#168: Software Engineer to CEO: Acquire a SaaS, Be Your Own Boss
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Welcome back to The Richard Geek Podcast. Today, I sit down with Michael Frew, a software engineer who pivoted his career to acquiring online SaaS companies. Frew discusses his journey from corporate burnout to becoming a successful entrepreneur who now enjoys the freedom of running his own portfolio of businesses.
In this episode, we're discussing...
Frew's transition from traditional software engineer to online business owner through acquisitions.
The benefits of acquiring established businesses compared to starting from scratch.
How to identify and target suitable businesses for acquisition.
Due diligence considerations for software acquisitions, including financial metrics and team expertise.
The concept of "buying momentum" and taking over operational businesses.
Warning signs to watch out for during the acquisition process, such as unrealistic profit margins.
Resources from Michael:
Resources from Mike and Nichole:
+ Read the transcript
Mike Stohler
Hey everybody, welcome back to another episode of The Richard Geek Podcast. We actually have a geek on board this week. He's 18 years as a software engineer, architect, technical consultants, everything that we do, he pivoted his IT career to acquiring online software SaaS companies a decade ago, he hasn't looked back. And today he's educating software developers and IT professionals on how to use digital acquisitions. As their next career evolution has been featured multiple media outlets, including FE International Indie Hackers, and Empire Flippers. Let's welcome Michael Frew, how you doing?
Michael Frew
Good, man. It's a great intro. Thank you so much for that.
Mike Stohler
You're welcome.
Michael Frew
Great to be here and get the opportunity to talk to your listeners and everything. And I've got a few books on my bookshelf behind me from your episodes that I bought from some of the people that have been on here. So thanks again for having me.
Mike Stohler
Wonderful that we really appreciate that. And so let's talk about Michael Frew, give us who are you? What do you do?
Michael Frew
So probably much like your audience, I was in your standard corporate engineering path. And I didn't, as you said about 18 years kind of jumping from junior developer all the way up to kind of a senior consultant and moving around with quite a few companies took a bit of a sabbatical when I was getting burned out. And probably like a lot of your audience, we get burned out quite a bit. There can be some challenges to whether the mission is fulfilling, and especially you get on some of those projects where you're not quite sure why you're doing it. So went through a few of those quarter life crisis ease, and on one of them. And I wish I could tell you the genius moment, but I started looking at trying to acquire a business instead of trying to start one, I think that's probably something else I have in common quite a bit with your audience that we all are kind of trying to start our side hustle. And we're looking to do a side hustle in something we know, which is engineering, it's doing projects, usually, it's kind of fun stuff, you know, I bet a ton of us just jumped onto an AI side project just because that came out. And the challenge, of course, is getting traction and getting that first customer that's not your family and friends and getting the marketing and a lot of us don't like setting up marketing funnels. So somewhere in there, after my dozens and dozens of failures, I started looking at acquiring businesses. And so that was roughly a decade ago. And the market wasn't as mature back then and a little more of the Wild West. And so kind of figured it out on my own. And so now, you know, fast forward a decade, I've acquired a few 6 and 7-figure software companies. And in the end, I'm running the same projects that your listeners are running. It's just it's all for me, I get to decide when or if we even do meetings, I decide what direction we get to go, I get to talk to other engineers every day, which is pretty rewarding. So it's been a fantastic transition where I went from a corporate lifestyle where I took everything I learned from there. And now I can apply it to my own company without going through that stage where you're trying to start a business and you're going to have that 99.9% failure rate.
Mike Stohler
Yeah, and it's and get this you probably don't know, have the suits telling you, hey, and by the way, this project needs to be done. And they're just making up a date. And as engineer and a program, you're like going wait, you got to be kidding me. So that's something that you can now determine yourself as more of a realistic timeframes on all your projects.
Michael Frew
I couldn't agree more. I try and look at working with the team that works with me from the point of view of when I used to be the young junior engineer. And we all tell ourselves, you know, if I ever manage anybody, I'm not doing it this way. I'm not making them hit these deadlines. I understand everything takes two to three times as long. And so I try and at least manage my team that way. Hopefully they see some of that benefit, but you're right, setting your own deadlines and being able to refuse projects that you aren't interested in. Where my little niche is, if and we've had this happen if a large Fortune 50 company comes to us and says hey, we you know, we want you to do this for us and we'll pay you a ton of money. We can actually say no, because it's gonna affect my lifestyle. I can't just go on vacation whenever I want. And to be able to refuse projects is pretty amazing.
Mike Stohler
You know, it's good. And the listeners probably asking us, like, when did you get to the point? And how did you get to the point where the lifestyle is more important than startup? Or it's like, man, we need to grow first, then the lifestyle comes, when did you make that decision? When were you able to?
Michael Frew
You know, one of the good things about the acquisition market is you kind of get to decide how quickly that happens. So you can look at a smaller business and a lot of people that I've spoken with, you know, do what should I start with something that's kind of a small four or five figure business to test it out. So when you're doing that, you know, you can't quickly switch to the lifestyle that you want, because you're not making enough income. But if you look at acquiring something larger, that's got a lot more of, let's say, kind of free time free cash, although it's more complicated, you're allowed to hire people hire a team, and more quickly, maybe move to that lifestyle where you're outside of the business, and you're deciding your own schedule, and then the business has its schedule as well. So to me, it seems like the way you can do that is by targeting kind of an acquisition size that gives you that net income where either you run it like I do, I love being an owner operator, or you can be an owner and have your team underneath you.
Mike Stohler
So let's talk about acquiring some type of a business. How do you where do you find them? You can't go to the classifieds and say, Hey, here's a SaaS company that I'm gonna buy in or in what are part two is what are some of the things you look for? Besides, you know, this is your strong point, this is your unique ability in that business, works with it. But what are some of the things due diligence type things that you work also?
Michael Frew
Those are the two best questions, and actually probably the first two questions that people ask me. And so I always kind of talk about the big challenge of awareness that this is out there. Now that I've been in this so long, I'm always stunned to find that engineers don't and developers haven't heard of doing this. So even just finding and being aware that this exists is kind of step one. And like you said, so how do I find if I'm suitable? What kind of a niche would I work in? And, you know, I kind of go through on one of my videos like, how can we take what we've been good at whether it's B2B sales, or whether we're kind of front end developing? What kinds of businesses at least that are online would be suitable for me? And then where do we find them? So as I mentioned earlier, this market has matured quite a bit, we now have brokers that are specializing only in online businesses, as well as brokers that are breaking out into niches like just software acquisitions, or just e-commerce, FBA acquisitions. So there's a list of brokers that I can go through with your listeners at any time, that do help you with that. There's also people that found off market deals where someone will approach me just because, hey, if you're running this business, my side project that I just don't have time for might work out. So just kind of keeping your internet work flowing as well. And then the next challenge, of course, is how do I finance this? How do I go through that whole process of due diligence going through the closing? What paperwork does it require? So it's a bit of a long process, and I've made kind of my own 10 step framework out of that, and it's something that I follow all the time, each time.
Mike Stohler
Only e-commerce, you know, you don't want to have some brick and mortar out in California or Texas or wherever. You look at this e-commerce business, and it says that, okay, it makes $500,000. Okay, I'm just throwing a number out there.
Michael Frew
It's good number.
Mike Stohler
And, you know, for the beginner, what are some of the things you're looking at? Is it worth four times gross? Or do you look at it that way? Is it two and a half times gross? Like other brick and mortars? What are some of the things you'd look at? Just to make sure this like, Okay, this is meetly? No, because he's wanting 10 times? Yes, or something like that?
Michael Frew
Yeah. And so one thing that's interesting is each niche is a little bit different on its multiple. And if you think, parallel of real estate, the different type of family or commercial is going to have different type of multiples as well. So if we take something like a content site, that's probably going to have a bit of a lower multiple than a software SaaS site, and that's all due to the reliability of the revenue, the ease of running the business, and you know, this whole list of factors. So you're correct. If you said, All right, it's a business makes half a million dollars a year, if the multiple is four or five, that's where you think the price should be. So some sellers come in through brokers who helped kind of manage their expectations of where they should be in that multiple area. And these multiples change. So we are speaking now in October 2023. I think everyone knows that the last 12 months has seen a massive change in the market with respect to rates. So all that free money that existed at the end of 2022 isn't there anymore, that affects multiples as well. We've switched a little bit to a buyer's market where it used to be a seller's market, and again, more parallels to real estate, but that affects multiples each, whether it's the niche and kind of what your economy is doing and then how healthy the business is. I've acquired a business well above what the standard multiple would be, but because everybody wanted it, so the seller was able to let that rise up. But we knew it was a business that was growing going so fast that in the end, that multiple would actually come down, you just had to be able to acquire it and run it in the first place.
Mike Stohler
Yeah, that's a very good point. Now, do you also look at you want them this ecommerce site to be open? Two years minimum or three years minimum stuff like that? And then do you look at also get one at least see so many page views or hits? Is that something also you'd look at?
Michael Frew
Absolutely, there's a huge pile of metrics that you can look at. And so it's, it's great to be able to set up your own due diligence standards, and everyone can do this. And I think you're right, two years minimum, this is kind of the the traffic pattern that I'm looking for things that I look at, you know, I'm looking for a tech stack that my team already knows, I'm looking for something that is scalable without adding staff. So if you have a kind of a, run a couple of cloud services, where it's kind of a set it and forget it, right? So every 10 customers that comes on, it doesn't mean I need more staff, you know, once they're set up, they're there for life. So you can really set up your own measurements of what you're looking for, speak to some of the brokers that are on the marketplaces that they're aware of what you're looking for, and then you spend that time kind of churning through things that are open to try and find that right business that might be a good fit for you. Like I said earlier, you know, somebody that's into B2B sales, where there's a lot of businesses that come up that for me, I'm not a salesperson, I don't want that one to one interaction. I don't particularly like meetings, you know, so for me, I would turn that over to someone else. There's also we had mentioned brick and mortar, there's a lot of good online businesses that have a brick and mortar aspect to it. And even, let's say scheduling for contractors, or roofers, you know, that in the end is a brick and mortar business, but you're running that cloud infrastructure on top. So if you have a little bit of a special team, maybe that used to be a summer job that you did, you know, and then you find an online business that is running scheduling for that and you think man, I would be the perfect person for this. That's what you're really looking for is that one business where you see it and say, like, this was made for me, like my best friend must have built this business. And now I can take it from them and kind of move it to that next level.
Mike Stohler
How long? Is this something that you see you buy an ecommerce site? Fix it grow it? It's a three year project five year or are you looking long? What's kind of your game plan?
Michael Frew
Yeah, people do it many ways. Some people do the Warren Buffett buy it and hold, some people are looking to flip in a couple years with, you know, a two or 3x gain. Again, you get to choose whatever you want, you're running your own business. Personally, I'm a buy and hold at the moment. One thing that I think a lot of us know about SaaS is it's almost impossible to find the time to sell it when it's growing. Because the metrics are so good, it's almost impossible to ever say, Well, I don't want all that future money, I'd rather have it all now. So in my in my world, I've kind of kept him and I really enjoy running them. But at some point, the portfolio becomes a bit unmanageable, and maybe you would look to sell one of your better ones. But people can set their own time limits. You make your portfolio, you have a team that runs it, and you buy and hold for as long as you like. So you'll find content sites and and maybe some e-commerce sites get flipped a little bit more often. That's a little bit more of the goal. And then maybe something like software and SaaS, you might want to hold on to it if it's something that you really enjoy. But again, completely up to you.
Mike Stohler
And again, everybody, it's Michael Frew, michaelfrew.com. So let's talk about when people go to ,michaelfrewcom. What are they gonna find? There's some guides, there's some lessons. Yeah. Talk to us about your site. What are you doing? Yeah,
Michael Frew
Yeah, even just the genesis of the site, you know, I'm pretty busy. So I never wrote about what I did, but just bumping into other developers and engineers, and I could tell there was such an appetite for you know, just help me understand what's going on here. How do I get into this? So I put together a four part course of just like the four common questions, I get every cocktail party, it's it's honestly, it's the same four questions every time, you know, why do people sell successful companies? There's a disbelief in that. How do you buy as 5,6, 7-figure business? How do you find that suitability, like we spoke about earlier to be, you know, what, what makes me such a good buyer? And then you know, where do I find a niche that matches that skill set. So I try and talk to everybody through that as if we're just meeting at a party. And you know, kind of give you some background and see if that's something you'd like to do. I push out a newsletter, as often as I can try to give some perspective, from the buyers point of view, most of the stuff that's out there comes from brokers and marketplaces. And so they help teach you kind of the process. But it's like only listening to real estate agents, they have an agenda. And in the real estate world, there's a lot more discussion of the people that are buying the businesses and the landlords in this world, you don't hear from buyers that much. So I'm trying to bring that out a little bit in the newsletter. And then a third thing from talking and putting this out, I've been asked to do a portfolio manager for a company called Web Street. And so that's an opportunity for your listeners, where if they don't have the time, you know, because I'm doing this as a full time job. But if you want to invest passively in basically this type of business, that's what they do now. And so if you go to their website, which links off mine, if you like, you can look at each portfolio manager and invest in there. And so I think that's very applicable for your audience. Because that's a passive way to do what I'm doing without actually doing it full time. Like I'm doing it.
Mike Stohler
Let's talk about the time, you know, you're kind of talking about you're doing it full time. The listeners here, they're, they're working their, their IT jobs or you know they're hustling. And there's that dream. It's like, okay, I'd love to but it's too much of a time suck, I don't have time, I already work 80 hours a week or whatever it is, how much of time do you think it's like, Okay, I'm gonna go buy something and talk us through from the beginning to maybe towards getting it stabilized, how much time is it going to take? Right?
Michael Frew
That's what makes the acquisition philosophy so fantastic. Because a lot of that time suck is in the beginning, when you're setting everything up, I could look at and say, Alright, so I've got I'm working 50 hours a week, I got maybe 10 spare hours. So let me find a business that's in a price point where it's going to be about 10 hours. And that could be my side hustle. But I don't have to set it all up and go look for those first customers, right? The marketing is already there. And I just go in there and prove it and run it. So the answer to your question, how long does it take? Well, as soon as you acquire it, you're already running. And so you're just looking to acquire something that you can fill in with that free time for me, because I was on sabbatical, I had the 40 hours, but I've seen a lot of people move in, you know, his first 10 hours, and then you then you realize this is exactly what I want to be doing. How do I replace my job, right? And so many ways, either you're trying to build that one, or you just start looking for that next acquisition. By doing this acquisition, instead of trying to start it yourself, you can pick those numbers that you want, I got 10 hours, I got this much money, I want to look for a business that doesn't make me do inside sales, you know, and then you go find that perfect business instead of trying to start it yourself. Yeah.
Mike Stohler
And if they already have the staff in place, you're just kind of, you're just the new owner, right. And it's just you may do some little tweaks. It's like me buying some hotels, hopefully I don't have to put too much time and effort. It's just already it's kind of up and running. And then he has I have time I look at the ADRs I look at the expenses and things like that. And tweak.
Michael Frew
Yeah, and just like real estate, like you don't go out there and build a hotel yourself. Right? You already buying a fully functional and operational business. So yeah, on day one, I try not to touch anything right now I'm observing. And so you know, you're already running. And hopefully, you know, customers don't even know ownership changed unless I want to say like, Hey, Michael Frew was running this now. So yeah, being able to step into something that's already moving and has momentum I was called buying momentum.
Mike Stohler
Yeah. You know, that is so important. Because you can be overwhelming because then most of these people are type a type of personalities. And they're like, Okay, I need to do this I need to be, it's so important not to micromanage these, right, just gonna let it happen. And then, at what point did you sit there and say, Okay, I need to start hiring people. Because, right, I'm not good at this, I'm not good at that I need to concentrate on maybe at the acquisition parts. For me, in the real estate career, I couldn't even even for maybe to hire some other people. But there's one point where I have to afford because I can't grow.
Michael Frew
Right. And that's exactly the moment I think hit me was I was working as much as I wanted to each week, leaving a lot of projects on the side. And I kind of had the self talking on I was like, "Listen, I've plateaued, Michael, I need help to be able to get I can see the things I need to do." But I can't because I'm messing around with accounting, messing around with my email, I'm answering customer questions all day, you know, I need help with those things. And the second thing I would say is when is what I'm doing not really adding that much more value than if somebody else was doing it. I'm not a professional bookkeeper. I'm not professional answering for technical service questions. Even if I'm adding a little 20% because of my personality is coming through, you know, really in the end, somebody else maybe should be answering that. And I need to move a little bit farther up the kind of value chain.
Mike Stohler
Yeah, that's so important. Because the one thing is, I hate sales. I don't like people bugging me for things. And I don't want to bug people you know what to do? Yeah, I don't want to do it back because it's just not wired in me. So it was like going well, so what do you do? Get a high or get or...
Michael Frew
Find someone that loves it.
Mike Stohler
Someone loves it. That's good at it, then it works. So we've talked about a lot of good things. What are some of the warning signs some of the things like Oh, my God, I love this business. I want to buy this, what are some of the things that you sit there and say, these are things that you have to kind of caution that you've learned? Maybe in your experience?
Michael Frew
I think that there's two things that I've noticed that are pretty common in businesses, the size that I look for. One is you have to replace the engineer or the engineering team that is selling the business because they're gonna go do something else. So that can be a challenge, because you have to find someone that not only understands the technology, but is interested in the entrepreneurial life that we're doing here. So that's probably the biggest risk that you're starting with. The second thing I've seen quite a bit recently is profit margins that are almost hard to believe. And so when you look through the expenses, you realize that you know, when a prospectus comes out from a broker, they're usually asking for about one year's worth of expenses. So what sellers do is they stopped doing anything that doesn't keep the lights on expenses. So Though you can run a business for a year without like a CRM system, and without tracking and all that stuff, but when you look at it and say, Alright, this thing has a 95% profit margin. Well, of course, like all it's doing is paying for hosting, and it's just coasting along, just realistically say, hey, there's a lot of stuff, I'm gonna have to add back in here that they have taken out. But you can take that out of the multiple and say, Listen, I, you know, you have it priced at this, but there's a $50,000 a year expense thing that, you know, is should be in here. So when those are the two that, you know, for me, I always go in assuming those are both true.
Mike Stohler
Yeah, or, you know, the owners haven't taken a paycheck in six months, all of a sudden, you know, I it's, you know, you're looking at something, I have to look at his payroll, it's like, okay, that kind of 20 people, and it's only this amount, what's going on?
Michael Frew
And you can use that to your advantage to where you're, you look at something and they're paying that payroll, and you say, Okay, well, I already have, I'm getting a salary from a different company. So I don't even need to pay myself that. So then it kind of switches from W to, you know, actually into like, dividends. Yeah. And so sometimes you just can't get anything out of your mouth. Yeah. And so you can also look at it where as the owner, it's more advantageous for you where the the seller might be in a different spot, you know, and so it can kind of go both ways where, you know, there's different ways to look at it, and where sometimes it's, we're looking for the negatives, but there are some positives that can come out of it as well.
Mike Stohler
Yeah, I agree. You know, there's sometimes I was looking to diligence and like, okay, there's three expensive cars on the scene.
Michael Frew
Which is nice.
Mike Stohler
So boom.
And those are the things that you look at it right for as far as the due diligence.
Michael Frew
So it always frustrates me because I look at it as a buyer. And I say, man, if you had called me as a seller, and we just had a one hour conversation, I would attend, you know, you need to take this stuff out, because you'll get a better price like drop the cars, that's maybe the Sunday I should just be a consultant on the selling side, buyers are looking for.
Mike Stohler
Less headache, and some of the people that I've known that have sold their e commerce sites, or they're the old owner stayed on for like six months. Is that something that you do? Or do you sit there and say, Nope, you guys are gone, I don't need you.
Michael Frew
Well, we definitely want to keep the prior owner or owners on for a period of time during the transition, because there's always going to be questions that maybe don't show up every 30 days, but they show up once a quarter or an expense shows up a year later, and you're asking what it is. So hopefully, that they're still available. I've never had a situation where the owner continued to, or the seller continued to run it for six months, I have seen those situations where you have like an urn out or you know, there's a million different ways to describe that some type of performance bonus. And that gets tricky because the seller knows well. If I'm not in control of the business, how do I control the performance? So for me, it has not happened, it is common in the industry. And there's definitely people I could refer to you or your listeners to to help you with, you know, thinking some of those challenges out. Yeah.
Mike Stohler
Before we wrap up, what are some of the things that I'm missing? It's this is a very interesting topic that I'm sure you know, I don't want to miss anything. Is there anything else that you'd like to let our listeners know,
Michael Frew
I think one of the things that we as engineers kind of we default a lot towards the real estate side of doing investing is to try and diversify what we're up to. You know, we say there's, there's three pillars to making wealth, right? It's going to be real estate, and it's going to be equities and bonds, and it's going to be owning a business. And so this is my attempt to talk about this a little bit to help people recognize more on the business ownership side, because we do kind of concentrate so much on the real estate. So whether it's kind of looking at the web street thing where you can kind of do a small piece of this and kind of buy along with me, or kind of like you suggested do 1020 hours a week on your own side, online business doesn't have to be putting food on the table, but it does all of your discretionary income. So for me, yeah, that the thing that I just kind of really want to highlight is how much flexibility that can give you and not to forget about this wealth creation pillar.
Mike Stohler
Yeah, it is very important. One of the things I always say it's like, look, you can make a lot of money work for someone else. But do you have a life? You know, and the transition for me, and I'm sure you agree is like, I can eventually get there doing my side hustle, and it becomes a full time. But now I dictate and I determined, and now I have a job that I can do anywhere in the world. And I don't need to take a vacation from my job because I love my job now. Right?
Michael Frew
Yeah, it's a weird thought like vacations to me or work because I really liked what I'm doing. But like I said, way in the beginning, you know, I enjoyed my 18 year career, but had I known about this option I might have about you know, year 10 started working on this moving myself out, so that I was in control of my life a little earlier. So yeah, if people hear this and kind of are like, that doesn't sound like a bad idea. You know, doing the corporate thing is good for a while but having that plan to leave. I just didn't have it until I came across this.
Mike Stohler
Sure. And so many people that's all the IT companies ecommerce people most I'd say most, if not all the owners of all these new companies were employees of a fire company. They're just building upon their successes like why making someone else money when I do the exact same thing make by?
Michael Frew
Yeah, I think it's the same projects you're working on in the office, it's just you get to take all the benefit.
Mike Stohler
Absolutely. Michael, where can people find you if they're interested in getting to know you.
Michael Frew
So I've got my own site there. It's michaelfrew.com. I've put up a landing page for just this podcast. So that's going to be at forward TRG. I'll put the video course on there, the newsletter, sign up a link out to that Web Street, if you're looking at doing some passive investing in the same thing, you can find me on LinkedIn, in/michaelfrew, not a lot of Frew is out there in the world. So that helps me out quite a bit. And just reach out to me anywhere there. I'm just always trying to help people. So reach out and ask them questions. And let me know where you found me so we can give some credit back here.
Mike Stohler
Sounds great, Michael. It's been a pleasure. And thank you for not selling anything but just wanting to grow and reach out and educate people that we're doing the exact same thing that you're doing. Thank you so much for coming on The Richer Geek Podcast.
Michael Frew
Awesome, thank you so much.
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ABOUT MICHAEL FREW
Michael Frew, owner of multiple 7-figure companies, digital business expert. Former software architect and cybersecurity consultant for top corporations. Holds B.S. and MBA in Business and Economics, with post-grad certifications in information security. Featured in various media outlets including FE International, Indie Hackers, and Empire Flippers.