Ismael Wrixen is the Executive Chairman of FE International, the market leader in the sale of SaaS, E-commerce and Content businesses. Over the past decade, Wrixen has overseen 1200+ successful acquisitions totaling more than a billion dollars in value.
Wrixen is also a member of the Forbes Finance Council. Wrixen’s previous background was in large-cap M&A investment banking, where he executed several high-profile public deals, namely in the technology sector.
Ismael, it's so great to have you here to talk about the state of SaaS, the state of the M&A market. You also are involved in a lot of content businesses, which I want to talk about. But first, let's start with your background. How did you get to where you are today?
Thank you very much for having me today on the show. My background, I actually worked in investment banking since graduating college, so very, very long time ago, a few less wrinkles ago I suppose. I actually worked in bulge bracket investment banking for a number of years at a couple of different institutions in the UK in our equivalent of Wall Street. And really there I learned a lot. I thoroughly enjoyed my time, a lot of work ethic and other things and real tangible transferable skills I got from that.
But ultimately we identified there was a gap in the market in terms of businesses and the representation that they were receiving or had available to them, I should say, below certain price points. I ended up leaving that particular line of work and then took a more entrepreneurial route, which ironically landed me in a very, very similar type of work, just dealing in the lower to mid-market segment and eventually gravitated towards SaaS, digital media businesses, e-commerce businesses as well. And that's very much what we do today.
At FE International, we represent somewhere in the region of, I would say 50 to 60 acquisitions per year. It's a relatively high volume business in terms of what we offer and the type of clients that we represent. But for me personally, that was a very, very exciting journey and a marked step away from the more bulge bracket investment banking where depending on the cycle and depending on the sector team, you may have transacted one or two deals, obviously much larger deals, but one or two deals per year. Very, very happy with the move. And it's been, well, almost 13 years and no looking back.
That's incredible, this whole choosing SaaS. But the number you said, did
you say 50 to 60 a year?
Per year, yeah. I mean, lifetime we've helped over a thousand founders exit, so we very much focus on bootstrap companies or companies that have taken small seed rounds, maybe gone up to a series round or thinking of that and then assessing their options. So from that perspective, we've helped a lot of people take that first step.
There's a stair stepping approach of bootstrap your first business, get to your first million in EBIT, and then a lot more doors open to you, a lot more opportunities in terms of funding sources and exiting becomes an opportunity at that stage. And for a lot of people they see that as a way to take chips off the table, value off the table. I say that one to $10 million EBIT levels where people get quite serious about exiting.
I'll say we are doing one to $20 million and we're slightly above as well, but that's the real range where we can get in and start to help people. And it just so happens that there are more businesses doing one to $20 million EBIT than one to $20 billion EBIT, so we can deal with a few more of them, yes.
How does a company or a founder or a CEO know the right move is to get acquired or to sell the business? How do they know that that's the right move rather than continue pursuing it?
Well, it's definitely a professional and a personal decision, I would say. For a lot of people, in a personal perspective, it can just be their interests move on. They have bandwidth issues, especially for successful, what we call serial entrepreneurs.
Oftentimes they get into running, let's say a SaaS business value between 10 to up a hundred million dollars. The starting point of that journey may have been they had a problem, they fixed it using a software or SaaS application, realized a hundred of their peers had the same issue, and then they started monetizing that. And then from there really started running a business.
So there's not necessarily a business plan that was associated with that. There's no MBA or in a lot of cases they just started doing and then eventually running a business. And really with the businesses to go from zero to one, one to a hundred, a hundred to a thousand, it takes a different skillset at each level as well.
Sometimes people just look at it and go, "Well, I've achieved, my business is now worth $10 million, $20 million," whatever that may be. That's the kind of significant milestone to achieve. And it may take more infrastructure, more funding to get the business to the next level and really do right and do the best for the customers, clients, the staff within the business as well. And sometimes, you tend to find that a lot of the founders that we work with are very honest with themselves and very humble in that they understand when the business needs a different potential skill set to take it to that next level.
And oftentimes founders will keep parts of the business, keep an interest, keep a stake, so they can be involved in a future round or other things over time as well. I think it just comes down to a bandwidth interest in taking it to that next level and also sometimes the infrastructure required to ultimately do that.
And who's buying these companies? Is it PE firms, bigger companies, everything in between?
Yeah, for SaaS specifically, I would typically say it's either strategic firms, as you would well imagine, and then also strategic, what we call strategically focused private equity firms. Private equity firms that have a portfolio, there may be something else in that portfolio that's aligned in some way, and they see this as a nice bolt on acquisition to that. Usually targeting customer sets or large customer sets thereafter, or particular features or other things that may be lacking from their portfolios. And very similar on the strategic side as well.
And I think that it's good to have both of those types of buyers in the conversation because strategics are usually more akin to acqui-hire deals, those types of situations. Private equity often goes the other route, which is more majority taken off the table, more of a walkaway structure.
It's good to have both because different founders often want to value different things, so it provides some optionality. But I'd say those are the two main biotypes. Every now and then you get institutional interest as well. Once you start to get towards the nine figure and above range, that's when it gets interesting there.
And then occasionally you get operators that can come with backing themselves that may have come out of a large corporation and have the skill and know-how and the backing to ultimately take on a well run brand and grow that over time too. There can be a real mix. But I would say volume wise is strategically focused private equity and out-and-out strategics too.
It seems like we went through the best period for software as a service businesses over the past 10, 15 years. It was just incredible the companies that were built and went public and all this type of stuff. What do you think the current state of software as a service businesses are?
We very much focus on that kind of lower to middle market level I would say. So my answer's always going to be kind of caveated. We're going to get focused around that. We haven't really seen a shift downwards in the same way that SaaS companies at the higher reaches, I would say, have seen in terms of valuation. And the reason is the dynamics for a lot of these businesses are just very, very different.
I mean, a multi-billion dollar SaaS company that's either publicly traded or gone through a series C, D towards an IPO path at some particular point in the future. The model to get them to that level is usually not one that's, I would say, focused around profitability or getting to break even or having some kind of trajectory beyond that. I would say that the VC route is a little bit different to the type of businesses that we typically deal with, which is more companies that have been profitable or can be profitable depending on what stage they are in terms of their ultimate growth cycle.
So because of that, the valuations, there was always a little bit of a disconnect between, I would say the more VC model versus the more M&A model.
The adjustments that we've seen have not been significant at all. I would say that maybe on the deal structuring that's changed a little bit as some of the funding sources have started to dry up in certain pockets. But the amount of dry capital that's out there on the PE side and not obviously the strategic side as well is vast.
I mean, the only reason that's come down in the past year or so is because of how much capital was deployed in 2021 and 2022. So it's not shrinking in terms of interest or LP or other types of money going into these particular investment vehicles and firms. It's just that they've actually done a very good job of deploying that capital over the past couple of years.
But there is still a significant volume out there looking to be actively deployed. I would say, if anything, the one difference that we've seen is that fewer people are actively bringing their businesses to market. I think that that's changing the dynamic a little bit. A lot of people see the macro, they see what's going on at a very high level, they see the interest rates and everything else and assume that the market isn't necessarily there. But the research that we have suggests that it very much is.
We're very data heavy internally and we track basically every metric under the sun. And in terms of the general demand and interest that we have from buyers in the space, I would say it's still very, very active. And that combination with fewer businesses currently coming to market is keeping the multiples reasonably high and very much within reach of where they were when the market was peaking about a year ago.
Oh, that's super interesting. That makes sense. How about the digital content businesses? I mean, again, I would say over the past decade that you see like Buzzfeed and Vice and these companies were going public and now they're down 99% or 98% and maybe they'll come back up, maybe they won't, who knows. But it seems like this independent publishing within that industry and Substack in particular may have disrupted some of this stuff, but what's your take on that? Is that entirely true?
Yeah, I mean I would say that. I can't speak to every company that went public, but a lot of them went public through SPACs. And I'm by no means a SPAC expert, but... and we have very close ties to people who are experts in that space. And the general narrative that I hear is that a lot of these companies just weren't companies that were in a position or should have been public in the first place. They were better off staying private and they reversed into these SPACs.
And ultimately there are a number of examples of businesses that haven't done well after that because just their cycle in terms of where that particular business is in its journey was not ready for the public markets at that particular point in time. So a lot of them have had significant decreases in terms of their valuation and some of them are starting to come back.
Some of them I'm sure are very receptive to the market feedback and have been changing and pushing. And as you mentioned, Buzzfeed about a month ago or so, obviously is now on what I believe to be a better path than it was previously. And was it good for them? But I mean, generally speaking, what we see in the content digital media space and M&A side, there's a huge amount of interest.
I think the pandemic changed a lot. It was definitely a net positive for the industry overall. A lot of people started empowering themselves in terms of their education, in terms of the quiet or silent resignations that happened. A lot of people started moving things from let's call them side hustles to full-time hustles. And the beneficiary of a lot of those were digital media and content businesses selling, I would say, for example, courses, six Sigma, items around Salesforce training and the types of businesses where people could get e-learning businesses, really go in and teach themselves new skills.
And those businesses have done very, very well. And we've seen a lot of institutional interest in those over time. And these will be very large institutions that have middle firms, let's say, that go out and make acquisitions and operate them under more of a private equity type structure, but with the view that they want access to those end users and end customers because those types of customers are the ones that are investing in themselves. The odds are they'll continue to do that over time. It'll be very, very good portfolio strategic play.
That side of the digital media spectrum, digital content spectrum is doing very well. On the other hand, if we talk about more traditional display advertising affiliate features, they go through their own cycle and that has something to do with the macroeconomic space, but that has more to do with Google and what they're doing at any particular point in time with regards to algorithm changes and other pieces over time.
Obviously CPMs on the advertising display advertiser have come down. One of the statistics we saw was that Q4, which is typically a very strong period of time for those types of businesses, was down about 40 to 50% year-on-year. There was definitely a material movement in terms of what we heard out of Google and some other places, but we are seeing that bounce back now as well. I think that the underlying connotation of high interest rates and all the inflation and everything is there so it tells me people are still spending.
And that is the reality of it. I mean, you can't have inflationary measures unless it's supply chain dynamics related, which I think a lot of that has shifted away from now is now really in focus is the spending. And that's continued and the CPMs in that space have started to come back in the first course of this year.
So in terms of what we are seeing, healthy recovery there too. But the real beneficiary, I would say, the past couple of years in the digital media space would be the course businesses, learning businesses, anything education related. Ed tech businesses and SaaS have done really well as well. So that has been a very, very hot part of the market.
Moving to e-commerce for a second, it does seem like Shopify really democratized this idea that you could beta test at the very least your brand, your product, all that stuff, and then maybe build into or keep it on Shopify forever or build in your own platform and that type of thing. And some of the incredible brands that have come out just because over the past decade are now household names.
I'm thinking Lululemon for example, or things like that where it's just incredible what can be built now where 20 years ago something like that would've been almost impossible, I would think. What's your thoughts on the state of e-commerce and its future?
I mean, you're completely right. And I think e-commerce is a fascinating space and I could honestly talk about it for hours. If we got to take a step back for a second, in terms of e-commerce, it basically brackets into a couple of different areas. You have the Amazon FBA side of it, which has seen incredible growth and great for that as a business model.
I think that some people now are looking at that and obviously that growth was then associated with a lot of aggregators, raising capital, et cetera, over time. And obviously literally hundreds of others. I think they were the first and likely largest, but they raised a lot of capital, made a lot of acquisitions. And I think that FBA model certainly had a time and a place and I think it'll continue to do very well.
I was reading an article a couple of days ago that basically said it's over 50% if you start adding on all the fees associated with that. I think that now a lot of people are looking at, well, alternatives, Shopify. I think drop shipping is starting to see a bit of a resurgence. I'm not sure if you remember, but drop shipping back in the early 2012 through 2015 was very popular. And then it started to fall out of fashion in terms of buyer interest and other things and obviously interest of operators as well as they were starting businesses in favor of FBA because it became so simple and so easy. Then obviously you had Shopify that took the rolling ball, pushed it further and faster as well. But drop shipping with the fee levels where they are with FBA is starting to see a resurgence certainly.
But Shopify, we really like the Shopify ecosystem. It's a great platform, obviously tiered into it's basic and plus side as well. And I think that the tell-tale sign is that Shopify, obviously they're a public company, released their data. The number of users on Shopify continues to go up over time, irrespective of what's happening on the macro side. So people really are continuing to invest in starting and launching and operating these businesses.
And if you look at a secondary data point, the actual apps associated with Shopify have their own app, SaaS app, marketplace ecosystem. Over the past, I would say four to five years that's gone from, I think it was about two and a half, 3000 apps to over 8,000 apps now. So there is a real demand in both a SaaS connotation and an e-commerce connotation for what they offer.
Obviously, as you alluded to, they do then get to a point where you become a Lululemon. You may say, "Okay, well it makes more sense for us to actually go off and build our business on a completely custom platform." And I know a lot of customers get to a certain point, I mean, in terms of testing, you're completely right, a lot of people will use Shopify. They'll figure out what their work, their winning product is through whatever advertising or source they're pushing traffic from. And then once they work that out, they'll go off to build their own landing pages or their own site plug in something like ThriveCart, which is very, very popular in terms of checkout process and managing payments and all those types of things. And then they'll just operate that way forward.
What we're seeing is a lot of people operating an omnichannel style approach in terms of they'll have their FBA side, they'll have their branded Shopify side, and then they'll have another side, which is more for their winning tier too. So people are definitely getting more sophisticated over time in terms of how they're approached. But Shopify is a fantastic testing bed for exactly this. Yes, that's completely correct.
Now here's the trillion-dollar question. How does AI disrupt all of this?
I think the reality is how long is a piece of string? I think AI has the ability to do weird and wonderful things. How much of that is going to be allowed with regulations that are inevitably going to come over time is going to depend on how far or how far that can be stretched.
I mean, a lot of low level tasks can definitely be replaced by AI. I mean, we're talking about—sticking with the topic of e-commerce for a second, the need to use products or services to go out and do product descriptions for highly curated product descriptions for every new product you may be bringing online.
Those services may need to adopt AI very quickly because somebody may just decide, "I can actually go out and do this for myself instead of paying this subscription for this product to do that." I think that would be a very obvious one. I think there's a lot of AI that's flowing into the backend of actual funnel management and on the marketing side. It's probably going to impact MarTech more than anything else.
But I think that from what we are seeing, certainly, obviously you've seen the Jaspers of the world and those sorts of things, these companies are adopting it very, very quickly. Obviously AI being a software SaaS type priority in it, in its first instance, the rate of adoption within software and Saas is very fast. And I think it's yet to be seen in terms of what it can achieve and importantly, what will let it achieve as well with all the regulation that at some point what we'll have certainly have to come.
I mean, if you've been following the education side already, plagiarism checkers, I know products like Quetext for example, a very, very popular plagiarism checker, integrating that with AI and other things as well. I mean, this now has to be done because if I were a college graduate writing a thesis, I mean, that's the first thing I would be trying. There's lots of weird and wonderful ways it's going to be used throughout society, I'm sure.
That's true. Here's another question I have for you. Just given Web 3.0 was all the rage maybe two years ago, and with these digital media businesses, particularly with e-commerce businesses, what was your experience of Web 3.0, blockchain? Not that it's completely over anything, but certainly it's not the trend anymore.
I mean, we didn't see much of it. It came and went very quickly. I mean, I think the longer term space for the ability for less talk, what is more realistic to happen in Metaverse and those types of things in the future. I mean, there is definitely a use case for that, but how it's monetized, how it's achieved... I think there's just a lot of obstacles to overcome with all this from a regulation perspective, from a user adoption perspective.
And the reality is that for businesses in that sub $250 million level where we tend to operate, it wasn't really a day-to-day focus for them. I mean, the past couple of years, just talking e-commerce for a second, with the supply chain issues that have been going on following the pandemic, operators had their hands full just trying to get enough inventory and enough containers and everything else, let alone worry about the future of what could happen with certain types of software and future sets and other things there too.
I mean, as quickly as it landed on our desks, it disappeared again. It wasn't, I would say, necessarily a primary focus, but again, a space that could see a resurgence in terms of interest. I mean, AI definitely has the ear of everybody at this particular point in time.
I'm interested in the FE International model. Do companies reach out to you and say, "Hey, we'd like to at least explore the possibility of getting acquired or selling the business."? Do you reach out to them? And then I'm also interested in the reverse of that. You probably just have relationships with all the buyers and that type of thing too. You're in a fascinating business. It's really interesting.
Appreciate that. So we lifetime, I think we've valued close to 23,000 companies at this stage. What we like to consider ourselves is a kind of nexus for information. If people want to get an understanding of the value of their businesses, we're always more than happy to provide complimentary valuations, exit planning, consulting to get to appointment. Because I mean the reason we started with this business in this industry was because there was just such a lack of information. It was attorneys masquerading as M&A advisors or account or CPAs masquerading as M&A advisors. And it's a very, very specific topic and needs a very usually curated approach on a business by business basis. In that context, I mean we became very well known just for the amount of information we were putting out there.
I wouldn't call it outreach per se, but we've written millions and millions of lines on the subjects of valuation and how to go about that. And a lot of people come to us. I would say historically, over 80% of everybody we've worked with from an M&A perspective when our acceptance rate of somebody coming to us getting evaluation and then going to market is under 1.8% because we are very selective about the deals that we ultimately take out.
I think instinctively, we then attract very, very high quality, good and sophisticated buyers and then you actually end up in a great position, whereas fantastic business meets a very sophisticated buyer base. And that's why our success rate hovers around 94 to 94.1%, but most of that is inbound in terms of people that come to us. They want to understand where they are, their valuation, how they can improve that over time. And we have all the time in the world to have those type of conversations. We're over 150 people now. We have a very large team and we've put ourselves out there to provide that type of information.
Obviously we do supplement that with outreach when we have seen certain pockets of businesses that are high demand. Obviously we are representing on the sell side, only one party can buy any particular business. You often get a lot of unhappy buyers that didn't end up with a specific opportunity. Then obviously we will always go out and find other businesses that may make sense to then have some of those conversations.
But I mean, I think we consider ourselves a very safe, transparent environment that founders can come to and have those type of conversations to really get an understanding of where they are. It's predominantly inbound in terms of what we do.
Do you think about the public market on a day-to-day basis or are you mostly focused on that earlier range before? These aren't companies that are about to go public.
We do in the context of understanding buyer sources of funding and the associations with that. I mean, buyers obviously they'll have a lot of buyers come to the table with a hundred percent cash considerations. Sometimes it's LP money that they're investing, sometimes it's associated with debt raises and those types of things as well. So it is important to keep an eye on the public markets and just have a good sense and understanding of how those dynamics change.
Because when people buy businesses, they're not buying businesses based off what you did in the last 12 months. They're buying businesses of where that business is going to go in the next 12 years. That's the bit they care about. And part of what we do when we represent sellers is help buyers to really understand the trajectory for that business.
And obviously the macro side of it comes into play there. Where is Shopify trading today or where Salesforce is trading has relatively little to do, I would say, with what's going on in terms of the lower to mid-market section, but it's all part of the same ecosystem at the end of the day. It is important to have a very close eye on the market.
One thing I would say that we've noticed over the past three to four years is, to your point earlier, as opportunities have become extremely expensive on the public side, private equity and strategic firms that, let's say, five years ago wouldn't touch anything below a hundred million, now are buying businesses of 10 million and up.
These are the types of buyers that you are now dealing with at the lower to mid- market level, which is obviously fantastic. But it is important to speak their language and understand the parameters and the context of things that go into their risk committee, their decision making and those elements as well. Because they're buying these businesses either to bolt onto a larger opportunity business that may be publicly traded or their view is that, "Hey, we're going to buy this business at $50 million or $100 million . Our exit path is a billion, and by doing that we're going to be going to the public market."
They need to know that it's a business that can get to that particular point in time. And there are usually very specific parameters around what type of business may be better off private perpetuity and some businesses that may be better off going the public route. So very important to have that context, but it doesn't necessarily impact the day-to- day multiples that we see.
Interesting. Ismael, I could talk to you forever, man. This is super interesting. I appreciate you coming on. Let me end with one final question. What advice would you have for CEOs and leaders right now building a company that they would like to get acquired or would like to sell or to see some sort of successful exit a couple years down the road?
Ultimately, my advice to people is don't make short term decisions based on things that may or may not materialize. Ultimately, if you are short term in nature in the sense of, "I'm building a business and I want to exit it in one year or two years or three years," don't take necessarily the view of, "Okay, how do I optimize, how do I trim, how do I do this and how do I do that?" Because as you face off against very sophisticated buyers, they'll see that very quickly. They want to see businesses that are seeing growth and they're seeing the building box of that growth being put in place so that they can continue to grow longer term.
I would say that people should always take a long term view in the type of and nature of how they're building their company. Don't take shortcuts. Run it and operate it as if you were going to actually be in charge of this business for the next 10 years. And then it usually ends up being a much more valuable business than a business that somebody wants to build, grow for a short phase of time and then immediately exit because that becomes very apparent and very obvious the way you build the team, the way you reward the team, the way the software or business or brand has been built. And ultimately a lot of that can come up unstuck later down the line.
I would say the more purposeful and longer term growth is always going to have a much better yield in terms of the ability to exit over time. And then obviously other things, it’s important to build a really good team around you, important to have a really good sense of your metrics and what's working and what's not working over time.
And I would say that honestly, whether it's us or anybody else, just having conversations with advisors that are willing to give you that time to walk you through the journey, it's always worth investing. I think for us, most people that exit will probably come to us anywhere between 12 to 18 months before they want to start that journey. And what we've seen over time is that companies that do that typically trade for about 14% higher in terms of multiples than companies that don't go through that exit planning process first. I'd always say just reach out and speak to us or advisors in the space in general because there's usually a lot of good pointers and advice that can be given over time as well.
That's fascinating. Ismael, thanks so much for coming on. I really appreciate it. Let's have you on again at some point. Good luck with everything. Your insights here were invaluable. Thanks, man.
Appreciate it. Thank you for having me on.