Not long ago, owning a commercial retail business would have meant renting out a brick-and-mortar store and appealing to a limited pool of customers. Now, thanks to the internet, almost anyone can get into the eCommerce industry.
With an online store, you don't need to own inventory. You can be as ambitious as you like when it comes to your customers, and your potential reach is unlimited. You can sell to, and work from, anywhere in the world.
However, that doesn't mean that starting a store from nothing is easy. You'll need to build your customer base with marketing, source your products, and oversee your online store's software development. You can skip these steps entirely if you choose to buy an already established eCommerce store.
This guide will look at eCommerce marketplaces, and why these are the best locations to buy an online business. By the end, you'll know which eCommerce marketplaces are worth signing up for today.
Why eCommerce businesses are great investments
As with any big purchase, you should consider your circumstances carefully before you invest in an eCommerce business. But, if you have the funds available and you choose wisely, you can purchase a store that will bring money in from day one.
Let's look at four reasons why eCommerce businesses are worth the investment:
The demand for online stores continues to grow.
209.6 million people shopped online in the US in 2016. In comparison, this figure is set to hit a predicted 230.5 million by the end of 2021.
There is far more convenience in being able to source and buy products from a mobile device, rather than having to leave home and visit a particular location. Customers have access to a larger selection of products online, too, which means they're more likely to find the exact product they're after.
Cheaper to maintain
There's no denying that buying an eCommerce store upfront can be expensive. But, if you invest wisely, your store will provide a steady stream of income with minimal effort and money spent on your part.
Aside from buying stock, your biggest recurring spend as an online eCommerce store owner will be for your website's hosting, which typically costs $80-$730 per month. For a brick-and-mortar store, on the other hand, you will need to pay for everything: rent, stock, salaries of in-house staff, vendor agreements, renovations and design, insurance, licenses, permits, store equipment, and more. This could cost thousands of dollars per month.
Many expansion opportunities
With an eCommerce business, there's no limit on how big your store can be, and how quickly you can grow your customer base. If you land on a marketing tactic that works especially well in bringing in paying customers, there's nothing to stop you putting more money into this tactic and doubling, or even tripling, your revenue in a matter of months.
This year, eCommerce retail sales were expected to increase 13.7% to reach $908.73 billion. But the speed at which you increase your own sales is up to you. Of course, business growth is somewhat governed by marketing budget, but there's nothing stopping you from expanding into multichannel and international markets at a much faster rate than traditional retail stores.
Minimal effort required
As with the best investments, investing in an eCommerce business can be very low-maintenance. Many eCommerce website owners choose to outsource their processes to businesses that specialize in eCommerce management. Outsourcing is an increasingly popular option - the most recent statistics from 2019 estimated that the global outsourcing market amounted to 92.5 billion U.S. dollars. You can outsource tasks for a very small portion of your revenue, especially if you choose to outsource outside of the US.
Equally, if you'd rather have more control over your investment, you can choose to manage your business yourself. You should still consider automating the more repetitive processes to help you cut down your daily responsibilities.
Best places to find eCommerce businesses for sale
The benefits of owning a thriving eCommerce business are obvious - but how can you invest wisely?
This section of the guide will look at some of the best places to find eCommerce businesses for sale.
Shopify Exchange Marketplace
Shopify has its own marketplace for buying and selling eCommerce businesses, called Exchange. Businesses that are registered on Shopify have special access to this platform.
On Exchange, business owners can create listings and choose whether to make them public or private. Exchange offers a valuation for businesses before listings are created, but businesses don't have to stick to this if they don't want to - you can set your own price if you prefer.
As a buyer, you can search for businesses by type, including partner stores and dropshipping. There's also a "staff picks" section.
When a sale is made on Exchange, the store is transferred securely to the buyer. Exchange uses Escrow to minimize risks associated with the transfer of funds. The buyer deposits their funds into Escrow, and when the sale goes through, the funds are released to the seller.
Pricing: Contact for more information. Once you accept an offer and set up a transaction, the final service fee is disclosed.
To sum up, let's take a look at the pros and cons of Shopify Exchange Marketplace:
Business owners can create listings and set them public or private.
Businesses can set their own prices, even if they prefer. In other words, you can sell as high as you want.
Buyers can search for businesses of any type, including dropshipping companies.
Safe transactions with Escrow.
Works only with Shopify eCommerce websites
Flippa is another popular marketplace for buying and selling businesses. On this platform, you can narrow down your search for businesses by price, age, or category, and can choose between domains, websites, apps, services, SaaS, and more.
If you're looking for a well-established marketplace, Flippa should tick your boxes, having facilitated more than 250,000 sales. The site also has more than 120,000 registered buyers to this date.
Flippa offers curated search options that will be of value to you if you have very specific requirements for your eCommerce business. You can choose to search only for businesses with a minimum annual profit, or search for fast-growing or low-maintenance businesses.
If you're a first-time buyer, you may feel more secure using Flippa's optional concierge service. The site also offers a due diligence service and recommends financing and broker services.
Price: Dependent on sale amount; 5-15% transaction fee. Additional pricing listed on site.
Now, let's break down the positives and negatives of the Flippa marketplace:
You can buy websites, apps, SaaS companies, and more, plus filter by price, age, or category.
Large database of registered buyers.
Options to search for businesses with a minimum annual profit or fast-growing firms.
First-time buyers can take advantage of Filipa's due diligence services.
Possibility of fraud according to users. So, do your due diligence before trying to purchase an online firm from Flippa.
Empire Flippers is a curated marketplace that has helped people sell over $200 million worth of online businesses.
Hosting buyers and sellers across the world, Empire Flippers has fine-tuned its process to ensure the safest, most secure buying process on its marketplace.
All sellers are vetted on Empire Flippers, and a site's traffic and history of earnings are assessed before it is listed on the marketplace. Sellers can't list their websites unless they can prove they make at least $1,000 in monthly profit and have a minimum of 1 year's revenue.
You can view the current websites for sale on Empire Flippers without having to log in. Website prices begin in the thousands and peak at more than $7 million.
Price: 2-15% commission, paid by the seller upon completion.
Time to have a quick at the positives and negatives of Empire Flippers:
A curated marketplace with countless active buyers.
One of the most secure buying processes.
Sellers cannot list their websites unless they prove their business is profitable.
No need to create an account and log in to view the websites for sale.
Limited deals and hidden gems due to Empire Flippers extensive due diligence.
GetAcquired is an online marketplace designed for facilitating 6- and 7-figure deals with far less hassle or time-wasting.
The team behind GetAcquired understands how frustrating the business sales process can be, for both buyers and sellers, having been on both sides of the table. A lack of trust on both ends can lead to months of wasted time, delayed transactions, or dead-end communication. GetAcquired helps buyers and sellers achieve faster deals with less hassle, using its simplistic selling process.
A big benefit of GetAcquired is that it's free for buyers - there's no cost to sign up and simply browse your options. You can chat directly to business owners on the marketplace, then securely close a deal if and when you decide to.
The business listings on GetAcquired offer all the information you need to know before making such a big investment. You can see a business's summary, reason for sale, and verified metrics, including monthly recurring revenue (in which sellers connect their billing provider to GetAcquired).
First-time buyers can get the support they need on GetAcquired. You'll have a team of experts to help you handle the communications with a seller, negotiate pricing, and work towards a signed deal. If you're just browsing, you can sign up to get instant access to GetAcquired's current listings.
Price: Free to join.
Designed for facilitating 7-figure deals.
It helps buyers and sellers achieve better and faster deals with no hassle.
Free for buyers since there's no cost to sign up.
Buyers can chat with business owners directly.
Business listings contain every information imaginable, from reasons for sale to monthly recurring revenue.
With your own eCommerce store, you can have the security of knowing you've invested in an industry that only continues to grow, with no sign of stopping soon.
eCommerce businesses are ever-increasing in popularity. They're affordable to maintain and can be expanded much more easily than a physical store.
However, to reap the rewards of a successful eCommerce business, it's important that you buy the right store for your requirements. eCommerce marketplaces can be essential in helping you to understand your options and ultimately make a smart purchase.
Not all marketplaces are equal in the value they offer. Some may be more beneficial to sellers than buyers. It's important to do your research carefully and find a platform that offers equal value to both buyers and sellers when choosing a marketplace to join.
Selling your website can burn precious months of your time and, despite your best efforts, still end in disappointment.
If you choose to sell your website with no outside support, you're at a higher risk of mistakes, mix-ups and other problems, or even being scammed by a so-called buyer.
This guide will look at website brokerages, and how such sites can simplify the website buying and selling process by acting as a middleman between buyer and seller. By the end, you'll know what makes marketplaces and brokerages different, and which marketplaces are worth your attention.
Introduction to website brokerages
Website brokerages have a similar function to the other brokers you know, like stock brokers and real estate brokers.
Brokerages connect buyers and sellers within one space. A website is not a tangible asset like a house, which can significantly complicate the selling process.
There tends to be a lot more financial and legal acumen to deal with in the website selling process, and a good website broker should assist both buyers and sellers in navigating the sales process.
Key differences between marketplaces & brokerages
When you sell a website via a brokerage or marketplace, versus buying from a Facebook group or similar, you get the benefit of a more heavily vetted, secure selling experience.
It's worth noting that website marketplaces and brokerages are slightly different, though both help you achieve your desired result: selling your website.
Let's take a look at marketplaces and brokerages in more detail and the differences between the two.
Website marketplaces behave like any popular retail marketplace. They connect buyers and sellers on a platform that showcases the seller's products (Websites, SaaS Products, eCommerce sites, etc).
However, unlike your average marketplace, a website marketplace heavily vets its buyers, ensuring that they're serious about making a purchase and that they're not going to waste time or attempt to scam sellers.
A seller will list their website on the marketplace. Buyers will then approach them with offers. If the seller likes what they hear, they'll proceed to make the sale - a process that is also heavily vetted by the marketplace.
Like marketplaces, brokerages will evaluate your site and help you to present it in a way that will bring in the highest possible offer.
Once you've entered into a sales agreement, a website broker will determine an appropriate valuation range and present the website to potential buyers. They will then draft offers and negotiate on your behalf.
The most significant difference here is that the broker communicates directly with you and the potential buyers they think are the most suitable candidates, rather than simply showcasing your website to all interested eyes. This can sometimes mean that you complete the deal faster, but you may also miss out on better offers.
Benefits of selling a website via a marketplace or brokerage
Using a website marketplace or brokerage to sell your website can help you save time, money, and hassle and increase your likelihood of a successful deal first-time around.
Read on for some of the benefits you can expect from marketplaces and brokerages when selling a website:
Getting the deal done faster
It can take months for a website sale to go through if you sell on your own. If you're trying to sell as quickly as possible without harming the process, facilitating the sale by yourself can be a challenge.
On the best website marketplaces, however, you'll receive offers almost instantly and will be able to accept an offer within 30 days. There's no rush, though. If you want to wait around for the best offer, you can keep your website listed for longer.
When selling a website independently, you may come across seemingly interested buyers who end up ghosting you after six months of relentless back-and-forth communication.
A website marketplace greatly reduces the potential for this problem, as buyers are vetted when they sign up. You'll know that the offers coming through are legitimate, and you won't have to bother with weaning out the time-wasters.
Simplified selling process
Selling a website on your own can become complex. You may end up exchanging tens of legal documents, not entirely certain of what you need to process the deal safely.
A website brokerage or marketplace takes away the stress and worry of the selling process and simplifies it into three or four simple steps. For instance, GetAcquired has a Letter of intent and Asset purchase agreement that must be signed to complete the deal.
Potential for better deals
If you try to sell your website on social media, there's no way to know how committed your audience is. Often, you'll be reaching people who are simply browsing their options and not yet genuinely committed to making a purchase.
It takes effort for a buyer to join a website marketplace. This means that you're less likely to be messed around, as you're selling your website to an interested audience that has taken active steps to buy. The more interest you have, the better your chance of an exciting offer.
Now that we know what makes a website marketplace or brokerage worth using to sell your website, so let's take a look at some of the best website brokerages available to use today.
Profitable online businesses can get full support throughout the selling process with QuietLight. An experienced analyst offers potential sellers a free valuation for every client selling a firm. On top of that, this broker also helps guide them through the whole process and negotiates with potential buyers.
The advisors at QuietLight have been there, done that, having bought, managed, or sold an online business themselves. The team has a mantra of "Relentless Honesty" — meaning they're committed to being truthful, even when it isn't pretty.
Another great thing about QuietLight is its vast database of confirmed buyers. Hence, brokers already have leads when actively trying to promote and sell an online firm.
Seller pricing: Up to 10%, depending on the cost of the business
SaaS, content and eCommerce businesses can benefit from the merger-and-acquisitions advisory services offered by FE International.
This website brokerage targets website owners looking to sell their site for $50,000 - $5,000,000 and can help entrepreneurs with every aspect of the selling process, including exit planning, strategic negotiations, due diligence, legal structuring, post-sale, and more.
That said, the best thing about FE International is its due diligence services. This brokerage knows how to evaluate a prospective buyer's assets, so you won't be caught off guard as a seller, avoiding potential fraud. Finally, when you're ready to sell, FE International will create an in-depth sales plan, where experienced brokers will analyze your business.
Seller pricing: 2.5% flat commission
Entrepreneurs that make $250,000 - $5,000,000 in annual profit from their online businesses can sell their websites on DigitalExits. This simply means that their clientele is comprised of large businesses mostly active in technology. In other words, if you're interested in purchasing or selling a technology-oriented business, DigitalExits could be the marketplace for you.
According to the brokerage's stats, the average deal price in the last 12 months is $3,100,000, and the closing rate currently sits at 94%. DigitalExits considers the niche, business model, website traffic, profit, age of the company, and its competitors when calculating the valuation of an online business.
DigitalExits also offers great due diligence services, where once the Letter of Intent is drafted, the chosen offer undergoes extensive due diligence to verify the company's information.
Seller pricing: 10% of the sale’s gross value
For sellers looking for a curated marketplace that weeds out the non-serious buyers, Empire Flippers is a good option to consider.
Sellers are vetted, too - they must have at least $1,000 in monthly profit and 12 months of revenue to use Empire Flippers. You can get an overview of the sites currently for sale at Empire Flippers without creating an account. Plus, Empire Flippers has received a number of awards for its high success rate as a website broker.
Seller pricing: 2 - 15% commission upon completion
GetAcquired is a website marketplace that streamlines and simplifies the website selling process. You can sell your website in just 30 days with GetAcquired, so it's the obvious option if you want to sell your website quickly with little hassle, or you're just not a fan of time-wasting.
As an online marketplace, GetAcquired lets you list your website — which is as simple as submitting your information for review by the site's experts — for viewing by an audience of prospective buyers. On GetAcquired, you let the buyers come to you with offers. Waiting up to 90-120 days gives you a greater chance of receiving the best offer.
You can choose how involved the GetAcquired team is, too, with the option to pay an additional fee to have an expert assist you through the entire sale process, helping you make more money. But the choice is yours — some people prefer to work alone, and that's fine. Not all website brokerages give you this option.
If you want to combine the convenience of not having to find your own buyers with the security of advanced vetting, GetAcquired offers a solution that just makes sense.
Seller pricing: No listing fees
Selling an online business is a huge deal and something you might spend months or years preparing for. When it comes to making the sale, you want to make sure that everything runs as smoothly as possible, with a minimal chance of a failed sale. A website brokerage or marketplace can help you achieve this.
There are plenty of online marketplaces to choose from nowadays, but not all offer the same features and benefits. GetAcquired combines the benefits of a website brokerage with the freedom and flexibility of selling on a marketplace.
Do your research carefully before you settle on a marketplace to sell your website. The right website marketplace or brokerage won't just provide you with the best selling experience — it can also help you get thousands more from your sale.
Acquiring a developed SaaS company does not need to be risky, and it is possible to generate great financial rewards without the stress of having to start from scratch.
While the rewards can be huge, buying or selling an online SaaS business is easier said than done, especially if you've never done it before.
From using marketplaces, such as GetAcquired, to understanding the risks that come with buying or selling, we're here to help.
We've compiled an in-depth guide about everything you need to know about where to buy or sell an online business, as well as some quick tips to help you get started.
Are you ready?
The Right Mindset
Having the proper mindset is imperative when it comes to either buying or selling a SaaS business. Of course, these are two different actions that require separate approaches.
Thanks to the rapid development of online marketplaces over the past few years, websites, blogs, and SaaS products can easily be listed online and sold.
Let’s not waste any time. Let's begin with how to get into the right mindset:
Do it for the right reason. Whether buying or selling, you should make sure you have the right mentality. This is vital. Selling shouldn't be your first thought because you're facing a challenge that seems impossible to overcome. At the same time, buying should only be on your mind if you're ready to grow a SaaS firm, as well as develop your business skills while on it too.
Can you make money? Making a profit is any business person's ultimate goal, but do you have the experience and knowledge to do so? In other words, do you know how to make money? Money doesn't grow on trees, so you have to know how to develop a SaaS business properly or ensure that the price you're selling is the right one. You don't want to complete a sale only to discover that you were taken advantage of and lost profit.
Know what you're doing. To avoid dodgy deals and frustrating buying processes, you must use the right platforms. On top of this, don't shy away from enlisting professional help where needed. That's why professionals, namely brokers, exist: to help out people in your situation.
Private Sales Vs. Brokers For Selling A SaaS
Broker services assist buyers and sellers when selling a SaaS business. And to ensure a smooth transaction, they provide extra safety measures for complete peace of mind.
Brokers, however, have several more advantages, like: The SaaS business is vetted for you. This is the single most significant benefit of working with a broker. You reduce the risk on your end, as brokers check if the company is legitimate.
In the SaaS business world, brokers use confidential data to find you the best deals. So, no one will know you’re actively hunting for new buying or selling opportunities, competitors included.
What’s more, brokers ensure a deal goes smoothly while, at the same time, offer legal assistance if things go south.
Brokers often have access to SaaS vendors you won't ever find by yourself, even if you try to. Consequently, some of the best deals or offers are kept in-house, and only brokers can access them.
Now, pay attention: Some brokers are legitimate, but not all. They are either simply negligent or use shady business practices to overcharge or scam you. When choosing a broker to work with, you must do your due diligence.
On that note, it's highly important to be aware of any potential red flags that may raise alarm bells and indicate you should steer clear.
We've included five examples below:
Fact-checking by using screenshots (which can be fake) instead of vetting a SaaS company. As a buyer, this puts too much risk on you.
Anyone can see the full details of a SaaS business listing. You benefit from having a buyer qualification process even if you are the buyer. The broker is screening only serious buyers.
A broker with outdated listings on their website (a SaaS business that has already sold or is inactive but continues to display it)
No migration support
Lying in their marketing for tactical reasons
Sourcing the Right Website to Buy or Sell a SAAS
Many platforms exist if you're looking for a reliable marketplace to purchase or sell a SaaS business. However, determining which ones are worth listing or searching on is a different ball game.
We've taken the stress out of the task for you by compiling a list of the top websites you should use. Sure, you might be already familiar with some of these avenues, but there's a good chance you'll learn something new here.
Perhaps the most well-known marketplace on the internet is Flippa. Websites and domain names can be bought and sold on the site. Over time, the platform has expanded into apps and even eCommerce stores.
One of the most significant advantages of using Flippa is that it's super popular. This means you get access to a large pool of potential SaaS buyers and sellers, and it offers flexible price ranges.
However, because of its popularity, it does come with some cons too. One of the biggest ones being that there are, unfortunately, some scammers and bogus buyers are kicking about.
Because Flippa doesn't carry out the most active form of vetting, this can cause some wasted time. With this said, many buyers and sellers in the SaaS space still have excellent experiences using the platform.
On the other extreme, we have FE International. This agency vets every business listed on its platform, unlike Flippa. They sell only businesses with revenues in the mid-five to the seven-figure range.
With FE International's strict vetting process, you're much more confident in the seller's credibility. It eliminates scams and bogus companies, so you're far less likely to experience any sort of risk.
In addition to this, FE International helps you at every stage of the buying or selling process. They even help you to draft the contract.
Yet, because of the type of vetting process the platform carries out, finding affordable SaaS businesses is hard to come by. That doesn't mean they don't exist, though. It's just hard to discover them. Therefore, you'll likely need a budget of millions to acquire a SaaS company on FE International.
Moreover, the platform does not offer migration services, so you will need to carry out the process yourself, which requires patience and expert help!
Empire Flippers specializes in selling quality online businesses, including SaaS products. As a trusted marketplace, the platform comes with a range of benefits.
The vetting service carried out by Empire Flippers considers both the buyer and seller with a legal team to smooth out any negotiation issues.
Every listing is carefully vetted, as data is reviewed thoroughly, offering complete transparency to prospective buyers.
Fortunately, the migration part of the process is handled by Empire Flippers. This takes the stress out of the admin tasks that come into play, saving time, money, and energy.
GetAcquired is the best online marketplace when looking to sell or buy online SaaS businesses. We can help you close a deal within 30 days and rid you of deals that go nowhere.
If you are a seller, here is how we help sell your online business in 3 simple steps:
Create your listing
Connect your revenue and analytics for review
Sign with GetAcquired
If you are a buyer, we make it as easy as possible to look at potential listings and interact with sellers who our team of experts has previously thoroughly vetted.
No matter what side of the coin you're on, buying and selling an online business via GetAcquired is the perfect place to explore startup investment and sales opportunities.
And, of course, the points above perfectly illustrate just how beneficial it can be to acquire a SaaS rather than start from the ground up.
When you buy rather than build your own SaaS business, you can enjoy many benefits.
An open mind, diligence, and willingness to explore opportunities are all that's needed.
What’s more, you might want to consult a reputable SaaS business broker. Hence, if you need solid SaaS buying advice or would like to make your SaaS hunt a lot easier, we're on board to help.
We have SaaS businesses for sale on our marketplace.
The question is: Do you have a SaaS business that you'd like to sell?
If so, GetAcquired will help you find the best deal.
And we can also assist you in acquiring a SaaS too, and with as little stress as possible.
Your Next Steps
If you're interested in exploring or learning more about GetAcquired and our online marketplace, visit our website to view our handy tools.
From quick valuation estimates and handy blogs on what to expect when buying or selling an online SaaS business, we aim to help everyone.
If you're sold on the idea of using GetAcquired, don't lose time. Get started today!
Are you thinking of selling your SaaS startup?
There are many reasons you may have decided that selling is your best move. Before doing it, but, there are a few things to consider.
First and foremost, valuing your SaaS requires a professional valuation. In addition to this, you have to think about de-risking the acquisition for your buyer.
This guide sets out the precise steps you should follow to get the offer you want for your SaaS startup.
Let's dive in and learn about what needs to be done.
Valuing Your SaaS Business
Before you can sell, you must evaluate your SaaS. That said, because every type of SaaS is different, there isn't a universal approach here.
Instead, you need to use the correct type of methodology.
Your startup's value is based on its current and future performance, which involves some uncertainty.
In every case, all valuations begin by comparing current earnings with revenue, so let's do that.
Start With Earnings
There are different types of earnings to look at when valuing your startup. Below, you'll find a breakdown of how to calculate the numbers related to each:
Seller Discretionary Earnings (SDE)
Small businesses apply the multiple to SDE. This is your profit after operating expenses and cost of goods are subtracted from revenue but after adding back in your compensation. Here's a formula to calculate your SDE:
SDE = (Revenue - Operating Expenses - Cost of Goods) + your salaries
But, what is the point of adding your compensation back in?
Simply put, if you take on the lion's share of responsibility, then you're probably taking home the most profits as compensation. At the same time, you're enjoying the capital and tax benefits of being a small business owner.
By incorporating owner compensation into SDE, earnings potential becomes even more accurate.
Earnings Before Interest, Taxes, Depreciation, and Amortization
After hiring a management team, things start to get trickier. For example, compensation cannot be included in your earnings since you no longer are the sole decision-maker. As such, this is added as an expense when calculating your earnings. In addition, EBITDA will be used as the multiplier.
Calculate EBITDA in two ways:
EBITDA = Operating Profit + Depreciation and Amortization
EBITDA = Net Profit + Interest + Taxes + Depreciation and Amortization
When To Use Revenue?
Since you invest in growth, your EBITDA or SDE might be zero. In this case, apply the multiple to revenue. Most SaaS companies accept losses in exchange for growth. If you scale, for instance, you might pull back on marketing and product development expenses.
When choosing revenue, remember that you'll have to prove to whoever is assessing your valuation that you're on track to achieve such growth. Remember to back up your valuation with projections, market research, and other evidence.
You can calculate SDE, EBITDA, and revenue from a balance sheet in minutes. Multiples, however, are much more complicated. In determining the multiple, business, market, and performance factors are taken into consideration in addition to earnings.
The above methodology is mainly used by publicly traded SaaS businesses. Even so, it is an excellent place to start for any SaaS firm. And now, it is up to you to figure out where you fall on the spectrum. To justify a higher multiple, consider if your startup:
Can run itself, without your involvement
It has been active for more than a year (the longer, the better)
Shows growth potential
A few success metrics will also need to be reviewed, including:
Image source: https://www.productplan.com/glossary/churn/
The term refers to lost revenue due to net customer losses and downsized commitments.
Churn rate is a valuable metric for gauging customer loyalty and how well your product or service performs. Yet, to determine if your churn is better than others in the industry, you must compare it.
As your churn rate declines, multiples rise. Keep that in mind.
Lifetime Value of Customer (LTV)
If your LTV is high, it might justify a higher CAC or other revenue losses. On top of this, it serves as a valuable way of targeting customers that offer the most satisfactory returns.
Consider churn, CAC, and LTV in tandem when calculating your earnings or revenue multiples. Together, they provide a better understanding of your business' growth potential.
Customer Acquisition Cost (CAC)
Overspending on customer acquisition impacts the value of your business, so you want to keep your CAC low.
Trying to gain new customers by burning cash is a short-term strategy that often leads to startups failing. If you want the multiple to remain high, you must show why a high CAC is justified.
The Final Valuation Figure
To calculate your startup's value correctly, follow these steps:
1. Identify the methodology that best suits your startup model: SDE, EBITDA, or revenue?
2. Choose an appropriate multiple: Consider the churn rate, CAC, and LTV data (reviewed together with age and operational requirements) to determine your startup's fit.
3. Calculate the multiple to your earnings or revenue: You can use this as a guide to starting a discussion with the buyer. Also, you must explain how you came up with the numbers so that buyers can trust your calculations.
Auditing and Records
Your buyer will audit you and your SaaS to every fine detail, so ensure your accounting, legal, and human resources teams get everything in order, including all necessary paperwork.
When there are miscalculations during due diligence, purchases could be threatened, or the valuation could be affected.
Remember, if such issues exist, a prospective buyer will spot them.
Enlist Outside Help
Engage outside help for due diligence. Even if your staff are competent, any mistakes at this stage can kill off a sale.
So hiring professionals with specialized knowledge of acquisitions can be invaluable during the selling process.
If you're looking to hire outside help, consider the following professionals:
Evaluation companies: They help you determine your SaaS startup's accurate market price that can satisfy even the most doubtful buyers.
Accounting firms: A pre-sale financial audit confirms your records' accuracy to the buyer, independently and legally. This helps grease the wheels and instills confidence and trust in the organization.
Accounting and finance services: Expect to receive pro forma pictures, financial schedules, expense accounts, and revenue reports. To better understand cash flow, the prospective buyers may ask for earnings projections and forecasts.
Law firms: They organize and standardize all legal documents associated with the sale. In addition, law firms may relieve prospective buyers of the stress of dealing with their legal counsel.
As expected, enlisting professional help costs, but in doing so, you'll have all hands on deck and the right expertise to guarantee the most profitable sale.
Vetting Your SaaS Buyer Pool
Selling your SaaS startup is challenging to say the least, since the involved parties have conflicting goals in mind.
So, as a final step, it's to evaluate prospective buyers to advance with the sale.
At GetAcquried, not only do you have access to great support along with a secure marketplace to buy and sell, but you also benefit from:
No favoritism, early access, or queue-cutting;
Direct integrations with services like Stripe to verify financials;
A platform solely for buying and selling of SaaS startups;
A consistent, proven acquisition process that works for both buying and selling;
A team of SaaS experts ready to help and intervene whenever required.
From the assistance you'll get from day one to the legal administration of investing in a startup, GetAcquired offers many benefits.
Here are some of our top tips on how to successfully vet your potential buyers to avoid wasting time:
Speak with them. Having clear expectations on both sides assures that an acquisition will not be stalled or hindered by disagreements in as little as fifteen minutes.
See what motivates prospective buyers by searching their LinkedIn and social media profiles. Look for evidence of successful acquisitions or a trail of happy founders.
How do they acquire customers?
It's important to know why they would like to buy your startup and that they have the funding to do so if you're their first acquisition.
A serious buyer has a plan. Buying from an experienced buyer is beneficial.
The ideal buyer, though, shares your goals, experiences, and plans. Goals are essential, but there is a whole spectrum between which acquisitions could be successful.
The buyer may have big plans for your startup. Often, they might have a vision of rapid growth and multiple profits. But, do they possess the expertise to accomplish their goals? If not, you risk the deal getting stalled if something starts to upset their vision.
Morale, productivity, and motivation are all affected by culture. It can make or break startups when times are tough.
A disagreeable and obnoxious buyer will bring your company into disrepute if you've nurtured a culture of positivity, support, and collaboration.
Get to know your buyer's values, beliefs, and leadership style before you start negotiating.
Ready to Sell Your SaaS Startup?
Using our handy step-by-step guide, we've walked you through the selling process. How you go about selling is totally up to you.
Selling your SaaS startup requires some analysis and even outside help. Yet, with the right framework to go by, you can get the offer you want.
With GetAcquired, you're accessing the number one marketplace for selling and buying startups.
Sign up today to find your next investment opportunity!
Are you ready to buy a SaaS startup?
By acquiring a SaaS startup, you’re entering an industry with sky-high returns, long-term profitability and much much more!
The cloud-based SaaS model offers convenience, scalability & lower maintenance costs. Plus, impressive annual prediction growth rates make it easy to see why many are looking to invest in SaaS startups.
If you're already sold on the idea of buying a SaaS startup, keep reading.
We’ll look at how the buying process works and what you need to consider before purchasing a SaaS business.
Why Buy a SaaS Business Instead of Building One?
Building a successful SaaS startup requires hard work. In fact, 90% of startups fail in the first five years of operating.
And those fortunate enough to raise startup venture capital might struggle to bring a return on investment (ROI) for their investors.
This can bring about a dilemma for prospective entrepreneurs: to buy or build?
When you love what you do and have the skills to build a business, you may be better off opting to start your own SaaS.
However, when you're a grower, it makes more sense to acquire a startup that aligns with your skill-set and allows you to expand and scale it up.
If you're on the fence, consider the following to help you determine your decision:
1. You Lack the Necessary Experience to Build
Take advantage of your strengths. The degree of passion you have for something influences your success. If you're a grower, pushing yourself through a hole designed for builders is a waste of time (you'll get stuck). Instead, invest in a startup that already has the pipes built.
2. You Don't Have the Time Required to Build
When buying a company, you buy time. That is no secret. Say you've come up with an excellent idea, but your job, business, or other responsibilities prevent you from pursuing it. If you want to boost your odds of a successful exit, you can run multiple SaaS businesses, for example. Buying a growing startup, you’ll reduce much of the stress as you step more into a private equity role.
3. You Want to Minimize Risk Exposure
Building a SaaS involves taking a risk to start a business from an idea. The late nights, setbacks, and stress that go along with it are unavoidable. Turning from zero to one, it's tough, especially if you're moving into a new niche, product, or service. Failure might be difficult to recover from both mentally and financially.
4. You Like the Idea of Evolving an Existing Startup
To put it simply: Acquiring a startup is more accessible than starting one. Taking an established business and improving it is much easier than starting a business from the ground up. It isn't only less effort, but it is also more enjoyable, and results will happen a lot faster if you ride that momentum instead of starting from scratch.
5. You've Identified an Opportunity
There is nothing wrong with iterating what already exists for great startup ideas. It could be a better service, a better marketing strategy, a more reliable business model, etc. It's even easier to acquire a flagging company, fix the problem, and then watch the revenue grow! A tired startup can be revitalized much more easily than a new startup can be created.
6. You're Ready to Beat the Competition
It is usually easier to acquire the competition than to compete with them. Try running the numbers at a minimum: what would it cost to implement new technology or revamp operations? Calculate the acquisition cost and compare it to determine the right call.
Now let's move on to the next step in the process - your step-by-step guide to buying a SaaS business.
Your Step-by-Step Checklist
Carrying out a complete analysis of the marketplace you'll be buying from is a common-sense step; however, many try to rush this part of the buying process. Below, find a checklist to help you perform due diligence on a SaaS business to prevent you from burning your hard-earned money:
Review their Financial Metrics
Arguably the most crucial step is to vet the accounts. If a business is of interest, it's time to crunch the numbers. The first step is to ensure that the relevant financial reports and numbers are available for review. Ideally, this means the actual revenue numbers & P&L are connected to the listing so that you can see live financial data, not just a series of static screenshots.
While all financial metrics in SaaS help tell the company’s story, ensure you review the profit and loss statement in detail. This should reveal any added expenses that come with the business. In reality, you don't want to purchase a SaaS company with good revenue figures only to discover high costs, which means the net profit is lower than expected.
If this is the case, it isn't always a reason to move on. It could mean there's potential to buy at a lower valuation, reduce the costs, and then enjoy a higher profit margin for the right investor.
In addition to viewing the available numbers, you should also be in a position to view the analytics accounts tied to the SaaS business of interest. You want to analyze the price the company is paying for website traffic, the cost per click, conversion rates, etc. While a high cost per conversion isn't optimal, it can mean there's room for improvement for a savvy investor.
Understand the Pricing Model
Once you have a clear idea of the revenue for the SaaS startup you're interested in, it's time to understand the pricing model.
There are many different pricing models for SaaS businesses. However, the most common and attractive investors are monthly recurring revenue (MRR) and annual recurring revenue (ARR).
MRR is generally the preferred method in the industry as it requires a smaller upfront investment for new customers. In addition, with MRR, it's far easier to track a company's performance. Remember that.
Approach this aspect of the process with a marketing viewpoint, as well. Your due diligence should not solely focus on legitimacy but include the identification of potential opportunities.
Look at figures that relate to the number of subscribers the platform has, what type of tiered system it uses and if it could be altered, churn rates, and the lifetime value of customers.
Check the Source Code
A SaaS business is built on its source code. With a strong foundation, be certain the product will last. However, on the flip side, if you pay over the odds for poor quality code, you could be entering into a money pit with huge never-ending technical debt.
If you're not a developer yourself, hire someone with technical expertise to review it for you. Not only is it essential to make sure that the code is well written, but it's also necessary to ensure that the source code belongs to the business owner, not the developers hired to create it.
Finally, include the complete source code in the terms of your purchase. Otherwise, you might not be eligible for owning the products, features, and relevant code after the sale.
Learn About Customer Acquisition
Weigh up the acquisition channels in which you'll source your customers via the SaaS startup. The main five channels are as follows:
Both paid advertising and organic search are the two primary sources when looking at SaaS acquisition channels.
We recommend diversifying traffic across multiple channels to ensure your startup lasts. If you are not well-versed in digital marketing, hiring a marketer to assist you with branching out and deploying strategies across the channels listed can be highly beneficial.
Analyze the Competitive Landscape
When you invest in a SaaS startup, you are also investing in a share of the associated market. Because of this, it is a good idea to find out about your competition to gather the relevant information to beat them.
A SaaS business is something that already has a following. Upon purchase, you could ask for customer feedback to better understand their reasons for using the software and what improvements they would like to see. Then you can build up a customer persona by getting to know your customers.
Remember to assess your competition from multiple standpoints. For example, you should consider pricing, marketing, and your competitors' products to understand better how your software can exceed theirs.
Check Social Media and Email Lists
Considering how social media is driving the world, it's always a good idea to assess the social media profiles of SaaS companies. That said, don't expect to find large followings, as some SaaS businesses might not have a following at all. A lack of a social media presence isn't necessarily a problem, though. If you can increase it, it will help broaden the reach of the product.
An email list serves the same purpose. An email list doesn't need to contain only paying subscribers. If you can find the email address of someone who still demonstrates interest, you can reach a potential subscriber interested in the same space as your product.
Having an email list also allows you to retargeting advertising, which is a great way to create campaigns.
Since software can be complex, it can be challenging to explain what it does and how it can improve your customer's lives. Good branding can help get your message across, so you should make it one of your top priorities from a marketing perspective.
If the business isn't branding its service clearly, this can be an opportunity to grow its revenue. You can improve its branding and increase sales. In addition, don't forget to make sure any trademarks or patents are included in the sale of the business.
Where to Buy a SaaS Startup
Before purchasing a SaaS startup, you need to choose a trustworthy marketplace that vets its sellers. So, it's wise to look at what the different platforms offer to keep the buying process speedy, efficient, and secure.
For example, when buying a SaaS business, opt to use platforms that specialize in collaborating with the SaaS industry, such as GetAcquired.
Before you get started, assess your buying platform in 3 steps:
Determine which platform is the best based on your needs and how much you can invest;
Find out the reputation of the buying platform;
Choose your platform according to the sector said platform is most affiliated with.
When you're choosing to buy a startup, you're going to need a few helping hands on board. That's especially true if you haven't any previous experience in investing in startups.
With GetAcquired, not only do you have access to great support along with a secure marketplace to buy and sell, but you also benefit from:
No favoritism, early access, or queue-cutting;
Direct integrations with services like Stripe to verify financials;
A platform solely for buying and selling of SaaS startups;
A consistent, proven acquisition process that works for both buying and selling;
A team of SaaS experts ready to help and intervene whenever required.
From the assistance you'll get from day one to the legal administration that comes alongside investing in a startup, there are many pros to choosing to buy your SaaS business via GetAcquired.
Ready to Buy a SaaS Startup?
We've guided you throughout the buying process with our handy step-by-step guide. But in the end, the choice of purchasing in a startup is up to you.
Sure, investing in a new business is intimidating, but, at the same time, it's also incredibly exciting.
Choosing GetAcquired means that you'll benefit from choosing the number one marketplace for selling and buying startups.
Sign up with GetAcquired today to find your next business investment opportunity tomorrow!
One of the biggest hurdles to buying a software as a service (SaaS) company is that, to some extent, you have to do it driving blind.
No matter how cooperative the seller is and how many snippets of code they share, no small business is going to reveal their entire codebase to you before you fork over the cash.
That means the technical due diligence you perform on that software—i.e. checking for bugs, seeing how well the thing is built, how easy or difficult it will be to add features, how much you’ll have to pay a developer rebuild the thing—will involve some amount of guesswork.
But that doesn’t mean you have to leave technical due diligence to chance, especially if you know what you’re looking for.
Technical debt: an introduction
When we do technical due diligence, we’re looking for tech debt. Pioneering developer Ward Cunningham came up with this analogy to explain all of the refactoring he was doing on a piece of software to his non-technical boss.
Refactoring is what you do when you rebuild and clean up a piece of code, knowing what you know now, without changing its outputs. (“Figure out what it should have been, and you make it that,” as Cunningham puts it.)
It can be difficult to justify spending money on rebuilding something without changing the way it (superficially) works, especially to someone non-technical. Because he was working on financial software at the time, Cunningham explained it in financial terms instead.
If you don’t refactor now, you’re going to have problems later—updates will take longer, new features will get more expensive to build, life will get harder. You’re going to start paying interest on all that work you’ve been putting off.
Continuously rushing updates out the door and tacking new features onto a piece of software without refactoring is like borrowing money without planning on paying it back. You always have to pay it back.
Technical debt is what we’re looking for when we do technical due diligence. How much you find can mean the difference between a seamless acquisition and months of rebuilding.
Gaining the buyer’s trust
Sellers are terrified of getting X-rayed by potential buyers: it’s time-consuming and distracts from their regular work, because they’re afraid of giving away their secret sauce, and also because like you, they’re afraid it might unearth some embarrassing flaw in their product.
You can’t perform due diligence properly if the seller is anxious—they won’t be forthcoming about any potential problems, they’ll be less transparent, and they’ll also be less likely to go through with the sale. The best way to avoid this is to build __trust__.
MEET FACE TO FACE IF YOU CAN
Much like you’d have coffee with someone before going into business with them or going on a second date, meeting face to face lets you instantly develop a rapport with a seller.
If you can’t meet in person, hop onto a Zoom call and introduce yourself. Ask them about any concerns they have, and do what you can to put them at ease. Reassure them that you’re not there to shake them down for information—you just want to learn more about how their software works.
KEEP THINGS SIMPLE AND LOW-STRESS
Warren Buffet is famous for his one-page contracts and his low-stress method of acquiring businesses. If he looks at your financial statements and likes what he sees, he’ll buy, simple as that.
This works not just because it removes a lot of friction, but also because it builds trust.
Poking and prodding too much into someone’s business does the opposite: it signals suspicion and puts the seller on edge.
By all means, do your due diligence, but try not to put the seller under a microscope either. If you’re worried about a problem in the product, ask the seller first instead of trying to dig it up yourself.
The technical due diligence walkthrough: a checklist
When we did technical due diligence on First Officer, a Stripe analytics tool we acquired, we were essentially trying to figure out how the founder, Jaana, had built the product.
Because you’re only looking at a codebase a few snippets at a time and asking fairly general questions about the technical choices the business has made, doing a technical walkthrough is as much an art as it is a science. You need to infer a bunch of things based on what you see.
What do they say about the way this software was built? What do they say about the habits of the person who built it? How much of this are you going to have to clean up/rebuild when the purchase goes through?
Sign up for the SaaS tool you’re inspecting first and see what you can figure out about the way it works from the outside. You’d be surprised by how much a talented developer can learn just by using Chrome’s Developer Tools.
ASK FOR SOME CODE
What does good code look like? People who write it for a living will tell you that it should read like a story, i.e. should make __sense__. If you can’t follow the story, it’s probably not written very well.
Can you figure out what’s going on in a piece of code just by looking at it? One fundamental building block of readability is naming—i.e. how has the person who built this software labelled everything?
Are all of the variables, functions and classes named meaningfully in a way that’s designed to aid readability? Being a non-technical or beginner might actually help you here. If you can’t make heads or tails of this stuff as a newbie, it might not be well-written code.
Has the code been tested at all? If not, that’s probably a red flag. And if yes, does it run when you test it?
ASK FOR DOCUMENTATION
Software development produces a lot of documentation: initial wireframes and sketches, fully fleshed out descriptions of the software architecture, API documentation, metrics that are important to day-to-day operations, etc.
Get your hands on as much of this material as you can—scanning over it is crucial to understanding how this system was built and how it’s evolved over time.
(Note: you’ll probably want someone with at least a bit of technical know-how to help you with at least these first three steps.)
ASK THEM HOW THEY BUILT IT
Why did they make the technical choices that they made? Why that specific programming language or database?
Ask them about the non-technical stuff too, like how long everything took to build and how much everything cost. What’s their process for developing new features? How do they test, deploy and support those features?
ASK ABOUT THIRD-PARTY TOOLS
What other software or services does this SaaS business rely on? Are any parts of it open source? Have they paid for all these tools and are they fully updated? What about the content on the site? You don’t want to buy a business that depends on pirated software or unlicensed images.
If the business relies heavily on web hosting, ask for and analyze the bandwidth and downtime data—is hosting currently reliable, or will you have to upgrade?
Don’t forget IP and licensing
One huge roadblock we ran into when buying FirstOfficer was that the original owner’s Stripe license—which was for businesses based in Europe—was no good in Canada, where we were based. This was especially problematic given the fact that this was a Stripe analytics tool!
Make sure you’re aware of all of the licensing and legal dimensions of the business you’re buying. Double check things like:
Is the business properly incorporated or otherwise registered, and do all its licences, tools, hardware, etc. belong to the business, or do they belong to the owner?
If the software depends on any patents, trademarks or any other form of intellectual property, has the business locked them down? Or will you have to do that yourself?
Is the business contractually obliged to do anything you might not want to do yourself? To use specific software or tools? Have they honored those obligations?
Keep everything in perspective
People who build software businesses are busy, move fast and sometimes have to make compromises. Dig deep enough and it’s almost inevitable that you’re going to come across some kind of problem when you do your due diligence.
As we mentioned before, the cornerstone of a transparent and successful sale is trust, so keep things in perspective when you find something you don’t like.
Be upfront about any concerns you have. But unless the problems you find are a dealbreaker for you, try to approach the conversation in a constructive way.
Remember that in the end, you’re not trying to critique this business—you’re trying to understand how this person built their business, why they built it the way they did, and how much it’s going to cost you to fix any mistakes they might have made along the way.
This is a big topic
I’ve got more articles coming on this so feel free to subscribe to our mailing list if you want to learn more about technical due diligence. Or if you want to read more about how we bought our first SaaS business, check that out here.
I’ve never understood the whole “unicorn or bust” thing in startups.
Don’t get me wrong, I get where it comes from. VCs raise big sums of money, so their investments need to deliver big too. They’ll make twenty of them, and one has to go ‘unicorn’ to produce a sizeable return that at least covers the other 19 that fail.
Raise. Scale. Grow or Die.
That’s been the model for tech entrepreneurship for the last decade. After years of unicorn this and unicorn that, founders have come to believe that if you don’t come in first, you’re last. And that mentality just never made any sense to Ajay and I.
We met while working together for a Tiny portfolio company that I was running at the time called Flow. What’s interesting about Tiny is that they manage to find and buy successful non-unicorn companies seemingly every other month.
There were many benefits to working for Tiny, but the best part was getting to witness four years worth of these non-unicorn startup acquisitions. It was hard to come away from that experience without wanting to try it ourselves. So after our time with Tiny was up in early 2019, Ajay and I made a decision. We were going to buy a SaaS business.
The Hardest Step: Finding Something To Buy
If you’ve been buying and selling businesses for a while, deals tend to find you. But if you’re starting from scratch like we were, your choices are a) to keep an eye on what’s publicly listed, b) hope something reaches you through your network, or c) conduct an off-market search.
And trust me, nobody wants to do an off-market search.
What we were looking for was a SaaS business that had been around for more than a year and had existing customers. We wanted something with flat to modest growth, and lots of upward potential. One of those “failed” start ups, one that wasn’t quite a unicorn. Even more important than its financials was the problem the company was solving. It needed to be a problem we were passionate about solving.
We weren’t interested in buying someone’s unfinished hobby project, so all of those side project sites you keep hearing about were out.
I tried using Flippa, which these days is best known for domains and, unfortunately, fraudulent ecommerce listings. I tried powering through, but once I realized most of the listings were open auctions, I was done. I had zero desire to buy a SaaS business off of eBay. Plus, doing due diligence on all of those listings was going to be a big pain in the ass. Site traffic stats are readily available, but if you want to figure out someone’s metrics, financials, sales, etc., get ready to sort through 30-40 long PDFs.
I had high hopes that we’d find something through a brokerage, but after several months I realized that wasn’t going to work either. Brokerages reject 95% of potential sellers because they want to list big deals that move quickly. That means being ruthlessly selective, turning away anything that isn’t an obvious mover. With a 95% rejection rate, the odds of us finding what we wanted was next to nil.
After five months of watching and waiting, we finally bit the bullet and decided to do an off-market search.
The Dreaded Off-Market Search
This meant hours upon hours upon hours of research and cold emailing.
I started by making a list of all the niche markets we cared about. Then I made a list of all the candidate companies in a particular niche, checked to see who’d raised money, and how much. If a VC had already crowned a king in that space, we’d avoid it.
I’d then try to get a sense of each company’s revenue. I’d first assume 80% of a startup’s customer base landed in their lowest price tier. That gave me a rough average revenue per account (ARPA) figure. I then searched for any customer milestone announcements they’d made to get a sense of how many customers they had. I multiplied the two, and bingo, a ballpark revenue guess. I did this to avoid wasting time reaching out to founders who weren’t in our price range.
When I found a potential fit, I’d check out the most recent post on their company blog. If it had been months since they’d posted, I’d take that as a sign that the company might not be a priority for the founder anymore, and I’d try to get in touch.
Despite taking all of these steps to waste as little of my time and the founders’ time as possible, there was still no way to avoid asking founders the same questions over and over.
And it wasn’t just time I was burning. I was also using pricey SEO analytics tools like Ahrefs and SEMrush to understand a company’s domain strength, keyword foundation, and PPC history. Plus other tools to track deals, conversations and capture my research.
After a few months of this, we ended up reaching out to a small software analytics startup based in Finland named FirstOfficer, a bootstrapped operation run by a person named Jaana who had put more than six years of her life into building the product.
Jaana told me she was interested in selling. In fact, she had been rejected by a brokerage just a year earlier.
We’d finally gotten lucky, but our quest to acquire a SaaS company wasn’t nearly over.
You Need To Be Lucky
We did an intro chat, signed a nondisclosure agreement, and immediately started doing our homework.
Jaana shared some detailed SaaS and financial metrics with us, which was pretty easy for her because the tool she built was a SaaS financial reporting tool. Lucky again!
Next, we made her a non-binding offer (letter of intent) to make sure we were in the right ballpark, price-wise, which we were.
Despite all of that good luck and buyer-seller fit, it still took us months to successfully acquire FirstOfficer. We were in very different time zones, so due diligence took extra long. We incorporated a new company, did technical due diligence, drafted our own purchase agreement, and had to navigate the legalities of Escrow. Once the sale was completed, we started the high-paced, high-stress process of transferring assets. Thanks to our past experience and helpful advice from friends, we got through it.
Almost an entire year after starting our journey, we finally owned a SaaS company.
Why The SaaS Market Needs GetAcquired
We’re building GetAcquired to scratch a few very obvious itches.
Brokerages are a great option if you’re looking to buy a P&L. Services like Flippa are great if you want to buy a domain. And sites like 1Kprojects are great if you want to buy someones half-built hobby.
But if you’re like most SaaS buyers, until recently your only option was to subject yourself to an off-market search and pray you get lucky before you run out of time, patience and money.
Same goes for the seller side. The vast majority of the offers you get from off-market buyers end up being a total waste of your time.
How We’re Different
We believe there’s a ‘best in class’ buyer-seller model for SaaS, one that doesn’t depend on open auctions or closed-door brokering.
We believe both sides should have access to real-time, up-to-date sales data and metrics that are anonymized, secure and—most importantly—verified.
Finally, we believe there’s a lack of tools, knowledge and support for founders and buyers who simply want to learn about the business of buying and selling SaaS. Founders pour years of work into building these companies. When it comes to advice about selling, they want to go to someone they can trust.
In short, our mission is to make GetAcquired your one stop shop for selling and buying a SaaS business.
Feel free to check out these other posts
We mentioned in a previous post that when someone buys a SaaS business, they’re buying a toehold into an industry niche.
Buyers do this because building a new SaaS business from scratch is difficult.
Whether you’re an investor building a portfolio of SaaS businesses or someone who just thinks they can take a product and make it better, it usually makes more sense to buy and build upon a business that already exists these days than it does to start from zero.
But there are tens—if not hundreds—of thousands of SaaS businesses. According to SaaS mag, there are 7,000 of them in the marketing space alone, most of which you can find in this breathtaking infographic:
How exactly are you supposed to pick an industry—much less an industry niche—when you’re overwhelmed with so many choices?
Here are some questions you can ask about an industry, niche or potential acquisition to help you answer the question – what type of SaaS business should I buy?.
Do you have past experience in a specific industry?
Stick to what you know. That’s what venture capitalist Paul Graham argues in his famous essay about picking problems to solve as a SaaS founder.
“It sounds obvious to say you should only work on problems that exist. And yet by far the most common mistake startups make is to solve problems no one has,” he writes.
It doesn’t matter whether you’re a SaaS founder or investor: it’s difficult to see gaps or opportunities in a market or to be sure you’re working on a problem worth solving if you aren’t already deeply familiar with it.
If you’ve already put a lot of legwork and time into a specific problem or niche—as a founder at a startup, an employee at a large company, or even a student in a PhD program—it’s probably worth your time as an investor too.
That’s not to say you need deep experience in every industry niche you look at. It just means you need to do your homework.
“It doesn’t work well simply to try to think of ideas,” emphasizes Graham. Dive deep and learn more about an industry, however, and good investment ideas will pop out and seem obvious to you.
Are you passionate about a specific problem?
Instead of looking for that one brilliant business idea or market, maybe you’re better off following what you’re passionate about instead.
“People typically reduce products to a single idea,” observes Pixar co-founder Ed Catmull for the Harvard Business Review. But as Catmull points out, finished movies contain “literally tens of thousands of ideas.”
Successful businesses are exactly the same: you’ll need hundreds of good ideas to make them work. Scaling a SaaS business is hard work, and you’re almost certainly better off picking an industry you can devote a few years of your life to than something that just looks good on paper.
Are you building a portfolio of SaaS businesses?
You might start your search by thinking about what other SaaS businesses might complement any existing SaaS businesses you own. In big business they call this integration.
Vertical integration is what you get when you buy a business further up or down your supply chain—i.e. your suppliers, or your customers. In SaaS, that might mean buying both an online store and the payment gateway that the store runs on.
Horizontal integration involves owning multiple businesses at the same place in the supply chain—owning two payment gateways, two SaaS finance analytics tools, two chatbot companies, two or more of whatever. Usually it involves buying a competitor and turning them into an asset.
Supply chain thinking has its limits in SaaS, but if you’re strapped for ideas about where to look for acquire-able businesses next, try to think about how they might integrate with any existing businesses you own.
Think about any SaaS tools any of your existing businesses already depend on, and whether it might benefit from owning one outright.
Same goes for any competitors you currently share a niche with. Instead of competing with them, could you afford to buy them (and their customers) out instead?
What do you want?
Buyers will often make a choice between scalability and sustainability when acquiring a SaaS business based on what their goals are as an investor. But those factors can guide you when exploring entire industries, too.
If you’re risk-seeking and looking for a business with solid growth prospects, you’ll probably find it in a growing industry or niche—i.e. a relatively new market segment where:
Demand is growing
Companies are young
There is no clear winner and competition is fragmented
Revenues are more important than profits
Buying into a growing industry usually also means buying into an idea and having some amount of passion for the industry.
Are your skills and experience valuable to a SaaS company that needs help growing? Then you’re better off looking for scalable companies in a growing market.
If you’re risk-averse and less interested in growth than you are in buying a SaaS business that can generate you a steady cash flow, you might find it in a mature industry or niche where:
Demand has tapered off
Sustainability and efficiency are more important than scalability
Buying into a busy, consolidating, mature industry is a financial transaction as much as it is an entrepreneurial one. Your money is just as important as your skills, experience and passion.
What does your network think?
Good SaaS companies are built, grown, invested in and purchased by people who know what they’re doing. It might help to talk to some of them before you start your search.
Use your network and ask people who already buy companies out for a coffee. People cover a lot of ground when they do an off-market search—if someone’s done it before you, they’ll probably be brimming with stories and advice.
Talk to SaaS entrepreneurs and ask them about what they’re excited about these days. Founders are passionate people who have to keep constant track of competitors, industry trends, customer sentiment, other founders, and a million other variables. If there’s any undiscovered value in an industry, a good founder might know about it.
It might be an industry cliché at this point, but talking to your customers is still the best way to find out what a market wants and whether or not you’re solving a real problem. If you have an existing SaaS business, ask your customers what other SaaS tools they use and whether they’re happy with them.
One last thought
If this is your first purchase, you should consider picking something that you’re passionate about. Anything worth doing comes with adversity and having something you are passionate about can be the difference between giving up and pushing through.
You’re ready to sell your SaaS business and finance the next chapter in your life—an early retirement maybe, or another SaaS business.
You know you might be able to get some amount of money for it. Based on conversations with other founders and people who are experts in this, you’ve got a ballpark idea, an order of magnitude maybe.
But do you know how to value a SaaS business?
How to value any business
Up until recently, SaaS valuations were heavily influenced by the unicorn economy, where valuations are based more on future projections than current profitability.
But most SaaS businesses aren’t unicorns. Most will be somewhere between a typical small and medium-sized business (SMBs) and a high-growth Silicon Valley rocket ship. And so how you value a SaaS business should probably fall somewhere in between.
How most business valuations work
Generally speaking, there are three ways to calculate the value of a business:
1. You can add up the value of all of its assets and subtract its debts to come up with its book value. This is what you’re left with if you liquidate your business, i.e. sell off all its assets, pay off all its creditors and keep the difference.
2. You can look past the numbers and base it on what similar companies are going for on the market, an expert’s opinion, or even your personal gut feeling.
3. Finally, you can base it on your company’s earnings—SDE, EBITDA, revenue multiples, these are all earnings-based valuation approaches—and project the value of those earnings into the future using some kind of multiple.
SaaS businesses use approach #3 because most of their assets are intangible, because SaaS people are focused on data and results, and because the most valuable thing about a SaaS business is usually its earnings and its customers.
How to use earnings to calculate the value your SaaS business
Most SaaS business valuation methods use one of two kinds of earnings: seller discretionary earnings (SDE) and earnings before interest, taxes, depreciation and amortization (EBITDA).
SDE is generally better for smaller single employee-owner SaaS businesses, and EBITDA works slightly better for multi-employee businesses. But both methods generally involve three steps:
1. Calculate revenue.
2. Subtract the costs you incurred generating that revenue.
3. Take what’s left over and apply a multiple.
Step 1: get your financial records together
If you aren’t already keeping close track of your business revenue and expenses using some kind of accounting or analytics solution, now’s the time to start.
Most serious buyers will want access to this information anyway, so you’ll want to catch up on your bookkeeping and accounting sooner than later.
If you haven’t already, make sure to bring together things like:
Revenue data from your payment gateway (i.e. Stripe, PayPal)
Any financial statements you have for the business
Individual customer sales data
Invoices and receipts for big discretionary/one-time expenses
Step 2: calculate SDE
SDE measures how much of your earnings are left over once you take into account the cost of goods sold (COGS) and any other expenses that are absolutely essential to your business:
SDE = Revenue – COGS – Essential Expenses
This is what your company earns, before subtracting anything else—software and equipment costs, employee salaries, taxes, interest, etc.
Ever heard the expression “you have to spend money to make money”? That’s what the cost of goods sold (COGS) is—the money you spend to provide your customers with a product.
SaaS companies usually have a very low COGS, because the cost of providing one extra customer with one extra subscription to your product is usually close to zero. That’s a big reason why people start SaaS companies in the first place: once you’re set up, they’re easy and inexpensive to scale.
But that doesn’t mean there aren’t any costs involved. When calculating COGS, look out for things like:
Web development costs
Customer support labour costs
These are also sometimes called “critical,” “operating” or “overhead” expenses. They’re all the things you spend money on that don’t directly relate to your product, but that your business couldn’t function without. They include things like:
Accounting and legal fees
Advertising and marketing costs
Non-essential expenses might include things like:
Travel, meals and entertainment
Non essential repairs and upgrades
Step 3: extrapolate using a multiple
Calculating your SDE for the last twelve months gives you a pretty good idea of how much money it might earn in the next twelve months. But your business isn’t going to stop running one year from now (at least we hope it won’t).
SDE doesn’t tell you how much it might earn in the long term, which is what we need to figure out if we want to figure out the total value of a business.
That’s where multiples come in. They’re a number that you multiply your SDE by to calculate the total value of your business.
Most small to medium-sized SaaS businesses these days command a multiple of somewhere between 2.0 and 4.0.
But they can also vary widely by growth rate, company size, the assets you have, and hundreds of other variables. This is what people who do this professionally spend most of their time thinking about, and the process of calculating multiples can get pretty complex and subjective.
If you don’t want to get into the weeds, use the following cheat sheet:
Growth rate Valuation Cheat Sheet
Variables that could influence the multiple for your SaaS business
Hundreds of variables could go into calculating a SaaS multiple, but most of them have to do with how scaleable your business is, how sustainable its earnings are, and how easy it is to transfer your business to a new owner.
This has to do with how easy or difficult it is to grow your business. If you’re well-established in a small niche market and post modest year over year growth, you probably have less scalability potential than a similar business in a larger market.
Buyers will look out for three things in particular when they evaluate scalability: your growth, the size of your business, and the age of your company.
If you’ve ever wondered where those sky-high unicorn valuations come from, multiples based on astronomical growth projections are your answer.
Software businesses spend a lot of money up front, but after that it’s fairly cheap for them to take on additional customers, so growth is a big deal in SaaS. The better a SaaS company’s growth prospects, the higher the multiple and the valuation.
Year over year growth rate valuation cheat sheet
THE GROWTH RATE OF YOUR GROWTH RATE
Your growth curve—is it declining? Flat? Or is it curving upwards, signalling that your growth rate is growing? The shape of your growth curve can be just as important to your multiple as the actual rate it happens to be growing at.
Growth curve valuation cheat sheet
If you’re a larger, multi-employee company, odds are that your customers are also on the larger side. Maybe you’ve even got some enterprise clients. The opposite usually holds for smaller businesses—most of their clients are usually also SMBs.
That’s why your company’s current size also has an impact on how scaleable it might appear to a potential buyer. If you already have a foothold in a larger market, it’s a whole lot easier to scale than if you’re starting from scratch.
Generally speaking, SaaS businesses get an age premium. If you’ve been in the business for a few years, an outside buyer will see you as a safer bet than a company that only has a few months of financial records.
But this cuts both ways, especially if you’re a high-growth business with lots of potential. Some buyers prefer the riskiness of a less-established business over the modest returns of an established business.
This has to do with your company’s ability to maintain its financial performance, and it’s mainly based on churn, and to a lesser extent on things like billing, acquisition costs and LTV.
This is how quickly your customers turn over. If one out of every twenty of your customers unsubscribes from your product every month, you have a monthly customer churn rate of 5%. Dollar churn rate is just that calculation, but for dollars instead of customers (this is useful if you have lots of different pricing tiers).
Churn trend also matters—if you graph out your churn rate, and the curve is sloping upwards? That means churn is going up and that your business might command a lower multiple.
Want to learn more about churn? Check out FirstOfficers Ultimate Churn Guide here.
Customer churn valuation cheat sheet
Generally speaking, people on the hunt for a SaaS business to buy prefer that you charge your customers monthly rather than annually, mainly because the former is more predictable.
CAC AND LTV
Customer lifetime value (LTV) is how much money a customer will pay you before they churn out, and customer acquisition cost (CAC) is how much money you need to spend to get your next customer. The higher the LTV and the lower the CAC, the higher the multiple.
LTV valuation cheat sheet
There’s also transferability—how easy it is to transfer ownership of your business to someone else without messing with its revenues. That depends on factors like:
How involved are you in day-to-day operations? Are you managing a support team from arms length and focusing on other projects, or are you deeply involved in every aspect of the business?
How easy would it be for someone with no technical knowledge to run your business? Whether this is an asset or liability for you depends a lot on the background of the buyer.
Does your SaaS business have access to a technology that gives it a unique competitive advantage in the marketplace?
So how much is my business worth?
Provided you’re on top of your financials and you follow the steps above, getting a decent ballpark valuation for your SaaS business should be relatively straightforward.
If you’ve run the numbers and still aren’t sure you’re doing it right, give our free valuation tool a try.
Things your business owns.
The value of your company’s assets minus the value of its liabilities.
How quickly do your customers turn over? Learn more here
The money you spend to provide your customers with a product.
Customer acquisition cost (CAC)
How much does your business have to spend to acquire one more customer?
Customer lifetime value (LTV)
How much money will your customer pay you before they churn out?
What you owe your creditors.
The money your company brings in.
Is your growth rate going up, down or staying flat?
How fast is your business growing?
What happens when you sell your company’s assets (rather than the company as a whole) and pay off your creditors.
A number that finance people will multiply your earnings by to arrive at a valuation.
How good are your company’s growth prospects?
How sustainable are your company’s earnings?
How easy is it for someone else to take over?
Got questions about buying and selling a SaaS business? So did we. Tons.
Figuring out how to buy a SaaS company was really hard. It took a ton of research and effort. There was lots of info on how to buy or sell a Shopify store or a domain, but there was no one single place that got into all the intricacies of how to buy or sell a SaaS business.
That’s why we are launching the GetAcquired Podcast, hosted by Paul Stephenson of 47insights and myself.
What are we covering in the GetAcquired Podcast?
It’s a 20 – 30 minute show where we’ll get under the hood of everything related to buying & selling a SaaS business. Here’s our initial 3 episode lineup:
Identifying the right SaaS market
Conducting a search
How to value a SaaS business
How can you find it?
The GetAcquired Podcast will be available on iTunes, Stitcher, and all other listening apps. We’re also going to provide you readable transcripts for each episode.
When does the show launch?
We’re targeting the end of July ’20 for our initial launch.
How can I get notified?
Subscribe to our email list and we’ll email you as soon as its live!