Guide for Finding and Buying a SaaS Businesses

Buying a SaaS Business

Introduction

If you’re a business owner or entrepreneur, you probably have thought about buying a SaaS business. SaaS businesses are popular among buyers because they typically have low upfront costs and require little maintenance once they’re up and running. They also tend to grow quickly, meaning your investment will increase in value over time. If you’re considering buying a SaaS business, there are many things to consider before leaping. In this guide, we’ll cover everything from why it makes sense to buy an existing SaaS business rather than starting one from scratch, how much these businesses are valued on average, where you can find them for sale and what kind of due diligence needs to be done before signing on the dotted line!

If you’re considering buying a SaaS business, there are many things to consider.

If you’re considering buying a SaaS business, there are many things to consider.

Advantages of owning a SaaS company:

  • Low fixed overhead costs. Most of the costs of running the business are the salaries paid to your employees. You don’t need lots of expensive production equipment or a warehouse full of inventory.
  • Predictable revenue and margins. The subscription model means that your revenue will be consistent from month to month, allowing you to plan with confidence and not worry about last-minute changes in demand or pricing (in fact, as long as your product is good enough for customers, you can usually raise prices without losing too many customers).

Why should you consider buying a SaaS business?

Consider buying a SaaS business if you’re looking for a new business opportunity. SaaS businesses are software as a service (or “software plus services”) offerings that give customers access to the same functionality and benefits that traditional software does—but without the on-premise costs or installation headaches. These businesses can scale rapidly and bring in high gross margins with no inventory to manage.

The result is that when it comes time to sell your SaaS business, investors will be willing to pay more money than they would have otherwise been willing because they know the company will continue growing after its acquisition.

Should you buy an existing business or start one from scratch?

Whether you’re looking to buy an existing SaaS business or start from scratch, there are a few key factors to consider.

  • Is it worth the time and money to buy an existing business?
  • Are you interested in becoming an entrepreneur?

The most challenging aspect of starting a SaaS business is the product-market fit.  If you know an industry and have an extensive Rolodex of decision-makers, creating your own SaaS business will give you absolute control of the product and company.  Be prepared to invest months to years to land your first customer and go through many iterations of your initial product idea.  Also, be prepared only to receive a salary once your business grows.

If your interest in owning a SaaS business is primarily financial, then it makes sense to buy an existing SaaS business.  Someone else has already been through the pain of initial product market fit.  You can bring to scale the business while earning a salary.

Where can you find SaaS businesses for sale?

You can find SaaS businesses for sale on business websites, off-market, and by networking in your local community.

  • On a website: Many websites will have listings of SaaS businesses for sale.
  • Off-market: You should talk to business brokers specializing in these companies. They may know of off-market opportunities that could be a good fit for your mix of technical and industry knowledge.
  • By networking in your local community: go into the real world and start talking with people! Even if they aren’t selling right now, it never hurts to keep them on your radar as someone who could potentially become a partner down the road!

How much are most SaaS businesses valued?

SaaS businesses can be valued at a range of prices. The price will depend on the company’s size, profitability, and growth prospects.  

Rules of thumb include 6-12x Cash Flow, 2-4x Recurring Revenue, and 0.5-0.7x CAC.

Higher multiples are applied to more prominent, faster-growing, and under-monetized companies.

Lower multiples are applied to smaller companies, slower-growing companies, and highly concentrated customer bases.

How should you evaluate a SaaS business for sale?

The most critical factors in evaluating a SaaS business for sale are:

  • Financials. If a company is profitable, you’re off to a good start. But there’s more to it than that. You’ll want to look at the company’s revenue growth over the past few years and how much money they’ve been able to invest back into the business while still maintaining profitability. Be wary of companies with high burn rates; they may have been spending too much money acquiring new customers or building out their product offerings without making any progress toward profitability—an unsustainable situation that often leads to bankruptcy when acquisitions slow down funding dries up.
  • Business model/customers/competition/product/technology ecosystem (in that order). It would help if you also looked at how competitors can replicate this SaaS and how much value can be added to user base expansion through marketing dollars spent on acquisition vs. R&D spent on innovation. It might seem like an easy win because you don’t have to build anything from scratch—but if someone else could do it better than you, they probably already would’ve done so by now!

What kind of due diligence should you do before buying a SaaS business?

In short, due diligence is another word for checking out the financials, legal structure, and other aspects of a potential acquisition. Doing this work before buying a business can avoid significant surprises down the line; once you own the company, there may be no recourse available if something goes wrong.

Conclusion

If you’re considering buying a SaaS business, there are many things to consider. We’ve laid out the important stuff here so you can immediately start your search without unnecessary delays.

If you are interested in our incoming and off-market opportunities, please get in touch with me to schedule an introductory call.

 

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David Jacobs
David Jacobs

David Jacobs is a Licensed California Business Broker for Software and B2B Service Companies — Predictable, transparent and orderly exits for business owners across the USA.