Should I Acquire A SaaS Business With $0 Revenue?

I've gotten a few confused responses on Indie Hackers about buying businesses. I think one useful way to think about this is using real estate as a metaphor. In real estate, you buy a property, you fix it up, and might rent it out and collect a rent check every month. Over time the property will increase in value (hopefully!), so that if you ever did want to sell it, you could do so for a profit.

Knowing what you want out of an acquisition is half the battle. If you're just looking to acquire cashflow, then the answer is easy: no. Don't buy anything with $0 in revenue because you're in the business of buying revenue!

If, on the other hand, you're a marketer who knows how to grow things, but you don't know how or don't want to know how to code, then buying a finished product from an ambitious developer created might be a great move. Maybe you're trying to flip it in 6 months after juicing it. That's awesome too!

But what's your strategy? Agreeing on one before buying it is a good idea especially when buying in a group. I say this knowing full well we haven't done a great job in my group but we're all loosely aligned on holding long term.

Buying For Cash Flow

Generally, don't buy $0 MRR companies if you're optimizing for cashflow unless you've got some kind of distribution in mind and have a high degree of confidence you can execute on it.

Playbook:

Fix the product "the right way"
Grow profitably. Make sure the cost of growth does not put you in the red each month.
Consider setting up a sales playbook or pipeline
Automate customer support and find a remote developer for relatively cheaper than a US dev.

If you're looking for some active income, a micro acquisition is a thing of beauty. After having launched so many failed products, to log in to your Stripe account and actually see money coming in is an amazing feeling.

Buying for cash flow is straight forward. Low churn, some growth. Growth doesn't have to be crazy but it should be at least 1.5x the churn (i.e. if two people unsubscribe from your product, 3 people subscribe each month).

Quick side note on growth: Generally sellers want you to pay for growth. When buying for cash flow, it's hard to justify paying the extra multiple for growth

The reason I said active is because the reality of most of these micro acquisitions (let's say below $50 MRR) require work. Sometimes it's engineering, definitely some support, and there's just not that much cash to spread around. This is another benefit to buying in a group. If the acquisition isn't going to be a full time job for you, then it's nice to have some help.

If you did want to automate it, then that's work too. Good work. Work worth doing, but work nonetheless. That's why I'm adamant you should consider these investments as active income instead of passive income.

There's also an intangible feeling to buying and holding. You have one thing that I'm not used to having when dealing with startups... time. If it takes another month for the re-write to make sure you're operating profitably, that's okay. So long as churn is low (which, it better be, you checked this in due diligence right?!) you have time on your side.

Buying To Flip

Don't buy $0 MRR companies if you're going to flip them. People always underestimate how hard it is to go from 0 to 1. Another gotcha is valuation: sometimes it's better to have $0 MRR than a low MRR because people will start asking hard questions about growth, churn, CAC, etc.

Playbook:

Squeeze every inch of growth out in a relatively short period of time, even if you go red for a few months.
Get the product "good enough".
For speed, you're probably doing a lot of the work along with some support staff to unblock you from time consuming tasks.
Holding for less than 6 months might be a red flag that you "just want to get rid of it"

Full disclosure. I'm buying for cash flow, so I'm not the best person to talk about this. In reality, buying to flip and buying to hold are functionally equivalent. What changes is the timing. When flipping, you might sacrifice short term profitability for growth but much of the work is still the same. If the product needs development, you'll have to do it or hire someone to do it. Your product isn't going to grow very well if the product sucks.

I'm mostly referring to SaaS businesses, but even SaaS has some people operations necessary for an awesome customer experience. Namely, support. One of the things I'm still figuring out is how we can have a portfolio of companies using shared resources. So for any individual company, paying someone full time for support doesn't make sense. But if we could hire one support person and have them do all support tickets across all our companies, that would be amazing! Development would ideally work the same, though so far we've bought 3 companies each with different tech stacks, which makes sharing developer resources slightly more complicated.

Buying To Operate

It's okay to buy $0 MRR companies if you're looking to operate them, though I'd strongly suggest finding something with some MRR, there are plenty out there.

Playbook:

Diligence the shit out of it. If you're going to be doing this for the next 5 years, you better make damn well sure you know what you're walking in to!
Consider using debt to offset the purchase price. I'll be doing a post on SBA loans in the future. TLDR; they're hard to get but they're the best deal in town!

This is the OG reason to acquire a small business. On paper, you put in a couple hundred thousand, buy a $1M business, and now you are the CEO. If you read the classics like the HBR Guide To Buying A Small Business, this is what they talk about. Although the book is a bit dated and talks about buying very unsexy stuff like storage units or a music rental store, all the principles still hold true.

I haven't heard many people speak about buying to operate. Specifically, a group of one or two partners acquire a business to take it over and run it long term. Perhaps this is a slightly nuanced position compared to buying for cash flow. In the cash flow scenario, the idea might be to put together a portfolio of businesses. In this case, I'm talking mostly about one big bet. All your eggs are in this one basket. This is not to say this is a bad idea. Most employees and entrepreneurs spend their lives betting on just one company at a time.

If you're considering making your first acquisition, it can be helpful to be aligned on goals. This is pretty similar to a startup. Although the answer may change over time as you inevitably get more information (i.e. we bought a lemon, or this business is growing like crazy!), it's still nice to have a north star, especially when buying with other people.

If you're just getting your feet wet, try to buy something you're going to hold on to for at least a year or two. Not only are there potential tax benefits, but the mindset might prevent you from buying something stupid.

Hope this helped. Best of luck out there!