How to Buy a SaaS Startup
Oct 01, 2021
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!