The Buying Online Businesses podcast is here with another exciting episode! Hosted by Jaryd Krause, this episode explores what it really takes to buy or sell an eight-figure digital business. Joining the discussion is Mark Woodbury, Managing Director of Raincatcher Digital Division. Mark brings years of experience helping entrepreneurs evaluate and sell e-commerce stores, SaaS companies, media businesses, marketing agencies, and more.
Mark’s journey includes co-founding and leading a boutique brokerage that focused on digital businesses. He’s also been a featured guest on podcasts and conferences, sharing advice on how to reduce risks, prepare businesses for sale, and achieve top-dollar exits.
In this episode, Mark talks about:
- How to finance a seven- or eight-figure business purchase, from SBA loans to private equity.
- The types of buyers—like private equity firms and larger companies—who are acquiring these businesses.
- Steps business owners can take to make their digital businesses more valuable, whether in e-commerce, SaaS, or media.
- The importance of due diligence and why selling or buying a business often takes at least a year to do right.
This episode is perfect for anyone growing their portfolio, thinking about selling, or curious about scaling to the next level. It’s packed with tips and real-world examples. Don’t miss it!
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Episode Highlights
03:00 How Mark started with the Raincatcher Digital Division?
09:30 How to prepare for a business exit?
17:00 A sneak peek to selling AI companies
28:00 Due diligence in mid-market businesses
33:30 Where to find Mark?
Courses & Training
Courses & Training
Key Takeaways
➥ Small businesses face more challenges finding buyers due to limited scalability and localized markets. Larger deals with diversified revenue streams and strong financial performance attract multiple bids.
➥ Entrepreneurs in AI or software development should recognize the value of their innovations in the eyes of larger SaaS companies.
➥ Acquisitions of companies in the $4M–$50M range are common, and financing often involves private equity (PE) funds. Small Business Administration (SBA) loans can go up to $8M but are capped, requiring alternative or creative financing options.
About The Guest
Mark Woodbury serves as Managing Director of the Raincatcher Digital Division, which is dedicated to assisting successful entrepreneurs through the nuanced process of evaluating and selling their eCommerce, SaaS, media websites, marketing agencies, or other digital service businesses.
Mark jumped on the opportunity to join the Raincatcher team and assist in building out the digital division after co-founding and acting as the CEO of a boutique brokerage firm that worked exclusively with digitally native companies.
Mark has been a guest on a handful of podcasts and conferences to discuss everything from the nuances of selling an Amazon business to how business owners can mitigate risk with content websites and prepare them for an optimal exit.
Connect with Mark Woodbury
Transcription:
Now Mark jumps on the opportunity to join the Raincatcher team and assist in building out the digital vision after co-founding and acting as a CEO of a boutique brokerage firm that worked exclusively with digital companies. Now Mark has been a guest on a handful of podcasts and conferences to discuss everything from the nuances of selling in an Amazon business to how business owners can mitigate risk with media businesses and content and prepare them for an optimal exit.
In this podcast episode, Mark and I talk about what it looks like to acquire or sell a seven-figure to eight-figure business. We talk about the financing options for buying something in the seven figures with the SBA and then what it looks like buying something after the eight figures plus with SPSC and private equity, what the funding option looks like, and who actually is acquiring these businesses.
Private equity firms and other types of investors, strategic acquisitions from larger companies, what it looks like. He also runs through some scenarios of some of the things that he helps and advises sellers to do prior to making an exit. And this can be a lead time of a year or more to getting them ready for an exit to get them a better exit and sell for a higher price. And so what are some of the things that they can do with an e-commerce business to make it more valuable and then also a SaaS business to make it more valuable to get it ready for sale?
We also talk about due diligence, what it looks like for these upper- to middle-class acquisitions, and the lead time it takes to sell a business or acquire the business and why it should take longer. There's so much value in this podcast sale. de. If you're thinking about scaling your portfolio and wanting to get to this level eventually or you're already there, this podcast is absolutely awesome to listen to for what could be coming up in the future for you and your portfolio.
Enjoy the pod.
Hello, Mark. Welcome to the pod. Thanks for coming on.
Jaryd, happy to be here, man. Thanks for having me.
It's funny. I just want to preface this for the listeners. As soon as we jumped on the call, we just started talking business straight away.
Yeah. Well, I just got off a call with a law firm that was not wanting to actually write up an APA based on where the seller and the buyer were located in the States. And then you just gave me a quick referral. So yeah, cheers.
We got straight to it. It's what country you're located in, and yeah, who do we know in common, and get straight to doing deals. That's good. Yeah, it's great. It's great. So how did you get into working with Raincatcher? So you're an advisor, right? And did you start helping people sell Amazon businesses before this? Like, I think you were advising on your own before you joined Raincatcher, right?
Correct. Yeah. Yeah. had a small firm. Yeah, Raincatcher, we're an M&A firm, business broker, Gemini. The difference is somewhat illusory, right? Where a business broker falls off, an M&A firm picks up. But really we focus on, I'd say, more upmarket deals from, you know, just a small Amazon asset with two listings or an affiliate website that sells it for a quarter million dollars. That's really below where we work, and kind of, we start at maybe two million enterprise value.
And our systems and processes are really designed for businesses even further upmarket than that. So our average deal this year will be around 10 million bucks. That's kind of the middle of our strike zone, right? We call it five to 50. I've heard people internally say four to 40. That's kind of the range of where we excel in getting into the processes and where it's differentiated, and obviously not doing so in a pitching fashion because there are other firms that do a good job with sellers in this range as well.
But you know how I got into answering your question: yeah, you know, I built and sold a small distribution business back in the days when you could just list products and call up manufacturers who weren't yet selling online. They were just selling through retailers and saying, Hey, I'm selling your products. I'm selling your competitors products. I would love to sell yours as well.
Right. And then it was just PLAs, 10 cents a click, $2 to acquire a customer. Fill the item and make a 10% gross profit and 6.7% net. So started off with that. And really before that, I did some web development and design stuff with it.
That, nothing that was, I'd say, worth selling up until that point. Yeah, online distribution business, and that's kind of the foray into entrepreneurship, into digital marketing, and all the different business models that it touches. And then got into advising sellers from there. So I had a partner, and we had two folks underneath us, and the average deal at that size was maybe, you know, between half a million and a million dollars.
So again, kind of slightly upmarket from the $70,000 affiliate website, or use the $5,000 domain that you purchase on Flip is a little bit more of a white glove. I pledge type service. Some of these were sold on SBA loans, but many of those are still below where I work today. That was what we did for probably three years before I was connected with the team of rain catchers and had an opportunity to join just post-COVID. So I've been here three, a little over three, about three and a half years now.
Yeah, a partner in error and still focused primarily on digitally native companies. So a lot of overlap with your audience. know we have some colleagues, some mutual colleagues in common, but you e-commerce, SaaS, do a fair amount in SaaS. Content media websites are actually a little bit less. It's the only one right now that's kind of online ticketing services, the media aspect, but yeah, SaaS, some consumer e-commerce, and marketing agencies. I had some success with digital marketing agencies, so B2B service.
Outside of that, as a firm we do kind of niche manufacturing, staff augmentation, B2B services, and facility services, but that's outside of my scope. So there's the long answer. Yeah. Yeah. Cool. Fair bit in there to decompress. So are you mostly on the sell side, right? Yeah. Primarily on the sell side, we'll work primarily with kind of founder family-owned businesses. So down market from PE groups who are looking to sell their asset and more working with founders and family-owned companies. Yeah. Cool. So with that, how early on, before a founder, before they decide to sell or before they actually do sell, how early on do founders reach out to you guys?
Is it like, let's try and sell this now? And, or is it like we're thinking about selling in a year's time? What do we need to do to get ready? How do they? I guess there's a variance in when they approach you, right? Yeah, no, it kind of runs the spectrum, right? Of some people wanting to get introduced and saying, Hey, I know this is—we're planning to sell; my partner and I are planning to sell in two or three years. What do we need to get done ahead of time?
We're always happy to have those conversations because prevention is worth a pound of cure. Yeah, if we can get you to make better decisions now, hire a CPA to do your books, get them on a cruel basis, and get one of you guys out of the business if it's a partnership. So it's not so owner reliant, and we're adding seven figures, sometimes eight figures, worth of value to this business, and you sell it in two or three years. I'm building some goodwill in a relationship in doing so.
That's the backbone of figures, business, and how we win clients is by providing value. We're open. to getting introduced as early as people want. Now it ends up being that a lot of our business just comes from either referrals from CPA firms, wealth managers, or sometimes other investment banks that don't go below kind of 100 million, and they say, Hey, decent business, but it's 4 million EBITDA. Go talk to these guys.
Those represent good deals for us, and we're getting it to them in the ninth inning, and they're like, Hey, I'm ready to run a process. It's been 30 years. It's been 15 years, wherever it might be, and we signed them up a week, two weeks later; you'll go out to dinner and talk about the process, and they're ready to sign and move forward.
So it kind of, there's a spectrum, but we're open to kind of getting looped in on whatever and happy to have introductory calls early on. Even if the deal's too small for us or not a sector fit for whatever reason, we'll still take the call to get introduced and then hope to make an introduction. They can get serviced by somebody who's a good fit for them.
And what's a deal too small? Are we talking like two mil, three mil, or anything under that four to five mil range? It is a bit too small for you guys. Kind of two to three in enterprise value is where we start to pick up. And that's for digitally native deals, right? If it's a construction business and we think it's going to trade two million, if it's a facility service, those are probably too small. Candidly.
I mean, there are just more moving pieces. It's harder to find buyers for those because you're working in a geographic region, a construction business. Now you do drywall. I need somebody who's licensed to drywall within 40 miles of that who's willing to buy themselves a full-time job. They just ended up being too small. They're great assets. Once you get to two, three, or four million in cash flow, we can get you 10 or 12 bids on a $20 million deal. It's not really a case when it's much smaller, and these people are really buying themselves a full-time job. Yeah, I mean, digitally native companies, we go as kind of small as half a million in earnings.
We'll look at its smaller, and some SaaS companies call it, you know, 5 million ARR or half a million in earnings. Yeah. Cool. Cool. Yeah. So sticking with the theme of online businesses, let's say we've got Ecom, like digital, digital Ecom businesses, and then you've got SaaS businesses. Say somebody approaches you; there's going to be multiple questions here. So we'll go back and re-ask them. Say somebody approaches you with an e-commerce business, and they want to sell it. It might not be; it might be, say, $3 million enterprise value, right?
Maybe they're doing like, a mil, and EBITDA, 1.5 and EBITDA, or something like that. What sort of advice do you give to them, or what are the top two to three things that you share with them to get them prepared for exits and/or have their business be more valuable to a buyer so they can exit? And then what would it look like for SaaS businesses as well? Yeah, it's a good question. And it really depends on each business, right? What the bottleneck is in each individual company.
So I'll give you a couple of real-life examples of the companies we've spoken to about what the issue was, why we thought the owner should wait, why that was, and what the business owner is going to do about it. So we're working with one. They sell fragrances, purely direct to consumer. These guys are great marketers, and then they kind of sign you up. Yeah, you buy a fragrance for kind of $40, and it automatically subscribes you. I think you have to opt in anyway for a subscription.
They just have landing pages and great direct response marketing and do a lot of affiliate work and paid ads, and they're going to kind of four or five million in EBITDA to us is unlikely to be sellable. We said we'll take it on; we'll take a swing at it, but we think your best bet is to try to get distribution. Get Shellspace; it's going to be hard to do, but that's going to turn this into a sellable asset: getting into CVS, getting into some of these kind of high-end boutique retailers, and selling through to the customer. You have some name recognition because you're such good marketers.
If you're able to do that, and it has the margin for a keystone markup, right? I like an 85% gross margin; that industry has very strong margins, and it's a consumable product. So if people end up repurchasing the brands that are able to get distribution, they are very sellable, right? So four or five million EBITDA, if they get to seven or eight, but kind of blended revenue streams. kind of half of it's through the website, and you know, a third or half of it is through retail.
We think that's the next type of business, and we're likely going to get eight or nine bids on it from committed funds and private equity groups. As it sits today, it's completely reliant on just these owners being really good marketers; realistically, is the fragrance that much differentiated? Now what's differentiated is that they get it in front of the right people because they're good direct response marketers.
So that gives you an idea of kind of where it sits from an e-commerce perspective. It's also true if people are just on Amazon, it's hard to build a brand on Amazon, right? I mean, obviously there's a number of groups out there. Some of them still exist that love the fact that the companies are just on Amazon. They already have the ecosystem in place to be able to purchase to be able to manage PPS and sell Amazon brands. It's more valuable.
If you build a more blended revenue stream, get off Amazon, own that customer, and get a couple of purchases on the backend. Get them on your Klaviyo list; get them on social media. Also, Amazon is great. If you're doing three to seven mil, three to eight mil on Amazon and you've got great product reviews, a lot of product listings, and good reviews, Walmart and other retailers will use Amazon and your listing on Amazon as a part of their due diligence for this.
What do we want to sell these products for in our stores? Which is the goal: to get selling on Amazon, or if you've got a brand that you've got a bunch of great reviews off Amazon as well, is using that as leverage to get you in the door to have bigger distribution channels and sell through retail with Walmart and other places? Right? Yeah. I didn't know that, but it makes perfect sense. Right? What's the barrier to entry on Amazon? It's nothing. Anybody can order a product; get it on there.
But the ability to sell is through the ability to organically rank very well, get a best seller badge, and use that as leverage and cash flow candidly, because you're going to need working capital to scale, especially as you get these larger POs ideally. So it's a great foot in the door, and you could sell the business at that level.
Once you get to three or four million on Amazon, there are plenty of groups out there that could sell that business and have had success doing it. As you contemplate getting larger and wanting to sell for a larger multiple, building a larger team, more infrastructure, and so those are some of the discussions we have about how do you get your clients off Amazon?
That's kind of the triple axel of e-commerce, right? It's how do we own this clientele, sell it in a commoditized marketplace, own the client, and get them to register the product or in some way connect with them off of Amazon. So we own the client and get wholesale one or two of those. If you have all three, right? Wholesale and direct-to-consumer through e-commerce, and we're selling on third-party marketplaces, Walmart, and Amazon. That's when it's really more desirable.
It's just a tricky one, right? And I've done this as well with an Amazon business; it's like selling retail instantaneously when you got Amazon working so well, especially when people, you know, in the digital marketing space are like, Well, Amazon's selling so well, people are going to type it into Amazon.
Like they'll see the brand, and then I'll type it in on Amazon and see if they can buy it on Amazon anyway. So people run Google ads literally to their Amazon listing link. And so that can sort of pigeonhole you into Amazon versus, like, working out how you can sell off Amazon. But once you do this, you've got a far more valuable business.
The multiple only goes out because you got three distributions and three sales channels, right? Amazon, off Amazon, like online off Amazon, and then you've got all retail in-person stores. It's making business far more sturdy and risk averse. Yeah, without question. And then exactly. You're not as subject to the ebbs and flows that Amazon can put you through or the paid ads can put you through. Yeah.
And then you can scale, right? Again, you're not limited in size, but add more products in terms of ways they can expand if they only have kind of maybe four or five listings. It's kind of a one- or two-product brand. Look, hey, how can we add something on the back end?
How can you continue to monetize this existing customer that you're getting? Is there something on the back end we could sell to increase your customer lifetime value and lifetime gross profit? So those are all discussions to be had. You and obviously many of your audience are going to be accustomed to those discussions as well.
As it relates to a SaaS company, I'll kind of classify it as just kind of B2B SaaS, which it seems most SaaS is business-facing, and there's less of it that's consumer. So a niche vertical B2B SaaS, it really comes down to churn customer acquisition costs, right? I mean, the third one is scalability, and how large is that TAM? Well, you've cornered yourself into a market typically when you decided to pursue that given market.
If the market's growing, great. If there's the ability to expand it into an adjacent market, like adding more features for your SaaS, a niche CRM system specifically for realtors, and then we can add some functionality, and now it's for realtors and business brokers and insurance brokers, or who knows what. We've seen a lot of those as kind of discussion points of what the new buyer can do. Very few of those actually add up, and it ends up being that we're in this niche market. This is who we are. So how large is the TAM?
Customer acquisition caused lifetime value. And net revenue retention is becoming one that's a more sought-after metric because a lot of these SaaS groups are finding a smaller tripwire, recurring revenue offer, maybe $10 or $20 a month, with the then benefit of, Let's upsell these people more features. So if we're able to get a stick of your customer on the front end, and then we're going to upsell them into the $100 and $200-a-month plans, that'll show a net revenue retention. So churn doesn't tell the whole story. That's really what it comes down to, right?
Keeping sticky customers: How scalable is it? And then, like this AI, the growth of AI—I can't tell you how many new, rapidly scaling AI businesses I've seen in the last 12 to 18 months. And some which are great companies. Yeah, tell us about these because the audience is super curious about what then, these, especially if these AI companies are selling for mid-seven to eight figures, high-eight figures. What do these look like? Sure. Well, I'll tell you one.
This is a, got scars around this one, but my partner and I pitched a deal called virtual staging AI. I can say the name of it now because it already closed. Zillow ended up being the end buyer. We were working to run that, and it ended up being another investment bank that typically does $100 million. plus deals but came down market for this one because it's just a very desirable asset.
We worked on this deal, and they do exactly what it says. It's virtual staging for anything related to real estate, commercial or residential; it doesn't matter. If you look at a home now, it might be empty, but they show you what it looks like with a fire going in the fireplace, steaming coffee on the counter, and a dog curled up on the sofa. And it's all generated immediately with AI.
This is a high-end image of each room to it. Then it will add furniture and lifestyle staging to it. Okay. Cool. Correct. Yeah. You upload a picture of an empty room with white walls, and you could say bookshelf, couch, armchair, et cetera, et cetera. And it does a good job of it. So obviously that is so smart.
Yeah, it's great, right? And he was the first mover in it. It's not that he, this team of two, and they're bright guys, but they didn't do anything that other entrepreneurs couldn't do, but they were first movers. And it's in the land grab stage, right? mean, AI is changing a lot of industries, and that's one of them. So photo editing, and in particular, this niche of photo editing being real estate images, and how to make them look more like homes and less like empty rooms.
Anyways, know that Zillow bought that one, which was on the short list of kind of specialty groups we were going to pursue with it. Again, how long ago did they start? How long did they start and own this business for? Then you're allowed to talk about it. Yeah, that's a good question. Again, I wasn't the advisor. I can't say exactly, but it was less than a year when they approached us about it. I think they signed on with somebody a month or two after that ended up; I think it closed in October this year. So soup to nuts. This whole thing's like 18 or 20 months old.
Right. I know exactly what the economics are around the exit, but eight fingers. Yeah. Cool. Congrats to them. exactly. So that's one example. Yeah. AI is revolutionizing a lot of these new, I mean, every SaaS company you see is now powered by AI to some extent. We're doing one right now that is kind of a third-party marketplace for a number of different functionalities. They were able to get AI functionality going with their product descriptions in like a weekend.
Now, both these guys are good engineers. spent kind of 10 or 12 years in their product, but the ability to implement AI functionality and that barrier to entry for entrepreneurs is rapidly declining. And so there are a lot of cool tools being put out right now. Yeah, it's for people starting or buying small AI software companies and knowing how to scale them and then sell them to larger firms like Zillow and even selling them to Zoom and all these large SaaS companies. These large SaaS companies are going to want to buy them up.
I'll just know tomorrow, right? Yeah, especially the groups like Zillow. They are essentially outsourcing the research and development component of their business to entrepreneurs and then just waiting for you to build something awesome that's in an adjacent space to them. They swallowed up.
That's been Silicon Valley's model for quite some time. So much so that each of these large mega-cap tech companies has its own VC arm, as do many of the media companies, to invest in kind of the early-stage entrepreneur who's building these companies up to the point where they're able to be acquired.
That was, I was going to be my next question around financing for these larger firms. So you're selling businesses from four to 40 million, five to 50 million. The companies that are acquiring these, they're using debt, right? Typically, where are they? Cause SBA goes up to, I mean, you can get up to eight mil, right? Best case scenario really with SBA. think it's five, and they can do a split lean load on top of it for another two or three. Five plus three, really.
Yeah, it's five max, and then you can do some other creative stuff with a three mil, being eight in total. So that caps out there. What are these acquirers doing for finance? Instead of, you said VC stuff. Like, what does it look like? Yeah, this is a good question. This is one I get a lot from potential sellers who come to us: Who is the right buyer? Is it John Smith down the street? Is it Bain Capital? And the answer is probably no and no. And it's somebody in between.
Right. And so the answer is there's probably 10 hundred million dollar private equity funds for every one billion dollar fund there is. Right. You know, extrapolate that and say, OK, there are only a couple of KKRs and Blackstones that manage 800 billion. There are 10 times that many firms that manage 200 billion. And then it just gets to be that there's multiple more of these firms where it's seven people, 10 people, or 15 people that split off of a larger firm, start, you know, open their own shingle, get some limited partners, and raise 100 million dollars.
So the answer is, by and large, money originates with private equity. And now it's allocated a number of different directions, but private equity firms from call it 50 million and committed capital to 500 million are likely the groups who are buying these deals that we represent. Right now, oftentimes they'll allocate money, whether it's a group or it's a family office that has, again, 50 or 100 million.
They'll allocate into a search fund vehicle where there's a searcher, somebody who worked on Wall Street and went to Harvard Business School, a CEO, and they worked at McKinsey for a couple of years. And now we're going to go buy whatever a Midwest sprinkler business, step in as the CEO, and run that for four, five, or six years. That's a subset of the buyers we have.
There's a, I think, a search fund conference where all these guys get together each year. There's kind of a who's who of who funds those groups, search fund partners, and a cap of partners, et cetera. And they buy the equity in these search fund deals. And we can talk about debt in a second, but end up being larger equity checks than most of these individuals can write.
And once you're large enough that you can write a $5, $7, or $8 million equity check, you probably don't want to buy yourself a full-time job. Right. And so there's this ecosystem of these very creditworthy, creditable operators who are stepping in to buy these companies, kind of one to five, and EBITDA with institutional capital behind them to buy the equity and, in some cases, the debt. So that's one too, independent sponsors. It's people who split off of larger private equity groups.
Maybe they were a VP or principal there for 15 years, and the partners kind of hoard the economics, and they say the hell with it. I'll go off on my own. And so these groups usually have three or more people with backgrounds in private equity, some of their own capital, and probably a million dollars of kind of friends and family money. And they go out, start their own P firm.
They don't have an investor relations department. They don't have committed funds from limited partners. These pension funds are high-net-worth individuals. They'll raise it on a deal-by-deal basis from our other private equity groups by and large. So that's more people who have a background in corporate finance as opposed to the operator model where search funders step in.
Capital comes from the same place, but the search funders are stepping in to run the organization for a number of years. By and large, that's who buys these kinds of one to five, one to $8 million EBITDA companies: groups like that. And I'd say the other subset of buyers is strategic buyers. Like I said, we're doing a kind of niche ticketing business right now that has this real cool software that creates events and ticketing and promotions all in one functionality.
We think it's a great fit for some of the larger ticketing players and getting some of those calls answered. We sold the business last year called Research Tool and Die, kind of a niche military manufacturing company. manufacture wiring harnesses for naval vessels. That's bought by a company called Fairbanks Morse, which is just a portfolio of niche aerospace and defense manufacturing companies. They love this.
That's just an area they have expertise in, right? And they're already selling to the military with Eclipse for F22 Raptors, and now they're selling naval ship wiring harnesses. So that's three, four million EBITDA, typically too small to be a platform for a group like this. But again, it's so adjacent that it's bought as a bolt-on because they know that industry so well, they already have the ecosystem and team in place to oversee that asset. So, and then sometimes it's committed funds.
If it's a great asset, like a new software company, we'll see some committed fund private equity groups who typically don't write checks below 30 or 40, and they'll go down and write a check at 10 or 15 to buy these companies. That's the answer to the equity question. The debt, sometimes it's the same group who does the equity. Other times it's kind of a mid-tier commercial lender, kind of a regional bank that has a sponsor finance desk, and they'll do the senior.
And then there's a whole litany of mezzanine firms out there that raise money through the SBIC, right? It was another program by the SBA, but it's a little bit more upmarket than where the SBA kind of local loans go. And they basically will match two for one money that a private equity group gets. If you're Jaryd Private Equity, you prove that you have expertise in a space, you raise 50 million, and the SBIC can give you a debenture.
You don't have to go through their program and get you another up to it; two to one on that. So up to another 100 million, you end up largely being a debt lender because you're getting the money from them on a debenture, which means you have to pay interest on it. A lot of these groups end up being specialty lenders, specialty mezzanine lenders, and can do kind of equity co-invest.
So there's the model log on who ends up buying these deals. That's an interesting one. So what are the typical terms on the SPSC, right? And the up to 2 to 1, is it like similar to SBA terms? No, it's going to be more aggressive than SBA terms. Yeah. Yeah. So, SBA terms mean the downside from the local entrepreneur and great lending terms from a cash flow perspective, right? It's kind of 90% loan to value; we'll finance working capital, 10% principal and interest.
It might be S plus four, S plus five; they're paying eight and a half, nine percent on these loans. If I'm buying a business at four terms, right, it makes a million dollars; I'm buying it at four million bucks. Can cash flow that, make a good living myself, and then step into the business and operate it. Again, principal and interest paid over 10 years. These are more, much more, kind of off the cuff. The downside of the SBA loan dollars is that you are personally guaranteeing it, right? mean, it's, the bank has a lien on your house.
Yeah, SBIC, you move up market; they're lending money to other private equity groups. They're lending money to search funders, people who have raised institutional capital. Yeah, a lot of capital they can take. So these people have a background at Goldman, at Blackstone, and they have their own capital.
They put half a million into a deal. They get another 8 million in equity, and they might get 7 or 8 million in debt from an SBIC firm. What does that look like? There's going to be a much broader spectrum. It's going to be interest only, or it's going to be 1% AMWRK.
Right. but by and large, interest only, it's going to be maybe a four- or five-year term. The expectation is that rather than selling the asset at that time or refinancing it and paying off the initial lender, the business should have grown. So now we get different terms, interest rates have changed, et cetera, but it's never going to be 10 years straight down like an SBA loan.
Absolutely. lot of the people listening, not my audience and not in the middle to upper market in acquisitions, and see that even for like a seven-figure deal, it can take three months, maybe more, to close a deal, right? From finding it to closing a deal on DD. What does it look like in this mid-market range, the 40 million, 30, 40, 50 million range, eight figures? What's the DD time and closing and all that sort of stuff? We tell sellers to plan on it being every bit of nine months from when we get engaged.
I mean, it's going to be five or six weeks before we're ready to go to market. And that's assuming you have your house in order. You don't need a quality of earnings upfront. That's assuming all the materials are ready to go. It's going to be a full five or six weeks. We need a 30-page memorandum on the business.
We need a financial model. We need to support go for projections with information from your industry, some of which we can pull from trade journals, etc. But we need to build a robust data room because we're trying to make this as appealing as possible to these investors, who are very capable investors, and we need to pull that research together, or else they're just going to move on and go to the next one and not believe anything we're saying as far as investors looking at material.
But call it five or six weeks to get to market. Phase one, marketing. Another, call it six weeks. This is getting out to market, getting NDAs signed, getting people in the data room, and giving them a couple of weeks for preliminary questions internally. They'll follow up. No, they're not interested, or yes, we are, and here are questions, et cetera.
Once we get that initial interest, we'll set a deadline for an indication of interest that precedes an LOI, an indication of interest that allows us to say, These 500 groups we went out to, 100 of them signed an NDA and got in the data room. Of these 100 that signed an NDA, we got 10 indications of interest. Right. So just a marketing funnel. We're just narrowing it down. At least 10. Here are the best four or five offers from those.
Price, terms, fit, who they are, etc. Broad outline and what their offer is going to look like. We know it's not going to have an exact nominal figure on it just yet, but we need to know kind of what range you're looking at, where your capital is coming from, etc. And then we'll conduct meetings with those finalists. These are typically in person for e-commerce and SaaS; we can do virtual.
We have one under LOI right now; it's 13 million, and they've never met in person. We actually haven't met them in person. They want to do the whole thing virtually; sellers are in two different locations. So we can do these virtual meetings. But again, each finalist bidder is going to want two or three hours to meet the business owner and ask thorough questions on the business.
And we think they deserve that degree of clarity on the business before they put pen to paper with their LOI. LOI is negotiated for another week or two. And then again, we call it 90 days from an LOI sign. The buyer simply does a full quality of earnings analysis, full legal diligence, tech diligence, and purchase agreement, which in and of itself could be 45 or 60 days. So yeah, call it 90 days. There's the long answer.
Cool. No, that's great. That's great. Thanks for breaking that down. It's just interesting for people to learn that as you start to scale up, that's what you're kind of looking at. There's a lot more involved. Well, and it has to be because they're investing money for other investors. They're limited partners who are largely pension funds. And it's a covenant of raising 20 million, 50 million from a pension fund. This is how you do business. Right. We do a full quality of earnings analysis before we write a nickel.
a check to a seller. So yes, it's a much more thorough, detailed process, and it can be taxing, but it's good for your audience to know, especially because many of them are moving upmarket and aspire to sell in this range. Absolutely. I met a guy in the surf a couple of years ago when I was living in Australia, and he was a CPA for a large firm, and they sold it for, I think, about three to 400 mil or something like that. They sold it to Ripple. Like, how long did it take to get there? And he's like, It took a year and a half.
I was like, well, for, ah, I mean, of course. I mean, the thing is, like when one company wants to acquire another company and it's a strategic acquisition, you really want to make sure that if you're going to merge it in, you really want to make sure that everything works out perfectly well and you can merge it in well and you get along with the founder, and like, you don't want to rush like I get the money wants to make it move faster and investors want it to make a move faster, but I think slowing it down is a really good thing in the end for both parties.
Yeah, you're absolutely right. And there are so many more moving pieces on deals that size, right? Like if you're buying a little Amazon business, I don't say a little disparagingly because those were large to me at some point, but when all it is is a relationship with a freight forwarder and a manufacturer and it goes straight to Amazon's warehouse and you have maybe a channel manager or you're just managing PPC yourself, there's not a tremendous amount of diligence.
There's very little in the way of reps and warranties. You're probably not doing an extensive or now it doesn't need an 80-page purchase agreement. And so you can move these more quickly or transactional aspects when it's a once-in-a-lifetime $30, 40, or $50 million transaction. Yeah, you want to do it right. You want to have capable legal guidance. You want to have it structured beneficially from a tax perspective and get those experts to weigh in. And then you're going to want more than one bid too.
You're not going to want to put an asking price on this and then three weeks later say, Sure, let's do it. Exactly. Love it. Mark, thank you so much for your time. Where can we send people to check out more about what you guys are up to or get in contact with you? Yeah, no, I appreciate it. Glad to be part of it, and you do a great job. Excited to be part of the podcast. People just go to raincatcher.com. It's just mark.woodbury at raincatcher.com, where they can pull that from our website as well. And yeah, hopefully it was helpful.
Definitely helpful, very valuable. Thank you for your time, Mark. Everybody's listening. Thank you for listening, and I'll see you on the next one.
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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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