Quick Context đ„
What does Baremetrics do: The SaaS product provides business analytics & insights from payments data processed through Stripe, Braintree, Recurly and more. For example, you could use Baremetrics to analyze your MRR, LTV, and customer churn.
Founder: Josh Pigford
Who are Baremetrics customers: Startups and small businesses around the globe
When was it founded: 2014
Team Size: Currently 8 people
How does Baremetrics make money: Monthly subscription to the cloud based product
Number of Customers: +850
Quick Facts đš
Purchase Price:Â $4M in cash
What Josh walked away with:Â $3.7M in cash
Three reasons Josh sold the business:
a. He realized that âbuilding thingsâ is what fulfills him and what he is particularly skilled at.
âItâs the âanything goesâ phase of creating that I get so much energy out of and that I havenât really had in yearsâ - Josh Pigford
b. Josh wasnât enjoying himself that much anymore and realized the company had more potential than he was willing to put in the effort for.
c. The structure of his deal allowed him to essentially walk away without having to stay and work on the business for 1-5 years through the transition. This is atypical since most acquisitions are structured such that the founder stays on board for a few years to ensure business performance remains consistent. Often the performance of the business is also tied to the ultimate payout given to the seller. So for example, if your business underperforms during that transition period, it can impact your payout depending on the deal terms.
âThe prospect of sticking around for years to actually get the payout was soul-crushing and I just wasnât interested.â - Josh Pigford
Multiple it sold at:Â ~ 2.65x ARR.
Buyer:Â Xenon Partners (Tech private equity firm that acquires and accelerates early stage SaaS products. Portfolio includes DreamFactory, Iron.io and Scripted)
Close Date:Â November 2020
Payment Structure:Â 3 separate payments (At close, 12 months & 18 months)
Why Xenon Bought Baremetrics đ€
Josh had a personal relationship of over 15 years with Jonathan Siegel, the founder and Chairman of Xenon. This is important because one of the most important factors in determining the likelihood of a sale going through is the rapport and trust between the buyer and the seller.
Baremetrics had a solid customer base with high satisfaction and seemingly low churn
2nd and 3rd order effects to Xenon: Baremetrics is a product that can quickly add significant value to Xenonâs portfolio of 28 + tech companies
Why does this matter?
The companies in Xenonâs portfolio sell products in the same âfamilyâ as the products provided by Baremetrics. This matters because now Xenon can cross-sell a subscription to Baremetrics to its existing portfolio but also sell its existing portfolio to Baremetrics customers. Win, win. When acquiring multiple business, one of the best practices is to buy businesses within the same âproduct themeâ. This facilitates rolling up multiple products or businesses into one core business.
đĄ As a buyer, it is key to consider your long term exit plan while determining what business or product to buy. Letâs say that you buy 10 companies in the same "family" each at a ~2.5x multiple and roll them up into one large company. The revenue of this larger company will be significantly larger than its individual constituents. Which means that the multiple it can be sold at suddenly increases to much higher multiples...50x-100x is not a rarity. The reason why larger firms are willing to pay these higher multiples is because higher revenues signal stability and risk reduction.
The Negotiation đ€
For Josh, the final sale price was important, but the terms mattered more.
A common misconception is that a seller cares most about the final sale price of the business. While sale price is influential, there are other factors that can often have a higher weight. This is important to realize especially as a buyer and a vital mindset to have during the negotiation process.
For example, it was paramount for Josh to not have a time-based or performance-based earn-out. This would have been a deal breaker. SoâŠDoes this mean tha Josh could have negotiated for more had he agreed to stay on board for a few years? Absolutely, but not being constrained was more valuable to Josh than the extra $. Kudos to Josh.
His team had to be treated fairly
Private Equity firms are notorious for buying a company and quickly firing many of the current employees. It was important to Josh that his team would be taken care of.
đĄ Selling a business is often a very emotional process, particularly for the seller. Not only has the seller put their blood, sweat and tears into the business but they have also made an immense investment into their team.
Everyone at Baremetrics who had stock options got the full value of their options. In total, 300k was paid out to the team.
Fixed Outcome
The relationship that Josh had with Jonathan seems to have really paid off in the end. As part of the deal, Xenon guaranteed that Josh would take home 3.7M despite what came up during the due diligence process.
To me, this goes to show how powerful trust and rapport can be during a deal. One must never take these two elements for granted.
800KâŠA Rounding Error đŻ
There was one aspect of this story that I found particularly intriguing and it goes back to the power of relationships.
Back in 2014, Baremetrics received 800K in seed money from two investors: General Catalyst and Bessemer. The investors were âgreat partners and never put any pressure on me to grow at all costâŠTheyâve simply made themselves available to help when needed. I think we all realized a few years ago that Baremetrics wasnât going to be a â10x our investmentâ company for them, especially after we started focusing on profitability over growth.â - Josh Pigford.
Usually youâd expect the investors to seek the return for their initial investment but in this case, according to Josh, âthey were incredibly gracious and both agreed to write off their investmentâ. While 800K is a lot to an individual person, itâs a rounding error to VC firms like General Catalyst and Bessemer.
I find this remarkable because had these investors sought the 800k, which obviously wouldnât have been unreasonable, the 4M deal likely wouldnât have proceeded.
đĄ This tells me that Josh also had a good relationship with these initial investorsâŠAn 800K relationship to be precise. I admire this and it further validates the influence that strong relationships can have in all facets of life.
A Peek into the Future of Baremetrics đ
My prediction is that Xenon will obviously seek to improve the product, sell the product to customers in its existing portfolio and reduce friction wherever it can.
It is unlikely that Baremetrics will be immediately integrated into another product anytime soon primarily because should always be a period of time where the acquired company should continue to run on its own. Clayton Christensen, a pioneer of Disruptive Innovation goes into this concept deeply within his numerous books.
My Main Takeaways âïž
1ïžâŁ As a seller, the depth of your relationship with both your buyer and your initial investor can make all the difference.
2ïžâŁ As a buyer, let go of the assumption that a seller purely wants to sell the business at the highest price possible.
3ïžâŁ As a seller, know your non-negotiables and stick with them. As can be seen in Joshâs case, patience paid off since he got the terms he was looking for out of this deal.
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