February 21, 2020

5 Mistakes SaaS Founders Make In the Steps To Selling Their Business

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Selling a SaaS business (or any business for that matter) is a deeply emotional, highly complex process. It’s like climbing Mt. Everest - there are bound to be set backs and moments where you want to turn back. But don’t! There are very clear steps to selling a business, the key is avoiding the common mistakes many Founders make.

We’ve successfully worked with over 47 Founders during their journey to sell their SaaS business. We’ve learned a thing or two about the common pitfalls and setbacks a Founder may experience. We’ve narrowed it down to the 5 most frequent mistakes Founders make when selling their SaaS business. Before you set out on your own climb - take a moment to learn from people who have been there. 

1. Not Researching Buyers Until You’re “Ready” To Sell.

If you’re a SaaS business, there’s a good chance you’ve received prospecting emails from a Buyer interested in investing in your business. You likely shoved these to a folder titled “get to these later”. 

Well, later should be now. 

Researching your exit options should be a consistent practice. We encourage you to take these calls along the way (every 6 months is a good cadence). You’ll likely learn a lot about what Buyers value most about your business, the market dynamics as a Seller, and ultimately what your company is worth in their eyes. 

For example, you might learn that you’ve spent too much time focused on growth at all costs and not nearly enough focused on creating efficient and sustainable growth; or maybe you didn’t prioritize an update to your UI only to hear from Buyers that your customer experience is behind your competitors.

Neither of these are easy to hear, but will shine a light on where you should focus before you get serious about selling.

2. Not Knowing What You're Looking For In a Buyer.

When selling your SaaS business, the single most important thing to take into account is who is on the other side of the table. What type of partner are you working with? This sounds simple but a lot of Founders get caught up in finding the Buyer with the highest headline number, this is oftentimes a mistake (more on this later). 

At first glance, all Buyers might look the same - a financial institution ready to write you a check. It’s up to you to weed through who is authentic and has your business’ best interest at heart.

A few smart ways to do this:

  1. Start with their website and find their core values or mission statement. Can you get a feel for the type of people they are and what they stand for? Do these align with your business? 
  2. Discuss what happens after you sell. There are a lot of questions you should ask when engaging with a Buyer, but the most important one is “what happens to me, my people, and my legacy after I sell?” Do you want to stay in the business? Ride off into the sunset? Will you have an amount of cash you have to earn after the close? These are important topics to build your future. Be upfront with the Buyer and ask the hard questions to understand their expectations. You’ll get a feel for their integrity and honesty when you address this.
  3. Ask for a referral at some point in the process. The best way to understand who they are is to talk to a Founder who sold them their business. Any reputable Buyer will offer up referrals. If they don’t, it might be a red flag. Listen to a few Founders talk about the process of selling their business.

3. Being Afraid To Share Your Target Price.

Every Founder has a value they want for their SaaS business. A number that makes it all worth it, grants financial independence, and helps diversify your net worth from being tied up in one asset. 

Once you have a number in mind, don’t be afraid to share it early and often in your conversations. A lot of Founders want to keep this close to the vest for fear they will shoot too low when a Buyer might want to pay more. 

After all, the first thing they teach you in negotiating school is he/she who speaks first loses. I can tell you right now that is not the case. As the Founder who knows your own business deeply, you are almost always going to value it higher than a Buyer. It’s your baby - of course you see immense value in it.

By sharing your target number early and often, you will:

  1. Weed through bottom-feeding Buyers quickly. A Buyer is either reasonably close to that number or not at all. The last thing you and the Buyer want is to waste weeks signing NDAs, sharing data, diving into your business, and dancing around the valuation number.
  2. Learn if you’re shooting too high. Are Buyers reacting swiftly and ending conversations quickly? If you’re aiming too high, they might. Before they do so, be sure to ask for feedback on the valuation. What do they think is reasonable? What have they paid for similar companies? How far off are you from that number? If you’re asking for 10x revenue and the Buyer is only willing to pay 3x revenue, that’s helpful feedback. If you hear this from multiple Buyers, it might be time to go back to the drawing board and adjust your expectations.

4. Not Understanding Your Total Addressable Market (TAM).

This is often overlooked by a Founder but is a huge point of focus for a Buyer. Think about it: A Buyer wants to know “if I invest in this business, how much runway is left to grow into? Who are the impact players and how do I stack up?”.  As the Founder, you should be prepared to talk about this in detail.

To calculate your TAM = (Annual Contract Value) x (# of addressable accounts).

That number is the starting point. Be prepared to dive into the deeper parts of this conversation: How much market share do you have right now? Have you done a competitive analysis to see who owns the rest? How does your product stack up against those competitors? Can you make a case for why and how you can convert these customers?

All of these questions make a case for why your business has a lot of runway left to grow (and thus a Buyer would want to own it). 

5. Thinking It’s Only About The Highest Valuation Rather Than The Structure of The Deal.

The structure of the deal matters, not just the size of the headline valuation. 

This is an area we frequently see Founders stumble, especially if it’s your first time transacting. The headline value is obviously where your eyes go first, but make sure you’re digging deeper there.  There are two main considerations when structuring a deal - how much equity you want to sell and the timing of when you earn your liquidity. 

Let’s start with equity sold. 

When you sell your business, you’ll have to ask yourself “how much of my company do I want to sell?”. There are usually three scenarios when it comes to selling equity:

  1. Selling 100%: this is a fairly straight forward sale. You sell ownership of the company and hand over the keys to the new Buyer. If you’ve grown the business as far as you can and you’re ready for your next chapter, this is a great option for you to earn all your liquidity upfront and move on to the next thing. 
  2. Retaining equity: You sell a majority stake in your company (but not 100%) which allows you to receive a large portion of your liquidity, but you’ll retain a portion of equity that will (hopefully) continue to grow. This type of deal is common in private equity as a way to give Founders a meaningful cash out but incentivize them to stay and grow the business long term. In this type of deal, it’s key to make sure you and the Buyer are clear and aligned on the future of the business. Remember, you aren’t the majority owner anymore so you answer to someone. This can be uncomfortable for many Founders who are used to running their own show.
  3. Retaining control - You sell a minority stake in your company for a small amount of liquidity but retain majority control. In this scenario, you are still running the day to day operations of your company, requiring the same energy and commitment of what’s gotten you this far, and you now have a board to answer to and weigh in on any and all decisions. So while you’re still in charge, you have other cooks in your kitchen. Maybe you’re not ready to part with your company, but you’re looking for a small capital infusion and a board of seasoned operators to help you grow - selling a minority stake and retaining control might be an option for you.

Now let’s talk about when you earn your liquidity. 

There are two main scenarios for earning your liquidity:

  1. 100% cash at close: you earn 100% of your purchase price at the time of close, riding off into the sunset with your pay out right when the deal closes. The potential downside is if you’re focused solely on the cash at close number, you might be disregarding opportunities to earn additional dollars through an earn out scenario.
  2. Contingent considerations: You receive a portion of your purchase price at the time of close but there are requirements for you to stay in the business in order to earn out the rest of your value. You might have to hit certain revenue goals or close a % of new customers in the pipeline over a set time period. If you’re selling your business on a growth story, this could be an option for you because you believe in the future growth and have strategies to get the business there. From a personal standpoint, this might mean you’ll have to stay in the business to earn that money. If you’re burnt out and ready to move on, this might not be a great option. This is why it’s important to think about the future you want when structuring a deal.

Each of these deal structures comes down to how you earn your cash, when you earn your cash, and how long you want to stay in the business. 

Bottom Line: Think About the Long Term in the Short Term.

Each of these mistakes is rooted in one thing: missing the opportunity to think about the future for you and your business. When you set out to sell your SaaS business, it’s tempting to think in short term gains (everyone wants that big pay day). It’s even harder to pull your head out of the sand and ask yourself some tough questions about the future. 

Take the time to understand the type of Buyer you want, what kind of deal structure works best for you, whether you want to stay in the business, and what your vision of the future looks like for you.

Interested in what other Founders have to say about this topic? Check out what one Founder had to say about his experience selling his SaaS business.


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