How This SaaS Seller Primed Their Business for a 48X Sales Multiple Exit
Updated on September 24, 2021
Imagine building a successful software as a service (SaaS) business and making a 1.7 million dollar exit in just a few years. It might sound like a pipe dream, but that’s exactly what one of our marketplace sellers did this year.
Demand for SaaS businesses is high among our buyers. In fact, demand far outweighs supply in this industry. While this has always been the case, we’re seeing an upward trend in both listings and offers.
Our 2021 State of the Industry report shows that in 2019, our Average Listing Multiple (ALM) for SaaS businesses was 43x. That rose to 49.3x in 2020. Taking a look at our marketplace today, it’s not uncommon to see SaaS businesses listed for 55x-65x sales multiples.
It would be easy to say that this is all just due to a SaaS market boom, and with demand for passive income streams at an all-time high, that might be part of it. But as we’ll see with this sale, there are ways sellers can make their businesses even more attractive to potential buyers, leading to a faster sale at a higher sales multiple.
So, let’s find out exactly how this life-changing exit happened.
The Million-Dollar SaaS Business
This SaaS in the eCommerce/business niche was created in 2018 and was profitable from the start. It was designed to streamline the research process in another rapidly growing industry to help both new and existing business owners launch and scale their companies faster.
The seller had spent a lot of time with their development team to iron out any wrinkles in the software. As a result, when the seller came to us to list, the software had already gone six months without any back-end bugs — an impressive feat in the startup SaaS space.
The business also came with an attractive list of assets, including:
- A highly organized and receptive email list
- Comprehensive video tutorials for subscribers
- Substantial SOPs for understanding the software
- Extensive digital products for bundling or upselling
The product was solid, and revenue was consistent. So why was the seller ready to walk away?
At the time, the seller also had a suite of eCommerce sites and found themselves more involved with the daily operations on those sites.
As a result, the seller found themselves increasingly less focused on the SaaS business. In fact, they had delegated most tasks to an employee, who spent around 10 hours per week on customer service-related tasks. The seller only spent around one hour per week checking in on the business.
Providing Room for Growth
The seller was conscious of the fact that they hadn’t spent a lot of time trying to grow the business through traditional marketing channels. Although the product was successful, they knew that they needed to map out future growth opportunities to make it even more attractive to potential buyers.
The seller thought potential buyers should focus more heavily on marketing the product. They felt the right owner could utilize the significant email list, social media channels, paid advertising, and affiliate marketing to increase sales. They also thought their product could easily be integrated as an add-on to other larger software in the industry.
Digging a Little Deeper During Vetting
While our vetting advisors were looking over the profit and loss (P&L) statements for the business, they came across one month with a significant increase in profit. When they came to the seller for an explanation, they found out that the seller had created an annual subscription plan during the month in question.
In order to advertise the new annual plan, the seller created an email marketing campaign for current monthly subscribers offering both a discount and bundle. The campaign was successful, and there was a huge increase in revenue for the month.
Would creating a new annual subscription cause a problem for valuing the business? Both yes and no.
On one hand, a successful marketing push is going to look great to future buyers. Being able to leverage their emailing list with a large, positive response was a concrete way to demonstrate the engagement of their subscribers.
That said, the problem was that the increase in sales was for annual plans. Our vetting team pointed out to the seller that annual plans have higher rates of cancellations, refunds, and chargebacks immediately after signup than monthly plans do.
It’s great to have a month of high revenue, but not if it ends up getting charged back soon after.
Second, whether to focus on annual or monthly revenue is an issue that many SaaS operators run into. As mentioned earlier, it can be tricky to come up with a fair and accurate valuation for a SaaS business, and this is just one of the reasons why.
It’s easy to understand why some business owners focus on annual recurring revenue (ARR). After all, a big influx of capital looks impressive and should add to the listing price of a business, right?
When it comes to valuing subscription-based businesses like SaaS companies, it doesn’t quite work that way.
The type of subscription plan offered often directly correlates with the way the revenue is reported. For example, when a business offers monthly subscriptions, it’s easy to see how this is considered monthly recurring revenue (MRR) since it’s a new charge for service every month. But when there are annual plans thrown into the mix, the MRR can get muddied.
Because of that, any annual recurring revenue (ARR) has to be amortized properly before being accurately calculated as MRR.
Additionally, many SaaS buyers, though not all, like to see MRR over ARR, because it makes it easier to forecast both future revenue and growth.
Fortunately, the majority of the software subscriptions for this business were monthly, and growth had been steady and consistent since the product had launched in 2018, so the outlier month of annual subscriptions was easy for our vetting team to amortize for valuation purposes.
However, during vetting, the seller was getting ready to launch another annual subscription promotion. After speaking with our vetting advisors and getting more insight into the situation, they actually decided to revamp their marketing strategy to focus on a monthly subscription discount and bundle promotion.
After getting all the business details ironed out during vetting, the seller accepted a valuation of $1,793,938, which was a 48x listing multiple.
Connecting With the Right 7-Figure Buyer
The business garnered a lot of interest, with 19 potential buyers unlocking the listing within a matter of days.
Our sales team wasn’t content with sitting back and letting the listing do all the work. One of our seller advisors reached out to a few potential buyers who were interested in acquiring SaaS businesses in the eCommerce niche.
One of the potential buyers had worked with us before. They were specifically looking for SaaS businesses exactly like this one to round out their portfolio. Since our sales team had pointed them in the right direction in the past, they were happy to take a look at this listing.
A buyer-seller call was set up right away, with great success. Both the buyer and seller found common ground with the future growth of the business, and they discovered that they had a lot in common outside of business as well.
Making the Winning Offer
Less than 30 days after listing, an offer was made. The buyer was willing to put up over $800k in cash, plus multiple installment payments. In addition, they were offering the seller 20% equity in the business, bringing the total sale amount to $1,700,000 at the time of sale.
An equity offering is an interesting prospect for sellers to consider. The terms will vary depending on the buyer, and a lot depends on the seller’s reasons for making an exit. But for sellers who are excited about being a part of the future growth of a business but don’t necessarily want to be in an operational role, an equity offering that lets the seller stay involved in the company without having to run it can be an attractive proposition.
In this case, the mutual respect and positive working relationship between the buyer and seller made it an easy choice for our seller, who wanted to remain a part of the company’s growth.
Migrating a SaaS Company
Originally, the buyer and seller considered handling migrations by themselves, without the help of the Empire Flippers migrations team.
This is possible, and it does happen on occasion with larger companies who already have dedicated teams in place to handle asset migration, but for most sales, it’s good to have the experience and knowledge of a migrations advisor to help.
So, why is it good to use an experienced migrations advisor?
The Benefits of Using a Migrations Service
To begin, migrations without assistance can take longer in complicated situations. For example, migrating payment processing accounts can occasionally cause interruptions to or cancellations of subscriptions.
Using a migrations team can also make complicated sales structures simpler over the coming months, especially in situations where buyer and seller interaction and cooperation are essential for the long-term growth of the business.
It also provides a layer of protection for the buyer. As per our Terms of Service, sellers are not allowed to make changes during the inspection period. This ensures that the buyer is getting the business they researched and chose to invest in.
It’s not just for buyers, though: sellers also benefit from using a migrations advisor. Certain assets, like SOPs, aren’t handed over until the inspection period is finished. So there’s less risk of a buyer getting access to sensitive information about operating procedures and then backing out of the sale.
In the end, the buyer and seller decided their resources would be better used elsewhere and wanted to go with our migrations team. The buyer had actually worked with our team previously and knew they were in good hands. And they were, because the assets were transferred quickly and without any issues.
Why This Listing Worked So Well
You can see the power of getting connected with the right buyer as quickly as possible. But while our marketplace connections are a fantastic resource, there’s a lot to be said about what the seller did to get their business in great shape before listing.
So, what are some of the things the seller did right?
First, although they had a bit of a stumble with the annual subscription plan as far as account reconciliation goes, they took the feedback offered by our vetting team and switched their upcoming marketing focus to monthly plans, which resulted in a cleaner-looking P&L statement during the sale.
They cultivated an email list, which is one of the most powerful tools in SaaS marketing. And one of the big takeaways from their venture into annual subscriptions is that the massive response and uptick in subscriptions shows they had a highly engaged community, which can be impressive to buyers.
They created in-depth SOPs for future buyers. This is a really important point. A lot of buyers looking for the passive income SaaS companies provide aren’t going to want to spend time and money operating or learning how to operate the software. Having everything ready to go for a smooth transition made this business far more attractive to investors.
Among the assets included was a range of digital products ready to be bundled or upsold with subscriptions. This was an excellent move on the part of our seller, because it gave buyers an enticing way to market the software right out of the gate.
Finally, they had an attractive growth plan ready to go and share with buyers. They knew where their weaknesses were and came prepared to offer buyers a way to scale the company.
All of this combined translated into a win-win situation for both the buyer and seller.
Selling a 7-Figure SaaS Businesses
Stories like this just go to show why it’s a great time to be in the SaaS space as a buyer or seller. Just look at what a phenomenal exit our seller was able to secure in 30 days.
An increasing number of private equity firms are looking for ways to increase their streams of passive income, and they’re turning their sights toward attractive SaaS models. It allows them to invest in already-established businesses without having to use funds for research and development that may end up going nowhere.
In this situation, our buyers saw an incredible opportunity to capitalize on existing, yet underutilized, foundations already put in place by the seller. But they also saw significant room for growth by expanding into marketing channels the seller had yet to explore.
If you’ve got a SaaS business and want to start planning your exit, there’s no better time than now to get in touch with one of our seller advisors. We’ll walk you through the entire process of selling your business, from vetting and offers to migrating your assets.
And if you’re a buyer looking for a quality SaaS business as an investment opportunity, we’ve got you covered. Take a look at our marketplace, and give us a call when you’re ready to unlock your next big opportunity.
