Buying a SaaS Business: A Step-by-Step Guide
Buying a SaaS business seems like a good idea…
When you look at the way the market is heading, it seems like an even better idea.
The SaaS model lives in the cloud, so it doesn’t rely on supply chains, making it one of the businesses least affected by the global pandemic.
The SaaS market has proven to be highly lucrative thanks to monthly recurring revenue (MRR) and enticing options of scalability. This means that the way SaaS companies are valued is different to almost any other online business model.
The best part for you is that it doesn’t seem to be slowing down. Annual growth is predicted to continue at a rate of 18%.
This means that you should call up your bank and get them to wire over the money now, right?
While we think buying a SaaS business is a great idea, there are a few things you should be aware of before you make that call. We want you to know your options and we’ll also run through a checklist you can use as a guide for performing due diligence on a SaaS business.
After reading this article, you’ll know exactly where to go and what to look for when evaluating a business. Then you can pick up the phone knowing you’ve made all the right decisions.
Why Buy a SaaS Business Instead of Building One?
This is an interesting question that crops up when talking about purchasing SaaS companies.
Building software takes a very specific skill set. If you’ve got a few free years, by all means, go ahead and learn how to code. Most of us, however, don’t have that luxury. “Time is money” as the old adage goes.
Time saved is one of the biggest benefits of buying a SaaS company instead of building one. It takes a considerable amount of time to build a SaaS product from the ground up. Especially when it comes to finding your feet within the market. We should know: we speak to a lot of sellers of SaaS businesses.
Of course, if you don’t have the coding skills, you could hire someone who does. Good developers don’t come cheap, but there are plenty of skilled people out there willing to work for you. But buying not only saves you time, it also allows you to get your hands on something that is already making money. When you create a software company from scratch, there’s no guarantee that it will make any money. Often, breaking into the market can be the most difficult part.
When you buy a SaaS company, you’re not just getting a piece of software: you’re also getting years worth of market data. This gives you a baseline from which to work, allowing you or an employee to focus on improving the product and scaling the business.
This data allows you to concentrate on things like conversion rate optimization, search engine optimization, and tweaks to the operating procedures. All of these can lead to quicker gains in profit.
Private Sale vs. Broker
The first decision you have to make is where to purchase a SaaS business.
The two options are either through a private sale or by working with a broker.
This is actually where your due diligence begins. You need to evaluate the marketplace you are considering buying from.
It’s important that you do background research to establish not only the legitimacy of a market but the experiences of previous buyers and sellers in it. One negative review doesn’t necessarily mean a bad marketplace, but several should be a warning sign. This simple step should weed out the places you should avoid and, hopefully, leave only the best.
For a buyer, the main difference between a private sale and a brokerage is the vetting.
A good broker will vet all of the businesses that want to sell on their marketplace. To do this, the minimum the broker should be doing is accessing the analytics and earnings accounts to prove the amount of traffic and revenue the business is claiming.
Being a marketplace, we happily admit we have some bias in this. However, we are completely transparent about everything we do, including our vetting process. We believe we have some of the most stringent checks in the industry to ensure our marketplace keeps its high standards. In fact, as part of our commitment to transparency, you can see how we’re doing anytime you like by checking out our scoreboard.
This is what a brokerage should offer. Choosing a good brokerage should give you more peace of mind when working through a deal. This doesn’t mean you can skip your due diligence: we actively encourage all buyers to carry this out, irrespective of the marketplace from which you buy.
Currently, we’re the only broker that offers a migration service. This service takes care of transferring the company over from the seller to you, the buyer.
The process can be complicated and time-consuming if you’re not experienced. Having a dedicated department take care of this for you can be a great relief. If you buy through a private sale or a broker that doesn’t offer migration, you may need the help of a migration specialist. This comes at an extra cost, so make sure you know who is going to be paying for this before you agree to any purchase. Of course, if you use us, it is free.
All of the points mentioned above and more should be included in a contract signed by both parties. This protects you should anything go awry. By using an experienced broker, you are getting the backing of a company that has done this many times before.
A Checklist for Performing Due Diligence on a SaaS Business
1. Vetting the Accounts
Number one on the list, and arguably the most important step, is vetting the accounts. Once a listing has piqued your interest and you’ve made the first steps to inquire about it, it’s time to get into the numbers.
It’s common for listings to include screenshots of their accounts to back up the revenue and traffic claims. However, this is not enough. You should be granted viewing permissions to access the analytics accounts. This will allow you to perform objective checks and analyze whether the valuation matches the performance of the business.
It’s helpful to see profit and loss statements, which should show any additional expenses that come with the business: you don’t want to be buying a SaaS company with good revenue figures only to realize the high expenses mean the net profit is lower than you thought.
To the sharp investor, a problem can sometimes be seen as an opportunity. Perhaps a SaaS business is paying too much for pay-per-click advertising or you know how to use keyword research to increase its organic traffic. Optimizing a business using your areas of expertise, or hiring people to do it for you, might be the best method of increasing the profit margins and, in turn, the valuation.
2. Understanding the Pricing Model
Now that you’ve got a good idea where the money is coming from and you’ve identified the strengths and weaknesses, the next step is to understand the pricing model.
The pricing model is the last barrier to people becoming subscribers. Surprisingly, there are quite a few different SaaS pricing options available. Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are the two ways these payment options are set up. MRR tends to be the preferred method as it requires less upfront payment for new customers plus it’s easier to track a companies performance on MRR.
It’s a good idea to look at this with one eye on marketing. Part of doing your due diligence is not just checking the legitimacy of the business, but also looking for opportunities. Maybe changing the structure from a flat fee to a tiered system will make it more appealing to customers. Things like this represent ways you can speed up your return on investment.
How many active subscribers does the software have? Looking at this, the churn rate, and the lifetime value of the customers will give you an idea of how the SaaS business performs as a whole.
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.
3. Access the Source Code
The source code is the foundation on which a SaaS business is built. A strong foundation means it’s a product that’s built to last. If you don’t have the technical know-how to assess this, then hire someone who does.
The source code should be the property of the owner, not the developers that are hired to create it. Make sure that the sale includes the full source code so all of the product gets transferred to you post-sale.
4. The Acquisition Channels
How does a SaaS business get customers?
There are usually five main methods for acquiring traffic:
- Paid advertising
- Organic search
Paid advertising and organic search (SEO) are usually the two main sources of traffic. One is not necessarily better than the other. Diversifying traffic across multiple channels is a good way to ensure the longevity of a SaaS company.
If a SaaS business doesn’t use one of these, perhaps you could optimize it to boost the traffic and, in turn, boost the subscription numbers. Really dig into the metrics and work out what’s working for the business owner and what are the opportunities for if you were to become the new owner.
Is there a domain included in the sale? Running a blog will help you to grab some of that Google search traffic. The best part of this channel is that once the content is created, it’s likely to remain evergreen, bringing you customers for the foreseeable future with little cost to maintain.
Experimenting with paid media can seem daunting, but it can return almost instant results when done right. If the budget allows, set some money aside to test paid advertising channels like Google Ads or Facebook Ads. If you don’t have the time to learn about advertising, you could employ the services of a digital marketing agency or contractor.
5. 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.
Maybe you’re purchasing a market leader who is the runaway leader in its niche. If this is the case, you’re probably buying a well-oiled machine that runs almost hands-free. You should still check for competitors 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 in order to better understand their reasons for using the software and any improvements they desire. This would allow you to get to know your customers and build up a customer persona.
6. Social Media and Email Lists
In a world driven by social media platforms, it’s always a good idea to evaluate the social media profiles of a SaaS company. It may be the case that it doesn’t have any or has a very small following. This isn’t a problem, but social media does help broaden the reach of a product.
The same can be said for an email list. An email list doesn’t necessarily have to contain only paying subscribers. If you can gain the email address of someone who is interested in the same space as your product, you have the means to reach a potential subscriber. Having an email list also allows you to do retargeted advertising, which can be a great way to create campaigns.
The lack of these things is not a deal-breaker. In fact, it represents great growth opportunities. It all comes down to what type of business you want to purchase. Is it a done-for-you model where you have employees and just pick-up the paycheck? Or is it a diamond in the rough you can take to the next level?
There is no right answer, just what works for you.
7. Evaluate the Branding
Finally, you should view the SaaS business as a whole. That is, try to put yourself in the position of the customer. What do they see when they find the product? If everything is good with the product, can anything be done to make it look more appealing?
This represents another opportunity to scale the brand.
While we’re talking about branding, you’ll want to make sure that any trademarks or patterns are included in the sale.
As you move towards a final deal, getting to know the seller is part of the process. It’s a fair question to ask them why they’re selling. You’ll also want them to disclose any other similar businesses that they own. At Empire Flippers, we get all sellers to sign a non-compete, meaning they’re not allowed to go out and start a similar business in the same niche immediately after selling.
We suggest you do the same.
Buying a SaaS Business
With all the necessary checks done, you can now make that call to your bank knowing you’ve got the knowledge to do it right.
It should be noted that once you’ve established the legitimacy of the business and the numbers are in check, if something is wrong with the business that doesn’t make it a bad investment. A business lacking in some areas is not always a negative; sometimes it can be a very lucrative opportunity for a smart investor.
On our marketplace, we’re open about the assets and opportunities of the SaaS businesses featured there, though, of course, it’s up to you to do the due diligence.
We do this to make the buying process as easy and transparent as possible. If you’re interested in buying a SaaS company or have a few questions, you can set up a call with one of our business analysts. They can answer any questions that you might have about the buying process.
Or you can register for a free marketplace account today to get your journey started.
You might be our next SaaS success story.