Masters of Debt: How I bought a $5m SaaS Company Using Debt, Grew to $20m

please help me giving a warm welcome to Brad Miller Brad come on up man

that was good right that was good all right grab a chair Brad Pull It Forward pick your favorite all right anywhere up here where people can see us here we go Okay so cool here come up here to these side payments there we go all right so um first just uh talk about what awareness Tech does and and how you found the deal and the revenue was doing when you found it sure um so I was previous to that running

another business uh called perimeter which was an internet security business we had just sold half the business to Goldman Sachs and as usual when these things happen you know I was there for two years and then looking to go do something else I was looking at buying another company for perimeter which but as I was leaving I decided to buy it for myself um and uh and so that business turned

out to be awareness Tech um awareness Tech was also a secure Internet Security Company more of uh more of a software business it had both a consumer a b2c and a B2B play but on the consumer side it was basically helping parents Monitor and control their kids online and on the B2B side it was Employee employers monitoring and managing their employees productivity and what was Top Line and bottom line in 2010 when you found them uh they were about 5 million in Revenue

losing one and then what did you do in the first year well they had a weird um now these guys are really really smart but and I'll tell you an interesting story in a second which I don't think I've ever told you they're really smart guys but they did a really dumb thing they had a business set up as a software as a service business but they sold the product as if it was a one-time sale and so they had an ongoing relationship with the customer who would

log in and you know forever but only get paid once and so we can inverted the business from a one-time payment to a subscription and that added two million dollars of Revenue overnight so it went from five million to seven million and as all that Revenue was profit the business went from losing a million to making a million I will tell you that the funny thing was uh the two years they worked for me afterwards they were really building another business on the side and um and I didn't like paying them a lot

of money to build another business so to shut me up they offered me 10 in their new Venture which was a protein bar company don't ask me why they were bodybuilders and I was like I the the world does not need another protein bar company they later sold it for a billion dollars if you if you never told me on the show you told me the bar name you know you haven't told them yet tell them the bar name Quest Bar I don't know if you've ever heard of it of course but that's crazy you didn't tell me that yeah you will you didn't have to pay for 10 quests you just made them feel guilty

well they offered it to me and I turned it down

whoa why didn't you take it why wouldn't you said of course because I could didn't feel right paying them to not work at my company in return for 10 of a piece of crap protein bar company not everyone's perfect that's incredible yeah I didn't know that so I'm I'm not [ __ ] money out of my ass okay so you go from okay and you didn't say the purchase price so the company oh it's five losing one what'd you pay we

paid uh six million six million and how'd you find the Six Million uh well five and a half million uh myself in a financial partner split at 50 50. and we did a little bit of Bank debt uh on top of that um a million bucks a Bank debt to fund you know the purchase price and some other expenses and all that kind of stuff and so you start scaling this 2011 7 million Revenue 1 million profits did you take dividends out this year or you waited till next year no the next year but then so then we finally got them off the payroll so that I wouldn't take the

10 that would have made me a hundred million dollars um and so but it did save me four hundred and five hundred thousand dollars a payroll so the business went from benefit lipstick on that big you go ahead sounds like a 100 million dollar loss to me uh so then we were making a million and a half and then we grew a little bit more and it you know it grew to you know maybe two million uh then we acquired a a small company wait hold on hold on hold on I want to get everyone on the timeline here so this is what people

don't take dividends I don't know why I mean you've heard some of it some folks say Bridget kicked us off talking about dividends but like you should take dividends right so um I mean this is accurate right it's one three six is that about right uh well it was total of 12 so there was 1 million for a couple years and then it grew to three then grew to six but yes that's not in 2016 that's not Revenue that's what you took out dividends six million dividends correct yeah we we took out double what we put in before we sold it yeah it's incredible so it made back more than the

5 million again before he sold it now um what I want to touch on here a bit um is inorganic growth which you were just about to go into so talk about the first acquisition here um so another funny story um I uh I missed out on Cliff Bars too no I I came home one day for dinner and my wife had made dinner and the kids were upstairs and they were younger they had phones and she was like okay old people don't have phones no no but you know that

uh yeah so I mean they were young kids you know and so she was like all right I gotta get the kids you know she called the kids down for dinner they didn't come and she goes wait a second and she like pulled up her phone and started tapping [ __ ] on her phone and put the phone down all proud of herself waited counted to five and all of a sudden we heard the kids come down and I was like what would you do and she's like oh it's the it's the greatest it's the greatest parental app ever you know it's I can

shut off their iPhones you know remotely and I was like do you know what business I'm in and so she had found this other parental app online um and um and so then I went and bought the company and and it was broken but I'm shocked I didn't lose this deal because what you told me was when you started negotiating they were doing like the LOI they were doing 50 they were doing they were doing 50 000 a month when we were negotiating

um and uh the the by the time we closed it the five months later it was doing a hundred thousand and then a year later it was doing I asked you to pay double then between the LOI and the closing docks they did but I didn't budge I hung up the phone and didn't answer the phone for three days and then they came back begging me to close the original deal because they had already spent the money you know it was it was just a one guy it was a guy and his wife and they had already you know they had bootstrapped it and it was three million bucks and

they were you know all cash up front for them it was half and half it was half uh we did a 50 up front and then 50 if once the revenue passed a threshold which it pretty much already did by the time the deal closed so this was 2016. so now with this first acquisition plus the core business what was total revenue in 2016. uh it was kind of approaching 12 million at that point and that's the same year you took out six million in

dividends right no we we were taking we didn't take out this final six until 2017. okay so that's for does that first deal make sense any any questions on the first deal from anyone you can just yell them out it was just on a run rate and it just you didn't know when it was going to stop you know but it's a problem it just kept going and you know all right so you buy it you get that deal done um you like how that felt and you said uh Brad wants more talk to us about the second acquisition in 2018.

so our biggest competitor uh this is also an odd story uh was a company called variato and at my previous business that I sold to Goldman I was trying to buy them too I got outbid heavily because they got sold for 45 million to two VCS and it was a nice you know business doing 15 million of Revenue making six million a profit um and then once so when I saw awareness Tech which was like a number two to them

I was like oh okay I've seen this movie before you know if we could only grow this business a little bit we can make a lot of money and it was a two-horse race between them and us and so they were always our daddy if you will for a long time and uh but then um they started to shrink and do badly uh for a variety of reasons and I got a call one day from a VC who said would you be open to being for sale and I said I don't know maybe and they said well

you would make a great tuck in acquisition for another company we're looking at buying and I knew there were there could only be one other company they could be talking about and I was like they must be for sale um and so I called up my investor who knew their investor and we started a process and they were starting to crash badly we started a negotiation where we were going to pay them 19 million dollars on it than they were doing 12

million of Revenue but by the time we closed a deal they they were on a eight million dollar run rate and they had run out of money and they couldn't meet payroll so we bought it for three and a half million uh that's a round of applause moment I mean holy crap um I mean I imagine for anyone thinking about uh buying tokens for their own business they're going how do I find a deal like that so I mean give how I mean is it luck can you program that I guess it was partial luck I mean we got a call from a VC thinking that we'd be a good

tuck-in for that one so we knew they would be for sale and we figured well why not take a look at it because we were now pretty profitable business you know and we thought we could afford you know we could you know Finance it and and in fact when we first looked at it and based on the numbers they sh they shared they were doing well you know they were doing 12 million Revenue making a couple million and we felt we could take out three million dollars a

cost so we were we had a term sheet to finance you know all 19 million of the purchase price but every time we turned around instead of doing two and a half million or three million a quarter they were one and a half million a quarter and every month we waited the revenue just kept falling and falling and falling and it was just one of these things where we just if if you hang around the hoop long enough you'll pick up a trash basket all right there you go that's a good one I'm gonna put on a shirt for you next

interview I want to wear that one um but uh so uh I guess the the comp from maybe like Bridget right you can book me right is if she's looking at maybe buying other companies the best way for her to get deal flow like the deal flow you got is to maybe Bluff that should be willing to be a tuck-in to a private Equity firm's other scheduling tool and then reverse it I think the message is just being the flow right just talk to a lot of people be in the flow and you the more flow you're in the more options you have you know swipe right as often as possible and fair you know fair you're

that guy options okay here we go all right now you buy the company and then you cut 30 people right talk to us about how that impacted bottom line uh they went from losing money to making two million dollars and so we were before we bought them we were you know a 12 million dollar business making four at this point and they added um they were eight and two now and so now we were 20 and six and then we said okay time to sell the business and keep going

and um and so we closed that deal and um you know mid 2019 and uh we were um we were talking to people to buy it in early 2020 and closed the deal late 2020 for uh 35 million you know which was on top of the 12 million so if we sum this full story out there's a lot of moving pieces we take the 5 million of initial

investment you can see let's make it a dollar right so you put a dollar in you turn that dollar into what over 10 years uh well 12 and 37 so 47 so five um you know uh nine times nine one dollar to nine dollars on a five million base it's pretty good right good story okay so the story gets more interesting um can we go there yeah we can we can go there uh story gets he has to because it's already on the next slide

so but before we do that any questions about just m a strategy here in general um just raise your hand if you've got one how we bought these companies anything all right yeah fire away what's your name Alex fire away

quasi distressed or healthy um well uh the first one was growing so when I bought awareness it had grown from one to three to five so it was growing um but they were more consumer than corporate and they were struggling growing in corporate they were trying to sell the business as a B2B business and when you read the book it looked like it was a B2B business but when you looked at the numbers it was a b2c

business and the number of buyers for a b2c business is much lower than the number for a B2B business and so it was distressed and that's in that it was badly packaged they were hoping to get a B2B multiple but you know their book was overly ambitious for who they were um and I had just looked at buying their competitor variato which was you know 50 50 B2B b2c so I knew there was a B2B

opportunity a B2B market and so you know relative to them they were maybe on the consumer side there was like two-thirds one-third of the market and on the B2B side it was like ten to one and so I knew there was a gap in the B2B Market that they could fill um that they were struggling to do and as it turned out they were consumer guys they knew how to sell protein bars and to Consumers uh and so they were

they had come up with a good technology they just couldn't figure out how to grow it out of it out of their original consumer Market it's a very distressed yeah Gill investor for the investor of that initial company what advice would you give them so they they avoid that shark move what would I give what what advice would you give them so that I don't know which company which company this one that he bought yeah the one

that the VCS put 45 in oh the 45 million in oh well so you're gonna hear a second part of this of my story which will emulate that this story which is the VCS bought the business from the original Founders and decided the original Founders weren't smart enough these are the guys that grew it from 0 to 15 million and making six million in profit to meet those guys are geniuses they got rid of those guys and hired professional management

so you'll keep control of your board so I would tell I would tell those VCS Professional Management isn't always the right answer all right you guys want to go into the next part of the story that's a very good question because it's a great segue it is all right so you sell it at 20 about 20 million Revenue in 2020. what happens next uh well um uh well so the short answer is the the business will do 10 million in

Revenue this year um they brought in guess what professional management and Professional Management spends all their time hiring two million dollars of overhead to you know the best people the greatest people um and um uh they and they don't actually manage the business day to day and so they're adding cost in the business on one end and the business is

starting to decline on the other they they decided um we used to manage the business on a cash basis so because we were very paper click oriented we needed to see sales cash sales today so we could measure the success how much were you doing in monthly PPC you were managing 300K a month you know and um so over you know three four million a year and um and so it was it was the biggest

source of our revenue and so we had to really carefully see we spend a dollar we get back blank dollars we had to really watch that they changed the business to a gap basis right away where you don't see the day-to-day revenue and GAP basically underestimates your Revenue if you're growing but overestimates your Revenue if you're shrinking because gaap is an historical average over your last 12 months and so

the drop in Revenue they didn't know was happening because they weren't looking at the cash sales they were looking at the Gap revenue and so we show up at these board meetings and I'm still on the board and they would show The Gap revenue and I'd be like I can't make heads or tails of this I mean can someone show me the cash revenue and they're like oh we're professional now we don't do things on a cash basis we do them on a gap basis and then one day I show up at a board meeting oh can we be not one day like two a couple months ago

yeah three months ago I show up at a board meeting in March they're high-fiving and chest bumping over what a how great the management is somebody in the audience here asked me um you know uh is this your company and they showed me the website and I was like and I didn't recognize it but it took me a minute to realize that it was because they spent hundreds of thousands of dollars trying to polish up a non-ecommerce website and adding

brackets to our logo just those packets it's a hundred thousand dollar brackets and uh so between hiring two million dollars or overhead and putting in time into brackets and a website that doesn't produce money um that's where the time went but not watching the day-to-day running of the business and so March we're at a board meeting everyone's high-fiving and chest bumping and then the bank payment is due March why there's a bank payment you got

to tell them that first oh well they bought our company using a lot of debt um which was fine when we were making six million dollars a year but not so fine when you're not making 6 million a year uh and um uh and then you know at the end of the month they turned around and there was no gash in the kitty and they told the banks they couldn't make the bank payment the principal or the interest um this bank was these are your friends I mean oh they were my original bank

that re-upped when in our deal um I mean we were a much smaller loan we had a loan with them but not like that and uh and so yeah they just the the money was gone and nobody knew where it went and uh you know and it was uh you know and uh and there's and they're in restructuring um and um right now oh yeah right now and they haven't made a bank payment or interest payment since March and they

might not for quite a while um my prediction was gonna this guy's gonna buy it back for a dollar he's gonna be in New York he not there's gonna be another thing on this graph and it's going to say I bought it back for a dollar and now it's growing again well they're not desperate enough yet so the the the um the the VC has put in another three million bucks to fund so it's not only not making six they're actually losing money because of course when you go from 20 to 10 million in Revenue

and it's you know that's a lot of lost profit and you add two million dollars of cost you know that math doesn't work well so it's like losing money quickly and uh and so they're putting more money into the business which is good I'm you know I approve of that um but you know so we'll see what happens nice on that note give this guy a round of applause Brad Miller awareness Tech unbelievable tell them a story I'm the

I'm then you know I'm the guy that lost 100 million by not yeah there's stories but we'll stick to this one next time this is fun thanks Brad appreciate that manager yep thanks thanks