Lessons From Over 100 Million Dollars in Deals – Thomas Smale – MicroConf 2018

0:18Hey everyone. Um so I'm Thomas from FE International. Like Mike said, today I'm going to be talking about some lessons I've learned from completing hundreds of millions of dollars in in deals. So if there's one thing that's true for every single person in this room who's running a business, it's that one day you're going to leave your business. And there's lots of different ways you can leave or exit your business, but my hope is that anyone in this room who owns a business will one day have a successful exit. And one of the metrics we we kind of look at internally and figure out if we've done a really good job is

1:00if someone can end up on the 2% of people on the pre-MicroConf survey that says they're now essentially retired. I think Rob's walking around with unemployed on his badge, which is a for for us, I think probably one of the only industries where a previous client becoming unemployed is actually a good result. Um so just a little bit brief introduction about me. Um I founded FE

1:26International in 2010. Uh since then we've completed nearly 600 deals. In total, that's into the hundreds of millions of transactions completed. Uh we have three offices, one in Boston, one in London, and one in Singapore. We currently have around 35 people working for us, and we're hiring for about 15 more. Um So we spend a huge amount of time working with people before they want to sell their business. So we're not in the the industry of kind of hard selling. We want to work with people who own a profitable business, like many of you in this room, who are one day thinking about selling. So the vast

2:07majority of people we speak to, the first conversation we have might be two, three, four, maybe even five years before they eventually sell. Um one of the reasons we invest a lot of time in it in this process is there are lots of different things you can do well in advance of thinking about selling a business that will massively increase your success rate when it does come time to sell. So again, another one of the metrics we track internally is our success rate. Uh a traditional M&A firm will have somewhere in the region of a 20% success rate for businesses they take on. For us, it's over 94%. So 94.1% of

2:50businesses we take on will sell. And that's because we spend a lot of time at events like this, speaking on stage, writing content, talking to people uh who own businesses and profitable businesses and helping them position it correctly. So when they do want to sell, they can have a a profitable outcome. So one of the first lessons I've learned, and I've put this talk together specifically for people at MicroConf. So I'm working under the assumption you already have a business that's off the ground. So you've already made the the first risk, which is effectively

3:24launching a business in the first place. And there's a lot of people, a lot of entrepreneurs out there, or people who want to be entrepreneurs, who never take that first step. So for all of you here, you've already done that. You've already done the hard part. One thing I've I've noticed, and I think this is common with particularly people at at MicroConf, a lot of very smart people in the room, but if there's one thing I've noticed over the years is that a lot of people tend to be very

3:50risk-averse. They don't like taking risks in their business. Um and one thing I found, one of the reasons I feel like we've grown successfully every single year for eight years is because we try new things, and we fail doing things. And I would say of the new things we try, probably 80% of them them fail. And that's not necessarily a a problem. If you want to keep your business moving forward, the most successful businesses we've seen have tried lots and lots and lots of different things, and lots of things have failed, but some will work. And the main thing is making sure you actually measure the results of what whatever you've

4:31tested. If you just test a bunch of things, and then you just continue with the one that worked well, or you thought was a good idea, you're never really going to grow your business sustainably in the in the long run. Particularly when you're speaking with buyers, cuz if someone's going to buy your business, they want to be able

4:50to prove anything you're going to say. And that's one of the key parts of due diligence is kind of verifying any claim you've made. So if you say, "Oh, I ran this amazing new marketing campaign, and then my customer numbers doubled." They need to be able to prove that, and need to be able to measure that. And I think the other thing is as well, you don't need to make crazy crazy risks and try new wonderful things that have never been seen before in your industry. You can make incremental risks and tests. You can find things that are already

5:20working, and you can test new things. You don't necessarily have to For example, if you're going to test pricing, you can test a new pricing model without increasing your prices across your whole platform, not grandfathering everyone, and just overnight doubling everyone's price. There are ways you can do that in a more intelligent way, which is incremental, so just to small group. You can measure the the success of that. So a lot of the businesses we work with that are successful and have successfully sold will be consistently taking risks. Which is absolutely fine, and you you should find you're failing more often than not. And I would say if

5:57you're not failing that often, you're probably not trying hard enough, and you're probably not actually taking risks. What you're probably doing is just making gradual and small improvements. We should be testing things. Things should not work, and that's fine, cuz you figure out then a good lesson is figuring out what doesn't work just as well as finding out

6:16what does. So this is saying again that's once you have a business that's off the ground, creating sustainable operational efficiencies is really important. Cuz chances are once you're off the ground, you might have hired your first employee, you might have 10, you might have 100, you might have 1,000. As you hire more people and scale, it's important to figure out operationally what's working well, what's not working well, and then put processes in place to improve that. It may well be that, for example, you have a customer service role within your company, and the same issues or client problems come up over and over again. What a lot of businesses

7:00will do, they'll just hire more people, and they'll say, "Well, we have we used to have 100 tickets a day, we now have 200 tickets a day, so we're going to double that. We'll double the number of people we have." But you can put things in place operationally to make it more efficient. So you could build out a a like a help center, you could write more videos. Lots of different things you can you can try and put in place to make your business more operationally efficient. And the reason this is important when it comes to eventually selling your business, if that's something you one day want to do, is

7:34chances are that's going to make your business more profitable, which is always a a good metric. It's always going to drive a a a stronger valuation than a less profitable business. Um So wherever you are in your business, I definitely encourage you to look at the processes you have, write them down. Uh maybe take some small risks, test some new test some new things. But these are the kind of things that a buyer will look for, uh particularly if they're investing 1, 5,

8:0410, 20 million dollars in your business. They want to understand uh if you already have efficient processes in place. make fixes in your business and make improvements, but if you want to get a premium, then if you've already got these things in place, then you're going to be in much better shape. So we get asked a lot of questions about

8:28what are the most im- important metrics. So there's lots of good tools out there. Um I know we've got Josh here from Baremetrics. Um lots of tools out here that will help you analyze your kind of different important metrics in your business. If you look in the the VC world of SaaS, one of their the main metrics they'll say is the most important is your CAC to LTV ratio. Um what I found with the vast majority majority of people who self-fund their businesses is the primary source of new customers is word of mouth. And word of

9:03mouth generally has a a CAC of zero. There's no acquisition cost to acquire a customer from word of mouth. But it So it's actually quite difficult to scale those businesses if your main channel is referrals. Um so we don't actually look at that as the most important ratio, because the answer is usually your CAC is zero, so it's kind of irrelevant. The probably the most important metric, and particularly this is really becomes important once you get beyond about $10,000 in MRR, is your revenue

9:36churn. So there's revenue churn, customer churn. I really encourage you, almost all of you, to completely ignore customer churn, and just focus on revenue churn. Cuz there are a lot of things you can do if you have, say, three different price points. You have a low price, a middle price, and a higher price. There are some things you do in your product, maybe when you're taking some incremental risks or or testing new

10:01things. There are things you can do that might really annoy the smaller and the lower price cohorts, and they might leave your product. So, your customer churn could be really quite high. But, what if that same thing you might have done might encourage more people to upgrade their plan? Um and we found that in almost any SaaS business, taking the focus away from the kind of looking at every customer as if they're the same, and focusing on the the cohorts that are paying you the most is really important. And that's one of those things that can really drive down revenue churn. So, I'd say one of the

10:40other key things, um there, is to listen to your customers. And almost every single person in this room, every single business owner, listens to their customers. But, it's very easy to listen to just the the vocal customers, just the ones who say, "Oh, this is great." or "Oh, this is terrible." Um and it's very easy to kind of get, particularly if you're a developer, to just have feature creep, where someone asks you a question, "Hey, can you build this?" and you just build it. "Hey, I want this feature." So, you

11:09just build that feature. Um as you grow, it's really important to focus on the things that um are actually going to drive your revenue forward, not just keeping the particularly the lower paying cohorts, not just keeping them happy, keeping your higher priced customers happy. And that's something that will really, long term, reduce your revenue churn. And as you scale into the 50, 100, 200, maybe even a million dollars in MRR, revenue churn becomes extremely important. Um and the the main way you can really get there, beyond kind of making improvements, testing new things, focusing on your bigger customers, is is

11:49with your pricing. Um a lot of al- almost every SaaS business out there doesn't do pricing very well, and there's improvements they can make to pricing. So, I'd say you all have completely different products. But, if you can focus or build a a pricing model that has expansion revenue built in, so the things the most successful businesses we see don't have. So, whatever you do, don't have a unlimited plan. Have um Don't have an unlimited plan. Have a kind of tiered model, where people can make more and more, or pay you more and

12:27more on your platform. And then, final lesson is sell your business at the right time. So many people come to us when their business has started to um decline, and then that's really not the right time to do it. Sell while you're still growing. Think about these things well in advance. So, a lot of things I've spoken about, even if you're thinking of selling in 5 years, or you're not thinking of selling at all, put them in

12:51in place now. Um so, I think I'm pretty much out of time. Um so, if anyone has any questions, um I posted in the Slack channel, but I'm going to host a a small dinner for people who might have questions about selling. It's not going to be any pitch or anything like that. If it's something you're thinking about doing in 1 year, 5 year, 10 years, then you can RSVP there, or just grab me, send me a message on Slack, send me a

13:14message. I'll be here until Thursday. So, I'm happy to answer any questions you have. Thank you very much.