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A Beginners Guide To Technical Due Diligence

A Beginners Guide To Technical Due Diligence

Ajay Sridharan

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?

PRE-WALKTHROUGH

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.

READABILITY

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.

TESTING

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:

INCORPORATION

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?

INTELLECTUAL PROPERTY

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?

CONTRACTUAL OBLIGATIONS

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.

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Buying A SaaS Business Was Really, Really Hard

Buying A SaaS Business Was Really, Really Hard

Mark Henderson

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

How to value a SaaS business

Announcing the GetAcquired Podcast Series

A beginners guide to technical due diligence

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What Type Of SaaS Business Should I Buy?

What Type Of SaaS Business Should I Buy?

Mark Henderson

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:

Martech 5000

Martech 5000

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.

SCALABILITY

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.

SUSTAINABILITY

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.

Other investors

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.

Founders

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.

Customers

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.

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How To Value A SaaS Business

How To Value A SaaS Business

Mark Henderson

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

  • Tax returns

  • 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

REVENUE

This is what your company earns, before subtracting anything else—software and equipment costs, employee salaries, taxes, interest, etc.

COGS

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:

  • Hosting costs

  • License fees

  • Subscription fees

  • Web development costs

  • Customer support labour costs

ESSENTIAL EXPENSES

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:

  • Rent

  • Insurance

  • Taxes

  • Utilities

  • Accounting and legal fees

  • Advertising and marketing costs

  • Office supplies

  • Vehicle expenses

  • Maintenance 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

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.

SCALABILITY

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.

GROWTH RATE

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

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

Growth curve valuation cheat sheet

COMPANY SIZE

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.

COMPANY AGE

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.

SUSTAINABILITY

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.

CHURN

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

Customer churn valuation cheat sheet

BILLING

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

LTV valuation cheat sheet

Transferability

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:

OWNER INVOLVEMENT

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?

TECHNICAL FACTORS

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.

SECRET SAUCE

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.

GLOSSARY

Assets

Things your business owns.

Book value

The value of your company’s assets minus the value of its liabilities.

Churn

How quickly do your customers turn over? Learn more here

COGS

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?

Debts

What you owe your creditors.

Earnings

The money your company brings in.

Growth curve

Is your growth rate going up, down or staying flat?

Growth rate

How fast is your business growing?

Liquidate

What happens when you sell your company’s assets (rather than the company as a whole) and pay off your creditors.

Multiple

A number that finance people will multiply your earnings by to arrive at a valuation.

Scalability

How good are your company’s growth prospects?

Sustainability

How sustainable are your company’s earnings?

Transferability

How easy is it for someone else to take over?

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The GetAcquired Podcast Series

The GetAcquired Podcast Series

Mark Henderson

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!

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