Whether you’re actively pursuing a sale of your SaaS business, or casually understanding the market of valuations, interviewing potential Buyers of your SaaS business can be a daunting task. How do you weed through Buyers? How do you make the calls meaningful? What questions should you ask to cut through the sales pitches and get straight to the heart of the matter (are you a good fit for the future of my company)?
Our biggest piece of advice is: know that these initial conversations are meant to be a casual discussion between the Seller and the Buyer. Remember, they’re interviewing you as much as you’re interviewing them. Be ready to ask your questions and open to answer theirs.
We’ve had thousands of calls with Founders of SaaS businesses which means we’ve heard a range of questions. To help you get these conversations started we’ve rounded up the top 7 questions to ask a potential Buyer when selling a SaaS business and the answers you should be aware of for each.
Top 7 Questions to Ask a Potential Buyer When Selling Your SaaS Business
1. What is my company worth?
This is typically the first question a Founder asks. The topic of how to value a SaaS business is complex and involves a lot of factors. Frankly, a good Buyer is going to be upfront and honest here by sharing that you can’t put a valuation on a business with one phone call and a few metrics. If you tell a Buyer you have X in revenue and X in EBITDA, they might give you a range of multiples.
Be wary if a Buyer goes straight to selling mode and starts overpromising a high valuation. There’s a high likelihood that valuation doesn’t stick and they back off of it as you continue conversations.
2. What do you find interesting about my business?
If you’re a reasonably healthy, growing SaaS business, I promise you Buyers are paying attention. Especially if you’re in a vertical that’s strategic to other companies they own. The same way you pay attention to your competitors, Buyers are paying attention to the landscape of SaaS solutions.
A reputable Buyer will have done their homework on your business before they get on the call. Ask them what was attractive about your company, why they reached out, why you. If they have a strategic interest in your SaaS business, they should have a great answer to how you and your business fit in the picture.
For example, if they own other businesses in your vertical, they should have a clear answer of how your company and solution fit with the others. If they fumble through this answer, you might get the sense that you’re just one of thousands of prospects they’re reaching out to.
3. How do I earn my liquidity?
This is one of the most overlooked questions by Founders. You are hyper focused on the cash at close number but miss the opportunity to understand how the deal is structured.
It’s important to understand from a Buyer not just how much they’re going to pay you, but how they’re going to pay you.
There are few common ways deals can be structured:
- 100% cash at close: You sell 100% of your company and receive a check at the time of close, walking away with your full liquidity and handing over the keys.
- Earn out: You sell 100% of your company. You receive a portion of the total value at close but you have to stay in the business and hit certain goals to earn out the rest of your value. The goals set and time period to earn it will vary depending on the Buyer.
- Roll over equity: You sell a majority stake of your company while rolling over a minority stake to the new owner. You still own that % of equity, but the Buyer has full ownership and operation of the business going forward.
A Buyer typically won’t go into too much detail on deal structure on the first call. This is something that gets hashed out later. The reality is there are a lot of creative ways to structure a deal and ensure both the Buyer and Seller are happy.
What you’re really looking for here are any important details on deal requirements. For example, if a Buyer strictly acquires 100% of the business, they will share it here. If you’re not interested in selling 100%, you’ll know that this Buyer likely isn’t the best fit.
Each of these deal structures have implications for not only how you receive your money but what happens to you after you sell. This question goes hand in hand with the next one.
4. What happens to me after we close?
This is arguably the most important question of the bunch. Even more so than “how much is my company worth?”
Because this question hits at the heart of any transaction – what will happen to you and your business? It’s so important that you and the Buyer are on the same page here.
A great Buyer will likely turn this question around and ask what do YOU want after close? Stay on and keep running it? Great. Hand over the keys and build your next idea? That’s great too. In either case, be clear about your expectations and ask the same of a Buyer.
There are a range of scenarios that could happen post sale but the two most common we’ve seen are:
- Ride off into the sunset. You’ve worked hard, you’re ready to cash out and go build the next thing. Realistically, this probably involves consulting for a few months to create a smooth transition for the business, employees, and new leader. Then you can move on.
- Stay on in a functional capacity but have the Buyer bring in an experienced leader. You’ve grown the thing as far as you can, now it’s time to get back to that CTO job you love and bring in a seasoned CEO to explode growth.
5. Why do you typically pass on deals?
This question will help you gauge what’s important to a Buyer and where your business might fall short. A Buyer won’t share extensive detail here on specific companies and why they passed, but some high level answers to listen for are:
The product wasn’t differentiated enough. This is more common than you think. Many Founders spend a lot of time building what they believe to be the perfect solution for their customers, but not nearly enough time getting curious about what their competitors are offering and how they’re differentiating themselves. When a Buyer starts to look at your market holistically, the first thing they’ll do is stack you up against your competitors. If you aren’t differentiated enough, they’ll pass.
The technology was outdated. This is par for the course in bootstrapped SaaS businesses. Many were founded 7+ years ago and likely didn’t have the time or money to update their technology (instead you put bandaid solutions together and kept growing). Most Buyers are prepared for some level of this, it’s a matter of just how old the tech is and how much investment (time, money, and people) is required to update it. If you read this and think “that’s me”, it’s probably time to prioritize those updates you’ve been delaying for the last few years.
The valuation was too high. This is an obvious one but worth mentioning. Simply, the Buyer and Seller couldn’t find a price that made them both happy. If you hear this from a Buyer, don’t immediately write them off as unable to meet your valuation. Every Buyer and Seller is different and every company is different. And this goes back to not chasing the highest number, but finding the right partner instead.
6. What’s the benefit of selling 100% versus raising money versus keeping it myself?
This is a common question from Founders who are transacting for the first time and trying to understand the different ways to gain liquidity. A Buyer will answer this differently depending on what kind of financial institution they are (VC, PE, strategic acquirer). A few ways to think about the differences are:
- Selling 100%: this is usually the case when you’re working with Private Equity or a strategic acquirer. The benefit of this is it’s the simplest transaction, typically involves one equity check at the time of close, and it means you can ride off into the sunset (if that’s what you want). Founders find a lot of comfort in the certainty of this and Buyers prefer the simplicity of this kind of transaction. Selling 100% is a good fit if you’ve hit your plateau of growth and recognize you need a partner to surpass this.
- Raising money: this is usually the case when you’re working with Venture Capital. You’re giving away a percentage of equity in exchange for a chunk of cash to reinvest in the business and continue growing. The benefit of this is you keep a percentage of ownership and can continue running and operating.
- Keeping it yourself: You might go through the process of talking to Buyers only to realize you want to keep the business for yourself. That’s great! The benefit is, of course, full autonomy of your company. The downside is if you aren’t taking on an investment of some sort, you won’t gain liquidity or reinvestment in the business. Which puts the business at risk for declining and you at risk of selling too late (thus earning less value).
A Buyer may or may not walk you through each of these scenarios. They’re going to fall in one of the first two buckets so they might focus on why their investing model is better than the rest. Make sure you understand the whole landscape going in.
7. Wouldn’t my company be more valuable if I just ran it for another year? Wouldn’t I be smart to sell next year?
The answer is: maybe. If you’re lucky enough to own a software company, it will likely continue to grow in value as long as you have the resources and capital to keep taking it to the next level.
The real question here isn’t “should I wait?”, it’s “what happens if I wait too long?”.
From what we’ve seen, there are four stages of a bootstrapped SaaS business. Eventually, Founders reach a key inflection point in bootstrapped SaaS businesses where they ask himself or herself “have I taken this thing as far as I can? What does my business need to get to the next phase of growth?”
If you find yourself at this point, there’s likely some fear here. What happens if you don’t sell now, you don’t get the resources you need to grow, and your business declines? The goal is you’re selling when the slope of your revenue is the greatest to get the highest return.
If you wait too long, you might miss that shot.