Software as a Service (SaaS) is a hot sector right now. Statistics show that there are currently around 15k SaaS companies, which serve more than 14 billion customers. The majority of them are in the US, but the rest are split over multiple countries.
Because SaaS is a billion-dollar industry, there are a lot of potential buyers out there searching for the “next big thing”. Such buyers aim to snap up a small SaaS startup that shows promise, so they can build it into a profitable company. Even if a SaaS company is yet to break even, it can still sell for millions of dollars if it meets the buyer’s criteria.
If you have built a SaaS business and are looking to sell up and move on to your next challenge, here’s how to get it ready for potential buyers.
Obtain an Accurate Valuation
Firstly, you need to get your company valued, so you know whether any future offers you receive are fair or not. Since there can be many differences between SaaS businesses, valuations are not always straightforward. For example, many SaaS businesses are in the tech sector, and with this business model, a valuation will depend on seller discretionary earnings versus gross earnings versus revenue. It’s a complex process!
Ultimately, how much your SaaS business is worth will come down to key metrics.
Key Metrics Buyers Look At
Buyers are looking for several things, which include:
A low churn rate is important. Loyal customers are happy with the product and will continue subscribing month after month, rather than canceling the service and moving to a competitor. The lower the churn rate (i.e., the number of customers lost over a specified time), the better. Ideally, revenue from existing customers should be higher than money lost from customers canceling their subscriptions.
Instead of trying to secure new customers before selling your SaaS, focus your energy on retaining existing customers, as this will lead to better churn metrics.
Revenue is important too, but don’t assume that your SaaS needs to generate massive revenue to be attractive to buyers. What buyers are looking for is the potential for future revenue growth. If you can show the business is growing and you have a strong customer base, it indicates future revenue projections are likely to be heading in the right direction.
Buyers will look closely at the costs associated with acquiring the business. Thinks like future marketing budget and how much it costs to sell the product are important. It doesn’t matter how great the revenue figures are if the cost of achieving that revenue wipes it all out. Aim to reduce your operating costs before selling the business, as this will help you achieve a sale faster.
How involved are you in your business? When a SaaS founder is heavily involved in the business, handover to a new buyer is tricky. If you wrote all the code and are working on it day after day, a buyer will have big concerns about whether the business is viable without your input.
Before you think about selling a SaaS, make sure you have a strong team in place, who can run the business without relying on you on a day-to-day basis. The more autonomous a SaaS business is, the more attractive it is to future buyers.
Finding a Buyer
Once you have all the paperwork in place to show your business is a viable proposition, it’s time to find a suitable buyer. You have several options here. One is to speak to a broker, who will find buyers in return for a commission payment. Another is to talk to a competitor to see if they are interested in purchasing your customer base and market share. You may also find buyers come to you once the word is out that you are looking to sell.
SaaS businesses are sought-after, but it’s important to be prepared and wait for the right buyer to come along. This will maximize the money you make from the sale.
