This is a guest post by Thomas Smale from FE International, a website brokerage with an emphasis on SaaS apps.
At FE International we speak to website owners on a daily basis who are looking to sell their businesses. Unfortunately, many of these businesses are not sellable for a number of very avoidable reasons. Planning your exit in advance (even if you have no intention of selling now) is always the sensible thing to do and will put you in good stead, saving you headaches when you do decide it’s time to move on.
SaaS products have always proven to be very popular with buyers over the years. Last year we sold 78 web-based businesses, so reflecting on these we’ve pooled together our collective experience to show you what really improves the saleability and the value of a SaaS business in the eyes of a new potential buyer. A combination of these factors could be the difference between selling for 1x EBITDA (if done badly) and 3x (if you follow these rules).
Choose your payment processor carefully
This is one of the most common issues we come across and can affect value significantly. With SaaS businesses the majority of revenue will be through monthly, quarterly or annual billing recurring payment plans. There are often hundreds if not thousands of subscribers paying through the year, usually processed by one payment platform.
A common problem sellers run in to is that when it comes to sell, the monthly subscribers cannot be transferred to a new owner – which is where the majority of business value lies and is an essential element of the sale. For instance, subscriptions in a Paypal account cannot be transferred and this requires a buyer either taking over the seller’s account (always a last resort and can be complex if the sale is international).
This can lead to complex transfer arrangements between buyer and seller which can be a deterrent for investors from the outset and is also an ongoing headache for both parties post sale as it will often involve contingency based financing agreements. To avoid this, opt for a transfer-friendly payment processor which will make the business universally appealing to buyers and save considerable effort post-transaction. Check with your merchant account or payment processor before signing up as they all have different policies depending on your location or history with them.
Future-proofing your software
Many SaaS business owners have developed their product themselves, usually to solve a problem they encountered personally or profit from a gap in the market they spotted. As the architect their technical knowledge of the source code is unrivalled, but it can present a problem when it comes to selling. How can a new owner upgrade or expand the software offering without the seller? This is a common issue and the best mitigation strategy is to source an affordable, reliable, independent third party to work on the product for 3-6 months before the sale.
Ensure they document everything they do in detail. This will assure the new owner that product developments can be carried out without the seller’s technical knowledge. It also opens up the potential buyer universe to non-software specialists, which is a considerable pool of demand for a business seller to tap in to.
Build and utilise the mailing list
Focus on building your email subscriber list and make the most of it (ideally through a scalable auto-responder sequence). Buyers are increasingly focused on email membership for SaaS businesses which they see as a first-step marketing strategy after a change of ownership.
For example, investors without much experience in the niche will likely initially focus on marketing to existing customers (always easier to sell to an existing client), so a responsive subscriber base is a strong business sale point. On the practical side, make sure you use a good provider (Mailchimp, Aweber etc.) and not a more complicated self-hosted solution that could put off buyers.
Depersonalise the service (mitigate key man risk)
This is a general point for many online businesses (particularly owner-run models) but is very relevant for SaaS sites. Make sure any personal branding you use for marketing or for the product itself is phased out prior to sale. Whilst a personal touch can help with humanising the marketing approach and selling services, it makes the transfer of ownership and ongoing operation more of a risk to new buyers who can’t continue the same approach and will likely affect sales price or mean you have to stay on for longer post-sale.
Guarantees to the new owner that they can market with your name aren’t worth near as much as a neutral product offering to begin with. Another solution would be to use a pseudonym to brand the product around and that way, the “owner” and his/her reputation would be far easier to transfer to a new owner.
Get on top of your data
Again this is a general point but in our years of brokerage experience, there is a direct correlation between the quality/quantity of information a seller has and the execution of a sale. In short, buyers like information and transparency. In SaaS, this is particularly acute given the number of subscribers involved and ongoing obligations to be transferred.
For example, in SaaS businesses, there are a number of key metrics that buyers expect to see, such as life-time value, churn, product breakdown split (assuming you have packages), conversion data and much more. There is no such thing as too much data when it comes to selling, and a good broker will help present these in a relevant manner.
Cultivate a quality affiliate network
Building out a solid affiliate network is commonly a sustainable way to build the profile of the product but more importantly it diversifies the marketing effort and revenue profile of the service. For investors, this is a big positive as it reduces the perceived overnight ‘acquired’ responsibility for direct sales and creates a ‘passive’ income stream for the service.
As a general rule of thumb, any passive income stream in an online business will attractive a premium valuation. However, do, of course ensure you partner with quality affiliates that will only enhance your profile and reputation of the service and try not to be reliant on any one affiliate. A general rule of thumb to achieve a top valuation would be to not have any one traffic source (or affiliate) driving more than 25% of sales.
Don’t discount without reason
A common strategy for sellers trying to maximise value before a sale is to bump revenue by pushing heavy discounts (or annual packages) in the months prior to listing. The unfortunate truth is that business valuations are almost always calculated off of normalised business performance so any last minute spikes in revenue will be significantly discounted by past performance and could even look dishonest.
Discounting the product in the run up to a sale may in fact have the adverse effect of weakening its value proposition in the market and thus perceived value to buyers.
Do a few things and do them well
Once the platform has been established, it’s usually the case that a SaaS business only has a finite amount of high ROI additions. Pursuing all of these opportunities exhaustively in the aim of an extra dollar is not always the best strategy. Focus on a few expansion strategies and do them well.
Trying to do everything might not improve profits (and thus the sale price) and more importantly might limit a new owner in terms of what they can ‘launch’ when taking over. A buyer likes to know that they can grow something, so leaving some future growth potential will benefit the sale price now.
