Jason Fan

Nov 27, 2023

Jason Fan

Nov 27, 2023

Acquisitions of SaaS companies with between $1mm and $10mm in revenues typically fall into the "lower mid market" of M&A. Companies of this size are generally too small for most investment banks to work with, but large enough that institutional capital is usually involved.

Compared to the the complex 9-10 figure M&A deals you hear about on the news, transactions at the scale typically involves just 6 phases:

1. Prepare for the sale

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.

The first step of selling a business is to prepare yourself and the business for what can be a long journey. We dive into some common ways SaaS companies prepare for an exit in this blog post.

This phase can last as long as you need until you’re ready to start marketing your business. In fact, if the right buyer comes along, you may be able to skip the marketing phase altogether, and evidence shows that this is in fact what most SaaS companies do.

For companies with revenues exceeding $10mm, 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 $10mm, 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.

Typical Duration: 3-6 months

2. Market the opportunity

Once you’ve done what’s necessary to feel ready to market your business for sale, many small businesses will retain the services of a local M&A advisor (commonly called a business broker) who will prepare a Confidential Information Memorandum (CIM) which is to lower mid market private transactions what a prospectus is to an IPO. The CIM is the primary document used to market an opportunity, although some brokers also use a anonymized teaser document to market the businesses they represent.

Brokers are commonly hired by small businesses in the old economy because marketing and finding buyers for a manufacturing business can be quite time consuming. When it comes to SaaS however, the value is less clear since brokers tend not to have strong networks in the tech industry and lack the technical expertise to understand the business and why it may be attractive to certain buyers, particularly if a strategic buyer is desired. It can also be detrimental to the company if information leaks and competitors, customers, investors, or employees find out a business is for sale, which is much more likely in the globally connected tech industry compared to the regional industries that brokers typically operate in.

Hiring a broker to market your business can be valuable if:

  • You prefer to have someone take on all the work of marketing your deal

  • Your business is not particularly technical and does not require specific expertise to communicate the nature of your product or service

  • You believe the broker has a stronger network among potential buyers for your business than you do

  • You do not mind if people find out you are trying to sell the business.

Brokers commonly charge 5-10% of the sale price as their fee.

Typical Duration: 3-12 months

3. Meet with buyers

The longest phase of a M&A transaction is the period where you will be meeting regularly with prospective buyers, either those your broker sourced or ones you found yourself. This can be a particularly challenging and uncomfortable process which has parallels to fundraising.

Some tips for optimizing your buyer conversations to get the best outcome as the seller:

  • Try to create some time pressure by meeting with as many buyers as possible over as short a period of time. Don’t be shy in letting buyers know how many other buyers you are speaking with, especially if they have impressive backgrounds

  • Be transparent with your financial and operational information. The biggest red flag for buyers is when a seller gives the impression of withholding information - the worst case scenario in a buyer’s mind is rarely as bad as reality, so you may as well share the full truth. It also saves you time in the long run by disqualifying prospective buyers early before you invest months of time and effort in working with them. Just make sure you have vetted the buyer and have an NDA in place with them.

  • Negotiate on price before signing any offers. Buyers rarely come in with their best offer unless there is significant competition for the deal.

Typical Duration: 1-3 months

4. Review LOIs

In the lower mid market, there is a threshold in the process after which marketing is put on pause and a buyer and seller are expected to agree to move forward and work exclusively with each other on completing the transaction. This threshold is demarcated by the acceptance of the seller of an executed Letter of Intent (LOI), which is a non-binding document drafted by the prospective buyer to make an official offer to purchase the business.

An LOI typically includes the following:

  • Standard legalese about confidentiality and the non-binding nature of the agreement

  • A date after which the LOI is no longer valid, and a new one must be agreed upon. Both parties have an incentive to close quickly, and this date gives the buyer a deadline for conducting due diligence.

  • The total consideration and price offered for the business

  • The deal structure. Deal structures can get exceedingly complex and include factors like how much will be paid as cash upfront, how much is put in escrow to be paid over time, how much is paid as an earnout, and how much is paid as debt extended by the seller to the buyer and the interest rate on such debt.

  • How the buyer proposes to finance the transaction. Typically this is a combination of equity capital and debt.

Once an LOI is accepted, it’s commonly stipulated that the buyer must cease marketing the transaction and commit to working with the buyer on closing the transaction until one or both parties terminates the agreement. On average, about 30% of transactions that are under LOI end up closing.

Typical Duration: 1-4 weeks

5. Due diligence

Once you’ve accepted an LOI and are working exclusively with one buyer, you’ll be asked for additional information on the business as the buyer tries to discover and red flags that would prevent them from being comfortable with the transaction. As the seller, your primary responsibility during this phase is to provide the information the buyer needs in order to move the process along.

Simultaneously, some individual buyers may also use this period to raise the financing needed to close the transaction. In the high interest environment of 2023 and 2024, the inability to raise debt financing is one of the most common reasons a deal falls through post-LOI, so it’s worth being a bit more aggressive with verifying the buyer’s source of financing before accepting an LOI.

Beware of buyer retrading - the practice of spending time with you on due diligence and then lowering the price, ostensibility based on information uncovered during due diligence. This is unfortunately a common tactic buyers use to pay less after you’ve invested considerable time in the transaction, and it can be hard to tell whether it’s done in good faith. The more transparent and upfront you are in providing information, the lower the likelihood a buyer will uncover information they can use to justify retrading later in the process.

Typical Duration: 3 months

6. Close

Once the buyer is satisfied with due diligence, you will work together with the buyer to draft a legally binding purchase agreement. There may be pre-closing obligations and covenants that both parties must satisfy, like getting the necessary consents from shareholders, regulatory approvals, or completing certain pre-closing conditions negotiated during the due diligence phase.

The final step is the signing of the purchase agreement and the transfer of payment from the buyer to the seller. The exact timing of the closing can vary and is often subject to the fulfillment of various conditions stipulated in the purchase agreement. Once the payment has been transferred, you’ve officially sold the business, and all that remains is to earn out the remaining portion of your payment as an employee of the new entity.

Typical Duration: 1-2 weeks

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Acquisitions of SaaS companies with between $1mm and $10mm in revenues typically fall into the "lower mid market" of M&A. Companies of this size are generally too small for most investment banks to work with, but large enough that institutional capital is usually involved.

Compared to the the complex 9-10 figure M&A deals you hear about on the news, transactions at the scale typically involves just 6 phases:

1. Prepare for the sale

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.

The first step of selling a business is to prepare yourself and the business for what can be a long journey. We dive into some common ways SaaS companies prepare for an exit in this blog post.

This phase can last as long as you need until you’re ready to start marketing your business. In fact, if the right buyer comes along, you may be able to skip the marketing phase altogether, and evidence shows that this is in fact what most SaaS companies do.

For companies with revenues exceeding $10mm, 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 $10mm, 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.

Typical Duration: 3-6 months

2. Market the opportunity

Once you’ve done what’s necessary to feel ready to market your business for sale, many small businesses will retain the services of a local M&A advisor (commonly called a business broker) who will prepare a Confidential Information Memorandum (CIM) which is to lower mid market private transactions what a prospectus is to an IPO. The CIM is the primary document used to market an opportunity, although some brokers also use a anonymized teaser document to market the businesses they represent.

Brokers are commonly hired by small businesses in the old economy because marketing and finding buyers for a manufacturing business can be quite time consuming. When it comes to SaaS however, the value is less clear since brokers tend not to have strong networks in the tech industry and lack the technical expertise to understand the business and why it may be attractive to certain buyers, particularly if a strategic buyer is desired. It can also be detrimental to the company if information leaks and competitors, customers, investors, or employees find out a business is for sale, which is much more likely in the globally connected tech industry compared to the regional industries that brokers typically operate in.

Hiring a broker to market your business can be valuable if:

  • You prefer to have someone take on all the work of marketing your deal

  • Your business is not particularly technical and does not require specific expertise to communicate the nature of your product or service

  • You believe the broker has a stronger network among potential buyers for your business than you do

  • You do not mind if people find out you are trying to sell the business.

Brokers commonly charge 5-10% of the sale price as their fee.

Typical Duration: 3-12 months

3. Meet with buyers

The longest phase of a M&A transaction is the period where you will be meeting regularly with prospective buyers, either those your broker sourced or ones you found yourself. This can be a particularly challenging and uncomfortable process which has parallels to fundraising.

Some tips for optimizing your buyer conversations to get the best outcome as the seller:

  • Try to create some time pressure by meeting with as many buyers as possible over as short a period of time. Don’t be shy in letting buyers know how many other buyers you are speaking with, especially if they have impressive backgrounds

  • Be transparent with your financial and operational information. The biggest red flag for buyers is when a seller gives the impression of withholding information - the worst case scenario in a buyer’s mind is rarely as bad as reality, so you may as well share the full truth. It also saves you time in the long run by disqualifying prospective buyers early before you invest months of time and effort in working with them. Just make sure you have vetted the buyer and have an NDA in place with them.

  • Negotiate on price before signing any offers. Buyers rarely come in with their best offer unless there is significant competition for the deal.

Typical Duration: 1-3 months

4. Review LOIs

In the lower mid market, there is a threshold in the process after which marketing is put on pause and a buyer and seller are expected to agree to move forward and work exclusively with each other on completing the transaction. This threshold is demarcated by the acceptance of the seller of an executed Letter of Intent (LOI), which is a non-binding document drafted by the prospective buyer to make an official offer to purchase the business.

An LOI typically includes the following:

  • Standard legalese about confidentiality and the non-binding nature of the agreement

  • A date after which the LOI is no longer valid, and a new one must be agreed upon. Both parties have an incentive to close quickly, and this date gives the buyer a deadline for conducting due diligence.

  • The total consideration and price offered for the business

  • The deal structure. Deal structures can get exceedingly complex and include factors like how much will be paid as cash upfront, how much is put in escrow to be paid over time, how much is paid as an earnout, and how much is paid as debt extended by the seller to the buyer and the interest rate on such debt.

  • How the buyer proposes to finance the transaction. Typically this is a combination of equity capital and debt.

Once an LOI is accepted, it’s commonly stipulated that the buyer must cease marketing the transaction and commit to working with the buyer on closing the transaction until one or both parties terminates the agreement. On average, about 30% of transactions that are under LOI end up closing.

Typical Duration: 1-4 weeks

5. Due diligence

Once you’ve accepted an LOI and are working exclusively with one buyer, you’ll be asked for additional information on the business as the buyer tries to discover and red flags that would prevent them from being comfortable with the transaction. As the seller, your primary responsibility during this phase is to provide the information the buyer needs in order to move the process along.

Simultaneously, some individual buyers may also use this period to raise the financing needed to close the transaction. In the high interest environment of 2023 and 2024, the inability to raise debt financing is one of the most common reasons a deal falls through post-LOI, so it’s worth being a bit more aggressive with verifying the buyer’s source of financing before accepting an LOI.

Beware of buyer retrading - the practice of spending time with you on due diligence and then lowering the price, ostensibility based on information uncovered during due diligence. This is unfortunately a common tactic buyers use to pay less after you’ve invested considerable time in the transaction, and it can be hard to tell whether it’s done in good faith. The more transparent and upfront you are in providing information, the lower the likelihood a buyer will uncover information they can use to justify retrading later in the process.

Typical Duration: 3 months

6. Close

Once the buyer is satisfied with due diligence, you will work together with the buyer to draft a legally binding purchase agreement. There may be pre-closing obligations and covenants that both parties must satisfy, like getting the necessary consents from shareholders, regulatory approvals, or completing certain pre-closing conditions negotiated during the due diligence phase.

The final step is the signing of the purchase agreement and the transfer of payment from the buyer to the seller. The exact timing of the closing can vary and is often subject to the fulfillment of various conditions stipulated in the purchase agreement. Once the payment has been transferred, you’ve officially sold the business, and all that remains is to earn out the remaining portion of your payment as an employee of the new entity.

Typical Duration: 1-2 weeks

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The M&A Process for SaaS Companies

Nov 27, 2023

Acquisitions of SaaS companies with between $1mm and $10mm in revenues typically fall into the "lower mid market" of M&A. Companies of this size are generally too small for most investment banks to work with, but large enough that institutional capital is usually involved.

Acquisitions of SaaS companies with between $1mm and $10mm in revenues typically fall into the "lower mid market" of M&A. Companies of this size are generally too small for most investment banks to work with, but large enough that institutional capital is usually involved.

Compared to the the complex 9-10 figure M&A deals you hear about on the news, transactions at the scale typically involves just 6 phases:

1. Prepare for the sale

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.

The first step of selling a business is to prepare yourself and the business for what can be a long journey. We dive into some common ways SaaS companies prepare for an exit in this blog post.

This phase can last as long as you need until you’re ready to start marketing your business. In fact, if the right buyer comes along, you may be able to skip the marketing phase altogether, and evidence shows that this is in fact what most SaaS companies do.

For companies with revenues exceeding $10mm, 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 $10mm, 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.

Typical Duration: 3-6 months

2. Market the opportunity

Once you’ve done what’s necessary to feel ready to market your business for sale, many small businesses will retain the services of a local M&A advisor (commonly called a business broker) who will prepare a Confidential Information Memorandum (CIM) which is to lower mid market private transactions what a prospectus is to an IPO. The CIM is the primary document used to market an opportunity, although some brokers also use a anonymized teaser document to market the businesses they represent.

Brokers are commonly hired by small businesses in the old economy because marketing and finding buyers for a manufacturing business can be quite time consuming. When it comes to SaaS however, the value is less clear since brokers tend not to have strong networks in the tech industry and lack the technical expertise to understand the business and why it may be attractive to certain buyers, particularly if a strategic buyer is desired. It can also be detrimental to the company if information leaks and competitors, customers, investors, or employees find out a business is for sale, which is much more likely in the globally connected tech industry compared to the regional industries that brokers typically operate in.

Hiring a broker to market your business can be valuable if:

  • You prefer to have someone take on all the work of marketing your deal

  • Your business is not particularly technical and does not require specific expertise to communicate the nature of your product or service

  • You believe the broker has a stronger network among potential buyers for your business than you do

  • You do not mind if people find out you are trying to sell the business.

Brokers commonly charge 5-10% of the sale price as their fee.

Typical Duration: 3-12 months

3. Meet with buyers

The longest phase of a M&A transaction is the period where you will be meeting regularly with prospective buyers, either those your broker sourced or ones you found yourself. This can be a particularly challenging and uncomfortable process which has parallels to fundraising.

Some tips for optimizing your buyer conversations to get the best outcome as the seller:

  • Try to create some time pressure by meeting with as many buyers as possible over as short a period of time. Don’t be shy in letting buyers know how many other buyers you are speaking with, especially if they have impressive backgrounds

  • Be transparent with your financial and operational information. The biggest red flag for buyers is when a seller gives the impression of withholding information - the worst case scenario in a buyer’s mind is rarely as bad as reality, so you may as well share the full truth. It also saves you time in the long run by disqualifying prospective buyers early before you invest months of time and effort in working with them. Just make sure you have vetted the buyer and have an NDA in place with them.

  • Negotiate on price before signing any offers. Buyers rarely come in with their best offer unless there is significant competition for the deal.

Typical Duration: 1-3 months

4. Review LOIs

In the lower mid market, there is a threshold in the process after which marketing is put on pause and a buyer and seller are expected to agree to move forward and work exclusively with each other on completing the transaction. This threshold is demarcated by the acceptance of the seller of an executed Letter of Intent (LOI), which is a non-binding document drafted by the prospective buyer to make an official offer to purchase the business.

An LOI typically includes the following:

  • Standard legalese about confidentiality and the non-binding nature of the agreement

  • A date after which the LOI is no longer valid, and a new one must be agreed upon. Both parties have an incentive to close quickly, and this date gives the buyer a deadline for conducting due diligence.

  • The total consideration and price offered for the business

  • The deal structure. Deal structures can get exceedingly complex and include factors like how much will be paid as cash upfront, how much is put in escrow to be paid over time, how much is paid as an earnout, and how much is paid as debt extended by the seller to the buyer and the interest rate on such debt.

  • How the buyer proposes to finance the transaction. Typically this is a combination of equity capital and debt.

Once an LOI is accepted, it’s commonly stipulated that the buyer must cease marketing the transaction and commit to working with the buyer on closing the transaction until one or both parties terminates the agreement. On average, about 30% of transactions that are under LOI end up closing.

Typical Duration: 1-4 weeks

5. Due diligence

Once you’ve accepted an LOI and are working exclusively with one buyer, you’ll be asked for additional information on the business as the buyer tries to discover and red flags that would prevent them from being comfortable with the transaction. As the seller, your primary responsibility during this phase is to provide the information the buyer needs in order to move the process along.

Simultaneously, some individual buyers may also use this period to raise the financing needed to close the transaction. In the high interest environment of 2023 and 2024, the inability to raise debt financing is one of the most common reasons a deal falls through post-LOI, so it’s worth being a bit more aggressive with verifying the buyer’s source of financing before accepting an LOI.

Beware of buyer retrading - the practice of spending time with you on due diligence and then lowering the price, ostensibility based on information uncovered during due diligence. This is unfortunately a common tactic buyers use to pay less after you’ve invested considerable time in the transaction, and it can be hard to tell whether it’s done in good faith. The more transparent and upfront you are in providing information, the lower the likelihood a buyer will uncover information they can use to justify retrading later in the process.

Typical Duration: 3 months

6. Close

Once the buyer is satisfied with due diligence, you will work together with the buyer to draft a legally binding purchase agreement. There may be pre-closing obligations and covenants that both parties must satisfy, like getting the necessary consents from shareholders, regulatory approvals, or completing certain pre-closing conditions negotiated during the due diligence phase.

The final step is the signing of the purchase agreement and the transfer of payment from the buyer to the seller. The exact timing of the closing can vary and is often subject to the fulfillment of various conditions stipulated in the purchase agreement. Once the payment has been transferred, you’ve officially sold the business, and all that remains is to earn out the remaining portion of your payment as an employee of the new entity.

Typical Duration: 1-2 weeks

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