Brian Wolfe, an M&A expert and former big law firm partner, shares his wealth of knowledge about entrepreneurship through acquisition. He discusses his transition from law to investing, emphasizing the power of multiple expansion in buying smaller companies. Wolfe dives into rolling up marketing SaaS businesses, the role of seller financing, and the complexities of earnouts in M&A. He also provides insights on strategic growth and offers valuable lessons on personal guarantees, showcasing how mentorship can guide first-time buyers.
Brian Wolfe's transition from a legal career to entrepreneurship illustrates the shift towards self-funded acquisitions in small businesses.
Multiple expansion highlights how smaller companies can significantly increase in value as they scale, enhancing overall investment returns.
Seller financing and earnouts are crucial strategies in business acquisitions, enabling flexible deal structures and fostering effective negotiations.
Deep dives
Understanding Multiple Expansion
Multiple expansion refers to the increase in valuation multiples associated with businesses as they grow in size and revenue. When acquiring smaller companies, lower entry multiples like three or four times EBITDA are common, which can significantly increase for larger companies valued at seven to twelve times EBITDA based on their growth rates. Multiple expansion can drastically enhance returns when it comes time to sell, indicating its critical importance in investment strategy. This phenomenon is likened to compounding returns and is highlighted as a key driver of equity growth in business acquisitions.
Transitioning from Law to Business
The transition from a successful legal career to engaging actively in business acquisitions demonstrates a shift from traditional roles to entrepreneurial endeavors. After nearly two decades as a lawyer, insights gained from various deals inspired a move down market towards acquiring smaller software businesses. Conversations within a community of entrepreneurs highlighted the viability of seizing opportunities in self-funded acquisitions of small, bootstrapped companies. This transition reflects a deeper engagement with market dynamics and the desire to capture value beyond the legal framework.
Identifying Growth Opportunities in SaaS
Many bootstrapped SaaS founders achieve initial success with solid revenue but struggle to grow further due to personal life changes or a transition to managing their businesses like annuities. The importance of the 'Rule of 40' for SaaS companies illustrates how growth rates and margins impact valuations, with low-growth businesses often significantly undervalued despite having good fundamentals. The strategy focuses on acquiring these low-growth, high-quality SaaS companies with the intent to reinvest profits back into sales and marketing to drive substantial growth. By correcting the trajectory of such businesses, substantial value can be created leading to favorable exit multiples.
Leveraging Seller Financing for Acquisitions
Seller financing plays a pivotal role in acquiring small businesses, allowing for flexible deal structures that can include notes covering a significant portion of the purchase price. A particular case highlighted the successful acquisition of a more established business through seller notes, demonstrating the effectiveness of this strategy, particularly in less efficient markets. The negotiation process requires clear communication and relationship-building to achieve favorable terms, as seller motivation can vary widely. Structuring deals with earnouts and seller financing requires careful planning to ensure both parties feel secure in the transaction.
Mentorship and Building the Future
Establishing Funded Ventures highlights the desire to mentor aspiring entrepreneurs through their acquisition journeys while maintaining an interest in small business growth. The structure involves providing capital and guidance to first-time operators, allowing them the opportunity to learn and navigate the acquisition process comfortably. This mentorship fosters a learning environment where experiences are shared, significantly impacting the journey of new operators. The aim is to build a foundation that may lead to larger opportunities while elevating the entrepreneurial spirit within the community.
I chatted with Brian Wolfe, an expert on M&A from all levels - he worked as a partner at a big law firm for 17 years, helping to close huge deals. Now he's in the world of ETA (entrepreneurship through acquisition). He helps searchers get started, and he's bought some businesses himself - including a rollup of marketing SaaS businesses. Brian gives a masterclass on buying businesses.
Highlights:
0:58 Going from lawyer to investor 9:25 Rolling up marketing software businesses 19:33 Selling the rollup 26:51 Earnouts in M&A (good or bad idea?) 33:18 Multiple expansion is the 8th wonder of the world 36:43 Personal guarantees 42:20 Sieva's first deals 44:12 Brian's current business, Funded Ventures
