It's no secret that I prefer acquiring micro-companies rather than starting them. Acquiring companies that are already profitable over starting new ones is an excellent strategic play. Gone are the woes of having to create an offer, validate it, and scale it up - somebody else is doing that for you. You just step in to take over steering the ship when whoever started the micro-company can't do it any more. Somewhere over the last year, after dealing with lots of founders, acquisition offers, wildly varying valuations, and other variables that accompany someone in the private equity game, we came up with our "standard offer".
12 * Average Monthly Net Earnings For Last 12 Months
Basically, one year of net profit. No multiples.
If you know anything about selling companies, your first reaction is "that's below average market value, how do you get away with that?", and the truthful answer is because founders agree to it. The exact number might differ, and we're fine with deviating from our standard offer (after all, it is just our opening offer and a baseline to consider), but the price will remain within that range.
We're able to buy for below market value because micro private equity is significantly smaller than LMM (lower middle market private equity), and with it comes a new set of rules. The companies we're buying are side hustles, the internet equivalent of a mom-and-pop shop. They're long-term investment vehicles, but at the end of the day, they're still micro-companies. There's less money on the table. Closing a deal is less stressful, and takes significantly less time than an LMM PE acquisition would take. It's easier on everyone.
Of course, we see the value in these micro-companies. Run properly, these types of companies will continue generating money indefinitely. Remember, Howdy Interactive is in it for the long haul. We're not going to flip the company in three years, so we can buy companies that have reached a growth ceiling, or that can't be scaled rapidly. That's what we do! But with that undeniable fact, companies lose some of their valuation.
Our standard offer is our opening offer. There's no "one size fits all" way to approach acquiring a company, which is why we employ the shotgun clause-esque tactic I wrote about on March 9. It's a negotiation strategy called "my price, your terms Or your price, my terms", and it works very well.
If we offer $150,000 one time for a company (which in some of our deals, may be an undervaluation), and the other party is looking for $200,000, it might make more strategic sense for us to sell for $200,000, paid out monthly over the course of 24 months, with delayed payments for 30 days. Since we only acquire profitable companies, theoretically, we can make those monthly payments using the profit the micro-company is already generating. In cases like those, it makes sense to pay more for the company because of a clear, strategic advantage for cash flow.
So how do you find founders willing to let go of their side hustle/micro-company at below market rates? At this point, we're thankful at Howdy to have enough organic inquiries coming in to sustain our deal pipeline. However, there are plenty of other options to start talking to founders. Flippa seems to be one of the best ways to start looking at micro-companies to acquire - they have plenty of companies for sale in the 1-1.5x multiplier range. Microacquire is a little more focused on the larger transactions with bigger multipliers, but also another great place to look.
To round things off, one of the questions we get from folks who want to model what we're doing is, "what's stopping the founders from just holding a company indefinitely like you're doing? Why do they need to sell to you?". That's a great question, and most often, the answer has to do with skillset. Founders may not have the skills they need to successfully manage all of the day-to-day operations of a company like that, or they might not have the skillset to hire and lead virtual assistants to do it for them. We do.