Ep 477 Inside the Mind of an Acquirer: Lessons from Analyzing Thousands of Real-Life Transactions
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Hi there, and welcome back to another episode of Built to Sell Radio, the podcast designed to help you punch above your weight when it comes time to sell your company. I'm the executive producer, Colin Morgan, and today's episode is part of our Inside the Mind of an Acquire series.

where we uncover what buyers are really looking for. And today, John speaks with Blake Hutchison, who's the CEO of Flippa, the world's largest marketplace for buying and selling digital businesses. With insights from analyzing tens of thousands of real transactions, Blake shares what acquires value most in today's market.

how they think about imperfection, and what it takes to get a deal across the finish line. If you've ever wondered what it takes to make your business irresistible to a buyer, this episode is for you. Without further ado, here is Blake Hutchison. Enjoy. Blake Hutchison, welcome to Built to Sell Radio. Thank you for having me, John. Looking forward to the chat.

Yeah, no, me too, because you're really in the epicenter of this M&A world. As the CEO of Flippa, you see thousands of deals. And so our goal today is really to get a handle on what you're seeing in the marketplace, some of the tips and tricks that both acquirers use to overwhelm business owners, and at the same time, things that business owners can do to make sure they punch above their weight class when it comes to selling. So

Again, welcome to the show. Thanks for doing this. You've also just done like a big M&A report. So we thought maybe that might be a cool place to start. It looks at the 2025 trends and you isolated three big ones. You know, AI is kind of obvious and not a lot of our listeners are focused on AI. So I thought maybe we'd skip that one. But the other two were really interesting to me.

You know, buyers, it seems, are really shifting their focus from revenue growth, which was the sort of mantra of the 2021-22 timeframe. And now they're really looking for, it sounds like, you know, more predictable profitability. Maybe we can start there. What did you guys see in that vein?

Yeah, that's certainly the case. I mean, obviously here at Flippa, it's a platform for digital businesses. So that's some context from which we tend to come at it. Of course, people like Cody Sanchez and others within the report have a broader opinion about both Main Street as well as the digital sector. But regardless, to your point, what buyers are looking for, and I wouldn't say this is overly new, but it's more that

Almost all of the buyers are now orientated this way, which is around clearly healthy cash flow position for the business, not only a growing revenue, but growing profitability, healthier unit economics, discipline around operational practices. And therefore, they're looking to kind of ensure growth.

their M&A processes better by going after those businesses which are going to be more predictable and repeatable in nature and less susceptible to challenging macro or market trends. So I think that's important.

What changed? Because, you know, I think a lot of business owners were recording this at the beginning of 2025. You know, a lot of them are planning the year ahead, revenue, profitability targets. And there's always this sort of push-pull dynamic between focusing on revenue and

at the expense perhaps of profitability in the short to medium-media term versus really jacking up EBITDA. And there was a time where, again, 2021, 2022, it was all about revenue growth. In particular, in SaaS and digital, it was all multiples of MRR. And that was the kind of mantra. What changed between 2022 and now beginning of 2025? Well, I think the

The biggest one to be basic about it is buyers want to have their cake and eat it too. So they want to see businesses with a healthy revenue growth profile, and that clearly hasn't changed. And unfortunately for business owners and entrepreneurs, those looking to exit, you have to still have a very, very healthy revenue growth profile. But in addition to that, you have to have been able to prove that you can do that in a more efficient way.

Now, what changed was risk appetite. Capital was cheaper. So therefore, the ability to find capital to acquire a business one for one was easy to come by and less expensive. And then to deploy that capital and acquire customers utilizing that capital was equally less expensive.

And so now, if I'm going to go and acquire a business, call it $10 million business, I've got to have the capital at my disposal to acquire the business. But I now need to run it at a level which is more efficient than in the past because the cost of capital is higher today. So therefore, the margins at which the business needs to operate at need to be healthier than they were in the past for me to be able to sustain the cost of that capital.

Now, that's a pretty rudimentary view of the world. And of course, each buyer has a different way of thinking about this. But it simply means that today, businesses need to be better run. And what I mean by that is kind of run in a way which is less about chasing short-term revenue and run in a way which is more about sustainable long-term revenue. You refer to something that's

a pretty common term in M&A circles, but maybe new to some of my listeners, cost of capital. And I think of interest rates being the primary input to the cost of capital. Could we look at those things as synonyms? When you say the cost of capital has gone up, are you really just saying interest rates have gone up or are there other elements that

that make up in your mind cost of capital? That's the obvious one for sure. And certainly, there are businesses today which are debt laden because they've taken on capital that was once cheap, i.e. interest rates for that capital were low, and that capital is now expensive and therefore paying back the debt is harder. That's not only the same, that's not the case just for entrepreneurs, by the way, that's the case for those buying businesses.

So you might have an entrepreneur who's taken out money from a Clearco or a Facebook or a Stripe or a PayPal or any other lender. At the same time, the acquirer who's coming to look at your business has also taken out loans to be able to acquire businesses or sustain their own businesses. So everyone's in the same boat. Then the second part to that, John, is cost of acquiring a customer has gone up, right? So...

That is another impact of the environment that we live in. Now, why is that? Well, it's because customers are trading down. Let's just think about that from the context of, say, Flippa. Flippa is doing 35% more transactions, but the average transaction value of deals done on Flippa is lower, was lower in 2024,

than it was in 23 and lower in 23 than it was in 2022. Now that is the same as say an e-commerce business or a cupcake maker on the main streets of a US city. The reality is customers have traded down. Someone used to buy lots of cupcakes, they're now buying fewer.

Therefore, when you acquire that customer, you might be paying the same amount for that customer, but your return on that customer is now lower. And so therefore, that's another cost of capital and it makes sense.

trading efficiently harder. So therefore, buyers are looking for these savvy entrepreneurs who have been able to figure out how to continue growing their business, but doing that with good quality unit economics. I guess some of my listeners I'm imagining are hearing you say this kind of notion of having your cake and eating it too, whatever that old expression is.

And sort of feeling frustrated because, you know, they feel like they build value. They've got a loyal customer base. You know, they deliver a great service or product. Customers are happy. But there's a little hair on their deal. Like there's a little bit of, you know, I mean, it's a small business. Yeah, it is.

You know, there's a there's a little bit of imperfection there. And and they hear that, oh, it's, you know, unit economics has got to be great. Revenue has got to be going through the roof. Profitability has got to be going through the roof. You have to have a decentralized customer base. And they kind of throw their arms up in the air and go, well, I'm never going to have anything worth buying.

because you know if i and frankly if i had a business like that why on earth would i want to sell it if it's so perfect and shiny and you know one carrot why would i ever sell it it's a perfect gem

Is there any room for imperfection in a small business? Of course. And all businesses, to your point, are imperfect. Your business is no doubt that way, John. Certainly Flipper's that way. And no doubt the listeners' businesses are that way too. And we obviously empathize. And so therefore, the job is to point out what is great about a business, what is

something that a buyer can hang their hat on and say, when I take over this business, this part of it is A-OK. This part of it is the part that I'm going to leave unchecked and simply run. While other parts, we say, yes, this is where there's a little more room for improvement. And we position that as opportunity.

And for instance, if you've got a great e-commerce business, for instance, doing five, six, $7 million in revenue, but for whatever reason, their SEO profile is absolutely deplorable. And there's one that is in my mind right now. Then we will say, have a look at this. You've got a business which is growing 50% year on year, has done so for the prior three,

They've clearly proven that their brand is much loved. They've got a good quality customer. It's a distributed customer across the US, across the UK, and maybe even down here in Australia. But they are leaving a lot of revenue on the table by way of not having the skill set, the know-how to do something about this problem that we've all uncovered. So for you, buyer, that's actually great. So you can't penalize the business for that. The underlying problem

financials, the underlying operating engine is sound, but there are some skeletons in the closet and these skeletons we're now revealing to you transparently, candidly, and we're telling you, take them on, optimize for them, and arguably pay a premium for that level of optimization opportunity.

So the seller's weakness is the buyer's opportunity for value creation. In fact, that's what I'm hearing you say. And so would you go so far as to recommend a business owner point out the area of opportunities and say like our SEO profile is weak and that's an area that if I can acquire had an expertise in that space, they could monetize? Yes. And it's

It's a double-edged sword, actually, because sometimes a buyer will fall in love with a founder and operator so much that there's no likelihood of a short-term clean exit because they want that founder and operator to stay in the business now for two, three, five-year earn-out opportunities because the founder is so good at what they do. And so there is a balancing act between pointing out what you are so good at and pointing out where the opportunities are.

But the short answer to your question is, yes, point out exactly what makes this business tick positively and what inhibits its growth negatively. And if an acquirer looks at the things that are inhibiting it and saying, we can solve that, you've got a match. You raised the...

E-words, shall we say, earn out. And that's the bane of most of our listeners' existence, in particular because our listeners tend to skew towards service businesses. We've got lots of e-commerce and digital businesses and SaaS businesses that listen as well, but we do have a large proportion of service businesses.

And of course, buyers will typically try to tie in the owner using an earn out. And for most of our listeners, that's the enemy. They want to get all their cash up front and go to the beach and they don't want to be tied to the business for three, five, seven years in the future. What advice would you have for a founder who is approaching their exit saying, I'm not doing an earn out?

It's a non-starter for me. Zero chance I'm going to sign up for that. So if it's that binary, then you're going to have to negotiate on enterprise value and the upfront amount that you are likely to receive and potentially consider discounting that. Because the reason earnouts exist is it's an insurance policy.

for the acquirer. They don't know how to run the business. They just like what you've been able to achieve. They want to be able to achieve exactly what you've been able to achieve, at least in that next 12 months, and then think about optimization after that.

The risk of spending $10, $15, $20 million on a deal and then having the IP, the energy, the passion, the enthusiasm, no doubt, the face of the brand, leave that business, exposes that acquirer.

and potentially sets them up for massive losses in the future. So if you're going to take that binary stance, that's okay, but you need to understand you're limiting your buyer universe, one. And two, if you do find a buyer who thinks they've got the capability to take over the business immediately post your departure,

then you need to probably think about being flexible around price. Now, there are other ways to think about this, of course. One, the time. So it's one thing to say, well, I'm not willing to do it. It's another thing to say, well, I'm willing to do it for 90 days, 120 days or a year.

It's another thing to, of course, be locked into a three to five year earn out. That's clearly paralyzing for some people, particularly when they feel tired, emotional, and they are looking for that clean exit. But think about time. Time's negotiable. And then even then, think about how you can not only limit the time to earn that earn out, but limit the time that you spend in the business. So negotiate a weekly turnover.

hourly contribution, call it 20 hours versus what you might have historically have to work in the business. And then think about how you can ensure your business prior to exiting with a new head of operations or a new GM.

or a new CEO, for instance, and do that work three, six, 12 months out before considering exit so that when that acquirer comes along, it's no longer about you being the insurance policy, somebody else is. So that key man at risk is really important. Yeah. What has been your experience around...

tying the earn out to EBITDA or seller discretionary earnings versus revenue. I think what I've heard on this show is that EBITDA can be gamed too readily by the acquirer, that it's too easy for them, even with good lawyers papering deals, it's just too easy for them to game EBITDA. And so if you can get an acquirer to

to tie the earn out to a revenue goal or even some sort of product release schedule, that's going to be something you can control. Are you in the same camp or are you more kind of positive towards EBITDA based earn outs? - No, I'm in the same camp. I guess there's a couple of nuances if I may. The first would be what protections can you put in place if being beholden to an EBITDA performance?

Now, one of those, for instance, is if you are still in the business and if you have agreed to retain your position within the business, you can actually have an approvals policy in place where there's a delegated authority and any expense over X must go through your sign-off. Okay? So that would mean, for instance, that any...

Major capital expense or operational expense, call it in excess of $50,000, in excess of $100,000, actually goes through you for sign-off, which means you get to eyeball and limit risk of there being an inflated expense line. The second thing you can do is move up the P&L.

to limit your risk, not go as high as revenue, which of course acquirers less like, because of course that can be inflated too, but do something like gross margin. And then think about the elements of gross margin, even an adjusted gross margin I've seen in contracts where that might be revenue minus cost of sales minus marketing. So it's an adjusted gross margin.

And therefore, it limits the ability for the acquirer to inflate the cost base, but it also gives the acquirer an insurance policy around having an inflated revenue number. What else are you seeing in the way of deal structuring?

I'd be curious to know kind of what's market these days. What are you seeing in the marketplace and maybe what's changing or what you see changing in 2025? Yep. So, of course, we talked about skeletons in the closet. We talked about maybe buyers not – sorry, sellers not being as operationally –

robust as some acquirers might like them to be. So one of the things that buyers will try to do is wrap the cost of either major capital expenditures and or inventory into an enterprise value and therefore not pay separately for that. So let's say you've got a warehouse with some embroidery machines in it.

instead of having to pay additional for those given the capital expense of those, or given you might have inventory sitting in boxes in a warehouse, a buyer just says, well, I don't want the risk of saying this is good or bad capital, or this is good or bad inventory. They'll just wrap that into the deal. And you've got to negotiate your way out of that, not allow that. And then think of another way to value that and de-risk that for the acquirer.

So I've seen that become more common and I don't like it on behalf of entrepreneurs. In addition to that, I have seen buyers get a little more savvy and positive with respect to paying good quality market rates for the founder to stay on board while that earn out is playing out.

Salary. Salary. They'll go and size the job. And we all know founders probably tend to pay themselves less than what the job is in the open market. So there's a good habit that I'm seeing right now where those jobs are being sized and then the founder is then rewarded for that earn out period in addition to the earn out happening. I think that more often than not,

We're seeing that institutional buyers are being a little more patient with the way in which the earn out plays out and they're in fact, I think historically,

They've basically said, we're really good at what we do. We will take it over almost immediately with our own operational know-how. It feels to me that they're being a little more patient and they're saying, we're going to buy this, but we actually need you to stay in the business and run this without too much influence from us so that we can protect our investment for longer. Yeah.

And these things-- So, it increased emphasis on structuring, whether that's an earn out or some sort of equity role. Yeah. Because when the capital markets were cheap, they were all trying to do lots of deals. And therefore, they just have boilerplate contracts, which basically said, clean exit for you, John, clean exit for you, Blake.

Move on, we'll take it over from here. That's become a risky practice. So now it's, hey, John, we're going to stay out of your way, but here's a good quality salary and compensation structure for you to continue to run the business through that in our period. The pendulum has been over, say, 2024, very much in the seller's benefit, excuse me, the buyer's benefit in 2024, capital being expensive and

M&A markets kind of locked up in a way. Do you see in 2025 as interest rates come down? Obviously, in the United States, there's a kind of a very pro-business administration coming in. Do you anticipate the balance of power in it, like a negotiation starting to go back to the sellers in 2025 or not? Yeah.

Maybe, and I'm going to say, I'm going to be unfortunately a little bit negative in this and say not. And here's the reason why. I imagine that you and I are talking to your audience of mostly subscale business owners, mostly sub $10 million annual revenue. Let me know if I'm wrong. Absolutely. Okay.

If that is the case, then it's not like there's ever been a frenetic bidding war for those types of businesses, right? So what I think will happen in 2025 is more deals will happen. What I think will happen in 2025 is more buyers will be interested in these deals. What I don't think will happen is that all of a sudden, the average subscale business owner has a bidding war playing out between two or more buyers because there's not two or more buyers for the average subscale business.

If you're selling a fantastic pool cleaning business over in Miami, then there's likely to be one buyer for that great business at that time. And it's really interesting. I mean, Flippa's got in excess of 2 million registered buyers. The reality is most deals still happen without a bidding war playing out. Really? Now, you get exceptions, of course, and we love that, and the entrepreneurs love that.

But the reality is you're looking for a buyer to fall in love with the business. You're looking for a buyer who has the capital to afford that business. You're looking for a buyer who has some kind of operational or synergistic strength that complements that business. By the time you get through all of that, it's likely there's one perfect buyer.

And so I don't think all of a sudden that means multiples for subscale businesses get pushed up because multiples for subscale businesses were never that inflated in the first place because it's not a high liquidity environment. It's not the public markets. It's not venture-backed startups. They're good quality, sustainable, small businesses. You define subscale businesses.

You kind of threw out the number 10 million in annual revenue. Do you think, is that a bit of a turning point or an inflection point in valuations? Is 10 million revenue where things become more competitive? Yeah, open yourself up to a different range of buyer. So you move, let's just go through the kind of buyer personas. You know, you've got family offices.

You've got high net worths, who often will be also part of family offices, but call it high net worths as a standalone. You've got small company buyers who are looking to aggregate, roll up for the benefit of some kind of growth strategy. You've got institutional buyers, small boutique private equity and beyond.

And then you've got strategic acquirers, big companies who want the capability of a small company. Now, as you move up the revenue value chain, more and more buyers come into that hitting range for want of a better description. And so, yes, you start to find yourself with more buyers interested and the ability to drive negotiation within your favour.

And that kicks in, in your experience, around $10 million. Yeah. I mean, it's a bit of an arbitrary statement, arbitrary number. But yeah, I would say that's probably commonly believed that at the $10 million mark, the world opens up for you a little bit more. Yeah. With regards to proprietary deals, we talk about these, you know,

as being challenging for sellers, when I refer to a proprietary deal, I go back to your example, the swimming pool company. There's one buyer, you know, the big swimming pool company in town that's buying these small businesses and they're like, hey, this is the natural, this is your buyer. How do founders, owners, sellers think about

You know, the discount that comes with being a proprietary deal, being, you know, negotiating with one buyer that seems like the the opposite of what they should be doing. Maybe walk us through if there is one natural buyer for a business, how can you defend yourself against being lowballed?

Test the market. So yes, one ultimate buyer, but you will be able to get a sense of whether there is other interest pretty quickly by testing the market. You will be able to get a sense for whether that one buyer is willing to pay a premium compared to what fair market value might be based on that.

feedback from the rest of the market. And of course, once you have other interested parties, albeit they won't be that ultimate end buyer, then you can learn from those discussions as to the types of things about your business which are going to appeal to that ultimate buyer. And so try to...

It's a little bit like if you're raising capital for a startup, you know, you want to speak to 10, 20 investors before you actually go out and pitch to the true investor that you're targeting to put money into your business because you want to know what everyone else thinks so that you can tailor and target your pitch and understand where you've got negotiation leverage. And so I would encourage people to do that.

And, you know, there's lots of opportunities to do that, depending on the space that you're in, of course. In our case, we're benefited from having so many buyers that we can seek out feedback for our entrepreneurs very, very quickly. But I would encourage people, regardless of the industry that they operate in, to try to do that. Probably the other thing to sort of point out and think about is if they are clearly

the only buyer in town, and they've supposedly done it before. Well, go and speak to their other portfolio companies. Acquirers, for the most part, don't shy away from bragging, for the most part. And so you should be able to do reference checks and speak to those portfolio companies. What is this buyer like? How have they been post-acquisition, given you're going to be locked up into some kind of earn-out period, for the most part?

What are some things that you went through as part of the acquisition and due diligence process that you should now be aware of? Did they try to retrade? Yeah, exactly. So, you know, I think it's a really obvious answer, but it's just do your own due diligence because it's funny, no matter how much people might say it on podcasts like yours, the reality is buyers do due diligence and entrepreneurs tend to not. Yeah.

And a little reverse due diligence can go a long way, especially when it comes to retrading. I know it's something that is the bane of...

every entrepreneur's existence when they agree to a term with or deal price with a buyer. And after diligence, it gets eroded or melted away. And I wonder to what extent you've seen that increase. I know in the 2025 M&A report that Flip had just published, there was some reference to deals taking a little longer

a little bit more scrutiny during the diligence process. I'm assuming that's leading to more retrading. Yeah. I think the simplest reason for that is simply that buyers are more risk averse today than they were in the past. They've been stung by bad deals, having done so many so fast that...

The diligence period is becoming frustrating for entrepreneurs. And it's worthwhile you and I pointing out what the average length of a due diligence process is. So you will get two parts to that LOI. You will probably get exclusive rights. So that is a buyer saying that they want a 120-day exclusive rights period of the deal.

Four months. Now, you want to negotiate that down to as low as you possibly can. There's two reasons for that. One, it's exhausting to be locked up in exclusivity with a buyer. Secondly, your business is likely, if it's a good quality business, worth more in four months time. So you don't want to be in a position where you're now renegotiating, having gone through all of that tiring due diligence.

Then there will be a due diligence period within the LOI and that due diligence period is now, I would say more commonly 60 to 90 days. And you want to get that down to 30 to 45 days. There's no reason why a buyer can't complete due diligence in a 30 to 45 day period of time. They just have to make sure that they're a bit more, they act a bit quicker. But those two things need to be negotiated because they can be very inhibiting for an entrepreneur.

Blake, I just want to make sure I understand this because I had coming into this conversation always considered the diligence period and this exclusivity period as the same.

What you're pointing out is those two things can be different and often are, which is super helpful for my edification. So what I'm hearing you say is the exclusivity period, the period with which the owner gives up negotiating leverage and effectively says, yes, we're getting engaged to be married and I won't negotiate with anyone else, in many cases can be as effective.

120 days, four months long while the buyer does their work. And that's different than the due diligence period. I'm assuming they overlap, like the diligence period happens during this exclusivity period. They overlap, but often the exclusivity period is longer. And the reason being is two things. One, once the due diligence period has expired, then they'll move into contracts and drafting. And that can take time. They know that lawyers will drag their feet.

And therefore, they will insure against that delay. The second thing is they're being a bit cheeky and making sure that the business can continue to run at the same level it has been through an extended period of time as an insurance policy to make sure that revenue and or margin and or EBITDA hasn't been inflated for the purpose of selling. Makes sense.

In your experience, what is a reasonable expectation that the owner can get that exclusivity period down? You mentioned due diligence. Almost always they come in at 60 to 90 days. You think it's reasonable to go back at 30 to 45. Yes. The exclusivity period maybe starts at 120. What do you think is a reasonable ask? 45, 60 max. It's too burdensome on an entrepreneur. It's too emotionally demanding.

heartbreaking when the deal falls over having been out of the market thinking and even communicating to your husband, your wife, your brother, your sister, whatever, that you think you've got a deal. So you've just got to be firm there. And there's just no reason why a buyer can't do the due diligence in a 30 to 45-day period of time. And there's no reason why that exclusivity period needs to be longer than 60 days.

What proportion of deals that go to LOI end up getting done? 60%. 60%.

So for my listeners, that means that you could get a letter of intent, which looks like a pretty formal document. It could be tempting to take that and pop the champagne cork and assume that you can put the down payment on the new house or the ski house or whatever you're going to do. What I'm hearing you say, though, Blake, in your experience, and you've looked at tens of thousands of deals on Flippa, 40% of the time, almost half that LOI

dies. Nothing happens. The deal does not get consummated. And part of that is that buyers often move fast knowing that that LOI isn't as formal a document as most entrepreneurs think it kind of is. So they're putting it out there to basically make sure that you're going to say yes to the deal terms.

And they can then move into that formal appraisal process. And that formal appraisal process, of course, due diligence and understanding the rats and mice of the deal and your business. So yeah, 60%. What are the most common reasons deals don't happen? The single most common reason is access to capital. So buyer says, I'm good for it. And then either the cost of capital is too high or the sources of capital dry up.

That'd be reason one. Reason two would be obviously due diligence. So something happens through the due diligence process that spooks the buyer and often they won't tell you what spooked them, but something did. Third reason would be they're actually running multiple deals in parallel and they can only afford two, but they're running three in parallel.

And therefore, they say, oh, look, thank you. It's been fantastic getting to know you. But as you know, we had a non-exclusive LOI here or even exclusive LOI and look for whatever reason we haven't been able to get our head around the deal anymore.

And they'll go and do those two other deals and yours will be left on the table. That'll be the third reason. Fourth reason would be probably on the entrepreneur side. They get cold feet. They say, it's not worth my while. Due diligence processes. Time consuming. The earn out sucks. I've decided that. I've spoken to enough people. I'm going to continue to run this business and take a big fat dividend out of it. Really interesting. I...

I think the fact that the number one reasons deal fall apart has nothing to do with the owner or his or her business. It's everything to do with the buyer who can't get the capital they thought they had lined up, et cetera. We talked about reverse due diligence earlier, and I'd be curious to know how can a seller evaluate the buyer's

likelihood to be able to get the capital they need to close. That seems like a very, very delicate conversation because nobody likes to be questioned on their ability to buy something. But that's in fact what you have to do to ensure that this deal is going to get consummated. How can a

That's a really awesome question, John. I guess there's a couple of things. So guaranteeing it is verifying funds. That's guaranteeing it, right? So show me evidence of the funds existing.

Now, that's difficult. We do that here at Flippa, right? So there's around about 35% of our buyers on the platform have gone through and verified funds. And that is then marked accordingly within the deal room when the entrepreneur and advisor is reviewing that buyer. Uploaded a bank statement.

Uploaded bank statement connected directly to Plaid or equal accredited investor status and therefore ability to be liquid and find the capital. Okay, but let's assume that hasn't happened. Then you want to validate it to the best of you can, and that's a different word to verifying it. Validating it to the best of your ability would be

history of doing deals. So how many deals have you done? Did you do in 2024, John? None. Okay, that's interesting. All of a sudden, you're about to start doing deals again, are you? Yeah. Okay, well, that's a bit of a red flag. Particularly, by the way, if I'm talking about a

micro business, so a business that is doing $100,000 to $500,000 in revenue, that's a different story because most buyers are first-timers, most entrepreneurs are first-timers, most buyers can come about that level of capital. So just to be clear, I'm not talking about those size deals. But at the $10 million mark, if someone's saying, well, I'm a great buyer, I'm sophisticated, I do a lot of deals, ask them the question, how many deals did you do in 2024, John? Now, if they say three,

Great. Now I want to know the nature of those deals. How did you fund those deals? What was your source of capital for those deals? Does that source of capital still exist for this deal? And so it's very much about understanding their past behaviors and where you can see evidence of those past behaviors. It's about now validating that those past behaviors did exist in the way that they articulate that they did.

Okay, so let's assume you don't have verified funds. You've attempted to validate that they're a historical buyer with the capacity to do the deal. Probably the third step is really to do those REF checks on that buyer.

Also, ask them to do a know your business check and get some kind of, or even just do web research, frankly. You're trying to look for evidence of the buyer having a history of being an investor at the level that they say they are. If they say that they are funded by somebody else, have a look at the history and resume for want of a better description of that institutional backer.

So it's a kind of roundabout answer. In short, that reverse DD process involves either objective checks or kind of more, I guess, subjective assessment as to whether you think you're dealing with a good buyer or not.

Such valuable information for our listeners. Again, I want to just put an underline, underscore, exclamation point around it. 40% of the deals that go from LOI to diligence fall apart. The biggest reason, as Blake is saying, that they fall apart is that nothing to do with you, the seller. It has everything to do with the buyer not being able to get the funds. So, Blake just shared some real wisdom there. I really appreciate you doing that. One of the areas that we see this cropping up more and more, this –

you know buyers claiming to be able to get a deal done but ultimately not being able to get the funds

is the explosive growth of this acquisition entrepreneur. I'm not sure if it's a thing in Australia. You're nodding, so I'm assuming you've heard of this. But now all of the big MBA programs in the United States, at least, Cornell, I think, was one of the first. Stanford, very, very famously, has taught an MBA course in business.

acquiring businesses and it's attracting all these 27 year old kids who think they want to own a business one day. They've seen Cody Sanchez on social media. They think, okay, I want to be just like her. I'm going to go buy some businesses. What's been your experience of how this acquisition entrepreneur, uh,

these search funds have impacted the marketplace? Well, one, I think it's great. I mean, clearly, the entire Flippa proposition works on the basis that there are more people who want to buy than start and that buying is actually a safer bet than starting and limiting the risk of long-term viability by acquiring something that is

been established, has traction, has a customer base, has revenue, has all those things. So clearly we're a big advocate for the movement for obvious reasons. Now, access to capital is hard for that cohort, but

Given the nature of the schools that are now teaching it and the cost of attending those schools, it tends to be that at least for smaller deals, those deals are happening pretty quickly, partly because of how excited, for want of a better description, that entrepreneur is in chasing the right deal.

What you want to make sure is that they do understand clearly their mandate because the number of times I've heard an acquisition entrepreneur have a shifting mandate. What do you mean by mandate? So a lot of the time, so an acquisition entrepreneur will say,

Either I'm funding myself or I'm part of a search fund, in which case the acquisition will be funded by somebody else. And my mandate is as follows. I am looking for a business in the health and beauty space. I am looking for a business which has a million dollars annual revenue.

I am looking for a business which is running at gross margins of X minimum and I'm looking at a business which has a recurring sticky customer base. I'm making up the mandate.

Problem with that is they come in with a lot of gusto and then that mandate starts to shift. So they've discovered that actually the gross margins they want to look for are now X. The industry that they're more interested in actually is not as broad as health and beauty. Specifically, I'm looking for a hair salon. And so we have seen

I'll be careful how sort of negative I sound, but we have seen some time wasters who call themselves acquisition entrepreneurs when in reality they don't really know what they're doing or what they're trying to achieve. So it's just, you know, it's just about for the entrepreneurs being cognizant and wary of who you're dealing with.

Can you, for our listeners who may be hearing the term search fund for the first time, define it in layperson's terms? What do you mean by a search fund and who is an acquisition entrepreneur? People aren't familiar with those terms. Yeah, long story short, I rate myself as an operator. I'm Blake. I do not have the capital at my disposal. And I have a sponsor. That sponsor could be an individual, i.e., John.

John says, "No worries, Blake. I get it. You're great. I'm good for a million dollars. I'm not going to run this thing, but I'm very happy to fund your acquisition of it. I will then own an equity position in the business that you acquire. You are now the founder. You will get a salary. You get the sweat equity.

but I am your sponsor. Now, John could be John the individual or John could be the group of individuals who are part of this fund that their entire business orientates to sponsoring people like me who want to go and buy businesses to run. Now, why does that exist? It exists because unlike an entrepreneur starting from scratch where you're just betting on that entrepreneur,

And the idea is good, but question around execution, question around finding product market fit, question around lots of things. In this particular case, one, I know Blake, and two, I can validate the business. Those two things combined are a better insurance policy. And so there's now groups who will look for searchers. That's the acquisition entrepreneur group.

who is looking for these businesses. So I get paid often to find the business, a small salary. So let's say it's a three-month search cycle. I'm getting paid a small salary to go and find the business. Then the fund, i.e. John, will help me in validating the business because I've bought lots of businesses before. I'm an investor. I'm pretty savvy. I'll help you understand the viability of that business. And then ultimately, I'm going to help you buy it. I'm going to fund the acquisition.

And the finder, the searcher, the acquisition entrepreneur, as the term goes, gets a piece of equity. And as I understand it, over time, they have the possibility of earning more equity if they grow it and are successful. So it's a great way for sometimes younger people to get into owning a business without necessarily having to capital go spend $5, $10 million on an existing business. Yeah, it's a pretty privileged position to be in, frankly. I mean, most search funders I know

I meet pretty well connected, well networked individuals.

Yeah. Yeah. Well, well said. And thanks for decoding that. We've talked quite a bit about businesses in general and negotiation tactics. You know, as I mentioned earlier, a lot of our listeners are in Main Street businesses. Flippa, I think, really specialize in digital businesses, content, e-commerce, SaaS businesses. What...

What do you see as the difference between a digital business and a traditional Main Street business that someone like Cody Sanchez might be acquiring? The major differences are really just around the metrics that matter for the businesses. And so clearly a SaaS business is being assessed differently to what a Main Street brick and mortar and or traditional business would be assessed by. And so you're looking for metrics like

lifetime value and retention rate and MRR and ARR and churn and things like that versus, you know, perhaps if you're selling a pool cleaning business, well, you're looking at the client base, you're looking at the repeat nature of that client base, you're looking at cost per order, you're looking at the quality of the staff and how many pool cleaners you need and what the size of the market for pool cleaning is in that particular geography.

So most of it relates to just the nuances that there are in different businesses and different business models. The practice of acquiring a business is identical, really. Now, what I will say is that there is, of course, this awesome PR engine right now around Main Street businesses.

Cody Sanchez, a bunch of other people who are espousing the benefits of the silver tsunami and all of this trillions of dollars in value hitting the marketplace that you can now go and avail yourself.

of dollars in business worth that is because all of Baby Boomer's retiring. That's different for us. So where most digital entrepreneurs are a bit younger, most digital entrepreneurs are dealing with businesses that of course built on top of the platform economy, Shopify and Google and Amazon. So there are nuances, but essentially it's the same thing. That's super helpful.

Thank you so much for summarizing that, but also for your insight today. I can hear the staff at Flip-A-Popping in as we go. For those listening, we started this interview, it was 7:30 AM in Melbourne, Australia.

Blake's a hard charging CEO. So he's in the office first. And now by 830, I can see there's one or two people coming in. So I think that's my, uh, uh, my cue to, to wrap because I'm sure you got a lot of people asking for your time. So, uh,

Thank you for doing this. Is there a, if folks wanted to reach out, learn more about Flippa, maybe connect with you, are you more of a, like a LinkedIn guy or what's the best way for folks to do that? I'm more a LinkedIn guy. So please just connect with me there. I'd love to say hello. Let me know that you heard me on the show and let me know your thoughts. And I'd love to go back and forth with a few people. So yeah, just connect and say hello and I'll be available. Blake, thanks for doing this. Thank you, John.

And there you have it for today's episode between John and Blake. If you enjoyed today's podcast, be sure to hit that subscribe button wherever you're listening to today's show. And if you want to help support this podcast, I'd encourage you to leave a rating and review. You can either leave it on the listening platform where you're listening to today's show or on YouTube, where you can find us at Built to Sell. Really helps us grow and get in front of more owners just like you.

For show notes, including links to everything referenced in today's episode with Blake, you can visit his episode page, which you're going to be able to find over at builttosell.com. Also, if you know of someone who'd be a great fit to be a guest right here on the show, you can nominate them. You can head over to builttosell.com slash nominate, where there you're going to have a chance to nominate yourself or someone else.

to be a guest right here on the show with John. Special thanks to Dennis Labataglia for handling today's audio engineering. And thank you to our community of certified value builders who help us bring our message to you. Our advisors are experts in helping you build the value of your company. To get in touch with an advisor or learn how to become one yourself, visit valuebuilder.com. I'm Colin Morgan, and I look forward to talking again next week.