How to Sell Your SaaS Startup
Oct 15, 2021
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!