When you started your business, you probably thought at some point “I want to sell my SaaS business.” You’re not alone. With breaking news every month about how much buyers are willing to pay for SaaS companies, many entrepreneurs want to figure out how to sell the company they started.
I’ve personally build and sold several SaaS businesses (see my LinkedIn profile for details). In this article, I will share exactly what a buyer looks for in a SaaS business and how your current situation will affect your valuation.
How Do I Sell My SaaS Business?
A SaaS buyer, or any corporate buyer for that matter, is purchasing both risk and growth potential when they buy a business. The closer you are to the SaaS Rule of 40 (i.e., your growth rate + profit margin should total more than 40%), the more money a buyer will be willing to pay.
Selling to a Strategic vs. Tactical Buyer
Let’s get down to brass tacks as you think through how to sell your SaaS business. There are two types of buyers:
Sell Your SaaS Business to a Tactical Buyer
Tactical buyers are looking at your numbers to add to theirs. They are not buying you for your software, but rather for your customer base. They may have a similar product and will port your customers to their platform. Then, they will likely try to sell more of their product line to your customers.
The lower your revenue, the lower your valuation. The faster your growth rate, the higher your valuation.
It really boils down to being that simple.
Sell Your SaaS Business to a Strategic Buyer
Strategic buyers look at your positioning in the marketplace and the solution you are providing.
When you sell your SaaS business to a strategic buyer, you can usually command a higher multiple on revenue because they are seeking a SaaS solution that fits nicely into their product line and they have made the “build vs. buy” decision to buy rather than to invest in building a competing solution.
Build vs. Buy is their driving factor. Building a SaaS solution like yours will take time. While they may be able to acquire customers buy selling to their existing client base, development, debugging, and iron out customer success routines will take time.
More so, if you have a dominant position in the market, a large buyer will seek you out to take over that position.
This is why you see companies like Facebook acquire Instagram and WhatsApp, why Microsoft acquired Skype and LinkedIn.
Selling My SaaS Business Under $1 Million in Revenue
SaaS sales of $1 million might sound like a lot, but to a buyer it is a very small deal. If this is where your company is at in terms of annual revenue, here is what you should be thinking about to answer the question “how do I sell my SaaS business?”
- Sophisticated buyers that pay high multiples typically look for larger deals since the amount of work to buy a company isn’t worth the effort for small deals.
- At under $1 million in SaaS sales, your revenue is not large enough to attract the more skilled M&A brokers just yet, or those who specialize in SaaS. You will find a slew of brokers willing to take on selling your business, but watch out since you may spin a lot of cycles and get locked into exclusive agreements for a period of time.
- Brokers are like real estate agents in that they are always looking for inventory to sell. Many will feed you lines to get you to sign with them.
- Be careful and check their reputation for selling similar businesses. I got stuck in such a situation with one of my product lines years ago and it was a really big waste of time and resulted in no deal.
- With your current SaaS revenue, most brokers will ask for 10% of the sale price as their fee and may even charge you a retainer during the process.
- You might be better off learning how to create a “book” (your small business prospectus) and marketing the business yourself to buyers on your own. However, if this is your first time selling a company, you should seek outside input from M&A lawyers, accountants and advisors to avoid terms that a buyer will try to slip into your deal.
Before you sell your SaaS business, consider sticking with it to make it bigger. Here’s a SaaS marketing plan that I used to grow my companies beyond $1 million:
Factors That Influence Your SaaS Valuation
As you think through selling your SaaS business, you must consider what a buyer is thinking. Doing so will help you prepare the right responses:
- Would a buyer want your client base only or would they want your SaaS product as well?
- If they only want your client base and plan to integrate your clients into their SaaS platform, they will pay you a smaller multiple on revenue.
- If they want your SaaS product because it addresses a build vs. buy decision they are dealing with to add similar functionality into their own tool, then they will likely pay you a higher multiple.
- What are your retention and growth rates?
- If you have 90%+ annual retention, your business will be considered less risky to a buyer so they would be willing to pay more for it. If they are an experienced buyer, they will expect to lose a percentage of your clients based on a formula they have already calculated from their prior acquisitions. So, the higher your retention rates, the better case you can make as you sell your SaaS business.
- If you are growing at a fast clip, especially if you are meeting the SaaS Rule of 40, you might consider staying on your path to increase revenue before you sell so you can increase your valuation. Low growth rates will reduce your valuation.
- What kind of effort will be required to continue running your product or managing your clients?
- The buyer’s total investment will include their costs going forward to make the deal successful. If they need to add staff, processes, or other costs, that will affect how much they are willing to invest.
- How much revenue do my top 10 (or even top 20) customers comprise?
- Every buyer will ask you this question. If you don’t answer it the right way, you will be dropped from consideration in their buying process. What they are looking for is how much risk will they incur if you lose some of your top paying clients.
- When I was asked this question during one of my exits, I responded by including the length of time each of those top customers have been clients. This added narrative provided comfort to show there is minimal risk in these clients leaving.
SaaS Deal Structure
The deal structure when you sell your SaaS business is just as important as the valuation. You might not get all of the sale price up front and there may be clawbacks if you don’t hit specific milestones.
Some components of deal structure can include:
- Cash upfront
- Earn outs you will get if you achieve specific milestones (and make sure you can achieve them or that extra money will vaporize)
- Stock or stock options, including locked stock which you cannot sell until a specific event happens
- Consulting or transition agreement that pays you to stay on for a period of time
- Client retention bonus to ensure that a specific percentage of customers stay on after the transaction
- Sign on or retention bonus for your staff
- Acceleration of stock vesting if the buyer gets acquired before your vesting period ends
As you can see, when you look to sell your SaaS business there are a lot of moving parts to address. Tackle them one by one, don’t sell too early, and you’ll increase your SaaS valuation.
Author: Raj Khera, Publisher of MoreBusiness.com (Former 3x SaaS CEO)