How Awareness Technologies Grew to $20M Revenue and $6M Profit Before Its Sale to Private Equity (Brad Miller, SaaS Open 2023)

Introduction and Brad Miller's Background

Nathan Latka

00:00So Brad is one of these guys that he never he never he doesn't speak at all. So you have to really work him to speak, but his story is really it's a fascinating story and I wanna get an update because you spoke, those of you raise your hand if you were here in Austin. So you got okay. So do you guys remember Brad? His speak on his speech on debt? You know, you missed out on the

00:24nut bar company. Which one was this?

Brad Miller

00:26>> West.

Nathan Latka

00:26The small bar quest. I guess it's like a billion dollar brand now.

Brad Miller

00:30>> Well, sold for a billion. Yeah.

Nathan Latka

00:32Sold for a billion. But I'm gonna give you his quick backstory, and then we're gonna jump into like the update of this story. So I would say Brad is a creative capitalist that's very opportunistic, and he buys SaaS companies, and many people think you can't buy a SaaS company that's willing to pay three, four, five, six x. Okay. He gets these deals done to like point six x, and he buys a $5,000,000 ARR company and he only

00:56puts up 2,500,000 of his own equity, maybe more, but then uses debt to do the rest, so he's not a lot of exposure. Then he makes back five, ten, fifteen x's return from dividends for five years and grows the company to 15,000,000 in ARR and then sells it, stays on a little bit and that's sort of where the story I think you had left, they invited you back in September, fill in any gaps in the story

01:19and then pick us up. Where is the company at today?

State of Awareness Technologies After the Sale

Brad Miller

01:22>> Well, the company two years later is half its size. It was at the time when I sold it doing 20,000,000 in revenue and 6 in profit and I believe it's like twelve

Nathan Latka

01:35and two, something along those lines. And so for the folks that missed you in September, what what quickly happened? And then I wanna talk about buying in the future.

What Went Wrong Under TZP Ownership

Brad Miller

01:47>> Well, there was a litany of things that happened, but one of the things that happened is and like many of the companies here are super efficient and many people wear many hats and the company kinda went from an entrepreneurial company to, we need, you know, more people to do the same amount of work, so the so the payroll skyrocketed. Who was the buyer? It was a, a New York based private equity fund called TZP.

Nathan Latka

02:11Raise your hand if you're here with TZP. Alright. So what what they fuck up?

Brad Miller

02:18>> Well, you know, when when they hired the consultants to do their due diligence, one of the things that came back on me was I felt I was a little too fast and loose and not structured enough. And, and I'm but you know, there was a ten year history of raising, increasing revenue and profits, so you can, you know, to listen to consultants tell you Brad Miller isn't structured enough, that may be true, but when you have

02:46>> a ten year history of raising revenue and profits Unstructured structure.

Nathan Latka

02:51Yeah. Just to be clear, they were challenging the fact that you were spending 300 to $500,000 per month on ads.

Brad Miller

02:57>> They weren't just challenging that. They were just really challenging the fact that there wasn't an organized structure. It was like Brad and his helpers and where was the game plan written down, where was this documented. But after ten years of working with the same people, you know, you don't necessarily have to document things. So they they were a little, you know, they wanted to hire more professional management and, know, the company proceeded to crash,

The Pay-Per-Click Advertising Model

Brad Miller

03:29>> know, in part because they, the cost side, raised the cost significantly. And on the and on the sales side, you know, our sales were heavily driven by pay per click, and they decided that that was not important, and so they outsourced it to an agency. This is something that I used to spend a fair amount of time working on with somebody because that's how we made our money. Yeah. You know, it was like being a being

03:54>> a day trader and outsourcing the day trading. And and so their returns on the advertising went from what they were to half of what they used to be.

Nathan Latka

04:06So what was your return on it? What year did you buy it again? 2010. And so for every dollar you put in, how much did you make five, ten years later? Three years later?

Brad Miller

04:16>> Well, so here's how we looked at it. We looked a little different. It's a reasonable question but we looked at it as we wanted we had an immediate sale and if we could make it if we spend a dollar, can make a dollar, then we knew that all renewals were profit after that. So we didn't have to invest any money if we could spend a dollar, make a dollar right away we were we were even and

04:37>> then any renewals or upsells thereafter were just gravy and that's how we operated. And so

Dividends: From $1M to a $6M Best Year

Nathan Latka

04:44But you took just for context because this is important, I mean he was taking $1,500,000 in dividends and your best year I think, right? 2018?

Brad Miller

04:52>> Best year was '6 actually.

Nathan Latka

04:54Oh, 2006?

Brad Miller

04:56>> No. 6,000,000.

Nathan Latka

04:58Oh, 6,000,000. Yeah. Oh. Yeah.

Brad Miller

05:05>> It started at a million and it was started at increased.

Nathan Latka

05:08I'm rarely speechless. So this is great. Okay.

Brad Miller

05:11>> So Well, when when you're making 6,000,000, right, you can go to the bank and say give me one x my profit and then, you know

Nathan Latka

05:18As debt. Yeah. I mean, I think you're genius at this. So my goal in the next fourteen, fifteen minutes is to pull some of this of out of you so that current operating staffs owners that wanna go buy someone in their space for point five x using debt can sort of have a playbook. The first thing is finding the deal, right? You're not going to find your deal reading TechCrunch articles about people that just raised it

05:37to evaluation because then you got to go negotiate with a VC that wants a 30 x multiple. So what is your advice for finding someone willing to sell for under one x?

Brad Miller

05:47>> That's that's not easy, advice, my friend. No. It's, you know, be network a lot. Oh, no. No.

Nathan Latka

05:53Tell them how you did it because then they can think how to use that.

Finding and Buying the Company: The Orphan SaaS Story

Brad Miller

05:55>> Well, I had a previous, Internet security company where we bought a lot of companies, and I sold that business to Goldman. And, I wanted to keep buying more businesses. They didn't want to, so I left and took the money that I got from selling it to Goldman and go went and bought the next company that I would have bought for them, you know, as part of this as part of my previous company, but they didn't wanna

06:19>> go in that direction. So I thought it was a good deal and so I went I went in it myself. You know, the the company was like in in in a lot of cases sometimes these are just orphan companies where the founders have done some things very well and some things very badly. And in this particular case, they created a good product. They had a very bizarre and it was an internet security product that was a

06:45>> cloud based product, a SaaS based product, but they had a perpetual sales model, meaning you sold the product for a dollar and then that's it and there were no renewals. And, but you continue to provide hosting. It wasn't like you're buying a piece of software and downloading it onto a device. You still had to log in like a like any other SaaS product. So why they had this bizarre business model So there's

Nathan Latka

07:13a takeaway for you guys. Right? So look in your space as somebody's selling something one time.

07:18Like this is a great way to like go build a lead list of things to go buy. Like look at your space and go find some of that's effectively what you did, and we're gonna make it recurring. So that's like step one. Step two, you're really close to I think it was a VC from a PE firm that you knew wanted to get rid of it. Sure. Was that is that true?

Brad Miller

07:34>> Well, it was an investment bank that was selling it. So Okay. And they approached me because I had had a history of buying like similar companies and I'm wasn't, you know, and they've known me as someone who's willing to buy complicated situations, and this was one of those complicated situations, in part because of the problem of not making it a SaaS. It was a SaaS product without a SaaS business model. So the first thing we did

08:00>> is we turned it into a you know, we made it a renewal, a subscription model and the and the revenue increased 40% overnight.

Nathan Latka

08:06And you bought it for

08:08like was it one what was it doing revenue wise when you bought it?

Brad Miller

08:11>> It's doing 5 or 6,000,000 and we bought it for about 5 or 6,000,000 and

Nathan Latka

08:15How much how much cash did you put up though?

Financing the Acquisition with Equity and Debt

Brad Miller

08:18>> We put up 5.5 of of equity and 1,000,000 of debt. Okay. And, the business was losing money day one, but because of the renewals within a year, it went from losing a million to making a million literally overnight just by that one element. And then we just continued, we bought more businesses at good prices and kept adding to the revenue line and we got a lot more lever. We only needed one CEO, one CFO and so

08:50>> you add revenue to that

08:54>> machine and more of it falls to the bottom line.

Nathan Latka

08:57So tactic one there would be again look for folks selling a one time thing in your space. Tactic two would be pull a power move and VC's are emailing you asking to invest. You can write back and say, we're very well capitalized. If you have any underperforming companies you'd like to get rid of, I'd be happy to take it off your hands. That would be a great reply email there in an appropriate way. A lot of

09:14these folks sometimes wanna take the write down, especially after the firm has a big exit because of the tax coverage. So they don't mind the write down occasionally. And those of if are any VCs in the room that can speak more about about know we have some VCs. We have our investors in the room which which we love, but people just investors love write downs. Right? They love a tax shelter. Right? A legal tax shelf. Right?

09:36Legal. Yeah. Legal tax shelter. Just but these are good things. And then step three step three, Brad, like there's all kinds of I've seen folks in this room buy companies for really cheap where they'll go on a marketplace like the Google Chrome store. They'll see that a Chrome extension has 500,000 downloads, but there's a thing that says when the developers push the last update. If it's more than a year ago, it's probably sitting there doing nothing.

10:00You buy that for cheap, it's a 500,000 email list. So my question to you is, now you guys have those three ideas, this company which you love and you know very well is now on the decline. Mhmm. We're in a bad economy. I'm waiting for the news to come out that you buy it for a dollar.

The Prop Tech Acquisition: A New Deal

Brad Miller

10:15>> Probably I actually bought another business.

Nathan Latka

10:17Oh, tell Okay. Tell us about this.

Brad Miller

10:19>> It's a prop tech business. Bootstrap Founder,

10:24>> you know, it's an app that you that the property manager provides to the renters of a high class building to do all the business operations. So if you wanna pay your rent, you wanna book a work order, you wanna go to a yoga class, you know, you do

10:37>> it all through the app.

Nathan Latka

10:38When did you close the transaction?

Brad Miller

10:40>> I closed it in mid twenty one. Just just about a year and a half or almost two years ago.

Nathan Latka

10:47And what was the revenue of this company when you bought it?

Brad Miller

10:50>> It was doing about 3,000,000. I bought it at a 6,000,000 pre, you know, pre money value.

Nathan Latka

10:56Oh, you're

Brad Miller

10:56>> you're up on your

Nathan Latka

10:57the two x is a big deal for you.

Brad Miller

10:59>> It was. It was. That one worked. So he was, you know, breaking even, very bootstrapped, was all in Chicago, had a 100 buildings in Chicago, and all the other competitors had raised 20 to $80,000,000, and they were all based in Chicago too. But he had the number one market share, and I'm like, how how is that possible that in their backyard, you're kicking their ass?

Nathan Latka

11:23How do you do it?

Brad Miller

11:24>> I'll tell you in a second, but, you know, but the deal was let's go take the show on the road. And so the money I I I invested actually went to him personally because he was starting to make profit and he was like, do I reinvest the money? Do I go buy myself a new, you know, car? And I was like, okay. Here's this money. It goes in your pocket. We're just gonna reinvest everything into the

11:45>> business.

Nathan Latka

11:46The 2,000,000 ARR, 4,000,000 cash. He took off 4,000,000 off the table. 3. Oh, 3,000,000 cash. So

Brad Miller

11:51>> I bought 51% for 3,000,000.

Nathan Latka

11:53Ah, okay.

Brad Miller

11:54>> And and now the business is doing 7,000,000.

Nathan Latka

11:58A year later. Yeah. It just came from selling. Why couldn't he think to sell outside of Chicago?

Brad Miller

12:04>> It's not that he couldn't sell it, it's just that he's he he was just looking at the cash and, like, the business was starting to make $30,000 to $40,000 a month, and he was like, you know, you know, and can I do I he wanted to, you know, spend it and Very good?

Nathan Latka

12:19You know, and so Which one would do with money.

Brad Miller

12:22>> Yeah. You know, and so I think it was a conflicting thing for him, and and, and so I took away the conflict. Jamie, what

Nathan Latka

12:29are you curious about? You got a you got a question for for Brad?

12:36What did you do on awareness tech to the people that were on perpetual licenses? Did you force them into a new recurring fee or did you grandfather them?

Brad Miller

12:44>> We did not grandfather them.

Nathan Latka

12:47Ruthless.

12:48We did. How did you do that copy wise though? Was there any blowback? Did they go post negative reviews on g two? How did you manage that?

Brad Miller

12:55>> Well, you know, so software kind of gets, extinct. Right? I mean, like it it you have to keep up with it, and so if you wanted to keep up with it, then we were like, if you want to you wanted to get the latest version that worked with, you know, worked with all the latest other software so that it was is functioning.

13:17>> And but, you know, we we gave them notice, and it was it was tricky for sure, but honestly, like, we didn't get that much pushback and most of that business was dealing with consumers,

13:32>> not not, you know, it wasn't b to b. On the b to b side, which was a small piece of the business they had, they were doing it on a subscription basis, but for consumers, they were doing it as a one off basis.

Nathan Latka

13:44Interesting.

Brad Miller

13:45>> And, it was a bizarre model and there was nothing super clear in the in the terms of service that

13:53>> said that you could have it forever. It it wasn't it wasn't super straightforward.

Negotiating Debt Terms: Bank Debt Basics

Nathan Latka

13:58Top three terms if these guys are looking at raising debt, I'm talking traditional, so not I'm not asking for a founder about So the way you raise debt, what are the top three terms they they should all be negotiating?

Brad Miller

14:08>> Well, depends what kind of debt it is. Right? I mean, so, you know, it's funny someone mentioned Silicon Valley for obvious reasons. They they were one of our banks, but they never lent us money. We we float all our credit cards through them, and, they would come to us all the time and ask if we wanted to borrow money from them. We'd say, sure. And, you know, we were the only company they had that was making

14:29>> money, And they'd say, but who's your name VC and when was your last raise? I'm like, well, here's the thing. We don't need that because we make money, so we don't have to fund our losses with a VC.

Nathan Latka

14:40Hello. And and they would

Brad Miller

14:43>> say, well, we're we need to have a VC. Go, so you want me to lose money and raise money to cover the losses and then you'll lend me money? And they're like, yes. Like, that's the most backward thing I've ever heard, but that was their business model. So we could never get a deal done with Silicon Valley though. They were a bank of ours and saw them cash flow flowing in every day, you know, and just

15:07>> couldn't get their arms around it. So that was that was one thing that didn't work. But you know we had both bank traditional bank debt and mezzanine debt.

Nathan Latka

15:17But like name the term. So should they negotiate for low warrants? Financial covenant is a gotcha?

Brad Miller

15:23>> So the basic bank debt was very was very plain vanilla. There were no warrants. It was purely a multiple of EBITDA typically two to three times So

Nathan Latka

15:36do they all have to be making EBITDA in order to go raise bank debt?

Brad Miller

15:39>> Yeah. So that's the difference with your debt is you don't need that, right? You're kind of a form of equity in a sense we were making profits so our rates were probably lower than what you charge but we were making profits versus your customers.

Managing Financial Covenants and the Fixed Charge Ratio

Nathan Latka

15:54We're not cheap but we don't take equity. But okay, so what are the what are some of the what's the biggest financial covenant gotcha that they should all negotiate out of?

Brad Miller

16:03>> Well, that stuff. I mean, like we were taking dividends and so we were always really good on the debt to EBITDA. We were always good on, interest EBITDA coverage. Where we always struggled was the fixed charge because it included the dividends. And so we would take out a dividend for the year, but we had to live with that coverage. Yeah. You know, and so we were always trying to balance it. What's the maximum we can take

16:26>> and not have any hiccups for the year and not, you know, not blow through that.

Nathan Latka

16:31Just write that down. Fixed charge coverage ratio is what he's referring to. If you wanna go down that rabbit hole. Fixed charge coverage ratio. What are some other ratios that were challenging to manage with debt?

Brad Miller

16:39>> Well, you know, the debt to EBITDA was the main one that they probably care about. Right? I mean, so that's the main one. But that's kind of standard in the traditional bank universe. And with the, you know, with the mezzanine debt, you know, which we also used, you know, one of one of of our one of my partners was in the mezzanine debt business and so

Mezzanine Debt: Cost, PIK, and Warrants

Nathan Latka

17:02How expensive was the mezz slice?

Brad Miller

17:04>> That was typically, 10 to 12% coupon with a PIK. So with a with a kicker which could either be in the form of a PIK, accreting PIK, or could be in the form of warrants.

Nathan Latka

17:18But So when you were evaluating and there's the there's the cut there's the cover rate of 12%, but then there's the warrants, the PIK. How did you guys actually model in your pro form a the true cost of the mezz slice all in?

Brad Miller

17:28>> Well, for the most part, they preferred to do it as a PIK, they were guaranteed their 18% Okay. All in number.

Nathan Latka

17:35Okay.

Brad Miller

17:36>> But, you know, we did in in the early days when we had less leverage, that's what we had to deal with. And then in the later days when we had more leverage, we got into do it on an EBITDA, you know, well, on a on a you know, you get an equity warrant, if you will. Mhmm.

17:55>> And, you know, they they they weren't super complicated. Honestly, it was pretty straightforward, not as straightforward as your debt. Yours is super easy. And our our biggest thing that I I hated the most was the legal fees. You had to pay for not only your lawyer, but their lawyer, and their lawyer had no incentive to keep the fees down. And when you're not raising a lot of money, we're talking about million, 2,000,000, 3,000,000, you'd get these

18:16>> crazy legal bills. You know, that's probably what drove me the most insane.

How Debt on the Books Affected the Exit

Nathan Latka

18:21Yeah. I wanna have you wrap up talking about how the buyer, if the debt you had on your books impacted your ability to sell at the end, but then I'll throw it over to the audience for one last question. So tell us that. It did not. It did not.

Why the Bank Lent More to the PE Buyer Than to Brad

Brad Miller

18:33>> Okay. It did not at all. They just viewed it as an enterprise value and whether they wrote the check to me or the bank didn't matter to them at all. And in fact, the bank ended up re upping, and whereas, so I, you know, it was a local bank in Connecticut called Webster Bank, which still was a large bank, and when I went when I went and asked them for 10,000,000, they laughed at me, but when

18:57>> the new buy they they but they could get comfortable with 5 or 6. But when the new buyer came in and said, we want 10,000,000, they had no problem. And I'm like, how is this possible? Same business,

Audience Q and A and Closing Remarks

Nathan Latka

19:08you know, but Big sponsor with some big funds. Yeah. Yeah. Alright. Raise your hand. Who's got a question? Any question? Okay. Susan or Bridget, sorry.

19:25Why didn't the private After

19:29the fact? Let me repeat it because everyone can't hear. Why did the private okay finish finish.

Brad Miller

19:40>> Yep. Oh, a gap earnings. Right. Right. Right. They changed it back. Yes. Yeah.

Nathan Latka

19:52So why summary is why didn't the private equity firm listen to Brad?

Brad Miller

19:56>> Have you have you have you no. I think she's I think she's saying after they realized they were wrong, why didn't they come crawling back. Right? Do do you know many private equity people?

20:06>> I can guarantee you that was the last thing. They would rather burn in hell hanging by their, you know, by their ankles than they would come back and say, screwed up.

20:18>> Mass you know, masters of the universe, you know, like just just, yeah.

Nathan Latka

20:23We got time for one more. Calvin, you wanna throw on at you wanna throw on at Brad? Any questions? Sinclair is not gonna go raise a bunch of debt and buy a bunch of companies? We We might. Alright. We'll go we'll go in the back. Go ahead. What do you got?

Brad Miller

20:42>> Initially, when we bought it. Yeah.

20:50>> Well, because, you know, I wanted to write less of an equity check. I was trying to figure out, like like anything else when you buy a house, how much can I borrow and then I'll fill in the gap? Right? And so this company was losing money, so the bank wasn't interested in giving us a big debt check. So they were comfortable giving us a million even though it was losing money, and so we had to fill

21:13>> in the rest which was another 5.

Nathan Latka

21:15We're out of time. Last question quick. Rajesh, hit me. You

21:23should be the next Mark Leonard. Why not create the next constellation?

Brad Miller

21:26>> I don't like working that hard.

Nathan Latka

21:28On that note, give it up for Brad Miller.

21:33Was great. Thank you. I'll follow you off.