Buying and Selling SaaS: Evaluating Deals Beyond the Dollars
by Project Owner / 21 Jun, 2021
Whether you’re thinking about selling your business, or you’ve been perusing listings for a SaaS to buy, the financial aspect of a potential deal is probably top of mind. But from our experience, while valuation certainly isn’t simple, there are a lot of factors besides the dollar amount that both buyers and sellers should think about before closing.
[In this post, we’re teaming up with Chris Reedy, V.P. of Acquisitions for SureSwift Capital, to take a look at things from both sides of the transaction. Full disclosure: SureSwift is a pro member on MicroAcquire, but they haven’t closed a deal here yet, and I’m a personal investor in one of their funds.]
Tips for buying your first SaaS company
First acquisitions are the hardest. No one knows who you are, and you don’t have a reputation as a buyer. Closing a small deal for a low- or pre-revenue product shouldn’t be too difficult. But if you want to buy something a bit bigger — say $5-10k in MRR — you’re going to need to build up a reputation through your early transactions.
Here are things you can do to have a good rep as a buyer.
Do Your Due Diligence BEFORE the LOI
Not having a clear understanding of the business and the technology before you write an LOI makes that LOI worthless. Shooting from the hip could tie up a seller needlessly from taking real offers from other buyers that are a better fit. It’s tempting to get excited and try to lock down a deal. But doing that before you understand that business and have a plan for how you will both buy it and run it just isn’t kind or fair to the seller, and it can hurt your reputation as a buyer.
Have the cash (or be up front if you don’t)
You might laugh at this one, but it’s a reputation killer, so we’re gonna cover it. If you’re raising funds to buy a business, make sure any founder you’re talking to knows that your offer comes with that contingency.
They may not want to invest their own time and money doing due diligence with you if you don’t have the funds, and that’s fair.
Be able to close quickly.
Take your time evaluating a potential business before you write an LOI or make an offer. Once you send an LOI, it’s not cool to make major changes, or decide you’re more interested in another product. Like not actually having the cash, these are bad karma moves that will follow you to your next deals.
Be able to share your plans for the product, customers, and team.
Whether it has 1 customer or 10,000, Founders have generally put a lot of time into a build, and they’ll be curious about your plans for it. Being able to clearly articulate what you like about their product (beyond cash flow), and why you think you’re a great fit as a buyer for them will make a difference.
Have a clear transition plan and expectations for the founder during transition.
Transitions for pre and low-revenue products can be pretty quick, but there’ll always be some kind of transition. Be super clear about what you’ll need from the Founder post-sale, and lay it out in a timeline. Make sure to cover: transfer of accounts/passwords, email boxes, walkthroughs of code, availability for questions, etc.
Be a generous member of the SaaS community.
If you’re interested in buying, be friendly on Twitter, get to know people through online communities, courses or virtual or in-person events (when those are a thing again). You might meet your seller months before they know they’re going to sell and if they already know you to be a normal, helpful human being interested in similar things, that can go a long way.
Use your words.
Presumably, you weren’t raised by wolves. Phrases like “Hi,” “Please,” “Thanks,” and punctuation go a surprisingly long way towards making you look like a professional and courteous person.
This is not a good intro message to a Founder:
“Like your biz $10k sound good?”
Here’s a great example of a good buyer.
Stetson:
It takes two to make a thing go right (please be sure you’re singing that one in falsetto in your head), so here are things we think sellers can do to make a deal go smoothly, and things to look out for to find the right buyer for you.
You’re not selling a house.
Just like you should probably ignore any messages from buyers that just say “Like your biz hows 10k,” You should take some care with how you communicate with potential buyers. “Offers due by Tuesday at noon” statements are fine if you’re selling a condo in downtown Miami. The new buyer isn’t going to be your roommate for a month after you sell.
Selling a business is a bit different, so you’ll want to take some time to get to know your potential buyers and let them get to know you, too.
Be up front on what’s great about your product, and what needs work.
Things like under-investing before a sale to boost perceived profit margins, and stats that don’t line up between your metrics dashboard and your payment gateway are generally uncovered pretty quickly by any buyer who does their due diligence. Bootstrapped SaaS products all have strengths and areas that can be improved on by a new buyer. Be up front about yours.
Choose a buyer you want to actually work with.
If you have a transition period spelled out in your deal, you’ll definitely want to be sure you’re selling to someone you can see yourself working with for that length of time. Six months can feel like a breeze or an eternity depending on relationship quality, so it’s worth considering. Even if you don’t have a transition period, you spent time and sweat equity building your business and you’ll want to feel like you’re leaving it in good hands.
Do your due diligence on your buyer.
It’s not a great feeling to announce a deal to your team and have it fall through. This one’s easy to avoid with a reputable buyer. If they’ve closed deals before, ask to talk to a previous founder who sold to them. If it’s their first deal, that doesn’t mean they won’t do a good job, but it’s okay to ask for things like proof of funds.
Deal terms
When will cash be transferred, what duties you’re expected to perform during a transition, and whether there are any clauses or fine print that would cause you to take a haircut in the 9th inning are all things you should be looking out for.
A $1M LOI sounds great if you just say the dollar amount. If it comes with a 2-year transition period before that money actually hits your account, you might feel less thrilled. It’s your deal, so make sure you fully understand all the details.
Here’s an example of a great seller.
Reilly:
[In this post, we’re teaming up with Chris Reedy, V.P. of Acquisitions for SureSwift Capital, to take a look at things from both sides of the transaction. Full disclosure: SureSwift is a pro member on MicroAcquire, but they haven’t closed a deal here yet, and I’m a personal investor in one of their funds.]
Tips for buying your first SaaS company
First acquisitions are the hardest. No one knows who you are, and you don’t have a reputation as a buyer. Closing a small deal for a low- or pre-revenue product shouldn’t be too difficult. But if you want to buy something a bit bigger — say $5-10k in MRR — you’re going to need to build up a reputation through your early transactions.
Here are things you can do to have a good rep as a buyer.
Do Your Due Diligence BEFORE the LOI
Not having a clear understanding of the business and the technology before you write an LOI makes that LOI worthless. Shooting from the hip could tie up a seller needlessly from taking real offers from other buyers that are a better fit. It’s tempting to get excited and try to lock down a deal. But doing that before you understand that business and have a plan for how you will both buy it and run it just isn’t kind or fair to the seller, and it can hurt your reputation as a buyer.
Have the cash (or be up front if you don’t)
You might laugh at this one, but it’s a reputation killer, so we’re gonna cover it. If you’re raising funds to buy a business, make sure any founder you’re talking to knows that your offer comes with that contingency.
They may not want to invest their own time and money doing due diligence with you if you don’t have the funds, and that’s fair.
Be able to close quickly.
Take your time evaluating a potential business before you write an LOI or make an offer. Once you send an LOI, it’s not cool to make major changes, or decide you’re more interested in another product. Like not actually having the cash, these are bad karma moves that will follow you to your next deals.
Be able to share your plans for the product, customers, and team.
Whether it has 1 customer or 10,000, Founders have generally put a lot of time into a build, and they’ll be curious about your plans for it. Being able to clearly articulate what you like about their product (beyond cash flow), and why you think you’re a great fit as a buyer for them will make a difference.
Have a clear transition plan and expectations for the founder during transition.
Transitions for pre and low-revenue products can be pretty quick, but there’ll always be some kind of transition. Be super clear about what you’ll need from the Founder post-sale, and lay it out in a timeline. Make sure to cover: transfer of accounts/passwords, email boxes, walkthroughs of code, availability for questions, etc.
Be a generous member of the SaaS community.
If you’re interested in buying, be friendly on Twitter, get to know people through online communities, courses or virtual or in-person events (when those are a thing again). You might meet your seller months before they know they’re going to sell and if they already know you to be a normal, helpful human being interested in similar things, that can go a long way.
Use your words.
Presumably, you weren’t raised by wolves. Phrases like “Hi,” “Please,” “Thanks,” and punctuation go a surprisingly long way towards making you look like a professional and courteous person.
This is not a good intro message to a Founder:
“Like your biz $10k sound good?”
Here’s a great example of a good buyer.
Stetson:
- Did due diligence on multiple products instead of buying the first one that looked good.
- Found a product and Founder he had good personal fit with.
- Has a clearly communicated vision for what he wants to do with the product after buying it.
- Replaced past deal cred with clear signals that he intended to be a good buyer by learning up on LOIs, negotiating, etc.
It takes two to make a thing go right (please be sure you’re singing that one in falsetto in your head), so here are things we think sellers can do to make a deal go smoothly, and things to look out for to find the right buyer for you.
You’re not selling a house.
Just like you should probably ignore any messages from buyers that just say “Like your biz hows 10k,” You should take some care with how you communicate with potential buyers. “Offers due by Tuesday at noon” statements are fine if you’re selling a condo in downtown Miami. The new buyer isn’t going to be your roommate for a month after you sell.
Selling a business is a bit different, so you’ll want to take some time to get to know your potential buyers and let them get to know you, too.
Be up front on what’s great about your product, and what needs work.
Things like under-investing before a sale to boost perceived profit margins, and stats that don’t line up between your metrics dashboard and your payment gateway are generally uncovered pretty quickly by any buyer who does their due diligence. Bootstrapped SaaS products all have strengths and areas that can be improved on by a new buyer. Be up front about yours.
Choose a buyer you want to actually work with.
If you have a transition period spelled out in your deal, you’ll definitely want to be sure you’re selling to someone you can see yourself working with for that length of time. Six months can feel like a breeze or an eternity depending on relationship quality, so it’s worth considering. Even if you don’t have a transition period, you spent time and sweat equity building your business and you’ll want to feel like you’re leaving it in good hands.
Do your due diligence on your buyer.
It’s not a great feeling to announce a deal to your team and have it fall through. This one’s easy to avoid with a reputable buyer. If they’ve closed deals before, ask to talk to a previous founder who sold to them. If it’s their first deal, that doesn’t mean they won’t do a good job, but it’s okay to ask for things like proof of funds.
Deal terms
When will cash be transferred, what duties you’re expected to perform during a transition, and whether there are any clauses or fine print that would cause you to take a haircut in the 9th inning are all things you should be looking out for.
A $1M LOI sounds great if you just say the dollar amount. If it comes with a 2-year transition period before that money actually hits your account, you might feel less thrilled. It’s your deal, so make sure you fully understand all the details.
Here’s an example of a great seller.
Reilly:
- Took time to evaluate offers and buyers.
- Wound up selling to someone he’d met and made a connection with already (i.e. had a good idea they’d be able to work together)
- Thanked everyone else who made offers.
- Kept specifics of the deal confidential
