Jason Fan

Nov 27, 2023

Jason Fan

Nov 27, 2023

Introduction

The lower end of the M&A market in 2023 continues to show no signs of slowing down. Despite high interest rates and economic uncertainty, both corporate and private investors are actively seeking attractive acquisition targets. Unfortunately, much of the current activity in private equity for SaaS deals is driven by the perception that many startups are struggling to meet growth targets set during the ZIRP era.

Any well-capitalized SaaS company with at least two years of runway is in a good position and, all else being equal, does not need to consider an exit. However, there are two types of SaaS founders who should consider selling in 2024:

  • If you are overcapitalized and see no way of growing your business to justify the expectations set in your last venture round. If you find yourself in this situation, it might be a better option to sell and start fresh. Even if you receive little or no financial return, it is preferable to spending years on a business that may never generate profits.

  • If you are well capitalized and are looking to exit your business soon to help meet your personal financial objectives. Companies that have raised minimal or no equity capital are currently highly appealing to investors right now because they tend to operate with healthy margins. With the current market conditions, more capital is being invested in private equity (PE) rather than venture capital (VC) to find such acquisition targets, so it can be an advantageous time for founders to pursue an exit.

For these founders, there are several important steps you need to take and factors to consider to ensure a smooth and successful sale.

Understand the Phases of a M&A Transaction

SaaS businesses with between $1mm and $10mm of revenue fall into the “lower mid market” of M&A, which are transactions that typically involve small businesses. Any founder looking to sell their business needs to understand what to expect in each phase of the transaction, how long it typically takes, and what they need to prepare as they move through the process.

Lower mid market transactions are much simpler than the 9-10 figure M&A deals you hear about on the news, and typically involves just 6 phases:

  1. Prepare for the sale

  2. Market the opportunity

  3. Meet with buyers

  4. Review LOIs

  5. Due diligence

  6. Close

We cover the expectations in each phase in detail in this blog post.

Understand the Types of Buyer Personas

There are many types of buyers for SaaS companies. Strategic acquisitions, especially at the higher end of the M&A market, receive a lot of attention since they tend to be at higher valuations. However, companies with strategic exit options are rare. In the lower mid-market, individuals with financing or private equity firms are the ones that end up closing the deal.

The buyers for a SaaS business can be categorized into 7 distinct personas under 3 umbrellas:

Private Equity

This category includes funds that raise capital from investors, known as limited partners (LPs), and invest them in private companies. Private equity encompasses a wide range of investment philosophies and fund structures. While venture capital is technically a type of private equity and may be the most familiar to founders, it actually represents only 17% of the total assets under management (AUM) in the private equity industry, and only half as much capital is deployed for VC as for funding buyouts.

PE firms have a negative reputation among founders since they typically employ aggressive tactics to improve profitability after an acquisition, and usually aim to re-sell the company within 5-7 years. However alternative models of private equity like search funds and EIR models are becoming increasingly common, and offer more founder-friendly terms for an exit.

Companies

This is self-explanatory - companies often acquire other companies if they believe that the assets of the target business will help them achieve their goals. In general, there are two main reasons why a company might make an offer to acquire yours. A strategic buyer can leverage the unique strengths of your company (such as intellectual property, talent, community, brand, etc.) and use them to generate additional revenue or profit by integrating them into their own company. Facebook's acquisition of Instagram is a classic example of a strategic acquisition. Direct competitors may also make offers to acquire your company with the goal of taking over your customer accounts. These offers are typically lower because they value your business based on just cashflow and upsell/cross-sell potential.

Individuals

Individual buyers are the most common buyer for SaaS companies with below $1mm in revenue since this is typically too small for institutional buyers to be interested. However some individuals are able to do significantly larger deals if they have substantial personal wealth to invest or use as collateral, or if they have connections with private investors who are committed to backing them.

Unlike with institutional buyers, it can be difficult to tell which individuals are serious and are capable of raising the necessary capital to finance a transaction. Many individuals are what the industry politely refers to as “tire kickers” - those who present as serious buyers but lack the connections or capital to realistically close on a transaction. It’s helpful to look at a buyer’s personal history, particularly whether they’ve had experience in M&A and especially if they’ve acquired similar companies in the past.

Decide if You Need an Investment Bank

For companies with revenues exceeding $50mm, it is worthwhile to retain the services of an investment bank to assist with your exit. While they may be expensive, their services and network are invaluable in ensuring successful deals without leaving money on the table.

For companies with revenues below $1mm, acquire.com (formerly MicroAcquire) is a great resource for finding individual buyers for small online businesses.

Unfortunately, for companies with revenues between $1mm and $50mm, there is no ideal resource for founders to find buyers. Business brokers are common, but they lack sophistication in understanding and valuing technology businesses. This is the gap that we aim to fill at Dealwise (YC W23). With a team that has over 10 years of software engineering experience at companies like Robinhood as well a background in M&A, our mission is to help SaaS founders who have found PMF in niche industries exit and achieve their financial goals.

Decide on Your Price Expecations

At Dealwise, the main reason we see deals fall through early in the process is due to a misalignment of price expectations between sellers and buyers. This is particularly common in 2023 and 2024, as the market is experiencing a decline from all-time highs, which were buoyed by historically low interest rates and COVID subsidies. Many founders still base their valuations on funding rounds or news of similar exits from the previous era.

According to SaaS Capital, a leading provider of debt financing for SaaS companies, the median valuation for a SaaS company in Q2 2023 was 5x revenue, compared to a peak of 16.9x revenue in Q2 2021. [Source] However, we have seen some deals closed significantly below these figures, as an independent third-party valuation is not necessarily what buyers are willing to pay in the market. Therefore, for most SaaS companies with revenues between $1 million and $50 million, the expected sale price in 2024 would range between 2x and 10x revenues.

Valuations can vary greatly depending on the financial and operational characteristics of a business, but there are a few general principles in the M&A industry that apply specifically to SaaS companies:

  1. Software companies, especially SaaS companies, are typically valued based on a multiple of revenue, unlike most other businesses which are valued based on a multiple of EBITDA or another measure of profitability. This is because SaaS businesses have low fixed costs and predictable, recurring revenue, making revenue growth a better indicator of future performance than profitability, which can fluctuate significantly quarter to quarter. To accurately assess the performance of companies that are often expected to double their revenue year-over-year, the annualized run-rate revenue (MRR x 12) is commonly used instead of trailing twelve months (TTM) or, in even rarer cases, the most recent fiscal year.

  2. Larger companies command higher multiples. A public company with 1000 employees may sell for 15x revenue, while a startup with 10 employees in the same market may only sell for 3x revenue. Larger and more established businesses inherently carry less risk.

  3. The quality of earnings (QoE) is crucial. SaaS companies that sell to risk-averse industries with infrequent vendor switching, such as healthcare, government, and enterprise, tend to command higher valuations.

Clean Up Your Books

Accurate and up-to-date bookkeeping is essential when selling any business, and SaaS businesses are no exception. Potential buyers will want to review your financial records to assess the profitability and growth potential of your business, and buyers will expect to have full access to your financial information well in advance of a LOI being accepted.

Fortunately, if you use Stripe to manage your subscriptions and one-off payments, you can easily export the data from the Payments page of your Stripe dashboard. Since this data will include confidential information, ensure that you have signed an NDA with prospective buyers before sharing it. Anonymize any customer information that should not be shared, and consult with your lawyer to determine if any agreements prohibit you from sharing transaction data with a prospective buyer.

Optimize Your Metrics

Any sophisticated SaaS buyer will consider both your revenue growth and profitability when making an offer. The rule of 40 is a good guideline to determine if your business is attractive to buyers, but financials are not the only factor. Your exit valuation also depends on market conditions as well as the unique characteristics of your business.

Whether you should focus on growing topline revenue or profitability (or both) before an exit depends on what is generally easier for your position in the market. If you are pre-PMF, growing topline revenue is typically easier, while post-PMF companies often find it easier to cut costs and improve profitability since revenue tends to grow organically.

Streamline Operations to Reduce Buyer Risk

The perceived risk associated with acquiring a business is the primary factor that determines the price a buyer is willing to offer. The more you can do to reduce the buyer's perception of risk, the stronger your position will be in negotiations.

Risks are subjective and come in infinite flavors. Here are some common risks to consider:

  • Quality of revenue risk: Are your accounts on annual or multi-year contracts, or are they month-to-month? Month-to-month billing is seen as a significant risk by buyers, as they need assurance that customers won't leave once ownership changes hands.

  • Customer concentration risk: Does a large portion of your revenue (30% or more) come from a single customer? Buyers see this as a risk because if that customer decides to switch vendors after the ownership change, it will have a significant impact on revenue. Buyers may request to speak with your customers if there is significant concentration.

  • Key person risk: Does the management team, including yourself and other founders, possess critical knowledge or skills that are difficult to replace? For example, if the sales pipeline relies solely on a founder who is an anesthesiologist and primarily sells to their own network of other anesthesiologists, a buyer would perceive it as a significant risk once the founder departs.

  • Supplier dependency risk: Do you work with suppliers or vendors (e.g., cloud computing) that may face insolvency or be unable to continue providing services to the new entity? This can be a concern for startups (especially YC-backed startups) who often build their early operations on products developed by other startup companies.

  • Legal and compliance risk: Are you involved in any litigation or legal disputes that have a material impact on the transaction? Would the buyer be required to assume one of the parties' roles in the dispute?

  • Market risk: Are you operating in a shrinking market or offering a service that will soon be replaced by a more competitive alternative?

Take the time to assess whether any of these risks (or others) apply to your business. If they do, document them and create an action plan to address each one, either in advance of an exit or during the post-acquisition transition period.

Give Visibility Through Documentation

To instill a sense of stability in buyers, it is advisable to thoroughly document every decision, process, and risk you can think of leading up to an acquisition. By providing extensive documentation to the seller, they will feel more at ease knowing that you are 1) transparent with them and 2) have a clear plan to address any concerns that might impede the transaction. Keep in mind that buyer confidence directly correlates with the offer price. As long as you are confident in the information you share, oversharing can be a great lever in negotiations and move things along quickly.

What’s the Next Step?

At Dealwise (YC W23), we specialize in helping founders of non-venture scale SaaS companies find buyers for their business. We understand that information and resources about mergers and acquisitions can be unnecessarily complex, especially in the tech industry. That's why we offer free information and resources based on our experiences in assisting companies with preparing and selling their business.

If you are the owner of a SaaS company with revenue ranging from $1mm to $10mm, please email us at founders@dealwise.biz. We are happy to have a confidential call with you and provide you with more details about what you can expect from an exit, whether or not you are actively seeking one. If you are open to it at the end of our call, we’ll make a few introductions to buyers in our network.

Joining our network is completely free. Unlike M&A advisors and business brokers, we charge our fees to the buyside, and we do not require you to be officially "on-market" or sign exclusively agreements to work with us. We simply ask that you are open to conversations with potential buyers.

To embed a website or widget, add it to the properties panel.

Introduction

The lower end of the M&A market in 2023 continues to show no signs of slowing down. Despite high interest rates and economic uncertainty, both corporate and private investors are actively seeking attractive acquisition targets. Unfortunately, much of the current activity in private equity for SaaS deals is driven by the perception that many startups are struggling to meet growth targets set during the ZIRP era.

Any well-capitalized SaaS company with at least two years of runway is in a good position and, all else being equal, does not need to consider an exit. However, there are two types of SaaS founders who should consider selling in 2024:

  • If you are overcapitalized and see no way of growing your business to justify the expectations set in your last venture round. If you find yourself in this situation, it might be a better option to sell and start fresh. Even if you receive little or no financial return, it is preferable to spending years on a business that may never generate profits.

  • If you are well capitalized and are looking to exit your business soon to help meet your personal financial objectives. Companies that have raised minimal or no equity capital are currently highly appealing to investors right now because they tend to operate with healthy margins. With the current market conditions, more capital is being invested in private equity (PE) rather than venture capital (VC) to find such acquisition targets, so it can be an advantageous time for founders to pursue an exit.

For these founders, there are several important steps you need to take and factors to consider to ensure a smooth and successful sale.

Understand the Phases of a M&A Transaction

SaaS businesses with between $1mm and $10mm of revenue fall into the “lower mid market” of M&A, which are transactions that typically involve small businesses. Any founder looking to sell their business needs to understand what to expect in each phase of the transaction, how long it typically takes, and what they need to prepare as they move through the process.

Lower mid market transactions are much simpler than the 9-10 figure M&A deals you hear about on the news, and typically involves just 6 phases:

  1. Prepare for the sale

  2. Market the opportunity

  3. Meet with buyers

  4. Review LOIs

  5. Due diligence

  6. Close

We cover the expectations in each phase in detail in this blog post.

Understand the Types of Buyer Personas

There are many types of buyers for SaaS companies. Strategic acquisitions, especially at the higher end of the M&A market, receive a lot of attention since they tend to be at higher valuations. However, companies with strategic exit options are rare. In the lower mid-market, individuals with financing or private equity firms are the ones that end up closing the deal.

The buyers for a SaaS business can be categorized into 7 distinct personas under 3 umbrellas:

Private Equity

This category includes funds that raise capital from investors, known as limited partners (LPs), and invest them in private companies. Private equity encompasses a wide range of investment philosophies and fund structures. While venture capital is technically a type of private equity and may be the most familiar to founders, it actually represents only 17% of the total assets under management (AUM) in the private equity industry, and only half as much capital is deployed for VC as for funding buyouts.

PE firms have a negative reputation among founders since they typically employ aggressive tactics to improve profitability after an acquisition, and usually aim to re-sell the company within 5-7 years. However alternative models of private equity like search funds and EIR models are becoming increasingly common, and offer more founder-friendly terms for an exit.

Companies

This is self-explanatory - companies often acquire other companies if they believe that the assets of the target business will help them achieve their goals. In general, there are two main reasons why a company might make an offer to acquire yours. A strategic buyer can leverage the unique strengths of your company (such as intellectual property, talent, community, brand, etc.) and use them to generate additional revenue or profit by integrating them into their own company. Facebook's acquisition of Instagram is a classic example of a strategic acquisition. Direct competitors may also make offers to acquire your company with the goal of taking over your customer accounts. These offers are typically lower because they value your business based on just cashflow and upsell/cross-sell potential.

Individuals

Individual buyers are the most common buyer for SaaS companies with below $1mm in revenue since this is typically too small for institutional buyers to be interested. However some individuals are able to do significantly larger deals if they have substantial personal wealth to invest or use as collateral, or if they have connections with private investors who are committed to backing them.

Unlike with institutional buyers, it can be difficult to tell which individuals are serious and are capable of raising the necessary capital to finance a transaction. Many individuals are what the industry politely refers to as “tire kickers” - those who present as serious buyers but lack the connections or capital to realistically close on a transaction. It’s helpful to look at a buyer’s personal history, particularly whether they’ve had experience in M&A and especially if they’ve acquired similar companies in the past.

Decide if You Need an Investment Bank

For companies with revenues exceeding $50mm, it is worthwhile to retain the services of an investment bank to assist with your exit. While they may be expensive, their services and network are invaluable in ensuring successful deals without leaving money on the table.

For companies with revenues below $1mm, acquire.com (formerly MicroAcquire) is a great resource for finding individual buyers for small online businesses.

Unfortunately, for companies with revenues between $1mm and $50mm, there is no ideal resource for founders to find buyers. Business brokers are common, but they lack sophistication in understanding and valuing technology businesses. This is the gap that we aim to fill at Dealwise (YC W23). With a team that has over 10 years of software engineering experience at companies like Robinhood as well a background in M&A, our mission is to help SaaS founders who have found PMF in niche industries exit and achieve their financial goals.

Decide on Your Price Expecations

At Dealwise, the main reason we see deals fall through early in the process is due to a misalignment of price expectations between sellers and buyers. This is particularly common in 2023 and 2024, as the market is experiencing a decline from all-time highs, which were buoyed by historically low interest rates and COVID subsidies. Many founders still base their valuations on funding rounds or news of similar exits from the previous era.

According to SaaS Capital, a leading provider of debt financing for SaaS companies, the median valuation for a SaaS company in Q2 2023 was 5x revenue, compared to a peak of 16.9x revenue in Q2 2021. [Source] However, we have seen some deals closed significantly below these figures, as an independent third-party valuation is not necessarily what buyers are willing to pay in the market. Therefore, for most SaaS companies with revenues between $1 million and $50 million, the expected sale price in 2024 would range between 2x and 10x revenues.

Valuations can vary greatly depending on the financial and operational characteristics of a business, but there are a few general principles in the M&A industry that apply specifically to SaaS companies:

  1. Software companies, especially SaaS companies, are typically valued based on a multiple of revenue, unlike most other businesses which are valued based on a multiple of EBITDA or another measure of profitability. This is because SaaS businesses have low fixed costs and predictable, recurring revenue, making revenue growth a better indicator of future performance than profitability, which can fluctuate significantly quarter to quarter. To accurately assess the performance of companies that are often expected to double their revenue year-over-year, the annualized run-rate revenue (MRR x 12) is commonly used instead of trailing twelve months (TTM) or, in even rarer cases, the most recent fiscal year.

  2. Larger companies command higher multiples. A public company with 1000 employees may sell for 15x revenue, while a startup with 10 employees in the same market may only sell for 3x revenue. Larger and more established businesses inherently carry less risk.

  3. The quality of earnings (QoE) is crucial. SaaS companies that sell to risk-averse industries with infrequent vendor switching, such as healthcare, government, and enterprise, tend to command higher valuations.

Clean Up Your Books

Accurate and up-to-date bookkeeping is essential when selling any business, and SaaS businesses are no exception. Potential buyers will want to review your financial records to assess the profitability and growth potential of your business, and buyers will expect to have full access to your financial information well in advance of a LOI being accepted.

Fortunately, if you use Stripe to manage your subscriptions and one-off payments, you can easily export the data from the Payments page of your Stripe dashboard. Since this data will include confidential information, ensure that you have signed an NDA with prospective buyers before sharing it. Anonymize any customer information that should not be shared, and consult with your lawyer to determine if any agreements prohibit you from sharing transaction data with a prospective buyer.

Optimize Your Metrics

Any sophisticated SaaS buyer will consider both your revenue growth and profitability when making an offer. The rule of 40 is a good guideline to determine if your business is attractive to buyers, but financials are not the only factor. Your exit valuation also depends on market conditions as well as the unique characteristics of your business.

Whether you should focus on growing topline revenue or profitability (or both) before an exit depends on what is generally easier for your position in the market. If you are pre-PMF, growing topline revenue is typically easier, while post-PMF companies often find it easier to cut costs and improve profitability since revenue tends to grow organically.

Streamline Operations to Reduce Buyer Risk

The perceived risk associated with acquiring a business is the primary factor that determines the price a buyer is willing to offer. The more you can do to reduce the buyer's perception of risk, the stronger your position will be in negotiations.

Risks are subjective and come in infinite flavors. Here are some common risks to consider:

  • Quality of revenue risk: Are your accounts on annual or multi-year contracts, or are they month-to-month? Month-to-month billing is seen as a significant risk by buyers, as they need assurance that customers won't leave once ownership changes hands.

  • Customer concentration risk: Does a large portion of your revenue (30% or more) come from a single customer? Buyers see this as a risk because if that customer decides to switch vendors after the ownership change, it will have a significant impact on revenue. Buyers may request to speak with your customers if there is significant concentration.

  • Key person risk: Does the management team, including yourself and other founders, possess critical knowledge or skills that are difficult to replace? For example, if the sales pipeline relies solely on a founder who is an anesthesiologist and primarily sells to their own network of other anesthesiologists, a buyer would perceive it as a significant risk once the founder departs.

  • Supplier dependency risk: Do you work with suppliers or vendors (e.g., cloud computing) that may face insolvency or be unable to continue providing services to the new entity? This can be a concern for startups (especially YC-backed startups) who often build their early operations on products developed by other startup companies.

  • Legal and compliance risk: Are you involved in any litigation or legal disputes that have a material impact on the transaction? Would the buyer be required to assume one of the parties' roles in the dispute?

  • Market risk: Are you operating in a shrinking market or offering a service that will soon be replaced by a more competitive alternative?

Take the time to assess whether any of these risks (or others) apply to your business. If they do, document them and create an action plan to address each one, either in advance of an exit or during the post-acquisition transition period.

Give Visibility Through Documentation

To instill a sense of stability in buyers, it is advisable to thoroughly document every decision, process, and risk you can think of leading up to an acquisition. By providing extensive documentation to the seller, they will feel more at ease knowing that you are 1) transparent with them and 2) have a clear plan to address any concerns that might impede the transaction. Keep in mind that buyer confidence directly correlates with the offer price. As long as you are confident in the information you share, oversharing can be a great lever in negotiations and move things along quickly.

What’s the Next Step?

At Dealwise (YC W23), we specialize in helping founders of non-venture scale SaaS companies find buyers for their business. We understand that information and resources about mergers and acquisitions can be unnecessarily complex, especially in the tech industry. That's why we offer free information and resources based on our experiences in assisting companies with preparing and selling their business.

If you are the owner of a SaaS company with revenue ranging from $1mm to $10mm, please email us at founders@dealwise.biz. We are happy to have a confidential call with you and provide you with more details about what you can expect from an exit, whether or not you are actively seeking one. If you are open to it at the end of our call, we’ll make a few introductions to buyers in our network.

Joining our network is completely free. Unlike M&A advisors and business brokers, we charge our fees to the buyside, and we do not require you to be officially "on-market" or sign exclusively agreements to work with us. We simply ask that you are open to conversations with potential buyers.

To embed a website or widget, add it to the properties panel.

How to Prepare a SaaS Business for Sale

Nov 27, 2023

SaaS businesses with between $1mm and $10mm of revenue fall into the “lower mid market” of M&A, which are transactions that typically involve small businesses. Any founder looking to sell their business needs to understand what to expect in each phase of the transaction, how long it typically takes, and what they need to prepare as they move through the process.

Introduction

The lower end of the M&A market in 2023 continues to show no signs of slowing down. Despite high interest rates and economic uncertainty, both corporate and private investors are actively seeking attractive acquisition targets. Unfortunately, much of the current activity in private equity for SaaS deals is driven by the perception that many startups are struggling to meet growth targets set during the ZIRP era.

Any well-capitalized SaaS company with at least two years of runway is in a good position and, all else being equal, does not need to consider an exit. However, there are two types of SaaS founders who should consider selling in 2024:

  • If you are overcapitalized and see no way of growing your business to justify the expectations set in your last venture round. If you find yourself in this situation, it might be a better option to sell and start fresh. Even if you receive little or no financial return, it is preferable to spending years on a business that may never generate profits.

  • If you are well capitalized and are looking to exit your business soon to help meet your personal financial objectives. Companies that have raised minimal or no equity capital are currently highly appealing to investors right now because they tend to operate with healthy margins. With the current market conditions, more capital is being invested in private equity (PE) rather than venture capital (VC) to find such acquisition targets, so it can be an advantageous time for founders to pursue an exit.

For these founders, there are several important steps you need to take and factors to consider to ensure a smooth and successful sale.

Understand the Phases of a M&A Transaction

SaaS businesses with between $1mm and $10mm of revenue fall into the “lower mid market” of M&A, which are transactions that typically involve small businesses. Any founder looking to sell their business needs to understand what to expect in each phase of the transaction, how long it typically takes, and what they need to prepare as they move through the process.

Lower mid market transactions are much simpler than the 9-10 figure M&A deals you hear about on the news, and typically involves just 6 phases:

  1. Prepare for the sale

  2. Market the opportunity

  3. Meet with buyers

  4. Review LOIs

  5. Due diligence

  6. Close

We cover the expectations in each phase in detail in this blog post.

Understand the Types of Buyer Personas

There are many types of buyers for SaaS companies. Strategic acquisitions, especially at the higher end of the M&A market, receive a lot of attention since they tend to be at higher valuations. However, companies with strategic exit options are rare. In the lower mid-market, individuals with financing or private equity firms are the ones that end up closing the deal.

The buyers for a SaaS business can be categorized into 7 distinct personas under 3 umbrellas:

Private Equity

This category includes funds that raise capital from investors, known as limited partners (LPs), and invest them in private companies. Private equity encompasses a wide range of investment philosophies and fund structures. While venture capital is technically a type of private equity and may be the most familiar to founders, it actually represents only 17% of the total assets under management (AUM) in the private equity industry, and only half as much capital is deployed for VC as for funding buyouts.

PE firms have a negative reputation among founders since they typically employ aggressive tactics to improve profitability after an acquisition, and usually aim to re-sell the company within 5-7 years. However alternative models of private equity like search funds and EIR models are becoming increasingly common, and offer more founder-friendly terms for an exit.

Companies

This is self-explanatory - companies often acquire other companies if they believe that the assets of the target business will help them achieve their goals. In general, there are two main reasons why a company might make an offer to acquire yours. A strategic buyer can leverage the unique strengths of your company (such as intellectual property, talent, community, brand, etc.) and use them to generate additional revenue or profit by integrating them into their own company. Facebook's acquisition of Instagram is a classic example of a strategic acquisition. Direct competitors may also make offers to acquire your company with the goal of taking over your customer accounts. These offers are typically lower because they value your business based on just cashflow and upsell/cross-sell potential.

Individuals

Individual buyers are the most common buyer for SaaS companies with below $1mm in revenue since this is typically too small for institutional buyers to be interested. However some individuals are able to do significantly larger deals if they have substantial personal wealth to invest or use as collateral, or if they have connections with private investors who are committed to backing them.

Unlike with institutional buyers, it can be difficult to tell which individuals are serious and are capable of raising the necessary capital to finance a transaction. Many individuals are what the industry politely refers to as “tire kickers” - those who present as serious buyers but lack the connections or capital to realistically close on a transaction. It’s helpful to look at a buyer’s personal history, particularly whether they’ve had experience in M&A and especially if they’ve acquired similar companies in the past.

Decide if You Need an Investment Bank

For companies with revenues exceeding $50mm, it is worthwhile to retain the services of an investment bank to assist with your exit. While they may be expensive, their services and network are invaluable in ensuring successful deals without leaving money on the table.

For companies with revenues below $1mm, acquire.com (formerly MicroAcquire) is a great resource for finding individual buyers for small online businesses.

Unfortunately, for companies with revenues between $1mm and $50mm, there is no ideal resource for founders to find buyers. Business brokers are common, but they lack sophistication in understanding and valuing technology businesses. This is the gap that we aim to fill at Dealwise (YC W23). With a team that has over 10 years of software engineering experience at companies like Robinhood as well a background in M&A, our mission is to help SaaS founders who have found PMF in niche industries exit and achieve their financial goals.

Decide on Your Price Expecations

At Dealwise, the main reason we see deals fall through early in the process is due to a misalignment of price expectations between sellers and buyers. This is particularly common in 2023 and 2024, as the market is experiencing a decline from all-time highs, which were buoyed by historically low interest rates and COVID subsidies. Many founders still base their valuations on funding rounds or news of similar exits from the previous era.

According to SaaS Capital, a leading provider of debt financing for SaaS companies, the median valuation for a SaaS company in Q2 2023 was 5x revenue, compared to a peak of 16.9x revenue in Q2 2021. [Source] However, we have seen some deals closed significantly below these figures, as an independent third-party valuation is not necessarily what buyers are willing to pay in the market. Therefore, for most SaaS companies with revenues between $1 million and $50 million, the expected sale price in 2024 would range between 2x and 10x revenues.

Valuations can vary greatly depending on the financial and operational characteristics of a business, but there are a few general principles in the M&A industry that apply specifically to SaaS companies:

  1. Software companies, especially SaaS companies, are typically valued based on a multiple of revenue, unlike most other businesses which are valued based on a multiple of EBITDA or another measure of profitability. This is because SaaS businesses have low fixed costs and predictable, recurring revenue, making revenue growth a better indicator of future performance than profitability, which can fluctuate significantly quarter to quarter. To accurately assess the performance of companies that are often expected to double their revenue year-over-year, the annualized run-rate revenue (MRR x 12) is commonly used instead of trailing twelve months (TTM) or, in even rarer cases, the most recent fiscal year.

  2. Larger companies command higher multiples. A public company with 1000 employees may sell for 15x revenue, while a startup with 10 employees in the same market may only sell for 3x revenue. Larger and more established businesses inherently carry less risk.

  3. The quality of earnings (QoE) is crucial. SaaS companies that sell to risk-averse industries with infrequent vendor switching, such as healthcare, government, and enterprise, tend to command higher valuations.

Clean Up Your Books

Accurate and up-to-date bookkeeping is essential when selling any business, and SaaS businesses are no exception. Potential buyers will want to review your financial records to assess the profitability and growth potential of your business, and buyers will expect to have full access to your financial information well in advance of a LOI being accepted.

Fortunately, if you use Stripe to manage your subscriptions and one-off payments, you can easily export the data from the Payments page of your Stripe dashboard. Since this data will include confidential information, ensure that you have signed an NDA with prospective buyers before sharing it. Anonymize any customer information that should not be shared, and consult with your lawyer to determine if any agreements prohibit you from sharing transaction data with a prospective buyer.

Optimize Your Metrics

Any sophisticated SaaS buyer will consider both your revenue growth and profitability when making an offer. The rule of 40 is a good guideline to determine if your business is attractive to buyers, but financials are not the only factor. Your exit valuation also depends on market conditions as well as the unique characteristics of your business.

Whether you should focus on growing topline revenue or profitability (or both) before an exit depends on what is generally easier for your position in the market. If you are pre-PMF, growing topline revenue is typically easier, while post-PMF companies often find it easier to cut costs and improve profitability since revenue tends to grow organically.

Streamline Operations to Reduce Buyer Risk

The perceived risk associated with acquiring a business is the primary factor that determines the price a buyer is willing to offer. The more you can do to reduce the buyer's perception of risk, the stronger your position will be in negotiations.

Risks are subjective and come in infinite flavors. Here are some common risks to consider:

  • Quality of revenue risk: Are your accounts on annual or multi-year contracts, or are they month-to-month? Month-to-month billing is seen as a significant risk by buyers, as they need assurance that customers won't leave once ownership changes hands.

  • Customer concentration risk: Does a large portion of your revenue (30% or more) come from a single customer? Buyers see this as a risk because if that customer decides to switch vendors after the ownership change, it will have a significant impact on revenue. Buyers may request to speak with your customers if there is significant concentration.

  • Key person risk: Does the management team, including yourself and other founders, possess critical knowledge or skills that are difficult to replace? For example, if the sales pipeline relies solely on a founder who is an anesthesiologist and primarily sells to their own network of other anesthesiologists, a buyer would perceive it as a significant risk once the founder departs.

  • Supplier dependency risk: Do you work with suppliers or vendors (e.g., cloud computing) that may face insolvency or be unable to continue providing services to the new entity? This can be a concern for startups (especially YC-backed startups) who often build their early operations on products developed by other startup companies.

  • Legal and compliance risk: Are you involved in any litigation or legal disputes that have a material impact on the transaction? Would the buyer be required to assume one of the parties' roles in the dispute?

  • Market risk: Are you operating in a shrinking market or offering a service that will soon be replaced by a more competitive alternative?

Take the time to assess whether any of these risks (or others) apply to your business. If they do, document them and create an action plan to address each one, either in advance of an exit or during the post-acquisition transition period.

Give Visibility Through Documentation

To instill a sense of stability in buyers, it is advisable to thoroughly document every decision, process, and risk you can think of leading up to an acquisition. By providing extensive documentation to the seller, they will feel more at ease knowing that you are 1) transparent with them and 2) have a clear plan to address any concerns that might impede the transaction. Keep in mind that buyer confidence directly correlates with the offer price. As long as you are confident in the information you share, oversharing can be a great lever in negotiations and move things along quickly.

What’s the Next Step?

At Dealwise (YC W23), we specialize in helping founders of non-venture scale SaaS companies find buyers for their business. We understand that information and resources about mergers and acquisitions can be unnecessarily complex, especially in the tech industry. That's why we offer free information and resources based on our experiences in assisting companies with preparing and selling their business.

If you are the owner of a SaaS company with revenue ranging from $1mm to $10mm, please email us at founders@dealwise.biz. We are happy to have a confidential call with you and provide you with more details about what you can expect from an exit, whether or not you are actively seeking one. If you are open to it at the end of our call, we’ll make a few introductions to buyers in our network.

Joining our network is completely free. Unlike M&A advisors and business brokers, we charge our fees to the buyside, and we do not require you to be officially "on-market" or sign exclusively agreements to work with us. We simply ask that you are open to conversations with potential buyers.

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Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.

Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.

Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.