How To Make Your SaaS Business More Attractive For Acquisition
Are you a SaaS business owner thinking about selling your business? SaaS companies are definitely hot right now for acquisitions, but you still could have trouble selling if you haven’t assessed your business from the perspective of potential buyers beforehand.
Most of the time, if you do a full assessment of each aspect of your business you will find at least something that can be tightened before offering it for sale.
So what makes a SaaS attractive to buyers and what areas could you improve? We have a few ideas…
What Makes A SaaS Business Attractive?
To understand what makes a SaaS business attractive for acquisition, think about potential buyers and what their typical motivations are for buying. Often it comes down to one or both of the following reasons:
It Makes Financial Sense
The financial acquirer is interested in purchasing your SaaS business for the potential growth and financial gains it presents for them. They are primarily interested in your revenue model, cash flow, cash flow growth rate and cash flow predictability.
It’s a Strategic Move
Strategic investors could be looking to acquire a SaaS because it provides something that is complementary to or in competition with a business they already have. They could also be looking for a particular asset you have which would be expensive or time-consuming for them to build from scratch, for example: your client list, your technology, your business processes, your team or your brand recognition.
In either case, buyers are looking for a tight ship which will deliver value upon acquisition. With this in mind, assess your business before putting it on the market, and in examining each area ask yourself, what’s in it for the investor?
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Your Revenue Model
One of the attractive things about SaaS is that most tend to operate on a monthly subscription model which provides predictable cash flow, but even if you enjoy good rates of growth, this is not the end of the story.
Potential buyers are interested in the whole picture, even if growth and revenue appear impressive. What percentage profit are you actually making? This is information you should know already, but if you don’t have a clear picture, it’s time to get the books in order and establish whether there is anything you can reasonably tighten with your costs or boost in your revenue.
For example, you should know these points;
- What is your average cost of acquisition per customer?
- How long does it take for you to return a profit on customers at different levels? (individual, small business, enterprise etc.).
- What is your average growth rate?
- What is your average rate of churn?
At a minimum, you need to be growing at a rate which keeps up with cancellations, however you are obviously more attractive if growth exceeds cancellations while keeping customer acquisition cost as low as possible.
Maximize the Uptake of Upgrades
One way SaaS businesses get around the growth/churn equation is to counteract the effect of cancellations with upgrades. It’s easier to upgrade a current customer than to acquire a new one, so has your SaaS business got an effective system in place which maximizes the chances of getting the upgrade?
As Jason Cohen explains for Venture Beat; “taking “rate of cancellations” minus “rate of upgrades” is called “net churn.” Getting to zero net-churn is a big step in getting profitable; the most successful SaaS companies have negative net churn.”
Minimize Your Customer Acquisition Costs
What procedures do you have in place that add to acquisition costs? Every time a prospect needs to talk with a salesperson to sign up or needs human assistance to learn your product, you are adding costs with these human touch points.
As part of assessing your SaaS business for sale, take stock of how easily clients can self-select and learn your product themselves. Do you have enough customer-friendly videos or other training content in place? Have you developed an effective Knowledge Base of FAQs?
While you’re assessing the ease of knowledge transfer, take a look at your paid advertising channels too. How successful is each channel in acquiring customers? Are there any non-performers you can drop to save some costs?
Have you got the right model in place?
Many SaaS companies are not maximizing their profit potential simply because they have the wrong revenue model in place for their type of business. Could you be better suited to a “freemium” rather than “free trial” model? Alternatively, are you doing enough to encourage the customer to use their free trial so that they have “skin in the game” and upgrading is a no-brainer?
SaaS revenue models, source: ScaleVP
Are you using a transferable payment processor?
Some payment processors (Paypal is one) do not allow paying subscribers to be transferred to the account of a new owner. These details can create headaches in the sales process, causing it to drag out and be less attractive for buyers.
If you’re considering selling, or even if you’re not sure but may sell one day, check this detail out from the start. Ideally, you want to select a payment processor which is easily transferred to a buyer, as this will create a cleaner deal and save the need for post-sale contingencies such as Stripe.
Your Strategic Offerings
One of the key points for any potential buyer is how simple your business is to acquire from a strategic point of view. This means that nothing in your business can hinge on you or another specific person being there to make sure it works properly.
You need to ensure that you have robust systems in place which effectively put your business on autopilot as much as possible, and clearly document these processes. Make it easy for potential buyers to understand how you work and how they could step in and pick up your business.
Will a new owner easily be able to upgrade or modify your software without coming back to you? Your technical knowledge has gone into the product, but a buyer doesn’t want to be reliant on you to make changes.
All source code should be documented. You could also prove to potential buyers that your software can be independently managed by hiring a third-party developer to work on and critique your software prior to putting your business up for sale.
“Service” is the other key term in SaaS and buyers are keen to see that you have efficient systems in place, not only to serve customer needs but to communicate regularly with them and grow an active email list.
Documentation is again important, and you should consider the following questions when assessing your business:
- Have you documented your customer service processes and standards?
- How well is your team meeting those and boosting the power of your brand?
- Does the service side of your business also operate well without you being there?
- Are there any immediate improvements you can make to the processes?
While some buyers may be willing to put in some work on the service side, when we’re talking what makes a business more attractive for acquisition, the less work a buyer has to do coming into a business, the better.
Your Email List
Do you have a focused strategy for building your list of email subscribers? Buyers are interested in seeing that SaaS businesses have a substantial (and growing) email list, preferably one that is engaged and used to regular communication from the business.
For new owners, email is a good strategy to begin marketing after they acquire the business. They can start by marketing to existing clients, which is always easier than acquiring new ones.
From a strategic perspective, a strong brand is an attractive selling point to potential buyers, but this means your brand must stand alone. If you use any kind of personal branding in your marketing or communications, phase that out early before putting the business on the market.
A stand-alone brand is a much more attractive one to purchase, and it also helps if you have put some work into generating good brand recognition. Is your SaaS being featured in the right media outlets? Are you generating engagement on social media channels? Have you syndicated content across well-read blogs? Consider strategies which will generate sustainable brand recognition in a way that a new owner could easily pick up.
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The process of selling your SaaS starts long before you actually put it on the market. Even if you’re not sure whether you want to sell your business, it’s a good idea to set it up as though you may one day.
Take a look at aspects of your business from the perspective of the buyer; are they attractive either financially or strategically? Take steps to improve, automate and document the processes which make up your business.
If you start taking these steps as early as possible, the road to selling your business will be a smoother one.
Originally published at feinternational.com on February 17, 2016.