How to Successfully Scale Your MSP or SaaS to Exit (Founder / CFO Point of View): Interview with Will Baccich
What really happens along the entrepreneurial journeys for MSP and SaaS founders? How should that inform decisions and how can you set yourself up for success?
In this episode, CFO and entrepreneur Will Baccich shares insights he gleaned going from a few customers in his MSP to 700+ and a successful exit. And, he adds insights gleaned from his current passion - acting as a fractional CFO to help other owners and founders succeed.
We deep dive into
Having the courage to focus on the right type of customers
The importance of taking ownership as a leader
Getting through the tough times together
The power of using business operating system to enable scale
Do's and don'ts when it comes to setting your key performance indicators (KPIs)
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Full transcript below
The Origin Story in a Nutshell
Will Baccich:
I started Global Data Vault with an investor partner in the UK. In 2006, we actually acquired a small backup provider that was located in Durango, Colorado. They had 50, 60, 70 customers. It wasn't a big acquisition, nothing terribly fancy, but it gave us a little platform to build onto. And we evolved that from a backup platform to a DAS disaster recovery platform and grew it to 700 or so customers around the country. Much bigger customers than the ones we started with. We actually sold that first customer base off somewhere along in the journey, drilled down, and focused on the DAS business. We enjoyed a really great run with that, grew it nicely, and as you say, successfully exited. We were acquired by a private equity firm. I worked for those guys for a little over a year and enjoyed that. It was very interesting and an educational time. That's the story in a nutshell.
How Business Operating Systems Helped Solve Early Problems
Will Baccich:
Having leveraged our group here in Dallas, I started a similar group in Southern California. We had a good base of business out in Southern California to start with. Following the same sort of model of the abundance mentality, that group has really flourished as well. We probably grew the business somewhere around 20 times where it was when we acquired it. That took quite a few years and we hit a ceiling several times. I don't know that this is the answer for every entrepreneur, but for me, the answer was, we were not EOS driven, but we did a lot of EOS-like things. We had a scorecard, we had accountability, we had milestones, we had rocks. We didn't call them that because I didn't really become an EOS fan until much more recently.
The formula we used to break through the ceiling was, at the beginning of each year, we would list 10 things we're going to do, knowing that we'd really only execute on seven, and hoping that at least two or three would work. That worked for us when, as the old saying goes, half the money we spent on marketing was wasted. You just never know which half.
As a CFO now, I'm very friendly to the marketing budget and I have run into people who are like, “Tell me, what's going to be the ROI on that?” And I'm like, “Oh, sheesh, come on, shut up. We have no idea.” It's an experiment, right? We're going to try some stuff if it's a more mature market. We're adding customers to an existing offering and there's known pathways. You can measure your customer acquisition costs and you can look at how your customer lifetime value will affect your ROI. But in an entrepreneurial environment, that might be overkill.
How the Role of a CFO Changes as a Company Grows
Scott Levy:
I gravitate towards CFOs that have very strong entrepreneurial experience, because there's this idea of your CFO as an accountant or a controller, and that's not what a CFO does. It's being able to allocate your resources and steward those resources in a way that can be very difficult at times, but get you where you need to go by making some of those tough calls, figuring it out and understanding what goes into building a business, whether you're going from 1 to 10 million or whether you're going from 10 to 50 or even 50 up.
A lot of these principles are still in there. Now that you're working with larger businesses, where do things change? Are you finding that there's a difference if a company is trying to get to 50, 100 or some other much larger milestone?
Will Baccich:
Yes and no. In a smaller business, the CFO is the go-to guy for the hard question. Let's make up an example: XYZ customer has said, “I'm completely unhappy with what you're doing for me. I never should have bought your services in the first place. You guys are a bunch of goofballs and I don't care what my contract says, I'm out of here and I'm not sending you another nickel.”
The question that comes to the CFO's desk is, what should we do here? There's a wide variety of options: did we really goof up? Should we say, you know what, you're right, please accept our apologies - maybe even here's a credit for you or a refund. We'd like to see you pay some or most of the rest of your contract. We're going to refer this to legal counsel. [The CFO has to figure out] if you don't send us the rest of the money, how to approach that. What's the right answer in that scenario? I don't think that kind of thing changes from a small company to a big company, except that in a big company, there'll be more people with more opinions about what the right answer is.
The Most Important KPIs for Companies
Scott Levy:
What are some examples of KPIs you like to look at and do they change at different company sizes?
Will Baccich:
There is no one-size-fits-all list of the right KPIs in my view. To maybe provoke some argument from listeners, there are many ways to measure KPIs. There is no one perfect measurement of most of these things. I've made a list of what I think are the dozen most important KPIs. These are focused around MSPs and SaaS businesses and software companies. I believe that the first two things are actually non-financial metrics, and they are the most important two things.
Customer Satisfaction and Quality of Service
Number one is customer satisfaction. If you're not making people happy, if you're not pleasing people, if you're not delivering a good solution, you don't have a business. Number two is quality of service. That can be measured so many different ways from one business to the next. In traditional service providers, it might be things like response times or time-to-resolution. I really like SLA-based measurements, such as uptime availability. Those are a little bit harder to measure. It depends on the quality and depth of the operating tools that you have to get the feedback and to measure those sorts of things. If your customers are happy and you're delivering what you also believe is quality service and you can back that up with data, you're really on a good track.
EBITDA
After that, the next most important thing is turning a profit. I'm a big fan of Warren Buffett. I've bought a few shares of Berkshire-Hathaway. I've even attended his annual meeting in Omaha, just to sit for a whole day and listen to him talk. But I don't quite see eye to eye with Warren Buffett on the subject of EBITDA.
In fact, he and Charlie have said some terribly nasty things about it, but yeah, Their investments are large, publicly held companies, Chevron, Apple, Occidental Petroleum, whereas our investments are closely held businesses. Chevron or Apple, as business will never trade or change hands. The ownership is never going to change hands. At least some part of ownership is never going to change hands without the debt moving with the value.
But in an entrepreneurial business, the business most likely will change hands without the debt moving with the business. If you're going to be acquired by a PE firm. They're like, “Sure, we want your business,” but they're either going to leave you with a debt or pay off the debt and take that out of what of their valuation of the business, because the value of the business is much more easily calculated based on what the earnings are, without the debt … I don't think Warren Buffett argues with that. He's got his intrinsic value formula that leans heavily on discounted cashflow.
It's a little bit different and a little bit inscrutable to me, but I'm not going to argue with that. But discounted cashflow essentially, you can pretty closely start with EBITDA in your discounted cashflow model, and you won't be way off unless there's other wild swings in the cashflow model. EBITDA is a terrific indicator and predictor measurement. It’s a great forward, backward looking indicator of the value of the business as well as current and future cash flows, I think.
Scott Levy:
That's a really helpful explanation. It's one of those metrics I've always just accepted, like this is how people do business and therefore I've accepted it. When you explain it that way, it really helps it make sense. I also explains why Buffett and Munger aren't using it, but they're invested very differently.
Will Baccich:
I started my career in public accounting in the 1980s. We came at it from that traditional mindset that the business is built on after-tax profits, the fully diluted earnings per share; those ultimate measures that investors look at in when they look at mega caps, large caps or even any kind of good-size publicly held shares. Those are the earnings metrics that matter. I was of that mindset sometime around the early stages of my business career, of, those are just some softies trying to put lipstick on a pig somehow.
If your debt and your debt service are eating up your earnings and your cash, you still don't have a business. I think that's changed as the ability to get investment money into businesses has enabled some of these businesses who might not have been able to fund their debt. Back in the day, it was largely bank finance, the whole angel investor thing didn't exist. Today, there's that whole ecosystem. I'm talking with some guys that have built a uniquely secure type of storage hardware. It's an interesting business, and they need more capital. They’re small. I think the next step for them is to visit with angel investors.
There's a whole universe of these guys. I've met a really interesting group in Northern California that has a online investment forum every month and brings in 20 or so investors and 5 or 10 entrepreneurs to make their pitch. It's just fascinating to go attend one of those meetings and see how diverse these companies are. [Their leader] does a good job of measuring the operational maturity of each of them, so that they can be matched up with investors that want to invest at a given stage of the development of a company, or a particular strength or see areas where as an investor, they can add value that might be needed and welcomed in some of these businesses. The world is a little bit different today.
The Importance of Fundamentals: Every Business Should be Investable
Scott Levy:
Is it fair to say that EBITDA is of special interest when you are thinking about building a business up for some kind of acquisition or sale?
Will Baccich:
Yeah. I think almost every business needs to be focused on being able to be acquired. You point to the numbers in terms of how many get to what size and whatnot, and those are challenging numbers. The other number that's challenging is literally the only other transition, which is how many businesses are actually passed down to heirs or employees? That transition is maybe even more rare, maybe even more difficult. My advice and strong encouragement to companies that I work with is, you should always be an investable company. If you're a startup, you really should work toward being an investable company because it gives you the option to have an exit if you want to transition ownership to the team through an ESOP or other mechanisms. You can pass it on to the next generation of your family if they're involved in the business and whatnot so much more effectively if you are investable and you're earning money.
Scott Levy:
I've heard that a lot too. We just did an interview with the authors of the Pumpkin Plan for Managed Service Providers and they talked about, at the beginning, whether if your business is small or large, think about what you want that end game to be, what you want the impact to be. I've heard this again and again, when I'm speaking with folks who value companies, the companies that are built that way, even if the founder's goal or the current owner or CEO's goal isn't to sell, you're going to be managed so much better and you're going to be able to have a much better mental health around what you're doing because your fundamentals are stronger, versus that sort of hair on fire to try to either keep things growing or keep things running, which I talked to so many CEOs who fall into.
Will Baccich:
Tthere's the other side to it, the very successful business that becomes a lifestyle business - are you paying for your vacations and your vacation homes and whatever other personal expenses out of the business? You're mixing business and persona, which is not necessarily healthy for the business. It has to be untangled if there's ever going to be a transaction. I recently heard the story of the journey of Muenster Mills. It was a four-generation family business. The great grandfather had started it as a cattle feed and seed sort of business outside of Fort Worth. It had passed down and evolved and eventually became a dog food business where they made roasted healthy dog food. The fourth generation two brothers bought it and there was the epitome of untangling business and personal - when they bought it from mom and dad, dad resigned and mom continued to work for the business but mom wouldn't play by the new rules and they had to fire mom twice.
Scott Levy:
That actually resonates for me, now that I hear that story, a little more than I'd like it to. My father bought his father's business and bought out shares from his siblings. He related to me later that he did not realize what he was buying. He got it turned around, sold it, ended up buying it back later, and sold it again. That process is very painful for those involved.
Will Baccich:
I can't imagine having to fire your mom twice. But they'd paid mom and dad something along the order of 10 million, and then they turned around and sold it for about double that about five years later with the backing of a strong investment bank. It's a win for the whole family, even if there were some hard times.
How Companies Should Think About Using Capital
Scott Levy:
Keeping things as simple as possible strengthens them. Then, once you have that in place, you talked about the decisions you have to make as a CFO in the role of informing decisions on how to deploy that capital. I know you've got some ideas on how to best deploy capital. What are the things businesses need to be thinking about how to use that capital?
Will Baccich:
I think it's fascinating that when you talk to some entrepreneurs about the idea of capital deployment, they're like, “No, that's for mega-caps and big companies that have all of this cash sitting around.” But, every business has a choice of where they're going to put their cash to work, assuming that they're profitable. If they're not profitable, you still have to figure out how are you finding capital and where you’re going to put it to work. How much are we going to invest in business development, in growth, in marketing and what things are we going to place our bets on? Then, over on the operational side, you're almost always going to have make versus buy type of decisions. We're spending X on cloud hosting with AWS, for example. Should we build the capital infrastructure ourselves, convert that OpEx to a CapEx and throw a whole lot more money to EBITDA? Where's the break-even point in terms of the effort versus the profitability opportunity in that capital deployment question?
Even pricing decisions, I think people can look at margins in a lot of different ways. I've personally been fascinated with one particular aspect of cost accounting called absorption costing. Absorption costing came into life via Henry Ford in the 20s, and the idea was that every car that he made had a labor cost component. So, he made sure that his pricing considered the labor cost component and that actually worked pretty well for Ford, because if he didn't have cars to make, if demand was slack and it was Wednesday afternoon and he didn't need to fire up the line on Thursday morning, he just told the guys, “there'll be no work tomorrow,” and people didn't show up, and no labor costs were incurred.
In today's world, that doesn't happen. The same group of guys and ladies need to get paid. The same group of folks need to get paid every twice a month. If work is slow, it's not going to change our labor costs. So, a lot of folks love to bring labor costs into the pricing decision, into gross profit models, and so forth. Unless we are adding or decreasing labor at a meaningful, changing clip within a year, I don't see any reason to consider labor anything other than a fixed cost. If we have an opportunity to win a particular piece of business and we measure the profitability and consider the labor that's involved: if we have spare capacity, if our team isn't as fully busy, if that project or job is not going to require us to hire, the true variable costs if it's a it's a service business. If it's a hosting business, the additional storage and CPU resource that we're going to incur if we're using a service provider, if we're capitalizing the asset there's none. You have to think through it carefully - how do you consider labor as a variable cost or a fixed cost? How does it impact pricing?
Marketing KPIs
Scott Levy:
You also mentioned this idea we talked about early on: every business needs a marketing strategy, some kind of unique value proposition, and I'd love to hear more about that and what KPIs you found are helpful, if any.
Will Baccich:
The measurement of the effectiveness of your marketing strategy is, how's your pipeline and what are you closing right now? In SaaS and MSP, I like to measure new MRR - what new MRR and new ARR have we added, and how much of that is in the pipeline? I think, today, maybe the fundamental thought that still is important is blue ocean strategy. I think it's an idea that's really resonated with a lot of people.
What is your differentiator? What is it about you that makes you different? Is it your service delivery model? Is it the quality that you bring? Is it some other special secret sauce? Personally, in working with SaaS companies and MSPs, I find that you should have a blue ocean strategy. That is, we're not just here to help improve the financials and the financial reporting, make better financial decisions - all the things that you think of a CFO providing - we're also highly engaged with the investment banking community and with the private equity community, and we seek to make opportunities for our clients to have those conversations. Whether or not they're interested in a transaction, in an exit or even just in a growth investment, we bring those relationships and opportunities to our clients.
What Holds CEOs Back?
Scott Levy:
Do you see out there things that hold CEOs back and making these changes? What are the types of things that hold them back?
Will Baccich:
Fear, greed, human emotion, right? That's a whole other thing.
Scott Levy:
I think that's something I hear a lot, that one way or another, it's us as the leader that, if you want to, if you want to make changes, start with a mirror and understand what you're doing to to create the situation.
I'm worried that if whether, as leaders, if it's trusting our team or having a rising-tide-raises-all-ships mentality with people we might want to think of as competitors, what we lose, what we fear that we'll lose that long term gain. The reality is it's really the other way around.
Will Baccich:
It is the ultimate conundrum, isn't it? Those are the things that, that entrepreneurs wrestle with and have so much opportunity. I'll tell you as working as a fractional CFO it is, I feel like I can contribute in those moments of fear and greed. With a far more reasoned, calm view of things because my butt's not on the line nearly as badly as I've spent most of my career having my butt on the line. And, I talked with a guy yesterday who I work closely with and I like and respect a lot. He had someone leave his organization and they were struggling about how to end things.
And they had very divergent perspectives on a proper ending. And I just said, I completely agree with you. Your points are all completely right. You're totally right. Relax just a little bit. Find some peace with this guy. Don't, don't torch the bridge completely. And I get it in that moment. He's what he's asking for is completely unreasonable. Yeah, probably. Find a middle ground there. That's one to find a middle ground on.
Scott Levy:
I've been surprised at how often those different types of problems, if I will step back. And create a little more clarity and sometimes a lot more clarity and really do my part to make sure I'm communicating and conveying the right level of clarity to others.
Things have a surprising way of working out differently than. You think they might, when your emotions or your fears are creeping in and some of the best relationships I've had, some of our best contributors have been people that, the baby Scott probably would have huffed and puffed and been like, Hey, this is done and grown up Scott's like, What have I done here? How can I take ownership of the situation and how can I be clear and what I need and also make sure that person, is feeling supported enough that they can be successful and obviously sometimes you have misaligned core values or it's not the right situation.
Scott Levy:
It's just been interesting how much as we get clearer on those elements of the business, our vision, our values what we're trying to do and how we communicate and collaborate. How many more of those relationships and have turned into something very positive.
Will Baccich: Yeah, that is a really great point, right? The “what's my part in this?” I think is what you're saying. That's obviously a great place to go. Another aspect of it is maintaining a high principle vision. The idea is somehow this is going to work out well for all of us. We're in the ditch in our relationship, but somehow we're coming out together.