How to Buy a SaaS Business
Building a unicorn isn’t the only way to be profitable in SaaS
SaaS is one of the most exciting online business models available right now.
The trouble is, SaaS can seem like an exclusive club that’s reserved for developers and M&A brokers. This simply isn’t the case. There’s a world of SaaS that’s open to a much wider audience if you know how to access it.
Buying a SaaS business allows you to acquire a business that’s already earning profit month after month. This means you don’t necessarily have to have coding experience because the revenue being generated allows you to use a developer inclusive of the costs.
The building phase is also a long process so it’s beneficial to skip ahead and get something that’s already got a share of the market.
Thanks, in part, to more people working from home, the market for SaaS products is as big as it has ever been, and it’s predicted to continue this upward growth trend. It’s important to note that there is a huge part of this market that exists outside of billion-dollar “unicorns.”
When I say, “buy a SaaS business,” I’m not talking about the likes of Uber, Canva, or Slack. While these are great companies, not many people can spare a billion dollars or are able to find an incredibly rare business.
What I’m talking about are the many SaaS businesses that are regularly selling in the five to seven-figure range and bringing in a profitable flow of monthly recurring revenue (MRR).
MRR is a desirable quality for any type of business and it’s a big reason why more and more investors are buying up SaaS businesses. If you want to get in on the action, then knowing what to look for is going to put you ahead of the competition.
Read on to find out the key areas of SaaS acquisitions and some tips for creating an even more valuable asset.
Understand the Pricing Model
The pricing model is the gateway through which a consumer must enter to become a paying customer.
Generally, as a buyer, MRR is preferred to annual recurring revenue because it’s more predictable. It’s much easier to see the fortunes of a company on a monthly basis than on a yearly one.
For the customer, the pricing page is a key part of the customer journey and it can be optimized to improve results. There are a few different pricing models, each with its own challenges and benefits.
If a SaaS has a high number of free users, maybe you can find a way to convert them to paying customers.
Tiered pricing is perhaps the most popular pricing strategy, but are the tiers being utilized correctly?
Giving the customer a product that is more suited to their needs is a great way to reduce churn and increase profit.
These are the kind of opportunities you need to be thinking about when analyzing businesses for sale. Improving the asset is going to speed up your return on investment and lift the valuation higher than when you purchased it.
Best Performing Acquisition Channels
This can be phrased as: how does the business get its customers?
The seller should be happy to disclose what they’re currently doing in terms of marketing. Paid ads, SEO, and social media can all be big drivers of traffic for a business. You might be surprised that many SaaS owners don’t take full advantage of all the marketing channels available, often relying on word of mouth and niche communities.
When it comes to doing your due diligence, don’t just take the seller’s word for it. Dig into the analytics data to find out more. Is the traffic growing? Which channels can be improved?
Although SEO can take time to return results, it’s one of the most cost-effective ways to advertise a SaaS business when done right. This lowers your customer acquisition costs and requires little in the way of upkeep.
The Market Position
One of the biggest reasons SaaS businesses fail is because they don’t carve out space in the market and as a result, they get beaten by competitors.
Buying into a SaaS business alleviates this problem somewhat as you’re getting a business that already has a corner of the market. But it’s still imperative that you do some research on who the competitors are.
Ideally, you want to see a unique selling point of your software over the competitors. It could be that yours has a more intuitive user interface or it can get the job done quicker. This will help you a great deal when it comes to marketing.
Even if you don’t know the niche particularly well, spend some time getting to know what else is out there. If the SaaS you’re interested in comes with a website, then enter the URL into Ahrefs to view the suggested competitors.
Also, try to find some forums to see what users involved in the community are saying about the software they use.
Branding
How the software is presented will be a huge factor in whether people decide to purchase. Branding includes everything from the name right down to the color scheme.
The best thing to do here is to put yourself in the shoes of a potential customer. Is it clear what the software does? Does it make you want to subscribe?
There could be room to improve the branding, which would in turn help to convert more customers.
Buying a SaaS Business
Now that you have an idea of what to look for, it’s time to start finding some suitable SaaS businesses for sale.
There are two main options when it comes to buying a business: opting for a private sale or using the services of a broker.
A private sale means you are sourcing, negotiating, and transferring deals on your own. You can find some marketplaces that have no level of vetting; these would also be considered a private sale as it’s still up to you and the seller to facilitate a deal.
The positive side of a private sale is that you don’t have to just rely on what’s listed on a marketplace. You can reach out to any SaaS business and ask if they’re interested in selling. This can be good if you’re after something very specific that isn’t regularly listed with a broker.
However, the main downsides are that there is less protection and you could end up paying over the odds. A broker should be vetting all the businesses that list on the marketplace to verify their claims of traffic and earnings. This gives you an added layer of protection and saves you time by avoiding all the SaaS businesses that aren’t profitable.
The broker also helps to keep valuations at market value. While there is a chance you might find an undervalued asset in a private sale, it’s very rare. Most business owners greatly overestimate the value of their business. This is especially true for online businesses where it’s harder to make comparisons between businesses.
It’s recommended that you use a broker for at least your first purchase. It helps to protect you and it gives you a guided look at the sales process. Some brokers will also help transfer the source code and additional assets into your name.
Now all that’s left is to put your new SaaS buying knowledge into action. If you’d like to register for a free account on the Empire Flippers marketplace, you’ll get access to search filters and a watchlist to make finding businesses even easier.
