You’ve built a successful software-as-a-service (SaaS) startup. You have a product that customers seem to value, and you’ve seen some moderate growth. What happens if you want to get out of the game? This guide will show you how to sell a SaaS company for a profit.
It’s a common dilemma many startup founders face. You’ve spent a lot of time and money building a product and marketing it to the right audiences. For a long time, your main focus was on acquiring funding, developing products, hiring a team, and scaling. But now you find yourself asking, how do I sell my SaaS business?
In this guide, we’ll cover some of the important questions to ask when selling a SaaS company, including how to determine value, what avenues to use to sell, and how you can position your company to get the best price possible.
Why Sell Your SaaS Company?
Arguably, the question to ask before how to sell a SaaS business is why sell at all? Why now? Ultimately, the motivation to sell is up to you and your plans for the company. It may be a personal life change that motivates you, such as retiring. Or, you may be looking to take advantage of the upward trend in the SaaS market without drowning in the competition.
Either way, there are certain criteria to use when considering the timing of a sale.
You Don’t Have The Means To Grow
This is a big one a lot of newer businesses face. Early growth trends may have been sharp, but this usually slacks off over time. If your business has been slacking in its growth and you don’t think you have the means to change it, then it might be time to sell.
A common scenario for businesses involves building a useful product and gaining some customers, only to find that there is nowhere to go within current means. Scaling requires money for new hires, marketing, technological advancement, and more – and not all small businesses have the revenue to push past this threshold.
There are a number of reasons this could be the case. Sometimes it’s an issue with the SaaS business model you chose. Some SaaS products lend themselves to low-cost, high-volume sales, and many businesses try a freemium model to entice users to adopt. Others rely more on fewer, big-ticket enterprise sales. A transactional sales model is arguably the most scalable, though many SaaS solutions lend themselves better to a low-cost subscription-based model.
The takeaway here is, your business model impacts scalability, and not all SaaS businesses will be equipped to grow. This may be hard to recognize or accept at first, but larger companies may have a better capacity to scale your business than you do.
You’re In It For The Product-Building
Some SaaS startup founders are more interested in the tech side than the business side. Fundraising, marketing, etc. can be draining, and it requires very different skill sets than developing a cutting-edge SaaS application.
If this might be you, experts suggest asking yourself if you would want to keep growing if you had the funds. If the answer is yes, you might consider selling a small percentage of shares just for some quick liquidity. You also might consider seeking a loan or other funding source if you think it might just be a temporary cash-flow issue.
But this isn’t the case for everyone. If you are more interested in tech than marketing, you can hire people to do the rest for you. But without the funds or the desire, future growth will be limited. There’s nothing wrong with moving on if you prefer to stay a developer and leave the long-term plans to another owner.
Your Product is Not a Whole Business
Another common challenge SaaS startups face is having a good idea that doesn’t necessarily lend itself to a full-scale business model. This is partially caused by the way most SaaS products are developed, namely, by identifying a problem in a particular industry and trying to fix it. Often, the problem and its solution are fairly niche, and this can yield a product that may be better as a feature of someone else’s service platform than an independent offering.
If this is the case with your business offering, that’s fine. Your product can still be valuable to customers and the industry. It just might be more valuable as a part of another business’s service suite than trying to make it on your own.
How To Measure Value
Before selling any business, it will need to be valued. We’ve previously prepared a guide on valuing online businesses, so that is a good place to start if you’re completely new to the topic. Here, we’ll briefly cover some basics and then get into the SaaS-specific factors to consider.
Estimating Fair Market Value
Without getting in over our heads in finance speak, a few basics first. Small businesses are commonly valued using a concept called seller’s discretionary earnings (SDE) to help prospective buyers estimate the expected ROI on their purchase. In short, SDE = Revenue – Cost of Goods Sold – Non-discretionary Operating Expenses + Owners Compensations (salary, shares).
This number is what a business can expect to earn in a year (pre-tax), so it’s then multiplied by an industry multiplier to try to predict long-term value. SaaS businesses historically fall within a 3x – 10x range. For our purposes, more important than the calculations themselves are the factors that influence it.
The Significant Variables
There are a few variables that are easy to understand as having an influence on your business value. The first of these is age. It’s an oft-cited statistic that about 90% of startups fail, and about half fail within the first two years.
So, congratulations – if you’re currently looking to sell your business, you probably beat the odds. That being said, an older business will show prospective buyers that your product and business model are sustainable. Businesses less than two years old can still be sold, but know that the age may count against you.
On the topic of sustainability, buyers will also want to know how much input the business will require. Many owners want a completely hands-off asset, so if you alone are the development, marketing, and sales departments of your startup, fewer prospects will want it. We’ll take a deeper dive into this point later on.
Finally, be ready to show prospective buyers the growth trends of your business. It probably goes without saying that a business trending upward is more valuable. But many businesses showing strong growth potential aren’t necessarily being sold. It’s not a problem necessarily if growth is not where you would like it to be – that might be why you’re selling in the first place. But you will hopefully be able to show at least consistency rather than a decline in order to prove the value of your business.
Overall, it’s important to know specifically what buyers will be looking for when they assess your SaaS business. Different industries have different ways of measuring value. For example, something that is unique to online businesses is the amount of attention paid to web metrics in assessing business value. Similarly, for SaaS businesses, churn, MRR, and ARR will be significant factors.
While some churn is unavoidable, high churn is often viewed as a potential flaw in a SaaS business model. That’s because acquiring new customers is expensive. What’s more, losing a lot of customers after a short time might highlight problems with your service.
The churn rate is calculated as the number of customers who leave in a certain period divided by the total number of customers (x100). It is expected that churn rates will be higher for newer startups. But for SaaS businesses, many of which rely on monthly and annual subscriptions, churn is a bit more complicated.
SaaS businesses must differentiate between annual run rate, also known as annual recurring revenue (ARR), and monthly run rate (MRR). MRR is the recurring revenue normalized into a monthly amount, and it can help put subscription-based revenue in perspective when you look at different billing periods. It’s important to track your revenue from yearly subscriptions as compared to monthly subscriptions.
To give more context to your churn rates and revenue, you should also consider two of the biggest metrics for SaaS: customer lifetime value (LTV) and customer acquisition cost (CAC). If the cost of acquiring new customers is too high, or the predicted long-term value you get from each customer is too low, your business will be less sustainable.
Where To Sell Your SaaS Company
Once you understand the basic criteria, you can start to calculate an internal valuation of what you think your business is worth. Then, get a second opinion, either through a free online tool or professional valuation service. After that, the next step is knowing the different platforms at your disposal.
Probably the most obvious way to sell a SaaS business is to just sell it. If you have what you think is a well-positioned company and you know there might be prospective buyers in the industry, there is no reason you can’t approach them. Some larger companies even make offers on smaller companies they find to be of value.
Steve Jobs, for example, once tried to acquire DropBox. Harkening back to our product vs. feature discussion, Jobs thought file syncing capabilities were not a business in and of itself. He saw it as a feature – a feature which he apparently wanted. DropBox turned down this offer and is still alive and well, but Apple and other giants also have added file syncing capabilities in their own platforms.
This isn’t to say you should wait around for Apple to come to seek you out. But it does go to show that large companies will recognize value when they see it. And you can help them to see it by cold-calling potential buyers and pitching to them the way you would any other customer. The downside is, this can take a long time and doesn’t always yield lucrative results. Plus, you will likely need to pay accountants, lawyers, etc. to assist, so you might not be saving yourself much money in the end.
List On A Marketplace
If you don’t want to sell directly, you can always list your business on a marketplace (life Flippa) – the online business version of the classified ads in newspapers. The cost to list is relatively low, and you are putting your business in front of people who are already seeking out businesses to purchase.
Still, this process can be time-consuming because you have to research every prospective buyer and negotiate. Just as with direct sales, you will have to handle all of the grunt work, contracts, etc. yourself. It’s certainly a viable option, but not always the best for first-time sellers.
Go To Auction
If your business is small and not priced very high, this option might be best for you. Like a traditional auction, there will be a set amount of time for prospective buyers to bid, so it’s a good way to shorten the time to sell if you’re in a hurry.
Again, the logistics are on you with this method. Unlike with marketplaces, the fee structure is usually a fixed listing fee and a percentage success fee when it sells. On top of that, auctioned businesses don’t usually sell for very much, so this will likely earn you less than other options. You may get a lot of looks and offers, but it doesn’t necessarily equate to a better price.
Use A Broker
Using a broker to sell your company is a good way to save time and effort, particularly if this is your first go at business ownership and selling. You will have someone to manage the sales process for you. Good brokers can also help you optimize your business before you sell so you can get the most out of the transaction.
There are trade-offs, of course. For a brokerage service, you will be charged a percentage fee of sale value, so you will pay more for the service the more money you make. On one hand, this can be good because you know your broker is invested in getting you the best possible offer. But if you suspect your small business isn’t worth much in the first place, you might be better off with a marketplace or auction.
Tips To Position Your Business as an Easy Sell
Now that you know how SaaS business value is determined, it’s time to think about how you can increase yours. If you are looking to sell soon, you may be somewhat limited in what you can do in terms of reducing churn, releasing new product upgrades, etc. But there are still some steps you can take to make your business appealing to buyers.
Audit Your Operations
As mentioned above, buyers will likely not want to acquire a business that will require a huge amount of input from them. This means it is in your best interest as a seller to automate and streamline as much of your internal business processes as possible.
A good example of this is customer service. Early-stage startups may have an all-hands-on-deck culture. But as your business matures, you should hopefully be outsourcing things like customer service – either to call centers or by utilizing chatbots. Functions like accounting should also be a mostly automated process, or at least not something you are doing yourself as the owner. If you are automating a large portion of your marketing, all that much better. Automation and outsourcing will noticeably increase the perceived value of your business because it will make owning it a mostly passive activity.
SaaS business buyers will not necessarily be tech people themselves. Even you as the business owner may not have been actively involved in every stage of the product development process. But when it comes time to sell, the new teams will need to precisely understand how the product works.
For this reason, clean, well-documented code is absolutely crucial to increase the value of your SaaS business. Document every change made, when it’s been last tested, etc. This rule doesn’t just apply to the technical aspects either. You should also have clear documentation of accounts, internal expenses, business processes, marketing plans, etc. The easier it is to understand your organization, the easier it will be to convince an outside party to get involved.
Don’t Try To Inflate Value
We’ve talked a lot about the factors that impact value, but that doesn’t mean you should make a last-ditch effort to fake them. For example, resist the urge to have a big sale on reduced price annual memberships just to rapidly increase your numbers. Buyers will see through this, and it will not equate to long-term growth. It’s better to maintain a consistent trajectory in the months before you try to sell.
Choosing when and how to sell a SaaS business is a big decision. You should avoid taking any drastic actions and instead reflect on why you want to sell and whether the present time is the best time to do it. Once you are sure selling is the right move, keep these tips in mind to make sure your success as a founder translates into a highly-valued, lucrative business offering.