his insights on Saas Due Diligence so you can make an informed decision on buying your first SaaS business. 

After obtaining his MBA from Essec Business School, Pierre completed over 30 deals in his first 5 years, first as an investment associate at Isatis Capital and then as an M&A transaction services consultant at PwC France and Australia. Since 2019, he has been growing HoriZen with his business partner Akeel Jabber and focusing on helping SaaS businesses and SaaS investors. He leads the HoriZen Transaction Services department providing Financial Due Diligence services to SaaS buyers and investors.

Pierre and I have talked about how he made the change out of big corporate M&A to working with his business partner? What are the sizes of deals that Pierre and his team work on? What are the types of SaaS deals and why it’s so important and specialised?

We also discussed financial and competitive due diligence. How to negotiate when buying this type of business?

Lastly, Pierre shared what are the real risks within deals he looked at and how to avoid them?

Are you looking forward to owning your first SaaS business? Watch this episode and get valuable information so you won’t waste your time and resources.


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Episode Highlights

03:01 About Pierre’s amazing background

09:22 Size of the business deals for financial due diligence

11:56 Important things to consider when doing financial due diligence

17:09 Red flags in the financials and the risks involved

24:38 Critical components of due diligence for SaaS business

29:22 The benefits of competitive due diligence

37:37 Where to find these SaaS businesses for sale?

40:28 Where can you find Pierre?

Courses & Training

Courses & Training

Key Takeaways

If you’re interested in buying a Saas business, you’re going to deep dive into understanding the revenue generation per customer.

➥ Financial due diligence is about understanding the analytics, and understanding the operation matrix.

➥ Some of the financial due diligence red flags are overstating the revenue, and growth. These both things can have a huge impact on valuation.

About The Guest

After obtaining his MBA from Essec Business School Pierre completed over 30 deals in his first 5 years, first as an investment associate at Isatis Capital and then as an M&A transaction services consultant at PwC France and Australia. Since 2019, he has been growing HoriZen with his business partner Akeel Jabber and focusing on helping SaaS businesses and SaaS investors. He leads the HoriZen Transaction Services department providing Financial Due Diligence services to SaaS buyers and investors. Pierre lives in beautiful Portugal, next to Lisbon, and enjoys surfing, kite surfing and playing volleyball in his free time.


Connect with Alexandre Heurtebize


Jaryd Krause (0:00)

Do you want to own a Saas business with higher profit margins and low maintenance? Hi, I'm Jaryd Krause, host of the buying online businesses podcast and today I'm speaking with Pierre Alexandre Heurtebise, I hope I'm pronouncing that correctly. Pierre after obtaining his MBA from ESSEC Business School. He completed over 30 deals in his first five years first as an investment associate. And then as an M&A transaction services consultant at PWC in France, and also in Australia. Now since 2019, he changed to growing horizon with his business partner, Akil Jabba and has been focusing on helping you know, Saas businesses and Saas investors.

Now he leads the horizon transaction services department providing financial doodled and services to those people investors buying Saas businesses. Now Pierre lives in Portugal next to Lisbon, love surfing, kite surfing, playing volleyball in his free time as well. We hit it off with talking surfing at the start of the podcast, being this podcast episode Pierre and I specifically talk about how he made that big change in transition from corporate M&A to working with his business partner keel in horizon, some of the size of the deals have done DD on what type of deals and why it's so important and specialized to have Saas due diligence done, we do talk about do the due diligence on the software itself on the actual tech and how it's how important it is to do due diligence on the tech in itself, and what some of the risks may be with that and how you can problem solve and resolve those risks or turn those risks into opportunities.

We also talk about financial due diligence quite heavily, and Pierre shares some examples of some red flags and things that happen through financial due diligence that we should all be very aware, wary of not just in Saas, but also can be with other business models as well. And they can increase the valuation price when it's not actually worth that. So I should say inflate instead of increase. We just spoke about risks. Within competitive due diligence, we talk about the competitive landscape and how to do due diligence on that market. So a bit of market research and the risks within doing these types of deals with those Saas businesses, and how to avoid a bunch of those different risks. There's so much value in this podcast episode on due diligence in itself, let alone due diligence within a Saas business or for Saas business. Now, this is such a valuable episode, you guys are absolutely going to love it.

Also note we spoke so much on due diligence, I want to make sure you get my due diligence framework for free. Before you go away and buy a business. Make sure you know how to do due diligence and educate yourself on this, you can get this for free. It's what I my clients use. We've helped people make millions of dollars and save millions of dollars through this actual tool. And you can get this buyingonlinebusinesses.com/freeresources. There's other awesome resources on that page too.

Let's dive in and have a chat with Pierre. Yeah, thanks for coming on the buying online businesses podcast.

Pierre-Alexandre Heurtebize (3:05)

Hi, thanks for having me.

Jaryd Krause (3:06)

So just before we got to hitting record buttons, just for everybody listening, Pierre is a mad surf fan just like me, used to live in Bondi in Sydney, and now lives in a really famous surf town in Portugal, one that I've been able to visit and surf as well. So we just connected on our surfing and our passion for surfing NPS that was my biggest my biggest goal was to be able to live anywhere and surf anywhere by getting into this business space sounds like a similar for Europe.

Pierre-Alexandre Heurtebize (3:36)

And it was exactly something similar to that. So I used to work for a big corporation. PwC was great to learn everything to know about financial analysis and all. But our data stays where you know, I couldn't get the visa in Australia, actually, you know, super hard to get the visa in your country. And so I decided to start as an independent contractor and be able to work remotely just before COVID. So now I can basically do work based on where the waves off.

Jaryd Krause (4:05)

Yeah, cool. Yeah, it's so hard. A lot of people do want to live in Australia. And it's very hard to be able to get not just the visa and then also the citizenship and become a resident. It's quite difficult. But I'm glad that you're in where you live in Portugal. It is a good spot. Now let's just dive straight on into business. I got so many questions. So you still work for PwC, which is basically a payment merchant. Is that right?

Pierre-Alexandre Heurtebize (4:29)

No, no. PwC Price Waterhouse Coopers is one of the big four audit firm. So they basically do accounting, auditing, they do transaction services, but they also do M&A and everything you can think of in terms of consulting they do. It's like therefore they are all several 1000s of people work there. They have a presence all over the world. But I used to work for them for five years. Now for the past three years I've worked with or raising capital and we've been focusing mostly on Saas businesses.

Jaryd Krause (5:03)

And so what caused you to go from PWC to horizon.

Pierre-Alexandre Heurtebize (5:09)

So there's also worries after working for five years at PWC, I felt like it was time in my career to move forward and try to try something new. So I left Australia and started as an independent contractor, trying to make it on a fully raw, fully remote basis. So that was bit hard at first, right? It was 2019. So pre COVID. And when I started doing that, you know, I saw starting putting posts on marketplace that connects independent contractors to clients.

And I get approached by Akil, who had just started arising. And we started working together first, as a contractor, we really hit it off, I really liked the project, you know, is very entrepreneurial, very creative in his way to approach business. I was bringing more financial acumen. And so that's really how it started. And now I'm basically a partner of Verizon, and we're growing it together trying to develop different activities.

Jaryd Krause (6:11)

Congrats, that's so cool. How out? So since you've done been in horizon, how many businesses have you been a part of that have been purchased? Like, because they're bigger businesses that have less volume? Or what does that look like?

Pierre-Alexandre Heurtebize(6:25)

Yeah, and because over the past three years, like I've done different things, as part as part of origins, also getting personal clients. So I've been involved doing financial modeling, business plans, transaction, financial, due diligence, and for investors or buyers, but also M&A advisory. So overall, I would think I've been involved in around 1010 businesses in 10, different transaction going through, you know, in one way or another.

And that made me realize that, by doing that, you know, I developed an expertise both in transaction services Invitrogen, from my time at PWC. And during my time at Verizon, since we focused 100%. On Saas businesses, I felt like combining both of them and launching the financial due diligence practice solely focused on Saas businesses will be a big differentiator in the market. Because as you know, with online businesses and Saas, in particular, there are so many specificities, in terms of Operation matrix, in terms of how they operate in terms of hours we grow, that I felt like it would make a lot of sense, you know, to offer that service into focus 100% on opinion, discerning buyers know what they buy.

Jaryd Krause (7:48)

I love that because you're right, there's so many people and especially you guys are going to ask how much you know what size these deals are in a second. Most people listening are buying smaller deals. And when they come most people come to the space and like I want to buy an online business somebody that's not in online business? Well they think of is ecommerce business. That's what I think in an online businesses.

And it's the same at this this level where people might be buying businesses between the, you know, 10k range to 200 or 300k range. Also above, you know, a million plus, most people like I want to buy a brand I want to buy an E commerce business for me, that's cringe worthy, just because I know how much is involved with it in terms of the different departments and stuff like that. And you know, just through this through this pandemic period with logistics, it's been a nightmare, inflation and cost of goods and things like that.

It's a so there's a lot a lot of moving parts, especially as you go up the ladder of how substantial the business is, in terms of size, I think it's a great idea to have the difference in business models and going straight into you know, Saas DD specific for Saas, because people are going to go buy a SaaS business, I'm just going to go want somebody that's just going to do due diligence on all of them. If you're specialized in the field, like what I do when I've injured myself or something, I'm going to go to a specialist. So I think it's a very important thing. And you're right, there's so many intricate things within Saas that are not within a lot of different types of online businesses, which I want to break down shortly. But what size deals are so people listening know what's those deals? Are we looking at, like the rough price range, where those 10.

Pierre-Alexandre Heurtebize (9:28)

Generally for financial due diligence consultant to get involved? You start at 100k AR or annual revenue, and go it goes up, Mike? During my career, I've worked on multibillion dollar deals. But with horizon we're focusing say on the 100k to 5 million or sorry 50 million ARR Yes.

Jaryd Krause (9:53)

Cool. So 150 mil.

Pierre-Alexandre Heurtebize (9:55)

Yeah, exactly. Cuz generally below that, I mean, you can still do financial due diligence. And you need to do the due diligence as all but didn't want to recap honestly, as long as you check that their bank accounts match their financials, that you check with their customer and that you understand the basics, you're taking less risk, right? If you start getting over 100k, and even more so above 1 million, when Janelle, you have a complexity, which is much wider and much more complex, because you start adding generic different stream of revenue, you start having different channels, your cogs are going to be more complicated, your marketing your marketing channels are going to be different, your conversion rates are going to be different.

Potentially, you're going to sell during on different geographies, so you have way more things and way more pattern to analyze. And that's you really need to understand, first to make sure you understand the business, but also and foremost, to make sure that you don't get screwed, and that you've seen all the red flags. Is there any red flags?

Jaryd Krause (11:05)

Yeah, that's great. Normally, just so you know, and a lot of people listening, most people that are buying businesses in the 1020 to 30 plus 200k range, they don't go away and get a CPA, which is what they call in America.

Pierre-Alexandre Heurtebize (11:21)

Yeah. I'm very familiar with.

Jaryd Krause (11:25) Yeah, it's quite a simple due diligence, financial due diligence to do when you've got one revenue stream from ad revenue, it can get more complex with E commerce, businesses and multiple products. And I definitely suggest people have a CPA, look at the finances on sites above that 200K range as well, especially above a million dollars, like you said, it's not just different products, but multiple sales channels in in different and then also the expenses as well, for a business like that.

So you talk about financial modeling, I want to come to that shortly. But what would you say are some of the most important things that you're looking at when you're doing financial due diligence on say, a business, you know, around the 200 to 500k range, or up to a million.

Pierre-Alexandre Heurtebize (12:12)

Is going to be used to some of your students sit like this, but you look at the revenue generation. Alright, so that's going to be your first main important point is understand our revenue are generated. So that means that you break it down between volume and price, generally, right. And depending on the business model you're looking at, because if you look at an E commerce model is not going to be the same as if you look at the Saas business model.

If you look at a Saas, for instance, where or any business where you have recurring revenue recurring clients, you're going to deep dive into understanding the revenue generation per customers. So our long your customers, there are much it costs you also to, to attract this customer and to convert them how much money to the generate over the lifetime. If you switch to an E commerce business, you're going to be very careful not only about the revenue generation, but about the margin and the gross margin as well.

Because you could you could be selling 4 million worth of merchandise, if you're sitting at cost, you know, you don't really have a business. And this is the main thing you want to look at revenue, and how much it cost you to generate those revenues.

Jaryd Krause (13:29)

A lot of people when they do due diligence on ecommerce businesses that they submit to us to review is they don't know. And we this is a cross between financial doing due diligence, and also looking at the marketing and the analytics as well. They don't know what CPA is cost per acquisition, how much it cost to acquire a customer, which is so important to understand to know All right, what, how much money do you need to put in to get the type of return that you want to put in as well?

And are there certain things in the funnel or in the market that you can do to change to decrease that cost per acquisition or increase the price? I think with Saas and membership businesses, a lot of people don't put enough weight into it depends on what you want to call it. You can call it a churn you can call it customer lifetime value. There's many different names, but I think knowing the customer lifetime value and the churn rate two really big ones.

Is that is that part of the due diligence packages that you look at as well as looking at like, Alright, how long are these people staying in? How much are they paying? What's their lifetime value? You know, when are they likely to leave? What the whole journey looks like? Is that something you pieced together with financial due diligence or are there some other things at play?

Pierre-Alexandre Heurtebize (14:43)

Yes, it is. I think it's actually one of the key elements we're going to look at doing the financial due diligence. So I think the main thing to understand which is quite misunderstood on the market, and especially when you mentioned for instance, you know, get a CPA, to look at your financial is great to have a CPA, but I generally do a big difference between CPA which is more related to auditing your accounts and understanding whether they've been prepared according to the law. And, and according to the financial standards and accounting standard 10 of financial due diligence is way more analytic.

Like for, for instance, I'm not a CPA, I'm not a CH alter content. And most of the people that I've worked with at PWC, and in before in general was the guy who do most of the financial due diligence, his work, most of them are not CSP, or partner level maybe. But until manager, senior manager, a lot of them don't have an account, like a pure accounting degree, because it's all about understanding the analytics, and understanding the operation matrix. Deep diving into the numbers. And at the, at the end of the day, when you're giving like a full report, what you're saying, you're not just showing the numbers, you're writing and explaining the whole story of the company from a financial perspective, which means that when you do that, you also touch base on the strategy, you explain how the company grew, you know, by focusing on one or several products, how certain product, you know, at a higher margin than others.

And our there was, I don't know, a switch, for instance, in the, in the number of sales in one specific products, which explain why as a margin as decreased over the past two years, because people are switched to that product, which is lower margin. So you're really trying to build a story and explain it in plain words, on top of diving and making sure, of course, everything is in order.

Jaryd Krause (16:48)

So people can see the full picture, people that don't know how to analyze the financials can see the full picture, and understand some of the risks and what those risks would look like if they would own the business, right, which is what we try and do with our due diligence on different types of businesses deals.

But I wanted to ask you about some misses the juicy stuff that people don't want to hear, what are some of the red flags that you see within that within the financials, that you're like, oh, this is a bit all that's a risk? And what would that risk look like if somebody was to take on those businesses? And maybe there's, you know, two to three, or maybe there's more, what are those?

Pierre-Alexandre Heurtebize (17:25)

There can be more were more than three for sure. So the first one is, is people trying to present the numbers in the light, which is not where representative of our business is doing. Like I actually have like a very good example that happened on one of my deal enterprise a company was doing was on the FBA markets. So something you're fairly familiar with, alright, so more ecommerce type of things that were sending a software to, to customer that were doing ecommerce, and they were reporting on a cash basis, which means that you book your numbers only when they hit your bank account, as opposed to recognize, recognizing revenue over three years.

If you have a three year client, for instance, like that, over the year, the customers of the city's targets, they add more clients moving from monthly subscription to annual subscription. But since they recognize it on a cash basis, that means that if you had a client what stayed for six months and moved to an annual basis, in your book, you would have six months of monthly plus the equivalent of 12 months of subscription. So that meant two things. First, the revenue were overstated. Second, the growth was also overstated. So we both thing, which add like a huge impact on valuation. So in some reason, one red flag to look for is make sure you understand the accounting and hours and number are presented to you because it may not reflect the what you think is face value.

The second thing, which again can be a red flag, we can be a red flag is everything around provisions. So I don't know how familiar you are with provision. Basically provision in accounting is something where I know you have a risk, you want to recognize an expense to so that it hits your p&l, even though the events that will lead to that expense has not happened yet. So it just to be prudent basically cautious about it. The only issue with that is people use it to manipulate the net profits.

Jaryd Krause (19:44)

Can you give us an example of like a provision expansion so people understand this concept?

Pierre-Alexandre Heurtebize (19:49)

Exactly. Exactly. And trying to tie to the E commerce for instance. So you're running an E commerce business and if you all you're stuck, you can have a provision for stock depreciation right? Okay, I don't know, imagine you're setting a high price couch, okay, that sell for 5k Each, if you are the coach coaching inventory for three years, you can kind of make up a provision, which is going to be the goal to say, Okay, this couch hasn't sold for three years, we're going to depreciate it by 30% or 40% of its value.

But really, you totally know that that coach, even in 10 years, you can still sell it at absolute price, right. And so I've seen companies where people use that as a cushion, so that if next year, they do less sales, or NESPA, less net profit, there really is part of the provision, which artificially increase the net profit back. And so you see on several year, you see a constant growth. Thanks to that.

Jaryd Krause (20:49)

Yeah. That’s crazy. That's a really good one to point out, what are some of the other big ones that you've seen as well like, because this is this can decrease, this can not only decrease the valuation, save the person who's looking at buying the business to save them a lot more money, but also can save them a lot more risk? What are some of those ones that were just like, wow, that’s a huge risk that you've sort of said to a client, like, look, this is a pretty, this is probably too much of a significant risk to go for.

Pierre-Alexandre Heurtebize (21:19)

Yeah, so the most classic one is revenue concentration, which means that I know 40% of the revenue of the company is made with only one client. When that happens, that means that you take the risk after buying the business, that client leaves, you just lost 40% of your revenue. And generally, because you have a certain level of fixed costs, if you lose 40% of your revenue, you lose 70 or 80% of your EBITDA. So that that may mean most of the cash flow you bought.

And under the pseudonym thing, you should be super careful, because in theory, you know, the arguments, which is always used by sellers is, yeah, but that customer I've been with us for five years is very loyal, blah sure. The only thing is you don't know what's a personal relationship, that the seller as with the buyer, because if they're buddies remitted, even from the same family, you're at high risk is that that customer has been staying only because they have such a great relationship. And so there you buy the business, then the customer may leave, because that.

Jaryd Krause (22:23)

That’s scary to think about the people talk about stickiness. In Saas businesses, the stickiness is tied to a personal relationship, rather than the product being so good that their business is tied in. And that it's going to be harder for them to leave, we call this single source dependency of revenue or single source.

And we have single source dependency of not just revenue, but single source dependency of traffic, sometimes when people are only getting traffic from one source, and it gets changed by an algorithm update, and they go, Oh, wow, like I've just lost all of this traffic, which means when they've lost all of that traffic that lost that same usually ends up being similar, same portion, percentage wise of revenue that they have lost. That's fascinating. So you're still seeing quite a lot of deals where they have single source dependency on a few customers.

Pierre-Alexandre Heurtebize (23:10)

Especially as a smaller one. Okay, what you're mentioning, businesses below 100k. I mean, it's very common that they rely only on SEO, for instance, or I've seen businesses relying a lot on Facebook ads. And Facebook changed their algorithm a couple of years ago, in the last, like 30% of their revenue overnight. So clearly, having those types of like, one channel source of revenue can be super, super risky.

Jaryd Krause (23:41)

Yeah, I know the Facebook one very well. Switching from 2018 to 2019, I nearly lost this whole business. For this podcast, we're talking about due to Facebook and me being so heavily tied into Facebook ads, we were getting a lot of leads spending a lot of money on ads, I had a sales team, I had a marketing team and was selling a product that was not actually that scalable at the time.

And yeah, it blew up in my face. And I went backwards for a year just trying to recover so and that was in hindsight it was a good lesson to learn because of me not understanding that single source dependency now I do and that's something that not only like, like to teach but I instill in in my own businesses. I want to switch gears for a financial due diligence. I'm curious around once financial due diligence is and maybe that financial due diligence doesn't come first.

I predict it does and correct me if I'm wrong. Probably most important to see the finances first. What would come next is looking at the software. What are some of the other critical components of due diligence for a Saas business?

Pierre-Alexandre Heurtebize (24:51)

Yeah, but didn't answer your first question. Generally what we're what we see each process is different All right, but I like when, because I also worked in private equity. So I also had that vision of being an investor's. So generally speaking, when you're in the first phase of reviewing a business, either as a private equity and private equity investor, you do that review yourself, you know, so I leave a review of financials, because that's obviously key for the valuation, knowing how much debt you need to raise, etc.

All the second option is you can, you can work with financial due diligence consultants that will make you a high level red flag report. So that's kind of the two things that we generally do either red flag report, which is, going to include all the essentials. So ILO, p&l balance sheets, cash flow, and equality of earnings, which is one of the key pieces of any financial due diligence reports. And then during phase two, and phase two, most of the time happened once the buyer is a potential buyer as an exclusivity with the seller, which means that they're always the only one bidding. And in a period where Windows, you can start spending more money on consultants, because they're not going to get stolen by your competitors with a better offer, basically.

And so generally, when you run an init process, well, when you get to phase two, which meant that you've already made the first financial analysis, and you're in that zone of exclusive exclusivity, you try to run all the due diligence in parallel, because you want, if you were doing them one by one, you know, the deal would take way too long. And if it's your professional investors, in particular, you're trying to be efficient with your time, because then you want to move on to the next year. If you're not proficient one. Sure you have less time, however, knows that the longer detects, the more chances you have for the dip to follow through. And so generally speaking, in intelligent agents, financial diligence are super important.

The tech due diligence is also very important. If you're buying a Saas product, I guess for an E commerce product that would be different, right? Because you don't really have technology evolves. And each will have more time, more money to spend want to be safer, or, you know, try trying to make a bigger investment buying a bigger company, or others that can be quite important are the tax due diligence, that goes sometimes in a scenario like a huge, huge impact on the deal. Also legal due diligence, making sure all the contracts and orders that also employees are paid according to the law, and that all the taxes are actually paid as well.

And an important one is a market due diligence, which is also called commercial due diligence. So while tax, legal, financial and tech due diligence, have a tendency to focus on the company, the market due diligence is going to look at the market on which the company is operating. So they will look at competitors, our competitors perform, what else a different country, you could expand, for instance, they will also look you know, at your different products, and potentially make recommendations on which products you should focus all your attention on. And so.

Jaryd Krause (28:36)

So good, I guess. And there's so many things I want to break down. So thanks for that explanation. I guess the tax thing would be important for the business owner that is purchasing it is understanding what sort of taxes and how much taxes they would be paying, if they were to have the business ran through their own home country versus maybe if I bought something and I was going to run it through Australia, an Australian company versus a US company, but also have us employees what that would look like.

So I'm sure there's a lot to dive into there. But I want to touch on to two very important things, the technical due diligence, which I guess is around the software, which I think is which I think is fascinating. I want to own and touch on that before I do competitive due diligence or what you call market due diligence. We actually call that competitive due diligence. And I've found that especially on the smaller deals that a lot of people looking for Saas businesses go away and find a business that can actually be the risk is that their business is it or is it's a software that is basically a benefit or could be a benefit of a bigger company.

For example, if somebody came out with some a feature or benefit that Zoom didn't have and they sold it as a soft software and zoom started to use that as a software or started to use that and that as a band. Fit for free does then that other business would quite easily and quickly go out of business. So there's a massive risk there. Do you see much of that with competitive due diligence? And then what other things? Do you what other things do you look at as well?

Pierre-Alexandre Heurtebize (30:11)

Yeah, do you clearly have that as a big risk? But honestly, I would say this is a risk with 95% of the software business you buy, because Google is their Facebook, and there, so technically they have the best engineering, the world is decided to go on your market, they will do it. But also what you see as a risk can also be an opportunity. Because if you see those big guys interested or lacking that piece of software, that means that if you're looking to sell your business in five years or down the road, then may actually be very good strategic buyer, right.

So scan was a two sides of the same coin. The other thing you look at when you're doing your commercial due diligence, is going to look at the prices of your competitors, right and see how well you position to your competitors. In short, if you're familiar with the work of McKinsey, BCG consultants sitting Bain and Company, they're specialized in commercial due diligence. So all the fancy metrics, you know, to show if your cash go or are your position on the market on very fancy charts, you know, where you are on different axes. This is all what commercial due diligence is about really understanding your positioning compared to your competitors, your strengths, your weaknesses, your threats, and all of that.

Jaryd Krause (31:42)

There's so much that goes into commercial due diligence I want to touch on because we don't have a whole lot of time. I do want to touch on the tech due diligence, I called it software due diligence. Basically, understanding the software and knowing I think a risk is not knowing how up to date the software is and then how many things that need to be plugged up and fixed, which is my major concern for somebody that says, hey, do you want to buy a software business?

And I asked them, how much do you know about software? And can you audit the tech? What are some of the big components? What are some of the biggest risks, I guess, that you need to identify and point out when doing tech DD?

Pierre-Alexandre Heurtebize (32:19)

On things DD, or honestly, that's not my core skills, simply because I'm not a tech guy. I got to have tech sensitivity, I've learned Python and the basics, but I'm not the one doing it. Like we have a partner actually handling that. However, if I had like to take two or three main things generally understand who wrote the code, because if only one person in the company wrote the code, that genuinely mean that everything depends on that person.

So you need to be extra careful. And check our well documented the code is because I've seen that in companies doing over 5 million in revenue per year, there was like one guy maintaining the code base, he had nothing documented. So basically, the whole company was really reliant on that guy. And you don't want that. And then the second thing is ask an expert to tell you whether the technology which is used is the right one is there is a more or more efficient one, try to see how clean the code is. Because obviously, you know, you, it's kind of like in mathematics in mathematics, you can do one plus three minus two plus one and get to the same results.

But it's way more complex than just doing one plus one equal to so someone who's an expert in code review will tell you whether the code is efficient. If it runs well. You can also check the number of books or and actually, if you're not a tech guy, even before hiring anyone a good way to know whether the technology is good or not just ask for log reports or look at how many customer complaints or issues with the software per week. And this will give you a very good indication of our buggy or how we've done two software's.

Jaryd Krause (34:18)

Yeah, that's really good asking for feedback and looking at the reviews, that's also a really good thing to have as your arsenal for growth in changing and updating and making the software better so people stay longer. So the code thing is interesting, though single source dependency on one person, like that's a really good example. I've what concerns I sometimes with Saas businesses and a lot of businesses is something that's built on a certain platform.

And if the team doesn't come along with the business, and you have to get other people in to try and understand the code, you have a big expense of people having to try and understand that software. And then change it because most often, what is this the case is most Saas businesses are custom built, like most of the software is custom made. But on a platform.

Pierre-Alexandre Heurtebize(35:11)

Where it's very what do you mean custom built? You mean for the customers? All custom made?

Jaryd Krause (35:16)

Yeah, no, like built like it's a brand like it’s on say like Python or different of like it type of code. But most of the Saas businesses are built specifically for that type of business model, right? So then there's going to be somebody else that has to come in and try and understand that which, which means that if you don't have a team that comes along with the business, you will have to pay a lot more hours towards somebody to first understand that before they know how to change it or alter or fix it.

Pierre-Alexandre Heurtebize (35:45)

Yeah, well, basically, is that there is not a straight answer on our Saas businesses are built because basically, your Saas business, as by definition is just something which you like a software or a piece of software, you can you can use online, and for which you pay a subscription, basically. But now, especially with all the new code tools that exists, you know, you can build the whole online application and the oh nine software using no code No, as injury, drag and drop type of things like weeks of verbal for instance, right.

So as long as you are able to code, you can do it in Python, and you can do it in react in JavaScript, in any type of coding and any type of environments. As long as your software is online on the cloud, then you can make a Saas business out of it. But for sure, if the team is not coming in, you're just buying the software, which happens a lot. When you buy very small software, say well, below 100k. General, generally, you're buying it from the person who's developed it, or paid someone to develop it.

And if you're trying to take it over, then you better make sure that first there's a transition period with the previous owner. So that's where you can really get a grasp of the code and how to make it work. And you likely need to factor the cost of developers to maintain the code base. If you're not a developer yourself, which is quite important to factor within the price. You're going to pay for performance after.

Jaryd Krause (37:24)

That. Now you don't know but maybe you do, where most of the deals that that you guys are doing DD on where are they coming from? Where are people finding them? Are they are they private? Or is there a marketplace that you've seen a few from like, what's the most common place people find these businesses that are up for sale?

Pierre-Alexandre Heurtebize (37:41)

Again, depends on what type of buyers if you're talking about private equity buyers, whichever one makes the most deal per year, they are their own source of deals. A lot of them sources deal through M&A brokers also who has their own channels. However, for private buyers, you have more and more marketplace, where you can find really great deals, like the most recent one, which super quality qualities Miko require, I guess you may have heard of it in America.

It's been launched by Andrew gas Dickie great entrepreneurs. And basically he created his own platform with entrepreneurs in mind first, so it's like you have a business. Let’s switch the position and the leverage, I want to be the platform for the entrepreneur to sell their business and not for buyers to buy those businesses. But he managed to create something with super quality deals and, and pre cooler websites as well.

And then you have other platforms, broker platforms where you get a can go to you can even subscribe to daily emails or weekly emails, so that as they reach out to you, but generally speaking, the best deals or the one as a buyer, or the one that no broker, because you're more likely to have less competition, and the surprise was also super hard to find.

Jaryd Krause (39:05)

Yeah, I agree. People that have a business that they want to sell that know it's valuable, they know that they could go out and sell it not needing a broker as well. Because it's a valuable business, they'll be able to find people.

Pierre-Alexandre Heurtebize (39:18)

Sometimes that's a mistake, though, I feel like a lot of people feel like they don't need a broker or M&A advisor because they don't realize all the work which is done by your M&A advisors. So some sometimes it's true, right? So sometimes you may end up with brokers who are literally just going to lease your website and be there on three calls and you're going to do most of the work.

But especially when the deal stopped getting bigger and bigger, having a third person here to manage the whole process, a few with negotiation, a few manager due diligence and save you a lot of times because you don't have to deal with all the admin can it can be super valuable as well.

Jaryd Krause (40:00)

Yeah, for sure. I'm one of those people that would be using an M&A broker for sure. It's not, something that excites me having to get the business, all the data and information and access and all those sorts of things sorted. This has been awesome Pierre where can lead people to find send people to find out more about you and what you're doing?

Pierre-Alexandre Heurtebize (40:21)

Yeah.So either on LinkedIn happy to always ask you to connect on LinkedIn. And also they can come directly to our website www.horizencapital.com where you can see the different type of services that we offer. And in particular, if you ever need financial due diligence, like you can reach out directly to me by email at [email protected].

Jaryd Krause (41:50)

Awesome. Thanks so much for coming on. Everybody that is listening. Thank you for listening. What I would love for you to do is if you know somebody that's looking buying a Saas business share this podcast episode with them. It helps Pierre helps me it helps us all to learn more, learn a lot more and help us.

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Jaryd Krause is a serial entrepreneur who helps people buy online businesses so they can spend more time doing what they love with who they love. He’s helped people buy and scale sites all the way up to 8 figures – from eCommerce to content websites. He spends his time surfing and traveling, and his biggest goals are around making a real tangible impact on people’s lives. 

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