[Case Study] How to Create a SaaS Business Customers and Buyers Love
Every Software as a Service (SaaS) entrepreneur wants their business to scale and boom right now – preferably yesterday.
The “move fast and break things” mentality still has some traction in the SaaS world. If building a SaaS business is like running the hurdles, some entrepreneurs would still choose to race right through them for the sake of speed rather than trying to clear them gracefully.
Speed plus carelessness is what trips up most SaaS businesses. These missteps can knock SaaS entrepreneurs down and out of the race for good.
This is a case study of a SaaS business that cleared the hurdles slow and steady, who got some fundamental aspects right on its journey to growth and succeeded in areas most other SaaS businesses fail. The business’s reward for its work was a sale of $150,000, cash up front.
For hungry SaaS business builders, this case study can help you strategize on how to run and win your race.
On your marks. Get set. Go!
A SaaS Business Built for the Race
While other entrepreneurs scrambled to build a SaaS business that worked, this seller steadily built a business over a four-year period. This deliberate intentionality in the midst of a growth-driven industry would pay off.
One of the most powerful drivers of the business’s success was how well positioned it was to solve a real need for its target audience.
At its core, the business connected job seekers to recruitment agencies. This type of service might seem like a dime a dozen, but what made this business work was its niche of job searchers. The business specialized in a specific international region with a high demand for expatriate talent. Droves of expats wanted to work in this region for its lucrative salaries and benefits, and many recruitment agencies desired foreign talent. Just the right amount of new jobs needing to be filled and a high turnover rate led to the site’s growth in customer base over time.
Simplicity was another driver of the SaaS business’s growth. It offered clarity around the service provided and no mysteries about its fee structure.
To explain, the business had an up-front fee for its service and was transparent about the connections it created between job seekers and recruitment agencies. This is what helped the business see growth in sign-ups and kept revenue consistent.
Plenty of SaaS businesses get in trouble for billing their customers without fair warning, which causes a huge drop off in subscriptions – and trust.
We’ve said it before and we’ll say it again: you can’t growth hack a good reputation.
The focus on simplicity carried over into how the business was run.
Automation was important to this seller, and they managed to achieve the most coveted entrepreneurial dream – the four-hour workweek. They employed one freelance employee who operated on a per-diem basis, responding to customers’ emails and managing recruitment agency relationships. Other than checking on analytics and the freelancer’s work, everything else about the business was fully automated.
An understanding of the customer base, simplicity of the model, and automation were all reasons the business was taking off. But it had one important trick up its sleeve for growth.
The seller had managed success in an area feared and revered – the email list.
The Power’s in the List
Simultaneously, it is their lifeblood and their lifeline to customers. It can be a powerful tool for winning with customers and yet cause the downfall of your relationship with them.
It’s so easy to get email wrong. Poorly written, lengthy emails can miss the mark with customers. Too many emails will turn them off; not enough emails won’t capture their attention.
With emails, this business achieved the near impossible.
It built an extensive email list of 127,530 subscribers and sent 1,040,686 emails over its history. More than a million emails had been sent, and they had an average open rate of 48.7% and a click-through rate of 15.5% – averages most in the industry could only dream of.
The seller was able to achieve these numbers with segmented email sequences that were fully automated and optimized for conversion.
The email list helped solidify an audience and customer base for the business. An impressive 40% of the traffic to the site came from returning visitors.
Its conversion was the power behind the business’s email list. The platform had 126,748 registered users and an average number of 8,664 new signups per month in the four months leading to the sale.
It was a shining example of what can happen when email is done right. The business had achieved what so many failed to do: create an email flow that really works. This showed up in the business’s valuation.
SaaS Demands a Premium
It’s not uncommon for our SaaS businesses to sell for a high multiple. In our 2020 Industry Report, we revealed how SaaS valuations went up by 20% in the past year for an average multiple of 36.3x.
At the time the business was submitted for sale, the vetting advisor recognized the gem that it was. The advisor wrote to the seller that the higher end of our valuation range would be used based on “the high level of optimization of the email list, the limited amount of required time to run the business, the ability to throttle income with ad spend given consistent CPA, and the upward trend in earnings.”
This was perfect for the seller because they felt that what they had built along with the growth potential left for the buyer deserved a solid sale price. It would allow them to gain the extra finances needed as they wrote in their vetting ticket, “The main reason for selling the website is being involved in another project that will require 200% of my time.”
The seller knew what they wanted. When the business launched on the marketplace, it was time to see if buyers would be willing to pay for what they had built.
Real Negotiations Begin
The business went live on our marketplace and garnered immediate attention. Seven potential buyers entered the ring to consider the business. On the third day the business was up for sale, the most serious buyer put down a deposit and got serious about due diligence.
The savvy buyer had a few questions and brought up concerns about growing the business.
First, mobile traffic and revenues were quite limited. With the shift to mobile, this trend was concerning. The buyer brought up this aspect, and the seller responded with a clarification: “The reason for this is that the web app needs a little more work to be fully optimized for mobile. The work needed is only in CSS, but I haven’t had the time to do it. For that reason, I’ve restricted the mobile traffic. While we know that mobile traffic accounts for 60% of the Internet, it indicates that the ad growth for search ads is not yet fully explored.”
This explanation seemed to clear up that issue, but further questions arose. The buyer wanted to know if there was an existing relationship with a developer, or if they would need to pay a new developer to learn the setup from scratch.
This can be a make-it or break-it question from a buyer. Working with a developer to learn the setup from scratch can be daunting, not to mention the risk of the asset’s profitability. The relationship might not work while sinking money into multiple developers would be painful for profit.
Having a developer who is willing to continue on can be a massive value-add for a buyer in the deal process. Someone who knows the minute details of your backend that can transfer smoothly with the business means one less (major) detail for the buyer to consider. A developer relationship that can continue on gives potential buyers a push to buy.
The seller had a good position on this. The code the site was built on was written in PHP, a fairly common language for developers. But finding a developer wouldn’t be necessary because the developer who had built the site was a friend, and he had agreed to continue on with the buyer.
The seller was safe on this front, but there’s an important lesson here when it comes to selling a SaaS business. You should be ready to back up the state of your software and how much developer work it might need. Be ready to respond to questions about whether the software needs updates, how many updates and changes it’s gone through, bugs you’ve experienced, and how workable the foundation you’ve built your site on is for developers.
The buyer and seller went back and forth on questions and negotiations. Finally, the buyer laid out an offer too good to ignore – $150,000 for the business, all cash upfront, and a 32x multiple for the business.
Needless to say, the seller shook hands with the buyer on the deal.
Now the seller would be free to focus on the newest business venture, with plenty of cash in the bank to support the next entrepreneurial adventure.
Creating a SaaS Business for Customers and Buyers
If your goal is to walk away from your SaaS business with six to seven figures in cash, you’ll have to keep a few things in mind.
Building something customers really love means putting customer service first. This means fostering trust and rapport with them by delivering on promises, not spamming them with promotions, and making the service easy to use at every touchpoint. Doing so invites more customers to the platform, but it also gives your business a leg up in the buying process. Buyers will pay more for a business that customers have demonstrated they already love.
To attract buyers, as discussed, knowing the state of your software and your developer relationship is a critical point for buyers. The goal is to get your software, maintenance, and developer relationship stable and smooth running so all a buyer has to do is buy the business and go. If you’ve already sweetened the deal by building smart automation into your workflow, you can demand even more money from the buyer.
It’s possible to build a business that first caters to a customer base and the eventual buyer base in a down the road deal. If from day one your build your business to fit both audience’s needs, you can reap dividends from your forward-thinking.
Do you think you have a SaaS business customers and buyers love? You can call us to plan your exit strategy so that you can demand a premium from buyers. If you’re a buyer hungry for a SaaS business, give us a call to discuss your buying criteria.