When some or most of your target acquisition is outsourced
June 27, 2023
by a searcher from Roosevelt University in Boston, MA, USA
Recently, an investor told he had invested in a search but not a searcher's acquisition target because the company he wanted to buy had too many employees outside of the US. In his words, 80% of the company could be gone tomorrow (the searcher would be located in the US.) There were a handful of employees in the US, the corporation was based in the US but they utilized a large outsourced engineering team.
Here is my question, when exactly does it make investors nervous that there are too many employees outside of the HQ country? In SaaS and many other industries, it's very typical to outsource engineering or manufacturing elements. I am curious if this was just one investor or if there are many others that have this concern. Is there a tipping point when outsourcing makes investors feel uncomfortable? Feel free to share any stories.
from Southwestern University in Houston, TX, USA
In SaaS, it's typical to outsource the development, but someone (and in smaller SaaS companies, it's usually the owner) has to act as "Product Manager". Most acquirers don't have that skillset and it would take a significant transition period to effectively move all knowledge to another hired employee.
While selling these companies is difficult, one of the best things you can do to increase your value and make everyone feel better is to document absolutely everything. Sure - document the tech stack thoroughly, but don't forget a security report showing all access levels for all users of all systems and where the administrative access points exist.
In addition, you'll want to document the flow of customers through the software. How do they hear about the software? What is the sales process to get them to demo / buy? What does customer onboarding look like? Where do they go for support? How long do they typically subscribe?
Having all of this data will make it easier to sell something that is a mostly-outsourced "company".
from University of Texas at Austin in Austin, TX, USA
Overseas Employees = you've hired specific individuals in other countries and follow that countries labor laws for your employees.
These are two different models, and two types of due diligence.
Anecdotally, a friend of mine, Indian-American, acquired a company with a substantial Indian work force (employees). He spoke Hindi and had experience with oversees employees, he was able to maximize the use of those employees (better understand the good vs bad employees, right size the pay rates, etc.) better than the previous owner and dramatically minimize the EBITDA drop that many acquisitions experience.