Thoughts on Managing for Growth and Profitability

May 01, 2023

Our friends over at Bigfoot Capital recently asked us to contribute a guest post in their fantastic newsletter. If you aren’t familiar with Bigfoot Capital, they provide growth-oriented loans for B2B SaaS companies with $1.5M+ ARR. If you are a founder looking for a solution that fills the gap between traditional banks and venture capital, it would be worth having a conversation with them. Here is what we had to say to their audience:

Thanks to Brian Parks and the team at Bigfoot Capital for the chance to share an intro of our new firm, Big Band Software, as well as a few thoughts on what we’re seeing and think founders should be aware of as we enter the market buying great SaaS businesses like the ones Bigfoot Capital has supported.

Although Big Band is a new firm, our principals have a lot of (referenceable) buy-side experience (over 45 acquisitions in the last decade), and our investors have strong roots in software as well - including Dan Martell's SaaS Academy and software private equity firm ParkerGale. We launched Big Band as a holding company this year to focus on providing short transition cash exits for great SaaS founders who either don’t want or aren’t a great fit for the cash-light, long transition deals preferred by funds.

Thoughts on Managing for Growth and Profitability

In our view, the days of the ‘blind ARR multiple’ for all but the highest growth SaaS companies have passed and were a reflection of historically low-interest rates. Valuation today is in flux - and we’re feeling it’s more in flux this spring than in the winter. It’s still critically important to unlock potential value with revenue growth to open up new sets of potential buyers (our floor is $1M ARR, by the way), but we also think a blended approach to profitability and growth can reduce the risks of a forced sale if churn ticks up. And we also think that having a solidly and sustainably profitable business, whose team and customers all are happy within the context of profitability, is important to reduce the risks of a forced sale and prove your viability to a large set of both strategic and financial buyers.

Why?

  • Strategics will have a harder time making purchases that aren’t cash flow positive - or accretive to GAAP earnings.

  • Most financial buyers are at least somewhat sensitive to changes in interest rates and bank covenants (both are tougher this year).

At Big Band, we always look at the ‘Rule of 40’ - profitability % plus growth % - for the businesses we acquire, and we think it’s a great time for founders to think similarly about their goals for the performance of their businesses in 2023 and beyond. To reiterate, the days of blind ARR multiples may be behind us, so planning for an exit means keeping one eye on profitability and one eye on growth.

Asking the Right Hard Questions from Potential Acquirers

Within the context of a more strained M&A environment, we think it’s important for Sellers to know that it’s ok to ask hard questions of potential buyers. In short, not all IOIs and not all LOIs are equal in terms of the buyer’s intent and ability to close. These are some of the important questions we hear from smart founders and bankers talking to us about opportunities before we present an offer:

  1. In order to close, what if any financing approvals/bank approvals do you need?

  2. In order to close, does your board need to approve the transaction? Usually, this is a yes, and if so then knowing exactly what awareness the BoD already has is important in discounting the likelihood to close for an offer.

  3. In order to close, what are the most important due diligence items? Not just the standard legal and financial bits and bobs - that is, not the confirmatory laundry list - but what are the questions that are still open at all about the opportunity?

  4. Do you have references from people who have sold you businesses in the past?

THE PLAYLIST (What We're Watching, Reading, and Listening to)

  • Built to Sell Radio - The Big Band podcast tour continues as Kevin dives into his role as an acquirer, and what he’s learned from acquiring 45 businesses (including three from former Built to Sell Radio guests).

  • Top M&A Entrepreneurs Podcast - Here’s the teaser directly from the podcast: “After making 45 acquisitions at SureSwift, Kevin McArdle is really flexing his CEO muscles this time. Now, he's embarking on a new adventure as CEO of Big Band Software with $100 Million to spend and his sights set exclusively on the B2B SaaS software acquisition market. It's definitely not easy but he seems to have mastered the art of buying great companies - now with a massive war chest, It looks like Kevin is about to set off on another exciting journey and we are eager to observe his success!”

  • What Makes You Happy - Morgan Housel at Collab Fund breaks down how the moments in life where contrast is magnified drives the greatest happiness - an important reminder to entrepreneurs and operators alike to take a step back from time to time and really focus on expectations and how that drives happiness, contentment and joy.

  • Buy Back Your Time by Dan Martell - The Big Band team read this book and held a ‘book club’ meeting to discuss what tools, systems, and processes we could put in place today that will help us scale exponentially in the future. We believe that building a foundation of efficiency from the beginning will pay dividends in the future and Buy Back Your Time provides a great blueprint to make this happen.

  • We mentioned Section 174 last month. Friend of the Band, Michelle Hansen has been mobilizing entrepreneurs to raise their voices and take action. Her work is getting noticed in Congress, but there is still more you can do to help.

UPCOMING IRL GIGS

  • Chris and Jason will be in Austin, TX May 31st through June 2nd attending the inaugural SaaStock USA.

  • The full team will be in Boston, MA the week of June 4th, spending time with our partners at SaaS Academy and attending their Intensive event. We’d love to carve out time to meet with friends and founders in the area so please reach out if you’ll be around!

JOIN THE BAND

We’re building our database with the best leaders and operators out there. If you know exceptionally talented people that may one day want to work with us, please have them get in touch with us at [email protected] or fill out the form on our Connect page.

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