Adventures in Buying a SaaS Business
Sometimes when things go well, you may not realize what could have gone wrong. This is why you hear that you can learn more from failure than from success. I get it, but I think success stories can also be good learning opportunities, as long as you can recognize what could have gone wrong and why.
Dancing through a minefield
The guys behind Codetree wrote a fantastic article on their adventures with buying their SaaS business. Their blow-by-blow diary from when they first started looking at the business until they sealed the deal is an instructive read for anyone trying to understand how software businesses are really bought and sold. Even though it was a small business at the time ($48k ARR), the core process and emotions involved are basically the same even when you add more zeros to the numbers.
What must be true?
When you set out to buy a software business, there are a lot of things that can go wrong. Due diligence lists are supposed to help you uncover potential issues before you make your purchase so you can decide if 1) you still want to proceed with the deal, 2) abandon the deal, or 3) proceed with the deal as long as there are some modifications to the price and/or terms of the deal.
Like the Codetree guys did, you should write out why you are buying the business, what has to be true for it to be a good deal, and what will need to happen in the future for it to be a great deal. As Warren Buffett says, “…[it is] far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.”
People matter… a lot
In my past life I was part of a deal where we bought the code and customer contracts of a SaaS company that was basically bankrupt. Even though we had super talented folks on our dev team and the market was adjacent to our current one, the business still struggled after we folded it in.
The lessons we learned were 1) it is tough to ask your dev team to pick up someone else’s software project when there isn’t anyone left from the original project and 2) customer expectations may be much different than what you may think going in.
I feel like the Codetree buyers were fortunate that they were buying from a known quantity, Derrick Reimer, a co-founder of Drip, who wouldn’t have wanted his reputation soiled by a bad deal. I read between the lines that this seemed to be the case given Derrick’s post-deal assistance that came as part of the deal.
In the end, who you are buying from can be more important than what you are buying. While reading the Codetree article, keep this in mind.
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