Selling a bootstrapped SaaS business is rarely how it is portrayed in the media. High-stakes negotiations, power moves, and stealing IP makes for great drama, but the actual transactions are much less exciting.
Misunderstandings between the parties are common, especially in the middle stages of a transaction. A skilled broker helps the parties find common ground to get deals.
Writing from my experience with several successful SaaS business sales completed, I’ll share my experience and thoughts to help you, as the business owner, navigate the landscape of SaaS company exits.
Grab a pot of coffee and let’s get started:
- When is the right time to sell your SaaS Business?
- Who buys privately owned SaaS companies?
- What is paid for privately owned SaaS companies?
- The importance of deal terms in a transactions
- The value of using a broker to sell a SaaS business
Why is Now the Time to Sell Your SaaS Company?
One of the first questions potential buyers will ask is, “Why sell the business?”
Knowing why software companies are usually sold will help you better frame your response as the seller. It will also help the buyer to understand better if their platform could serve as a viable option for the seller’s goals.
You Don’t Have The Means for Future Growth
Your business can be stuck at its current size for many reasons. Maybe due to the lack of a large addressable market. It could be a lack of well-developed sales and marketing teams. Perhaps your product market fit isn’t tight enough.
Understanding these and other reasons for a SaaS company’s lack of revenue growth will be essential to know who the likely buyer should be and how to present the business to get attractive offers.
You’re In It For The Product-Building
Many software company founders are technical by nature. They enjoy building things and seeing their ideas evolve into full-featured products with paying customers. Of course most people need to earn a solid living from a financial perspective, but from a personal fulfillment perspective, they like building stuff. Once the product is built and a stable base of subscribing customers is achieved, managing the administrative aspects of the business isn’t attractive.
Your Product is Not a Whole Business
You’ve developed a fully functional product that customers love using, but you’ve realized that a product is not a company. Suppose you lack the interest to build a global sales and marketing organization, a 24/7 customer service staff, and a finance and accounting department. In that case, it could be time to consider being acquired by a larger company.
What are Your Plans Post Sale?
Rarely will a business owner be able to sell their company and walk away. You should plan to stay involved for at least six months and probably 12 months post-closing. The longer you are willing to stay involved in the business, the more options you’ll have to attract potential buyers and increase the value of their offers.
How Can You Sell Your Software Business?
If you’ve been in the software industry a while and have an extensive professional network, then selling the business yourself is a viable option. After all, who knows the business better than the founder.? You may have personal relationships with competitors or have been approached by potential acquirers over the years. Asking if they are still interested may spark a discussion and an offer.
Use A Broker
It makes sense to work with a broker if you need to get a deal done at the highest possible price. The broker should be able to attract multiple, simultaneous offers. The resulting competition should increase the final offer price and help reduce one-sided deal terms and the reps and warranties in the purchase agreement.
An experienced business broker can guide you through all aspects of the sale process. It begins with preparing your company for sale, selecting the most appropriate type of strategic buyers, and working through the deal until closure.
Additionally, many professional buyers prefer to work on brokered deals. Brokers tend to work with reasonable sellers and help them properly prepare the materials necessary to bring a company to market. In addition, a trusted advisors find common ground during an impasse.
Not all business brokers work with software companies. Software industry experience matters. Lack of experience shows up as offers not received or deals that fail to close.
Be careful working with a broker who charges a large upfront or monthly retainer. These large retainers change the incentive structure of a broker’s engagement.
The SaaS Buyer Landscape
Types of Buyers
As a lower middle market business broker, I work with software company owners with annual revenue between $3m-$20m. We can attract prospective buyers from these categories for companies of this size.
- Owner Operators
- Private Equity Funds
- Family Offices
- Corporate Buyers
Each type of buyer brings benefits, requirements, and challenges to a transaction. Identifying who the best buyer is, based on the sellers’ goals and expectations is a critical step to properly presenting the business opportunity.
Understanding Your Software Company’s Value
Business valuation can be a world of carnival barkers, flim-flam consultants, and others who tell the business owner what they want to hear. They earn a sizeable fee but rarely commit to finding a buyer at that sale price.
I maintain that you don’t know what a software business is worth until you find a ready, willing, and able buyer who makes an offer. An offer which also includes deal terms.
Having realistic expectations based on similar past transactions is helpful. These quick estimates are easy to calculate as a multiple of revenue. These estimates of business value can powerfully set expectations and serve as a great starting point to think about how to build a more valuable business from the perspective of the buyer.
The Role of Perceived Risk in Valuation
Small companies carry considerable risk compared to larger companies. This drives down the value of these businesses. As a quick metric to understand the massive role of perceived risk in valuing a software company, compare the value of the same cash flows from a risky small software company to a publicly traded software company to a risk-free US Treasury bond.
Assuming $1m in Cash Flow (SDE).
High Risk – A no-growth Software company with $1m in SDE will value at $6m (a 6x multiple).
Medium Risk – A large, slowly growing publicly traded software company would trade at a 10x EBITDA multiple.
Low Risk – A risk-free treasury bond with $1m in annual cash flow will value at $30m (a 30x multiple).
Actively working to reduce the business risk in a small software company increases the value of the company.
How Do you Reduce the Risk of a SaaS Company?
Here are few areas which reduce the risk of purchasing a SaaS business.
Accurate Financial Statements – Has the business been producing financial statements on a regular and recurring basis? Are the statements factual and in standard formats?
Documentation of Key Processes – Are the key processes and procedures documented? Do they processes and procedures scale as the business grows?
Employees and Leadership – Having the staff and leadership in place to prevent owner dependence and continuity should someone resign or be unable to perform their role.
Customer Concentration – Revenue should be evenly spread across hundreds or thousands of customers. Or, does the business depend on just a few large and important customers to be viable.?
Product Market Fit and Annual Churn – Sales may be good at closing a new customer, but does the customer keep using the company’s software products for years and years? Having to replace lost customers constantly becomes an expensive problem at scale.
Liabilities – Document all stakeholder relationships. Does the business have pending outstanding legal, tax, or HR-related liabilities or pending lawsuits?
The Role of Growth in Valuation
Besides risk, increasing revenue growth will also increase the value of a software company. A well-managed software company should reliably grow top-line revenue by at least 30% per year. Great software companies can achieve growth rates above 100% per year, well beyond $100m in Annual Recurring Revenue.
All knowledgeable buyers will ask where you fit within this range and the steps needed to improve revenue growth.
How to Increase the Growth Rate of a SaaS Business?
Lower Annual Churn Rate – A leaky bucket becomes increasingly difficult and expensive to fill. Monitoring and managing the causes of customer churn will help increase your revenue growth rate and reduce your market expenses.
Create A Scalable Marketing Process – Figuring out how to reliably add new customers in a scalable and predictable way should be a top priority for your marketing team.
Knowing Your Sales Funnel – Knowing your KPIs around the cost of sales, length of the sales cycle, closing rates, and customer acquisition costs are critical to optimizing a well-functioning sales and marketing process.
All knowledgeable buyers will ask where you fit within this range and the steps needed to improve revenue growth.
Beyond the Multiple
There is a saying in my business, “your price, my terms or your terms, my price.”
Thinking beyond the top line transaction value is critical for a business owner contemplating an exit. Rarely will you be able to dictate terms and prices to potential buyers. A clear understanding of how your business compares to others will go a long way to correctly understanding your competitive standing in the market and achieving the best results in a transaction.
Why Hire an Advisor to Help Sell Your SaaS Business?
More Demand = Greater Value
The main goal of the broker is to create as much demand as possible. Clearly explaining the business opportunity and presenting that opportunity to the broadest network of qualified prospective buyers through a well-defined marketing strategy is where an advisor earns their fee.
Sell Your Best Story
A broker who has spoken to hundreds of potential buyers understands how to present a specific opportunity best. I know what buyers look for in a potential acquisition and what details are deal breakers.
Increase Your Value Before You Go To Market
To increase your perceived value be clear and confident answering the common buyer questions. The entire process can reduce perceived risk to the buyers to increase value for the sellers. Document, document, and document all critical processes.
Negotiating The Best Terms
Knowing what is ‘industry standard’ and what is outside of ordinary business practices in similar transactions.
It is the buyer’s perspective to try and eliminate all transaction risks and reduce the purchase price.
The seller’s perspective is to increase the purchase price and transfer all business risk to the buyer.
Deals with standard terms close. The more complicated the terms become, the less likely the deal will close.
Navigating Due Diligence
What is a reasonable request, what is an unreasonable request, and how does the decision-making at each stage fit into an overall Due Diligence Process. Having been through Due Diligence many times, keeping the train on the tracks is essential. You’ll be spending real money at this stage with accountants and attorneys. The last thing you’ll want to do is go through the process only to have the deal fall apart at the last minute.
While an M&A transaction isn’t rocket science, navigating a detailed process between 2 parties, one risk-averse and the other emotionally invested in a deal, is a recipe for misunderstandings and unreasonable requests. To get the deal to close, all parties must agree to a defined process.
Avoid Emotional Fatigue (Partially)
Software companies attract considerable interest from potential buyers. Most buyers will lack the capital or expertise to acquire your business successfully. Speaking to each of these buyers and screening out the unqualified ones can be emotionally exhausting, especially when you have a strong emotional connection to your business. You may also find many of their legitimate questions insulting, especially when they repeat multiple times by multiple buyers. Getting help screening these buyers can go a long way toward making an exit a more pleasant experience.
Increase Success Rate
Preparing a company for the market and handling the transaction is incredibly time-consuming. An experienced broker guides you through the process and explains the chances of getting a deal done.
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.