Is Buying a SaaS Business a Good Idea If You’re Not a Developer?
SaaS is an online business model that is taking the world by storm. The service it provides is central to the operations of most large online businesses.
If an entrepreneur is looking to grow a business, I would be surprised if they didn’t use some sort of SaaS product to help them.
The premise of the software-as-a-service, or SaaS model, is that a piece of software is hosted on a cloud infrastructure (i.e., operated through a web browser), and businesses pay a monthly fee to get access to this software. This is unlike a technology software company where you have to build a whole IT infrastructure to integrate the software into the customer’s business that would require a whole IT team to operate. The most obvious SaaS company examples are Google, Netflix, and Microsoft Office. It often takes a good amount of coding knowledge, combined with a good amount of user interface design skills, to really make a SaaS product worthwhile. SaaS businesses in general are probably the most complex online business models when compared to eCommerce and others.
The main difference between SaaS businesses and software companies is that for a SaaS product, the software is hosted in the cloud. This eliminates the need for an end-user license to activate the software and any infrastructure to host the software. Instead, the SaaS company hosts their membership. The customer just has to log into their account to get full access.
Why Would You Invest in a SaaS Business?
The beauty of the SaaS business model is that your customers can become insanely loyal to your product. This is because most SaaS products become an integral part of how the customer’s business operates. Because they become so ingrained in the customer’s business, it brings a community feel when entrepreneurs meet others who use the same service. Just look at the huge following of Clickfunnels. It’s customer loyalty that makes the SaaS business model so reliable.
Take Zendesk for example. They offer software that helps businesses create an effective customer service solution. The market might see a new ticketing software come out that blows Zendesk out of the water, but because Zendesk is so vital to a business’ success and so integral to that business’ processes, the business owner is unlikely to change their whole infrastructure for the new and improved solution.
This loyalty can create customers that last for years, adding to the burgeoning recurring income that makes SaaS products so profitable.
Even if a SaaS product is a small part of a business’ operations, you still receive the monthly recurring revenue from customers. Every customer is technically only renting the software on a monthly basis, instead of outright owning it with a one-time purchase. Monthly recurring revenue (MRR) is often the dream for those who get involved with online businesses, and a SaaS business model has this idea of MRR at its very core, whereas for eCommerce, affiliate, Amazon-based businesses, and others, it’s more difficult to make MRR as it isn’t integral to the natural structure of the business.
The Benefits to the Customers are Benefits to the Owner
The nature of a SaaS product means that scaling up the number of users or the size of the operation is relatively easy. Since the entirety of the software is owned and managed by the host company, users can bump up the size of the operation at any point without much hassle. This means when your customer’s businesses scale up, they stay with your SaaS product, and similar to the previous point, it would be a lot of hassle for them to migrate to another SaaS product.
When it comes to upgrading your SaaS product with new features, you can automatically upgrade the system, allowing you to scale your SaaS business without disrupting your customer’s experience.
Considerations For Investing in a SaaS Business
While recurring income is extremely nice, the large sum of money to keep your SaaS business going is not nearly as attractive.
Maintenance of the business can’t be done by you if you don’t have any coding knowledge. You’ll need good developers, programmers, and UI designers who will combine their skills to make your software as user friendly and efficient as possible for your customers. And I need not tell you that these experts are expensive, which can eat into profit margins. This even comes down to dealing with customer support, which you might not be able to do if you don’t have the technical know-how needed to help your customers.
When you get a customer who integrates your SaaS product into their business, they usually stay with your brand for a long time, but there still can be a high percentage of customers who churn (known as the churn rate). This is when customers sign up for your service and leave after only a short period of time. It’s a key metric to track the performance of your SaaS product as high churn rates are expensive and can be a sign that the software needs developing more.
When you have the maintenance down, to scale a SaaS business, you need a lot of capital. SaaS businesses tend to scale rapidly compared to other small businesses if the service fits market needs. To be able to handle this growth, called the “hyper growth phase,” you will need to expand your data capabilities, security, and storage, as well as keep your team around to handle maintenance in addition to managing any unanticipated issues that will likely crop up.
Before anything, however, you need to make sure you get the migration of the business right. When you buy software you need to make sure you’re taking ownership of the software source code itself from the current owner. If the software was coded by a developer, then you should verify that the developer doesn’t own the rights to the source code.
Related to this is the payment service used for the business. If customer payments are taken from PayPal, the subscriptions with PayPal are non-transferable and you’d have to acquire the account to get access. Even then, PayPal has a history of freezing accounts without giving the owner a reasonable amount of time to take out their money. Therefore, you should consider whether it would be best for the seller of the business to change payment processors before you buy their business.
You Can Still Buy a SaaS Business If You’re Not a Developer
Despite the consequences you may have to face when buying a SaaS business, it can still be a fantastic investment for you to get some almost-passive and recurring income. If you decide to take the opportunity, you should bear in mind the following.
Vetting the Accounts
This is where you get into the numbers. You want to ask for viewing access to the analytics accounts to see whether the performance of the business matches its stated value. Similarly, you should also look at the profit and loss statements for the business to determine if costs are too high and if there’s a way you can change that to quickly increase profits. If not, the business might not be worth your money.
Understanding the Pricing Model
Many SaaS owners struggle with pricing models. It can be a last barrier stopping prospects becoming customers, and most SaaS owners don’t know how to price their service. This can be a quick win for you if the owner is not pricing their service effectively. Another factor to look at is the number of free users. If the pricing model includes a freemium level that has a high number of users, is there something you can do to convert these users to low-tier paying members? Doing so will make the revenue go in the right direction.
Access the Source Code
The source code is the foundation of a SaaS business, it should be the property of the owner, not of the developers hired to create it. Make sure that the sale includes the full source code when conducting your due diligence, so all of the product gets transferred to you post-sale.
Know the Competition
When you buy a SaaS company, you’re buying a share of the market. You’ll want to find out who you’re sharing that market with. If the SaaS you’re purchasing is a market leader, you’re probably buying a well-oiled machine that runs almost hands-free. You should still check for competitors on Google and such like, but you’re buying into the top of the ladder, so sustainability will be an important consideration.
The competition should be studied in terms of price, marketing, and what they have to offer: How does it compare to what your software has to offer? If you can find an angle that gives you marketability, then that’s something to work with.
When buying a SaaS business, you are taking on something that already has a following. After purchasing, you could request customer feedback to better understand their reasons for using the software and any improvements they desire. This would allow you to get to know how your customers think, feel, and interact with your brand so you can build up a customer persona.
Evaluate the Branding
Because software is so complicated, it can be difficult to communicate what it does to an audience and how it can better their life. This should be your number one priority from a marketing perspective, and if the business isn’t branding their service clearly, then that will be an opportunity for you to improve the branding and make more sales. You also want to make sure any trademarks or patents are included in the sale of the business.
We Can Help You Find a SaaS Business To Buy
As an online business broker, we help to take the mysticism out of the buying process for acquiring a SaaS business that is for sale. We vet all businesses that we accept onto our marketplace to filter out any businesses that aren’t legitimate or are just not suitable for our pool of buyers. We also value the business, so you can trust as a buyer that you won’t be paying more than you should be. All that’s left for you is to conduct your due diligence on the business, we take care of the rest of the buying process.
Our experienced sales team handle the negotiations as well to ensure that both parties come out with the best deal possible.
Apart from negotiations, we also handle the migration of the business over to you with our very own migrations team dedicated to this aspect of mergers and acquisitions (M&A). In addition, you’ll have access to our in-house team of legal professionals, agreement templates, and so on to make the process as smooth as possible – we hold your hand through the whole buying process.
We have many first-time buyers come to us because they need the help in a new territory making their first online business purchase. We also get experienced buyers because they know our marketplace is curated, so they can trust that all businesses they deal with are legitimate.
If you could see yourself investing in a SaaS business, then speak to one of our friendly Business Analysts who can talk you through the process on a free call.