Introduction
The world of Software as a Service, or SaaS, is an exciting space to be in. Building a robust digital product that solves real-world problems, while bringing in a steady income from loyal subscribers, is rewarding. At some point, however, you may find yourself contemplating a new venture or seeking to cash out the value of the enterprise you’ve built. In those instances, the idea of selling your software company may surface.
Deciding to sell is a significant step and it might feel daunting. But it’s important to know that it’s a well-charted course. With the right guidance, it can be a smooth transition.
This comprehensive guide aims to equip you with knowledge and insights into the process of selling a SaaS business. We’ll explore the nitty-gritty of how to evaluate your business’s worth, prepare it for sale, find potential buyers, and successfully close the deal. Plus, we’ll shed light on what to expect post-sale.
So, whether you’re at the inception stage of your SaaS start-up, or you’re already in the thick of operations and foresee a future sale, this guide will serve as a valuable resource. Remember, selling a SaaS company isn’t an end—it’s an opportunity for new beginnings.
Table of Contents
I. Why sell your SaaS company?
II. How to prepare your SaaS business for sale?
III. Where to sell your SaaS business ?
IV. How to find the right buyer?
VI. How does the sales process work?
VIII. How to measure the value of your SaaS business?
Why sell your SaaS company?
There are several reasons why entrepreneurs might consider selling their SaaS businesses. Understanding these can help put your own thoughts into perspective.
You want to take your business to the next level, but you lack the means
Firstly, selling can offer an opportunity to take your business to the next level. You’ve built a solid foundation, but maybe another entity with more resources, a larger network, or specific expertise can propel it further. It’s not a sign of giving up—it’s about recognizing the potential for accelerated growth.
Your main focus is on building your products
As a business grows, administrative and management tasks can take precedence and pull you away from product development, which might be where your true passion lies. Selling your business can allow you to refocus on what you love—whether that’s honing your existing product or creating something entirely new.
Your product may be more valuable as part of another business’s service suite
In some cases, your SaaS company may be more valuable as a feature of another service platform rather than as its own standalone offering. One common challenge that many SaaS startups face is having a great idea that solves a niche problem in a niche industry. While the idea itself may be extremely useful, it may not hold its own as a full-scale business model.
As a result, it may not be viable to keep it going as an independent offering. SaaS companies in this position are better off as being part of another business’s service suite, where they can reach more customers and make a bigger impact.
You want to leave the project and enjoy the fruits of your labor
Lastly, the decision to sell is often driven by personal reasons such as retirement or the desire to pursue other interests. Selling your SaaS business can offer the financial freedom and flexibility to explore new avenues, spend more time with loved ones, or simply enjoy the fruits of your labor.
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How to prepare your SaaS business for sale?
When preparing your SaaS business for sale, you must focus on strategic steps to:
- Increase company valuation
- Organize your financials and documentation
- Address legal requirements, and
- Set up a compelling data room.
These measures aim to boost your business’s attractiveness and establish a solid foundation for potential buyers. Below, we outline how you can implement each of these strategic steps to prepare your SaaS business for sale.
Step 1: Increase company valuation
There are a few things you can do before beginning the selling process to increase your company’s valuation. These include:
Time the sales process appropriately
Selling a business when it’s at peak performance is likely to maximize its value. Strong recent growth trends and positive future outlooks make the business more attractive to buyers. Additionally, industry trends and the macroeconomic environment also play a crucial role in determining the optimal time for a sale.
Optimize your pricing strategy
Many SaaS businesses undervalue their offerings and resist increasing prices due to the fear of customer churn. However, undervaluing your product can lead to lower perceived value and profitability. Regularly re-evaluating your pricing strategy in accordance with market trends, customer feedback, and the added value your service provides, can significantly boost your revenues. Remember, a small price increase for your existing customers could translate to a substantial increase in your bottom line if implemented correctly.
Refine your sales strategy
An ideal SaaS business has a healthy mix of customers, including high-value enterprise clients. Often, small and medium businesses heavily rely on self-service sales, but a shift towards more sales-assisted models can open doors to larger enterprise potential customers. These larger contracts not only boost revenue but also increase the average contract value (ACV) and the perceived stability of your income stream.
Reduce owner-dependency
A SaaS business heavily dependent on its owner may be less appealing to potential buyers due to the perceived risks and transition difficulties. Establish systems and processes that allow your business to run smoothly without your direct involvement. This may involve training your staff for leadership roles or automating certain tasks.
Step 2: Organize your financials and SaaS metrics
Having your finances in order helps make your business appear more attractive to potential buyers and ensures it has a steady foundation for them to work with. Below are some steps you can take to organize your financials and SaaS metrics before selling your company. Organize your company’s finances
Organizing financials and metrics is a critical part of preparing a SaaS business for sale. Financial statements from the past few years would be the first thing that any buyer will request from you and are likely to form the basis for their offer.
You can start organizing your finances by making sure that your financial statements are accurate and up to date. Ideally, you would have them audited by a reputable firm. Financial statements to organize include income statements, balance sheets, and cash flow statements.
Know your SaaS metrics
Next, compile your key SaaS metrics such as Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), Lifetime Value (LTV), churn rate, and net promoter score (NPS). It’s important to provide a clear narrative around these metrics that explains trends and key decisions made. This level of transparency can significantly improve buyer confidence and streamline the due diligence process.
Keep financial projections accurate
Beyond organizing your financials and metrics, crafting accurate and compelling financial projections is of paramount importance during the sales process. These projections, including revenue forecasts, expense predictions, and estimated growth rates, act as a window into your business’s future, enabling potential buyers to gauge its potential profitability and scalability.
A well-structured financial projection that aligns with your business strategy can significantly boost buyer confidence and demonstrate the sustainability of your growth model. Moreover, these projections can shape the negotiation process, helping you defend your valuation and potentially catalyzing higher offers. However, remember that these forecasts should be data-driven, realistic, and continually updated as your business evolves and market conditions change.
Maintain up-to-date company information up-to-date at all times
It’s important to note that the sale process for a SaaS company is not a static event, but a dynamic period which can last several months. Throughout this time, the business will continue to operate, acquire new customers, and generate revenues. This means that your key metrics will not stay the same but will continue to change and evolve. It’s therefore crucial to keep these metrics updated during the sale process.
Regular updates will provide potential buyers with an accurate, real-time understanding of the business’s performance. This not only enhances transparency but also shows your commitment to maintain the business’s health, even during the transition period, thereby increasing buyer confidence.
Step 3: Address legal requirements
Thorough legal preparation is vital in avoiding potential pitfalls during the selling process. This involves reviewing all contracts, such as customer agreements, vendor contracts, and employee agreements. Also, ensure you have clear ownership of all Intellectual Property (IP) related to your SaaS business. An experienced M&A advisor can help you prepare for this aspect of the sale.
Step 4: Prepare a compelling data room
A data room is a secure online repository that stores all critical business documents. This includes financial statements, contracts, user data, operational metrics, and anything else a potential buyer might need to evaluate your business.
Preparing a compelling data room not only expedites the due diligence process but also shows potential buyers that your business is well-organized and transparent. A well-prepared data room can be the difference between a smooth transaction and a deal falling through.
In conclusion, preparing your SaaS business for sale involves a combination of strategic, technical, and legal steps. By carefully planning and implementing these measures, you can ensure a successful and profitable sale.
Where to sell your SaaS business ?
Ready to sell your SaaS business? There are a few routes you can take, including selling it directly, listing it on a marketplace, or using an M&A advisor. We explore each of these options below.
Sell it directly
The first option for people wanting to sell their SaaS business is to pitch it directly to prospective buyers. This is a reasonable option if you already have an idea of potential buyers in mind who you believe may be interested in your company. Simply reach out to these buyers and let them know that your business is for sale. Don’t be afraid to cold-call or email people and pitch your company to them, just as you would to customers or clients.
This method is a good route for people who prefer to sell their company independently, however it can take a longer time than some of the other methods. If you’re choosing this option to save money, know that you may still need to invest in a lawyer and accountant to help with the process.
List your company on a marketplace
Another way to sell an SaaS business is to list it on an online marketplace. These marketplaces work like classified pages in a newspaper: you list your business for sale and your listing reaches people looking to buy a business.
This option may be relatively cost-effective compared to some of the other methods for selling a business, however it is still time-consuming as you need to research every prospective buyer and negotiate the sale yourself. If it’s your first time selling a company, this process may be difficult without someone advising you along the way.
Use an M&A advisor
Using an M&A advisor to help you sell your SaaS business is the best option for first-time business owners and anyone who wants to get the most out of the transaction. This option not only saves time and effort but helps you walk away with a good deal that you’re happy with.
A good M&A advisory team will manage the sales process on your behalf, find appropriate buyers, and can even guide you through optimizing your business before selling so you get a higher valuation.
Many M&A advisors charge a percentage fee of the sale price, so the higher your business sells for, the more you will pay for their services. This usually means that they’re invested in getting you the best possible offer for your business. For some companies, this is essential, but if your business is small and unlikely to sell at a high price then it may be more appropriate to list it on a marketplace or auction.
How to Prepare Your Company for Sale
How to find the right buyer?
Finding the right buyer for your SaaS business is paramount. The ideal buyer should align with your company’s culture, have the necessary financial resources, and hold a strategic interest in your operation. Mergers and Acquisitions (M&A) advisors can be an invaluable asset in this regard. These professionals have a deep understanding of the market and can help identify potential buyers, handle negotiations, and guide you through the complex process.
Types of Potential Buyers
In M&A transactions, it is common to divide buyers into two groups: strategic and financial investors.
- Strategic investors: These are typically other businesses within your industry, possibly competitors, looking to gain a competitive edge through acquisition. They value synergies and are often prepared to pay a premium for strategic benefits.
- Private equity investors: These buyers are primarily interested in the financial returns your business can offer. They scrutinize profitability, growth potential, and financial stability.
One of the buyer groups specific to SaaS software is vertical software conglomerates (e.g. Constellation Software). They effectively merge the characteristics of both financial and strategic investors.
Like financial investors, they primarily focus on financial metrics in valuation and operate each acquired company standalone. At the same time, like strategic buyers, they don’t have an exit plan and operate the business indefinitely. This dual approach enables them to unlock value in the companies they acquire in ways that other buyers may not be able to achieve.
Strategic vs. Financial Buyer – Which one is right for you?
How to evaluate the right fit?
Selecting the right buyer involves assessing their financial capability to ensure they can afford the purchase and subsequent operation costs. Strategic alignment is equally critical, as the buyer should share your business’s vision and growth plans. Lastly, cultural compatibility should not be overlooked. The buyer should resonate with your company’s culture and values to make the post-sale transition smooth for both your team and customers.
How does the sale process work?
Navigating the complex waters of a SaaS business sale involves many stages, each with its own significance and challenges. It’s in these phases where an M&A advisor’s expertise becomes invaluable.
Phase 1: Negotiating the deal
The process often begins with a ‘teaser’ – a brief, anonymous document designed to pique the interest of potential buyers without revealing the identity of your business. This document will typically highlight key selling points and attractive metrics while maintaining confidentiality.
Next is the Information Memorandum (Info Memo), a detailed document that provides comprehensive information about your business. It covers everything from company history, product descriptions, and market analysis to financials, key metrics, and future projections. The Info Memo is the primary document potential buyers will use to evaluate your business.
Following the Info Memo, there’s usually a Q&A phase, where interested parties can seek clarifications and more information. Your M&A advisor will help manage this process, fielding questions and ensuring that all communication supports the overall negotiation strategy.
A significant milestone in the deal-making process is the Letter of Intent (LOI). This is a document that outlines the buyer’s intention to purchase your business, including the proposed price and terms. While not legally binding, an LOI signifies serious intent from the buyer and allows both parties to move forward with more detailed negotiations.
Upon acceptance of the LOI, the buyer will initiate the due diligence process. This involves a thorough review of your business, including financial, legal, and technical aspects. Financial due diligence assesses the financial health of your company. Legal due diligence examines contractual obligations, legal disputes, and compliance with laws and regulations. Technical due diligence involves a deep dive into your software, including its architecture, codebase, and scalability.
Phase 2: Closing the deal
The closing stage involves finalizing the Sale and Purchase Agreement (SPA), and arranging the payment through a secure method like an escrow service. Your M&A advisor, working in tandem with your legal team, ensures all these steps are completed smoothly and in your best interest.
Throughout these stages, your M&A advisor plays a pivotal role. They help prepare the teaser and Info Memo to ensure both are compelling and accurate. They manage the Q&A process to help you respond to queries in a way that maximizes perceived value. Finally, they guide all negotiations, leveraging their market knowledge and experience to secure the best possible terms.
Post-sale considerations
After the sale of your SaaS business, there are several key considerations that should be accounted for to ensure a smooth transition and secure your financial future.
Transition period
Firstly, many deals involve a transition period where the previous owner provides support to the new owner. This typically involves training the new owner or management team, introducing them to key clients or partners, and helping to troubleshoot any challenges that arise in the early days post-acquisition. The length and nature of this transition support period should be clearly defined in the Share Purchase Agreement.
Non-compete agreements
Secondly, non-compete agreements are common in SaaS companies’ sales. These legally-binding agreements restrict the seller from starting a similar business or working with a direct competitor for a specified period of time and in a defined geographic area. While these agreements protect the buyer’s investment, as a seller, it’s essential to ensure that the terms of the non-compete agreement are fair and reasonable, and won’t unduly limit your future career opportunities.
Tax implications
Finally, the sale of a business can have significant tax implications and you’ll need to engage in careful financial planning to manage your newfound wealth effectively. Depending on your jurisdiction and the structure of your deal, you may face capital gains tax or other tax liabilities. It’s advisable to work with a tax advisor or financial planner who can help you understand the tax implications of your sale, identify strategies to minimize your tax liability, and guide you in investing and managing your post-sale finances.
How to measure the value of your SaaS business?
Before you dive into the process of selling, it’s crucial to understand what your SaaS business is worth. But how exactly do you put a business value on your tech business? There are three main approaches used to value SaaS companies, which we describe below.
SaaS revenue multiples
The most common valuation method for SaaS businesses is the multiples method. The EV/Revenue multiple is more common than EV/EBITDA, as many companies still need to be profitable and continue investing in growth. The SaaS business model allows companies to be unprofitable for some time while they invest in future growth.
In this method, a company’s value is its revenue times a fixed multiple.
In our analysis of more than 300 transactions, the median revenue multiple in transactions with SaaS businesses stood at 5.2x. There was a significant difference in valuations between companies, with top 25% valued above 9.7x, while bottom 25% below 2.9x.Importantly, deal size played an important role in determining the revenue multiple, with deals in $50-100M bracket having a median multiple of 6.1x, while smaller $5-20M deals – of only 3.4x.
What are the valuation multiples for SaaS companies?
Revenue growth and profitability of your business
There are many factors in play for valuation, but the two most crucial ones are revenue growth and profitability. These metrics offer a snapshot of a company’s current cash generation capabilities and forecast the potential for future profit growth.
The sum of these two metrics is also used in the calculation of a so-called Rule of 40. Rule of 40 states that an efficient SaaS company has a sum of profit margin and revenue growth above 40. For public SaaS companies in our analysis, Rule of 40 is an important predictor of revenue multiple with a 10% in Rule of 40 score corresponding to 1.0x increase in multiple.
SaaS-specific value determination metrics
In the SaaS world, there are other factors to take into account besides the headline revenue and profit numbers. In our experience, buyers tend to look at the following metrics:
- Share of recurring revenue
- Churn rate
- Net Revenue retention
- LTV/CAC (customer lifetime value divided by customer acquisition cost)
- Share of enterprise clients
Finally, remember the importance of well-kept financial records. Not only do they feed into all these calculations, but they also build trust with potential buyers. If you’ve been diligent in your bookkeeping, you’re already one step ahead.
Valuing a SaaS business isn’t a straightforward task—it’s part art, part science. But by understanding these key factors, you’ll be well-equipped to determine a fair price that reflects the true worth of your SaaS business.
Conclusion
Selling a SaaS business is a significant undertaking that requires careful planning, preparation, and execution. From understanding the unique characteristics of SaaS business valuation, to preparing your business for sale, finding the right buyer, and navigating through negotiations and the closing process – each step is critical to achieving a successful outcome.
Remember, it’s not only about securing the best price, but also about ensuring a good fit between the buyer and your business. Thiscan set the stage for future growth and success.
If you’re considering selling your SaaS business, or are simply interested in learning more about the process, we’re here to help. Reach out to our experienced team and we’ll provide you with the guidance and support you need to navigate this complex landscape.
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